Supreme Court of WA|2005-01-14|Before: Miere J

Townsend & Ors v Collova & Ors [2005] WASC 4 (14 January 2005)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : TOWNSEND & ORS -v- COLLOVA & ORS [2005] WASC 4

Claim for damages - Contract - Tort - Misleading and deceptive conduct - Trade Practices Act 1974 (Cth) - Fair Trading Act 1987 (WA) - Breach of fiduciary duty

Contract claim - Whether contract of retainer exists - Actions of defendants not in pursuance of contractual undertaking

Misleading or deceptive conduct - Section 52 Trade Practices Act - Section 10 Fair Trading Act - Conduct of third defendant deemed to be conduct of second defendant - Conduct in trade or commerce - Whether conduct was misleading - Silence and nondisclosure - Inadvertent silence - Conduct of defendant contravened s 52 - Defendant knowingly involved in contravention - Claim for damages - Reliance

Tortious claim - Duty of care - Negligent misstatement - Reliance

Equitable claim - Breach of fiduciary duty - Whether fiduciary relationship exists - Scope of fiduciary relationship - No relevant fiduciary duty

Como Investments Pty Ltd (In Liq) v Yenald Nominees Pty Ltd (1997) ATPR 31 550

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Mohr & Mohr v Cleaver & Cleaver (1986) WAR 67

New Zealand Netherlands Society "Oranje" Inc v Kuys (1973) 1 WLR 1126

Pavan v Ratnam (1996) 23 ACSR 214

Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477

San Sebastian Pty Ltd v Minister Administering Environmental Planning Act [1986] HCA 68; (1986) 162 CLR 340

Sutherland Shire Council v Heyman [1985] HCA 41; (1985) 157 CLR 424

Sutton v A J Thompson Pty Ltd (in liq) (1987) 73 ALR 233

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Beach Petroleum NL v Abbott Tout Russell Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1

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City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94

Commonwealth Bank of Australia v Mehta (Swiss Franc Cases) (1991) 23 NSWLR 84

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Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31

Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41

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Leader Holdings Pty Ltd v Oraka Pty Ltd (1998) ATPR 41601

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1 LE MIERE J: In May 2000 the first and second plaintiffs each borrowed $100,000 to invest in a cake shop franchise. The first defendant was the promoter of the investment. The second and third defendants are an accountancy practice and an accountant respectively and are alleged to have acted for, and made false or misleading representations to, the plaintiffs. The investment failed and the plaintiffs lost their money.

2 In this action the plaintiffs seek to recover what they have lost. They rely on causes of action in contract, in tort, under the Trade Practices Act 1974 (Cth) or the Fair Trading Act 1987 (WA) and for breach of fiduciary duty.

3 This action has its origins in the enterprise and activities of the first defendant, Carlo Collova. I will refer to the first defendant as "Carlo", as did the witnesses throughout the trial.

4 Carlo and his brothers, Jerry Collova and Riccardo Collova, had been involved for a long time in the pastry and cake business. They ran a business under the name Cookies & More, making and selling pastries, cakes and other food initially from a property in Charles Street, North Perth, and later from larger premises in Malaga. Initially CRJ Assets Pty Ltd (CRJ), as trustee of the Collova Unit Trust (the Trust), operated the business. Later The Rise Group Pty Ltd (The Rise Group) was appointed trustee of the Trust in place of CRJ and thereafter operated the Cookies & More business. Carlo was a director of CRJ and The Rise Group. CRJ owned the Charles Street property. The holders of the units in the Trust were the respective family trusts of Carlo, Jerry and Riccardo Collova.

5 By February 2000, Carlo and CRJ were in serious financial difficulty. On 8 February 2000 Carlo wrote a memorandum entitled "Dealings between CRJ Assets Pty Ltd and Clifford Wilbur Mitchell" (the Collova Memorandum). Carlo sent a copy of the memorandum to the third defendant by facsimile on 16 February 2000. The memorandum bears a word processing date of 16 February and is exhibit 9 in these proceedings. In the memorandum Carlo refers to his dealings with a finance broker, Clifford Mitchell.

6 The Collova memorandum sets out these dealings as follows. In July 1997 Mitchell brokered a loan of $566,000 for CRJ to purchase the Charles Street property. In the following years the loan was refinanced and there was a series of further transactions. On 16 February 2000 CRJ owed $1,000,000. The loan was secured by a mortgage over the Charles Street property. The Charles Street property was worth $640,000. The next instalment of interest was due on 18 February 2000. Carlo wrote: "My nightmare continues and I have no way out at this stage except to declare bankruptcy which I most certainly do not wish to do."

7 On 13 March 2000, Carlo's solicitors Pullinger Stewart, sent a facsimile letter to a barrister, Mr John Chaney. The solicitors sent a copy to the third defendant. The letter says the following things. The Charles Street property is mortgaged for $1,000,000. The term of the loan expired on 18 January 2000 and CRJ was then negotiating to extend the term for a further three years. The current market value of the property was $650,000. Carlo and his brothers guaranteed the loan. CRJ carried on business through the Trust. The Trust was established after the initial loan of $566,000 was made but before the remaining loans were effected.

8 On 20 September 2000 CRJ retired as trustee of the Trust and was replaced by The Rise Group. The appointment of the Rise Group as trustee was effected to protect the business of Cookies & More from any proceedings that might be instituted by the mortgagees to enforce the mortgage. CRJ did not execute the mortgage in its capacity as trustee of the Trust. In the view of Pullinger Stewart, neither the business nor the Trust formed part of the security for the loan or constituted by the mortgage. However, the business had funded some of the interest payments under the mortgage. If CRJ was successful in extending the loan for three years the interest repayments would be met by the business. Counsel was asked to advise whether the business and other Trust assets would be "safe" if the mortgage was not extended and the mortgagees exercised their powers of sale under the mortgage and enforced the personal guarantees.

9 On 20 March 2000 Mr Chaney delivered his advice to Pullinger Stewart by facsimile letter. The third defendant received a copy of the advice. Mr Chaney gave advice to the following effect. The mortgage did not give the mortgagees recourse to the business or other assets of the Trust to satisfy any obligation of CRJ to the mortgagees. The Trust assets were exposed to risk if CRJ were to be put into administration or liquidation. The exposure existed either by virtue of the enforcement of the right of indemnity of CRJ as trustee of the Trust or the advance by CRJ to the Trust to pay for Trust assets or debts. The extent of the exposure appeared to be something in excess of $70,000.

10 On 25 March 2000 the third defendant sent to Mr McLeod, a partner of, or solicitor employed by, Pullinger Stewart, an e-mail to the following effect. It was likely the mortgagees would agree to extend the mortgage for a further three years but they were seeking additional security. The third defendant needed to discuss with Mr McLeod the ramifications for the Collova brothers and the Cookies & More business if the mortgagees foreclosed.

11 In the meantime, Carlo had been working on the Cookies & More franchise concept. Carlo had produced a brochure dated 3 March 2000 that is part of exhibit 12. A letter dated 22 March 2000 addressed to "Potential Investor" explains the franchise concept as follows. The investor is to invest $250,000 in consideration for 50 per cent of the shares in the investment and master franchise company, Pimpernel Bakeries Pty Ltd (Pimpernel Bakeries), and 50 per cent of the shares in a company that would own and operate any franchise outlets. The Rise Group required settlement to take place on 8 May 2000. Two locations were being negotiated, one in the North Perth Village complex and one in the Kardinya Park Shopping Centre.

12 On 23 March 2000 Carlo approached the first and second plaintiffs to invest in the franchise project.

14 In 1998, Mrs Townsend opened with her husband, Leon, a cafe that traded as Cafe Amari in Tuart Hill. Cookies & More supplied cakes for the cafe. The cafe operated at a loss. The cafe was sold in mid-March 2000 and Mrs Townsend and her husband continued to operate the cafe until settlement of the sale in early April 2000.

15 On 13 March 2000 the first and second plaintiffs, in partnership, took over the operation of a pizza shop in Applecross.

16 The third plaintiff, Rubylea Holdings Pty Ltd, was acquired by Carlo to operate the franchise outlets. The first and second plaintiffs later became the sole directors and shareholders of the third plaintiff. Counsel for the plaintiffs announced in opening that the third plaintiff had not suffered any relevant loss and did not pursue any claim at trial. In these reasons unless otherwise stated I will refer to the first and second plaintiffs as Mrs Townsend and Ms Morris or as the plaintiffs.

18 The writ was issued on 26 June 2001. The first defendant, Carlo, was declared bankrupt on 3 July 2001 whereupon the plaintiffs could not continue the action against the first defendant. The plaintiffs have continued the action against the second and third defendants.

19 The second defendant is an incorporated accounting practice. The third defendant is an accountant and the sole director and shareholder of the second defendant.

20 The third defendant had known Carlo since 1997. He did accounting work for Carlo and his companies. As I have said, in March 2000 the third defendant was involved in instructing Pullinger Stewart and Mr Chaney to advise Carlo in relation to the exposure of the Cookies & More business, the Trust and the Collova brothers to claims by the mortgagees arising from the CRJ mortgage.

21 The only evidence concerning Carlo's approach to the plaintiffs to invest in the franchise project and the subsequent dealings between the plaintiffs and Carlo is the evidence of the plaintiffs and the documentary evidence. That evidence was not challenged and I accept it.

22 On 23 March 2000, Carlo approached the plaintiffs at their pizza shop in Applecross. He told them he was looking for franchisees for coffee and cake shops and that the plaintiffs would be well suited because of their vibrant personalties. He said he would drop off a brochure.

23 On 25 March, Carlo met with the plaintiffs at the Applecross pizza shop and made a proposal to them to the effect that the plaintiffs should pay $250,000 to purchase a half interest in the master franchiser of coffee and cake shops to be established and a half interest in the company that was to operate the first franchised store. Carlo handed the plaintiffs the letter dated 22 March 2000 addressed to "Potential Investor" and the brochure, to both of which I have already referred. The letter outlines the investment proposal. The brochure provides background information on the growth of the business of Cookies & More, the experience of Carlo and his brothers in the restaurant and pastry baking business and information on how the proposed master franchise and retail business would work. The plaintiffs both read the brochure.

24 In the course of this meeting, Carlo told the plaintiffs that the proposed business would be very successful, that he and his brothers had done four years' research and that Cookies & More was almost number one in supplying cakes to the restaurant industry in Perth. Carlo said that the money invested by the plaintiffs would be repaid in 6 to 18 months and that he was looking to establish five retail shops by Christmas, which would pay $500 per shop per week in franchise fees.

25 The plaintiffs told Carlo they wanted to go ahead with the investment. Carlo gave Mrs Townsend the telephone number of S Mitchell & Co, finance brokers.

26 On 30 March, Carlo was appointed director and secretary of Pimpernel Bakeries and Rubylea. 150 shares were issued in Pimpernel Bakeries and one share was issued in Rubylea.

27 On 31 March 2000, the plaintiffs signed a written offer to purchase for $250,000 a 50 per cent shareholding in each of Pimpernel Bakeries and its subsidiary, Rubylea. Rubylea was to hold the first "Pimpernel Bakery" outlet. The written offer provides that $120,000 of the $250,000 was to remain in Pimpernel Bakeries and $130,000 was to be paid to The Rise Group. The agreement was subject to finance.

28 The plaintiffs approached Paul Bishop at Easi Home Loans to finance their investment. On 5 April 2000, Carlo wrote to Mr Bishop requesting confirmation of loans totalling $250,000 to the plaintiffs. The plaintiffs were unable to obtain finance and informed Carlo that they would not proceed with the investment.

29 On 8 April 2000, Carlo made a verbal offer to the plaintiffs that he would reduce the purchase price to $200,000. The plaintiffs decided to accept the verbal offer on the basis of the information contained in the brochure and on what Carlo had told them. They informed Carlo of this decision.

30 On 11 April 2000, the second defendant issued an invoice to Rubylea for work done in connection with the incorporation of the company.

31 On 14 April 2000, Carlo wrote to the plaintiffs. Carlo recommended the plaintiffs set up a new company to own the first outlet. He said he had already set up a company to hold the outlet - Rubylea. He said he would resign as director and the plaintiffs may continue as directors. He said: "I also recommend as we will be shareholders in the same project that you meet my accountant and perhaps use Stan Pilkadaris (Roussety & Co) as your own to less complicate business transactions etc".

32 On 17 April 2000, the plaintiffs paid a deposit of $10,000.

33 On 22 April 2000, Carlo again wrote to the plaintiffs. He said it was important that they seek a good accountant to attend to their accounting matters and that he had spoken to his accountant, the third defendant, who would be very happy to meet the plaintiffs. Carlo asked them to call an accountant as soon as possible and said that once they had seen an accountant, the accountant would pass on the information Carlo's lawyer required to start on the legal documentation.

34 On 26 April 2000, the plaintiffs signed a written offer to purchase a 50 per cent shareholding in Pimpernel Bakeries and the right to operate and own the first outlet of "Pimpernel's Bakery". The purchase price was $200,000. The offer document signed by the plaintiffs, and Carlo, on 26 April 2000 states as follows:

"We, the purchaser, [first plaintiff and second plaintiff] hereby offer to purchase a fifty per cent (50%) share in Pimpernel Bakeries Pty Ltd ... and the right to operate and own the first outlet of 'Pimpernel's Bakery'.

The purchase price of the abovementioned company and shares is $200,000 of which $110,000 will remain in Pimpernel Bakeries Pty Ltd and drawn down as required and $90,000 is to be paid to Rise Group Pty Ltd.

Manner of payment: a deposit of $10,000 of which $10,000 is paid herewith and held in trust and $190,000 shall be paid on settlement as described above.

Settlement date: Monday, 8 May 2000.

This is a cash offer. This offer is only subject to the parties entering into a formal agreement for sale prepared by the vendor's solicitors on terms and conditions mutually agreed between the parties.

Purchaser

[Plaintiffs]

We, the vendor, Pimpernel Bakeries Pty Ltd ... hereby accept the above offer.

Vendor

Carlo Collova

Chairman of Directors"

35 The plaintiffs met the third defendant for the first time on 27 April 2000 at the third defendant's office. There is a conflict between the plaintiffs, on the one hand, and the third defendant, on the other, concerning whether there were one or two meetings between them and what occurred at that meeting or meetings.

36 The plaintiffs say that Carlo arranged for them to meet the third defendant on Thursday 27 April 2000 at about 11 am at his West Perth office before the plaintiffs met the finance broker, Mr Langoulant, at S Mitchell & Co, at 12 noon. The purpose of the meeting with the third defendant was, and they informed the third defendant that the purpose of the meeting was, to obtain information about the business and Carlo to tell the finance broker. The plaintiffs say that the third defendant made certain statements to them concerning Carlo and the proposed business. The plaintiffs were running late for their meeting with Mr Langoulant. The third defendant's secretary Debbie, who was the third defendant's wife, telephoned S Mitchell & Co and informed them that the plaintiffs were running late for their meeting. The plaintiffs then went to their meeting with Mr Langoulant.

37 The plaintiffs' evidence is that later on 27 April 2000 the plaintiffs met with Mr Langoulant of S Mitchell & Co. The plaintiffs took with them Carlo's letter of 22 March 2000 and the brochure. Mr Langoulant gave the plaintiffs application forms. The plaintiffs completed and signed the forms.

38 The plaintiffs' evidence is that they later decided that the brokerage was too high. They told Carlo that they would not use S Mitchell & Co Carlo suggested they see the third defendant to see what he could do to assist. Carlo then arranged a second meeting with the third defendant.

39 The defendants admit that the third defendant met the plaintiffs on 27 April 2000. They admit that the third defendant made certain statements concerning Carlo and the proposed franchise business. However, the defendants say that the meeting took place after the plaintiffs had met the finance broker, Mr Langoulant. The third defendant's evidence is that the meeting was not pre-arranged. One of the plaintiffs telephoned the third defendant. She told the third defendant that they had just seen a finance broker and were just around the corner and asked whether they could drop in and see him. The meeting lasted 15 to 20 minutes. There was a social conversation. They spoke about Carlo and made some comment about the proposed cake franchise. The plaintiffs told the third defendant that they had just acquired the Applecross pizza shop business. The plaintiffs told the third defendant that they were trying to obtain finance and that they had just seen the finance broker, Mr Langoulant. They showed him a certificate of appointment of S Mitchell & Co signed by Mrs Townsend that set out the brokerage and other costs to be charged. The third defendant said the brokerage was too high and that they should approach someone like WA Home Loans. He offered to phone WA Home Loans on the plaintiffs' behalf. The third defendant phoned Mr Pinto of WA Home Loans. Mr Pinto said he would arrange for a loans representative to contact the third defendant.

40 On 27 April 2000, Carlo again wrote to the plaintiffs. He said: "I hope your meetings with Stan Pilkadaris and Kevin Langoulant went well." Carlo set out steps that had to be taken to progress the project, including securing funding.

41 The plaintiffs say that they then met with the third defendant for the second time. Mrs Townsend's evidence is that the meeting was in early May. Ms Morris said in evidence that the meeting was on 1 May 2000. The plaintiffs say that at the second meeting there was a further discussion about Carlo, the franchise and the plaintiffs' personal and financial circumstances and the third defendant made further statements or comments about Carlo and the proposed franchise business. The plaintiffs say that they told the third defendant that the fees to be charged by Mitchell & Co were too high and they were not prepared to use Mitchell & Co. The third defendant then contacted WA Home Loans and told the plaintiffs that a representative of WA Home Loans would contact them about a loan.

42 The third defendant denies he met with the plaintiffs in early May or that he had any second meeting with the plaintiffs prior to June when they met to complete the investment transaction.

43 Mr Smith of WA Home Loans met with Ms Morris at her home and with both of the plaintiffs at the Applecross pizza shop in early May. According to his diary, he met with Ms Morris at 1 pm on 1 May and with the two plaintiffs on 3 May.

44 Each of the plaintiffs completed and signed loan applications to WA Home Loans.

45 After meeting with the plaintiffs Mr Smith asked the third defendant to confirm that the estimated income for the Applecross pizza shop was approximately $60,000. He asked the third defendant because he believed the third defendant to be the plaintiffs' accountant. On 8 May 2000, Mr Smith sent a fax to the third defendant asking him to confirm that the estimated income for the Applecross pizza shop was approximately $60,000.

46 On 7 May 2000, the third defendant called in at the Applecross pizza shop. Both of the plaintiffs and Ms Morris' partner, Robert Bandy, were at the shop. Later Mrs Townsend's husband, Leon, joined them. Mrs Townsend said in evidence that the third defendant asked about the turn over of the pizza shop. She told him they had been doing about $3500 per week and she would like to get close to $5000 per week but $4500 would be more realistic. The third defendant did not tell her he was preparing a financial projection for WA Home Loans.

47 At one time, the third defendant went outside with Mr Bandy for Mr Bandy to give some treatment to the third defendant for his sore back. Mr Bandy gave evidence that whilst they were outside he said:

"I'm not really happy about the girls getting into this. What do you think?"

"Carlo and his brothers are good blokes. This is a solid investment opportunity for Ellen and Caroline."

49 Mr Bandy and Mrs Townsend gave evidence that after the third defendant left, Mr Bandy told Mrs Townsend that the third defendant had said that Carlo and his brothers were good blokes and that this was a solid investment opportunity for the plaintiffs.

50 The third defendant gave evidence as follows. He made notes on the Applecross pizza shop notepad. He noted what he was told by the plaintiffs. He noted that the plaintiffs were each drawing $1000.

51 The third defendant said that Mr Bandy offered to do something to fix his sore back. They went outside. Mr Bandy carried out some procedure that involved lifting up the third defendant. The third defendant denies that Mr Bandy said words to the effect that he was not happy about the girls getting into the investment. The third defendant denies that Mr Bandy asked him what he thought about it. The third defendant agrees that he said that Carlo and his brothers are good blokes, but denies that he said words to the effect: "This is a solid investment".

52 The next day Mr Smith sent the third defendant a facsimile dated 8 May 2000, which referred to their previous discussions and discussed a profit and loss statement for the pizza shop for the 1998 and 1999 financial years. Mr Smith asked the third defendant to confirm the estimated income of the pizza shop and its purchase price. The third defendant then prepared a budgeted profit and loss statement for the 2001 financial year for the pizza shop. He based the budgeted profit and loss statement on what the plaintiffs had told him about the estimated turnover for the upcoming financial year and their drawings. He used $5000 as the average weekly estimated turnover in the budgeted profit and loss statement. At his visit to the pizza shop he did not make a written note that the plaintiffs had estimated the average weekly turnover to be $5000 but he asserts that one of the plaintiffs must have told him that. The expenses listed in the budgeted profit and loss statement were primarily based on the standard cash flow projections that he had used for the various Domino's Pizza shops for which he did the accounting work. He also compared the residual profit together with the owners' remuneration as shown in the budgeted profit and loss statement, namely $9252 plus $74,900 for the year, with what the plaintiffs had told him their current drawings were. At weekly drawings of $1000 each, the yearly profit together with the owners' remuneration would have been at least $104,000. That confirmed to him that the budgeted profit and loss statement was a fair estimate. He then forwarded the projections to Mr Smith under cover of a facsimile.

53 On 12 May 2000 Pimpernel Bakeries resolved to change its name to Poppies Corporation Pty Ltd (Poppies Corporation).

54 On 16 May 2000 the third defendant contacted Mrs Townsend to obtain information concerning her business experience and sent a fax to Mr Smith in which he referred to Mrs Townsend's experience in business and confirmed she was seeking a loan of $100,000 for investment purposes. The following day Mr Smith informed the third defendant that WA Home Loans had approved the loans to the plaintiffs. On 17 and 18 May 2000 the third defendant was involved in obtaining further information from Mrs Townsend and supplying it to Mr Smith.

55 On or about 23 May 2000 WA Home Loans formally notified the plaintiffs that their loans had been approved.

56 On 25 May 2000 the third defendant wrote to a solicitor, Eric Ross-Adje. The third defendant said that Poppies Corporation would loan $90,000 to The Rise Group for three years at 6.5 per cent per annum interest. The Rise Group would provide services, advice and consulting to Poppies Corporation in setting up the franchise system for which Poppies Corporation would pay The Rise Group $3000 per month for three years.

57 The following day, 26 May 2000, the third defendant wrote to Carlo and told him that the banks were holding up refinancing and he anticipated funds to be available the following week.

58 On 2 June 2000, Ms Morris caused to be paid $100,000 to Poppies Corporation from money borrowed from WA Home Loans. Ms Morris, together with her partner and daughter borrowed a total of $392,000. The balance over $100,000 was used to discharge existing loans and for other purposes.

59 On 26 June 2000, Mrs Townsend caused to be paid $100,000 to Poppies Corporation from money borrowed from WA Home Loans. Mrs Townsend, jointly with her husband, borrowed a total of $160,000. The balance over $100,000 was used to discharge an existing loan and for other purposes

60 Meanwhile, on 13 June 2000, Carlo had resigned as a director of Rubylea and the plaintiffs were appointed directors. Poppies Corporation transferred its share in Rubylea to Ms Morris and a new share was issued to Mrs Townsend. Thereafter the plaintiffs were the sole directors and shareholders of Rubylea. The documents to effect these changes were signed in the third defendant's office.

61 Mrs Townsend said in evidence that in June Carlo had told her that the first franchise outlet would be opening in North Perth in September. Carlo had said that the plaintiffs would not have to do anything and that she would thenceforth collect her loan repayment of $250 per week.

62 The first Poppies shop opened in the Village Square Shopping Centre, North Perth. It is not clear when it opened. The lessee of the premises was Poppies Corporation. Carlo and Ms Morris for Poppies Corporation executed the lease. It commenced on 1 August 2000, is dated 12 September 2000 and was stamped on 19 December 2000.

63 From the outset the shop performed poorly. Poppies Corporation met the plaintiffs' first three loan repayments but thereafter there were insufficient funds available to continue to do so. By July 2000, the plaintiffs had fallen out with each other. The Applecross pizza shop partnership was dissolved. On 27 October 2000 Carlo wrote to the plaintiffs. He said that the Poppies North Perth shop was paying for itself but there was insufficient revenue to pay "finance costs". Carlo said he wished to terminate his business relationship with the plaintiffs because they had fallen out with each other and he had begun negotiating with other parties who "were willing to give you both very reasonable returns on your investment."

64 There were further communications between the plaintiffs and Carlo. On 10 November 2000, Carlo wrote to Rubylea. Carlo said that he had contributed $18,000 from another company to pay bills owing by Poppies Corporation but that Poppies Corporation still had unpaid bills of $17,000.

65 A Poppies Corporation trial balance at 31 December 2000, shows that Poppies Corporation was trading at a loss. On 2 January 2001, Carlo wrote to the plaintiffs. He said Poppies North Perth had not been profitable.

66 On 1 February or 1 March 2001, Nicholas Saba went into occupation of the Poppies North Perth shop. The agreement with Carlo was that Mr Saba and his partner would have the profit after payment of operating expenses which included loan commitments for the plaintiffs. There was a meeting between Carlo, Ms Morris, her partner, Mr Bandy, and Mr Saba_._ Ms Morris was presented with a heads of agreement that provided for Mr Saba's company, Quantum Assets Pty Ltd, to take over the shop. Ms Morris did not accept the proposal.

67 On 26 February 2001, Poppies Corporation changed its name to Poppies North Perth Pty Ltd (Poppies North Perth).

68 On 20 April 2001, there was a meeting at Cookies & More's premises at Malaga, attended by the plaintiffs, Carlo, Mr Saba and others. Carlo said the business was losing substantial amounts of money and the position seemed hopeless. After the meeting Mr Saba formulated an offer. The offer included that Saba or his nominee would become directors and 100 per cent shareholders of Poppies North Perth.

69 By this time Arthur Metaxas of Metaxas Vernon, solicitors, were acting for the plaintiffs. Ms Morris instructed Mr Metaxas to engage Brendon Buckley, an accountant, to examine the business and advise what should be done. The lease payments were in arrears as they had been for some time. Mr Metaxas advised the plaintiffs to accept an offer from Mr Saba that effectively assigned their interests in Poppies North Perth to Mr Saba's company in exchange for being relieved of any liability for arrears of rent or future rent liability.

70 On 18 July 2001, Poppies North Perth (wrongly named Poppies Corporation in the agreement) entered into a written agreement with Quantum Assets Pty Ltd. Poppies North Perth sold to Quantum Assets Pty Ltd the goodwill of the Poppies North Perth shop, the plant and equipment, the fixtures and fittings and the vendor's interest in the lease of the premises for $1. Quantum Assets Pty Ltd agreed to indemnify Poppies North Perth in respect of any liability under the lease of the premises.

71 There was a conflict of evidence between the plaintiffs on the one hand and the third defendant on the other concerning what the third defendant said to the plaintiffs about Carlo, the proposed franchise business and the plaintiffs' proposed investment.

72 This is not a case in which I am able to make findings of fact based upon a preference for the evidence of one witness over another. I have scrutinised the evidence of the principal witnesses carefully. Their demeanour is of limited assistance in assessing their credibility and reliability. None of them was a compelling witness.

73 In their witness statements both plaintiffs profess to recall in considerable detail the crucial conversations between them and the first defendant and between them and the third defendant. However, they have little or no recall of other conversations and events. For example, the second plaintiff has little recall of her conversation with Mr Bretton Day, a friend and business broker, to whom she spoke about the proposed investment at a time when she was considering entering into the transaction with Carlo. The second plaintiff has little recollection of the occasion when the second, and final, offer to purchase was signed. The first plaintiff has little recollection of other telephone conversations with the first defendant and whether Stuart Smith visited the second plaintiff on 1 May 2000.

74 For reasons I will state shortly, I find that the plaintiffs are wrong in their evidence that their first meeting with the third defendant took place before they met the finance broker, Mr Langoulant, and are wrong in their evidence that they had a second meeting with the third defendant before they obtained loans from WA Home Loans. That is, the plaintiffs' recollection of their meeting or meetings with the third defendant is unreliable. Those findings are another reason that I find the plaintiffs' evidence to be unreliable.

75 The third defendant's evidence was also unconvincing in a number of areas. His evidence about his knowledge of and belief as to Carlo's financial viability was evasive and unconvincing. His evidence about his knowledge of and belief as to the basis for Carlo's representations in the brochure was evasive and unconvincing. The third defendant was unwilling to concede the apparent difficulty of Carlo's financial position. I do not accept that the third defendant got the revenue figures for the Applecross pizza shop financial projections from the plaintiffs. He did not write the figures on the notes he took. It is more likely that the third defendant drew up the Applecross pizza shop projections so as to achieve the $60,000 profit that Mr Smith had requested and used his knowledge of Domino's Pizzas' operations to construct the figures. The third defendant's denial that the plaintiffs' investment in the Pimpernel or Poppies project would have benefited the first defendant's financial position was not convincing.

76 I reject the third defendant's description of his meeting with the plaintiffs on 27 April 2000 as a social conversation. The third defendant knew that the plaintiffs were proposing to make a substantial investment and to borrow substantial funds to do so. He knew Carlo, his brothers, CRJ and The Rise Group were in a precarious financial position. The third defendant had advised Carlo about the investment structure he should set up for the franchise project and had set up two companies for Carlo - Pimpernel Bakeries Pty Ltd and Rubylea Holdings. The third defendant knew that Carlo had asked the plaintiffs to come and see the third defendant because the third defendant had been involved in setting up Pimpernel Bakeries and Rubylea Holdings and would do the accounting work for those companies.

77 The third defendant admits that at the meeting he said words to the effect that Carlo and his brothers had taken the Cookies & More business from a garage to the then premises in Malaga. He admits he told the plaintiffs that Carlo had done a lot of research over the last few years into the proposed retail business and that Carlo was trustworthy and that he had confidence in him. He admits he said he thought the concept of establishing multiple retail outlets selling cakes and coffees was a good idea and that he could see no reason why this concept would not be successful.

78 The meeting took place in a context where the third defendant must have realised that the plaintiffs would or might be influenced by, and rely upon, what he said about the structure and operation of the proposed franchise business. In my view, the third defendant's description of the meeting as a social conversation was a conscious attempt to downplay the significance of what he said to the plaintiffs at that meeting.

79 In resolving conflicts of evidence, I place most reliance upon the objective circumstances and the inherent probabilities.

80 The plaintiffs and the third defendant agree that they first met at the office of the third defendant on 27 April 2000. The plaintiffs say the meeting took place before the plaintiffs met the finance broker, Mr Langoulant. The third defendant said in evidence the meeting took place after the plaintiffs met Mr Langoulant.

81 I find that the meeting took place after the plaintiffs met Mr Langoulant for the following reasons.

82 The Telstra business records show that a telephone call was made from the third defendant's offices to Don Pinto's telephone number at WA Home Loans on 27 April 2000 at 2.13 pm. It is likely that when the third defendant made that telephone call he had already seen the plaintiffs and the plaintiffs had informed him how much Mr Langoulant at S Mitchell & Co would be charging in brokerage for the proposed loans, and that caused the third defendant to telephone Mr Pinto. The third defendant would have had no occasion to telephone Mr Pinto if, as the plaintiffs maintain, they had not yet spoken to Mr Langoulant at the time of their meeting with the third defendant. Further, the Telstra business records do not disclose any telephone call from the third defendant's offices to the offices of S Mitchell & Co. That is inconsistent with the evidence of each of the plaintiffs that the third defendant's secretary telephoned S Mitchell & Co, whilst the plaintiffs were at the third defendant's office, to inform Mr Langoulant that the plaintiffs would be late for their appointment.

83 The third defendant denied that a second meeting took place between himself and the plaintiffs at which the investment was further discussed and a telephone call made by the third defendant to WA Home Loans. The plaintiffs' evidence is that the third defendant telephoned WA Home Loans in the course of a second meeting between the plaintiffs and the third defendant in early May 2000. The plaintiffs' evidence is inconsistent with the Telstra business records. Those records show that the third defendant telephoned WA Home Loans on 27 April 2000, that is in the course of the first meeting. There is no record of a telephone call by the third defendant to WA Home Loans on any other day in April or May 2000.

84 Stuart Smith, a contractor to WA Home Loans, gave evidence. His evidence is consistent with his diary. I accept the evidence of Mr Smith. His evidence is that he was contacted by Don Pinto and asked to ring the third defendant. Mr Smith thereupon contacted the third defendant who referred him to the plaintiffs. Mr Smith then made contact with Ms Morris and made a note in his diary that he would meet her at her house in Como on 1 May 2000, at 1 pm. Mr Smith gave evidence that he would not have made this note in his diary if this had not been agreed with Ms Morris and that it was his practice to write events into his diary prior to them occurring.

85 27 April 2000 was a Thursday. 1 May was a Monday. Mrs Townsend gave evidence that the second meeting with the third defendant did not take place on Friday 28 April or on the weekend. This only leaves the morning of 1 May 2000 as the date and time for a second meeting prior to the meeting between Mr Smith and Ms Morris at 1 pm on Monday 1 May 2000. The plaintiffs gave evidence that the telephone call by the third defendant to WA Home Loans was made at the second meeting and the second plaintiff said that the second meeting took place after 11 am. Mr Smith gave evidence that it was unlikely that he would have had time to arrange a meeting with Ms Morris at her home at 1 pm on Monday 1 May 2000 if Don Pinto had only contacted him after 11 am on the same day.

86 Each of the plaintiffs gives a different account of what happened at the second meeting with the third defendant. Mrs Townsend said that at the second meeting she raised her involvement with cancer and her husband's concern about the investment and the lack of security. She said that the third defendant told her that the invested money would be repaid within two years, that the plaintiffs would have security over Cookies & More, which was freehold, and two houses, that she should see the investment as a superannuation for herself and her children and that he could see no reason why it would not be successful. Mrs Townsend gave evidence that at the second meeting only the brokerage to be charged by S Mitchell & Co was discussed and that the third defendant then rang WA Home Loans in her presence.

87 The writ of summons, dated 26 June 2001, was endorsed with a statement of claim. The plaintiffs' statement of claim only pleads one meeting with the defendant - on 26 April 2000. The writ of summons and statement of claim were issued less than a year after the relevant events took place, when the matters were still fresh in the plaintiffs' memories, or at least fresher than at the time of trial. The plaintiffs admitted that they provided the facts pleaded in the statement of claim to their solicitors. Mrs Townsend admitted that she did not recollect a second meeting when she originally gave instructions to her solicitors. The plaintiffs subsequently amended the statement of claim in September 2000 to plead a second meeting with the third defendant on or about 3 or 4 May 2000, which was a Wednesday or Thursday. The plaintiffs acknowledged in cross-examination that that pleading was prepared on their instructions.

88 In Mrs Townsend's statement of evidence prepared in February 2004, as exchanged before the trial, Mrs Townsend alleged that the second meeting took place in late April. While giving evidence-in-chief she changed this date in her witness statement to early May. Under cross-examination she said that it must have been a Monday or a Tuesday. Ms Morris said in her witness statement, as exchanged, that the second meeting was on 3 or 4 May 2000 and under cross-examination agreed that she instructed her solicitors to this effect and was quite sure of the dates at the time. During her evidence-in-chief she first said that she could not give a specific date for the second meeting and that it had taken place some time between 27 April and 3 May 2000. Shortly thereafter she stated that the second meeting had taken place on Monday 1 May 2000.

89 At the time the plaintiffs gave evidence at trial they knew that Mr Smith had made an appointment to see them at 1 pm on 1 May. The second meeting, if there was one, had to have taken place before then. The plaintiffs' evidence at trial must be seen in the light of that knowledge.

90 I find that the alleged second meeting did not take place, for the following reasons. First, the Telstra business records are inconsistent with the plaintiff's evidence that the third defendant telephoned WA Home Loans in the course of a second meeting. The records are consistent with the evidence of the third defendant that he telephoned WA Home Loans in the course of the meeting on 27 April 2000. Secondly, the effect of the plaintiffs' evidence is that the second meeting could only have taken place some time after 11 am on Monday 1 May 2000 and if the meeting had taken place then it is unlikely that Mr Smith would have had time to arrange meeting with Ms Morris at 1 pm that day. Thirdly, the plaintiffs initially recalled only one meeting. It is only with the passage of time that they have recalled a second meeting.

91 There is much common ground about what took place at the meeting of 27 April 2000 between the plaintiffs and the third defendant. The plaintiffs plead that, in the course of that meeting, the third defendant made a number of representations. The third defendant admits that he said some of those things alleged, but denies others. I will discuss each in turn.

92 The plaintiffs plead that the third defendant represented to them, in effect, that he had known Carlo and his family for a number of years. The third defendant admits that.

93 The plaintiffs plead that the third defendant represented to them, in effect, that Carlo was a good businessman and trustworthy. The third defendant admits that he said that Carlo was trustworthy, but denies that he said that Carlo was a good businessman. Mrs Townsend agreed in cross-examination that she may have assumed that the third defendant said that Carlo was a good businessman when the third defendant said that Carlo was trustworthy and that he had confidence in him. Both plaintiffs agreed, in cross-examination, that they already thought that Carlo and his brothers were good businessmen on the basis of what Carlo had told them and on the basis of the brochure. I am not persuaded that the third defendant made the statement that Carlo was a good businessman.

94 The plaintiffs plead that the third defendant represented to them, in effect, that Carlo and his brothers had worked very hard and had taken their business from a garage to its then premises in Malaga. The third defendant admits that.

95 The plaintiffs plead that the third defendant represented to them, in effect, that Carlo had done a lot of research over the past four to five years and that the third defendant had seen that research. The third defendant admitted that he said, in effect, that Carlo had done a lot of research over the last few years into the proposed retail business, but denied having said that he had seen the research. I am not persuaded that the third defendant said that he had seen the research.

96 The plaintiffs plead that the third defendant represented to them, in effect, that he was confident the investment proposed by Carlo would be a good business. The third defendant denies that he made that representation. His evidence was that he would not have used the words "a good business", as he had not done any research or investigations into the proposed retail business and had not reviewed the financial projections. Both plaintiffs agreed that they might have misunderstood the third defendant to say that it was a good business when he in fact only said that the concept of establishing multiple retail outlets to sell the Cookies & More products was a good idea. I am not persuaded that the third defendant made the representation attributed to him.

97 The plaintiffs plead that the third defendant represented to them, in effect, that if the finance broker the plaintiffs were about to consult could not organise the finance they required, then the third defendant would be able to assist them. I am not persuaded that the third defendant made a representation to that effect. I have found that the meeting took place after the plaintiffs had met with the finance broker. However, the third defendant did introduce the plaintiffs to WA Home Loans and provided information to WA Home Loans in support of the plaintiffs' application for finance.

98 The plaintiffs plead that at the alleged second meeting the third defendant informed them that he knew of no reason why the plaintiffs' proposed investment in the franchise would not be successful. The third defendant denies he said that but admits he said that he could see no reason why the concept would not be successful.

99 The plaintiffs plead that at the alleged second meeting the third defendant made a number of further representations to them concerning the proposed investment. The third defendant denies having made those statements. I am not persuaded that the third defendant made those representations. I make that finding because I am not persuaded that the second alleged meeting took place and there is no reliable or sufficient evidence that the representations were made at the first meeting or some other time.

100 The plaintiffs plead that at the alleged second meeting they informed the third defendant of a number of things concerning Mrs Townsend's financial position, health and age, the attitude of Ms Morris' partner to the proposal, the plaintiffs' attitude to servicing the proposed loans and the security that the plaintiffs would have for the moneys they were to invest and a number of further representations. The third defendant denies having made those statements. I am not persuaded that the plaintiffs informed the third defendant of those matters. I make that finding because I am not persuaded that the second alleged meeting took place and there is no reliable or sufficient evidence that the representations were made at the first meeting or some other time.

101 I accept the evidence of Mr Bandy that the third defendant said to him that Carlo and his brothers were good blokes and that this was a solid investment opportunity for the plaintiffs, and that Mr Bandy informed Mrs Townsend that the third defendant had so informed him. The third defendant admits that he met Mr Bandy at the Applecross pizza shop on 7 May 2000. The third defendant further admits that he went outside with Mr Bandy for Mr Bandy to give him some treatment for his sore back and that whilst they were outside he said to Mr Bandy that Carlo and his brothers are good blokes. The third defendant and Mr Bandy could only have been discussing Carlo and his brothers in the context of the plaintiffs' proposed investment. There is nothing to suggest that Mr Bandy confused this conversation with some other conversation.

102 The plaintiffs submit that there was a contract of retainer between the plaintiffs and the second defendant. The contract is said to arise from the conversations between the plaintiffs and the third defendant, from the third defendant acting on behalf of the plaintiffs to obtain the loans from WA Home Loans, from the third defendant assisting the plaintiffs to become directors and shareholders of Rubylea and Poppies Corporation to give effect to the contract by which they were to invest $200,000 in the franchise project, and by reason of the second defendant rendering accounts for services.

103 There was no express contract. There was no communication of an offer and acceptance. Of course, there may be an agreement in the absence of an offer and acceptance. On this approach, the Court's task is to ask whether, objectively and having regard to the totality of the dealings between the parties, they should be considered to have entered into a contractual relationship without inquiring too closely into the formalities of offer and acceptance. A contract may be inferred from the acts and conduct of parties as well as or in the absence of their words: Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110.

104 The third defendant did things to facilitate WA Home Loans making loans to the plaintiffs, but that was not in pursuance of any contractual undertaking by which the second or third defendant agreed to do so. The invoices rendered by the second defendant were rendered to Rubylea and Poppies Corporation not to the plaintiffs. The plaintiffs have not established that there was any contract of retainer between the plaintiffs and the second defendant.

105 The plaintiffs seek damages for loss suffered by reason of a contravention of s 52 of the Trade Practices Act 1974 (Cth) (TPA), or s 10 of the Fair Trading Act 1987 (WA) (FTA).

106 Section 52 of the TPA provides that a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive. Section 10 of the FTA provides that a person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

107 The plaintiffs plead that the second and third defendants engaged in misleading and deceptive conduct contrary to s 52 of the TPA and s 10 of the FTA. The conduct consists of statements allegedly made by the third defendant to the plaintiffs and conduct of the third defendant towards the plaintiffs.

Conduct deemed to be engaged in by second defendant

108 The second defendant is an incorporated accounting practice. The third defendant was at all material times the sole director and shareholder of the second defendant. The third defendant carried out the accounting work of the second defendant. The statements made by the third defendant and the conduct engaged in by him towards the plaintiffs in their meeting on 27 April 2000 and subsequently was engaged in by the third defendant on behalf of the second defendant and within the scope of the third defendant's actual or apparent authority. Section 84 of the TPA deems that conduct to have been engaged in by the second defendant.

109 The plaintiffs plead that the second defendant engaged in the conduct complained of in trade or commerce. The plaintiffs called on the third defendant because he was Carlo's accountant and would be the accountant for the companies to be incorporated or acquired to give effect to the franchise arrangement that the plaintiffs proposed investing in. The conduct of the second defendant was in commerce. It was conduct that was an aspect of the second defendant's accounting practice.

The representations made by the third defendant

110 I have found that the third defendant made statements to the plaintiffs to the following effect:

1. The third defendant had known Carlo and his family for a number of years.

3. Carlo and his brothers had worked very hard and had taken their business to its then premises in Malaga.

4. Carlo had done a lot of research over the past four to five years.

5. The concept of establishing multiple retail outlets to sell the Cookies & More products was a good idea.

6. The third defendant could see no reason why the concept would not be successful.

111 I have also found that the third defendant said to Mr Bandy, and Mr Bandy repeated to Mrs Townsend, that Carlo and his brothers were good blokes and that this was a solid investment opportunity for the plaintiffs.

112 An important issue concerns the third defendant's knowledge of, and belief as to, the financial viability of Carlo and the Pimpernel Bakeries franchise project.

113 At the time the third defendant met with the plaintiffs and made to them the representations that I have found he made, the third defendant knew a good deal about the financial position of Carlo, his brothers, CRJ and The Rise Group. He knew that CRJ owed $1,000,000 to creditors and that the loan was guaranteed by Carlo and his brothers and that the loan was secured by a mortgage over the Charles Street property. He knew the Charles Street property was worth no more than about $640,000.

114 In February 2000, the third defendant had read the Collova memorandum. The Collova memorandum disclosed that CRJ and Carlo had serious financial problems and that Carlo was desperate to obtain money to try to avoid bankruptcy. In his evidence, the third defendant played down the seriousness of Carlo's financial situation disclosed by the Collova memorandum. When it was put to him in cross-examination that Carlo had described his situation in the Collova memorandum in very desperate terms, describing his position as a nightmare, the third defendant replied: "I think he may have had a nightmare that night when he typed up that document." The third defendant said that there was no need for Carlo to go bankrupt because he could have caused the Charles Street property to be sold for $650,000 and the Cookies & More business for $350,000. There was no evidence that on or about 27 April 2000 the third defendant knew or believed that Carlo was considering repaying the CRJ loan by selling the Charles Street property and the Cookies & More business. If that was an option being considered by Carlo, or one that Carlo might be driven to, then that would have been material to the viability or desirability of the plaintiffs' proposed investment. The proposed investment was dependent upon the supply of pastries and cakes by Cookies & More.

115 In March 2000, the third defendant was concerned that there was a risk that the creditors of CRJ might seek to sell the assets of the Trust used to conduct the business of Cookies & More to satisfy the CRJ loan. That is disclosed by the facsimile letter of 13 March 2000 from Carlo's solicitors, Pullinger Stewart, to Mr Chaney, (a copy of which was sent to the third defendant), Mr Chaney's advice of 20 March 2000, (a copy of which was received by the third defendant), and the third defendant's email of 25 March 2000 to Pullinger Stewart.

116 In his evidence, the third defendant sought to play down his knowledge of the financial difficulties of Carlo, CRJ and, potentially, The Rise Group. The third defendant denied that he was giving Carlo advice on his desperate financial situation and how to address it. He said he was doing Carlo's accounting work. The third defendant accepted that he had advised Carlo on whether his assets could be kept safe and participated in getting an opinion on the matter. The third defendant said that was part of the accounting work.

117 The third defendant said in cross-examination that he believed Carlo had overcome his financial problems by 27 April 2000 in that he had refinanced the loan. When it was put to him that Carlo and CRJ did not have the means to repay the loan, the third defendant again said that the loan could have been repaid by selling the Charles Street property for $650,000 and the Cookies & More business for $350,000. The third defendant agreed that he had undertaken no valuation of the Cookies & More business.

118 I am satisfied that on 27 April 2000 the third defendant knew that Carlo and CRJ were in a difficult financial situation that put the continuation of the Cookies & More business at risk. The third defendant said that he believed the CRJ loan had been refinanced. The only evidence of any attempt to refinance the loan is that Carlo and CRJ had asked the mortgagees to extend the loan. On 25 March 2000, the third defendant sent to Carlo's solicitors an e-mail that said, amongst other things, it was likely the mortgagees would agree to extend the mortgage for a further three years, but they were seeking additional security. CRJ had been having difficulties meeting the loan repayment instalments. At some time the loan would have to be repaid. The only means for repaying the loan that the third defendant was aware of was the sale of the Cookies & More business. On 27 April 2000, the third defendant must have known that Carlo and CRJ remained in a difficult financial situation and there was a risk to the continuation of the Cookies & More business.

Was the third defendant's conduct misleading?

119 This is not a case where each statement or representation made by the defendant to the plaintiff should be looked at in isolation to determine whether the defendant engaged in misleading or deceptive conduct. If the plaintiffs were misled by the conduct of the third defendant, it was because what the third defendant said to the plaintiffs about Carlo, the Cookies & More business and the proposed franchise investment created an erroneous picture or impression of those matters. The third defendant failed to disclose to the plaintiffs what he knew about the financial difficulties confronting Carlo and CRJ and the potential risk to the Cookies & More business and hence the franchise business posed by those difficulties.

Townsend & Ors v Collova & Ors [2005] WASC 4

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (274 paragraphs)

Townsend & Ors v Collova & Ors [2005] WASC 4 (14 January 2005)

Conduct deemed to be engaged in by second defendant

The representations made by the third defendant

Was the third defendant's conduct misleading?

Third defendant was knowingly concerned in the contravention

Claim for damages for misleading conduct

Parties

Legislation Cited (2)

Cases Cited (39)