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[2018] FCAFC 148
Federal Court of Australia (Full Court)
2018-08-13
Dr AJ, Smith JJ
Original judgment source is linked above.
THE COURT: 1 This appeal is limited to a short point that, in essence, turned on whether the primary judge erred in using the average weekly earnings, excluding GST, instead of including GST when assessing the value of the business that generated those earnings. It arises in the following context.
Background 2 The appellant, Jimitkumar Bhupeshkumar Shah, was the sole director of the second applicant below, Riversub Pty Limited as trustee of the Tandon family Trust. Mr Shah purchased the right to operate a Subway franchise business operated under a licence from a well-known retail fast food chain, in Haymarket, on George Street, Sydney, from the respondents and vendors, Mazen Hagemrad and Michael Allouche. The third respondent below was a company associated with the vendors, The Retail Group (Darlinghurst) Pty Limited that is now in liquidation. Mr Allouche and The Retail Group did not appear at the trial. Mr Shah joined only the two vendors as respondents to the appeal. Mr Allouche was served with the notice of appeal personally on 20 July 2018 together with the primary judge's reasons, final orders and procedural orders made by the Registrar on 2 May 2018, but he has not appeared. 3 The negotiations for the purchase of the business resulted in Mr Shah agreeing to purchase it on the basis of his understanding of the net weekly sales figures that the vendors' agent initially provided to him. Mr Shah had experience of Subway franchises having already operated three other Subway franchise businesses. 4 On 16 July 2015, Mr Shah as purchaser, entered into a contract for the sale and purchase of the business with Mr Hagemrad and Mr Allouche, as vendors. The price was $500,000, exclusive of the value of the stock, to be determined by a stocktake on the day of completion to a maximum value of $6,000. 5 The primary judge found that not much appeared to have happened after the entry into the contract while the parties awaited the consent of the franchisor, Subway Systems Australia Pty Limited, to the transfer of the business. Part of the franchisor's arrangements with its franchisees involved a sales reporting system on the basis of which franchise payments were to be calculated. 6 The primary judge found that on about 11 October 2015 Mr Shah asked Mr Hagemrad for a copy of the latest monthly combo sales report submitted by the business to the franchisor and the next day Mr Hagemrad provided it to Mr Shah. This led to some further discussions, because Mr Shah had noticed that sales had declined by about 10% over the last three months. In the event, the parties renegotiated the purchase price based on the latest figures. Ultimately, on 21 October 2015, Mr Shah caused the vendors to be paid about $424,000, being the balance outstanding of the renegotiated price of $460,000. 7 The primary judge found that the monthly combo sales reports that the vendors had provided to Mr Shah were fraudulent and that Mr Hagemrad had given false evidence that Mr Allouche had taken cash out of the takings to justify the sale price. 8 Mr Shah's lawyers prepared a table that became an exhibit at the trial, that his Honour set out in his reasons. The table showed the differences between the actual bankings of the business, sourced from its cash and credit sales, and the receipts as reported in the fraudulent monthly combo reports provided to Mr Shah, in order to enable him to assess the worth of the business. Those monthly combo reports, which were also provided to Subway, and led to the business having to pay more in franchise fees than it actually was obliged to pay. 9 Crucially, his Honour found that, for the 12 months ended 30 June 2015 the business's average total weekly bankings were $12,442.26 inclusive of GST, or about $11,311 exclusive of GST. In contrast, if the average were calculated by including the figures for the first six months in 2014, so as to obtain a weekly average based on the preceding 18 months banked amounts, it amounted to $13,042 inclusive of GST or $11,856.38 exclusive of GST. 10 His Honour found that the business was in a dire financial state during most of 2014 and 2015, as the above comparison suggested. His Honour found that the vendors had contributed money to assist the business with its serious cash flow problems. His Honour found: I am satisfied that the true explanation for the cash flow problems experienced by the Haymarket franchise was the poor trading performance of the business. I am also satisfied that the banking records for the period June 2014 to October 2015 provide a much more reliable record of the takings of the business during that period than the Combo Reports and that the Combo Reports significantly overstate the sales that were made from about May 2014 to September 2015. I am satisfied that this is more likely than not the result of fake sales that were registered by either Mr Allouche or Mr Hagemrad or both. 11 The primary judge found that Mr Shah was aware that the business had been in decline in the three or four months leading up to the completion of the sale in October 2015. The primary judge took into account, as a partial explanation for that recent period of decline, the impact of the construction of the light rail system on George Street, Sydney that was occurring outside the business premises and the removal, during those works, of a bus stop that previously had been located there. However, his Honour rejected the vendors' argument that any decline in sales of the business under Mr Shah's management, when compared to earlier periods, was wholly attributable to the removal of the bus stop or other factors on which the vendors relied. 12 The primary judge disbelieved Mr Hagemrad's evidence that he had taken no steps to stop his partner, Mr Allouche, allegedly stealing from the business. He found that there had been no such stealing. 13 The primary judge found that this occurred due to fake entries made by one or both vendors and that they had sought falsely to inflate the sales figures so that they could obtain a better price for the business when they came to sell it. He said: On the question of reliance, I am satisfied that if (as I have found) the actual average weekly sales for the Haymarket franchise were in the vicinity of $12,000 per week then Mr Shah would never have agreed to purchase the Haymarket franchise. (emphasis added) 14 His Honour found that the monthly combo reports overstated the actual sales of the business in the period to which they related by approximately 30% and that, had Mr Shah known this, he would never have agreed to purchase. 15 In those circumstances, his Honour found that Mr Hagemrad and Mr Allouche had engaged in misleading and deceptive conduct by providing the false monthly combo reports to Mr Shah directly, and through their sales agent, and by doing so had misrepresented the sales for the business in circumstances where they knew that Mr Shah was likely to rely on those documents. 16 His Honour then came to assess Mr Shah's damages. He assessed the damages by reference to the difference between the value of the business at the date of purchase and the price paid for the business being its value as at October 2015. He noted that the evidence in relation to the value of the business at the time of the purchase was "rather scant." 17 At the trial, the purchasers had tendered the expert report filed on behalf of Mr Hagemrad, prepared by Michael Ozich, as evidence of the value of the business in several factual scenarios. Mr Ozich's report opined that if the business achieved sales of about $11,200 per week exclusive of GST, it would operate at a loss of $389 per week, or about $20,000 per annum. Mr Ozich opined that on that basis, taking into account the working owner's wage of $45,000, the business still would have a value of about $40,000. Instead his Honour arrived at a valuation based on the business having net weekly sales of $12,000, exclusive of GST. 18 Mr Shah had argued that the business was of no value at the time of purchase because it was incapable of making a profit. It was not in dispute before his Honour, as he recorded, that if the net weekly sales for the business, exclusive of GST, were any less than $11,200 then, the business was essentially worthless. 19 His Honour made the following findings that are critical to the appeal: In my view, the business should be valued on the basis of its trading performance as at October 2015 which was when Mr Shah re-negotiated the contract. Recognising that it is impossible to be exact in this exercise, I am satisfied that the business was by that time one achieving actual nett sales (exclusive of GST) of about $12,000 per week based upon the probable actual sales figures for the preceding 12 months. According to Mr Ozich's report, on the assumption that the nett weekly sales (exclusive of GST) for the business were $13,000, the business was worth approximately $230,000. On the assumption that the nett weekly sales (exclusive of GST) were $11,200 he valued the business at $40,000. Mr Ozich's report does not specify a valuation for the business if the average weekly sales (exclusive of GST) were approximately $12,000. Doing the best I can given the limitations of the valuation evidence, I am satisfied that the business was likely to have a value of approximately $160,000 in October 2015, and I propose to assess damages on that basis. This includes an allowance for the value of stock. The difference between the amount paid by Mr Shah ($460,000) and the true value of the business ($160,000) as at October 2015 is $300,000 which represents the amount of Mr Shah's loss excluding any interest component (emphasis added).
The issue 20 The sole issue in the appeal is whether the primary judge erred in finding (set out at [17] above) that the business was earning weekly sales of $12,000 exclusive of GST, because the evidence was that the sales of $12,000 included GST, and that accordingly, his Honour's valuation miscarried. 21 Mr Shah contended that the primary judge ought to have found, given his other findings of fact that, on the basis of Mr Ozich's evidence, the business had a value of $40,000 rather than $160,000.
Mr Hagemrad's submissions 22 Mr Hagemrad argued that his Honour was entitled to arrive at his broad estimation of the takings of $12,000 per week, exclusive of GST, on the material before him that he used in arriving at the value of business. He contended that a judge in his Honour's position was entitled to do the best that could be done on the material before him, relying on what Sheppard, Morling and Wilcox JJ said in Enzed Holdings Limited v Wynthea Pty Limited (1984) 57 ALR 167 at 183 namely: If the court finds that damage has occurred it must do its best to quantify the loss even if a degree of speculation and guess work is involved. Furthermore, if actual damage is suffered the award must be for more than nominal damages. 23 Mr Hagemrad argued that his Honour had made clear in the reasons his awareness of the difference between the inclusion and exclusion of GST in or from the figure of $12,000 per week. He contended that the primary judge had come to that finding of the appropriate net weekly sales figure to be used in valuing the business, as of October 2015, having had regard to the evidence that there had been some cash taken out of the business, albeit his Honour had not made a finding that this had occurred. Mr Hagemrad argued that the primary judge was entitled to round the figures in his favour in the way he did when making the challenged finding. That was, so Mr Hagemrad submitted, because his Honour did not need to make a finding precisely in accordance with any of the evidence when he found that the business was not entirely worthless. 24 Mr Hagemrad accepted that the primary judge had not elaborated or explained how he had arrived at his finding that the actual net weekly takings (i.e. exclusive of GST) were $12,000 per week. Mr Hagemrad contended that, in a case such as the present, his Honour was entitled to make that finding because it was open to him to do so in exercising a discretionary judgment as to the value of the business.
Consideration 25 Mr Hagemrad's argument must be rejected. A judge must give reasons as to why he or she has assessed damages in a particular way. There will be cases where it is difficult to be precise, as the Full Court in Enzed 57 ALR at 183 suggested. Indeed, in Australian Iron and Steel Limited v Greenwood (1962) 107 CLR 308 at 326, Windeyer J compared the task of a jury in assessing general damages for personal injury with what Lord Goddard CJ had said, as Goddard LJ, in Mills v Stanway Coaches Limited [1940] 2 KB 334 at 349, namely: Of course, different minds have diferent ideas as to what is moderate in seeking for a mean, a normal or an average. Where there is really no guide it is very like Lord Bowen's illustration of a blind man looking for a black hat in a dark room. 26 However, this is not such a case: cf Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257 at 267 [41] per Hayne J, with whom Gleeson CJ, McHugh and Kirby JJ agreed. 27 His Honour did not explain how, in the context of his other findings, he had arrived at a takings figure of $12,000 per week exclusive of GST or $13,200 inclusive of GST. That context consisted of the primary judge's findings that, first, the banking records for the period June 2014 to October 2015 provided a much more reliable record of the takings of the business than the monthly combo reports, secondly, the business had been in a dire financial state over that period, and thirdly, the banking records of the business for the 12 months ended 30 June 2015 showed average weekly takings, inclusive of GST, of $12,442 per week. Given his Honour's findings that the business continued to decline after 30 June 2015, with respect, in our opinion, his Honour did not explain how he arrived at his finding that, in fact, the actual sales figures, excluding GST, for the preceding 12 months were $12,000, which equalised to $13,200 per week inclusive of GST. 28 In those circumstances, his Honour's finding that the average sales were about $12,000 per week, exclusive of GST, appears to have been either a mistake or to have no basis in the evidence. Accordingly, the Court must undertake on a rehearing, pursuant to s 27 of the Federal Court of Australia Act (1976) (Cth), the task that Gibbs ACJ, Jacobs and Murphy JJ identified in Warren v Coombes (1979) 142 CLR 531 at 551, namely: … in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge. In deciding what is the proper inference to be drawn, the appellate court will give respect and weight to the conclusion of the trial judge, but, once having reached its own conclusion, will not shrink from giving effect to it. These principles, we venture to think, are not only sound in law, but beneficial in their operation. 29 We reject Mr Hagemrad's argument that his Honour was exercising a judicial discretion in selecting the figure of average weekly takings to arrive at his valuation. The primary judge needed to explain in his reasons how he arrived at the figure of average weekly sales of $12,000 exclusive of GST in light of his other findings which were inconsistent with that finding. The business had been in decline for the 18 months preceding 30 June 2015, which continued thereafter, and had generated an average banked weekly return for the 12 months to 30 June 2015 of $12,442 (or about $11,311 exclusive of GST), as the primary judge found based on the banking records. 30 Although the primary judge made no finding of what the business's banking records revealed for the period between July and October 2015, his Honour's findings in relation to the earlier figures set out above, demonstrated that the business's average weekly earnings were declining from the higher earnings at the beginning of the period, of the 12 months ending 30 June 2015, that ultimately produced the $12,442 figure for the whole of that year. Moreover, his Honour's reference to the actual weekly sales figures appeared to be a reference to the cash value of the receipts, namely, the total cash that the business charged or received from its customers. Those receipts included GST. 31 However, Mr Ozich's report looked at the position exclusive of GST. This may explain what appears to have been a transpositional error in the way in which his Honour came to assess the damages. Be that as it may, we are satisfied that the correct finding on the evidence, based on the primary judge's other findings, is what his Honour found (as we have recorded at [9] above), namely, that the takings as at October 2015 were in the vicinity of $12,000 per week inclusive of GST. 32 On that basis the parties agreed before us that Mr Ozich's valuation would have generated a value of $40,000 for the business and that his Honour's award of damages was, thus, understated by $120,000 plus interest.
Conclusion 33 For these reasons, the appeal must be allowed and order 1 made on 23 February 2018 should be varied from $337,696 to $476,160.02. Costs should follow the event. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Rares, Markovic, Banks-Smith.
Shah
Hagemrad