Raoul Cruz v Future Network

The Pleading of the Cross-Claim 4By an Amended Cross-Claim filed on 7 April 2011, the defendants' crossclaim against the plaintiff/cross-defendant seeking the following relief: (1)"A declaration that the cross-defendant is owed no further sum pursuant to the Company Agreement and the Varied Company Agreement. (2)Alternatively, a declaration that the Company Agreement and the Varied Company Agreement are void and of no effect. (3)An order that the cross-defendant pay the cross-claimants the sum of $345,000.00. (4)Interest. (5)Costs." 5The cause of action outlined in the Amended Cross-Claim is based on allegedly false misrepresentations which occurred during the period from September 2006 to 27 June 2007. The representations are set out in paragraph 6 7 & 8 of the Amended Cross-Claim as follows: "6. From time to time in the period from September 2006 to 27 June 2007, the cross-defendant made oral representations to the second cross-claimant: 6.1 That the MYOB financial records of Dragnet were always wrong. 6.2 That the Excel financial records provided by the crossdefendant were correct. 6.3 That the cross-defendant could be relied upon to accurately advise the true financial position of Dragnet. 6.4 That the cross-defendant could be relied upon to accurately assess the financial position of Dragnet because: 6.4.1 The cross-defendant was a Certified Practising Accountant. 6.4.2 The cross-defendant used to be employed by a large accountancy firm to problem-solve clients' businesses and was put into those businesses to fix up the problems. 6.4.3 The cross-defendant was trustworthy because the cross-defendant and the second cross-claimant were friends. (the first representations) 7 On or about 23 October 2006 and on or about 2 November 2006, the cross-defendant represented to the second cross-claimant that the true and correct financial position of Dragnet was set out in documents provided by the cross-defendant to the second cross-claimant. Particulars 7.1 The representations were entirely in writing. 7.2 By email from the cross-defendant to the second crossclaimant received on or about 23 October 2006, the cross-defendant provided a document entitled, "Dragnet ... Balance Sheet 30-Sep-06" (September 06 Balance Sheet). 7.3 On or about 2 November 2006, the cross-defendant handed the second cross-claimant three documents entitled "Dragnet ... Profit & Loss Statement July 2006 through September 2006"; "Dragnet ... Aged Receivables [Summary]", and "Dragnet ... Aged Payables [Summary]", respectively. At the top of the front page of each document, the crossdefendant had written the words, "True & correct document". Beneath these words, the crossdefendant had written his name; signed his name, and added the date, "2/11/06" (True & Correct Documents). (the second representations) 8 In or about November 2006, the cross-defendant represented to the second cross-claimant that Dragnet owned satellite dishes valued at about $1.9M. Particulars 8.1 The representation was partly oral and partly in writing. 8.2The oral parts were the cross-defendant informing the second cross-claimant: That Dragnet owned approximately 1,600 satellite dishes installed on customers' roofs with a total value of about $1.9M; That Dragnet's ownership of the dishes was secured by the terms of the Dragnet Customer Contract that the second cross-claimant could read on the Dragnet Website. 8.3 The written part was the form of Dragnet Customer Contract which was published on the Dragnet website at that time. (the third representation)" 6The cross-claimant alleges that on 27 June 2007, in reliance on the representations set out above, the cross-claimants were induced by the cross-defendant to exercise an option to purchase the shares. The cross-claimants allege that the representations were false and by reason of the false representations and/or unconscionable conduct of the cross-defendant, the cross-claimants had suffered loss and damage totalling $340,000.00, particularised in paragraph 26 of the cross-claim as follows: "1. Payment of the sum of $100,000.00 to or for the benefit of the cross-defendant on 21 December 2007. 2. Transfer of Lot 6 to the cross-defendant pursuant to a transfer and a consideration of $245,000.00. 3. Loss of use of the monies and land referred to in subparagraphs 1 & 2 hereof." 7But for the misrepresentations made by the cross-defendant and/or his unconscionable conduct, the Amended Cross-Claim pleads that the cross-claimants would not have exercised the option to purchase the shares or have entered into the Company Agreement or the Varied Company Agreement, which was made on 21 December 2007. 8The cross-defendant has denied the cross-claimant's entitlement to the relief sought, and submits that there was no false or misleading representations, and/or unconscionable conduct established by the crossclaimants which would entitle them to the relief sought.

The Evidence 9Evidence was adduced by way of affidavits upon which each of the deponents was cross-examined. The plaintiff relied on the following affidavits: (1)Raoul Cruz sworn 18 October 2011 and 28 September 2012, together with exhibits E-RC-1 and E-RC-2 exhibited thereto. (2)Ross Gatwood sworn 9 November 2012. (3)Cameron Diffey sworn 28 September 2012 and 13 November 2012. (4)Karen Sojkowski sworn 15 August 2012; and (5)Andrea Storm sworn 12 September 2012. 10The following summary includes my findings of fact based on the evidence, much of which was uncontroversial. 11The evidence established that for some years prior to 27 June 2007, Mr Raoul Cruz and Mr Chris Abbott were friends who shared common interests. During 2006 Mr Cruz had informed Mr Abbott of financial difficulties that his corporation, Dragnet, had been experiencing. After a number of meetings in October and November 2006, Mr Cruz agreed to transfer to Mr Abbott 20 ordinary shares in Dragnet, for no consideration. He also agreed to grant an option to Mr Abbott to purchase a further 80 ordinary shares following due diligence on Dragnet. Upon exercise of the option, Mr Abbott would hold half of the shares in the corporation. 12It was agreed that Dragnet was valued at $1.3 million. On 16 November 2006 a Memorandum of Particulars in respect of the transaction was prepared by Mr Cruz's accountant, Mr Ross Gatwood, and forwarded to Mr Abbott's solicitor. The transfer of 20 ordinary shares to Mr Abbott for no consideration was recorded in the corporation's records in a document headed "Circular Resolution of Member", on 13 November 2006. 13On 27 June 2007 Mr Cruz, Mr Abbott and his wife, Donna Helen Abbott, entered into what became known as the Company Agreement. An undated copy of that agreement was exhibited to Mr Cruz's affidavit sworn on 18 October 2011 as exhibit E-RC-1. The agreement provided for an option to be exercised on or before 12 noon on 30 June 2007, upon which, Mr Abbott would pay to Mr Cruz the sum of $242,769.00. 14The option was exercised by the first defendant, Future Network (Albury) Pty Limited by letter dated 29 June 2007. In that letter, the defendant, Christopher Abbott, had undertaken to make the necessary funding arrangement to fulfil the terms set out in Clause 13.2 of the Company Agreement. 15The consideration for the exercise of the option was not paid. Mr Abbott had become ill in April 2007 and underwent surgery and chemotherapy. Notwithstanding that, both Mr Cruz and Mr Abbott continued as directors of Dragnet between July and December 2007. In early December 2007 further discussions took place between Mr Cruz and Mr Abbott. On 13 December 2007 Mr Abbott resigned as a director of Dragnet out of concern that the corporation may have been trading while insolvent. It was agreed that the option price would be paid as follows: (a)$100,000 in cash; (b)Transfer of real property owned by Future Network (Albury) Pty Limited known as Lot 6 in DP1098610 at an agreed value of $245,000; and (c)The balance of $180,000 payable once further real property owned by Future Network (Albury) Pty Limited known as Lot 10 in DP1098610 was sold. 16A company resolution entitled "Circular Resolution of Members of the Company" dated 21 December 2007 was executed by Mrs Abbott on behalf of Future Network Family Trust and Mr Cruz, detailing the resolutions to approve the transfer of 80 fully paid shares from Mr Cruz to Mrs Abbott as trustee of the Future Network Family Trust and setting out the terms as agreed. 17On the same day, Lot 6 was transferred to Mr Cruz, together with the sum of $100,000. 18Lot 10 was eventually sold on 7 May 2009, but the proceeds were not paid to Mr Cruz.

Determination Of The Plaintiff's Claim 19By letter dated 13 August 2008, solicitors acting for Mr and Mrs Abbott wrote to solicitors acting for Mr Cruz acknowledging that his client had a liability to pay $180,000 to Mr Cruz upon sale of Lot 10. It is that admission upon which the plaintiff relied on to establish liability for the debt, as referred to in paragraph 3 above. 20To the extent that the Defence to the Amended Statement of Claim amounts to a denial of the matters pleaded, it does not defeat the plaintiff's claim. To the extent that the defence pleads that any obligation to pay the sum owing to the plaintiff is an obligation of the fourth defendant, namely, the Trust, that defence has not been made out. I accept the plaintiff's submissions that the Trust is not a legal entity which has capacity to contract. It was the Trustee that held the property for the benefit of the beneficiaries and unit holders. The liability remained with Mr Abbott to the extent that the Company Circular constitutes a valid and subsisting agreement between the parties. Mrs Abbott is also personally liable on the debt as a contracting party. 21The defendants also claimed that the debt owing was not $180,000, but $142,769. I do not accept that submission as it is based on a misconception. However, simple arithmetic demonstrates that the amount outstanding on the purchase price of $520,000, after the sums paid to a value of $100,000 and $245,000, is $175,000. There will therefore be a judgment entered in favour of the plaintiff for the sum of $175,000, plus interest from 7 May 2009 (being the date Lot 10 was sold).

The Cross Claim 22Most of the evidence on the hearing was in fact taken up with issues relating to the cross-claim. The defendant relied on affidavits sworn by himself on 26 March 2012 and 28 November 2012 and affidavits sworn by his accountant, Mr Phillip Worsley, sworn on 29 June 2012 and 28 November 2012. 23The issues to be determined by me in respect to the cross-claim are: (1)Are the representations as pleaded established? (2)Are those representations false? (3)Did Mr Abbott act on reliance of them in entering the Company Agreement or the "Varied Company Agreement". (4)If so, what damage did he suffer? 24The starting point for consideration of these issues is that from the outset Mr Abbott sought the assistance of his accountant, Mr Phillip Worsley, in respect of his dealings with Mr Cruz. Exhibit B in the proceedings was an email from Mr Abbott to Mr Worsley dated 3 October 2006 in the following terms: "Subject: chris abbott Phil Can we talk regarding a proposal that has been given to me regarding a rescue mission of an internet business that has cash problems he has offered me 10% ownership current and growth and 10% profit share I will be putting in only time no money and reorganising business management, finance and project management is 10% enough? please can you contact me for a suitable time to talk after 1pm today. (sic)" 25At about this time, it was not in issue that Mr Abbott had agreed to provide contract services to Dragnet to secure finances for that corporation. His remuneration was to be $100 per hour. 26Mr Worsley was the accountant and business adviser of Mr Abbott and his various family entities for a period of over ten years. He examined the financial records of Dragnet and prepared a report as to the value of the Dragnet business and cash flow projection on or about 31 October 2006. His valuation of Dragnet was $1.3 million. He believed that valuation was based on financial information contained in financial documents which included profit and loss statements for the period July 2006 to September 2006 and which were referred to in the proceedings as the "true and correct document", as it was signed by Mr Cruz on 2 November 2006 as being "true and correct". When asked in crossexamination whether he was content with the valuation that he prepared was an accurate valuation of the business that Mr Abbott was considering investing in, Mr Worsley said: "A: The question I was asked by Mr Abbott was, was the purchase price fair and reasonable, and the valuations I prepared which is a copy within the affidavit, was based upon the possible projection of the future of the business given certain growth factors. Now, the business itself, the valuation that I prepared based upon the information supplied to me was two major factors, cost of sales and labour costs. Mr Abbott was an expert within the internet area and believed that the cost of labour was excessive, and my valuation was based upon Mr Abbott's belief of what the proper cost of labour would be. Q: Was there any other input that Mr Abbott had as to assist you to prepare your valuation? A: The basis of the valuation that you have was based upon a business obtaining government subsidies to fund more internet sites for clients. Q: Did you see it as a risk that the government subsidies may not continue or be reduced? A: I wasn't asked that question, I was relying on the information Mr Abbott provided of what he believed the future of the business would be, for the valuation as I said, I was asked the question was the purchase price fair and reasonable, and based upon the information I was given, the purchase price established by Mr Cruz's accountant to me, at the time, was fair and reasonable." 27Mr Abbott, in his affidavit sworn 26 March 2012, set out the background to his dealings with Mr Cruz and his involvement in Dragnet. He was an experienced businessman with experience in raising finance. It was in the capacity of assisting with raising finance for the company that he initially became involved in October 2006. It was on the basis that he was successful in obtaining finance for Dragnet that Mr Cruz agreed to provide him with 20 shares in Dragnet, for no consideration and redeemable upon him buying 80 more shares to make up 50% of the shareholding. That led to Mr Abbott being provided with certain financial information relating to Dragnet, and him having Mr Worsley examine that material. 28It was on Mr Abbott's insistence that Mr Cruz signed the financial documents referred to above as being "true and correct" on 2 November 2006. 29On 21 November 2006 Mr Cruz announced in an email to Dragnet staff that Mr Abbott and himself were now 50% owners of Dragnet. Whilst Mr Abbott denied that that was correct, he was a director from 17 November 2006. 30One issue that arose that was relevant to the representations was whether Mr Abbott had access to the financial records of Dragnet for the 12 months following November 2006. It was Mr Abbott's contention that his access was limited and that Mr Cruz had represented to him inter alia that the MYOB financial records were always wrong and therefore there was no point looking at them, and further, that he could rely on what he was told by Mr Cruz as he was a CPA. 31Mr Abbott submitted that he was refused access to relevant financial information until after he had exercised the option to purchase shares in Dragnet in June 2007. He relied on an email he sent to Mr Cruz on 8 January 2007, however, that email made it clear that Mr Cruz was offering access to Dragnet's file server. More importantly, the evidence of Karen Sojkowski, a bookkeeper employed by Dragnet, was to the effect that she had been instructed by Mr Cruz to give Mr Abbott "whatever he wants" in respect of financial information. She deposed that Mr Abbott had full access to Dragnet's MYOB financial database from the time that he became a director. I accept Ms Sojkowksi's evidence in that respect. That evidence was corroborated in part by the evidence of Ms Storm, although she was incorrect in the dates of her employment. 32Mr Abbott's principal contention was that the information contained in the "true and correct document" was not accurate. In cross-examination Mr Abbott distinguished between financial documents that he had reviewed at Dragnet's premises between September 2006 and the end of June 2007 as being Excel spreadsheets but that he had restricted access to the MYOB database. 33Mr Abbott was asked what role he had in the creation of the "true and correct document". His evidence was as follows: "A: I requested the document from Mr Cruz, we were in discussion about finance and valuation. I had no input to the document. His suggestion to Mr Cruz was that he showed me the original document that he printed out and there was calculating errors on it and I said to Mr Cruz to fix it up because we can't present this as it is." 34Mr Abbott gave evidence that he and Mr Cruz did discuss some of the items in the depreciation schedule that had become the "true and correct document", and the "true and correct document" reflected their discussions. 35Mr Cameron Diffey gave evidence in relation to the "true and correct document". It comprised an Aged Payables Report and an Aged Receivables Report for period 30/9/06 - 2/11/06, together with a Profit and Loss Statement for the period July 2006 through September 2006. 36Mr Diffey reviewed those documents and the documents held by the corporation's account and found a variance of $23,555 which he considered to be not of significance. Mr Diffey considered that, having regard to the due diligence process undertaken by Mr Worsley on behalf of Mr Abbott, Mr Worsley did not rely on the "true and correct document" in providing a valuation to Mr Abbott. I accept that evidence, and to the extent that Mr Diffey's evidence conflicts with Mr Abbott's evidence about the "true and correct document", I prefer the evidence of Mr Diffey. He was a qualified accountant with no interest in the outcome of the proceeding.

Legal Principles 37The first representations pleaded by the cross-claimant are oral representations. The second representations are entirely in writing (i.e. a balance sheet and the "true and correct document") and the third representations are pleaded as partly oral and partly in writing. The cross-claimant bears the onus of proof in respect of each representation alleged, and the Court "must feel an actual persuasion of its occurrence or existence" per Dixon J, as he then was, in Briginshaw v Briginshaw (1938) 60 CLR 336 at 361; - see also Helton v Allen (1940) 63 CLR 691 at 712. 38In a claim alleging misleading and deceptive conduct contrary to s 52 of the Trade Practices Act 1974 (Cth) or s 42 of the Fair Trading Act 1987, McClelland CJ in Equity said in Watson v Foxman (2000) 49 NSWLR 315 at [318]-[319]: "Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the Court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question of whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word of phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlayed, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience." 39McClelland CJ in Equity went on to state that in the absence of some reliable contemporaneous record or other satisfactory corroboration, a party relying on spoken words as the foundation of a cause of action of this type faced serious difficulties of proof. He went on to say that his comments were equally applicable to causes of action based on contract and on equitable estoppel. In my view they are equally applicable in a case such as this where false representations are alleged. (See also BBB Contructions v Aldi Foods [2010] NSWSC 1352 at [6] - [10] where McDougall J affirmed and adopted these principles, and De Costi Seafoods (Franchises) Pty Limited & Or v Wachtenheim & Or (No. 3) [2013] NSWDC 54, per Taylor DCJ at [18] - [22]. 40Whether the cross-claimants relied on any representation is a question of fact to be determined on the whole of the evidence. The terms of the Company Agreement, or "Varied Company Agreement" may be relevant to that question as is the availability of accounting and legal advice to the party alleging reliance. 41In De Costi Seafoods, supra, Taylor DCJ said in respect of unconscionable conduct: "322 At common law, unconscionable conduct required one party to take unconscientious advantage of another party who is at a special disadvantage (Blomley v Ryan (1956) 99 CLR 362 at 415 per Kitto J). The special disadvantage may be "illness, ignorance, inexperience, impaired facilities, financial need or other circumstances affecting his ability to conserve his own interests". It is necessary that the "special disability was sufficiently evident to the other party to make it prima facie, unfair or 'unconscionable'" that the benefit be retained (Louth v Diprose (1992) 175 CLR 621, 637). Unconscionability requires that the will of the disadvantaged party not be independent and voluntary, or unable to make a worthwhile independent assessment as to what is in his best interest: Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 at 461. Inequality of bargaining power is insufficient: Australian Competition and Consumer Commission (ACCC) v C G Berbatis Holdings Pty Limited (2003) 214 CLR 51 at [11]. A "high level of moral obloquy" or "highly unethical" conduct is required: Attorney General (NSW) v World Best Holdings Limited (2005) 63 NSWLR 557 at [339]." 42I have had regard to these various principles in determining the issues in this case.

Determination 43Having regard to the whole of the evidence, I am not satisfied that the representations contained in paragraph 6.1 and 6.3 were made by the cross-defendant. Further, I am not satisfied that the representations contained in paragraphs 6.2 and 6.4, if made, were false. 44There was no contemporaneous record of any of the alleged oral representations comprising the first representation and I am therefore not satisfied that those representations have been established as false representations. 45The second representations comprising the balance sheet dated 30 September 2006 and the "true and correct document", for the reasons set out above, could not be regarded as false representations. To the extent that they contained error identified by Mr Diffey's evidence, that error was de minimis. In any event, Mr Abbott was aware of the financial information contained therein and where it was derived from. He requested Mr Cruz to correct the "true and correct document" before it was signed. He also had the benefit of Mr Worsley's advice in respect of the financial position of Dragnet and the due diligence he conducted. I am therefore not satisfied that either category of the documents pleaded amount to false representations. 46The third representation is alleged to be partly oral and partly in writing relating to satellite dishes installed by Dragnet on its customer's rooves with a total value of $1.9 million. The evidence established that whilst Dragnet claimed ownership of the dishes, in respect of some 170 of those satellite dishes, installation was carried out on the basis that the customer retain ownership of the dishes upon termination. 47I am satisfied that a conversation took place in November 2006 between Mr Cruz and Mr Abbott about satellite dishes. I accept Mr Abbott's evidence that Mr Cruz referred him to the customers contract on Dragnet's website. I am not satisfied that the cross-defendant made any false representation in doing so. 48Further, in respect of each of the three representations pleaded, I am not satisfied that Mr Abbott relied on any of them in entering the Company Agreement or the "Varied Company Agreement". The Company Agreement was a detailed document which each party had the benefit of accountancy and legal advice before entering into. Clause 27.9 of the Agreement provided as follows: "27.9 Entire Agreement This document, together with the other transaction documents, constitutes the entire agreement between the parties in connection with its subject matter and supersedes all previous agreements or understandings between the parties in connection with its subject matter." 49I am therefore not satisfied on the balance of probabilities that Mr Abbott was induced by any of the alleged representations to enter into either the Company Agreement or to exercise the option to purchase the shares, or to enter into the Varied Company Agreement. Rather, he was an experienced businessman at the time and had for a long period of time relied on the advice of his accountant and business adviser, Mr Worsley. He had ample opportunity to conduct due diligence in respect of the financial position of Dragnet, for which he relied upon Mr Worsley. He understood at all relevant times that he was engaged in a rescue mission which must have meant that he knew and was aware of Dragnet's financial difficulties. There was no inequality of bargaining position between Mr Cruz and Mr Abbott relied on by the cross-claimants. 50Nor am I satisfied that by virtue of his illness, in the circumstances of this case, that Mr Abbott suffered a special disadvantage. There was no evidence that his illness affected any of his decision making leading into the making of the Company Agreement on 27 June 2007. That his illness meant that he was absent from the business between July and November 2007, did not deter him from negotiating the "Varied Company Agreement" in December 2007. There was no unethical conduct, dishonesty or sharp practice established on the part of Mr Cruz in respect of Mr Abbott's illness, and having regard to the authorities outlined above, I am not satisfied that the cross-claimant's case, based on unconscionability, is made out. 51For all of the above reasons, I am not satisfied that: (1)Any of the representations, if made, were false; (2)Mr Abbott was induced to enter the Company Agreement or the "Varied Company Agreement" by any representation made by Mr Cruz; (3)He suffered any damage thereby; or (4)The cross-defendant engaged in unconscionable conduct. 52I therefore find that the cross-claimants are not entitled to the declaratory relief claimed here, or to payment back to them of the part-consideration they paid for the shares, i.e. $345,000. The cross-claim will therefore be dismissed.

Orders 53I order as follows: (1)Verdict and Judgment for the Plaintiff against the First, Second and Third Defendants in the sum of $175,000, plus interest. (2)The Plaintiff is entitled to interest on the sum of $175,000 from 7 May 2009 until 7 June 2013. (3)The Defendants are to pay the Plaintiff's costs of the proceedings. (4)The Cross-Claim is dismissed. (5)The Cross-Claimants are to pay the Cross-Defendant's costs of the Cross-Claim. (6)The exhibits are returned forthwith. (7)The parties are granted liberty to apply in respect of any special costs orders on 7 days notice. (8)Note Interest at the prescribed rate for the period 7 May 2009 to 7 June 2013 is $60,012.98. (9)Verdict and Judgment for the Plaintiff against the First, Second and Third Defendants in the sum of $235,010.00. (10)Direct the Plaintiff to file, by email to my associate, a Schedule of the Interest Calculation within 7 days. (11)File to be returned to the Albury Registry once applications concerning interest and costs have been dealt with. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 June 2013