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Federal Court of Australia |
DAMAGES - whether damages recoverable even if not reasonably foreseeable - test to be applied.
Trade Practices Act 1974 (Cth) s 52, s 82
Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525, distinguished
Nescor Industries Group Pty Ltd v Miba Pty Ltd
(Davies, Tamberlin and Nicholson JJ, 17 December 1997, unreported), distinguished
Bateman v Slatyer (1987) 71 ALR 553, applied
RAIA Insurance Brokers Ltd v FAI General Insurance Co. Ltd [1993] FCA 92; (1993) 41 FCR 164, referred to
Global Sportsman Pty Ltd v Mirror Newspapers Ltd [1984] FCA 180; (1984) 2 FCR 82, referred to
James v ANZ Banking Group Ltd (1986) 64 ALR 347, referred to
Leisure Industries Pty Ltd v D.F. McCloy Pty Ltd (1991) 28 FCR 151, considered
Kizbeau Pty Ltd v W G & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281, followed
PETER ANTHONY THOMPSON AND ROBYN LESLEY THOMPSON V ICE CREAMERIES OF AUSTRALIA PTY LTD and DAVID ALAN ATCHISON
NG 281 of 1994
LEHANE J
SYDNEY
11 FEBRUARY 1998
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | NG 281 of 1994 |
|
BETWEEN: | PETER ANTHONY THOMPSON AND ROBYN LESLEY THOMPSON
Applicant |
|
AND: | ICE CREAMERIES OF AUSTRALIA PTY LTD
First Respondent
DAVID ALAN ATCHISON Second Respondent |
|
JUDGE(S): | LEHANE J |
| DATE OF ORDER: | 11 FEBRUARY 1998 |
| WHERE MADE: | SYDNEY |
THE COURT ORDERS THAT:
1. The applicants serve on the respondents, within 14 days of delivery of this judgment, short minutes of orders to give effect to these reasons.
2. The matter be set down, on a date settled with the Associate to Lehane J, so that formal orders may be made, and, if necessary, any argument as to costs may take place.
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| NEW SOUTH WALES DISTRICT REGISTRY | NG 281 of 1994 |
|
BETWEEN: | PETER ANTHONY THOMPSON AND ROBYN LESLEY THOMPSON
Applicant |
|
AND: | ICE CREAMERIES OF AUSTRALIA PTY LTD
First Respondent
DAVID ALAN ATCHISON Second Respondent |
JUDGE(S):
LEHANE J DATE: 11 FEBRUARY 1998 PLACE: SYDNEY
The applicants, Mr and Mrs Thompson, claim damages from the respondents, under s 82 of the Trade Practices Act 1974 (Cth) (the "Trade Practices Act"). The damages are claimed for loss which they claim to have suffered as a result of misleading or deceptive conduct on the part of the first respondent (ICA) infringing s 52 of the Trade Practices Act. The second respondent, Mr Atchison, is alleged to have been involved in the contravention of s 52 and thus, by reason of s 75B, is liable also in damages measured by the loss resulting from the contravening conduct. That conduct comprised, so the applicants allege, misrepresentations by Mr Atchison on behalf of ICA as to the suitability of premises in Engadine for the conduct of an "ice creamery" and as to the turnover which the applicants could expect if they conducted a franchised ice creamery at the site. Induced by the representations, the applicants say, they entered into a franchise agreement and a lease of the premises, and subsequently purchased the freehold of the premises. The applicants claim that the representations were untrue and that as a result they suffered loss. They claim also that, in making the representations, the respondents breached a duty of care owed to the applicants.
Background Facts
(a) The Respondents
Mr Atchison and his wife purchased an ice cream parlour in Weston Creek, a suburb of Canberra, in 1977. In the same year they started an ice cream parlour in Batemans Bay. Mr Atchison's evidence was that each parlour was very successful and that he and his wife received many enquiries from people interested in starting similar parlours. They began franchising ice cream parlours in 1982; in 1984 they established ICA, of which they are joint managing directors; since its establishment ICA has been the franchisor of franchises to conduct ice cream parlours trading under the name "The Great Australian Ice Creamery". By 1991 ICA conducted, from its headquarters in Bowral, New South Wales, a large and successful franchising operation. A large number of ice cream parlours operated under franchise from ICA in metropolitan, coastal and country areas of New South Wales and in other states. Only three parlours had failed; Mr Atchison attributed the failures, in one case to the operators, in another to a combination of the attitude of the operators and the demographics of the area where the parlour was situated and, in the third, to a variety of circumstances including, particularly, a strike by air traffic controllers which substantially reduced the number of tourists in the area.
Great Australian Ice Creameries were painted and decorated in a uniform and distinctive manner; each sold substantially the same range of products as the others, principally ice cream products; each provided seating for customers consuming "ice cream meals". This reflected ICA's marketing strategy: the object, principally, was not to secure passing "impulse" trade but the repeat business of the "Australian family at leisure" making a "planned purchase". The aim was to encourage families to regard a Great Australian Ice Creamery as a destination in itself, planning visits to it as part of the ordinary round of family activities and for special occasions, for example, children's birthday parties. The aim being to attract repeat business and planned purchases, a Great Australian Ice Creamery offered ice cream sundaes and other products of a more elaborate, and more expensive, kind than one might expect to find in a milk bar or a booth offering passers-by conventional ice cream cones and packaged, branded ice cream products.
The evidence demonstrates that the Atchisons paid considerable attention both to the appraisal of potential franchisees and to the selection of sites. An enquiry from potential franchisees elicited a package of documents concerning the ICA franchising system and some pro-forma financial information. If the potential franchisees expressed interest in proceeding, the Atchisons' custom in 1991 was that they would conduct (jointly) a lengthy interview, lasting several hours, with them; the purpose, as Mr Atchison explained it in evidence, was both to enable Mr and Mrs Atchison to obtain a clear impression of the suitability of the potential franchisees and to enable the potential franchisees to gain an understanding of the nature and requirements of the business to which they were contemplating committing themselves and an acquaintance with those who controlled the franchisor, with whom they would deal. Following that interview, the potential franchisees, if they still wished to proceed, would submit a formal application, with references.
I shall consider the question of site selection and approval in more detail later in these reasons. For the present, it is sufficient to say that the evidence indicates that Mr Atchison and employees of ICA spent a considerable amount of time looking for potential sites; and the process of approving a particular site involved the completion of a form of site evaluation report; the report dealt with characteristics of the area in which the site was located (for example, population numbers and demographics) and those of the particular site (for example, size, zoning, rental and other terms of the lease offered).
If the franchisees and the site were approved, the franchisees would pay ICA a franchise fee and a fee for initial training and the franchisees and ICA would enter into a franchise agreement in a standard form. That agreement entitled, and required, the franchisees to use the business name "The Great Australian Ice Creamery" and "other symbols, designs, insignias, logos and descriptions" belonging to ICA; it required the franchisees to sell only ice cream and other products which were approved by ICA; it required the franchisees to "adequately use the Company's System" (that is, "the distinctive style and method of carrying on the business of presenting, supplying, retailing and serving ice cream and other food products developed by the Company and as adapted from time to time"); ICA was to make available advice, information and guidance in relation to the management of the ice creamery and to provide training for the franchisees and their staff; the franchisees were required to attend ICA's Annual Conference and (presumably also annually) an "Industry Product and Menu Updating Seminar". To the extent that ICA received, from the supplier, rebates on approved products sold, the franchisees were relieved of any obligation to pay royalties to ICA (the evidence demonstrates that in fact rebates were received and royalties were not claimed). There were restrictions on the sale by the franchisees of the franchised business. ICA agreed not to franchise any other person within the area allotted to the franchisees. Finally, there were provisions for termination of the agreement by ICA on default by the franchisees.
(b) The Applicants
Mr Thompson had been employed by the Commonwealth Bank from 1964, shortly after he left school with the Intermediate Certificate, until about 1990 when he accepted voluntary retrenchment. After an initial period as a teller, his duties with the bank were largely clerical. He was for a time involved in the process leading to the approval of loans by the bank, but never had authority himself to approve loans. He spent some time in the hire purchase operations of the bank, involved mostly with debt collection and account monitoring; in 1988 he was seconded to a team designing a new computer system for the bank's hire purchase operations. While employed at the bank, Mr Thompson undertook casual work also, from time to time, for example at a service station.
Mrs Thompson was employed by the Bank of New South Wales for seven years after leaving school. She left full-time employment shortly before their first child was born in 1979. She undertook part-time employment from 1984 to 1991. Mr and Mrs Thompson have four children, the youngest of whom was born in July 1990.
Until 1991, neither Mr nor Mrs Thompson had any experience in running a business. Both shortly before Mr Thompson's retrenchment and afterwards, they had considered various business possibilities, including a chicken shop at Cronulla and a Wendy's Ice Cream outlet. In about April 1991 Mr and Mrs Thompson, having heard of Great Australian Ice Creameries, took a day trip to Kiama, visited the Great Australian Ice Creamery there and picked up a brochure which offered franchise opportunities within the ICA Group. Mr Thompson telephoned ICA and asked for some information about the group.
Mr and Mrs Thompson Become ICA Franchisees
On about 8 April 1991, ICA sent Mr Thompson a package of information concerning the ICA franchise system. The information included a copy of the standard form of franchise agreement. Shortly afterwards, probably on Friday 12 April, Mr and Mrs Atchison met Mr and Mrs Thompson at the Thompsons' home in Engadine (Mr Thompson suggested in evidence that it might have been earlier, but plainly it could not have been much earlier and, in submissions, counsel for the applicants appeared to accept 12 April as the date of the meeting). The parties differ as to the length of the meeting - the Thompsons put it at about one and a half hours whereas Mr Atchison says it lasted considerably longer - and as to what was said at the meeting. Clearly enough, however, the meeting was a preliminary interview of the kind which I have described. It was, at least in part, a "getting to know you" meeting on each side and the Atchisons gave the Thompsons some information as to the history, aims and methods of the ICA franchise system; in particular, Mr Atchison took the Thompsons through the terms of the standard franchise agreement. Evidently, Mr Thompson was both impressed and enthusiastic. His evidence was that "a day or so after the meeting" he was telephoned by someone from ICA who said, "Once you have a suitable site, we will offer you a franchise". Having already ascertained that Cronulla, which he said was his first choice, was unavailable, Mr Thompson gave evidence that he thought of Brighton-Le-Sands as a potentially suitable area; he and Mrs Thompson visited Brighton-Le-Sands and identified two properties which he thought might be suitable; he telephoned Mr Atchison and told him about the two sites to which, Mr Thompson says, Mr Atchison replied "I'll get back to you". Mr Thompson's affidavit evidence was that at that point he would have accepted, had it been offered to him, an ICA franchise for a site in Brighton. His affidavit evidence was:
At that stage I was set upon a Brighton-Le-Sands site and would have walked away from the First Respondent if they could not give me a franchise in that location.
Substantially, Mr Thompson maintained that evidence in cross-examination:
You say today that was subject to me getting finance approved to actually pay the money to get the franchise? - Yes, that's correct.
Subject only to that reservation you had made up your mind that you wished to have the Great Australian Ice Creamery franchise in Brighton? - Yes.
At about the same time, Mr Thompson says, he met an old family friend, a Mr McAlpine, to whom he said:
I've found a couple of possible sites for an ice cream parlour I'm opening at Brighton-Le-Sands. I'm just getting all the details together at the moment.
Mr McAlpine gave evidence about that conversation to similar effect.
The next event of significance was a meeting between Mr Thompson and Mr Atchison which took place, at least in part, at the McDonald's restaurant at Engadine. The conversation during the meeting is crucial to the case; there is a significant conflict of evidence both as to how the meeting came about and as to what was said during it. Mr Thompson's account was that Mrs Thompson told him that Mr Atchison had telephoned to say that he had found a site in Engadine and would ring the Thompsons later that day. Mr Atchison then telephoned Mr Thompson, and suggested that they meet at McDonald's at Engadine. The meeting, Mr Thompson says, took place at McDonald's on about 15 April 1991. Mrs Thompson confirmed that account; she gave evidence of the initial telephone call from Mr Atchison and said that she was certain that the call was received on 15 April, that being her birthday. Mr Thompson's account of the meeting at McDonald's, which he maintained in cross-examination, was as follows:
I met Mr Atchison on about 15 April 1991 at the McDonald's at Engadine. We had a conversation in words to the following effect:-
Mr Atchison "I have found a good site for you."
Me: "Where?"
Mr Atchison: "Here in Engadine next door to the bicycle shop. It is currently leased as an amusement parlour but the Landlord is unhappy with the tenant. The tenant is currently on a monthly lease so immediate occupancy is available. The rent is around $750 per week, inclusive and is within market range."
Me: "As you know I have been looking for a site in the area of the Promenade at Brighton-Le-Sands and we are currently awaiting replies from the estate agents. Wouldn't this be better suited to selling ice cream?"
Mr Atchison: "No. Ours is a "planned" not an impulse purchase. Once people are aware than an ice creamery has opened they will "plan" a visit just as they do with McDonald's."
Me: "The only ice cream parlours we have ever visited have been at seaside resorts. If we were to treat our children to an ice cream we would automatically head to Cronulla as a days outing while in Sydney."
Mr Atchison: "Ours being a planned purchase it is not necessary for our shops to be located at the beach or even in the main shopping centre."
Me: "I have not previously considered Engadine as a suitable site for an ice creamery."
Mr Atchison: "Engadine currently supports the three major food outlets, McDonald's, Pizza Hut and Kentucky Fried Chicken so an ice creamery will fit in well."
I have spoken to friends at Wendy's and other businessmen who say that the Engadine site is well suited to an ice creamery."
Me: "Exactly where is the shop?"
Mr Atchison: "Nearly opposite where we are now. It is also opposite the video shop, a few doors up from the Library and Bus stop."
Me: "That's a long way from the main shopping area and where the people are."
Mr Atchison: "Jeanie and I have been successfully retailing ice cream for 14 years. Over the next few months we will have opened over 60 shops with only one shop ever having failed and this was due to the poor performance of the Franchisees. Most of these have been away from the main shopping centres which allows us to negotiate better rents for you. People also can't get parking in the main street.
McDonald's have a very high success rate when it comes to site selection and we consider that we enjoy a similar success."
Me: "With the shops that failed what was the problem?"
Mr Atchison: "The Franchisees were not suited to selling ice cream and decided not to continue."
Me: "Are the rest of your shops profitable?"
Mr Atchison: "Yes"
Me: "My wife is paranoid about mortgaging our house. Are there any risks?"
Mr Atchison: "Our system has been proven over many years so I cannot foresee any problems."
Me: "What sort of turnover can I expect from this site?"
Mr Atchison: "There is a 470% mark up on scooped ice cream and I would expect sales of $250,000 in your first year, beyond that it is entirely up to you.
Nett profit is worked on 30% of sales so your profit will be in the vicinity of $75,000."
Me: "Is this in line with the financial information you have already forwarded?"
Mr Atchison: "The figures we supplied are actually written down by 15% for taxation purposes. Many owners are able to draw upwards of $500 per week in undeclared earnings, but this is up to you."
Overall our conversation lasted for approximately three quarters to one hour. On several further occasions during the course of our conversation, Mr Atchison said words to the effect of:-
"There is a lot of profit to be made in scooped ice cream;" and
"This site (referring to the Engadine site he had selected) is perfectly suited to our system of retailing ice cream."
He referred to Ice Creameries of Australia as being the "McDonald's of Ice Cream retailing."
Mrs Thompson gave evidence that Mr Thompson told her he was going to McDonald's to meet Mr Atchison. Her evidence continues:
Prior to this, my husband and I had never discussed the possibility of Engadine as the location of the ice creamery. When my husband came home we had a conversation in words to the following effect:
Peter: "Alan has recommended a site in Station Street where Timezone is."
Me: "Why there? I hate that end of town, it's got a real hooligan element, it is the dead end of town. I hate going that far and there is never any parking."
Peter: "Alan knows about these things. It's near the video shop, bus stop and library and opposite McDonald's. He has convinced me that is where the shop should be."
After further discussion I left the selection of the Engadine site to my husband.
Mr Atchison's version is rather different. He gave evidence of a recollection that the meeting was arranged not by him but by Mr Thompson, Mr Thompson having found the Engadine site. His affidavit evidence was as follows:
In about mid April I received a telephone call from Mr Thompson. During the telephone call Mr Thompson said to me words to the following effect:
Mr Thompson: `I've found a site in Engadine. Would you please come and look at it.'
Mr Thompson then told me the address of the site.
Thereafter, I met Mr Thompson at the site in Station Street, Engadine. I observed that the site was being used as a pinball and video game parlour. I had a discussion with Mr Thompson, partly in front of the site and partly at McDonald's, to the following effect:
Mr Thompson: `This site is becoming available because it is going to have to close down due to community pressure. The community pressure includes the local member of parliament seeking its closure. The police are also seeking to have it closed. Other community groups are also seeking its closure. The reasons for this activity are that a bad element is being attracted, there are suspicions of alcohol and drugs being available on the premises and many parents are concerned for the sake of their children.'
Me: `In favour of the site are its size and exposure. The bad name associated with the pinball parlour should not extend to us because we are squeaky clean and we are a favoured destination in which families feel comfortable. The proximity to McDonald's would be in our favour because the passing traffic would add to public awareness that we are there. School children catch buses in the area after school and people going to the train station including students would have to pass the door. That will remind people you are here. High school students are generally not our market* but there should be some trade from this group and again exposure would be given to our business simply by the passing trade. Parking is available in the local area and in view of our market this location would be suitable. This site can be made to work and you should continue to investigate the possibilities of leasing it.'
*(Although over the last 12 months or so I have noticed we are attracting this market).
I left the investigation to Mr Thompson to pursue because the property was not, as I understood him, then available to rent.
Mr Atchison denied telephoning Mrs Thompson and denied also:
- telling Mr Thompson that he had found a site in Engadine;
- telling Mr Thompson about the history of the shop;
- speaking to "our friends at Wendy's" about the suitability of the Engadine site or saying that he had done so;
- saying that he could not foresee any problems, that he "would expect sales of $250,000 in your first year, beyond that it is entirely up to you" or that "your profit will be in the vicinity of $75,000";
- stating that figures supplied were written down for tax purposes or that many owners were able to draw upwards of $500 per week in undeclared earnings;
- saying "McDonald's have a very high success rate when it comes to site selection and we consider that we enjoy a similar success".
Mr Atchison's evidence was that he had no recollection of talking, at the meeting, about the nature of a Great Australian Ice Creamery, and suggested that part of the Thompsons' account of the conversation appeared to be a variation on what was said at the initial interview. He also said that he had no recollection of having been asked what sort of turnover could be expected from the site or of replying to such a query. He did, however, give evidence, which is of some importance, as to his practice:
I have no recollection of having been asked what sort of turnover could be expected from the site, nor can I remember replying to such a query from Mr Thompson. However, when prospective franchisees enquire as to what they can expect in relation to turnover in a Great Australian Ice Creamery, I am very careful to emphasise that franchising is about minimising risk, not eliminating it. If asked, I generally say (and I believe I would have said to Mr Thompson if asked) words to the following effect:
`Average sales in our group range from $200,000 to $220,000 per year. Obviously, if this is an average figure there must be shops below the average and shops above the average. I cannot make a projection or prediction as to your outlet. I cannot guarantee any level of income or turnover: this is entirely up to you. However, for planning purposes I can provide a pro forma which says: "If your turnover is in this price range, then this is how the outlet will function financially", and we put in figures representing 30% cost of sales, 11-12% wages and whatever the actual rent will be.'
Mr Atchison also denied discussing, at the McDonald's meeting, the outlets which had failed; his recollection was that this topic was dealt with in (and only in) the initial interview. Mr Atchison's account, like Mr Thompson's, was the subject of substantial cross-examination; I shall return to some aspects of that later in these reasons.
Following the meeting at McDonald's, Mr Thompson entered into negotiations, for a lease of the site which he and Mr Atchison had discussed, with the owner's agent. Before those negotiations were completed, however, Mr Thompson discovered that a nearby site, 3/24-28 Station Street, Engadine, was available for lease at a lower rental. He mentioned that site to Mr Atchison; Mr Atchison, according to Mr Thompson, said that it sounded suitable; a site evaluation report was prepared by an employee of ICA, Mr Brian Ruckley, and the site was approved. Meantime, Mr and Mrs Thompson submitted an application for a franchise; the application form was dated 11 May 1991. That application was approved and ICA and the Thompsons entered into a franchise agreement, in ICA's standard form, which was dated 21 May 1991 and expressed to take effect from 1 July. Mr and Mrs Thompson entered into a lease of the shop at 3/24-28 Station Street, Engadine for a period of five years commencing on 1 July 1991; with an option to renew for a further five years; shortly afterwards (completion took place on 2 October 1991), they purchased the freehold of the shop. They commenced trading at the shop, as a Great Australian Ice Creamery, on or about 29 July 1991.
There is one other significant matter which should be mentioned before I turn to later events. Mr and Mrs Thompson applied to the National Australia Bank Limited for finance to enable them to pay the franchise fee and the training charge and to equip and stock the shop. ICA sent to the bank a document headed "Potential Cashflow for Engadine NSW". The document was, as its title suggests, a cash flow projection: projected revenue (sales) for each month and projected costs and outgoings. Two things about the document should be noted: one is that the total projected amount of sales for a full year was $250,000; the other is that the following note appears at the foot of the document:
These figures are only estimates. There is no assurance that you will do as well. If you rely on these figures, you must accept the risk of not achieving them.
Mr Thompson's evidence was that he asked Mr Atchison to provide the projected cashflow statement to the bank, because the bank required such a document. Mr Thompson's evidence as to the time when he first saw the document was somewhat confusing. His affidavit evidence was to the effect that he believed that he did not see it until after the bank loan was approved (during June 1991). He gave oral evidence in chief to the effect that an accountant, Mr Powe, prepared a cashflow statement for him for submission to the bank, and that in order to enable Mr Powe to do so he (Mr Thompson) collected ICA's "potential cashflow" from the bank and delivered it to Mr Powe, with whom he had a discussion on or about 19 May 1991. He gave no detail, in evidence, of the content of that discussion. However, following answers early in his cross-examination which suggested that he may have seen the potential cashflow document in May, later in cross-examination Mr Thompson gave this evidence:
When you say in your affidavit in the last two sentences in relation to the annexure G, I did not see it until later, that is to say after it had been sent to the bank, "I believe I did not see it until after my loan was approved". That statement in your affidavit was simply wrong, is that right? - No, I think it was quite correct.
When do you say your loan was approved? - Well, you have told me it was about June. I assume that was the correct time, yes.
So you saw annexure G after June? - Well, I did actually get it in October and that is my first recollection of seeing that cashflow.
October of 19? - when I asked for a specific copy from the bank, I have a copy here available if you would like to see the original photocopy, it is in my documents if you wish.
The annexure G referred to is ICA's potential cashflow document. At all events, Mr Thompson was quite clear in his cross-examination as to the revenue projection on which he relied:
So I take it that what his Honour should take from this affidavit is that the time you signed the franchise agreement or made the application for lending to the bank, you were not relying on anything that was in the cashflow document, annexure G to Mr Atchison's affidavit? - I was relying on the projections given to me by Mr Atchison verbally and otherwise.
When you say "verbally and otherwise", Mr Thompson, the "verbally" you are there referring to is the conversation that you have set out as occurring at McDonald's, is that right? - .....(indistinct)......
What is the "otherwise" referring to? - I apologise. It would be just simply on that conversation that we had at McDonald's.
So is this right: that you say, so far as numbers provided to me that are relied on in relation to the entry into the franchise agreement or borrowing of monies and so forth, it was that said to me by Mr Atchison on the occasion of the McDonald's conversation deposed to in your first affidavit? - That's right.
That is all that has been your understanding, is it? - It's always been my understanding that Mr Atchison provided those figures - sorry, he told me the turnover - he supplied those figures to the bank and the bank subsequently approved the loan.
But so far as your point of view is concerned, it has always been your understanding, has it, that that which you relied on in making a decision to execute the franchise agreement and reply to the bank for loans and so forth, it was what Mr Atchison said to you at the McDonald's on the occasion you have referred to in your first affidavit? - Yes, I relied on his knowledge and experience, yes, and what -
He relied on he said to you about turnover and the like and profitability at the McDonald's conversation, is that right? - That's correct.
No doubt about it? - No doubt at all.
Because, you say, I was not even aware of the contents of annexure G until after I had signed the agreement and got the money from the bank? - The only - my only clear recollection of first seeing the cashflow was in October.
Which was well after the event? - Obviously, that's right.
Mr Atchison's account of the events surrounding the production of the cashflow statement differed significantly from Mr Thompson's. Mr Atchison said that on about 13 May 1991 he had a discussion with Mr Thompson concerning the preparation of a cashflow statement to be used in seeking bank finance. Again, it is useful to set out in full Mr Atchison's affidavit evidence, particularly because of its description of the way in which such cashflow projections were produced:
At about this time, I had a discussion with Mr Thompson regarding the preparation of a cashflow to be used in seeking bank finance in words to the following effect:
Me: `Peter, I'll prepare a standard cashflow for you with sales of $200,000.'
Mr Thompson: `I believe I can do better than that. Could you prepare one at $250,000?'
Me: `Certainly, but you must be aware that it is up to you to achieve those figures. I cannot guarantee the level of trade.'
I arranged for ICA to prepare a potential cashflow summary for $250,000. Annexed and marked `G' is a copy of this document. I understand that the summary was sent to Mr and Mrs Thompson. The summary was prepared using figures in ICA's computer. ICA has cashflow summaries on the computer for resort, country town and city/suburb franchises. I selected the city/suburb franchise for Mr and Mrs Thompson's potential cashflow summary. The potential cashflow summary was prepared by using the rent figures provided by Mr and Mrs Thompson along with other standard figures which are based on my experience of many sites over many years and are confirmed to me in discussions with our other franchisees from time to time.
Later Events
For present purposes, these may be dealt with quite briefly; it will be necessary to return to some aspects of them in more detail later. After promising trading by the Engadine ice creamery during the first few months, sales declined. From January 1992, in an attempt to boost cashflow but without the approval of ICA, Mr Thompson installed video game machines in the shop and introduced a number of additional items of food and confectionary. The decline in ice cream sales, however, continued and, despite some uncertainty and controversy over the figures, it seems reasonably clear that the shop traded at a loss. Certainly it did not make a substantial profit in any year during which it traded. There was acrimonious correspondence between Mr Thompson and ICA from at least March 1992. The ICA attitude appears clearly enough in a letter from Mr Atchison to Mr Thompson dated 3 March 1992, which is worth quoting in full:
Dear Peter,
When you purchased a franchise from Ice Creameries of Australia, you purchased a system. This system has worked successfully for many years in many locations.
You are not using this system. This is obvious for a number of reasons:
1. Your level of purchases of ice cream indicates that you are not doing well.
2. We have received a number of comments from patrons that your Ice Creamery is not like the others.
3. You have repeatedly sold products which are not part of our system. These include confectionery, stick lines, and donuts. None of these products are approved for use in our outlets.
4. Pinball machines are prohibited in Ice Creameries, as are video games. They attract the same sort of element as were attracted by the pinball parlour which was in your neighbourhood before you opened. They not only attract the wrong element. They drive our market, the Australian family at leisure, away. Further, many families will not allow their children into outlets which have these machines, because of the association with hooliganism, alcohol, and drugs.
5. You were in contravention of your franchise agreement when you failed to attend the annual conference. If anyone needed the conference, you certainly did.
You have shown no inclination to follow advice. Any time Jean [Mrs Atchison] has talked to you, your attitude has been negative. You are very quick to point out why nothing will work.
We would like for you to get back to working the system. If you require advice, you need only call. If you find that you are unwilling or unable to do this, we suggest that you put your outlet on the market and try to find a buyer. Continued flouting of the system will put your franchise in jeopardy.
In the meantime, the pinball machines are to be removed immediately.
All unauthorised products are to be removed immediately.
Further, you are reminded that the GAIC Telephone Book, as stated on the cover, is only for internal use within our group. It has come to our attention that you furnished a list of our franchisees to a salesperson. Our owners are being harassed by a cash register rolls salesperson.
Peter, you joined a very good group which has a lot of talent and potential assistance available to you if you are encountering difficulties. When you joined this group, at the time of the initial interview, you and your wife indicated that you would both be working in the outlet. This has not occurred. You are working ridiculously long hours, and in our estimation, have lost your perspective.
In summary, as we used to say during my days in the military: "Shape up or ship out!."
Alan Atchison
Jt Managing Director
Mr Thompson replied, by a letter dated 6 March 1992:
Dear Alan,
I am in receipt of your letter of 3 March 1992 and am naturally concerned with its contents.
I agree that the shop is not trading profitably and has not done so for some time, despite extensive advertising and promotion.
There are of course many possible reasons as to why the site has not been a successful one, however the following are some of the reasons I consider may have caused this to be so:-
1. Site selection. Ice Creameries of Australia (ICA) played a major role in the selection of a site just two doors away from where I am and indicated that the eastern end of Station Street was suitable despite its substantial lack of pedestrian traffic. ICA were well aware at the time that my preferred shop position was the Rockdale/Brighton-Le-Sands area.
2. Anticipated profitability figures supplied by ICA are obviously not achievable. It was substantially on these figures that my Accountant produced cash flows and subsequently on which I based my borrowings and final site selection.
3. Overstaffing. Based on advice from ICA, prior to late December 1991 I had one full time employee and ten part time employees. This was a gross exaggeration of my true staffing needs and as a consequence put unnecessary pressure on my liquidity during poor trading.
4. General economic climatic conditions have not been conducive to the opening of a Sydney suburban site.
As mentioned earlier the content and tone of your letter do concern me particularly as I understand that there are quite a few shops within the Franchise who are not and have not for some time been "using the system". I trust that I am not being singled out and that all shops within the group who carry lines that are "not approved" have been written to in a similar manner.
I understand from your Operations Manager that video games/pinball machines have previously been approved at another outlet within the group as have sandwich making facilities. Discounted sweets, Vitari and stick lines at other outlets are also tolerated.
Like many in the group, I have commitments to meet and the video machines were installed in good faith to assist with these liabilities. Without the liquidity that these have provided there was a distinct possibility that I would need to close the doors here. The confectionary likewise was purchased through your "approved" supplier. The stick lines (two only) have been made available at the specific request of parents with children who have milk allergies and who under normal circumstances could only sit and watch their respective parents/brothers/sisters enjoy ice creams that they cannot have for medical reasons.
In all the circumstances I have requested my solicitor to forward this letter to you.
Yours sincerely,
P.A. THOMPSON
Neither side departed substantially from the battle lines thus fixed. ICA, orally through various representatives and in writing, continued to advise or insist upon the removal of pinball and video machines and unapproved items, and Mr Thompson, taking the view that advice of that kind offered no solution to his problems, continued to refuse. Attempts to sell the business, commencing in 1992, were unsuccessful. Ultimately, Mr Thompson shut the shop at the close of trading on 30 June 1995. Subsequent attempts to dispose of the premises, by lease or sale, had up to the time of the trial been unsuccessful.
Claims In These Proceedings
These proceedings were commenced on 18 May 1994. By their further amended statement of claim filed on 29 March 1996, Mr and Mrs Thompson base their claim for damages upon, first, a number of particular alleged representations as to the suitability of the Engadine premises as the site of a Great Australian Ice Creamery, principally representations alleged to have been made at the McDonald's meeting, and alleged representations as to the turnover and profit of a Great Australian Ice Creamery at Engadine. It is convenient to consider the allegations, and the response to them of ICA and Mr Atchison, separately in relation to turnover and profitability, on the one hand, and suitability of the site on the other. The respondents deny making the alleged representations concerning turnover and profit; while they deny certain particular representations relevant to the suitability of the Engadine site, they admit representing that the site was suitable: on that question, accordingly, the principal issue is whether the making of that representation constituted an infringement of s 52 of the Trade Practices Act or actionable negligence.
Alleged Representations as to Turnover and Profit
The applicants allege, in the further amended statement of claim, that Mr Atchison made the following statements at the McDonald's meeting:
* that the applicants' GAIC (Great Australian Ice Creamery) at the first site (that is, the site discussed at the McDonald's meeting) would have sales of $250,000 in its first year of operation;
* that the applicants' GAIC at the first site would make a profit of approximately $75,000 in its first year of operation;
* that the applicants' GAIC at the first site would have sales of $250,000 in each of the years after its first year of operation;
* that the applicants' GAIC at the first site would make a profit of at least approximately $75,000 in each of the years after its first year of operation.
It is pleaded also that the cashflow projection, showing an annual turnover of $250,000, was prepared "in or about early to mid May 1991" and sent to the applicants. The applicants then plead that the respondents had information from Streets Ice Cream Pty Limited (which supplied ice cream to ICA franchisees) which indicated that returns of the order said to have been represented were unlikely to be achieved; the respondents thus had no reasonable grounds for making the representations, which were representations with respect to future matters. The pleading alleges that the applicants entered into the franchise agreement and the lease in reliance on the representations and suffered loss as a result. As I have mentioned, Mr Atchison is alleged to have been a person involved in the contravention of s 52 alleged against ICA. It has pleaded also that in making the alleged representations the respondents breached a duty of care which they owed to the applicants.
The respondents by their defence deny making the representations about turnover and profit alleged to have been made at the McDonald's meeting. They admit that the applicants requested a cashflow projection. They say that Mr Atchison offered to prepare one showing an annual turnover of $200,000, that Mr Thompson requested that it show a turnover of $250,000 and that Mr Atchison provided such a cashflow projection; but they say that they informed Mr Thompson that he could not guarantee that the applicants would achieve that or any other turnover and that it was up to the applicants to achieve "these type of figures"; and they plead that the cashflow projection included the disclaimer to which I have already referred.
No doubt because of Mr Thompson's evidence as to when he first saw the cashflow projection, and perhaps also having in mind the disclaimer, the applicants did not seek at the trial to make a case of misleading conduct or negligence based directly on the making of representations in the cashflow projection. The substantial question in controversy between the parties was, accordingly, whether Mr Atchison made the representations which the pleading, supported by Mr Thompson's evidence, alleges that he made at the McDonald's meeting. The issue is, thus, what if anything was said about turnover (and profit) at a meeting of which (so far as the evidence goes) no contemporaneous note was made and at which only two people, Mr Thompson and Mr Atchison, were present. Counsel for the applicants submitted that I should prefer the evidence of Mr Thompson to that of Mr Atchison, on a number of grounds.
First, it was said that Mr Thompson's evidence displayed a more complete and detailed recollection of the conversations than did Mr Atchison's and that this was unsurprising given that Mr Atchison spoke to a great number of intending franchisees whereas, for Mr Thompson, the transaction was unique: particularly, as to a number of matters, Mr Atchison relied not upon specific recollection of his conversations with the Thompsons but upon what he said was his usual practice. Obviously there is force in such a submission. However, for a number of reasons (to some of which I shall return later) I cannot be entirely confident as to the detailed accuracy of Mr Thompson's recollection: for example, Mr Thompson's recollection, given in cross-examination, of the meeting with the Atchisons at the Thompsons' home was somewhat vague as to detail (perhaps not surprisingly, given the lapse of time) as, in a number of respects, it was as to the conversation at McDonald's. Senior counsel for the respondents pointed to the following exchange:
And in which conversation do you say that Mr Atchison said that this was, Engadine was, a great location? - I believe that was at McDonald's Restaurant at Engadine.
And that is dealt with in your first affidavit in paragraph 12? - Yes.
And could you point out to his Honour where it is that Mr Atchison says that this is a great location? - Well, in general terms he would have said so. This is an event that happened six years ago and these are the general, this is the general thrust of that conversation. I can't give you that conversation verbatim.
Secondly, counsel for the applicants referred to evidence, given by other former franchisees, of conversations in which Mr Atchison had stated that the average turnover of ICA franchisees was $250,000. I shall consider the significance of that evidence later. Counsel also referred to the fact that Mrs Atchison, who on the evidence conducted initial interviews jointly with Mr Atchison at the relevant time, was not called to give evidence supporting that of Mr Atchison as to their usual practice.
Thirdly, a number of particular criticisms were made of evidence given by Mr Atchison in cross-examination. It was said that he gave evasive answers, for instance, in relation to franchises which had closed and as to the desirability that Mrs Thompson be actively involved in the business at Engadine. It is unnecessary to multiply examples; the following exchange sufficiently illustrates the kind of answer to which counsel referred:
You never said to Mr and Mrs Thompson that their franchise would not work unless Mrs Thompson were significantly involved in its operation did you? - We said what is in my affidavit that a successful outlet requires - not requires - the ideal franchisees are a married couple both working in the franchise.
But you did not say that the possibility of success in the franchise would be significantly reduced if they were not both working together in it, did you? - My recollection is that we said for the outlet to be successful it is very important that Robyn have - that Robyn, the wife, the female, had an active role, I didn't define full or part-time, have an active role to ensure that things were seen that men normally don't see.
Well, when you went to their house to interview them, you saw that Mrs Thompson had a young child, did not you? - Yes.
Do you recall her leaving the room and going upstairs to change or feed the child at one stage? - Yes.....
......You did not say to them that the prospects of success would be greatly reduced unless she were able to work in the franchise as well, did you? - The large majority of our franchise families -
Look, did you say that to her or not? - Excuse me. The large majority of our franchise families have children including infants ......
...... Will you please answer my question, Mr Atchison. You did not say to Mrs Thompson when she explained that she was feeding a baby and would be continuing to do so, you did not say that the prospects for success in the franchise would be substantially reduced unless she were able to work in the franchise with her husband, did you? - What I said, one more time, is that I said that the involvement of a married couple enhances the chances of success of an outlet.
But when she said, `Well, I have this baby to look after and other children and I am not going to be involved to any great extent', you did not say to her `Well, wait a minute, that might significantly impair the prospects of success', did you? - The Thompsons' application showed that she would be working in a part-time role and as with many of the mothers in our group, I assumed that that was the case.
Do you refuse to answer the question I am asking you, Mr Atchison? - You are asking me if I said that the chances of success would be diminished significantly and I am saying that the chances of success would be enhanced to a good deal by having an active involvement by both parties.
I will ask you the question again, because I want to be quite fair to you about this, Mr Atchison. When she said her time would be taken up with children, you did not say to her or her husband, `that might significantly reduce the prospects of success, did you?' - No, I said what I said.
Next, counsel characterised a number of answers as demonstrating a desire to promote a certain position, rather than to answer the question asked. That was so, counsel submitted, in relation to a series of questions as to whether or not particular outlets had closed, in answer to some of which Mr Atchison asserted what he took to be ICA's legal position in relation to those outlets; counsel referred again to Mr Atchison's evidence concerning Mrs Thompson's involvement in the business; and he referred also to the following exchange concerning a report to ICA by one of its representatives about the Engadine shop as conducted by Mr Thompson:
Then under Owners Attitude, it says: energy not there, serves customers well? - Yes, I see that.
So, there is no doubt that his relationship with his customers appeared from this evaluation to be reasonable? - Comparing this form with other visit forms, I could say that this is a very, very bad one overall in relevance to others.
I am not asking you about it overall at the moment. I am saying that so far as the observations in the form concerning the way he dealt with his customers is concerned, those observations appear to indicate that he dealt with them reasonably well? - I believe that you also quoted Mrs King as saying that she had very limited observation of that someplace else in her affidavit, which I haven't seen, but I - I recall your reading that to me this morning, that she is basing that on having observed several customers.
Yes. I want to put it to you that as these site inspections go, this is not a particularly bad one, is it? - Yes, it is a very bad one.
Then, counsel referred to what he characterised as inconsistency between answers given by Mr Atchison in cross-examination and either objective facts or other evidence which he had given: for instance, there was evidence about whether beachside outlets were the most successful and the extent to which ICA franchisees relied on the "impulse" market and competed, in relation to that market, with other franchises. Particularly, there was evidence about the extent to which the conversation at McDonald's referred to turnover. It will be recalled that Mr Atchison, in affidavit evidence, said that he had no recollection of being asked what sort of turnover could be expected from the site, or replying to such a question. He proceeded to set out what he described as his general practice. In cross-examination, he gave the following evidence:
Do you recall during this meeting with Mr Thompson that he asked you about whether your shops were profitable? - I recall at some time Peter and I discussing turnover. My recollection is that I said that the average turnover of an ice creamery at that time was in the neighbourhood of $200-220,000. At that time or some other time, Peter said "I believe I can do 250". And I recall that when he made that statement I said, Peter, I can make you a cashflow for your bank or your accountant at that level but that doesn't change the fact that the average turnover of an outlet at this time is in the range of $200-220,000.
So you remember him making that inquiry of you and giving him that answer, do you? - Yes.
When did you first remember that he had inquired of you about turnover? - Well, when someone inquires initially they get a package and in that package they are given examples of turnover at varying levels. Normally, not necessarily part of normal practice, but frequently during an interview the question of turnover will come up in which case it is my practice to say, the average turnover at this time is - blah, blah, blah, blah. If franchisees subsequently ask the same question again in subsequent meetings, my answer is invariably the same: the average at this time is - blah, blah, blah, blah. There are obviously shops above and below that". I have no recollections of anything with Mr Thompson outside of normal practice.
But you said a moment ago you recall him asking you about the turnover and you recall saying to him, average turnover is between $200 and $220,000? - That's correct.
In paragraph 38(f) of your affidavit you say:
I have no recollection of having been asked what sort of turnover could be expected from the site nor can I remember replying to such a query from Mr Thompson.
do you not? - That is regarding that particular site. I believe that what I have been talking about in the last few minutes is basically a statement that I make regarding average turnover within our group. I don't recall having made any representations that that site was anything - I don't recall any specifics linking possible turnover to that site in Engadine.....
... Do you remember him asking you about average turnover for your shops? - Yes.
I see, so he asked you what was the average turnover for your shops and you remember him asking that, do you? - I recall Peter and I discussing, and my going through that. I do not recall whether I initiated it or whether he asked, or -
Please, Mr Atchison, just listen to my question and answer it. You do remember now Mr Thompson asking you about the average turnover for shops, do you? - No.
Do you remember him asking you what the turnover of his shop might be? - I remember Mr Thompson being very enthusiastic and very -
Yes or no, do you remember him asking you what the turnover of an Engadine shop might be? -I remember him saying "What sort of turnover do you believe I could enjoy".
At Engadine? - I don't recall him saying at Engadine.
Well, he was not - ? - But presumably he was, yes.
And what do you recall that you said to him in answer to that question? - I said in answer to that that the average turnover of our outlets is in the range of two hundred to two hundred and twenty thousand dollars a year.
And you remember-? - Obviously - I then go on to say obviously if that is the average there are a number of outlets above or below it.
All right, and you remember saying that to him when he made that inquiry of you? - I remember having said that to him. I still am unable to give you sworn testimony that that was in response to a direct inquiry regarding the Engadine site.
Well, I just, Mr Thompson - Mr Atchison - I just inquired of you whether he had asked you what the average turnover was and you said "No". I then said to you, "Did he ask you what the potential turnover at Engadine might be", and you said, "Yes". Now, in your affidavit you have said, "I have no recollection of having been asked what sort of turnover could be expected from the site"? - And I have not changed - I have not changed that.
Later in cross-examination, Mr Atchison maintained that there was no inconsistency in that passage.
Finally, counsel submitted that in one respect Mr Atchison had fabricated evidence. That criticism related to a statement in Mr Atchison's principal affidavit and cross-examination on that statement. In his affidavit, Mr Atchison said this:
I recall that Mr Thompson did research into the demographics of Engadine's population. I do not recall whether this had been done at the time we inspected the site but I clearly recall Mr Thompson having such figures available and showing them to me at some time that I cannot now recall. I recall a discussion with Mr Thompson in which he said words to the effect "I am confident Engadine is suitable" and in which he appeared enthusiastic about Engadine.
Again, I think it is desirable to set out in full the passage in Mr Atchison's cross-examination:
And do you say to this court that you did make inquiries about the population in Engadine? - I suggest - I recall suggesting to Mr Thompson that to confirm my instincts and professional knowledge that Engadine was suitable that he get figures, and he did, and I recall him showing them to me and I recall looking at the age and recall believing that it was a suitable - based on the age of the families and the children that it was suitable, yes.
So your evidence to this court is that the information that you had about population came from something you were shown by Mr Thompson? - That is correct.
And do you say that Mr Thompson showed you any other type of demographic information? - No.
When do you say he showed you the population numbers? - I do not remember that clearly. I do remember having discussed with Peter that he should research this. Part of our system is very frequently a cooperative effort between the prospective franchisee and Ice Creameries of Australia looking for and at sites and evaluating them with obviously the final approval being ours. I do recall suggesting to Peter that he get figures. I do recall him handing them to me. I do recall reading them. I do not recall at what time that happened.
That never occurred, did it, Mr Atchison? - Yes.
Mr Thompson never showed you any demographic type figures at all, did he? - Yes.
Where do you say you were when he showed them to you? - I have not said.
Can you not remember where you were when he showed them to you? - I have said I do not recollect where I was or when I was. I can recollect Peter handing me figures and I can recollect looking at them and they were demographics for the Engadine area.
Mr Atchison, that is just a lie, is it not? - No.
Go to annexure C to your affidavit? - Yes
That is a document headed, Site evaluation report for Engadine? - Yes.
Prepared by Mr Ruckley? - Yes.
Why is not the population of the area filled in in that report if in fact you had been told the population numbers of Engadine? - Because Mr Ruckley failed to complete the form properly and because I had already looked at the figures presumably but as I say I had no recollection of when but I do recall I personally verified the population of the area and Mr Ruckley was in error in not putting that in.
Mr Atchison, this form, annexure C, shows quite clearly that the population of the area is considered by you to be of the utmost significance in evaluating a site, does it not? - Yes.
And there had been no inquiry made by you and you had not been given any information by anybody else as to the population of the Engadine area? - No, Mr Harris, and may I also point out that I believe that this site evaluation is of the second site that we looked at and I believe that by the time that we were filling out an evaluation of the second site we had already decided that Engadine was an appropriate area.
Mr Thompson, in affidavit evidence, said that he would have had no idea how to go about doing a demographic study and that he did not engage the services of an expert but "relied totally upon Mr Atchison's assessment and recommendation of the locality and the site". He was not cross-examined on that evidence. The submission of counsel for the applicants was that the event described by Mr Atchison could not have occurred: there would have been no occasion for Mr Thompson to obtain demographic information before 12 April or before 15 April which was when, on Mr Thompson's evidence, the question of a possible site in Engadine was first raised. There was no other evidence of any relevant meeting between Mr Thompson and Mr Atchison. Mr Atchison's evidence was given with a degree of certainty which made it impossible to conclude that he was merely mistaken; the evidence must be fabricated.
On the other hand, although Mrs Atchison did not give evidence, Mr Atchison's account of his general practice received considerable support in the evidence. A number of franchisees and former franchisees gave evidence, some called by each party. Several aspects of that evidence are noteworthy. First, all the witnesses (including some called by the applicants), who gave evidence as to statements made orally by Mr Atchison about turnover, said that he spoke of the current average turnover of ICA stores, not of the turnover that an intending franchisee might expect from a store which he or she contemplated establishing. It is unnecessary to describe all that evidence in detail. It is sufficient, I think, to refer to the evidence of Kyungman Min, who was formerly the franchisee of a Great Australian Ice Creamery in Oxford Street, Darlinghurst. Mr Min's affidavit evidence was:
In about November, 1990 I had a conversation with David Alan Atchison, when I said to him words to the effect: -
"What could I expect the turnover of the Hyde Park franchise to be?"
And he said:
"The average turnover is about $250,000 per annum".
In cross-examination, Mr Min agreed that Mr Atchison had also said that the turnover at some sites was higher, and that at other sites lower, than the average. Secondly, Mr Min was not the only witness who gave evidence that the average quoted by Mr Atchison was $250,000 and for some (Mr Min included) ICA had prepared a cashflow on the basis of an annual turnover of $250,000. For reasons which will appear, I doubt that much in the end turns on this, but it should be mentioned that Mr Atchison gave evidence that at certain times the average was in fact $250,000 and his practice was to quote, from time to time, the current average, whatever it was; it may also be said that the witness whose conversation with Mr Atchison was closest in time to Mr Thompson's meeting with him spoke of a represented average of $250,000 but received a cashflow statement showing a total annual turnover of $220,000. A third significant aspect of this evidence is that a good deal of it supports in other respects, and none of it contradicts, Mr Atchison's account of the customary discussions at initial interviews, and their duration.
Counsel for the respondents relied on that evidence. He also sought to rely on what he characterised as a number of improbabilities and inconsistencies in Mr Thompson's version of the events. First, there was the timing difficulty. If, as counsel for the applicants appeared to accept in submissions, the initial interview took place on 12 April (as I have mentioned it could hardly, in any event, have taken place much earlier) it is almost impossible to see, on Mr Thompson's account of the intervening events, how the McDonald's meeting could have occurred on 15 April; nor is it easy to see how, particularly given that account, it is at all probable that over the intervening weekend, or early on the Monday morning, Mr Atchison would have found, and discovered the history of, the site which, at the McDonald's meeting, he discussed with Mr Thompson. A further difficulty is that an ICA telephone log shows a call received at Bowral from Mr Thompson during the time when, on evidence, he was talking to Mr Atchison at Engadine. Given Mr Atchison's evidence that he was travelling in northern New South Wales from Tuesday 16 April to the end of the week (that evidence was supported by his contemporaneous diary), it was far more likely, the submission continued, that the meeting occurred after Mr Atchison's return during which time it was possible, and more likely, that Mr Thompson both identified the site and obtained population numbers for Engadine. Next, if one were to accept Mr Thompson's account of his readiness to accept a franchise at Brighton and his determination to reject any other site, it was somewhat extraordinary, so it was submitted, that he was so readily converted at the McDonald's meeting, on the basis of the conversation as he describes it, incorporating very little by way of discussion of the comparative merits of Engadine and Brighton, and sufficiently confident to dismiss the doubts expressed by Mrs Thompson upon his return from the interview.
Next, it was submitted that it flew in the face of the probabilities to suggest that Mr Atchison, uniquely in Mr Thompson's case, departed from the habit of a lifetime and, to a person of whom Mr Atchison's knowledge came only from a relatively brief interview three days earlier, should offer a confident prediction of the turnover he would achieve at a new site rather than a cautious statement of average turnover actually achieved by franchisees. Other aspects of Mr Thompson's account of the McDonald's conversation were attacked as highly improbable: for instance, the statement, in answer to the question "Are there any risks?", "Our system has been proven over many years so I cannot foresee any problems". It was submitted that the statement about a franchisee's ability to draw up to $500 per week in "undeclared earnings" bore all the hallmarks of gratuitous invention: Mr Atchison denied making such a statement, no other franchisee or former franchisee claimed that such a statement had been made to him or her and a number of those called by the respondent denied that any such statement had been made to them.
There was one other particular matter on which senior counsel for the respondents strongly relied. I have set out earlier in these reasons Mr Thompson's letter to Mr Atchison of 6 March 1992. The significance of that letter is that it is the first written complaint by Mr Thompson. The letter makes no reference at all to the conversation at McDonald's: in relation to profitability, it refers only to the figures (those contained in the projected cashflow document) on the basis of which the accountant produced cashflows (Mr Thompson accepted in cross-examination that the reference in the letter to "anticipated profitability figures" was not a reference to the McDonald's conversation). It was submitted that the McDonald's conversation first achieved, in Mr Thompson's affidavit of 23 November 1994, a significance that it did not have in a complaint made by Mr Thompson much sooner after the event.
There are a number of aspects of the events about which I could not, on the evidence, make confident findings. One of those is the question whether Mr Atchison, as Mr Thompson confidently says, or Mr Thompson, as Mr Atchison says with rather less certainty, found the Engadine site. I accept, substantially for the reasons put to me by counsel for the respondents, that the McDonald's meeting could not have occurred on 15 April or, indeed, during that week. I think Mrs Thompson's evidence that she was telephoned, and the meeting took place, on her birthday, must be mistaken. An estate agent, Mr Cooley, gave evidence of a note he had made dated 15 April 1991 of Mr Thompson's name and address in relation to a franchised ice cream parlour, to the effect that he was "looking for Caldarra Court type location or Corner Shop". Mr Cooley accepted that that note might refer to a conversation which he had had with Mr Thompson; his affidavit evidence was that he was visited by Mr Atchison, who said that he was looking for a shop for selling ice cream; in cross-examination, however, he was less certain that his visitor had been Mr Atchison, but maintained that the visitor claimed to be a representative of an ice creamery and was wearing a suit. Mr Atchison claimed that he had no recollection of ever seeing Mr Cooley before he gave evidence, but would not positively rule out a visit to him, at some stage, either by himself or by Mr Ruckley. The evidence suggests that it would be by no means unprecedented for Mr Atchison, or ICA, to find a site and propose it to an intending franchisee. In short, the evidence leaves me in a state of uncertainty on that question.
Perhaps more importantly, I am unable to resolve that uncertainty on the basis that I would, in a case of conflict, accept the evidence of one of the participants in preference to that of the other. I have indicated why I would not accept Mr Thompson's evidence as to the timing of the meeting; in view of Mr Atchison's denial and the evidence of the other franchisees, I do not accept his evidence about "undeclared earnings"; and I accept the submission of counsel for the respondents that in a number of respects the terms of the conversation, as deposed to by Mr Thompson, are not at all probable. It does not follow, however, in my view that I should treat Mr Thompson as a generally unreliable witness to whose evidence that of Mr Atchison should, where they conflict, be preferred. As for the criticisms of Mr Atchison's evidence, the matters said to constitute evasion seem to me more appropriately to be placed in the second category to which the applicant's counsel referred, that of answers directed to promoting a point of view rather than to provide a precise answer to the question asked; undoubtedly, in the instances referred to, Mr Atchison displayed an anxiety to press a legal view, or a view as to the circumstances, rather than directly answer the question put: but I would not be prepared on that account to treat his evidence as unreliable. His evidence as to whether beachside or resort sites typically did better than others (to which I shall return in the next section of these reasons) falls, I think, into the same category; and the evidence about "impulse" trade and competition, it seems to me, illustrates principally that some of the views expressed in Mr Atchison's affidavit evidence as to the nature of the market for which ICA aims and which it attracts was expressed in a way which obviously demanded some qualification: particularly, perhaps, the affidavit evidence did not draw a distinction (the significance of which was demonstrated by expert evidence given at the trial) between ICA's marketing objectives and the types of sales which an ICA franchisee might expect, in practice, to make. I do not think, however, that it offers much help in coming to a decision as to whether Mr Atchison's version, or Mr Thompson's, of the relevant part of the McDonald's conversation should be accepted.
Mr Atchison's evidence in cross-examination about what exactly he was asked in relation to turnover was in my view, despite his denials, somewhat confused and confusing. Significantly, however, he maintained that, whatever he was asked, he did not depart, in answering, from his standard practice; and I do not think that the fact that Mr Atchison has recovered some memory of a conversation about turnover since the date of his affidavit, and that his recollection of what he was asked is by no means clear, should be given any particular weight in relation to the question which I have to decide.
The matter of the "research into the demographics of Engadine's population" is more difficult. Mr Atchison's affidavit evidence on that was not calculated to lead Mr Thompson to think that all that he was referring to was a statement of the number of people resident in the Engadine area: that, however, is what Mr Atchison's answers in cross-examination suggest he was really referring to. No doubt I should give some weight to the fact that Mr Atchison's statement was not directly put to Mr Thompson in cross-examination: even if I accept, however, that Mr Thompson did not, at any stage, show Mr Atchison a statement of population numbers in Engadine, I do not think I should conclude that Mr Atchison's evidence is simply an invention. It may be wrong; but it would not be the first occasion on which an initial faint (and possibly incorrect) recollection has firmed in a witness' mind into the degree of certainty reflected in Mr Atchison's evidence, given in cross-examination.
In short, given the matters to which I have referred, I am not prepared to accept counsel's submission that I should proceed on the simple basis that where there is a divergence between Mr Atchison's evidence and that of Mr Thompson, I should prefer Mr Thompson's evidence.
In the end, I think that the crucial factual question may be decided on the more certain basis of what, having regard to all the evidence, are the inherent probabilities. The evidence of the other franchisees clearly supports Mr Atchison's evidence that his standard practice was to speak in terms of a current average turnover rather than in terms of a prediction of an actual future turnover of a particular site. Mr Atchison has interviewed many potential franchisees: a number gave evidence. There is no evidence that Mr Atchison has ever made to anyone else a representation of the kind which Mr Thompson claims was made to him. Mr Atchison in 1991 was a franchisor of considerable experience. He was on the board of directors of the Franchisors' Association of Australia and New Zealand Limited from 1988 to 1994 and was the Chairman of that Association between 1991 and 1992. I think it is plain that, on the evidence, I should infer that Mr Atchison was well aware of the pitfalls inherent in dealings with potential franchisees. The evidence shows that he had a standard practice which involved the making of careful and limited statements about turnover. It is, I think, highly improbable that he would have departed, in the case of Mr Thompson, so radically from his practice. The evidence of the circumstances suggests no reason why he should thus have departed from his practice; and, on the other hand, the improbability of some of that which Mr Thompson asserts reinforces my conclusion that I should not find that Mr Atchison, in the conversation at McDonald's, made the representations as to turnover or profit pleaded in the further amended statement of claim or deposed to by Mr Thompson. If Mr Atchison made any representation as to turnover, it was a representation as to an average.
It is, in my view, unnecessary for me to go further than that. Counsel for the applicants submitted, if I were to find that the applicants had not established the particular representations pleaded, that it was open to me nevertheless to find as a fact that Mr Atchison made to Mr Thompson, at McDonald's, a representation similar to that deposed to by Mr Min: that is, that Mr Atchison had said that the average turnover of ICA franchises was $250,000 per annum; I could and should proceed to find that that representation constituted misleading or deceptive conduct which caused the loss which the applicants claim to have suffered. He based that submission on the decision of Merkel J in Miba Pty Limited v Nescor Industries Group Pty Limited (1996) 141 ALR 525, particularly at 542, 543 (a decision upheld by the Full Court on appeal, Davies, Tamberlin and Nicholson JJ, 17 December 1997, unreported). Certainly that case establishes the unsurprising proposition that, even if a particular representation is not pleaded, the court may nevertheless find that a respondent engaged in conduct which was misleading or deceptive on the footing that the representation is established by evidence, where it is clear that the case was conducted on the footing that the particular representation was in fact alleged and that the Court might make a finding on that basis. This case, however, is different. The representation on which counsel sought to rely in the alternative is not supported by the evidence of either party to the McDonald's meeting, but is contrary to the evidence of each of them. More particularly, Mr Thompson in cross-examination quite explicitly rejected any suggestion that Mr Atchison made any representation about an average turnover:
And I suggest to you that what he, in fact, said to you that an average business would do between $200,000 and $220,000 worth of business? An average?
Ice Creamery? - No, he told me 250,000.
Well, you say he said 250,000 in relation to this business, do not you? - That is right at Engadine.
Not an average business: this business? - This business.
Did you have any discussion with Mr Atchison about an average business?
- No.
None at all? - None at all.
Ever? - Never.
In my view it is not open to me to take, on that evidence, the alternative course submitted by counsel for the applicants.
The Suitability of the Engadine Site
(a) The representations
In the further amended statement of claim the applicants plead that on or about 15 April 1991, by arrangement made by telephone, Mr Atchison met with Mr Thompson at the McDonald's restaurant at Engadine; and that, at that meeting, Mr Atchison identified to Mr Thompson a site at 1/30-34 Station Street, Engadine, as the site he had in mind for the establishment of a Great Australian Ice Creamery and made a number of particular statements which are then specified. The respondents say, of course, that it was Mr Thompson who identified the site and brought it to the attention of Mr Atchison; they say that the meeting began near the site before continuing at McDonald's; and they deny that the particular representations, as specified, accurately record the conversation which took place during the McDonald's meeting. The respondents also say that, to the extent that any representations are admitted, they were made in the context of statements by Mr Atchison that if any Great Australian Ice Creamery franchise were to be a commercial success, it must be operated by trained franchisees committed to using the ICA system (as defined in the standard franchise agreement) and on the understanding that the Thompsons would operate the franchise "as a couple".
Subject to those matters, a number of the particular representations alleged by the applicants are admitted by the respondents. They are as follows:
(aa) that the first site was a suitable site for the establishment of a GAIC; .....
(b) that the applicants would have nothing to fear from the fact that the first site was away from Engadine's major pedestrian traffic;
(c) that the applicants would have nothing to fear from the fact that the first site was away from the main street of Engadine and the adjoining highway;
(d) that the fact that the first site was away from Engadine's major pedestrian traffic would not render it unsuitable for the franchise business because the nature of the business was to cater for "planned" purchases of ice-cream as distinct from "impulse" purchases of ice-cream;
(e) that it was not necessary for success of the franchise operation to have a large passing flow of pedestrian traffic;
(f) that once residents of Engadine were aware of the applicants having opened their shop, the residents would plan to visit the shop as a family;
(g) that it was not necessary for the success of the franchise operation for it to be located at a beach or even in the main shopping centre of the area where it was located; ...
(k) that the first respondent was the oldest established ice-cream parlour chain in Australia; ...
(o) that the first respondent was the leader in the ice-cream retailing industry ......;
(p) that there were reasonable grounds ..... to conclude that the First Site was a suitable one for [a GAIC franchise]; .....
A number of other particular representations alleged in the further amended statement of claim are denied by the respondents and it was not submitted to me that I should find that any of those representations were in fact made. The primary battleground between the parties was representation (aa), that the first site was a suitable site for the establishment of a GAIC. Counsel for the applicants made it clear, in answer to a question from me, that he did not abandon the other particular representations admitted by the respondents; but they were not the subject of any specific argument. For the most part they deal with characteristics of the site bearing on the question of its suitability in the light of the way ICA sought to place and promote its franchises in the market, so that, in a practical sense, they add little if anything to the primary representation that the site was suitable. Representations (k) and (o) are, no doubt, relevant to the weight which, on the applicants' case, Mr Thompson was entitled to place on statements by Mr Atchison; but Mr Atchison readily conceded, in evidence, that he would expect an intending franchisee to rely on representations which he made, including representations as to the suitability of a suggested site. That makes the admission of representation (p) virtually inevitable; that is a topic to which I shall return.
The "first site" was, of course, the site discussed at the McDonald's meeting, not the site at which the ice creamery actually opened, a few doors away on the same side of the same street. Nothing, however, turns on that; the site finally chosen was, after all, approved by ICA and it was not suggested that what was represented of the first site was not equally applicable to it.
(b) What did the representations convey?
Not a great deal of attention was given, during the trial, to the precise message which the representation that the site was suitable might be expected to convey to Mr Thompson. Perhaps on the applicants' case that did not greatly matter: their case was, in substance, that the characteristics of the site (and of Engadine generally) were such that any Great Australian Ice Creamery established there in 1991 was doomed to failure; if that were so, it could hardly be said, on any view of what "suitable" meant, that the site was suitable for the establishment of a Great Australian Ice Creamery. Ordinarily, of course, in considering the precise message conveyed to the hearer by what was said the starting point is the actual words used. That starting point, in this case, is somewhat elusive because of the conflicting versions of what was said and the impossibility, in the circumstances, of forming a confident conclusion as to the actual words used. But clearly Mr Atchison at the very least (taking the account given by him in affidavit evidence) said that, having regard to ICA's market, the location would be suitable and the site could be made to work. The appropriate conclusion is, I think, that the words used by Mr Atchison were such as to convey to Mr Thompson that the site was one at which suitable franchisees, diligently promoting and conducting their business in accordance with the ICA system, could expect to achieve results, over time, at least approximating the average of those achieved by other ICA franchisees.
There is a second aspect of what was conveyed to Mr Thompson. In Bateman v Slatyer (1987) 71 ALR 553 at 559, Burchett J held that a statement that a particular shop satisfied all the requirements for a particular kind of franchised store was a representation not of fact but of opinion. It was submitted on behalf of the respondents that Mr Atchison's statements to the effect that the site was a suitable one fell into the same category. Subject to what follows, in my view that submission is correct: Mr Atchison was not simply stating facts; he was expressing a conclusion involving matters of judgment (RAIA Insurance Brokers Ltd v FAI General Insurance Co. Ltd [1993] FCA 92; (1993) 41 FCR 164 at 166 per Davies J). What precisely is conveyed by such a statement will, no doubt, depend upon a number of factors including the words used, the context and circumstances in which they were used and any relevant expertise or experience of the maker of the statement. In some circumstances the expression of an opinion may convey no more than that the opinion is held by the person expressing it; commonly it will convey also that there is a basis for the opinion (Global Sportsman Pty Ltd v Mirror Newspapers Ltd [1984] FCA 180; (1984) 2 FCR 82 at 88; James v ANZ Banking Group Ltd (1986) 64 ALR 347 at 372). Where the statement is made by a person professing particular expertise in the field with which the statement is concerned, the expression of opinion may convey additionally that the opinion is held on rational grounds involving an application of the relevant expertise: Bateman v Slatyer at 559; RAIA Insurance Brokers at 174, 175. In Leisure Industries Pty Ltd v D.F. McCloy Pty Ltd (1991) 28 FCR 151 at 167, French J said, in relation to an opinion expressed on a matter of law:
Expert advice as to the law may convey the representation that it is based upon an underlying body of knowledge, experience or expertise possessed by the person proffering it or to which that person has access. The situations in which advice, expert or otherwise, as to the law may be misleading or deceptive for the purposes of s 52 will depend upon the context and circumstances in which it is proffered and the representations implied or expressed that accompany it.
Mr Thompson gave evidence that, both in the initial interview and at the McDonald's meeting, Mr Atchison expressed himself in terms which stressed, in a highly optimistic manner, the prospects of success and minimised the prospects of failure. The evidence as to Mr Atchison's practice, both his own evidence and that of other franchisees, suggests, and I accept, that he expressed himself in a considerably more measured way. Clearly, however, during the initial interview and at McDonald's, Mr Thompson was told that the Atchisons had had many years of experience of selling ice cream in a particular way, that they, and ICA, had developed a successful chain of ice cream parlours based on the same marketing principles which Mr and Mrs Atchison had developed and that very few of the ICA franchised parlours had failed. It is clear also - it emerges from the admitted representations and from Mr Atchison's account of the McDonald's conversation - that Mr Atchison conveyed to the Thompsons that he, and ICA, had developed a body of knowledge as to the attributes of a successful site for the establishment of a Great Australian Ice Creamery. And, according to Mr Atchison's own version of the McDonald's conversation, he discussed with Mr Thompson what he regarded as some of the relevant considerations.
In short, Mr Atchison was joint managing director of what he represented to be the leader in the ice cream retailing industry; and his representation as to the suitability of the site conveyed not merely that he believed the site to be suitable but that, based on his experience and on information available to him, there were reasonable grounds for that belief.
It is not suggested that Mr Atchison did not genuinely believe that the Engadine site was suitable. The applicants contend, however, that the opinion was wrong and that it was not based on reasonable grounds. The authorities to which I have referred establish that a person who states an opinion will not be found to have engaged in conduct which is misleading or deceptive merely because the opinion is wrong; but if Mr Atchison did not have reasonable grounds, based on his experience and on information available to him, for the opinion which he expressed, then the representation which I have found that he made, was false and ICA's conduct, in making the representation through the agency of Mr Atchison, was misleading or deceptive.
(c) Engadine and the site
It is convenient to start by referring to a number of uncontroversial aspects of the Engadine area and of the site chosen for the ice creamery. Engadine is one of the most southerly suburbs of Sydney; the Princes Highway and the railway pass Engadine on the east. The neighbouring suburb of Heathcote is the suburb most distant from central Sydney on that route. The Royal National Park adjoins the Princes Highway on the east as far north as the outskirts of Sutherland; the Heathcote National Park adjoins Heathcote and Engadine on the west and the Woronora River runs north from the Heathcote National Park. Engadine is thus, as it was described in the evidence, roughly at the centre of a fan-shaped region bounded, on the east and west, by national parks and the Woronora River. It includes, as well as Engadine and Heathcote, the suburbs of Yarrawarrah, Loftus and Woronora Heights. That area in 1991 had a population of about 35,000. The area had an above average socio-economic profile: taxable income both per person and per household was above average; unemployment was significantly below average; the number of employed persons per dwelling was relatively high at 1.71. The number of homes owned by those who lived in them also was relatively high; and more than one third of the total population was aged less than 19 years.
At Miranda, roughly twelve kilometres from Engadine, there was a large retail and entertainment complex known as Miranda Fair. At Miranda Fair, in addition to a wide variety of retail shops, there was a substantial cinema complex; it incorporated also a number of "fast food" outlets, including ice cream outlets. Miranda Fair expanded significantly after 1991.
The main shopping area of Engadine, including two substantial supermarkets, was some little distance from the site. But close to the site were a library, a gymnasium, a video shop, a bicycle shop and restaurants, including a large Chinese restaurant on the upper floor of the building containing the site. The McDonald's restaurant in which Mr Atchison and Mr Thompson had their conversation continued in operation at the time of the trial: there was an entrance to it, though not the main entrance, a short distance from the site on the opposite side of Station Street. Pedestrians reached the Engadine railway station through a subway from Station Street, not far from the site; there was also a bus stop nearby. One of the witnesses commented on waves of pedestrians passing the ice creamery shortly after the arrival of trains. In 1991 there were a number of well known fast food outlets in Engadine in addition to McDonald's. They included a Pizza Hut. They also included a Wendy's ice cream shop; that shop continued in business at the time of the trial.
(d) The applicants' case
The applicants' case on the representation that the site was suitable was based largely on the evidence of two experts called by the applicants: that evidence was relied on for the proposition that the site could not succeed because the population of the surrounding area was insufficient to sustain it, because there was no sufficient "draw card" in the vicinity of the site and because data from Streets, available to ICA, indicated that suburban sites typically, at the relevant time, did not perform nearly as well as sites situated either close to a beach or in a country town. The applicants contended also that, in evaluating the Engadine site, ICA did not apply principles or consider factors which its own documentation singled out as applicable and relevant; and they submitted that what actually happened at the Engadine ice creamery demonstrated that on no view could the site reasonably have been regarded as suitable.
It was not - and could hardly have been - in dispute that an important factor in considering a potential site for an ice creamery is the size of the population of the area surrounding it. Mr Atchison accepted that proposition. He gave evidence that he considered that an ice creamery at Engadine would attract predominantly planned, rather than impulse, purchases. His evidence continued:
If the predominant market is going to come from planned purchases then the size of the population in the market is very important is it not? - It plays a very key element, yes.
Because it is from within that population that the people will be planning or making plans to visit the ice creamery? - That is correct.
The first two items to be completed in ICA's site evaluation form are "population of area" and "local demographics". Mr Stephen Kelly, who gave expert evidence for the respondents, gave the following answers in cross-examination:
It is your view, then, that one would have to have considered the size of the population in Engadine and have compared that against the population range of numbers that one ought to have established so as to determine whether or not it was worth going on to the next step in the investigation of whether Engadine was an appropriate site, is that correct? - Yes.
And if one looked at the population numbers and the population was less than the range that one had developed, then one would probably go no further or would certainly investigate many other things before going further? - I'd say that would be correct, sir.
The two expert witnesses called by the applicants were Mr Nick Nicholas, a geo-demographer, and Mr Ian Booth, a specialist consultant to the retail industry. The evidence of Mr Nicholas can be summarised as follows. He conducted an exit study of all customers of the Engadine ice creamery during the week beginning on 14 October 1994. The outcome of that study was that about 74 per cent of all those who made purchases during that week lived within five kilometres of the site. That was consistent with previous analyses of shopping centres, supermarkets, bank branches and other retail outlets which indicated that ordinarily between 75 per cent and 80 per cent of a retail outlet's sales were to persons living within five kilometres of the outlet. The population of the area within five kilometres of the Engadine site was about 35,000. The Australian Bureau of Statistics conducted surveys on household expenditure patterns; in April 1991, the 1988/89 survey was the most recently conducted. The survey identified, among other things, sales per week of iced confectionery to households over a range of levels of household income. An application of the results of the survey to the population of Engadine suggested an annual sales potential for Engadine, in 1990/91, of $1,074,907.98 for all iced confectionery products. Mr Nicholas then referred to ice cream manufacturers' statistics which suggested, on Mr Nicholas' analysis, that 10 per cent of total annual sales potential should be attributed to "parlour" retail ice cream: thus, for Engadine, the annual sales potential for "parlour" sold ice cream was about $107,491.
Mr Nicholas then performed an analysis, the object of which was to test an hypothesis that the "shape of the trading area caused by natural boundary means that there is a limit to a large enough population base". In performing the analysis Mr Nicholas assumed average annual sales by a Great Australian Ice Creamery of $250,000 and that 75 per cent of the sales of a Great Australian Ice Creamery would be made to those living within five kilometres of it. Mr Nicholas took sixteen city and suburban ice creamery sites and calculated the aggregate population and the aggregate number of dwellings within five kilometres of each of them: total population thus arrived at was 1,483,310 and total dwellings were 624,690. Assuming total annual sales of $4,000,000 (that is, $250,000 per ice creamery), Mr Nicholas arrived at annual sales per capita of $2.70 and annual sales per dwelling of $6.40. Applying those figures to the population within five kilometres of the Engadine site, Mr Nicholas arrived at an estimate of an annual sales potential of $96,160. Applying the average sales per dwelling to the number of dwellings within five kilometres of the Engadine site, he arrived at $68,492. Mr Nicholas concluded that the analysis thus performed suggested that the minimum population required to produce a turnover of $250,000, for a city site, was 92,600 living within five kilometres of the site; the population of the Engadine area was only 38 per cent of that minimum. Mr Nicholas regarded the results of his analysis as substantially confirming the results at which he had arrived by applying the ABS figures and that, consequently, the target population being too small, there was no reasonable basis for an assertion that the Engadine ice creamery was situated in a suitable area for an ice cream parlour of its kind.
Mr Nicholas performed a similar analysis in relation to the Brighton-Le-Sands area and arrived at potential annual sales of $378,248. Mr Nicholas also expressed the view that high pedestrian traffic enhances turnover by taking full advantage of potential impulse purchases and that "the issue of pedestrian traffic", though secondary, was a contributing factor to Engadine's low sales turnover, and he commented that the proximity to McDonald's was a disadvantage (in that McDonald's competed for family leisure time) and also that the site suffered through not being readily visible from McDonald's except from a limited number of places in the McDonald's car park.
Mr Booth prepared two reports. First, he extracted from documents supplied by Streets Ice Cream what was described as the gross sale value of ice cream supplied by it to Great Australian Ice Creameries from 1987 to 1995. Mr Booth classified the New South Wales outlets (and also those in the Australian Capital Territory and at Wodonga) into three categories, which he described as "beachside", "country town (inland)" and "Sydney urban or ACT (not beachside)". In each year the average for sites classified as beachside was substantially greater than the averages for country town and urban sites; in 1990 sales to outlets classified as beachside significantly exceeded the average for those classified as country town, which in turn significantly exceeded the average for those classified as urban. The disparity between the country town and urban sites was, on Mr Booth's figures, strikingly apparent for the first time only in 1990 but continued in later years. Obviously, the latest full year figures available to Mr Atchison in April 1991 were those for 1990, though he may have had figures for the early months of 1991. Mr Booth assumed, on the basis of Mr Atchison's affidavit evidence, that mark-ups on ice creams sold were substantially common to all franchises and that the proportion of ice cream to other products sold was substantially the same throughout the group. On that footing he concluded that in 1990 and in 1991 sites which he classified as beachside traded at about 18-20 per cent above the average for NSW whereas the urban sites traded at levels 25-38 per cent below the NSW average. Outlets in country towns traded at about the average level. ICA had the Streets gross sale value figures but had not adopted the practice of classifying in the way Mr Booth did. Mr Booth, however, drew from information available to ICA the following conclusion:
I conclude that there can be no doubt whatsoever that the success or otherwise of a Great Australian Ice Creamery outlet is very much influenced by the type of Region/Catchment in which it is located. In particular, if the sites are located close to a Beachside and/or tourist/high visitor type of location, they have a vastly greater likelihood of success. By start contrast, the dramatically poorer performance in all of the urban locations clearly indicates that these sites are not likely to perform at any better than about 45-65% of the average of all appropriately sited Great Australian Ice Creameries.
It is impossible then to accept that a feasibility for an Ice Cream outlet can be undertaken by assuming that all outlets will have an average turnover. While not representing a comprehensive site evaluation study, the results of this very simple exercise, which could be undertaken by any person who had access to the Streets data, clearly and unequivocably shows that urban locations, i.e., non-beach, non-country town have all performed more poorly than the average and vastly lower than Beachside locations.
Mr Booth also extracted data from the Telecom Business Finder for 1992/93 listing "all locations classified as Ice Cream Retail". He discovered that 832 "specialist ice cream parlours" were listed; if one divided that number into the population of Australia, the result was 21,200 persons per ice cream parlour. If the Sydney figures were used, the figure was about 25,100 per ice cream parlour. On that basis, if the Sutherland local government area were to reflect the average, there would be eight parlours in that area; in fact there were ten. Mr Booth emphasised that this was a crude and inadequate approach but it provided, he said, a first guide to the market place requirements and could be undertaken by anyone. He concluded:
On this basis, the siting of a leisure retailing ice cream parlour in Engadine would look tenuous at best. When combined with the GSV Sales Analysis conducted by [Mr Booth] and the Overview Demographic Analysis conducted by [Mr Nicholas], it should be clear that such an egocentric [sic] location was not appropriate for an ice cream parlour. The only way that an ice cream parlour could be successful at such a location would be if there were other major draw card attractions, such as a major Cinema Complex or other leisure activities adjacent to the Engadine GAIC site. No such facility exists or existed.
The "drawcard" aspect of this part of Mr Booth's report loomed large in his evidence given in cross-examination. The effect of his evidence was that, in his opinion, a Great Australian Ice Creamery could not succeed in an area such as the Engadine shopping centre unless there were a substantial "drawcard", such as, perhaps, a twin cinema, which would bring to the area substantial numbers of people at leisure. This was because only substantial passing pedestrian traffic can generate substantial impulse trade and also because, in the absence of national advertising (the evidence was that whereas, for example, McDonald's engages in heavy national advertising, the Great Australian Ice Creameries advertise only locally), only by exposure to significant passing traffic could sufficient repeat or planned sales be attracted. Mr Booth referred to the establishment and expansion of Miranda Fair (and other centres similar to it) at which outlets such as ice cream parlours were placed in close proximity both to shops and to cinemas. Mr Booth's opinion, vigorously expressed, was that the railway station, the bus stop, the video shop and the other neighbours to which I have referred did not, between them, generate sufficient passing leisure traffic.
Mr Booth also criticised, at times with a degree of trenchancy bordering on the intemperate, evidence given by Mr Kelly and Mr Atchison's evidence as to ICA's market. It is convenient to return to those matters briefly later in these reasons. As will appear, it is not necessary for me to deal with them in detail.
The principal alleged failures of ICA to apply its own site selection principles related to the question of population. The site evaluation report completed by Mr Ruckley left "population of area" uncompleted and described "local demographics" simply as "families". In affidavit evidence, Mr Ruckley described instructions Mr Atchison had given him as to the matters to take into account in selecting or evaluating a site. Among other things, Mr Ruckley said:
He also instructed me to visit local businesses and ask the owners whether trade was good or not. I would also contact the local council in the area to obtain the latest census figures for the local area and population projections for the following year, and also any tourism figures that were available.
In cross-examination Mr Ruckley gave the following answers:
And then, in the next sentence in [the paragraph of Mr Ruckley's affidavit which I have quoted] it says you could also contact the council to obtain census figures and so on. I assume you did not do that in relation to this site? - I don't recall that I have in this instance, no.
I mean, if you had done that, I take it that you would have completed on the first page the population of the area where it appears? - Right.
So, from the fact that that is not completed, can we take it that you had not made enquiries from the council about census figures? - Certainly from not having it completed there would be no formal enquiries, I may have phoned them and asked, but I haven't written anything down. ...
.......If you had had some information given to you about the population of the area, then you would have recorded on that part of the report, would you have not? - That would be the obvious spot to put it.
Mr Atchison gave the following evidence:
Why is not the population of the area filled in in that report if in fact you had been told the population numbers of Engadine? - Because Mr Ruckley failed to complete the form properly and because I had already looked at the figures presumably but as I say I had no recollection of when but I do recall I personally verified the population of the area and Mr Ruckley was in error in not putting that in.
Mr Atchison, this form ... shows quite clearly that the population of the area is considered by you to be of the utmost significance in evaluating a site, does it not? - Yes.
It is desirable, in order to give a more complete picture of Mr Atchison's attitude and opinion, to set out the three following questions and answers:
And there had been no enquiry made by you and you had not been given any information by anybody else as to the population of the Engadine area? - No, Mr Harris, and may I also point out that I believe that this site evaluation is of the second site that we looked at and I believe that by the time that we were filling out an evaluation of the second site we had already decided that Engadine was an appropriate area.
And the extent of your so-called demographic study of the Engadine site was to note that there was a McDonald's nearby and to assume that because McDonald's had a site they must have done their homework and therefore an Ice Creamery could be established there as well?- No.
Now what is the population that you consider is necessary as a minimum to support a suburban ice creamery? - Roughly 20,000 but that is, I have to add that it is an arbitrary figure because different suburbs share different
characteristics, different suburbs have different traffic flows, different suburbs have different catchment areas, and I think that 20,000 is a number which I use for country towns unless there is a tourism element and 20,000 would be the number which I would have used at the time for Engadine being as I said in my testimony earlier sharing many of the characteristics of a country town.
The applicants also contended that there were inconsistencies in ICA's approach to site selection. Both Mr Atchison and Mr Ruckley gave evidence that in their view, while the characteristics of the town or locality were of great importance, the choice of a particular site within the town or locality was less so because the market at which a Great Australian Ice Creamery was aimed was the "planned purchase" rather than the "impulse" market: on the other hand, an ICA document which, according to Mr Atchison set out ICA's attitude to site selection in 1991, included the following passage:
Getting the town or suburb right is vital; where you locate within the town or suburb is less vital. However, there are guidelines to be followed. The key to locating a site for an Ice Creamery lies in remembering that you want to be located where people are WHEN THEY WANT AN ICE CREAM. The busiest corner in Sydney may be good for selling newspapers, but people may be too busy to enjoy having an ice cream. The same holds true in country towns and in resort areas. The heart of the shopping district may be good for retailers, but not necessarily for ice cream.
The document also gave the following advice:
Our experience is that close to 60 percent of our sales take place on weekends and during the evening. Find out where the people are at this time; remember that buying an ice cream is a happy experience. You want to be where people spend their leisure time. If you are looking at the main street of a town and one end is busy with shoppers during the day, and the other end is filled with restaurants and take-away food shops, quiet during the day but busy at night and on weekends, that is where you should be located. Remember, the best place to locate a restaurant is between two other restaurants.
Finally, the applicants contended that subsequent history demonstrated the soundness of their case. Not only did the Thompsons fail, but - unlike other sites which had encountered difficulties but had been purchased and revived by new owners - the Engadine site had proved impossible either to sell or to lease.
(e) The respondents' case
Mr Atchison, Mr Ruckley and Mr Hester (who succeeded Mr Ruckley at ICA) gave evidence that they continued to regard the Engadine site as a suitable one for the establishment of a Great Australian Ice Creamery. There is no doubt on the evidence that both Mr Atchison and Mr Ruckley had spent some time considering sites within the Sutherland local government area. Mr Atchison, particularly, gave evidence of numerous visits which he had made to Engadine, commencing well before his dealings with Mr Thompson. He gave evidence of the reasons why he thought Engadine was suitable. In his affidavit he said:
Based on my many years of experience in ice cream parlours and ice cream parlour franchising I thought that the site was suitable. I thought that the presence of McDonald's was relevant to whether Engadine itself was suitable, because it demonstrated to me that Engadine had the population to justify McDonald's investment there. McDonald's investment would be many times larger than an ICA franchise. The variety of other shops, the feel of the area and the like were all correct for a site.
Mr Atchison expanded on this in re-examination:
You said to his Honour this morning that you had been visiting Engadine either because of your family rest or food stops on the way up the coast or because of reviews of the southern suburbs for potential sites. I think you said to his Honour that, as a result of those matters, you had formed a view about Engadine as a suitable site - ? - Yes.
....Prior to talking to Mr Thompson? - Yes.
What was it that you had observed about Engadine that had led you to the view that it was a suitable site for an ice creamery? - I think it's a number of factors to which I have already referred. One is that of it is self-contained which gives you the opportunity to develop a market where they identify the ice creamery as being the Engadine ice creamery, number one. Number two, my observation of Engadine over the years was that there were very, very rarely any empty retail premises at all which, to me, is a very good indicator of a healthy business community and a healthy retail community. The fact that as I said earlier, there was civic pride there; the main streets were clean, well-organised; cars were washed; there were a substantial number of young families in evidence.
On the question of population, Mr Atchison gave evidence that before he obtained the information which he claimed to have been given by Mr Thompson, he had a belief about the approximate population of Engadine:
What population numbers did you understand were in Engadine before Mr Thompson showed you the information he had obtained? - My suspicion at the time, my belief at the time, was Engadine had a population of roughly 25,000.
It will be recalled that elsewhere Mr Atchison gave evidence that he regarded approximately 20,000 as a minimum population figure for a location such as Engadine.
Thus, Mr Atchison had a view both about the minimum necessary population and the actual population; he took that, and other relevant matters, into account. Additionally, the site evaluation report showed that ICA had taken a number of other relevant matters into account, relating particularly to the location of the site within Engadine.
Counsel for the respondents made a number of comments on the evidence of Mr Nicholas. First, the respondents attacked the conclusions which he drew from his exit survey. Mr Nicholas conceded that the sales by the Engadine Ice Creamery during the week of the survey were mostly "low-value" sales, typical of the kind of sales one might expect in a milk bar: that, it was contended, could not be regarded as typical of the trading of a Great Australian Ice Creamery, whose object was to attract families to make purchases of higher value (a sit-down "ice cream meal", rather than the sale of a piece of confectionery or a single cone). Thus, it was said, the conclusion that 75 per cent of sales of a Great Australian Ice Creamery typically come from an area having a radius of 5 kilometres from it must be regarded as invalid. Secondly, a number of factors (at least some of which Mr Nicholas conceded) indicated, it was said, that the conclusions based on the household expenditure survey figures were invalid: for instance, if the conclusions were right, the Engadine Ice Creamery had secured the whole of the "parlour" market in Engadine in its first year of trading despite the presence of the Wendy's outlet; the figures did not allow for the high (about 400 per cent) mark up applied to ice cream products in a Great Australian Ice Creamery; additionally, whereas the household expenditure figures suggested a per capita expenditure of $1.70, the analysis of the sixteen Great Australian Ice Creameries suggested a per capita figure of $2.70, so that there was a real possibility that the market estimate based on the household expenditure survey figures was significantly too low. There were also a number of matters about which Mr Nicholas, in cross-examination, expressed substantial agreement with Mr Atchison: for example, the concentration in Engadine of young families with a higher than average discretionary income, that choosing a site involved a "trade off" between the visibility of a particular site and the rent that a franchisee was able or prepared to pay and that the Engadine Ice Creamery was situated in a section of Engadine where there was foot traffic both during the day and at night: it was not a section of town likely in effect to die at 5pm.
Mr Booth's evidence was criticised also. His "drawcard" proposition was said not to be supported by the evidence: for example, among the Great Australian Ice Creameries which had failed there were two, in Bourke Street, Melbourne and Rundell Street, Adelaide, both in very high traffic areas; the substantial problem there was that the level of rent was too great even with relatively high turnover; there was also evidence that a number of a competitor's ice cream parlours close to cinema complexes had closed. His conclusions based upon the classification of sites into "beachside", "country town" and "urban" was criticised on the footing that the statistical information was incomplete (both as to its geographic spread - New South Wales only - and because of missing and apparently anomalous figures for certain years at certain outlets); it was said also that the categorisation by itself provided no useful information, because it failed to take account of other factors leading to higher turnover, particularly the length of time during which an ice creamery has operated and the experience and ability of the franchisee. Mr Atchison's evidence was that the "beachside" outlets included many of those operated by the most experienced and able ICA franchisees.
Mr Stephen Kelly, who gave expert evidence for the respondents, is a consultant with substantial experience in the hospitality industry, particularly in relation to the suitability of sites for food retail shops, restaurants and hotels. He proceeded on the basis of an assumption that ICA had "a population range of numbers" which it took into account when considering whether a Great Australian Ice Creamery in a particular locality would be viable. I have already referred to some of the evidence he gave on this aspect of the matter. Mr Kelly observed that, in 1991, Engadine "had a base population greater than the base populations of a number of other successful GAIC stores". From demographic data, he concluded that the population of the Engadine area was growing; he regarded as relevant a number of matters taken into account by Mr Atchison, including the level of discretionary income and employment statistics. He concluded, on the footing of the demographics statistics, that "it was both reasonable and justifiable in 1991 to state that Engadine was a favourable site for the establishment of a Great Australian Ice Creamery". He substantially agreed with the ICA view of the actual site: he drew attention to the library, video shop, McDonald's and bus stop; he considered that, through its location away from the "pure" retail area, it would not be adversely affected by any limitation on trading hours and trading days. He concluded that the site was suitable. He proceeded to consider in some detail Mr Atchison's view of the Great Australian Ice Creamery concept and the target market, and the ICA site selection criteria. Having regard to those, he confirmed his conclusion that it was reasonable to regard the site as suitable. The confirmation was, however, subject, again, to this comment:
Whilst it appears not to have been documented anywhere amongst the affidavits and supporting documents with which we have been provided, we would presume that there is some broad range of population numbers at which Atchison considers the Great Australian Ice Creamery to become viable. This minimum population count may not be entirely critical within the Sydney Metropolitan area, however we would assume that it could be an early and critical factor in analysing a given site's potential.
The respondents relied also on a number of other matters revealed by the evidence. First, there was the fact that the population and demographics of Engadine were apparently sufficient to support, throughout the relevant period, not only the McDonald's restaurant but also the Wendy's outlet and, at various times not made entirely clear in the evidence, other restaurants and "fast food" establishments. They relied also, with some force, on a number of aspects of the way in which the Engadine ice creamery traded. First, it was said that the financial statements of the business for the year ended 30 June 1992 showed total sales of $155,945 and that the performance of the shop during the first two months was very satisfactory; then it was said (and truly on the evidence) that in subsequent years sales had markedly declined, by contrast to the performance of almost all other Great Australian Ice Creameries; thirdly, from at least January 1992, by introducing video machines and products which were not approved, Mr Thompson operated the ice creamery contrary to the ICA system; there was evidence to the effect that the appearance of the shop was cluttered and that it looked more like a milk bar than a Great Australian Ice Creamery; it was said that video machines attracted an "undesirable element" and put off the very people (families) whose custom an ice creamery sought to attract; other matters were pointed to, such as Mr Thompson's attendance at only two meetings during the life of the franchise, Mrs Thompson's relatively slight involvement in the business and evidence said to suggest that Mr Thompson set himself up as a "rebel" within the ICA system and as the focus of a potential "rebel" group. Thus, it was said, though the respondents could not give a precise reason for the failure of the shop, it failed for a combination of reasons which had nothing to do with the suitability of the site. What Mr Nicholas' exit survey demonstrated, however, was that the ice creamery was generating substantial impulse trade: what it was not doing was converting that into the repeat business which, on the evidence of other franchisees, was the foundation of an ice creamery's success.
(f) Discussion
The critical issue, in my view, is that relating to population numbers. Mr Nicholas expressed the view, based on the analyses he made, that the population of the area surrounding Engadine was insufficient. Mr Booth, though he did not fully accept Mr Nicholas' methods in performing his analyses, also took the view that, at least in the absence of a "major drawcard", the population of the area surrounding Engadine was too small to justify the establishment of an ice creamery. Mr Kelly took the view that an important factor to consider, in selecting a site, was the local population: and he would expect that to be assessed against an established "range". Mr Atchison accepted that population, numbers as well as characteristics, was an important consideration.
I have mentioned the respondents' criticisms of Mr Nicholas' survey and analysis. One was that the survey could not be treated as producing a result typical of Great Australian Ice Creameries, because of the eccentric pattern of trade at Engadine, the vast majority of sales being, apparently, impulse sales. It was said, correctly, that both the evidence of Mr Atchison and that of other franchisees who had dealt with the topic was to the effect that planned purchases were not merely the aim of a Great Australian Ice Creamery but in fact constituted the majority of the business of a successful ice creamery. Mr Nicholas had found support for his 75 per cent analysis in the circumstance that similar results had been obtained in surveys of a number of retail shops; but, it was said, a Great Australian Ice Creamery is not a retail shop; it is a destination in itself for those who plan to make a purchase. For the applicants it was said that, if this were so, it would have been very easy for the respondents to establish that the 75 per cent rule is not applicable to Great Australian Ice Creameries by conducting exit surveys at some typical sites; to that, the respondents replied that the suggestion was not to the point, given the eccentricity of Engadine's behaviour; and, it was said, it was simply not conceivable that everything Mr Atchison said about planned purchases, the evidence of other franchisees and evidence of the proceedings of meetings of franchisees, at which matters relevant to attracting planned purchases were discussed, were entirely divorced from reality, and thus equally inconceivable that planned purchases did not in fact account for a large proportion of a typical ice creamery's business.
To a considerable extent, in my view, that controversy misses the point. All witnesses who gave evidence on the topic agreed that population numbers were important in site selection. "Population numbers", in that context, has meaning only in relation to an area, particularly an area within which an ice creamery is situated or from which it can expect to draw custom. But no witness, other than Mr Nicholas, suggested how, or applying what principles, one ascertained what the relevant area was. ICA's site evaluation form required a population number to be completed, but the form itself gave no indication of how one ascertained the area the population of which was to be inserted. Mr Atchison gave no evidence as to that, although in his first affidavit he replied to some of the opinions expressed by Mr Nicholas (among other things, he contested the relevance of the five kilometre radius). His evidence as to the actual minimum population he had in mind to make Engadine viable (20,000) was given in cross-examination and with no elaboration as to the area within which he would require that minimum population to be found or as to why he thought that 20,000 would be sufficient. There was some evidence as to successful ice creameries in places with a smaller "base" population than Engadine's, but none of those were city or suburban sites and each was either a tourist destination or a place (for example Cooma) through which numerous tourists passed en route to other destinations. No evidence was given as to any other city or suburban site comparable with Engadine, surrounded by a population numerically similar population to that of Engadine, having characteristics similar to those of Engadine's population. On the other hand, whatever controversy there may have been about the methods and results of Mr Nicholas' analysis, there was none about his calculation of the average population of the areas within a radius of five kilometres of the sixteen sites which he selected: the population of Engadine was about one third of that average.
Of course, mere numbers, the evidence makes clear, are no certain guide and other matters need to be taken into account. Mr Booth referred to some such matters, for example, the seasonal influx of population into tourist areas, the daily workforce outflow in "dormitory" suburbs and the presence or absence of competing businesses. There was substantial agreement among the experts supporting the relevance of particular demographic considerations which Mr Atchison took into account. And Mr Atchison himself gave the following evidence:
Mr Atchison, I take it that you say that a population of 35,000 is a sufficient population to support a Great Australian Ice Cream franchise? - No.
It is inadequate, is it? - Stated the way - there are a large number of factors which have to be taken into account when considering a suitable location for one of our outlets. The population, as I have stated, is one of those; the demographics is another. The nature of the suburban area or country town is another. I have never said that 35,000 by itself would be an adequate number. There are locations ... which would have a population of 100,000 which I might consider unsuitable. I have said that in terms of Engadine I said that it had some of the elements of a country town and I have said that I believe that the population there was adequate. I reject any notion that I am going to say that 35,000 is a magic number because it is not.
Well, did you not [have] a base population which you considered was necessary to support a franchise? - In taking into account whether an area is suitable or not I look at, as I said, many characteristics. Whether there is an element of tourism, whether there is - the age of the population. I take many things into consideration.
Do you have a base number of young families that you feel should be present to be able to support a franchise? - I am unable to comment on simply taking numbers into account. That is not, there is no way that I can simply take numbers into account and say that that is suitable or not.
The applicants, of course, bear the burden of demonstrating that Mr Atchison's representations were misleading or deceptive. Disregarding evidence as to what occurred from January 1992 (having regard to the departures from the ICA system), the evidence upon which they rely may be summarised as follows. Mr Thompson, between the opening of the ice creamery in July and the end of December 1991, diligently followed the system. He was an enthusiastic and affable operator (no-one suggested that his attitude to customers, and his dealings with them, were less than satisfactory); he engaged (at least in the early stages) in a good deal of promotional and community activity designed to promote awareness of the ice creamery in the surrounding area and to attract custom; but, after two months of satisfactory trading, sales dropped substantially in October, a month in which, on Mr Atchison's evidence - and according to the cashflow document - they could be expected to increase very substantially; they then decreased further in November and again in December, a month in which again, on the ICA evidence, a substantial increase might have been expected. Secondly, the applicants rely on the expert evidence, which is unanimous as to the proposition that, however it is ascertained and whatever other factors may be relevant, no site will be successful unless there is a sufficient surrounding population. They then rely on Mr Nicholas' evidence to the extent that it shows that the population surrounding Engadine was only about one third of the average population surrounding the sixteen selected sites and on Mr Booth's evidence that he agreed with the "most important" finding of Mr Nicholas, that "there is a substantially lower population available in the Catchment for the Engadine site relative to the other sites". In the light of those matters, the applicants say, I should draw inferences adverse to the respondents from the absence of any expert demographic evidence called by them and from the absence of any other evidence from the respondents (other than the evidence of Mr Atchison in cross-examination, to which I have referred) about any "population range of numbers" which they had established or any basis for such a range.
To be weighed against that principally is the evidence of Mr Atchison. It is supported by Mr Ruckley and Mr Hester, but plainly, within ICA, Mr Atchison's experience and views were very influential and the views of its employees reflected those of Mr Atchison. Mr Atchison's views are not to be lightly dismissed. He was, in 1991, very experienced in the selection of sites and the establishment of ice creameries and he had been very successful. There was no dispute that the failure rate of ICA franchises, at the time Mr Atchison spoke to Mr Thompson, was very low. Mr Booth had some harsh things to say in his evidence about what he regarded as confusion between Mr Atchison's marketing objectives and the actual market, about Mr Atchison's stated views about the place of impulse sales in the marketing of ice cream through ice creameries and about some of the criteria used by ICA for site selection. It is unnecessary, I think, to discuss the criticisms in detail: my consideration of the evidence leads me to the firm conclusion that much of it is based on a misreading of what Mr Atchison had to say; and on a number of matters relevant to site selection Mr Atchison had substantial support in the expert evidence. And in 1991, to a considerable extent, the results spoke for themselves. It is important to recognise the potentially distorting effect of hindsight in a matter of this kind.
There is also to be taken into account the evidence of Mr Kelly which, on his assumption as to population numbers, supported ICA's site selection (or approval). Additionally, senior counsel for the respondents pointed out that both McDonald's and Wendy's had continued in operation in Engadine throughout the relevant period and that other establishments, such as Pizza Hut, had operated there despite what was said to be a "restricted catchment". All that the evidence shows about other businesses in Engadine, however, including McDonald's and Wendy's, is that they operated there and, in the case of McDonald's, the fact (which perhaps hardly needs evidence) that it is a nationally advertised and virtually universally recognised brand. I do not think I can draw any conclusion from the evidence about those businesses, any more than I think I can accept the invitation of senior counsel to conclude that, because Mr Nicholas' exit survey indicated substantial impulse sales, there were sufficient planned sales to be made by a properly conducted ice creamery.
In the end, the difficulty is the one to which I have already referred. It is agreed that there must be a sufficient surrounding population to justify the selection of a site. There is evidence that the surrounding population of the Engadine site was substantially smaller than that of comparable sites. There is expert evidence that, given that circumstance and the configuration of the locality and the characteristics of the site, the population of the Engadine area was insufficient to justify the selection of Engadine as a location for a Great Australian Ice Creamery. Mr Kelly's evidence was that he assumed that ICA had in mind a "population range of numbers"; if a client who had not done that asked him for an assessment of the site, he would develop such a range. But there is no evidence that ICA had done so or as to any basis on which, in Mr Atchison's view, the population of the Engadine area was sufficient, or that 20,000, the figure he mentioned in cross-examination, was in fact sufficient or was justified by any particular process of reasoning.
That being the state of the evidence, it is not sufficient, I think, to point to other, undoubtedly relevant, matters which were taken into account: if, as obviously must be so, a sufficient number of potential customers is essential, then a selection process which provides no rational basis to ascertain what number is sufficient may well result in the selection of a site which is not "suitable". In this case, on the basis of population numbers, experts called by the applicants gave the opinion, on what appears (at least as to the comparison with the sixteen sites) to be a substantial basis, that the population was insufficient and that the site was therefore unsuitable. The first five months of trading at the site, while perhaps not disastrous, showed at least disturbing tendencies in months which might have been expected to produce particularly substantial sales. Mr Atchison's evidence as to the sufficiency of numbers at Engadine may fairly, in my view, be characterised as assertion based upon a "feel" for the area derived from his visits to it and his experience generally. In that state of the evidence, in my view I must find on the balance of probabilities, and I do, that the population numbers in the Engadine area were not sufficient to justify a statement that the site in Engadine was suitable, in the sense discussed earlier in these reasons. Given the lack of evidence as to any basis upon which ICA assessed, for a site of any kind, the necessary minimum population level, it follows equally, in my opinion, that I must find that in that respect the representation made by Mr Atchison lacked a rational basis; and again, on the balance of probabilities, I so find. It follows that the applicants have established their claim that, in representing that the Engadine site was suitable for the establishment of a Great Australian Ice Creamery, ICA infringed s 52 of the Trade Practices Act.
It is unnecessary, given that conclusion, to consider matters, relied on particularly by Mr Booth, relating to the particular site. It is perhaps appropriate to say, however, that, apart from the question of population numbers, I would not be inclined to find that a rational basis for the selection (or approval) of the Engadine site was lacking: why that is so will, I think, be sufficiently apparent from my comments on the matters which ICA in fact took into account.
Reliance
Mr Thompson gave evidence that, in entering into the lease and the franchise agreement, the applicants relied on the representation as to the suitability of the site. Mr Atchison accepted that potential franchisees relied on representations which he made to them. I am satisfied that the representation as to the suitability of the site was an important factor inducing the applicants to enter into the transactions. I find, accordingly, that the infringing conduct caused the applicants to enter into the franchise agreement and the lease and to become ICA franchisees.
Other Aspects of the Applicants' Case on Liability
Given the conclusion to which I have come, it is unnecessary to consider a case pleaded by the applicants relying on failure by the respondents to inform them that beachside sites performed, on average, substantially better than other, particularly suburban, sites. There are difficulties, particularly as to reliance, with that part of the case and, in submissions, the applicants placed little separate reliance on it.
It is unnecessary also, I think, to deal with the claim that the respondents breached a duty of care owed to the applicants; if I am wrong in concluding that ICA infringed s 52, it is hardly likely that the applicants would, nevertheless, succeed in negligence, because my error could only be in holding either that the representation as to suitability was incorrect or that, in the respect I have held it to do so, it lacked a rational basis. And the applicants, rightly in my view, did not suggest that damages recoverable for negligent misrepresentation could exceed those which they might recover for infringement of s 52.
Damages
The applicants are entitled to recover damages from ICA, under s 82(1) of the Trade Practices Act, the measure of which is the amount of the loss caused by ICA's misleading or deceptive conduct. The measure, the parties agreed, is analogous to that which applies in tort and it was common ground that the proper approach, in a general sense, is to compare the position which the applicants are in with that which they would have been in had the conduct in question not occurred.
(a) Establishment costs
The applicants claimed to be entitled to the franchise fee of $25,000, and that claim, on the footing that the applicants succeeded on liability, was not disputed. In addition, the applicants claimed the price paid for shop fittings, plant and equipment less the amount realised on sale of the remaining equipment when the business was closed. It was not disputed that that amount would be payable if proved; it was submitted, however, that at least in certain respects the applicants had not established their loss under this head.
The equipment, furniture and fittings purchased are listed in an affidavit of Mr David Kutcher, an accountant who prepared accounts and tax returns for the Engadine ice creamery business. The amount paid for the equipment, furniture and fittings was, on Mr Kutcher's evidence, $87,770. The evidence about the ultimate disposal of the equipment is less clear. Mr Thompson's evidence, not in this respect seriously challenged, was as follows:
After the business was closed down, I made arrangements for the sale of the plant, fixtures and fittings of the business. Some of these items were sold by private treaty after having engaged Lawsons, Auctioneers and Valuers, to value each of the items of equipment.
A copy of the Valuation is annexed to the affidavit.
Mr Thompson did not give evidence as to precisely what was realised. Mr Philip Edmonds, an accountant who gave expert evidence for the applicants, made his calculations on the basis that "proceeds of sale of balance of equipment" amounted to $5,135. The estimated auction realisation value placed upon the equipment by Lawsons was $7,003. Presumably the difference, which in any event is not very large, arose simply because what was realised by the "private treaty" sales was less than the estimated value. I think Mr Thompson's evidence is to be taken as a statement that all the items listed by Lawsons were sold and I am prepared to accept that the amount realised was $5,135.
There remain, however, two issues raised by the respondents. The first is whether it is appropriate to accept that the equipment was properly disposed of as on a forced sale rather than with the business as a going concern. Certainly - and I shall return to this later - Mr Thompson did not conduct the ice creamery in accordance with the ICA system; I have found, however, that the representation that the site was suitable was misleading or deceptive, and it is clear on the evidence that Mr Thompson, from the first half of 1992, made efforts to dispose of the business, without success. In the circumstances, the "break up" realisation should be accepted as appropriate. The other matter raised by the respondents is that three items, a stereo purchased for $400, a CD player purchased for $500 and video machines purchased for $8,800 are missing from the Lawsons list. I think I may safely regard the stereo and CD player, after, presumably, four years' use as de minimis. The video machines are, I think, another matter. They were not purchased at the outset: the purchase date was 1 March 1993. Certainly the respondents did not encourage their purchase: quite the reverse. The question, however, is whether ICA's conduct caused the purchase of the video machines. If their purchase was a reasonable incident of carrying on, for the purpose of selling the business or of ascertaining whether it might be made to succeed, it might, perhaps, be properly attributed to the misleading conduct. For reasons which will become apparent, however, I do not think that the purchase of the video machines can properly be described in that way. Quite apart from the particular point made by the respondents, I think the purchase price of the video machines should be excluded from the establishment costs.
In the result, the applicants are entitled to the franchise fee of $25,000 together with the price of the equipment, fittings and furnishings ($87,770) less the purchase price of the video machines ($8,800) less the proceeds of sale of the balance of the equipment ($5,135); the net amount is $98,835.
(b) Interest on capital introduced by the applicants
The applicants borrowed from the National Australia Bank Limited for the purpose of acquiring the business and financing it. In addition to an overdraft facility of $10,000, the applicants borrowed from the bank $315,000. Of that sum $202,000 was applied towards the purchase of the site. That left, according to the evidence of Mr Kutcher (accepted by Mr Edmonds) $113,000 applied to the ice creamery business. However, Mr Thompson's evidence was that $45,662 was applied to repay the balance of a housing loan which had been provided to the Thompsons by another bank. The suggestion was that, because part of the $113,000 from the bank was in fact used to pay off the housing loan, the applicants must be taken to have contributed to the business from their own monies $45,662 (Mr Thompson gave evidence that he had funds of that order available, and applied them as part of the overall transaction by which the franchise was acquired, the site was purchased and the housing loan was discharged). Mr Vella, an accountant called by the respondents as an expert, accepted that, if $45,662 out of the $113,000 from the bank was in fact used to pay out the housing loan, then the applicants must have contributed $45,662 to the business from their own money. Mr Vella's calculations indicated that, in any event, the applicants had introduced $7,000 of their own funds as part of the establishment costs and that, accordingly, they were entitled as damages to interest on that sum at the rates in Schedule J to the Supreme Court Rules (NSW). The submission was, accordingly, that the amount at which the interest should be calculated was not $7,000, but $52,662.
This topic was not specifically canvassed by counsel for the respondents, but it seems to me that, if the applicants' argument were accepted, there might be some double counting. If (as appears to be the case) the interest on the bank borrowing of $113,000 is included as an outgoing in calculating trading losses, and to the extent that trading losses are included in damages, the applicants are not entitled to interest on the $45,662 as well. In any case, it does not seem to me by any means clear on the evidence that the amount applied to discharge the housing loan came from the bank rather than from the Thompsons; and, if it came from the Thompsons (so that the full $113,000 from the bank was applied to the business) there is no obvious reason why the respondents should pay them interest on it. Accordingly, my view is that the amount on which interest is to be calculated under this head is the amount accepted by Mr Vella in his report, namely $7,000.
(c) Trading losses
There is no doubt (Gould v Vaggelas (1985) 157 CLR 215, Kizbeau Pty Ltd v W G & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281 at 291) that where the acquisition of a business has been induced by misleading or deceptive conduct an applicant may recover, as part of its damages, losses arising over some period of unprofitable trading. A number of questions, however, arise on that aspect of this case.
First, there is the question of the purchase of the site: are the applicants entitled, as part of their damages, to the amount of losses incurred taking into account the fact that they purchased the site? Mr Thompson gave evidence that he would not have purchased the site but for the representation made by Mr Atchison, but that, of course, does not conclude the matter. The issue was discussed by counsel for the applicants largely in terms of foreseeability; counsel submitted that I should proceed on the footing that damages were recoverable even if not reasonably foreseeable (Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158; State of South South Australia v Johnson (1982) 42 ALR 161 at 169, 170; Frith v Gold Coast Mineral Springs Pty Ltd [1984] FCA 146; (1983) 65 FLR 213; Yorke v Ross Lucas Pty Ltd [1982] FCA 180; (1982) 69 FLR 116). Probably, however, in the light of more recent authorities, the latest in the series being perhaps Kizbeau, the question is rather one of causation: is the purchase to be regarded as caused by the misleading conduct?
Senior counsel for the respondents argued that it followed from Mr Thompson's own evidence that the necessary element of causation was absent. In short, Mr Thompson's evidence was that, although he had a lease for five years with an option to extend for a further five years, when the freehold was placed on the market he feared that it might be acquired by a new landlord who would wish to "get rid of" the ice creamery and might well be able to find a pretext for doing so. Accordingly, he thought it prudent to buy the freehold. In cross-examination, he gave the following evidence:
Can you tell his Honour when it was that you first considered purchasing the building? - Well, I believe that it was August of 1991.
That is the same month as you opened the doors? - That's right, because I had signed a lease; the landlord obviously had intended to sell the building and that was offered to me to make a quick sale on his behalf, not necessarily for me, and I didn't want to change the landlord. I felt that I needed security of tenure; I did spent a lot of capital there and I required to have a security of tenure because there was a local dentist who made an offer on the property who wanted to move in and get me out within twelve months and I have that from the real estate agent.
But you had a five-year lease with a five-year option to renew? - That's right but I mean, in commercial terms, it's not difficult to get rid of a tenant for fairly minuscule reasons, I've been a landlord myself but I've never done that obviously. I'm no expert in this area but I believe that you can always find a breach somewhere.
So is this right, that your purchase of the building was not because of anything said to you by Mr Atchison but because you were concerned that you might lose the benefit of your plus five-year lease if you were confronted with a hostile landlord? - That's right, that's correct.
And that someone made a representation to you that you thought could be construed as the proposition that the likely landlord would be hostile to you? -That's correct.
In those circumstances you determined that you would buy the property? - That's correct.
The submission was that the purchase should be attributed to those supervening events and not regarded in any relevant sense as caused by ICA's conduct. I do not think, however, that it is quite so straightforward. The decision to purchase was made, and no doubt the contract of purchase was entered into, within a very short time - a matter of days or weeks - after the ice creamery opened. It was at a time when, plainly enough, Mr Thompson thought that the applicants had opened, and were trading, in a good location. There was no pattern of trading up to that point which indicated otherwise. It would, I think, be inconsistent with the whole tenor of Mr Thompson's evidence to hold that the few answers which I have reproduced should be taken as an admission that the representation as to the suitability of the site was not relevantly a cause of his anxiety to protect his tenure and his ability to continue to trade at the site. Accordingly, to the extent that trading losses are to be included as part of the damages to which the applicants are entitled, I think the appropriate course is to have regard to actual trading losses incurred - on the basis that the property was in fact purchased - not losses recalculated on a different basis.
The applicants claimed, as damages, the trading losses as shown in the accounts of the business from its commencement until 30 June 1995, when it was closed. Those losses are $31,320 for the year ended 30 June 1992; $8,505 for the year ended 30 June 1993; $6,242 for the year ended 30 June 1994 and $34,444 for the year ended 30 June 1995. The respondents contended that they should not be held responsible for those losses, on a number of bases. First, they said, it was clear on the applicants' own figures that the business was unprofitable during its first year of operation and they should therefore have made a prompt decision to close it. Secondly, the applicants had chosen, against the strong urgings of the respondents, to conduct the business in a manner unlike that in which a typical Great Australian Ice Creamery was conducted: they introduced video machines, they introduced non-approved confectionery and other items and, in a general sense, it was said that they turned the shop into something more like a milk bar than a Great Australian Ice Creamery; and, on the applicants' own figures, takings dropped dramatically. Sales, including video takings from January 1992, amounted to $155,946 in 1992, $113,439 in 1993, $107,410 in 1994 and $61,441 in 1995. That was at a time when, on the evidence, sales in other ice creameries were rising, not falling: this ice creamery, it was said, was behaving like no other, and there was nothing in the characteristics of Engadine itself or of the Engadine site to explain that eccentric behaviour. Then, it was said, Mr Thompson's record keeping was inadequate, even after litigation was contemplated and, then, commenced. He did not keep till rolls; there were no records from which video takings could be verified; and there were discrepancies between Mr Thompson's records of takings and the amount of takings as included in the annual accounts (the latter, it should be said, was in each case the greater amount). Further, it was said, an analysis by Mr Peter McGee, an accountant called by the respondents, showed that there were discrepancies between the amounts of ice cream purchased by the applicants from Streets and the sales which they might be expected to have made applying standard markups. Additionally, Mr Hester gave evidence of a conversation which he had with Mr Thompson in June 1993 in which, Mr Hester said, Mr Thompson told him that the video machines "bring in an additional $1,000 per week net": that account was supported by a contemporaneous note made by Mr Hester (on which Mr Hester was not cross-examined); and $1,000 per week was very substantially more than Mr Thompson's accounts record him as having received from the video machines (Mr Thompson strenuously denied mentioning a figure of $1,000 per week). Then, the results in the 1995 year were particularly surprising. On the basis of the accounts of the business, the ratio of cost of goods sold to sales was 37% in 1992, 34% in 1993, 36% in 1994 and 67% in 1995. The evidence of Mr Kutcher (the applicants' accountant) was that the trend was the opposite of that which he would have expected following the introduction of the video machines and the 1995 figure could not be fully explained by reference to circumstances surrounding the closure of the business. The suggestion of the respondents, in short, was that all those matters taken together indicated that the applicants did not disclose the full amount of the income of the business. The respondents pointed also to evidence of reasonably substantial drawings, at least in years after that ended on 30 June 1992 and to the somewhat surprising evidence by Mr Thompson to the effect that he had to keep a very substantially loss-making business going so as to provide a source of income to meet living and other expenses.
The respondents referred to some particular matters as well. First, the accounts for each of the trading years included an amount for depreciation of the plant; but, they said, to include depreciation was to double count in circumstances where the applicants claimed the full purchase price of the plant less the proceeds of its ultimate disposal. Secondly, Mr Vella suggested, in evidence, that certain of the outgoings recorded in the accounts were much higher than one would expect for a business of the nature of the ice creamery: particularly telephone charges and bank charges. The suggestion, in relation to telephone charges, was that they were in large part attributable to Mr Thompson's efforts to establish a franchisees' association. As to the bank charges, the suggestion was that charges were included which were not properly attributable to the business but to other borrowings from the bank.
It is rarely easy to come to precise conclusions about matters such as this, and this case is no exception. I think there is a great deal of force in the submission that there is no doubt that, from January 1992 and to a progressively greater degree as trading continued, the Engadine ice creamery was conducted in a way markedly different from the norm and behaved (as to its trading results) quite differently from the norm, there being nothing about the site, on the evidence, to explain the disastrous trend (as opposed to a course of trading at a relatively constant, if unsatisfactory, level). Quite apart from what was described as a duty to mitigate, I think there is real difficulty in regarding the results, at least after 1992, as caused by ICA's conduct. That is particularly so in relation to the year ended 30 June 1995, for the extraordinary character of which the applicants offered no substantial explanation. Furthermore, depreciation in 1992 was $10,324, in 1993 $10,615, in 1994 $10,143 and in 1995 $8,300. If that is eliminated (as, to avoid double counting, I think it must be), so is the loss for each of the 1993 and 1994 years. Given all those matters, it is unnecessary to make a finding as to whether income was not fully disclosed in order to conclude that no damages should be allowed for trading losses after 30 June 1992.
Apart from depreciation, the elimination of which would reduce the loss to $20,996, in my opinion it is appropriate to include the loss for the year ended 30 June 1992 as part of the damages to which the applicants are entitled. A relatively modest "trial" of video machines should not, I think, be regarded as unreasonable; the conversation with Mr Hester took place almost a year after the end of the 1992 year; evidence as to reasonably substantial drawings from the business to pay, for example, living expenses appear to have been made, principally, after June 1992. I am not convinced that bank fees and telephone charges in the 1992 year ought to be regarded as unreasonable. In short, in my view, the applicants are entitled to damages in the amount of $20,996, but no more, for trading losses.
There remains a question, which also was somewhat vexed, as to proprietors' remuneration. Initially, based on Mr Edmonds' evidence, a very substantial sum was claimed for this. In the end, counsel for the applicants limited the claim to an amount of $18,000 per annum (based on award wages for a 40 hour week) reduced by tax of $6,000, thus $12,000 net per annum. Mr Thompson's evidence was that he was looking for remunerative employment, or a profitable business, at the time of his discussions with Mr Atchison and I think it is reasonable to conclude that, but for the opening of the ice creamery, he would have earned the amount now claimed in the 1992 year. The amount of $12,000, thus, should be added to the damages on that account. Quite apart from questions of mitigation, similar amounts for future years would be reduced to the extent that the business was profitable; putting the matter another way, in my view the applicants have not established that, in any of the years after 30 June 1992, the business (taking into account the elimination of depreciation and the other matters to which I have referred) was not profitable at least to the extent of $12,000.
(d) Summary of damages
Thus, the applicants are entitled to damages comprising the sum of $98,835 on account of establishment costs, interest as calculated by Mr Vella on the sum of $7,000, $20,996 in respect of losses incurred in the year ended 30 June 1992 and $12,000, in effect for lost earnings during that year. On the sum thus arrived at, the applicants are entitled to interest at the rates set out in Schedule J to the Supreme Court Rules: that interest should, I think, be calculated from 1 July 1992.
Mr Atchison: s 75B
Clearly Mr Atchison, as the joint managing director of ICA who made the representation on its behalf, was a person involved in ICA's contravention of s 52. It follows that he, as well as ICA, is liable to pay the damages to which the applicants are entitled.
Conclusion
Thus the applicants are entitled to a judgment in their favour, against each respondent, for damages in an amount calculated on the basis I have indicated. I hope that the parties will be able to agree upon the precise amount, in the light of these reasons. The appropriate course is, I think, to direct the applicants, within fourteen days, to serve on the respondents short minutes of orders to give effect to these reasons; the matter may then be set down, on a date settled with my Associate, so that formal orders may be made. There remains the question of costs. It may well be that costs should simply follow the event.
However, the applicants, though successful, have recovered a significantly lesser amount than they claimed and I have heard no submissions as to costs: that matter may be dealt with when the proceeding is listed for the making of orders. If agreement between the parties is not reached, any necessary argument can take place then.
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I certify that this and the preceding sixty-four (64) pages are a true copy of the Reasons for Judgment herein of the Honourable
Justice Lehane |
Associate:
Dated: 11 February 1998
|
Counsel for the Applicants: | Mr Christopher Harris |
| Solicitor for the Applicants: | Willis & Bowring |
| Counsel for the Respondents: | Mr Nigel Cotman SC
Mr Matthew Dicker |
| Solicitor for the Respondents: | Minter Ellison |
| Date of Hearing: | 4-8, 11-15, 18-22 August 1997 |
| Date of Judgment: | 11 February 1998 |
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/1998/54.html