QVB Pharmacy Pty Ltd v Le [2022] NSWSC 1612 (1 December 2022)

QVB Pharmacy Pty Ltd v Le [2022] NSWSC 1612 (1 December 2022)

Intro:

The plaintiffs, QVB Pharmacy Pty Ltd (“the Pharmacy”) and Peter Galettis (“Mr Galettis”), seek damages from David Le (“the first defendant”) for misleading and deceptive conduct in connection with the sale of a pharmacy in the QVB Building in Sydney (“the Business”) by the first defendant to Mr Galettis. The plaintiffs say that the first defendant made two representations during the course of negotiations leading to the sale of the Business in 2018 which are alleged to have been misleading and deceptive.

Facts:

Mr Galettis is a registered pharmacist. He has been registered since 1965. He has owned a number of pharmacies.

In 2017, in circumstances in which there is some dispute, Mr Galettis was introduced to or put in contact with Mr Tim Peterson who was assisting the first defendant in attempting to sell two pharmacies that the first defendant owned. One of those pharmacies was the Business.

Mr Galettis says that during the course of discussions with Mr Peterson, he either requested or was provided with documents relating to the operation of the Business, including:

(1) Documents described as the “2017 financial statements” (which also made reference to the 2016 financial statements); and

(2) Documents conveniently described as the “Other Documents”.

The plaintiffs say that both the 2017 financial statements and the Other Documents were inaccurate, wrong or false. The plaintiffs say that, in providing documents which contained such inaccurate information, the first defendant engaged in misleading and deceptive conduct.

It is the plaintiffs’ case that, if they had known the true position, they would not have agreed to purchase the Business at all. The plaintiffs thus pursued a “no transaction” case on the basis that the Pharmacy would never have entered into the contract with the first defendant if it had known the true position of the Business. The plaintiffs then rely on an expert valuation report of Mark Williams dated 4 December 2019 (“the Williams valuation”) for the purposes of establishing that, as at the date of the report, the value of goodwill in the Business was nominal, being $1,886.

The Pharmacy thus says that it is entitled to damages representing the whole of the amount paid for goodwill, $750,000, less the sum of $1,886. The Pharmacy obtained finance to purchase the Business and claims the interest payable under those loans, again on the basis that the Pharmacy would never have taken out the loans but for the misleading and deceptive conduct.

Defendant’s defence

The first defendant denies that any representations that were made (if any), were not truthful or inaccurate. Further, he relies on clause 37.3 of the sale of business contract dated 2 August 2018 (“the sale contract”), stating that the first plaintiff acknowledged:

(1) It was purchasing the business as a result of its own inspection;

(2) It was not induced to enter into the sale contract by any warranties or representations whatsoever except such as were expressly contained in the sale contract; and

(3) The first defendant did not, nor did anyone on the first defendant’s behalf, make any warranty or representation in respect of the Business or any aspect of the Business.

The first defendant’s position is that:

(1) The information provided to the plaintiffs was not inaccurate, wrong or false in any material way.

(2) He relied on his accountant to prepare the financial statements. As far as he was aware, the accountant prepared the 2017 financial statements in the same way that he had always prepared the financial statements and they were correct.

(3) He provided all documentation and information that the plaintiffs requested and were always available to provide any further information that the plaintiffs may have required.

(4) The plaintiffs should have relied on their own enquiries and, if there was any discrepancy between documents such as the script reports or the end-of-day history (recording the total sales), then it was up to the plaintiffs to make their own enquiries and reconcile those discrepancies. The first defendant says he was unaware of any such discrepancies.

(5) The information provided was consistent with the information he provided to the Commissioner of Taxation.

(6) He did not intend to provide any information which was inaccurate.

(7) He rejected any suggestion that what was said to be the very high price he originally sought for the sale of the Business was indicative of some attempt to mislead the plaintiffs. Further, he rejected any suggestion that his primary motivator in selling the Business was the fact that his registration had been suspended and that he attempted to conceal that from the plaintiffs.

Issue:

Whether or not the defendant passed on misleading information.

Ruling:

Yes.

In the circumstances:

(1) I accept that the plaintiffs have established the pleaded representations and;

(2) The representations were misleading or deceptive; and

(3) To the extent that the Pharmacy suffered a loss consequent on those misrepresentations, it would be entitled to damages.

The 2017 financial statements provided to Mr Galettis were false and inaccurate in a number of respects, critically in respect of the annual sales of the Business. Having regard to the pre-tax profit of the Business as disclosed in the 2017 financial statements, the variances identified by Mr Pekenti in his report are significant in that the amount of the discrepancy is such that it would mean that the Business was not actually making a profit at the time of sale.

There are unexplained discrepancies in the financial records of the Business which I have already identified. The plaintiffs’ claim that the 2017 financial statements were false and inaccurate is not just based on expert opinion. The plaintiffs also point to the first defendant’s BAS summary report for 2017. Mr Pekenti did not have that summary report available to him when he prepared his report. As is well-known, the first defendant was required to disclose the income of the Business to the ATO. The total sales disclosed by the first defendant in respect of the Business for the period 1 July 2016 to 30 June 2017 was $1,997,016. This is $554,763 less than the total trading income for 2017 as set out in the 2017 financial statements. No explanation has been offered by the first defendant for this discrepancy.

Further, some of the Other Documents contained information which was inaccurate and false. For example, the number of scripts for the drug Ferinject cannot be adequately explained, particularly having regard to the observations of Mr Galettis as to its general use.

It follows that if the true figures had been disclosed in the 2017 financial statements, the goodwill of the Business would have been nominal.

I accept Mr Galettis’ evidence that he would not have purchased the Business if he had known the true position. Indeed, as a result of the reduced turnover, he was required to obtain additional finance and borrow from relatives to meet ongoing financial obligations.

I do not accept that clause 37.3 of the sale contract provides a defence or limits the liability of the first defendant. I accept the plaintiffs’ submission that clause 37.3 does not operate as an exclusion of liability. It is merely a standard form clause by which the plaintiffs acknowledge that they have made their own enquiries and relied on their own enquiries. The entry into the contract on these terms does not cause me to reject Mr Galettis’ evidence as to his reliance on the accuracy of the information provided to him.

Orders

(1) Judgment for the first plaintiff in the sum of $1,027,163.52.

(2) The first defendant is to pay the plaintiffs' costs.

(3) Grant liberty to apply should any party seek a variation of that costs order.