WSA Online Limited (in administration) v Arms

background facts 2 The background facts are identical to those in an appeal on other issues heard contemporaneously with this appeal, namely VID 855 of 2005. The circumstances are, so far as necessary, recapitulated here. 3 In 1999 the respondent proposed to establish a business of providing a market service for small to medium independent wineries by means of a website on the internet under the name 'auscellardoor' ('the Original Concept'). The method of operation was to be as follows: (a) retail purchasers would identify and purchase wines from participating vendor wineries through the auscellardoor website. (b) payment for the wine would be made online by credit card processed through an 'e-Gate' facility on the website provided on behalf of the ANZ Bank by the respondent. (c) the vendor wineries would be credited with the purchase directly into the account of the vendor winery, after deduction of a small transaction charge (estimated to be between 2 per cent and 2.5 per cent). (d) the vendor wineries would pay auscellardoor a commission of 5 per cent on each sale effected through the website. The Original Concept did not require payment of sales tax on 'cellar door sales'. 4 The appellant provided services to the respondent in respect of the Original Concept. Prior to the respondent contracting with the vendor wineries, the appellant represented to the respondent that the vendor winery would not be required to do anything more to become an ANZ e-Gate merchant than to complete the documents in a Trade Presentation Kit and, in particular, to complete the ANZ form with certain banking details. This representation was said by the respondent to arise from two sources. First, a statement on 7 February 2000 by Messrs Student and Houghton, employees of the appellant, that wineries could be added to the website by simply filling in a form and paying a small setup fee. Second, approval by the appellant and its employees of the form in a Trade Presentation Kit in March 2000. 5 In reliance on the representations, the respondent travelled around Australia signing up wineries on the basis that all that was required of vendor wineries to be added to the website and receive payments through the ANZ e-Gate facilities was to sign the simple form. However, as the Mr Student disclosed to the respondent on 23 June 2000, he would have to arrange for each winery to become a merchant and the procedure for the vendor wineries to become ANZ e-Gate merchants 'was far from simple'. It required more of an applicant by way of provision of financial statements and projections and company or partnership details, together with accreditation by the ANZ Bank, Diners Club and American Express, acceptable profit and loss statements for the last two years and a business plan. 6 At that time, acting to establish the Original Concept, the respondent had already enrolled about 30 wineries and the website was to be launched within five days. It therefore was impossible for him to require wineries to comply with the conditions necessary to become individual merchants. Consequently, he was forced to make an urgent application for auscellardoor to become an accredited merchant. He operated the business as follows ('the Interim Arrangement'): (a) auscellardoor was to become a retailer of wine offering to the public the wines of the vendor wineries with whom he had contracted. (b) auscellardoor would purchase the wines from the vendor wineries. (c) auscellardoor would charge a mark up or commission limited to 5 per cent. (d) Purchases would be by the ANZ by Mastercard, American Express or Diners Club facilities of auscellardoor and auscellardoor would be liable for the associated transaction fees. (e) As the sale would be effected by auscellardoor as retailer and not by the vendor wineries, the sales would not be 'cellar door' sales and sales tax would not be avoided, as was the Original Concept. On this basis the business was not viable but the respondent was required to maintain the Interim Arrangement for 12 months to preserve his credibility and goodwill. 7 From late 2001 the respondent was able to change to his current business structure ('the Current Business Structure') which involved establishing a supply network of distributors and wineries, purchasing wines, principally from distributors, and selling on a retail basis. He rapidly built up a number of wineries on the website and, at the time of the trial, had about 137 wineries listed on it.

reasons of primary judge 8 His Honour found that the appellant was liable in respect of what was described as the ANZ Requirements Representation. That was a representation to the present respondent that in order to effectively run the business and operate the website, he was not required to obtain any documentation from the wineries other than a form, with provision for banking details. His Honour dismissed claims in respect of two other representations described as the Production Representation and the Best Method Representation, into the details of which it is not necessary to proceed. 9 His Honour's reasoning in relation to the resultant damages from the finding of liability proceeded as follows: 1. He said that it was no answer to a claim for damages under s 82 of the TPA that the loss suffered by an applicant is difficult, or even impossible to quantify with precision: The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 125 per Deane J. His Honour said '[T]hat difficulty is frequently encountered where, as here, the Court is invited to assess the profit which an applicant would have made had he or she taken a course different from that which was, in fact, taken'. Nevertheless his Honour said that the difficulty was alleviated to some extent by the ability to take into account all matters known by the later date when the Court's assessment is being carried out. 2. His Honour identified the starting point of the present respondent's case on damages as being that he had spent almost six months to the end of June 2000 developing a business which was incapable of operating in the manner which he intended. To preserve his credibility and goodwill with the wineries and in the industry generally he had been forced to convert auscellardoor into a retailer, but one with a mark-up or commission limited to the 5 per cent which he had represented would be charged to the wineries under the system which he had been forced to abandon at the end of June 2000. Additionally, the business had to operate in that way for the ensuing 12 months. This compelled him to maintain, for that year, the system under which auscellardoor was the merchant accredited to credit card operators but confined to its recovery of the commission of only 5 per cent of sales effected. 3. His Honour said the present respondent contended before him that once he was free of those constraints he was able to adopt a completely different business structure and move from trading losses of about $40 052 in the year ended 30 June 2001 and about $26 898 in 2001-2002 to a net operating profit of $55 728.96 in the nine months ending on 31 March 2003 and a net operating profit for the year ended 30 June 2004 of $130 219.35 after disregarding, as an abnormal expense, legal costs incurred in connection with the case. The respondent contended that had he not been misled by the ANZ Requirements Representation, he would have commenced the business under its present structure early in 2000. Therefore the respondent argued before the primary judge that he had been set back 18 months in the development of his business. He proposed a figure of $195 000 as appropriate to compensate him for the period of 'arrested development' from January 2000 to 30 June 2001. 4. His Honour noted that the present appellant submitted to him that since the auscellardoor website had eventually become a successful operation, the measure of the respondent's loss was the difference between what the website had cost and what the respondent would have expended if the representation had not been made. It was submitted there was no evidence to establish that any damage had been suffered on that measure. 5. His Honour considered that the submissions on behalf of the appellant did not acknowledge the premise of the respondent's case that the operation of the business whereby he became the merchant but was confined to charging a commission of only 5 per cent was an interim arrangement until he could, without damage to his goodwill, undertake the more profitable role of an independent retailer, presumably through the same website. He found that the respondent's decision to maintain the Interim Arrangement for 12 months was not unreasonable. 6. His Honour was not prepared to allow as part of the respondent's damages for the breach the expenses incurred in developing the website, being amounts successively paid to the appellant and Rare Media. He inferred that such expenses would have been incurred in developing the website even if the respondent had adopted his Current Business Structure of trading earlier in 2000. 7. His Honour also was not prepared to allow promotional expenses in the order of $14 000 which were said to have been thrown away because of a delay until November in auscellardoor's website becoming operational. The expenses were included in the trading losses for the year ended 30 June 2001. 8. His Honour rejected the possibility of making a finding that the losses of slightly more than $40 000 and slightly more than $26 000 incurred in the financial years ended 30 June 2001 and 30 June 2002 would not have been incurred had the business operated in its reconstituted form from the outset. 9. His Honour then said as to the period of time lost in respect of the respondent's claim: '[123] In the circumstances, I consider it reasonable to assume that, had he known the truth about the ANZ Requirements Representation, Arms would have changed the website to its present method of trading by November 2000. (It is to be remembered that it was not until then that auscellardoor, as the sole ANZ e-Gate merchant, obtained the necessary accreditation from both Diners Club and American Express). On that assumption the time lost in the development of the reconstituted business was about seven months between November 2000 and 30 June 2001.' 10. As to the quantum of damages, his Honour reasoned: '[124] The authorities noted at [111] above recognize that it is appropriate to assess, with the benefit of hindsight, profits which would have been made on the hypothesis which an applicant has persuaded the court to adopt. However, I am not persuaded on the basis of evidence of 21 months of profitable trading to assume that the reconstituted auscellardoor business will continue to return an average annual profit of $130,000 in real terms. Although it involves an arbitrary estimate in the nature of the "guesswork" referred to by Hayne J in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257, at 266 [38], I have discounted the probable average profit from the amount of slightly more than $130,000 achieved in the year ended 30 June 2004 to $100,000. That is to take account of vicissitudes likely to affect the reconstituted business over its expected life and the notoriously intense competition which prevails in the local wine retailing industry. On that basis, a figure of $58,331 represents appropriate compensation for the set back of seven months which I have imputed to the development of the business.'

Appellant's contentions 10 The appellant's notice of appeal contains five grounds in relation to the issue of damages. These assert that there was error in holding that damage had been suffered by the respondent; the measure of damage had been erroneously assessed as if it were relative to a breach of warranty; damages had wrongly been assessed in that there was no evidence as to how long it would take to get the business in its present form up and running; it should have been found that there was no loss and damage proven to have been suffered on the basis that there was reliance on the ANZ Requirements Representation; and that the quantum of damages was incorrect because for the first two years the respondent was trading at a loss. 11 In oral submissions the appellant pressed two matters in particular within the rubric of these grounds. The first was said to be an error of principle in that his Honour assumed that the business would have become profitable immediately. Second, it is said that his Honour erred in applying the figure of $100 000 to the seven months of set-back because that latter period was one when losses were suffered. Additionally, as part of this second contention, it is said that his Honour failed to have regard to the fact that the business for the period 30 June 2003 to 30 June 2004 was a different business to that in issue at the time of the set-back. On this second point it was contended that the respondent had failed to discharge the onus of proving his case at trial.

reasoning 12 The submissions of the appellant took the Court to evidence in support of the above submissions. However the submissions for the appellant entirely overlook that his Honour was addressing a theoretical seven month delay as a means of calculating damages appropriate to all the circumstances. He was not simply looking at the seven month period when there were losses sustained in a particular point in time. He assumed that the lead time would have been seven months shorter to get to the level of profitability which ultimately the business achieved if the ANZ Requirements Representation had not been made. What the damages were intended to achieve was to compensate the respondent for the value of being deprived of seven months of profitable trading. 13 In his reasons at [120], his Honour treated the expenses associated with development of the website by the appellant and Rare Media as part of the natural evolution of the business rather than as directed to change in the nature of the business. Even if there were differences in the business between the seven months from November 2000 to 30 June 2001 and the business extant of 30 June 2003 to 30 June 2004 (because the latter business had extended into the sale of racking and glassware in addition to wine), that was not a germane factor in relation to the exercise of calculation of damages which his Honour undertook. Doing the best which he could with what was before him, his Honour sought to arrive at a figure to compensate the respondent for the losses which he had suffered. 14 In doing so, he acted both hypothetically and conservatively. The respondent had claimed the expenses in relation to development of the website and these were rejected. Second, the respondent had claimed that the losses that were suffered would not have been suffered because the retail business would have been up and running by July 2000 and would have been profitable. His Honour rejected the claim for these losses made in the first two years. Third, his Honour rejected the claim by the respondent for the set-back period to be of 18 months duration. 15 Additionally, his Honour also found that the appellant had not acknowledged the premise of the respondent's case that the operation of the business by the Interim Arrangement had the consequence that the respondent was confined to charging a commission of only 5 per cent. 16 Finally, his Honour also had reduced the figure of $130 000 to $100 000 as his base figure on which to compute the value of seven months of loss. 17 To the extent that the appellant's submissions touched on the issue of reliance, whether encompassed within the grounds of appeal or not, the only evidence before the primary judge was the present respondent's uncontradicted evidence that he would have started the Current Business Structure earlier had he been able to do so. 18 In consequence, his Honour did not wrongly assume that between November 2000 and June 2001 the business was profitable. We agree with the submission for the respondent that his Honour's approach did not err in principle. The contention in the first way in which the appeal is pressed in particular does not correctly attribute to his Honour the process which he undertook.

conclusion 19 In our opinion the appeal should be dismissed with costs. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Nicholson, Mansfield and Bennett.

Associate: Dated: 30 March 2006 Counsel for the Appellant: PG Cawthorn

Solicitor for the Appellant: Herbert Geer & Rundle