Oddo & Anor v Watare Pty Ltd & Ors [1999] VSCA 124

6. On 22 February 1991, the appellants sold a licensed package liquor business which traded in East Doncaster under the name "The Liquor Exchange" ("the Business") to the first respondent ("Watare"). The sale price was $280,000 which included plant and equipment. In addition, Watare paid approximately $110,000 for stock. The second, third and fourth respondents ("the respondents") were shareholders in Watare and had lent substantial sums to it in order to enable the acquisition and operation of the business. Most of the money so advanced to the company was borrowed by the respondents.

9. One of the documents given by the appellants to the respondents during the course of their negotiations was a statement purportedly made in accordance with s.52 of the Estate Agents Act 1980 ("the s.52 statement") which set out, inter alia, the income and expenditure figures of the Business for the financial years ended 30 June 1989 and 1990. From those figures, it is possible to calculate the gross profit margin earned by the Business during each of the two years. Such a calculation in respect of the 1990 financial year, if made, would have disclosed a gross profit margin of 19.5 per cent.

12. Not long after taking over the Business, it became apparent to the respondents that it was operating at a loss and was not producing the turnover or the profits which they say were represented to them by the appellants. Nevertheless, they continued to conduct the Business through Watare and eventually, lost the liquor licence due to their inability to pay licence fees. The Business ceased operating on 11 January 1993 and apart from some $30,000 recouped from the sale of plant and equipment, it was worthless at the time its doors closed. Thus, the respondents had traded for approximately 20 months after discovering that it was not possible, as they claimed, to make the Business viable. Their lenders sold up the assets which were provided as security for the loans with the result that the third and fourth respondents lost their home, as did the mother of the second respondent. Further, the respondents lost everything they invested in the Business and continued to be personally liable for the substantial loans taken out and guaranteed by them in connection with the acquisition and operation of it. As the trial judge said, the venture proved an unmitigating financial disaster for them.

15. In January 1992, Watare brought a proceeding against the appellants in the County Court in connection with the losses so suffered by it. In May 1993, the proceeding was transferred to the Supreme Court because the second to fourth respondents were added as plaintiffs and the plaintiffs' claims were such as to take the matter beyond the jurisdiction of the County Court. In August of that year, the Master ordered that the proceeding receive a speedy trial, but in August of 1994 the respondents requested that it be taken out of the list on the basis that they were impecunious (due to the alleged misconduct of the appellants). The case was reinstated in the list at the behest of the respondents in May 1997 and was heard in November of that year. In so far as is relevant, the principal allegations ultimately pursued by the plaintiffs were that the appellants made the following misrepresentations to them, fraudulently and in breach of s.11 of the Fair Trading Act 1985.

(a) By way of the s.52 statement, that the ratio of gross profits to sales of the Business for the year ended 30 June 1990, was 19.5 per cent.

(b) By implication, that the gross profit margin of the Business for the period 1 July 1990 to 22 February 1991 ("the relevant period") was at least 19.5 per cent.

20. His Honour delivered judgment on 12 February 1998 in which he essentially found for the respondents. Although he held that they did not establish to his satisfaction the falsity of the representation in the s.52 statement as to the gross profit margin, he found that the appellants expressly represented that during the relevant period the turnover of the Business had increased and that business was improving. He also found that in the circumstances, those representations contained an implied representation that during that period, the Business traded at a gross profit margin of 19.5 per cent or better. His Honour went on to find that the latter representation was untrue and that during the relevant period the Business had traded at a gross profit margin which was significantly below 19.5 per cent (and which, on one view, fell below 15 per cent at one stage). His Honour was satisfied on the evidence that each of the respondents had made out a case based on breach of s.11 of the Fair Trading Act and for fraudulent misrepresentation. Further, his Honour found that but for the misrepresentation, the respondents would not have bought the Business or incurred associated expenses and other liabilities. He was of the opinion that it was reasonable in the circumstances for the respondents to have continued trading to 31 December 1991, notwithstanding their apprehension since about late March 1991, that the Business was not viable. As a result, he ordered in effect that the appellants pay the following amounts by way of damages:

41. After hearing further argument, his Honour held on 6 March 1998, that the appellants had not shown "good cause to the contrary" under s.60 of the Supreme Court Act 1986 why they should not pay interest on the judgment sums for the period when the proceeding was taken out of the list, namely, August 1994 to May 1997 (in accordance with the requirements of s.60(1)). Accordingly, his Honour ordered that the appellants pay to the respondents damages in the nature of interest from the commencement of proceedings until 12 February 1998. His Honour made other orders which are not relevant to this appeal.

44. The appellants have appealed against the above orders including the order that they pay damages in the nature of interest under the Supreme Court Act. The respondents have cross-appealed against his Honour's refusal to order that the appellants pay by way of damages, the interest that the respondents were required to pay on their relevant borrowings after 31 December 1991.

47. Mr Berglund, who appeared for the appellants, accepted for the purposes of the appeal, his Honour's findings that:

(a) the appellants impliedly represented to the respondents that during the relevant period, the Business traded at a gross profit margin of at least 19.5 per cent;

He contended, however, that his Honour erred in the following respects.

(a) His Honour's finding that the difference between the price paid for the Business and its value on 22 February 1991 was $40,000 was unsupported by the evidence and was, in any event, made on the false premise that the reduction in the gross profit margin of the Business during the relevant period resulted in a reduction in its maintainable earnings and, therefore, its value.

(b) His Honour erred in awarding the respondents damages in respect of trading losses, establishment and legal costs and interest payments on loans by wrongly attributing them to the appellants' misrepresentations.

(c) His Honour erred in holding that the appellants had not shown "good cause" under s.60 of the Supreme Court Act 1986 and in so ordering that they pay interest on the relevant judgment sums from the date of the issue of the proceeding until 12 February 1998.

56. I turn first to consider each ground contended for by the appellants. I will then deal with the respondents' cross-appeal.

60. The only expert witness who gave evidence on the issue of what was the value of the Business at the relevant time, was John Michael Sayers ("Sayers"), a chartered accountant who was called by the respondents. In his oral evidence he spoke, in effect, to his report of 28 October 1997, which dealt with, inter alia, the value of the Business. Under the heading "The value of the Business at the time of sale", he proffered the figure of $240,000.

63. In relation to Sayers' evidence, it is convenient to quote from the reasons for judgment:

"Sayers said that in 1990-91 within the industry the basis for estimating the value of a business was by a relationship of sale price to profits in the range of 1.5 times to 2.5 times. He adopted the rate of two times. Applying his calculations to the s.52 Statement, which has not been proved to have been inaccurate, the value was $240,000, of which the plant and equipment was valued at $30,000, and good will at $210,000. The purchasers paid $280,000. Sayers said that if the s.52 Statement was correct then the price paid by the purchasers was justifiable. By basing his alternative calculation on the s.52 Statement he made an assumption, of course, that the value as at 30 June 1990 would remain the same as at 22 February 1991. That may not necessarily follow, but I heard no evidence on the matter, and I am left with the fact that in his statement, which was tendered before me, Sayers said that the value of the business at the time of sale was $240,000, if valuation was based on the s.52 Statement. Thus, once I have accepted the accuracy of the s.52 Statement, then, if it is a correct assumption that the value of the Business remained at $240,000 as at 22 February 1991, the evidence called by the plaintiff (which is the only evidence before me as to value) leads to the conclusion that that is its value for the purpose of damages. The date of assessment of the true value of the Business is the date of acquisition of the Business (see Gould v. Vaggelas, supra at 221). The onus is on the plaintiff to prove damages. Given that I have concluded that the gross profit ratio reduced after 30 June 1990 then the valuation of the Business based on the s.52 Statement, as made by Sayers as at 30 June 1990 must, if anything, have been higher than its true value as at 22 February 1991, the date of acquisition."

His Honour concluded that "... the proven loss in the value of the Business is $40,000".

68. Counsel for the appellants attacked his Honour's finding that for the purpose of calculating damages, the value of the Business at the date of acquisition was $240,000 on the following bases:

(a) Mr Berglund argued that his Honour misapprehended Sayers' evidence in two respects. First, Sayers did not value the Business at $240,000, but merely said that such a valuation was within range; $280,000 was just as correct a valuation. More particularly, Sayers did not adopt a multiplier of 2 for the purpose of placing a value on the Business; he said no more than that the appropriate range of multipliers was between 1.5 and 2.5 and that a multiplier of 2 was selected only for the purpose of illustration. Secondly, if Sayers did value the Business at $240,000, he did so as at 30 June 1990 and not as at the date of acquisition.

(b) His Honour also erred in assuming that a reduction in the gross profit margin of the Business during the relevant period would have led to a reduction in its value.

73. In my opinion, however, his Honour did not misapprehend Sayers' evidence. In my view, a fair reading of the valuation shows that Sayers used the multiplier of 2 for the purpose of calculating what he thought was the value of the Business. More particularly, as is evident from his calculations in Schedule 5 to his report, his opinion was that a multiplier of 2 was appropriate to value this particular Business and that, given future maintainable earnings of $120,000, its value was $240,000. Mr Berglund sought to emphasise Sayers' evidence that the price paid of $280,000 was "justifiable", but as Mr Tatarka, who appeared for the respondents, submitted, in opining that the price paid by the purchaser was "justifiable", Sayers was doing no more than expressing the view that the price paid was not altogether out of kilter with the value of the Business, if determined according to his calculations made with reference to the s.52 statement. Such evidence went, of course, to reliance by the respondents on the s.52 statement and, it may be, served to put out of Court any suggestion that the measure of damages was not to be determined simply by the difference between the value of the Business purchased and the price which the respondents chose to pay for it.

76. Consequently, in using the figure of $240,000 for the purpose of the damages calculation, his Honour did not fall into error. There were many aspects of Mr Sayers' evidence which his Honour found unsatisfactory but, as he said, there was no other relevant evidence before him and, therefore, it was appropriate that he should take $240,000 as the value of the Business.

79. I am also of the view that Sayers placed a value on the Business as at the date of acquisition, 22 February 1991. It is true that he made his calculations on the basis of information as at 30 June 1990. Nonetheless, he said that he valued the Business "at the time of the sale". Of course in doing so, as the judge said, he "made an assumption ... that the value as at 30 June 1990 would remain the same as at 22 February 1991" (and that "that may not necessarily follow"). But, like Sayers, the judge had no evidence on the matter and was left simply with the valuation tendered by the respondents. Given the state of the evidence at the trial, however, it is difficult to see how his Honour could have done other than to adopt $240,000 as "the value of the Business at the time of the sale" for the purpose of quantifying the damages to be awarded by reference to price paid and value of the thing being purchased. His Honour expressly declined to attempt for himself to make some independent valuation of the Business as at 22 February 1991 and in all the particular circumstances he was correct in so declining.

82. That leaves for consideration Mr Berglund's submission that his Honour erred in reasoning that because there was a decline in the gross profit margin, there was a decline in the value of the Business. There is perhaps some force in Mr Berglund's argument that if gross profit ratio reduces, the value may not be reduced if, by reason of increased turnover, maintainable earnings are not reduced. But in the result, there is nothing to the point. His Honour referred to the gross profit ratio reducing after 30 June 1990, not for the purpose of arriving at a value of the Business which was less than $240,000, but in order to justify his conclusion that the value of the Business was not greater on 22 February 1991 than it was as at 30 June 1990. So much is said, in my view, expressly in the last sentence of the passage of judgment reproduced earlier. That being the only purpose of the judge's reference to the reduction in gross profit ratio after 30 June 1990, the mistaken conclusion that the value of the Business must also have reduced (if mistake it was) occasioned no prejudice to the appellants.

85. It is worth being clear about the judge's conclusion in this respect because it bears on other arguments that were raised. On a fair reading of the judgment, his Honour did not really conclude that the value of the Business at the time of sale was $240,000, but only that it was no more than that. The value at 22 February 1991 was to be inferred only from such evidence as his Honour had before him, and as explained in his reasons for judgment, that evidence was far from satisfactory. What his Honour was clear about was that by the time of the sale the Business was not worth any more than $240,000. There was more than enough evidence, in my view, to justify the conclusion that as at 22 February 1991, the value of the Business was no more than it was at 30 June 1990. It was common ground that the proper measure of damages, on this aspect of the case at least, was the difference between the real value of the property at the time of the purchase and what the purchasers paid for it. In my opinion the conclusion that that difference was in this case $40,000 was not attended by appealable error.

89. Mr Berglund submitted that trading losses incurred by Watare were not recoverable by it. He relied primarily on Netaf v. Bikane (1990) 26 F.C.R.305 at 308:

"We reiterate that where a purchase has been induced by misleading conduct it is not enough in order to recover losses subsequent to the purchase to prove that but for the misleading conduct or as a partial consequence of it the agreement to purchase would not have been made; that is so in every successful application of that kind. It is not the law that in every such case the party held to have been engaged in misleading conduct ... becomes the insurer of the other's success and prima facie liable to indemnify him against the consequences of the purchase."

So much may be accepted. But in this instance, there are particular circumstances serving to reinforce the respondent's claim for trading losses.

94. The representation which was found to be false related specifically to the profit margin. The critical representation was found to have been made by implication because, in part, of the applicants' "knowledge that the purchasers were very limited as to their available finance, would be heavily geared, and were very dependent on the gross profit ratio being as high as had been the case asserted in the s.52 statement". In short, the appellants were aware that, once the Business changed hands, viability would depend upon the gross profit ratio being 19.5 per cent or more. That the respondents then made trading losses can be seen as the direct result, not just of the acquisition of a less valuable business, but of the acquisition of a business lacking the represented gross profit ratio. There was, in the circumstances, a direct causal nexus between the misrepresentation and the trading losses, for that ratio was essential to their trading at a profit. Hence, the judge was correct to allow damages to compensate for those trading losses.

97. Mr Berglund rested his argument on the fact that the Business was profitable at the time of sale, and yet immediately after sale was making losses. That the business was profitable, he submitted, was implicit in the valuation of the business at $240,000; for as has been demonstrated, that value was fixed by multiplying maintainable earnings of $120,000. The respondents could not have it both ways, he argued; if the business had that value at the date of sale, then it was a viable business, capable of making profits, and that it made losses must have been due to factors other than the nature of the business itself. In this regard, counsel relied upon what the judge said in the course of his reasons:

" On behalf of the defendants, however, it was submitted that it has not been demonstrated that the Business under the plaintiffs did, in fact, fail to make a profit, or even if it did, that the failure was in any way due to fault on the part of the defendants, or to misrepresentations by the defendants. I do not discount the possibility that some factors, unconnected to any fault of the defendants, may have contributed to the poor results experienced by the plaintiffs. For example, the plaintiffs had a very low stock level when they commenced trading, and had to restock from their limited funds, but such explanation (sic) do not entirely account for the failure of the Business."

Building on this, Mr Berglund submitted that the respondents had not established at trial that their trading losses were caused by the misrepresentation as to gross profit ratio.

102. Two things may be said of this argument. First, as I said earlier, the judge did not conclude that at the time of the sale the value of the Business was $240,000, but only that it was not more than $240,000. There was substantial evidence to suggest that the Business was worth much less than $240,000 by the date of the sale and certainly it could not be assumed that by then there were maintainable earnings of $120,000. Nor did the judge so find. That destroys the premise on which the argument proceeded.

105. Moreover, that the appellants incurred trading losses as soon as they took over the Business was not nearly so inexplicable as Mr Berglund's argument sought to suggest. There was no direct evidence before his Honour that the Business traded at a profit during the relevant period. Further, by the date of the sale its trading operations were very different from those which prevailed on 30 June 1990 in terms of discounting, stock and mark-up. By design, and indeed by arrangement, there had been significant reductions in stock levels and, in part, that had been achieved by a significant increase in discounting. In addition, as his Honour found, the appellants had engaged in on-selling to other retail outlets for re-sale. In the circumstances, it could scarcely be surprising that the respondents made losses, at least while they sought to re-establish the Business.

108. Secondly, so far as causation is concerned, it is enough, contrary to Mr Berglund's submission, that the misrepresentation was a cause of the loss, and, in this particular case, for the reasons already given, I am of the view that the misrepresentation as to gross profit ratio was a cause of the losses that followed. As the judge said in his reasons for judgment, on any calculation it may well have been difficult for the appellants to make a profit. But that they made losses was the result of the gross profit ratio being less than was represented. The appellants therefore established no error in respect of the trading losses.

112. In my view, for the same reason that there was a causal nexus between the misrepresentation and the trading losses, there was also such a nexus between the misrepresentation and the incurring by the respondents of the above expenses and liabilities (up to 31 December 1991). Consequently, the respondents were entitled to those damages.

115. It was contended, but not enthusiastically, by counsel for the appellants that because the respondents obtained a viable business, they were not entitled, in addition to the $40,000, to out-of-pocket costs in respect of the borrowings which would have been inevitable whatever the business acquired. But again that is to confuse two things: the prima facie measure of the loss suffered by reason of the misrepresentation and losses flowing from the particular nature and significance of the misrepresentation in this case. The misrepresentation was such, as the judge found, that had it not been made, the purchasers would never have contemplated purchasing the Business. They did purchase it and they obtained a business which, to them, was worthless because the particular representation made to them was false.

118. In those circumstances, in my view, his Honour did not err in awarding damages to the respondents by way of establishment costs, legal fees and interest.

Interest under the Supreme Court Act

122. The final point taken on this appeal by the appellants was that his Honour erred in the exercise of his discretion under s.60 of the Supreme Court Act 1986. The principal contention below on behalf of the appellants was that there was "good cause" for them not paying interest under s.60 for the whole of the period between the date of the commencement of the proceeding and the date of the judgment, 12 February 1998, and that lay in the delay occasioned by the respondents themselves when they had the case taken out of the list in August 1994, not reinstating it until May 1997. But that argument was fully considered by his Honour and in my view, it was not shown that he mistook any principle, misapprehended the facts, took into account irrelevant considerations or failed to take into account relevant considerations. Quite simply, the appellants' attack seems to me to be no more than this: that the judge got it wrong. But the principles upon which an exercise of discretion may be attacked are well known and well established and, in short, I am satisfied that, notwithstanding his able argument, Mr Berglund did not establish any appealable error in this regard.

126. In their cross-appeal, the respondents complained that the judge had erred in failing to award them damages for loss in the nature of interest paid beyond 31 December 1991. No such complaint was made in respect of the trading losses; it was accepted, as the judge found, that their continuing to trade had been reasonable up until, but not beyond, 31 December 1991. Neither side sought to challenge the fixing of that date as the appropriate cut-off point. What the respondents argued was that, while that was perfectly valid in relation to trading losses, it did not hold good in relation to interest on borrowings; the decision to trade or not rested within the control of the respondents once they acquired the Business, however, their liability for interest endured, so long as the lenders insisted upon their honouring their bargains.

129. As was pointed out in the course of the argument, the difficulty confronting the argument lay in the absence of evidence before the judge. As I have said, the judge was of the view that trading beyond 31 December 1991 was not reasonable. His Honour allowed interest on borrowings up until that date, but for the rest he said this:

"It was submitted that since an obligation, under the loan agreement, to pay all interest arose as soon as the loan was taken out, it could fairly be said that damages comprising the entire sum were caused by the misrepresentations and misleading conduct of the defendants. I do not accept that argument. In any event, I have no evidence as to the obligations under the loan agreement save as to the sums paid and due to be paid by way of interest. Had the plaintiffs sold the Business by 31 December 1991 I do not know whether that may have had an effect on reducing the sums due under the loan agreement or would have enabled the loan to be paid out."

133. Without evidence about the effect of selling the business on paying out the loans, I cannot see that the judge fell into error in refusing to award damages for interest paid or payable after 31 December.

136. For these reasons, I think that this appeal and the cross-appeal should both be dismissed.

148. The orders of the Court will be that the appeal be dismissed with costs and that the cross-appeal be dismissed with costs.