Abstract

This article analyses a Full Court of the Federal Court case, Radferry Pty Ltd v Starborne Holdings Pty Ltd, in which Burns & Associates Solicitors acted for the successful applicant. This case deals with the assessment and measure of damages in deceit, misleading or deceptive conduct and contract where a purchaser of a business was induced to buy that business, relying upon false trading figures. The case highlights the different results that can arise if the claim is brought for breach of contract or in deceit or misleading or deceptive conduct.

Key points

1. A buyer of a business may have claims in deceit, misleading or deceptive conduct and contract where those trading figures constitute false representations and, in addition, are warranted to be true under the terms of the contract.
2. The measure of damages in contract often can be substantially more than the measure of damages in deceit or misleading or deceptive conduct.
3. Generally, the measure of damages in deceit or misleading or deceptive conduct will be the same where a purchaser is induced to enter into a contract to purchase a business in reliance upon false representations as to the relevant trading figures. That is, the relevant damages are calculated to be the difference between the value of the business at the time of acquisition and the price paid for it. This resulted in Radferry and its directors being ordered to pay damages to Starborne in the amount of $90,000, plus interest and costs for deceit and misleading or deceptive conduct.
4. By contrast, the measure of damages for a breach of warranty as to the truth of trading figures annexed to a business sale contract is the difference between the value of the business as warranted and the actual value of the business at the date of acquisition of the business. This mode of assessment for damages for breach of contract resulted in Radferry being ordered to pay contractual damages of $257,000.
5. A frequently used method of valuing a business is to capitalise, at the appropriate capitalisation rate, the net annual profit of the business after allowing for an owner’s salary and any other extraordinary expenses.

The facts

1. In January 1996, Starborne entered into a contract to buy a coffee shop from Radferry for the price of $290,000.
2. Under the sale contract, Radferry warranted the accuracy of trading figures attached to the contract.
3. In February 1996, the contract settled.
4. By August 1996, Starborne formed the view that the trading figures attached to the contract of sale were false, as Starborne was achieving turnover and profit figures substantially lower than that contained in the trading figures attached to the contract.
5. In August 1996, Starborne rescinded the contract of sale and advised that it would continue to act as a caretaker of the business until the dispute had been resolved.
6. In October 1997, Starborne negotiated a reduction in the rent and elected to keep the business and instead claim damages for deceit, misleading or deceptive conduct and/or breach of contract.
7. The trial judge held that Radferry and its directors fraudulently misrepresented the trading figures.
8. When assessing damages in deceit and for misleading or deceptive conduct, the trial judge made a finding that Starborne did not actively exploit the business to its optimal level until October 1997, when it changed its mind and elected to affirm the contract and keep the business.
9. As a result, in assessing damages, the trial judge had regard to Starborne’s trading figures between October 1997 and February 1998, finding that these figures were the trading figures that Starborne could have achieved from the date of the acquisition of the business had they exploited the business.
10. The appeal and cross-appeal involved the issue as to the appropriate quantification of damages.

The decision

1. The Full Court of the Federal Court awarded:
   1. damages in deceit and for misleading or deceptive conduct to be paid to Starborne by Radferry and its directors in the amount of $90,000, plus interest and costs;
   2. damages for breach of contract to be paid to Starborne by Radferry in the amount of $257,000, plus interest and costs.
2. When assessing damages for deceit, the Full Court observed that the starting point is the difference between the value of the business at the time of acquisition and the price paid for it. Although there are several methods of valuation, the Court preferred to adopt the capitalisation approach. The capitalisation approach requires:
   1. identification of a relevant net profit figure; and
   2. the application to the relevant net profit figure of an appropriate capitalisation rate.
3. When working out the relevant net profit figure, the Full Court was bound by the trial judge’s findings that Starborne’s trading figures between October 1997 and February 1998 gave a reasonable guide to the prospects of the business at the date of acquisition. Based on these trading figures, the net profit actually derivable from the business at the date of acquisition, allowing for an owner’s salary of $50,000 and extraordinary items of expense, was $52,600.
4. Applying a capitalisation rate of 25%, the value of the business at the time of acquisition was $210,400. The Court further reduced this sum due to the uncertainties surrounding the rent and the lease, such that the Court decided that the value of the business at the date of acquisition was $200,000. It follows that damages for deceit are equal to the contract price of $290,000 less the value of the business at the date of acquisition of $200,000, being $90,000 in damages.
5. The Court held that the award of damages for misleading or deceptive conduct was the same as for the tort of deceit, being $90,000.
6. When assessing damages for breach of contract, the Full Court observed that this calculation requires an assessment of the price which a purchaser would pay for the business as warranted.
7. In calculating this sum, the Full Court held that, based on the warranted trading figures attached to the contract, the net annual profit was $164,400 from which was deducted $50,000 for the notional owner’s salary, showing $114,400 as the net profit.
8. Applying the capitalisation rate of 25% to this net profit figure, this showed a value for the business of $457,600.
9. The Full Court then observed that the measure of damages in contract is derived by deducting the true value of the business ($200,000) from the value as warranted ($457,000), showing $257,000 as the damages for breach of contract. The Court also awarded interest.
10. To avoid double counting, the Court stipulated that the maximum payment to Starborne was $257,000, plus interest plus costs.

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