FEDERAL COURT OF AUSTRALIA

Burg Design Pty Ltd v Wolki [1999] FCA 388

TRADE PRACTICES ACT, s 52     )          

FAIR TRADING ACT, s 42             )           - sale of business – representations made orally and by financial statements – failure to make correction when previously made representations were falsified – reliance – inference from nature of representations and fact of ensuing agreement – discussion of checking by representee as not denying reliance – contractual acknowledgment that representations not relied on – effect - contract with exclusion clause signed because representation was believed.

EVIDENCE – without prejudice privilege – no offer made – waiver.

Trade Practices Act 1974 (Cth), s 52

Evidence Act 1995 (Cth), s 131(2)

Fair Trading Act 1987 (NSW), s 42

Martin v Osborne (1936) 55 CLR 367 referred to

Gould v Vaggelas (1985) 157 CLR 215 applied

San Sebastian Proprietary Limited v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 referred to

Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 110 ALR 535 applied

Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 applied

Como Investments Pty Ltd (in liquidation) v Yenald Nominees Pty Ltd (1997) ATPR 43,617 applied

Sibley v Grosvenor (1916) 21 CLR 469 applied

Krakowski v Eurolynx Properties Limited (1995) 183 CLR 563 applied

Menmel Pty Limited v The Great Australian Bite Pty Limited (1997) ATPR 43,639 applied

Bowler v Hilda Pty Ltd (1998) 80 FCR 191 applied

Tantipech v IOOF Australia Trustees (NSW) Limited (1998) ATPR 40,730 applied

I00F Australia Trustees (NSW) Ltd v Tantipech (1998) 156 ALR 470 applied

GIO Australia Holdings Limited v Marks (1997) ATPR 43,541 applied

Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 applied

Ritchie v Woollett (Santow J, Supreme Court of New South Wales, 25 September 1996) applied

Greenhalgh v Composite Buyers Limited (Davies, Einfeld and Sackville JJ, unreported, 31 May 1995) applied

Leda Holdings Pty Ltd v Oraka Pty Ltd (1998) ATPR 40,501 referred to

Hanave Pty Ltd v LFOT Pty Ltd [1999] FCA 357 applied

Kizbeau Pty Limited v W G & B Pty Limited (1995) 184 CLR 281 applied

The Great Australian Bite Pty Ltd v Menmel Pty Limited (1996) ATPR 42,322 applied

Smith New Court Securities Ltd v Citibank NA [1997] AC 254 referred to

Marks v GIO Australia Holdings Ltd (1998) 158 ALR 333 referred to

BURG DESIGN PTY LIMITED & ORS v KLAUS DIETER JOHANNES WOLKI & ANOR

NG 501 of 1996

Burchett J

9 April 1999

Sydney

THE COURT ORDERS THAT:

The applicants bring in, on a date to be fixed, short minutes of orders to reflect the reasons of the Court.

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

REASONS FOR JUDGMENT

1                     This is a claim made under s 52 of the Trade Practices Act 1974 (Cth) and s 42 of the Fair Trading Act 1987 (NSW).  Counsel accepted that there is no material difference between the relevant provisions of those Acts, except the general restriction of the Trade Practices Act to the conduct of corporations.  Since the respondents are individuals, and the case alleged is not of a kind where the Trade Practices Act is acknowledged to be capable of applying to individuals, as, for example, it might apply if representations had been made by telephone, the claim was pursued at the hearing in reliance on the Fair Trading Act.

2                     The transaction that gave rise to the dispute was the purchase for the sum of $190,000 of the business of a barbecued chicken shop in Albury, known as “Birdnest BBQ Chickens”, and the taking of a lease, supported by guarantees, of the premises on which the shop was conducted.  The agreement of purchase was dated 25 June 1994, and the lease, with its commencement back-dated to 2 August 1994, was executed on 11 August 1994.  The vendors and lessors were the respondents, Mr and Mrs Wolki, and the purchaser and lessee was the first applicant, a company the shareholders of which were the second applicants, Mr and Mrs Mallows.  They were the guarantors in respect of the obligations under the lease.  Mr Wolki had conducted the shop, with assistance from his family, for thirteen of the previous fifteen years, and he was an experienced and successful businessman. 

3                     The Birdnest BBQ Chickens shop had been sold previously, on or about 1 November 1991, to a company Haikate Pty Limited (Haikate), of which one John Hailey was a director, as trustee for a trust known as the John Hailey Family Trust.  Haikate had agreed to pay $365,000.00 for the business, borrowing $290,000.00 from Mr Wolki at an interest rate of 18% per annum secured by mortgage over its lease and the business.  Haikate had got into difficulties, falling behind both in respect of rent and in respect of interest.  At the beginning of September 1993, Mr Wolki evicted Haikate, repossessed the business, and set about its resale.  He received advice from a business agent that any purchaser would want to see up to date trading figures, so, after conducting the business himself from 4 September 1993 to the end of the year, he had his accountant prepare financial statements for that period, and then on 25 January 1994 he placed the business in the hands of another business agent, Mr Collins.  While seeking a buyer, Mr Wolki continued to keep the shop open and in operation through the first half of 1994.

4                     In early February 1994, Mr and Mrs Mallows, who were desirous of selling a dry-cleaning business they had been successfully conducting in Albury, and of purchasing some other business, learned from Mr Collins of the availability of the business Mr and Mrs Wolki had for sale.  Financial statements were obtained from Mr Collins, and an inspection was arranged.  Mr Noel Mallows, the father of the male applicant, an experienced businessman who was then visiting Albury, was asked for advice.  At an inspection of the premises in February, Mr and Mrs Mallows met Mr Wolki.  According to Mr and Mrs Mallows, Mr Wolki informed them that the business was returning “better than $130,000.00 a year by way of nett profit”.  He also said that the business was successfully operating on the staffing levels disclosed in the financial documents.  Those documents included a trading statement for the period 4 September 1993 to 31 December 1993 showing a gross profit of $81,289.66 earned by sales of $172,368.30, the cost of goods sold being $91,078.64.  Mr Mallows, who had sufficient business expertise to analyse figures of this kind, calculated that the gross profit margin was 47.1%.  He also analysed in detail a profit and loss statement for the same period, concluding that, appropriately adjusted by the deletion of some items he regarded as not truly relevant to the capacity of the business to earn a net profit, it showed a net profit equivalent, not to the $130,000.00 per annum claimed, but to $90,397.00 per annum.  Unadjusted, the profit and loss statement showed a profit of $15,734.77 for the 17 weeks.  The adjustments involved adding back $10,620.00 in respect of interest and $3,207.00 in respect of depreciation.  Counsel for the respondents criticized Mr Mallows for doing this, but when the respondents’ own accountant prepared a profit and loss statement for the full period 4 September 1993 to 30 June 1994, he showed the item of interest as “Expenditure Peculiar to Proprietor”, thus plainly indicating that he then took the same view as was taken by Mr Mallows in respect of this item.  The only other item involved, the sum of $3,207.00 for depreciation, is of a kind often regarded as relevant to taxation rather than to the ascertainment of the true state of trading operations, unless the amount allowed for depreciation is actually related to the replacement of equipment for the replacement of which provision must be made.  Mr Wolki himself, in evidence, distinguished “tax figures” as “always a bit different” from other figures with respect to the profit of a business.  I shall return very shortly to the question of the gap between the sums of $90,397.00 and $130,000.00.

5                     The financial documents handed to the applicants also included a profit and loss statement of Haikate, for the period 1 July 1992 to 30 June 1993, showing the very same gross profit margin of 47.1%, but very much higher wages.  The wages for the period of one year were shown at $108,990.00, which might be compared with wages of $1,338.00 per week for the later period of 17 weeks, ie approximately at the rate of $70,000.00 per annum.  The Haikate figures represented that company as having made a net profit of $55,531.00 in the year.  There were also financial statements relating to the earlier operation of the business by Mr Wolki during periods in 1990 and 1991.

6                     The sum of $130,000 per annum is equivalent to $2500 per week.  Both Mr Collins and Mr Wolki, according to Mr Mallows, told him the business was showing a net profit of $2000 per week, while Mr Wolki told him $500 per week was also being abstracted in cash in order to avoid tax.  So far as the figure of $2000 per week is concerned, there is documentary confirmation of this evidence, in the form of an advertisement in Albury’s leading newspaper stating the price of the business, $190,000 plus stock, and claiming for it “in excess of $2000 nett profit per week”.  I find, on the evidence of Mr Collins, that this advertisement appeared on three successive weeks, and that it reflected the instructions he had received from Mr Wolki.  I infer Mr Wolki would have seen the advertisement of his business, and would certainly have noticed had it not reflected his instructions.  Yet he shied away, in evidence, from supporting a profit figure of $2000 per week, which would be $104,000 per annum, and made no claim that the weekly profit was in fact “in excess of $2000”.  In cross-examination, he suggested about $95,000 per annum; then said “between 95 and 100, I’d agree to that, yes”; and added:  “Not in excess of 2000, I never talked about that.”  Indeed, he hedged his position even further when he was asked “You meant, did you not, by net profit of between 95,000 and 100,000, after their expenses?” and answered:  “No.  I didn’t quite get that.  Net profit, my figures might show 50,000, and at that time I leased a car which cost me nearly 40,000 a year; that brings it up to 90,000.”  (Emphasis added.)

7                     If Mr Wolki temporized about the claim, in his agent’s advertisement, of a net profit “in excess of $2000” per week, he was firm in his denials of any suggestion that he had said there was an additional $500 per week abstracted by him in cash.  Mr Mallows, supported by both his wife and his father, gave evidence just as firmly that this representation was made.  I found Mr and Mrs Mallows to be impressive witnesses.  I was not impressed by Mr Wolki.  His credit was, of course, necessarily damaged by the evidence about the advertisement, and it was also damaged by other matters to which I shall refer.

8                     But the issue does not turn only on the effect of the oral evidence of the parties.  It emerged in cross-examination of Mr Mallows that he had asked his then accountant, a Mr Salisbury, to telephone Mr Wolki’s accountant, Mr Power, about the business, at one stage during the negotiations.  Counsel for the respondent emphasized in his submissions that Mr Salisbury was not called.  But, to my mind, the significant thing is that Mr Salisbury had apparently been asked to check, so far as he could, or had received instructions that led him to decide to do so, as to the undisclosed cash takings of the business.  For counsel for the respondents asked Mr Mallows whether he had been told by Mr Salisbury “that he had been unable to verify hidden cash he had taken under the counter”.  Mr Mallows agreed that this had been said.  Mr Power gave evidence of a telephone call by Mr Salisbury to him on 18 March 1994, in which “Mr Salisbury said words to the effect ‘How much cash is taken under the counter?'” and he replied to the effect:  “I do not know that, I am not privy to that …”  What all this evidence shows is that Mr Mallows acted as a man might be expected to act if he had taken seriously a suggestion that a business which had been offered to him was earning additional cash moneys; he consulted his accountant, and gave instructions that led to further inquiries.  But if nothing had been said about cash in the negotiations, the accountant’s telephone call would have been bereft of context, and unlikely.

9                     Another piece of evidence that fits naturally into the evidence of Mr Mallows, and of his wife and father, is evidence, which Mr Wolki gave in cross-examination, that he told Mr and Mrs Mallows he had been required to pay $100,000 to adjust his taxation after a tax audit.  He was unable to suggest any reason for telling them, and he does not appear to be a particularly likely person to indulge in a display of spontaneous and pointless gregariousness.  It is more probable his statement about his taxation affairs arose naturally out of a representation about untaxed earnings he had succeeded in abstracting.

10                  There is a background to this aspect of the matter.  It will be recalled Mr Wolki had conducted the business for quite a long period, and then had sold it to Haikate, which failed.  During the first six months of 1994, when Mr Wolki was negotiating with Mr and Mrs Mallows, he had only been operating the shop again since 3 September 1993, after receiving advice that it was important to show a good trading position on the face of the books.  With knowledge of that advice, and the keen eye of hindsight, it is easy to see Mr Wolki would have been unlikely in fact to have taken money “under the counter” at that time.  But he would have been more likely to have represented himself as doing so if, in fact, he had done so in the past.  There is evidence from Mr Hailey that Mr Wolki told him he was taking substantial undeclared cash.  I do not rely on that as similar fact evidence, for the application of the doctrine to it is doubtful, and I did not understand it to be pressed, other than faintly, on that basis.  But it is evidence of an admission of conduct proof of which adds to the probability the contested representation was made:  cf Martin v Osborne (1936) 55 CLR 367 at 375.  Mr Hailey was a witness whose evidence must be assessed with care, for he plainly has a grudge against Mr Wolki, as a result of the eviction of Haikate and the sale under the mortgage.  However, his account is supported by an apparently genuine and contemporaneous note, and I accept it.

11                  In a quite separate respect, the credit of Mr Wolki suffered, and the case of the applicants was strengthened.  It will be recalled that the Haikate figures produced to Mr Mallows and Mr Wolki’s figures for the period 3 September 1993 to 31 December 1993 revealed gross profit margins that coincided precisely.  Each was 47.1%.  But it is now plain that Mr Wolki was achieving nothing like that in the first six months (less 5 days) of 1994, when he was negotiating with Mr and Mrs Mallows.  Upon accounts being prepared later in the year, it was revealed that the gross profit margin for 1 January 1994 to 30 June 1994 was 41.18%, a margin to which, in due course, the applicants’ figures for the balance of the year, a time when the manner of conduct of the business did not change significantly, were found to conform quite closely.  Naturally, the plunge in the gross profit margin was reflected in the net profit, and the result for the first 17 weeks of the period from 3 September 1993, which Mr Mallows was able to accept, with adjustments, as not far below the represented $2000 per week plus, became, by 30 June 1994, a net profit, after similar adjustments, of barely $1300 per week.  It is not possible to accept that Mr Wolki, with his intimate knowledge of the business, could have been unaware of such a change.  Mr Wolki’s own counsel felt able to press upon the much less experienced Mr Mallows that he would have had “a very good idea of what the turnover was doing at all times”, and that he “knew on a day by day basis how many chickens were being sold and how much money was coming into the business”, propositions Mr Mallows effectively accepted.  Mr French, the applicants’ accountant, said, and I accept, concerning the difference in the performance of the business after 31 December 1993, “I would feel that you would be aware that there had been some significant change in your business operations”.  If there was not in fact a palpable change, the previous figures were not genuine.  Assuming they were genuine, it was a serious misrepresentation to continue to rely on those figures up to the conclusion of the contract on 25 June 1994.  At that time, Mr Wolki must have known that what he had told Mr and Mrs Mallows about the net profit and what the accounts he had given them showed, in particular as to the gross profit margin being achieved, was in each case false.  It was a misrepresentation to fail to correct his previous statements and those accounts.  The accounting evidence left no doubt that the change from the 17 weeks at the end of 1993 to the first 26 weeks of the following year was striking.  Mr Power conceded that it would “raise concern if [he] was advising the Mallows”, and that one explanation could be the figures for the 17 weeks were “not genuine”.  The applicants’ accountant, Mr French, referred to the figures as showing a “wide discrepancy”, which was “beyond the sort of variation you expect in a business of this kind”.  Mr Boswell, an accountant called for the respondents, conceded “it does look unusual, I will say that”, but he added “it could depend on [a] variety of things”.  He said he was “really not in a position to answer” the suggestion that the figures might not be accurate.  However, Mr Wolki proffered no acceptable explanation putting forward as the fact any of the “variety of things” to which such a fall in his gross profit margin might theoretically have been due.  Counsel suggested December would have been a particularly good month, but the evidence of the accountant, Mr Power, contradicted this explanation.  He said:

“And then you’ve got July through to December, which is – it only starts to get better at around December and January.  I understand from Mr Wolki they are his better trading periods.”

So, a good period before Christmas, followed by a bad period after Christmas is not the explanation.  Indeed, Mr Wolki himself is said by Mr Mallows to have asserted the monthly takings were “all pretty similar”.  Other things not being too unequal, the expectation would have been that the business, after the failure of Haikate, would have been set on an upward course into 1994, following its rejuvenation under the competent guidance of Mr Wolki.

12                  All these considerations point to the conclusion that, not only, in the context of what had been represented about the 17 weeks at the end of 1993, was it a misrepresentation to leave uncorrected the impression of considerable profitability that had been created, but the representations made by the accounts about the results achieved in those 17 weeks were themselves misrepresentations.

13                  The Haikate figures tell their own curious tale.  They consist of a single document headed as a profit and loss statement of Haikate for the period 1 July 1992 to 30 June 1993.  As has been said, they show a gross profit margin of 47.1%.  They also show a net profit of $55,569.  Mr Collins, the agent, gave evidence that he received the document from Mr Wolki at or shortly after the time when the business was listed for sale.  Subsequently, on 15 March 1994, he received from Mr Power Mr and Mrs Wolki’s own financial statements for the year ended 30 June 1991 and the period 1 July 1991 to 4 November 1991.  Mr Collins said Mr Wolki told him he had found the Haikate document and could not vouch for its authenticity, but it was the only evidence he had.  Mr Collins passed it on to Mr and Mrs Mallows.  He could not recall precisely what he said, but he “would have thought [it was] basically along the lines …‘look, that’s been found, Mr Wolki has given me that but neither of us can vouch for how accurate it is’.”  There is no doubt that in fact the document was misleading.  Mr Hailey has made it quite clear the figures in it were not actual, but projected.  Apparently, Mr Wolki found it in the premises after evicting Mr Hailey.  But Mr Wolki, in his negotiations with Mr Mallows, treated the document as a genuine profit and loss statement, from the items in which he sought to demonstrate the virtues of the business.  He pointed to various expenses it showed, suggesting they could be substantially reduced.  He pointed to the wages item, asserting Mr Hailey had paid himself $36,000, without which the figure was “what the shop runs at”, namely, $72,000 per annum.  In fact, the evidence of Mr Wolki’s accountant, Mr Power, shows that in the currency of 1988 and 1989 Mr and Mrs Wolki had paid wages of $86,000 odd and $95,000 respectively, and it seems clear the wages were not a constant, but fluctuated considerably.  Despite the evidence of Mr Collins to which I have referred, Mr Wolki himself, in his affidavit, did not suggest he expressed any reservation about the authenticity of the Haikate document when he handed it to Mr Collins.  He simply recalled commenting:  “Look at Hailey.  One minute he goes bankrupt the next minute he has done well.”

14                  That Mr Wolki had in fact used the Haikate document as material support for the profitability apparently shown by his own financial documents for the 17 weeks to 31 December 1993, and that he knew perfectly well that he had done so, and that he should not have done so, is evidenced by his reaction much later, on 20 March 1996, when challenged by Mr Mallows on the validity of the Haikate figures.  He immediately denied he had anything to do with the document.  He said “I have never seen those figures before … I’ve never seen them, maybe you found them on the floor of the shop.”  Later in the conversation, he said:  “[M]aybe John Collins had the figures or got them from John Hailey.”  The evidence of Mr Mallows about this is substantially denied by Mr Wolki.  He swears he could not at first remember the document, but then replied that he did show it to Mr Collins, who asked if he could make a copy.  This version is contradicted, not only by Mr Mallows, but by his then solicitor, Mr Weatherly.  Mr Weatherly confirms in all essentials the version given by Mr Mallows, and I accept it.

15                  Although both Mr Mallows and Mr Wolki had sworn affidavits giving accounts of the meeting on 20 March 1996, which had been filed and served, and Mr and Mrs Mallows had been cross-examined, when Mr Weatherly gave oral evidence, he said the meeting had commenced with a statement by him:  “This is going to be a without prejudice meeting”.  On that basis, notwithstanding there was no suggestion any offer of settlement was actually made, counsel for the respondents sought to have Mr Weatherly’s evidence struck out.  In my opinion, any claim to privilege had clearly been waived by the course the parties had taken.  See too the Evidence Act 1995, s 131(2).  In any case, I am not satisfied that the relevant part of the conversation was privileged.  It was not related to any attempt to settle the matter.

16                  After the applicant company took over the business, its trading showed a gross profit margin very close to that achieved by Mr and Mrs Wolki in the first half of 1994, not that represented by the figures for the previous 17 weeks, and the net result was a loss of $18,261 in the period to 30 June 1995, and a further loss of $17,578 (plus undrawn wages of $13,475, a total of $31,053) in the following period up to 31 January 1996, after which an administrator was appointed to the company, and the lease was surrendered.  Although the respondents, who have gone back into the business, are able to achieve a much better net result, their accounts show that they also are operating upon a gross profit margin almost the same as before (recent periods show 39.8% and 41.6%), that is, far below the 47.1% represented by the Haikate document and by the figures which Mr Wolki presented to Mr Mallows in respect of the 17 weeks to 31 December 1993.

17                  Mr Mallows gave evidence, and I accept, that the pressure of the business and the lack of a set of accounts left him in ignorance of the full magnitude of the problem until late in 1995.  Of course, he did appreciate that, although he was maintaining the turnover, and even improving it, the results of the business were not as he had expected.

18                  There was a great deal of evidence given and argument presented at the hearing to suggest the disaster the applicant company suffered was due to mismanagement.  I find it unnecessary to discuss the details, because I accept the evidence of Mr and Mrs Mallows, and I am quite satisfied that the difficulties encountered by them were not caused by failings on their part in the way the respondents’ case suggested.  Nor were these difficulties the result of any new competition arising, as was also suggested.  There was no price war; and the fact is they built up the business – it did not fall away, as it might have been expected to do, had competitors taken sales from it.  But the gross profit margin was much less than had been represented, and that confronted Mr and Mrs Mallows with an insuperable obstacle to profitability.  It was not an obstacle produced by substantial changes in the nature of the trading carried on, for they had continued the business in very much the same way, retaining the same key staff.

19                  Counsel for the respondents took a stand, in argument, on the question whether the applicants had shown that in causing the applicant company to enter into the agreement and lease, and in entering into their guarantees, Mr and Mrs Mallows had placed reliance on the misrepresentations proved to have been made.  The starting point in considering any argument of this kind must be the judgment of Wilson J in Gould v Vaggelas (1985) 157 CLR 215 at 236, where his Honour said:

“If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation.”

Wilson J also noted that “[t]he representation need not be the sole inducement.  It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.”  The latter point was affirmed by Brennan J in San Sebastian Proprietary Limited v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 at 366.  Both points were supported by the decision of the full court (Beaumont, Foster and Hill JJ) in Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 110 ALR 535 at 546-547, where it was held that “the inference of inducement and reliance could readily be drawn” even in the absence of “direct evidence of reliance”.  In the Court of Appeal in England, Stuart-Smith LJ (with whom Farquharson and Evans LJJ agreed) said in Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 282:

“[W]here a false representation is made for the purpose of inducing the other party to adopt a certain course of conduct and the representation is such as to influence a person behaving reasonably to adopt that course of conduct, the court should infer, in the absence of evidence to the contrary, that the representation did have that effect.”

This passage, together with a number of other authorities, was relied on in the joint judgment of Burchett, Ryan and RD Nicholson JJ in Como Investments Pty Ltd (in liquidation) v Yenald Nominees Pty Ltd (1997) ATPR 43,617 at 43,619-43,620.  Their Honours there said:

“Where a representation is relevant to the decision in question, and in its nature persuasive to induce the making of that decision, it accords with legal notions of causation to hold that it has a causative effect.  And where a respondent, who may be taken to know his own business, has thought it was in his interests to misrepresent the situation in a particular respect, the Court may infer that the misrepresentation was persuasive.  These inferences arise from the making of the representation followed by the respondent doing the thing it was calculated to induce him to do.”

See also Sibley v Grosvenor (1916) 21 CLR 469 at 473, 478, 481; Krakowski v Eurolynx Properties Limited (1995) 183 CLR 563 at 578; Menmel Pty Limited v The Great Australian Bite Pty Limited (1997) ATPR 43,639 at 43,648; Hanave Pty Ltd v LFOT Pty Ltd [1999] FCA 357 at paras 37, 45, per Kiefel J (with whom Wilcox J agreed).

20                  But, in the present case, the applicants rely on much more than a general inference from the nature of the misrepresentations.  The evidence shows that Mr Mallows gave close attention, during the negotiations for the purchase of the business, to the gross profit margin indicated by the Haikate document and the financial statements for the period of 17 weeks to 31 December 1993, as well as to the net profit which they revealed, and the potential returns which the figures implied.  He made detailed calculations with respect to those financial statements, and the fact that he did so clearly indicates the importance he placed on the performance of the business, as indicated in its records, and particularly on the attainable level of profit.  Those calculations based on the figures supplied to him by the respondents and their agent did, in broad terms, support the view that a return of the order of $2,000 per week net profit, and somewhat more, was not unrealistic.  One reason why it was sensible to take this view was that Mr Wolki asserted the figures were increasing.  I accept the evidence of Mr Mallows that Mr Wolki told him “the shop was doing more now” and that “it was actually more sales, more gross sales, than what is actually on that sheet” (ie, the Haikate document).  It would be entirely reasonable to accept that Mr Wolki would be improving, not only on the performance of Haikate which had failed, but also on his own performance for the first 17 weeks after virtually a standing start, picking up a failed business. 

21                  Counsel for the respondents attempted to argue that the industrious checking which Mr Mallows undertook, in the calculations he made from the figures supplied, in itself indicated he was not relying on the representations made to him.  So far as the representations were contained in documents, it seems to me that calculations designed to bring out the internal consistency of those documents, and that they really did involve the representations, are a strong refutation of counsel’s argument.  To do this was to demonstrate the importance placed on what the document actually represented.  So far as the oral representations are concerned, to check and see to what extent they were supported by the documents is not to show that the representations themselves played no part in the ultimate decision.  Given that Mr Mallows reconciled those oral representations with his own interpretation of the documents, it seems to me the very fact that he entered upon this exercise is an indication the representations had some effect on his thinking.  He considered the implications of what he had been told, and checked those implications against the documents as best he could.  Mrs Mallows gave evidence, and I accept, that she found Mr Wolki “a very convincing man”, and I am satisfied that Mr Mallows was similarly impressed.  When all his checking was done, I think he remained significantly influenced by the oral claims made by Mr Wolki, and also by the picture of profitability conveyed, among other things, by the gross profit margin shown or implicit in the documents.

22                  But the respondents point to clause 20 of the contract signed by the parties, which reads:

“The Purchasers acknowledge that, in entering into this agreement, they have not relied upon any statement, representation, warranty or condition made or given by the Vendors or any one on their behalf in respect of the subject matter of this agreement, other than those that are expressly herein contained.”

It is recognized by counsel for the respondents that such a clause cannot prevail against the policy of either the Trade Practices Act or the Fair Trading Act.  Numerous authorities establish that it cannot, as was tersely indicated by Heerey J, who was one of the majority, in Bowler v Hilda Pty Ltd (1998) 80 FCR 191 at 207:

“The … argument [that a representation was contrary to the contract itself] however runs counter to what is now a substantial body of authority in this Court which holds that exclusionary and disclaimer clauses cannot override the statutory prohibition against misleading and deceptive conduct or prevent the grant of appropriate statutory relief where loss or damage is, as a matter of fact, caused by a contravention of the statute:  see the review by Burchett J in Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 at 556-558.”

See also Tantipech v IOOF Australia Trustees (NSW) Limited (1998) ATPR 40,730 at 40,740; affirmed I00F Australia Trustees (NSW) Ltd v Tantipech (1998) 156 ALR 470 at 478-482; GIO Australia Holdings Limited v Marks (1997) ATPR 43,541 at 43,555.  Bowler and Lezam were decisions under the Trade Practices Act; but the same view has been taken in the Supreme Court of New South Wales in relation to the Fair Trading Act.  In Ritchie v Woollett (unreported, 25 September 1996), Santow J said:

“It was further argued by the Defendants that even if misleading or deceptive statements were made, the Plaintiffs cannot claim  that they relied upon these representations because, by clause 20 of the Agreement of Sale [the same form may have been utilized as was utilized in the present case], Mr Ritchie acknowledged that in purchasing the business he had not relied upon any representations other than as expressed in the Agreement.

There are a number of decisions dealing with this issue.  The general principle is that clauses of this type will be ineffective against a claim of misleading or deceptive conduct under the Trade Practices Act 1974 (Cth) or the Fair Trading Acts”.

His Honour cited many decisions. 

23                  Although the respondents’ counsel acknowledged the weight of authority denying clause 20 any direct effect, his argument was that the very fact Mr and Mrs Mallows were prepared to have their company execute a contract containing such a clause was an indication they did not rely on the representations made to them.  Without offering such an argument much encouragement, I left it open in Lezam at 557 (a passage cited with approval by Davies and Einfeld JJ, with whom Sackville J relevantly agreed, in Greenhalgh v Composite Buyers Limited (unreported on this point, 31 May 1995)), where I said:

“When a court comes to apply that principle [the principle that the question is whether the conduct of the respondents, taken as a whole, is misleading] to a case of a plain misrepresentation, said later to have been disclaimed, it should not allow fine textual analysis, nor the differently orientated rules of contract law, to distract it from seeing the obvious.  A disclaimer or qualification will frequently have little or no effect on the impact of a misrepresentation.  …  This Court has, on a number of occasions, rejected defences based on clauses of the present kind in actions for contraventions of s 52.  Once misrepresentation has been shown, the statute prevails over a formal disclaimer.  If such a clause is to be effective, it must be by enabling the conduct as a whole (including in it the provision to the complainant of the document containing the clause) to be seen as not misleading.”

While clauses such as clause 20 have generally been held ineffective to avoid a claim of misrepresentation, a clause of this kind was, in the particular circumstances of the case, given weight in the joint majority judgment of Branson and Emmett JJ in Leda Holdings Pty Ltd v Oraka Pty Ltd (1998) ATPR 40,501 at 40,516, where it was concluded that an applicant for relief under s 52 of the Trade Practices Act had not in fact relied on a misrepresentation.

24                  The question in each case remains the one posed in Lezam, whether the conduct as a whole (including in it the provision to the complainant of the document containing the clause) was misleading in fact.  In most cases, the written contract containing such a clause will only be presented to a party after the representation has already done its work of persuasion.  If a party is thoroughly persuaded that a contract is favourable, the presence of a clause, particularly a printed clause which appears to be part of a legal form, suggesting there would be a defence to a claim which is not at all contemplated may not have a significant deterrent effect.  Just because the representation is believed, no claim arising out of it is expected.  The position must often be as Shakespeare depicted it in The Merchant of Venice (Act 1, Scene III), where Antonio, believing Shylock’s representation that the forfeit of a pound of flesh is “a merry sport”, part of an accommodation offered in “much kindness”, is prepared with alacrity to seal the openly dreadful bond.  On the facts of the present case, I am satisfied that any explanation given to Mr Mallows as to the effect of clause 20 would not have prevented him relying on the representations he had already come to believe, after thoroughly considering them.  On the contrary, because he believed the representations he was prepared to sign the contract, including clause 20. 

25                  I find that each of the misrepresentations to which I have already referred materially induced the contract of purchase of the business, the lease and the guarantees.  In the circumstances of this case, it is appropriate that the guarantees be set aside ab initio and that the lease be set aside as from the date when the business was relinquished.  It is also appropriate, of course, in these circumstances to award damages to the applicant company.  On that issue, there was little dispute.  Mr French put forward a calculation of damages, from which it was subsequently accepted by the applicants that certain sums should be deducted.  That calculation, so adjusted, was not the subject of any criticism by counsel for the respondents.  Its components were the purchase price of the business ($190,000) less an amount of $20,700.00 which the applicant company was able to recoup, plus the amounts of the losses to which I have already referred.  The resultant figure is $218,614.00.  In my opinion, the losses were sustained by reason of the misrepresentations (see Kizbeau Pty Limited v W G & B Pty Limited (1995) 184 CLR 281 at 291; The Great Australian Bite Pty Ltd v Menmel Pty Limited (1996) ATPR 42,322 at 42,339; Smith New Court Securities Ltd v Citibank NA [1997] AC 254 at 267, per Lord Browne-Wilkinson; Marks v GIO Australia Holdings Ltd (1998) 158 ALR 333, which is discussed in a case note in (1999) 18 Aust Bar Rev at 79), and the business was worth no more than the sum of $20,700.00.  The respondents have not shown that the applicants acted unreasonably, or failed to mitigate their loss.  I am positively satisfied that, in the particular circumstances, it was reasonable to attempt to keep the business operating for the period to 31 January 1996.  It is appropriate to award the sum I have stated, adding to it interest under s 51A of the Federal Court of Australia Act 1976, on the amount of $190,000 from 2 August 1994, and on the full amount from 31 January 1996.  The interest should be calculated at the rates determined from time to time by the Supreme Court of New South Wales.  The only order that I make at this stage is to direct the applicants to bring in, on a date to be fixed, short minutes of orders to reflect these reasons.

Associate:

Dated:              9 April 1999