TROULIS v VAMVOUKAKIS

Court of Appeal (NSW)|1998-02-11|Before: Gleeson CJ, Mason P, Stein JA

TROULIS v VAMVOUKAKIS SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

GLEESON CJ, MASON P and STEIN JA 10 and 11 February 1998, 27 February 1998

DAMAGES - FAIR TRADING ACT - Sale of business - valuation of goodwill - no evidence permitting rational assessment.

PRACTICE AND PROCEDURE - District Court - Arbitration - observations on undesirability of sending relatively lengthy cases to arbitration over objection of parties.

JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237, Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (19978) 16 ALR 23, Newark Engineering (NZ) Ltd v Jenkin [1980] 1 NZLR 504 followed.

Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167 distinguished.

Gleeson CJ In December 1992 the respondents, Mr and Mrs Vamvoukakis, purchased from the appellants, Mr and Mrs Troulis, the business of a take-away food shop. The subject matter of the sale included the goodwill of the business, and certain plant and equipment listed in the agreement for sale. The purchase price was $80,000. That amount was not apportioned between goodwill and plant and equipment. However, in circumstances which will be explained below, it was agreed between the parties that in October 1994 the value of the plant and equipment was $24,667. It seems not unreasonable to infer that this was at least its approximate value at the date of the agreement, which was 11 December 1992. On that basis, the respondents may be taken to have paid approximately $55,300 for the goodwill.

The respondents, as well as purchasing the business, entered into a lease of the premises on which the business was conducted. The premises were owned by the appellants. The rent was $300 per week. There were some additional financial obligations, but they may be regarded as presently immaterial.

According to the evidence of Mr Vamvoukakis, in the course of negotiations leading up to the sale the purchasers sought, and obtained, from Mr Troulis, information about the takings of the business, including what was described as a guarantee of future takings. Mr Vamvoukakis said that, at one stage in the negotiations, he said to Mr Troulis: "If you guarantee to me a turnover of $5,500-$6,000 per week then we will go ahead". Mr Troulis said: "That's okay". According to Mr Vamvoukakis there were a number of other conversations to like effect. Mr Vamvoukakis gave an account of a series of discussions between

himself and Mr Troulis, leading up to the signing of the agreement for sale, in which Mr Troulis made representations about the past and current takings of the business and assured him that the business would take $5,500 per week in the future.

Mr Troulis's accountant provided Mr Vamvoukakis's accountant with a draft statement of the financial results of the business for the year ended 30 June 1992. The accountant pointed out to Mr Vamvoukakis that the statement did not bear out the proposition that the business was taking $5,500 per week, or anything like that amount. It showed total takings for the year as $153,303, and a gross profit of $72,619, yielding a net income to the owners of the business of $50,473. Mr Vamvoukakis said that Mr Troulis told him that takings to the extent of about $2,000 per week were not recorded in the books of the business but went straight into his pocket. That explained the difference between the takings shown in the accounts and the takings as represented by Mr Troulis.

The parties agreed on a trial period from 23 November 1992 to 4 December 1992, which covered ten business days. During that period the respondents worked in the business. The purpose of having such a trial period was to enable them to see what the business was taking. The results during that period did not bear out the representations allegedly made by Mr Troulis, but once again, according to Mr Vamvoukakis, Mr Troulis gave an explanation for this, which he accepted.

The agreement for sale, which was dated 11 December 1992, was completed on 15 December 1992, when the respondents went into possession.

It appears that over the Christmas and New Year period trading was approximately up to the level said to have been predicted by Mr Troulis, but it was said that this was because other nearby competitors had closed down for the holiday period. During late January Mr Vamvoukakis observed that takings were less than represented by Mr Troulis. He said that by the end of February, or the beginning of March, 1993 it had become apparent to him that the representations were untrue, and that the assurance as to future takings would not be made good. He said, "the shop was not making five or five and a half thousand a week, not even three."

The respondents complained, claiming they had been misled in relation to the takings. The parties resorted to self help. The respondents stopped paying rent. The dispute continued. Ultimately, in October 1994, the appellants re-entered the premises. They took possession of the plant and equipment which had been sold with the business, and they also seized some water filters and other items belonging to the respondents. It was ultimately agreed between the parties that the action of the appellants amounted to conversion of these items of property, that the value of the plant and equipment at the time of the conversion was $24,667, and that the value of the water filters and sundry items was $1,680. It was also agreed that the respondents owed the appellants $10,000 for arrears of rent.

On 8 February 1996 the respondents commenced proceedings against the appellants, claiming, amongst other things, damages for misleading and deceptive conduct, the claim being made under s68 of the Fair Trading Act 1987. There was also a claim for conversion of the plant and equipment and the water filters, and a counterclaim for the arrears of rent.

The trial judge, Sorby ADCJ, gave judgment for the respondents in the sum of $57,576.13. The manner in which that was calculated will be referred to later. The appellants, who seek to have set aside the award of damages under the Fair

Trading Act, acknowledge that, even if their appeal is successful, there should be a judgment against them for the respondents in an amount of $21,020.43 calculated as follows:

Damages for conversion of plant and equipment $24,667.00 Interest on damages relating to plant and equipment $7,190.43 Damages for conversion of water filters $1,680.00 Interest on damages relating to water filters $508.00 Counterclaim for rent ($10,000.00) Interest on counterclaim ($ 3,095.00) Balance $21,020.43

It is also common ground that Sorby ADCJ, in calculating the amount of his judgment, made a significant error in favour of the respondents by double counting in relation to interest.

It is the claim for damages under the Fair Trading Act that is in issue in this appeal.

"The defendants represented to the plaintiffs in connection with the possible sale to them of the business that the weekly earnings of the business were guaranteed at $5,500."

The representations allegedly made by Mr Troulis related both to the past and to the future performance of the business. Insofar as what was said related to the future performance of the business, it was implicit in the case for the respondents that there was no reasonable basis, at the time of the conversations between Mr Vamvoukakis and Mr Troulis, for the "guarantee" of future takings.

Mr Troulis did not deny making statements to Mr Vamvoukakis about the takings of the business, or mentioning a figure of $5,500 per

week. His account of what was said, in response to a question from Mr Vamvoukakis as to the weekly takings, was as follows:

"The time up to Christmas you could get up to $5,500. But after Christmas people are on holidays, factories close down. I always go on holidays in the first week in January. It is quiet. Early January I start again, but January is slow. Schools then open again and people return to work. On average over the full year you get about $3,000 per week. If you count all the months, you could get about $3,000 per week takings."

That was consistent with the draft profit and loss statement handed to Mr Vamvoukakis's accountant. Mr Troulis denied telling Mr Vamvoukakis that he was putting in his pocket, and not recording in his books, about $2,000 per week.

The trial judge preferred the evidence of Mr Vamvoukakis to that of Mr Troulis. One of the complaints made by the appellants is that, in reaching that conclusion of fact, the judge failed to give sufficient, or any, weight, to certain aspects of the conduct of the parties, and of the written agreement they entered into, which had an important bearing on the probabilities as to what they said to one another about takings.

There are three principal issues in the appeal. The first concerns a contention by the appellants that the claim for damages for misleading and deceptive conduct was statute-barred. The second involves challenges to the trial judge's

findings of fact as to the alleged misleading and deceptive conduct. The third concerns the manner in which damages were assessed.

Before going to those issues, there is a general observation about the case which ought to be made.

The amounts involved in this litigation are set out above. They are modest.

The proceedings were commenced on 8 February 1996. In February and March 1996 there were three directions hearings in the District Court. The District Court then exercised its power under s63A of the District Court Act 1973 to send the case to arbitration. We were told that this was done against the wishes of the parties. The arbitration hearing extended over six days, on various dates between July and September 1996. There being dissatisfaction with the outcome of the arbitration, the matter then proceeded to a hearing before an acting judge of the District Court. The hearing commenced in June 1997 and ended in early July 1997. The hearing lasted ten days. It is against the decision of that judge that the present appeal is brought.

The legal costs incurred by the parties in fighting this case have exceeded the amount in issue by a large margin.

It has always been the case, and probably will always be the case, that in some civil actions the nature of the issues, and the determination of the parties to contest those issues, will be such that the costs of the litigation far exceed the amount in dispute. The system cannot eliminate that possibility. Citizens are entitled to invoke the jurisdiction of the courts, even in cases where the due exercise of that jurisdiction will inevitably involve a cost to the parties, and to the State, greatly in excess of the amount in dispute. In the present case, the court does not know what, if any, offers of compromise have been made by one or other party at various stages of the proceedings, or what the response to any such offer might have been. We are in no position to attribute blame for what has occurred. It is, however, a matter of concern that, against the wishes of the parties, the proceedings at first instance were substantially extended by what turned out to be a six day warm-up in front of an arbitrator. The power under s63A is not to be exercised where the hearing of an action is expected to be lengthy (s63A(3)(c)). The term "lengthy" is imprecise, and relative, but it is difficult to accept that the procedure of compulsory arbitration was intended to be invoked in a case where the amount in issue was small compared to the legal costs likely to be involved in the arbitration and any subsequent litigation. Having regard to the amount of money in dispute, the hearing, when viewed with the benefit of hindsight, was lengthy. It is surprising that this was not regarded as predictable.

The system has provided the parties to these proceedings with their day in court in over-abundance. However, they are entitled now to have this court deal with their arguments about the decision of Sorby ADCJ. This, again, will involve legal costs disproportionate to the amount in Issue.

The sale of the business from the appellants to the respondents was effected by a written agreement, in standard form, dated 11 December 1992. The parties to the agreement had solicitors acting for them, and they had the benefit of the advice of accountants. It might seem not unreasonable to conclude that they intended their rights and obligations to be governed by their written contract.

The written agreement dealt specifically with the gross takings of the business, and contained a certain warranty about that matter. Further reference to that warranty will be made below. The written agreement also contained an

acknowledgment by the purchasers that they had not relied upon any statement, representation, or warranty made or given by the vendors other than such as was expressly contained in the agreement.

The evidence of Mr Vamvoukakis as to what was said between him and Mr Troulis about the takings of the business, in the course of the negotiations leading up to the sale, attributed to Mr Troulis a statement of the takings expressed as a "guarantee".

In those circumstances it might have been expected that the legal relations between the parties would be determined by the law of contract, and that the contractual relations between the parties would be governed by the written agreement prepared by their respective solicitors. If it were otherwise, one might ask why it is that parties engage the services of solicitors, and enter into written contracts, in transactions of this kind.

Nevertheless, the respondents made no claim against the appellants for breach of contract. On the contrary, care was taken to avoid basing the claim on contract, no doubt because in certain respects the written agreement was embarrassing to the respondents' claim.

The respondents relied instead upon the provisions of the Fair Trading Act 1987. They alleged that, in contravention of s42 of that Act, the vendors had engaged in conduct that was misleading or deceptive by making the representations as to takings referred to. They relied upon s68 of the Act which is in the following terms:

"68(1) A person who suffers loss or damage by conduct of another person that is in contravention of a provision (including s42) may recover the amount of the loss or damage by action against the other person or against any person involved in the contravention.

(2) An action under subs(1) may be commenced at any time within 3 years after the date on which the cause of action accrued.

The legislature has provided, in the interests of justice, that the rights and liabilities of the parties to a transaction of the kind now in question may be determined otherwise than by reading and applying the written agreement they signed, as advised by their solicitors. The history of the present litigation demonstrates what is sometimes involved in justice of that kind.

The action was commenced on 8 February 1996. This was more than three years after the date of completion of the purchase of the business (15 December 1992), but less than three years after the date (early March 1993) when, according to Mr Vamvoukakis, whose evidence the trial judge accepted, it became apparent to him that the representations said to have been made by Mr Troulis about the takings of the business were untrue.

The defence filed on behalf of the appellants did not plead, under s68(2), that the action had not been commenced within the time limited by the statute. On the first day of the hearing before Sorby ADCJ, counsel for the appellants indicated a desire to take the point, and applied to amend the defence accordingly. There was some discussion of the matter on that day. The application to amend the defence was opposed. Sorby ADCJ postponed further argument and a decision on the point for several days, and then, in a brief judgment, ruled that in the exercise of his discretion he would decline to permit the amendment.

It is far from clear that there ever was any substance in the limitation point. The decisions of the High Court in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 and of the Full Court of the Federal Court in Karedis Enterprises Pty Ltd v Antoniou (1995) 137 ALR 544 provide strong support for

an argument that, in the present case, the cause of action sued upon did not accrue until it was reasonably ascertainable by Mr Vamvoukakis that the representations relied upon by him were false and, therefore, the business he acquired was worth less than he agreed to pay for it. However, it is unnecessary to decide that question, because it has not been demonstrated that this is a case in which this court should interfere that the trial judge's exercise of discretion in declining to allow an amendment to the pleading.

Although the reasons for declining to permit the amendment were expressed only briefly, we were informed by counsel, during the course of the appeal, of the arguments that were put against the amendment. One of the arguments advanced was that, if the defendants were permitted to amend their defence to raise the limitation point, the plaintiffs would then have sought to circumvent the defence by applying to amend the statement of claim to allege fraud. S55 of the Limitation Act 1969 governs the limitation period applicable to actions in fraud and deceit, and the present action would have been commenced within that period. Such a change in the character of the case being made out by the plaintiffs would probably have necessitated an adjournment of the proceedings and, it was argued, the prejudice suffered by the plaintiffs could not have been adequately compensated for by an order as to costs. Furthermore, this was a case where there had been three directions hearings and lengthy and expensive arbitration proceedings, and where various possible amendments to the pleadings, not including the one presently in question, had been discussed between the legal representatives of the parties. It was argued that to have permitted the taking of this point at the hearing, against the background of all that had gone before, would have been unreasonable and unfair.

It has not been shown that this is a case in which the amendment to the defence should have been permitted.

This issue was not raised in the appellants' notice of appeal, and leave to amend the notice of appeal is sought. Such leave should be refused.

Challenges to findings of misleading and deceptive conduct

The appellants mounted a strong challenge to the findings of Sorby ADCJ which, in substance, accepted the evidence of Mr Vamvoukakis as to what was said to him by Mr Troulis concerning the takings of the business.

It is important to note some aspects of the background to the case, and the ambit of the dispute between the two principal witnesses as to what was said between them concerning the takings.

The case was complicated, and, perhaps, the conduct of the case was in some respects artificially constrained, by an aspect of the business in question which was dealt with in argument with a degree of circumspection. As was noted, Mr Vamvoukakis and Mr Troulis agreed that they discussed takings, and they also agreed that they spoke about a figure of $5,500 per week. The principal difference between them was that Mr Vamvoukakis said that figure was mentioned as average weekly takings whereas Mr Troulis said the figure was mentioned as exceptional, and that average takings were said to be about $3,000 per week. On the face of it, the version given by Mr Troulis received support from the figures handed to the accountant for Mr Vamvoukakis during the course of the negotiations. Those figures, which showed a net income from the business of about $50,000, showed sales in an amount which corresponded to takings of about $3,000 per week. (Curiously, a significantly different set of figures appeared in the tax return filed later by Mr Troulis, but the ultimate net income

of the business was shown to be about the same). Mr Vamvoukakis said that, when he pointed this out to Mr Troulis, Mr Troulis reassured him by telling him that he was putting about $2,000 per week in his own pocket and not showing that amount in the books. The obvious suggestion being made by Mr Vamvoukakis in that regard was that, this being a cash business, the accounts that were prepared for the benefit of the revenue authorities were not reliable. Whether this may also have been an attraction of the business to Mr Vamvoukakis is a matter upon which he did not comment. However, although Mr Vamvoukakis conducted the business for almost two years, when he came to give evidence about the takings of the business he found himself unable to produce any books of account or records of any description. It appears that he never prepared any tax return covering the period when he was running the business. He explained this by saying that he kept his business records in exercise books which were lost at the time the vendors re-entered the premises in October 1994. Sorby ADCJ believed that explanation.

There were aspects of the transaction which might have been thought to cast some doubt on the evidence of Mr Vamvoukakis. The terms of the written agreement for sale dealt expressly with the matter of takings, contained a particular warranty about the takings, and excluded other warranties. There was, however, a problem about the form of the warranty concerning the takings. This problem, in turn, was related to aspects of the circumstances in which the agreement for sale was prepared. The warranty was expressed to relate to takings for a trial period of ten business days which preceded the date of the agreement.

During that period Mr Vamvoukakis had been closely involved in the running of the business, for the purpose of checking the takings. According to the literal terms of the agreement, the warranty was that the takings amounted to $5,500 for that period of ten business days. However, there was evidence that instructions for the preparation of the agreement, as noted by a solicitor's employee, referred to the figure of $5,500 "pw". There was, therefore, something to be said for the proposition that the reference to $5,500 in the written agreement was a mistake, and should have been $5,500 per week.

Sorby ADCJ, in his reasons for judgment, said he interpreted the agreement to mean $5,500 per week. It was rightly pointed out on behalf of the appellants that this seems to be an impossible interpretation of the agreement, but mistake is a different question.

Mr Vamvoukakis was not cross-examined about that aspect of the agreement in direct terms. As the issues developed at the trial, the relevance of what was written in the agreement concerned the bearing, if any, it may have on the reliability of the evidence of Mr Vamvoukakis as to what Mr Troulis said to him. It would have had a quite different relevance if the action had been framed in contract, and that may be one reason why the action was not framed in contract.

It was also pointed out on behalf of the appellants that there was a trial period before the agreement was entered into, for the purpose of enabling the takings to be checked, and it appears to be common ground that the takings during that trial period did not amount to $5,500 per week. This was also something that tended against acceptance of the evidence of Mr Vamvoukakis, although he explained this by saying that he was given certain reassurances by Mr Troulis which he accepted.

On the other hand, support for the evidence of Mr Vamvoukakis came from the accountant, Mr Souleles, who said that he told Mr Vamvoukakis that, on the figures given to him about the takings of the business, and the profit, Mr

Vamvoukakis would be ill advised to purchase the business. He said that Mr Vamvoukakis responded by referring to the representations that had been made by Mr Troulis about the takings that were not shown in the accounts. This evidence was not challenged, and was accepted. There is no apparent reason why Mr Vamvoukakis would have misled Mr Souleles about what he was told by Mr Troulis.

This is a case in which the impressions formed by the trial judge as to the reliability of various witnesses were an important factor in his ultimate decision. Whilst there is a good deal of force in a number of arguments advanced by the appellants, and whilst the reasons given by Sorby ADCJ do not do full justice to all those arguments, Mr Vamvoukakis impressed the trial judge as a witness of truth, and his evidence was supported by the accountant. This court would not be justified in interfering with the trial judge's finding of fact. The error concerning the interpretation of the agreement does not appear to be material. This ground of challenge to the decision below has not been made out.

The respondents did not sue the appellants for breach of contract. The only warranty as to takings contained in the written agreement related to the takings of the trial period of ten days which preceded the contract. The agreement expressly excluded any other representations or warranties. Notwithstanding the promissory aspect of part of what was allegedly said by Mr Troulis to Mr Vamvoukakis, and, in particular, the references to a "guarantee" of takings, no attempt was made to assert the existence of a collateral contract. The cause of action relied upon was a claim for damages pursuant to s68 of the Fair Trading Act 1987, which corresponds to s82 of the Trade Practices Act 1974 (C'th).

The authorities concerning s82 of the Trade Practices Act, which are equally applicable to s68 of the Fair Trading Act, establish that, in a case such as the present, a plaintiff does not sue to recover expectation loss, and that the measure of damages is the measure of damages applicable to an action for deceit, being the difference between the value of what the purchasers acquired as a result of the transaction they entered into following the misleading and deceptive conduct of the vendors and the price they paid. (Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; Kizbeau Pty Ltd v W G & B Pty Ltd (1996) 184 CLR 281). Once the respondents succeeded in establishing that they were entitled to damages under s68 of the Fair Trading Act, then what they were entitled to recover was the difference between the price they paid for the goodwill of the business which they purchased and the true value of that goodwill at the date of purchase. Thus, they were entitled to recover the difference between $56,300 and the true value of the goodwill of the business at 15 December 1992.

The following passage in the judgment in Kizbeau (184 CLR 281 at 290-291) is in point:

"Actions based on s52 (of the Trade Practices Act) are analogous to actions for torts. It follows that, in assessing damages under s82 of the Act, the rules for assessing damages in tort, and not the rules for assessing damages in contract, are the appropriate guide in most, if not all, cases.

In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it. Nevertheless, although the value is

assessed as at the date of acquisition, subsequent events may be looked at insofar as they illuminate the value of the thing as at that date. A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement. Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false but also to prove the true value of the business as at the date of purchase. Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible, "subject to due allowance being made for any difference in relevant conditions'. But if it is established that the decline in takings has been caused by business ineptitude or unexpected competition, evidence of subsequent takings is not admissible to prove the value of the business as at that date, events such as ineptitude and unexpected competition being regarded as supervening events. In some cases of deceit, it may also be proper to compensate the defrauded party not only for the difference between the value of the thing acquired and the price paid for it but also for losses induced by the fraud and directly incurred in conducting the business. All of these principles are appropriate to the assessment of damages under s82 where a breach of s52 of the Act has induced a person to purchase a business."

There was a good deal of evidence, and argument, at the trial arising out of allegations that the takings of the business whilst it was being conducted by Mr Vamvoukakis were affected by incompetence and other considerations which explained why his expectations were disappointed. However, the respondents were not seeking to be compensated for expectation loss. They were seeking to be compensated for the loss which they suffered as a consequence of being induced, by misleading and deceptive conduct, to pay $55,300 for the goodwill of the business on 15 December 1992. They could only demonstrate that they suffered loss of that kind by demonstrating that on 15 December 1992 the goodwill of the business was worth less than $55,300.

Neither side on this appeal has attempted to support the approach taken by Sorby ADC]J to the assessment of damages.

In considering the way in which his Honour approached this question it is necessary to bear in mind the other issues involved in the case, in addition to the matter of the alleged breach of the Fair Trading Act, to which reference was made at an earlier part of this judgment. There were claims for damages for conversion of plant and equipment, and water filters, there was a cross-claim for arrears of rent, and there were questions of interest in relation to those claims. All of the claims except the matter of the claim under the Fair Trading Act were resolved by agreement of the parties.

For some unexplained reason Sorby ADCJ dealt compendiously with the claim for damages for breach of the Fair Trading Act and the claim for damages for conversion of the plant and equipment. These were quite separate causes of action. They arose at different dates. The cause of action for conversion of plant and equipment arose in about October 1994. The cause of action for breach of the Fair Trading Act may be taken to have arisen in early March 1993. Quite different amounts of damage were involved. Interest on any damages awarded ran from different dates.

At the conclusion of his reasons for judgment Sorby ADCJ itemised the various components of his award of damages as follows. He described as the "principal claim", compendiously, the claim for damages for breach of the Fair Trading Act and the claim for damages for conversion of the plant and equipment, and in respect of that total claim he awarded damages of $47,004. He calculated interest on that amount at $14,218.70. He then awarded, additionally, "interest on converted plant and equipment" in an amount of $7,190.43. It is common ground that this involves an element of double counting, because the amount of interest he awarded on the "principal claim" must have included interest in relation to the conversion of the plant and equipment. He gave a separate award in relation to the conversion of the water filters in an amount of $1,680, and he awarded interest on that amount in the sum of $508. In relation to the cross-claim he awarded $10,000 for arrears of rent, and interest on that sum of $3,025. Taking account of all those amounts, there was a total verdict and judgment for the plaintiff in an amount of $57,576.14.

Reference has already been made to a concession made by the appellants as to the amount of the judgment to which the respondents are entitled assuming the appellants were to succeed entirely on the basis of one of the three principal arguments advanced in support of the proposition that there should have been no award of damages for breach of the Fair Trading Act.

The reasoning of Sorby ADCJ in assessing damages in respect of what he described as the "principal claim" (that is, the combined claims for damages for breach of the Fair Trading Act and damages for conversion of the plant and equipment) was expressed as follows:

"How to assess the loss has created some difficulty for me. Mr Kintominas for the plaintiffs said in accordance with authority the loss is to be determined in the same way as in a tortious action, that is a plaintiff should be compensated for the change of position brought about by the tort. See for example Gates v The City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 14-15.

However, I consider I should also consider the extent to which the plaintiffs mitigated their loss. See Henjo supra to which I have referred already per Lee J at p93, and also take into consideration the fact that the plaintiffs had the benefit of the business which they bought for $80,000 between December of 1992 and October 1994, the date of the lockout, that being 17 October. The evidence was that the plaintiffs not only worked the business but lived off it as well taking their food from the stock and even paying school fees out of the takings for their children. Mr Kintominas said the plaintiffs' loss was simply the $80,000 the plaintiffs paid plus legal expenses and stamp duty and such a sum to include the plant and equipment that came with the business, but no evidence was called as to how a business should be valued for these purposes.

Therefore in awarding damages I intend to take as a starting point the $80,000 inclusive of plant and equipment paid by the plaintiff plus stamp duty and legal expenses paid by him. However, because of the paucity of the evidence over nearly two years as to the operating expenses of the business or its profits or loss, together with the fact that the plaintiffs had the use of the $80,000 and supported his family and himself during that period which is nearly two years, I intend to discount the sum by the figure of 40 percent to take into account those factors.

I therefore award the plaintiff the sum of $80,000 plus legal costs and stamp duty of $2,490 as agreed, less 40 percent, and (arrive at) a sum of $47,004."

The references to $80,000 as the amount the plaintiffs paid for the business appears to overlook the fact that what is of immediate concern is the value of the goodwill of the business, and the price that was paid for it. Although the purchase price was not apportioned between goodwill on the one hand, and plant and equipment on the other, the judge had before him a claim for damages for conversion of the plant and equipment, and he knew that the claim was being settled on the basis that the plaintiffs were being awarded a sum of $24,667 for such conversion, that being the agreed value of the plant and equipment on the date of the conversion, which was October 1994. He should, therefore, have dealt separately with the question of the goodwill of the business. There was no difficulty about working back to an inferred price that was paid for the goodwill of the business by deducting from $80,000 the agreed value of the plant and equipment, for which the plaintiffs were being compensated by an award of damages. It is true that the damages for conversion were based upon the value of the equipment as at October 1994, not as at December 1992, but there was no suggestion that the plant and equipment had materially altered in value over that period of two years.

It may be added that one of the consequences of the approach taken by Sorby ADCJ was to discount the damages that were being awarded for conversion of the plant and equipment; a matter of which the respondents complained, and which was part of the subject of a cross appeal.

Having been referred to Gates, Sorby ADCJ was aware that his primary task was to compare the value of the business at the date it was acquired with the price that was paid for it. His Honour also appreciated that there was a lack of evidence as to the value of the business as at 15 December 1992.

No witness was called by either side to express an opinion as to the value of the goodwill of the business on 15 December 1992, on any assumption as to the takings, or outgoings of, the business, made relevant by any of the evidence in the case, or on any other basis. There was no direct evidence of such value. In the course of this appeal, a deal of time was taken up in argument as to whether it might be possible, by some process of reasoning, to infer what that value might have been.

There were, in evidence, figures concerning the profits of the business over a period of years leading up to and including the year ended 30 June 1992, while the business was being conducted by the vendors. That evidence included the figures handed to the accountant for the respondents during the course of the negotiations, and the inconsistent figures ultimately appearing in the tax returns of the appellants.

The respondents did not call a valuer, or any other witness, to say, for example, that, assuming the figures prepared by Mr Troulis for the purposes of his tax returns to have been correct, and the takings to have been the amounts shown in those statements, the real value of the business was a certain sum, which was less than the price which the purchasers agreed to pay for it.

Reference has already been made to a draft statement of profit and loss for the year ended 30 June 1992 which was given to Mr Souleles, the respondents' accountant, during the negotiations for the sale of the business. That statement showed sales of $153,303 (about $3,000 per week), purchases of $80,899, a gross profit of $72,619 and a net income, to the owners of the business, after deducting certain outgoings, of $50,473.

Mr Souleles pointed out to Mr Vamvoukakis that, since he was going to lease the premises from the vendors after the sale, he would have an additional outgoing for rent of $300 per week. That would have reduced the net income from the business, as represented in the draft document, by $15,600 per year. He also pointed out that the purchasers were intending to borrow a substantial sum from the bank and would therefore have a significant amount to pay by way of interest (about $9,000 per year). Assuming all the figures to have been otherwise correct, the rent alone would reduce the net income to less than $35,000, and interest would have to be deducted from that. On that basis, Mr Souleles advised Mr Vamvoukakis that, bearing in mind that he and his wife were both intending to work in the business, it was not worth their while buying it for the price under discussion. He said:

"The figures do not justify getting involved in the business if you take into account the interest on the loan you will have to pay and the rent on the premises. In fact, there is no justification for a price of $80,000 unless the shop really does take $5,500 per week."

Mr Souleles was not put forward as an expert in valuing businesses. He was giving advice, as an accountant, as to whether it was in his clients' financial interests to enter into a particular transaction. He did not say, and his evidence does not support a conclusion that, assuming the figures he was shown to have been correct, the business was valueless. Nor did he give evidence as to how one goes about valuing such a business.

The evidence of Mr Souleles cast doubt on the accuracy of other figures in the draft profit and loss statement apart from the figure for takings. He pointed out that, in the course of the litigation, he had seen a copy of the figures which went into the appellant's income tax return for the year ended 30 June 1992. Those figures showed sales of only $118,457 (or about $2,300 per week), but they also showed purchases of only $43,335. They showed a gross profit, and a net income, not materially different from the figures shown to Mr Souleles during the negotiations for the sale. He also said that in his experience a business of this kind would be expected to make a gross profit of about fifty percent of sales, which caused him to doubt the relationship between sales and gross profit on the figures in the tax return.

If the respondent had called a valuer to value the business as at December 1992, what assumptions would the valuer have made as to the figures prepared by the appellants? He or she would have had two sets of figures, produced at different times by the appellants, which showed substantially different figures for sales and purchases for the year ended 30 June 1992. One set showed sales of $153,303 and purchases of $72,619; the other set showed sales of $118,457 and purchases of $46,335. There would be no justification for assuming that the figures in either set of accounts were correct, especially where the background included an allegation by Mr Vamvoukakis, accepted as true by the judge, that Mr Troulis was telling him that the accounts did not reflect the true position of the business.

As the passage from Kizbeau cited above accepts, if the necessary information had been available, it might have been possible to use the trading experience of the respondents between December 1992 and October 1994 to draw inferences as to the position of the business in 1992 from which conclusions as to its value in December 1992 might have been drawn. However, that exercise would have involved two steps. First, it would have been necessary to reconstruct, by

inference, the results of the business in 1992. Second, it would have been necessary to explain how one draws, from those results, a conclusion as to the value of the business.

The respondents were unable to produce any business records as to their trading experience between 1992 and 1994. They said that their records of takings had been lost at the time when the appellants re-entered the premises. They had never filed any income tax returns in relation to the period. The absence of any income tax returns or other accounts recording the results of their trading, or their best efforts to estimate those results, was not necessarily the end of the matter, but it was an inauspicious beginning. The most Mr Vamvoukakis did by way of giving evidence as to his trading experience was to express, in a very general and approximate form, some estimates of his takings.

No valuer was called to attempt to put a value on the business in December 1992 on the basis of such information as to his trading experience between 1992 and 1994 as came from Mr Vamvoukakis, and it is difficult to see how any such attempt could have been made.

In brief, the trading figures prepared by Mr Troulis were asserted, and found to be, inconsistent and unreliable, no trading figures were produced by Mr Vamvoukakis, and no witness was called to put a value on the business. This was against the background of a contention by Mr Vamvoukakis that, when he was considering the purchase of the business, he was told it was a cash business in which the current proprietors were putting two-fifths of the takings directly into their pockets and were not keeping, or providing to the revenue authorities, proper accounts.

In such circumstances, there are limits to the lengths to which a court may properly go in "doing the best it can" to assess damages (cf Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167).

We are not here concerned with damages of a kind which are inherently difficult to quantify, or which involve estimating a risk, or measuring a chance, or predicting future uncertain events. The assessment of damages turned upon the valuation of the goodwill of a business. That was a matter in respect of which there may well have been room for differences of opinion. However, it was not shown that the goodwill was valueless, and it was necessary for the respondents (who themselves conducted the business for almost two years) to provide some evidence upon which a rational assessment of value could be made.

The reasoning of Sorby ADCJ involved beginning with the assumption that the respondents lost the whole of what they paid for the business, (which is tantamount to saying the goodwill of the business was valueless), and then moderating that assumption, by acknowledging that they obtained some benefits from operating the business, and allowing a "discount" of 40 percent.

Neither side supports that reasoning on this appeal, but the appellants say that the very fact that the judge was driven to such an exercise demonstrates the force of their submission that the evidence provided no foundation for an assessment of the value of the business in December 1992.

The principles governing the approach which a court should take when there has been a failure of proof by a party carrying the onus of establishing the extent

of damage suffered as a result of breach of contract or tort were discussed in JLUW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237.

Examples of cases, similar to the present, where courts have declined to substitute guesswork for evidence, and have refused to award damages where no basis for a rational assessment has been laid in the evidence, include Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 and Newark Engineering (NZ) Ltd v Jenkin [1980] 1 NZLR 504.

As Deane J observed in The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 118-119, the limitations of the curial process, or the nature of the subject matter in question, often mean that the task of assessing damages involves a pragmatic exercise of a kind traditionally left to the good sense of a jury. Where, however, what is involved is the valuation of the goodwill of a business, and the plaintiff fails to adduce either reliable evidence of the trading results of the business, or evidence as to how one goes about valuing such a business, then there is an absence of the raw material to which good sense may be applied. Justice does not dictate that, in such a case, a figure should be plucked out of the air.

The challenge made by the appellants to the award of damages for breach of the Fair Trading Act has been made good.

This is not a case where the interests of justice would be served by ordering a new trial. I do not understand it to have been suggested that such an order should be made, but in any event, it would not be appropriate. Both sides had ample opportunity to call such evidence as they desired, and the apparent inability of the respondents to produce anything but the barest information as to the results of their trading is not something that could be remedied at this stage.

The appeal should be allowed and the cross-appeal dismissed. The judgment should be set aside. In lieu thereof there should be judgment for the respondents in the agreed amounts listed above.

The parties agreed that the consequences as to interest and costs turn upon material not presently before this court and, in the event that the appeal is allowed, asked for an opportunity to resolve those matters by agreement, or, if they cannot agree, to put written material and submissions to the court.

I propose, therefore, that the court should refrain from making any formal orders at this stage.

The parties should be given twenty-one days from the date of publication of these reasons either to file agreed minutes of the formal orders to be made to give effect to these reasons or to file such further material and submissions on the questions of interest and costs as they may be advised.

Mason P I agree with the Chief Justice. Stein JA I agree with Gleeson CJ.

Making of formal orders allowing appeal postponed. Counsel for the appellant: M D Broun QC / B Guest Solicitors for the appellant: McDonell Vertzayias Counsel for the respondent: P Kintominas / H S Packer

At a glance

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Judgment (117 paragraphs)

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Cases Cited (7)