Disputes regarding falsified figures from the sale of a business are common in commercial litigation.

The allegation is frequently heard that a vendor has misrepresented the amount of sales and profits from their business in order to “fatten the pig for market”. The Victorian Court of Appeal recently delivered a decision in H & Q Cafe Pty Ltd v Melbourne Cafe Pty Ltd & Anor [2023] VSCA 200 which contains important learnings for those involved in sale of business disputes.

The outcome of this appeal was devastating for the vendor. The purchaser’s loss and damage was increased from $100 of nominal damages (at first instance in the County Court) up to $2.15m on appeal.

Background

The purchaser (H&Q Café Pty Ltd) of a café at the Royal Children’s Hospital (Melbourne Café Pty Ltd) brought claims for breach of contractual warranty and misleading and deceptive conduct against the vendor.

At trial, misleading and deceptive conduct was established. Representations made were not materially true and correct and constituted a breach of contractual warranty.

However the purchaser was awarded nominal damages of $100 for a breach of contractual warranty, and nothing for misleading and deceptive conduct, on the basis that “any loss or damage suffered by H&Q is negligible at best” (at [4]).

The trial judge was not satisfied on the evidence that the plaintiff purchaser proved with “sufficient particularity, as it is required to do, the difference between the purchase price paid and the true value of the business as at the date of the acquisition” (at [6]). This statement, and the evidential burden it suggests, was criticised by the Court of Appeal as we will see below.

Misleading and deceptive conduct – assessment of damages under s 236 of the Australian Consumer Law (“ACL”)

On appeal, the Court of Appeal summarised the settled principles for discharging the onus of proof at [108] – [117]. I will not repeat them here.

General principles for appellate review of damages

The Court summarised these settled principles for the general review of damages:

The assessment of damages at trial is a matter of discretion. An appellate court ought not intervene unless the discretion miscarried (at [104]).
The intervention of an appellate court is justified where the award of damages at trial was beyond the limits of what a sound discretionary judgment could reasonably adopt (at [105]).
If the award of damages erroneous, the appellate court has a duty to substitute its own assessment. What falls to be done is a total reassessment (at [106]).
The appellate court should avoid returning a matter to the court below unless further findings of fact are necessary (at [107]).

Rejection of the claim for loss on the purchase of the business

The Court of Appeal overturned the first instance finding on damages for loss on the purchase of the business.

It structured its decision around 4 key errors of the trial judge regarding the assessment of damages (at [132]), which I summarise below as positive propositions:

1) Post-acquisition loss is unnecessary to the assessment of loss and damage under the ACL: First, there is no need to treat evidence of the post-acquisition performance of the business as a necessary component of the assessment of loss and damage under the ACL.

A court can take into account events subsequent to the sale if they shed light on changes to the conditions that existed at the time of acquisition. However the traditional way of proving loss is consistent with the rule in Potts v Miller, whereby the focus is on the evidence relevant to the ‘true value’ at the time of acquisition (at [134]).

The two elements to be proved are:

· Price paid; and

· True value at the time of acquisition.

The purchaser’s failure to establish ongoing losses (post-acquisition) did not impact on its claim for damages for loss on the sale of the business.

2) The standard for proof of loss is whether on the balance of probabilities a party has proved its loss: Second, there is no requirement for the Court to demand exact and complete proof of a purchaser’s loss. This would impose a greater burden of proof on the claimant in an action under the ACL than is normally required in civil proceedings.

The Court of Appeal criticised the trial judge’s use of the phrase ‘sufficient particularity and certainty’ in relation to the burden of proof which had to be discharged by the purchaser. This phrase was found to be incorrect. Epithets such as ‘sufficient particularity and certainty’ are to be avoided.

Instead, the standard required to prove loss and damage as required by s 140(1) of the Evidence Act 2008 is whether on the balance of probabilities a party has proved its loss. The test in civil proceedings is qualified at times by the Briginshaw test in s 140(2) of the Evidence Act.

The test in this case was whether the purchaser had more probably than not proved a loss in accordance with the rule in Potts v Miller – being the difference between the price paid and real or true value on its purchase of the business. No less and no more (at [142]).

3) Uncontroversial expert evidence should only be rejected with good reason: Third, uncontradicted expert evidence (here, regarding the true value of the business at acquisition) should only be rejected by the trial judge with an adequate explanation.

The Court of Appeal said the judge simply did not subject the expert evidence at trial to any form of critical analysis and necessary determination. This is not the same as saying the trial judge should wholly accept the evidence of an expert, even if unchallenged. The trial judge concluded there was insufficient information before the Court to assess the value of the business at the point of acquisition. However this was incorrect as there was evidence from an expert, a lay witness, underlying documentation, and a tax return (at [153]).

The Court cited a High Court case of Golden Eagle International Trading Pty Ltd v Zhang which held “…courts should act upon the least speculative and most current admissible evidence available” (at [162]).

4) Wrongdoers with unique knowledge may frame the way evidence is viewed: Fourth, where there is a wrongdoer who has the controlling mind, it should be recognised that the facts to be proven were particularly within the knowledge of that wrongdoer.

A peculiar challenge of this case is that that purchaser relied upon evidence solely within the control of the vendor and its director, the wrongdoers. The evidence ought to have been evaluated in that light. If it had been, it would have fortified reliance on the underlying documentation and tax return referred to above (and at [153]).

The relevant burden of proof will be discharged:

…by adducing evidence of some fact the existence of which, in the absence of further evidence, is sufficient to justify the drawing of an inference that it is more likely than not that the event occurred or that the state of affairs exists. This process of inferential reasoning is informed by the fundamental principle established in Blatch v Archer that ‘all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted’ (at [168]).

Where there is only limited evidence available:

[I]n deciding facts according to the civil standard of proof, the court is dealing with two questions: not just what are the probabilities on the limited material which the court has, but also whether that limited material is an appropriate basis on which to reach a reasonable decision...

In considering the second question, it is important to have regard to the ability of parties, particularly parties bearing the onus of proof, to lead evidence on a particular matter, and the extent to which they have in fact done so (at [169]).

The presumption that the evidentiary burden shifts to the defendant applies a fortiori where the wrongdoer has destroyed or failed to produce evidence which is required to be proven by the innocent party to establish its loss or damage: ‘it is just that the wrongdoer should suffer the resulting uncertainty’. Where evidence is destroyed or suppressed by a party, the court may infer that the facts essential to that party’s position are lacking or that a particular part of its case is weak (at [171]).

Finding on appeal

The Court of Appeal held that “In determining the real or true value of the business at the time of sale, a court is required to make a finding as to its value at the time of sale and not at the time of trial” (at [186]).

Ultimately they accepted that the true or real value of the business at the time it was purchased was $250,000. They assessed the damages at $2,150,000 being the difference between the purchase price ($2.4m) and the true or real value of the business at the time of purchase ($250,000).

This was a considerable change from the finding at trial where it was found that the plaintiff (purchaser) had failed to provide its claim for damages (at [130]).

Consequential loss

A brief side issue was the purchaser’s claim for consequential loss. The trial judge found there was no entitlement to damages for consequential loss, and the Court of appeal agreed (at [128]).

The purchaser claimed it suffered consequential operational losses from operating the business after settlement of the sale, and interest payments on the purchase loan from CBA. However this particular head of damage did not succeed because the evidence about the claimed operating losses was not conclusive and causation could not be proved.

The trial judge found there were a myriad of reasons why the business was not performing as well as expected after the purchase. She was not persuaded that the operating losses were in fact attributable to the conduct of the defendants or that the vendors were liable for events such as the pandemic (at [126]). There was also no documentary evidence of the interest paid (at [127]).

Summary

Demonstrating quantum of loss in a case like this requires careful consideration of the evidence.

The general take-aways are:

loss must be proved on the balance of probabilities pursuant to s 140(1) of the Evidence Act 2008 (not an epithet like “sufficient particularity and certainty”);
expert evidence which is not challenged can only be rejected with an adequate explanation;
post-acquisition loss is not a necessary component for assessing loss and damage under the ACL; and
wrong-doers with particular knowledge (unknown to the other side) should have their evidence treated with tactical care.