- Unreported Judgment
SUPREME COURT OF QUEENSLAND
Neilson Investments (Qld) P/L & Ors v Spud Mulligan’s P/L & Ors  QSC 258
NEILSON INVESTMENTS (QLD) PTY LTD
ACN 071 942 026
PETER STEWART NEILSON AND SANDRA
ROBIN CROSSLEY NEILSON
SPUD MULLIGAN’S PTY LTD ACN 062 200 695
S 11169 of 1997
Supreme Court Brisbane
29 August 2002
24, 25, 26, 27, 28 September 2001, 1, 2, 3 October 2001
Judgment for each of the plaintiffs against each of the defendants
TRADE PRACTICES – misleading and deceptive conduct – representations – claims for breach of contract (first plaintiff against first defendant) and damages and/or compensation and/or relief under the Trade Practices Act by all plaintiffs against all defendants – where plaintiffs purchased franchise from defendants and franchise eventually failed – where defendants built competing store within three kilometres of plaintiffs’ store – where plaintiffs relied on representations by defendants – whether representations made – whether representations relied on or induced plaintiffs to enter into franchise agreement – whether misleading or deceptive conduct under Trade Practices Act
Supreme Court Act 1995, s 48
Trade Practices Act 1974 (Cth), Part V, s 51A, s 51A(1), s 51A(2), s 52, s 52(1), s 75B, s 75B(1)(c), s 82, s 81(1), s 81(2), s 82(2), s 87
Uniform Civil Procedure Rules 1999 (Qld), r 375, r 375(2), r 376(4), r 376(4)(b), r 387(1), r 387(2)
ACCC v Top Snack Foods Pty Ltd  FCA 572, considered
Bateman v Slatyer (1987) 71 ALR 553, considered
Bell v Australasian Recyclers (WA) Pty Ltd (1986) ATPR 40-644, considered
Cummings v Lewis (1993) ATPR (Digest) 46-1032, considered
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, considered
ENZED Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167, considered
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 , considered
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, considered
General Newspapers Pty Ltd v Telstra Corporation (1993) ATPR 41-274, considered
Gould v Vaggelas (1983-85) 157 CLR 215, followed
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546, considered
Henville v Walker (2001) 75 ALJR 1410, considered
James v ANZ Banking Group Ltd (1986) 64 ALR 347, considered
Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) ATPR 41-534, considered
Tefbao Pty Ltd v Stannic Security Pty Ltd (1993) 118 ALR 565 at 575, considered
Thompson v Ice Creameries of Australia Pty Ltd (1998) ATPR 41-611, considered
Ting v Blanche (1993) ATPR 41-282, considered
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, considered
Wheeler, Grace & Pierutti Pty Ltd v Wright (1989) ATPR 40-940, considered
Yorke v Ross Lucas Pty Ltd (1982) 69 FLR 116, considered
P Smith for the plaintiff
No appearance for the first defendant
M J Robinson (sol) for the second and third defendants
A P Collins for the fourth and fifth defendants
Paul Everingham and Company for the plaintiff
Murrays Lawyers for the second and third defendants
Wight-Shera for the fourth and fifth defendants
- The first plaintiff is a trustee company of which the second plaintiffs are directors.
- The first plaintiff was incorporated to enable a family trust, of which the second plaintiffs and their children were beneficiaries, to conduct a food franchise business called “Spud Mulligan’s” on the corner of King Street and Beerburrum Road at Caboolture; at that time the business was owned by the first defendant, of which the second, fourth and fifth defendants were directors. The third defendant, at all times relevant to this action, was employed by the first defendant as a salesman and was an undischarged bankrupt. He was sent bankrupt on 9 November 1993 and remained bankrupt until 10 November 1996 when, upon his evidence, having paid his creditors in full his bankruptcy was annulled. He became sole director of the first defendant on 26 November 1997 and secretary on 28 November 1997 upon the resignation of the second, fourth and fifth defendants as directors.
- The first plaintiff as purchaser of the food franchise business from the first defendant and the second plaintiffs as guarantors of the first plaintiff’s obligations under the purchase agreement commenced these proceedings by writ of summons and statement of claim filed on 10 December 1997 – within a couple of weeks of the resignation of the second, fourth and fifth defendants as directors of the first defendant and the appointment of the third defendant as director in their place.
- The first defendant was wound up upon a creditor’s application on 22 April 1999. It was a $2 company at the time it was wound up, the two shareholders being the second defendant and the fourth defendant. The first plaintiff seeks to recover damages against the first defendant for breach of contract based upon breaches of various terms of the franchise agreement executed finally by the first plaintiff on 22 December 1995.
- The first plaintiff also seeks to recover damages and/or compensation and/or relief pursuant to section 82 of the Trade Practices Act 1974 against the first defendant.
- The second plaintiffs also claim against the second, third, fourth and fifth defendants, damages or compensation of the sort the first plaintiff seeks to recover against the first defendant pursuant to s 82 of the Trade Practices Act. They do not of course seek to recover damages for breach of contract because they were not in any contractual relationship with the second, third, fourth and fifth defendants at the time of the execution of the franchise agreement and their guarantee of the first plaintiff’s performance of it on 22 December 1995.
- At all material times prior to their making any contact with the second, third, fourth or fifth defendants (who admittedly were the agents for the first defendant to make representations, give undertakings etc to the second plaintiffs prior to the execution of the franchise agreement on 22 December 1995), neither of the second plaintiffs had any experience in conducting a business. The second plaintiff (“Peter”) had spent most of his life in the public service and had latterly been a purchasing officer for various health related goods used in the public hospital system. The second plaintiff (“Sandra”) had worked as a bus driver.
- In 1995 Peter, then aged about 46 years, was retrenched and received about $225,000 as severance pay. He had been taking a business training course for some time at a university and upon retrenchment, completed most of that course. The second plaintiffs decided between them that they would try to buy a business that they could manage and which would allow them to work together, produce an income to support their family and give them an interest. They were obviously hopeful that if they bought a good business and worked hard for five or perhaps ten years, they would not merely make a good income but would also build up the value of the business of which they might then be able to dispose profitably. They had a child who had health problems that required his treatment in a special educational institution and they had some hopes that he might, to the extent of his capacity and with their assistance, take part in the running of any business they might acquire.
- In the course of one of the lectures he attended at university, Peter discussed with his lecturer, the arguable advantages to persons unskilled and inexperienced in business affairs wishing to embark upon some sort of business venture, in acquiring a business franchise. That lecturer then gave to Peter a brochure that had been prepared by agents of the first defendant concerning a Spud Mulligan’s franchise business, which specified that contact for further information might be made through the second defendant and the fifth defendant.
- The brochure (Ex 4) excited the interest of both plaintiffs because it included the following assertion –
“EXCEPTIONAL BUSINESS SUPPORT
Spud Mulligan’s Head Office synergistically combines the full time talents of four individuals with between them, many years of experience in accountancy, financial control, taxation and business management, business investment, data processing, restaurants and the hospitality industry, corporate communications, retail advertising, marketing, and brand development – it’s for this reason that Store Managers and Franchise Owners can expect and enjoy an exceptionally high level of business support”.
The four individuals were the second, third, fourth and fifth defendants.
- The brochure contained much other material to excite the interest of people with a background of limited if any business experience who desired to embark upon the conduct of a business “of their own”. It is unnecessary for me to analyse that material. It suffices to say that it promoted a franchise business involving the sale of potatoes cooked in their jacket and containing various prepared fillings. It illustrated various “spuds” with different sorts of fillings which sold within a price range of from $3.50 to $5.00 per serving. Those prices were asserted to be correct as at 1 May 1994.
- Encouraged by the content and hyperbole of the brochure, Peter made contact, probably during November 1995, with the fifth defendant described in the brochure as “Franchise Manager”. The fifth defendant advised Peter to make contact with the third defendant who was “looking after” people interested in the franchise business and who was “the point of contact for potentially new franchisees”.
- Peter then contacted the third defendant, who encouraged his interest in the franchise business, and arranged for him to meet the second defendant on 18 November 1995. This meeting occurred at the home of the second defendant at Maroochydore. The third defendant acting as salesman for the first defendant attended that meeting with Peter and Sandra. Peter told the second defendant that neither he nor his wife had any business experience and that they were looking for a franchise that would give them a lot of support and assistance. There was some discussion as to the background, experience and financial position of both Peter and Sandra and Peter was persuaded to provide the second and third defendants with a written list of their available assets (including of course the money recently received by Peter as severance pay).
- Mention was made by either or both the second defendant and third defendant in the presence of each other of a Spud Mulligan’s shop due to open in mid December in Caboolture. The second plaintiffs were interested in this because Caboolture was reasonably close to where they then resided at Kallangur. During this discussion between the second and third defendants and the second plaintiffs there was some discussion about what it would cost the second plaintiffs to acquire the franchise business soon to be established at Caboolture by the first defendant and either the second defendant or third defendant or both mentioned the sum of $160,000.
- The second defendant told Peter and Sandra that the shop to be opened in Caboolture was going to be “the best store in the franchise”. He said that it had the best location of any of the first defendant’s franchise businesses and that it was going to be the first defendant’s top of the range business venue and the best that so far had been opened.
- There was some discussion as to the lack of previous business experience of each of the second plaintiffs and the second defendant said words to the effect “If I can do it you can do it. It’s a simple concept and we will be there to help you”.
- The third defendant then arranged with the second plaintiffs to visit several of the first defendant’s franchise stores within easy distance of Maroochydore. Together they visited a store in the Sunshine Plaza at Mooloolaba, a short distance from the second defendant’s residence. The second plaintiff found that the food court there was extremely busy. They met the second defendant’s wife at that store and the third defendant conducted them around the store to inspect behind its counter, kitchen area etc. They were there all told for about 10 or 15 minutes. That store was very busy during the whole of the time they were there.
- They next moved to inspect another franchise store at Caloundra where they met the franchisee, a Mr Nichols; he also appeared to be fairly busy at the time and they spent about 15 or 20 minutes at that franchise store also.
- Both plaintiffs were impressed by the experience that both the second and third defendants claimed to have had in business and, I infer by, what they had observed while at the Mooloolaba and Caloundra franchise operations.
- No mention was made to them then or at any later time for that matter, that in fact the third defendant was at that time an undischarged bankrupt or indeed that the second defendant had been bankrupt between 13 September 1984 and 14 September 1987 having presented his own debtor’s petition.
- A second meeting was arranged with the third defendant at the residence of the second plaintiffs at Kallangur on 20 November 1995. The third defendant brought with him a document described as an Operational Manual which is Ex 26 and the proposed layout plan of the first defendant’s store at Caboolture. The third defendant informed the second plaintiffs that the Caboolture store “was going to be the best store in the franchise” because its layout and concept was the best so far developed. The operational manual outlined in significant detail some aspects of food preparation and provided other information concerning monies payable in franchise fees, advertising fees etc. I accept the evidence of Peter that the second plaintiffs were advised by the third defendant that they would get regular visits and an exceptionally high level of support on the business side of the franchise operation such as accounting, book keeping, advertising, promotion, food presentation etc. On 23 November 1995, the third defendant again visited the second plaintiffs’ residence at Kallangur to collect a cheque for $10,000 by way of deposit payable on a franchise fee of $40,000 to secure the first defendant’s business franchise at its café at Caboolture in which other people were then “interested”. Upon the evidence the only “interested” person to that time had been Frank Mitchell who operated a Spud Mulligan’s franchise business at Redcliffe; he had declined an offer to acquire the Caboolture franchise. He gave evidence that after the opening of the Spud Mulligan’s franchise at the Morayfield Shopping Centre he would not be prepared to pay more than $50,000 to $60,000 for the Caboolture franchise – i.e. $100,000 less than the first plaintiff was persuaded by the second, third, fourth and fifth defendants to pay for it 16 months earlier.
- The second plaintiffs had substantially made up their minds (at least provisionally) to acquire the franchise between 20 November and 23 November 1995, when the third defendant confirmed that the first defendant’s Caboolture café would open in about mid December 1995. It would take until then for the fitting out of the Caboolture store, then under way, to be completed. It was on the third defendant’s visit to the second plaintiffs, on 23 November 1995, that he gave them a document described as a disclosure document – which is Ex 5.
- This document extolled the experience and business capacities of the second, third, fourth and fifth defendants, although it made no mention that the third defendant was then an undischarged bankrupt or that the second defendant had also, some years previously, been bankrupt for three years. At no material time did the third defendant make reference to his bankruptcy.
- There are representations and statements contained in this disclosure document upon which the plaintiffs rely to establish misleading statements and forecasts as to profitability, training, ongoing support etc available to persons who become franchisees of the first defendant. It is the plaintiffs’ case that none of the defendants had reasonable grounds to believe the accuracy or truth of those statements whatever might eventuate, and that they were made merely to induce the plaintiffs with hundreds of thousands of dollars available for investment to enter into a franchise agreement with the first defendant, and assume the financial obligations it imposed. It listed 11 of the first defendant’s food franchise stores said to be operating in October 1995 together with a statement asserted to be a “typical Spud Mulligan’s store income and expenditure”.
- I will analyse this document at a later stage when considering whether that document and its annexures does either, standing alone or in the context of other statements, made before the franchise agreement was executed on 22 December 1995 constitute misleading statements either of existing facts or of prognostications as to the financial success of the Caboolture store having regard to what might reasonably have been believed by any of the defendants as to their accuracy or reliability.
- The second plaintiffs read the disclosure document carefully and it appeared to Peter to answer various questions he had proposed to ask the second or third defendant about gross profit margins, cost of purchasing goods etc.
- Peter paid a $10,000 deposit on the franchising fee (of $40,000) to secure the Caboolture franchise because the third defendant said that without payment of that deposit it could not be guaranteed that the Caboolture franchise would remain available to the plaintiffs because other people were then interested to acquire that franchise. These other alleged potential purchasers of that franchise in Caboolture were not then identified; no evidence as to their identity was given at trial, indeed the third defendant denied any such conversation. I do not accept that denial. I accept the evidence of Peter that the third defendant did make that assertion.
- I infer that the third defendant assessed the plaintiffs as an inexperienced and somewhat gullible couple looking to invest a significant sum of money in a franchise business of a kind which the defendants were anxious to sell as quickly as possible, and that their payment of a deposit of $10,000 would confine their interest and attention to only the defendants’ franchise at Caboolture to the exclusion of other available business investments of a similar kind.
- Peter visited the first defendant’s café for the first time on 3 December 1995; at that time the fitting out work in the café was still in course of completion. The second defendant was present at the café on that occasion. This was long before the franchise agreement was signed. The second defendant pointed across the road to a vacant parcel of land and told Peter that it was the site for a multi-level car park shortly to be erected. He said that the car park would be very good for the franchise business because it would be convenient to people using the car park who could just walk across the road to the first defendant’s café. I accept that the advice given by the second defendant on this occasion as to the proposed construction of the multi‑level car park just over the road from the first defendant’s café, then in course of completion, increased the confidence of the plaintiffs in continuing on with their plan to enter into the franchise agreement with the first defendant and was an inducement to them to do so. Exhibit 6 is a plan prepared by Peter, indicating the location of the first defendant’s franchise business which he was contemplating purchasing. He had of course, by this stage already paid the $10,000 deposit on the franchise on 23 November 1995. The payment of that deposit obviously motivated him to complete the purchase. The site for the proposed multi-level car park indicated to the second plaintiffs, was the site formerly occupied by an old hotel which had been demolished leaving vacant land ripe for re-development. I am satisfied that the second defendant told Peter of the location of the proposed car park development to maintain his confidence in the commercial wisdom of his proposal to enter into the franchise agreement and to induce him to complete the agreement.
- Ultimately, a multi-level car park was constructed on land on the other side of the road upon which the first defendant’s franchise business on the corner of King Street and Beerburrum Road was to be conducted but at a distance many hundreds of metres removed from the site indicated by the second defendant just across the road from the Spud Mulligan’s franchise business and located in a position which I am satisfied would by reason of its location be of no commercial advantage whatever to persons running that business.
- On 12 December 1995, the second plaintiffs commenced to operate out of the first defendant’s Caboolture store just as soon as it had been fitted out. No franchise agreement or guarantee had been executed by the plaintiffs as this stage although both the plaintiffs and the defendants appeared willing if not indeed anxious to proceed on the basis that they would be. Between 3 December and 12 December 1995, the second plaintiffs received some training on the actual preparation of potatoes for sale with various fillings, for 2 to 3 hours per day for 3 or 4 days at the first defendant’s franchise store at Stafford. That was a food court store and not a stand-alone café of the kind to be opened in Caboolture. There was a computerised system involving a cash register at the Stafford store but the second plaintiffs received no real operating instructions because it was being used in the course of serving customers while they were there.
- The second plaintiffs received some assistance in the selection of staff appropriate to commence the franchise business operations from a Mr Russell Hill, who was then employed by the first defendant. They also received some training at a Redcliffe franchise store for a short time.
- Apart from that training there was no formal training given to the second plaintiffs before execution of the franchise agreement.
- I am satisfied that the fourth defendant did indeed visit the second plaintiffs in their store, either shortly before or shortly after 10 December 1995 and well prior to the execution of the franchise agreement and guarantee by the plaintiffs. He then seemed very enthusiastic and said that the Caboolture store would be a great success and that the second plaintiffs were just the sort of people the first defendant and its directors were looking for.
- On 14 December 1995, the plaintiffs paid the sum of $30,000 to the first defendant being the balance of the franchise fee. At that stage, the franchise agreement and guarantee by the second plaintiffs, in a form prepared by the solicitors for the first defendant but not yet accepted by the plaintiffs, was held by the solicitors for the plaintiffs and its terms were being discussed between the solicitors for the respective parties.
- The plaintiffs apparently received the proposed agreement and the second plaintiffs’ proposed guarantee for their execution from their solicitors to whom the solicitors for the first defendant had forwarded it. In any event, it was not received by the solicitors for the plaintiffs until after the whole of the franchise fee of $40,000 had been paid.
- Although relevant documents seem to have been mislaid, there is no issue as to the signing of both the franchise agreement and the guarantee of the first plaintiff’s performance of it by the second plaintiffs on 22 December 1995.
- Before the franchise agreement and guarantee were executed the second plaintiffs received advice from their solicitor concerning the effect of the licence to occupy the first defendant’s franchise business premises in Caboolture and concerning also the area in which they were to have the exclusive right to operate a Spud Mulligan’s franchise.
- I am satisfied on the evidence, including the contemporaneous correspondence, that Peter had informed his solicitor that he wanted his exclusive franchise area to extend further south than first proposed by the first defendant. I am satisfied that even at that late stage after the whole of the franchise fee had been paid the plaintiffs were anxious that they should not have to compete against another Spud Mulligan’s franchisee operating between Caboolture and Sheep Station Creek to the south. The fifth defendant at least was well aware of this anxiety; I infer that he communicated this to other defendants.
- I am satisfied that on 21 December 1995, the fifth defendant came to the franchise store in Caboolture to fix or adjust a computer programme connected with the recording of business transactions. He then advised Peter that he had received information about the “increased size” of the exclusive area desired by the plaintiffs and that a map of that extended area would be sent back the next day so that settlement of the franchise agreement could proceed. The following day, Peter in the office of his solicitor, saw a letter dated 22 December 1995 attaching a second map signed by the fifth defendant as director of the first defendant. This new map showed an alteration to the boundary of the initially proposed area of exclusivity which highlighted the protrusion of a proposed non-exclusive area into the newly proposed extension of the exclusive area which apart from that protrusion would be an otherwise understandable extension of the formerly suggested exclusive area to an area bounded by Sheep Station Creek which Peter had asked for. I accept that Peter did make contact with the fifth defendant by telephone about this protrusion, and he was then informed by him that the protrusion of non-exclusive land into the area generally extended to the South of the boundary of the exclusive area first proposed, was an area for a proposed shopping centre that might go ahead at Morayfield and that the first defendant would want to put a franchise business into that shopping centre. When Peter expressed concern at this prospect (the site of the proposed shopping centre being only about three kilometres from the first defendant’s franchise business in Caboolture) the fifth defendant said, “Look, don’t worry about it because it’s not going to go ahead within the next five years.” He added that Peter (presumably by the first plaintiff) would have the right of first refusal of any Spud Mulligan’s franchise business which might be established at that shopping centre. There was no discussion as to what, if any, accommodation the first defendant might be prepared to offer to the plaintiffs with respect to their obligations to the first defendant under the proposed franchise agreement in the event of the obvious economic impact upon the commercial viability of the operation of the Caboolture franchise of competition with another franchise business conducted in that shopping centre so close by. I attribute the failure of Peter to canvass this matter with the fifth defendant to his complete lack of experience in matters of business and commerce which must have been palpable to the fifth defendant.
- Complaint was made, on behalf of the defendants, that what had been pleaded as the relevant representation or misstatement was not established by the evidence that Peter gave to support it. The matter pleaded was a representation that no other Spud Mulligan’s franchise would operate in the proposed exclusive area within five years of the execution of the franchise agreement by the plaintiffs whereas his evidence was that the representation was that any shopping centre at Morayfield, in which the first defendant might put a franchise business, would not open or go ahead within the next five years. In my view there is little merit in such complaint. The whole object of the discussion which I am satisfied did take place between Peter and the fifth defendant was to persuade the second plaintiffs prior to their execution of the franchise agreement and guarantee that although competition from another Spud Mulligan’s franchise might be located at the proposed shopping centre site, that site would not be developed within another 5 years. It would follow automatically of course, that there would be no competition from any Spud Mulligan’s franchise until, in fact, it could be established in the proposed shopping centre. The essence of the representation was to the effect that there would be no competition from another Spud Mulligan's franchise within a period of five years from the execution of the franchise agreement.
- By that stage, of course, although the franchise agreement and licence to occupy and their guarantee of the first plaintiff’s obligations under it had not been completed by signature of the second plaintiffs, the whole of the franchise fee had been paid and the second plaintiffs had been conducting the franchise business for 1½ weeks.
- In concluding that there was such a statement made by the fifth defendant to Peter, I have regard to the contemporaneous correspondence and, as well, to the different impression that the second exclusive area map would have made upon Peter and/or his wife when compared with the first map. I accept the evidence of the second plaintiffs, that they did not have any idea at the time they were negotiating with the defendants for the acquisition of this franchise business, and the proposed exclusive area for its operation, of any proposal to establish a shopping centre at Morayfield, until the discussion between Peter and the fifth defendant after examination of the second plan. It is equally clear however, that the defendants were well aware of the Morayfield Shopping Centre proposal, and contemplated establishing in it, upon its completion, a Spud Mulligan’s franchise which could only have the most significant adverse impact on the profitable operation of its Caboolture franchise.
- I infer that the fifth defendant made the representation as to the time which would elapse before the Morayfield Shopping Centre development was completed, because the first defendant had entered into a lease of the Caboolture café premises, which it or a company with which it was or the other defendants were associated had fitted out at considerable expense, and which attracted an obligation to pay a rental of $3,000 per month. Mr Mitchell another Spud Mulligan’s franchisee at Redcliffe, who had shown an initial interest in it, had declined to acquire that Caboolture franchise business. There is no direct evidence that his supervening lack of interest in the defendants’ Caboolture franchise business was attributable to his knowledge of the proposed development at the Morayfield Shopping Centre and the effect on the business viability of the Caboolture franchise that would have, although his change of heart would have been consistent with such knowledge. In any event, the Redcliffe franchisee acquired a franchise business, from the first defendant, in Bundaberg instead of acquiring the Caboolture franchise first offered to him. He operated this Bundaberg franchise business for a year or two together with his franchise business at Redcliffe. I rather gained the impression from the way he gave his evidence (as distinct from its content) that he was favourably disposed towards the defendants.
- I infer that at all material times the defendants were well aware of the plan to develop a large regional shopping centre at Morayfield which was to open “at the end of 1996”. I refer to the article in the “Caboolture News” published on 30 August 1995 (Ex 27). I infer in the circumstances that towards the end of 1995 they were anxious to avoid their liability to pay rent for and to pay for the fitting out of their Caboolture café in the light of their evaluation of its commercial viability after the opening of the Morayfield Shopping Centre within about 12 months.
- Before addressing the misrepresentations which the plaintiffs seek to establish under s 52 of the Trade Practices Act I mention only that the plaintiffs seek to recover damages not merely against the first defendant (in liquidation) but also against each of the second, third, fourth and fifth defendants who were all officers of the first defendant at material times and who upon the plaintiffs’ case actually procured the first defendant’s contravention of Part V of the Trade Practices Act by what they said or did or omitted to say or do. The plaintiffs seek to call in aid s 75B(1)(c) of the Act.
- It was strongly contended for the second, third, fourth and fifth defendants that essential to the plaintiff’s success against them was the amendment of the statement of claim first filed on 10 December 1997 to allege an “accessorial” liability under s 75B of the Act. It was contended that without an amendment of the statement of claim to specifically plead accessorial responsibility under s 75B of the Act the plaintiffs could not succeed in their action against those defendants. It was contended that to permit such an amendment at date of trial would in effect be contrary to the limitation contained in s 82(2) of the Act.
- After lengthy debate on this matter I tentatively gave leave to the plaintiffs to amend their statement of claim and indeed to the defendants to amend their defence on the basis that even if the defendants’ contentions were well based it would be appropriate to permit the amendments pursuant to UCPR 376(4) and 375(2). I reserved for further consideration the effect of s 82(2) upon the ability of the plaintiff to pursue relief under s 75B of the Act.
- The amendments to the statements of claim are contained in Exs 2 and 3 and those to the defence in Ex 60.
- In my view in seeking leave to make the amendments to which I have referred the plaintiffs could not be said to be raising for the first time a cause of action not pleaded in their original notice of claim and statement of claim which were filed on 10 December 1997.
- In the action then instituted – less than 2 years after the execution of the franchise agreement after payment of the monies under it had already been made by the plaintiffs, and certainly well within the period of 3 years from the time when the first items of misleading and deceptive conduct upon which the plaintiffs relied occurred in November 1995, it is clear that the action was commenced well within the 3 year period limited under s 82(2) of the Act.
- The only question is whether on the face of that statement of claim which was clearly brought upon s 82 of the Act the plaintiffs pleaded facts relevant only to relief sought pursuant to s 75B of the Act. It is true that when one reads the original statement of claim no explicit reference is made to s 75B of the Act; neither is any such reference made to s 52 of the Act. What is clear however is that the plaintiffs claimed against all defendants damages to compensate them for misleading and deceptive conduct. It specifically pleaded aspects of the conduct of the second defendant, the third defendant, the fourth defendant and the fifth defendant. It was specifically pleaded that those defendants had no reasonable grounds for making representation/predictions which misled and deceived the plaintiffs. The statement of claim pleaded that the plaintiffs relied upon each of the representations made by the second, third, fourth and fifth defendants when entering into the franchise agreement.
- The statement of claim specifically pleaded that that conduct was misleading and deceptive. It pleaded that the first defendant was liable under s 82 only because of the conduct of all the other defendants for which as its agents it was responsible when the misleading and deceptive conduct occurred.
- In my view the amendments to the statement of claim contained in Ex’s 2 and 3 might be more correctly categorised as the addition of particulars of facts already pleaded rather than the pleading of new facts for the first time after the lapse of more than 3 years from the occurrence of those facts.
- In my view therefore to the extent that s 81(2) provided no obstacle to the amendments actually made, the defendants are unable to raise valid objection to the relief sought by the plaintiffs in their amended statement of claim against the agents of the first defendant.
- To the extent that is arguable that s 82(2) is at all relevant to the exercise of discretion to grant leave to make the amendments I exercise my discretion in favour of the plaintiffs pursuant to UCPR 375 and 376(4).
- In my view the amendments made upon tentative leave given at trial take effect from the date of the statement of claim amended under UCPR 387(1) – i.e. 10 December 1997.
- In my view on the facts of this case UCPR 387(2) has no application because the plaintiff’s causes of actions clearly arose before the action was commenced. If however a contrary view were to be taken it seems to me that R 387(2) should not be read with UCPR 376(4)(b) so as to require that the period of limitation contained in s 82(2) of the Act operate to further constrain the wide discretion given to a Court under s 376(4) beyond the limits expressed in R 376(4)(b) itself. To do so would be to render illusory the power expressly given under R 376(4)(b). I propose therefore merely to confirm the leave to amend the pleadings which I gave at the commencement of the trial.
- It was held in ENZED Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167 that in effect when ss 52, 82 and 75B of the Trade Practices Act are read together an award of damages for a contravention of the Act may be made against any officer of a corporation knowingly concerned in a contravention of the Act by that corporation.
- It does not follow of course that all officers of a corporation will become vicariously liable for all contraventions of the Act by that Corporation which of course can only act by its agents. On the other hand a corporation can only do or omit to do things for which it may become responsible under the Act by or through its authorised officers. I proceed on the basis therefore that to the extent that the evidence in this case establishes contraventions of s 52 of the Act by the first defendant, with respect to some of those contraventions one or more of the second, third, fourth and fifth defendants were “directly or indirectly knowingly concerned in” the making of those contraventions; on the other hand some contraventions for which the first defendant is responsible did not personally involve each of those officers or agents.
- In my view therefore to sheet home personal liability to any one of the second, third, fourth and fifth defendants, it must be proved that he was knowingly concerned in activities constituting a contravention of the Act.
- To the extent then that an officer/agent of the first defendant actually made a misrepresentation, or perhaps more accurately “engaged in conduct that is misleading or deceptive or is likely to mislead or deceive”, which rendered the first defendant liable under ss 52 and 82 of the Act, that officer/agent would also be personally responsible under s 75B.
- Section 52(1) upon which the plaintiffs base their claim provides –
“(1)A corporation shall not in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”
- That section is contained in Part V of the Act.
- Section 82(1) provides –
“(1)A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part ---V---may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention”.
- Under s 51A (also in Part V of the Act) it is provided –
“(1)For the purpose 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.
- For the purpose of the application of sub section (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”.
- It is clear that a representation as to a “future matter” may include “financial projections” – Cummings v Lewis (1993) ATPR (Digest) 46-103 such as a representation as to likely rental income from a property – Ting v Blanche (1993) ATPR 41-282 where Hill J held that a representation in the form of a prediction was a representation with respect to a future matter – whether or not there was impliedly a representation as to the state of mind of the person making it.
- In James v ANZ Banking Group Ltd (1986) 64 ALR 347 Toohey J at 372 held that a statement relating to a future event may contain an implied statement as to the present or a past fact. It may represent impliedly that the promisor has a present intention to make good the promise and impliedly that he has the means to do so.
- Toohey J held further that the maker of a statement which involves the state of that person’s mind in predicting or expressing an opinion as to a future matter will ordinarily convey the meaning that the maker of the statement had a particular state of mind when the statement was made and that there was a basis for that state of mind. He held that if the meaning contained in or conveyed by the statement made was false in that, or in any other respect, there would be a contravention of s 52 of the Act.
- In Wheeler, Grace & Pierutti Pty Ltd v Wright (1989) ATPR 40-940 at 50, 251 Lee J observed “A positive unqualified prediction by a corporation may be misleading conduct in trade or commerce if relevant circumstances show the need for some qualification to be attached to that statement or the possibility of its non-fulfilment to be disclosed as a requirement of fair trading … The misleading or deceptive conduct may be found in the failure to qualify the statement or disclose the risk of non-fulfilment…”.
- It is clear that “conduct” within s 52 of the Act comprehends both acts and omissions considered in the context of the circumstances of the negotiations and discussions with the corporation the conduct of which is challenged under s 52 of the Act; it is not confined to the proof only of “misrepresentations” of fact or belief within the constraints of the Common law or Equity.
- In General Newspapers Pty Ltd v Telstra Corporation (1993) ATPR 41-274 the Court held at 41,690 – “…in the ordinary course of commercial dealings, a certain degree of “puffing” or exaggeration is to be expected. Indeed, puffery is part of the ordinary stuff of commerce”. In my view, upon the facts of this case it would be unhelpful to analyse each of the statements or failures to make statements by officers/agents of the first defendant individually to determine whether standing alone it amounted to no more than “introductory puffery”. Even if when considered alone, a representation might be characterised as “puffery”, that same statement considered in the context of the circumstances including other representations, promises, and failures to qualify hyperbolic predictions designed to induce the plaintiffs in this case to enter into the franchise agreement with the defendants may be characterised as conduct “misleading or deceptive” or as “likely to mislead or deceive”.
- It is clear that in some circumstances, silence itself may constitute misleading or deceptive conduct – where the revelation of facts, in the light of other positive assertions made, is required to avoid misleading or deceiving.
- In Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 Black CJ observed at 32 –
“Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive”.
- In Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 the Full Court of the Federal Court at 467 observed –
“…unless the information given constitutes a full and fair disclosure of all facts which are material to enable the members to make a properly informed decision, the combination of what is said and what is left unsaid may, depending on the full circumstances, be likely to mislead or deceive the membership”.
- In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 the vendor of a restaurant was held to have breached s 52 in failing to disclose that the restaurant was licensed to hold a lesser number of people than indicated by the available seating in the restaurant inspected by the purchaser.
- Every case of course must be determined on its own particular facts. Under s 51(A)(2) unless a corporation adduces evidence to the contrary, it will be deemed not to have had reasonable grounds for making a representation with respect to any “future matter” (vide para 66). I construe this section as placing the onus on the defendants to show that as agents of the first defendant they did in fact have reasonable grounds for making the predictions and giving the assurances which the plaintiffs assert constitute a breach of s 52.
- In ACCC v Top Snack Foods Pty Ltd  FCA 572 franchisees were induced to buy franchises by misleading representations – predictions, including the profitability of the franchised area and the number of sites that could be serviced in a day.
- In Thompson v Ice Creameries of Australia Pty Ltd (1998) ATPR 41-611 it was held that a franchisor did not have reasonable grounds to make a representation that a particular urban area, the subject of a franchise agreement, was suitable for an ice cream franchise.
- In Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) ATPR 41-534 a franchisor stated that it understood that food stores in a shopping centre in which it was establishing a franchise operation would have a particular turn over. It was held that such a statement in the circumstances of that case constituted conduct that was or was likely to mislead or deceive.
- I refer also to Bateman v Slatyer (1987) 71 ALR 553 where Burchett J held in the circumstances that statements made to an inexperienced franchisee as to the suitability of a franchise site were misleading and actionable because there was no sufficient basis for making them honestly, and to Bell v Australasian Recyclers (WA) Pty Ltd (1986) ATPR 40-644 when Toohey J held that by expressing an opinion in which they had no present honest belief directors of a franchise engaged in conduct which was misleading or deceptive.
- With respect to damages recoverable under s 82 of the Act it was held in Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, that a person who suffers loss or damage “by conduct of another person” done in contravention of s 52 of the Act “may recover the amount of the loss or damage by action” against that other person (or any person for that matter involved in the contravention.). It was held that the right to recover damages under s 82(1) was not limited, by analogy, by traditional constraints in contract and tort. It was held that one must approach the assessment of damages by comparing the position of the person suffering the loss with the position of that person had there been no contravention.
- It was held that loss under s 82 is not necessarily limited to economic loss although in practice it often will be.
- In Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 it was held that essential to the recovery of loss under s 82, is that the applicant sustained a prejudice or disadvantage as a consequence of altering his or her position under the inducement of the misleading conduct of the corporation.
- In ACCC v Top Snack Foods Pty Ltd  FCA 752 franchisees recovered damages for loss of capital, their unrewarded labour, anxiety and interest on finance raised to acquire the franchises.
- In Yorke v Ross Lucas Pty Ltd (1982) 69 FLR 116 it was held that in assessing damages under s 82 for contraventions of s 52 of the Trade Practices Act the applicants were entitled to –
“(a)compensation for the actual losses they incurred in carrying on the business flowing directly from the inducement, not only those losses which were reasonably foreseeable;
- interest on the purchase price paid;
- the amount payable by the applicants to the landlord in respect of loss and expenses incurred by it upon re-entry and re-letting the premises;
- the costs of going into and out of the business; and
- a proportion of the additional money provided by the applicants for the business”.
- It was held however that the applicants were not entitled to the costs of obtaining finance to acquire the business or to their loss of wages which they may otherwise have earned.
- To the extent that the plaintiffs in this case failed to take care to check out the reliability of express or implied representations made by and on behalf of the defendants I refer to the observations of McHugh J in Henville v Walker (2001) 75 ALJR 1410 at 1434
“Nothing in the common law, in ss 52 or 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. There is no ground for reading in s 82 doctrines of contributory negligence and apportionment of damages. No doubt, if part of the loss or damage would not have occurred but for the unreasonable conduct of the claimant, it will be appropriate in assessing damages under s 82 to apply notions of reasonableness in assessing how much of the loss was caused by the contravention of the Act [Tefbao Pty Ltd v Stannic Security Pty Ltd (1993) 118 ALR 565 at 575]. But that proposition is concerned with the items that go to the computation of the loss”.
- The plaintiffs delivered their statement of claim on 10 December 1997. In paragraphs 11, 12, 22, 23 and 24 it analyses the brochure which Peter had first obtained from his lecturer, identified as “THE REAL HOT POTATO OPPORTUNITY” which is Ex 4 together with the “disclosure document” which is Ex 5.
- The statement of claim then pleads an analysis involving various “representations” contained in those documents and pleads that by making them the first defendant thought its agents – the other defendants engaged in misleading or deceptive conduct or conduct that was likely to mislead or deceive the plaintiffs. The pleading further alleges that to the extent that the representations “confirmed predictions”, there was no reasonable ground for making those predictions.
- I infer that when the disclosure document (Ex 5) was prepared during or subsequent to October 1995 all defendants were well aware that ─
- Construction of a shopping centre at Morayfield was proposed and the proposal had been publicised about August 1995 (vide Ex 27 at p 3-4).
- More probably than not before becoming aware of that proposal the first defendant had taken an onerous lease of the Caboolture café premises requiring payment of rental of $3,000 per month and had embarked upon the development and fitting out of the café at a cost at least asserted to be in excess of $121,000.
- They intended that the first defendant open a Spud Mulligan’s food franchise store in the Morayfield Shopping Centre when it opened about the end of 1996 – about three kilometres from the café in Caboolture.
- They were aware that the financial viability of the Caboolture café would be significantly diminished - if not indeed destroyed - when it was called upon to compete with a Spud Mulligan’s store in a food court three kilometres away at Morayfield, the contemplated opening of which was to occur “at the end of 1996”.
- In my view the authorities to which I have referred show clearly enough that conduct viewed as a whole may constitute “misleading or deceptive conduct” or conduct that is “likely to mislead or deceive”. It is not essential to show that considered in isolation from the circumstances, what was said on a specified occasion amounted to a “representation” which upon its face was capable of misleading or deceiving.
- I will deal with the misleading and deceptive conduct alleged against the defendants under the following headings –
- Failure to disclose bankruptcy history of the second and third defendants
- Assurance/representation of intention to provide training and assistance
- Assurance that the Caboolture franchise café would be the best of the first defendant’s franchise outlets
- Assurance/representation that there would be no competition with the defendants’ franchise café in Caboolture from any franchise business of the defendant at Morayfield within five years of December 1995
- Assurance of proposed construction of public car park immediately opposite the Caboolture franchise café
- FAILURE TO DISCLOSE BANKRUPTCY HISTORY OF THE SECOND AND THIRD DEFENDANTS
- With the reservation expressed in para 91 hereof I refer
- to the statement contained in “THE REAL HOT POTATO OPPORTUNITY” brochure (Ex 4) which I have cited in paragraph 10 hereof, and
- to the following statements in the disclosure document which is Ex 5.
On page 10 it is stated -
“All of us in the management team have been involved in business for long enough to know that those brands which succeed in a big way do so to a large extent by virtue of the quality of their advertising and corporate communications – the development of their “corporate culture”.”
“We’re really confident that over the last three years we’ve done an exceptionally thorough job, in putting together a competent, effective and workable team, and in developing every working facet of the business, to give us the grounding so important to the birth, development and administration of a major franchise”.
- On page 12 in answer to a question posed relating to the relationship between the defendant and its franchisees it is stated ─
“To answer your questions, no, we’re not in dispute with any of our franchise owners, and neither do we expect to be. Why? Because we take very seriously our responsibility to support our stores, and we’re prepared to systematically confront and overcome problems, as soon as we become aware of them. On quite a few occasions, this has meant we’ve actually helped franchise owners to improve important potential trouble spots before they themselves have become aware of them, and in the case of one store where an illness has brought about significant difficulties, we’re providing a level of support which would certainly not be available, at almost any price, if they were not a Spud Mulligan’s store”.
“Amongst all this change and development, the constant is both our capacity and willingness to help Spud Mulligan’s owners achieve the best results they can with their business, by applying our various skills, professional expertise and experience to produce informed, practical advice and effective help where it’s needed”.
- On page 13 it is stated inter alia ─
“Spud Mulligan’s franchise owners need to accept that, as an essential part of optimising our collective performance, they will be required to operate their shop in a certain way and to a certain standard, provide frequent performance updates and detailed financial returns and then not only be prepared to accept our analysis, but also act on the suggestions and coaching we give them”.
- On page 15 purporting to answer the question:
“You keep talking about training and on-going support. If we buy a franchise, how much training and support will we receive? What expertise is available to us, and will we have to pay for it?”.
The answer given ─
“In the beginning we felt it would be possible to simply teach people the basics of how to operate their store, and then follow up later with more detailed coaching in the areas where we felt they needed it.
However, we’ve since decided that it will be better to spend much more time with new franchise owners at the beginning, so that you’ll have a good idea of how we expect you to carry out every aspect of your operation, even before you actually start trading.
This way we’ll be certain that all new owners will be fully conversant, right from the start, with vital operational aspects like the importance of accurate book-keeping and reporting procedures, the effective use of the in-store business computers, the monitoring of cost control methods and the importance of stock-taking, how you can help in establishing and building our brand identity, and so on.
Then, even after you take over your new store, whether it takes a few days or a week or more, you won’t be left alone until we’re completely satisfied you’re sufficiently familiar with the day-to-day operating procedures.
After that, you’ll be visited on a reasonably regular basis by our food services manager, who is also freely available at any time during working hours to provide advice or assistance whenever it’s needed. He’s a qualified, very experienced operator, and he’ll be able to handle most enquiries with ease. If he feels he’s getting out of his area, or needs more “high powered” support, then he can call on any member of the management team ─ this includes me, either of our two qualified CPAs our computer systems expert or our marketing/advertising specialist.
Between the lot of us, that’s a fair bit of support, and we’re certain we’re well-equipped to handle most problems any small business is likely to encounter.
Finally, no, apart from paying your way to meetings and training sessions, this support doesn’t cost you anything more than the 6% franchise fee”.
- I pause to mention that under its franchise agreement the first plaintiff was obliged to pay to the first defendant 6% of the gross proceeds of sale of food and drink in the franchise café.
- On page 17 of the disclosure document it is stated inter alia ─
“Secondly, under our arrangement of being responsible for holding the site’s head lease, we ultimately bear the practical and financial consequences of the store’s eventual performance – successful or otherwise.
Generally speaking, the price a new franchise owner pays for a new store is the pre-estimated and approved cost of its construction and fitout, plus the $40,000 franchise fee (the “goodwill”, etc) I’ve already discussed.
Our most expensive store to date cost its owner $220,000, and the cheapest cost just over $130,000. In each case, the price clearly justifiable by the store’s location and eventual or projected performance”.
- On page 18 of the disclosure document it is stated ─
“When we set up the franchising company, quite separate from our original business (Spuds on the Wharf at Mooloolaba), we put together a management team which comprised a mix of people who we believe, individually and between them, have the skills and expertise to take the company where we want to go.
All of these people, including myself, have in common an extensive background in their various fields. All of us have contributed, in some major way and on more than one occasion, to the concept, establishment and growth of various substantial, successful business enterprises in a diverse range of fields – property development, general management, cost and management accounting, business services, retail, tourism, hospitality and primary industry.
A brief summary of the background of each member of the Spud Mulligan’s board of management is attached as ANNEX C to this document.
Excluding the extensive experience three of the management team have had in consulting to and acting for numerous businesses including some franchises and franchisors, none of us has previously been personally involved in any other franchise, successful or otherwise”.
- On page 19 it is stated ─
“As far as providing the actual accounts of operating stores, individual franchise owners are entitled to a degree of privacy in regard to the precise financial performance of their businesses, and we must respect that. We have however, prepared an averaged financial performance statement for two typical stores, and these are attached as ANNEX E.
In regard to any particular new store or stores you may be looking at, we’re more than happy to show you and discuss how we arrived at an assessment of viability for our own purposes, and give you any other assistance you may need to help you to reach your own conclusions.
In the final analysis however, the decision you make must be a business judgment based not only on your assessment of the viability of any proposed store, but also on your confidence in your own ability to provide the necessary human impetus which will ultimately be the most important contributing factor to the degree of success the business achieves.
For that reason, the decision to proceed must be yours, and yours alone”.
- On page 1 of annex C to the disclosure document in a brief statement of the background of the second defendant it is asserted ─
“Frank’s first job was as an office boy for a long-established Adelaide real estate company. He worked his way up and in 1970 he bought this business with three partners and expanded quite rapidly into property development, building, brickmaking, and swimming pools. Tricia [the second defendant’s wife] worked with Frank from the earliest days of his ownership of the business, until Frank sold out and they moved to Noosa in 1980.
They opened a Raine & Horne Noosa with a partner, and lived in Noosa until moving to Brisbane to open a restaurant in 1983. They returned to the Sunshine Coast in 1985 to manage the marketing, functions, food and beverage aspects for a tourist resort.
They bought the three year-old Spuds on the Wharf in 1992, commenced franchising as Spud Mulligan’s in 1994, and opened Spud Mulligan’s at Sunshine Plaza some ten months later”.
- In the light of this glowing résumé of the second defendant’s commercial and business achievements between 1970 and 1994 the question arises whether the failure of the first defendant (and the second defendant) to disclose that he was made bankrupt on his own application between 13 September 1984 and 14 September 1987 in the circumstances made the published statement of his background in Ex 5 misleading and deceptive or likely to mislead and deceive.
- On the same page 1 of annex C there is a statement as to the background of the third defendant. It is there stated ─
“Bill Gemmell has enjoyed nearly 20 years in both the managerial and creative sides of the advertising and corporate communications industry. He has worked with large and small agencies on behalf of a wide range of large and not-so-large retail, corporate, manufacturing and institutional clients. He was the founder and senior partner of the Sunshine Coast full service agency which helped to develop many local businesses as well as national clients including Boral Timber and Boral Masonry, and appliance giant Kleenmaid from its earliest days.
He has a reputation as an industry all-rounder with the ability to produce pragmatic business development and marketing concepts…
Bill was responsible for creating the Spud Mulligan’s name, brand, graphics, store fronts, point-of-sale, uniforms and promotional strategy. Based on the Coard’s successful operating system, he wrote, produced and is responsible for maintaining the Spud Mulligan’s operating manual”.
- Again at all material times during the negotiations between the second plaintiffs and all the defendants the third defendant was an undischarged bankrupt.
- He was made bankrupt on 9 November 1993 and remained bankrupt until 10 November 1996. He was bankrupt then at the very time the “disclosure document” (Ex 5) was prepared.
- The same question arises whether the failure of the first defendant to disclose this fact in the so called disclosure document and the failure of the third defendant to do so personally, in the light of the rather glowing and fulsome account of his business successes, amounted in the circumstances to misleading and deceptive conduct or conduct likely to mislead and deceive within the meaning of the legislation.
- It is abundantly clear upon the material that the second, third, fourth and fifth defendants did not merely overlook disclosing that two of their number had gone bankrupt as a consequence of pursuing various business activities but in fact discussed whether such a disclosure should be made. They concluded upon the evidence that the bankruptcies were “not material” and therefore need not be mentioned in the disclosure document. In my view the whole object of describing the experience and capacity of the second, third, fourth and fifth defendants in both Ex 4 and Ex 5 in such fulsome terms was to engender confidence in the business capacities of those men in persons who read those documents. It was quite unnecessary for the defendants to make any reference to their former business activities and experience and reputation in the business world when endeavouring to sell the first defendant’s franchise businesses to persons inexperienced in business who had approximately $160,000 to invest in such a business. However such persons were expressly invited to rely upon the skill, experience and reputation of those defendants. In embarking upon the fulsome and laudatory résumé of the successful business activities of all defendants over the years preceding their embarking upon the Spud Mulligan’s business franchise exercise the first defendant clearly decided to engender confidence in the management skills of the franchisor’s directors and the third defendant (the salesman of its franchises) in potential investors before they decided whether or not to invest their money in a Spud Mulligan’s Food franchise café, the financial success of which would be assured by the business skills, reliability, experience and dedication of the defendants. I find it understandable that it was determined to refrain from including in the résumés of the experience and business activities and reputation of each of the directors (and Mr Gemmell) any reference to the fact that the second defendant had been bankrupt for three years in the course of his activities which are set out in detail in the disclosure document or indeed that the third defendant was then an undischarged bankrupt. I infer that the real reason for not including this information in the otherwise laudatory account of the business skills, experience and reputation of those two men in the disclosure document was the defendants’ perception that persons being aware of those facts may not have had as much confidence in their experience and ability which they were invited to rely upon, if they knew of the bankruptcy history of two of the four as they would have if they read the material in the disclosure document without that knowledge. In my view the very fact that all four defendants on the evidence discussed whether or not the bankruptcies ought be disclosed (even receiving legal advice on the matter) indicates that they were anxious not to disclose these facts. I
- infer that their anxiety not to disclose them was based on their understanding that if those facts were disclosed to persons reading the disclosure document (and Ex 4) those persons may well not give the weight to their content which the defendants hoped they would give to them and be induced thereby at a cost in excess of $160,000 to obtain a franchise café controlled/managed by those defendants.
- Apart from any obligation imposed in the circumstances by s 52, in my view the first defendant and the second defendant and the third defendant were under no legal obligation to disclose the former bankruptcy of the second defendant and the current bankruptcy of the third defendant. Had it not been for the information actually published by them in Ex 4 and 5 designed to engender confidence in their business abilities it could not be said that such non-disclosure was misleading or deceptive. However in my view in the light of what was in fact published in Ex 4 and 5 which was designed to convince potential purchasers of a franchise business of the future financial safety and profitability of such businesses having regard to the business capabilities of each of the four defendants, the determination by all defendants not to disclose the former bankruptcy of the second defendant and the current bankruptcy of the third defendant did amount to deceptive conduct within the meaning of the legislation. In this respect I refer merely to the observations of Black CJ in Demagogue Pty Ltd v Ramensky (supra) and to Fraser v NRMA Holdings Ltd (supra at para 75).
- On my assessment of the evidence, all defendants were associated with the production of both “THE REAL HOT POTATO OPPORTUNITY” document which is Ex 4 and the disclosure document which is Ex 5. It was after formal discussion between the second, third, fourth and fifth defendants as agents of the first defendant that they decided not to make disclosure of the existing and former bankruptcy of two of them. I am satisfied that they did this because they thought that such disclosure may lessen the effect of the content of the disclosure document which as a consequence may not engender the confidence in their capacities which the résumé of their previous business activities, experience and reputation in that document was hoped to achieve. The second plaintiffs said that had they known of the bankruptcy of two of the four agents of the first defendant they would not have purchased the first defendant’s franchise business at Caboolture. I accept that evidence.
- In the circumstances I am satisfied that all defendants were guilty of deceptive conduct by the publication to the plaintiffs of the content of Ex 4 and 5 to which I have referred without disclosing the bankruptcy history of two of them – keeping in mind the part each was said to have played in achieving past successes in the franchise business, and the part that each was expected to play in achieving success in the future conduct of the first defendant’s franchise operation.
(ii)ASSURANCE/REPRESENTATION OF INTENTION TO PROVIDE TRAINING AND ASSISTANCE
- Apart from the assurances contained in Ex 4 and 5 that one or more of the second, third, fourth and fifth defendants would ensure that the second plaintiffs’ lack of experience in running a business would be corrected by the very high level of assistance and training that the defendants would provide to them, on 18 November 1995 the second defendant confirmed this orally and indeed told the second plaintiffs that, albeit that they had no prior experience in conducting any kind of business they were “precisely the type of people” that the first defendant was seeking to run its franchise businesses. One may only query whether their most readily perceived attribute was their recently acquired ready financial capacity to pay the first defendant’s asking price for its Caboolture franchise café business.
- I am satisfied on the evidence that had the second plaintiffs not been assured that the first defendant would provide all the assistance they would need to run the business, and in particular to utilise efficiently the computerised equipment in the café designed to keep track of the use of stock and to record the gross proceeds and outgoings of the business which seems to have been an essential ingredient in the conduct of the business as a profit making exercise as part of the first defendant’s franchise business structure, the first plaintiff would never have agreed to incur the obligations which it did in buying the franchise from the first defendant and the second plaintiffs would never have agreed to personally guarantee performance of the first plaintiff’s obligations to the first defendant under that franchise agreement.
- Mr Nicholls who purchased a franchise in the Caloundra area in September 1994 said that the only training he had ever received from the defendants in the use of the Quicken computer system used by franchisees was a single 45 minute “session” in the office of the fifth defendant. The franchise business which Mr Nicholls had commenced to operate was not performing well. He could not understand very well the computer system and had to rely upon training/assistance from his wife. He said that after the training he received during the first week, the second defendant and his wife did a “coffee course” in Brisbane one day. He said that after his “training” by the second defendant and his wife, he received visits from Mr Hill an employee of the first defendant for about half an hour each fortnight for several months. He said that there was never any training in the implementation of management techniques by the defendants as far as he was concerned, and he said that he continually complained to the defendants about business problems without receiving any real assistance. Eventually CFX Holdings Pty Ltd (“CFX”) came on to the scene from which he then sought advice. He said that in 1997 the second, fourth and fifth defendants all resigned as directors although the third defendant remained with the Spud Mulligan’s franchise business and was assisted by Mr Kevin Kiepe. According to Mrs Nicholls a week before she and her husband commenced business they received some computer training at a Caloundra franchise store. The only training they received, which seemed to be integral in the management of the franchise business, was a “very quick run through Quicken program” at the fifth defendant’s office. Mrs Nicholls said that Mr Drake had spent about half an hour with her dealing with the operation of the Quicken system in the franchise business. She was familiar with the operation of the Quicken system from previous employment and had no particular difficulty in its operation.
- It emerged from her evidence that the franchise business performed so poorly that she was forced to get another job and thereafter confine herself to assisting her husband “doing the books” at the weekend for some time.
- It is clear to my mind on this material that the defendants made no real effort to train Mr Nicholls in the operation of the Quicken computer system. To the extent that he was trained at all he was trained by his wife.
- Another franchisee of the first defendant commenced operating a franchise store at Browns Plains on 2 October 1995. She said that Mr Hill had shown her and her husband around a “company store” at Stafford for a couple of days and then took them to an office in Toowong where they had some “computer practice”. She said that both she and her husband were “rather computer illiterate and only a couple of days was spent at the Toowong office”. She said that “she and her husband could only absorb the lessons quite slowly”. When the training at the first defendant’s Toowong office terminated they had to rely upon their son who was very skilful with computers to train them. She said that the franchise business commenced to fail within the first 6 months and “continued to go down hill”. She said that she and her husband had trouble with the management of the business from the outset. The only assistance they received from anybody was from Mr Hill who was a liaison officer who was “very helpful”; however when she raised matters with him he said he would take them to the “directors”; eventually he said that he had too much to do and thereafter they did not receive any assistance from anybody connected with operating efficiently within the first defendant’s franchise system.
- I accept the evidence of Peter to which I have referred, that he and Sandra received very little advice and/or assistance from the defendants concerning the management side of the business to ensure that it was conducted as a viable financial operation which involved proper training in the use of the computerised recording system of business activities to which I have referred. In coming to this conclusion I draw comfort from the evidence of Mr & Mrs Nicholls and Mrs Spencer that in 1994 and 1995 they also failed to receive the training which the first defendant had promised them in spite of their efforts to obtain it. I am satisfied that the only real training and/or assistance that the second plaintiffs received before they embarked upon the operation of this café franchise business on 12 December 1995, was the training to which I referred to in paragraph 31 hereof. Whilst it is true that from time to time they received some advice from Mr Hill, an employee of the first defendant, I accept the evidence of the second plaintiffs that apart from receiving some training for a few hours a day for a few days in the actual preparation of potatoes with filling for sale, they received nothing like the assistance in running the business, which as inexperienced persons who had never had any association with computerised account keeping, they both needed and which they unsuccessfully sought from the defendants. Indeed in late January and early February 1996 Peter informed both Mr Hill and the second defendant that although the sales were quite good his inability to understand and manage the “accounting side” of the franchise business meant that he could not work out whether the first plaintiff was making a profit or a loss. The second defendant merely observed “Don’t worry if your books don’t balance we can fix that later. You’re doing fine”. It was then arranged that Peter should go to the office of Mr Hill for assistance. On 8 February 1996 the plaintiff had put $24,000 into the franchise business bank account so that the business could continue to operate. In May and June 1996 various franchisees complained at the lack of assistance from the defendants which they were experiencing (vide Ex 13). The only reaction was that the third defendant observed that Peter was “one of the rebels”. Most of the assistance and advice which they did receive was given prior to the execution of the franchise agreement and their guarantee of the first plaintiff’s performance of it on 22 December 1995 and did not relate to the operation of the computerised record keeping system.
- In my view the promises/assertions/assurances given and made in both the disclosure document and by the second defendant and by the third defendant to which I have already referred were made without their honest belief or intention that the assistance promised would be given. Had the defendants making these promises/representations really entertained such belief or intention as to the first defendants’ future behaviour, I infer that they would have taken steps to see that the assistance and attention which the second plaintiffs so desperately needed to efficiently operate the business franchise in the defendants’ café fitted out for that purpose were given promptly within the first 6 months of its operation. The evidence discloses that such assistance was not forthcoming in spite of requests for it.
- I am persuaded that when the representations/assurances/promises of all necessary future assistance were made by and on behalf of the defendants from the time of their involvement with the plaintiffs in November 1995 there was no intention or honest belief in the persons making or giving them that they would be fulfilled. I infer that the defendants intended to give no greater assistance to the plaintiffs than had in fact been given to Mr & Mrs Nicholls and Mr & Mrs Spencer in 1994 and 1995.
- I find that knowing that the plaintiffs were completely inexperienced in running the sort of café franchise business that they were trying to sell to them, in making and giving those representations/promises and assurances to persuade the plaintiffs to enter into the arrangements which eventually they did with the first defendant, all defendants involved in or responsible for making them were guilty of misleading and deceptive conduct.
- ASSURANCE THAT THE CABOOLTURE FRANCHISE CAFÉ WOULD BE THE BEST OF THE DEFENDANTS FRANCHISE OUTLETS
- I am satisfied that on or about 18 November 1995 the second defendant did inform Peter that the business in Caboolture which in fact the plaintiffs commenced to conduct on 12 December 1995 would be the first defendant’s best store because of its great location and excellent design. I am also satisfied that on 20 November 1995 the third defendant did inform Peter that as a consequence of his planning and establishing the first defendants café in Caboolture, that café would be the best shop in the whole of the first defendants franchise operation.
- I am satisfied that when the second defendant and the third defendant so advised Peter both were well aware that the proposed agreement and occupation of the Caboolture franchise premises was to cover an initial period of approximately 3.6 years – ie from mid December 1995 to September 1999 with two options to renew, each for a period of 3 years. When the second and third defendants so advised Peter I am satisfied that they were well aware of the proposed establishment of a very large regional shopping centre at Morayfield a distance of about three kilometres from the first defendant’s Caboolture franchise café and they both contemplated and intended that the first defendant would establish a Spud Mulligan’s franchise in the large food court to commence operation in that shopping centre within about 12 months and that its competition with the Caboolture café franchise would have a very deleterious effect on that café’s financial viability.
- I find therefore that the reason those defendants made those statements to Peter without disclosing the knowledge which I infer both had of the Morayfield Shopping Centre proposal and their intention to establish in that centre a Spud Mulligan’s franchise business was to mislead and deceive the plaintiffs as to their prospects of successfully conducting in the Caboolture franchise café a viable Spud Mulligan’s franchise business over a period of not less than five years, and to leave them in complete ignorance of the fact that within approximately 12 months of their commencing operation of that franchise business, there would be another Spud Mulligan’s franchise business operating in a large food court in a very large shopping centre only three kilometres away.
- In those circumstances, in my view, by giving the assurances and making the statements to which I have referred the second defendant and the third defendant as agents of the first defendant were guilty of misleading and deceptive conduct. In my view the probability is that to avoid the consequences of the first defendant having to bear the financial obligations it had already incurred to establish the franchise café in Caboolture – probably at a time before the defendants became aware of the proposal to establish the Morayfield Shopping Centre which could have only a devastating effect on the financial viability of the first defendant’s Caboolture franchise café ─ the defendants were probably anxious to dispose of that franchise café as quickly as possible and to persuade the plaintiffs to enter into the franchise agreement and ancillary agreements promptly to avoid as far as possible the first defendant having to meet the financial obligations already incurred in preparing the Caboolture café to open by mid December 1995.
- On 10 December 1995 the fourth defendant told the second plaintiffs that the Caboolture café site was a very good one and that the franchise to be operated from it would be very successful. I am satisfied for the reasons I gave with respect to the statements made by the second and third defendants on 18 and 20 November 1995 that this statement was also misleading and deceptive because I infer that the fourth defendant was then well aware of the likelihood of the first defendant opening a Spud Mulligan’s store in a food court which was expected to open in the shopping centre at Morayfield within about 12 months.
- ASSURANCE/REPRESENTATION THAT THERE WOULD BE NO COMPETITION WITH THE DEFENDANTS’ FRANCHISE CAFÉ IN CABOOLTURE FROM ANY FRANCHISE BUSINESS OF THE DEFENDANT AT MORYAFIELD WITHIN FIVE YEARS OF DECEMBER 1995
- I have referred in some detail to the circumstances in which the fifth defendant on 22 December 1995 assured the second plaintiffs that within the next five years there would not in fact be competition from another Spud Mulligan’s store at premises which the second plaintiffs learnt for the first time on that day would be opened at the Morayfield Shopping Centre when it commenced operations. For the reasons I have already given I am satisfied that the effect of the representation/assurance given by the fifth defendant to Peter on 22 December 1995 was that it would be at least five years before the franchise business in the first defendant’s café premises at Caboolture would have to compete with any other Spud Mulligan’s store to be located in the Morayfield Shopping Centre three kilometres away.
- I am satisfied that when the fifth defendant so advised Peter he was well aware of the likelihood that within 12 months or so there would most probably be a Spud Mulligan’s store operating at the Morayfield Shopping Centre food court which would directly compete with the franchise business conducted at the first defendant’s café premises in Caboolture. In fact the evidence discloses that such franchise store did commence so to compete with the first plaintiff’s Caboolture café in April 1997 and that such competition had an immediate and significant deleterious effect on the financial viability of the first plaintiffs café franchise business.
- The likelihood is that the defendants’ anxiety to ensure the plaintiffs’ prompt execution of documents with respect to their franchise business in Caboolture motivated the fifth defendant to accede to Peter’s request to extend the non-competition area from the Spud Mulligan’s café in Caboolture as far south as Sheep Station Creek. Instead of simply declining to so extend that area of non-competition beyond the boundary first marked out by the defendants, adjacent to the south of which was the site of the proposed Morayfield Shopping Centre, the fifth defendant extended the non-competition boundary substantially to where the plaintiff in my view reasonably sought to have it extended to Sheep Station Creek; however in doing this he excluded the area within that extended area to be covered by the proposed shopping centre. The speed with which the fifth defendant moved to prepare the new non-competition zone map to exclude with some precision the area proposed for redevelopment of the Morayfield Shopping Centre is consistent with the fifth defendant, and indeed I infer all the other defendants for that matter, being well aware of the precise location of the proposed shopping centre within which it was intended that the first defendant would establish a Spud Mulligan’s store in a food court in it. It was really Peter’s discovery of this proposal on 22 December 1995 which resulted in the fifth defendant then asserting in effect that there would be no competition within five years from its store in the food court in the Morayfield Shopping Centre.
- I am satisfied that not merely had the fifth defendant no reason to believe this statement or assurance given to Peter on 22 December 1995 to be true, but that in fact he did not believe it to be true. I am satisfied that his assertion or assurance given on 22 December 1995 was misleading and deceptive and was motivated only by the desire of the fifth defendant – and probably the other defendants as well – to have the plaintiffs finalise their contractual arrangements with the first defendant without delay on 22 December 1995. The second plaintiffs at this stage of course had been persuaded to pay the whole of the franchise fee of $40,000 to the first defendant together with the whole of the cost of fitting out the first defendant's café of $121,601. The first plaintiff had been conducting the franchise business out of the first defendant’s Caboolture café for about 1 week on 22 December 1995. I infer that the second plaintiffs were conscious of the considerable outlay of money the first plaintiff had already made to acquire the franchise and were excited, as only inexperienced people in this field would be excited, at the apparent success of the business within the first weeks of its operation which I find was probably due to the efforts made by the defendants to ensure that it opened with significant promotional publicity and to have it staffed with many more people than it could conceivably afford to employ over the long term. Had the plaintiffs had any experience in running a franchise café business of the sort they had agreed to buy they would or should have postponed signing the agreement on 22 December 1995 to make further inquiries and investigation of the information the fifth defendant gave them about the Morayfield Shopping Centre proposal that day. They would also probably have taken advice from an investment advisor and a legal advisor as to the financial consequences of their trying to dispose of the Caboolture franchise ─ even in five years time ─ so that they might acquire the proposed franchise in the Morayfield Shopping Centre. On the facts of this case they could have repudiated the agreement and taken legal action to recover the monies they had been persuaded to pay to the first defendant. However the plaintiffs failure to take reasonable steps to avoid the financial disaster which resulted from execution of the agreement on 22 December 1995 has no effect on their entitlement under s 82 of the Act (vide Henville v Walker supra at para 88).
- ASSURANCE OF PROPOSED CONSTRUCTION OF PUBLIC CAR PARK IMMEDIATELY OPPOSITE THE CABOOLTURE FRANCHISE CAFÉ
- I am satisfied that on or about 3 December 1995 the second defendant did inform the second plaintiffs that part of the vacant block of land just over the road from the first defendant’s café premises in Caboolture was to be redeveloped as a multi-level car park; this of course would greatly enhance the viability of any Spud Mulligan’s franchise business to be conducted out of the first defendant’s Caboolture café premises. Although the second defendant denies making any such assertion I am satisfied that the assertion was made in an effort to persuade the second plaintiffs that the café site was a very good one – “the best of the first defendant’s franchise sites” because people would be attracted to the franchise café when passing to and from the Caboolture public car park.
- I am satisfied that the second defendant did not honestly believe and indeed had no reason to believe that any such public car park would be constructed on the site where he told Peter it was to be constructed. Indeed on 22 March 1995 there was published in the Caboolture Times newspaper an article dealing with the proposed redevelopment of the block bounded by Beerburrum Road, King Street and Hasking Street showing the location of the proposed public car park having access from Hasking Street ─ far removed from the first defendants franchise café ─ and so located one would think as to have no commercial impact on the business viability of that café ─ I refer to Ex 41 (part 1 of 2). I am satisfied that the second defendant as indeed the other defendants for that matter were prepared to make such assertions and predictions in an effort to influence the second plaintiffs to complete their arrangements to acquire the first defendants café franchise in Caboolture as quickly as possible. It is clear on the material that there was no such proposal at all and that the only multi-storey car park that was ever to be erected on the town block opposite the defendants' café site was erected hundreds of metres away on the other side of that block and not even in sight of the first defendant’s café.
- I am satisfied that each of the second plaintiffs believed what they were told by the second, third, fourth and fifth defendants and relied upon the truth of what they had been told and/or relied at least upon the fact that those defendants had good reason to believe in the truth of what they said and predicted, and did in fact so believe. I am unpersuaded that those defendants believed or had any reasonable grounds to believe in the truth or reliability of what they told the plaintiffs.
- I am satisfied that it was the second plaintiffs reliance upon the truth of what the second, third, fourth and fifth defendants had told them and upon the truth of the contents of the disclosure document (Ex 5) and the other document which is Ex 4 which on 22 December 1995 led them to execute the franchise agreement and ancillary documents on behalf of the first plaintiff and to execute their guarantee of the performance of the first plaintiff’s obligations under those documents.
- It was strongly contended for the defence that the plaintiffs were estopped from pursuing their action against the defendants by reason of their execution of a deed bearing date 16 October 1996, which is Ex 15.
- In particular this contention is based upon clause 3 of that deed which provides ─
“3. RELEASE OF VENDOR
- The Franchisee hereby releases to the full extent permitted by law the Vendor and its respective agents, employees and contractors from all actions, claims, demands, suits, losses, damages, costs and expenses of every kind which the Franchisee may hereafter have against the Vendor in respect of or in any way arising from the Franchise Agreement provided that the Vendor shall remain liable for:─
- any non performance of its obligations contained in the Franchise Agreement and incurred to the Completion Date.
- any non performance of those obligations contained in the Franchise Agreement which the Vendor is, pursuant to the terms of the Master Franchise, undertaking in its capacity as National Franchisor.”
- The deed was executed between the first defendant described as “the vendor” and CFX described as “the purchaser” and all plaintiffs described as “the franchisee”. Recitals to the deed refer to the franchise agreement dated 22 December 1995 between the first defendant and the first plaintiff in respect of the first defendant’s Caboolture café.
- Recital B reads ─
“By a Contract dated the 20th day of August 1996 (“the Contract”) executed between the Vendor and the Purchaser the Vendor agreed to sell to the Purchaser the benefit and burden of the Vendor’s interest in the Franchise Agreement subject to the terms of a Master Franchise Agreement dated the 26th day of August 1996 (“the Master Franchise”) executed between the Vendor as National Franchisor and the Purchaser as Master Franchisee”.
- Recital C then continues ─
“C. Completion of the Contract and assignment of the Vendor’s interest as aforesaid is to occur on the 26th day of August 1996 (“the Completion Date”).
- Recital D then reads ─
“D. The Contract contains a covenant by the Purchaser in the terms set out in the First Schedule hereto”.
- The covenant recorded in the first schedule reads as follows ─
“Subject always to the provisions of the Master Franchise Agreement the vendor assigns to the purchaser subject to the completion of this contract and with effect from the date of completion the benefit and burden of all conditions contained in the Franchise Agreements in respect to the existing twelve (12) Spud Mulligan’s Stores. The purchaser shall prior to the date for completion herein execute any assignment agreement requested by the vendor in respect of the existing franchise agreements (excluding existing leases) so that the purchaser can perform and observe all conditions contained in the existing Franchise Agreements in the same manner and to the same extent as if the purchaser had been the “Franchisor” originally name in the Franchise Agreements and as if the Franchise Agreements had been entered into between the purchaser and respective Franchisees in the first instance.”
- The effect of clause 3 of the deed which the defendants contend estops the plaintiffs from pursuing this action under the Trade Practices Act must of course be determined having regard to its context in the other provisions of the deed. In my view the content of the covenant in the first schedule is significant.
- The first difficulty with the defendant’s contention is that under the express terms of clause 3.1 of the deed the plaintiffs only purport to release the first defendant and its agents from actions, claims and demands which the plaintiffs “may hereafter have against the Vendor in respect of or in any way arising from the Franchise Agreement”. There is no purported release of existing claims.
- The claims that the plaintiffs seek to pursue against the defendants in this case under the Trade Practices Act arose in December 1995 – nine months before the purported assignment by the first defendant of its rights and obligations under the franchise agreement it had with the plaintiffs to CFX and indeed eleven months before the execution of the deed upon which the defendants rely.
- Moreover the action which the plaintiffs brought against the defendants in 1997 includes not merely a claim for damages for breach of the franchise agreement but also for damages pursuant to ss 52 and 82 of the Trade Practices Act. I would not construe that action as one “in respect of or in any way arising from” the franchise agreement (and guarantees of its performance given by the second plaintiffs) as actions, claims or suits “in respect of or in any way arising from” the franchise agreement between the plaintiffs and the first defendant made on 22 December 1995.
- The whole purpose of the deed was to substitute CFX for the first defendant as from the completion of the contract of assignment with respect to the legal rights and obligations existing at that time between the first defendant and the plaintiffs. This objective is made clear from the terms of clause 3.1.1. If the completion date was 26 August 1996 as asserted in recital C it is clear that the first defendant did remain liable to the plaintiffs for any non-performance of its contractual obligations under the franchise agreement up to 26 August 1996.
- To my mind on any construction of the deed, the purchaser CFX did not assume or even purport to assume any liability which the defendants had to the plaintiffs for any breach of ss 52 or 82 of the Trade Practices Act which occurred in 1995.
- The contract between the first defendant and CFX dated 20 August 1996, referred to in recital B was not tendered. There is no material advanced on behalf of the defendants to support their plea of estoppel except the deed dated 16October 1996 which is Ex 15.
- I am satisfied that when they executed the deed in October 1996, whatever may have been the intention or hope of the defendants, it was never the intention of the plaintiffs to release the first defendant from all legal liability to them not merely for breaches of the franchise agreement which preceded 26 August 1996 but also for breaches of its obligations under s 52 and 82 of the Trade Practices Act, which preceded the making of that agreement on 22 December 1995. By October 1996 it must have been well known to them, that contrary to all the assurances given them by the fifth defendant, the Morayfield Shopping Centre would open within a couple of months. Indeed under clause 3.1.1 it is expressly provided that the defendants were to remain liable to the plaintiffs for any breaches of the franchise agreement incurred prior to the completion date (which seems to have been 26 August 1996).
- The deed in question was executed well before the plaintiffs commenced to suffer their devastating loss of income when the first defendant’s other franchise store commenced to operate at the Morayfield Shopping Centre in April 1997.
- It is unclear to me on the evidence precisely what was the nature of the “sale” by the first defendant to CFX on 20 August 1996, which was apparently connected with the execution of a “Master Franchise Agreement”, between the same parties dated 26 August 1996. According to Mr Nicholls another franchisee of the defendant who conducted a franchise café in Caloundra, when CFX “took over” the general management and supervision of the first defendant’s franchise business as “Master Franchisor” from about September 1996, Mr Nicholls then reported directly to CFX rather than “directly” to the first defendant’s directors.
- It is clear on the whole of the evidence that whatever may have been the altered legal structure for the control of the first defendant’s franchise business its agents were personally involved in someway with it long after the execution of the deed which is Ex 15. In my view the execution of that deed was simply one part of a reorganisation of the first defendant’s business structure which involved CFX playing a major part in the supervision of its Queensland operation which until then its directors and agents, including Mr Hill had performed.
- The cases indicate that exclusion clauses cannot operate to defeat claims under s 52 of the Trade Practices Act. In this respect I refer to the observations of Lockhart J in Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at pp 561.
“There are wider objections to allowing effect to such clauses. Otherwise the operation of the Act, a public policy statute, could be ousted by private agreement…it would be contrary to public policy for special conditions such as those with which this contract was concerned to deny or prohibit a statutory remedy for offending conduct under the Act”.
- I refer to similar observations of Sheppard J in Clarke Equipment Australia Pty Ltd v CAT Pty Ltd (1987) 71 ALR 367 at 371.
- More recently in IOOF Australia Trustees NSW Ltd v Tantipech & Anor (1998) ATPR 41-652 at 41,249 the Full Court of the Federal Court referred to Henjo Investments (supra) and observed ─
“Although the clause in question in Henjo was part of the contract the applicant had been induced to enter into by representations in contravention of s 52, the public policy basis for the denial of its effectiveness is applicable to a case such as the present where the exculpatory clause is found in another document”.
- In Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR (Digest) 46-048 Spender J considered a deed of acknowledgement containing disclaimer clauses and observed ─
“…if in fact the misleading conduct of the respondent has induced an applicant to enter into an agreement, that inducement is not negated because, in a document separate to the agreement itself, the applicant says to the contrary”.
It is unnecessary for me to consider the interesting point whether a formal compromise or abandonment of a subsisting claim or cause of action under ss 52 and 82 of the Trade Practices Act by execution of a deedcould raise an estoppel without infringing the general rule applied in Clarke Equipment Australia, Henjo, and IOOF Australia Trustees (NSW). This case in my view is clearly not such a case. To the extent that contrary to my construction of the deed the view were taken that it did indeed on its face record a disclaimer by the plaintiffs of the statutory cause of action which ss 52 and 82 of the Trade Practices Act gave them, for the reasons of public policy discussed in the cases to which I have referred, I would reject the defendants contention that the effect of the execution of the deed by the plaintiffs on 16 October 1996 was to estop them from pursuing this action against the defendants.
- In summary therefore I find that the first defendant was guilty of a breach of duty owed to the first plaintiff under ss 52 and 82 of the Trade Practices Act in failing to include in Ex 4 and Ex 5 a statement relating to the bankruptcy history of the second defendant and the third defendant.
- I find that each of the second, third, fourth and fifth defendants was responsible for and involved in the commission of that breach and so personally liable under s 75B of the Act.
- With respect to the non disclosure of the defendants’ knowledge of the proposed development and opening of the Morayfield Shopping Centre when making representation as to the suitability of the Caboolture franchise café site and of the first defendant’s intention to establish a franchise in it within about 12 months, I find that the first defendant is responsible for and is guilty of a breach of sections 52 and 82 of the Trade Practices Act.
- I find that each of the second, third and fourth defendants in the course of negotiations with the plaintiffs represented and indeed extolled the suitability of the site/location of the first defendant’s Caboolture franchise café and in this respect I refer to para’s 111, 112 and 115 of these reasons. Accordingly I find that those defendants are personally liable to the plaintiff under s 75B of the Act and were involved in breach of section 52 and 82 of the Act in failing to advise the plaintiffs of the proposed development of the Morayfield Shopping Centre and the proposal of the first defendant to open in it a franchise business when representing the viability of the first defendant’s Caboolture franchise café as potentially a successful franchise business enterprise to be conducted pursuant to the proposed franchise agreement.
- I find that the first defendant was guilty of a breach of sections 52 and 82 of the Act by reason of the fifth defendant’s assertion that no competition from the franchise outlet which the first defendant intended to open in the Morayfield shopping centre would commence with the first defendant’s franchise store in Caboolture within the ensuing five years.
- I find that the fifth defendant is personally liable to the plaintiffs for this representation and/or prediction pursuant to s 75B of the Act because he was responsible for and involved in the resulting breach referred to in para 161.
- With reference to the representations/assurances made that the first defendant would provide assistance to and training of the second plaintiffs I find that the first defendant is in breach of the requirements of s 52 and s 82 of the Act.
- I find that in respect of those assurances the second, third, fourth and fifth defendants were all involved in making them in both Ex 4 and Ex 5 and as well the second and third defendants gave such assurances personally. I find therefore that all defendants were responsible for and involved in the resulting breach of s 52 and s 82 in this regard and that the second, third, fourth and fifth are personally liable pursuant to s 75B of the Act.
- With respect to the representations that the first defendant’s Caboolture franchise café would be “its best store” and would occupy a prime site or a very good site, I find that the first defendant was guilty of a breach of s 52 and s 82 of the Act.
- I find that the second and third defendants (vide para 125 hereof) and the fourth defendant (vide para 126 hereof) were involved in making those representations and are also personally liable to the first plaintiff pursuant to s 75B of the Act.
- I find that the first defendant is liable for the representation made by the second defendant that the council car park would open directly over the road from the first defendants franchise café.
- It was the second defendant who made this representation and I find that he is also personally liable under s 75B of the Act for that misleading and deceptive conduct in which he was involved as agent of the first defendant.
- Stated shortly therefore the first defendant is liable to the first plaintiff for each of the breaches of the Trade Practices Act with which I have dealt in detail. Pursuant to s 82 of the Act the first defendant is also liable to each of the second plaintiffs in this regard.
- I find that each of the second, third, fourth and fifth defendants was personally involved in one or more items of that misleading and deceptive conduct and when so involved was acting as the agent of the first defendant.
- I find that the plaintiffs relied upon each item of such misleading and deceptive conduct when executing the franchise agreement and ancillary documents on 22 December 1995.
- I find therefore that each of the defendants is liable to the plaintiffs for the damage suffered as a consequence of one or more breaches of s 52 and s 82 of the Trade Practices Act.
- I will turn now to assess that damage.
- In my view damages may be assessed without the assistance of the complicated and detailed financial analyses of the sort advanced in the course of the trial.
- In my view what the first plaintiff acquired when it assumed its rights and obligations under the franchise agreement was a franchise café business with a potential which no properly informed business investor would ever have acquired at a cost in excess of $160,000.
- Initially the plaintiffs paid in total $161,601; they paid this sum on the basis that they would obtain a viable business free of competition for five years from any of the first defendant’s other franchise outlets within the area of exclusion marked on the map provided by the fifth defendant on 22 December 1995 or from the area within the proposed Morayfield Shopping Centre site adjacent to it. This agreement gave them a right to renew the business arrangement in the future. They had purchased the business intending to build it up over a period of five years or ten years and then to dispose of it profitably having made a reasonable income from it in the meantime.
- By reason of the poor siting of the franchise café far removed from the public car park which the second defendant said would enhance its commercial viability and by reason of the defendants’ intention to commence to compete with it out of a site in the Morayfield Shopping Centre within 12 months or so, it is clear that the first defendant’s franchise café was an investment which only gullible and inexperienced persons would be persuaded to acquire.
- In my view a simple and appropriate way to assess damages is to treat the difference between the whole of the monies paid for the investment - $161,601 minus the demolition value of the fittings in the business obtained by the plaintiffs when they went out of business on 3 December 1977 – the sum of approximately $6,600 – as the out of pocket capital loss suffered by the first plaintiff. This loss amounts to $155,001.
- In addition to this sum however the second plaintiffs also injected $24,102 by way of personal funds into the business on 8 February 1996 because obviously the expenses of running the business far outstripped the income which it was able to generate after the first couple of months of its operation; between 6 February and 14 November 1997 they injected a further $19,688 in efforts to keep the franchise business afloat. The first plaintiff thereby incurred an obligation to reimburse them for those advances in the sum of $43,790. I am unpersuaded that the gradual decline and eventual collapse of the business was attributable to any lack of application and effort by the second plaintiffs. I am satisfied that its collapse was indeed foreseeable to all defendants at the time the plaintiffs were persuaded to enter into the agreement. It must have been apparent to any person with any business experience that the opening of the first defendant’s competitive franchise business in the Morayfield Shopping Centre about 3km removed from its franchise café in Caboolture would have the devastating financial effect on the viability of the Caboolture café which in fact it proved to have.
- In late January or early February 1996 Peter complained to the second defendant that he could not tell whether he was making a profit or a loss (vide para 118). In an effort to placate him the second defendant said that the second plaintiffs would be making between $75,000 - $100,000 in the following year. While I am satisfied that the second defendant had no reasonable basis whatever upon which to make such a prognostication and that it was made only to ensure that the second plaintiffs maintained their current enthusiasm and application, I am unpersuaded in the circumstances that any reliance Peter and Sandra placed on that prognostication had any effect other than to postpone their eventual realisation that the business they had been persuaded to purchase was worthless. The first plaintiff was really the alter ego of the second plaintiffs who ultimately suffered the losses suffered by the first plaintiff. In coming to this conclusion I adopt the approach of Brennan J in Gould v Vaggelas (1983-85) 157 CLR 215 at 258-9 and that of Gibbs C J at 225-227 and of Wilson J at 245-246.
- While it is true that that representation may have made them more willing than they may otherwise have been to put the additional funds into the business in four advances totalling $43,790 (vide para 179) it had no causative effect on their major loss of $160,000 incurred as beneficiaries of their family trust business conducted by the first plaintiff. To the extent that it was also a cause of them making the further $43,790 advances during the year 1996-1997 it merely supported the various representations, assurances and prognostications made in November 1995 and prior to 22 December 1995 to them as directors and/or proposed directors of the first plaintiff each of which was a cause of the whole of the loss ultimately suffered by the plaintiffs both before and after February 1996. In the circumstances I hold merely that those representations (referred to in para 26 of the amended statement of claim Ex 59) were also a cause of the first and second plaintiff’s loss to the extent of $43,790.
- It is inappropriate in my view on the cases to make any award for loss of wages that the second plaintiffs suffered by reason of their venturing into the first defendant’s café franchise business rather than simply endeavouring to get employment somewhere else and earn a wage or wages and perhaps to invest more wisely in some secure and income yielding investment most of Peter’s severance pay advanced to the first plaintiff and used to acquire the first defendant’s café franchise business.
- It was suggested that perhaps the second plaintiffs were able to use some of the food that they could not sell in the café franchise and thereby save themselves some money in providing food for domestic consumption and that this should be taken into account in determining what their real loss was.
- I reject this suggestion; I find it improbable that they would have found attractive the prospect of eating at home the extremely limited range of foodstuff they prepared and attempted to sell in their café each day; it may be that when their financial losses mounted as the café business was in the final stages of decline they did consume some of their unsold food rather than throw it out. I propose however to disregard this possibility in assessing damages. I regard the assumption made by the Deputy Commissioner of Taxation as to the value of food provided by the franchise café for the second plaintiffs consumption when assessing income tax payable by the first plaintiff as of no assistance in this assessment. To the extent that the defendants were obliged to establish that the plaintiffs failed to minimise their damage, in my judgment they have failed to do so.
- It was contended for the defendants that when the franchise café in Caboolture finally collapsed in December 1997 the plaintiffs instead of walking out of the café premises and selling the fittings which they took with them, should have made an attempt to minimise their damages, and to this end have attempted to persuade the first defendant to attempt to arrange its sale for them as a going concern. It is said that they acted precipitously in simply closing down and selling the shop fittings (for which of course they had paid in full a couple of years earlier) and that what they should have done was list the franchise café business for sale as a going concern.
- I am quite unpersuaded that had the plaintiffs done such a thing the first defendant (or any other agent for that matter) would have persuaded anybody with relevant experience and professional advice to assume the plaintiffs rights and obligations under the franchise agreement and guarantee, and enter into occupation of those premises at a rental of $3,000.00 per month. Any such purchaser would have been forced to compete with the first defendant’s other franchise business 3km to the south, the operation of which I am satisfied would be perceived by any person with any business experience or advice as an insurmountable hurdle to the viable operation of the first defendant’s franchise café in Caboolture. No sensible purchaser would buy such a business without considering the financial records of the business over the two previous years. Any consideration of those records – particularly those kept subsequent to the opening of the first defendant’s franchise business in April 1997 would dissuade such a purchaser from acquiring the business. In arriving at this conclusion I am comforted by the analysis of the financial viability of the franchise café business contained in the report from Cabreras Chartered Accountants of 28 September 2001 (Ex 46) and the evaluation of Mr Sergiacomi (Ex 48).
- I give default judgment therefore on the first plaintiff’s claim against the first defendant for breach of contract on the issue of liability and quantum on the basis that the first defendant did not appear upon trial to contest those issues. On the issues of liability and quantum I give judgment against the first defendant for breach of s 52 and s 82 of the Trade Practices Act upon consideration of the evidence adduced upon trial. In the circumstances I will not embark upon an assessment of damages on this default judgment for breach of contract on the issue of quantum. The measure of damages for breach of contract is not the same as that for breach of s 52 and s 82 of the Trade Practices Act and in default of appearance of the first defendant the quantum of damage for breach of contract has not been argued; the prospect of recovery of such damages against the first defendant in any event would seem remote. I give judgment for the first plaintiff against the first defendant for damages for breach of contract to be assessed.
- It seems unlikely to me in the circumstances that the plaintiffs will seek to have such damages assessed. The only issues really contested upon trial related to the plaintiffs’ cause of action under the Trade Practices Act against the second, third, fourth and fifth defendants. That contest may properly be characterised as adversarial; those same issues of liability under the Act were contested against the first defendant only on the issue of accessorial liability under s 75B of the Act.
- With respect to the plaintiffs’ claim against each of the defendants I assess damages pursuant to s 52 and s 82 and s 75B of the Trade Practices Act against each of those defendants for misleading and deceptive conduct in the sum of $198,791. Again the prospect of recovery of such damages against the first defendant seems remote. However the prospect of recovery of damages against one or more of the other defendants may not be so remote.
- I assess interest on this award at 10% p.a. on $161,601 for 2 years from January 1996 to December 1997 which is $32,320.20 and on $155,001 for 4.6 years from December 1997 to August 2002 which is $71,300.46 and on $24,102 for 6.4 years from February 1996 to August 2002, which is $15,425.28 and on $19,688 for 5.1 years from February – November 1997 to August 2002 which is $10,040.88 making a total of $129,086.82.
- I give judgment for each of the plaintiffs against each of the defendants for breach of s 52 and s 82 of the Trade Practices Act and interest thereon in the sum of $327,877.82. The total amount recoverable under this judgment against all defendants will be this sum together with interest if any pursuant to s 48 of the Supreme Court Act 1995.
- I order that each of the defendants pay to the first plaintiff and to the second plaintiffs their costs of and incidental to this action to be assessed on a standard basis.
- Published Case Name:
Neilson Investments (Qld) P/L & Ors v Spud Mulligan's P/L & Ors
- Shortened Case Name:
Neilson Investments (Qld) Pty Ltd v Spud Mulligan's Pty Ltd
 QSC 258
29 Aug 2002
No Litigation History