Federal Court of Australia|1989-07-07|Before: Mr P

Re Henjo Investments Pty Limited; Henry Saade and Saade Developments Pty Limited v Collins Marrickville Pty Limited [1989] FCA 246; 89 ALR 539; (1989) 40 FCR 76 (7 July 1989)

Re: HENJO INVESTMENTS PTY LIMITED; HENRY SAADE and SAADE DEVELOPMENTS

Trade Practices Act - measure of damages in respect of sale of restaurant business induced by misrepresentations of the vendor - consequential losses flowing from conduct of business by purchaser - assessment of damages for burden of uneconomic lease of the restaurant until May 1990 - problems of causation of losses discussed.

Counsel for the Respondent: Mr P.R. Graham Q.C.

with Mr G.A. Moore

Solicitor for the Respondent: Sly and Weigall

The appeal be allowed and the judgment entered in the sum of $902,243.47 be set aside.

In lieu of the judgment set aside there be judgment in the sum of $817,243.47.

The respondent pay the appellants' costs of the appeal and of the cross-appeal.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The appellants, Henjo Investments Pty Limited ("Henjo Investments"), Henry Saade and Saade Developments Pty Limited, have appealed against an award of damages made against them in favour of the respondent, Collins Marrickville Pty Limited ("Collins Marrickville"). Collins Marrickville has cross-appealed, seeking that the award of damages be increased.

2. The proceedings before his Honour were based principally upon the Trade Practices Act 1974 (Cth) alleging that Henjo Investments had, in breach of s.52 of the Trade Practices Act, engaged in conduct that was misleading or deceptive or likely to mislead or deceive and that Saade had been involved in that contravention.

3. The dispute between the parties arose from the sale by Henjo Investments to Collins Marrickville of a licenced restaurant, "The New York Deli", situated in Double Bay. The restaurant, which first opened in 1984, had an unusual decor displaying attractive foods in stands where they could be viewed and selected by patrons. The restaurant was approved by the Woollahra Municipal Council and licensed by the Licensing Court of New South Wales for a maximum of 84 persons seated at 26 tables. However, when in early 1985 Collins Marrickville negotiated for the purchase of the business, the restaurant contained 120 seats and there were a further 8 bar stools in the passageway in front of the bar. The bar stools did not conform to any plan approved by the Licensing Court and were contrary to the terms of the licence.

4. On 2 March 1985, the business was advertised for sale. On inquiry being made, the agent informed Collins Marrickville that the business being offered for sale was a licensed coffee lounge-restaurant with 128 seats. No further representation was made as to the seating. A representation was made as to the gross takings of the business, $21,000 per week, and a term to that effect was inserted in the contract of sale. A trial period of one month was nominated. Collins Marrickville made no inquiries as to the number of seats or as to the set-up of the restaurant but instructed its solicitor in writing to "confirm all council by-laws etc are complied with" and "check and spell out clearly the type of liquor licence and make sure restaurant is complying and that our purposes (in future) will apply". Unfortunately, the solicitor did not do so.

5. The trial period was 4 April 1985 to 1 May 1985. The gross takings in this period matched or were close enough to the warranted takings to satisfy Collins Marrickville. Settlement took place on 1 May 1985. Six weeks later, on 14 June 1985, a Commissioner of the Licensing Court inspected the New York Deli and observed the 8 bar stools. He ordered that they be removed and this was done. Collins Marrickville then ascertained that the legal capacity of the restaurant was 84 persons. However, no direction was given by, or request made by, the Woollahra Municipal Council or the Licensing Court that the excess number of seats be removed. Indeed, it appears that Collins Marrickville actually increased the seating a little.

6. Collins Marrickville commenced proceedings in the Federal Court on 5 August 1986. On 16 April 1987, the learned trial Judge held that Mr Saade had told the agent that there were 128 seats in the restaurant, that this information had been passed on to Collins Marrickville and that Henjo Investments' further silence on the matter had misled Collins Marrickville as to the legal seating capacity of the restaurant and as to the lawfulness of the 8 bar stools.

7. Subsequently, on 20 October 1987, after a further hearing, the learned trial Judge ordered that the contract of sale be rescinded and that compensation for the loss which Collins Marrickville had suffered be paid. On 26 February 1988, a Full Court of this Court disallowed an appeal against his Honour's finding on the issue of liability, but allowed the appeal insofar as it dealt with the question of relief. The Full Court held, primarily because of the time that Collins Marrickville had held the restaurant and because of changes that had occurred in the restaurant over the period, that it was too late to rescind and that Collins Marrickville should be left to its remedy of damages. Accordingly, the matter was remitted to the trial Judge for rehearing on the question of damages. His judgment on this was given on 2 December 1988 and it is from that judgment that the appeal and the cross-appeal arise.

8. In the judgment under appeal, his Honour did not specifically discuss the authorities governing the award of damages in a case where a misrepresentation in breach of s.52 of the Trade Practices Act was a cause of the purchase of a business or like asset. However, in his judgment of 20 October 1987, his Honour had this to say:-

"However, in relation to the assessment of

damages for deceit, this approach has been

firmly rejected. In an old case, Twycross v

Grant (1877) 2 CPD 469, Cockburn CJ discussed

at some length the argument that a plaintiff

should be allowed to recover the whole of the

losses sustained by him as a result of

entering into the transaction. At pp 544-545

he rejected the argument, drawing a

distinction between a loss occasioned by a

latent defect at the time of purchase and a

loss from a supervening cause:

'If a man is induced by misrepresentation

to buy an article, and while it is still

in his possession, it becomes destroyed

or damaged, he can only recover the

difference between the value as

represented and the real value at the

time he bought. He cannot add to it any

further deterioration which has arisen

from some other supervening cause. If a

man buys a horse, as a racehorse, on the

false representation that it has won some

great race, while in reality it is a

horse of very inferior speed, and he pays

ten or twenty times as much as the horse

is worth, and after the buyer has got the

animal home it dies of some latent

disease inherent in its system at the

time he bought it, he may claim the

entire price he gave; the horse was by

reason of the latent mischief worthless

when he bought; but if it catches some

disease and dies, the buyer cannot claim

the entire value of the horse, which he

is no longer in a condition to restore,

but only the difference between the price

he gave and the real value at the time he

bought.'

The principles stated by Cockburn CJ were

applied by Dixon J in Potts v Miller (1940) 64

CLR 282 at pp 297-299, his Honour commenting

at p 298:

'This reasoning makes it necessary to

distinguish between the kinds of cause

occasioning the deterioration or

diminution in value. If the cause is

inherent in the thing itself, then its

existence should be taken into account in

arriving at the real value of the shares

or other things at the time of the

purchase. If the cause be 'independent,'

'extrinsic,' 'supervening' or

'accidental,' then the additional loss is

not the consequence of the inducement.'

Doyle v Olby (Ironmongers) Ltd [1969] EWCA Civ 2; (1969) 2 QB 158

was a fraud case in which the plaintiff was

induced to buy a business by the

misrepresentations of the defendant. Lord

Denning MR at p 166 referred to a statement

made by Lord Atkin in Clark v Urquhart (1930)

AC 28 at pp 67-68 that, in an action in

deceit, damages were 'based on the actual

damage directly flowing from the fraudulent

inducement'. He applied this principle so as

to award to Mr Doyle damages compensating him

for all the losses which he had sustained in

the operation of the business, saying at

p 167:

'The defendant is bound to make reparation

for all the actual damages directly

flowing from the fraudulent inducement.

The person who has been defrauded is

entitled to say:

'I would not have entered into this

bargain at all but for your

representation. Owing to your

fraud, I have not only lost all the

money I paid you, but, what is more,

I have been put to a large amount of

extra expense as well and suffered

this or that extra damages.'

All such damages can be recovered: and it

does not lie in the mouth of the

fraudulent person to say that they could

not reasonably have been foreseen. For

instance, in this very case Mr Doyle has

not only lost the money which he paid for

the business, which he would never have

done if there had been no fraud: he put

all that money in and lost it; but also

he has been put to the expense and loss

in trying to run a business which has

turned out to be a disaster for him. He

is entitled to damages for all his loss,

subject, of course to giving credit for

any benefit that he has received.'

This passage was cited with approval in the

judgment of the Full High Court of Australia

in South Australia v Johnson (1981) 42 ALR 161

at p 170.

The formula 'loss flowing directly from the

fraudulent inducement' was adopted in the High

Court in Gould v Vaggelas (1985) 157 CLR 215.

Gibbs CJ, at p 220, pointed out that, in an

action of deceit concerning a purchase, the

measure of damages usually applicable is the

difference between the real value of the

property at the time of purchase and what the

plaintiff paid for it. But his Honour went on

to say that this was only a special

application of the general principle that a

plaintiff is entitled to recover as damages a

sum representing the prejudice or disadvantage

which he has suffered in consequence of his

altering his position under the inducement of

the fraudulent misrepresentations made by the

defendants. 'In other words, the general

principle is that the plaintiff is to be put,

so far as possible, in the position he would

have been in if he had not acted on the

fraudulent inducement'. Wilson J, at p 242,

referred to the use of the phrase 'the value

of the property acquired' in South Australia v

Johnson 'as taking account of consequential

losses provided (and it is an important

proviso) that they flowed directly from the

fraudulent inducement'. Brennan J discussed

the measure of damages at pp 254-255,

concluding with the proposition that 'damages

are limited to those that flow directly from

the fraudulent inducement'. Dawson J put the

matter in slightly different words at p 267

saying that 'for a loss to be recoverable it

must be clear that it is suffered as a direct

consequence of the deceit and is not referable

to something else such as the purchaser's

ineptitude in the conduct of the business'.

In both Doyle and Gould the whole of the

losses proved by the plaintiffs were allowed

as damages. But in each case the relevant

representations related to matters fundamental

to the profitable operation of the business:

the level of income and of expenses. The

losses were caused by inherent characteristics

of the business in relation to which

misrepresentations were made. In the present

case the trading losses, except to the extent

that they have been increased by the loss of

the bar stools, have been occasioned by

factors in connection with which there was no

misrepresentation. This is an important

distinction which makes it impossible directly

to apply Doyle or Gould so as to allow

recovery of all the trading losses incurred by

the applicant."

It has not been suggested that the principles enunciated by his Honour were inappropriate to the facts before him or that, in the judgment under appeal, his Honour did not apply them. His Honour's exposition accords, for example, with that of French J. in Pavich & Anor v. Bobra Nominees Pty Ltd (Unreported delivered 4 August 1988).

9. His Honour had evidence of value from Mr R.E. Roberts, a valuer with experience in licensed premises. His Honour accepted the substance of Mr Roberts' evidence, namely, that assuming a turnover at the time of sale of $21,000 per week, the warranted turnover, the restaurant would have produced so little profit that it was worthless, save for the value of its plant and fittings on a breakup. His Honour said:-

"Mr Roberts thought that, if the expenses of

the business had been properly analysed by a

prospective purchaser, even with the bar

stools, that is with a turnover of $21,000 per

week, the nett profit would have been seen to

be so low that the purchaser would not have

been willing to go ahead with the

transaction."

10. In his judgment of October 1987, his Honour had found that the loss of the bar stools would have reduced the gross receipts by 10%. In the judgment under appeal, His Honour stood by this finding. It was challenged by Collins Marrickville as being too low. However, consideration of the evidence has led me to the view that there was no error in his Honour's conclusion in this respect. Indeed, the bar stools were not an original concept of the restaurant but were put in place in late 1984. There was evidence that the restaurant was as busy before the installation of the bar stools as it had been afterwards. In any event, the main feature of the restaurant was the food and the manner in which it was presented.

11. In his judgment of October 1987, the trial Judge said:-

"In the present case I am satisfied that most

of the losses were caused by factors which had

nothing to do with the misrepresentations as

to seating capacity. They were not 'directly

attributable' to the misrepresentations and

ought not to be allowed."

"When I previously assessed damages I acted

upon the assumption that, under Henjo

Investment, the restaurant traded profitably.

... This was a natural assumption for the

Court; the first trial of damages was

conducted upon that basis. However, we now

have Mr Roberts' analysis. In the light of

that analysis, the Henjo Investments trading

figures not having been proved, one must be

sceptical about the claim of profitability.

It cannot properly be assumed that, in the

hands of a purchaser who would be required to

pay the increased rental after 19 May 1985 and

who was not willing to defraud the Taxation

Commissioner, the business would have been

profitable, in the absence of supervening

factors.

The significance of the assumption to which I

have referred is that it led me to attribute

all of the trading losses incurred under the

management of Collins Marrickville to changes

in the conduct of the restaurant which had

occurred after the completion of the purchase.

As it seemed to me that the removal of the bar

stools constituted only a minor element in the

list of changes, assessed at 10%, I allowed

recovery of only 10% of the losses. But once

one accepts the possibility that the business

was inherently unprofitable, it becomes

obvious that this approach may be unfair to

the applicant; the losses may be partly

attributable to an inherent characteristic of

the business which it was induced by

misrepresentation to buy. The applicant is

entitled to be compensated for losses which

fall within that category."

12. An issue before the trial Judge was that of causation, of which McHugh J.A said in Nader v. Urban Transit Authority of New South Wales (1985) 2 NSWLR 501 at pp 530-1:-

"Causation involves two elements. The

plaintiff must prove as a pure question of

fact that the defendant's negligent conduct

caused his injury and that the damage is one

for which the defendant bears legal

responsibility. Causation in fact is to be

determined, not according to scientific or

philosophical theories of causation, but by

'common sense principles': Leyland Shipping Co

Ltd v Norwich Union Fire Insurance Society Ltd

(1918) AC 350 at 362; Fitzgerald v Penn (1954)

[1954] HCA 74; 91 CLR 268 at 277. In Stapley v Gypsum Mines

Ltd [1953] UKHL 4; (1953) AC 663 at 681 Lord Reid said that

'if there is any valid, logical or scientific

theory of causation it is quite irrelevant in

this connection. In a court of law this

question must be decided as a properly

instructed and reasonable jury would decide

it'. Although this passage brings out the

point that the test is the same for the court

as for the jury, lawyers nevertheless have

attempted to analyse the notion of cause in a

way which is more refined than the blunt

commonsense of the juryman's approach. In JS

Mill's theory of causation the cause of an

event was the sum of the conditions which were

jointly sufficient to produce the event.

Lawyers, and particularly academic lawyers,

have modified Mill's theory of causation and

adapted it for legal purposes. The adaption

of Mill's theory holds that every necessary

member of the group of conditions jointly

sufficient to produce the injury or damage is

a cause of that injury or damage: 'Causation

and Remoteness of Damage', International

Encyclopaedia of Comparative Law, vol XI Ch 1

at 27; Prosser, Law of Torts, 4th ed (1971) at

237; Fleming, Law of Torts, 6th ed (1983) at

171; Hart & Honore, Causation in the Law

(1959) at 106. This has led in turn to the

use of the shorthand but perhaps more

practical 'but for' test: Williams, Causation

in the Law (1961) Cambridge LJ 62 at 63-66;

Hoffmueller v Commonwealth (1981) 54 FLR 48 at

52. A variation of the 'but for' test is

found in the statement of Dixon CJ, Fullagar

and Kitto in Fitzgerald v Penn (at 277) that

it would have been better to explain the

position to the jury 'by telling them to ask

themselves the question whether they were

satisfied that the collision would not have

taken place with the same results if driver A

had been driving at a reasonable speed'.

Another variation is the question 'Given this

wrongful act (or other designated event) and

given this loss or harm, is the latter the

consequence of the former?': Salmond, Law of

Torts, 12th ed (1957) at 721-2."

13. McHugh J.A. subsequently developed this point in Alexander and Ors v. Cambridge Credit Corporation Limited and Anor (1987) 9 NSWLR 310 where his Honour said, at pp 350-1:-

"Since the act or omission of a person will

only be one of a set of conditions or

relations necessary and sufficient to produce

the result to which legal liability attaches,

a choice has been forced upon the law. It

must either abandon causation as a requirement

of legal liability or be content to declare

that, depending on the circumstances,

responsibility for only one of the set of

conditions or relations necessary and

sufficient to produce a result is enough to

attract liability. It has preferred the

latter alternative. Hence in the law of

contract, it is sufficient that the breach

'causally contributed' to the loss: Norton

Australia Pty Ltd v Streets Ice Cream Pty Ltd

[1968] HCA 61; (1968) 120 CLR 635 at 643. However, whether

or not a particular act or omission attracts

legal liability ultimately depends on policy

and not logic. Thus the common law is

concerned with whether on a particular

occasion a particular act or omission

contributed to the occurrence of a particular

event (causation) and, if so, with whether

responsibility should attach to that act or

omission (remoteness). In principle,

therefore, there is no reason why the legal

theory of causation should be concerned with

any question other than whether a particular

act or condition was one of the conditions or

relations necessary to complete the set of

conditions which represents the total cause.

This is the basis of the 'but for' test of

causation which is championed by many legal

writers and applied in practice by courts and

juries. It accords with ordinary habits of

thought and speech. People attribute as a

cause any condition or relation known to them

'but for' which the result would not have

occurred. Those who favour the 'but for' test

as the exclusive test of legal causation urge

that a person should be liable for all the

consequences of his conduct as long as they

are within the scope of reasonable foresight,

if the issue is in tort, and within the

reasonable contemplation of the parties if the

issue is in contract".

"In general, the application of the 'but for'

test will be sufficient to prove the necessary

causal connection. But that test is only a

guide. The ultimate question is whether, as a

matter of common sense, the relevant act or

omission was a cause."

See also Barnes and Ors v. Hay (1988) 12 NSWLR 337 where difficulties in the application of a strict "but for" test were discussed. At p 339, Hope and Priestley JJA said:-

"Few judges have the time to plumb these

philosophical depths by giving a full

consideration to the conceptual issues

involved. What happens in practice and what

we think the law requires is that the court

decides whether the connection of the

negligent act or omission of the defendant to

the plaintiff's loss was such that the

defendant should be made liable for it."

To like effect were the remarks of Windeyer J. in The National Insurance Company of New Zealand Ltd v. Espagne [1961] HCA 15; (1961) 105 CLR 569 at 590-2. At p 592 his Honour commented:-

"As the purpose of the inquiry into causes is

to attribute or apportion legal

responsibility, and not to find ultimate

explanations, the factor chosen by the common

law is that which common sense fixes upon as

relevant to responsibility in a particular

case. ... 'In the varied web of affairs, the

law' said Lord Wright, 'must abstract some

consequences as relevant, not perhaps on the

grounds of pure logic but simply for

practical reasons' (Liesbosch, Dredger v.

S.S. Edison (Owners)(1933) AC 449, at

p 460. And in looking back to cause instead

of forward to consequence the same rule applies."

14. This was the task which confronted the trial Judge, and a difficult task it was on the evidence before him.

15. The trial Judge considered that the misrepresentations had been a cause of the purchase of the restaurant. He therefore first assessed $445,105, the difference between the price paid for the restaurant, $500,000, and its actual value at the date of purchase, $54,895, and there is no issue as to that. This was reduced by $200,000 owing under a mortgage which his Honour ordered be rescinded. His Honour awarded certain legal and miscellaneous expenses and there is no issue with respect to these matters. His Honour then turned to consequential losses. His Honour allowed a part of the trading losses incurred up to 30 June 1986, by which time his Honour thought that the purchaser, Collins Marrickville should have realised its position and closed the restaurant. His Honour then turned to the lease which, on Mr Roberts' evidence was an onerous lease running until 1990. His Honour proceeded on the footing that it would have taken Collins Marrickville six months to dispose of the lease after closing down the business and that, in disposing of the lease, Collins Marrickville would have had to offer a rental subsidy of 25% of the reserved rent. His Honour therefore allowed an amount equal to the rent and outgoings payable for the six months from 1 July 1986 to 31 December 1986. In relation to the position from 1 January 1987 until the termination of the lease in 1990, his Honour allowed a sum of $173,999.05 for rental subsidy. His Honour allowed various amounts for prejudgment interest. The total awarded by his Honour was $902,243.47.

16. In this appeal, both the appellant, Henjo Investments and the cross-appellant, Collins Marrickville, have contended that the trial Judge should have given more weight to the facts which actually occurred.

17. Collins Marrickville did not, in fact, close down the business on 30 June 1986, but continued it until the middle of 1988, when an arrangement was made whereby persons interested in Collins Marrickville took an interest in a restaurant to be established on the premises to be known as the Bombay Bicycle Club. The organisation establishing the restaurant was an overseas organisation which specialised in expensive Indian restaurants of that name. After 1 July 1988, the Bombay Bicycle Club took over payment of the rent.

18. Counsel for Collins Marrickville formally submitted that the trial Judge should have allowed the full trading losses of Collins Marrickville up to the time of the actual closure of the New York Deli in 1988 and that his Honour should therefore have awarded damages totalling $1,881,927.60. In argument before the Court, however, counsel did not contend strongly for an award of trading losses after 30 June 1986, and that claim appears to be without merits. Collins Marrickville was not "locked in" to carrying on the restaurant but could have discontinued at any time.

19. Counsel, nevertheless, submitted with force that his Honour ought to have allowed the full trading losses from 1 May 1985 to 30 June 1986, $262,048, rather than the losses which his Honour calculated, $114,201.50.

20. There is much to be said for counsel's submissions that the basis which his Honour adopted for distinguishing between losses which were inherent in the business and losses which were due to supervening causes was not strong. The changes which Collins Marrickville made to the business were not substantial. Although over a period of time the business became associated with the new management and with the ambiance which that management reflected, it is difficult to identify specific matters said to be inherent in the business and different matters said to be attributable to supervening events.

21. Counsel submitted that Collins Marrickville had taken all reasonable steps to mitigate its loss and that no reduction should have been made from the trading losses actually incurred. Counsel's submissions reflected the remarks of French J. in Nella & Ors v. Kingia Pty Ltd & Ors (Unreported, delivered 2 December 1988) when his Honour said:-

"I make no allowance for some of the

extraneous factors which may have influenced

trading results such as Mr Brown's management

style and other incidents. The extent to

which such factors may be taken into account

will depend upon the extent to which they may

be seen to have broken the chain of causation

from wrong to loss. To a degree a wrongdoer

must take the victim and his times and

circumstances as he finds them."

22. However, his Honour's judgment must be looked at as a whole. His Honour came to the view that the express and implied representations as to seating capacity and as to the lawfulness of the 8 bar stools were a cause of Collins Marrickville's acquisition of the New York Deli, a business which his Honour thought was worthless save for the breakup value of its plant and equipment. His Honour also found that the number of seats played no significant part in the trading losses which subsequently occurred and that the loss of the bar stools played only a minor part therein.

23. His Honour's views find firm support in the evidence. The bar stools had only been in place for a few months when the business was purchased and do not appear to have had a major influence on the business. The gross turnover of the business remained about the warranted level for some time. But in the end the restaurant fared badly. His Honour thought that the misfortunes of Collins Marrickville came about principally because the New York Deli was basically unprofitable and because, over a period of time, the management of Collins Marrickville not only failed to stem the losses but brought about a loss in turnover and patronage.

24. Had the trial Judge decided to disregard trading losses altogether, he would have taken into account the capital loss suffered by Collins Marrickville on the purchase of the New York Deli including any loss resulting from the fact that Collins Marrickville was contracted to an onerous lease which ran until 1990. If the trial Judge had considered that it would have taken six months to dispose of the lease and that Collins Marrickville would have had to subsidise the transferee, the damages so assessed would have been a little less than the amount actually awarded. As it is, the trial Judge thought fit to allow some amounts in respect of loss of profits and there is no challenge to this.

25. A greater loss was in fact sustained. But what his Honour had to calculate was the loss flowing from the representations which were a breach of s.52 of the Trade Practices Act. His Honour's means of calculation achieved this. Collins Marrickville knew within 6 weeks of purchase that the representations were false. Yet it chose to carry on with the restaurant. Not all the losses incurred thereafter could be attributed to the representations. I would not allow any greater sum that that assessed by his Honour. I see no fault in the way his Honour approached the matter.

26. This is a case where different judges would be likely to select different figures and different bases for an award of damages. No figure for or basis of an award of damages stands out with clarity as being more appropriate that that selected by his Honour. His Honour chose to accept the evidence of the valuer, Mr Roberts. He was entitled to do so and an appellate court, not having seen the witnesses and not having the same familiarity with the whole of the evidence as his Honour had, ought not to draw conclusions of which the best that can be said is that they are equally as open as the conclusions drawn by his Honour.

27. Whether the lease was onerous and what sum should be allowed for the liability imposed upon Collins Marrickville by the high rent were matters for his Honour. His Honour's findings were based on the evidence before him.

28. Counsel for Henjo Investments submitted, though not strongly, that his Honour should not have allowed the full rent and rates for the six months' period, 1 July 1986 to 31 December 1986. However, the evidence before his Honour as to the negotiations between Collins Marrickville and the Bombay Bicycle Club show that it took Collins Marrickville almost six months to obtain an assignee of the lease. I do not see any ground for rejecting his Honour's view on this point.

29. Counsel also submitted that no allowance should have been made for losses that did not occur and that, after 1 July 1988, the liability for the whole of the rent was accepted by the Bombay Bicycle Club. However, it would be inconsistent with the way in which his Honour approached the matter to base the award upon the dealing with the Bombay Bicycle Club. That transaction was unusual. Collins Marrickville contributed to the project and shareholders in Collins Marrickville took a financial interest in the venture. All this occurred a long time after the transaction between Henjo Investments and Collins Marrickville. His Honour correctly allowed compensation for the onerous lease, into which Collins Marrickville entered as a result partly of the misleading and deceptive conduct of Henjo Investments, rather than allowing compensation for all the losses which Collins Marrickville suffered thereafter.

30. In my opinion, it has not been shown that his Honour's award of damages was erroneous in any respect.

31. The trial Judge ordered that Henjo Investments should pay the whole of the costs of Collins Marrickville incurred after the date of the decision of the Full Court, 26 February 1988. In this appeal, counsel for Henjo Investments submitted that all or some of those costs would have been avoided had Collins Marrickville adduced proper evidence of damage during the first hearings. His Honour rejected a like submission as, by its orders as to costs, the Full Court had "'wiped the slate clean', leaving the further costs of the matter to be dealt with in the usual way." His Honour was correct in this approach for the orders made by the Full Court took into account and made allowance for the fact that there would have to be another hearing at which additional evidence would be adduced. See [1988] FCA 40; 79 ALR 83 at 105, 110. I see no ground for interfering with his Honour's order as to costs.

32. I would dismiss both the appeal and the cross-appeal with costs.

I agree, except in respect of an issue to which I shall turn at once, with the way in which Davies J., in his reasons, disposes of the questions raised by the appeal and the cross-appeal.

2. The one aspect of the appeal which has given me concern arises as follows. The learned trial judge, having reached the conclusion that the only reasonable course for the respondent to take, as at 30 June 1986, was to close down the restaurant, and having reached the further conclusion that, if it had done so, it would have been confronted with the grave problem of a continuing liability to meet its obligations under an uneconomic lease running until 20 May 1990, had the unenviable task of assessing the appropriate measure of relief in respect of the period after 30 June 1986. He sought to solve the problem by first determining how long it would have taken the respondent, had it acted with a proper degree of vigour, to achieve an assignment of the lease; and by secondly assessing the amount of the rental subsidy which it would have had to offer so as to make the rent economic in order to attract an assignee. His Honour's answer to the first question was that a period of six months would have been required as at 30 June 1986. He answered the second by calculating an amount to be added to the rental for the balance of the term of the lease, after the expiry of the six months on 1 January 1987, totalling $173,999.05.

3. I do not accept the view that the respondent's failure promptly and unequivocally to disaffirm the contract, which was held in Henjo Investments Pty Ltd v. Collins Marrickville Pty Ltd [1988] FCA 40; (1988) 79 ALR 83 to be one of the factors barring its claim to rescind, also bars any right to damages for the consequences of the terms of the lease. These were not new obligations undertaken by the respondent on or after 30 June 1986, nor was the trial judge representing them as obligations so undertaken. What the trial judge was doing was applying a measure to enable him to assess the effects already inherent in the situation as at 30 June 1986; even if the respondent did not then realize it, that situation involved an already existing liability to suffer losses, though those losses would reach fruition in the future. The wind had already been sown, though the whirlwind was yet to be reaped. In such a case, there is to my mind no theoretical difficulty about awarding damages to take account of all the losses inherent in the situation, even if the contract is treated as affirmed.

4. It is plain that the Full Court which decided the earlier Henjo Investments appeal (supra) contemplated an assessment of damages which would contain an allowance for the continuing burden of the lease. For Lockhart J. (with whose judgment I agreed) said at 103:

"It is plain that the remaining obligations of

Collins Marrickville and of Mr Collins with

respect to the remaining two years or so of

the lease are substantial; but due to the

time the matter has taken to reach the

present position only a little over two years

of the six year lease remains to run. This

is a circumstance which, in my view, can

adequately be taken into account in an

assessment of damages."

5. My difficulty is quite different. The evidence revealed that, for about eighteen months, the respondent took no steps to endeavour to find an assignee of the lease; that when the respondent did seek a solution, an arrangement was made within about six months for the taking over of the lease by a company (referred to as the Bombay Bicycle Club) which, though the respondent had an involvement in it, was substantially controlled by an apparently successful London-based restaurant owner; and that, since 1 July 1988, the respondent has not had to bear any part of the rental. To award $173,999.05 to cover the respondent's expected monthly outgoings for the period 1 January 1987 to 20 May 1990 when it is known that these outgoings ceased on 1 July 1988, and it was not proved, or even alleged, that there was any likelihood they would recommence, seems to me to be wrong.

6. I understand the proposition that the method of assessment adopted a hypothetical position, which involved the rejection of the respondent's real losses in carrying on the business; and the contention that, having started the calculation hypothetically on 30 June 1986, the court should not switch to a reality which, had the hypothetical situation existed, may never have come about - that is to say, if the respondent had taken the hypothesised action of seeking an assignee promptly after 30 June 1986, some other agreement may very well have been reached long before 1988 which may have precluded any negotiations with the Bombay Bicycle Club. But at least the solution actually found shows that some solution short of the huge losses the trial judge postulated was possible. It is a truism, both of valuation law and of the law of damages, that facts are to be preferred to prophecy. Here, the event should at least be used to correct the prophecy.

7. There is no indication in the trial judge's reasons that this aspect of the matter received any consideration. What he said was:

" In relation to the position from 1

January 1987 until the termination of the

lease in 1990, it is, I think, necessary to

assume that the applicant would have been

compelled to offer a rental subsidy equal to

the difference between the reserved rent and

the market rent. Once again, precision is

impossible, but it seems reasonable to assess

this subsidy at 25% of the reserved rent.

The assumption, therefore, is that, during

this period, the applicant would have made,

and will make, monthly payments to either the

lessor or the assignee of an amount equal to

25% of the reserved rent; but not outgoings.

According to a computation made by Mr James,

which is not challenged, the rent paid under

the lease has been, and will be:

20 November 1986 - 19 May 1988 $257,985

20 May 1988 - 19 November 1989 $331,155

20 November 1989 - 19 May 1990 $127,495

The last two figures should be taken in full,

for the purposes of calculating the 25%

subsidy; but $20,638.80, being the six weeks

already allowed at $3,439.80 per week, should

be deducted from the first figure. The

addition of these three figures is

$695,996.20, 25% of which is $173,999.05.

The assumption is that this sum of

$173,999.05 would have been paid out by

Collins Marrickville progressively over a

period of 41 months. Strictly, prejudgment

interest should be added in respect of the

months up to the date of this judgment and a

deduction should be made in respect of future

months in recognition of the fact that

judgment is being entered at a date earlier

than the date of the hypothetical payments.

However, I think that substantial justice

will be done if one is offset against the

other. Judgment is being entered more than

half way through the period, at the end of

the 23rd month in the series of 41 months.

But, as against that, a higher amount is

payable in respect of the later months. A

precise calculation would, I think, show that

there was very little involved one way or the

other."

8. If his Honour had evaluated the chance of an arrangement being reached similar to that which was reached, and assessed the chance as small, I should have been reluctant to interfere with his view upon appeal. But no discount at all has been made from the figure directly calculated from his Honour's view of the amount of the excess of the rent over an economic rent, nor is there any discussion in the judgment as to whether a discount is appropriate, nor any statement showing why none was applied. Some discount, at the least, to reflect the known reality was required. Adopting as applicable a fortiori the words of Lord Wilberforce in Mulholland v. Mitchell (1971) AC 666 at 680 (where fresh evidence was admitted after the hearing to establish the falsity of a prediction), to allow the assessment to stand "on the basis of factors ... which have been falsified to such an extent would hardly be creditable to the judicial process."

9. In my opinion, it was an error of law to approach the assessment of damages for the effect of the onerous lease without having regard to the possibility the respondent may have been able to reach an arrangement of the kind later reached with the Bombay Bicycle Club. I reject the appellant's contention that any assessment referable to the future position should have been cut off at 1 July 1988, both because I accept that what is involved is a weighing of the situation as it presented itself to the respondent as at about 30 June 1986, and because the evidence does not reveal the arrangement with the Bombay Bicycle Club to be necessarily a perfect solution for the respondent's problems. But, doing the best I can to make the estimation of the prospects, in the light of the known events, which I think should have been made, I would discount the figure calculated in respect of rental subsidy by approximately 50%. On that basis I would deduct from the damages assessed the sum of $85,000.

10. As the appellants have substantially succeeded on the only major grounds of appeal argued, and also on the cross-appeal, I think the respondent should pay the appellants' costs of the appeal and of the cross-appeal.

This is a case involving a finding against the first appellant that it engaged in conduct in trade or commerce that was misleading in contravention of s.52 of the Trade Practices Act 1974 ("the Act"). The particular conduct found to be misleading was a statement without qualification made on behalf of the first appellant that the restaurant business carried on by the first appellant, the New York Deli, provided seating for 128 patrons. There were 128 seats in the restaurant but the local authority had approved the operation of the restaurant subject to a condition that the maximum seating capacity of the restaurant be limited to 84 persons. In addition, 8 of those seats were stools installed at a bar approved under the Liquor Act (NSW) 1982 as a service area for waiters. The license to serve liquor granted under that Act did not permit the consumption of liquor by persons seated in that area.

2. The trial judge found that the first appellant's statement that the restaurant had a capacity for 128 seats carried with it an obligation to disclose that the lawful seating was 84 and that seating of persons at the service bar area was contrary to the terms of the license granted under the Liquor Act (NSW). (See Collins Marrickville Pty. Ltd. v. Henjo Investments Pty. Ltd. and Ors. (1987) 72 ALR 601 at pp 607-610.) There was no express finding that the first appellant had engaged in conduct that was deceptive under s.52 of the Act, but his Honour appears to have treated the particular conduct of the first appellant as equivalent to the tort of deceit at common law (see pp 611-613). The trial judge and the parties seem to have accepted that his Honour's findings were equivalent to the finding of a tort of deceit by fraudulent misrepresentation rather than a tort of negligent misstatement by innocent misrepresentation. The second appellant was found to be a person involved in the contravention of s.52 by the first appellant and was, therefore, a person against whom orders could be made pursuant to ss.82 and 87 of the Act.

3. His Honour's finding of misleading conduct was upheld by the Full Court (Henjo Investments Pty. Ltd. and Ors. v. Collins Marrickville Pty. Ltd. [1988] FCA 40; (1988) 79 ALR 83). The Full Court determined, however, that the orders for relief granted by his Honour pursuant to s.87 - equivalent to orders for rescission in equity - were inappropriate. The Full Court did not decide that the conduct of the first appellant was not such as would entitle the respondent to obtain such orders and, to the contrary, appeared to accept that the conduct was such as would make such orders appropriate. The majority of the Court decided, though, that the time for the respondent to obtain such an order had passed and that damages was now the appropriate remedy. (See Henjo Investments Pty. Ltd. and Ors. v. Collins Marrickville Pty. Ltd. per Lockhart J. pp 101-104, per Burchett J. p 106.) The matter was returned to his Honour to determine the loss or damage suffered by conduct of the first and second appellants' contravention of s.52 of the Act. The appellants now appeal against his Honour's assessment of the amount of loss or damage suffered by the respondent.

4. The nature of the relief available at common law or in equity in such circumstances provides guidance to the Court as to how it should exercise the discretion provided by ss.82 and 87 of the Act to provide appropriate remedies. (See Munchies Management Pty. Ltd. v. Belperio [1988] FCA 413; (1988) 84 ALR 700 at pp 712-714; Henjo Investments Pty. Ltd. v. Collins Marrickville Pty. Ltd. per Lockhart J. at pp 102-103; Gates v. City Mutual Life Assurance Society Ltd. (1986) 160 CLR 1.)

5. In the present case it is instructive to look at the options presented to the respondent under the general law assuming that the conduct found to be misleading conduct in contravention of s.52 of the Act consisted of fraudulent misrepresentations.

6. The respondent in such a circumstance had to elect what course of action it would follow once the nature of the fraud practised upon it had been discovered. The respondent was aware of the deceit in respect of the representation as to the lawfulness of the use of the bar stools within 3 weeks of the respondent taking over the first appellant's business on 1 May 1985. The limitation upon the seating permitted on the premises was discovered by the respondent in June 1985.

7. On the one hand, if the respondent were in a position to return the first appellant's property in the same plight as that in which the respondent had received it, the respondent could have exercised a right of rescission recognized at common law and sought damages for deceit. If precise restitutio in integrum was not possible, the respondent may have resorted to equity to have rescission confirmed or ordered and obtained appropriate consequential orders for financial adjustments and indemnities so as to restore the parties substantially to the status quo as far as it was practicable to do so. (See Munchies Management Pty. Ltd. v. Belperio pp 708-711.)

8. A purchaser who elects to rescind will be bound to take reasonable steps to preserve the property to be returned to the vendor and not abandon it, but if the vendor fails to retake possession of the property after reasonable notice the property will be at the vendor's risk if the purchaser decides to shed the onerous burdens of a business being conducted at a loss. (See Alati v. Kruger [1955] HCA 64; (1955) 94 CLR 216 per Fullagar J. at p 228.)

9. On the other hand, the respondent may have elected to affirm the contract and sought damages in deceit. The usual measure of such damages would have been the amount by which the price paid for the business exceeded its true value at the time of purchase, such value taking account of the probability of losses being sustained in carrying on the business. (See McAllister v. Richmond Brewing Co. (NSW) Pty. Ltd. [1942] NSWStRp 17; (1942) 42 SR(NSW) 187 per Jordan C.J. at pp 191-193; Toteff v. Antonas [1952] HCA 16; (1952) 87 CLR 647 per Dixon J. at pp 650-651; Yorke v. Ross Lucas Pty. Ltd. [1982] FCA 180; (1982) 45 ALR 299 at pp 317-318; Munchies Management Pty. Ltd. v. Belperio at pp 706-708.)

10. In Toteff v. Antonas; Potts v. Miller [1940] HCA 43; (1940) 64 CLR 282, McAllister v. Richmond Brewing Co. (NSW) Pty. Ltd. and Selman v. Minogue [1937] NSWStRp 25; (1937) 37 SR(NSW) 280 it was suggested that a well-settled rule of practice applied to the measure of damages in deceit limiting such damages to the amount by which the price paid exceeded the true value of the thing purchased unless exceptional circumstances justifed a greater award. In Gould v. Vaggelas (1985) 157 CLR 215, Gibbs C.J. at pp 221-222 stated that the rule was not quite as inflexible as had been suggested and that in cases where a purchaser continues to trade either because he has no real alternative or is not aware of the nature of the fraud and thereby incurs losses, the damages may include such losses in so far as those losses were not represented in the measure of difference between the price paid for the business and the true value of it and provided that such losses flowed directly from the fraudulent inducement. Apparently this view was shared by the Full Court of the High Court in State of South Australia v. Johnson (1982) 42 ALR 161 at pp 169-170 in its acceptance of the principles of assessment adopted in Doyle v. Olby (Ironmongers) Ltd. [1969] EWCA Civ 2; (1969) 2 QB 158. In Doyle v. Olby (Ironmongers) Ltd. the Court did not determine the difference between the price paid for the business and its value at the time of purchase. The method of assessment adopted was to deduct from the price paid for the business all benefits received by the purchaser as a result of taking over the business and then to add to the amount remaining the debts incurred as a result of trading losses suffered in the course of running the business. A similar approach was taken to settle the appropriate measure of damages for negligent misstatement in Esso Petroleum v. Mardon [1976] EWCA Civ 4; (1976) 1 QB 801.

11. Under the general law, a person who affirmed the contract induced by deceit would lose the right to rescind but not the right to recover damages for the tort of deceit. The act of affirming the contract would make no difference in itself to the right to recover damages for the misrepresentation inducing the contract. (See S. Gormley and Co. Pty. Ltd. v. Cubit (1964-5) NSWR 557.) There would, however, be an obligation upon the party affirming the contract to take reasonable steps to mitigate the loss resulting from the deceit. The actual or imputed affirmation may be treated as the point at which it becomes unreasonable for consequential damages to continue to accrue if no steps to mitigate the loss are taken thereafter or if affirmation of the contract was not the reasonable course to have followed. (See Mr Figgins Pty. Ltd. v. Centrepoint Freeholds Pty. Ltd. [1981] FCA 15; (1981) 36 ALR 23 at p 60; T.N. Lucas Pty. Ltd. v. Centrepoint Freeholds Pty. Ltd [1984] FCA 73; (1984) 1 FCR 110 at p 118.)

12. In August 1985 the respondent commenced proceedings against the first appellant alleging that it had engaged in conduct that had contravened s.52 of the Act. As previously indicated, the nature of the fraud had been fully discovered by then.

13. In those proceedings the respondent sought relief under ss.82 and 87 of the Act but did not claim a specific order equivalent to an order for rescission until March 1986 when counsel advised the Court that it was possible that the respondent may seek an order for rescission. (See Henjo Investments Pty. Ltd. v. Collins Marrickville Pty. Ltd. per Lockhart J. pp 100-101.) At the same time the respondent sought and obtained an adjournment of the hearing of its application to allow the respondent to apply to the local authority and to the Licensing Court to obtain approval for an increased seating capacity of 128 persons and approval for the seating of 8 persons at bar stools in the reception area. Such conduct by the respondent may have indicated that it was taking steps to affirm the contract.

14. As it happened the respondent did not approach the local authority or the Licensing Court to seek the necessary approvals or variation of licence. It continued to operate the business until about July 1988. In June 1988 the respondent entered an agreement under which the respondent would obtain a one-quarter share in the capital of a company which would operate a new restaurant business on the leased premises in return for a transfer to the company of all the items of plant and equipment used by the respondent in the conduct of the business of the New York Deli. In addition, the respondent agreed to effect transfers of the lease and liquor licence to the company. The respondent's nominee became the holder of the liquor licence for the premises on 8 July 1988. A formal assignment of the lease was not completed but the respondent was apparently permitted by the lessor to allow the company to occupy the leased premises. Since July 1988 the company has discharged the respondent's liability for rental under the assignment of lease. The company has made modifications to the leased premises and has operated a new restaurant business on those premises since about October/November 1988.

15. In assessing the appropriate orders to be made pursuant to ss.82 and 87 of the Act to offset the amount of loss or damage suffered by reason of the first appellant's contravention of s.52 of the Act, his Honour broadly followed the measure of damages in deceit as the appropriate guide. His Honour was not confined to such a measure and in the end his orders stood as an exercise of a discretion under ss.82 and 87 to make those orders considered most appropriate for providing compensation to or preventing loss or damage being suffered by the respondent as a person affected by the misleading conduct of the first appellant.

16. It has been established that the measure of damages in tort, and not breach of contract, will usually apply to the assessment of damages to be recovered under ss.82 and 87 of the Act for a contravention of s.52 of the Act. (See Gates v. City Mutual Life Assurance Society Ltd. per Gibbs C.J. at pp 6-7; per Mason, Wilson and Dawson JJ. at p 14.)

17. As the majority stated in Gates v. City Mututal Life Assurance Society Ltd. at p 14, Courts are not bound to make a definitive choice between the measure of damages in tort and the measure of damages in contract nor to apply the former to the exclusion of the latter in all cases. It was recognized, however, that in most, if not all, cases involving contraventions of Pt.V of the Act, the measure of damages in tort would be appropriate.

18. However, in some cases where misleading or deceptive conduct induces the formation of a contract, the appropriate recompense for the misleading conduct may be the cost of making good the subject of the contract to match the nature of the inducement. (See Gurdag v. B.S. Stillwell Ford Pty. Ltd. (1985) 8 FCR 526 at p 535.) The potential inadequacy of the measure in tort was illustrated in Ellul v. Oakes (1972) 3 SASR 377. That measure may overlook that the representee may have been denied the opportunity to improve the bargain he entered by being gulled into inactivity by the inducement of the misrepresentation. (See Hornal v. Neuberger Products Ltd. (1957) 1 QB 247 per Denning LJ. at p 260.)

19. The measure of damages in tort may, however, differ according to whether the tort is deceit or negligence.

20. As Gibbs C.J., Mason, Murphy, Wilson and Brennan JJ. stated in their joint judgment in State of South Australia v. Johnson at pp 169-170:

"The principle which underlines the award of

damages in tort is, generally speaking, that of

restitutio in integrum. The object is to restore

the plaintiff to the position in which he would

have been placed if the wrongful act had not been

committed. The measure will vary as between

deceit and negligence. In deceit, the plaintiff

recovers the difference between the amount paid

and the value of the property acquired, the object

being to place him in a position equivalent to

that which he would have occupied had the

transaction not taken place. The defendant being

guilty of a deliberate wrong, the damages will

include the whole loss directly flowing from the

fraudulent inducement because, as Lord Denning MR

declared in Doyle v Olby (Ironmongers) Ltd (1969)

2 QB 158 at 167, 'it does not lie in the mouth of

the fraudulent person to say that they could not

reasonably have been foreseen'.

It is otherwise in cases of negligent

misrepresentation. Although the wrongdoer is

liable for the damage which flows directly from

his wrongful act or omission, the plaintiff's

damages are limited to that which was reasonably

foreseeable. This limitation applies in

accordance with the general principle in

negligence."

21. In that passage it is suggested that the measure of damages in deceit is not limited to that which is reasonably foreseeable. However, in Gould v. Vaggelas Gibbs C.J. at pp 221 and 223-224 considered that this important question remained open. In Gates v. City Mutual Life Assurance Society Limited at p 12 in their joint judgment, Mason, Wilson and Dawson JJ. apparently answered the question by accepting that foreseeability was required:

"This entitles the plaintiff to all the

consequential loss directly flowing from his

reliance on the representation (Potts v. Miller at

pp 297-8; Doyle v. Olby (Ironmongers) Ltd, at

least if the loss is foreseeable (see Gould v.

Vaggelas at pp 223-224."

The view of Mason, Wilson and Dawson JJ. is supported by the authors of several texts. (See Greig and Davis, The Law of Contract at pp 858-859 and other texts there referred to.)

22. However, whilst it may be accepted that the measure of damages in tort can provide appropriate guidelines for the operation of ss.82 and 87 of the Act, it is to be remembered that the legislature has not laid down any rules in that regard. (See Yorke v. Ross Lucas Pty. Ltd. at p 316.) As Fitzgerald J. stated in Frith v. Gold Coast Mineral Springs Pty. Ltd. [1983] FCA 28; (1983) 47 ALR 547 at p 565:

"Similarly, in my opinion, whilst common law rules

as to the measure of damages in tort may, in

appropriate circumstances, provide a useful guide,

no justification exists for confining the damages

which are recoverable under ss.82 and 87 of the

Act by reference to common law tests. The only

limitations which exist in proceedings under the

Act are those expressed or inherent in the

statutory provisions themselves.

It seems plain that the statutory right to damages

now under consideration serves a wider purpose and

is intended to have a broader ambit than the

common law actions of tort or negligent

misstatement."

23. In some cases the appropriate pecuniary remedy to be provided by s.82 may be equivalent to the remedy obtainable in equity against a person who has committed a breach of fiduciary duty thereby inflicting a loss or diverting a gain to the detriment of the person affected by the misleading conduct. (See Munchies Management Pty. Ltd. v. Belperio at p 713; Elna Australia Pty. Ltd. v. International Computers (Australia) Pty. Ltd. [1987] FCA 230; (1987) 16 FCR 410 at pp 420-421.) In such a circumstance there may be no questions of reliance or remoteness, and the element of causation imported into the construction of s.82 may be satisfied by lesser events than would be necessary to satisfy the common law "rules". (See Elna Australia Pty. Ltd. v. International Computers (Australia) Pty. Ltd. at pp 418-419; Sheppard, Law of Fiduciaries at pp 9-10.)

24. In assessing the extent of the pecuniary remedy available under s.82 of the Act, it may be unnecessary to define that measure by reference to the particular concepts of remoteness, causation, mitigation and contributory negligence. (See Munchies v. Belperio at p 712.) The inquiry as to the amount of loss or damage suffered by a person as a result of, or by reason of the conduct of another in contravention of s.52, becomes an assessment of that which is reasonable having regard to the degree of connection between the loss suffered and the contravening conduct as well as to the extent to which the loss could have been mitigated.

25. Therefore, if a person elects to affirm a contract induced by fraud when possessing information which would indicate to a person acting reasonably that the loss caused, and to be caused, by the tort is best mitigated by rescission of the contract, such further loss may be irrecoverable not by the analogous application of a "rule of practice" employed at common law, but because it is not within the contemplation of s.82. (See T.N. Lucas Pty. Ltd. v. Centrepoint Freeholds Pty. Ltd. p 117; Mr Figgins Pty. Ltd. v. Centrepoint Freeholds Pty. Ltd. at p 60; Tiplady v. Gold Coast Carlton Pty. Ltd. [1984] FCA 152; (1984) 54 ALR 337 at p 374; Neilsen v. Hempstead Holdings Pty. Ltd. (1986) 65 ALR 302.)

26. In the present case his Honour had regard to the fact that the respondent knew the full extent of the deception within a month of taking over the business and that it had commenced proceedings under the Act within three months. It was his Honour's conclusion that had the respondent diligently persisted with its litigation, it could have expected to obtain orders from the Court by 30 June 1986, twelve months after it became aware of the fraud. It would have been open to his Honour to conclude that the only reasonable step for the respondent to have taken by 30 June 1986 was to rescind the contract, to throw all losses back on the first appellant and have itself restored to the position it was in at the time of contract. Instead his Honour has assessed the measure of damages by concluding that the respondent was entitled to recover consequential trading losses incurred until 30 June 1986 in addition to the difference between the price paid for the business and its true value at the time of purchase.

27. The value of the business at the time of purchase took into account that the business was unprofitable, but the ensuing trading losses were not regarded as having been comprehended in the difference between the value of the business and the price paid for it. The measure of damages applied was to assess what amount of loss was unavoidable as a result of entering into the agreement. (See Bateman v. Slatyer (1987) 71 ALR 553 at pp 564-565.)

28. His Honour assessed the difference between the price paid and value of the business on the day of sale and that difference as assessed was accepted by the parties. In normal circumstances the calculation of the true value of the business at the time of sale would have entailed an assessment of the extent to which the ordinary value was impaired by the prospect that the limitations on seating and lack of Licensing Court approval for the seating of patrons on bar stools in the reception area would result in compliance orders being issued by the relevant authorities leading to diminution of the turnover of the business. His Honour, however, accepted that the value of the business was worth no more than the realizable value of the items of plant and equipment. At all times, the business had traded unprofitably even with the use of unauthorized seating and stools. There was no allegation against the first appellant that it had engaged in misleading conduct by failing to advise the respondent of the unprofitable nature of the business. Nor was it alleged that the first appellant had engaged in misleading conduct in respect of representations as to the turnover of the business. The business received the turnover represented by the first appellant.

29. His Honour also assessed as a consequential loss arising directly from the deceit so much of the trading losses incurred by the respondent between the date of taking over the business, 1 May 1985, and 30 June 1986 as was attributable to the business' inherent capacity for loss at the time of acquisition exacerbated by any losses attributable to the misleading conduct. His Honour calculated the rate of loss being recorded by the business at the time of sale and added to it a further calculation of loss attributable to the removal of the bar stools. His Honour calculated the impact of the loss of the stools to be a reduction of turnover by 10 per cent partially offset by reduction of labour costs of 5 per cent, a net increase in the annual loss of the business of approximately $41,600. His Honour's calculation of the extent of the consequential loss under this heading was the sum of $114,201.50. The actual trading losses incurred by the respondent to 30 June 1986 were $262,048.

30. Although the first appellant's notice of appeal listed various grounds, most of the grounds were abandoned at the hearing. The substance of the appeal concerned his Honour's including, as an item of consequential loss, the prospect of the respondent incurring some loss after 30 June 1986 pursuant to its covenants under the assignment of lease. It is appropriate to deal with this matter in the course of considering the matters raised by the respondent in its cross-appeal.

31. In the cross-appeal the respondent contended that at all material times it was "locked in" to its bargain until it was able to merge the business into another operation in which it had an interest in about October 1988. The respondent placed particular reliance upon the obligations it had undertaken pursuant to the assignment of lease of the premises in which the business was conducted and contended that, in the absence of a release from those obligations by the landlord, there was little the respondent could do but continue to conduct the business and endeavour to earn sufficient from the proceeds of the business to meet the rental commitments under the assignment. At all material times the business was operated at a substantial loss which exceeded the sum payable by way of rent under the lease. The respondent submitted that it was reasonable for the respondent to continue to trade in the hope that the profitability of the business would improve and that all losses incurred should have been regarded as consequential losses.

32. The obligations of the respondent under the assignment of lease were in no way a bar to the respondent moving to rescind the purchase and thereafter carrying on the business as caretaker for the first appellant if it refused to re-take possession of the business. Nor did those obligations prevent the respondent from commencing proceedings seeking appropriate orders from the Court pursuant to s.87 of the Act and thereby effectively rescinding the contract. Indeed, his Honour found that if the respondent had prosecuted its action diligently, such orders could have been obtained by 30 June 1986. It may be a difficult question for a purchaser to determine whether affirmation of the contract and recovery of damages in deceit, or rescission of the contract and orders for damages or indemnities, is the appropriate course to follow. According to the circumstances of each case, a purchaser will be given a reasonable time to determine what election should be made. (See Neilsen v. Hempstead Holdings at p 317.)

33. The respondent also contended in its cross-appeal that his Honour should have calculated the impact of the loss of the bar stools as being a reduction of 25 per cent of the turnover of the business and should have made no reduction in labour costs but, to the contrary, should have increased them. There was no specific ground of appeal detailing where his Honour had erred in any finding of fact in that regard. It remained a matter of judgment and assessment for his Honour according to his view of the evidence. There was evidence to support his finding and accordingly it was open to his Honour to reach such a conclusion. The finding should not be disturbed.

34. The respondent further submitted that the particular calculation of consequential loss undertaken by his Honour was unnecessary and that the respondent should have recovered the entire trading losses incurred by it between the date of commencement of the business and 30 June 1986. The principal additional components of outgoings occasioning that degree of loss were additional expenditures on advertising and wages over and above the amounts provided for in his Honour's calculation according to the level of outgoings of the business at the time of acquisition. It was open to his Honour to take the view that such additional losses resulted from the decisions of the respondent as to the manner in which it had decided to conduct the business. His Honour expressly found that the first appellant made changes of some significance in the operation of the business and that losses flowing from those changes therefore resulted from supervening causes and not from the inherent unprofitability of the business.

35. His Honour also held, however, that to spend the additional sums on advertising was a reasonable course to follow at that time rather than closing down the business. No part of that additional advertising cost appears to have been included in the calculation of consequential loss flowing from the misrepresentation or from the inherent nature of the business. Consistently with his Honour's findings, the amount of advertising expenditure incurred after the bar stools had been removed, a sum of approximately $18,000, should have been allowed as part of the trading losses of the respondent to 30 June 1986.

36. His Honour seems to have accepted that the respondent's obligations to third parties impeded the ease with which the respondent could rescind the agreement and that it was, therefore, reasonable for the respondent to continue to trade until at least 30 June 1986, but thereafter the respondent should have taken steps to terminate the business and cease incurring trading losses. His Honour found that it would have taken the respondent six months to arrange a suitable assignment of the lease or sub lease. Consequently, his Honour allowed as a further item of the pecuniary remedy a sum equivalent to the six months rental falling due between 1 July 1986 and 31 December 1986 and interest thereon until 2 December 1988, the date of judgment, a total sum of $122,356.86. There was ample evidence to support his Honour's conclusion in that regard.

37. The respondent submitted that his Honour erred in failing to award the further trading losses incurred between 30 June 1986 and October 1988, a sum of $785,177.08. For the reasons set out above, it was for his Honour to decide what were the reasonable steps to be expected of the respondent after it became aware of the deceit and to assess the degree of loss that should be recovered as a result. His Honour did not err in exercising his discretion to award compensation in the manner he did.

38. His Honour then made a further finding that it was probable that any such assignment or sublease would entail a continuing obligation on the part of the respondent to contribute 25 per cent of the amount of rental payable to the lessor for the remainder of the lease between 1 January 1987 and 20 May 1990. The sum allowed for further losses to be incurred between 31 December 1986 and 20 May 1990 was $173,999.05.

39. It may have been arguable that recovery of such additional loss was more than was necessary to provide adequate pecuniary compensation for the respondent after the respondent had affirmed the contract. It was, however, a matter for his Honour to determine what was reasonable in the circumstances and he regarded this element of loss as unavoidable. Nevertheless, in determining what amount of loss was recoverable under this head, it was necessary for his Honour to assess the prospect of the respondent incurring such further loss by having regard to events that had occurred up to the date of assessment. (See Gould v. Vaggelas per Gibbs C.J. at p 227) Those events clearly demonstrated that the sum allowed for this item should have been heavily discounted.

40. Firstly, the rental payable under the lease was not tied to market rates and from December 1986 the rental increased only in accordance with movements in the Consumer Price Index. The market rate payable between December 1988 and May 1990 may have overtaken the level of rental payable under the lease. Further, the agreement made in June 1988, under which the proprietor of the new restaurant undertook to pay the full rental, may have indicated such a movement. Secondly, between July 1988 and 2 December 1988, the date of assessment, full liability for the rental had been taken over by another entity as part of a merger of interests. There would have been a need to consider the probabilities of that situation prevailing for the remainder of the lease. It could not be disregarded entirely nor the prospect of a like arrangement being made with another party ignored.

41. For those reasons and for the reasons expounded in the judgment of Burchett J., which I respectfully adopt, I would reduce this item of the assessment by 50 per cent, in round terms a sum of $85,000.

42. The appellants also argued that the trial judge erred in awarding the respondent the costs of the re-hearing of the issue of damages and should have awarded such costs to the appellants. The contention was not pushed with great fervour, it being apparent that his Honour was entitled to conclude that the time engaged in the hearing would have been necessary in any event and that the consequences of the appellants' success on the first appeal had already been taken into account by the Full Court in the orders it made in respect of costs of the original hearing when disposing of the appeal. The matter was peculiarly one for his Honour and in no respect can it be said that he erred in the exercise of his discretion in that regard.

43. The appeal should, therefore, be allowed by reducing the sum awarded by his Honour by $85,000. I would also have allowed the cross-appeal by increasing the sum awarded by $18,000.

44. In view of the fact that it is the opinion of the majority of the Court that the cross-appeal should be dismissed, I agree that the appropriate order for costs should be that the respondent pay the appellant's costs of the appeal and of the cross-appeal.

Trade Practices Act 1936

Re Henjo Investments Pty Limited; Henry Saade and Saade Developments Pty Limited v Collins Marrickville Pty Limited [1989] FCA 246; 89 ALR 539;

At a glance

Court

Decision date

Before

Source

Judgment (115 paragraphs)

Re Henjo Investments Pty Limited; Henry Saade and Saade Developments Pty Limited v Collins Marrickville Pty Limited [1989] FCA 246; 89 ALR 539; (1989) 40 FCR 76 (7 July 1989)

Parties

Legislation Cited (8)

Cases Cited (27)