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Federal Court of Australia |
Last Updated: 3 February 1999
Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 30
FRANCHISE AGREEMENTS - validity of notice of default - whether notice required to state an intention to terminate franchise agreement if default unremedied
Trade Practices Act 1974 ss 52, 82, 87, 75B
Kizbeau Pty Limited v W G & B Pty Limited [1995] HCA 4; (1995) 184 CLR 281 - considered
Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216 - considered
Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 - applied
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40; (1988) 79 ALR 83 - cited
Munchies Management v Belperio (1988) 84 ALR 700 - considered
Civil Service Co-operative Society of Victoria Ltd v Byth [1914] HCA 17; (1914) 17 CLR 601 - considered
Laurinda Pty Limited v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 323 - applied
Baillieu Knight Frank (Gold Coast) Pty Ltd v Susan Pender Jewellery Pty Ltd [1997] ATPR 41-542 - cited
Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23 - cited
Gates v City Mutual Life Assurance Society Ltd (1986) CLR 1 at 12 - cited
Gould v Vaggelas (1985) 157 CLR 215 - cited
Netaf Pty Ltd v Bikane Pty Ltd [1990] FCA 35; (1990) 26 FCR 305 - cited
Potts v Westpac Banking Corporation [1993] 1 Qd R 135 - cited
Sellars v Adelaide Petroleum NL [1994] HCA 4; (1992) 179 CLR 332 - cited
Pownall v Conlan Management 16 ACSR 227 - considered
ANEMA E CORE PTY LTD V AROMAS PTY LTD
QG 203 of 1996
SPENDER J
BRISBANE
22 JANUARY 1999
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| QUEENSLAND DISTRICT REGISTRY | QG 203 OF 1996 |
|
BETWEEN: | ANEMA E CORE PTY LTD
First Applicant
ANNE MICHELE ALROE Second Applicant
DAMIEN JOHN ALROE Third Applicant |
|
AND: | AROMAS PTY LTD
First Respondent
AROMAS FRANCHISING PTY LTD Second Respondent
CHRISTOPHER JOHN BRYANT Third Respondent
ROBYN LESLEY HORLEY Fourth Respondent
EMMA HOSSACK Fifth Respondent
MARISE McGRORY Sixth Respondent |
|
JUDGE: | SPENDER J |
| DATE: | 22 JANUARY 1999 |
| WHERE MADE: | BRISBANE |
THE COURT ORDERS THAT:
1. Judgment is entered for the first applicant against the first and second respondents in the sum of $82,800.00.
2. The application is dismissed against the third to sixth respondents inclusive.
THE COURT DECLARES THAT:
1. The second respondent is entitled to terminate the franchise agreement dated 8 December 1995 and entitled "Aromas Franchise Agreement".
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
|
IN THE FEDERAL COURT OF AUSTRALIA | |
| QUEENSLAND DISTRICT REGISTRY | QG 203 OF 1996 |
|
BETWEEN: | ANEMA E CORE PTY LTD
First Applicant
ANNE MICHELE ALROE Second Applicant
DAMIEN JOHN ALROE Third Applicant |
|
AND: | AROMAS PTY LTD
First Respondent
AROMAS FRANCHISING PTY LTD Second Respondent
CHRISTOPHER JOHN BRYANT Third Respondent
ROBYN LESLEY HORLEY Fourth Respondent
EMMA HOSSACK Fifth Respondent
MARISE McGRORY Sixth Respondent |
JUDGE:
SPENDER J DATE: 22 JANUARY 1999 PLACE: BRISBANE
1 When judgment in this matter was reserved on 11 December 1998, it seemed desirable, given the deliberate attitude of the parties to the question of the renewal of the lease of the premises in Margaret Street, Toowoomba, that I give judgment in this matter if it was possible to do so during the Court vacation and before the termination of the lease on 31 January 1999.
2 The proceedings relate to the purchase by the first applicant ("Anema"), a company of which Mr and Mrs Alroe, the second and third applicants, were directors and shareholders, of the business of a licensed café and coffee house known as "Aromas, Toowoomba", at 191 Margaret Street, Toowoomba, and the right to operate the business as an "Aromas" franchise, which agreements were made in December 1995. By a memorandum of transfer dated 8 December 1995, the first respondent ("Aromas") assigned to Anema its interest in registered lease L938714V. Emma Hossack, the fifth respondent, at all material times was employed by Aromas and Aromas Franchising Pty Ltd ("Aromas Franchising") as their solicitor, and Marise McGrory at all material times was the general manager of Aromas and/or Aromas Franchising. Ms McGrory commenced as General Manager on 24 July 1995. The third respondent, ("Mr Bryant") and the fourth respondent, ("Ms Horley") were shareholders and directors of the corporate respondents. Clause 1(n) of the lease gave to the lessee an option for renewal for a further term of five years from the date of expiration of the lease provided that not less than three months' notice in writing of the lessee's desire to exercise the option was given. The last day for exercising that right was 30 October 1998. The applicants did not give notice pursuant to that option.
3 The original application and statement of claim was filed on 29 November 1996. The applicants allege that the first applicant was induced to purchase the business, to accept an assignment of the lease, and to execute a purchase agreement, guarantee, and franchise agreement by multiple fraudulent or misleading misrepresentations.
4 It is accepted that Aromas carried on the business of a licensed café and coffee house under the registered business name `Aromas Toowoomba' from leasehold premises at The Chronicle Arcade, 191 Margaret Street, Toowoomba, and was the owner of the trade mark "Aromas" and the distinctive and unique method for the operation of a licensed café and coffee house referred to by Aromas as the "Aromas system". It is further accepted by the parties that Aromas Franchising was licensed by Aromas to operate the Aromas system and trade mark pursuant to a licence agreement dated 27 April 1994. By a written agreement dated 1 December 1995, Anema purchased from Aromas the business for $220,000. By a guarantee dated 1 December 1995, Mrs Alroe guaranteed the obligations of Anema as purchaser pursuant to the purchase agreement. By a written franchise agreement dated 8 December 1995 ("the franchise agreement") Anema acquired the right to operate the business as an Aromas franchise for $75,000.00, terms and conditions appearing in the franchise agreement. Finally, Mr and Mrs Alroe allege that by a guarantee dated 11 December 1995, they guaranteed the obligations of Anema pursuant to the lease assigned by Aromas to Anema. The purchase agreement settled on 11 December 1995 and the applicants entered into possession on that date.
5 By the amended application of 14 October 1997 the applicants claim against the first and second respondents an order pursuant to s 87(1A) of the Trade Practices Act 1974 declaring void ab initio the purchase agreement, the guarantee of Mrs Alroe guaranteeing the obligations of Anema pursuant to the purchase agreement, the franchise agreement, the memorandum of transfer and assignment of the lease, and the alleged guarantee of Mr and Mrs Alroe of the obligations of Anema pursuant to the lease. The applicants claim further, repayment in the sum of $313,060.44, together with interest, and against each respondent claim damages for misleading and deceptive conduct, fraud, breach of contract, interest and costs. The respondents by cross-claim claim a declaration that Aromas Franchising is entitled to terminate the franchise agreement. That claim is based on the various provisions in the franchise agreement and breaches of the terms of the agreement alleged by Aromas Franchising, which, it is said, have not been remedied and which entitle Aromas Franchising to terminate the Franchise agreement.
6 It is because of the circumstance that the lease of the premises at which the coffee business is conducted is to terminate on 31 January 1999 and the fact that there has been no exercise of any option conferred in the lease by the applicants or any action in relation to the lease taken by Aromas or Aromas Franchising; coupled with the claim for a declaration pursuant to s 87 of the Trade Practices Act 1995 that, inter alia, the assignment of the lease from Aromas to Anema is void ab initio, that it is desirable that judgment be given on that claim so that the parties might, in the light of the Court's conclusion whether to grant s 87 relief, take such further action as they may be advised.
7 The proceedings were set down for hearing over four days, 10, 11, 13 and 14 August 1998. The matter, contrary to the earlier indications of the parties when the matter was set down, was not able to be concluded during that time and indeed much remained to be heard at the end of proceedings on 14 August 1998. Counsel for the applicants and for the respondents were agreed then that three to four days would be necessary to conclude the matter, including time for addresses. On 14 August, I said:
"In the ordinary course, this should go over till next year, but it is not fair to the parties to have such a break in the oral evidence."8 I then listed the matter according to the time estimate indicated by counsel for 27, 28, 29 and 30 October 1998. The evidence, but not submissions, concluded on that day and I directed that the respondents submit written submissions by 13 November 1998, written submissions by the applicants by 27 November 1998 and any submissions by the respondents in reply by 7 December 1998, and the parties could speak to or add further submissions on 11 December 1998.
9 On the last day of the hearing of this matter, 11 December 1998, at the conclusion of final addresses, there were tendered to the Court two letters from the solicitors for the applicants dated 3 November 1998 and 4 November 1998 in connection with the question of renewal of the lease. After advising that Anema had not prior to 30 October 1998 exercised the option conferred on it pursuant to the lease, the solicitors continued:
"We are instructed to advise you that the reason for our clients' decision was a commercial one forced upon them primarily by the provisions of the Lease concerning the level of rent for the renewed term. We are instructed that having regard to extensive redevelopment of other areas in Toowoomba the current rent being paid is far too high, yet on renewal the Lease provided that in no event would the rent for any rental year be less than the rent payable in the previous year.10 The letter of 4 November 1998 included the following:
Our clients also believe that for any future tenure the provisions of the Retail Shop Leases Act ought to apply, which they would not, were the current Lease to be renewed.
Our clients now propose to enter negotiations with the Lessor with a view to arriving at a Lease in which rent is truly reflective of the prevailing market conditions in Toowoomba and which also provides to the Lessee the safe guards of the Retail Shop Leases legislation. Our clients believe that this is essential for the financial well being of the business. Having regard to the evidence given at the recent trial, in particular, that relating to the financial performance of the store since 1995, we believe your client would agree that containment of expenses, especially rent, is critical.
Our clients would expect that the Lessor will give to your client a Notice under Clause 5(b) of the Lease. We would appreciate being advised if and when such a Notice is received and what your client proposes to do in response to it."
"We are also instructed by our clients to advise you that prior to the expiry of the option notice period they did seek from the landlord an extension of time to exercise the option, and an indication as to whether future rent could be reviewed to market. In both respects the landlord's attitude was that the terms of the lease would prevail.11 The attitude of Aromas concerning the continuation of the lease appears from an affidavit sworn by Mr Bryant on 11 December 1998. Mr Bryant in that affidavit indicates:
Whilst our clients' decision was, as expressed in our earlier letter, primarily based on commercial considerations the uncertainty surrounding the outcome of the Federal Court proceedings and the prospect that upon a renewal our clients (sic) personal guarantees would continue for a further five years were additional influencing factors."
"The lease agreement between [Anema] and the landlord of the Aromas Toowoomba premises contains certain provisions which relate to the default of the lease or franchise agreement and provide a level of protection for Aromas Pty Ltd as franchisor."12 Clause 5(b) of the lease agreement provides as follows:
"5. (a)13 Mr Bryant in his affidavit says:
...
(b) The lessor (B R C Investments Pty Ltd) shall give to the franchisor (Aromas Pty Ltd) written notice of any...failure to exercise any option to renew...on the part of the Lessee (the first applicant) in respect of which it intends to exercise its rights pursuant to the Lease and the Lessor shall not exercise any such rights unless and until:
(i) ...
(ii) ...
(iii) in the case of the Lessee committing making or suffering any act default or omission (including the failure to exercise an option for renewal of the Lease for a further term)...the Lessor has served upon the Franchisor a notice specifying the occurrence of such default, omission or event and the Franchisor has not within a period of 14 days thereafter commenced to take any of the actions set out in clause 5 hereof."
"Aromas Pty Ltd has received a notice pursuant to clause 5(b)(iii) from the lessor but did not within 14 days of the receipt of that notice commence to take any of the actions set out in clause 5 and the period of 14 days has now expired."14 On 17 December, after oral and written submissions, the solicitors for the applicants made further written submissions, in particular concerning Mr Bryant's affidavit. In those submissions the applicants submit that a perusal of the terms of the franchise and lease agreements confirm that the applicants' submission, namely, that if the leasehold tenure has now been lost, that consequence arose from the conscious decision of the relevant respondents to allow this to occur, is correct and significant for the purposes of s 87 relief. It was said that consistent with the reasoning in Kizbeau Pty Limited v W G & B Pty Limited [1995] HCA 4; (1995) 184 CLR 281, and it was submitted that: the possible non renewal of the lease is not a consideration relevant to the making of a s 87 order designed to ensure a `fair result' on the facts of this case.
15 However, the crucial question whether to order rescission is whether substantial restitutio in integrum is possible. At 298, Brennan, Deane, Dawson, Gaudron and McHugh JJ said:
"Section 87 of the Act confers a wide discretionary power on courts to make remedial orders in appropriate cases to ensure a fair result. Section 87(2) sets out the orders a court can make including an order varying any contract or arrangement in such a manner and from such a date as the court thinks fit: s 87(2)(b). An order should be made under s 87 varying the lease so as to reflect the fact that the commencing rent should have been $455,000 and not $480,000."16 The applicants submit that as they had allegedly breached the franchise agreement in a manner justifying the issue of two default notices and particularly after the applicants had initiated proceedings seeking avoidance of, inter alia, the franchise and lease obligations, it was incumbent upon those respondents affected by these matters to obtain interim protection of their interests. Reference was made to Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216 at 225-226.
17 The legal position is not as one-sided as that submission might suggest. In Alati v Kruger Kitto CJ, Webb, Kitto and Taylor JJ said at 225:
"The service of the writ had given the appellant clear notice that if the case alleged against him were made out at the trial the business and the lease would be held to have been his all along."And later:
"He could have applied for the appointment by the court of a receiver and manager to preserve the property pending the determination of the case, but he made no such application. He did not even make any offer to the respondent to take the property back or suggest any modus vivendi. He took his chance, contenting himself with such maintenance of the business as the respondent's continuing conduct of it might afford. But the respondent was under no duty to go on indefinitely, working for nothing and incurring losses, especially after the judge had announced findings of fact in his favour."18 No quarrel can be taken of course with these propositions. Fullagar at 228 said:
"The fundamental factor in the situation is, of course, the rule that restitutio in integrum is a condition of rescission. It seems to me necessarily to follow from this that a purchaser remaining in possession after giving notice of rescission is under a duty to take reasonable care to preserve the property, so that what he has received from the other party may, so far as reasonably practicable, be restored to that other party."And later, Fullagar J said:
"I do not think that the purchaser is bound to remain in possession. On the other hand, I think that he would commit a breach of his duty if he simply abandoned the property without notice to the vendor. If he gave reasonable notice to the vendor offering to restore possession of the property to him, I think that the vendor would act at his own risk if he declined to take the opportunity offered to him, and that he could make no claim for compensation if the purchaser then left the property and it were subsequently held that he was entitled to rescind".19 The lessor in this case extended the time for the exercise of the option for renewal by letter dated 7 December 1998, which was communicated by the applicants' solicitors to the respondents' solicitors on 9 December 1998 by facsimile transmission on 9 December. These matters were not referred to in Mr Bryant's affidavit. The applicants say that the respondents could, pursuant to the Power of Attorney (cl 7) of the deed of assignment have renewed the lease in the name of the first applicant, but failed to do so.
20 The facts in this case are that each of the applicants and the respondents have in a sense taken their chance on the question of rescission being granted.
21 Since the major relief sought by the applicants are orders pursuant to s 87 of the Trade Practices Act, being orders in the nature of rescission ab initio, and in the light of the lease position as I have indicated above, it is clearly desirable that the question of whether the court would grant orders under s 87 be determined prior to the actual termination of the lease.
22 I turn now to consider the issues in the proceedings.
23 The applicants claim that the first applicant was induced to purchase the business, accept the assignment of the lease, and execute the various documents associated with the acquisition of the business, and the second and third applicants were induced to execute guarantees, by reason of representations made on behalf of Aromas and Aromas Franchising.
24 The representations on which the applicants rely are as follows, the paragraph numbering being that appearing in the amended statement of claim:
"13 ...25 There are further representations alleged which are said to be contained in the contractual documents. The applicants say that Aromas and Aromas Franchising represented:
(d) on 18 October 1995 the Third and Fifth Respondents orally represented to the Second Applicant that:-
(i) the business was trading profitably;
(ii) if the Applicants acquired the business and the franchise they would enjoy the full assistance and support of the Queensland market leader in the operation of licensed cafes and coffee houses which jealously guarded its commercial reputation;
(iii) the business was trading with competent management;
(iv) the planned opening of the Coffee Club would have little or no impact upon the profitability of the business as the two businesses operated differently, appealed to different consumer markets and hence were not in direct competition;
(e) by a letter dated 25 October 1995 the Fifth Respondent represented to the Second Applicant that for an investment of $325,000.00 the business would show a return of capital of 19.8%;
(f) by a letter dated 3 November 1995 the Fifth Respondent represented to the Second Applicant that the gross profit for the business for the month of October, 1995 was $9,728.00;
(g) by a letter dated 9 November, 1995 the Fifth Respondent represented to the Second Applicant that:-
(i) the business was sound notwithstanding the imminent opening of the Coffee Club,
(ii) competition from the Coffee Club would only cause an overall 2% reduction in sales, although it might possibly be as much as 5% but only in the very short term after the opening of the Coffee Club;
(h) by letters dated 27 October 1995, 3 November 1995, 9 November, 1995 and 10 November, 1995 the Fifth Respondent represented that a document described by her as a 1995/1996 budget for the business was accurate and reliable;
(i) on 15 November 1995 the Fourth Respondent represented to the Second Applicant:-
(i) the business was trading profitably;
(ii) the anticipated competition from the Coffee Club would have little or no effect upon the business;
(iii) the business had minor management problems which had been addressed;
(j) on about 20 November, 1995 the Fifth Respondent informed the Second and Third Applicants that they then had all the information required by them to make an informed decision about the viability of the business and implicitly represented that there was no other information known to the Respondents which was relevant to the Second and Third Applicants in making an informed decision whether to purchase the business and enter into the franchise;
(k) on about 22 November, 1995 the Sixth Respondent informed the Second Applicant that certain roadworks to be undertaken by the Toowoomba City Council in Margaret Street immediately outside the business would only effect (sic) the business for two months and there was no need to worry about this matter;
(l) on 29 November, 1995 the Sixth Respondent orally represented to the Third Applicant that:-
(i) the amount of $5,000.00 referred to in a draft purchase contract was a sufficient sum to acquire the stock of the business and the items referred to in special condition 45(d) of the said draft contract;
(ii) any management problems in the business had been resolved;
(iii) the Sixth Respondent would provide any assistance required by the Second Applicant to operate the business;
(iv) the business was trading profitably;
(v) its profitability would increase with the benefit of local operators;
(vi) the business enjoyed the patronage of at least 200 regular customers;
(vii) competition from the Coffee Club would have no effect on the profitability of the business;
(m) on 29 November, 1995 the First and Second Respondents represented to the Applicants that the franchise fee of $75,000.00 to be paid to the Second Respondent would secure all necessary support of the Second Respondent as franchisor to enable the First Applicant to operate the business successfully;
(n) on 10 December 1995 the Fourth Respondent orally represented to the Second Applicant that the opening of the Coffee Club would no (sic) affect the business;
(o) on 10 December 1995 the Sixth Respondent represented to the Second Applicant that the current trading level of the business was unexceptional;
(p) prior to settlement the First Respondent represented that it was unable to provide to the Applicants prior to settlement the trading figures of the business for the month of November to demonstrate what effect the Coffee Club had upon the profitability of the business.
"15. By the terms of the purchase agreement the First and Fifth Respondents represented:-26 The applicants further allege that by 1 December 1995 and/or 10 December 1995 each of the respondents knew that the representations earlier set out were untrue, or so inaccurate and unreliable that they could not be relied upon by the applicants to decide whether to enter into the purchase agreement and the franchise agreement or to settle the purchase agreement, and the respondents failed to inform the applicants of their knowledge at any time prior to the execution of the documents and/or the settlement of the contracts, and by their silence continually represented up until the said settlement that the representations were true.
(a) by clause 8.1 as follows:
"The vendor states and assures the purchaser that except as otherwise disclosed in this Contract:-
8.1 The trading figures and other financial data relating to the business particulars of which are set out in any schedule annexure or appendix to the contract are true and correct in every particular."
(b) by clause 44 as follows:-
"The Vendor warrants that:-
44.1 The following information has been provided to the Purchaser ("the Financial Information"):-
(a) Aromas Profit and Loss and Forecast as at February, 1995;
(b) Summary of Results for Aromas Toowoomba for period ended 30/6/95;
(c) Detailed Profit and Loss for Aromas Toowoomba for period ended 30/6/95;
(d) /1996 Budget for Aromas Toowoomba;
(e) Detailed figures for Aromas Toowoomba for period ended 10/95;
(f) Actual to Budget Variance report for Aromas Toowoomba for July-October 1995, inclusive and
(g) Computer generated profit and Loss for Aromas Toowoomba for period ending October 1995.
Copies of these figures are attached in Schedule F.
44.2 The above financial information was prepared by the Vendor based on the trading figures from Aromas Toowoomba and is to the best of the Vendor's knowledge true and correct in all respects."
27 It is said by the applicants the representations were untrue to the knowledge of each of the respondents who made them when they were made. The applicants plead also:
22. "Further or alternatively, the representations pleaded in paragraphs 13(d)(iv), 13(e), 13(g)(ii), 13(h), 13(i)(ii), 13(k), 13(l)(v), 13(l)(vii) and 13(n):-28 The applicants claim that they have suffered loss or damage in that:
(a) were representations with respect to future matters when made; and
(b) the Respondent making each of those representations had no reasonable grounds for doing so at the time the representation was made; and
(c) in the premises constituted misleading and deceptive conduct by reason of S.51A Trade Practices Act."
"(a) the First Applicant paid to the First and Second Respondents sums totalling $305,142.74 in consideration for the purchase of the business and the franchise agreement which was worthless or worth significantly less than the sum paid;29 Before turning to a consideration of these allegations, it is important to have regard to relevant provisions of the Trade Practices Act. At the material time that Act relevantly provided:
(b) the First Applicant incurred costs and expenses in relation to the purchase of the business and franchise agreement totalling $7,917.70;
(c) the Applicants have lost the income which would otherwise had (sic) been earned on the monies paid to the First and Second Respondents and the costs and expenses incurred in respect of the purchase of the business and the franchise agreement;
(d) the First Applicant suffered trading losses in conducting the business;
(e) the Second and Third Applicants lost the opportunity to earn income from alternative employment;
(f) alternatively, the Second Applicant is entitled to compensation for the value of her services rendered to the First Applicant in and about the operation of the business;
(g) the Second Applicant is entitled to compensation for her wasted time, inconvenience, stress and injury caused by the conduct of the Second Respondent pleaded in paragraph 25."
"52.(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.30 As McHugh, Hayne and Callinan JJ noted in Marks v GIO Australia Holdings Ltd (1998) HCA 69 at paragraphs 33 to 39:
(2)Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1).
...
82.(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
(2) An action under subsection (1) may be commenced at any time within 3 years after the date on which the cause of action accrued.
87.(1)Without limiting the generality of section 80, where, in a proceeding instituted under, or for an offence against, this Part, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in (whether before or after the commencement of this subsection) in contravention of a provision of Part IV, IVA or V, the Court may, whether or not it grants an injunction under section 80 or makes an order under section 80A or 82, make such order or orders as it thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (2) of this section) if the Court considers that the order or orders concerned will compensate the first-mentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage.
(1A)Without limiting the generality of section 80, the Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in (whether before or after the commencement of this subsection) in contravention of a provision of Part IVA or V or on the application of the Commission in accordance with subsection (IB) on behalf of such a person or 2 or more such persons, make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (2)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person.
87(2)The orders referred to in subsection (1) and (1A) are:
(a) an order declaring the whole or any part of a contract made between the person who suffered, or is likely to suffer, the loss or damage and the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, or of a collateral arrangement relating to such a contract, to be void and, if the Court thinks fit, to have been void ab initio or at all times on and after such date before the date on which the order is made as is specified in the order;
(b) an order varying such a contract or arrangement in such manner as is specified in the order and, if the Court thinks fit, declaring the contract or arrangement to have had effect as so varied on and after such date before the date on which the order is made as is so specified;
(ba) an order refusing to enforce any or all of the provisions of such a contract;
(c) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to refund money or return property to the person who suffered the loss or damage;
(d) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to pay to the person who suffered the loss or damage the amount of the loss or damage;
(e) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, at his or her own expense, to repair, or provide parts for, goods that had been supplied by the person who engaged in the conduct to the person who suffered, or is likely to suffer, the loss or damage;
(f) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, at his or her own expense, to supply specified services to the person who suffered, or is likely to suffer, the loss or damage; and
(g) an order, in relation to an instrument creating or transferring an interest in land, directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to execute an instrument that:
(i) varies, or has the effect of varying, the first-mentioned instrument; or
(ii)terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the first-mentioned instrument."
"First, s 82 applies in cases of contravention of any provision of Pts IV or V of the Act and s 87 in cases of contravention of any provision of Pts IV or V of the Act (and more recently Pt IVA as well). Thus, both ss 82 and 87 can apply in many different kinds of case, not just the case where it is alleged that there has been misleading and deceptive conduct contrary to s 52. In particular, s 87 can apply not only to cases as diverse as misusing market power contrary to s 46 or s 46A or engaging in exclusive dealing contrary to s 47 but also, now, to engaging in conduct that is `unconscionable within the meaning of the unwritten law, from time to time of the States and Territories' contrary to s 51AA.31 I have referred at length to the observations in Marks because the question of whether the Court should order relief under s 87 of the Trade Practices Act is not to be determined by recourse to doctrines of affirmation, waiver or election, although the considerations that infuse those concepts are not irrelevant in the exercise of the discretions involved in the issue of what orders, if any, to make under s 87 of the Act. It is in the circumstances of this case necessary to consider what loss or damage, if any, has been suffered by the applicants by conduct in contravention of s 52 and then to determine what orders the court ought make to compensate the applicants in respect of that loss or damage. Counsel for the applicants, Mr David Cooper, considered the various alleged misrepresentations under the headings as follows:
Secondly, s 82 provides, in effect, that the loss or damage that may be recovered by action is the amount of the loss or damage suffered `by conduct of' another person that was done in contravention of Pts IV or V. It contains no stated limitation of the kinds of loss or damage that may be recovered and contains no express indication that some kinds of loss or damage are to be regarded as too remote to be recovered. Indeed, s 4K may be seen as expanding the kinds of loss or damage that are dealt with in s 82 (and elsewhere in the Act) by its provisions that:
` In this Act:
(a) a reference to loss or damage, other than a reference to the amount of any loss or damage, includes a reference to injury; and
(b) a reference to the amount of any loss or damage includes a reference to damages in respect of an injury.'
Thirdly, the power of the Court to make orders under s 87(1) is predicated upon the Court finding `that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another' engaged in the contravention of a provision of Pts IV, IVA or V. Leaving aside the case where the Commission is applicant, s 87(1A) is also predicated upon the applicant being `a person who has suffered, or is likely to suffer, loss or damage by conduct of another' engaged in the contravention (in this case) of Pts IVA or V.
Fourthly, the powers given under s 87(1) and (1A) are powers to make `such order or orders as the Court thinks appropriate...if the Court considers that the order or orders concerned will compensate [the person wronged] in whole or in part for the loss or damage, or will prevent or reduce the loss or damage'.
Fifthly, among the many forms of order that can be made under s 87 is an order:
`directing the person who engaged in the conduct...to pay to the person who suffered the loss or damage the amount of the loss or damage'.
It can be seen, therefore, that both ss 82 and 87 require examination of whether a person has suffered (or, in the case of s 87, is likely to suffer loss or damage `by conduct of another person' that was engaged in the contravention of one of the identified provisions of the Act. That inquiry is one that seeks to identify a causal connection between the loss or damage that it is alleged has been or is likely to be suffered and the contravening conduct. But once that causal connection is established, there is nothing in s 82 or s 87 (or elsewhere in the Act) which suggests either that the amount that may be recovered under s 82(1), or that the orders that may be made under s 87, should be limited by drawing some analogy with the law of contract, tort or equitable remedies. Indeed, the very fact that ss 82 and 87 may be applied to widely differing contraventions of the Act, some of which can be seen as inviting analogies with torts such as deceit or with equity but others of which find no ready analogies in the common law or equity, shows that it is wrong to limit the apparently clear words of the Act by reference to one or other of these analogies."
1. Management
2. Competition from Coffee Club
3. Roadworks
4. The Accuracy and Reliability of the 1995/96 Budget
5. October Figures
6. Business Trading Profitably
7. Full franchise support
8. Other representations.
32 Before dealing in more detail with the factual questions, I should indicate generally my view on questions of the credit of the principal witnesses.
33 Mrs Alroe presented as a person who was quite enthusiastic and willing to work hard to make a success of her decision to carry on a business which was to be the primary source of income for the family during her husband's efforts at further education. While acknowledging her inexperience, she was very conscious that she was in charge and resented receiving suggestions with which she disagreed. Her evidence was coloured by the view that all of the difficulties experienced in the operation of the business were the fault of Aromas, a view which, at least subconsciously, has affected the reliability of her recollection of events and conversations. The other evidence, in particular the documentary evidence and the extensive facsimile communications from her to particularly Ms Hossack really gives a truer indication of the nature of the dealings between the applicants generally on the one hand, and the respondents in the period prior to the execution of the contracts and the settlement. As well as the contemporaneous documentary material, I have to say that I prefer the recollection of Ms Hossack and, in particular, Ms McGrory in the areas of factual disputation between their accounts and Mrs Alroe.
34 Ms Hossack said in her statement that:
"I have meticulously kept notes of calls from any prospective purchasers and copies of all correspondence and meetings held on appropriate files..."and
"I habitually take notes of every communication no matter how trivial...A phone call about price would have been significant and a note would have been made."She said that all her file notes were accurate and contemporaneous. I think, generally speaking, the evidence demonstrates that she was a person who kept notes of calls and notes of correspondence and meetings, though not everything was noted down, ie, the notes cannot be regarded as comprehensive. It is true that there does not appear to be a note of a couple of telephone conversations and in other instances there is not a precise correlation between the time of a diary note of a phone call and the time of that phone call according to the telephone company records, but in general I was impressed by the care and thoroughness of the notetaking by Ms Hossack. Mrs Alroe, on the other hand, apart from the written communications between her and one or other of the respondents had no independent notes and in many respects her recollection, in my view, does not accord with what occurred objectively. One example is Mrs Alroe's account of a telephone conversation with Ms Hossack of which she says that Ms Hossack's behaviour was unbelievable and rude, yet in a letter a few days later, Mrs Alroe wrote in quite glowing terms of her dealings with Ms Hossack.
35 So also I prefer the recollection of Ms McGrory concerning the conversations that she had with Mrs Alroe concerning the management problems engendered by Joanne Jensen, who was the manager of the Aromas Toowoomba store prior to and subsequent to the purchase of the business by the first applicant. Also, I prefer Ms McGrory's account concerning her dealings with Mrs Alroe about roadworks and the effect of the roadworks on the Aromas business.
36 In my assessment, Ms Horley's recollection was less than complete. I got the impression that the circumstances, for her both personally and from a business point of view meant that her recall of events was rather vague and their reliability was imprecise and one could not repose total confidence in the precision of her recollections. Mr Bryant did not claim to have a detailed recollection of the events and conversations in which he was involved. Ms Hossack and Ms McGrory are more directly concerned with the issues in these proceedings than Ms Horley or Mr Bryant.
37 It has to be said that the applicants' case was presented vigorously as one of multiple, fraudulent misrepresentations and one in which the respondents' case was riddled with deliberate lies, both in the communications that occurred prior to the sale and settlement of the business and also in the course of the evidence before the court. While, for the reasons which appear below, I am satisfied that there was conduct in contravention of s 52 anterior to the sale and settlement of the business by Aromas and Aromas Franchising, I am not satisfied that there was any dishonest, let alone fraudulent, conduct on the part of the directors or agents of Aromas or Aromas Franchising, including any of the human respondents. Also for reasons which are detailed below, I am quite satisfied that this is not a case where the court ought to make orders pursuant to s 87 of the Trade Practices Act in the nature of rescission or that the relevant contract should be set aside, the business re-conveyed, and the purchase price and franchise fees refunded with interest.
38 The events leading to these proceedings are as follows. The first shop conducted by Aromas commenced business in 1982. A number of other Aromas shops were established between then and 1995. Mr Bryant had experience with the effect on Aromas of other coffee shops opening in the vicinity of operating Aromas shops. The effect of that competition, according to Mr Bryant, was not to affect the sales of the Aromas shops, at least to any significant extent. One exception to this experience was the position of the Aromas Park Road shop. In late 1994 a coffee shop called "Rue de Paris" opened some five shops away from Aromas and at No 1 Park Road, a development containing some six other cafes and coffee shops also commenced operations and, according to Mr Bryant, Aromas takings at Park Road fell 13% in the six months during which those seven other shops opened.
39 On 20 March 1995, Mr David Cassidy was appointed Administrator under a voluntary administration scheme. Subsequent to the commencement of the administration, a number of Aromas shops were sold, without the Aromas "badge" continuing as part of the business. The shops were described as having been sold "unbadged". On 23 March 1995, the directors of the "Coffee Club" offered $275,000.00 for the Aromas Toowoomba business unbadged. On 26 March 1995 Ms Hossack sent a memorandum to the Administrator and to the in-house accountant for Aromas, Mr O'Hare, which memorandum said in part:
"We need accurate and revised figures for all the remaining shops. The current figures...are apparently inaccurate which exposes the company...to...actions under the Trade Practices...legislation."40 On 28 March 1995 Ms Hossack requested Gil Wright & Associates to value all the Aromas shops and on 31 March Mr Wright valued, unbadged, the Riverside shop at $256,000.00, Broadbeach at $196,000.00, Toowoomba at $327,000.00 and Orchid Avenue at $230,000.00. The first three shops were valued on a capitalisation of three times estimated maintainable net earnings. The Orchid Avenue shop was valued on the basis of plant and fixtures, fittings and equipment. The Orchid Avenue shop sold on 3 May 1995 for $230,000.00, the sale being settled on 23 June 1995. The Riverside shop sold on 4 May 1995 for $282,000.00 and was settled on 30 May 1995.
41 A Mr Zaris had a series of communications concerning the Toowoomba shop. On 17 October, Mr Alroe, then a solicitor at Messrs Cleary & Lee, Toowoomba, advised Ms Hossack that Mr Zaris did not wish to proceed with the Toowoomba Aromas shop but that Mrs Alroe was interested. Mr Zaris had offered $220,000.00 for the Toowoomba shop on 31 May 1995. On 9 June he offered $250,000.00 for the Toowoomba shop, and on 28 June $270,000.00. Mr Cassidy resolved to sell the Toowoomba shop as part of the administration on 4 July 1995. Ms Hossack's minute of a meeting she attended with Mr Cassidy, Mr Bryant, Ms Horley and Ms McGrory and one Steve Riech on 12 September 1995, recorded, in respect of one of the agenda items which dealt with the sale of Toowoomba, "Will not sell TWBA now but, must get manager replacement". On 26 September 1995, Mr Bryant, Ms Hossack and Mr Cassidy further discussed the Toowoomba shop management. The minutes of that meeting record:
"Toowoomba is being managed poorly but will improve with some of the new initiatives."42 The records for the Toowoomba shop show that in July there were actual sales of $47,321.00 over the four week period, with a net profit pre-tax of $3,498.00; in August actual sales of $45,087.00 with a net profit pre-tax of $6,480.00, and in September there were actual sales over a five week period of $62,532.00 with a net profit pre-tax of $6,218.00.
43 On 2 October 1995 cash was banked in respect of Aromas shops at Hoyts in Brisbane, the Wintergarden in Brisbane, Noosa and Toowoomba from sales which were included in the September sales figures. $6,686.40 of the cash which was banked reflected cash banked by Aromas Toowoomba.
44 On 18 October there was a meeting between Mr Bryant, Ms Hossack and Mrs Alroe at Aromas Head Office, West End. Ms Hossack's note of that meeting indicates that "Michele [Mrs Alroe] is interested in having her own income stream." The note describes her as "very gregarious, her husband Damien is a solicitor, both lived in Toowoomba, her mother-in-law is on the Council and has a profile". The minute also noted that:
"She will work 20 hours per week. She wants 20% return. She has unencumbered $500,000.00 of assets. She would like to take over by December."45 Marise McGrory sent a memorandum to Ms Horley, Mr Bryant and Ms Hossack on 23 October about the month-to-date figures as at 22 October 1995, which indicated that Toowoomba had achieved $36,204.00 as against a budget figure of $37,500.00. On 25 October 1995, Ms Hossack faxed to Mrs Alroe a letter which is important in the present proceedings, and I set it out in full:
"Further to our meeting last Wednesday and our discussions yesterday, I confirm that Chris Bryant enjoyed meeting with you and feels that you would be a suitable Aromas Franchise (sic).46 On the following day Mrs Alroe phoned requesting financial information for the year ending June 1995 and actual to budget variance reports for July and August 1995. On 27 October 1995 Ms Hossack faxed to Mrs Alroe at Messrs Cleary & Lee a letter. The letter enclosed a detailed Profit and Loss statement for the period ending 30 June 1995, the actual to budget variances for the period ending July 1995, the actual budget to variances for the period ending August 1995 and the 1995/1996 budget for Toowoomba Aromas. The letter made various comments in respect of the Profit and Loss sheets ending June 1995, and pointed out some figures which might be dramatically reduced or deleted having regard to their connection with Head Office and Aromas expenses. It is to be noted that the July actual to budget variance report showed sales 5% less than budget, operating expenses 10% more than budget, net profit before tax 60% less than budget. The August actual to budget variance report showed sales 10% less than budget, operating expenses 8% more than budget, and net profit before tax 26% less than budget.
Accordingly I enclose:
1. Summary of Results for the Toowoomba shop for period ended 30 June, 1995, and
2. Detailed figures for the Toowoomba shop for period ended 1 October, 1995.
As you will note from the figures for the last quarter, the store would return an EBIT figure just over a 19.8% on a $325,000.00 investment, if the figures were annualised.
I am informed by the General Manager in respect of the figures as follows:
1. The $4,948 expended on in store promotions included an extraordinary amount of "free coffee" vouchers. I am advised that this promotions figure can be brought down by $2,000 without any detrimental affect (sic) on the shop;
2. The freight and cartage figures will be significantly reduced if the current initiatives (which impacted positively on the September figures) are continued.
3. The sales are improving (as indicated by the September figures) on account of newspaper advertising, a good "foodie" being appointed and the general restructuring of store management.
Obviously Aromas tax position and the lease and goodwill amortisation figures are irrelevant for your purposes, they have not been included in the enclosed figures.
On account of the improvements to running the shop, some of which have been noted, the Directors of Aromas Pty Ltd are optimistic that the Toowoomba shop will achieve its budget. Naturally this would have a significant impact on the trading results."
47 On 30 October 1995, by telephone Mrs Alroe told Ms Hossack that she would like to check the October figures. On 2 November Ms Hossack phoned Mrs Alroe, who told Ms Hossack that she was having an accountant look at the figures and also that Mr Zaris kept saying that the price was $305,000.00, and Ms Hossack said that it was not ever $305.000.00. On 3 November Ms Hossack wrote to Mrs Alroe, which letter said:
"As discussed, I enclose a computer generated Profit and Loss Report which shows a $9,728.66 profit for the month (budgeted profit $5,039)48 This document run at 11.13 am on 3 November shows sales of coffee beans at $7,496.91, with the year to date figure for coffee beans at $11,044.39. These figures, which are incorrect, are to be contrasted with the previous year's figures for the current period of $954.28 and a year to date figure of $4,953.91. I am satisfied that on 7 November 1995 Mr Cassidy rang Ms Hossack and confirmed that he was happy with the figures in the Profit and Loss Report.
I confirm that the Administrator has not signed off on these figures yet, but that I will have his comment on Monday. Naturally I will advise you if there is any change."
49 On 8 November 1995 Mrs Alroe faxed a handwritten letter dated 7 November 1995 to Ms Hossack, which letter said in part:
"As a result of a lengthy interview with my accountant today I wish to raise the following:And a number of matters are then raised. She then later asked:
..."
"What are your anticipated trends in operating expenses given the comment above re turnover trending downwards."She later said in looking at the 1995/96 projected figures:
"I have altered them as follows."She then indicates in some detail the adjustments that she has made. She then importantly said:
"These figures do not include an allowance for any shop refit and are based on figures which currently have not been achieved.50 On that same afternoon Ms Hossack telephoned Mrs Alroe, who advised Ms Hossack that she had spent two hours with the accountant, who had a lot of questions. According to Mrs Alroe, he had played the devil's advocate and advised that the mocked up figures did not look good. On 9 November 1995 Ms Hossack faxed to Mrs Alroe a letter which said, importantly:
They do not include a figure for the impact that Coffee Club will inevitably have on all coffee shops and eateries in Toowoomba and given the anticipated trendy appeal it will have initially and to some extent permanently on Toowoomba's population, it will certainly affect Aromas. Have you an anticipated figure based on past experience. Here we must consider Toowoomba is not Brisbane where there are many so called upper class coffee shops/eateries. In Toowoomba Aromas & Coffee Club will be in direct competition.
..."
"Following your facsimile yesterday and our telephone conversation I am instructed as follows:The letter identified savings that "could be achieved" totalling $8,640.00 and continued:
...
2. Toowoomba's Gross Profit compares favourably with the other shops.
...
4. A reduction of Sales has been anticipated on account of increased competition but operational improvements are now producing better margins.
"Accordingly, our version of the figures would look as follows:
Gross Profit $268.880.00
Expenses $124,054.00
($132,694 - $8,640)
$144,826.00
Less: Franchise Charges $ 52.800.00
EBIT $ 92,026.00"
The letter continued:
"In respect of competition, we have factored in a 2% reduction of sales and have been advised by a Valuer that notwithstanding the advent of Coffee Club in Toowoomba, the position of "Aromas Toowoomba" is sound. The Directors, who each have had fourteen years experience in the trade, are also of the view that:51 Notwithstanding the reference "I am instructed as follows" and the evidence of Ms Hossack that she merely passed on information she received from other officers and employees of Aromas, I am satisfied that she was acting as the principal negotiator and communicator of information on behalf of Aromas in respect of the sale of the Aromas Toowoomba business. This letter enclosed an Actual to Budget Variance Report for October. It showed a net profit before tax of $9,729.00 rather than the correct figure of $3,892.00. It enclosed an estimate for the hours for the manager at 54 hours. I am satisfied that on 10 November when Ms Hossack phoned Mrs Alroe, Mrs Alroe confirmed that "she was very committed" and that she was not totally accepting her accountant's advice. On the same day in a handwritten letter to Ms Hossack, Mrs Alroe said:
1) As in Brisbane, an increase in Cafes seems to generate more business and create a "Café Society", and
2) The proposed Coffee Club will be a full restaurant operation with 270 chairs. In this regard it takes itself out of the "Café" market both in size and services offered. People are not always comfortable just ordering coffee and cake in large restaurant areas. Also, as with all Coffee Clubs, it will be targeting a different market and type of customer.
Naturally, you will have to make your own decision and obtain your own financial advice in respect of these figures and Aromas Pty Ltd Actual and Budgeted figures.
Aromas Pty Ltd has provided the above information to assist you, based on its own knowledge of its own shops and franchises but makes no representation that if you do buy the business it will achieve the quoted figures."
"Before passing your reply on to my accountant I have several points to clarify and a few further questions."
The letter continued:
"...52 Mrs Alroe in her oral evidence thought that she would be lucky to get away with a 10% loss of permanent trade and in the short term it was possible that the loss would be greater. Mr and Mrs Alroe say that they received separate telephone calls from Ms Hossack on 20 November, during which she complained about the enormous amount of time she and the staff were spending responding to Michele Alroe's queries, and that Michele had to make up her mind whether or not she wanted to proceed. Mrs Alroe says of her conversation with Emma Hossack:
With regard to Coffee Club I would make the following comments. I agree with your comments in 2) and I experienced the same feeling when I visited Coffee Clubs (sic) West End shop. However to say its impact will only be 2% I believe is unrealistic. Rascals the large upmarket coffee shop in Market Plaza is up for sale and is having difficulty in convincing the agent and prospective buyers that Coffee Club will have little effect. I agree we are in a much better position in the street than Coffee Club and we do and will continue to attract a different crowd to some extent but there will be a crossing between the two shops. I do not believe you can compare Brisbane to Toowoomba. You would have to live here to appreciate how conservative a town it is, how you have to drag people out of their houses. The Uni is a saviour as far as young people looking for entertainment goes. However for nearly four months of the year the students return home leaving the locals to fill their places. We are not the size of Brisbane. We do not have an enormous population to drawn (sic) on therefore while I agree Coffee Club may initially bring a few extras out of doors to check it out and they may wander down the street to check us out to say there will be a significant number of people being drawn into the street as a new café opens and remaining there as permanent Margaret Street customers is unrealistic in a town the size and tone of Toowoomba. If by hard work, improvement of service and a further improvement of food and particularity by a large imput (sic) by the new owner of Aromas we get away with a 10% loss of permanent trade I think we would be very lucky indeed. Of course over a period of time I believe I could build up the business and long term will see the profits increasing and Coffee Club just not part of the senario (sic) but not in the short term.
...
c) The main reason for my buying Aromas is because I believe I can build it up into a great business having the advantage over the current arrangement as I am a local, the family is well known & I believe I'd be good at the business....To get my capital back under this arrangement I would need to sell after say 4-5 years which is not what I want - particularly if it is returning what I expect it could with my imput (sic) and necessary hard work."
"On 20 November when Emma rang me she was so rude it was unbelievable. I couldn't believe that conversation, that anyone could ring - I couldn't believe she could speak to me like that."Ms Hossack denies that she spoke in the terms alleged on 20 November to either Mr or Mrs Alroe. While I accept there might have been complaint by Ms Hossack at the repetition and details of the requests emanating from Mrs Alroe, I simply do not accept Mrs Alroe's assertion that Ms Hossack spoke in terms that were so rude as to be unbelievable. This is so, particularly since on 23 November, a short time later, Mrs Alroe wrote to Ms Hossack commencing "Dear Emma", which letter stated:
"Firstly let me express my appreciation for the assistance you, the Directors and staff members have provided to me in assessing the business. You have all been most patient with a self-confessed novice. Your frankness, while convincing me the business is one I could successfully manage, has also enabled me to identify areas of real concern to me as an investor."The tenor of this letter is quite inconsistent with Mrs Alroe's evidence as to the content of the conversation on 20 November.
53 On 21 November, an article appeared in the Toowoomba Chronicle concerning a remodelling of Margaret Street in early 1996. There is a serious factual discrepancy as to what occurred and in what sequence concerning the proposed roadworks. Mrs Alroe says that on the morning of 21 November she phoned Aromas in Brisbane and spoke to Marise McGrory. She says that on the following day she met Ms McGrory at the shop after Ms McGrory had been to the Council and Mrs Alroe says that there was a general discussion about minor matters including management, but "We didn't have a big discussion on management capacity". She denied that Marise McGuire told her that she was concerned that Jo Jensen had personal problems and was absent too often and that the staff were protecting her and covering for her out of loyalty. In particular, she denied that it was her choice and that she could let Jo Jensen go.
54 On the other hand, Ms Hossack says that there was a telephone conversation at 9.35am on 21 November 1995 between her and Michele Alroe. A memo by Ms Hossack records the conversation that Mrs Alroe said she got on well with Ruby, that she had heard that Margaret Street would be renovated, that Peter Watts was the engineer in Council, people can then use it for seating and other quite detailed information concerning the roadworks. The diary note of the conversation also records that February, March and April were referred to in connection with the roadworks and a statement appears that they wanted it completed by the end of April. Ms Hossack suggested putting the Council on notice, to which the diary note recorded that Mrs Alroe agreed and said that long term it would be a big positive, and that she really appreciated Ruby's comments and time. The Telstra records corroborate Ms Hossack's account in that the Telstra records show a 28 min 31 sec telephone call at 9.34 am from Aromas Head Office to Mrs Alroe's home phone number.
55 Further, Ms McGrory says that she spoke with Mrs Alroe at the shop, discussing difficulties with Jo Jensen's management with her at the shop and then going to meet the Council officers and promising to contact Mrs Alroe afterwards. Mrs Alroe, on the other hand, says that she met Ms McGrory after Ms McGrory had spoken to the Council officers. The telephone records support the account by Ms McGrory. The office records show that at 11.40 there was a telephone call from Ms McGrory's mobile phone to Aromas Head Office for some 7 minutes. Ms McGrory says that the Council meeting lasted about an hour and she says that she phoned Mrs Alroe from the Council chambers carpark to go through everything. Her Optus phone records show that there was a phone from her mobile phone to Cleary & Lee for 21 min 30 sec at 12.22. There is a memo by Ms Hossack with the time of 11.50 am marked, noting a conversation with Mrs Alroe which recorded that she was "very happy with her meeting with Marise and Marise's suggestin (sic) on Joe (sic) & that she has gone to Council". Notwithstanding the typographical errors in the note, it suggests first, that at the meeting with Marise McGrory, Marise had made suggestions concerning the manager, Jo Jensen, and further, that conversation had occurred prior to Ms McGrory going to the Council. Moreover, Ms Hossack at a time marked at 12.55 pm noted a phone call from Marise McGrory recording that she had spoken to the Council, who were very cooperative and wanted to liaise with retailers and Michele, that a plan was being sent to her after the meeting and the diary note indicates that the work was to commence the last week in February and was to last 8-10 weeks maximum. The note further records that McGrory told Hassock that she had informed Michele Alroe of all of those matters and had suggested giving her an altered role which was to take administration away and give it to Mrs Alroe, that is, support manager trial. The note also noted:
"She's taken `possession' in her mind."56 The Optus records in relation to Ms McGrory's mobile phone indicates a telephone call at 1.09pm from Ms McGrory to Aromas Head Office for some three minutes.
57 On the evidence I accept the evidence of Ms McGrory both concerning her discussion with Mrs Alroe about management difficulties and the position of Jo Jensen, and with her account concerning the roadworks. Notwithstanding the evidence from the Council officers concerning the absence of an estimate as to how long roadworks could be expected to take, it seems to me, and I accept, that in the conversation that the officers had with Marise McGrory on 22 November, it was suggested to her that the works would commence in the last week in February and would be 8-10 weeks maximum. It would be quite extraordinary for Ms McGrory to invent such a time limit and to communicate it, immediately after the meeting with the Council officers, to Ms Hossack at Aromas Head Office. There would be no point in such a manufacture and her sworn testimony seems to me to be corroborated by the contemporaneous note. That there was a "Council" view of 8-10 weeks at that time is corroborated by Mrs Alroe's statement to Ms Hossack before 10 o'clock on 21 November 1995.
58 Earlier reference was made to the letter of 23 November 1995 from Mrs Alroe to Ms Hossack expressing her appreciation for the assistance and patience that had been extended to her. The areas of concern referred to in the second paragraph of that letter were four in number. The first concerned "A very professional and focussed competitor in the form of Coffee Club" and that in its `honeymoon period' "will be a significant competitor affecting Aromas' sales". The second numbered paragraph said "Council proposes to do major work on the northern side of Margaret Street between Neil and Russel Streets during the first half of next year commencing at the end of February". She referred to the concern conveyed in a telephone call from her bank manager during which he recommend that she contact her accountant to revise her cash flow forecasts. She said:
"He instantly recognised, as I did, the potential impact on trading through what should be the best months of the year."She also said:
"I will not be able to stop the inevitable downturn in trade these works will cause but I will do my utmost to ensure its affect (sic) was minimal."Concerning the management problems, she said:
"I am uneasy about the staffing arrangements and what I have observed to be the disparity in performance between the Noosa and Toowoomba shops. I...feel this disparity was palpable. This was reaffirmed during my discussions with Marise. Any illusions I had about being an investor rather than a hands on proprietor have been completely dispelled. Save for a good October, the figures in Toowoomba are considerably below budget expectations....I will need to give my total devotion to the business for at least the first 6-9 months of my ownership..."In the letter she also said:
"The accountant has alerted me to other items in the 95/96 budget and franchise agreement which I admit I have ignored to remain positive in my aim to purchase Aromas.59 The offer totalling $295,000 was made, after Mrs Alroe had specifically highlighted the factors of competition, roadworks, management difficulties and given her assessment of their magnitude. The "asking" price had been $325,000.
...no matter how effectively I run the franchise and no matter how hard I work, and believe me to protect my investment I intend to work hard, the next 5-6 months will be difficult and returns from the business will not be in accordance with projections. The risk factor is greater than I had anticipated and affects what the business is worth...Yet in the short term even with me giving 150% the business faces real threats to its profitability...I am prepared to offer $220,000 for the business and $75,000 for the franchise with settlement to take place on say the 6th December assuming the necessary paper work can be concluded quickly....
I would be grateful if you would communicate my offer to the directors and the accountant appointed pursuant to the deed of Company Arrangement.
Once again thank you for your considerable assistance and patience."
60 On 26 November 1995 the actual sales for the period up to that date (4 weeks) totalled $43,702.00. On the following day Ms Hossack noted a telephone call from Mrs Alroe which noted "Wants to know how we went over weekend. Says if we had `any' business we'd have been lucky....The note also says "She thinks place in town for both of them - she calls them a `fringe dweller'".
61 On 28 November Mr Alroe received a copy of the plan for the redevelopment of Margaret Street, and the letter accompanying the plan directed attention for any additional information to Mr Peter Watts, technical officer, with his telephone number. Also on that day Mr Alroe acquired a shelf company and Mr and Mrs Alroe became directors.
62 On 29 November 1995 Mr and Mrs Alroe signed a disclosure document from Aromas Franchising Pty Ltd which, amongst other things, recited:
"The Franchisor hereby expressly states that it does not possess or profess to have any expertise in any area relating to the compilation of the information, figures or accounts contained in this Disclosure Document. Persons who read this Disclosure Document should not rely upon the Franchisor, but should conduct their own independent enquiries and engage their own independent accountant and other professional advisers to advise them in respect of the information, figures and accounts obtained in this Disclosure Document."On that day also a copy of the purchase agreement was forwarded to Mr Alroe. After suggestions concerning amendments, the purchaser signed the agreement on 1 December 1995. It is necessary to set out Special Conditions 44 and 45 as amended:
"44. VENDOR'S WARRANTIESThe words after the asterisk have been handwritten and initialled. Those words are in substitution for words which have been crossed out, which read "and waives any rights it has or may have against the Vendor in respect of the accuracy of the Financial Information or its reliance on the Financial Information".
The Vendor warrants that:
44.1 The following financial information has been provided to the Purchaser (the Financial Information):
(a) Aromas Profit & Loss and Forecast as at February 1995;
(b) Summary of Results for Aromas Toowoomba for period ended 30/6/95;
(c) Detailed profit & Loss for Aromas Toowoomba for period ended 30/6/95;
(d) 1995/96 Budget for Aromas Toowoomba;
(e) Detailed figures for Aromas Toowoomba for period ended 10/95;
(f) Actual to Budget Variance report for Aromas Toowoomba for July-October 1995 inclusive, and
(g) Computer generated Profit & Loss for Aromas Toowoomba for period ending October 1995.
Copies of these figures are attached in Schedule F.
44.2 The above Financial Information was prepared by the Vendor based on the trading figures from Aromas Toowoomba and is to the best of the Vendor's knowledge true and correct in all respects.
45. PURCHASER'S ACKNOWLEDGEMENTS AND WAIVER
The Purchaser acknowledges:
(a) Receipt of the Financial Information referred to in Clause 44:
(b) That it has received its own financial/accounting advice and is aware that there is no assurance that the business of Aromas Toowoomba will perform as well as the Financial Information indicates as the actual sales levels and profitability primarily depend on the Purchaser's own efforts:
(c) The Financial Information has been provided to the Purchaser to assist the Purchaser in obtaining its own financial advice. The Purchaser acknowledges that no representation is made or has been made by the Vendor that Aromas Toowoomba will perform according to the Financial Information.*
(d) All goods not specifically referred to in Schedule A are specifically excluded from the items being sold. The title to these excluded items, which include without limitation crockery, cutlery, tea towels, trays, glasses, ornaments, postcards and antiques, is retained by the Vendor who may at its option sell on its own terms any or all of the items to the Purchaser.
*The Purchaser also acknowledges that the vendor has advised the Purchaser that all of the financial information was compiled from trading figures downloaded by modem from Aromas Toowoomba to the Vendors Registered Office and that the financial information is true and correct to the best of the vendor's knowledge but has not been audited and the Purchaser has elected not to audit the financial information."
63 The fact is that the detailed figures for Aromas Toowoomba for the period ended October 1995 and the computer generated Profit & Loss for Aromas Toowoomba for the period ended October 1995 are not true and correct, because the amount for bean sales had been seriously overstated. The error was caused by a misposting of the cash banked on 2 October in respect of September takings, and erroneously augments to a substantial degree the actual sale of coffee beans. In my opinion, it is not correct to say that the financial information contained in Schedule F was based on the trading figures from Aromas Toowoomba. The figures supplied for October 1995 and the Profit and Loss Account ending October 1995 did not reflect the actual trading for October , but included the erroneous posting of the September cash bankings as coffee bean sales. In my opinion, however, none of the respondents was aware of the error and consequently none of the respondents knew that the figures were false. That conclusion is reinforced in my opinion from the transparency of the error when compared with the October sales in the previous year and the year to date sales from the previous year. It would be a very silly thing to do to make such an obvious error deliberately and, in my judgment, while the figures for Aromas Toowoomba for the period ended October 1995 and the computer generated Profit & Loss for Aromas Toowoomba for the period ended October 1995 were erroneous, the error was not made deliberately, dishonestly or fraudulently by any person nor was there communication of it.
64 The several contractual acknowledgments are directed to displace any reliance that future performance would be a reflection of historical performance. Erroneous historical trading figures wee supplied to the prospective purchasers, and the contract as amended did not have the effect of denying to them rights based on that error. I am satisfied that Mr and Mrs Alroe relied on that erroneous information in their decision to purchase the business, and that the provision of the erroneous information was a factor in their decision. I am satisfied that the provision of the erroneous trading figures amounts to misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act and was conduct which induced the first applicant to enter into the purchase contract and franchise agreement and to the giving of guarantees by the second and third applicants.
65 Mrs Alroe says that a week or so after the opening of the Coffee Club in Toowoomba on Wednesday, 22 November, her husband asked her "if we could get updated figures from Aromas to see what if any Coffee Club might be having on our figures". Mrs Alroe says that she telephoned Emma Hossack on 6 December about this and was told that no figures would be available for approximately two weeks until after the Administrator had signed off on the figures. Mrs Alroe in her evidence said that at that time she was not aware that there were daily takings figures that could be obtained. The conversation was consistent with a request for the figures for November as opposed to daily figures. I do not accept the contention on behalf of the applicants that there was a deliberate decision to conceal from Mrs Alroe the trading figures for the Aromas Toowoomba shop, which would reveal the significant impact the Coffee Club had on those takings in the first days of the Coffee Club's operation.
66 On 11 December 1995, an interview with Mrs Alroe appeared in the Toowoomba Chronicle in which she said that "the competition had been enjoying a honeymoon but that she was in business for the long term". In the Chronicle Entertainment Weekly is a quotation from Mrs Alroe saying that Aromas opened about two and a half years ago and it was really great for the first six months, and "that's the Aromas you want to operate".
67 At the stocktake after settlement on 11 December, Mrs Alroe says that she expected that $5000.00 would be enough to acquire the stock and that the amount on the stocktake "was way over the top". She was asked in cross-examination:
"It was made clear to you by her [a reference to Marise McGrory] that you were only obliged to take $5000.00 worth, to which she replied `Yes'."She admitted that within the first week she knew that her figures were not anything like those that she had expected. She said that she was expecting $12-$13,000.00 for the week and she thinks she got $9,000.00. Mrs Alroe admitted further that she had been informed by staff that the Coffee Club had had an enormous impact and that in early January the takings may have fallen by as much as 31%. She also admitted that she knew by the end of the second week that there were major problems with Jo's competence as a manager.
68 Importantly, Mrs Alroe says that in early January 1996 she became aware that the October takings were less than the figures that she had been shown by Aromas, by something of the order of about $6,500.00. She was asked by Mr Andrews, counsel for the respondents:
"And I suggest to you that if the October figures had been of any significance to you, any special significance, you'd have complained in January '96 as soon as you saw the error?---My husband told me to say nothing.69 Also, on 6 February 1996 Mrs Alroe says that she rang the Toowoomba City Council assistant engineer and was advised that the roadworks which were commencing that day were not likely to be finished until August 1996.
You appreciated in January '96, didn't you, that the October figure for beans had been inflated by about $6600?---In January, yes."
70 On 13 April 1996, Elliotts MGW Pty Ltd, Chartered Accountants, calculated the adjusted net loss for the business for the period 11 December 1995 to 13 April 1996 of $3,608.00, excluding depreciation and wages to Mr and Mrs Alroe at commercial rates. Mrs Alroe says that later, in April 1996, after Aromas had come out of administration she decided to confront Marise regarding some issues and complained to her of Aromas lack of support and the representations which had been made to her before the purchase. On 19 April 1996, Mr Bryant wrote to Mrs Alroe and the letter included the following:
"The question of approaching Council regarding compensation has been raised before and you rejected out offer of help at that time. However, as it is now mid April and the works are likely to continue until the end of June, we are of the view that the Council's representation to us that we would only be effected (sic) for two months should be addressed. Marise is firmly of the opinion that the works are substantially effecting (sic) your business and we would be happy to seek compensation for you at our cost."Also the letter said:
"We do agree that the opening of the Coffee Club has had an effect on your business, which you anticipated in your letter of offer, however, we feel the roadworks are equally to blame.The letter also stated:
You were aware of both of these situations before you entered the franchise, and the price was significantly reduced on this account. At that time you were extremely positive about succeeding. We are still extremely positive and are certain that by working together we can succeed...."
"Enclosed you will find a weekly Franchise Report for you to complete. By sharing this information weekly, we will be able to assist you with your business."71 Mrs Alroe said that it was not easy to find time to complete a reply to this letter, but replied on 30 April 1996. That letter commences:
"Your recent letter simply adds insult to injury and clearly shows Aromas refusal to face the reality of the situation in which I find myself..."72 In respect of the offer of management assistance, Mrs Alroe said:
"I was handed a management disaster but I do not, and I repeat DO NOT have a management problem."73 Concerning the Coffee Club and the roadworks, the letter said:
"You told me Coffee Club would have at most a 5% reducing to 2% effect on sales and laughed at me when I suggested it could be greater. In good faith I took your worst case scenario, doubled it and factored this into my offer. Are you seriously suggesting that I should have taken your worst case scenario as an experienced operator and quadrupled it? How could I factor in the effect of the roadworks when I was told that they would take two, not six, months? Besides, my factor translated into $10,000.00 not $30,000.00 in terms of price reduction.Later:
"Your requirement that I complete a weekly franchise report, creates more paperwork for me when I am already overloaded with workAnd later still:
"In spite of all the difficulties I face, I have a feeling that the business has turned the corner..."74 On 30 April Mrs Alroe declined to supply weekly franchise reports. Subsequently there were discussions between the parties culminating in a letter of 28 August 1996 where Aromas indicated that it was not happy with "the performance and management of [the] franchise...".
75 On 30 August 1996 Cleary & Lee wrote to the company solicitor of Aromas in the following terms:
"proceedings are to be instituted in the Federal Court against Aromas Pty Ltd, Aromas Franchising Pty Ltd, the companies' directors and the relevant officers."The letter indicated:
"...our clients will be seeking rescission of both the franchise and business contract..."The letter said:
"We understand that you are aware of the nature of the dispute in that our client alleges that your clients made various representations regarding the business, Aromas Toowoomba, which they knew were untrue or became aware were untrue in circumstances where there was an obligation to disclose that the representations were untrue. Those representations which our client alleges were made are as follows:-76 On 3 September 1996 Cleary & Lee wrote to Ms Hossack, which letter commenced:
(a) that the business was trading profitably;
(b) the impact of sales on the opening of the Coffee Club would be a reduction in gross sales of no more than 5% reducing to 2%;
(c) Council roadworks in Margaret Street would affect the business for no more than two months;
(d) that the business had minor management problems but was essentially a capably run business supported by a competent and experienced franchisor;
(e) financial information attached to the business contract was correct;
(f) the stock at settlement together with the items referred to in special condition 45(d) of the business contract would not exceed an amount of $5,000.
..."
"As the directors of our company advised you in July, they had preliminary advices from Senior Counsel that our client could expect to succeed in an action for damages against your companies but Counsel's considered advice was not received until Wednesday of last week...And later the letter said:
"Please explain why a demand is now made for monthly reports when these have not been required previously and we understand are not required from other franchisees...."77 The default notice was issued on 6 September 1996, and on 27 March 1997 a second default notice dated 10 March 1997 was served. This service was effected on a Thursday. The covering letter is dated 10 March 1997. The default notice is dated 27 March 1997 and signed by Mr Bryant and witnessed by Ms Hossack. On 23 April 1997 the solicitors for the respondents wrote that:
"... our clients totally reject your clients' claims as being without foundation and consider the only solution is for your clients to take on new management or sell the franchise to a third party."The letter concluded:
"To assist in that regard, but with a complete reservation of existing and future rights, our client franchisor does not intend to terminate the franchise immediately but will merely cross-claim now for a declaration of its rights to do so."78 As to the present situation in Toowoomba, Mrs Alroe said in an affidavit in October 1988:
"With the establishment and revamping of a number of cafes since 1995 competition for market share is much fiercer than it was in 1994/1995. In December 1995, there were 4 or 5 eateries and cafes in the immediate vicinity of Aromas Toowoomba. Today there are 15. Further, the expansion of the Clifford Gardens Shopping Centre, the Wilsonton Shopping Centre and the Myer Grand Central Complex which alone brought to the town an additional 120 retail shopping outlets to the city has seen a drastic reduction in the numbers of people frequenting that area of the city in which Aromas Toowoomba is located."79 As to the alleged representation concerning management of Aromas Toowoomba, the pleaded representation is not made out. I am satisfied that the allegation of Mrs Alroe that she was told at the first meeting with Bryant and Hossack that the business was operating under competent management was simply not made. I prefer the recollection of Hossack of this conversation to the effect that Mrs Alroe was told by Mr Bryant that Joanne Jensen, the manager of Toowoomba, was a company trained manager who had some personal problems and was not managing the shop as well as he would like, but that with appropriate guidance she could be a good assistant manager. I am fortified in this conclusion by my acceptance of the evidence of Ms McGrory of her conversation with Mrs Alroe on 22 November 1995. I prefer Ms McGrory's evidence as earlier indicated on this aspect of the matter, supported as it is by the terms of the telephone conversation between Mrs Alroe and Ms Hossack, a reference to the fact that Mrs Alroe was "very happy with....Marise's suggestion on Jo", and Mrs Alroe's letter of 23 November 1995.
80 On the question of competition from the Coffee Club, it is clear that the Coffee Club detrimentally affected the trading figures of the first applicant for some considerable time. In my view there was nothing representational or having the flavour of a warranty or guarantee as to the effect of the Coffee Club on Aromas Toowoomba. Mr Bryant particularly expressed his opinion as to the likely effect, particularly after a `honeymoon period'. That opinion, in my view, reflected his experience of competition in respect of a number of disparate Aromas shops in Brisbane, and the Park Road experience where there was a significant continuing effect on Aromas Park Road, which occurred in the materially different circumstances of a large number of similar establishments opening almost contemporaneously. The correspondence from Mrs Alroe makes it plain beyond argument that she was aware of the likely impact of the Coffee Club and took a much less sanguine view of the effects on Aromas Toowoomba than that expressed by Mr Bryant and the other employees of Aromas. It is significant in this respect that Mrs Alroe seems to acknowledge in her handwritten note of 2 May 1996 that the Coffee Club was "a competitor that had devastated them in a way they had never seen before". In the light of that evidence, I am not satisfied that there was any reliance by Mr or Mrs Alroe in the decision to purchase the business or any statements made by any of the respondents as to the likely effect, either in the short term or long term, of the Coffee Club on Aromas Toowoomba.
81 The position is similar in relation to the issue of roadworks. I am satisfied that Ms McGrory told Mrs Alroe that she had been informed that the roadworks would commence in late February and would occupy 8-10 weeks. Ms McGrory believed this and on reasonable grounds. There is just no evidence to suggest that any of the respondents knew or believed that the roadworks would last for more than 8-10 weeks. That the roadworks had a significant impact on takings is accepted. Mrs Alroe in particular bought in anticipation of a downturn caused by roadworks, but there is no evidence to establish that any conduct of any of the respondents caused the losses resulting from roadworks after the period of 8-10 weeks, nor is there any evidence to sheet home any loss or damage suffered as a result of the second lot of roadworks on the other side of Margaret Street at a later time. It was specifically submitted by counsel for the applicants that the file note EJH 86 by Ms Hossack relating to a conversation between Ms Hossack and Mrs Alroe on 21 November 1995 was constructed at a later date and is a fabrication. The contents of the diary note and the sheer improbability that such a fabrication would serve any useful purpose, supports my view in rejecting that submission.
82 As to the complaints concerning the accuracy and reliability of the 1995-96 budget, it is plain that the actual performance of the Toowoomba store was in disconformity with the budget predictions. In my view, there was never any representation that the actual performance was, or would be, in conformity with the budgeted estimates. On the other hand, I have earlier expressed my conclusion that the provision of the October Profit and Loss Report and of the October results constituted misleading and deceptive conduct in that the document represented that the Toowoomba shop had a gross profit of some $9,726.66 for the month of October, where in fact that figure was affected by the overstatement of some $6,500.00 worth of bean sales. This incorrect information was not supplied dishonestly or fraudulently, but nonetheless the trading performance of Aromas Toowoomba was a factor in the decision that the first applicant purchase the coffee shop business.
83 The other alleged misrepresentations can be disposed of shortly. I am not satisfied that the business was not trading profitably at the time that Mrs Alroe was told that at the meeting of 14 October, nor am I satisfied that that statement was untrue at the time of the contract or settlement of it. In my view, a representation that a business is trading profitably is not the same thing as a representation that a business would return 19.8% on a $325,000.00 investment. There was, moreover, never at any stage in the light of the special conditions of contract, any representation that the historical performance would be reflected in the future sales and profitability or that performance of Aromas Toowoomba would mirror the historical sales and profitability; what was represented was that the trading figures that had been supplied to the purchasers were the historical trading figures from Toowoomba, and that representation was false. I am not satisfied that there was any misrepresentation in the representation to Mrs Alroe at her first meeting that she would have full franchise support. Nor am I satisfied that there was a representation by Ms Hossack on 20 November 1995 to the effect that there was no other information that she was aware of that the Alroes needed to consider in order to form a decision as to whether or not to purchase the business. I have earlier indicated that I am not satisfied that there was any deliberate withholding of trading figures for November, withheld for the purpose of concealing the deteriorating trading position as a result of the opening of the Coffee Club.
84 It has not been shown that the third to sixth respondents aided or were directly knowingly concerned in the contravention of s 52 by the first and second respondents. I accept that before the human respondents can be said to have aided or been directly, knowingly concerned in contraventions, it is necessary that the applicants prove that that human respondent had knowledge of the essential facts constituting the contravention. In the circumstances of this case, that requirement means that it must be established that the natural respondent had knowledge of the falsity of the representation concerning the October bean sales.
85 In Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661, Mason ACJ, Wilson, Deane and Dawson JJ said at 668:
"Whilst Lucas was aware of the representations - indeed they were made by him - he had no knowledge of their falsity and could not for that reason be said to have intentionally participated in the contravention."And their Honours said at 670:
"There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention."86 Brennan J at 674 referred to the holding by the Full Court in Yorke v Lucas that knowledge was essential to liability under s 75B of the Trade Practices Act. The Full Court said [(1983) 49 ALR 672 at 680]:
"It follows that Mr Lucas could not be held to have contravened s 52 as an aider or abettor unless the Court is satisfied that he knew of the essential facts or matters constituting the contravention including knowledge that the relevant representations as to the weekly turnover of the record business and its gross profit were incorrect. The incorrectness of those representations is essential to support a finding of misleading or deceptive conduct. Mr Lucas had no actual knowledge whatever of their incorrectness and it is not suggested that the circumstances of the case warrant an inference of constructive knowledge on his part of the character of the conduct complained of."Later at 674 Brennan J said:
"The distinction which their Honours drew between the liability of the Lucas company and the liability of its managing director stemmed from the view that knowledge of the falsity of the representations made by Mr Lucas was not an element in the contravention of s 52 by the Lucas company but knowledge of the falsity of the representation was a condition of any liability imposed by s 75B in respect of that contravention."At 677 Brennan J said:
"...s 75B(a) does not extend liability for a s 52 contravention to a person who procures the corporation to engage in contravening conduct if that person is honestly ignorant of the circumstances that give that conduct a contravening character."87 The applicants have not established that the third to sixth respondents knew of the falsity of the representation concerning the October bean sales at the time prior to settlement. That error, in my view, was discovered from the Aromas' viewpoint in January 1996, although each of the third to sixth respondents swore that they were not aware of that error until much later. I am satisfied that in any event Mr and Mrs Alroe were aware of that error from early January 1996 and were aware of that error prior to knowledge of it by the third to sixth respondents.
88 In the light of these findings, it is necessary to consider what orders the court would make pursuant to ss 82 and 87 of the Trade Practices Act. In my opinion, this is clearly a case where the court would not make orders akin to rescission pursuant to s 87 of the Act. Mr Alroe, a solicitor, in his evidence said that he held the view from the first week of trading in December 1995 that the applicants were entitled to rescission, and this view did not change between December 1995 to June 1996. By early 1996 each of Mr and Mrs Alroe knew that the bean sales for October was inflated. At the second week's trading, they knew that there were major problems with the management and by the end of the first week's trading that the figures were way below their expectations. On 6 February 1996 they knew that the roadworks would take 6 months not 2. Mrs Alroe understood in November 1995 that Aromas was solvent and capable of selling the shop to pay for debts and the applicants did not ever suggest terminating the franchise. Mrs Alroe expressed the belief on 30 April 1996 that "the business had turned the corner", a statement consistent with an intention to retain the business. Mr Alroe says that he made a deliberate decision not to confront the respondents about the October figures. The applicants say they briefed counsel in April 1996 and saw senior counsel in June 1996 and received his advice in August or early September. The first indication that the applicants would be seeking rescission was in a letter dated 30 August 1996, and the first application for rescission was on 29 November 1996 with the filing of these proceedings. This is almost exactly a year after Mr Alroe believed the applicants had a right to rescission. It is clear that there was a significant change in the trading environment between settlement of the contract in December 1995 and the filing of these proceedings. There has since, as Mrs Alroe explains, been a dramatic change in the trading environment between December 1995 and October 1998. The franchisor has been continuing to perform its obligations pursuant to the franchise, and at the end of the first block of evidence on 14 August 1998, the applicants declined to accept Aromas' offer to forego franchise fees in return for an undertaking that the applicants would operate under a name other than Aromas. Not only have the fittings and fixtures depreciated for more than three years, but the deliberate choice to make no complaint about the error in the October bean sales is a telling reason why orders akin to rescission ought not be made.
89 In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40; (1988) 79 ALR 83, Burchett J said at 106:
"...for the reasons Lockhart J has given, this is simply not a matter in which the remedy of rescission is appropriate on any footing. Too long had elapsed and too much had happened, attributable to the actions and neglect of the respondent purchaser, for it to be right to attempt a disentanglement so dilatorily asked, and fraught with so many possibilities of injustice to other parties.90 In Alati v Kruger [1955] HCA 64; (1995) 94 CLR 216, rescission was allowed by the High Court, but in that case there was only a short period between the respondents taking possession of the business on 16 June and the issue of the writ on 29 June; there was no difficulty in repaying the [sterling]20 worth of stock that had been used, nor had there been any disentitling conduct by the purchaser, such as a deliberate choice to do nothing.
Section 52 should not be seen as a statutory charter of indulgence enabling a purchaser with a cause of action to keep delaying the crucial decision to affirm or disaffirm, nor does it confer a vague right to redress where an applicant does not prove in the normal way what damages are due. There is as much reason to require a vigilant response in respect of misleading conduct as there is under the general law in respect of a fraudulent misrepresentation."
91 On discovery of the misrepresentations in January 1996, there was no request made to Aromas to arrange to take back the business or end the franchise. The letter claiming that rescission would be sought in June 1996 and the application filed in November 1996 seeking rescission from the court are to be contrasted with the absence of any demand in January 1996 that the status quo be restored.
92 In Munchies Management v Belperio (1988) 84 ALR 700, a business contract had been entered into on 14 November 1986 and settled on 19 January 1987. Three months later on 24 April 1987 the applicants by their solicitors gave notice:
"that they rescind the contract...and that our clients merely treat themselves as caretakers of the business and that all losses which they are incurring or have incurred since settlement have been and will be to your account."The respondents wrote:
"Our clients do not accept your clients' rescission of the contract...We have instructions to accept service."On 11 June 1987 the solicitors for the applicants wrote:
"We are instructed that in an attempt to avoid further financial loss, our clients intend to place the business...on the market....This action is not to be treated as an affirmation of the contract of purchase..."93 The Full Court in Munchies (Fisher, Gummow and Lee JJ) said at 709:
"Under the general law, Mr and Mrs Belperio had had a choice open to them on discovery of the fraud practised upon them. They might have sought to recover, as damages for fraud, the difference between the price paid and the fair value of the business at the time of the contract, in accordance with the authorities to which we have already referred, but this would have involved affirming the purchase. Alternatively, they might have sought to avoid the purchase for fraud, thus rescinding in the sense described above."94 In Civil Service Co-operative Society of Victoria Ltd v Byth [1914] HCA 17; (1914) 17 CLR 601 where the plaintiffs were held disentitled to rescission for misrepresentation because of delay after knowledge of the whole of the material facts, Isaacs J said at 614-615:
[emphasis added]
"...in so simple a case as a discovered misrepresentation, or, as the respondent Miss Tighe says, a `cheat', it is almost an irresistible inference that a person sui juris, sound in mind and body, and of ordinary intelligence, would understand enough to ask to be released altogether if he so desired. If, however, he...were willing to take the chance...on the advent of more prosperous times bringing at the same time profits and interest, then it amounts to an election to stand by the contract..."95 So far the cross-claim is concerned, cl 13 of the franchise agreement obliged the first applicant to furnish to Aromas Franchising monthly reports, an accountant's report by 30 September each year in the form of a financial statement for the preceding financial year, including external accountant's report, balance sheet and profit and loss statement prepared by an independent, qualified external accountant approved in writing by Aromas Franchising, and other reports, sales slips, order forms, records and calculations as Aromas Franchising may from time to time in writing reasonably require. On 6 September 1996, Aromas Franchising requested Anema to provide monthly reports by requiring compliance with cl 13B of the franchise agreements, ie, to provide monthly reports. By letter of 6 February 1997, Aromas Franchising requested Anema to furnish monthly reports, external accountant's reports and an annual budget. It is not in dispute that Anema failed and refused to furnish monthly reports. The franchise agreement defined an event of default to be the failure by Anema to conform to comply with any term of the agreement and the failure to remedy any breach within ten business days after notification by Aromas Franchising. By notice in writing of 27 March 1997 Aromas Franchising required Anema to remedy the breaches. These breaches were not remedied and Aromas Franchising seeks a declaration that it is entitled to terminate the franchise agreement.
96 To this claim the applicants say that the notice purportedly issued under the franchise agreement was issued solely for the collateral purpose to force the Alroes out of the business. They further say that the notices were defective in substance because they failed to identify the breaches and did not express an intention by the franchisor to terminate the franchise agreement if the breaches were not remedied.
97 In my opinion, it is not necessary to the validity of a notice of default that a franchisor state an intention to terminate the agreement. In Laurinda Pty Limited v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 323, Mason CJ said at 638:
"For my part I agree with the suggestion made by Gibbs J that it is not necessary that the notice should state that the party will treat the contract as at an end in the event of non-compliance with the requirement stated in the notice and that it is sufficient if the notice indicates that the party giving it may choose to rely on his rights in that event. However, the notice must convey a definite and specific intent to require strict compliance with the terms of the contract within a reasonable time, so that the recipient will be made aware that the party giving the notice may elect to treat the contract as at an end at the conclusion of such reasonable time unless compliance is forthcoming."98 I do not accept that the notices were sent solely for the collateral purpose of forcing the Alroes out of business or, indeed, that that was a purpose at all. In a sense, Mrs Alroe wanted to have her cake and eat it too. She wanted to conduct her business as an Aromas coffee shop but was very reluctant to comply with the requirements of the franchise agreement. In my opinion, the second respondent was entitled to insist on compliance with the franchise agreement, the first applicant was in breach of it and is entitled to the declaration sought on the cross-claim.
99 I turn now to consider the question of what loss and damage the applicants have suffered by reason of the contravention by the first respondent of s 52 of the Trade Practices Act. In Baillieu Knight Frank (Gold Coast) Pty Ltd v Susan Pender Jewellery Pty Ltd [1997] ATPR 41-542, Sackville, Kiefel & Finn JJ held at 43,525:
"Where a person, having been induced to enter a transaction by a misrepresentation, subsequently learns that the representation was false when made, a court might well be justified in holding that losses post-dating the person's knowledge cannot be attributed to the representation. For example, if a lessee who has entered a lease in reliance on a misrepresentation subsequently learns that the representation was false, but nonetheless consciously chooses to continue in possession, a court might conclude that any further losses were caused by the decision to retain possession rather than by the original representation."100 The normal measure for damages in an action for deceit where the plaintiff has been induced by fraudulent misrepresentation to enter into a contract to purchase is the difference between the price paid and a fair value at the time of purchase: Ted Brown Quarries Pty Ltd v General Quarries (Gilston) Pty Ltd (1977) 16 ALR 23; Gates v City Mutual Life Assurance Society Ltd (1986) CLR 1 at 12. In Gould v Vaggelas (1985) 157 CLR 215, Gibbs CJ said at 221:
"This rule, is, with all respect, not quite as inflexible as Potts v Miller might suggest. There may be cases in which the purchaser continues to trade, either because he has no real alternative or because he has not become aware of the nature of the fraud, and in those circumstances incurs losses which are not represented by the difference between the price and value of the business...If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence, has already been taken into account in determining the value of the business."101 In Netaf Pty Ltd v Bikane Pty Ltd [1990] FCA 35; (1990) 26 FCR 305, Sheppard and Pincus JJ said at 308:
"These cases [Munchies Management Pty Ltd v Belperio and Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd] illustrate the proposition that allowance of trading losses is by no means automatic, particularly in businesses of a kind where trade is particularly prone to fluctuation, as in restaurants (see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40; (1988) 79 ALR 83 at 100). In our opinion, it may be very difficult to determine to what extent trading losses were a product of the `inherent vice' of the business and to what extent they were avoidable by the purchaser...We reiterate that, where a purchase has been induced by misleading conduct, it is not enough, in order to recover losses subsequent to the purchase, to prove that but for the misleading conduct or as a partial consequence of it, the agreement to purchase would not have been made; that is so in every successful application of that kind. It is not the law that in every such case the party held to have been engaged in misleading conduct (who may have acted quite innocently) becomes the insurer of the other's success and prima facie liable to indemnify him against the consequences of the purchase."Their Honours said at 309:
"It is a matter of common experience that, on a change of management, many businesses engaged in competitive activities do substantially worse and that some do substantially better; such reversals of fortune may be due to superior or inferior management, or to causes beyond management's control, such as the activities of competitors or suppliers. As we understand from the reasons of our brother, Wilcox J, his Honour is of the view that there is a prima facie right in a buyer such as the cross-appellant to recover trading losses and a loss on re-sale, subject to the possibility of that right being defeated if it is proved that reasonable steps were not taken to mitigate losses. We do not decide this appeal on that basis, but think that an applicant must prove each element of his loss....We respectfully express the view that the primary entitlement, on the authorities, is to the difference between the price and the value at the time of the purchase; the question whether further losses should be allowed is to be determined having regard to the circumstances of each individual case."102 Whether the applicants should be awarded loss and damage in addition to the primary entitlement (being the difference in value between the price and the value at the time of purchase), it is useful to have regard to the observations by Macrossan CJ in Potts v Westpac Banking Corporation [1993] 1 Qd R 135, where the Chief Justice observed at 142-143:
"It cannot, in reason, be the position that once introduced to the risky world of foreign currency dealing, the plaintiffs were entitled, wholly at the defendant's expense, to stay involved in it indefinitely, in effect guaranteed against loss by the possibility of recourse to the defendant, while, on the other hand, being entitled to keep for themselves any profits which they might be fortunate enough to make."And at 141:
"In the present case, no circumstances locked the plaintiffs into a continuation of foreign currency borrowing. The conclusion should be drawn that the effect of their free choice to stay in that market was, in a fair and practical sense, to break the chain of causation arising from their reliance on the misstatement made two years before. No doubt, the plaintiffs would have been prompted by a disinclination to accept the losses which had already been experienced, but still it appears that they freely chose to attempt to restore their damaged fortunes by staying in an unpredictable market, the risks of which had by that stage already been sharply brought home to them. Their decision to continue as they were and renew their loan was no more attributable to the initial bad advice than could be said of a decision which they might have made at that point to attempt to restore their position by buying or trading in shares or by gambling on horse races."Dowsett J agreed with the judgment of Macrossan CJ.
103 In the present case the decision by Mr and Mrs Alroe to do nothing for many months after discovering the misrepresentation concerning the October bean sales to bring an end to the business contract and franchise agreement, is strong reason to say that in this case the applicants are entitled to the `primary entitlement', namely, the difference between the price and the value at the time of purchase, and not entitled to any losses, if indeed there be any, on a full analysis, subsequent to January 1996.
104 The claim for damages for loss of a chance to invest elsewhere was described by counsel for the applicants on 14 October 1998:
"It is a claim for general damage. It is not a claim for special damages in the nature of Hungerford v Walker [1989] HCA 8; (1989) 171 CLR 125. Our case is not - and we have repeatedly told them this - not a case of the money being used in a specific way, it is just a claim that the money in general terms could have been used differently. For example, it could have been put in the bank. It is a claim for general damages."105 In Sellars v Adelaide Petroleum NL [1994] HCA 4; (1992) 179 CLR 332, Brennan observed at 365:
"To prove the substantiality of a prospect of acquiring a benefit or of avoiding a detriment and what would have been the plaintiff's actions if the opportunity had been offered, it will usually be necessary to tender evidence to establish the plaintiff's objectives and the contingencies in the way of their achievement. Evidence of that kind will bear upon both the existence and the value of the lost opportunity."Brennan J said at 368:
"A plaintiff seeking to prove the amount of a loss does not obtain the right to argue for a possibility by refraining from adducing evidence of the fact."106 There is no evidence of what opportunity is said to be lost. It seems to me that if the applicants did suffer loss or damage by virtue of the conduct of the first applicant, they will be compensated by an award of interest for being deprived of that money from the time of settlement.
107 Concerning the claim for damages "for the substantial distress and vexation intentionally caused to them by the deliberate policy undertaken to force them out of the franchise and business", such distress has not been attempted to be quantified by the evidence but, in any event, such distress is not caused by conduct alleged to be in breach of the Act. In my opinion, no damages could be awarded under s 82 for any such distress or vexation because that would not be loss or damage by conduct of another person that was done in contravention of a provision of Part V of the Act. In my view, any distress or vexation of either human applicant was associated with the requirement by the second respondent that the first applicant comply with the obligations under the franchise agreement. I will not award any damages on this claim.
108 Concerning the claim that Mr and Mrs Alroe lost the opportunity to earn income from alternative employment, Mr Alroe on the evidence has lost nothing and I do not think that any insufficiency in respect of wages to Mrs Alroe were caused by any relevant misrepresentation. She chose to continue for nearly six months with the employment of Jo Jensen as manager while she herself performed long hours in managerial work and in my opinion no relevant misrepresentation was causative of any loss of this kind.
109 I turn finally to consider the difference between the price and value at the time of purchase. Mr Paul Vincent, a chartered accountant, partner of Vincents Chartered Accountants -Litigation Support reported that the loss suffered by the applicants consisted of a capital loss of between $155,000.00 and $177,000.00 and trading losses to date of $75,448.00. The $155,000.00 capital loss is obtained by deducting $140,000.00, being the apportionment in the purchase contract and verifying affidavit pursuant to s 54A(2) (Stamp Act 1894-1986 (Qld)) relating to the acquisition of a business, to tangible assets. Mr Vincent refers to a valuation at the request of Aromas on 5 April 1995, which valued tangible assets at $126,765.00. There is some evidence that the assets as at 9 July 1998 were $118,000.00. In the circumstances, I think it appropriate to proceed on the basis that the value of the tangible assets as at the date of purchase was $140,000.00.
110 Mr Vincent expressed the view that the business, on making appropriate adjustments, at the time of purchase was operating at "earnings before interest and tax" of $5,000.00 per annum, and it was therefore not appropriate to value the business at the purchase date on an earnings basis by capitalising the level of maintainable earnings by an appropriate capitalisation rate. The calculation of future maintainable earnings at $5,000.00 takes the figures for July to October from the documents in the purchase contract, but adds depreciation of $1220.00 per month and deducts a depreciation allowance of $2333.00 per month, and a further deduction for manager's remuneration of $3,750.00 per month. This involves double counting in respect of manager's remuneration, since Jo Jensen was being remunerated as a manager and this allowance is a very generous remuneration item for Mrs Alroe in addition to the salary for the manager, Jo Jensen. I am not satisfied that the business was trading at such a figure that the capitalisation method of valuation is not the appropriate method to apply.
111 I have earlier expressed my reasons for not allowing a sum for trading losses. From early January 1996 when the Alroes were aware of the error in the October bean sales, it seems to me that it is not fair to visit any trading losses that might be incurred subsequent to that date as loss or damage flowing from any s 52 conduct by Aromas. Any trading losses at least subsequent to that time flowed, amongst other things, from the decision by the Alroes to say nothing of their discovery to Aromas; any trading losses subsequent to that date owe a considerable amount as a matter of causation to the impact of the Coffee Club and the influence of the roadworks for which, in my opinion, the none of the respondents is liable.
112 Valuation evidence for the respondents was given by Mr Gil Wright. Mr Cooper for the applicants objected to the evidence of Mr Wright being received on two bases: the first that he was not a qualified expert, not being a valuer or accountant, and secondly, that his evidence was inadmissible hearsay. Mr Wright has been a practising business broker since 1975, obtaining a real estate agent's licence in 1979. He was elected as first Chairman of the Formation Committee of the Australian Business Brokers and Valuers Association, a Foundation Member and Chairman of the Brisbane Brokers Chapter of the Real Estate Institute of Queensland, and has conducted courses and given lectures on business market evaluation and appraisal to TAFE colleges as well as to professional bodies such as the Australian Society of CPA's and the Association of Taxation and Management Accountants. He was invited to deliver the business and hotel valuation lectures in the Specialist Valuation Unit of the Bachelor of Applied Science in Property Economics degree at the University of Technology in September 1998, and he has been engaged by government and semi-government departments, various shire councils, as well as a number of accountants and trade associations to give valuations of businesses. He is the director of what he says is the longest established specialist business brokerage and business valuation office in Queensland. I am quite satisfied that he is qualified as an expert in business valuation.
113 As to the submission that his evidence is inadmissible hearsay, Mr Wright and his firm have built a database from his own sales and the sales of other business brokers. With respect to his own sales, he requires information from the vendors of the historical earnings of the business before interest and tax and other relevant data, as well as the sale price of his own sales and of the sale price of sales conducted by other brokers. He has taken files from other brokers which they have maintained with respect to sales of property listed with them so that the information on files can be added to the data base.
114 Notwithstanding that the information on which Mr Wright relies for his valuation is not direct or firsthand, that information is not in my opinion inadmissible hearsay - s 69(2) of the Evidence Act 1995 is of importance in this regard.
115 In Pownall v Conlan Management 16 ACSR 227, Ipp J held that specific hearsay, by which is meant hearsay evidence of particular comparable transactions that are used to infer the value of a property that is directly in issue, which is not otherwise proved by direct evidence, cannot be used by the valuer. Megarry J in English Exporters (London) Ltd v Eldonwall Ltd [1973] 1 Ch 415 at 420 said:
"As an expert witness, the valuer is entitled to express his opinion about matters within his field of competence. In building up his opinions about values, he will no doubt have learned from transactions in which he has himself been engaged, and of which he could give first-hand evidence. But he will also have learned much from many other sources, including much of which he could give no first-hand evidence. Textbooks, journals, reports of auctions and other dealings, and information obtained from his professional brethren and others, some related to particular transactions and some more general and indefinite will all have contributed their share."116 Much of the material on which Mr Wright relied was information of which he had direct knowledge, and the balance was supplied to him by persons who might reasonably be supposed to have had personal knowledge of the information. Pownall's Case antedates the Evidence Act 1995. In my opinion, the evidence given by Mr Wright is not inadmissible.
117 Mr Wright valued the franchise business as at 1 December 1995 and as at 11 December 1995 at $305,700.00, the submission then being made that the applicants had suffered no loss or damage as a result of the representation found. The value at which Mr Wright arrived is obtained from an estimated maintainable net profit of $80,998.00 which he capitalised at 25%, to give a rounded up market value of $324,000.00, from which he deducted stock, plant, fixtures, fittings and equipment and working capital to give a goodwill value of $165,700.00. The sum of $165,700.00 plus the value for plant, fixtures, fittings and equipment give the figure of $305,700.00.
118 Mr Wright had in April 1995 valued Aromas Toowoomba as an unbadged shop by applying a capitalisation rate of 2 of 50%. In the exercise for the December valuations he applied a capitalisation rate of 25%. Those valuations were as a badged shop. Mr Wright notes the observation by Professors F J Finn and D J H Watson in The Valuation of Business Entities University of Queensland, October 1984:
"The appropriate capitalisation rate or price to earnings ratio is typically based on industry norms in the market place and may be further adjusted to subjective assessments on the part of the person performing the valuation."119 A capitalisation rate of 25% as an unbadged shop and 50% as a badged shop illustrates just how subjective and arbitrary the choice of a capitalisation rate can be and how crucially can such a rate affect the final valuation.
120 Moreover, the assessment of future maintainable profits can involve real problems. In The Valuation of Business Shares and Other Equity, 3rd ed, by Wayne Lonergan (1998), the learned author says at 33:
"The selection of an appropriate maintainable profits figures is a matter of judgment depending on the circumstances. For example, a company may be in a position of a short-term decline as a result of industry pressures or internal management problems. In such a situation, it is important to adopt a longer term view so as to discount any short-term irregularities in the company's profitability".121 No account was made by Mr Wright in his estimation of gross monthly sales of $55,000.00 for the effect of competition from the Coffee Club either in the short or longer term or in respect of the roadworks.
Too many FMP-based valuations are flawed in that they automatically employ historical profits as a proxy for FMP without undertaking sufficient critical examination of past performance and likely future events. An understanding of the future of a business is essential for an accurate valuation, yet is omitted when historical profits are used in isolation".
122 In assessing the value of the business at settlement, I am prepared to follow the general methodology adopted by Mr Wright, but in several significant respects the components in that methodology which Mr Wright adopted are erroneous. First in relation to estimated maintainable gross sales, Mr Wright adopted a figure of $55,000.00 per calendar month for the December 1995 valuation and nearly $47,000.00 for a valuation as at 29 November 1996. The dramatic downturn in sales in December 1995 gave at least some indication of the impact of competition. It was known that there would be a negative impact as a result of roadworks. I cannot accept that $55,000.00 per month is a fair estimate of maintainable gross sales of Aromas coffee shop after settlement. When I have regard particularly to the monthly sales figures which appear in the chart and trend line for the 42 month period ending 31 May 1998, it seems to me that taking proper account of known future risks the estimatable maintainable gross sales could not be more than $50,000.00 per month, which very closely corresponds with the trend line in Mr Wright's chart dated 6.8.98.
123 As to the estimated maintainable gross profit, the industry range for coffee shops is from 54% to 67% with an average of 62%. Mr Wright adopted the historical gross profit levels achieved by the subject business which was higher than the industry average. He adopted a figure of 68.5% for his December valuations, a choice which enhances the valuation from the respondents' viewpoint. As to the estimated maintainable net profit, which involves a determination of the estimated maintainable direct business expenditure, in some items Mr Wright has adopted a constant annual figure for each of the periods at which a valuation was done by him. Thus, depreciation expense of $8,000.00 per annum is applied in each of his valuations, an accountant's fee of $2,000.00 per annum is adopted in each of his accounts. For cleaning and refuse disposal a fixed annual fee of $4,800.00 is adopted. However, for franchise and group advertising fees a percentage of 8% of estimated maintainable gross sales has been adopted. Actual rents after rent reviews has been applied in each case. A fixed $5,000.00 per annum has been applied for repairs and maintenance, yet wages and salaries, where the industry averages range from a low of 27% with a high of 35% with an average of 32% of gross sales, Mr Wright has adopted 28% of estimated maintainable gross sales. Notwithstanding the inconsistency of approach for the various items and the difficulty of precisely calculating what the figure would be on the method adopted by Mr Wright, it seems to me that the estimated maintainable direct business expenditure (based on estimated maintainable gross sales per annum of $50,000.00 per month, and an estimated maintainable gross profit margin of 67%) would be of the order of $340,000.00.
124 Adopting $50,000.00 as a fair estimated maintainable gross sales per month, and applying a gross profit margin of 67%, being the high of the industry average rather than 68.5% which Mr Wright applied, and adopting $340,000.00 as a genuine and fair assessment of the estimated maintainable direct business expenditure, the estimated maintainable net profit before tax, leasing and financing costs, after owner/operator/manager's salary, is $62,000.00, made up of 67% of $600,000.00, being $402,000.00, less $340,000.00. Applying Mr Wright's generous capitalisation rate of 4, or 25%, leads to a total open market value of $348,000.00, from which one has to deduct stock, plant, fixtures, fittings and equipment and working capital to arrive at a goodwill value of $89,700.00. If one adds to this the value of the tangible assets of $140,000.00, one derives a December valuation of the business at $229,700.00, which means that the difference between the price and the value of the business which the first applicant acquired is $66,300.00.
125 I will allow interest at 8% simple to reflect a fair compensation to the applicants for being deprived of the sum of $66,300.00 from December 1995 to date, which I round down to $16,500, making a total sum of $82,800.
126 I think it appropriate in the circumstances to give judgment for the first applicant against both the first and second respondents. I give judgment in the sum of $82,800.00 in favour of the first applicant against the first and second respondents. I dismiss the claims by the applicants against the third to sixth respondents inclusive. I declare that the second respondent is entitled to terminate the franchise agreement.
127 In the light of these reasons for judgment I will hear the parties on costs.
|
I certify that the preceding one hundred and twenty-seven (127) numbered paragraphs are a true copy of the Reasons for Judgment herein
of the Honourable Justice J E J Spender. |
Associate:
Dated: 22 January 1999
|
Counsel for the Applicant: | D R Cooper |
| Solicitor for the Applicant: | Lees Marshall Warnick |
| Counsel for the Respondent: | D C Andrews |
| Solicitor for the Respondent: | Gadens Lawyers |
| Date of Hearing: | 10, 11, 13, 14 August and 27, 28, 29 and 30 October 1998 |
| Date of Judgment: | 22 January 1999 |
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