FEDERAL COURT OF AUSTRALIA
Metz Holdings Pty Ltd v Simmac Pty Ltd (No 2) [2011] FCA 981
| IN THE FEDERAL COURT OF AUSTRALIA | |
| DATE OF ORDER: | |
| WHERE MADE: |
THE COURT ORDERS THAT:
1. The applicants bring forward a minute of proposed final Orders designed to carry forward the Orders proposed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
| WESTERN AUSTRALIA DISTRICT REGISTRY | |
| GENERAL DIVISION | WAD 114 of 2009 |
| BETWEEN: | METZ HOLDINGS PTY LTD (ACN 059 264 210) AS TRUSTEE FOR THE ZULU TRUST AND GROUP M PTY LTD (ACN 118 506 148) AS TRUSTEE FOR THE ROUBAIX TRUST First applicants MERVIN METZ Second Applicant FARREL METZ Third Applicant |
| AND: | SIMMAC PTY LTD (ACN 062 327 397) First Respondent PAUL CAMPBELL SIM Second Respondent LINDA MCBRIERTY Third Respondent LINDA MCBRIERTY AND EDWARD HUGH JENNINGS AS TRUSTEES FOR THE LINDA MCBRIERTY SUPERANNUATION FUND Fourth Respondent |
| JUDGE: | BARKER J |
| DATE: | 25 AUGUST 2011 |
| PLACE: | PERTH |
REASONS FOR JUDGMENT
1 On 29 April 2008, the first applicant companies by their directors, respectively the second applicant (Mervin Metz) and the third applicant (Farrel Metz), signed a document described as agreement for sale of the business (as a going concern) (sale agreement) by which they offered, as “Buyer”, to purchase the goodwill of the wholesale lighting business known as Illumination Services WA, including the business or trade name and plant, furniture, fixtures, fittings, chattels, stock in trade and other assets described in the schedule to the agreement, for a gross purchase price of $1.25 million allocated as follows:
Goodwill - $900,000
Fixtures as per annexure - $150,000
Stock in trade (to be adjusted as provided in cl 5) - $200,000.
2 The manner of payment of the purchase price was specified by the sale agreement to be a deposit of $50,000 to be paid within three days of acceptance with the balance to be paid in accordance with cl 7 of Annexure A of the agreement.
3 Possession on completion of the counting of stock was to be given on 1 July 2008.
4 The owner of the business, the first respondent, accepted the offer, as “Seller”, on 7 May 2008 when the two directors of the company, the second respondent (Mr Sim) and the third respondent (Ms McBrierty), signed the sale agreement for the company.
5 Annexure A to the sale agreement provided that the agreement was subject to and conditional upon seven conditions which may briefly be described, so far as their effect is concerned, as follows:
(1) Due diligence over a five week period at the end of which the Buyer was entitled in its absolute discretion to give written notice of its intention to terminate the agreement if dissatisfied with the report of their accountant in respect of the financial information provided by the Seller.
(2) The Buyer being satisfied as to the terms and conditions of new property leases to be supplied by the Seller within 14 days of acceptance, together with a first right of refusal to purchase the property located at unit 3, 9 King Edward Road, Osborne Park, being the premises at which the business was carried on.
(3) In the event that stock in trade exceeds $200,000, the Seller shall raise an invoice in favour of the Buyer for stock in excess of that sum and an invoice shall provide that the Buyer has 60 days from the date of settlement upon which to pay for any excess stock over that sum, which would not attract interest unless not paid in that period.
(4) The Seller warranted that it was not in possession of any “knowledge or information” which –
(4.1) if unrevealed could, at a later date, prove detrimental to or adversely affect the normal trading of the subject business, or
(4.2) if revealed now could cause the Buyer to substantially modify their terms of this offer or withdraw this offer.
(5) The Buyer and Seller would obtain independent legal and accounting advice.
(6) The Buyer entering into an employment agreement with Mr Paul Sim under reasonable terms and conditions acceptable to both parties. Either party in their absolute discretion could give written notice to terminate the agreement within 14 days of receipt of the employment agreement if they or their solicitor were dissatisfied with the terms and conditions and, in that event, the sale agreement would be at an end and the Seller would return all monies paid pursuant to the agreement to the Buyer.
(7) The purchase price was to be paid as follows:
(7.1) Deposit paid: $50,000.
(7.2) Amount to be paid at settlement: $950,000.
(7.3) The sum of $125,000, “Sellers Finance”, shall be paid on 1 July 2009.
(7.4) The sum of $125,000, “Sellers Finance”, shall be paid on 1 July 2010.
6 The expression “Sellers Finance” was not defined in the sale agreement but in context simply meant that $250,000 of the purchase price would not be payable prior to possession and would be paid in the manner provided for in condition 7 of Annexure A.
7 The first respondent had earlier engaged Goodwin Mitchell O’Hehir (WA) Pty Ltd (GMO), business brokers, in about March 2008, to offer the business for sale. Ms McBrierty was instrumental in causing this to happen. She and Mr Sim had effectively been partners in the business, she as financial administrator and he as the salesperson and driving force, as well as in a personal relationship. When the personal relationship ended, Ms McBrierty and Mr Sim agreed to sell the business.
8 Ms McBrierty obtained a valuation of the business from an accountant, Mr Todd, and then briefed Gary Murphy, an employee of GMO, to seek buyers.
9 Mr Murphy prepared two brochures, which were similar and which identified the nature of the business and key aspects of its financial performance. The second brochure included financial statements as to the end of the financial year ending 30 June 2007. It represented the last gross profit was 36.8% on a turnover of about $2.7 million.
10 James Goodwin, a director of GMO, soon became involved in handling the negotiations that ensued between the Metzes and the first respondent, he having been approached by Mervin and Farrel Metz, with whom he had some dealings some years earlier.
11 Mervin Metz, the father of Farrel Metz, had been in a range of small businesses in the past, both in South Africa before immigrating to Australia in about 1996, and then in Australia. Most recently, Mr Metz had operated a business in Western Australia selling school uniforms. That business had been sold in 2003 following which Mervin Metz had effectively retired from business.
12 Farrel Metz had been engaged in the earlier school uniform business as an office administrator. Following the sale of that business he travelled overseas for an extended period before returning to Perth in about 2004.
13 In about 2008, the Metzes, Mervin and Farrel, began considering the purchase of another business. That is how they came to approach Mr Goodwin at GMO in about March 2008.
14 GMO provided the Metzes with the two brochures prepared by Mr Murphy. On 17 March 2008 and then again on 18 April 2008, the Metzes, with Mr Goodwin, met with Mr Sim at the business’ premises. In the course of these meetings Mr Sim made representations to the business. Questions of gross profit and Mr Sim remaining as an employee of the business for two years if the applicants were to purchase the business were among those discussed. However, proceeding just what representations were made and their precise terms is in issue in this proceeding.
15 On 29 April 2008, the Metzes, on behalf of the first applicants, signed the offer to purchase the business.
16 On 7 May 2008, the first respondent, by its directors Mr Sim and Ms McBrierty, accepted that offer.
17 As noted above, the sale agreement was subject to a number of precedent conditions, including a due diligence condition and a condition that Mr Sim would complete an agreement to be an employee of the business following settlement of the sale.
18 During the due diligence period, following the acceptance of the offer by the first respondent on 7 May 2008, the Metzes, principally through Farrel Metz took advice from their accountants, McGillivray Partners, and requested information of the first respondent, as provided for by condition 1 of Annexure A of the sale agreement. In particular, a list of projects on hand was supplied by Mr Sim. Just what this represented and whether the applicants relied on it is in issue.
19 Following due diligence the Metzes proceeded to settlement of the sale.
20 An employment agreement in the form of a letter from the first applicants to Mr Sim was drafted by the solicitors for the first applicant and presented to Mr Sim for consideration and he signed his acceptance of its terms and conditions on 24 June 2008. By it he agreed to be employed for two years, on the terms set out. By cl 6, Mr Sim acknowledged, amongst other things, he was to be a “key employee for at least two years”. Whether this clause created representations is in issue.
21 A lease of the business premises was also taken by the first applicants from the fourth respondents.
22 Settlement was then effected and the first applicants took possession of the business on 4 July 2008 (not 1 July 2008), with Mr Sim on board as their employee.
23 Following possession things seem relatively quickly to have become unstuck between the parties, particularly between the Metzes, on the one hand, and Mr Sim, on the other. By then Ms McBrierty had left the scene.
24 The broad picture created by the evidence is that after settlement, the Metzes took up employment in the business, they being the only persons additional to Mr Sim and his “old” employee, Ms Lauren Kuster, then working in the business. While some training sessions were held periodically for the Metzes and Ms Kuster, Mr Sim committed himself to advancing a number of projects on hand that he had mentioned on a list he had provided to the Metzes during due diligence.
25 From Mr Sim’s point of view, it was business as usual. From the Metzes’ they were not getting to meet many customers or suppliers as they would have liked. They did, however, process and deliver goods as directed by Mr Sim.
26 Farrel Metz set about organising the office and endeavouring to computerise the accounts and filing systems, which he considered to be completely lacking. In late August 2008, Ms Helen Friedle was taken on as the office administrator to assist in this regard.
27 A number of issues began to develop early on which, before long, contributed to cashflow difficulties for the business. Whereas the brochures and sale agreement stated stock in hand was valued at approximately $200,000, when the stocktake was taken in accordance with the terms of the sale agreement, the value was found to be just over $346,000. Under the terms of the sale agreement, $200,000 was paid at settlement but held in trust pending the stocktake valuation. Once the stocktake was conducted, the $200,000 was paid to the Seller. The balance of about $146,000 then became payable within 60 days. Mr Sim and Ms McBrierty indicated, however, they would accept $115,000 if paid by 15 September 2008. Following negotiations, the parties agreed in October 2008 to the payment of that amount by instalments ending on 4 December 2008.
28 Then, in about mid-August 2008, Mr Sim advised Farrel Metz that it was necessary to pay about $90,000 (USD66,000) to secure the supply of additional fittings from China for a current project.
29 The applicants plainly were not expecting these additional financial outlays. Nonetheless, they met them.
30 While those events were developing, Mr Sim was proving to be an exceptionally difficult person for the Metzes to deal with. He quickly evinced a desire not to be bothered in his single-minded advancement of the projects he had on hand. Mr Sim also formed the view that the Metzes were slow learners when it came to the ways of their new business. He began parrying their requests for advice and assistance. In particular, he soon became very critical of Farrel Metz because, in his opinion, he spent too much time in the office upstairs attending to computers and not enough time out of the office securing new business.
31 By September and into October 2008, it was quite clear that Mr Sim resented any attempts by the Metzes or the new office administrator, Helen Friedle, to obtain information about the projects he was handling or any apparent uninvited intrusions into the realm of his projects. Mr Sim became increasingly rude to the Metzes, difficult with Ms Friedle, and dismissive of and rude about the Metzes. Before too long, Mr Sim fell into the habit of writing notes to Farrel Metz, in his trademark uppercase printing, telling him, among other things, to “butt out” of “his” projects.
32 The position plainly became intolerable from the Metzes point of view, and despite their efforts to change his ways, Mr Sim chose not to do so. He had apparently found his way of doing things successful for many years in running the business.
33 In November 2008, Mr Sim, was concerned the business would fail under the Metzes’ control. He demanded bank guarantees from the Metzes for the balance of $250,000 due to the first respondent under the sale agreement, failing which he said he would “walk” – that is to say, would end his employment. The demand was rejected by the Metzes. The Metzes instead encouraged Mr Sim yet again to cooperate with them and Ms Friedle.
34 Following an email from Farrel Metz to Mr Sim on 17 April 2009, and a response from Mr Sim on 19 April 2009, a series of exchanges occurred upstairs and downstairs in the premises of the business on 20 April 2009 that involved Mr Sim and Farrel Metz mostly, but Mervin Metz as well. In the end, Mr Sim departed the business premises just over nine months into a two year employment agreement. It is in issue in this proceeding whether Mr Sim was fired by the Metzes, as he claims he was, or chose to leave in breach of his employment agreement, as the applicants claim.
35 A key related issue is whether, as claimed by the applicants, but denied by Mr Sim, Mr Sim ever intended remaining an employee of the business for two years when he represented he would during the negotiations.
36 In May 2009, within a matter of weeks of leaving the business on 20 April 2009, Mr Sim commenced working as an employee with another lighting business, Lanark Trading Pty Ltd. It is in issue whether, in so doing, Mr Sim breached the restraint of trade condition of his employment agreement.
37 Following Mr Sim’s departure from the business on 20 April 2009, the applicants instructed their solicitors and took their advice in relation to their dealings with the first and second respondents. By letter dated 6 May 2009, their solicitors, Karp Steedman Ross-Adjie wrote to first and second respondents advising that they acted for the first applicants and were instructed that:
(1) Representations concerning training and introductions that were made during the negotiations for the purchase of the business were made without any reasonable basis and that their clients had suffered loss and damage.
(2) During the course of his employment Mr Sim had repeatedly and consistently breached the terms of the employment contract by his conduct, which was itemised, noting that he had not attended the business premises since 20 April 2009, and that his conduct constituted a fundamental breach, or alternatively a repudiation of his obligations under the employment contract, which their clients accepted and they terminated the employment agreement.
(3) Reminding Mr Sim of the restraint clause in cl 12 of the employment agreement and advising that their clients would take whatever action was necessary in the event of breach.
(4) Requiring the payment of monies mistakenly paid to the first respondent by three customers that were due to their clients.
(5) Requiring the payment of $11,929.72 (being $14,751.22 less the amount of $2,821.50) that had been paid on behalf of the first respondent and, which, by agreement of the first respondent through Mr Sim, the first respondent had agreed to reimburse the first applicants once paid.
38 By email to the first applicants’ solicitors, Mr Sim, on 6 May 2009, rejected the allegations made against him and further alleged that monies were due and owing to him, alleging that the Metzes had verbally told him that they would not be paying the balance due under the sale agreement and that he had asked his lawyer to recover the monies. Mr Sim alleged he had been “sacked”.
39 By letter dated 7 May 2009, the solicitors for the first applicants wrote to Mr Sim at his postal address indicating that, as he was engaging lawyers, it was ethically appropriate for them to deal directly with the lawyers and requested him to provide the lawyers’ contact details. Mr Sim responded immediately by email on 7 May 2009 advising the solicitors that he required a response to his letter before he could pass it on to his lawyers.
40 By letter dated 18 May 2009 to the first respondent and Mr Sim, the solicitors for the first applicants advised Mr Sim that their clients understood he was working for Lanark, a direct competitor of the business and required him forthwith to cease such work or their clients might, without further notice, institute court proceedings. Mr Sim by email on the same day, 18 May 2009, responded to the solicitors rejecting the allegations in a general sense in a letter saying he had taken legal advice and his lawyer’s advice was “completely different to yours”.
41 In another email soon after that, Mr Sim demanded a response to his email of 6 May 2009 and follow up email of 7 May 2009, and again demanded bank guarantees in “place for two outstanding payments, 1st July 2009 and final payment 30th June 2010”.
42 By letter dated 20 May 2009, the first applicants’ solicitors wrote to the first respondent and Mr Sim, generally responding to Mr Sim’s earlier letters repeating the restraint of trade allegation and requesting advice as to the identity and contact details of his lawyer. Eventually, by letter dated 26 June 2009, the solicitors for the first applicants wrote to Staffa Lawyers noting that they assumed they were acting for both the first and second respondents and requesting advice if that were not the case. By the letter the solicitors:
(1) Referred to the earlier alleged representations made during a negotiating period.
(2) Set out additional representations concerning the Targetti line of fittings and difficulties at home representations, working capital representations, saleability of stock representations, representations concerning relationships with suppliers and customers, representations about projects on hand and exclusive supplier and distributor representations.
(3) Stated that each of the representations was misleading or deceptive within the meaning of s 52 of the Trade Practices Act 1974 (Cth) (TP Act) or s 10 of the Fair Trading Act (WA) (FT Act).
(4) Stated that by Mr Sim leaving the business on 20 April 2009, he engaged in a repudiatory breach of his employment agreement.
(5) Alleged unconscionable conduct within the meaning of s 51AC of the TP Act.
(6) Advised that in the circumstances their client rescinded the sale agreement and that they intended to apply to the Court as soon as possible for appropriate relief and that, in the interim, and until their clients had been granted appropriate relief by the Court, “our clients shall run the Business as caretakers”.
43 On 8 July 2009, these proceedings were commenced by the applicants against the respondents seeking the foreshadowed remedies.
44 As they developed, the proceedings were amended at various stages, but a significant amendment to the claim in 2010 raised an allegation which was additional to those made in the correspondence before action. The applicants then further alleged that the first respondent and Mr Sim had engaged in a practice the applicants called “product substitution”, that is to say, underquoting on projects to get the work, and then supplying products different from and less costly to those specified by customers. The applicants allege that this practice enabled the first respondent, in the past, to quote competitively and to achieve the financial performance represented during negotiations – of 36.8% on turnover in the 2007 financial year – but failed to disclose it as they should have during negotiations and before settlement.
45 The first and second respondents have consistently denied the key allegations made against them and also deny the product substitution allegation.
46 The applicants’ case is principally advanced on the basis that pleaded conduct of the first respondent, principally by Mr Sim, contravened the fair trading provisions of the then operative Trade Practices Act 1974 (Cth) (TP Act) and the Fair Trading Act 1987 (WA) (FT Act) in that representations made in the course of negotiations and were misleading or deceptive contrary to s 52 of the TP Act and/or s 10 of the FT Act, and that other representations made, including during due diligence, prior to settlement, were also misleading and deceptive; and that some of the representations made during negotiations constituted collateral warranties to the sale agreement.
47 In summary, the applicants say that:
(1) during negotiations the respondents made representations to them concerning:
The turnover and gross profit of the business.
The relationship of Mr Sim with customers and suppliers of the business.
The saleability of stock in hand.
Mr Sim’s preparedness to continue to work for the business following settlement and his preparedness to teach the Metzes the business.
Mr Sim’s willingness to assist the Metzes develop and maintain good working relationships with suppliers and customers of the business.
Mr Sim’s preparedness not to compete for a period of five years with the business.
(2) during due diligence further representations were made on behalf of the first respondent:
As to whether the business had been involved in any disputed claims or litigation.
Concerning projects on hand.
That full disclosure had been made of all things material to the conduct of the business.
48 The applicants also claim that the conduct of Mr Sim after settlement during the period he was an employee of the first applicants, was conduct relevantly engaged in on behalf of the first respondent and which was unconscionable in terms of s 51AC of the TP Act, and by which he also repudiated the sale agreement and employment agreement.
49 The first applicants further claim that, in breach of the contractual warranty contained in the sale agreement to disclose material information, the first respondent failed to disclose before settlement, or any time thereafter that in the course of operating the business the first respondent, through Mr Sim, had engaged in the practice of “product substitution”.
50 In these circumstances the applicants say they are entitled to the following remedies:
(1) Rescission of the sale agreement, lease of the premises with the fourth respondents and the associated employment agreement with Mr Sim under the TP Act, on the basis that damages alone would be an inadequate remedy;
(2) Damages, additional to rescission, on the basis that the applicants are entitled to be fully compensated for the loss and damage they have suffered as a result of entering into the transactions with the respondents;
(3) Alternatively, if rescission is not an available remedy, damages for the loss and damage they have suffered as a result of the contraventions of the TP Act or the FT Act.
51 Prior to trial the third respondent, Ms McBrierty and the fourth respondents for the Linda McBrierty Superannuation Fund settled with the applicants on the basis that the third and fourth respondents would abide the decision of the Court if rescission were to be ordered.
52 However, at trial the first respondent and Mr Sim strongly defended the cases brought against them. Their position, through Mr Sim, was that most representations pleaded against them, express or implied are denied, and that they deny, in any event, that any relevant conduct on their part was misleading or deceptive under the fair trading provisions of the TP Act or the FT Act. They also deny the existence of pleaded collateral warranties or breaches of the sale agreement or the employment agreement. They deny they acted unconscionably or repudiated any of the agreements.
53 These respondents say that, whatever findings the Court might make about the representations alleged to have been made by them or on their behalf, the conduct of the Metzes at all material times, both during negotiations, during due diligence and after settlement up until the time Mr Sim departed the business on 20 April 2009, indicates that at no time did the Metzes rely on the representations the applicants have pleaded.
54 The respondents also strongly deny the allegation of product substitution.
55 The first respondent cross-claims that the first applicants repudiated the sale agreement and that the sum of $250,000 is now due and payable under the sale agreement, together with some other, small sums.
56 Mr Sim also cross-claims in respect of some minor amounts he says are due under the employment agreement.
57 These respondents seek to encapsulate their response to the applicants’ claims in the following observations:
At all times, Mr Mervin Metz was experienced in business;
The applicants proceeded with the purchase of the business, in effect, with their eyes wide open;
The applicants conducted due diligence and understood the nature of the business and the financial statements provided to them and received advice from their own accountants;
As to the list of projects on hand that was provided by Mr Sim during the course of due diligence, no further inquiries were pressed at all about that list by or on behalf of the applicants;
As to the allegations that these respondents did not have any reasonable grounds for making representation as to future matters, and that they misrepresented present facts, they are denied;
In essence, the sale agreement constituted a regular business dealing and that no misleading or deceptive conduct was engaged in by them at any point and that the case for unconscionable conduct is misconceived in fact and law;
So far as the conduct of Mr Sim following the settlement is concerned, in essence he carried on the business in that period in the same way as he had been carrying it on himself for some years beforehand and that while Mervin Metz did his best, Farrel Metz was not equal to the task and in fact did not apply himself to the activity of sales, but spent all or most of his time in the office upstairs installing and operating computer systems;
Mr Sim denies the allegation made against him that he had always planned, or had decided it was time to leave the business and leave the applicants to their own devices. He says that he was eventually “sacked” on 20 April 2009 and did not breach the employment agreement;
That if the Metzes had really struggled to run the business following Mr Sim’s departure on 20 April 2009, they would have called as a witness, but did not, Mr Neil Catterall, a person the first applicants’ later engaged as an employee to help them run the business, to confirm what they had alleged.
That the first applicants’ business operation was undercapitalised and, in effect, they were the authors of their own misfortune.
58 Before turning to the pleaded representations and other causes of action, it is useful to outline the evidence leading up to settlement. This and other evidence will also be considered in determining each of the pleaded causes of action.
59 As noted above, Mr Murphy of GMO was initially approached by Ms McBrierty with respect to the listing of the business for sale in about March 2008, she and Mr Sim having agreed to put the business up for sale following the termination of their personal relationship.
60 Mr Murphy then prepared two brochures from information provided to him by Ms McBrierty. The information included a valuation of the business dated 7 December 2007, she had obtained from an accountant, RL Todd, as well as financial statements, a plant schedule and extracts from the business’ product catalogues.
61 Following an initial inquiry from within the lighting industry, Mr Sim indicated to Mr Murphy that he did not wish to sell the business to a person or entity in the lighting industry because he was concerned that information about the business might get out to the opposition as he felt they would only be fishing to find out what was for sale.
62 From about March 2008, Mr Murphy ceased to have any real involvement in the sale of the business, other than attending some meetings with Mervin and Farrel Metz when they first approached GMO, and liaising with Mr Sim and Ms McBrierty where required to do so. Instead, his colleague, Mr Goodwin, a principal in the broking business became closely involved following an approach to him from Mervin and Farrel Metz.
63 The Metzes were given the brochures. The first brochure provided a business prÉcis in which the business was simply described as “Light Fittings”:
The price was stated at $1,390,000 comprising goodwill of $1 million, plant of $190,000 and stock of $200,000.
Sales/Turnover were described at $2,700,000 annually.
Net Profit was stated to be $519,512 “Average 3 Years”. The profit was stated to be based on “1 Full-Time Owner”.
Staffing Requirements were stated to be Three Employees with wages of $2,597 with current owner involvement being one of full-time and one part-time owner.
The trading hours were specified to be Monday to Friday, 7am – 6pm and Saturday 9am – 1pm.
The brief overview of the business was stated as follows:
Import/Wholesaler of electrical fittings for the commercial and construction market. This niche wholesale business supplies direct to end users and contractors and has the potential to greatly broaden its market with new products and marketing. Products are serviced both within Australia and direct imports from overseas manufacturers.
64 The brochure indicated that the vendor was prepared to provide a restrictive covenant and ongoing assistance, in these terms:
11. RESTRICTIVE COVENANT
The Vendor agrees to a restrictive covenant for a period of five (5) years with a radius of two hundred (200) kilometres.
12. ONGOING ASSISTANCE FROM VENDOR
The Vendor is prepared to remain in the business for a period of twenty six (26) weeks on a full-time basis to help familiarise the Purchaser with the business.
65 This brochure also indicated that plant and equipment was “to be advised”. There was no quantification or costing in respect of it. However, as noted above, the stock component of the purchase price was listed as $200,000, and in the section dealing with the offering terms, the $200,000 was stated to be:
Current Estimated Stock (to be valued, stocktaking fee to be shared equally between Vendor and Purchaser).
66 The brochure then provided a general guide to “addbacks”, which it defined as income or expenses which were personal in nature used to minimise taxation, or that were non-recurring, and listed examples, including owner’s wages and rent.
67 The brochure attached financial statements including a trading summary showing an average profit after wages, including $280,000 to Mr Sim and Ms McBrierty, over three years of $519,512 “to one owner”, the trading account for the year ending 30 June 2006, and a profit and loss for July 2006 through June 2007, a detailed profit and loss statement for the year ended 30 June 2006 showing profit from ordinary activities before income tax for the year ended 30 June 2006 of $215,223, and three pages of advertising or promotional material in relation to products and suppliers.
68 The second brochure was in similar terms, save that the sale price of $1.38 million was changed by hand to $1.29 million. The value of plant in the second brochure was reduced to $90,000, not the $190,000 that appeared in the first brochure. A similar amendment was made in the section dealing with the offering terms, which was amended to read $1,290,000 inclusive of stock. (The evidence referred to at [78] below suggests this amendment may have been made following the meeting of 18 April).
69 However, while this second brochure also includes the trading summary referred above, it also includes financial statements for the year ending 30 June 2007, unlike the earlier brochure which included various documents reflecting financial statements for the year ended 30 June 2006. The financial statements for the 2007 financial year stated a 36.8% gross profit for that year compared with only 20.8% for the 2006 financial year.
70 As noted above, Mr Murphy prepared the two brochures having regard to information supplied by Ms McBrierty, including a valuation from RL Todd, dated 7 December 2007. Ms McBrierty had provided information to Mr Todd to enable him to prepare that valuation. Mr Todd had regard to trading of the business for the past four financial years, that is to say the four years up to and including 30 June 2007. Mr Todd noted that the business had a:
large increase in gross profit and earnings in the 07 year. This was the result of an increase in direct imports and a reduction in low margin lines.
71 Mr Todd noted that the primary method of valuation of a business of this type was capitalisation of maintainable earnings, that is to say, earnings before interest, taxation, depreciation and abnormals (EBITDA), which produces a total value for the business assets of stock, plant and equipment and goodwill. Mr Todd expressed the opinion that capitalisation rates based on post-management earnings to total value are in the general range of 20% to 33.3% or earnings multiples of 3 to 5.
72 Mr Todd added as follows:
In the subject case factors affecting the capitalisation rate are that the business has only 1 year’s history of earning at current levels, the business requires a degree of technical knowledge of the lighting industry and has a working capital requirement of around $300,000. Given these factors I consider the capitalisation rate is at the upper end of the range or 33.3% which produces a value as follows:
Earnings $463,000 x 100/33.3 = $1,390,000
Average stock $ 200,000
Plant & Vehicles (book value) $ 190,000
Goodwill $1,000,000
$1,390,000
73 Mr Todd then stated that:
The net value of the business is $1,190,000 plus stock at valuation. Goodwill at $1,000,000 is 2.15 years purchase of earnings of $463,000 and is considered reasonable for the subject business.
A value of $1,190,000 plus stock is on the basis of a total sale of the business.
74 While that valuation was provided to Ms McBrierty and in turn was given by her to Mr Murphy of GMO, for the purpose of the listing – and used by him when preparing the brochures – the valuation itself was not provided to potential purchasers including the Metzes at any relevant time prior to the completion of the sale transaction.
75 Once Mr Goodwin became involved in the sale in about March 2008, he took the Metzes to meet Mr Sim at the premises of the business. He had met the Metzes a number of years earlier shortly after they had arrived from South Africa, but had had little contact with them since.
76 Mervin Metz said that in about mid-late March 2008 he met with Mr Sim at the business premises. His recollection (at [9] of Exhibit 10) is that the meeting was arranged and attended by Mr Murphy. However, I accept the later evidence of Mr Goodwin and Mr Murphy that Mr Murphy had gone out of the picture by the time of the first March meeting with Mr Sim and it was Mr Goodwin who attended both the March and April 2008 meetings at the business premises. Mervin Metz says that at the first meeting with Mr Sim amongst other things:
(1) Farrel Metz asked about the profits of the business and in particular asked for an explanation as to the increased gross profit, despite the reduction in turnover over the two previous years.
(2) Mr Sim said words to the effect that the reduction in turnover and level of gross profit was as a consequence of him no longer selling an imported Italian product.
(3) Mr Sim said that if the Metzes purchased the business he would agree to remain an employee for the purposes of training and instructing Farrel and Mervin to operate it without him.
(4) Mr Sim said he wanted Farrel and Mervin to develop relationships with the customers and suppliers of the business and that he would introduce them as the new owners.
(5) Mr Sim said he would give a restraint of trade so he could not compete with the business when he ceased employment.
(6) Mr Sim also said that the business had exclusivity arrangements with suppliers such as Cooper Industries, Xing Feng and Australume.
(7) He asked Mr Sim about the lighting industry and how competitive it was and was told words to the effect that the industry was relatively small, but that the business was one of the top players.
(8) He asked Mr Sim about things such as working hours as he was only looking for a five day a week operation. Mr Sim said that it was by and large an “8 to 5” job and that he only worked on Saturdays to clean up and little business was done on Saturdays.
(9) He also asked how the business generated business in response to which Mr Sim said words to the effect that “we get it from the electrical contractors”, a comment from which he assumed meant that customers would come in with a list of products they required and the business would supply them.
77 Mervin Metz further states that in about mid-April 2008, he and his son Farrel met with Mr Sim and Mr Goodwin at the business premises to discuss aspects of the business including its trading performance and the maintainability of it, the stock in hand and Mr Sim’s continued involvement with the business. During this meeting, Mervin Metz says:
(1) he specifically asked Mr Sim whether he had good relationships with suppliers and customers;
(2) Mr Sim said that he had over the years built up good relationships with all suppliers and customers and he would ensure that these relationships would be maintained and he would be there to assist in building up and maintaining them;
(3) he asked Mr Sim what, if any, technical knowledge would be necessary to understand the business and was advised that no technical knowledge was necessary as the subject matter was “simply commonsense” and that in any event he would be around to train and assist them and train Farrel and him until they were completely familiar with the business and could operate it without him and could maintain the profits on an ongoing basis.
78 Farrel Metz, consistently with the evidence of his father, recalls the first meeting at the business premises with Mr Sim attended by himself and his father and he recalls, Mr Murphy. As noted above, I accept Mr Murphy’s and Mr Goodwin’s evidence that Mr Goodwin attended that meeting with them, not Mr Murphy. Farrel Metz says that, at this first meeting, he said words to the effect that he and his father were concerned that the business was one that depended for its success heavily on Mr Sim’s relationships with suppliers and customers and of his knowledge of the industry. Mr Sim then stated words to the effect that:
(1) the purchase price had been reduced to $1.29 million instead of $1.39 million;
(2) he would agree to providing ongoing assistance for at least one year following the acquisition notwithstanding that the brochure provided for 26 weeks only;
(3) he would fully train and instruct the Metzes so they would become completely familiar with the business and could run the business and at least maintain its earnings and goodwill;
(4) he would, when he left the business, provide a restraint as set out in the brochure;
(5) he would ensure continuation of the suppliers, customers and employees of the business following their acquisition and he would introduce them to all the suppliers and customers and would make sure they developed good relationships independently of him.
79 Farrel Metz says he then raised concerns with respect to the loss of turnover in reduction of purchasers in the 2006/2007 financial year and was told by Mr Sim that this was the result of getting rid of an expensive Italian line and replacing it with an alternative cheaper product and that even though purchases and sales were less, the gross profit margin the business was now able to generate was much greater – up to 36.8% from 28% – which led to a greater gross profit.
80 Farrel Metz says that at a mid-April 2008 meeting at the business premises, which was attended by Mr Sim, Jim Goodwin, his father and himself, the following things were discussed and said:
(1) There was discussion about the concerns he had raised at the previous meeting in mid-March about the drop in turnover and purchases and he asked Mr Sim whether the gross profit could realistically have increased despite a drop in turnover as a consequence of the Italian light fitting change. Mr Sim said it could have and did.
(2) The question of working capital required for the business was raised and Mr Sim said words to the effect that working capital to the value of no more than $100,000 would sufficient.
(3) The question of gross profit margin was discussed and Mr Sim told him it had increased to 36.8% and told him that this would be easily maintainable and he did not believe there would be any further decline in turnover.
(4) The question of the stock of the business was discussed which, in the brochure, had been estimated at approximately $200,000, and Mr Sim said that the stock was saleable “good stock”, which “would turn around quickly”.
(5) Mr Sim reassured him and his father that he had no intention of competing with the business following the sale and was looking forward to continuing his involvement with the business as a sales representative without the responsibility of owning and managing the business and would remain with the business for at least two years and teach him and his father how to conduct the business, would introduce them to customers and suppliers so they would be able to properly conduct business following his departure.
(6) Mr Sim said words that once he was done working at the business, he would go and farm a coconut plantation that he had recently acquired in the Philippines.
(7) He asked how the products were marketed and whether there was much potential for growth of the business and Mr Sim stated that it was easy as going to sit in a client’s office until they see you, after which the products sell themselves.
(8) He spoke of people he knew in the commercial property market and asked Mr Sim if these types of companies and organisations would be receptive to sourcing product from the business to which Mr Sim replied with words to the effect of “Why not?” and “I will be here anyway looking after sales”.
(9) He also asked about the legal fees that the business had incurred and asked if the business had been involved or implicated in any litigation and Mr Sim stated words to the effect that the legal fees incurred related to a minor matter, involving Hob Nob, which he was only pursuing on principle.
81 Farrel Metz says that at the April meeting, he also asked Mr Sim whether the business had any exclusive arrangements to which Mr Sim replied with words to the effect that the business did have exclusive supply arrangements for Western Australia with certain suppliers, namely Australume, Cooper Industries Australia and Xing Feng.
82 Farrel Metz says (exhibit 1 [27] and [28]) that later before making the offer to purchase the business he told Mr Sim that his promises and representations as to staying with them in the business for at least two years and teaching them the business and introducing them to the customers and suppliers and familiarising them with the business and maintaining sales were the most important factors in inducing Mervin and him to purchase the business and that they wanted some protection in that regard. Therefore, they would propose the sale of the business on conditions that, amongst other things, Mr Sim enter into an employment agreement on terms satisfactory to them.
83 I infer from the evidence of the Metzes, and also from that of Mr Sim and Mr Goodwin, to which I will soon come, that the two year employment period was finally negotiated during the course of the meeting on or about 18 April 2008.
84 Mr Sim accepts there were two such meetings in March and April 2008, but denies that the representations pleaded were then made either at all or in the precise terms alleged. Mr Sim recalls there were in fact four or five meetings between the parties, in or about mid-April 2008, and that he was told by Ms McBrierty that she had also attended other meetings with the applicants and “Lorraine”, the accountant of the business, but he did not attend them. Mr Sim recalls for example another meeting with the Metzes at Bellini’s Restaurant on one occasion, and recalls another with them at a Chinese restaurant. I should note that little turns on this evidence as the parties agree, on the evidence, that the substance of what occurred during the negotiations occurred at the March and April meetings with Mr Goodwin in attendance.
85 Mr Sim recalls offering to remain an employee for six months, but states that the applicants instead requested, through Jim Goodwin, that he stay on for two years, to which “I ultimately agreed”.
86 Mr Sim recalls a subsequent meeting in or about April 2008 where he stated to the Metzes in effect that he would train them about lighting products and their uses and the running of the business in general, but that he never stated he would train them “comprehensively” in all matters of, and associated with, the running and operating the business.
87 He also recalls at this April meeting that he said he would introduce the Metzes to the more important customers and suppliers of the business but never stated that he would introduce them “to all suppliers and customers” or that he would ensure that they independently developed good working relationships with relevant suppliers and customers.
88 He also recalls stating at this meeting that he had excellent relationships with all suppliers that mattered, but did not state that he would “ensure” that those relationships would “be maintained” if they bought the business.
89 Mr Sim further says that he stated that the turnover of the business had decreased, but the profit had been increased substantially due to the business importing a lot of lighting products directly from China, rather than through Australian suppliers, and by reason one of the local suppliers having ceased buying lighting products from Targetti, whose products were in his opinion too expensive and whose warranty service was unreliable.
90 Mr Sim denied that he said that the 36.8% gross profit “at the then current level of turnover” was “easily maintained” or words to that effect.
91 Mr Sim says that he did state that in addition to cashflow from sales, the business only required additional working capital of $100,000 as a reserve. He said this because that was all that was needed as the business did not carry any big overheads or expenses.
92 Mr Sim says he also stated in effect that some of the business stock was slow moving but that all stock was saleable, and was just waiting for the right project to place the stock. He denies that he stated that the stock would “turnaround quickly” or words to that effect.
93 Mr Sim says that he stated that he and the first respondent had an excellent relationship with all of the customers “that mattered”, but that is all that he said. He further states that he did not state that he would assist the applicants to maintain those customer relationships and was never asked a question about that.
94 Mr Sim states that he also told the applicants that the business had ongoing projects where the business expected to get formal orders worth at least $2 million, possibly up to $2.5 million, as was the case. He did however add the words “specific details of which would be provided in due course” or words to that effect.
95 Mr Sim also rejects the applicants’ evidence that he stated that he would ensure there were “enough future projects to maintain the turnover and profitability of the Business or that the Business would be awarded further projects in the near future, the specific details of which he would provide in due course”.
96 Mr Sim recalls stating, however, that he would assist in running the business but not that he would support the applicants “to maintain the turnover and goodwill of the business”.
97 Mr Sim says that he recalls stating to the Metzes on numerous occasions that they needed to get out into the market and source new clients. He recalls Farrel Metz stating that he was going to look after all the sales and was confident he could increase them.
98 Mr Sim denies stating that the business was the “exclusive supplier and distributor in WA of the products supplied by Xing Feng, Cooper Industries P/L and Australume”. He says the business never had exclusive distribution agreements with any suppliers.
99 In his responsive witness statement (exhibit 35 [3]) Mr Sim denied that he ever stated at any meeting that he would agree to provide ongoing assistance of at least one year following the acquisition. He says that based on his experience in the industry he did not think that any longer than six months would be necessary for a purchaser to learn the business and maintain earnings and good will. That is why the GMO brochures only ever stated six months. It was only at the subsequent meeting in April 2008 that he agreed to stay on for two years after being requested to do so by the applicants.
100 Mr Goodwin said that on or about 17 March 2008, he and the Metzes met with Mr Sim at the business premises in Osborne Park. Mr Sim then responded to queries raised by the Metzes during discussion about the business with words to the following effect:
(1) The decrease in turnover and increase of gross profit in the last three financial years would not affect the profitability of the business and was a consequence of Mr Sim abandoning an expensive Italian product and replacing it with an alternate cheaper product imported from China, which the business sold at a higher margin, and Mr Sim had also been experiencing difficulties at home while finalising a divorce.
(2) That the gross profit of the business (which at that time was stated in the brochures to be approximately 36.8%) was readily maintainable – something that Mr Sim repeated more than once.
(3) He had a great relationship with all of the customers of the business and he would assist the Metzes to establish and maintain those relationships.
(4) The stock that would be sold with the business would be readily saleable and would turn around quickly. Mr Sim took the Metzes and Mr Goodwin through the warehouse in the premises and identified which stock was required for which project and said that most of the stock was virtually all sold.
(5) That limited technical knowledge was required to understand the nature of and the subject matter of the business as it was all commonsense and in any event he would be around to teach Farrel and Mervin Metz until they were both completely familiar with the business and able to operate the business independently of him and maintain the profits.
101 Counsel for the first respondent and Mr Sim put to Mr Goodwin in cross-examination that Mr Sim said a number of things. Mr Goodwin accepted that some of those things were said – consistent with his own evidence – but that others were not. For example, Mr Goodwin plainly had no recollection of Mr Sim saying that, for his training and instruction for the Metzes to be effective, “he required them to put every effort into the business”.
102 Nor did Mr Goodwin recall that Mr Sim had said during this meeting that relationships with customers and suppliers of the business “were dependent upon the business paying its accounts on time”.
103 He also rejected a proposition that gross profit of the business was only discussed at the second meeting in April and not at the first meeting in March. Mr Goodwin recalled not only the issue being discussed of importing a lot of lighting products directly from China and through Australian suppliers, but also that the Italian line was mentioned and he recalled that Mr Sim had said that one of the local suppliers that he had ceased using was Targetti. He remembered a comment to the effect that it was too expensive.
104 Mr Goodwin, however, did not recall any discussions at this first meeting about exclusive arrangements with suppliers.
105 Mr Goodwin did not recall Mr Sim discussing a working capital requirement of around $100,000 at this first meeting, and noted that the question of working capital had been mentioned in one of the brochures.
106 Mr Goodwin also confirmed that the question of gross profit margin and its maintenance, notwithstanding a decline in sales, was canvassed “quite solidly” at this meeting because it was a strong question in the purchaser’s mind.
107 On 18 April Mr Goodwin said he attended with the Metzes at the business premises and met with Mr Sim for a second time, at which discussion ensued during which Mr Sim did and said the following things to the Metzes in relation to the business:
(1) During the two years he was to be employed by the business he would train and instruct Mervin and Farrel Metz fully and comprehensively in all matters of and associated with running and operating the business.
(2) He would introduce Mervin and Farrel Metz to all suppliers and customers of the business and would ensure that each of them independently developed good working relationships with the suppliers and customers of the business so that following the end of the two year period, the goodwill and earnings of the business could and would be maintained. He made this point frequently.
(3) He had an excellent relationship with all of the suppliers of the business which he would ensure would be maintained if Farrel and Mervin Metz bought the business.
(4) If Farrell and Mervin Metz were to purchase the business he would not for a period of five years in any way compete with the business.
(5) He had an excellent relationship with all of the customers of the business which he would assist Farrel and Mervin Metz to maintain if they were to purchase the business; and he pulled out files relating to specific clients to show them the type of work that he had been doing.
(6) The business had plenty of projects on hand to the value of approximately $2 million, a figure he mentioned a couple of times.
(7) At various stages during the negotiations Mr Sim stated that the business had plenty of forward work.
(8) Mr Sim would remain employed with the business for two years during which time he would assist and support Farrel and Mervin Metz to run the business.
(9) Mr Sim would refrain from competing with the business and was looking forward to continuing the role in the business as a sales representative without the responsibility of running the business. He said that he had in any event nowhere to go.
(10) He would teach and train Mervin and Farrel Metz to run the business and that this would have to be in a staged manner.
(11) He would introduce Mervin and Farrel Metz to customers and suppliers of the business.
108 The evidence of Mr Goodwin does not deal with the course of negotiations that resulted in Mr Sim agreeing to stay on in the business for two years following settlement. As noted, Mr Sim denies that he ever suggested at the March meeting that he was prepared to extend his involvement to 12 months instead of the six months represented in the brochure. He denies Farrel Metz’s evidence in this regard.
109 I am not satisfied on the balance of probabilities that there was any firm offer made by Mr Sim at the March meeting that he would stay for 12 months, but do accept Farrel Metz’s evidence that a 12 month employment period was mentioned.
110 There is no doubt that at the 18 April 2008 meeting the parties discussed very directly the question of Mr Sim’s continued employment if the applicants were to purchase the business and that the Metzes made it very plain that unless he were prepared to remain as an employee for at least two years, they would not be interested in purchasing the business.
111 As to the representations made at the April meeting, I accept without reservation the evidence of Mr Goodwin as to what was actually represented. Of the contesting witnesses, his recall of what was said was clear, and given without any hint of equivocation. He was tested in cross-examination and the clarity of his recollection was confirmed. He is not a witness who had any axe to grind in the proceeding.
112 I also generally accept the substance of Mervin Metz and Farrel Metz’s evidence as to the items discussed at the key meetings between the parties on the business premises in March and April 2008. I accept that the tenor of the negotiations was that the Metzes knew they needed a substantial commitment from Mr Sim to remain with the business for at least two years and not merely six months (or a year) if they were to make a success of the business. I find that Mr Sim understood the importance of this requirement to the Metzes.
113 I also accept Farrel Metz’s evidence that he separately impressed on Mr Sim, prior to presenting the offer to purchase the business, the need for the sale agreement to be conditional upon a two year employment agreement. The sale agreement was signed by the Metzes 11 days after the 18 April meeting on 29 April 2008. Just over a week after that, Mr Sim and Ms McBrierty, as directors of the first respondent, accepted the offer set out in the sale agreement subject, amongst other conditions, to the employment condition mentioned above.
114 On the subject of Mervin Metz’s recollection of events, the first and second respondents say he was demonstrated not to have a reliable memory. On numerous occasions counsel for the first respondent and Mr Sim suggested to Mr Metz his memory was not good. Mr Metz agreed at one point in cross-examination that he did not recall the events of the April meeting. In this I took Mervin Metz to be indicating he truly lacked, as he sat in the witness box, any detailed recall of what happened at that meeting. This admission weakens the value of his primary evidence, even though he later sought to recover his position by saying he had refreshed his memory. Counsel challenged Mr Metz to later produce the notes he said he had refreshed his memory. He said he would. The Court heard nothing further from counsel for those respondents on this issue. Overall, Mr Metz’s evidence seems to have been supported by reference to documents. I do not think he had a detailed recall of all meetings but I do consider that he had an overall recollection of things that he considered important. Generally speaking, I do not count Mervin Metz’s occasional lapses against him.
115 Following the signing of the sale agreement, pursuant to condition 1 of Annexure A to the sale agreement, the applicants undertook due diligence. By email dated 12 May 2008, Farrel Metz provided Jim Goodwin of GMO with a typed list of due diligence requirements, with the understanding that Mr Goodwin would seek from the first respondent and supply to the applicants the required information.
116 Farrel Metz says that on or about 16 May 2008, he met with Ms McBrierty at the premises of the business during which meeting he asked her, among other things, whether the first respondent had been involved in any disputed claims and the nature of such claims and/or court proceedings, in response to which she words to the effect that the company had not been involved in any disputed claims or litigation. Ms McBrierty, as explained below, denies there was any such meeting or representation.
117 On or about 18 June 2008, Jim Goodwin, having been earlier requested by Farrel Metz to provide a detailed list of projects on hand for the 2008/2009 financial year, provided Farrel Metz by email with a two page handwritten document which he had obtained from Mr Sim. The list, in Mr Sim’s handwriting, contained 13 items, the first 12 totalling $2,059,000, the last, item 13, stated to be “potential $400K we will get some”. At the bottom of the first page, Mr Sim made an additional notation that “There is many many more small project $5-$10K.”. The covering email letter to the Metzes from Jim Goodwin described the attached document as “forward orders summary prepared by Paul Sim, for Illumination Services WA”.
118 A question arises as to what the description of the content of the list as “forward orders” meant, if it was Mr Sim’s or Mr Goodwin’s description. Asked how he came by the document, Mr Goodwin said that he collected it from Illumination Services, from Paul Sim on 18 June 2008. In cross-examination Mr Goodwin was asked whether Mr Sim had told him that these were “estimates of the projects”. Mr Goodwin replied “forward orders”. Counsel noted that the document Mr Sim had provided him with did not use the expression “forward orders”. Mr Goodwin responded: “No, but that was Paul’s description”. When further pressed Mr Goodwin said they were estimates, “forward orders estimates”. In re-examination Mr Goodwin explained by reference to one of the entries in the document:
It was a forward order estimate. These are companies with forward orders and the estimated value of it was $350,000 but not to a dollar degree. They are not $349,112. They are just an estimate of what that would be.
As to what he understood by “forward orders”, Mr Goodwin replied:
Orders to come. Work that was in reasonable – reasonably could be expected to be commenced by the company.
119 It was never put to Mr Goodwin (or Mr Murphy) in cross-examination by counsel for the first respondent and Mr Sim that the document was not received by Mr Goodwin on or about 18 June 2008, but was in fact provided at some much earlier time by Mr Sim to GMO when GMO first received the listing from Ms McBrierty or thereabouts, as pleaded in the defence. To the extent therefore that the defence and Mr Sim’s evidence suggests to the contrary, which it does, I reject Mr Sim’s evidence and rely entirely on that of Mr Goodwin, which I accept.
120 On the face of it, therefore, the description of the content of the document as “forward orders” was that of Mr Sim, according to Mr Goodwin, whose evidence I accept. But as to what that meant, or represented, and whether the Metzes relied on the document as representing secured orders is discussed below.
121 I do note however that the question of projects on hand had been raised at earlier meetings, especially that of 18 April 2008. Mr Sim in his evidence suggested that the question of projects on hand was discussed at the April 2008 meeting, but only in the context of him indicating that he considered that there were about $2 million worth of projects for which orders could be anticipated in the future. I accept the evidence of Mr Goodwin that the applicants were keen to receive details of the business’ projects on hand and had been pressing for a list for some time. One would reasonably assume that a list of projects on hand would be an important consideration to any prudent purchaser acquiring the business with an asking price of $1.25 million and a goodwill component of $900,000.
122 One of the last things to occur prior to settlement and the applicants taking possession of the business was the completion of Mr Sim’s employment agreement. By letter dated 23 June 2008, the terms of which were confirmed in writing on the letter by Mr Sim on 24 June 2008, the terms and conditions of employment of Mr Sim by the first applicants provided, in essence, that:
Mr Sim was employed as a “sales representative”;
the employment commenced on 1 July 2008;
the employment was stipulated to end on 30 June 2010;
Mr Sim was to report directly to the Board at the times and in the manner required by the Board;
Mr Sim was expected to work at least a 37.5 hour week, which would generally be worked between Monday and Friday;
his general duties included devoting the whole of his time, attention, skill and normal business hours to the duties of his office and such other duties assigned by the Board from time to time, including to promote the interests of the company;
the basic salary was set at $65,000 per annum, plus superannuation;
a vehicle allowance based on mileage for business purposes was stated;
clause 6 contained an “Acknowledgment” in these terms:
You acknowledge and agree that:
(a) the Company purchased the Business from your company Simmac Pty Ltd pursuant to the Agreement for Sale of Business as a Going Concern dated 7 May 2008 (“Agreement”);
(b) the Company paid substantial goodwill of $900,000 for the Business. That goodwill is based upon your remaining a key employee of the Business for a period of at least 2 years;
(c) your contacts and knowledge are essential for the success of the Business;
(d) the Agreement was conditional upon your entering into this contract (clause 6 of Annexure “A” to the Agreement); and
(e) the Company purchased the Business in reliance upon your representations that you would remain a key employee of the Business for period of at least 2 years from the settlement date.
(The “Company” referred to was earlier defined in the letter to include both entities constituting the first applicants in this proceeding);
a resolution of disputes process was provided for, as were a range of other terms and conditions relating to superannuation, expenses, leave, confidentiality and restraint after termination of employment;
a restraint period of five years;
termination of the employment would occur automatically at the end of the contract, being 30 June 2010, but the contract might be terminated “at any time by either party giving one (1) months notice in writing to the other party” or in the case of the first applicants, payment in lieu of notice;
by cl 15.2 the parties agreed that the contract constituted “the entire agreement” between the parties with respect to the subject matter of it and contained all the representations, warranties, covenants and agreements of the parties and there are no oral statements, representations, undertakings, covenants or agreements between the parties expressed or implied except as are contained in the contact.
123 The first applicants also took a lease of the business premises from the fourth respondents prior to settlement.
124 As noted above, the brochures and the sale agreement provided that stock in trade was valued at $200,000. However, item 3 of Annexure “A” to the agreement provided that in the event it exceeded the sum of $200,000 the Buyer would be responsible for the excess.
125 The Metzes say, and I accept their evidence, they did not know that there was as much stock as there in the end turned out to be. Farrel Metz says that he saw stock stored at the premises of the business (as Mr Goodwin confirms) but at no material time up to the making of the agreement did Mr Sim advise him that there was a second warehouse in Howe Street, Osborne Park containing additional stock.
126 Farrel Metz says that in late June 2008, Jim Goodwin of GMO provided him with a schedule entitled “Stocktake 2008 – Howe Street Warehouse” listing stock at $89,030.98, which he thought was an itemisation of all the stock of the business – something considerably less than the $200,000 estimate. He says he proceeded to settlement on the basis that this was the stock value.
127 However, after settlement, Farrel Metz says he became aware that the stock housed in Howe Street was in addition to that at the business premises, which was later valued and resulted in Mr Sim writing a letter to the Metzes dated 28 July 2008 in which he stated, amongst other things, that the total stock at valuation was $346,987.24, of which $200,000 had been paid for, leaving an outstanding balance of $146,987.24. Mr Sim indicated that he and Ms McBrierty were prepared to discount that figure to $115,000 if payment was made on or before 15 September 2008.
128 A month later, on about 28 August 2008, Mr Sim advised Farrel Metz about the need to order additional stock from Xing Feng, through a business agent in China, Anita Chan, to cover an existing order on hand. Farrel Metz acted on this advice from Mr Sim to order further stock to the value of USD66,418.80, or approximately AUD90,000, on 28 August 2008. It seems Mr Sim had earlier placed the order with Anita Chan on 5 August without then advising Farrel Metz.
129 In early October 2008, the Metzes wrote to Mr Sim and Ms McBrierty and secured agreement to the repayment of by instalments the additional stock to the value of $115,000, concluding with a $40,000 payment on 4 December 2008.
130 While these matters of stock were being resolved, the evidence shows that Mr Sim was, more or less, conducting the business as he usually had in the years preceding settlement. In particular, he pursued the projects on hand, most of which had been identified in the list prepared on 18 June 2008.
131 Mervin Metz said that, upon taking possession, Mr Sim continued to manage the business and would direct him to do certain tasks, for example, collating and packing orders, checking of stock from the goods stored in the warehouse or collecting orders for delivery to site. Mr Sim also asked him on several occasions to source and obtain the supply of specific products, which he did.
132 Mervin Metz recalls that on or about 11 July 2008, Mr Sim ran a training session at the business premises for Farrel Metz, Lauren Kuster, then an “old” employee of the business, and himself during which Mr Sim discussed lamps, control gear and ballasts and described which lamps and control gear was suitable for certain ballasts. Lauren Kuster at this point was a sales person in the business. This training session ran for approximately one hour and Mervin Metz made notes of it, which he produced to the Court.
133 Mervin Metz recalls a second training session occurred on or about 21 July 2008, which was about low voltage downlights. Again Farrel and Lauren Kuster and he attended this session, and he took some notes, which he again produced to the Court. The session was again for about one hour and held at the business premises.
134 Mervin Metz recalls that other training sessions were held later which were attended by himself, Farrel Metz and Lauren Kuster, each lasting about one hour, and each held at the business’s premises. He took notes in respect of each of them. They occurred on 28 July 2008 (about emergency and exit lighting), 4 August 2008 (incandescent and discharge lamps at their applications) and 1 September 2008 (fluorescent fittings and their associated lamps).
135 After the 1 September session, Mervin Metz says that Mr Sim did not conduct any further training sessions.
136 Mervin Metz says that he felt overwhelmed during each training session as he did not fully understand much of the information Mr Sim conveyed, as it was highly technical. But he was not overly concerned as he believed that Mr Sim would be able to assist as he had two years employment with them. Mervin Metz says that whenever he did follow up Mr Sim for help, Mr Sim dismissed his requests, saying words to the effect “You should know this by now”.
137 So far as introductions to customers and suppliers of the business were concerned, Mervin Metz says that what occurred in fact was that when customers or suppliers came into the business premises to see Mr Sim and he, Mervin, was present, Mr Sim would ignore him and he had to introduce himself to whoever was there or not be introduced at all. On this basis, he introduced himself at the business premises to Tony Tartaglia of Freeway Electrical, Derek Stone of Lamp Replacements and Rod Smirk of Smirk Electrical.
138 Mervin Metz however acknowledged that Mr Sim took him to the premises of Custom Electrics, WB Electrics and Curtin University although apart from when Mr Sim introduced him to Jim Moles at Custom Electrics, he was obliged to introduce himself as one of the new owners of the business to Cyril Lind at WB Electrics and Murray McLean at Curtin University.
139 Mervin Metz says that in relation to other customers and suppliers, Mr Sim did not introduce him but he had to introduce himself when he went to do deliveries at their premises or when they came into the business to collect products. In this vein he recalls introducing himself to Mars from Di Lena Metals, Andrew from A&S Powdercoaters, Danny of Cable 8, Gary Bell of Lamp Replacements, Anthony of Williams Electrical, Ian of Stockland and Halko of Skylake Investments.
140 Mervin Metz says that on a number of occasions he asked Mr Sim to assist him with the pricing of products, learning about and understanding projects on hand, queries about stock, quotations and understanding the supplier’s catalogues, but on most occasions Mr Sim replied variously to the effect that “I have already told you”, “it is commonsense”, “it is all in the files”, “you are wasting my time” or “don’t ask stupid questions”.
141 Mervin Metz says that from about August 2008 he came to realise that he could not rely on Mr Sim for the imparting of knowledge from the few short training sessions he had provided and so he began asking other people in the industry, for example, Gary Bell, the manager at Lamp Replacements, for guidance.
142 On another occasion, Derek Stone from Lamp Replacements came to the business premises and gave a detailed presentation to him and Farrel about halogen lamps, which was an effective training session from their point of view and quite different from that given by Mr Sim.
143 Farrel Metz gave evidence to similar effect concerning the approach, conduct and behaviour of Mr Sim soon after settlement. Farrel Metz says that approximately a week after settlement, the owner of one of the major clients, Tony Tartaglia of Freeway Electrical, called at the business premises to meet with Mr Sim. Prior to his arrival Mr Sim told him that he was going out to resolve an issue that had arisen. Farrel Metz asked if he could attend the site meeting and Mr Sim told him that he could not and that it was “none of his business”. Tony Tartaglia came in but he was not introduced to either Mervin Metz or Farrel Metz.
144 Farrel Metz confirms the evidence of his father, Mervin Metz, that there were training sessions conducted by Mr Sim, which were attended by Mervin and Lauren Kuster, as well as himself. The first training session was on 11 July 2008, the next on 21 July 2008. There was a further session on 28 July 2008 and another on 4 August 2008. He also recalls a training session on 1 September 2008 but none after that.
145 Like Mervin Metz, Farrel Metz says he found useful information was provided in these sessions but generally found them to be “overwhelming”. Like Mervin Metz, Farrel Metz found it necessary to obtain guidance from representatives at Lamp Replacements, such as Gary Bell and Derek Stone. Like Mervin Metz, Farrel Metz says that he had to introduce himself to customers in the main.
146 Farrel Metz said that on 17 July 2008, Mr Sim gave him a handwritten document displaying a further list of projects on hand, which in effect updated the list that had been provided through Jim Goodwin of GMO on or around 18 June 2008. The only material change was that the value of the 432 Murray Street project had been reduced to $200,000.
147 Then, on 1 August 2008 Mr Sim gave him a revised list of projects on hand for the business, which was broken into those for which the business had received confirmed orders, those for which orders were yet to be received and projects awaiting further developments for which the likelihood of securing orders was stated to be extremely high.
148 Farrel Metz says that after settlement he and his father did not have any involvement in any of these significant ongoing projects of the business and that Mr Sim managed all of those which he had identified in the initial list of projects, dated 18 June 2008 and the list dated 17 July 2008, as well as on the revised list of 1 August 2008.
149 He said Mr Sim also kept the files for these projects with him, and undertook all the sales and pricing for the projects. However, Mr Sim would often ask Mervin Metz and himself to collate pack orders and to check off stock from the goods stored in the warehouse or to collect orders for delivery to site. On occasions Mr Sim also asked them to source and obtain supplier products which he would do.
150 Farrel Metz says that when he asked Mr Sim specific questions about particular projects, for example what products to order, Mr Sim would tell him it was all in the files, and that when he asked to look at the files Mr Sim refused to show them to him, or give him any explanation as to the information within the files. He was told to butt out of Mr Sim’s jobs.
151 Farrel Metz says it was only after Mr Sim’s departure on 20 April 2009 that he was able to access the files for the major projects on hand.
152 Around August/September 2008, the first applicants employed Helen Friedle as the office administrator. She said she first met Mr Sim at the end of September. I note in passing that Mr Sim was on holidays between 7-15 August 2008 and again between 23-26 September 2008 (see Farrel Metz, exhibit 2 [55]). It is appropriate to note her experiences in dealing with Mr Sim. Ms Friedle’s job involved the ordering and delivering of goods. She often needed information about customers. She had the need on a number of occasions to approach Mr Sim to learn from him the process relating to delivery of goods and the like. There was nobody else, at that point from whom she could seek this information as they were not apprised of knowledge as to how the business had been run by Mr Sim. Ms Friedle’s evidence in chief (transcript 213-214) is instructive:
COUNSEL: Okay. And what was the response to that when you asked him those questions generally?
MS FRIEDLE: Generally it was very negative response.
COUNSEL: When you say negative, can you just describe what you’re talking about?
MS FRIEDLE: He would turn around and say he hadn’t got time. He would sometimes, you know, pick up the phone and start to make a telephone call while you were trying to find this information out. He would use avoid – he would avoid or he would be very aggressive in his mannerisms or when he said no – or he would just point blankly would say, “No, find out yourself.”
COUNSEL: Can you just describe to his Honour what you mean by that? Is there any particular incident you can remember or just general? What do you mean by aggressive?
MS FRIEDLE: He would – he would constantly come towards me and tell me that I didn’t know what I was doing, that I was useless, and you know, he would – he would step towards me or lean over my desk or – and he would scream and he would screw his face up and just be really nasty.
COUNSEL: Right?
MS FRIEDLE: As what I felt was quite – quite intimidating.
153 Ms Friedle said that over time she started to build a rapport with Mr Sim and develop “a reputation” with him and then Mr Sim would allow her to see some of the information she required. But by saying this I did not understand that she then found it easy to work with Mr Sim, for plainly she did not.
154 Ms Friedle also noticed that Mr Sim dealt with the Metzes in a similar way. Ms Friedle (transcript 214) said that when Farrel Metz would ask Mr Sim for help with pricing, costing, where to get this from, Mr Sim would be quite dismissive of him. He would say he did not have time and would tell him to go away and that it was his, Farrell’s, business and it was down to him to find out. He would be “quite evasive”. The tone of these conversations was, she said, “very intimidating, very aggressive, very much in a raised voice”. Ms Friedle explained that Mr Sim would stand up from behind his desk and, with this raised voice try to intimidate Farrel Metz. Indeed, she said there were occasions when Mr Sim would tell Farrel Metz to wait outside his office and have him stand at the door until he was ready for him and then would let him in.
155 Ms Friedle said that Mervin Metz was not as quiet as Farrel and he would push that little bit harder when dealing with Mr Sim. However, again Mr Sim’s tone when speaking to Mervin Metz was “very dismissive, very confrontational. He would be very aggressive, he would raise his voice”. Ms Friedle noted, however, that there were times Mervin would raise his voice back to Mr Sim and “it would dissipate”, then Mr Sim might be fine. Generally speaking Ms Friedle considered that Mervin would sometimes get a better response from Mr Sim than Farrel because he would stand up to him.
156 I should also add that when Ms Friedle gave her evidence in chief, she became very distressed when, after a period in the witness box, she noticed that Mr Sim was sitting in the back of the Court. When this became obvious, Mr Sim, to his credit, left the courtroom. When counsel for Mr Sim later suggested to Ms Friedle in cross-examination that she had become apparently upset when she saw Mr Sim in the court room because she held a resentment against him, she disagreed and said that what had upset her was that “he intimidates me”. His mere presence, she indicated, did this. I accept her evidence. It goes to illustrate the extent to which Mr Sim’s behaviour overall during the period August/September 2008 to March/April 2009 was utterly appalling, as I find it was.
157 The impression one gains simply from considering the evidence of Ms Friedle through most of the period between October 2008 and March 2009, when she had to deal with him that Mr Sim was a very difficult person to deal with. He was uncooperative when the new owners – the Metzes – and a new employee like Ms Friedle approached him for information, he being virtually the only person with knowledge of processes of the business and particular contracts being dealt with. The evidence of Ms Friedle strongly corroborates the evidence of Mervin Metz and Farrel Metz about the difficult nature of the relationship that they had with Mr Sim from 4 July 2008 on.
158 I have little doubt from Ms Friedle’s honest and direct account of the way Mr Sim often conducted himself, that Mr Sim was a person used to operating his own business on his own terms, and not having to account to any superior, but having a few persons about him with whom he could work; and that if he did not like the terms or basis on which he was required to deal with another person he could be quite aggressive towards them and attempt to intimidate and bully them. It seems that when Mervin Metz endeavoured to stand up to this sort of conduct by Mr Sim it had some effect. Mr Sim would then withdraw. It is also clear that the personality of Farrel Metz was such that he was not inclined to respond or was adept at responding to someone like Mr Sim and was in many ways responding passively. In this, one forms the view that Mr Sim perceived a weakness on Farrel Metz’s part and sought to exploit it.
159 In this proceeding I let into evidence some tape recordings Mervin Metz made of some of the exchanges between the Metzes and Mr Sim at different times in 2008 and 2009: see Metz Holdings Pty Ltd v Simmac Pty Ltd (No 1) [2011] FCA 263. These recordings audibly display Mr Sim’s verbal behaviour on those particular occasions. Taking the evidence as a whole, and hearing those verbal exchanges, I draw the inference that these recordings give a very reliable indication of exactly how Mr Sim spoke and behaved on many occasions at material times and how appalling his conduct was.
160 By October 2008, Mervin Metz said that he had become quite concerned with Mr Sim’s behaviour and was unable to have a rational discussion with him. At that point he made recordings with his mobile phone of some of those discussions.
161 Mervin Metz witnessed an argument between Farrel Metz and Mr Sim on 31 October 2008 when Mr Sim challenged Farrel about an overdue superannuation payment. This followed Farrel Metz asking Mr Sim about a task that he had asked Mr Sim to do and where he had been the day before at 4 o’clock, during working hours. Mervin Metz recorded this exchange on his mobile phone which, in part, included the following:
MR SIM: But nothing is in sequence now. Fix it right, stop fucking around and fix it.
FARREL METZ: You know you don’t have to use that language.
MR SIM: I do not care, I hate your guts to be honest with you. I think you are dickhead an absolute dickhead. I’ve got respect for the old man but none for you. Ok. None whatsoever. You are an idiot. Alright
When Mervin Metz intervened to encourage a civil discussion, Mr Sim responded by saying:
MR SIM: I’m fed up with it, because Farrel here thinks he knows everything
When Mervin Metz continued to try to encourage a rational discussion, Mr Sim concluded the exchange by saying “Go piss off”.
162 Exchanges along these lines continued. A recording of an exchange between Farrel and Mervin Metz and Mr Sim at the business premises on 7 November 2008 emphasises this. Mr Sim expressed some frustration that he had provided four and a half months of teaching but it had all gone “in one ear and out the other”. Mervin Metz’s observation, that Mr Sim had had 40 years of learning and they had only had 4 months, plainly fell on deaf ears.
163 It became apparent, not only during the evidence of Mervin and Farrel Metz and Ms Friedle but also during Mr Sim’s evidence, that Mr Sim believed that no-one should interfere with the projects that he was currently working on, and that he considered that both Mervin Metz and Farrel Metz should be out “selling”. Mr Sim plainly resented the fact that Farrel Metz was establishing a formal computerised system of administration when plainly there had been little formal organisation of any sort during his earlier period of control of the business.
164 Farrel Metz also observed that, while Lauren Kuster was able to work effectively with Mr Sim, Helen Friedle was having difficulties. He spoke to Lauren Kuster who considered everything was fine as far as she was concerned. A few days after this, Mr Sim approached him and said words to the effect that he objected to him (Farrel) talking to Lauren Kuster and that if he had any issues with her, he should raise them with him first.
165 On or about 29 October 2008, Mervin Metz noted that Paul Sim wrote on delivery docket 32191, the words: “My client, stop interfering bloody cheek” and “Not required until 2 December 2008. Greedy People”. This related, Mervin Metz explained, to an order from McCartney and Associates that was scheduled for delivery on 2 December 2008, but was ready for delivery by the end of October 2008. On 27 October 2008 he telephone Brian McCartney regarding delivery docket 32191 and told him that the goods were ready for delivery. The invoice then went out. Mr Sim responded by making the notes just mentioned.
166 Eventually, Mervin Metz gave Mr Sim a note dated 18 November 2008, expressing frustration about Mr Sim’s conduct and the fact that Helen Friedle was then talking about leaving the business. He posed the question in his note:
Why you have to be abusive, utterly rude and personal is beyond our understanding.
In the note he also made reference to the fact that Mr Sim’s conduct had led to other employees leaving. Mervin Metz then noted:
You would have to be blind not to have noticed the impact your behaviour has had on both Farrel and myself and quite honestly even my wife is suffering. I have now been put onto anti-depressant drugs by my doctor and have lost almost 20kg in weight. Great job you are doing. Your constant picking on Farrel has gone to(sic) far. It is none of your business how he dresses (may be you should look in the mirror yourself) or what he does in his office. *1 He owns half this business whether you like it or not and is entitled as am I to respect and courtesy and to be spoken to in a decent way. When asking a question I don’t need you telling me it’s a stupid question. Just give us a civil answer whether we ask it once or a dozen times or until we don’t have to ask it again.
The last page of the note was the rider marked as *1, which stated:
I do not appreciate you telling me he is a bludger or that he sits upstairs doing nothing. It’s none of your business. And then you go off on one of your tirades about him running a secret service upstairs because he linked the computers together. Your behaviour can only be because you are afraid we will find things on the comp that you want to hide from us. This is a business not your personal outlet. And if he feels the necessity to speak to Lauren about anything he will without you telling us you are the only one who can speak to her. Reminder – we pay her salary not you. And by the way he was never discourteous to her.
167 In the middle of November 2008, Mervin Metz and Helen Friedle together responded to Josh, a representative of the business’ important customer, Custom Electrics, who had called into the premises. As it transpires Mervin Metz gave him goods which were to be collected by another representative of the customer. Later that day Andrew from Custom Electrics came in to collect the goods. Mervin Metz explained to Andrew what had happened and that Josh had collected them earlier that day. Mr Sim then joined the discussion and said he had provided instructions that the goods were to be collected by Andrew. Mervin Metz said to Mr Sim that he should have left clearer instructions. In the presence of Andrew, Mr Sim stated to Mervin Metz words to the effect that he was “stupid” and did not listen and then stated: “You are an arrogant South African and I have been warned about you”. He also added “I hate you”. While Mr Sim denied he said “You are an arrogant South African and I have been warned about you”, I accept Mervin Metz’s evidence that indeed he did say this.
168 All this evidence shows that by October 2008 at the latest, Mr Sim was quite unrestrained in the way he chose to deal with the Metzes and the new office administrator, Helen Friedle. His conduct was appalling. Indeed it may be described as reprehensible, as the applicants submit it was.
169 Plainly the process by which the Metzes expected to receive the transmission of knowledge and instruction in the skills required to run the business, as well as to establish personal relationships with customers and suppliers was not happening in the way that they had expected it would.
170 Mervin Metz said that when he sought assistance from Mr Sim for pricing on quotes he was doing, Mr Sim responded by saying he would do the pricing and to leave it to him. Mervin Metz said he did this as a result of which Mr Sim never showed him how to do it.
171 At the end of November 2008, Mr Sim began demanding “bank guarantees”. Mervin Metz explained that, at the end of October 2008, a customer, Paul Lucas without him knowing, had paid a business account directly to Mr Sim instead of the business. Mr Sim did not remit the monies for a further month. At the end of November Paul Lucas’ account remained outstanding and so a statement was issued to him. Mr Sim then told Farrel Metz and Mervin Metz that Paul Lucas had contacted him and asked why he had been sent a statement when he had already paid. At that point Mr Sim attacked Farrel Metz with words to the effect that he was a “sleaze bucket”. When Mervin Metz asked Mr Sim to quieten down, he responded by saying he would not and that he wanted “bank guarantees”.
172 Mervin Metz told Mr Sim that he would not get a guarantee as they had a contract, to which Mr Sim stated that it was not a guarantee and that the business could go under. At that point, Mr Sim stated:
No. I don’t need this kind of bullshit in my life. I want out of here because I can’t put up with this sort of shit.
Mervin Metz said he responded by telling Mr Sim that if he gave them their money back, he could have the business back. To this Mr Sim responded:
You’re fucking getting nothing. You’re getting nothing from now on. Pay out the $250 grand or a bank guarantee and I’m out of here. Alright, get Jim Goodwin on Monday because I’m fed up with the way this place is operating.
173 I accept the evidence of Mervin Metz and Farrel Metz, and Helen Friedle that these various instances indicate the substance of the conduct and behaviour of Mr Sim through much of the period of Mr Sim’s employment, at least after September 2008. Whatever the full explanation is for the manner in which Mr Sim behaved, the fact is that he considered the clients of the business that he had been fostering for some years before the settlement to be his clients and he did not require any involvement from the Metzes in dealing with their projects. Some training sessions were held, but by early September 2008 they had come to an end. By then, there was a complete breakdown in whatever relationship had initially existed following settlement between Paul Sim and Farrel Metz. Despite entreaties, particularly by Mervin Metz, for Mr Sim to deal with the Metzes and Helen Friedle in a civil and constructive manner, that plainly did not happen.
174 It seems that Mr Sim, in November 2008, perceiving that the business was experiencing some financial pressures and forming his own view about the applicants’ ability to succeed in the lighting business, responded in an even more negative and aggressive fashion by demanding bank guarantees when he had no right to do so, and voiced the threat that he would leave the business if they were not given. When the bank guarantees were refused, he stayed.
175 However, nothing changed thereafter. Mervin Metz said that on 15 January 2009, during a heated discussion between Farrel Metz and himself on the one hand, and Mr Sim, on the other about the Burswood Tower 5 project he asked Mr Sim to make sure that any goods leaving the business’ premises did so with a detailed delivery note and not a piece of paper simply marked “This delivery contains …”. Mr Sim responded with words to the effect that he had done it that way for 20 years and would not change, and that the Metzes were to “butt out of his jobs and get their own jobs and that his deals were with his clients and they were not to interfere”.
176 Farrel Metz says that whenever he asked about any of the projects Mr Sim was working on he would abruptly answer by telling him that they were his clients and that he, Farrel Metz, should get his own jobs. Farrel Metz gave an example from 4 December 2008 concerning Knutsford where Mr Sim told Mervin and Farrel Metz that they were trying to take over his job.
177 He gave a further example from 4 March 2009 when he, Farrel Metz, answered a telephone call from Mauro of United Electrical during which Mauro asked him whether the business had a problem with him or his company as he had left messages for Mr Sim which had not been returned. When Farrel Metz told Mr Sim about this conversation, he received a handwritten note from Mr Sim, dated 4 March 2009, as follows:
I object to you just butting in. Use your manners and do not just butt in. I do not do it to you so please do not do it to me. It’s very rude. Take messages please.
178 Farrel Metz said he soon discovered that he was receiving letters and notes from Mr Sim and personally found it difficult to speak to him verbally because of the abrupt and aggressive response he would inevitably get from him. As a result he started writing notes to Mr Sim.
179 Farrel Metz recalls an occasion in early April 2009 when David of Freeway Electrics telephoned to speak with Mr Sim, who was not available, so he endeavoured to be of assistance. The following day Mr Sim approached him and told him he was an idiot and that he should pass on messages and that he was “just trying to worm your way into my jobs” and that he should butt out and that he potentially could have cost the company big money.
180 On 3 April 2009, Mr Sim sent Cheryl of Freeway Electricals a fax which he copied to Farrel Metz, which stated, amongst other things:
Can you pass on to your guys that I must be contacted about your various jobs.
Unfortunately we have people here who think they know everything but they know nothing.
Farrel info to Dave yesterday nearly cost both companies big money because of his inexperience.
Not all Dave’s fault as Farrel never pass(sic) on Dave’s message to me to ring him back. Just as well rang here this morning. Just as well.
181 On 3 April 2009, Mr Sim also gave to Farrel Metz another note which, amongst other things, stated:
Why are you trying to big note yourself. Can you back out please, go get your own jobs and stop this sleazy business of trying to worm you(sic) way onto my jobs.
182 Obviously things were beginning to come to something of a head because on 3 April 2009, Mr Sim gave Farrel Metz a further note in the following terms:
I suggest you start getting your own projects. You have been here over 9 months and I have not seen one major project from you. In fact I don’t think you have had one job over $10,000. You spend way too much time inside producing nothing.
My jobs are continually holding this company together, but there will be months where I will have a quiet one. Also stay out of my jobs please, you nearly caused a disaster Thursday, 2nd April, because you neglected telling me that Dave asked for me.
I have money still in this company and you nearly cost this company big money yesterday. You are still inexperienced, you are still learning, do not try to big note yourself. Common courtesy is that you should pass phone messages onto me.
Please get out and start getting your own jobs. Come on 9 months have gone and you have produced very very little. It’s embarrassing to be completely honest.
I have since been told the following:
You advised Dave that you were going to talk to me about the situation and for me to ring him back. When are you going to talk to me. You are too sleazy for my liking. In the future before I respond to any questions you have you give me full details of what the question relates to. God you were so close to causing a major disaster this morning and now I am wasting my time fixing everything up. Butt out of my jobs, get your own and please do not lie. You have an extremely bad habit of lying.
183 When one has regard to the whole of the evidence, as of early April 2009 it is clear that Mr Sim had become totally unprepared to assist the Metzes to learn the ropes of the business. He had also taken a set against Farrel Metz. It is plain that on most occasions when Farrel Metz sought any sort of assistance from Mr Sim, he was fobbed off. Other examples provided by Farrel Metz to this effect, which I accept, include:
1. A request for advice considering a particular light fitting used in a project for Aegis Aged Care, involving Neal Coles of Coles Electrical.
2. Advice concerning the completion of an order for Grandlite Fittings from China in February 2009.
3. Advice sought in late February 2009 concerning price and design for light fittings for a project at the Girrawheen Baptist Church.
184 Farrel Metz also explained that in late 2008 and early 2009, issues were raised with the business concerning work done by the old business when operated by the first respondent under the control of Mr Sim, which he then found himself attending to.
185 On 17 April 2009, Farrel Metz sent an email to Mr Sim, with a copy to Mervin Metz, referring to then recent correspondence and notes about the dealings with Freeway Electrical. In the email Farrel Metz outlined background matters and referred to a range of issues, including: the Abacus project services and the fact that Mr Sim had not been available to take Mr Stephenson’s telephone call when he was wanting a quote; an issue that had arisen with CNW, an electrical wholesaler and a substantial customer of the business; to business payments mistakenly made to Mr Sim and the question of access to working files.
186 In summary, Farrel Metz stated that he and his father were “extremely concerned and disappointed by your conduct”. He reminded Mr Sim that prior to purchasing the business, Mr Sim had repeatedly represented and promised that he would remain on as a key employee for at least two years in order to train them, introduce them to suppliers and customers and help maintain a reasonable profit margin. The email then asserted:
Contrary to these promises and representations, you have failed (and repeatedly refused) to provide either Merv or I with any substantive training whatsoever. In fact, we feel as though you continually exclude Merv and me from current and future projects of the business.
187 On the topic of “moving forward”, Farrel Metz then made requests in the email concerning training and instruction. He added:
In order to facilitate this, Monday 20 April 2009 at 2pm, we will sit down and go through each file thoroughly in order to bring us up-to-date with all projects on hand and discuss all current issues. We propose to do this on a regular basis so that we may learn and be across all projects. In addition, we will require an update once a week on the projects at hand and quotations provided.
It has also come to our attention that quotations have been amended without you advising us of these changes. We therefore request that you advise us (in writing) of all amendments you have made to quoted prices that customers have already accepted for both existing and future jobs.
In addition, from now on, any goods leaving the premises should be documented in the carbonised delivery docket book to ensure that if you are absent from the office, all customer inquiries can be addressed.
We look forward to working with you in the best interests of the Business in a respectful manner.
188 On 19 April 2009, Mr Sim responded to Farrel Metz’s email of 17 April 2009 dealing with a number of issues including:
His entitlement to 20 days annual leave.
That he only had one file in his car and the rest of the job files were at work, and complaining about the system.
That comments about Freeway and Dave were totally incorrect, and again raising questions about why Farrel Metz had failed to pass the message from Dave onto him.
189 Mr Sim then stated:
I have becomed(sic) completely disillusioned with the way you are running ISWA. Everything is so secret with you and your old man. Yes its(sic) your business but it’s embarrassing the way things are going. You have made your money problems and I have extreme concerns you will not be able to pay Linda and I our due monies by 1st July 2009. I will need some Guarantee in writing by Wednesday night 22nd April that payment will be made. You also need to sort out my wages and make payment of my car expenses by COB 20th April otherwise my services to ISWA (NEW) will be withdrawn. I have taken Legal Advice on this matter and the person has a copy of my employment contract.
I have put a lot of effort over the 9 months but you guys are in my eyes very poor businessmen. You are still riding on my back and my jobs after 9 months. You deduct monies from my salary which is god dam(sic) disgrace. I have work on(sic) average 50 hours plus per week. I am still paying your wages, i(sic) am still bringing in very good business, look at Pluto and SKM and Holycross and Secret(sic) Heart coming up and what have you and your old man got in, nothing to my knowledge over $10k. IT’S A GOD DAM(sic) DISGRACE.
190 This particular email when read as a whole may be seen to encapsulate a number of Mr Sim’s historic and historically expressed complaints and his apparent degree of frustration. In evidence Mr Sim maintained those same complaints and appeared to consider they both explained and excused his appalling conduct over the period.
191 It may be appreciated that the correspondence of 17 April 2009 and 19 April 2009 had set things up for another fiery exchange on 20 April 2009, the date of Farrel Metz’s proposed meeting with Mr Sim.
192 On 20 April 2009, Mr Sim left the premises of the business following an argument involving both Mervin Metz and Farrel Metz, and did not return. He took and takes the view that his employment was terminated by the first applicants that day and he was and is not in breach of his employment agreement. The applicants take the view that Mr Sim left his employment without justification and is in breach of the employment agreement and indeed repudiated it, which repudiation they later accepted.
193 Additionally, the applicants take the view that the first respondent by the conduct of Mr Sim pretty much from the time he commenced his employment on 4 July 2008 up to 20 April 2009, and his departure that day, was designed to frustrate the applicants’ enjoyment of the sales agreement and also constitutes unconscionable conduct on behalf of the first respondent within the meaning of s 51AC of the TP Act.
194 Mervin Metz’s account of what occurred between Mr Sim, Mervin Metz and Farrel Metz on 20 April 2009, is broadly supported by recordings he made of what was said that day, at various junctures, by Mr Sim and himself and Farrel Metz, and which were received into evidence. Relevant portions were played in open court.
195 Mervin Metz explained that he and Mr Sim on 20 April 2009 were having an argument about the whereabouts of certain project files. Farrel Metz was present. I interpolate to note that Farrel Metz’s email to Mr Sim of 17 April 2009 has raised the question of files. Mervin Metz says that in the course of the argument about the whereabouts of certain project files, Mr Sim said words to him to the effect that the files were going missing. When Farrel Metz interrupted, Mr Sim told him to mind his own business. The Perth Modern School file was in particular referred to. Constant exchanges took place about the files. At one point Mr Sim complained that Mervin Metz had the practice of coming to his office and taking files from his desk, which Mervin Metz denied. There was debate about the extent to which Mr Sim ever had a system for maintaining files, in the course of which Farrel Metz complained that they had never been shown the alleged system. Plainly Mr Sim at this point was not prepared to converse with Farrel Metz. Mervin Metz complained that Mr Sim was incapable of conducting a decent conversation.
196 All of that was in the morning. Mervin Metz says that at about mid-afternoon, Farrel Metz, Mr Sim and he were in the reception area of the premises. Mr Sim and Farrel Metz were arguing again, with Mr Sim again complaining that Farrel Metz was not doing sufficient work and bringing in orders, which Farrel Metz refuted. Mr Sim in response labelled Farrel Metz a “compulsive liar”. When Farrel Metz invited Paul Sim to sit down, Mr Sim responded that he could not be “bothered” with Mr Farrel Metz.
197 In the light of this attitude, Farrel Metz asked Mr Sim how he was supposed to reason with him in response to which Mr Sim replied:
You’ve gotta find out for yourself from now on because I’m not helping you. And if you don’t bloody well like it, I’ll piss off.
To that Farrel Metz stated:
then go, go.
Mr Sim responded saying that he would “but you pay $250 grand first”.
198 Not long afterwards Mr Sim and Farrel Metz again exchanged words, where again Mr Sim complained that the Metzes did not understand and that Mervin Metz had got it wrong. Mervin Metz responded by indicating that if they had the information, they would be able to carry on on their own for nine months but they could not and invited Mr Sim again to sit down and talk.
199 Mr Sim then said words to Mervin Metz to the effect that he still owned 25% of the business, to which Mervin Metz responded that he owned nothing and had sold the business to them.
200 Mr Sim then responded with words to the effect that they had not paid for it, to which Mervin Metz responded by saying that he did not have anything, was merely an employee and again asked why he could not work with them.
201 Mervin Metz says that at that point, Mr Sim said words to the effect that he was going because they had not fulfilled their obligations.
202 Mervin Metz asked him to put it in writing in response to which Mr Sim said he was and that he was “waiting on it now”.
203 Farrel Metz asked Mr Sim whether Alanna Carter, an employee, was typing up a letter for him and he said that she was and that he had asked her to do it.
204 Mervin Metz asked Mr Sim why he would do such a thing in response to which Mr Sim asked what was the problem with it, to which Farrel Metz said that he paid her wages and that he would take the letter she was typing. Mr Sim then indicated that he would not take it and that he would take it to the lawyers, telling the Metzes that they would hear about it and wishing them good luck.
205 Mervin Metz obtained a copy of the letter, which Ms Carter was in the process of typing, but before it was fully complete. The letter was produced in evidence. In it, Mr Sim repeated his assertion that he still had $250,000 “invested” in the company and complained that the Metzes “obviously you think the company is totally yours”. He then added:
This is not the case and we are extremely concerned that Illumination Services WA has become the secret service.
I no longer going to deal with your son. He is a compulsive liar and his bad habit of twisting the truth to cover his mistakes is a disgrace … Your son has produced nothing in the last 9 months and he has not got in one decent order and he is living off my jobs as well.
You have major money problems, your history with payments to suppliers is disgraceful…
Because of your money problems Linda and I want Bank Guarantees to cover our investment. We have taken legal advice and we will approach Westpac to inform them of the situation.
If you can not produce bank guarantees by the close of business 23rd April 2009, I will walk away. You have not honoured the employment contract, you son, play games, I have
The typed letter ended at that point.
206 After the question of the letter being typed was mentioned, there was a further discussion about missing files, during which, once again, Mr Sim denied that the only file he had was the one for Holy Cross. Mervin Metz says that Mr Sim then said words to the effect that:
I am going to take great delight in causing you maximum problems.
Farrel Metz then mentioned the restraint of trade. Mr Sim then asked where his phone was and said “be prepared for big trouble” as he walked out of the premises.
207 Farrel Metz gave a similar account of the events of 20 April 2009. He said the day started as normal. He was at the premises when Mr Sim arrived at around 7.30 or 7.45am. He came into his office and told him to stop “dicking” around with his salary and suggested that his motor vehicle payments be brought up to date because he was owed money. Farrel Metz said he responded by saying that he had put a cheque for the motor vehicle expenses in the tray on his desk about two weeks earlier. Mr Sim then went to his office to look for the cheque and came back and said he did not want to receive “bullshit” emails like the one he got on 17 April. He then gave Farrel Metz a letter with a list of new motor vehicle expenses that were not due until the following month and demanded immediate payment. Farrel Metz responded that they were not due. Mr Sim then said to him that the Metzes had money problems and he wanted bank guarantees.
208 After this Farrel Metz said Mr Sim went back to his office and things seemed to settle down for about half an hour. Later he was in Mr Sim’s office and said to him words to the effect that in his email of 17 April he had scheduled a meeting for that afternoon to discuss the contents of it and Mr Sim said he had not read the email and in any event he would not be available to attend the meeting. Farrel Metz said why not have the meeting straight away, in response to which Mr Sim said that was fine. Farrel Metz then asked Mervin Metz to join them. Farrel Metz said they began the meeting by discussing the Howard Solomon project file. In the course of discussion Mr Sim told him to butt out. He said to Mervin that he, Farrel, was a troublemaker.
209 It appears that the exchanges between the Metzes and Mr Sim on 20 April 2009 occurred at various places within the premises. Mr Farrel Metz says that at this point of the discussion Mr Sim walked out of his office and while he was walking down the stairs he, Farrel, called out to Mr Sim that there would not be any guarantees and he followed Mr Sim downstairs.
210 He says that Mr Sim then grabbed the file and said that he would gone, to which he, Farrel Metz, said that he did not want him to remove any property of the business. He said Mr Sim responded to the effect that the file was his property. There was further discussion.
211 Farrel Metz recalls that Mr Sim pushed him out of the way and said words to the effect that he was having a letter drafted to which he, Farrel, responded and asked why an employee of the business was typing a letter for him and he then asked that employee, Ms Carter, to stop typing it.
212 Farrel Metz recalls that Mr Sim took his handwritten letter from Ms Carter’s desk, took some files and said words to the effect that he was “out of here”.
213 Farrel Metz said he asked Mr Sim to open up the files, which he refused to do, and as Mr Sim walked out he said words to the effect that:
I am going to take great delight in causing you maximum problems.
He also said to be prepared for “big trouble”.
214 Farrel Metz apparently followed Mr Sim out of the premises and as he got into his car Farrel Metz called out reminding him of the restraint on trade.
215 Farrel Metz recalls that Mr Sim returned five minutes later to fetch his reading glasses and then left again.
216 Mr Sim’s recollection of events was most expansively provided in cross-examination. He began by saying (transcript 712), when asked what happened on 20 April 2009, that “this is my opinion”, and then when pressed about his choice of words said it was his “recollection of events”.
217 Mr Sim recalled arriving at the business premises about 7-7.15am and believes that Farrel Metz had got in early that morning. There was an argument about car expenses. He was directed by Farrel Metz to his in tray and then went off and found the cheque which was dated 17 April 2009. At about 8.30 or 9 o’clock, he received a call from a client who complained about things that had not been done, having left instructions with Mervin or Farrel, so he went back upstairs to see Farrel and find out what was going on and “it progressively got worse from there”. Mr Sim said at about 10.30 he came down again, down to his office and he was trying to “rescue some things that hadn’t been done” when Farrel walked in and that is when things really started. He was accused of not doing his job by Farrel. He asked what he wanted him to do. Mr Sim says (transcript 714) Farrel responded by saying:
Go.
To that he asked:
What, get out?
Farrel said:
Go, go, go, go.
218 Mr Sim said he took that as being fired and walked out. He had a few more arguments and walked out. He said he knew the end was up, walked out and had to get his mobile phone because he left it behind.
219 Mr Sim was adamant that he was fired and was told to get out. He believes that Mervin Metz’s face at that point went red because Mervin knew him being kicked was a “grave mistake”. In other words, Paul Sim attributed to Farrel Metz the order to leave his employment.
220 Mr Sim, having been provided by counsel for the applicants with the opportunity to provide his account of exactly what happened on 20 April 2009, was then cross-examined in more detail. Counsel suggested that Farrel had invited him to sit down, in order to discuss issues, and he, Mr Sim, said that he “couldn’t be bothered” with them. To this Mr Sim replied (transcript 714):
Mr Mendelow, that was a very sad day – 20 April. Exactly what happened I’m not 100% sure but the sequence of events was as I explained to you a few minutes ago.
Soon afterwards he added (transcript 715):
I was furious, he was furious. Things are said that, you know, maybe shouldn’t have been said.
In the event, Mr Sim said he did not recall a number of the detailed statements that had been attributed to him by Mervin and Farrel Metz.
221 In particular, as to the evidence that he had stated:
If you don’t bloody well like it I’ll piss off,
Mr Sim denied (transcript 715) that he had given that sort of ultimatum to Farrel Metz, “because I had a two year contract”.
222 He could not recall (transcript 716) if he had ever said: “I’m not going to help you with anything and if you don’t like it, I’m out of here”.
223 Mr Sim simply could not recall any of the detail of what passed between him and the Metzes on 20 April 2009 prior to him leaving the premises and, in effect, put down his lack of recall to the fact that it was a “very, very heated argument that morning” (transcript 716).
224 However, he did not deny (transcript 716) that he did say to Farrel Metz that he wanted his “250 grand” – a reference to $250,000 that he considered that he had invested in the business.
225 When pressed whether he had used the expression “sleazy” or “sleaze bucket”, when the issue of a $400 payment was raised, Mr Sim in effect acknowledged that he might have, noting that “sleazy” is an “acronym” in New Zealand and he was a Kiwi and that was a word that was very commonly used over there (transcript 717). He also recalled that Mervin Metz tried hard to get him and Farrel Metz to withdraw from the argument “but it just spiralled out of control”.
226 Mr Sim also insisted in cross-examination he was more than a mere employee of the business because he had $250,000 “still in the company” (transcript 717).
227 He also recalled the Metzes saying that he wasn’t doing his job, but did not recall (transcript 718) telling the Metzes that they had not fulfilled their obligations.
228 He did not recall (transcript 718) discussions about him taking files away.
229 Mr Sim did not recall saying he was “going to take great delight in causing you maximum problems”. However, he did not deny it (transcript 719).
230 Similarly he did not recall (transcript 719) saying “be prepared for big trouble”.
231 The audio recording made by Mervin Metz of much of what was said between the three men on 20 April 2009 was played in Court. Mr Sim was then asked whether he accepted that what was played accurately recorded the conversations that he heard. Mr Sim replied (transcript 721):
Yes, but I don’t hear the words “go, go, go, get out.” Where are they? They’re not in here.
When counsel suggested that that was because they never took place, Mr Sim insisted that they did take place and he vividly remembered it.
232 Mr Sim when pressed further said he did not agree with some of the stuff that he had said on the recording, but he was annoyed about the things that had been picked out that were advantageous only to the applicants. He considered it was necessary to look at everything that had happened that morning from 7 o’clock on.
233 When it was put to Mr Sim in cross-examination (transcript 722) that he had never intended seeing out the 24 months employment, as provided for in the employment contract, he insisted that he considered himself bound by the employment contract and “was looking forward to semi-retiring in June 2010, or 1 July 2010” (transcript 722). He said it was “100 per cent incorrect” that he had only offered the period of two years because he knew the Metzes would not buy the business unless they had his assistance for two years. He insisted that he had an employment contract for two years and knew what the employment contract was and that he was going to “stick it out” for two years.
234 In effect, accepting that he had said that he was “going to get great delight in causing maximum problems”, Mr Sim said that it was something said “in the heat of the moment” (transcript 722). He accepted that should not have been said.
235 I have no hesitation in accepting the substance of the evidence of Mervin Metz and Farrel Metz as to the events that transpired on 20 April 2009, involving Mr Sim, supported as they are by the recording of many of the exchanges. I have no doubt that, without the recording, Mervin Metz may not have recalled everything that was said that day. However, in general I found that Mervin Metz’s recall of events was reliable and while each man may at times have been unsure of the exact order of everything that happened and was said, for example on 20 April, the substance of his recollection in relation to material issues was reliable. Even putting aside the recordings of exchanges on 20 April 2009, I have no hesitation in finding that the account of what happened at various times, during the nine to ten month period, including on 20 April 2009, given by the Metzes was reliable and in substance accurate.
236 By contrast, Mr Sim did not have an accurate recall of what was done and said at various times including on 20 April 2009. On 20 April 2009 he recalled arriving at work, and he recalled, from his point of view, being fired. The recordings, of various meetings, that have gone into evidence confirm that Mr Sim often presents as a hot head and 20 April is an example. He blusters. He shouts. He speaks over people. He intimidates and bullies. I should add his personality is also transmitted by the various notes he left for Farrel Metz – always a flow of consciousness, often without punctuation and nearly always in uppercase printing. He is a man who is given to having his own way and based on the evidence given to the Court in this proceeding, not used to working co-operatively with people. He is not a person whose recollection of events, let alone detailed recollections of events, I am inclined to accept. He is given, in my estimation, to putting himself in the most favourable light and readily imputing blame to others in order to protect his own interests. He was generally an unimpressive witness, unresponsive to questions, talking incessantly.
237 I will deal below with two important questions: whether Mr Sim was “sacked” as he claimed, or chose to leave his employment, and, secondly, whether he ever intended at any material time to honour his representation to remain an employee for two years.
Representation pleaded in [15(a)] of statement of claim – two year employment period
238 By [15(a)] of the further amended reamended statement of claim (statement of claim) the applicants plead that during the course of negotiations Mr Sim made the following representation to preserve the goodwill of the business:
(a) that if the applicants were to purchase the business, Mr Sim would remain on as an employee of the business for a period of at least two years following settlement.
239 By [40] of the statement of claim the applicants plead that this representation was misleading or deceptive or was likely to mislead in that:
(1) instead of remaining as an employee for two years Mr Sim left after a period of 10 months;
(2) by reason of the matters pleaded in [27]-[39ZD], concerning product substitution, it is to be inferred that Mr Sim at no material time had any intention of remaining on as an employee of the business for two years;
(3) at no material time did Mr Sim have reasonable grounds for making the representation;
(4) the representation is a representation as to a future matter and the applicants rely on s 51A of the TP Act or s 9 of the FT Act.
240 By [13] of the defence, the first and second respondents:
(1) say that at the meeting with the Metzes in April 2008 Mr Sim offered to remain as an employee for six months;
(2) say that the applicants asked Mr Sim to stay on for two years and he ultimately agreed;
(3) otherwise deny the paragraph.
241 As to [40] of the statement of claim, these respondents in [53] of the defence plead as follows:
(1) say that when Mr Sim agreed to the request for him to stay on for two years, he intended to do so;
(2) he left in the circumstances pleaded in [51] of the defence, that is to say he was sacked; and
(3) otherwise deny the paragraph and say that if any representations were made (which are denied) then they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
242 The representation is pleaded to be a representation as to a future matter. There is no pleading that it is a representation as to the present fact. Notwithstanding that on one view it may be said that a promise by a person that they will do something in the future, such as remain an employee for two years, constitutes an implied representation that as a matter of present fact they intend to do that and have the capacity to do so it seems to me that it is also open to construe the promise as a representation as to a future matter – that the person will do that thing – and have reasonable grounds for so representing. If the promisor is shown never to have had any such intention then that evidence would go to proving a lack of reasonable grounds. It appears that it is on this latter basis that the applicants put their case. Either way, the first and second respondents have never been in any doubt that the applicants alleged they never had the requisite intention.
243 In this regard I should make further reference to the effect and operation of s 51A of the TP Act and s 9 of the FT Act, which the applicants expressly plead and rely upon in relation to all pleaded representations as to future acts in this case.
244 At material times s 51A of the TP Act provided as follows:
(1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
(3) Subsection (1) shall be deemed not to limit by implication the meaning of a reference in this Division to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.
Section 9 of the FT Act, the State Act, in a similar but not identical way, provides:
(1) For the purposes of this Part, where a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
(2) The onus of establishing that a person had reasonable grounds for making a representation referred to in subsection (1) is on the person.
(3) Subsection (1) shall not be taken to limit by implication the meaning of a reference in this Part to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.
245 The point has been made often and is well understood that these provisions do not of themselves create a cause of action or define a norm of conduct. Rather, they respectively assist the application of s 52 of the TP Act and s 10 of the FT Act which proscribe misleading or deceptive conduct and so endeavour to stamp out unfair practices in consumer dealings.
246 Section 52(1) of the TP Act provides:
A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
Section 10 of the FT Act at material times was to similar effect, but applying to a “person” more generally, not just to a competitor.
247 On the face of it, there is an issue, where a person promises to do something in the future, whether the promise constitutes a representation that may be falsified, and thereby shown to be a misrepresentation at material times when it was made, by showing the promise was not met. However, it is well established that the non-fulfilment of a promise does not of itself establish that the promisor did not intend to perform it at the time it was made or that the promisor’s intention lacked any, or any adequate, foundation. Similarly, it is well understood now that because a prediction proves inaccurate does not of itself establish that the maker of the prediction did not believe that it would eventuate or that the belief lacked any, or any adequate foundation: Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 (Global Sportsman) at 88. In Global Sportsman, at 88, the Court went on to observe that an expression of an opinion which is identifiable as such conveys no more than that the opinion expressed is held and perhaps there is basis for the opinion. At least if those conditions are met then an expression of opinion, however erroneous misrepresents nothing.
248 In Fubilan Catering Services Limited v Compass Group (Aust) Pty Ltd [2007] FCA 1205 (Fubilan) at [546], French J (as the Chief Justice of Australia then was), at first instance, acknowledging the authority of Global Sportsman, added that the making of a promise or prediction may, however, contain implied representations of present fact as to the promisor’s intention or capacity to perform the promise and that such representations if false may be misleading or deceptive within the meaning of s 52 of the TP Act.
249 On appeal, in Fubilan Catering Services Limited (Incorporated in PNG) v Compass Group (Australia) Pty Ltd [2008] FCAFC 53, the Full Court of this Court, at [91], similarly observed that it is clear that to make a promise which is not performed or a prediction which is not fulfilled is not, without more misleading or deceptive. The Court added that:
It is only where the making of a promise or prediction contains an implied representation of present fact, such as a representation that the promisor is capable of performing the promise, that the promise or prediction can be misleading or deceptive. Alternatively, if the promise can be construed as a representation with respect to a future matter, and the promisor does not have reasonable grounds for making the representation, it is taken to be misleading: TP Act, s 51A(1). In this case the promisor, unless it adduces evidence to the contrary, is deemed not to have had reasonable grounds for making the representation: s 51A(2).
250 In Fubilan at first instance, French J emphasised, at [547], that it is important to bear in mind that s 51A does not introduce a rule of law that a promise which is not performed or a prediction which is not fulfilled is thereby misleading or deceptive. Subsection (1) simply requires that a statement about a future matter made without reasonable grounds will be treated as if it is misleading or deceptive. His Honour there added:
It may be that in many if not most cases a person making a statement about the future will be treated as making the implied representation that he or she has reasonable grounds for the statement. If the reasonable grounds do not exist, the statement will generally be misleading or deceptive although that need not always be the case. Section 51A(1) may be said to involve a limited extension of the scope of s 52 to the extent that it transforms a logical proposition which is of broad scope into a rule of universal application.
251 Justice French went on, in [547], to emphasise that where a pleading of misleading or deceptive conduct relies upon s 51A it should make clear that it involves the allegation that the representor did not have reasonable grounds for making the statement alleged. Section 51A will then operate to require the conduct of the representor, if established, to be treated as misleading or deceptive, “for that is its substantive operation”. His Honour added:
Its adjectival operation puts the evidential burden upon the representor and supports it with a powerful deeming provision. If a pleading of misleading or deceptive conduct based upon a statement about future facts does not expressly plead want of reasonable grounds, yet invokes s 51A, then it should be taken to so plead or if that implication is not open it should be regarded as deficient.
252 It also follows from what his Honour had to say about the evidential burden that his Honour considered that s 51A(2) casts an evidential burden on a respondent to adduce evidence, but not a legal onus (or persuasive burden) to prove that it had reasonable grounds for making the representations alleged. In this s 9(2) of the FT Act may be contrasted. It expressly provides that a respondent in some circumstances bears the legal onus of proving it had reasonable grounds for the representation made as to a future matter.
253 While the authorities for a period suggested an apparent difference of opinion as to the effect of s 51A(2) in this regard, with one view being that if a respondent adduces some evidence to the contrary the deeming provision in subs (1) will not apply (as to which see ACCC v Universal Sports Challenge Ltd [2002] FCA 1276 (Universal Sports Challenge) per Emmett J), a competing view was that the person making the representation can only avoid the deeming provision by establishing on the usual balance of probabilities that there were reasonable grounds for making the representation (as to which see Lewarne v Momentum Productions Pty Ltd [2007] FCA 1136 per Stone J). In Downey & Anor v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199, the Queensland Court of Appeal (Keane JA (as his Honour then was), Williams JA and Atkinson J), at [127], considered the views of Emmett J in Universal Sports Challenge went no further than advancing the proposition that, when the representor adduces evidence of reasonable grounds it will be a matter for the court to determine whether that evidence establishes there were reasonable grounds and no automatic deeming arises.
254 In McGrath v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2; (2008) 165 FCR 230, a Full Court of the Federal Court comprising Emmett, Stone and Allsop JJ, had occasion to consider the effect and operation of s 51A(2). By a majority (Allsop J, Emmett J agreeing), and as the headnote puts it, s 51A(2) requires evidence “to the contrary” to be adduced, that is evidence that tends to establish, or that admits of the inference that there were reasonable grounds for making the representation before the deeming provision ceases to operate. If evidence is adduced by the representor that is said to be evidence to the contrary, it will be for the Court to determine whether it is adduced to the contrary in a sense just discussed. Section 51A(2) does not cast the legal or persuasive onus on the representor: see Emmett J at [6] and [44], Allsop J at [191]-[192].
255 Justice Allsop in his judgment analysed not only the text but also the legislative history leading up to the enactment of s 51A(2) and at [192] explicitly relied on that history, accepting that legislation in Territory and State jurisdictions in Australia created what he described, at [193], as “simpler onus-shifting provisions”. His Honour considered that was as a result of clear Parliamentary choice, at least in respect to the Commonwealth Parliament, not any quirk or idiosyncrasy of judicial interpretation.
256 Justice Stone, in her Honour’s dissent on this point at [72]-[74], was not persuaded that the legislative history indicated any clear Parliamentary intent and that the requirement that evidence “to the contrary” be adduced in order to counter the deeming provision concerning no reasonable grounds, required the representor to establish on the balance of probabilities that there were reasonable grounds for the representation as to a future matter.
257 Notwithstanding the observation of Stone J at [76] and the dicta of Allsop J on this critical point was obiter, and that the correct interpretation of s 51A(2) had not been the subject of full argument on the appeal before the Court, I consider I should follow the majority ruling as to the operation and effect of s 51A(2), even if it is open to argue that I am not bound to do so.
258 The result is, as explained by Allsop J, at [192], if evidence “to the contrary” is adduced by the representor, and the representee itself adduces evidence tending to the lack of reasonable grounds, the matter might be equally poised. In such a case, there has been evidence “to the contrary” adduced by the representee, thereby eliminating the operation of the deeming provision, and, on the totality of the evidence, the proof of the reasonableness (or lack thereof) of the grounds is evenly balanced. Section 51A(2) does not mean that in those circumstances the representor has not met an onus. The section does not cast a legal or persuasive onus, in such a case, on the representor. Plainly, however, it remains for the Court in those circumstances to decide whether, on the evidence, the representee, as applicant, has established on the whole of the evidence that there were not reasonable grounds for the making of the representation.
259 However, in relation to the application of s 9(2) of the FT Act at material times, the legislative intent of the Western Australian Parliament is clear, in that the representor carries the legal or persuasive burden of establishing that it had reasonable grounds for the representation as to a future matter that it made. In some circumstances, where, as Allsop J put it, the matter might be equally poised, the location of the legal or persuasive burden might make the difference in whether or not the Court ultimately determines that there were, or were not, reasonable grounds for the making of a representation as to a future matter.
260 There are then important distinctions to be made when a representation is pleaded between a representation as to present fact and a representation as to a future matter. The pleadings of the applicants in this proceeding explicitly choose to characterise some representations as to future matters only, some representations as to present fact only, and other representations as to, in part, present fact, and in part, future matters.
261 In some cases concerning representations as to future matters, where it is pleaded there were no reasonable grounds for the representation, the applicants rely on a range of evidence including that, taking into account evidence of later events, the Court might reasonably infer that, in the absence of other cogent evidence, there were no reasonable grounds. However, as noted above, the mere non-fulfilment of a promise or prediction made at an earlier time does not mean of itself that there were no reasonable grounds for the representation as to a future matter.
262 As noted, by [53(a)] of the defence, the first and second respondents plead that, when Mr Sim agreed to the applicants’ request for him to work for the business for two years, he intended to do so. The applicants contend there is no evidence adduced to support such a plea. There is no doubt that such a representation as pleaded was made. As explained above, the background to the making of the representation was that the two brochures given by GMO to the applicants each represented that:
The Vendor is prepared to remain in the business for a period of twenty six (26) weeks on a full-time basis to help familiarise the Purchaser with the business.
As a result of negotiations, the parties agreed that Mr Sim would in fact remain employed with the business for a period of two years.
263 In the employment agreement subsequently made between the first applicants and Mr Sim, dated 23 June 2008, it is expressly stated in cl 6 that Mr Sim acknowledges and agrees that the first respondent purchase the business in reliance upon his representations that he would remain as a key employee of the business for a period of at least two years from the settlement date.
264 The applicants contend that the evidence adduced at trial is clearly at odds with any contemporaneous intent of Mr Sim to work for the business for 24 months. The applicants rely upon the following evidence to this end:
(1) The evidence of Derek Stone that, in a discussion with Mr Sim, in mid to late August 2008, Mr Sim told Mr Stone “that he wanted to be out of there within three to four months”.
(2) On numerous occasions after settlement Mr Sim stated words to the effect that he wanted to be out of the business before the expiration of the 24 month employment term, including:
(a) Handwritten letter from Mr Sim to Farrel Metz, dated 30 October 2008 (exhibit 1, tab 45) stating “just another reason why I want out of here”.
(b) Tape recording of a conversation (exhibit 11) track 3 at 6 mins 14 secs to 6 mins 35 secs – 31 October 2008:
That’s fine, just pay me out and I will fuck off. Pay me out and I will go. Easy. Easy. Pay me out and I will go.
(c) Recording (exhibit 11), track 9 at 50 secs to 55 secs – 12 December 2008:
No. I don’t need this kind of bullshit in my life. I want out of here because I can’t put up with this sort of shit.
(d) Recording (exhibit 11), track 9 at 1 min 25 secs to 1 min 40 secs – 5 December 2008:
Pay out the two fifty grand or a bank guarantee and I’m out of here.
(e) Recording (exhibit 11), track 17 at 2 min 20 secs to 3 mins 20 secs – 20 April 2009:
You have got to find out for yourself from now on because I am not helping you. If you don’t bloody well like it then I will piss off.
(f) Recording (exhibit 11), track 17 at 3 mins 50 secs to 4 mins 10 secs – 20 April 2009:
In the meantime, Wednesday night bank guarantees otherwise I am off to my lawyer. It will happen.
(g) Recording (exhibit 11), track 18 at 55 secs to 1 min 10 secs – 20 April 2009:
I am going, I am going, I am going. I am going alright because you haven’t fulfilled your obligations.
265 The applicants say that, in this context, the reference to non-fulfilled obligations in the last mentioned recording, seem to have been to:
(1) The failure of the applicants to provide a bank guarantee to secure vendor finance in the sum of $250,000, even through there was no contractual obligation to do so, and, in any event, the first instalment of the balance of $250,000 had not fallen due at these times of demand.
(2) Failure to permit further annual leave entitlements – even though Mr Sim had already well exceeded his entitlements to annual leave.
(3) As to car expenses, even when Mr Metz had given Mr Sim a cheque for the March car expenses and his claim for April expenses was premature.
266 The applicants say none of the demands or accusations by Mr Sim had any substance and no cogent evidence was adduced to support any of his complaints. In any event, even if there were anything to those complaints, it was not a basis upon which he was entitled to terminate his employment.
267 The applicants say that no conduct on the part of Mr Sim during the nine month period after settlement evidences any intention to remain with the applicants for the 24 month period and to fulfil the obligations ancillary there to.
268 The first and second respondents draw attention to both the pleaded representation in [15(a)] and [12] which plead that the goodwill of the business and the value was inextricably linked with preservation of the knowledge and relationships pleaded in [6(f)(i)-(vii)] for the benefit of any third party purchaser who was to purchase the business, and then [13], which pleads that it was essential to the maintenance of the ongoing business and the preservation of goodwill, if a third party purchaser was to purchase the business, that Mr Sim, would, amongst other things, remain on as an employee for at least two years. The respondents submit, in my view correctly, that there is no direct evidence which in a temporal or causal sense attempts to make out these assertions, and that in initial discussions with the Metzes Mr Sim made it clear that he was prepared to remain for a period of six months and these were the instructions to the broker. What happened was that, arising out of discussions, he agreed to stay on as an employee for a period of two years. The agreed period was two years, not “at least” two years as pleaded in [15(a)].
269 These respondents therefore submit that there is no factual or other basis for a contention that the period “of at least two years” was pivotal to the maintenance of the ongoing success of the business. Further, and in any event, if there was a breach by Mr Sim of the terms of the employment contract made, then the contractual consequences are to be measured in its own terms.
270 None of these submissions (which are all in the final written submissions of these respondents concerning the topic of Goodwill at [123]-[131]) deal directly with the pleading in [15(a)] of the statement of claim. The subject of the “Employment Contract” is however dealt with directly in these closing written submissions at [229]-[243]. These respondents draw attention to the fact that the employment agreement contains an entire agreement clause in cl 15.2 thereof, which materially provides that:
This contract constitutes the entire agreement between the parties with respect to the subject matter of it, and contains all the representations, warranties, covenants and agreements of the parties and there are no oral statements, representations, undertakings, covenants or agreements between the parties expressed or implied except as are contained in this contract.
These respondents also draw attention to cl 13 of the employment agreement that deals with termination, including by cl 13.2 the entitlement of either party on giving one month’s notice in writing to the other to terminate the employment.
271 Put shortly, these respondents contend that either of the parties to the employment agreement if unhappy could terminate on one month’s notice under cl 13.2. Similarly, if they believed there was serious misconduct or serious poor performance, they could terminate under cl 13.3. In other words, the only real employment security was a period of one month and there was no provision in the employment contract and no provision in the sale agreement which provided for any sort of claw back provision if Mr Sim left employment inside the two year period. There was no penalty, no sanction, no disincentive, no limitation in the employment agreement or in the sale agreement. The agreement was one which had been carefully crafted by the solicitors for the applicants on their specific instructions.
272 These respondents say further that, if s 52 of the TP Act is breached, then the respondents accept it is not possible to exclude liability for the breach of the TP Act, but it is possible by disclaimer or contractual clause, to prevent a breach arising by preventing the alleged “victim” of the conduct in question from being misled (by there being no reliance). By reference to Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131; (2005) 220 ALR 211, at [101]-[106] these respondents submit that it is impossible to see how, on any objective assessment, the applicants could have relied on any pre-contractual representations made by the first and second respondents given their legal and accounting advice, the previous experience of Mr Mervin Metz in business and the failure to make any issue of the forward orders or gross profit estimations by approaching Mr Sim during due diligence or whilst he was an employee. The respondents say that if the purchasers were truly reliant on the forward orders or other representations, then a reasonable person would have been appalled by the trading figures, lack of introduction by Mr Sim to customers of business and so on, and would have approached Mr Sim in the first nine months whilst he was there, for answers. This is especially so in the context of their being ongoing arguments, conflict and accusations between the parties. Not once in all the recorded conversations or other evidence was the allegations regarding forward orders, for example, or the other alleged misrepresentations specifically addressed.
273 Ultimately, these respondents submit that the applicants have failed to explain reasonably or at all the inconsistency in their pleadings by:
(1) claiming the employment agreement was collateral to the sale agreement ([25] of the statement of claim);
(2) that the applicants relied on a representation that Mr Sim would stay employed for two years ([25(c)(iii)] of the Statement of Claim) and then claiming what a disaster it was that he left and they had no technical knowledge and were relying on his contacts and ability to bring in orders ; but yet
(3) instructing their solicitors to prepare, draft and include a clause in the employment agreement to the effect that Mr Sim could terminate the employment agreement by giving one months notice,
274 The respondents say all of this must invite the drawing of the irresistible inference that there was never any actual reliance by the applicants on this or any other representation alleged.
275 The applicants respond to these submissions of the respondents by saying that the matters on which they are based were neither pleaded nor raised at trial. No attempt was made to cross-examine any of the applicants on the basis that they had had regard to any exclusion clauses contained in any of the agreements. It has not been demonstrated that any legal advice received or accounting advice given negatived the impact of the representation.
276 Ultimately, the applicants say that one cannot lose sight of the following facts:
(1) the applicants entered into the sale agreement based on a number of representations including a representation that Mr Sim would remain a key employee of the business for a period of at least two years;
(2) acting in reliance on that representation they entered into the sale agreement and associated agreements;
(3) the employment agreement clearly stipulated that the first applicants purchased the business in reliance upon the representation that Mr Sim would remain a key employee for at least two years;
(4) it was neither raised with the applicants nor pleaded that the notice provision contained in the employment agreement was a matter evidencing no reliance on the matters stated in [6] of the employment agreement;
(5) in any event the position is that as a matter of law a representation can remain an operative inducement to enter into a transaction, notwithstanding that a contractual provision may be ever so slightly at odds with the alleged representation made;
(6) for these reasons, as these matters were not dealt with at trial it is not open to the respondents to raise these matters now.
277 In my view, the submissions of the applicants to the effect that the respondents should not at this stage of the proceeding be entitled to raise the unpleaded inconsistency point based on cl 13 of the employment agreement should be upheld. The respondents at no time have pleaded the terms of the employment agreement as an answer to the applicants’ claim based on the representation pleaded in [15(a)] and they should not be permitted to do so in this fashion in the closing of the case. Also, it was never put to Mervin Metz or Farrel Metz that they did not actually rely on the employment representation made but relied only on the basis of the terms of the employment agreement. The applicants may well have conducted their case, and their cross-examination of Mr Sim differently, if this had been a pleaded issue; they may even have considered seeking rectification of the employment agreement to reflect the common intention of the parties as to the two year period.
278 In any event, it is plain beyond any doubt, let alone on the balance of probabilities, that the Metzes fully acted on a representation that Mr Sim would remain as an employee of the business for at least two years. The fact that on close analysis of the employment agreement Mr Sim might have been in a position to leave his employment with the first applicants earlier than two years, on one month’s notice, pursuant to cl 13.2 of the employment contract, is neither here nor there. It does not contradict a representation that Mr Sim would remain for two years if the sale agreement were made. Indeed, the acknowledgments in the employment agreement, in my view, confirm the substance of the representation pleaded and are an additional reason why there is no inconsistency between the representation pleaded and the employment agreement. Further, the evidence shows that Mr Sim himself was troubled by the fact that he had undertaken to remain with the business for two years at least. Indeed he asserted in evidence he did not quit his job on 20 April 2009, because he knew he had a two year contract. Certainly the Metzes believed that he would be there for two years and they were wanting him to improve his performance so that they could get the benefit of his continued employment during that period.
279 The question which remains however is whether the representation as pleaded was made and being as to a future matter, whether, having regard to s 51A(2) of the TP Act and s 9(2) of the FT Act, there were reasonable grounds for it.
280 So far as the terms of the representation are concerned, I find the representation as pleaded was made. The only point of apparent substance taken on behalf of the respondents is that the words “at least” were not part of the representation. For example, the employment agreement specifies a “two year” employment period. Notwithstanding that, on a proper understanding of the evidence, what was represented at the April 2008 meeting and indeed the terms of the employment agreement itself, the expectation was and the representation was that Mr Sim would be employed for at least two years. I note also that the acknowledgements in cl 6 of the employment agreement speaks of a period of “at least” two years. I consider it fairly reflects what was represented on 18 April 2008 by Mr Sim.
281 The background to the circumstances in which the two year employment representation was made have been set out above. Mr Sim, at all material times, plainly understood that it would be a necessary part of an agreement to sell the business owned by the first respondent, that he as its driving force remain on as an employee with the new owners for a period. The purpose of this was obvious – the applicants believed that without him as a key employee for two years they would not adequately learn the business, meet the clients and protect the $1.25 million investment they were proposing to make.
282 The employment period initially proposed by the two brochures was that he would remain for six months – 26 weeks. Following negotiations, as the respondents contend, the employment period of two years was struck. There is nothing up to that point to suggest that the two year agreement was not one that Mr Sim intended to comply with. However, the evidence concerning the circumstances of Mr Sim’s departure from the business on 20 April 2009 and the evidence of a person Mr Sim considered a “close friend” – Mr Derek Stone – in my view significantly alters this view.
283 I have come to the view and find, having regard to all of the evidence including that of Mr Stone, that Mr Sim never intended remaining in the applicants’ employment for two years at any material time from and including 18 April 2008. I have also concluded and find that on 20 April 2009, Mr Sim of his own volition decided that he would terminate his employment with the first applicants and would cease working for the business.
284 As I have just stated, if the evidence in this proceeding concerning the circumstances in which Mr Sim conducted himself as an employee of the first applicants between 4 July 2008 and 20 April 2009, and the circumstances in which he left the business premises on 20 April 2009, and the question of whether Mr Sim, at all material times, actually held the intention of remaining an employee for two years were to be adjudged on the evidence absent that of Mr Stone, I would be inclined to the view that the applicants had not adduced evidence sufficient to satisfy the Court on the balance of probabilities that Mr Sim, as of 18 April 2008 did not have that intention. On that evidence, one might construe the appalling behaviour of Mr Sim for much of the employment period up until 20 April 2009, as conduct that became increasingly curmudgeonly, to put it generously, as his concerns about the financial health of the first applicants’ business and his frustration with the Metzes increased. That view, for example, may be supported by the fact that it was not until November 2008 – four months into the employment period – that Mr Sim first made the express threat that if the Metzes did not give him bank guarantees he would leave.
285 But the evidence does not rest there. The applicants called Mr Derek Stone to give evidence at the hearing. At the time he gave evidence, Mr Stone was employed by Phillips Lighting. Before that he had worked for Lamp Replacements Australia for about three years between about 2008 and 2010. Prior to that he had worked with Osram Australia for about eight years. Both Osram and Lamp Replacements were suppliers of lamp and electronic control gear to Illumination Services WA when the first respondent owned the business and in his employment he had had regular dealings with Mr Sim.
286 Mr Stone met Farrel and Mervin Metz after they acquired the business of Illumination Services WA. Mr Stone in examination in chief explained that approximately six weeks after the “changeover” – which in context means about six weeks after 4 July 2008, in mid to late August 2008 – he met the Metzes at the business premises. Prior to that he had been asked to stay away (he did not say by whom, but I infer by Mr Sim) because the Metzes were finding their feet. On the occasion of his visit in August he caught up with Paul Sim in his office at the business and had a private conversation with him. Mr Stone was asked by counsel for the applicants what the conversation was he had with Mr Sim, to which Mr Stone replied as follows:
MR STONE: The conversation was that – I was surprised that he was still there, okay, I thought that he was going to move on, but he told me that he was under contract to stay there for a period of two or three years, from memory.
COUNSEL: Right, and did he say anything else to you at that time?
MR STONE: Yes, he did, he said but he had a – he said to me that he wanted to be out of there within three to four months.
COUNSEL: That’s what he said to you?
MR STONE: He said it to me verbally, yes.
COUNSEL: How clear is your recollection?
MR STONE: Very clear.
COUNSEL: Did Mr Sim express anything else to you in terms of other plans that he wanted to do at that time?
MR STONE: He used to always speak about his overseas interest, which was his coconut tree plantations in Papua New Guinea, and also his farming. It was just general conversation.
COUNSEL: And where did you have those sorts of conversations, where he discussed those interests?
MR STONE: Paul used to always advice of – Paul used to like talking to me about other things besides work, because our relationship was at that level. So anything he had purchased with regard to housing or farms, or anything of that nature, we generally spoke about.
287 Counsel for the first applicants and Mr Sim cross-examined Mr Stone about this evidence and asked whether he had any axe to grind with Mr Sim, to which Mr Stone replied, “Not at all, no”. Counsel then asked Mr Stone:
COUNSEL: Well, I’ve got to put it to you that he did not say to you at any stage, and certainly not within 2008 that he planned to be out of there in three to four months?
MR STONE: Sorry, are…
COUNSEL: I’m putting to you that you didn’t have that conversation?
MR STONE: I’m under oath, I heard it, and I’m prepared to do a lie detector test, or anything to confirm that; if that exists.
288 I consider Mr Stone to be a direct and honest witness. Plainly he did not have an axe to grind, as he directly indicated to counsel for Mr Sim when cross-examined on this point. He indicated that he was a person who had something of a more personal relationship with Mr Sim. Thus, they spoke about things other than business and that is how he came to know about such things as Mr Sim’s coconut palm plantation and farming and the like. Incidentally, at another point of the evidence Mr Sim denied the suggestion that he had a coconut plantation in the Philippines, something Farrel Metz had stated. Whether or not he has a coconut plantation, clearly enough he informed Mr Stone at some point that he had one, albeit in Papua New Guinea. When Mr Sim was later cross-examined about his dealings with Mr Stone, he observed (transcript 689) that “Derek and I were close friends. He used to come and see me fairly regularly”.
289 Mr Stone’s evidence was unhesitating and unambiguous. I have absolutely no hesitation in accepting his evidence as honestly given and utterly truthful. I use the adverbs deliberately. Mr Stone’s evidence in this regard was denied by Mr Sim. No evidence was ever adduced by the first and second respondents to suggest any basis upon which Mr Stone had some axe to grind. I find that, when Mr Stone, during a private conversation in mid to late August 2008 with Mr Sim, expressed surprise that Mr Sim was still in the business, Mr Sim told him that he “wanted to be out of there within three to four months”, or words very much like that.
290 What significant is to be placed on this evidence? On the one hand, one might say that all Mr Sim was doing was expressing his feelings, his growing frustrations to the effect that he “wanted to be out of there within three to four months”. On the other hand, there is no evidence that he had any discussion to that effect with Mr Stone. And we are all here speaking if only six weeks after settlement, long before November when Mr Sim first demanded bank guarantees or he would “walk”. Indeed, when one has regard to the detailed evidence recounted above, that includes the facts that:
the first and second respondents through the GMO brochures initially indicated that Mr Sim would be prepared to stay on in the business for six months following sale;
that Mr Sim, on his own evidence, strongly took the view that he never represented at the March meeting that he was prepared to extend the six months to one year, because he always considered that six months for the new owners to learn the business was plenty;
but as of 18 April 2008 Mr Sim represented in negotiations that he was prepared to stay for two years after sale if the applicants paid $1.25 million for the business; and
then take into account the utterly appalling manner in which Mr Sim conducted himself through much of the employment period up until 20 April 2009;
then the unguarded statement made by Mr Sim to Mr Stone, a person he (Mr Sim), without prompting, described in evidence as a “close friend”, in my view takes on considerable significance. Taking all of this evidence into account I infer that it is more probable than not that at no material time from and including 18 April 2008 did Mr Sim intend to remain an employee of the applicants for two years, and that his unguarded comment to Mr Stone, a person he considered a close friend, betrays Mr Sim’s true intentions throughout this period. This finding also emphasises that Mr Sim simply decided on 20 April 2009 that it was the right time for him to leave the business – he was not “sacked”.
291 I find that the representation made by Mr Sim was, as pleaded by the applicants, made on his own behalf and also on behalf of the first respondent. While on one of the pleadings in the defence, the first and second respondents deny that Mr Sim acted on behalf of the first respondent at material times, no evidence was led to that effect on behalf of these respondents, and no submissions to that end were advanced on behalf of these respondents in closing. In all the circumstances I am satisfied that at all material times Mr Sim acted on his own behalf and for and on behalf of the first respondent in making all representations during the negotiations as well as subsequently during the due diligence period leading up to the settlement of the sale agreement. Having made that finding I will not repeat it in any detail in relation to the subsequent findings about pleaded representations and similar pleadings concerning collateral oral warranties.
292 Accordingly, I find the representation pleaded in [15(a)] was made, that Mr Sim did not have reasonable grounds for it, and so it was misleading or deceptive, and that the applicants relied on the representation when they entered into the sale agreement.
Representation pleaded in [15(b)] statement of claim – training
293 By [15(b)] of the statement of claim, the applicants plead that during the course of the negotiations Mr Sim made the following representation to preserve the goodwill of the business:
(b) that during the two year period [referred to in [15(a)] of the statement of claim] Mr Sim will train and instruct both Mervin and Farrel Metz fully and comprehensibly in all matters of and associated with running and operating the business.
294 By [41] of the statement of claim, the applicants plead that the representations in [15(b)] were misleading or deceptive or likely to mislead or deceive in that:
(1) because of the matters pleaded in [40] concerning the misleading and deceptive nature of the representation pleaded in [15(a)] concerning the employment representation;
(2) by reason of the matters pleaded in [27]-[39ZD], concerning the allegations of product substitution, from which the applicants say it is to be inferred that at no material time did Mr Sim intend to assist the applicants to perform the matters pleaded in [15(b)];
(3) it is to be inferred that the conduct of Mr Sim pleaded in [27], concerning his active obstruction of the applicants between 4 July 2008 and 20 April 2009, was to conceal from the applicants the product substitution practice he engaged in;
(4) there existed no reasonable grounds for making the representation;
(5) the representation is a representation as to a future matter and the applicants rely on s 51A of the TP Act and s 9 of the FT Act.
295 The first and second respondents by [14] of their defence say as to [15(b)]:
(1) that Mr Sim told the Metzes that he would train them about lighting products and their uses and the running of the business in general;
(2) otherwise deny the paragraph.
296 These respondents in [54] of the defence, as to [41] of the statement of claim, plead that:
(1) at all material times Mr Sim intended to and had in fact assisted Mervin and Farrel Metz to run and operate the business;
(2) repeat their pleas in [14], [44(a)]-[44(j)] and [52C]-[52Z] – which overall deny the obstruction allegations and the product substitution allegations;
(3) say that Mr Sim ceased doing so upon his dismissal;
(4) otherwise deny the paragraph and say that if any representations were made (which are denied), then they were not relied on by the applicants by reason of the matters pleaded in [20] of the defence.
297 It is clear from the way the applicants put their case that they rely on the representation as to training and instruction during the two year employment period to be a representation as to a future matter, and that there were no reasonable grounds for it.
298 It is also clear from their pleading that the first respondent and Mr Sim deny the allegations and say that at all material times he intended to do what he says he represented, namely that he would train them about lighting products and their uses and the running of the business in general.
299 It may be observed that there is not a lot of difference in substance between the pleaded representation and that which Mr Sim says he made. The Metzes say the training and instruction was to be “fully and comprehensibly” in all matters associated with the running and operating of the business, words Mr Sim denies saying.
300 The applicants submit that the representation is proved by the evidence of the Metzes corroborated by that of Jim Goodwin of GMO.
301 The applicants again rely on s 51A of the TP Act and/or s 9 of the FT Act in relation to the representation as to a future matter, and say there were no reasonable grounds to support it.
302 The applicants refer to [27]-[39ZD] of the statement of claim and the obstruction and product substitution conduct pleaded therein, which they submit has been proved and from which it may be inferred that at no material times did Mr Sim intend to assist the applicants and to train and instruct Mervin and Farrel Metz fully and comprehensibly in all matters associated with running and operating a business. The facts relied upon are those that suggest that:
(1) Mr Sim actively obstructed the applicants from obtaining the benefit of the goodwill of the business ([27] statement of claim).
(2) That Mr Sim made unreasonable demands and engaged in reprehensible conduct ([28]-[37] statement of claim).
(3) That Mr Sim joined a competitor once he left the business in April 2009 and attempted to solicit suppliers and customers of the business ([38]-[39] statement of claim).
(4) That he engaged in what the applicants called product substitution practices ([39]-[39ZD] statement of claim).
(5) At no time did Mr Sim involve Mervin Metz or Farrel Metz in any projects of the business.
303 In relation to the product substitution allegations concerning 432 Murray Street, Howard Solomon project ([39B]) and Burswood Tower 5 project ([39C]), tabs 274-276 of the trial bundle (exhibit 59) contain documents for those projects respectively and when asked to identify the extent to which either Mr Farrel Metz or Mr Mervin Metz were involved in these projects, all that Mr Sim was able to identify was one document relating to 432 Murray Street to show the attendance of Mervin Metz at a sample inspection meeting on 11 November 2008 at tab 274, p 1701.
304 The applicants say the evidence discloses that for the period from 4 July 2008 to 20 April 2009, Mr Sim was only able to identify, by way of corroborating documentary evidence, one occasion on which Mervin Metz was present at a meeting relating to one of the major projects. The applicants submit that on an analysis of the documents in tabs 274-276 of the trial bundle illustrates that only Mr Sim was involved in these important projects, to the exclusion of the Metzes, prior to his departure on 20 April 2009.
305 The applicants say this is consistent with the evidence demonstrating that Mr Sim completely excluded the Metzes from all of the important projects of the business and in this they refer to the following evidence:
(1) Delivery docket dated 29 October 2008 to Mervin Metz stating: “My client stop interfering bloody cheek” (exhibit 10, tab 12).
(2) Note (exhibit 1, tab 40) dated 6 November 2008, wherein Mr Sim stated to Farrel Metz:
You do not need me to ask me questions on pricing like you did this morning for ODG. It your money that you play with. I am here to guide you where necessary but pricing is your decision. You make a mistake you learn from this.
(3) Communication on 14 November 2008, where Farrel Metz asked Mr Sim about a particular light fitting used in the project for Aegis Aged Care involving Neil Coles and sought clarification in relation to a transformer that was required for a certain garden spot light, to which Mr Sim wrote to Farrel Metz (exhibit 1, tab 41) as follows:
I have serious reservations about Neil Cole’s Electrical. He is a big shit stirrer and please don’t involve me with his projects.
(4) Recording of 4 December 2008 (exhibit 11) track 7 from beginning to 45 secs, where in it is stated:
You are butting into my jobs now… he’s bloody interfering alright … you just leave it to me, I am running Knutsford you have got nothing to do with it… you are trying to take over… fuck off. Go and get your own jobs.
(5) In relation to a job involving pricing for the Girrawheen Church in response to numerous requests for help Mr Sim stated that he was too busy and would have to do it at another time. While Mr Sim in his responsive statement (exhibit 35) said that church jobs were not sufficiently profitable, he did not deny stating that he was too busy.
(6) On 19 November 2008, Farrel Metz asked Mr Sim to clarify whether a transformer was required for a certain garden spotlight following a personal inquiry he had received from Geoff Bryant of ODG, in response to which Mr Sim stated words to the effect “Use your brain. You are an idiot, and stop your bloody interfering” and then left the business premises only to return several hours later. Mr Sim did not deny making the statement in [92] of his responsive witness statement (exhibit 35).
(7) On 3 April 2009, Mr Sim typed a letter to Farrel Metz stating:
I suggest you start getting your own projects … also stay out of my projects please … please get out and start getting your own jobs … butt out of my jobs, get your own.
(8) In an email from Mr Sim to Farrel Metz dated 19 April 2009 (exhibit 1, tab 62), he stated:
My problem is you are trying to take over all my jobs.
(9) Further in that email, Mr Sim stated:
Suggest you get everything as requested above sorted out so I can come to work to service MY clients. How about you putting in an effort to go and get your own business instead of interfering with my jobs.
(10) Also, in that email, Mr Sim stated:
The trouble is you are trying to make yourself a expert when you know very little.
306 The applicants submit that the instances of conduct just set out are entirely at odds with the assertion that Mr Sim did in fact assist Mervin and Farrel Metz to run and operate the business.
307 The applicants refer to evidence of communications and dealings between the Metzes and Mr Sim which they say demonstrate in no uncertain terms an environment in which neither Farrel nor Mervin Metz dared to ask any questions of Mr Sim about the operations of the business and that environment was entirely unconducive to the transfer of Mr Sim’s knowledge to either or both of them. His tone in fact was so abusive that Mr Sim on one occasion during the trial stated that his language at the time was “disgusting. I do apologise” (transcript 702, lines 3-4). The applicants also refer to extensive evidence to show that technical knowledge of the industry was required and that the learning of it is necessary: see for example, the evidence of Gary Lerm, concerning dealings with electrical engineers at transcript 386-387.
308 The applicants note that Mr Sim, on the evidence including his own evidence at trial, considered Farrel Metz was of no use or assistance to him because he spent all his time upstairs working on the computer. The applicants submit that this estimation overlooks a number of facts:
(1) There were no systems in place whereby the price of stock could be readily ascertained from computerised records when the first applicants commenced the business;
(2) There existed no computerised system to ascertain stock on hand at any given time when the first applicants acquired the business;
(3) Every written communication demonstrated that when Farrel Metz sought assistance from Mr Sim it was denied;
(4) Ms Helen Friedle gave evidence that Mr Sim actively obstructed Mervin and Farrel Metz and her in their attempts to learn the business and went so far as to deny access to files (see transcript 213 and 216 respectively).
309 From this evidence, the applicants contend that it may be inferred that at no material time did Mr Sim intend to provide the level of assistance referred to in [15(b)] of the statement of claim.
310 The applicants also submit that the evidence is all one way in showing that the applicants relied upon this representation in concluding the sale agreement.
311 The respondents by [54] of the defence, say that at all material times Mr Sim intended to and did in fact assist Mervin and Farrel Metz to run and operate the business, repeat earlier pleas in the statement of claim, say that Mr Sim ceased doing so upon his dismissal and otherwise deny the pleading and say that if any representations were made, then they were not relied upon by the applicants by reason of the matters pleaded in [20].
312 The closing written submissions of the respondents do not appear to deal directly with the training representation. As to training sessions, the written submissions in [91] simply say that this is “dealt with in Farrel Metz’s statement (sic-evidence) at TS 140” – a reference to Farrel Metz’s acceptance that there were training sessions.
313 Parts of the respondent’s closing written submissions at [229]-[243] dealing with the general question of “Employment Contract”, which have been referred to above in some detail concerning the representation pleaded in [15(a)] of the statement of claim, are broadly cast to deal with all alleged pre-contractual representations. I take the respondents ultimately to be contending that because of the first applicants’ capacity under cl 13 of the employment agreement to terminate the employment of Mr Sim, either on one month’s notice or immediately for serious misconduct, there was no actual reliance on any of the pre-contractual representations alleged. For the reasons given above in relation to a similar plea of non-reliance in relation to the representation pleaded in [15(a)] of the statement of claim, I accept the applicants’ submissions that this submission was not the subject of a pleaded defence and should not be allowed. In any event, the employment agreement cl 6 “Acknowledgement” notes the importance of Mr Sim as a “key employee” and by “contacts and knowledge”. The employment agreement in these circumstances should not be taken to contradict the representation, but confirm it. These acknowledgements, when one takes into account the surrounding circumstances in which the employment agreement came about, implicitly acknowledges the employment and training representations pleaded in [15(a)] and [15(b)].
314 The question then is whether the first respondent did not have reasonable grounds for making the representation and whether, for the purposes of s 51A(2), it has adduced evidence to the contrary, or has discharged the onus imposed upon it in that regard by s 9(2) of the FT Act.
315 As to the evidence adduced, whether one considers the evidence adduced directly from Mr Sim or the evidence overall touching on the training and instruction question, little evidence bears upon what Mr Sim’s intentions were at the time the representation was made. It was made, having regard to the overall context of the evidence, at the same time that Mr Sim made the employment representation pleaded in [15(a)] of the statement of claim. From the evidence it can be taken that Mr Sim says that he intended to do what he promised.
316 A considerable part of the applicants’ case is dependent upon the overall characterisation of the conduct of Mr Sim after settlement until he left on 20 April 2009, as obstructive, reprehensible, influenced by his desire to keep secret the alleged regular product substitution practice that he engaged in, all suggesting an earlier lack of intention to honour the training representation when made, and so a lack of reasonable grounds for it. The applicants also point to Mr Sim’s conduct in keeping the files to himself, telling the Metzes to butt out of his jobs and demanding that they get their own as supporting such an inference. In these circumstances, the applicants’ submission is that while Mr Sim provided some initial training sessions, these of themselves were of limited assistance and Mr Sim’s conduct in not letting them fully engage in the projects he was handling meant that they were not in fact trained and instructed comprehensively and fully as promised.
317 The respondents’ also point to the fact that Mr Sim did provide training sessions and say it is beside the point whether, from the subjective point of view of the Metzes, they found them helpful or not. In other words, the respondents point to evidence adduced through Mr Sim, and generally in the proceeding, that he did attempt to give them instruction, but found that they were not receptive to it. They say that this evidence is evidence from which it may be inferred that Mr Sim had reasonable grounds for making the pleaded representation when he did, even if the realisation of that promise may be the subject of criticism by the applicants at a later date.
318 In my view, leaving aside for the moment the evidence of Mr Stone as to what Mr Sim said to him in mid to late August 2008, which has been fully canvassed above in relation to the representation pleaded in [15(a)], I am satisfied that the first and second respondents have adduced evidence to the contrary of the pleaded representation as to a future matter. Accordingly, under s 51A(2) of the TP Act, the deeming provision is negated. That leaves the question whether I consider on the evidence as a whole that the applicants have established that there were no reasonable grounds for the making of the pleaded training representation when made on 18 April 2008.
319 In this regard, leaving aside Mr Stone’s evidence, I would not be satisfied on the balance of probabilities that the applicants have made out a lack of reasonable grounds. On one view of the evidence, the position of Mr Sim was that he became increasingly dissatisfied with his lot, the performance of the Metzes and the financial performance of the business and that he was simply working hard on his projects. The fact that I have found below that he had underquoted on the Howard Solomon project and on the Burswood Tower 5 project does not of itself lead me to the conclusion contended for by the applicants, that Mr Sim engaged in a regular product substitution practice and so was desiring not to impart too much information through training to the applicants for fear that they would discover his product substitution practices. Nor do I think the reasonable inference can be drawn that just because Mr Sim plainly held his projects and files close to his chest that he thereby should be taken not to have reasonable grounds for the making of the pleaded representation when it was made. I have rejected below the plea that Mr Sim engaged in the practice of product substitution “regularly”. Therefore, leaving aside the evidence of Mr Stone, I would not consider that the applicants have made out a lack of reasonable grounds for the purpose of s 51A of the TP Act.
320 The question that remains is, having regard to my findings in relation to the representation pleaded in [15(a)] and in particular that in my view it has been established that Mr Sim lacked reasonable grounds for the representation that he would remain in the applicants employment for two years after settlement, does this mean also that there was a lack of reasonable grounds for the representation made by Mr Sim in relation to the training representation when it was made on 18 April 2008. In my view that Mr Sim did not intend to remain an employee for two years when he made the representation in [15(b)] leads me to the inevitable conclusion he did not have the intention to do what he represented, as he did not plan to be there for two years.
321 For the reasons given in relation to the representation pleaded in [15(a)], I find that when Mr Sim pleaded this training representation, he did so on his own part and also for the first respondent.
322 Consequently, I find the representation pleaded in [15(b] was made, there were no reasonable grounds for it, it was misleading or deceptive and that it was relied on by the applicants in entering in to the sale agreement.
Representation pleaded in [15(c)] of statement of claim – introductions
323 By [15(c)] of the statement of claim, the applicants plead that during the course of negotiations Mr Sim made the following representation to preserve the goodwill of the business:
(c) Mr Sim would introduce each of Mervin and Farrel Metz to all suppliers and customers of the business and would ensure that each of Mervin and Farrel Metz independently developed good working relationships with the relevant suppliers and customers, so that during the two year period and following the end of the two year period [pleaded in [15(a)] and [15(b)]] and Mr Sim’s employment in the business, the goodwill and earnings of the business could and would be maintained.
324 By [42] of the statement of claim, the applicants plead that these representations were misleading or deceptive or likely to mislead or deceive in that:
(1) by reason of the same matters pleaded in relation to the previous two pleaded representations, that generally speaking Mr Sim had no intention of remaining in the business for two years, acted in an obstructive manner and also engaged in product substitution practices from which it can be inferred he did not intend to assist the applicants;
(2) at no material time did there exist reasonable grounds for making the representations;
(3) the representations or representation are/is as to a future matter and they rely on s 51A of the TP Act and s 9 of the FT Act.
325 By [15] of the defence the first applicant and Mr Sim:
(1) say that Mr Sim said he would introduce Mervin and Farrel Metz to the more important suppliers and customers of the business; and
(2) otherwise deny the pleading.
326 As to [42] of the statement of claim, by [55] of the defence these respondents:
(1) say that at all material times Mr Sim intended to and did in fact introduce the applicants to the suppliers and customers of the business that mattered;
(2) otherwise deny the pleading and say further that if any representations were made (which are denied) then they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
327 The applicants refer to the evidence of Farrel Metz as proving this representation and also the evidence of Jim Goodwin of GMO as corroborating it. Mr Goodwin at [11(b)] of his witness statement (exhibit 17) said that at the meeting he attended at the business premises on 18 April 2008 with the Metzes and Mr Sim, Mr Sim had said, in relation to the business, amongst other things:
(b) that he would introduce Mervin and Farrel to all suppliers and customers of the business and would ensure that each of Mervin and Farrel would independently develop good working relationships with the suppliers and customers of the business so that following the end of the two year period, the goodwill and earnings of the business could and would be maintained. Mr Goodwin noted that “Paul made this point frequently”.
328 I have already noted above that I accept the evidence of Mr Goodwin. I consider it reliable. Taking account also of Farrel Metz’s evidence, which I also generally accept, I have no doubt this representation as to a future matter was made and in these terms.
329 While the closing written submissions of the respondents refer to the topic of “Relationships with Customers and Suppliers” they do not deal directly with this pleaded representation. However, as noted, the defence by [15] admits that Mr Sim said he would introduce Mervin Metz to the “more important” suppliers and customers of the business but otherwise denies the paragraph. Despite Mr Sim’s evidence supporting a narrower representation, I am satisfied that the representation made was broader than that, and was as Mr Goodwin stated it, that is, without qualification.
330 The effect of the pleading of the defence once again puts in issue the question of the Metzes having relied upon any such representation. In that regard, the closing written submissions of the respondents in [229]-[243], in dealing with the subject of “Employment Contract”, ultimately submit that there was never actual reliance by the applicants on any of the pre-contractual representations alleged. I take this to include the representation pleaded in [15(c)] of this statement of claim. For the reasons given above in relation to the same reliance point raised as a defence in respect of the representations pleaded in [15(a)] and [15(b)], I reject the reliance submission.
331 So far as the representation pleaded is concerned, the applicants again note that it is a representation as to a future matter and rely upon s 51A of the TP Act and s 9 of the FT Act. So far as introductions are concerned, the parties point to what actually happened to support their pleadings. The applicants note that, by [44(e)] of the defence, the respondents plead that Mr Sim introduced Mervin Metz to the customers and suppliers identified in a list, comprising 24 customers and suppliers in total. The applicants say the evidence of Mervin Metz is at odds with that assertion and in this regard refer to his witness statement (exhibit 10) at [44]-[49]. The applicants make the point that it was open to Mr Sim to call customers and suppliers as witnesses to confirm what introductions had been made.
332 Of the 24 customers or suppliers referred to by Mr Sim only three were called to give evidence, being Cheryl King of Freeway Electrical, Ren Stefanuto of Cable Eight and Mauro Di Lena of Di Lena Metals. Ms King stated that she recalled either Mervin or Farrel Metz telling her that they were the new owners of the business and she cannot recall whether Paul Sim was present or not. I accept the submission of the applicants that from this evidence it is not at all clear that Farrel Metz received any meaningful introduction to Freeway Electrical.
333 The evidence of Mr Stefanuto was that the first time he recalls meeting Farrel Metz was somewhere between June and December 2008 when Farrel came out to his business premises. He could not recall whether Mr Sim was with him or not. He met Mervin Metz separately on another occasion and he also came out to his business premises on yet another occasion and introduced himself as the new owner. He could not recall whether Paul Sim was with Mervin or not.
334 Mr Di Lena gave evidence which demonstrated that he was a very small dealer who had supplied to the business products to the value of $1,227.27 – the equivalent of 0.1% of supplies to the business overall for the financial year ending 30 June 2008 – and so, as the applicants submit, it should come as no surprise that Mr Metz did not recall that introduction, if it were made.
335 Overall, of the top 20 customers identified from the financial records by the expert accountant called by the applicants, Mr Cook, Mr Sim on his own evidence only made introductions to seven. The applicants admitted only that to Custom Electrics.
336 The applicants further submit that the evidence shows, in relation to the representation pleaded in [15(b)] of the statement of claim, that following settlement Mr Sim regarded key customers as his own customers and was reluctant to allow either of the Metzes to become involved in those projects.
337 The applicants also submit that, in the course of giving his evidence to the Court, Mr Sim evinced the view that he was entitled to keep his clients to himself because in many instances he considered the person at the business with whom he dealt to be a personal friend. For example, Cyril of WB Electrics (transcript 725-726).
338 The applicants submit that despite Mr Sim’s evidence that he intended to and did effect introductions, in light of all the evidence it can be inferred that Mr Sim had no reasonable grounds to assert that he would ensure that each of Mervin and Farrel independently developed good working relationships with the suppliers and customers of the business so that, following the end of the two year period, the goodwill and earnings of the business could, and would, be maintained.
339 The evidence adduced to the contrary on behalf of these respondents is relatively slim. Mr Sim, as in relation to the representations concerning employment and training pleaded in [15(a)] and [15(b)] of the statement of claim, says that he agreed about these things and so intended to do what he represented. But apart from that broader assertion in each case, there is precious little other evidence contemporaneous with the making of the introduction representation adduced by these respondents to the contrary. Rather, there is a wealth of evidence that suggests that if there had been an intention to make good the promise, following settlement of the sale agreement, Mr Sim’s behaviour contradicted it.
340 While Mr Sim sought to call some evidence to show that introductions were in fact made, it was puny indeed. For the reasons stated above, the evidence of Mr Di Lena can be ignored, Mr Stefanuto of Cable 8 could not recall whether Mr Sim effected the introduction and nor could Cheryl King of Freeway Electrical. The Freeway Electrical introduction was nonetheless admitted by the applicants.
341 Consequently, there is very little evidence adduced by the first respondent and Mr Sim to show any systematic, or indeed any real process of introductions to customers and suppliers at all. The Metzes in the main were left to make their own arrangements by way of meeting customers.
342 In this regard the evidence of Mr Derek Stone, that Mr Sim told him in mid to late August 2008 that he wanted to be out of the business within four to five months, in response to an expression of surprise by Mr Stone that he was still involved in the business, must again be noted.
343 When one takes into account Mr Stone’s evidence, and what actually happened following settlement in relation to introductions, the extent to which Mr Sim held onto “his own clients” and did not allow the Metzes near them, and effected very few introductions, as I find was the case, there is very little evidence to support the respondents submission that when Mr Sim made this pleaded representation he had reasonable grounds for doing so.
344 In those circumstances, I find that the first respondent and Mr Sim have not discharged the evidential burden imposed upon them to adduce evidence to the contrary by s 51A(2) of the TP Act. I also find that they have failed to discharge the legal or persuasive burden imposed upon them by s 9(2) of the FT Act in this regard. In any event, I am satisfied on all the evidence the introduction representation lacked reasonable grounds.
345 For the reasons given in relation to the employment and training representations pleaded in [15(a)] and [15(b)] I am also satisfied the applicants relied on this pleaded representation when entering into the sale agreement.
346 I find that Mr Sim made the pleaded representation for himself and the first respondent.
347 Consequently I find the representation pleaded in [15(c)] was made, there were no reasonable grounds for it, it was therefore misleading and deceptive and that the applicants relied on it when entering into the sale agreement.
Representation pleaded in [15(d)] of statement of claim – restraint of trade
348 By [15(d)] of the statement of claim the applicants plead that during the course of their negotiations Mr Sim made the following representation to preserve the goodwill of the business:
(d) that if the applicants were to purchase the business, then Mr Sim would not for a period of five years in any way compete with the business.
349 By [43] of the statement of claim, the applicants plead that this representation was misleading or deceptive or likely to mislead or deceive in that:
(1) by reason of the matters pleaded in [35]-[39] of the statement of claim to do with the circumstances in which Mr Sim left the business on 20 April 2009 and then began working with a competitor of the business, Lanark;
(2) further, that by reason of those matters and the matters pleaded in [27]-[35] to do with the obstruction of Mr Sim in the running of the business, that it is to be inferred that at no material time did Mr Sim intend not to compete with the business for a period of five years;
(3) at no material time did Mr Sim have reasonable grounds on which to make the representation; and
(4) the representation is one as to a future matter and the applicants rely on s 51A of the TP Act and s 9 of the FT Act.
350 By [16] of the defence, the first and second respondents deny each and every allegation in [15(d)] of the statement of claim.
351 There is no doubt that such a representation was made, quite independently of such a restrictive trade covenant in similar, though not identical, terms being included in the employment agreement.
352 The representation constitutes a representation as to a future matter and the applicants invoke the operation of s 51A of the TP Act and s 9 of the FT Act.
353 The two brochures initially provided by GMO, the first respondent’s broker, included the offer as a term of the sale of a “restrictive covenant” in the following terms:
11. RESTRICTIVE COVENANT
The Vendor agrees to a restrictive covenant for a period of five (5) years with a radius of two hundred (200) kilometres.
354 In the course of his cross-examination, although Mr Sim initially denied the making of the representation in his defence and also denied making the representation at meetings involving the Metzes and Mr Goodwin, in response to a question by the Court as to whether he recalled saying he would not compete for a five year period at any meeting with the applicants, the witness (transcript 681, lines 28-31) stated:
I probably agreed to that but I don’t know whether it was at that meeting.
355 Having regard to the evidence of the Metzes, that such a representation was made by Mr Sim at the meetings they and Mr Goodwin had with Mr Sim, and having regard to the evidence of Mr Goodwin (exhibit 17 at [11(d)]) I find that there is no doubt that at the meeting on 18 April 2008, Mr Sim made the representation pleaded in [15(d)] of the statement of claim.
356 The applicants submit that Mr Sim has neither pleaded nor adduced evidence to the effect that there existed reasonable grounds for the making of the representation made. They argue that the events which unfolded clearly demonstrate that Mr Sim canvassed and secured the business of customers of the business after he had joined Lanark or he attempted to do so. They point also to his course of conduct from settlement to 20 April 2009, as comprising evidence from which it can be inferred he never meant what he represented.
357 Mr Sim’s evidence was that he intended to abide by the restraint clause. Indeed he said he stayed in the business because of it, amongst other things. However, as became apparent during his evidence at the hearing, he plainly took the view that once he was no longer employed by the business following 20 April 2009, he was no longer subject to the trade restraint. That view is plainly wrongheaded but it suggests, if accepted (as I do) that prior thereto he understood that there were restraint provisions. This in turn is evidence that supports the view, having regard to the whole of the evidence, that when the restrictive covenant was initially offered and confirmed in April 2008 as a term of the sale agreement, it was not offered spuriously and Mr Sim at that point intended complying with the pleaded restrictive trade representation. In my view, Mr Sim adduced evidence to the contrary to negate the deeming provision of s 51A of the TP Act. I am not satisfied that on the whole of the evidence the applicants have made out a lack of reasonable grounds for this representation. I am satisfied the first respondent and Mr Sim have established reasonable grounds for the representation for the purposes of s 9(2) FT Act.
358 The circumstances, on the evidence in which the representation pleaded in [15(d)] was made, and the events that subsequently followed, including the making of a similar restrictive covenant in the employment agreement, and the difficult relationship between the parties in the nine months or so following settlement of the sale on 4 July 2008, do not permit the Court to infer that Mr Sim did not intend not to compete when the representation was made. It is one thing to infer, as I have in relation to the representations pleaded in [15(a)], [15(b)] and [15(c)] that by reason of all the evidence I have relied upon there, the representations did not have reasonable grounds, but another in relation to the representation that Mr Sim would not compete to find that the same evidence supports an inference that he did not have reasonable grounds to make that representation. The evidence more generally, including that of Mr Stone, is ambivalent in relation to what Mr Sim would do once he left the business. Mr Stone always understood that Mr Sim would attend to his coconut plantation. Thus it is one thing to find that the evidence supports an inference that Mr Sim never intended to remain in the business for two years and in that period to do the things that he represented he would do, but altogether another thing to say that when he ceased in the business, he did not intend to honour the non-competition agreement and did not have reasonable grounds for making that representation. There is no evidence to support an inference, for example, that Mr Sim planned all along to abandon the first applicants’ business and soon after join a competitor.
359 Consequently, I find that the representation pleaded in [15(d)] was made, but the applicants have not established a lack of reasonable grounds for it.
Representations pleaded in [16] and [16A] of statement of claim – gross profit
360 By [16] of the statement of claim, the applicants plead that by the first brochure and the second brochure it was represented that the business was achieving a gross profit of 36.8% on a turnover of $2.7 million per annum, which gross profit and turnover would be sustainable.
361 Further, by [16A] of the statement of claim, the applicants plead:
16A Implicit in the representation included in paragraph 16 hereof was the representation that neither the first respondent nor its directors involved in the day to day administration of the affairs of the first respondent were aware of any circumstance that could result in the gross profit and turnover referred to in paragraph 16 above not being sustainable in the reasonably foreseeable future by any potential purchaser of the business.
362 By [44] of the statement of claim, the applicants say the representations pleaded in [16] and [16A] were misleading or deceptive or likely to mislead or deceive in that the turnover in the sum of $2.7 million at a gross profit of 36.8% was not sustainable, and then give the following particulars:
(1) That at no material time since settlement has the business achieved an average turnover of $2.7 million at a gross profit of 36.8% per annum.
(2) For the financial year ended 30 June 2009 the turnover was $2,212,416 at a gross profit of 24.6%, and for the three quarters to 31 March 2009 whilst Mr Sim worked in the business the turnover was $1,605,891 at a gross profit 21.1% and for the three quarters to 31 March 2010, the turnover was $1,374,156 at a gross profit of 28.45%.
(3) The applicants further rely on the product substitution pleadings in [39A]-[39ZD] of the statement of claim.
(4) At no material time did there exist reasonable grounds on which to make the representations.
(5) The representations are as to future matters and the applicants rely on s 51 of the TP Act and s 9 of the FT Act.
363 Save to admit that the first and second brochures indicated that the turnover of the business had for the previous financial year been approximately $2.7 million (which was the case), the first respondent and Mr Sim by [18] and [18A] respectively of the defence, deny [16] and [16A] of the statement of claim.
364 In [56] of the defence, the respondents in (a) repeat the denial of [16] and [16A] of the statement of claim that first appeared in [18] and [18A] of the defence, but then specifically:
(1) deny that Mr Sim made the representations as alleged in [16] and [16A] of the statement of claim;
(2) do not admit that since settlement the business has not achieved an average turnover of $2.7 million per annum;
(3) repeat [18] and [52C]-[52Z] of the defence, [52C]-[52Z] of the defence that respond to the allegations of product substitution made by the applicants and deny them;
(4) say that if the turnover is less that $2.7 million per annum, which the respondents do not admit, had the applicants efficiently run the business the turnover should have been in the region of $2.7 million per annum;
(5) otherwise deny the paragraph and say that if the representations were made, which are denied, then they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
365 There is no dispute concerning what the turnover representation was. The first brochure (exhibit 1, tab 2 on p 4) stated:
Sales/Turnover: $2,700,000 Annually.
This was repeated on the next page under the heading “Financial Information”.
366 The trading summary at p 103 of the first brochure, stated that the gross profit for the financial year ending 30 June 2007 was 36.8%. The second brochure contained the same wording and the same financial trading analysis.
367 The evidence of Jim Goodwin was that, at the meeting in March 2008, Mr Sim said the words to the effect that:
(1) the gross profit of the business (which at that time was stated to be 36.8%) was readily maintainable; and that Mr Sim repeated that more than once; and
(2) the decreases in turnover and increase in gross profit of the business in the previous three financial years would not affect the profitability of the business and was as a consequence of Mr Sim abandoning an expensive Italian product and replacing it with an alternative cheaper product, imported from China, which the business sold at a higher margin.
368 I have previously accepted the evidence of Mr Goodwin about what was discussed at this meeting and find that what Mr Goodwin says was represented was indeed represented. This is also consistent with what the Metzes say was represented to them at the meeting by Mr Sim.
369 In re-examination of Mr Goodwin, following some objections, Mr Goodwin gave evidence to the effect (transcript 324-325) that the “discussions” with Mr Sim were that the margins were there and that the margins were sustainable, so that the increased margin was going to continue.
370 As to this evidence, given in re-examination as it was, I did not understand Mr Goodwin to be saying that they were the actual words used by Mr Sim, but that the discussions led to that understanding. I accept his evidence. Whether Mr Sim said these profits were “maintainable” or “sustainable” I accept the representation as pleaded was conveyed. To the extent Mr Sim suggests otherwise I reject this evidence.
371 The respondents accept that the two brochures represented a turnover in the 2007 financial year of $2.7 million with a gross profit margin of 36.8%. They say, however, that there was no representation in the brochure that either the turnover or the gross profit figure would be “sustainable”. In the light of Mr Goodwin’s evidence, in particular, this is irrelevant. Mr Sim made the oral representation in effect to explain the nature of his written one in the brochures.
372 As to the implicit representation concerning sustainability in the reasonably foreseeable future pleaded in [16A], the respondents say that, given that was one of the primary purposes of due diligence undertaken pursuant to cl 1 of Sch A of the sale agreement, it must be emphasised, as is the case, that the actual representation as to turnover and gross profit were not challenged in the proceeding as being in any way incorrect. The respondents say the brochures did not contain any representation beyond that. Again, I find the oral representation made in the terms described by Mr Goodwin.
373 The respondents further say that a contention that Mr Sim’s decision to cease having anything to do with the Italian line – Targetti – involves some further implied representation that the sales and turnover figure would not further decrease, cease to impute to Mr Sim something which he did not say and to impose upon the respondents in effect a guarantee. The respondents say it is axiomatic that a change in business ownership necessarily effects, in the short term, the operation of the business. If, as is the contention the goodwill on the business related largely to Mr Sim’s involvement, then given that the purpose of the acquisition was for the applicants to run the business and to employ Mr Sim, there must in the interim have been an expectation that the fundamental change could not have provided a basis for and did not provide a basis for any form of guarantee as to the future turnover and profitability of the business.
374 The respondents therefore say it is farfetched and simply involves the applicant stretching the position to cover the shortcomings for which they were responsible. This extends to the gross profit margin on the basis that the things that most influenced the gross profit margin was sales and the cost of sales.
375 The respondents argue that a review of the financial data undertaken by Mr Simon Cook, the expert accountant called by the applicants, reveals that the position is not as painted by the applicants, but rather during the relevant financial years 2008/2009 and 2009/2010, the level of gross profit was a function of those two factors.
376 In response to these submissions, the applicants make two points, first that so far as the implicit representation is concerned, if the respondents engaged in product substitution, as alleged, that is not something that would have been picked up during due diligence, but is nonetheless something in respect of which the representation would be relevant. Secondly, that the very reason why Mr Sim was sought to be retained as a long term employee (for two years) was because of the respondents’ submission, namely, that it is axiomatic that a change in business ownership necessarily affects, in the short term, the operation of the business.
377 The applicants contend that it is clearly the position that the business has not since settlement achieved an average turnover of $2.7 million per annum and in that regard rely on the evidence of Mr Farrel Metz (exhibit 1 at [16c]).
378 The applicants say that while Mr Sim remained with the business for nine months, he did not generate the level of turnover represented and the turnover was in fact achieved at a greatly reduced profit margin, and refer to the evidence of Farrel Metz (exhibit 1 at [16c]).
379 As to the allegation of the respondents that the reduced turnover was due to the inefficient running of the business by the applicants, the applicants say that is at odds with the fact that Mr Sim was in control of all the projects over the relevant period from 4 July 2008 to 20 April 2009 and in that time achieved nowhere near the turnover represented at the level of profitability represented.
380 The applicants say the respondents have failed to adduce any cogent and admissible evidence which demonstrates that the level of turnover and the level of profitability decreased due to conduct on the part of the applicants. The applicants say the respondents did not seek to place reliance on the global financial crisis and that is a matter not pleaded and in respect of which there is in any event no expert evidence.
381 The applicants say the respondents have not adduced any expert evidence whatsoever to support their plea that it was as a result of inefficiencies of the applicants that the turnover was reduced.
382 As to the implied representation that the first respondent and its directors were not aware of any circumstance that could result in gross profit and turnover not being sustainable, the applicants say this follows as a matter of law based on the circumstances referred to in [16] of the statement of claim, and that the respondents were in fact aware of the circumstances concerning substitution of products pleaded in [39A]-[39ZD] of the statement of claim.
383 In their closing written submissions, the first respondent and Mr Sim summarise their contentions about the gross profit margin in three points. First, that the gross profit margin which was represented in the accounts of the business up to the date of settlement were in fact reconciled and verified by the due diligence undertaken by the applicants’ accountants. Secondly, that the two years from settlement, that is 2008/2009 and 2009/2010 financial years do in fact achieve the represented 36.8% profit, as Mr Cook, the applicants’ expert, accepted in cross-examination (transcript 424). Thirdly, that the discussion was about gross profit, not gross profit linked to or dependent upon a representation as to turnover and the evasive and unacceptable evidence given by Mr Farrel Metz in this regard (transcript 129-131) should be noted. These respondents contend this is an instance where a patent deficiency in the evidence is sought to be overcome by the Metzes creating something which does appear either in original written statement or the responsive statement. They refer to the cross-examination at transcript 130.41-131.12.
384 So far as the financial results are concerned, these respondents note that in the financial year ended 30 June 2009 a net profit of $55,000 was distributed to the Trust of Mr Farrel Metz. The respondents say that if one brings to account the add backs of the business, namely $39,000 worth of accountancy fees, $113,679 of interest and $20,630, this represents in effect about $140,000 for each of the two partners. The profits of Farrel Metz and Mervin Metz were reduced to $55,000 each only because of the financial structure they imposed on the business. After taking out the add backs, the business made a profit in 2008/2009 of $215,797.60 (see exhibit 26, appendix 10). In 2009/2010, the profit, after taking out add backs was $354,959.00 (as Mr Cook, the expert accountant called by the applicants identified). Thus, the respondents contend that the gross profit represented of 36.8% was in fact achieved.
385 The respondents also say there is a tension between Mr Farrel Metz’s assertion that he was reliant on Mr Sim and the lack of any complaint or a lack of any specifics as to any difficulties encountered after Mr Sim left the business in April 2009, for example by calling Mr Neil Catterall, who was later engaged as an employee. The respondents say the only way that apparent conflict can be reconciled is by noting that, whilst in one sense at the outset it might have been the case that they were dependent upon Mr Sim, it could not in any tangible sense be concluded that that was the position in April 2009, and that the Metzes were thereby rendered capable of carrying the business into effect themselves because their lack of complaint self evidently supports that as the irresistible conclusion.
386 The applicants respond to these contentions by saying that the losses have been incurred and it is not to the point that the financial structure of the applicants resulted in greater expenses being set off against the gross profits and that the respondents are not be absolved of the applicants’ losses by reason of the structure they adopted.
387 As to the question of the position in which the applicants found themselves following Mr Sim’s departure in April 2009, the applicants say the submissions made on behalf of the respondent is misconceived and:
(1) had the applicants known the true position they would never had entered into the sale agreement and proceeded to settlement;
(2) the turnover of the business after settlement was nowhere near the sum of $2.7 million represented as the sustainable annual turnover and at a gross profit of 36.8% on that turnover;
(3) the applicants would never have entered into the transaction had they known that Mr Sim would not remain with the business for a period of two years and transfer his knowledge and transfer his contacts to maintain the value of the goodwill that was paid;
(4) by reason of the fact that Mr Sim left the business after a nine month period and competed with the applicants, the goodwill is in effect worthless.
388 The applicants say it is not open to divorce the gross profit margin from the level of turnover, as the respondents seek to do in suggesting that a 36.8% gross profit was actually achieved. A discussion about gross profit margin is meaningless without reference to turnover or the maintainability thereof.
389 The applicants say that, furthermore, what is not alluded to is the fact that in the first nine months of trading, under the management and direction of Mr Sim, the business achieved a gross profit margin of 21.1% on a turnover of $1,605,520, as explained in the evidence of Farrel Metz (exhibit 1 at [16c]). The applicants say this evidence was not contradicted and he was not cross-examined on it.
390 Thus, the parties put considerable store on the evidence of what was in fact achieved by turnover and gross profit following settlement of the sale of the business, and the reasons for variance from the predictions in order to infer, from the applicants’ point of view, the predictions lacked reasonable grounds and, from the respondents’ point of view, that the Metzes were responsible for the drop in turnover and gross profit.
391 I accept the evidence of Farrel Metz, referred to above, which is essentially uncontradicted, that in fact the turnover achieved in the first financial year following settlement was nothing like that represented and, therefore, that the profit margin represented as being achievable and sustainable in respect of such a turnover was not met.
392 I am not satisfied on any evidence led, particularly in relation to the first financial year ending 30 June 2009, when Mr Sim was extensively involved in the running of the business and managing “his” major projects for the first nine months or so, that the inexperience of the Metzes contributed in any significant way to the failure of the business to achieve the represented turnover and gross profit against that turnover.
393 I am also not satisfied, found below, that the applicants have established a regular practice of product substitution on the part of Mr Sim prior to settlement, to explain the high profit against turnover prior to 30 June 2009, with the position thereafter.
394 The position was that, when the representation as to gross turnover of $2.7 million with a gross profit of 36.8% was made, as set out initially in bald terms in the brochures, it reflected the trading and gross profit for the year ending 30 June 2007. The first brochure had only included information for the financial year ending 30 June 2006, the second brochure brought it up to date to the end of the 2007 financial year and include the 36.8% representation. The valuation report of Mr Todd, supplied by Ms McBrierty to GMO, had made a point about the last financial year to 30 June 2007, being the one which mainly supported the higher gross profit margin.
395 The question about the turnover and gross profit, given that the profit seemed to be a strong one, was obviously of critical interest to the Metzes, both in their analysis of the business opportunity and in the discussions they had with Mr Goodwin and which they then raised directly with Mr Sim during both the March and April 2008 meetings. Mr Goodwin confirms the fact that the question of the achievement of the turnover and gross profit was the subject of “solid” discussion, and that the sustainability or maintainability of it was mentioned “more than once” by Mr Sim. The fact that the Targetti line had been abandoned in favour of an imported Chinese line, to help produce that higher gross profit was emphasised by Mr Sim.
396 I find that Mr Sim made it clear that he considered that the turnover and the gross profit so represented was maintainable into the future. Of course it goes without saying that the maintenance of turnover and gross profit also required a lot of other things to happen, such as the satisfaction of the other representations pleaded in [15(a), (b) and (c)] of the statement of claim, which I have found were made, and hard work on Mr Sim’s part as the key employment.
397 Mr Sim’s representation as to the sustainability or maintainability of this turnover and gross profit as represented was clearly reliant on his understanding of the performance of the first respondent. There is no dispute in this case that the first respondent had achieved those earlier results in the 2007 financial year. Due diligence was conducted on current records and, as the respondents say, no question was raised about them. It was not said in this case that the 2007 statements were misleading. The issue is whether there was any reasonable grounds for a representation by Mr Sim that the 2007 represented performance was sustainable and maintainable into the future.
398 When one has regard to the basis upon which the representation was made, it seems quite clear that Mr Sim made much at these meetings in March and April with the Metzes of the fact that he had found a cheaper Chinese line to replace the more expensive Italian line. On the face of it, that may be considered a plausible explanation for why he had been able to boost the gross profit in recent years from 20.8% in 2006 to 36.8% in 2007. If he had also been engaging in the regular practice of product substitution, as alleged by the applicants – but which I have found below is not made out – then that would also explain how a higher gross profit may have been achieved and, of course, should have been disclosed if it were the case.
399 Notwithstanding my rejection of the plea of a regular product substitution practice, the simple fact is that, even with Mr Sim at the helm during the first nine to ten months of the ownership of the business by the first applicants, holding his own projects close to his chest and conducting the business under the new ownership apparently in very much the same way he had conducted it prior to 4 July 2008 the business did not achieve anywhere near the turnover or the gross profits that were represented.
400 For the purposes of s 52A(2), I find that Mr Sim and the first respondent have adduced evidence to the contrary, that is, some evidence to suggest that there were reasonable grounds for the making of the pleaded representation, but having regard to the evidence as a whole I am not satisfied that in fact there were reasonable grounds for the representation. I particularly infer from Mr Sim’s actual performance in the period when he had virtual total control of the business’ main projects from 4 July 2008 to 20 April 2009, that what was predicted was not sustainable or maintainable.
401 Similarly, for the purpose of s 9(2) of the FT Act I consider that the first respondent and Mr Sim have not discharged the legal or persuasive burden imposed on them to establish that there were reasonable grounds for the representation.
402 I am satisfied Mr Sim made the representations for himself and the first respondent.
403 Consequently, I find the representations pleaded in [16] and [16A] are made out, that there were no reasonable grounds for them, and so they were misleading and deceptive, and that the first applicants relied on the representations when they entered into the sale agreement.
Representation pleaded in [17(a)] of statement of claim –relationship with suppliers
404 By [17(a)] of the statement of claim, the applicants plead that during the course of the negotiations Mr Sim made the following further representation to the applicants:
(a) That Mr Sim had an excellent relationship with all suppliers of the business, which Mr Sim would ensure would be maintained if the applicants were to purchase the business.
405 By [45] of the statement of claim, the applicants plead that this representation was misleading or deceptive or likely to mislead or deceive in that these respondents did not have an excellent relationship with all suppliers and/or had not maintained and/or did not maintain a good relationship with all suppliers. Particulars are provided concerning a dispute with Osram Australia Pty Ltd, Lamparts, Atcom Distributors and Targetti.
406 The applicants plead that Mr Sim had no reasonable grounds on which to make the representation and, insofar as the representation is one as to future matters, they rely on s 51A of the TP Act and s 9 of the FT Act.
407 In their defence at [19] as to this plea, the first and second respondents:
(1) say that Mr Sim said to the applicants that he had an excellent relationship with all of the suppliers that mattered;
(2) deny that he said that he would ensure that the relationships would be maintained if the applicants bought the business;
(3) otherwise deny the paragraph.
408 By [57] of the defence, these respondents:
(1) repeat [19], [20] and [26] of the defence;
(2) say the first respondents ceased dealing with Osram in about 2006 or 2007;
(3) do not admit the particulars otherwise;
(4) deny that Lamparts was an important part of the business;
(5) deny that the first respondent had any dispute with Lamparts;
(6) deny that Atcom Distributors was a major supplier;
(7) admit that there was a dispute with Atcom;
(8) say that the first respondent ceased dealing with Targetti in about 2005 as a result of Targetti’s products being too expensive and its warranty service being unsatisfactory;
(9) otherwise deny the paragraph and say that if any representations were made (which are denied) then they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
409 The Metzes say, in their evidence, that the representation pleaded was made. So does Mr Goodwin. In his witness statement Mr Goodwin (exhibit 17 at [11(c)]) says that at the 18 April 2008 meeting that he attended at the business premises with the Metzes and Mr Sim, Mr Sim said that he had an excellent relationship with all of the suppliers in the business which he would ensure would be maintained if Farrel and Mervin bought the business.
410 There are two aspects to the representation: first, a representation of present fact, that Mr Sim had excellent relationships with all suppliers of the business; secondly, a representation as to a future matter, that Mr Sim would ensure that those excellent relationships would be maintained if the applicants were to purchase the business.
411 The applicants contend that the representation was misleading in that shortly prior to the sale of the business, the evidence discloses that the relationship with Osram Australia Pty Ltd (the fourth largest supplier identified by the expert Mr Cook) had deteriorated. They refer to the evidence of Mr Chatfield from Osram. Mr Chatfield explained (transcript 458-459) that as a result of a dispute between Osram and Mr Sim in late 2007, over the payment by Illumination Services of a debt owed of about $12,000 he had discussions with Mr Sim. When later only about $7,000 had been paid, around Christmas time 2007 or early 2008, he chose to close the account.
412 As to the plea in [57(b)] of the defence, to the effect that the first respondents ceased dealing with Osram in about 2006 or 2007, the applicants say this is negated by appendix 6 to the report of Mr Cook which, following an examination of the financial records of the first respondent, indicated that for the financial year ending 30 June 2008, business with Osram had been transacted in the sum of $59,083.
413 While I accept the evidence of Mr Chatfield and the evidence in the report of Mr Cook concerning the trading in the financial year ending 30 June 2008 with Osram, the fact of the matter is, based on Mr Chatfield’s evidence, that the Osram account was closed by Osram at the latest in early 2008. At the time the representations were made it seems that it cannot be reasonably be said that Osram was a supplier of the business.
414 Therefore, to the extent that the representation contains a statement of present fact that there was an excellent relationship with all suppliers, it is not disproved by showing that there was not an excellent relationship with Osram, given that Osram was no longer a relevant supplier.
415 In its written closing submissions, the applicants do not rely on any other evidence to show that the representation was misleading. In my view, there is no basis for finding a lack of reasonable grounds for the pleaded representation.
416 Consequently, I find the representations pleaded in [17(a)] were made, but that the applicants have not established a lack of reasonable grounds for them.
Representation pleaded in [17(b)-(e)] of statement of claim – decreases in turnover not affecting profitability
417 By [17(b)] of the statement of claim, the applicants plead that during the course of negotiations Mr Sim made the following further representation to the applicants:
(b) that although there were decreases in the turnover and sales of the business in the last 3 financial years, as was evident from the trading summary in the first brochure and the second brochure, such decreases did not and would not affect the profitability of the business as:
(a) such decreases in sales were attributable to the business “getting rid of the Italian Targetti line which was expensive” and replacing it with a cheaper line that produced a greater level of profitability to each sale; and
(b) Mr Sim stated that during that time he had “some differences at home” due to getting divorced and that the level of profitability would have been even better had this not occurred.
418 The applicants further plead in [17(c)]:
(c) By making the representation pleaded in (b) above, within the context of the representation pleaded in [16] of the statement of claim, Mr Sim impliedly represented that the level of sales depicted in the brochure “Sales/Turnover: $2,700,000 annually” would not further decrease.
419 The applicants further plead in [17(d)]:
(d) By making the representation pleaded in (a) above, within the context of the representation pleaded in [17(a)] of the statement of claim, Mr Sim impliedly represented that the business voluntarily ceased ordering the Targetti line to enhance its profitability with a cheaper replacement line and the business ceasing the relationship with Targetti (a significant and well regarded supplier in the industry) – did not arise as a result of any dispute or breakdown in the relationship between Mr Sim and Targetti.
420 Finally, the applicants plead in [17(e)] of the statement of claim:
(e) That the business had increased its gross profit to 36.8% at the then current level of turnover, and that this was easily maintained.
421 In [46] of the statement of claim the applicants plead that the representation in [17(b)] was misleading and deceptive in that:
(1) Decreases in the turnover and sales of the business did adversely impact upon the ability of the business to maintain this profitability.
(2) Decreases in sales were not attributable to the business “getting rid of the Italian Targetti line” as Targetti had ceased dealing with the first respondent one or two years earlier.
(3) Decreases in the turnover and sales of the business were not attributable to Mr Sim experiencing difficulties at home.
(4) It was in fact the position that the turnover of the business stated to be annually in the sum of $2.7 million at a gross profit of 36.8% was not sustainable and the applicants in so pleading repeat [39A]-[39ZD] and [44] and say that the profitability of the business did decrease and could not be maintained without implementing the product substitution practice.
422 In [47] of the statement of claim the applicants say the representation included in [17(c)] was misleading or deceptive in that:
(1) At no time since settlement has the business achieved an average turnover of $2.7 million per annum.
(2) For the financial year ending 30 June 2009, the turnover was $2,212,416 and for the first three quarters to 31 March 2009 while Mr Sim worked in the business the turnover was $1,605,891 and for the three quarters to 31 March 2010 the turnover was $1,374,156.
(3) The turnover of the business for April 2010 was $78,001.69 and the level of turnover continues to deteriorate.
(4) The applicants repeat the matters pleaded in [39A]-[39ZD] and say that the product substitution practice was likely to affect the reputation, goodwill and profitability of the business and accordingly was likely to result in decreased sales of the business.
(5) The representation is to a future matter and the applicants rely on s 51A of the TP Act and s 9 of the FT Act.
423 By [48] of the statement of claim, the applicant say the representation pleaded in [17(d)] was misleading or deceptive or likely to mislead or deceive in that the business had not voluntarily ceased ordering the Targetti line but it ceased the Targetti line as a result of a dispute or breakdown in the relationship between the first respondent and Targetti.
424 In [49] the applicants plead that the representation pleaded in [17(e)] was misleading or deceptive or likely to mislead or deceive in that the business was not easily able to maintain a gross profit of 36.5% on a turnover of $2.7 million or thereabouts and particulars given that in part repeat [1], [2], [3] and [4] of the preceding paragraph.
425 In their defence, the first respondent and Mr Sim, as to [17(b)] of the statement of claim plead that:
(1) Mr Sim said to the Metzes to the effect that:
(a) in the last three years, although the turnover of the business had decreased, that profit had been maintained due to the business importing a lot of lighting products directly from China, rather than through Australian suppliers (as was the case); and
(b) one of the local suppliers which the first respondent had ceased buying lighting products from was Targetti, whose products were too expensive and whose warranty services was unreliable.
(2) Otherwise deny the paragraph.
426 By [21] of the defence, these respondents deny [17(c)] of the statement of claim.
427 By [22] of the defence, these respondents deny [17(d)] of the statement of claim.
428 By [23] of the defence, these respondents, save to say that Mr Sim said that the business had increased its gross profit to 36.8% (as was the case), deny [17(e)] of the statement of claim.
429 These respondents further plead in [58] of the defence, in relation to [46] of the statement of claim and the representation pleaded in [17(b)] that if the profitability of the business did decrease it was due to the first applicants not running the business properly or efficiently and further, that if any representations were made (which are denied) then they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
430 These defendants further plead, in [59] of the defence, as to [47] of the statement of claim and the representation pleaded in [17(c)], that they do not admit the turnover of the business pleaded and if any representations were made (which are denied) then they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
431 By [60] of the defence, these defendants deny [48] of the statement of claim concerning the pleaded breakdown of the relationship between the first respondent and Targetti and repeat [20] of the defence.
432 In [61] of the defence, these defendants, as to [49] of the statement of claim and the representation pleaded in [17(e)]:
(1) Repeat [20], [52C]-[52Z] and [49] of the defence.
(2) Do not admit the gross profit of the business was 21.2% as pleaded.
(3) Save for sales to Custom Electrics, deny that while Mr Sim was in the business he sold products at far lesser margins after the settlement date.
(4) Say that after settlement, Mr Sim continued to sell products to Custom Electrics at lesser margins than those supplied to others, as was the long standing situation prior to settlement as Custom Electrics was a long standing and reliable customer.
(5) Deny that after the settlement date, Mr Sim was selling products at loss.
(6) Otherwise deny the paragraph and say if the representations were made (which are denied) then they were not relied upon by reason of the matters pleaded in [20] of the defence.
433 I find that the representations pleaded in [17(b)] of the statement of claim were made as alleged and do not accept the alternative plea as to what was actually represented and put forward in the defence. The evidence of the Metzes is consistent with the pleaded representations. So too is the evidence of Mr Goodwin. In his witness statement (exhibit 17 at [9(a)] and [9(b)], Mr Goodwin says that, at the meeting at the business premises on 17 March 2008 that he attended along with the Metzes and Mr Sim, Mr Sim said words to the effect that:
The decrease in turnover and increase in gross profit of the business in the last three financial years would not affect the profitability of the business and was a consequence of him abandoning an expensive Italian product and replacing it with an alternative cheaper product imported from China, which the business sold at a higher margin, and that he was experiencing difficulties at home while finalising a divorce.
The gross profit of the business was readily maintainable – which he repeated more than once.
I accept without hesitation the evidence of Mr Goodwin and find that the representations pleaded in [17(b)] are made out.
434 The applicants say that documents generated when the first respondent was running the business disclose disputes with Targetti. The documentary material produced by Mr Farrel Metz in this regard (exhibit 1, tab 160B) constituted correspondence from late 2003 and in 2004.
435 What the correspondence of Mr Sim discloses is that he wrote letters to the Targetti Australia representative that were direct (and not unlike the manner in which he communicated with the Metzes during the nine month or so period that he was an employee of the first applicants), that is to say, blunt to the point that one would be surprised that ordinary commercial people would wish to continue to carry on business with him. Ultimately, however, it is difficult to infer from those documents, and I will not do so, a conclusion that Targetti decided not to deal with Mr Sim or Mr Sim decided not to deal with Targetti. The simple fact of the matter is that the business under Mr Sim ceased dealing in Targetti products at some point.
436 The applicants say that Mr Cook, in his expert analysis of the financial records of the first respondent, has observed that imports of Chinese products were relatively small in the period between 2007 and 2009, compared to the cost of goods sold in those years. The point the applicants wish to make is that such an observation, drawn from the records, does not support a representation that the importation of Chinese products in place of the Targetti products underpinned an increased profit margin at a time when turnover was decreasing.
437 The applicants finally make the submission that these respondents did not adduce any evidence to support a business model of a turnover of at least $2.7 million with a gross profit of 36.8% and to show that such levels were maintainable, notwithstanding the sustained pattern of declining turnover.
438 The representation pleaded in [17(b)] is as to a future matter and the applicants rely on s 52A of the TP Act and s 9 of the FT Act (see [46] and [44] of the statement of claim).
439 The question is whether for the purposes of s 52A(2) Mr Sim has adduced any evidence to the contrary concerning reasonable grounds. The applicants in relation to [17(b)(i)] in effect contend there is no evidence to show that decreases in sales were attributable to the business ceasing to use the Targetti line. I have noted above the evidence of Mr Cook to the effect that his consideration of the turnover and sales of the relevant three financial years did not establish that the Chinese substitutes for the Targetti line were responsible for the 36.8% profit represented. Mr Sim plainly represented that the jettisoning of the Targetti line was important. I am satisfied that Mr Sim has adduced evidence to the contrary, for the purpose of s 52A(2).
440 I am not satisfied on the whole of the evidence that the applicants have established, on the balance of probabilities, that the representation in (i) lack reasonable grounds. I accept the submissions made on behalf of Mr Sim that the representation cannot be construed as a representation that the profitability of the business would never change because of the ceasing of the Targetti line and the moving to the Chinese line. In short, I do not construe the representation as pleaded, and confirmed by the evidence of Mr Goodwin, as anything more than a representation that the profitability had been achieved through the technique of abandoning the Targetti line.
441 I also reject the applicants further submission that the representation confirmed by Mr Goodwin, as pleaded in (ii) of [17(b)] was made without reasonable grounds. It is simply a representation that Mr Sim believed that he had been distracted by family matters he could have worked harder and earned more. The evidence is there that Mr Sim and Ms McBrierty had indeed ended their relationship.
442 Similarly, I reject the implied representation in [17(c)] that by representing that he had “some differences at home” and that the level of profitability would have been even better had this not occurred, Mr Sim thereby represented that the level of sales depicted “would not decrease further”. In my view, no such implication arises from the representation made. To say that the turnover might have been better save for his family situation, does not equate to a representation that the level of sales would not reduce in the future.
443 As to the representation in [17(d)] I reject the pleading that by virtue of the representation in [17(b)(i)] Mr Sim impliedly represented that the business voluntarily ceased ordering the Targetti line to enhance its profitability and that this event did not arise as a result of any dispute or breakdown between those parties. As I have said above, the materials relied on by the applicants do not assist one way or the other in determining whether Mr Sim and Targetti had a dispute as a result of which the relationship broke down. In any event, I do not consider that the implied representation pleaded necessarily arises out of the representation pleaded in [17(b)(i)].
444 Consequently I am not satisfied the representations pleaded in [17(b)] and [17(d)] have been made out.
445 However, as to the representation pleaded in [17(e)], that the business had increased its gross profit to 36.8% at the then current level of turnover, and that this was “easily maintained”, I accept that this representation was made. In doing so I rely particularly on the evidence of Mr Goodwin, who stated (exhibit 17 [9(b)]) that at the 17 March 2008 meeting Mr Sim stated to the Metzes that the gross profit of the business (which at that time was stated to be approximately 36.8%) was readily maintainable – something which Mr Sim repeated more than once.
446 For the same reasons that I have found above that the representation pleaded in [16] of the statement of claim above lacked reasonable grounds, I find that the representation pleaded in [17(e)], to similar effect as that in [16], lacked reasonable grounds.
447 I find Mr Sim made the representation for himself and the first respondent.
448 For the reasons given above, I accept the applicants relied on the representation pleaded in [17(e)].
449 Consequently, I find the representation pleaded in [17(e)] was made, that it lacked reasonable grounds and so was misleading and deceptive, and that it was relied upon by the applicants in entering into the sale agreement.
Representation pleaded in [17(f)] of statement of claim – working capital
450 By [17(f)] of the statement of claim, the applicants plead that during the course of the negotiations Mr Sim made the following further representation to the applicants:
(f) That the business required ongoing working capital of only about $100,000.
451 By [24] of the defence, the first and second respondents plead that Mr Sim told the Metzes that in addition to cashflow from sales the business only required additional working capital of $100,000 as a reserve.
452 The applicants say that during cross-examination Mr Sim conceded that he stated that the business required working capital of $100,000 without placing any qualification on that.
453 The applicants by [50] of the statement of claim plead that this representation was misleading or deceptive or likely to mislead or deceive in that:
(1) the business was required and continues to require ongoing working capital of approximately $380,000;
(2) there existed no reasonable grounds on which to make the representation; and
(3) the representation is a representation as to a future matter and they rely on s 51A of the TP Act and s 9 of the FT Act.
454 Accordingly, the applicants only rely on the representation being as to a future matter, in the operation of the ongoing business, and not as to a present fact.
455 By [62] of the defence, the first and second respondents repeat their earlier plea in response to [17(d)] and say they do not know and do not admit that the business has required or continues to require ongoing working capital of $380,000 and otherwise the deny the paragraph and say that if any representation was made (which is denied), then it was not relied upon by the applicants by reasons of the matters pleaded in [20] of the defence.
456 In their written closing submissions these respondents say little directly in response to the applicants contentions on this claim.
457 The applicants say the representation was misleading or deceptive – that is to say, there were no reasonable grounds for it – when one has regard to the following evidence. First, that Ms McBrierty provided Mr Murphy of GMO with a copy of Mr Todd’s valuation letter, which stated at p 14:
the business requires a degree of technical knowledge of the lighting industry and has a working capital requirement of $300,000.
The applicants say that no cogent evidence has been adduced to the effect that Mr Todd reached a wrong conclusion based on the instructions or material provided to him. Accordingly, it is to be inferred if based on materials and instructions he was given, he concluded that the working capital requirement was around $300,000. The applicants note that Mr Sim in evidence (transcript 595) stated that Ms McBrierty was authorised by him and he had total confidence in her as far as her dealings with Mr Todd were concerned.
458 Secondly, the applicants say it can also be inferred from the working capital requirement of around $300,000 that it is stated to relate to the one year history of earnings at the level of $2.7 million, as explained in Mr Todd’s valuation at [9] (see attachment to exhibit 9). They say Mr Sim said that he had seen the Todd valuation.
459 Thirdly, the applicants note that all the amounts in the Todd valuation found their way into the two GMO brochures without amendment, particularly:
(1) Earnings of $463,000.
(2) Stock figure of $200,000.
(3) Goodwill figure of $1 million.
(4) Plant and equipment of $190,000.
(5) Salaries paid to working directors of $180,000 and $100,000 respectively.
460 The applicants say Mr Sim clearly knew that Ms McBrierty had told Mr Todd that the working capital requirement of the business was around $300,000 and refer to the admissions of Mr Sim in that regard (written submission at [131] transcript 597, lines 14 to 17). The applicants point out that the respondents’ counsel did not re-examine as to the correctness or incorrectness of that figure or to argue in cross-examination that it was incorrect.
461 In evidence, Farrel Metz said that on 4 December 2008, during one of their exchanges, Mr Sim told him the business needed far more than $100,000 as working capital and when he asked Mr Sim why he did not tell them that earlier, he failed to get an adequate response to his question (see the recording of the exchange at exhibit 11, track 7, 22 mins 10 secs to 22 mins 35 secs).
462 In the disclosure statement given to GMO (see exhibit 9, tab 1) Mr Sim in his own handwriting, in answer to the question “Vendor’s estimate of working capital in addition to price?” he wrote “$100,000-$150,000”. At material times when the working capital representation was made, the business did not have an overdraft.
463 The applicants plead, as noted, that the representation is one as to a future matter and rely on s 51A of the TP Act and s 9 of the FT Act and say that the respondents have failed to discharge the evidential burden or the persuasive burden respectively they bear to establish they had reasonable grounds for making the representation.
464 The applicants say further that it was clearly the position that working capital in the sum of $100,000 could never have been an adequate sum for working capital based on the events that actually occurred. Relatively soon after the business commenced, on 5 August 2008, Mr Sim wrote to Anita Chan of Tacklite about the need to order additional stock from Xing Feng to cover orders on hand that came to a sum of USD66,419.80, which equated at the time to about AUD90,000. That stock was additional to the stock held by the business and so increased the need for working capital. The applicants contend that if within a month following settlement the sum of AUD90,000 was to be incurred to purchase additional stock, beyond that already held by the business, there could hardly have been a reasonable basis on which to represent that the working capital requirements of the business were confined to a sum of $100,000 per annum.
465 I consider the submissions made on behalf of the applicants should be accepted. The respondents have adduced little if any evidence to support the respondents’ case that the respondents had reasonable grounds for making the representation pleaded. The Todd valuation, given to GMO by Ms McBrierty, with Mr Sim’s assent, plainly assumed a $300,000 working capital requirement. The representation made, which I accept was that pleaded as explained by the Metzes in their evidence, was a $100,000 requirement without qualification. I also accept that the events which occurred after settlement concerning the $90,000 cost of stock ordered from China, on a current project, accentuate the lack of reasonable grounds for the earlier predictions.
466 The first and second respondents also make the point the arrangements by which the applicants financed the purchase of the business, including the entering into of factoring arrangements with their bank, Westpac, meant that they were more highly geared in relation to overdraft or working capital demands. To the extent that such an observation might be true – and obviously the circumstances in which the applicants’ financed the business were different from the financing arrangements that the first respondent had in place at the time of the negotiations for sale, whereby it was able to operate the business on the basis of revenue and a certain working capital provision, the fact remains that the representation made was $100,000 was sufficient working capital. I do not accept that there was any particular qualification about that made by Mr Sim. To the extent that the respondents now seek to put that in the context of the business as they then ran it, is not, in my view, relevant.
467 The facts as I have laid them out above inevitably lead to the view that Mr Sim knew or ought to have known and the first respondent certainly knew from his knowledge and that of Ms McBrierty, that the working capital requirement was in the vicinity of $300,000, not $100,000. There is simply no evidentiary base for the view that their $100,000 working capital was sufficient. In my view, taking all of the evidence into account the applicants have established that the representation pleaded, which I find was made, lacked reasonable grounds.
468 So far as the respondents plea that the representation was not relied upon by reason of the matters pleaded in [20] of the defence, that plea is that:
20. (1) Mr Sim said to Mervin and Farrel Metz words to the effect that:
(a) in the last three years, although the turnover of the business had decreased, the profit had been maintained due to the business importing a lot of lighting products directly from China rather than through Australian suppliers (as was the case); and
(b) one of the local suppliers which the first respondent had ceased buying lighting products from was Targetti whose products were too expensive and whose warranty service was unreliable.
469 In my view, even if that precise statement as pleaded in [20] of the defence were made out, it does not falsify the representation made or provide some warning that the Metzes should be taken to have been aware of and so knew that they would be put to additional expenses over and above the $100,000 working capital representation made by Mr Sim. I reject the plea contained in [62(c)] of the defence.
470 I find that Mr Sim made the representation for himself and the first respondent.
471 Consequently, I find the pleaded representation was made, that there were no reasonable grounds for it, and so it was misleading and deceptive, and that it was relied upon by the applicants.
Representation pleaded in [17(g)] of statement of claim – stock easily saleable
472 By [17(g)] of the statement of claim the applicants plead that during the course of the negotiations, Mr Sim made the following further representation to the applicants:
(g) That the stock held by the business which would be acquired by the applicants if the applicants were to purchase the business was all easily saleable, and would turn around quickly.
473 The applicants in [51] of the statement of claim plead that the representation was misleading or deceptive or likely to mislead or deceive in that:
(1) a significant portion of the stock purchased has either been unsaleable or very slow moving, and particulars are provided;
(2) there existed no reasonable grounds on which to make the representation; and
(3) the representation is one as to a future matter and the applicants rely on s 51A of the TP Act and s 9 of the FT Act.
474 By [25] of the defence, the first and second respondents plead as to [17(g)] that:
(1) Mr Sim said that some of the business stock was slow moving but all saleable; and
(2) otherwise deny the paragraph.
475 In [63] of the defence, these respondents:
(1) repeat their earlier pleas in [17(g)] and [25];
(2) deny a significant portion of the stock was either unsaleable or very slow moving;
(3) say the stocktake conducted on or around settlement identified approximately $60,000 which was saleable but slow moving;
(4) say the first respondent gave the applicants the slow moving stock to the applicants at no cost;
(5) say the slow moving stock was and is nevertheless saleable should the applicants use reasonable endeavours to sell it;
(6) otherwise deny the paragraph and say further that if the representations (which are denied) then they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
476 I have little doubt that the representations were made. Farrel Metz gave evidence of it (exhibit 1 at [16d]). Mr Goodwin also confirmed the making of the representation (exhibit 17 at 9d). His evidence is that at the meeting on 17 March 2008 attended by Mervin and Farrel Metz, Mr Sim and himself, Mr Sim said words to the effect:
The stock that would be sold with the business would be readily saleable, and would turn around quickly.
Mr Goodwin added that Mr Sim took the three of them through the warehouse and identified which stock was required for which projects and said that most of the stock was virtually all sold.
477 Under cross-examination Mr Sim stated that he recalled saying that, in relation to the stock of the business, if the business was purchased, that the stock would turn around quickly (transcript 684). Mr Sim acknowledged saying to the Metzes that the stock was readily saleable (transcript 660, line 8).
478 It is important here to note that following the taking of the stocktake pursuant to the terms of the sale agreement, the stock (which was at the business premises and the separate warehouse) was found to have a value of $346,987.24 – far in excess of the $200,000 suggested in the brochures. An offer was then made by the respondents to discount the total price to $315,000, on condition that payment was made by 15 September 2009. The parties then came to an agreement about that price and its repayment by instalment up to early December 2008.
479 As noted above, in [63(c)] of the defence, the respondents say that Mr Sim identified approximately $60,000 worth of stock which was saleable but slow moving. In [63(d)] it is pleaded he gave the slow moving stock to the applicants at no cost. In their reply, at [19], the applicants say that Mr Sim offered to discount the price and there was no giving of stock “at no cost”. In any event, the applicants say that Mr Sim does not seek to assert that the additional stock, which he says was given for free, fell within the stock for which an agreed payment of $315,000 was made. The applicants say further that nowhere in the letter whereby the $315,000 payment was agreed to be paid by instalments is it stated that additional stock was given at no price. The applicants say that on Mr Sim’s own admission (transcript 663, 20-40) there were no records supporting his assertion that there was an additional $60,000 worth of stock given free of charge.
480 The applicants say that, in any event, if it is asserted that the stock that was provided free of charge was the stock that was slow moving and readily saleable, the respondents have failed to adduce any evidence of any causal connection between the stock allegedly provided free of charge and the stock being the very stock which was slow moving.
481 The applicants also contend that notwithstanding the plea in [63(e)] of the defence, that the slow moving stock was saleable if reasonable endeavours were used, no evidence was adduced to support that plea.
482 The applicants submit the representation that the stock was easily saleable and would turn around quickly was made without any reasonable grounds, noting that:
(1) No inventory of stock was kept.
(2) Ms McBrierty stated she took the level of stock from the previous tax return for the financial year ending 30 June 2007.
(3) No stocktake was conducted prior to the marketing and sale of the business.
483 In those circumstances, the applicants say there existed no basis upon which the respondents were able to state that the stock was easily saleable and would turn around quickly.
484 The evidence concerning the discounting of the price to be paid for the stock, down to $315,000, when there had been an estimate of $200,000 initially, is not entirely clear. In the end, I consider on the balance of probabilities that the stock that Mr Sim refers to, that he says was given to the applicants free of charge, was part of the stock that was valued at a total price of $346,987.24. In the end, the applicants were required to pay only $315,000 for all the stock and they agreed to do so in instalments. It is therefore the totality of the stock, for which $315,000 was paid, which, in my view, is the subject of the representations.
485 As to that stock, I accept the evidence of Farrel Metz, noted above, that stock to the value of $105,000, not merely $60,000, was unsaleable (see exhibit 1 at [430]-[432]).
486 As to the claim by the respondents that slow moving stock was nevertheless saleable had the applicants used reasonable endeavours to sell it, there is a paucity of evidence to support that claim and nothing to suggest that the applicants, at material times, were not endeavouring to sell the stock they held and I reject that claim.
487 In my view there is very little evidence adduced by the respondents to provide reasonable grounds for the representation that the stock was easily saleable and would turn around quickly. It was Mr Sim’s opinion based on his asserted familiarity with the stock.
488 Mr Goodwin’s evidence helps to understand how the stock estimate arose. On 17 March 2008, Mr Sim showed the Metzes and him the stock at the business premises and said it was all nearly sold. Later, after the stocktake, the higher value including the other warehouse stock, came to hand.
489 As the applicants contend, no inventory of stock was kept, the $200,000 estimate was provided by Ms McBrierty on the basis of the 2007 tax returns of the business, and no attempt at a stocktake was made before the representations were made. In those circumstances, for Mr Sim effectively to claim he had reasonable grounds for making the representations because he was familiar with the stock is a feeble response.
490 This observation is highlighted by the fact that, following settlement when the stocktake of all stock was taken, the value of about $346,000 was completed and the Metzes then discovered the full extent of the stock they were acquiring. I accept Farrel Metz’s evidence that he only then became aware of, or fully aware of, the stock held at the Howe Street warehouse.
491 Be that as it may, Mr Sim and Ms McBrierty recognise the obvious fact that a much higher than expected valuation of stock had been provided and immediately indicated that they would accept $315,000, requiring an additional payment for stock of $115,000, if the balance were to be paid by about 15 September 2008.
492 It is at that point that a discussion ensued and Mr Sim in evidence claims that he gifted $60,000 worth of slow moving, but saleable stock.
493 This evidence, in my view, of itself emphasises that at the time Mr Sim made the representation that the stock was “all easily saleable, and would turn around quickly”, he did not give any proper attention to what was there. As noted, no stocktake was taken before the sale and settlement. Ms McBrierty’s estimate of $200,000 for the stock had been based on the 2007 tax returns. The representation seems to have been based on Mr Sim’s historic belief as to what stock he was carrying and how saleable it was.
494 Having regard to what was soon discovered in July when the stocktake was taken, producing the much higher figure of about $346,000, and the arrangements then made that included, even on Mr Sim’s own evidence, a gifted amount of stock to the value of $60,000, I conclude that Mr Sim (and the first respondent) had no reasonable basis to make the representation that they did.
495 In these circumstances, while for the purposes of s 52A of the TP Act Mr Sim has adduced some evidence to the contrary, taking the evidence overall I find that the applicants have established, on the balance of probabilities, that the representations lacked reasonable grounds.
496 For the purpose of s 9 of the FT Act I find further that Mr Sim has not established, on the balance of probabilities, that he had reasonable grounds for making the pleaded representations.
497 As to the further claim of the respondents that, in any event, the representations if made were not relied upon by reason of the matters pleaded in [20] of the defence, I have previously set out the terms of the plea in [20] of the defence, which relates to the statement by Mr Sim to the Metzes that in the last three years, while turnover of the business had decreased the profit had been maintained due to the business importing a lot of lighting products directly from China and that the first respondent had ceased buying Targetti products. In my view, this statement pleaded in [20], if made, or words to that effect, does not have the effect of falsifying the representation pleaded and do not provide grounds for saying the applicants were not entitled to rely upon the representation made in the light of such advice. None of what was said by its terms or nature was calculated to contradict the representation made. I therefore reject the plea made in [63(f)] of the defence.
498 I find Mr Sim made the representations for himself and the first respondent.
499 Consequently, I find the pleaded representations were made, that they lacked reasonable grounds and so they were misleading and deceptive, and that the applicants relied on them in entering into the sale agreement.
Representation pleaded in [17(h)] of statement of claim –relationship with customers
500 The applicants plead in [17(h)] of the statement of claim that during the course of the negotiations Mr Sim made the following further representation to the applicants:
(h) That Mr Sim and the first respondent had an excellent relationship with all of the customers of the business, which Mr Sim would assist the applicants to maintain if they were to purchase the business.
501 The applicants by [52] of the statement of claim, plead that the representation in [17(h)] was misleading or deceptive in that:
(1) neither Mr Sim or the first respondent had an excellent relationship with certain customers and electrical engineering firms, particulars of which are given;
(2) there existed no reasonable grounds on which to make the representation; and
(3) the representation is one as to a future matter and the applicants rely s 51A of the TP Act and s 9 of the FT Act.
502 As to [17(h)], the first and second respondents, by [26] of the defence say:
(1) Mr Sim said that the first and second respondents had an excellent relationship with all the customers of the business that mattered (as was the case); and
(2) otherwise deny the paragraph.
503 The respondents in [64] of the defence plead as to [52] that they:
(1) repeat [26];
(2) say that the first respondent ceased dealing with BCA Consulting (one of the firms mentioned in the particulars) in about 2005, following a dispute;
(3) say that the first respondent only occasionally dealt with Everett Smith (another firm mentioned in the particulars);
(4) deny that Everett Smith and BCA Consulting or any other relevant firm as particularised were disgruntled and highly dissatisfied with Mr Sim and the manner in which he dealt with them;
(5) otherwise deny the paragraph and say further that if any representations were made (which are denied) that they were not relied upon by the applicants by reason of the matters pleaded in [20] of the defence.
504 Mervin Metz gave evidence (exhibit 10, at [12] and [13]) that the representation as pleaded was given. The evidence of Mr Goodwin (exhibit 17 at [9(c)] largely corroborated this evidence. Mr Goodwin said he attended a meeting on 17 March 2008 attended by himself, the Metzes and Mr Sim at which, amongst other things, Mr Sim said words to the effect:
That he had a great relationship with all the customers of the business and that he would assist Farrel and Mervin to establish and maintain those relationships.
505 Mr Sim under cross-examination said that he had said to the Metzes that he had an excellent relationship with all the customers of the business. He did not place the qualification on that statement, that appears in [26(a)] of the defence, to the effect that his relationship was only with those customers “that mattered”. That may be what he intended to convey, but I find it was not what he said or what was actually conveyed.
506 So far as the precise representation made is concerned I am satisfied on the balance of probabilities that the representation as pleaded was made. Mr Metz and Mr Sim each consider the relationship represented was “excellent”, Mr Goodwin says “great”. I am prepared to accept what Mr Metz and Mr Sim agree upon. I also note Mr Goodwin was not cross-examined on this aspect of his evidence.
507 The applicants rely on the pleaded representation as one as to a future matter only and that s 51A of the TP Act and s 9 of the FT Act apply to them. I say that because the first part of the representation appears as one as to present fact, although the latter part – assisting in the maintenance of the relationship – plainly is as to a future matter. As to the latter, there is a burden on the respondents to establish an evidential basis that Mr Sim had reasonable grounds for making the representation under s 51A, and a legal or persuasive burden to establish reasonable grounds under s 9 FT Act. Without discharging the onus in each case, the representation is deemed to be misleading.
508 The applicants say the respondents have adduced no evidence whatsoever to demonstrate that Mr Sim assisted Farrel and Mervin Metz to maintain whatever customer relationships had been established. The applicants say that even on Mr Sim’s own version of events (which remains unproved and denied), the high watermark of assistance provided was the alleged introductions which he effected. Even if his evidence in that regard were to be accepted that cannot be said to constitute evidence of assisting the Metzes to maintain the relationships. Furthermore, a bare introduction should not be said to establish relationships without there being a meaningful introduction and there was no evidence of meaningful introductions.
509 To the contrary, the applicants submit that the evidence shows that after settlement Mr Sim embarked upon a strategy of assassinating the good character of the new owners. For example, by letter dated 3 April 2009 to Cheryl King at Freeway Electrical, one of the major customers of the business (as identified by the expert Mr Cook), he stated, amongst other things:
Unfortunately we have people here who think they know everything but know nothing. Farrel info (sic) to Dave yesterday cost both companies big money because of his inexperience.
The applicants say these words can hardly be construed as providing assistance to maintain an excellent relationship with Freeway Electrical.
510 Additionally, by letter dated 5 March 2009, from Mr Sim to Josh of Custom Electrics (tab 87 of the trial bundle, exhibit 59) Mr Sim stated:
Josh, I am told by Farrel goods only order 4/4/09, reasons not known. Not due here until approximately 13th-16th March. Suggest in future you come direct to myself.
The applicants say that overall this conveys the impression that the new owners are incompetent and that the customer should deal directly with him, again not conducive to enabling the new owners to maintain excellent relations.
511 The applicants then draw attention to evidence concerning the nature of the relationships with particular customers of the business, starting with Everett Smith & Co Pty Ltd. In the financial analysis of Mr Cook (exhibit 26, page 52) Everett Smith & Co appears as a major customer during the period 2005 and 2008. Peter Kim of Everett Smith & Co gave evidence in the proceeding to the following effect:
Everett Smith is possibly the largest commercial electrical contractor privately owned in Western Australia.
The relationship between ISWA and Everett Smith had substantially deteriorated in the period between 2006 and 2007.
The relationship deteriorated because of “attitude” and issues pertaining to substitution of fittings as well as Mr Sim displaying “an aggressive manner towards myself and the conduct of the business”.
512 During cross-examination of Mr Kim, counsel for the respondents sought to demonstrate that the deterioration in the relationship occurred in 2006 and had come to an end. However, the applicants say the Cook Report demonstrates that sales of $116,856 were still occurring in the financial year ending 30 June 2008, although thereafter there were no further sales. The applicants note that Mr Sim does not deny that there was a breakdown in the relationship (exhibit 43, response to Mr Kim’s witness statement).
513 In relation to Neal Coles of Coles Electrical, the applicant notes that for the financial year ending 30 June 2007, Coles Electrical was the thirteenth most important customer of the business (exhibit 26 at p 52). As at 14 November 2008, the applicant says it may be discerned that Mr Sim stated he had serious reservations about Neal Coles Electrical because he stated of him, “He is a big shit stirrer and please don’t involve me with his projects”. The applicants says it was the position of Mr Sim that he did not have an excellent relationship with Neal Coles or Coles Electrical.
514 So far as reliance is concerned, the applicants say that had they been aware that custom from Everett Smith & Co had deteriorated significantly from $610,322 for the financial year ending 30 June 2005 to $17,249 for the financial year ending 30 June 2007, due to a deterioration in that relationship, that would have been a major disincentive for them to have entered into the transaction to acquire the business. Good relationships with important customers must be considered important.
515 In relation to the latter evidence, the applicants appear to wish to falsify a representation as to a present fact that Mr Sim had an excellent relationship with all of the customers of the business. But that is not the way the representation is pleaded, as noted above. In any event, in my view, the evidence is insufficient to show that at the time the representation was made, as I accept it was, it was necessarily false so far as present fact is concerned. Mr Kim’s evidence was that the relationship deteriorated. Plainly, Mr Sim held a different view about that. How the Court should attempt to seek to understand a customer/supplier relationship in circumstances such as these is difficult to say. What can be said is that the evidence does not disclose a complete severing of the relationship. Indeed Everett Smith seems to have continued to be a client, albeit that the orders tapered down over the years. That of itself, however, is not necessarily evidence of something other than an excellent relationship. One would have thought that if there were concerns, following due diligence, that a particular customer or organisation that appeared to be a customer of the business had become a less important customer over the recent few years, some separate inquiry might have been made into that. But one cannot infer from a decline in business between two parties that this necessarily means that there is a relationship that is not excellent. The fact that there is a relationship at all might suggest the contrary.
516 Similarly, so far as the evidence concerning Mr Coles is concerned, and what Mr Sim said about him being a “big shit stirrer” and he, Mr Sim, not wanting to be involved in his projects, does not necessarily mean that at the time the representation was made in March of 2008, the relationship was not a good one.
517 I am not satisfied that the representation as one of present fact was not true. Nor am I satisfied that such a representation was not reasonably based.
518 So far as the future matter representation is concerned, that Mr Sim would assist the applicants to maintain these excellent relationships if they were to purchase the business, overall the evidence suggests that at the time the representation was made Mr Sim had reasonable grounds for making it, in that he regularly dealt with a range of customer which had been maintained over a number of years, and that he would be able to introduce the Metzes to the customers and help to maintain the relationships. I am satisfied then that the respondents have discharged the evidential burden imposed on them by s 51A of the TP Act.
519 I am not prepared on the evidence overall, including the subsequent events relied on by the applicants, to draw an inference that Mr Sim did not actually have reasonable grounds for the representation or representations made when he made it or them, and I also consider on the evidence the respondents have discharged the legal or persuasive burden imposed on them by s 9 of the FT Act.
Representations pleaded in [17(i)] and [17(ia)] of statement of claim – projects on hand
520 By [17(i)] and [17(ia)] of the statement of claim, the applicants plead that during the course of negotiations Mr Sim made the following further representations to the applicants:
(i) That the business had projects on hand (namely orders from customers who are undertaking projects and who were purchasing products from the business for the projects) to the value of at least $2 million and closer to $2.5 million, the specific details of which would be provided in due course:
(ia) implicit in the representation pleaded in [i], within the context of the representation pleaded in [17(e)], was the representation that the projects on hand were likely to achieve gross profits thereon in the sum of 36.8% or thereabouts.
521 By [23] of the statement of claim, the applicants also plead that during the course of conducting due diligence:
(1) Mr Sim on 18 June 2008, through Jim Goodwin of GMO provided the applicants with a list of projects on hand of the business, depicting the name and value of each project, including, amongst others:
(a) The Madely School project valued at $35,000.
(b) The Howard Solomon project valued at $350,000.
(c) The Amberley Aged Care project valued at $300,000.
(d) The Burswood Tower 5 project valued at $200,000.
(e) The 432 Murray Street project valued at $400,000.
(2) By acting in this way, Mr Sim represented that each of the projects would come to fruition and earn revenue for the business in approximately the sums valued.
(3) Further by acting as pleaded in para (2), within the context of the representation pleaded in [17(e)] of the statement of claim, Mr Sim impliedly represented that the projects would be profitable and/or likely to result in the business achieving a gross profit in the sum of 36.8% or thereabouts.
522 By [53] of the statement of claim, the applicants say these representations were misleading or deceptive or likely to mislead or deceive in that with respect to the alleged projects on hand:
(1) The business did not have projects on hand to the value represented.
(2) The Madely School project never eventuated.
(3) Whilst the Howard Solomon project was represented at approximately $350,000, a purchase order suggested that the project was in fact valued at $237,000.
(4) Whilst the Amberley Aged Care project was represented to be valued at approximately $300,000, a quotation dated 19 June 2008 confirmed the job was quoted at $236,248 (less a further 10% discount).
(5) Whilst the Burswood Tower 5 project was represented to be valued at approximately $200,000, a quotation dated 5 June 2008 confirmed the job was quoted at $139,878.
(6) Whilst the 432 Murray Street project was represented to be valued at a potential $400,000, it appears to have been originally quoted on 23 April 2007 for $224,000 and then to have been requoted on 21 July 2007 at $215,745. Furthermore, the value for this job changed again on or about 17 July 2008 when it was revalued by Mr Sim at $200,000.
(7) The representations were continuing representations and at no time did Mr Sim direct the attention of the applicants to the change in position just pleaded.
(8) By reason of the matters pleaded in [39A]-[39ZD] of the statement of claim, the projects on hand were unlikely to assist in any manner to sustain the turnover of the business at $2.7 million and to sustain profitability there of it of 36.8% or thereabouts.
(9) There existed no reasonable grounds on which to make the representations.
(10) In so far as the representations are representations as to future matters, the applicants rely on s 51A of the TP Act and s 9 of the FT Act.
523 The first and second respondents by [27] of the defence, as to [17(i)] of the statement of claim:
(1) Say that Mr Sim told the Metzes that the business had ongoing projects or projects where the business expected to get formal orders worth at least $2 million, possibly up to $2.5 million – as was the case.
(2) Otherwise deny the paragraph.
(3) These respondents deny[17(ia)] of the statement of claim.
524 By [65] of the defence, these respondents:
(1) Repeat their earlier pleas in respect of the representations.
(2) In relation to specific projects pleaded in [53] of the statement of claim say:
(a) The Madely School project was billed by the first respondent in about May 2008 and the applicants were aware of this fact during the due diligence process.
(b) That stage one of the Howard Solomon project was worth approximately $237,000 and stage two approximately $120,000.
(c) That stage two of the Howard Solomon project was delayed by the developer due to the international credit crunch in late 2008.
(d) The specifications for the Amberley Aged Care project were subsequently changed by the developer producing a lesser value of the project.
(e) The Burswood Tower 5 project was subject to major cost cutting by the developer and the builder resulting in a lesser quotation.
(f) The 432 Murray Street project was subject to substantial cost cutting resulting in several reduced quotes, but nevertheless had a potential value to the business of up $400,000 had the applicants sought to obtain the contract for the fit out of that development.
(3) Otherwise deny the allegations and repeat [52C]-[52Z] of the defence and say further that if the representations were made (which are denied) then they were not relied upon by reason of the matters pleaded in [20] of the defence.
525 I have already found above that, at the request of Farrel Metz, on 18 June 2007, during the due diligence period, Jim Goodwin obtained from Mr Sim the projects on hand document, which he was told by Mr Sim represented “forward sales”. I have rejected the claim of Mr Sim that the document was provided to GMO at some earlier time – in March 2008.
526 The applicants contend that the description of the content of the list emailed by Jim Goodwin to Farrel Metz on about 18 June 2008 as “forward orders”, clearly means that the orders were orders that had been placed, although in relation to 432 Murray Street, when reading the documents as a whole, it is only identified as a potential order.
527 The applicants accept that the figures are approximate, but only in the sense of rounding off the sum of the order for convenience to the nearest $1,000 or $10,000 figure. The applicants contend:
As to the Howard Solomon project, the document contains the clear impression that there existed a forward order in the sum of $350,000;
As to the Amberley Aged Care project, the document conveys the clear impression that there existed a forward order in the sum of $300,000;
As to the Burswood Tower 4 project, the document conveys the clear impression that there existed a forward order in the sum of $180,000;
In relation to the Burswood Tower 5 project, the document conveys the clear impression that there existed a forward order in the sum of $200,000;
As to the 432 Murray Street project, the document conveys the clear impression that there was a reasonable basis to believe that it has a potential value of $400,000.
528 Overall, the applicants contend, a reasonable purchaser in the position of the applicants was likely to infer that items 1-12 of the list constituted secured orders in the sums stated, rounded off for convenience.
529 As a matter of fact, on 19 June 2008, the day after Mr Sim gave the list to Mr Goodwin, Mr Sim issued a quote to Freeway Electrical on the Amberley Aged Care project in the sum of $236,247.99 (inclusive of GST) (exhibit 1, tab 16). The list ascribed a value of $300,000 to this project. When cross-examined, Mr Sim stated that he had verbal confirmation of an order in the sum of $300,000 from Cheryl of Freeway Electrical as at June 2008. When called to give evidence Cheryl King of Freeway Electrical said that she never provided verbal confirmation of an order in the sum of $300,000 and indeed it was not her practice to provide verbal confirmations but to confirm matters in writing (transcript 678 at lines 37-40).
530 It is also worthy of note, as the applicants submit, that Mr Sim was otherwise at pains in his evidence to confirm the importance of recording things in writing, as he seems to have done on a number of occasions in his dealings with Farrel Metz in particular.
531 Later, the quote given to Freeway Electrical of $236,247.99 was further reduced to $195,017 (exhibit 49).
532 In the defence of these respondents at [37(d)] the Amberley project is depicted in the sum of $220,000 under the heading “Official orders not received but verbal confirmation received”. Mr Sim’s initial evidence was that he received verbal confirmation in the sum of $300,000. In his responsive witness statement (exhibit 35 at [30]) Mr Sim stated that:
As to Amberley Aged Care, I received a verbal confirmation of an order for $220,000 from Cheryl King through Freeway Electrical.
533 I reject Mr Sim’s evidence concerning the Amberley quote.
534 As to the Burswood Tower 5 project, on 5 June 2008 – just two weeks before creating the list – Mr Sim issued a quotation in the sum of $149,536.44 (inclusive of GST) (exhibit 1 at tab 79). In the list this project was shown as having a value of $200,000.
535 In the list, the Madely School project is stated to have a value of $35,000. In the defence at [65(b)(i)] it is pleaded that:
The Madely School project was billed by the first respondent in about May 2008 and the applicants were aware of this fact during the due diligence process.
536 As to the 432 Murray Street project, the first respondent raised a quotation dated 23 April 2007 in the sum of $224,055.70 (inclusive of GST) (exhibit 1, tab 17A). As the applicants point out, if it were the case, as Mr Sim claimed in evidence – and which I have rejected – that he had prepared some months earlier the list of projects that Mr Goodwin sent by email to Farrel Metz on 18 June 2008 it is difficult to understand on what basis this project would have been represented as having a potential value of $400,000 at that earlier time in March, in light of the quote in April 2007 of a little over half that sum. On 12 July 2008, Mr Sim issued another quotation in relation to 432 Murray Street in the sum of $220,689.15 (inclusive of GST). Mr Sim when pressed in cross-examination about this evidence, stated that as at 11 June 2008, this project had been confirmed as a project on hand (transcript 640, lines 10-15). Mr Sim insisted that there were verbal approvals from the electrical contractor for a large part of the $400,000.
537 The applicants submit that this is at odds with Mr Sim’s evidence at the commencement of his cross-examination to the effect that he required all matters to be in writing. The applicants submit that Mr Sim failed to identify when and where such conversations giving verbal confirmation took place, with whom and in respect of what components the project had a potential value of $400,000. The applicants submit that Mr Sim failed to identify any documentary evidence supporting his assertion that the project had a potential value of $400,000.
538 In [37(d)] of the defence, these respondents treat this project as being under the heading “Formal Orders Received”. However, Mr Sim changed his position in cross-examination acknowledging that no formal order had been received, but rather claimed it had been verbally confirmed.
539 I reject Mr Sim’s evidence.
540 In relation to the Howard Solomon project, the document provided to Farrel Metz on 18 June 2008 stated a sum of $350,000. On the evidence of Farrel Metz, the project appears only to have had a value of $237,315. This is the amount shown in a Freeway Electrical purchase order, dated 4 September 2008 (exhibit 1, tab 15). The applicants say the respondents have failed to adduce any evidence to show that the project had any greater value than that and so there were no reasonable grounds to support it either as a statement of present fact or as to a future matter.
541 As to the representation pleaded in [17(i)], the respondents deny [53] of the statement of claim and submit that the fact that a project did not eventuate did not, and does not, represent a basis for concluding that the representation that there was a project of a particular value was misleading or deceptive. The position remains to be determined as of the date on which the listed projects was provided – that is 18 June 2008.
542 Counsel for the respondents notes that the cross-examination of Mr Sim was about only those projects which counsel for the applicants considered sufficiently relevant to warrant questioning and that the answers provided indicated a proper basis for Mr Sim to have expressed the view in the document which was transmitted on 18 June 2008, that there was a basis for the view.
543 Further, and in event, the respondents say there is no evidence of any reliance by the applicants on the document at all, notwithstanding significant and substantive changes between the various lists. The respondents submit that the applicants’ apparent lack of interest is the obverse of a lack of reliance. If you had not relied upon a list of projects that would explain why you were not interested in significant changes in both projects and the numbers ascribed to those projects, reasonably soon after you had taken over the business.
544 The respondents submit that more compelling is that there is no evidence that the Metzes ever sat down with Mr Sim upon the takeover of the business on 4 July 2008 and sought the documentation for themselves of projects that were on hand. They took a backseat role.
545 The respondents say it should be concluded that this part of the claim has not been made out, or alternatively, there is no reliance and therefore no loss and damage and finally no evidence of any damage otherwise said to have been suffered solely referable to this claim.
546 The first and second respondents mount a strong attack on the contention that the list of projects was an important document and an important consideration in relation to the ultimate decision of the first applicants to purchase the business. In the course of so doing, they attack the credibility of Mr Farrel Metz.
547 The respondents, pointing to the overall facts of this case, particularly during the due diligence period following the signing of the sale agreement, submit that notwithstanding having received the list of projects on 18 June 2008, neither Farrel Metz nor Mervin Metz did what anybody else would have done in such circumstances, which would have been to telephone Mr Sim to have him explain the document or to ask for and look at the files pertaining to those projects, or otherwise to try and make sense of it, or to get specific numbers. None of this he did as he admitted (transcript 90). The respondents say all of this is against a background that the list of projects document itself provides no details, round figures and no breakdown.
548 The respondents submits that it beggars belief that someone could have been looking for a business for 18 months or more, who had investigated at least a dozen businesses and who had made an offer on one, would not have further investigated the matters unless they were of no interest or consequence to them, because it was irrelevant to the basis upon which they were proceeding to purchase the business. They make the point here that the applicants were expecting Mr Sim to do all the hard work once they settled into the business.
549 The respondents further submit that the evidence shows there was no attempt made by Farrel Metz or Mervin Metz to cross-reference the names on the list of projects with the key customers or suppliers apparently extracted from their accountant’s analysis of the financial records, or to find out if they were reflected in customers or suppliers who were customers or suppliers of the business in the previous two financial years, or to understand what in any specific sense these projects were.
550 The respondents submit that when confronted with this reality, and cross-examined about it, Mr Farrel Metz simply endeavoured to create something to fill the gap. The respondents refer to this exchange (transcript 90) as illustrating the point:
COUNSEL: All right. So you surmise they were the projects on hand, but you didn’t know; is that right?
F METZ: I didn’t know who the customers were, but I surmised that these were the project names of the various contracts one (sic) [won].
COUNSEL: And one of the things that you had asked back in May was a list of the top customers and suppliers; that was right, wasn’t it?
F METZ: Yes.
COUNSEL: And that was an important thing to know, wasn’t it?
F METZ: Yes.
COUNSEL: And getting this sheet telling you the projects without telling you the customers or suppliers; it was pretty meaningless, wasn’t it?
F METZ: No. Because Sim had alluded in the second meeting as to who did what, which customers looked at – covered what.
COUNSEL: Well, alluded, so is there something in your statement that tells us what he said?
F METZ: No. There isn’t.
551 The respondents submit that there is no omission, rather this evidence is not in the witness statement because it did not happen. To suggest otherwise is a palpable falsity and again reflects upon the credit of Mr Farrel Metz.
552 Counsel for the respondents also draws attention to the fact that there were three lists in the end, concerning the projects on hand: that of 18 June 2008; another of 17 July 2008 soon after settlement of 4 July 2008; and a further one on 1 August 2008.
553 The respondents submit that notwithstanding considerable differences between the three lists, and notwithstanding the self-serving protestation that Farrel Metz made about his reliance on the June list, when differences were drawn to his attention in cross-examination it became apparent that he had not raised such differences with Mr Sim after settlement and it did not appear in his statement, and any suggestion that he had otherwise raised it with Mr Sim was really a matter of recent invention. The respondents refer to the following further exchange in cross-examination (transcript 112):
COUNSEL: You would agree with me again that there are differences between the June list and this list and the July list and this list [‘this list’ being a reference to the August list]?
F METZ: That is correct.
COUNSEL: And you make no reference in your statement, do you, about discussing this list with Mr Sim?
F METZ: No, I don’t make any reference in my statement.
COUNSEL: Because you didn’t, did you?
F METZ: No. I did discuss it with him.
COUNSEL: But it’s not in your statement?
F METZ: It’s not in my statement.
COUNSEL: Again in relation to the list of, said to be, updated 1 August 2008, you never looked at, I take it, any files that related to the projects that are identified on page 144?
F METZ: Yes, that’s correct.
554 The respondents finally submit that the role of projects in the business and what might happen to them is something which appears to be accepted without equivocation ultimately (transcript 99) albeit preceded by lengthy cross-examination in which there appears to have been a denial, rejection and equivocation and finally an acceptance. At transcript 99, the following exchange occurred:
COUNSEL: So Mr Sim did tell you, in the due diligence period, that projects come and projects go?
F METZ: He was referring to the differences in sales for – why there was a decrease in sales for particular customers that we pointed out.
COUNSEL: That’s right, because projects come and projects go?
F METZ: Correct.
COUNSEL: So as a result, what the future held for the business depended upon whether those customers and suppliers had projects which had items which would involve Illumination Services?
F METZ: Yes.
COUNSEL: And if they didn’t, either they would go elsewhere, or they didn’t have the projects, in which case they wouldn’t come to you anyway; correct?
F METZ: Yes. That is correct.
555 The applicants respond to these submissions of the respondents by asking why the Metzes should not have been comforted by Mr Sim’s advice as to projects that were “on hand”. As to what happened following settlement, the applicants say that it is plainly evident that Mr Sim was consistently rude and intimidating and dismissive of anything raised with him and there would have been no point in trying to raise any concerns with him. The Metzes were concerned he would leave if pressed.
556 With regard to the submission, to the effect that the fact that the project did not eventuate does not provide a basis to conclude that a representation that there was a project was misleading or deceptive, the applicants contend that this completely ignores the distinction that was clearly made between projects that were on hand and those that were potential.
557 As to the question of lack of reliance, the applicants argue that reliance, at material times, was no longer an issue as both the contract and settlement had been concluded when the subsequent lists for work were produced in July and revised in August 2008.
558 Again, the applicants ask, rhetorically, what more was Farrel Metz supposed to do having asked for details of the projects from Jim Goodwin and having been provided with them. He trusted Mr Sim that the projects on hand were as stated and that the list was true and correct. In circumstances where Mr Sim was to remain in the business for the next two years, the applicants say it is unlikely that a party in the position of Mr Sim would misrepresent the true position. In short, in these circumstances, the applicants say it beggars belief as to why a party in the position of Farrel Metz, who trusted Mr Sim, ought to have made further investigations.
559 The applicants also submit that following settlement, failure to raise express concerns with Mr Sim should not result in the Court drawing an adverse inference.
560 As to the respondents’ submission that the answers provided by Mr Sim about other projects indicated a proper basis for him to express the view in the document of 18 June 2008 as to value, it is said by the applicants not to accord with the evidence of Mr Sim. He maintained the view in evidence – even though this does not appear to be the position upon which the final closing submissions of the respondents have been made – that the document of 18 June 2008 was prepared in March 2008 and not current as of 18 June 2008.
561 Again, the applicants say that when one has regard to the intimidatory behaviour of Mr Sim, as an employee towards the Metzes, particularly Farrel Metz, it is not at all surprising that Farrel Metz would not have confronted Mr Sim in relation to the listed projects provided after the settlement.
562 The applicants say there is ample evidence of reliance and Farrel Metz was not cross-examined of this aspect of his evidence.
563 As to the cross-examination at transcript 99, referred to above, the applicants submit that the answers do not negate the operative effect of the representations contained in the list. At no material time did the cross-examiner ask Farrel Metz whether the result of this understanding he knew it to be the position that the list of projects was transient and could not be relied upon. The Court should not draw such an inference and to so would be patently unfair.
564 By way of consideration of these competing views of the evidence, the analysis the respondents make of the due diligence exercise undertaken by the applicants, following the concluding of the sale agreement, may be considered to have much force in it, especially when one looks at the business decision to buy the business confirmed during that period by the applicants. However, the matter in issue in this proceeding is not whether first applicants, as the purchaser under the sale agreement, conducted themselves in an astute business manner at all material times. That assessment might be an interesting one for students of business to undertake, but it is not necessary for the Court, in the circumstances of this case, to do so. All that need be said by the Court, by way of observation, is that their agents, the Metzes, seem to have acted at all times with a considerable degree of trust in others. During the due diligence period they largely left matters in the hands of their accountants, who looked at the financial statements of the first respondent in order to advise the applicants what the parameters of the business were from a financial point of view. Farrel Metz and Mervin Metz also met with Mr Sim, with Mr Goodwin present. It may be accepted, therefore, as the respondents contend, that it is surprising that Farrel Metz did not press for more information about the projects on hand when he received the list of such projects in the email from Mr Goodwin on 18 June 2008.
565 However, as to the circumstances in which the list of projects was supplied, I reject totally the claim by Mr Sim that he had prepared that list earlier in the piece, in about March 2008, when Ms McBrierty instructed GMO to be the brokers on the sale. Mr Sim’s claim seems improbable in all the circumstances. What in fact happened is as explained by Mr Goodwin, whose evidence I accept entirely in this regard. First, Mr Goodwin stated (exhibit 17 [12]) that the purchasers had, on numerous occasions on which he had attended with them upon Mr Sim, requested Mr Sim to provide written details of the business projects on hand and this had been discussed at length during these meetings. Then, in response to the purchasers’ request on 18 June 2008, Mr Sim provided him with the list of projects. He then forwarded the list as an attachment to an email to Farrel Metz on the same day, describing the content as “forward orders”, which is how Mr Sim had described them to him when he collected the document. In all of those circumstances, I conclude on the balance of probabilities that the undated list of projects sent by Mr Goodwin to Farrel Metz by email on 18 June 2008 was prepared by Mr Sim that day. In all the circumstances described by Mr Goodwin, I would infer that the time for producing such a list had well and truly arrived and that Mr Sim sat down and prepared it immediately. This may help to explain why the projects identified were given approximate or rounded off values.
566 I also consider that, on any reasonable construction of the document, provided in the circumstances described by Mr Goodwin, the document conveyed that all but item 13 were secured projects that were the subject of orders that had values of approximately the amounts specified. Item 13, in respect of the Murray Street project, however was not, as it was described as having a “potential” value, thus not being the subject of any firm order.
567 I find that in the circumstances described by Mr Goodwin, a reasonable purchaser in the circumstances of the first applicants in this case, would have understood the list of projects, save for the Murray Street project, as identifying firm orders, and not mere estimates of possible sales to be confirmed later. A question arises, however, whether the Metzes actually understood the list as doing this.
568 While in hindsight one might say it is surprising that Farrel Metz did not seek out more information about these projects when he received the list, a further question is whether he took Mr Sim at his word and relied on what he represented as firm orders.
569 To the extent that what occurred after settlement may provide some indication of the true position before settlement during the due diligence period, the respondents say that when further lists were produced, on 17 July and then a revised list in early August, which were variations on the 18 June list, Mr Farrel Metz did not question Mr Sim about the changes at all. In that regard there is an argument to be made that this suggests some degree of inconsistency in the Metzes insistence that they relied on the list of projects when earlier proceeding with the purchase that one would have expected the new owners and operators of the business to have agitated for much more information at the time, they saw the lists that varied from the list provided on 18 June that they say they relied upon.
570 Farrel Metz, however, says that the only material change in the list that Mr Sim gave him on 17 July to the values shown on the 18 June list was in relation to 432 Murray Street, which had been reduced to $200,000.
571 He accepted, however, that the list now included “projects to be confirmed”, including the Madely School project, the Seascapes Mandurah project, the St Martins project, the Lifestyle Village project and the Stylelite Lord Street project.
572 Farrel Metz also accepted that the revised list of 1 August 2008 broke the projects down into those which the business had received confirmed orders, those for which orders were yet to be received and those awaiting further elements which were likely of securing orders was stated to be extremely high.
573 I find it very surprising that, in light of these changes, and changes to the categorisation of the projects, and whether or not they were the subject of firm orders, Farrel Metz did not query Mr Sim about the changes when he received the July and 1 August lists, if he had understood that the list of projects given to him on 18 June was a list of firm orders. The 1 August list plainly represented something else. Farrel Metz does not say, for example, that he raised any queries. To the extent he suggested otherwise in cross-examination, I consider he was reconstructing the event.
574 The substantive response of the applicants to the charge made against them by the first and second respondents to the effect that all this shows evidence that Farrel Metz never relied on the 18 June document as specifying firm sales or at all, is to say that he did rely upon the 18 June 2008 document and that, in the light of Mr Sim’s behaviour after settlement, he was not in any position to query him further.
575 I did not find this explanation terribly convincing. I say that because the applicants took possession of the business on 4 July 2008. The list of 17 July, less than two weeks later, immediately indicated a number of projects “to be confirmed”. Within a month of possession, on 1 August, the revised list broke the projects down to the different categories which suggested a number were yet to be confirmed. While the conduct of Mr Sim plainly became intimidatory quite early on in the piece, the evidence does not disclose that the relationship between Farrel Metz and Mr Sim had become so difficult or intractable within one month of the applicants taking possession of the business, that Farrel Metz actually felt that he could not have raised queries about these documents with Mr Sim.
576 The first evidence of any difficult behaviour of Mr Sim that Farrel Metz gives is to the effect that, when Tony Tartaglia of Freeway Electrical was to come in to meet Mr Sim about some disputed matter after about a week from possession, and Farrel Metz asked if he could attend the meeting with Mr Sim, Mr Sim told him it was none of his business. Farrel Metz complains that this opportunity was not taken by Mr Sim to introduce the Metzes to Mr Tartaglia, given that Freeway Electrical was an important customer. This may have been a pointer to Mr Sim’s later behaviour, but it hardly forms the basis for a claim that Farrel Metz was thereby so intimidated he would not have raised a query on the 1 August list.
577 Farrel Metz’s evidence of the very difficult and intractable relationship between him and Mr Sim otherwise seems to date to much later in the piece – at least into late August 2008. Ms Helen Friedle’s evidence of the difficult relationship that she had with Mr Sim, as well the difficult relationship that Farrel Metz had with Mr Sim, by inference appears to cover much of the period from the end of September 2008 until she left in March 2009.
578 All in all, based on this evidence, I am not satisfied that the relationship between Mr Sim and Farrel Metz was so bad as of mid to late July and the beginning of August 2008, that Farrel Metz would not have felt able to raise queries about the 17 July 2008 project list or the revised 1 August 2008 project list with Mr Sim. Further, if Farrel Metz had entertained concerns about what he had been shown, compared with what he had understood earlier when given the 18 June 2008 list, one expects he would have raised his concerns with his father, Mervin Metz, and that Mervin Metz might have separately decided to raise the concerns with Mr Sim. As a matter of practice, however, the financial side of the business at this point seems to have been left to Farrel Metz and it was up to him to raise these sorts of queries. He did not.
579 I should also add that there is no other clear evidence that, in the later months, when the business apparently was suffering cashflow difficulties, the Metzes ever raised with Mr Sim the issue of them having been mislead or deceived by the 18 June 2008 list of projects, compared with what was then happening by way of firm orders in the business.
580 In all of these circumstances, while I consider it would have been open to a reasonable purchaser in the position of the first applicants to have treated the list of projects given to them on 18 June 2008 by Mr Goodwin as secured orders that they were entitled to rely upon in proceeding to enter into the sale agreement, the fact that no queries were made during the due diligence period concerning that list, and no queries were raised later when the lists of 17 July 2008 and 1 August 2008 were given by Mr Sim to Farrel Metz, and no further challenges of misleading or deceptive conduct were raised in the months of 2008 that followed, I am led to two conclusions: first, that the Metzes never placed the store on the 18 June list that they now claim, that is to say, they did not in fact treat it as a list of secured orders when they received it; and secondly, that they never relied on that list as constituting a list of secured orders when deciding to proceed with the purchase of the business at the completion of the due diligence provided for under the sale agreement. In these circumstances I accept the claims in defence that the applicants did not rely on this representation as one of secured orders or at all.
581 For the sake of completeness, I should say that but for this finding of a lack of reliance, I would accept the submissions made by the applicants concerning the absence of reasonable grounds for the values of the particular projects in the 18 June 2008 list as challenged by the applicants.
582 As to the allied representation said to be implicit in the representation pleaded in [17(i)], given my finding that the applicants did not rely on the 18 June list of projects and values as constituting secured orders, I find it is not open to the applicants to contend that they relied on the list as impliedly representing projects with an expected turnover of between $2 million and $2.5 million with a sustainable gross profit on turnover of in the region of 36.8%.
583 Consequently, I find that the applicants have not established that they relied on representations pleaded in [16] and [16A].
Representation pleaded in [17(j)] of statement of claim – future projects
584 By [17(j)] of the statement of claim, the applicants plead that during the course of the negotiations Mr Sim made the following further representations to the applicants:
(j) That he would ensure that here were enough future projects to maintain the turnover and profitability of the business, and that in fact the business would soon be awarded further projects in the near future, the specific details of which would be provided in due course.
585 The first and second respondents by [28] of the defence deny [17(j)].
586 The applicants have not formulated any submissions in their closing written submissions in respect of this pleaded representation and I take it that the representation is not pressed.
587 It might be noted in any event, the representation seems to be inconsistent with that pleaded in [17(i)] and [17(ia)].
588 In all the circumstances I find that this representation is not established.
Representation pleaded in [17(k)] of statement of claim – assistance in running business
589 By [17(k)] of the statement of claim, the applicants plead that during the course of the negotiations, Mr Sim made the following further representation to the applicants:
(k) Mr Sim would assist and support the applicants to run the business successfully and to maintain the turnover and goodwill of the business, and would continue to source new projects during his employment which would be at least two years following settlement.
590 By [29] of the defence, other than to admit that Mr Sim said he would assist the applicants in running the business, the first and second respondents deny [17(k)].
591 This plea, like that in [17(j)] is not the subject of any submissions in the applicants’ closing written submissions and I take it that this plea is not pressed.
592 In any event, the subject matter of the pleaded representation overlaps of the preceding representations in [17] as well as the representations as to employment, training and introductions in [15] of the statement of claim.
593 In these circumstances I consider the representation has not been made out.
Representation pleaded in [17(l)] of statement of claim – exclusive supplier
594 By [17(l)] of the statement of claim, the applicants plead that during the course of the negotiations Mr Sim made the following further representation to the applicants:
(l) That the business was the exclusive supplier and distributor in Western Australia of the products supplied by Xing Feng, Cooper Industries Pty Ltd and Australume.
595 By [56] of the statement of claim the applicants say this representation was misleading or deceptive or likely to mislead or deceive as the business was not the exclusive supplier and distributor as represented.
596 The first and second respondents, by [8] of the defence, deny the representation.
597 In [30] of the defence, these respondents repeat [8] but otherwise deny the paragraph to say that if any representation was made then it was not relied upon by the applicants by the reason of the matters pleaded in [20] of the defence.
598 The applicants point to the evidence generally of Ms McBrierty who stated that it was her understanding that the business was the WA agent of Menvier, that is that it had an exclusive agency (transcript 540-541). Ms McBrierty also had an understanding that the business was the exclusive agent for Australume products (transcript 541).
599 The applicants note that in [131] of his responsive statement Mr Sim (exhibit 35) states that the business was the WA agent for Menvier (which is Coopers).
600 In cross-examination, while he was equivocal about it, Mr Sim ultimately conceded that the business was considered to be the agent for Menvier (transcript 686).
601 Farrel Metz (exhibit 1 [9]) says that at the April 2008 meeting he asked Mr Sim whether the business had any exclusive arrangements, to which Mr Sim replied with words to the effect that it did have exclusive supply arrangements for WA with certain suppliers, namely Australume, Cooper Industries and Xing Feng. Mervin Metz corroborated this evidence (exhibit 10 [10(f)]).
602 Mr Goodwin, who gave clear evidence about what transpired and was said at meetings involving the Metzes, Mr Sim and himself in March and April 2008, did not give any evidence of such a representation or any evidence bearing on the alleged representation.
603 The respondents note that in cross-examination Farrel Metz accepted that at no stage did he ask Mr Sim when the exclusive arrangements he alleged ran out or on what terms they were made or whether payments were forthcoming or what significance there was in relation to the agreements or for a copy of the arrangements. The respondents submit this is conduct of someone who falsely asserts that this is what was said, rather than the conduct of somebody who apparently merely took someone else’s word.
604 The respondents also draw attention to the evidence of Farrel Metz and the fact that when he looked at a Starlite catalogue two or three months following settlement and identified that Starlite was stocking and promoting and presumably selling Xing Feng products, he identified without hesitation that the products were Xing Feng. He did not raise the question of an exclusive arrangement with Mr Sim or anyone else.
605 There is force in the respondents’ observation that the evidence of the Metzes is not the conduct of persons who had previously been told that the business was the exclusive agent of Xing Feng in Western Australia.
606 In the circumstances, I consider the evidence in relation to this pleaded representation to be unclear. I have little doubt, on the evidence of Mr Farrel Metz and Mr Mervin Metz, as well on the evidence of Ms McBrierty and Mr Sim himself, that there may well have been some discussion about the business’ agency for the products of Coopers, Australume and Xing Feng in the course of discussions. I am not satisfied, however, that such discussions ever rose to the lofty heights of a clear representation of exclusive agency as pleaded. As I have noted Mr Goodwin gave no evidence about any such discussion at the March or April meeting at the premises of the business. This causes me to also to doubt that any firm representations were made about exclusive agencies.
607 Consequently, I am not satisfied on the balance of probabilities that the representation pleaded in [17(l)] was made.
Representation pleaded in [17(m)] of statement of claim –litigation
608 By [17(m)] of the statement of claim, the applicants plead that during the course of the negotiations Mr Sim made the following further representation to the applicants:
(m) That the business had not been involved in litigation.
609 By [31] of the defence, the first and second respondents are taken to deny this representation.
610 The applicants in support of this claim point to the evidence of Farrel Metz (exhibit 1 [16(i)]) who said that Mr Sim, following a question from Farrel Metz about the business’ involvement in any litigation, said words to the effect that the legal fees shown in the financial statements were incurred in a minor matter involving, Mr Metz thought, HobNob which he, Mr Sim, was only pursuing on principle.
611 In his responsive statement (exhibit 35 [19]), Mr Sim said that Farrel Metz never asked him whether the business had ever been involved in litigation or words to that effect.
612 The applicants submit that the evidence of Farrel Metz is to be preferred to that of Mr Sim and that the evidence of Mr Sim generally speaking is unsatisfactory in almost every material respect. On the other hand, the evidence of Farrel Metz was satisfactory in every material respect.
613 The evidence actually given by Farrel Metz (exhibit 1 at [16]) concerning the present alleged representation is as follows:
During about late/mid-April 2008, I attended a second meeting with Sim, Jim Goodwin and my father at the Business premises during which [amongst other things]:
(i) I also asked about the legal fees that the Business had incurred, and asked if the Business had been involved or implicated in any litigation. In response Sim stated words to the effect that the legal fees incurred related to a minor matter, involving Hob Nob from memory, which he was only pursuing on principle.
614 Mr Goodwin also attended the meeting on 18 April 2008. He did not give any evidence about any discussion at all concerning litigation or comments that accord with Mr Farrel Metz’s recollections.
615 In all of these circumstances, taking into account the fact that Mr Goodwin gave no evidence on this topic, I am left in some doubt that, if there was any discussion about litigation, it was anything more than an incidental reference to some litigation that arose out of the mention of legal fees.
616 Consequently, I am not satisfied on the balance of probabilities that the applicants have established the representation pleaded in [17(m)] was made.
Representation pleaded in [23A] of statement of claim – disputed claims/court proceedings
617 By [23A] of the statement of claim, the applicants plead that, when conducting due diligence pursuant to the sale agreement, Ms McBrierty, the third respondent, or Ms McBrierty on behalf of the first respondent and/or Mr Sim, represented that the first respondent had not been involved in any disputed claim and/or court proceedings.
618 By [37A] of the defence of the first and second respondents, these respondents do not plead to [23A] of the statement of claim. There seems to be some misapprehension in that regard because it is alleged that Ms McBrierty acted not only for herself, but also for the first respondent and/or Mr Sim. Be that as it may, that is the pleading. Counsel for the first respondent and Mr Sim did however address the claim in submissions.
619 Ms McBrierty denied meeting with Farrel Metz on 16 May 2008 or at all. She was not pursued further in cross-examination on that topic, as the respondents point out.
620 The representation pleaded in [23A(f)] refers to “disputed claims and/or court proceedings”. I take “court proceedings” however to be the same as “litigation”.
621 So far as the representation about “disputed claims” is concerned, the applicants rely on a number of aspects of Ms McBrierty’s evidence during cross-examination generally that they say suggests her evidence was unsatisfactory and so generally should not be accepted. It is submitted, for example, that:
(1) while she instructed Mr Todd to do the Todd valuation in relation to which the working capital requirement was stated at $300,000 she denied that the working capital requirement was in fact in that sum and gave no satisfactory explanation as to why Mr Todd would have used the $300,000 figure;
(2) she estimated stock to be worth $200,000 in reliance on June 2007 figures knowing that stock changes dramatically from time to time but allowed that sum to be inserted;
(3) she estimated stock to be worth $200,000 without having an inventory in place to verify the value of stock;
(4) in [26.3] of her statement (exhibit 33), she stated that the email received from Jim Goodwin requesting information as to relevant disputes was sent back to the applicants by facsimile transmission, but under cross-examination she acknowledged that it was not sent to the applicants but then suggested it was sent to GMO;
(5) the use of the word “understand” in [26.3] of her statement does not convey that she based her account of events on recollection but on reconstruction;
(6) the document at tab 13B of exhibit 1 contains her handwriting. In relation to “Documents relating to any Litigation and Claims”, she placed a cross next to this entry and wrote the names “Green Co” and “Tridonic” adjacent to the words “any pending action against lawyer’s correspondence”, yet sought to assert in [26.1] that Delgo Pty Ltd v Simmac Pty Ltd was a pending action. Further her handwritten notations thereon show that “Green Co” and “Tridonic” were actions that had been settled;
(7) despite it being open to the respondents to have cross-examined GMO as to whether the document at tab 13B of exhibit (the statement of Farrel Metz) had been received by GMO, no attempt was made to do so. Furthermore, no effort was made to obtain the document from GMO who were at those times the agents of the respondents and clearly he would have had an obligation to provide it, had they been so requested;
(8) Ms McBrierty acknowledged she did not remember the events of three years ago during cross-examination.
622 The applicants submit that in those circumstances and having regard to the observations and the evidence of Farrel Metz, his evidence is to be preferred to the evidence of Linda McBrierty denying any meetings and so that she ever made the pleaded representations.
623 I have had careful regard to the document at tab 13B. The document supports the finding, as does the general evidence of both Farrel Metz and Ms McBrierty, that Jim Goodwin by email dated 13 May 2008 wrote to Ms McBrierty about the subject of due diligence, the text of the email being addressed to both “Paul and Linda”. She was the office administrator and so was the logical person to deal with on a number of queries raised in it. The email contained a list of due diligence requirements that “the purchasers’ accountant has asked for”. It included “Notes on bad debts and any write off and any pending action including lawyer’s correspondence”. Next to that the following appeared:
b Green Co
Tridonic
|
Files in top
drawer – black
filing cabinet
both settled.
A further item on the list was “Documents relating to any litigation claims”, against which appeared a “x” (cross symbol). A handwritten “x” also appears next to a number of other items on the list, including “Any budgets and cashflows and business plans for ’06 through to ’08”, and “Information relating to any contingent liabilities”.
624 I take the “x” in each case to signify that the author of the symbol considered there were no documents in that category, although in other places the notation “N/A” – which usually signifies “not applicable” – is employed in relation to “Copy of employment agreements”, “Copy of internal procedure files”, and “Marketing plans”.
625 Document 13B as produced has red handwriting on it as well as red ticks. The red ticks on the face of it have been made with a different writing implement from that used for the red writing, as the red ticks are much thicker than the red writing. It is difficult to know whether the person who wrote in red also applied the red ticks.
626 Ms McBrierty believes that she provided a copy of document 13B to Mr Goodwin and the respondents imply that the document must have finished up in the hands of Farrel Metz or the Metzes and their advisors. Farrel Metz, however, says that following Mr Sim’s departure from the business on 20 April 2009, he located a copy of this email with Ms McBrierty’s handwritten notations on it, together with various files relating to legal disputes between the first respondent and other parties, including Notya Pty Ltd, Tridonic Pty Ltd and Targetti, in the back of a cupboard at the business premises.
627 I am inclined on all the evidence, including the note like notations made on tab 13B, to consider that it was not intended to be a final response in relation to the due diligence inquiries listed on it, was not given to Mr Goodwin and remained with Ms McBrierty. I consider there is no reason to disbelieve Mr Farrel Metz as to how he came by the document.
628 Nonetheless, I am left in considerable doubt as to a meeting at which any clear representations were made on the topic of “disputed claims” or “court proceedings”.
629 Consequently, I am not satisfied on the balance of probabilities that Ms McBrierty made for herself, or for any of the respondents, the representation pleaded in [23A] of the statement of claim.
630 By [21] of the statement of claim the applicants plead that the representations pleaded in [15] of the statement of claim, which have been the subject of consideration above, constituted collateral oral warranties by Mr Sim and/or Mr Sim on behalf of the first respondent which were collateral to the sale agreement, in consideration of which the first applicants agreed to purchase the business.
631 By [35] of the defence, the first and second respondents deny [21] of the statement of claim.
632 The respondents do not further elucidate their position in relation to this plea of collateral warranties in their written or oral submissions in the proceeding, save that the respondents deny the representations pleaded in [15] of the statement of claim or, if made, that they were in fact relied upon. It may be taken that the respondents’ position in relation to the extended argument concerning collateral warranties is exactly the same.
633 The concept of collateral contract or warranty has long been with the law. In the present context, the theory is that an oral promise made in consideration of the promisee entering into another agreement may itself institute an enforceable agreement, an agreement which is collateral to the other, main agreement.
634 In the present case, in [21] the applicants contend that Mr Sim and/or the first respondent gave the collateral warranties in relation to the representations pleaded in [15], namely, that:
Mr Sim would remain on as an employee for two years following settlement.
During the two year period, Mr Sim would train and instruct the Metzes fully and comprehensibly in the operation of the business.
Mr Sim would introduce the Metzes to all suppliers and customers and ensure they independently developed good working relationships.
If they were to purchase the business, Mr Sim would not compete with the business for a period of five years.
635 In Cheshire and Fifoot’s Law of Contract, Ninth Australian Edition at [1.53], the learned authors, NC Seddon and MP Ellinghaus, make the following points in relation to collateral contracts which, for present purposes, serve as a convenient summary of the law:
(1) Statements, written or oral, which are relied on as constituting a collateral contract must be clearly promissory in nature.
(2) The undertaking relied on must not be one which would be expected to be incorporated in the principal contract, noting that the attempt to divide what is clearly one transaction between the parties into two contracts is often artificial.
(3) The undertaking relied on must not be inconsistent with the principal contract, although the rule must be reconsidered in light of the modern doctrine of estoppel which provides a possible means of circumventing it.
636 As to point 1, each of the representations made was promissory in nature.
637 As to point 2, given that the undertakings relied upon as to the employment of Mr Sim, the training that Mr Sim would provide to the Metzes and the steps that Mr Sim would take to effect introductions to suppliers and customers and the promise not to compete, were personal to Mr Sim, there is no ready expectation that they should be found in the sale agreement. That is because, while I consider Mr Sim made the representation for himself and the first respondent, the most legally effectual way to bind Mr Sim personally to these promises was in a separate employment agreement.
638 As to point 3, there is in my view nothing inconsistent between the undertakings relied upon and the sale agreement; very much for the same reasons just outlined. The main contract, in respect of which the collateral warranties are alleged, is the sale agreement. The undertakings are each in respect of the conduct of Mr Sim following the sale of the business, but designed to ensure that the applicants both enter into and complete the sale agreement with the first respondent.
639 On the question of consistency the decision in Hoyt’s Pty Ltd v Spencer (1919) 27 CLR 133 continues to hold good in Australia, so that, if there is any inconsistency evidence of the alleged oral warranty will not be admitted. This problem often squarely arises where the principal contract, to which the collateral warranty or contract is said to relate, has an entire contract clause to the effect that the principal contract is stated to contain all clauses and there are no other relevant representations, warranties, implied terms and the like. In this case, while there is an entire contract clause in the employment agreement, I do not consider it relevant as the collateral warranties contended for were made to induce the applicants to enter into the sale agreement, which agreement contains no such relevant clause.
640 In the circumstances, I find that the pleaded representations of the first and second respondents constitute oral collateral warranties.
641 Consequently, I find that the representations pleaded in [15] of the statement of claim constituted oral collateral warranties given on behalf of the first and second respondents, as pleaded, and that they were relied upon by the applicants in entering into the sale agreement.
Representation pleaded in [21B] of statement of claim –product substitution
642 The applicants then relevantly plead in [21B] that the warranty pleaded in [21A] also constituted a representation made by each of the first, second and third respondents of the same matters, to the effect that they were not in possession of such information disclosed therein; and that the first respondent had disclosed all information known to it relating to the business, which was material.
643 The contractual warranty (arising from cl 4 of Annexure A to the sale agreement) pleaded in [21A] is to the effect that the first respondent warrants that it is not in possession of any knowledge or information which:
(1) if unrevealed, could at a later date prove detrimental to or adversely affect the normal trading of the business; and
(2) if revealed, could cause the first applicants to modify substantially the terms of the offer or withdraw the offer.
644 By [58A] of the statement of claim, the applicants plead these representations were misleading or deceptive or likely to mislead or deceive in that Mr Sim and/or Mr Sim on behalf of the first respondent knew it to be the position that:
(1) he had engaged in the product substitution practices pleaded in [39ZA] of the statement of claim, that is to say, regularly engaged in the practice of substituting products specified in customer quotes that were accepted with different (but usually visually similar) and significantly cheaper products, products either already assembled, or purchased in parts only and assembled with other parts by, or at the direction of, Mr Sim – the product substitution practice – thereby enabling Mr Sim to be extremely competitive in his quoting and to thus obtain sales that would not have been obtained if the products specified were quoted at the true cost plus the usual profit margin represented;
(2) and/or he had provided quotes for the Howard Solomon project and the Burswood Tower 5 project specifying prices for products quoted at costs below cost price or at cost at which the business were unable to supply the products.
645 The first respondent by [35A] of the defence admits the sale agreement contained a warranty to the effect pleaded in [21A] of the statement of claim, but otherwise denies that paragraph.
646 The first and second respondents, by [35B]-[35E] of the defence, deny respectively [21B]-[21E] of the statement of claim. The first and second respondents also, by [70A] of the defence, deny [58A]-[58C] of the statement of claim and repeat [20] and [52C]-[52Z] of the defence. In short, these defendants deny the practice of product substitution alleged against them.
647 In my view, in light of the contractual warranty, I find that: the first respondent, and the second and third respondents as directors of the first respondent, thereby represented, quite independently of the sale agreement, that they were not in possession of such material information or knowledge mentioned in the warranty; and that the first respondent represented it had disclosed to the applicants all material information relating to the business.
648 While I generally agree with observations to the effect that the task of implying representations from the making of contractual promises and the entry into contracts is to be approached with caution and with an eye to all the facts, and not mechanistically from the promises made (as to which see Concrete Constructions Group v Litevale Pty Ltd (2002) 170 FLR 290 at [156]-[168], per Mason P; McGrath v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2; (2008) 165 FCR 230 at [138] per Allsop J, with whom Emmett J agreed generally) in this case to imply such representations from the contractual warranty is not a merely mechanistic process. The contractual warranty given at the point the sale agreement was concluded plainly meant that not only would the Seller make appropriate disclosures in accordance with the contractual warranty, but impliedly that the Seller then had nothing material to disclose or it would already have disclosed it. By Mr Sim and Ms McBrierty as directors signing the sale agreement they too must be taken to have represented that they, as the moving forces behind the first respondent, had nothing material to disclose.
649 In order to make the alleged general product substitution practice alleged, the applicants rely upon the particular instances of underquoting pleaded in respect of the Howard Solomon project and the Burswood Tower 5 project, as well as particular instances of what they say are clear examples of product substitution on the Howard Solomon project and a 2006 project known as the Midland Gate shopping centre project, as well by way of inference from disputes that the first respondent, by Mr Sim, had with a number of customers or former customers of the business when the first respondent owned the business.
650 Generally speaking the first respondent and Mr Sim say there is no evidence to support any regular substitution practice and particular instances alleged are either incorrectly characterised or lacking probative value.
651 It is necessary then to consider each of the examples offered in order to be able to deal with the way the applicants put their case on this point.
652 The Howard Solomon project: Farrel Metz produced the documentary evidence concerning the quoting, contract and work done in relation to the Howard Solomon project. Sage Consulting issued a schedule of luminaires dated 6 November 2007 setting out the luminaires required for this project. They included, amongst others, an A1 Enlite 9913-338 (type A1), A2 Enlite 9913-39 (type A2), B Masson Domino (Masson Domino), D Environmental Lighting 9915-38-5 (type D), N1 Harcroft (type N1), N2 Harcroft (type N2), A Pole 3S Lighting 407166-78 (A/Pole), B Pole 3S Lighting 407166-78 (B/Pole) and A1 (required for stage 2 of project (Enlite 9913-38 (type A1-Stage 2).
653 Mr Sim issued a quotation dated 9 June 2008 to Freeway Electrical, the electricians on the project in which the items were quoted at the following prices:
Type A1 - $465
Type A2 - $375
Masson Domino - $169
Type D - $294
Type N1 - $87
Type N2 - $95
A/Pole - $720
B/Pole - $725
Type A1-Stage 2 - $465
654 On 4 September 2008, Freeway Electrical issued purchase order 0561 to Illumination Services WA based on the quotation Mr Sim had issued.
655 The applicants then allege that after settlement, but prior to Mr Sim’s departure from the business, Mr Sim without the knowledge or consent of the applicants supplied products in substitution for or in modification of the products so specified in the quote ([39F] statement of claim).
656 Further, the applicants allege that at no material time did Mr Sim disclose to the customer, Sage Consulting, that the products supplied did not conform to the products specified, quoted and ordered ([39G] statement of claim).
657 Finally, the applicants say that after Mr Sim departed from the business, the customer required the first applicants to supply the products specified at a cost to the applicants ([39H) which resulted in the first applicants completing the project at a los of $85,906.18 ([39I]).
658 By [52D] of the defence it is pleaded, in effect that the Howard Solomon quote was varied at a subsequent sample inspection meeting and there were express terms of the Howard Solomon quote that all quantities were to be verified by Freeway Electrical and that prices were fixed for 30 days from the date of quote.
659 The first and second respondents contend that the products actually installed on the Howard Solomon project were physically identified at a time when Mervin Metz was present and which were signed off on by Mr Mike Sage of Sage Consulting on 28 January 2009. In other words, they say this is not substitution but rather a change in specification effected by the owner through its agent Mr Sage and to which the business was then and always subject. As a result, what was installed was identified by Mr Sage because he physically identified the product delivered by Mervin Metz because it was in the van and having been signed off, there is no basis for this claim.
660 The respondents say Freeway Electrical was the electrical contractor who supplied the relevant luminaires. The respondents say that as Ms Cheryl King pointed out in re-examination, the luminaires were installed in the Howard Solomon project at the end of 2009, or in early 2010, in other words many months after Mr Sim had left the business and for which he could not be responsible.
661 The respondents say in relation to the Howard Solomon project, but also more generally, that even if any of the matters the subject of the pleadings were found to have been made out on the evidence, there is no evidentiary basis to invite the conclusion provided for in [39V] of the statement of claim, namely, that “by acting as pleaded in [39T] hereof, Sim caused the goodwill and reputation of the business to be substantially diminished”. The respondents say the opinion of Mr Cook, the expert accountant called by the applicants, does not deal with this question and no evidence was called from any customer which would add to any factual basis for any conclusion invited by the pleading.
662 The applicants join issue with these respondents’ response.
663 The product substitution allegations are very serious. The applicants say that not only is the conduct of Mr Sim on the Howard Solomon project evidence of his breach of his employment agreement with the first applicants, but that it also affords, with other evidence of a more widespread product substitution practice that the first respondent (and Mr Sim) engaged in before settlement but which was not disclosed as part of the contractual warranty as it should have been. The allegations are tantamount to allegations of conscious, that is to say fraudulent behaviour on the part of the first respondent and Mr Sim. The essence of the allegation is that Mr Sim would quote for jobs that specified a particular product, representing that the specified product would be supplied, but, when it came to performance of the contract, he would use another, cheaper product which, in turn, enabled the first respondent to achieve a greater profit margin on the performance of the contract that it would have achieved had it supplied the specified product. The applicants say this practice both allowed the first respondent to quote competitively and when it won jobs, to make a higher profit margin.
664 In these circumstances, in considering the allegations made and the evidence said to support them, it is appropriate that I should not lightly make the finding that the applicants contend for, but bear in mind the admonition contained in Briginshaw v Briginshaw (1938) 60 CLR 336 (Briginshaw). In Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 110 ALR 449 at 449-450; 67 ALJR 170 at 170-171, Mason CJ, Brennan, Deane and Gaudron JJ explained the Briginshaw approach in the following way:
The ordinary standard of proof required of a party who bears the onus in civil litigation in this country is proof on the balance of probabilities. That remains so even where the matter to be proved involves criminal conduct or fraud. [footnote omitted] On the other hand, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear [footnote omitted] or cogent [footnote omitted] or strict [footnote omitted] proof is necessary ‘where so serious a matter as fraud is to be found’.[footnote omitted] Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society do not ordinarily engage in fraudulent or criminal conduct [footnote omitted] and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct.
665 The applicants say that a proper analysis of the evidence relied upon by the respondents to contend that Mr Sage approved the use of products on the Howard Solomon project, does not bear out the respondents’ claim. This is because, next to the signature of Mr Sage in relation to each of the products in question, it is stated “subject to spec”. At the base of the page it is stated that “subject to spec means subject to specification and drawings” (exhibit 34, documents referred at [18]).
666 In evidence, Mr Sage confirmed that to be the position. In cross-examination, volume 7, p 2160 of the trial bundle was put before Mr Sage. He identified (transcript 345) his signature on the document and was asked whether in this document he in effect signed off his acceptance of the luminaires to be used on the project. Mr Sage answered (transcript 346):
Partly correct. If you see there, it is a – it’s a acceptance but subject to specification.
When pressed further about that and whether it was subject to sample, the following further exchange occurred:
COUNSEL: So that you physically inspect the sample and you identify it and then you sign approved if it’s approved; is that right?
MR SAGE: They were signed as accepted but subject to specification.
When further pressed, Mr Sage explained:
They were accepted subject to specification because what was subjected was generally what was required for the project but did not comply with the specification in that they were not the variance that were specified. They were generally the light fitting or luminaire that had been specified but did not have the correct equipment inside them.
When pressed even further, Mr Sage indicated that his signature was on the document because he had physically inspected the items and that he was confirming that they, subject to specification, is what he had indicated.
667 In re-examination (transcript 350) in respect of this same document, Mr Sage was asked whether the samples that were approved were actually fitted on site, and he responded:
I would like to qualify my answer in that regard. The samples that were submitted did not comply with a specification, but they were generally what was required for the job. The equipment installed inside those samples was not correct. That’s back in January. In October, we saw something else again.
668 Mr Sage then went on (transcript 350) to confirm that what was subsequently installed was not to specification.
669 Mr Gary Lerm also gave evidence concerning the Howard Solomon project. He was, at material times, with a company called Environmental Lighting and his involvement in the project was in relation to the supply of luminaires for general areas. Mr Lerm supplied Mr Sim with the basic fitting which was a standard light fitting with a single lamp for general illumination. Mr Lerm ascertained from Mr Sim that he would be wiring the emergency and night light additions himself and so required only standard fittings. Some time later, Mr Lerm attended the Howard Solomon site and saw the light fittings which had been installed, which he recognised as the fittings from his firm. He was required to replace a ring on the fittings. He saw the wiring configuration that was inside the fittings which had been done by Illumination Services. He stated (transcript 376) that it in no way met the electrical specifications set out by Sage Consulting Engineers, being the specification at tab 184 of the trial bundle. He stated (transcript 377) that what had been done, should not have been done, in the interests of safety, because the inverter in the battery can get very hot due to other components and can cause a fire.
670 When Cheryl King of Freeway Electrical, called by the respondents, was cross-examined she stated that type A1, A2, B and D products were not to the architects or electrical consultant’s specification and then stated that the whole process was not “a very happy adventure for all concerned”.
671 The fittings on the Howard Solomon project were supplied on various dates in March and April 2009 (see tab 276 of the trial bundle). It is not in issue that Mr Sim himself arranged for the delivery of the fittings, having put them together, for plainly he did this work and did it as an employee of the first applicants. His primary position is that Mr Sage, the electrical engineer, approved what was installed by him.
672 I find that the fittings installed by Mr Sim were not those specified and that they were not approved for installation by Mr Sage. I accept the evidence of Farrel Metz at [274-]281] of exhibit 1 in this regard. They were contrary to the specifications and the business of the first applicants thereby failed to meet its contractual obligations on the Howard Solomon project as pleaded.
673 I find then the Howard Solomon project provides an example of product substitution as alleged.
674 The Midland Gate project: The applicants contend that the Howard Solomon project is not a “one off instance” of product substitution. In this regard, Mr Peter Kim, a director of Everett Smith, which he said is one of the largest electrical commercial contractors privately owned in Western Australia, and its construction manager, was called by the applicants in relation to the Midland Gate shopping centre project. He had dealt with Illumination Services WA prior to July 2008 and also when at Nilsen Electrics before that. He said he had a working relationship with Illumination Services up until 2006/2007 in that he dealt with Mr Sim on a variety of projects that the company he worked for had won where Mr Sim was supplying light fittings for the projects. He said, at Everett Smith, Illumination Services WA was one of the preferred lighting suppliers.
675 Mr Kim said that the relationship between Mr Sim and the business and Everett Smith lasted for about three to four years until approximately 2006, when it finished with the Midland Gate shopping centre project. Mr Kim said the relationship then deteriorated and there were “substitution of fittings that you weren’t aware of” and an aggressive manner towards him, Mr Kim, by Mr Sim in the conduct of business.
676 Mr Kim said that the last substitution would have been at Midland Gate Shopping Centre with carpark lighting of the undercroft light fittings which were fluorescent light fittings. The type of tube was the main item that was substituted from that specified, to an alternative type. He found out about the substitutions from lighting tests conducted when consultants and shopping owners complained that the lighting levels were not to what they had expected. Research then showed that the lamps provided were not the correct light fittings as specified.
677 As to other examples of substitution that Mr Kim more generally alluded to, he did not provide any details and I do not have any regard to the generalised allegation. Mr Kim was sparingly cross-examined.
678 I accept Mr Kim’s evidence and find that Mr Sim and the first respondent engaged in product substitution in relation to the carpark lighting of the undercroft light fittings as explained by Mr Kim in relation to the Midland Gate project in about 2006.
679 Other examples drawn from the records: In his witness statement (exhibit 1 at [324]-[389]) Farrel Metz sets out a number of what he says involved “product substitution” which had occurred during the period 2002 and 2008. These he drew from the records of the business in the first applicants’ possession. The records included correspondent between Mr Sim and disgruntled customers, none of whom were called to give evidence.
680 This material suggests that Mr Sim at various times supplied a range of customers with products they had not ordered and which led to some level of disputation with them. Sometimes Mr Sim’s response to their subsequent complaints was blunt and uncooperative, much along the lines evidenced by his dealings with the Metzes in the nine month or so period that he was employed by the first applicants following settlement.
681 In circumstances where the applicants simply put these materials before the Court without calling any further evidence in relation to the matters canvassed or disclosed in the materials (for example, by calling the contractors or customers who were apparently disgruntled), and without having cross-examined Mr Sim in any detailed way about the allegation that these documents also disclosed or supported the allegation of product substitution in these cases, or a more widespread practice of product substitution, I am reluctant to afford this material any great weight in determining the plea that Mr Sim engaged in the regular practice of product substitution.
682 As I have stated above, the allegations of product substitution are serious and so the Court should not lightly make a finding that it occurred, or that it occurred as a “regular” practice. These materials on their own, and even when taken in conjunction with other materials, do not allow a reasonable inference of the “regular” practice contended for.
683 The Burswood Tower 5 project: By [39C], [39K], [39L], [39M], [39n], [39O], [39P] and [39Q] of the statement of claim, the applicants allege that Mr Sim quoted on products in relation to the Burswood Tower 5 project referred to in [39C] in a sum less than the products could be sourced by the business. The allegations are as follows:
Norman Disney Young in the lighting services luminaire schedule specified items C7, C8, J3, K2, P1 and P2 which were then the subject of a quote issued by Mr Sim on behalf of the first respondent ([39C]).
This quote was accepted by the customer ([39K]).
Each item quoted was a quote in a sum less than the cost price at which the business was able to access the product and/or was a quote for a product that the business was unable to access or supply ([39L]).
After the settlement date, but prior to Mr Sim’s departure from the business, Mr Sim, without the knowledge or consent of the applicants supplied products in substitution or in modification of the products specified (as particularised in [39M]).
At no material time did Mr Sim disclose to the customer that the product supplied did not conform to the items specified, quoted and ordered ([39N]).
After Mr Sim departed from the business, the customer required the first applicants to supply to it the products as specified, which the first applicants were required to ([39O]).
As a result the Burswood Tower 5 project was completed at a loss to the first applicants in the sum of approximately $34,250 ([39P]).
The conduct of Mr Sim caused or contributed to this loss ([39Q]).
684 The evidence from Farrel Metz (exhibit 1, [290]-[322]) supports the applicants’ claims.
685 Mr Sim in response essentially asserts (exhibit 37, [124.2]) that there were Burswood Tower 5 revised quotes dated 27 May and 29 June 2009, after those pleaded, which absolve him of any responsibility for the earlier quotations.
686 The applicants point to Mr Metz’s evidence and say it shows that while there was a requote of Burswood Tower 5, ass suggested by Mr Sim, it was in fact 10 December 2008, while he was still employed by the first applicants, and it was not a revision made after his departure.
687 Mr Glen Pusey, who at material times was the State Purchasing Manager at O’Donnell Griffin, the electrical contractor for this project, dealt with Illumination Services on the Burswood Tower 5 project. Mr Pusey was called by the applicants and shown the copy of an email dated 10 December 2008 from Illumination Services WA to himself concerning the pricing of the Burswood Tower 5 project (exhibit 1, tabs 81A.1 and 81A.2).
688 When asked to identify this document Mr Pusey said it was the placement of the purchase order for the lighting for Burswood Tower 5 and an advice of closures for Christmas. He said it was issued at that time to ensure that all orders were placed prior to the Christmas break, so that the procurement of products by Illumination Services could be effected in a timely way. He said that after that date there were no requotes for the Burswood Tower 5 project from Illumination Services. The email in question was from Paul Sim.
689 In their closing written submissions, the first and second respondents say that in relation to Burswood Tower 5, Mr Sage signed off on luminaires which were acceptable to the business (exhibit 20) in January 2009, and that the luminaires as installed were installed many months after Mr Sim had left the business. He therefore cannot be held responsible for what was done after he went. The respondents say this is not a case of product substitution. It is a failure on the part of those operating the contract to do what is contractually required.
690 The difficulty with the respondents’ position, however, is that Mr Sim plainly was responsible for pricing the Burswood Tower 5 project. Products such as J3, P1 and P2 on the quote could never have been supplied at the price for which they were quoted, having regard to the evidence before the Court.
691 I also consider the original quote for Burswood Tower 5, dated 5 June 2008 (exhibit 1, [291]) was not substantially different to the sums in the requote in December 2008.
692 Mr Sim has failed to demonstrate how he could have sourced the pleaded products specified and quoted for, for a sum less than the prices actually paid for the specified products (as to which see the evidence of Farrel Metz at exhibit 1, [311]-[322]).
693 I accept the submission of the applicants that Mr Sim has failed to adduce cogent evidence that he could have sourced the products in question for anywhere near the sums referred to in [291]-[296] of the evidence of Farrel Metz (exhibit 1).
694 I find the allegations of the applicants as pleaded and noted above in relation to the Burswood Tower 5 project made out.
695 The applicants contend, and I accept, that the position represented by the work finally quoted for and done, by inference was no different in substance as at 5 June 2008, the date on which the original quote was prepared and submitted by Mr Sim for the business when controlled by the first respondent.
696 Whether a “regular” practice of product substitution proved: Two issues arise from these findings. First, whether this evidence supports the applicants’ allegations of a practice of product substitution going beyond this “one-off instance”. Secondly, whether the finding in respect of Burswood Tower 5 falsifies the representation to disclose material information or knowledge in terms of the collateral warranty.
697 As to the first issue, the respondents’ submit that the evidence is vague and otherwise not supportive of the claims made and also no adverse inferences should be drawn against the first and second respondent in relation to the alleged substitution practices because Mr Sim was inadequately cross-examined on the topic and did not have the chance to deal with the issues raised.
698 In relation to the latter submission, in [155] of the written closing submissions of the respondent it is suggested that the cross-examination of Mr Sim was “perfunctory” and could readily have been accepted as the effective abandonment of this as a plank of the applicants’ case. The transcript at pp 758-759 and p 767 is referred to. Counsel for the respondents suggest that while there are many views as to what the rule in Browne v Dunn in practice actually means, at the least procedural fairness required the details as pleaded and apparently the subject of the evidence of Mr Farrel Metz to be put to Mr Sim.
699 The applicants say that Mr Sim was adequately cross-examined and failed to provide any adequate explanation. His broad denials of substitution practices in his statement of evidence and in his responsive statement of evidence and the failure on the part of the respondents to cross-examine any of the witnesses for the applicants in any depth in relation to this aspect of the matter, appears more readily to be a concession that there were substitution practices. The applicants reject the proposition that the level of cross-examination can be viewed as the effective abandonment of this part of the applicants’ case.
700 In my view there is no particular, or even broader, Browne v Dunn point. This is a proceeding in which the parties filed extensive pleadings, including greatly amended pleadings, which raised the product substitution issue fairly and squarely. The witness statements on each side, and then responsive witness statements provided detailed accounts and opportunities for the parties to deal with this issue in evidence. It is not now open to the respondents effectively to say that, because they were not pursued on the chapter and verse of each of the alleged product substitution instances mentioned in Farrel Metz’s evidence during cross-examination of Mr Sim, they are entitled to treat the allegations as either abandoned or having no weight. In my view Mr Sim and the first respondent were on notice as to these issues, which were raised and denied.
701 In the event, as I have found above in relation to the alleged examples drawn from the records, I do not consider that they should bear on my determination of the matters pleaded. Rather the material evidence that should bear upon the determination that I must make are my findings in relation to Mr Sim’s conduct on the Howard Solomon project, the Midland Gate project and the Burswood Tower 5 project. In this regard, I have found that Mr Sim did in fact substitute specified products on the Howard Solomon project. I have also found that Mr Sim underquoted on the Burswood Tower 5 project in circumstances where he must have known that the specified products could not actually be supplied by the first respondent at the cost quoted for. I have also found that historically Mr Sim substituted products on the Midland Gate project in about 2006. The applicants contend that taking into account this evidence the Court is entitled to infer that Mr Sim regularly engaged in the practice of product substitution.
702 In my view, the evidence relating to Midland Gate, the Howard Solomon project and the Burswood Tower 5 project, raises a very serious question as to whether or not these were isolated instances. However, I am reluctant to consider there was a regular practice of product substitution, as pleaded going beyond the particular instances identified in the evidence. It seems to me that in a case such as this, it is necessary for the applicants to prove particular cases of product substitution rather than simply allege a “regular” practice. What, after all, does it mean to state there was a “regular” practice? That it was normal or usual or customary, or happened more often than not when quotes were made? This certainly is not established by the evidence. As I have emphasised above, the Court should not lightly find such a serious allegation proved.
703 In pressing their submission that the Court should infer a regular practice of product substitution at material times prior to the sale of the business by the first respondent, the applicants also plead at [39X]-[39Y] of the statement of claim that despite requests of Mr Sim at material times following settlement, and despite their searches following his departure on 20 April 2009, they have been unable to locate files relating to the various projects of the business in the period of about July 2006 to June 2008.
704 I accept the evidence of the applicants that at material times while Mr Sim remained an employee of the business in 2008 up until 20 April 2009, they had considerable difficulty in locating and accessing files that related to the projects that Mr Sim was handling. Farrel Metz gives clear evidence to that regard, which I accept, as does Ms Friedle. I also accept the evidence of the Metzes that despite searches following the departure of Mr Sim they could not find historic files of the business. However, I am not prepared reasonably to draw from this evidence of the absence of these historic files, either on its own or taken in conjunction with the other findings I have made, an inference that Mr Sim was wishing to hide information from the applicants that would assist them in making out their claim of a regular product substitution practice in the period between July 2006 and June 2008.
705 In all of these circumstances, I am not satisfied on the balance of probabilities that, as alleged in [39ZA] of the statement of claim, Mr Sim regularly engaged in the practice of substituting products specified in customer quotes that were accepted with different (but usually visually similar) and significantly cheaper products, products either already assembled, or purchased in parts only and assembled with other parts by, or at the direction of, Mr Sim – the product substitution practice – thereby enabling Mr Sim to be extremely competitive in his quoting and to thus obtain sales that would not have been obtained if the products specified were quoted at the true cost plus the usual profit margin represented.
706 The point ultimately is this, that while the findings I have made raise very serious questions as to whether the instances of underquoting or product substitution I have found are not isolated instances, and there may be a suspicion on the evidence that there may well have been others in the period between June 2006 to June 2008, the state of the evidence does not permit a finding in terms of the plea made, namely, that Mr Sim “regularly” engaged in the practice of substituting products in the manner alleged.
707 Underquoting on Burswood Tower 5 project: I accept, however, that in relation to the Burswood Tower 5 project, the first respondent and Mr Sim underquoted on the project. I also find that the first respondent, Mr Sim and Ms McBrierty failed to disclose this to the applicants at material times before settlement. I find further that the information contained or represented by the quote of 6 June 2008 constituted knowledge or information that could have caused the first applicants to modify substantially or withdraw their offer to purchase the business, in terms of the representation made. To have been told that the Seller had underquoted on a major project would have rung alarm bells for any reasonable purchaser, especially where questions had already been asked about the sustainability of a 36.8% gross profit on turnover. Consequently, I find the conduct of the first respondent in not making such disclosure engaged in misleading or deceptive conduct as alleged.
Matters pleaded in [24] and [24A] of statement of claim – employment agreement
708 By [24] of the statement of claim, the first applicants plead that on or about 24 June 2008, Mr Sim and the first applicants entered into a written agreement pursuant to which:
(1) Mr Sim covenanted to work for the first applicants in the business from 1 July 2008 to 30 June 2010 at a base salary of $65,000 per annum together with superannuation;
(2) Mr Sim agreed to be restrained from competing with the business for a period of five years or such lesser time that is enforceable to reasonably protect the goodwill of the business; and
(3) Mr Sim expressly acknowledged that:
(a) the first applicants paid substantial goodwill of $900,000 to purchase the business, the goodwill being based upon him remaining a key employee of the business for at least two years;
(b) his contacts and knowledge were essential for the ongoing success of the business; and
(c) the first applicants purchased the business in reliance on representations made by Mr Sim that he would remain a key employee of the business for a period of at least two years from the settlement date.
709 By [24A] the first applicants plead that there were implied terms of the employment agreement that Mr Sim would:
(1) exercise reasonable skill in care and performance of his duties; and
(2) act honestly in the performance of his duties.
710 The first and second respondents admit [24] and say that the agreement was drafted by the applicants or their solicitors, but deny [24A].
711 By [25] the first applicants further plea that the covenants and acknowledgements pleaded in [24] of the statement of claim constitute representations to the effect that Mr Sim would comply with the obligations set out therein.
712 The first applicants say, by [59] of the statement of claim, the representations pleaded in [25] are misleading and deceptive and:
(1) repeat the matters pleaded in [37]-[39] of the statement of claim that have to do with what Mr Sim said when he left his employment on 20 April 2009, to the effect that he would take delight in causing them big trouble, that he then joined a direct competitor, Lanark Trading Company Pty Ltd (Lanark), and thereafter contacted customers of the business;
(2) in that there were no reasonable grounds on which to make the representations; and
(3) in that the representations are ones as to a future matter and the applicants rely on s 51A of the TP Act and s 9 of the FT Act.
713 By [37] of the statement of claim the applicants allege that Mr Sim summarily and unilaterally terminated his employment with the business on 20 April 2009.
714 The first and second respondents deny [25]. By [71] they respond to [59] of the statement of claim by repeating [41], [42] and [50]-[56] of the defence and otherwise denying the paragraphs. By [50]-[56] of the defence the first and second respondents in substance allege that Mr Sim’s employment was terminated by the first applicants in breach of the employment agreement, admit that he joined Lanark but deny that Lanark is a direct competitor of the business, say that Mr Sim has worked in the lighting industry all of his life and it was his only realistic area of employment at his age, and that if the terms of the restraint in the employment agreement preclude him from so working then they are an unreasonable restraint of trade and are unenforceable.
715 A number of the items made in this pleading repeat or overlap or are similar to the allegations I have dealt with above.
716 In my view the entire contract clause in the employment agreement, to which reference has been made above, has the effect that it is not open to the applicants to plead other than the express terms of the agreement. The parties have agreed that no other terms should be implied.
717 The term of the agreement [15.2] provides as follows:
15.2 Entire Agreement
This contract constitutes the entire agreement between the parties with respect to the subject matter of it and contains all of the representations, warranties, covenants and agreements of the parties and there are no oral statements, representations, or undertakings, covenants or agreements between the parties expressed or implied except as they are contained in this contract.
718 As noted above, the employment agreement contains a term [6] in the following terms:
6. Acknowledgement
You acknowledge and agree that:
(a) the Company purchased the Business from your Company Simmac Pty Ltd pursuant to the Agreement for Sale of Business as a Going Concern dated 7 May 2008 (“Agreement”);
(b) the Company paid substantial goodwill of $900,000 for the Business. That goodwill is based upon your remaining a key employee of the business for a period of at least 2 years;
(c) your contacts and knowledge are essential for the success of the Business;
(d) the Agreement was conditional upon you entering into this Contract (clause 6 of Annexure “A” to the Agreement); and
(e) the Company purchased the Business in reliance upon your representations that you would remain a key employee of the Business for a period of at least 2 years from the settlement date.
719 To the extent that the entire contract clause is effective in preventing evidence to be led of all the representations, warranties, covenants and agreements of the parties and forms an agreement that “there are no oral statements, representations, undertakings, covenants or agreements between the parties express or implied except as they are contained in this contract” the parties plainly have not agreed to exclude any evidence concerning the acknowledgement in cl 6 of the employment agreement on representations that may arise from it.
720 I consider that the terms of cl 6 of the employment agreement convey representations as to future matters as pleaded in effect by the first applicants in [25] and [24] of the statement of claim, to that effect that:
(1) Mr Sim would remain a key employee of the business for a period of at least two years;
(2) Mr Sim’s contacts and knowledge would be essential to the success of the business and he would pass them on to the applicants.
721 In my view these representations were conveyed, notwithstanding cl 13 provided for termination, including under cl 13.2 by either party giving one month’s notice in writing or under cl 13.3 by the first applicants terminating the agreement immediately for serious misconduct or serious poor performance. This is not necessarily inconsistent with a representation conveyed that Mr Sim would remain with the business for at least two years. Nor are the mechanistically drawn from a contractual term. These acknowledgements plainly formed an important basis for the agreement and were intended to reinforce the understanding the parties had earlier established through the representations made on 18 April 2008.
722 For the reasons given above in relation to the representations pleaded in [15(a)], I consider there were no reasonable grounds for the representation in (i) above. The question of the circumstances in which Mr Sim left the employ of the first applicants has been dealt with above. I have found, and repeat that finding that Mr Sim was not dismissed by the first applicants on 20 April 2009, but chose to terminate his employment that day in breach of his employment agreement.
723 As to whether Mr Sim then breached the restraint provision in his employment contract, I find that, in going to work with Lanark, he breached the agreement in that he took employment with Lanark which plainly was a competitor of the business.
724 There is little doubt that Lanark has been in the wholesale lighting industry for a long time – in the region of 30 years (exhibit 31). Lanark was in the business of selling luminaires that could be used to fill every need for both commercial and domestic applications and supplied the wholesale and retail trade in Australia and had a huge range of light fittings.
725 In the Todd valuation, the business of Illumination Services WA was described as “importer, wholesaler and distributor of commercial light fittings and accessories”. Mr Sim and Ms McBrierty agreed that was an accurate description of the business. The GMO brochures described the business as “import/wholesaler of electrical fittings for the commercial and construction market”.
726 After Mr Sim took employment with Lanark, Custom Electrics, Vision Cabling, WB Electrics and Smirk Electrical became customers of Lanark, having previously been customers of Illumination Services WA. This, again, reinforces the clear view that while Illumination Services WA and Lanark may have endeavoured to engage different customers historically, they are indeed in the same electrical lighting market. I also accept the evidence of Farrel Metz (exhibit 29A) which shows that Lanark and the first applicants were tendering for the same projects and selling the same products to the same customers at material times. The evidence of Mr Craig Bennett, from Lanark, properly understood did not suggest that Lanark was not a competitor (transcript 504 and 505).
727 The respondents plead that the restraint clause in the employment contract should be considered void for public policy, on the basis it unreasonably restricts Mr Sim from obtaining gainful employment in the one area in which he can most easily obtain employment.
728 The law has long permitted purchasers, subject to the clearly unreasonable restraints, to impose restraints reasonably necessary to protect the goodwill of the business being purchased: see for example, BB Australia Pty Ltd v Kaioi Pty Ltd [2010] NSWCA 347; (2010) 278 ALR 105 at [60].
729 At a very practical level, one can see how public policy should not, on the facts of the case like this, prevent the conclusion of a restraint agreement for five years like that agreed here. The simple fact is that Mr Sim and his co-shareholder, Ms McBrierty, through the first respondent, were able to sell the business for a price that included a $900,000 goodwill component. In this context, goodwill is not an easily identifiable thing. It simply represents the apparent capacity of the business to generate the sort of gross profits that were represented to the Metzes at material times. If following the sale of a business such as this, with a goodwill component of $900,000 or thereabouts, the moving force behind the business – a person like Mr Sim – could walk down the road and commence a new business, or commence employment with a competitor and attract custom from his old business, then the goodwill payment would be relatively worthless.
730 Just as the Metzes expected Mr Sim to stay in the business, as is quite usual in such business sales, and instruct and train them in the ways of the wholesale lighting business established by him, they also expected that he would not soon after go out and compete against them. It is entirely reasonable, therefore, and not at all against public policy in a case like this that the parties should have concluded the restraint agreement. So far as the non-competition period is concerned, in all of these circumstances, a period of five years is not unreasonable when a $900,000 goodwill component is paid. I am sure if Mr Sim thought otherwise, he would not have accepted it.
731 Consequently, I find that, as pleaded, Mr Sim:
breached the employment agreement by failing to honour the covenant to work for two years;
breach the trade restraint by working with Lanark from May 2009;
did not have reasonable grounds for making the representation conveyed by cl 6 of the employment agreement that he would remain a key employee for at least two years, which representation was misleading and relied on by the applicants in making the employment agreement.
Matters pleaded in [27]-[39] of statement of claim – repudiation of employment agreement
732 By [27]-[39] of the statement of claim, the applicants plead in effect that Mr Sim actively obstructed them from obtaining the benefits of the goodwill of the business, made unreasonable demands and unfair demands and engaged in reprehensible conduct, and then joined a competitor and attempted to solicit supplies and customers of the business, which conduct, as pleaded by [63A], constituted a repudiation of the employment agreement between the first applicants and Mr Sim.
733 By [44] of the defence the first and second respondents deny [27] of the statement of claim and say that during due diligence Mr Sim explained to the Metzes in general terms the procedures of the business relating to bookkeeping and accounting, pricing, tendering and catalogues, and that after settlement from about 4 July 2008 until February 2009 initiated and held weekly training sessions, but that Farrel Metz showed little interest in them and often did not attend and that he, Mr Sim, took Mervin Metz to meet or introduced him to customers, suppliers and contractors. Particulars are given. In particular they deny that Mr Sim had no intention to continue employment for two years.
734 By [45] of the defence the first and second respondents admit that Mr Sim demanded bank guarantees as pleaded during December 2008 and on 20 April 2009. These respondents say that by October the liability of the business had become seriously compromised in that:
1. Farrel Metz had changed the computerised accounting system and it was complicated and unreliable;
2. the applicants had changed or failed to adhere to the business’ previous internal administration and document filing procedures, which led to files and catalogues being mislaid;
3. the applicants often did not pay creditors on time, delaying supply to customers;
4. the applicants did not order products on time;
5. the applicants were slow in sending out accounts;
6. the Metzes were often abrupt with staff members as a result they lost Lauren Kuster;
7. during due diligence Mr Sim stressed to Farrel Metz the importance of product catalogues and told him they were due for renewal in July or August 2008 and he undertook to produce them but did not until about February 2009;
8. the applicants changed business tendering procedures without informing him;
9. Farrel Metz showed a lack of interest in the training sessions;
10. the business was generally disorganised;
11. as a result, Mr Sim had serious concerns about the first applicants’ solvency, ability to continue to trading and ability to pay the first respondent the balance of the purchase price.
735 The first and second respondents deny in [31] of the statement of claim, namely, that if not given bank guarantees it would sink the business into the ground and, save to admit that he told Mervin Metz that Farrel Metz was a “no hoper” and riding his coattails, deny in [32] and that he said that if the bank guarantees were not provided there would be “big problems”.
736 The first and second respondents further deny that applicants’ account of what happened on 20 April 2009 and say that the applicants terminated Mr Sim’s services and also deny that when he took up employment with Lanark that he was in breach of the trade restraint and denies that he had contact with customers of the business and offered to supply them with products usually supplied by the business.
737 There is no doubt that Mr Sim conducted himself in ways that were calculated to frustrate both Farrel Metz and Mervin Metz and any other person working in the business, after settlement, for whom he did not have time, such as Ms Helen Friedle. I have set out above the litany of events that show the appalling relationship that existed between Mr Sim, on the one hand, and the Metzes, on the other at most material times after settlement.
738 It does not behove Mr Sim to complain that the Metzes knew nothing about the industry into which they had bought, to explain or excuse his behaviour. He knew their position at the time he negotiated with them. He knew they were depending on him to help them learn the business so that after two years they would be in a good position to be able to operate it on their own. He knew he was the “key” employee. In his employment agreement he acknowledged this. What seems to have happened is that Mr Sim, pretty much from the outset, had made up his mind to continue operating the business on his own terms, much as he had done for some years past. The evidence, much of which is related above, of the unsatisfactory dealings that Mr Sim and the first respondent had had with a number of former customers and suppliers, and the manner in which Mr Sim, in particular, personally dealt with people – directly, rudely, bluntly and by trying to bully them – were techniques that he continued to apply, but this time in his direct dealings with the Metzes and employees like Ms Friedle. This was a business transition, from an old owner to a new owner, through the agency of Mr Sim, that in retrospect was bound to fail. How one could actually ensure, in a small business setting, that what happened here should not happen, is again something for students of business to ponder over. What the Court has to deal with is what in fact happened and what the legal consequences are of the proven events.
739 The facts of the matter are that Mr Sim continued to hold his projects close to him and refused effectively to allow Mervin or Farrel Metz to become familiar with them. He kept the files, maintaining all the dealings with the business’ customers. He became agitated and abusive whenever Farrel Metz, in particular, showed any inclination to deal with the customers directly or to become directly involved in “his” (Mr Sim’s) project management. He demanded that Farrel Metz go out and get his own jobs. Exactly how Farrel Metz was meant to do that in any substantive way when he was new to the business, is difficult to understand. Perhaps the most that can be said is that Mr Sim was concerned to ensure that his projects on hand were actually realised so that the profitability of the business was maintained and the first respondent would be assured of being paid out the balance of the purchase price of $250,000 due under the sale agreement. But even if that is the explanation, it does not excuse Mr Sim from his contractual obligations.
740 But whether it can realistically be said that, taking account of all Mr Sim’s arrogance, bullying, rudeness and general obtuseness, and demands for bank guarantees from about November 2008 on, he repudiated the employment contract, is another thing. What he did not do was honour a number of the promises that he had made, in terms of teaching and instruction and making sure that the Metzes learnt the ropes of the business and met and established good relations with customers and suppliers. On the other hand, he was busily at work, and seemingly working long hours, on his projects on hand, even if he were effectively excluding the Metzes from any active involvement in them and from any learning experiences to be derived by being actively involved in them.
741 The fact that Mr Sim never intended at material times to remain as the key employee for two years is a factor that may lead one to a different view. However, in the result, I am not satisfied, on the balance of probabilities, that Mr Sim’s conduct up until 20 April 2009, should be construed as repudiation of the employment agreement. He may have been breaking a number of his employment duties as he went along, and he may have been preparing to leave, but I do not consider he had in effect abandoned, expressly or constructively the employment agreement during the period. Of course, things changed on 20 April 2009.
742 Further I do not accept that the events pleaded in [38] and [39] of the statement of claim concerning Mr Sim’s employment with Lanark, after his departure from the business of the first applicants on 20 April 2009, can be relevant to the plea in [63A] of repudiation of the employment agreement, when plainly Mr Sim had already left the business and, so had already, on the applicants’ own case, repudiated the employment agreement.
743 I do accept, however, and have found above that by leaving his employment on 20 April 2009, Mr Sim at that point repudiated the employment agreement by severing the employment relationship of his own volition. This repudiation was later accepted by the applicants’ solicitors.
744 Consequently, I find Mr Sim repudiated the employment agreement by leaving his employment on 20 April 2009.
Matters pleaded in [39F], [39G], [39M] and [39N] of statement of claim – breach of employment agreement on Howard Solomon project
745 By [63B] of the statement of claim the applicants plead that the conduct of Mr Sim pleaded in [39F], [39G], [39M] and [39N] constituted a breach or a repudiatory breach of the employment agreement. The plea in these particular paragraphs concerns the alleged product substitution or modification in respect of the Howard Solomon project, the details of which have been dealt with above.
746 On the findings I have made above I consider Mr Sim breached the employment agreement. Condition 4 of the employment agreement, dated 23 June 2008 which obliged Mr Sim, amongst other things to:
(b) Faithfully and diligently perform the duties and exercise the responsibilities consistent with the position of sales representatives (as set out in the attached draft job description) …
(c) Promote the interests of the Company.
(d) Conduct yourself in accordance with the highest personal standards at all times.
(e) Provide prompt and full information to the Board regarding the operation of the business known as “Illumination Services WA” (Business) conducted by the Company.
(g) Perform the duties and exercise the responsibilities imposed upon you under this contract with all due care, skill and diligence.
747 To supply materials on the Howard Solomon project that did not accord with specification, but were of an inferior quality meant that the first applicants was in breach of their contractual obligations to the contractor on the Howard Solomon project.
748 For Mr Sim to have put his employer in such a position meant that he did not:
faithfully and diligently perform the duties and exercise the responsibilities consistent with the position of sales representative;
promote the interests of the company;
conduct himself in accordance with the highest personal standards;
provide prompt and full information to the Board regarding the operation of the business, by advising the Board of what he had done;
perform his responsibilities with all due care, skill and diligence.
749 I find Mr Sim thereby breached his employment agreement as pleaded.
750 I also find, having regard to my findings above, that the first applicants suffered loss, being the costs of meeting the specifications as pleaded above.
751 However, I do not consider there is any evidence to prove that the breach caused the goodwill of the business to be rendered nugatory, as pleaded in [63C]. There is no persuasive evidence, lay or expert, to that end.
Matter pleaded in [63D] of statement of claim – failure to disclose product substitution practice
752 By [63D] of the statement of claim, the applicants further or in the alternative plead that the failure on the part of the first respondent to disclose to the applicants prior to settlement the matters pleaded in [58A(a)] and [58A(b)] – the product substitution practices alleged in respect to the Howard Solomon project and the Burswood Tower 5 project – constituted a breach or a repudiatory breach of the terms of the sale agreement.
753 I have rejected the applicants’ claim that there was a regular product substitution practice engaged in by the first and second respondents.
754 In relation to the allegation that there was below cost quoting on the Howard Solomon project prior to settlement, the state of the evidence does not permit the Court to find positively this was a case of underquoting, as in the Burswood Tower 5 project before settlement (even though product substitution after settlement by Mr Sim was established) and the applicants did not submit otherwise.
755 The position in relation to the Burswood Tower 5 project, however, is different. As set out above, the last quote given in respect of this project was 10 December 2008, but was based on an original Burswood Tower 5 quote given as at 5 June 2008. As I have found above, Mr Sim must have known at that time that he would be unable to complete the Burswood Tower 5 project by providing the specified products in question for the quoted price. This quote was given in the due diligence period. At no time did Mr Sim, himself or on behalf of the first respondent, disclose to the applicants that he had, in effect, under bidded on this project in relation to these specified products. In my view, the failure to do so constituted a breach of the contractual warranty in the sale agreement discussed above, to disclose material knowledge or information. Plainly it was knowledge or information that ought to have been disclosed and constituted a breach of the sale agreement terms pleaded in [21A] and [21E] of the statement of claim.
756 If the first and second respondents had disclosed this information to the applicants in a timely way, prior to settlement, the applicants would have been in the position to have made further inquiries in relation to the matter, which inquiries may well have caused them to inquire directly about the nature, purpose or extent to which underquoting was a practice that Mr Sim and the first respondent used in the conduct of the business and the extent to which it may have been instrumental in assisting the first respondent to achieve a 36.8% gross profit on turnover as previously represented.
757 I find the breach pleaded in [63D] made out in relation to the matter pleaded in [58(b)] on the Burswood Tower 5 project.
758 However, I do not consider the evidence establishes this breach as a repudiatory breach of the sale agreement. In Shevill v Builders Licensing Board (1982) 149 CLR 621, Gibbs CJ (with whom Murphy and Brennan JJ agreed) observed at 625-626 that a valid and binding contract may be repudiated if one party renounces their liabilities under it, that is to say, evinces an intention no longer to be bound by it or shows that they intend to fulfil the contract only in a manner substantially inconsistent with their obligations and not in any other way. Chief Justice Gibbs said that in such a case, the innocent party is in entitled to accept the repudiation, thereby discharging themselves from further performance, and sue for damages. As his Honour noted, it is convenient to say that the injured party in such circumstances “rescinds” the contract. In this case, while the non-disclosure is material I do not consider it one that disclosed an intention by the Seller not otherwise to honour the agreement. Accordingly, there was no repudiation of the contract by this breach.
759 Section 51AC(1), in Pt IVA of the TP Act provides:
51AC Unconscionable conduct in business transactions
(1) A corporation must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
760 Section 51AC(2) of the TP Acts provides that:
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a corporation (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a corporation (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
761 Subsections (3) and (4) of s 51AC set out criteria for the purposes of determining whether a corporation or a person has contravened subs (1) or subs (2), although the requirements are not exhaustive.
762 A breach of s 51AC attracts the operation of s 82 and s 87 of the TP Act.
763 By s 87(2)(a) of the TP Act, the Court is empowered to declare the whole or part of any contract void with effect from a date specified in the order.
764 At material times, the Pt IVA of the TP Act also included s 51AA and s 51AB. Section 51AA(1) provided that a corporation must not in trade or commerce engage in conduct that is “unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories”. Section 51AB(1) provided that a corporation shall not in trade or commerce in connection with the supply or possible supply of goods or services to a person engage in conduct that is “in all the circumstances, unconscionable”.
765 Section 51AC(1), as noted, provides that a corporation must not in trade or commerce in connection with the matters there referred to – namely the supply or possible supply of goods or services to a person (other than a listed public company) or the acquisition or possible acquisition of goods or services from a person (other than a listed public company – engage in conduct that is, “in all the circumstances, unconscionable”. As noted, subs (3) of s 51AC(1) sets out a number of factors the Court may have regard to for the purpose of determining whether subs (1) has been contravened.
766 An issue arises whether, for the purposes of s 51AC(1), the proscribed conduct – conduct that is, “in the circumstances, unconscionable” – describes a different range of conduct from conduct that is “unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories”, that is proscribed by s 551AA(1).
767 In Hurley v McDonalds Australia Limited [1999] FCA 465 at [7] and [8], Dowsett J considered that the unconscionable conduct in s 51AA and s 51AB encompassed traditional equitable concepts. On appeal, in Hurley v McDonalds Australia Limited [1999] FCA 1728; (2000) ATPR 41-741, the Full Court said at [21] that they should not be taken necessarily to be in agreement with this view and then went on to add, in [22]:
For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated – Cameron v Qantas Airways Ltd (1994) 55 FCR 147 at 179. Whatever ‘unconscionable’ means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable – Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term ‘unconscionable’ import a pejorative moral judgment – Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 283-4 and 298. [Emphasis in original]
768 In Simply-No-Knead, Sunberg J, at [31], expressed the view that whatever might be the position with s 51AB, in his view “unconscionable” in s 51AC is not limited to the cases of equitable or unwritten law unconscionability the subject of s 51AA. For his Honour the principal pointer to an enlarged notion of unconscionability in s 51AC lay in the factors to which subs (3) permits the Court to have regard, some of them describe conduct that goes beyond what would ordinarily constitute unconscionability in equity, in this regard his Honour noted factor (j) which directs attention to the extent to which the supplier, which was not willing to negotiate the terms and conditions of any contract for supply of the goods or services with the business consumer, in factor (g), which relates to the requirements of any applicable industry code.
769 As Sunberg J observed, at [33], French J in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2000] FCA 2; (2000) 169 ALR 324, at 335, observed there was no reason to suppose that the unconscionable conduct prohibited by s 51AB and s 51AC is limited by reference to “specific equitable doctrines”.
770 In Australian Competition and Consumer Commission v Allphones Retail Pty Ltd (No 2) [2009] FCA 17; (2009) 253 ALR 324, Foster J, at [113] considered there is now a body of authority in this Court which establishes the following propositions:
(1) The scope of s 51AC is wider than that of s 51AA. The meaning of unconscionable for the purposes of s 51AC is not limited to the meaning of the word according to established principles of common law and equity.
(2) The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up by the use of the word in s 51AC. When used in that section, the expression requires that the actions of the alleged contravener show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment.
(3) Normally, some moral fault or moral responsibility would be involved. This would not ordinarily be present if the critical actions are merely negligent. There would ordinarily need to be a deliberate (in the sense of intentional) act or at least a reckless act.
771 Justice Foster, noted, however, at [114], that the authorities that he relied upon in stating these propositions do not prescribe a precise definition which would be able to be applied in every set of circumstances presented to the Court for consideration and that the application of the meaning accorded to the concept would always be a matter of judgment in every case and will depend upon careful consideration of the circumstances of each case.
772 In Australian Competition and Consumer Commission v Seal-A-Fridge Pty Ltd, Logan J accepted this summary to be succinct and accurate and that the general propositions were not disputed in that case by either party.
773 I proceed in this case on the same basis.
774 The first applicants here relies on contravention of s 51AC(1). To make out contravention it is necessary to establish a number of things:
(1) that there is a “corporation”;
(2) that has in trade or commerce engaged in conduct;
(3) that the trade or commerce is connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
(4) that the conduct engaged in is, in all the circumstances, unconscionable.
775 The first applicants contend that the first respondent has contravened this provision.
776 There is no doubt that the first respondent is a “corporation”.
777 The next question is whether the first respondent has, in trade or commerce, engaged in conduct in connection with the supply or possible supply of goods or services to a person or the acquisition or possible acquisition of goods or services from a person, in each case the person being other than a listed public company. The argument is that the relevant trade or commerce, in which the impugned conduct was engaged in, is the working out of the terms of the sales agreement that provides Mr Sim to be engaged as an employee of the purchaser of the business for a period of two years in order to do what is necessary to pass on his knowledge and skill to the purchaser and its representatives.
778 In the written closing submissions of the applicants, counsel contends that there has been a clear contravention of s 51AC in the circumstances of this matter as:
(1) Mr Sim clearly knew it to be the position that it was an essential pre-requisite to the applicant’s acquiring the business that Mr Sim would remain as an employee for a period of two years and transfer to the applicants the benefit of his contacts and knowledge to enable the applicants to have the benefit of the goodwill paid for the business in the sum of $900,000;
(2) this was a matter that was clearly and expressly acknowledged in the employment agreement at cl 6;
(3) notwithstanding that the applicants clearly insisted upon this pre-requisite being complied with as a condition of acquiring the business, Mr Sim after settlement and for the nine month period he remained with the applicants created an environment of:
(a) threatening the applicants;
(b) isolating the applicants from his jobs;
(c) precluding the applicants from learning about the major projects;
(d) speaking to the applicants in a manner that was nothing short of abuse, reprehensible and engaging in thuggish behaviour.
(4) Mr Sim threatened to leave the applicants and leave them in the lurch unless the applicants provided bank guarantees to secure the outstanding balance of purchase price;
(5) Mr Sim left the applicants in the lurch on 20 April 2009 and threatened the applicants by saying words to the effect of: “I will take great delight in causing you maximum problems”;
(6) Mr Sim not only terminated his employment after nine months, but then joined a competitor and on top of that made every attempt to solicit away the major customer of the business. Save as to Freeway Electrical he was successful in that endeavour.
779 The first applicants contend that the conduct of Mr Sim in this regard invokes the operation of s 51AC(3) and s 51AC(4), having regard to:
(1) the relative strengths of the bargaining positions of the supplier of services and the business consumer (Mr Sim held the key to relationships with customers and suppliers and in relation to industry knowledge – which he refused to hand to the applicants);
(2) Mr Sim required the applicants to comply with conditions that were not reasonably necessary for the protection of the legitimate interest of Mr Sim – namely insisting on guarantees being supplied in circumstances in which there were no legal entitlements to obtain such guarantees – stating that he would otherwise leave;
(3) he exerted undue pressure and used unfair tactics to attempt to extract such guarantees in circumstances in which he was not entitled to them – he threatened to leave and deprive the applicants of his knowledge and contact (and did indeed leave);
(4) at all times Mr Sim acted in bad faith.
780 The first applicants contend that the conduct of Mr Sim was clearly “something which is clearly unfair and unreasonable” or “something which is irreconcilable with what is right or unreasonable” and was clearly reprehensible in all the circumstances invoking moral fault or moral responsibility. They say Mr Sim engaged in unreasonable, unfair, bullying and thuggish behaviour and in that regard the incident involving Andrew from Custom Electrics in the presence of Helen Friedle cannot be overlooked (nor any of the other serious instances of misconduct referred to in the evidence).
781 The first applicants say the conduct of Mr Sim clearly negated the goodwill of the business and no prospective purchaser of it would have been interested in purchasing the business in the circumstance which obtained.
782 In relation to the question of how the evidence shows that Mr Sim on behalf of the first respondent engaged in conduct that, in all the circumstances, was unconscionable “in connection with the supply of services”, counsel for the applicants in closing oral submissions submitted that he (Mr Sim) withheld supply, in effect, in that he did not do what he was engaged to do. He obstructed the applicants in the conduct of the business. He would not assist them. He was rude and obstructive. And he procured an unlawful termination.
783 As to how a bridge is constructed between the conduct of Mr Sim, under his employment contract and the sale agreement involving the first respondent, counsel for the applicants submitted that Mr Sim at material times was also acting on behalf of the first respondent and indeed, at the time the sale agreement was entered into, part of the agreement was that he would be restrained from competing subsequently and the sale agreement was conditional upon Mr Sim being employed for a period of two years. Accordingly, because the first respondent had the benefit of the sale agreement, and it was on the basis that Mr Sim would perform as agreed, the conduct of Mr Sim complained of may be attributed to the first respondent.
784 In response to the question whether the first respondent warranted the performance of Mr Sim as an employee, counsel indicated that it had and that what is pleaded is that there were collateral warranties made by Mr Sim and the first respondent.
785 Counsel thus put the submission this way (transcript 810):
So when Sim is providing those services he’s not doing it on his own behalf, he’s doing it on behalf of Simmac. If he then engages in conduct which blocks supply of those services – in effect, sabotages the goodwill of the business and then takes further steps subsequently to solicit away the important customers and suppliers, and that is in a period during which he was supposed to be with the business fostering the goodwill, promoting it and building up the relationships and contacts and industry knowledge of the applicants, in those circumstances it is my submission he is acting both in own capacity and on behalf of Simmac.
786 Counsel confirmed that his submission was that the first respondent engaged in conduct that was in all the circumstances unconscionable in that everything that Mr Sim did, he did as the agent of the first respondent, and this was because there was an obligation that went with the contractual arrangements that the first respondent had undertaken that continued to apply to Mr Sim, as a director of the first respondent.
787 Ultimately, counsel submitted that Mr Sim was for all intents and purposes the company and it was a fundament premise of the sale agreement that he would discharge his obligation as an employee of the company for a period of two years.
788 Counsel for the first applicants emphasised that on the facts, the fact that Mr Sim threatened to walk out and leave his employment with the first applicants until guarantees were provided in respect of the unpaid purchase price of $250,000 clearly established that Mr Sim was acting not only for himself but acting on behalf of the company who was to receive the benefit of those guarantees. Counsel submitted that the conduct of Mr Sim and the first respondent were inextricably linked, particularly because Mr Sim did not seek to draw any distinction between himself and the company when demanding the guarantees.
789 Counsel for the first applicants also emphasised that the overall conduct of Mr Sim, on behalf of the company should be considered disgraceful. For example, working capital needs were represented at $100,000 and stock was represented as having a value of $200,000. In the result the working capital that was required was $300,000 or more and there was an additional $115,000 of stock to be paid for. Then, after two months into the new business the first applicants is obliged to expend a further $90,000 in acquiring additional stock from China to meet an order. In the end, the first applicants found itself in a position where it had to expend close to $500,000 more than what had been anticipated, based on the representations and, in the submission of the first applicants, Mr Sim, on behalf of the first respondent, took advantage of the financial predicament in which the applicants generally found themselves. In those circumstances to demand the guarantees for the payment of a further $250,000 was horrendous and unconscionable. The applicants submit that Mr Sim orchestrated his termination knowing that he was leaving the applicants “in the lurch”. It is that overall conduct, Mr Sim’s appreciation of the circumstances in which the applicants found themselves and then to demand that there be the provision of guarantees that together are said to constitute the unconscionable conduct pleaded.
790 The first respondent and Mr Sim deny that Mr Sim’s conduct, even if it is open to be criticised at material times, is conduct governed by the sale agreement and does not provide a basis for rescission of the sale agreement under s 51AC of the TP Act. They say it is conduct under the employment agreement only.
791 These respondents say that the authorities referred to above, upon which the applicants rely, are all cases involving franchisees and franchisors and are necessarily distinguishable from the present circumstances principally by reference to the control a franchisor can exercise over a franchisee, which is lacking here.
792 These respondents contend that the fact that there may have been differences of a personal nature between Mr Sim and the Metzes could not, on any view of unconscionability as a concept, lead to the result that a basis has been laid for the relief sought by the applicants.
793 These respondents submit it is difficult in the extreme to understand how an employee said to be in breach of an employment contract can fall within that which was contemplated under s 51AC. Indeed, counsel for these respondents submit that the conduct of Mr Sim, in the course of his employment relationship with the applicants, was not conduct “in trade or commerce” at all, rather it was “an internal matter”: Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594 (Concrete Constructions); McWilliams Wines Pty Ltd v L S Booth Wine Transport Pty Ltd (1992) 25 NSWLR 723 (McWilliams Wines); and Wright v TNT Management Pty Ltd.
794 These respondents contend that, in any event, any conduct of Mr Sim after 4 July 2008, the settlement date, can only be it can only be of conduct which is personal to him and not conduct attributable to the first respondent.
795 Thus, the first respondent’s position is that if there are any misrepresentations established, made prior to purchase and on which the applicants have relied, and in respect to which they have suffered loss and damage, then such representations are accepted as having been made in trade or commerce and would affect both the first and second respondents.
796 Counsel also contends that the position of the first respondent is that it is entitled to $250,000 being the balance payable under sale agreement and that payment is not dependent upon Mr Sim working for two years or any period, but was to be paid in part on 1 July 2009 and as to the balance on 1 July 2010. It is entitled to relief on that basis.
797 Having carefully considered the applicants’ submissions, I must say have real difficulty in seeing any continuing trade or commerce involving the first applicants and the first respondent arising out the sale agreement. On the face of it, the sales agreement stands on its own terms. It was acted upon, the conditions precedent were all satisfied and settlement of the sale of the business duly occurred on 4 July 2008. One of the preconditions satisfied involved Mr Sim signing the employment agreement.
798 I have great difficulty in analysing the subsequent conduct engaged in by Mr Sim, when he was an employee of the first applicants, as conduct the first respondent has engaged in, in trade or commerce, in relation to the supply of services to a person. To the extent the applicants contend the supply of services involved the supply of employment services to the first applicants, I struggle to see how it can be argued that the first respondent was responsible for the employment services.
799 Even though I have found above that the first respondent is responsible with Mr Sim for making the employment representation, that does not in my view alter the position. Thus, even if it is accepted that the first respondent knew, because Mr Sim did, that he had no grounds for staying on in the “first applicants’” employ for two years, it is difficult to identify the supply or intended supply of goods or services by the first respondent that it, through Mr Sim, then acted unconscionably in respect of.
800 I do not consider that the first respondent has engaged in any relevant conduct, beyond the 4 July 2008, in trade or commerce in connection with the supply of services to the first applicants.
801 While I recognise how the applicants seek to form their contention that what Mr Sim did at material times while he was an employee of the first applicants, he did in order to protect his interests as a shareholder of the first respondent, and so should be taken to have acted as the agent of the first respondent, in the end I have so great a difficulty in concluding that the first respondent in that period engaged in conduct in trade or commerce in connection with the supply of services to the first applicants – which finding is necessary to engage s 51AC – that I am unable to accept that the applicants’ argument is open.
802 However much it might be said that the conduct of Mr Sim at particular times, as disclosed by the evidence, was reprehensible and might be said to satisfy the general description of unconscionability behaviour under s 51AC, because it was serious conduct, clearly unfair or unreasonable and often showing no regard to the conscience and otherwise being irreconcilable with what is right or reasonable, and which displays a considerable degree of moral fault on the part of Mr Sim, in the end, for me, that conduct is only relevant to questions of earlier made representations, and breaches of the sales agreement and employment contract, not to whether the first respondent engaged in unconscionable conduct of the type provided for by s 51AC in the period 4 July 2008 to 20 April 2009.
803 I therefore must reject the applicants’’ plea that the first respondent engaged in unconscionable conduct contrary to s 51AC of the TP Act.
Matters pleaded in [71]-[72] of statement of claim – claim for return of erroneous payments
804 By [71]-[72] of the statement of claim, the first applicants plead that:
Following settlement and prior to Mr Sim’s departure from the business the following parties paid the following amounts directly to the first applicants:
(1) $7,994.80 paid by Triventi Electrical Services on or about 22 February 2009.
(2) $2,310.00 paid by Middendorph Electrical on or about 1 April 2009.
Despite demand by the applicants to the first respondent and Mr Sim for the payment of the total sum of $10,304.80, the first respondent has failed to repay these amounts.
805 While, in [71] the plea is that the payments were made to the “first applicants”, it is apparent that the plea is intended to be that the monies were actually paid to the first respondent.
806 The respondents have not admitted these claims.
807 In the applicants’ Annexure A to their written submissions at [20], the applicants say that “Mr Metz has proved these claims in the paragraphs of his statements referred to in paragraph 18 above”.
808 In [18] of this part of the submissions, the applicants contend:
In relation to the claim for Westwide in paragraph 67 to 70 of the further amended re-amended statement of claim, Mr Farrel Metz has given evidence in paragraphs 174 to 179 of his statement (exhibit 1), and in paragraph 76 to 82 of Farrel Metz’ responsive statement (exhibit 2), in which Mr Metz responds to what Mr Sim has stated in paragraphs 24.2 and 32 of Mr Sim’s witness statement (exhibit 34), and in response to which the respondents have pleaded in paragraphs 78B of the respondents’ defence.
809 I have considered all of the paragraphs of the witness statements referred to in [18] of these submissions but I am unable to identify any evidence given by Mr Farrel Metz that relates to this claim.
810 Those paragraphs of the witness statement all appear to deal with the Westwide claim, which is the subject of [67]-[70] of the statement of claim and a cross-claim, to which I will shortly turn.
811 Consequently, there is no evidence to support the matters pleaded in [71]-[72] of the statement of claim and I find that the claim for $10,304.80 by the first applicants against the first respondent is not proved.
Matters the subject of [67]-[70] of statement of claim - Westwide fittings claim and related cross-claim
812 In [67]-[70] of the statement of claim the applicants plead the following facts:
Prior to the settlement of the sale of the business, the first respondent sold and delivered certain weatherproof light fittings to Westwide Electrical and to Doric Constructions which were found to be faulty.
After repeated requests by the Metzes to Mr Sim on behalf of the first respondent to replace these faulty fittings so as not to continue to damage the goodwill and reputation of the business, Mr Sim agreed on behalf of the first respondent that the first applicants would order and supply replacement fittings and the first respondent would reimburse the first applicants for the cost.
The first applicants ordered and supplied the replacement fittings.
Despite demand the first respondent has failed to repay the first applicants in the sum of $14,751.22.
813 By [78B] of the defence, Mr Sim says that, on behalf of the first respondent, he agreed that the first respondent would reimburse the first applicants for the replacement fittings, provided that the first applicants paid an outstanding account from the first respondent to the first applicants, being tax invoice number 31675, dated 19 December 2008 for $12,859, being for light fittings at an earlier time supplied by the first respondent in respect of the job at Burswood, for which fittings the first applicants had billed the client.
814 In [78D] of the defence, the first and second respondents say that the first applicants rendered two accounts for the replacement fittings totalling $14,259.85 – not the $14,751.22 now alleged – and that the first applicants has refused or neglected to pay the respondent’s tax invoice 31675. Accordingly, the first respondent claims that the first applicants are indebted to it in the sum of $12,859 in respect of the first respondent’s tax invoice number 31675, but, by inference, contends there is no obligation in these circumstances to pay the first applicants accounts, whether in the sum of $14,259.85 or $14,751.22.
815 Farrel Metz says (exhibit 1 at [174] and following) that in about February or March 2009, he was asked by John Sweeting, the managing director of Westwide Electrical, to resolve an issue that had arisen between Mr Sim and Westwide concerning faulty weatherproof fittings that Mr Sim had supplied prior to the first applicants’ acquisition of the business. Farrel Metz says that, on 20 February 2009, he and Mr Sim verbally agreed that the first applicants would order replacement fittings through the business, as Mr Sim did not have trading accounts with relevant suppliers, and would supply the replacement fittings to Westwide, and that Mr Sim would then reimburse the business for the cost of the replacement fittings.
816 On 17 February 2009, Farrel Metz supplied replacement fittings to Westwide and caused tax invoices totalling $14,751.22 to be issued to the first respondent. The first was tax invoice 32573, dated 28 February 2009 in the sum of $7,454.15. The second was tax invoice 32730, dated 26 March 2009 in the sum of $7,297.07. The total of two was $14,751.22. Mr Sim (exhibit 34) says that the first applicants rendered two accounts which totalled $14,259.85 and that the first applicants had not paid tax invoice number 31675 the first respondent issued to the first applicants in the sum of $12,859.
817 In response to Mr Sim’s evidence, Farrel Metz says (exhibit 2 at [74] and following) that in about 29 October 2008, Mr Sim told him that he was having difficulty receiving payment for certain lights the first respondent had sold to ODG for the Burswood Tower 4 project at an earlier time and, as the balance of the order was then due, he would issue a credit to ODG for the fittings the first respondent had earlier supplied. Farrel Metz was then to reissue and recharge ODG for the fittings the first respondent had sold together with the balance of brick lights then on order from the first applicants. The first respondent would then issue an invoice to the first applicants for the fittings that had been credited.
818 By handwritten letter dated 29 October 2008, Mr Sim advised Farrel Metz, amongst other things, that:
The QTY should be 79 not 78 so I suggest we credit everything above and re-invoice QTY 79. Old ISWA will give you bill for $2,821.50 and you pay us. You will have to raise invoice for QTY 79.
819 Farrel Metz produced a document dated 17 December 2008, handwritten by Mr Sim and given to him purporting to invoice the “new ISWA” for “goods belong to old ISWA”, which were then listed – seemingly being the goods in relation to the ODG Burswood Tower 4 job – totalling $12,859. Then, a further invoice of Illumination Services WA, tax invoice 31675, dated 19 December 2008 was issued listing three items totalling $12,859. Farrel Metz says that Mr Sim had not mentioned these additional fittings to him and he was not expecting the business would be invoiced for them. He asked Mr Sim why the first respondent had invoiced the business for the cost of these fittings. He says Mr Sim did not respond and despite his request for an explanation did not at any time explain to him why the first respondent had invoiced the business with these additional fittings.
820 I accept the evidence of Farrel Metz relating to these invoicing issues concerning Westwide Electrical. First of all, the two invoices produced in evidence as issued by the first applicants in relation to the Westwide Electrical replacement fittings totalled $14,751.22 and not some lesser sum as claimed by Mr Sim. Accordingly, as to the first respondent’s purported tax invoice number 31675, I accept Mr Farrel Metz’s evidence that this was raised by Mr Sim without explanation, and save for the sum of $2,821.50 acknowledged to be due in the note of Mr Sim dated 29 October 2008 – being the difference between what the first applicants were due to refund the first respondent and what the first respondent was due to pay the first applicants – no other portion of the first respondent is due and payable by the first applicants to the first respondent.
821 Accordingly, only $2,821,50 is due by the first applicants to the first respondent as a result of the parties’ agreement on the payment.
822 The first respondent by [81] and [82] of the cross-claim, claims that the first applicants have not paid the instalment of $125,000 on purchase price due under the sale agreement as of 1 July 2009. The first respondent further pleads that the first applicants have also evinced an intention not to be bound by the terms of the sale agreement and not to pay the instalment due on 1 July 2010 in a similar amount. Thus, a total sum of $250,000 is claimed as due under the sale agreement.
823 Mr Sim also claims the sum of $400, by [83] and [84] of the cross-claim, that he says was wrongly deducted from his pay, contrary to the terms of the employment agreement with the first applicants.
824 Mr Sim further claims, by [85] and [86] of the cross-claim that the first applicants wrongly terminated his employment without giving one month’s salary in lieu of notice and that he is thereby entitled to $5,416.66.
825 As to the cross-claim that the first applicants wrongly deducted $400 from the second respondent’s pay, I am not satisfied on the evidence that any amount was wrongly deducted. I accept Farrel Metz’s evidence in that regard. I accept he exceeded his annual leave entitlements (see exhibit 2 [53]-[55]).
826 As to the claim by Mr Sim for damages for breach of contract, equal to one month’s salary in lieu of notice amounting $5,416.66, I reject that on the basis of my earlier finding that it was Mr Sim who breached the employment agreement, not the first applicants.
827 As noted above, the first respondent’s cross-claim on its invoice 31675 is made out as to the sum of $2,821 against the first applicants.
828 The entitlement of the first respondent to relief in respect of the unpaid balance of purchase price of $250,000 under the sale agreement is dependent on what relief the first applicants may be entitled for the various breaches I have found on the claims against the first respondent.
829 Summary of findings where applicants successful: The appropriate remedy or remedies to which the applicants may be entitled will necessarily reflect the proven contraventions or breaches of the respondents, which may be summarised as follows:
(1) Employment representation in [15(a)] of statement of claim:
Representation as to future matter made by Mr Sim.
No reasonable grounds for representation.
Representation misleading or deceptive.
Applicants relied on the representation in making sales agreement.
(2) Training representation in [15(b)] of statement of claim:
Representation as to a future matter made by Mr Sim.
No reasonable grounds for representation.
Representation misleading or deceptive.
Applicants relied on representation in making sales agreement.
(3) Introduction representation in [15(c)] of statement of claim:
Representation as to a future matter made by Mr Sim.
No reasonable grounds for representation.
Representation misleading or deceptive.
Applicants relied on representation in making sales agreement.
(4) Decreases in sales not affecting profitability representations in [17(b)]-[17(e)] of statement of claim:
Representations as to future matters made by Mr Sim.
Applicants failed to establish lack of reasonable grounds at [17(b)]-[17(d)].
No reasonable grounds for [17(e)].
Representation in [17(e)] misleading or deceptive.
Applicants relied on [17(e)] in making sales agreement.
(5) Gross profit sustainability representations in [16] and [16A] of statement of claim:
Representations as to future matters made by Mr Sim.
No reasonable grounds for representations.
Representations misleading or deceptive.
Applicants relied on representations in making sales agreement.
(6) Working capital representation in [17(f)] of statement of claim:
Representations as to a future matter made by Mr Sim.
No reasonable grounds for either representation.
Representations misleading or deceptive.
Applicants relied on representation in making sales agreement.
(7) Stock easily saleable representation in [17(g)] of statement of claim:
Representation as to a future matter made by Mr Sim.
No reasonable grounds for representation.
Representation misleading or deceptive.
Applicants relied on representation in making sales agreement.
(8) Employment representation in [24A] and [25] of statement of claim:
Employment representation made by Mr Sim.
First applicants relied on employment representation in making employment agreement.
(9) Breach for active obstruction, unreasonable demands and reprehensible conduct and for joining competitor in [27]-[39] of statement of claim:
Conduct of Mr Sim in leaving employment on 20 April 2009 constituted breach and repudiatory breach of employment agreement.
Otherwise no breach or repudiatory breach of sale agreement or employment agreement by conduct alleged.
(10) Product substitution claims in [39A]-[39ZD] of statement of claim:
Allegations of underquoting on Howard Solomon project and Burswood Tower 5 project established.
Otherwise plea that Mr Sim regularly engaged in the practice of product substitution not established.
(11) Disclosure representations in [21B] of statement of claim:
Representations made.
Conduct of non-disclosure of underquoting on Burswood Tower 5 project misleading.
Applicants relied on representation in concluding sale agreement.
(12) Breach of employment agreement in [63B] of statement of claim:
Conduct of Mr Sim on 20 April 2009 constituted breach and repudiation of employment agreement.
(13) Breach or repudiatory breach for failure to disclose underquoting in [63D] of statement of claim:
Conduct constituted breach, but not repudiatory breach of contractual warranty in sale agreement in respect of underquoting on Howard Solomon project and Burswood Tower 5 project.
(14) Claim for Westwide fittings pleaded in [70] of statement of claim:
Established by applicants but first respondent entitled to set off payment due on cross-claim that exceeds claim..
830 Summary of findings where applicants not successful:
(1) Restraint representation in [15(d)] of statement of claim:
Representation as to a future matter made by Mr Sim.
Applicants failed to establish lack of reasonable grounds.
(2) Relationship with suppliers representation in [17(a)] of statement of claim:
Representation as to a future matter made by Mr Sim.
Applicants failed to establish lack of reasonable grounds.
(3) Decreases in sales not affecting profitability representations in [17(b)]-[17(e)] of statement of claim:
Representations as to future matters made by Mr Sim.
Applicants failed to establish lack of reasonable grounds at [17(b)]-[17(d)].
No reasonable grounds for [17(e)].
Representation in [17(e)] misleading or deceptive.
Applicants relied on [17(e)] in making sales agreement.
(4) Relationship with customers representation in [17(h)] of statement of claim:
Representation as to a future matter made by Mr Sim.
Applicants failed to establish lack of reasonable ground.
(5) Projects on hand representations in [17(i)] and [17(ia)] of statement of claim:
Representations as to present fact and as to future matter made by Mr Sim.
Applicants failed to establish reliance on representations.
(6) Exclusive agency representation pleaded in [17(l)] of statement of claim:
Representation as to present fact by Mr Sim not established.
(7) No litigation representation pleaded in [17(m)] of statement of claim:
Representation as to present fact by Mr Sim not established.
(8) The representations pleaded in [17(j)] and [17(k)] not established.
(9) Due diligence project value representation pleaded in [23(a), (b) and (ba)] of statement of claim:
Representations as to present fact and future matter made by Mr Sim.
Applicants failed to establish reliance on representations.
(10) Disputed claims/court proceedings representation pleaded in [23A] of statement of claim:
Representation as to present fact by Ms McBrierty not established.
(11) Employment terms in [24A] and [25] statement of claim:
No implied terms.
(12) Breach for active obstruction, unreasonable demands and reprehensible conduct and for joining competitor in [27]-[39] of statement of claim:
Conduct of Mr Sim in leaving employment on 20 April 2009 constituted breach and repudiatory breach of employment agreement.
Otherwise no breach or repudiatory breach of sale agreement or employment agreement by conduct alleged.
(13) Product substitution claims in [39A]-[39ZD] of statement of claim:
Allegations of underquoting on Howard Solomon project and Burswood Tower 5 project established.
Otherwise plea that Mr Sim regularly engaged in the practice of product substitution not established.
(14) Claim of unconscionable conduct in breach of s 51AC of the TP Act pleaded in [65] of statement of claim:
Unconscionable conduct under s 51AC not established.
(15) Claim for return of erroneous payments pleaded in [71]-[72] of statement of claim:
Claim not established on the evidence.
831 Summary of cross-claim findings:
Subject to first applicants’ entitlement to relief against first respondent, first respondent entitled to payment of unpaid $250,000 due under sale agreement.
First respondent entitled to order for payment of $2,821.50, subject to first applicants’ right of set off under its claims.
Mr Sim’s claim for wrongful deduction of $400 under his employment agreement not established.
Mr Sim’s claim for one month’s pay in lieu of notice of termination under employment agreement not established.
832 Rescission: In light of the findings of contravention and/or breach, the first applicants primarily seek the remedy of rescission in respect of:
the sale agreement;
the lease agreement with the fourth respondent; and
the employment agreement.
If rescission is not available they seek damages.
833 So far as rescission of the sale agreement is concerned, the first applicants rely on the power of the Court under s 87(2)(a) of the TP Act, as it applied at material times, to make an order declaring the whole or any part of a contract made between a person who has suffered loss or damage and the person who engaged in the conduct that contravened relevant parts of the TP Act, or a person who was involved in the contravention constituted by the conduct or of a collateral arrangement relating to such a contract, to be void and, if the Court thinks fit, to have been void ab initio or at all times on and after such date before the date on which the order is made as is specified in the order. Thus the first applicants rely on the findings of contraventions of the TP Act noted above. This is the principal basis upon which rescission is sought.
834 Section 82(1) of the TP Act by comparison with s 87 only enables a person who has suffered loss or damage “by conduct” of another person that was done in contravention of the provision of relevant parts of the TP Act, to recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
835 The power of the Court under s 82, and, by proper construction, s 87 to effect full compensation of a person who has suffered loss in the circumstances mentioned, are broad.
836 The High Court of Australia has made it clear that the use of the term “by” in the expression “by conduct” in s 82, invokes common law concepts of causation, that is to say a practical or commonsense concept of causation, except insofar as that concept is modified or supplemented expressly or impliedly by the provisions of the TP Act, although this does not mean that common law conceptions of causation should be rigidly applied without regard to the terms or objects of the Act: Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 (Henville) for example, McHugh J (with whom Gummow J at [152] agreed), at 489.
837 In Henville the Court recognised the longstanding rule that two or more causes may jointly influence a person to undertake a course of conduct. Thus, as McHugh J emphasised (at 494 [109]), in respect of claims under s 82, that courts have accepted that loss or damage is causally connected to a contravention of the Act if a misrepresentation was one of the causes of the loss or damage sustained by the claimant.
838 The decision in Henville emphasises that a court should be careful not to allow aspects of a claimant’s conduct to obscure a proper analysis of whether contravening conduct in fact caused a loss complained of: see for example, McHugh J, at 501 [129].
839 So far as the assessment of damages under s 82 is concerned, Henville confirms that, in most cases, the measure of damages in tort is the appropriate guide in determining an award of damages under s 82: see for example, McHugh J at 501 [130].
840 Accordingly, once a causal connection is established between the loss claimed and the contravening conduct, nothing in s 82 suggests that the recoverable amount should be limited by drawing an analogy with contract, tort or equitable remedies, although they will usually be of assistance: Henville, McHugh J at 501-502 [130].
841 In Henville, McHugh J (at 502 [132]), considered that, on the facts, the most appropriate approach was to identify what Mr Henville had suffered by way of prejudice or disadvantage in consequence of altering his position by reason of the breach of the TP Act. However, the measure of that loss was not to be determined simply by reference to what he would have received if Mr Walker’s representations to him had been true. Rather, by entering into a development project, Mr Henville lost an identifiable amount of money. If Mr Walker had not made representations in breach of the Act, none of this loss would have occurred. The loss suffered therefore was directly attributable to the contravention of the Act even though other factors played their part in bringing about the loss.
842 In Henville, McHugh J (at 505 [140]) also made it clear that nothing in the common law, in s 52 or s 82 or in the policy of the Act supports the conclusion that a claimant’s damages under s 82 should be reduced because the loss or damage could have been avoided by the exercise of reasonable care on the claimant’s part. Thus, there is no ground for reading into s 82 doctrines of contributory negligence or apportionment of damages. Justice McHugh (at 505 [141]) rejected the notion that Mr Henville should not recover the actual loss that he incurred as a result of Mr Walker’s contravention of the TP Act, on the basis that he was partly to blame for his own misfortune.
843 Justice Hayne (with whom Gummow J also agreed), emphasised a number of the same points made by McHugh J. For example, his Honour noted (at 509 [160]), first, it was necessary to identify the loss sustained by the appellants. Secondly, his Honour noted (at 509 [163]), seldom, if ever, will contravening conduct be the sole cause of a person’s loss. What the Act draws attention to is whether the contravening conduct was a cause. Thirdly, his Honour (at 509 [164]), said that it is necessary to recognise that, on its face, s 82 permits recovery of the whole of the loss sustained, where it is demonstrated that a contravention was a cause of that loss. His Honour (at 509-510 [165]) added that nothing in the Act suggests that carelessness of a person who suffers loss or damage should be taken into account in deciding what was the amount of the loss or damage actually suffered. Like McHugh J, his Honour rejected the proposition that notions of contributory fault are to be given any place in the operation of s 82.
844 In my view, as the applicants contend, the observations of the majority in Henville are equally applicable to an analysis of s 87 of the TP Act, at least in relation to the recognisation of a legislative policy that a person affected by contravening conduct is to be fully compensated for what they have lost and are not, in effect, to be only partly compensated by reference to notions of contributory negligence or fault, or apportionment of damages. If to declare void a contract produced by contravening conduct is necessary to compensate a person, then the remedy must be considered if not granted.
845 The applicants contend that the appropriate measure of compensation in this case having regard to the clear breaches of the sale agreement and the employment agreement and for repudiation of contract is to refund the applicants the full purchase price and to grant the applicants an order for rescission under s 87 of the TP Act.
846 The applicants say they cannot be expected to remain in the business in circumstances where they were led into error and received something substantially different from that which they paid for. The applicants say they sought rescission without delay, following Mr Sim’s departure from the business, and have remained in the business as caretakers pending the appropriate court order.
847 The applicants draw on what McHugh J observed in Henville (at 506 [144]-[145]) to the effect that an award of damages under the TP Act will ordinarily be inadequate to achieve one of the main purposes of the TP Act, unless the claimant is compensated for what he or she has suffered in consequence of his or her altering their position under the inducement of the misrepresentations.
848 The applicants also draw attention to what Hayne J said in Henville (at 509 [162]) to the effect that the conclusion that a party has suffered loss “requires comparison between the position in which [they] … found themselves after the project finished, and the position in which they would have been if, instead of relying on what they were told by the respondents, they had not undertaken the project”.
849 The applicants therefore say this is a “no transaction case” and they are entitled to be restored to the position they would have been in had they not purchased the business.
850 The applicants rely on the expert evidence of Mr Cook to demonstrate that the value of the goodwill paid by the first applicants for the business has been rendered nugatory and that, if regard be had to subsequent events in valuing the business, the “true value” or “real value” of the business as at the date of acquisition was nil.
851 In short, the applicants contend that in circumstances where the breaches of the TP Act and the contractual breaches are so extensive the most appropriate remedy in order to properly compensate the first applicants for the loss they have suffered is, in effect, to reverse the sale transaction by rescinding the sale agreement and associated agreements and requiring the payment of damages so that the applicants are, as far as possible, restored to the position they would have been in had there been no transaction at all.
852 The applicants recognise that rescission and damages on a no-transaction basis in the circumstances where there has been a completed sale and a purchaser has gone into possession of a business and has operated the business for a period may not always be possible. Nonetheless, they say Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 (Munchies) provides a useful precedent for ordering rescission.
853 The applicants contend as in Munchies that they put the relevant respondents on notice that the sale agreement should be rescinded as soon as they reasonably could and that they have considered themselves to be “caretakers” of the business pending appropriate court orders being made to reverse the transaction.
854 It may be noted, however, without going into other aspects of apparent differences between the Munchies case and this case, that the applicants did not put the relevant respondents on such notice until the middle of 2009, following the departure of Mr Sim as an employee of the business. The applicants say that it was not until then that they fully appreciated the extent of the misrepresentations made and, in relation to some issues, that there had been misrepresentation.
855 The applicants contend not only that they gave notice to the respondents of their rescission of the sale agreement in a timely way but that this was the earliest reasonable opportunity to do so after Mr Sim left the business on 20 April 2009, and the time at which the applicants became aware that Mr Sim had joined Lanark and had begun soliciting away customers of the business.
856 So far as effectually reversing the sale transaction is concerned, the applicants point to the terms of the settlement, confirmed by Ms McBrierty in cross-examination, that they have achieved with the third and fourth respondents, which include an undertaking by the third and fourth respondents to take all steps reasonably necessary to abide by or give effect to any judgment awarding rescission of the sale agreement/or of the lease, or return of the business or any like relief, subject to the applicants’ undertaking that they would not seek to recover from the third or fourth respondents any rent or other payments made pursuant to the lease.
857 The first and second respondents oppose rescission as an appropriate remedy and contend that the applicants made no attempt to enforce the restraint provisions in Mr Sim’s employment contract and they simply rely upon the fact that in late June 2009, they elected to treat the conduct of the first respondent and Mr Sim as repudiatory and to rescind the sale agreement and, by implication, the employment agreement at that time. These respondents contend that the objective fact remains that the applicants could have from the earliest moment at which they were aware, made application to restrain Mr Sim from competing on the basis of the restraint provisions in the sale agreement and employment contract, but did not do so.
858 To this end counsel for these respondents in closing oral submissions accepted that the restraint provisions in the employment agreement survived the termination of the agreement – even though in evidence Mr Sim himself sought to justify his position in joining Lanark as an employee on the basis that, because he had been sacked, the restraint provision no longer applied to him.
859 As to the decision in Munchies, counsel for these respondents noted that the Court in the factual scenario there presented accepted the applicant/purchaser: was locked into a sale agreement by the terms of the agreement; the onerous terms of the lease; and the parlous financial circumstances in which they found themselves operating a business which was not succeeding. However, in the present case, Illumination Services WA has never traded at a loss either before or after the settlement of the sale agreement.
860 The applicants add to their rescission submission by saying it is difficult, in a practical sense, to know whether Mr Sim will in the future continue to breach the restraint provision, thus another reason why rescission is an appropriate remedy. The respondents point that, on the evidence, Mr Sim ceased his employment with Lanark in October 2010, and the question of what other pursuits he may be engaged in was not pursued with him in cross-examination.
861 The question that must be asked, respecting the nature of the remedial provisions of the TP Act, found in s 82 and s 87, is why, in the face of the contraventions of the TP Act I have found, the first applicants as purchasers of the business should not now be entitled to an order reversing the transaction on the basis they contend for.
862 I have been at pains to emphasise what the High Court in Henville emphasised about the entitlement of the party to be fully compensated under s 82, and in my view by extension under s 87, when they suffer loss. Justice Gummow who agreed with both McHugh J and Hayne J in Henville, had earlier noted as a member of a Full Court of this Court (with whom Black CJ and Cooper J agreed) in Demagogue Pty Ltd v Nicholas Ramensky (1992) 39 FCR 31 (Demagogue) at 43, that while s 82 is concerned with the recovery of an amount representing the loss or damage, s 87 is concerned with compensation, whether in whole or in part, for loss or damage and with the reduction of loss or damage, and with the prevention of loss or damage which is likely to be suffered. His Honour, by reference to other authority, noted that the language of s 87 emphasises that the phrase “the loss of damage”, at least in s 87, may be concerned with more than pecuniary recovery as understood in the law of damages in tort.
863 Justice Gummow further noted in Demagogue, at 43, that unlike the position of general law with the administration of the equitable remedy of rescission of contracts, orders under s 87 may be made not only against parties to the contract but also against third parties, being persons involved (within the meaning of s 75B) and the contravention as the result of which the plaintiff ended into the contract. His Honour noted, in that context, the decision in Munchies.
864 In Demagogue, at 45, Gummow J made some further observations about the decision in Munchies. His Honour (who was a member of the Court in Munchies) noted that the purchasers in that case complained that they had entered a contract for the acquisition of a business in reliance upon such fraudulent and misrepresentations, the making of which contravenes s 52. There was no evidence of the true value of the business, so the ground was not laid for an assessment of damages under s 82 by analogy to the measure of damages in deceit. However, the Full Court held that in the events that had happened the right to rescission had not been lost. It was from a consideration of the position that would obtain from administration of the remedy of rescission (with ancillary orders) that appropriate guidance was to be derived for the granting of relief under the Act. His Honour said that the authorities showed that in cases of rescission for fraudulent, rather than innocent, misrepresentation, the vendor must indemnify the purchaser for detriment suffered as a direct consequence of the fraud.
865 His Honour noted that in Munchies, the Full Court said (at 713) that an order for accounting and payment of money made as part of the process of rescission might be seen as recovery literally of the amount of loss or damage in the meaning of s 82, giving “recover” the sense of regaining through restitution a position lost by the conduct of which complaint is made. His Honour then noted that the Full Court went on to decide (at 713-714) that, in any event, such orders might properly be considered as reducing the loss or damage within the meaning of s 87. In particular, the Full Court held (at 716) that the purchasers were, amongst other things, entitled to an appropriate indemnity for trading losses incurred before rescission and after rescission, whilst the business was maintained for the benefit of the vendor.
866 In Akron Securities v Iliffe (1997) 143 ALR 457, Mason P (with whom Priestley JA agreed) relied on much of what the Full Court said in Demagogue. In particular at 469, Mason P noted that in granting a remedy under s 87, the Court is not restricted by the limitations under the general law upon a party’s right to rescind from misrepresentation. His Honour also accepted that nor is the Court restricted in granting a remedy under s 87 by the general law’s limitation upon a party’s right to rescind for breach of contract or misrepresentation. In short, Mason P considered the power conferred by s 87 is (in subs (1)’s own words) to make “such order or orders as the Court thinks appropriate”. The President added that the very scope of s 87 means that the Court “must consider all the circumstances before it in the exercise of its discretion”. In that his Honour relied on what was said in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at 564, per Lockhart J.
867 The President also made it clear at 469 that the Court should not automatically grant rescission without considering other remedies, particularly damages, will be a sufficient remedy.
868 Plainly, in light of these authorities, it would not be correct to say that rescission can only be granted where the facts of a case more or less replicate those in Munchies. The facts of each case must be regarded. In this case, the evidence shows that during the nine to ten month period following settlement, the applicants tried valiantly, as I find they did, though quite unsuccessfully, to have Mr Sim work with them for the purpose of effecting a smooth transmission of the knowledge and imparting of the skills necessary to operate successfully this wholesale lighting business, Illumination Services WA. One can only wonder why the interpersonal dealings should have proved so fraught, as they did between Mr Sim and Farrel Metz in particular, but for my part the significant fault for that lay with Mr Sim. He plainly was not a person who was capable of working well with others. He seems to have enjoyed confrontation. He simply worked on the projects he considered his and was not prepared to involve others in them in any meaningful way. He resented anything he viewed as an intrusion into his projects. In the end the explanation for his behaviour must be found in the finding I have made that Mr Sim never intended to remain an employee for two years as he had represented to the applicants. He simply did not have his heart in it. The inference may be drawn reasonably that he was biding his time before leaving, busily doing what he considered he needed to do to protect his $250,000 “investment”.
869 As soon as Mr Sim left the business of his own accord, he was true to his parting words to the Metzes, that he would cause them maximum trouble. He immediately – or almost immediately – joined Lanark, a competitor of the business and drew business from the first applicants’ business (see evidence of Farrel Metz, exhibit 1, which I accept). At that point the applicants had no option but to try to continue the business and protect the investment they had made. They also needed to deal with Mr Sim as best they could. As soon as they discovered he was at Lanark they put Mr Sim on notice of his unlawful conduct. They could have taken court action to prevent Mr Sim engaging in such employment, but they did not. Rather, they rescinded the sale agreement at the end of June – just over four months after Mr Sim left his employment – and commenced this proceeding soon after for confirmatory orders of this Court.
870 The applicants say they discovered in the short time following Mr Sim’s departure that there were no proper bases to a range of representations made to them before the sale and settlement. Later again they say they discovered the product substitution problems they eventually pleaded in 2010.
871 Going back to the primary question of rescission, the question that one comes back to is, in circumstances where contraventions of the TP Act of the seriousness I have found, from the contract negotiation period and following, is why should the decision as of late June 2009 of the applicants to rescind the agreements count against them in all the circumstances? Why too should the fact that the prosecution of this action over more than 18 months, during which the applicants have carried on the business, count against them when rescission is sought? In Munchies, as noted above, the Court (Fisher, Gummow and Lee JJ) observed (at 288-289) of the respondent/vendor in that case that, by refusing to accept the return of the property involved in the sale, they elected to carry the risk of any devaluation of plant or business that might occur by allowing a business to be continued by the purchasers. In particular, they accepted the risk that the business might be terminated either by the purchasers walking out or being evicted. Those things might have happened in this case, but the applicants in fact carried on the business and attempted to protect their investment in the best way they could by trading and making such profits as they could. The fact is, however, the trading and the profits achieved were not those achieved by the business prior to their purchase of it. In this regard, I find the actual trading position is as set out in the expert evidence of Mr Cook based on the financial information in this regard set out in Farrel Metz’s evidence.
872 There is no doubt that the applicants have suffered real loss and damage as a result of the contraventions of the TP Act I have found. There is no doubt that, leaving aside the other significant examples of misleading and deceptive conduct found above, if the applicants had known Mr Sim would not stay the promised two years, and had no reasonable grounds for making that representation, there is simply no way they would have entered into the sale agreement or proceeded to settlement.
873 Accordingly, I entertain a significant concern that to leave the first applicants without the remedy of rescission, and merely to order damages (which would be no precise task in any event), would be to condemn the first applicants to a continuation of a sale transaction that was tainted from the outset with the fundamental misrepresentations of Mr Sim and the first respondent.
874 To order damages, but not to order rescission and reverse the transaction would, I consider, simply leave the applicants with a business which, while they have done their best to operate it successfully and would continue to do so, would continue to suffer from the stain of the original contraventions of the TP Act. That would constitute an unjust outcome that fails adequately to compensate the applicants for their loss. In the result, I do not consider that the first applicants can be adequately compensated for the loss they have suffered unless the Court orders rescission of the sale agreement and associated agreements.
875 While it may be that, to order rescission under the TP Act, complete restitution of the parties’ positions from before the sale agreement is not necessary, I am satisfied that rescission of the sale transaction is feasible in any event. The third and fourth respondents, through Ms McBrierty, have settled on terms with the applicants that will ensure the lease of the premises will be available upon the return of the business to the first respondent and Mr Sim.
876 Also the gains and losses that the parties have made or suffered between the settlement of the sale agreement on 4 July 2008 and the date of return of the business to the first respondent are able to be adjusted to ensure that justice is done to all. The first respondent and Mr Sim will then have back in their control the business which should never have been sold on the basis of the misrepresentations I have found against them, and the applicants will be restored as far as possible to the position they would have been in had they not entered into the transaction. Ms McBrierty will still hold her lease.
877 I mentioned the question of assessment of damages and difficulties associated with it. Mr Simon Cook was called by the applicants to express an opinion, amongst other things, as to the value of goodwill as at the time the sale agreement was concluded. He expressed the view in his report (exhibit 26) at [11.3] that as at 7 May 2008 with the benefit of hindsight, he would calculate the value of the business at $216,000, representing future maintainable earnings but with no goodwill at the business at that time. That evidence depended on a number of assumptions (being the pleaded representations) being made good, not all of them being consistent with the findings I have made. For example:
In [7.4] of Mr Cook’s report he assumes excellent relationships with suppliers and excellent relationships with all customers had been disproved, something I have not found.
At [7.5], Mr Cook assumed a firm projects on hand to the value of at least $2 million and closer to $2.5 million, which I have not found was a representation relied on.
In [7.7], Mr Cook assumed exclusive agency representations, which I have found were not made.
In these circumstances, while the expert evidence of Mr Cook is helpful, it has not addressed the factual scenario as I have ultimately found it to be.
878 Mr Cook’s report generally assists me in its overall analysis of how the value of a business might fluctuate depending on assumptions made by confirming the view I have formed that, as at the time the first applicants made the offer to purchase the business on 7 May 2008, and when they settled on the transaction on 4 July 2008, the business necessarily did not have the value, and certainly not the goodwill value, that it would have had, had Mr Sim’s crucial employment representation not been misleading and had he not engaged in the other misleading or deceptive conduct I have found. It is difficult on the evidence in all these circumstances to say precisely what the value of the business was, if anything, so far as goodwill is concerned, when the first applicants purchased it, but it was plainly not worth anywhere near the $1.25 million the first applicants paid for it.
879 I reject the respondents’ submissions that Mr Cook’s opinion should largely be ignored due to his lack of experience/qualification to give his evidence. Mr Cook’s evidence was in the nature of expert accounting advice but tempered by his experience in addition to business sales.
880 Taking all these factors into consideration, rescission remains, in my estimation, the only fair and just means of ensuring that the first applicants are properly compensated for the undoubted loss they have suffered at the hands of the respondents.
881 Damages: The applicants submit that in the light of the applicants being unaware of the current financial position of the first respondent and so of the first respondent’s ability or ability to satisfy any order for rescission, it is appropriate for orders to be made also against Mr Sim for repayment of the sums that will need to be paid to the first applicants consequent upon rescission. They submit that the conduct of Mr Sim clearly attracts that relief, given that he was involved in the contravention conduct under the TP Act. I agree. Mr Sim plainly was involved in the first respondent’s breach and attracts liability under s 75B of the TP Act.
882 Orders proposed by the applicants: The applicants seeks orders to the following effect:
1. That the Court declare void ab initio, that is to say rescind, the sale agreement, the employment agreement and the lease.
2. The applicants, in exchange for payment ordered below, return to the first respondent, at a date to be ordered by the Court, the assets comprising the business known as Illumination Services WA and sign all documents necessary and do all things necessary to transfer the business name and assets comprising the business to the first respondent.
3. In relation to stock:
(a) The first and second respondents pay to the first applicants the sum of $105,000, being the amount paid by the first applicants for stock which was unsaleable or unmarketable.
(b) The first and respondents pay to the first applicants the value of the balance of stock held at the business on the date on which the business is returned to the first respondent as determined by a stocktaker, appointed by the Chairman for the time being of the Real Estate Institute of Western Australia, or another person appointed for this purpose by the Court, failing agreement by the parties.
4. Subject to compliance with the preceding order for payment of $105,000, the applicants are not to be compensated for the payment of stock in the sum of $200,000 paid upon settlement of the sale agreement, nor for the payment of the additional sum of $115,000 paid consequent upon the stocktake after settlement.
5. The first and second respondents to pay the first applicants the sum of $650,000 in respect of the goodwill component of the purchase price actually paid to the first respondent, that is to say, the sum of $900,000, less the sum of $250,000 that remained unpaid at material times under the sale agreement.
6. The first and second respondents pay to the first applicants the sum of $150,000 paid in respect of plant and equipment.
7. The first respondent and second respondent pay to the first applicants by way of damages:
(c) Conveyancing costs incurred in the sum of $2,258 in connection with the purchase of the business.
(d) Stamp duty paid on the purchase of the business by the first applicants in the sum of $48,314.
(e) Interest on the sum of $50,000 which was paid as a deposit by the first applicants under the sale agreement at the rate of 8.3% per annum under the sale agreement from 4 July 2008, being the actual settlement date of the sale agreement, to the date of payment.
8. The payment of the above sums be subject to the deduction from the aggregate amount to be paid of profits derived by the first applicants in the operation of the business from the date of settlement of 4 July 2008 to the date that payment of the aggregate sum is to be made.
9. For the purpose of counting for profit in the specified period, the second and third applicants should be deemed to have received by way of salaries as full time employees of the business either $554,749 or $375,000 additional to the sums of $58,160 for the financial year ending 30 June 2009, the sum of $58,160 for the financial year ending 30 June 2010 and the sum of $29,050 for the financial year ending 31 December 2010 as calculated in [8(k)] of Annexure A of the written closing submissions of the applicants in this proceeding.
883 Consideration of proposed orders: I am prepared to make orders that reflect the substance of those terms. However, so far as an allowance in respect of a deemed sum of remuneration for the full time employment of the second and third applicants in the business is concerned I find it both difficult to accept the applicants’ submissions and to assess this sum. However, an appropriate sum greater than what the applicants have actually been paid must be allowed. In my view, the misrepresentations I have identified meant that the applicants necessarily struggled to achieve profit of the type that was represented and remunerate the Metzes at an appropriate level. Not to allow an additional amount of salary on account of remuneration foregone would mean, in effect, that when the business is returned to the first respondent, they would get the business back without having to pay for the “caretaking” efforts of the Metzes in the period, effectively from 4 July 2008.
884 However, the calculation of the amount that the Metzes have foregone cannot, in my view, simply be calculated by reference to what, prior to the purchase, Mr Sim and Ms McBrierty were paid by way of salary. Nor can it simply be calculated by reference to what people in businesses like this normally get – Mr Cook’s alternative proposal put forward by the applicants. For a start, the Metzes did not have the skills at the outset to justify what Mr Sim and Ms McBrierty were paid. Mr Sim, as an employee of the applicants, received about $65,000 per annum. Further, the financing arrangements to purchase the business put in place by the applicants with Westpac to differed significantly from those the respondents had in place to operate the business. This was bound to affect cashflow and affect the ability of the applicants to pay any extravagant, or even moderately high sum by way of salary to the Metzes. I consider taking all this into account, that the remuneration for each of the Metzes was bound to be less than it had been for the two old directors. I would, therefore, doing the best that I can, allow an additional or deemed sum of $255,000 by way of salary for the period to 30 June 2011, which is equal to an additional $85,000 per annum over three financial years to 30 June 2011.
885 I recognise that I have, in mediating the allowance for remuneration foregone by the Metzes in this way, taken into account the financial structure they adopted in financing the business. The applicants caution against such an approach citing the decision of Steytler J in Gardner Corp Pty Ltd v Zed Bears Pty Ltd [2003] WASC 13 at [74]-[83] where at [78] his Honour observed:
[78] In this case, the whole of the loss claimed by Krishell would not have occurred but for the misrepresentation and there was no item of loss which could, in my opinion, properly be separated out and attributed to some other cause.
His Honour there made reference to what Hayne J said in Henville at [160]. In my view, however, it is appropriate to have regard to the financing position for the reason expressed above.
886 I accept the evidence of the financial performance of the business as conducted by the first applicants between 4 July 2008 and 31 December 2010 set out in the financial statements provided by Farrel Metz in his evidence, as well as the adoption of those figures by Mr Cook in his report. They indicate, as the applicants contend in Annexure A of the applicants’ written closing submissions at [8(g)], as follows:
For the financial year ending 30 June 2009, a profit of $110,608.77 (exhibit 26, Mr Cook’s report, p 93).
For the financial year ending 30 June 2010, a profit of $143,802.00 (exhibit 26, p 96).
For half year ending 31 December 2010, a loss of $102,738.30 (trial bundle, tab 173).
Aggregate gross profit in the period to 31 December 2010 of $151,672.77.
887 However, what this assessment does not do is take into account the actual position in respect of the full financial year for the financial year ending 30 June 2011. The provisional loss indicated by the evidence, which I have accepted, of $102,738.30 may be more or less.
888 The applicants also contend that legal costs paid by them in connection with the conduct of this proceeding must also be brought to account when calculating the net profit. I reject that submission on the basis that to make such an allowance would, in effect, enable the applicants to recover as an item of loss or damage in this proceeding their legal costs, which I consider is not permissible: see Gray v Sirtex Medical Ltd [2011] FCAFC 40; (2011) 193 FCR 1. The applicants will be duly compensated in respect of their costs of the proceedings by an award of costs in relation to the proceedings, assuming such an order is appropriate.
889 The relief proposed by the applicants should also be subject to the set off of the $2,821 sum which I have found to be payable by the first applicants to the first respondent on the cross-claim.
890 There is also a question whether order 1 and 2 of the orders proposed by the applicants effectually requires the rescission of the agreements, return of monies paid and delivery of transfer documentation.
891 Given that I consider rescission is an appropriate remedy, substantially on the terms proposed by the applicants, together with the damages, including against Mr Sim, and allowing for the set off identified, I would formally order to that effect.
892 As a result, it is unnecessary to quantify the damages that might have been awarded if damages had been identified as the appropriate remedy. Accordingly, it is not necessary to deal with damages for the contraventions of the TP Act or the breaches of contract identified above as a separate assessment issue.
893 The proposed order of the Court is:
1. The Court declares to be void ab initio, pursuant to s 87(2)(a) of the Trade Practices Act 1974 (Cth):
(1) the sale agreement between the first respondent and the first applicants in respect of the business Illumination Services WA that was made 7 May 2008;
(2) the employment agreement between the first applicants and the second respondent that was made 24 June 2008;
(3) the lease of unit 9, 3 King Edward Road, Osborne Park, Western Australia granted by the fourth respondents to the first applicants on 5 July 2008.
2. The first applicants pay the amounts ordered under Orders 4 to 11 of this Order, on a date agreed by the parties or, failing which ordered by the Court.
3. Immediately upon payment of the amounts ordered by Order 2 above, the first applicants return to the first respondent the assets comprising the business of Illumination Services WA and sign all documents necessary and do all things necessary to effect a transfer of the business name and assets comprising the business to the first respondent.
4. In relation to stock in trade:
(1) The first and second respondents pay to the first applicants the sum of $105,000, being the amount paid under the sale agreement by the first applicants for stock in trade which was unsaleable.
(2) The first and second respondents pay to the first applicants the value of the balance of stock held at the business on the date on which the business is returned to the first respondent, as valued by a person qualified to make such valuation as the parties may agree, or failing such agreement as nominated by the Chairman for the time being of the Real Estate Institute of Western Australia Inc.
5. Subject to compliance with Order 4(1) above, the applicants are not to be compensated for the payment of stock in the sum of $200,000 paid upon settlement of the sale agreement, nor for the payment of the additional sum of $115,000 paid by the first applicants upon the stocktake conducted under the sale agreement after settlement.
6. The first and second respondents pay to the first applicants the sum of $650,000 in respect of the goodwill component of the purchase price paid by the first applicants to the first respondent under the sale agreement.
7. The first and second respondents pay to the first applicants the sum of $150,000 paid in respect of plant and equipment paid under the sale agreement.
8. The first and second respondents pay to the first applicants by way of damages, the following:
(1) Conveyancing costs in the sum of $2,258 incurred by the first applicants in connection with the purchase of the business.
(2) Stamp duty on the purchase of the business paid by the first applicants in the sum of $48,315.
(3) Interest on the deposit of $50,000 paid by the first applicants under the sale agreement at the rate of 8.3% per annum from 4 July 2008, being the date of possession and settlement of the sale agreement, to the date referred in order 2 above.
9. The payment of the sums under Order 2 above, be subject to a deduction on account of profits derived by the first applicants in the operation of the business from the date of possession of 4 July 2008 to the date that payment is made in accordance with Order 2 above.
10. For the purpose of calculating profits for the purposes of Order 9 above, the second and third applicants be deemed to have received by way of salaries as full time employees of the business, in addition to the sums of $58,160 that they received in each of the financial years ending 30 June 2009 and 30 June 2010, and $29,050 in the financial year ending 31 December 2010, the additional amount of $29,050 for the period 1 January 2011 to 30 June 2011 and the additional sum of $255,000 (being an additional amount of $85,000 per annum for each of the financial years ending 30 June 2009, 30 June 2010 and 30 June 2011) and such other sum as the Court may order in respect of the period from 1 July 2011 to the payment date ordered under Order 2 above.
11. The payment made under Order 2 be reduced by the sum of $2,821 being the set off to which the first respondent is entitled under Order 12 of this Order.
12. The first respondent is entitled to the payment of $2,821 under the cross-claim, but the cross-claims are otherwise dismissed.
894 I will hear from the parties concerning:
1. the appropriateness of the Orders proposed in Orders 1, 2 and 3 in effecting rescission.
2. the date of payment under Order 2;
3. what Orders should be made in relation to the final calculation of profits in relation to the financial year ending 30 June 2011 and the period up to the date of payment under Order 2;
4. the final terms of this Order, particularly in relation to mathematical calculations and machinery provisions;
5. costs of the proceedings;
6. any other orders that may appear appropriate.
895 The Court orders that:
1. The applicants bring forward a minute of proposed final Orders designed to carry forward the Orders proposed.
| I certify that the preceding eight hundred and ninety-five (895) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Barker. |
Associate:
