Oraka Pty Limited and Wendy's Supa Sundaes v Pilgrim and Ors [2004] NSWIRComm 39 (12 March 2004)

Last Updated: 19 March 2004

NEW SOUTH WALES INDUSTRIAL RELATIONS COMMISSION

CITATION : Oraka Pty Limited and Wendy's Supa Sundaes v Pilgrim and Ors [2004] NSWIRComm 39

FILE NUMBER(S): IRC 7014 & 7075

HEARING DATE(S): 10/09/2003, 12/02/2004, 13/02/2004

DECISION DATE: 12/03/2004

PARTIES:

FIRST APPEAL

Appellants:

Oraka Pty Limited

Bryan Clifford Johnson

Respondents:

Stephen John Pilgrim

Julie Anne Pilgrim

Wendy's Supa Sundaes Pty Limited

SECOND APPEAL

Appellants:

Wendy's Supa Sundaes Pty Limited

Respondents:

Stephen John Pilgrim

Julie Anne Pilgrim

Oraka Pty Limited

Bryan Clifford Johnson

JUDGMENT OF: Wright J President Walton J Vice-President Boland J

LEGAL REPRESENTATIVES

ORAKA PTY LIMITED:

Mr M J Kimber SC with Mr I M Neil SC

Solicitors: Mr K Pringle

Gordon & Johnstone

WENDY'S SUPA SUNDAES PTY LTD:

Mr R J Buchanan QC with Mr R F Crow of counsel

Solicitor: Piper Alderman Lawyers

PILGRIM AND PILGRIM:

Mr J B Whittle SC with Mr J V Gooley of counsel

Solicitor: Mr B Lazarus

Barry Lazarus Lawyers

CASES CITED: Abalos v Australian Postal Commission (1990) 171 CLR 170

Alexander v Rayson [1936] 1 KB 169

Bourke Air Charter v Easton (2001) 109 IR 443

Brown v Rezitis (1970) 127 CLR 157

Burgess v Mt Thorley Operations Pty Ltd (2002) 115 IR 13

Devries v Australian National Railways Commission (1993) 177 CLR 472

Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford [2003] NSWIRComm 101

Fletcher Construction Australia Ltd v Lines MacFarlane & Marshall Pty Ltd (2001) 4 VR 28

Fox v Percy (2003) 197 ALR 201

Hugenin v Baseley (1807) 14 Ves 273 at 300; 33 ER 526

Humphries v Cootamundra Ex-Services and Citizens Memorial Club Limited [2003] NSWIRComm 211

Jones v Dunkel (1959) 101 CLR 298

Jones v Hyde (1989) 85 ALR 23

King v State Bank of New South Wales [2002] NSWIRComm 353

Knowles v Anglican Church Property Trust (No 2) (1999) 95 IR 380

Pilgrim and anor v Wendy's Supa Sundaes and ors [2002] NSWIRComm 308

Pilgrim and anor v Wendy's Supa Sundaes Pty Ltd and ors (2002) 118 IR 173

Port Macquarie Golf Club Ltd v Stead (1996) 64 IR 53, 59

Re Association of Architects of Australia; Ex parte Municipal Officers Association of Australia and Others (1989) 63 ALJR 298; 27 IR 278

Rolles v Donald Scott Surgicals Pty Ltd (Industrial Commission of New South Wales in Court Session, Fisher P, Cahill VP and Bauer J, unreported, 19 February 1988)

Stephen John Pilgrim and anor v Wendy's Supa Sundaes Pty Ltd and ors [2002] NSWIRComm 198

LEGISLATION CITED: Industrial Relations Act 1996

Stamp Duties Act 1920

JUDGMENT:

INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES

IN COURT SESSION

FULL BENCH

CORAM: WRIGHT J, President

WALTON J, Vice-President

BOLAND J

Friday 12 March 2004

Matter No IRC 7014 of 2002

ORAKA PTY LIMITED AND ANOR v STEPHEN JOHN PILGRIM AND ORS

Application by Oraka Pty Limited and another for leave to appeal and appeal against decision of Justice Peterson given on 22 November 2002 in Matter No 1028 of 1999

Matter No IRC 7075 of 2002

WENDY'S SUPA SUNDAES PTY LIMITED v STEPHEN JOHN PILGRIM AND ORS

Application by Wendy's Supa Sundaes Pty Ltd for leave to appeal and appeal against decision of Justice Peterson given on 12 August, 13 September and 22 November 2002 in Matter No 1028 of 1999

JUDGMENT OF THE COURT

[2004] NSWIRComm 39

1 In March 1993, Stephen John Pilgrim and his spouse, Julie Anne Pilgrim, commenced to operate a franchised ice cream shop in The Bay Village Shopping Centre, at Bateau Bay in the State. The national franchisor of the franchise was Wendy's Supa Sundaes Pty Limited ("Wendy's"). Oraka Pty Limited ("Oraka") was the master franchisee for New South Wales and Brian Clifford Johnson and Ann Margaret Johnson were directors of Oraka. Mr Johnson was also a shareholder in Oraka.

2 In December 2000 the Pilgrims surrendered the franchise to Wendy's. Mr and Mrs Pilgrim commenced proceedings against Wendy's, Oraka and Mr and Mrs Johnson, seeking relief based on claims of unfairness pursuant to s 106 of the Industrial Relations Act 1996. The claims were heard by Peterson J in 2001 and 2002 and in a series of judgments his Honour found unfairness and granted relief to the Pilgrims. His Honour's primary judgment is reported as Stephen John Pilgrim and anor v Wendy's Supa Sundaes Pty Ltd and ors [2002] NSWIRComm 198. There were two supplementary judgments reported as Pilgrim and anor v Wendy's Supa Sundaes Pty Ltd and ors (2002) 118 IR 173 and Pilgrim and anor v Wendy's Supa Sundaes and ors [2002] NSWIRComm 308. The orders made by Peterson J, the details of which will be addressed in the course of this judgment, were against Wendy's, Oraka and Mr Johnson but not Mrs Johnson.

3 Wendy's ("the first appellant"), has sought leave to appeal and to appeal against the judgments of Peterson J. The respondents named in that appeal were Mr and Mrs Pilgrim, Oraka and Mr Johnson. Oraka ("the second appellant") and Mr Johnson ("the third appellant") have also sought leave to appeal and to appeal, with the respondents in that appeal being the Pilgrims and Wendy's.

DECISIONS AT FIRST INSTANCE

4 In his primary judgment, Peterson J summarised the history of events leading to the claims by the Pilgrims of unfairness. The summary revealed that initially Oraka established the Wendy's franchise at Bateau Bay and in doing so entered into an assignment of a lease. Frozen Fun Pty Ltd, whose principal was Barry Madeley, later purchased the franchise from Oraka for $200,000. In August 1990 the assignment of the lease to Oraka expired. In late 1991 the Pilgrims became interested in the Bateau Bay franchise and that interest continued throughout 1992. Discussions in this respect were held between Mr Johnson and the Pilgrims. The Pilgrims were given various documents and forms to complete, including a document headed "Important Facts I should know about a Wendy's Franchise". On 8 December 1992 the Pilgrims' accountant wrote to Mr Madeley indicating their willingness to purchase the Bateau Bay franchise.

5 On 17 March 1993 the Pilgrims executed an Agreement for Sale of Business in relation to the Bateau Bay franchise. The vendor was Frozen Fun and the purchase price was $165,000 comprising plant, fittings and chattels valued at $72,460 and goodwill of $92,540. In addition, the Pilgrims paid Mr Madeley $20,000 in cash. Franchise agreements were also executed at around this time. Mrs Pilgrim was not a party to the franchise agreements. During March 1993 Mr Johnson sent the Pilgrims to the Wendy's store at Ashfield for four days training. They then went to South Australia for one week's training. On 22 March 1993 the Pilgrims began operating the Bateau Bay franchise from shop 21 without a lease.

6 On 10 January 1994 Byvan Management Systems Pty Ltd (the agent for the lessor, Legal and General Property Investment Ltd) advised Oraka of increased rent on the "casual lease agreement". On 1 July 1994 Wendy's advised the Pilgrims that they were going to introduce a renewal fee on all stores. On 13 October 1994 "McDonalds" opened outside the Shopping Centre.

7 In June 1995 the Pilgrims were advised that the Bateau Bay franchise would be required to relocate. The Centre's manager advised the Pilgrims that it would be prepared to enter a 7-year lease with Oraka. Mr Pilgrim contacted Oraka and requested that Oraka enter into a 7-year lease. Mr Johnson advised the Pilgrims that they were required to move premises almost immediately and that they would have to bear the cost of relocation and refurbishment of the new premises. The represented cost of relocation and refurbishment was $30,000 to $40,000. The Pilgrims protested.

8 On 5 July 1995 the Pilgrims sought the assistance of Oraka to obtain finance for the relocation and refurbishment. The eventual cost of the relocation was a matter in dispute but the Pilgrims claimed it to be $70,000, to be financed by a bank loan. On 25 August 1995 the solicitor for the Pilgrims expressed concern to Wendy's about the demand by Wendy's for refurbishment costs to be paid by the Pilgrims. Wendy's National Franchise Manager responded to the 25 August letter, suggesting the $60,000 spent on refurbishment be offset against the 2.5 per cent levy on gross receipts on account of maintenance and repairs. This was later agreed. The letter also mentioned the absence of a lease, Mr Pilgrim's knowledge of that and the possibility he could have lost possession of the premises.

9 In September 1995 the Pilgrims began operating the Bateau Bay franchise from shop 69. The Pilgrims were granted a licence by Oraka to occupy the premises. The licence was to operate in the period 1 September 1995 to 31 August 2002. The Pilgrims paid Oraka's costs of the lease and the licence agreement as well as stamp duty.

10 On 16 August 1996 Byvan advised Oraka of a rental increase of 5 per cent. In September 1997 Mr Johnson advised the Pilgrims that Wendy's would begin direct debiting from the Pilgrims' bank account. On 31 December 1997 Oraka on its own behalf, and on behalf of Wendy's, sought to have the Pilgrims enter into a new franchise agreement. The Pilgrims refused to execute this agreement. The former franchise agreement expired.

11 By 1998 the Pilgrims were experiencing considerable financial difficulty. They unsuccessfully advertised the sale of the Bateau Bay franchise. In August 1998 Wendy's increased the Pilgrims' advertising levy from 3 to 5 per cent. In December 2000 the Pilgrims surrendered their business to Wendy's. In his primary judgment Peterson J found that the Pilgrims surrendered the franchise to Oraka. That was an error corrected by his Honour in his supplementary judgments.

12 In his primary judgment Peterson J found that an important feature of the case was that the evidence was substantially put forward only in the case presented by the Pilgrims. The respondents at first instance (Wendy's, Oraka and the Johnsons), while taking the opportunity to cross-examine and to tender certain documentary material, did not adduce evidence from any witness involved in the formation, operation or ending of the franchise arrangement. His Honour, however, also found Mr Pilgrim to be an unsatisfactory witness in a number of respects and that some of his evidence was "truly incredible". Nevertheless, his Honour did not find Mr Pilgrim to be a witness whose word should be rejected in all respects.

13 In relation to the evidence Peterson J said:

10 This left the evidence in the unusual position where the evidence of Mr Pilgrim, although unsatisfactory in many respects, was not put in issue save to the extent of cross-examination. Without seeking to diminish the impact of cross-examination where it was effective, the consequence must be that evidence of Mr Pilgrim which asserts the content of conversations with Mr Johnson, for example, which has not been impugned by cross-examination, must be accepted as evidence of truth in the absence of a finding that the witness could not be believed on his oath. This is a case when Jones v Dunkel (1959) 101 CLR 298 inferences may properly be drawn, that, for example, Mr Johnson's evidence on these conversations would not have assisted him.

14 As to Mrs Pilgrim's evidence, his Honour said he had considerably less difficulty with it than he found with Mr Pilgrim. Further, his Honour said:

12 Overall, the applicants' evidence seems to me to establish that they were approaching this business with the degree of gullibility so often found in unsuccessful franchise operators. They were taking a view of their prospects which was if not irrational, certainly over-brimming with confidence.

15 Peterson J rejected a number of the Pilgrims' claims regarding unfairness. However, his Honour did find at [49] and [50] of his primary judgment that:

Oraka sold the franchise to Mr Madeley for $200,000 and received franchise fees in the sum of 3% of sales (an additional 3% going to Wendy's). During the period of the trading of the Bay Village, Oraka, through Mr Johnson, desired Mr Madeley to be out of the franchise and was encouraging of the Pilgrims' purchase of it. Mr Johnson promised that the applicants would receive a free relocation and refurbishment. The applicants paid $185,000 for the franchise with fittings and funded an additional $70,000 principally for the purpose of the relocation and refurbishment. Accordingly, the applicants' capital payments were $185,000 plus $70,000. The applicants paid franchise fees totalling $119,119.85 during their occupancy.

50 By vacating the premises upon the expiry of the lease, the applicants thereby returned to Oraka an asset upon which they had spent more than $255,000 but which had returned them income over a period of years. Oraka, having sold the business for $200,000 regained it for nothing. The applicants' loss was thus Oraka's gain.

As we have already noted, his Honour was in error in finding that the business was surrendered to Oraka.

16 In light of his conclusions on the evidence, his Honour found the contract unfair on several grounds:

51 I find the arrangement between the parties unfair in that it resulted in part from a false representation by Mr Johnson that there would be a relocation and refurbishment of the shop premises at no expense to the applicants. The franchise agreement was unfair in that it failed to provide that Mrs Pilgrim was a party to it, when her participation was essential to the functioning of the business, as her training by Wendy's and Oraka's evidences. The franchise agreement was unfair also in that it required the approval of a sale of the business by Wendy's and Oraka, which in the circumstances was unfairly withheld due to the applicants' inability to meet the costs of re-fitting the shop premises to the latest adopted styling. The arrangement was also unfair in that it permitted Oraka to regain at no cost the benefit of the business for which it had been paid full value.

17 Counsel for Oraka and the Johnsons argued in the proceedings at first instance that since the purchase price recorded on the sales agreement was lower than that actually paid, the sale "agreement was ineffective in law or equity" as it did not comply with the provisions of the Stamp Duties Act 1920. His Honour dealt with the contention in the following terms:

58 Critical to the defence of illegality raised here is the satisfaction of an onus on Oraka, Mr Johnson and Mrs Johnson to demonstrate that Mr Pilgrim had an intention to defraud the Stamp Commissioner. Section 19 of the Stamp Duties Act 1920 provided (at the time, it having been repealed later by Act No. 123 of 1997) that:

19(1) All the facts and circumstances affecting the liability of any instrument to duty, or the amount of the duty with which it is chargeable, are to be fully and truly set forth in such instrument.

(2) This provision shall not prevent the Commissioner exercising the powers conferred upon him by the next succeeding section, and, if the facts justify it, charging or assessing a different amount of duty than would appear to be chargeable or assessable by a reference to the language and contents of such instrument.

59 Here the evidence raises a question but falls far short of providing a positive answer that the requisite intention existed.

18 His Honour then set out s 21 (Penalty for not fully setting forth facts) and 29 (Inadmissibility of unstamped and other instruments) of the Stamp Duties Act and an extract from Alexander v Rayson [1936] 1 KB 169 before concluding:

63 Applying that reasoning here, the relevance of the sale agreement can only be to prove the purchase and to establish a price paid, which it obviously fails to do. There is an abundance of extraneous evidence to show the price. There is no dispute that the property in the business passed to the Pilgrims, nor that it had a value of $185,000. In these circumstances, I consider the value of the business as it was at the conclusion of the relationship, may be assessed by reference to the price paid for it.

19 His Honour then recorded the following conclusions at pars [64] to [67]:

The Pilgrims paid $185,000, $100,000 of which came from the sale of their Sydney home. Oraka and Mr Johnson were aware of the price, through Mr Johnson's receipt of an offer of first refusal from Barry Madeley; from Mr Johnson's discussions with Mr Pilgrim and through Ms Coles having issued a receipt for a deposit of $18,500, being 10%, which was held by Oraka. The business, then valued at $185,000 without demur from Mr Johnson, was handed back to Oraka for nothing.

65 In all of the circumstances, I consider the applicants have established a case for the avoidance of the agreement from its inception save to the extent that it gave rise to an entitlement in the applicants to receive moneys, and that they should receive the benefit of an order in the sum of $255,000 being the price paid for the business plus the cost of the refurbishment, plus interest.

66 I take the view that no order should be made against Mrs Johnson. The only status she had in the matter, as it was conceded by Mr Whittle, is "that she is a shareholder of the second respondent and a co-guarantor of its obligation to Wendy's". Other than that, there was no relevant mention of Mrs Johnson in the proceedings. There has not been any culpable association of her with the arrangement and accordingly, I would make no order against her.

67 There seems to me to be a sufficient connection between Wendy's and the arrangement to justify the order extending to it. Wendy's was an integral part of the franchise system in which the applicants participated; it provided training to them in Adelaide and it received 50 percent of the franchise fees which were paid during the term of the franchise by the applicants. Wendy's engaged Oraka as its master franchisor for New South Wales. Further, Wendy's failed to act to deal with the developing problem with the Pilgrims when they sought assistance, choosing to deflect their request back to Oraka. I consider Wendy's was inextricably linked in the whole arrangement and must bear some responsibility for the basic aspects of the arrangement. As I have earlier noted there is no reasonable basis for Wendy's to bear any burden with respect to the costs of the refurbishment. The order for the payment of money ought, I consider, extend to Wendy's, Oraka and Mr Johnson as to the purchase price of $185,000 and to Oraka and Mr Johnson as to the balance of $70,000.

20 On 13 September 2002, his Honour delivered his first supplementary judgment following the identification of the factual error in the judgment of 12 August to which we have already referred. The parties accepted, and his Honour held accordingly, that since "judgment had not yet been perfected there is no bar to the Commission in Court Session, as a superior court of record, calling up judgment for the purpose of correcting the error", following the authority of Fletcher Construction Australia Ltd v Lines MacFarlane & Marshall Pty Ltd (2001) 4 VR 28.

21 His Honour then dealt with the consequences following the correction of the finding of fact in the following way:

17 My approach to the matter in the earlier judgment reflected an intention to ensure that firstly, the party receiving the benefit of the yielding up of the franchise business would be liable. That was, mistakenly, a basis upon which Oraka and Mr Johnson were perceived to have a liability in that regard. Secondly, the inclusion of Wendy's in that regard related essentially to Wendy's role as an active participant in the franchise arrangement. It seemed to me inappropriate that Wendy's should escape any liability whatsoever in the circumstances as then found. In the light of this review of the findings, and the obvious need to substitute Wendy's for Oraka and Mr Johnson in the context of the recovery of the franchise business, a matter about which there may be no detailed evidence but there never was any dispute, it is obviously necessary that Wendy's remain liable in respect of the sum of $185,000 referable to the return of the franchise business.

18 The question then arises whether I should maintain a liability in Oraka and Mr Johnson in that respect. They were associated to an equal if not greater degree than Wendy's in the arrangement and shared the proceeds by way of franchise fees. They are clearly open to inclusion in the liability on the principles in Brown v Rezitis. It is clear enough that the major contribution in this respect ought be Wendy's, but I consider there is no reason why Oraka and Mr Johnson ought not be included in the same way as was Wendy's initially. I therefore maintain the order originally identified with respect to the sum of $185,000.

22 Counsel for Oraka and the Johnsons made further submissions as to his Honour's finding that the franchise agreement was unfair in that it required the approval of a sale of the business by Wendy's and Oraka. His Honour declined to further consider his original finding stating:

19 Mr Neil also submitted that I should deal with a finding made to the effect that the applicants were denied the opportunity to sell their business by virtue of the respondents' having denied their approval to effect the sale. It was submitted that no prospective purchaser had been presented to the respondents for consideration and that no approval was withheld. The fact of the matter was that the applicants were informed by the respondents that it would be necessary that any prospective purchaser be advised of a need to expend the sum of $30,000 to restyle the business to conform with the then current styling. This had a dampening effect which, it was suggested by the applicants, achieved a not dissimilar result. The applicants had put the business for sale in Oraka's hands but nothing came of this over a period of time. Whether any prospective purchasers presented to Oraka is unknown, Mr Johnson not having gone into evidence. Further, this issue does not have any bearing upon the ultimate disposition of the business as described above. In these circumstances, I am not persuaded that I should take any steps in this respect vis-a-vis my primary judgment.

23 On 22 November 2002, his Honour delivered his second supplementary judgment dealing with costs and interest issues. Peterson J also addressed the issue of contribution as between the respondents in respect of the $185,000 value of the business and said at [26]:

I consider Wendy's submissions to be correct. The case was not conducted by any party on the basis that contribution was a matter in issue. It was never identified as such and no evidence was called by any respondent, on any issue including this suggested issue. The basis for a joint and several order against the relevant respondents is the connection each had with the subject matter. The observation I made in my supplementary judgment of 13 September 2002 that "It is clear enough that the major contribution in this respect ought be Wendys . . ." was predicated upon the established fact that the business was handed back to Wendy's and not to Oraka or Mr Johnson. However, the facts surrounding those events were not put in evidence. It is impossible for me to know whether any particular level of contribution ought be made by either party, or indeed, whether my observation would be ultimately correct in the light of any relevant evidence on the issue of contribution. Of course, it may be that the whole value of the order with respect should be attributable to Wendy's and no other respondent but that is a matter I am unable to finally determine in these proceedings. Were I to attempt to do so, it would be no more than guessing at the result.

24 The judgment of 22 November 2002 also included his Honour's declarations and orders in the following terms:

32 Accordingly, I make the following declarations and orders:

The Court declares that:

1. The contract or arrangement whereby the applicants performed work in the retail industry in New South Wales was unfair pursuant to s106 of the Industrial Relations Act.

2. The contract or arrangement be avoided ab initio except insofar as it conferred upon the applicants' rights to remuneration and profit.

The Court orders that:

3. The first, second and third respondents jointly and severally pay to the applicants the sum of $185,000.00.

4. The second and third respondents jointly and severally pay to the applicants $70,000.00;

5. (i) in relation to order 3 interest be paid from 31 December 2000 to 22 November 2002 at Supreme Court rates,

(ii) in relation to order 4 interest be paid from 8 March 1999 to 22 November 2002 at Supreme Court rates;

6. The proceedings against the fourth respondent be dismissed with no order as to costs.

7. The first, second and third respondents jointly and severally pay the applicants' costs of the proceedings except as provided in orders 8, 9, 10 and 11 below.

8. The applicants pay the first respondent $1,390.98, being the costs of the Australian Securities Investment Commission in responding to a Summons issued by the first respondent.

9. The applicants pay the costs incurred by the respondents in the preparation of expert evidence of Mr Claude Jugmans in response to accounting evidence prepared by Mr Michael Gilowitz on behalf of the applicants, those costs to be paid on a party-party basis.

10. The applicants pay the costs of the respondents in relation to the extra days hearing made necessary by Mr Pilgrim's late revelation of his reading disability, those costs to be paid on an indemnity basis.

11. The applicants pay the costs of the first respondent in relation to the 2000 motion on a party/party basis.

33 The parties shall discuss the amounts of interest due under order 5 and the applicants shall file and serve within 7 days a draft form of order incorporating amounts of interest.

LEAVE TO APPEAL AND NATURE OF APPEAL

25 The relevant section of the Act governing appeals to the Full Bench is s 188, which provides, inter alia, that an appeal may be made only with the leave of the Full Bench and that leave to appeal is to be granted if, in the opinion of the Full Bench, the matter is of such importance that, in the public interest, leave should be granted.

26 Oraka and Mr Johnson submitted that it was in the public interest to grant leave to appeal to correct the following errors in the orders made in the exercise of the Commission's discretion and jurisdiction:

1. The orders were not based on evidence that was probative and tended logically to show the existence of facts that were consistent with the orders.

2. The orders were inconsistent with findings of fact that either were made or were logically required by uncontradicted evidence.

3. The orders apparently supported by reasoning which is contradictory and not logical.

4. As to the claim relating to $185,000 ("the capital loss claim"):

(i) The orders were not based on claims made by the respondents.

(ii) The orders have no rational, sensible or just connection with any blameworthy association with the making, performance, variation or avoidance of the franchise agreement, or any loss occasioned thereby.

(iii) The orders included orders for the payment of money against Oraka and Mr Johnson in circumstances where they were innocent of any participation in, or benefit from, any relevant unfairness.

27 Wendy's submitted that it was in the public interest that leave to appeal should be granted for the following reasons:

1. The decision impugned the fairness of a franchise arrangement that was in terms similar to, or the same as, arrangements for 288 other franchises in Australia and New Zealand, of which 72 are in New South Wales;

2. The appeal involved issues which have significance beyond the inter partes litigation: Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford (2003) 125 IR 35 at [23];

3. There were significant areas in which his Honour failed to afford Wendy's either proper notice or a reasonable opportunity to deal with matters central to the making of orders against Wendy's and thereby denied Wendy's procedural fairness;

4. There was no basis for his Honour's order against Wendy's on the ground that there was a sufficient connection between Wendy's and the arrangement as the claim made by the applicants did not depend on sharing in the proceeds of the sale of the business but on the recovery of the purchase price in circumstances where the purchase was alleged to have been induced by misrepresentations, although not Wendy's. Nor did the fact that the business was surrendered to Wendy's rather than Oraka retrospectively justify the maintenance of the order against Wendy's;

5. The approach taken by his Honour infringes the principles emphasised in Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford [2003] NSWIRComm 101, that the grant of relief must be proportionate to any findings of unfairness.

28 The Pilgrims submitted that none of the factors identified in Knowles v Anglican Church Property Trust (No 2) (1999) 95 IR 380 that warranted granting leave were present in the applications. It was submitted that in order to warrant the grant of leave to appeal, the appellants needed to demonstrate that the appeal would involve issues that have significance beyond the inter partes litigation, sufficient to warrant the grant of leave in the public interest. The only issue that could raise any broader question concerned Wendy’s rights and obligations under the Franchise Agreement and its involvement in it but this seemed only to arise on the question of relief and not unfairness.

29 The Commission, it was submitted, has often stressed the importance of affording significant weight to the decision of the trial judge when approaching the findings of fact or the existence of a discretion: see Port Macquarie Golf Club Ltd v Stead (1996) 64 IR 53, 59 and Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford [2003] NSWIRComm 101 at [23]. It was submitted for the Pilgrims that this was particularly so in the present case where credit played an important part in the Court’s decisions and those findings of credit were not open to successful attack.

30 The principles governing leave to appeal are well settled. The oft-cited authority for these principles is Knowles. In brief, leave to appeal will not be lightly or automatically granted and will be restricted to cases that meet the public interest test stated in s 188(2) of the Act. It will also be relevant to consider whether the appellant has brought a substantially different case in the appeal and whether the appeal raises substantial issues of principle or fact or has wider implications for the jurisprudence of the Commission.

31 The appeals raise a number of complex issues involving relationships between parties to franchise agreements and in this respect we note that Wendy's operates a large number of franchises in Australia and New Zealand. The appeals also challenge findings of fact, findings as to credit, the exercise of discretion by the judge at first instance and allege a denial of procedural fairness. We consider that this is an appropriate case in which to grant leave to the appellants.

32 As to the nature of the appeal, s 191 of the Act is relevant. In King v State Bank of New South Wales [2002] NSWIRComm 353 the Full Bench reviewed the authorities of the Full Bench and its predecessors as to the effect of s 191 and held that appeals to the Full Bench are directed at correcting error and do not permit the Full Bench on appeal to substitute its decision for that at first instance. Although leave may be granted on a limited basis under s 191(2) to receive further evidence if the Full Bench considers that special grounds exist or if the evidence concerns matters occurring after the decision appealed against, appeals to the Full Bench remain an appeal stricto sensu.

33 In the present proceedings Wendy's sought leave to adduce a considerable amount of further evidence in the form of an affidavit of Simon Jacob Morris, the solicitor and partner who had conduct of the matter for Wendy's. We have given this matter very serious consideration because of the complications arising from the error by his Honour at first instance in finding that it was Oraka to whom the franchise was surrendered rather than Wendy's and the implications flowing from the corrections of that error. However, to grant such leave, in our opinion, would be tantamount to ordering a new trial and the expense and delay involved in such a course must weigh heavily against doing so. We consider that we have been able to satisfactorily deal with the complications to which we have referred. We consider, therefore, that the necessary special grounds for allowing further evidence to be adduced do not exist in this case and the application is refused.

SUBMISSIONS OF WENDY'S

34 Wendy's identified 14 grounds of appeal. In essence, the first appellant contended that Peterson J erred in making Wendy’s jointly liable or liable at all in his primary judgment for the payment of $185,000 and in maintaining that order in subsequent decisions. In the alternative, it was submitted that the quantification of the payment was unjustified and unsupported by the evidence.

35 Wendy's submitted that the order for a monetary payment of $185,000 related only to his Honour's finding that the arrangement permitted Oraka, later corrected to Wendy's, to regain at no cost the benefit of the business for which it had been paid full value was unfair.

36 It was submitted that the submissions of the Pilgrims in support of the making of an order against all the respondents below, highlighted the paucity of reasons in their case for an order against Wendy’s. The Pilgrims relied on the authority of Brown v Rezitis (1970) 127 CLR 157 as to the jurisdiction of the Commission to make orders for the payment of money against persons not party to the avoided or varied contract or arrangement. However, it was submitted, Brown v Rezitis was not a case about discretion and it did not explain why, in this case, his Honour should have made Wendy’s jointly liable for the payment of money.

37 It was submitted by senior counsel for Wendy's that none of the matters identified by Peterson J as demonstrating that Wendy’s was an integral part of the franchise system in which the Pilgrims participated were adequate reasons for making Wendy's jointly liable to compensate the Pilgrims. The provision of training could only be regarded as being to the benefit of the Pilgrims and there was no other indication in his Honour’s decisions that this could conceivably be a matter for criticism. There was also no criticism of the overall franchise arrangement, which was accepted by his Honour to be substantially successful. Further, the evidence demonstrated Wendy’s preparedness to accommodate the Pilgrims' difficulties. Therefore, it was submitted that any criticism arising from the problems with the lease must be confined to Oraka and Mr Johnson.

38 In any event, on a more general level it was submitted, any order for compensation assessed by reference to the purchase price of the business was misconceived and wrong in principle. His Honour found that the business was not a financial disaster and that the downturn in sales was something for which neither Oraka nor Wendy's should be held to any degree responsible. The business was a commercial venture subject to ordinary commercial fortunes and in respect of which Wendy’s, in particular, had no obligation to become involved in the setting of the purchase price or underwrite its success. Further, Wendy’s expressly warned prospective franchisees of the ordinary commercial risks of being in business in their brochure, "Important Facts You Should Know About Wendy's ".

39 It was contended that, in accordance with the principle in Eagle Boys Dial-A-Pizza Australia Pty Ltd v Clifford [2003] NSWIRComm 101 at [42]-[43], [60]-[61], no order of relief against Wendy’s should have been made. Upon the reasoning of his Honour in the first decision it was not appropriate to order the payment of any money in circumstances where the basis for the compensation, and the perceived benefit, were all attributed to the Oraka interests.

40 The realisation that the business was surrendered to Wendy’s, rather than Oraka, did not provide any independent foundation for an order against Wendy’s. His Honour’s finding that it was unfair for Oraka to recover for nothing the business it had originally sold for $200,000 was a significant factor in his decision to order the payment of $185,000 to the applicants. The assumed recovery of the business by Oraka was connected in his Honour’s reasoning with the fact that Oraka had originally sold it. No such connection could be made with respect to Wendy’s as Wendy’s had not sold it to the applicants’ predecessors.

41 Wendy's submitted that there was no allegation of unfairness in the surrender of the business by the Pilgrims. The Pilgrims sought the avoidance of the arrangement rather than its continuance. It was procedurally unfair of his Honour to rely on this circumstance without giving Wendy’s the opportunity to deal with it. Wendy’s was denied natural justice: Re Association of Architects of Australia; Ex parte Municipal Officers Association of Australia and Others (1989) 63 ALJR 298; 27 IR 278.

42 In any event, there was no evidence that Wendy’s obtained the Pilgrims' business for nothing. The business was, in fact, surrendered pursuant to an agreement between the parties in settlement of a motion on notice by the Pilgrims filed in the proceedings below on 11 October 2000. The agreement provided for Wendy’s to purchase the plant and equipment, fittings and stock of the business at a price to be agreed or assessed. The proceeds were to be applied against outstanding franchise fees that, by this time, significantly exceeded the value of these items. Further, the agreement constituted interlocutory proceedings. It cannot be regarded as unfair in its own right nor could it have made the original contract or arrangement unfair.

43 Wendy's submitted that it was Frozen Fun that benefited from the purchase price, not them. There was no sound reason, in the absence of evidence, for his Honour to assume the real value of the business when purchased was reflected by the price that the Pilgrims paid. An order that Wendy’s compensate the applicants for any supposed loss of the original purchase price was unrelated to an objective assessment of the value of the business at the time of purchase and wholly disproportionate to Wendy’s involvement in the overall franchise arrangements.

44 In addition, it was submitted, no account was taken of the issue that from any order of compensation purporting to relate to the original purchase price, there would need to be deducted an amount for plant and equipment, fittings and stock.

45 If the Court rejected the submission that Wendy's should not be liable to contribute to any order of compensation, it was submitted that the appeal should at least be upheld to correct his Honour's value of the business. The value should be assessed as a sum representing the market value of the business at the time of surrender.

SUBMISSIONS OF ORAKA AND MR JOHNSON

46 The grounds of Oraka and Mr Johnson's appeal, in brief, were:

1. His Honour erred in finding the arrangement between the parties was unfair because it resulted in part from a representation by Mr Johnson that there would be a relocation and refurbishment of the shop premises at no expense to the Pilgrims.

2. His Honour erred in his assessment of the amount of the orders giving effect to the foregoing finding.

3. His Honour erred in finding that the arrangement was unfair in that it permitted Wendy's to gain at no cost the benefit of the business conducted by the Pilgrims, and gave effect to that finding by ordering that Wendy's, Oraka and Mr Johnson should be jointly and severally liable to pay the compensation to the Pilgrims.

4. His Honour erred in his assessment of the amount of the capital loss that he had found the Pilgrims had suffered.

5. The significance of his Honour's finding that the agreement was unfair because it required the approval of a sale of the business by Wendy's and Oraka, which in the circumstances were unfairly withheld, is unclear and should be set aside.

6. His Honour erred in holding that although the contract on which they sued misstated the purchase price to the knowledge of at least Mr Pilgrim, the Pilgrims had not contravene the provisions of the Stamp Duties Act 1920.

47 Oraka and Johnson submitted that the only possible conclusion on the evidence was that Mr Johnson represented only that he would negotiate with the new lessor to “make sure the free refurb comes through.” Peterson J erroneously ignored the uncontradicted admission of Mr Pilgrim that his belief was no more than Mr Johnson “was going to do the best of his ability to get a lease and a new refurb.” The admission should have disposed of the relocation claim relating to the amount of $70,000. Although Mr Pilgrim claimed (inconsistently) not to have had this appreciation, commonsense required that Mr Pilgrim’s belief was consistent only with a corresponding appreciation that an undertaking to do one’s best did not carry with it a guarantee of success.

48 Peterson J gave effect to the finding of unfairness relating to the relocation claim by ordering that Oraka and Mr Johnson pay to the Pilgrims an amount that was characterised as being the cost of the relocation and refurbishment and assessed at $70,000, together with interest thereon. Senior counsel for Oraka and Mr Johnson submitted that these orders were erroneous on the following grounds:

1. If, contrary to the evidence and the findings of the trial judge, the Franchise Agreement did result from a representation that there would be a relocation and refurbishment of the shop premises at no expense to the Pilgrims, then logically and in light of the evidence the only proper order would be limited to the amount by which the profitability or value of their business was relevantly affected. As the Pilgrims led no evidence by which any finding could be made that there was such an effect, or, if there was, its amount, his Honour’s conclusion that the loss suffered by the Respondents should be assessed at the amount that they paid for the relocation and refurbishment is an assumption that is neither logical nor supported by the evidence.

2. If Peterson J's assumption was correct, his assessment that the amount paid for the relocation and refurbishment was $70,000, was contrary to the evidence. The evidence established that the cost of the re-location was not $70,000, but rather was no more than $46,700. His Honour wrongly accepted the Pilgrims’ assertions in this respect, and ignored the evidence that the Pilgrims had included in their claim for $70,000 amounts of $12,300 that they had spent on a new car and $11,000 that they had spent on a new soft-serve machine, neither of which had anything to do with the relocation. Further, the evidence was that the Pilgrims were relieved on about 29 August 1995 of their obligation to pay a levy of 2.5 per cent of turnover as a contribution to advertising expressly on account of the cost of the relocation. This should have been, but was not, set off against any liability of Oraka and Mr Johnson on account of the relocation.

49 It was submitted that Peterson J's initial finding that the arrangement associated with the franchise agreement was unfair because it “permitted Oraka to regain at no cost the benefit of the business for which it had been paid full value” was vitiated by the fact that the Pilgrims had never contended for such a finding. The circumstances in which the Pilgrims had given up the shop and the business were mentioned, only in passing and without any relevant suggestion of unfairness, when the Pilgrims’ case was opened. The circumstances were not mentioned in their pleadings, evidence or submissions. Contrary to principle, the capital loss claim ($185,000) was determined by Peterson J without any notice to Oraka, Johnson or Wendy’s: Bourke Air Charter v Easton (2001) 109 IR 443 and Burgess v Mt Thorley Operations Pty Ltd (2002) 115 IR 13 at [119].

50 In the supplementary judgment delivered on 13 September 2002, Peterson J withdrew his finding that Oraka had received the benefit of the business as a result of the Pilgrims having returned it to Oraka, and in substitution found that the franchise was returned to Wendy’s in December 2000. However, Peterson J found that Oraka and Mr Johnson should continue to be jointly and severally liable with Wendy’s on the capital loss claim. The only basis that was then suggested for this finding (it not having been mentioned in the first decision) was that Oraka and Mr Johnson had been associated with Wendy’s in the arrangement and shared the proceeds by way of franchise fees. Counsel for Oraka and Mr Johnson submitted that there was no rational, sensible or just basis for the orders against Oraka, and still less against Mr Johnson, given that by December 2002, Oraka and Mr Johnson ceased to have anything to do with the franchise agreement, having earlier assigned their interest to Wendy’s and that the Pilgrims' complaints about the franchise fees had not been accepted by his Honour earlier in the proceedings.

51 Following the first supplementary judgment, counsel for Oraka and Mr Johnson submitted below that his Honour should give effect to his finding that Wendy’s ought to have the major contribution to the liability to repay the Pilgrims by fixing the amount of that contribution to any monetary order by reference to their contribution to any relevant unfairness. His Honour rejected this submission on the basis that contribution was not a matter in issue. It was submitted that this basis was erroneous as it overlooked the following considerations:

1. The capital loss claim itself had never been an issue in the proceedings until Peterson J introduced it in his first decision.

2. The only evidence that was relevant to the position of Oraka and Mr Johnson was that they had nothing to do with the Franchise Agreement at the time when the Pilgrims gave up their shop and business to Wendy’s, and that they neither played any part in, nor received any benefit from, that exit.

3. At the conclusion of the evidence, Oraka and Mr Johnson had pointed to these facts in order to submit that, if the resumption of the franchise becomes relevant to any finding of unfairness, no orders should be made against them in that respect. Wendy's did not put this submission in issue.

52 Senior counsel for Oraka and Mr Johnson submitted that notwithstanding the finding that Peterson J had earlier made that it was clear that the major contribution in this respect ought to be Wendy’s, his Honour held that he would be “guessing” if he attempted to assess what the contribution of Oraka and Johnson should be. This conclusion suggests only two possibilities. First, that if Peterson J did not have enough evidence to make any assessment of the contribution that Oraka and Mr Johnson should make, then he did not have enough evidence to properly make an assessment that they should be liable at all. Consequently, his findings and orders against Oraka and Mr Johnson on the capital loss claim cannot stand. Alternatively, if his Honour was of the view (erroneously, as this appeal contended) that he had enough evidence to fix Oraka and Mr Johnson with liability in any degree, then he must also have been equipped to assess what it was, and was required to do so in accordance with Rolles v Donald Scott Surgicals Pty Ltd (Industrial Commission of New South Wales in Court Session, Fisher P, Cahill VP and Bauer J, unreported, 19 February 1988).

53 Peterson J assessed the amount of the capital loss that he had found the Pilgrims had suffered to be $185,000 upon the unexplained assumption that “the value of the business as it was at the conclusion of the relationship, may be assessed by reference to the price paid for it." Senior counsel for Oraka and Mr Johnson submitted that this assumption could not stand, as it was not supported, whether directly or indirectly, by any evidence. In any event, commonsense required that the finding must be wrong as by the trial judge’s own findings the business had suffered a downturn due to external influences since it had been purchased seven years before. The downturn must have had an influence on the value of the business. The best evidence was that the Pilgrims yielded the business “by consent” in December 2000.

54 As to other alleged errors committed by Peterson J it was submitted that the significance of his Honour's finding that the franchise agreement was unfair because it required the approval of a sale of the business by Wendy’s and Oraka, which in the circumstances was unfairly withheld, was unclear. The Pilgrims made no claim in these terms. The trial judge did not relate it to any of the orders that he made for the payment of money. It was submitted that the better view was that the trial judge intended this finding to be only a step towards his conclusions on the capital loss claim. If so, it was submitted, it should be set aside as there was no evidence to support the finding that Wendy’s and Oraka withheld their approval for a sale. Moreover, it is contrary to the basis upon which the Pilgrims’ case was conducted. Their counsel conceded in opening the case below that it was not suggested that Wendy’s or Oraka actually rejected any prospective purchaser that the Pilgrims had put forward.

55 It was submitted that Peterson J erroneously held that, although the contract on which the Pilgrims sued misstated the purchase price to the knowledge, of at least, Mr Pilgrim:

1. The Pilgrims had not contravened s 21 of the Stamp Duties Act 1920.

2. The contract on which they sued did not contravene s 19 of the Stamp Duties Act; and/or.

3. Neither s 29 of the Stamp Duties Act, nor the principle that the courts should deny any aid to a party seeking to sue on a contract which was designed to defraud the revenue, did not apply in the context of the claims made by the Respondents.

56 Senior counsel for Oraka and Mr Johnson submitted that the Court should have declined to give relief in these circumstances or at the very least the argument should have led to a reduction in the alleged capital loss from $185,000.00 to $165,000.00.

SUBMISSIONS OF THE PILGRIMS IN RELATION TO WENDY'S APPEAL

57 As to his Honour's finding of unfairness on the ground that the agreement required that Oraka and Wendy's approve any sale of the business by the Pilgrims, it was submitted by senior counsel for the Pilgrims that while Wendy’s may not have actively discouraged purchasers it effectively did nothing to meet the Pilgrims' inability to pay the costs of refurbishing the premises and thus, in substance, joined with Oraka in the unfairness identified by his Honour.

58 On the finding of unfairness in the surrender of the business to Wendy's, the Pilgrims submitted that contrary to Wendy's characterisation, the key finding by Peterson J was that Wendy’s was an “integral part” of the franchise system. The franchise agreement supports this finding. For example, it was clear from the opening recitals A-F, the agreement was entirely founded and built upon a system originated, developed and controlled by Wendy’s. The matters identified by Wendy's in their submissions were merely instances of how Wendy's were involved in the franchise system and they do not deal with the broader finding his Honour made about Wendy's place in the franchise system. In any event, it was submitted that his Honour’s finding that Wendy’s failed to deal with the developing problem the Pilgrims' faced, in particular with the requirement that the premises be refurbished before they could be sold, was correct. Mr Pilgrim wrote to Wendy’s but Wendy’s left it to Mr Johnson to respond to that letter and he failed to address Mr Pilgrim’s concerns about the unconscionability of the requirement for a further upgrade. While Wendy’s was prepared to grant some concession on advertising levies this was on condition it secured an amendment to the franchise agreement that was of benefit to itself. Further, it was submitted that the advertising (sic) levy was not an issue of importance to the Court, except as an instance of the way that the franchise agreement operated.

59 Pursuant to clause 9.1 of the franchise agreement, it was submitted, Wendy’s was entitled to regain possession because there was an automatic assignment under that clause of the Master Franchisee’s interest in the franchise agreement. This meant that, in effect, Wendy’s recovered something from the Pilgrims without any consideration passing between them at all and something of value for which they paid nothing. The fact that full value might have originally been paid to Oraka rather than Wendy’s, it was submitted, was not of great significance when it is considered that the Pilgrims thereby lost all rights they had.

60 The Pilgrims submitted that his Honour's primary judgment at [52] - [53], demonstrated that he was concerned that a failure to recoup the capital sum which had originally been expended in acquiring the franchise rights meant that the level of earnings made by the Pilgrims out of the franchise “could only be viewed as unfair” if that cost was amortised as against earnings. This was what must occur in order to assess whether or not the earnings the Pilgrims derived from the business were adequate. Senior counsel for the Pilgrims submitted that once one reaches the conclusion that such an amortisation clearly shows unfairness (as his Honour did) then it was a relatively straight-forward step to conclude that the respondents should receive compensation in respect of their capital loss. It was those considerations that led to his Honour’s principal order for the payment of $255,000 (being $185,000 for the purchase price and $70,000 for the relocation expenses). The purchase price, it was submitted, was assessed as being properly repayable to the Pilgrims to take account of the fact that their earnings from the business would otherwise have been at a level wholly unacceptable and “unfair” within the meaning of the Act. If his Honour’s conclusions on this point were correct, it was also submitted that the question of Wendy’s intimate involvement in the structure represented by the franchise agreement, did provide the proper foundation for them to be made jointly and severally liable with Oraka and Mr Johnson.

61 His Honour's finding that the business was “not a financial disaster” was on the proviso that the capital sum expended to acquire the business could be recovered, which never occurred.

62 The Pilgrims contended that all parties had notice (for example, in claim 3(a) of the amended summons) that the surrender of the business would be relied upon as an element of unfairness. Whilst the business was surrendered pursuant to an agreement, as was alleged in the statement of claim, this was because of a threat to evict the Pilgrims. In any event it was submitted that, whether by agreement or otherwise between the parties, the franchise was not realised in a way which enabled any sum to be paid to the Pilgrims on account of potential recovery of their capital. It was, therefore, also not correct for Wendy's to argue that the abandonment by the Pilgrims of the premises was a commercial decision. It was a decision taken to compromise a motion brought by them to resist Wendy’s threat to take possession of the premises.

63 As to the valuation of the business, it was submitted that his Honour was entitled, if it were relevant, to assume that the true market value of the business when purchased was reflected in the price paid by the Pilgrims. Further, it did not follow that the applicants could not have expected to recover more than the true market value of the business at the time of purchase. This would depend upon exactly how they stated their case and what order was found to be “just” by the Court within the meaning of s 106(5) of the Act. As already submitted, it was apparent that his Honour used the price paid for the business as a measure of compensation in order to take account of the loss of capital that the Pilgrims sustained and the effect that loss of capital had on the earnings they derived from the business during the time they operated it. The real value of the business (whatever that may be) either at the beginning of the Pilgrims’ involvement with it or at the end was, on this basis, not of relevance. Further, there was no reason, in point of principle, why the market value of the goodwill of the business at the time when Wendy's resumed it had anything to do with the appropriate level of compensation. If market value of the goodwill were to be assessed at the time that Wendy’s took possession of the business, it was submitted one would also have to ascertain how far that market goodwill had been affected by the acts of both Oraka and Wendy’s during the preceding relationship and the damage those acts had caused in either the reduction of the goodwill, or, more indirectly, in lessening and diminishing the viability of the business. It was submitted that there was no reason why evidence should be taken on these topics at this point in the litigation.

64 The Pilgrims submitted that it was not correct to say that an order for joint and several compensation by Wendy’s, Oraka and Mr Johnson was wholly disproportionate to Wendy’s involvement in the overall franchise arrangement. That arrangement was the contract by which the Pilgrims performed work in an industry and, on any reading of the Franchise Agreement, Wendy’s was central to its day-to-day operation. Once it was held that that agreement was unfair and should be avoided repayment of the purchase price by the three appellants was an appropriate order.

SUBMISSIONS OF THE PILGRIMS RELATING TO ORAKA/JOHNSON APPEAL

65 It was submitted by senior counsel for the Pilgrims that the finding made by the trial judge that Mr Johnson represented that the Pilgrims should receive a free relocation and fit-out when the time arrived for the business to be moved within the Bay Village Shopping Centre, was fully open to his Honour on the evidence.

66 This finding, it was submitted, was made after a careful assessment of the credit of both the Pilgrims and, contrary to the submission of Oraka and Mr Johnson, was a clear finding of the making of the representation in the terms asserted by the Pilgrims. As a finding based on credit it should not be disturbed unless one or more of the well known principles discussed by the High Court in the cases of Jones v Hyde (1989) 85 ALR 23, Abalos v Australian Postal Commission (1990) 171 CLR 167, Devries v Australian National Railways Commission (1993) 177 CLR 472 and Fox v Percy (2003) 197 ALR 201 were successfully invoked by Oraka and Mr Johnson. For example, Oraka and Mr Johnson have failed to show that the advantages the trial judge had, of seeing the witnesses and of assessing the evidence as a whole in the light of those advantages, were clearly misused by him when he accepted Mr Pilgrim’s evidence. It was, therefore, submitted that the attack by Oraka and Mr Johnson on his Honour's finding as to Mr Johnson’s representation should be rejected.

67 These credit based findings were supported by the inference that his Honour was entitled to draw (under the principles discussed in Jones v Dunkel (1959) 101 CLR 298) that Mr Johnson’s evidence as to his alleged representation would not have assisted him or Oraka. As already noted, Mr Johnson’s contemporaneous denials were in evidence but this was not of itself sufficient to negative the inference his Honour drew. This, it was submitted, was because Mr Johnson’s failure to give evidence was not merely a failure to give his own version of events, it was a failure to place himself on oath and subject himself to cross-examination on this and other topics and thus avoid the risk of adverse findings on questions of fact and, just as importantly, on his general credit.

68 Mr Whittle for the Pilgrims submitted that it was also suggested by the second and third appellants that commonsense required it be accepted that Mr Pilgrim’s belief was only consistent with an understanding that Mr Johnson would do his best to get a free relocation and fit-out and did not carry with it a guarantee of success. Commonsense does suggest that a prudent person might have advised Mr Pilgrim that he could only do his best but his Honour was not given the opportunity to assess whether Mr Johnson was a prudent person who might have said such a thing or to hear him give evidence he had so informed Mr Pilgrim. In any event, it was submitted, while commonsense might suggest caution in accepting evidence of a representation couched in terms of an assurance, it does not prevent the acceptance of such evidence if the Court is satisfied that, on the balance of probabilities, it is true.

69 It was submitted that if his Honour's conclusion as to the making of the representation stood, it must follow that his Honour's conclusion that the statement operated as an inducement for the Pilgrims to enter into the transaction to purchase the franchise should also stand. A reading of Mr Pilgrim's evidence supports this conclusion.

70 As to the submission by Oraka and Mr Johnson that his Honour erred in his order to give effect to the finding of unfairness arising from the misrepresentation, the Pilgrims submitted that neither logic nor the evidence showed that changes in the profitability or value of the franchise provided the proper basis for assessing any monetary order under this head of unfairness. The Pilgrims had to pay the costs of the refurbishment and relocation out of their own monies. Whatever the success or otherwise of the move the business was required to make, the Pilgrims were out of pocket. It was submitted that the extent to which they were out of pocket must be, in this instance, the appropriate measure of restitution.

71 On the issue of the quantum of the order of payment, it was submitted that it was open to his Honour to find that the refurbishment and relocation cost was $70,000. Senior counsel for Oraka and Mr Johnson failed to cite any evidence to support their submission that the $70,000 included a sum for a new car and as to the sum of $11,000 spent on a new soft serve machine, it is submitted it was proper to regard the purchase of the new machine as appropriate when the store was being moved.

72 Further, while correspondence between the parties did show that Wendy's agreed to waive the 2.5 per cent advertising (sic) levy because of the Pilgrims’ complaint about the costs of the move, there was no evidence that Oraka, as a party to the tripartite franchise agreement, made any such waiver. Moreover, as it is a matter that Oraka and Mr Johnson alleged should be taken into account in their favour, they have to have shown that the 2.5 per cent levy was properly able to be demanded from the Pilgrims under the franchise agreement (so that giving it up was a real and not illusory benefit to the Pilgrims) and what was the sum attributable to the levy forgone. The onus lay on them in both these respects and they did not discharge this onus.

73 The Pilgrims provided an analysis of the legal relations between the parties and submitted that at all times they had the most tenuous of rights both in relation to the franchise and their license to occupy the shop premises. This Court, it was submitted, was entitled to look to the substance of arrangements rather than being bound to their precise legal form and, on that view, could conclude that the Pilgrims were de facto franchisees and licensees until November 2000. If either Wendy's or Oraka had sought to enforce their strict legal rights at any time it was difficult to see how the Pilgrims could have had any answer to being instantaneously deprived of the benefit of the arrangements they thought they had. The clear evidence was that they paid $185,000 for this bundle of “rights” and were encouraged to do so by Mr Johnson in his desire, amongst other things, to be rid of the previous franchisee, Mr Madeley.

74 The Pilgrims submitted that the evidence justified the conclusion that Oraka did unfairly withhold permission to sell due to the Pilgrims’ inability to pay costs for a change of Wendy’s image. Under sub-clause 9.1.11 of the franchise agreement this was a condition that had to be met prior to any sale. His Honour's conclusions that consent to a sale was unfairly withheld due to the Pilgrims inability to pay for an image upgrade was, therefore, fully justified. It was not answered by saying there were no purchasers who were refused. As long as Wendy's and Oraka maintained their insistence on payment for fit-out to the latest Wendy's image, such a refusal was inevitable.

75 The Pilgrims submitted that the order for payment of the cost of the franchise must be considered in context of his Honour's rejection of the Pilgrims’ claim for wages. His Honour rejected the claim for wages, finding that their income from trading was not unreasonable. However, this was on the basis that the Pilgrims should receive compensation in respect of their capital loss. On this reasoning, the preservation of the right to sell the business and recover capital was, in both a practical and legal sense, an important aspect of unfairness if wages earned were treated as adequate and, as a consequence, influenced the way his Honour framed his orders. If the right to recover or be recompensed for capital were not preserved then, in his Honour's view, the arrangement was unfair. The right to sell did not, as a practical matter, exist because of economic reality, the provisions of the franchise agreement, and Oraka’s attitude to the enforcement of those provisions. It followed that there was, therefore, no real right to recover the capital the Pilgrims had invested.

76 It was submitted in the alternative that from a legal point of view, it could be argued that the Pilgrims got very little for their $185,000 namely, a right to operate a franchise for a period defined by reference to the term of a lease which did not exist. This, of itself, could be seen to be unfair within the meaning of the Act. It was no answer that the Pilgrims intended to enter into such an arrangement and must live with the consequences, as it ignored the fact that Mr Pilgrim was a person who was not well equipped to make a judgment as to a business matter. Further, his Honour held that Mr Johnson actively induced the Pilgrims to enter into the franchise by the misrepresentations he made. The Pilgrims' intention to go into the arrangement must have been produced in part by that misrepresentation (cf Hugenin v Baseley (1807) 14 Ves 273 at 300; 33 ER 526 at 536 per Lord Eldon LC). Accordingly, Mr Johnson and Oraka had no basis for complaint when they were ordered to pay compensation of $185,000 for the capital expenditure the Pilgrims made, inter alia, on the faith of that inducement.

77 It was submitted that it was an incorrect assertion that the Pilgrims did not contend for an order based on the return of the business to Wendy’s. Relief on this basis was claimed in claim 3(a) of the Amended Summons. Equally, it was mentioned in evidence as to the sale price and the frustration the Pilgrims experienced in trying to sell the franchise. It followed that the capital loss claim did not spring from the trial judge without notice to the appellants and to suggest it did was without foundation.

78 It was submitted that Oraka and Mr Johnson should be held liable, although the business was ultimately resumed by Wendy's, for the following reasons:

1. Oraka was an integral part of the franchise system;

2. Oraka provided training to the Pilgrims;

3. Oraka received 50 per cent of the franchise fees;

4. Oraka was engaged by Wendy's as master franchisee for New South Wales;

5. Oraka failed to deal with the problems that arose with the franchise;

6. Oraka was inextricably linked to the whole arrangement and must be some responsibility for the basic aspects of the arrangement;

7. Oraka and Mr Johnson were fully involved in inducing Mr Pilgrim’s entry into the arrangement in the first place and they continued to be fully involved throughout virtually its entire life;

8. The administration by Oraka and Mr Johnson of that part of the franchise agreement dealing with assignment, and the effective prevention of a sale that resulted.

79 It was submitted that it was not correct to say that if his Honour was unable to make any apportionment of liability he could not have been able to determine that there was any liability to the Pilgrims at all. The second proposition does not follow from the first. His Honour was not determining liability in the sense used in an ordinary tort or contract claim. His Honour was determining whether a contract was unjust and, if so, he was then called on to consider, under s 106(5), the making such orders as to the payment of money as the Commission considers just in the circumstances. This was a broad discretionary power not limited to ordinary civil law notions of liability or causation. If this was correct it was quite possible for a judge to hold that it would be just to order payment of money by one or more persons (even if not parties to the contract) without him being able to say that there could be an apportionment amongst those ordered to pay. It was submitted that this followed from the broad considerations referred to by Barwick CJ in Brown v Rezitis 127 CLR 157 at 165.

80 It was submitted that contrary to the submissions of Oraka and Mr Johnson, his Honour did not hold that the value of the business as at 2000 could be assessed by reference to the price paid for it. Rather, it is apparent from the judgment that his Honour assessed that the sum of $185,000.00 was payable if the claim for extra wages was rejected and the Pilgrims no longer had rights to the business. In other words, if the price they paid for the franchise was notionally written-off against income actually earned by the Pilgrims, the arrangement could only be viewed as unfair.

81 The Pilgrims submitted that there was no “fraud” on the revenue by either of the respondents as no intent to defraud the revenue by Mr Pilgrim was proved (and his Honour found none). As to the requirements under s 29 of the Stamp Duties Act, when the point concerning stamping was raised at the hearing the respondents undertook to the Court to have the sale agreement up-stamped and this was done on 12 July 2003. His Honour was informed of this when he delivered judgment on 12 August 2002. However, it was not possible then for his Honour to amend his reasons. It is submitted that because the up-stamping occurred prior to judgment being delivered, the contract was, of itself, available as evidence before his Honour when he delivered judgment and this point in the appeal should not detain the Court.

CONSIDERATION AND CONCLUSIONS

82 The central issues to be determined in these appeals are as follows:

1. Whether Peterson J erred in finding unfairness in relation to the contract or arrangement between the Pilgrims and Wendy's.

2. Whether Peterson J erred in finding that Mr Johnson made a promise or false representation to the Pilgrims that the business would be relocated and refurbished at no cost to the Pilgrims. Whether his Honour found by that promise or representation the Pilgrims were induced into acquiring the franchise business in the first place and, if so, whether his Honour erred in that respect.

3. Whether Peterson J erred in finding unfairness in relation to the contract or arrangement between the Pilgrims and Oraka and Mr Johnson so that Oraka and Mr Johnson became jointly and severally liable with Wendy's to provide restitution of the capital loss claim of $185,000 or some lesser amount.

4. Whether Peterson J erred in the manner in which he apportioned liability as between Wendy's and Oraka and Mr Johnson in relation to the capital loss claim.

5. Whether Peterson J erred in determining the liability of Wendy's and Oraka and Mr Johnson for the capital loss claim to be an amount of $185,000.

6. Whether Peterson J erred in making orders against Oraka and Mr Johnson that they pay the amount of $70,000 to the Pilgrims in restitution for the cost of relocation and refurbishment.

Mr Johnson and Oraka did not press the "fraud on the revenue" issue.

Liability of Wendy's

83 Peterson J found that there was a sufficient connection between Wendy's and the "arrangement" to justify the order relating to the payment of $185,000 extending to it. His Honour nowhere defines the "arrangement" but it is apparent that he regarded the franchise agreements and the whole of the dealings between the Pilgrims on the one hand and Wendy's, Oraka and the Johnsons on the other as an overall arrangement within the meaning of s 106 of the Act.

84 The connection between Wendy's and the arrangement found by his Honour came about because he found that "Wendy's was an "integral part of the franchise system" and that "Wendy's was inextricably linked in the whole arrangement and must bear some responsibility for the basic aspects of the arrangement". His Honour gave a number of instances of Wendy's involvement as follows:

1. Wendy’s provided training to the applicants in Adelaide.

2. Wendy’s received 50% of the franchise fees that the applicants paid.

3. Wendy’s engaged Oraka as its master franchisee for New South Wales.

4. Wendy’s failed to act to deal with the developing problem with the applicants when they sought assistance, and deflected the applicants’ request to Oraka.

85 It becomes necessary to consider what his Honour meant by Wendy's being "inextricably linked in the whole arrangement", what is the significance of the four matters listed above and what are the implications of the Pilgrims' business reverting to Wendy's.

86 We fail to see how the first three matters listed above can, of themselves, justify a finding of unfairness against Wendy's. As to the fourth matter, the "developing problem" referred to was the requirement that the premises be refurbished before they could be sold and this is related to his Honour's earlier finding in his judgment that:

The franchise agreement was unfair also in that it required the approval of a sale of the business by Wendy's and Oraka, which in the circumstances was unfairly withheld due to the applicants' inability to meet the costs of re-fitting the shop premises to the latest adopted styling.

87 It was not the case that prospective purchasers had presented themselves to the Pilgrims and that approval to sell had been withheld by Wendy's and Oraka for the reason that the Pilgrims had not met their obligations to pay for an upgrading of the shop. It would appear from the evidence, however, that Oraka was advising prospective buyers that the price the Pilgrims were asking for the business ($200,000) was too high because in addition to the asking price, any new franchisee would have to pay $30,000 - $40,000 on an upgrade to comply with Wendy's new image.

88 We consider that Peterson J erred in concluding in his primary judgment that approval to sell had been unfairly withheld by Wendy's. However, his Honour appears to recognise his error in his first supplementary judgment where he said at par [19]:

19 Mr Neil also submitted that I should deal with a finding made to the effect that the applicants were denied the opportunity to sell their business by virtue of the respondents' having denied their approval to effect the sale. It was submitted that no prospective purchaser had been presented to the respondents for consideration and that no approval was withheld. The fact of the matter was that the applicants were informed by the respondents that it would be necessary that any prospective purchaser be advised of a need to expend the sum of $30,000 to restyle the business to conform with the then current styling. This had a dampening effect which, it was suggested by the applicants, achieved a not dissimilar result. The applicants had put the business for sale in Oraka's hands but nothing came of this over a period of time. Whether any prospective purchasers presented to Oraka is unknown, Mr Johnson not having gone into evidence. Further, this issue does not have any bearing upon the ultimate disposition of the business as described above. In these circumstances, I am not persuaded that I should take any steps in this respect vis-a-vis my primary judgment.

89 It is difficult to understand just what his Honour was getting at in this part of the judgment but he appears to concede that whilst actual approval to sell was not unfairly withheld, the requirement to inform prospective purchasers that they would need to expend an additional $30,000 to restyle the business had a dampening effect which, his Honour seems to accept, had a not "dissimilar result" to a refusal to approve a sale. This, of itself, could not support a finding of unfairness in our opinion. However, his Honour's finding that Wendy's was an "integral part of the franchise system" and that "Wendy's was inextricably linked in the whole arrangement and must bear some responsibility for the basic aspects of the arrangement" calls for closer examination, particularly in light of the finding that Wendy's failed to act to deal with the developing problem with the Pilgrims when they sought assistance, and deflected the applicants’ request to Oraka.

90 On 26 May 1998 Mr Pilgrim wrote to Mr Geoff Davis, Executive Chairman of Wendy's, stating he had put the store on the market for $200,000 but could not sell it because:

Regional Office constantly advise interested parties that it does not conform to the latest Wendys Image and will cost an estimated $40,000 to be spent ... to bring it up to date. This we feel is unconscionable as it was only upgraded 2 and a half years ago at a cost to ourselves of $60,000.

91 Mr Pilgrim's letter also referred to the fact that he and his wife had paid management fees in accordance with the franchise agreement although no lease was in place; they were "forced" to relocate at their own expense despite a promise by Mr Johnson that the relocation would be free; that he and his wife were "totally overcommitted" financially and could not pay their creditors; that their dream had turned into a "nightmare"; and, that they were unable to pay the increased promotional levy imposed by Wendy's.

92 Mr Davis could have been left in no doubt that Mr and Mrs Pilgrim were in serious trouble financially and were seeking Wendy's help but Mr Davis left it to Mr Johnson to respond to the letter. Mr Johnson did not address any of Mr Pilgrim's concerns, including his concern about the unconscionability of the requirement for a further upgrade. Mr Johnson's reply focused mainly on the promotional levy and his concern about Mr Pilgrim's opposition to it. Mr Johnson also took the opportunity in the letter of saying that:

[W]ithout a lease the landlord had no obligation to pay for a relocation. Your "free" relocation, as you refer to it, would have occurred if the reconfiguration of the Centre had happened inside the term of your lease.

93 In his letter Mr Johnson did, however, indicate that "Geoff has requested a meeting with you to help resolve some of your concerns." A meeting was arranged for 13 July 1998 but because Mr Pilgrim was insisting that a representative of the Australian Franchisee's Association ("AFA") be present the meeting did not go ahead because, Mr Pilgrim said, Mr Johnson would not deal with that Association.

94 There is no doubt that franchises are commercial arrangements and that any person taking up a franchise is engaging in a commercial venture with all of its attendant risks. The franchisor does not assume the role of guarantor and as Sheldon J observed in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 "the section's [s 88F of the Industrial Arbitration Act 1940] massive power makes it imperative that it should be exercised with proper restraint ... it should not permit itself to become a refuge for those who are merely disgruntled with a bargain entered into on even terms. ... the discretion should be exercised to protect victims of wrong dealing not to prescribe anodynes." However, a franchisee may seek relief under s 106 of the Act and the Commission may provide that relief if it finds the contract is unfair. The test of unfairness, as observed in Port Macquarie Golf Club v Stead (1996) 64 IR 53 at 59-60, involves:

[T]he commonsense approach characteristic of the ordinary juryman by applying standards providing a proper balance or division of advantage or disadvantage between the parties who have made the contract or arrangement, bearing in mind the conduct of the parties, their capability to appreciate the bargain they have made and their comparative bargaining positions when entering into the contract or arrangement: Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 at 374; A & M Thompson Pty Ltd v Total Australia Ltd [1980] 2 NSWLR 1 at 13; and Baker at 271-272.

95 We do not consider that Wendy's acted fairly in dealing with the very real concerns raised by Mr Pilgrim in his letter of 26 May 1998. The matters raised were left essentially in the hands of Mr Johnson. Whilst Mr Johnson arranged for a meeting, it did not eventuate, seemingly because of Mr Johnson's attitude to the AFA. No attempt was made by Wendy's to follow up on Mr Pilgrim's concerns. It was put by Wendy's that it had sought to accommodate the Pilgrim's concerns by setting off part of the cost of relocation against a refurbishment levy (not an advertising levy as submitted by the respondents) of 2.5 per cent of annual gross receipts. This offer, however, was conditional on Wendy's achieving an amendment to the franchise agreement, which whilst providing some relief to the Pilgrims, also protected the interests of Wendy's, including by increasing the levy to 3.5 per cent. Further, given the relocation to new premises at a cost to the Pilgrims of $60,000, it would seem that in agreeing to the offset relating to refurbishment Wendy's was not making much of a concession in any event. Moreover, the setting off of the cost of relocation against the 3.5 per cent levy would have meant a relatively small concession for the 1995 year in circumstances where the Pilgrims were required to borrow $60,000 to expend on relocation at that time and where, in 1998, the Pilgrims were required to expend a further $30,000-$40,000 on an image upgrade.

96 The failure by Wendy's to address the Pilgrims' concerns in a more reasonable way than merely providing an offset against the refurbishment levy must be seen against the background of the franchise agreement and, in particular, cl 9 of that agreement, which sets out the conditions upon which any sale would be approved and which required, inter alia: payments of $11,500; the payment of the incoming franchisee’s training fees by the outgoing franchisee; the execution of general releases; the premises complying with the then current Wendy’s image, that is to say, its fit-out; the franchisee not being in default of the franchise or any other agreement between the parties such as, for example, the license agreement; the payment of all outstanding indebtedness to Wendy’s and Oraka; and, the approval of Oraka to the sale agreement. Further, that if the franchisee were to be terminated or if the franchisee abandoned the business the franchise would revert to Wendy's.

97 The effect of Wendy's failure to address the Pilgrims' dilemma given the terms of the franchise agreement meant that the Pilgrims could not assign the franchise or any part of it. It might be contended that Wendy's had no obligation to assist the Pilgrims find a solution to their problems and that Wendy's in no way contravened the terms of the franchise agreement. But we consider that in finding Wendy's was "inextricably linked in the whole arrangement and must bear some responsibility for the basic aspects of the arrangement", Peterson J was entitled to take into account in assessing whether there was unfairness, the following matters:

· The Pilgrims were unable to pay the costs of refitting the shop premises to comply with Wendy's latest "image".

· This inability had the effect under the terms of the franchise agreement of preventing the Pilgrims assigning the franchise or any part of it unless they, or a new purchaser, paid for the refit.

· Wendy's was the national franchisor.

· Wendy's was aware of the allegation against its master franchisee that the Pilgrims had been promised a free relocation but this was not forthcoming and the Pilgrims had to meet this unexpected expense.

· If the Pilgrims were to pay for the image upgrade their asking price for the business would be some $30-40,000 less than what they paid for it in 1993 in circumstances where they had already had to pay for the alleged unexpected and significant cost of relocation and an image upgrade.

· Wendy's were aware of the serious financial difficulties in which the Pilgrims found themselves but took no initiative of any substance as the national franchisor to at least attempt to find a solution.

· Mr Pilgrim's abilities, which his Honour described as "demonstrably limited business ability and seemingly ordinary intellect."

98 The other matter relied upon by Peterson J to found unfairness was that the business reverted to Wendy's. At [50] of his primary judgment Peterson J stated:

50 By vacating the premises upon the expiry of the lease, the applicants thereby returned to Oraka an asset upon which they had spent more than $255,000 but which had returned them income over a period of years. Oraka, having sold the business for $200,000 regained it for nothing. The applicants' loss was thus Oraka's gain.

99 Of course, his Honour was, as we have explained, mistaken because the business reverted to Wendy's. After substituting Wendy's for Oraka in his first supplementary judgment, Peterson J considered the implications of this. At [18] his Honour said:

18 The question then arises whether I should maintain a liability in Oraka and Mr Johnson in that respect. They were associated to an equal if not greater degree than Wendy's in the arrangement and shared the proceeds by way of franchise fees. They are clearly open to inclusion in the liability on the principles in Brown v Rezitis. It is clear enough that the major contribution in this respect ought be Wendy's, but I consider there is no reason why Oraka and Mr Johnson ought not be included in the same way as was Wendy's initially. I therefore maintain the order originally identified with respect to the sum of $185,000.

100 The basis on which Peterson J considered the arrangement unfair in relation to Oraka regaining the business was that he understood that Oraka did so at no cost, in circumstances where it had already been paid full value for the business ($200,000) by Frozen Fun. This was not the case in relation to Wendy's. The reason why the business reverted to Wendy's rather than Oraka was simply that in July 2000 Wendy's acquired the master franchise for New South Wales and the ACT from Oraka. There was no basis, in our opinion, to find unfairness against Wendy's merely because the franchise reverted to Wendy's under the franchise agreement unless it could be shown that Wendy's conduct was designed to secure a return of the franchise by improper or unfair means. There was no evidence to support any such finding. Moreover, we consider that the issue of unfairness in relation to the surrender of the business to either Oraka or Wendy's and how getting back the business amounted to unfairness, was not a live issue in the proceedings. This is reflected in the fact that if it had been, there would have been no question of any mistake on his Honour's part as to whether Oraka or Wendy's regained the business because it would have been a central issue in the proceedings.

101 We consider that it was open to Peterson J to find unfairness on Wendy's part given its role as national franchisor and its failure in the circumstances described to take reasonable steps to address the problems raised by the Pilgrims in the letter of 26 May 1998. Wendy's had a clear connection with the arrangement involving the Pilgrims and Wendy's conduct in failing to take steps to deal with the problems encountered by the Pilgrims in operating the franchise, rendered the arrangement unfair. Wendy's failure, in our opinion, contributed significantly to the Pilgrims' decision to surrender the business. There was no unfairness on Wendy's part in relation to the fact that it regained the business at Bateau Bay.

Representation by Mr Johnson of free relocation.

102 At [46] of his primary judgment Peterson J stated that:

46 If the letter did not clarify the point for the Pilgrims, as it claimed, it certainly did clarify Mr Johnson's position in relation to it. The letter seems to be predicated upon the idea that there was a subsisting lease under which a free location and refurbishment was to operate but that it had expired because of the effluxion of the elongated time taken to undertake the renovation. Of course, there never was a lease in operation during the early period of the applicants' occupancy. It follows that Mr Johnson's promise to the Pilgrims of the free location and refurbishment prior to their entering into the arrangement, while an obvious inducement, was never going to come to fruition (our emphasis).

103 Later in his judgment at [51] his Honour found as follows:

51 I find the arrangement between the parties unfair in that it resulted in part from a false representation by Mr Johnson that there would be a relocation and refurbishment of the shop premises at no expense to the applicants. The franchise agreement was unfair in that it failed to provide that Mrs Pilgrim was a party to it, when her participation was essential to the functioning of the business, as her training by Wendy's and Oraka's evidences. The franchise agreement was unfair also in that it required the approval of a sale of the business by Wendy's and Oraka, which in the circumstances was unfairly withheld due to the applicants' inability to meet the costs of re-fitting the shop premises to the latest adopted styling. The arrangement was also unfair in that it permitted Oraka to regain at no cost the benefit of the business for which it had been paid full value (our emphasis).

104 There are three issues arising out of his Honour's findings regarding false representation: firstly, whether there was such a representation; secondly, if so did it have the effect of inducing the Pilgrims into buying the franchise and thereby make Mr Johnson and Oraka jointly liable with Wendy's in relation to the claimed capital loss sum; and, thirdly, if there was such a representation did it make Oraka and Mr Johnson liable in relation to the cost of relocation. We will deal with the third issue later in this judgment.

105 Senior counsel for Oraka and Mr Johnson strongly contested his Honour's finding about false representation. It was Mr Kimber's submission that when the whole of the evidence was considered the Court could not possibly come to the view that Mr Johnson made such a representation. Senior counsel for the Pilgrims contended that the findings of Peterson J were open to him and that it had not been shown that his Honour had misused the advantage of seeing the witnesses and assessing the evidence as a whole.

106 This issue is finely balanced. We have had particular difficulty reconciling the finding of the trial judge that there was a promise or false representation by Mr Johnson that he would provide free relocation and refurbishment, with Mr Pilgrim's concession in cross-examination that "Brian [Mr Johnson] was going to do his best of his [sic] ability to get a lease and new refurb" and the fact that the conversations between Mr Pilgrim and Mr Johnson regarding the promise of a free relocation and refurbishment were not able to be corroborated by an independent witness. Mrs Pilgrim's evidence about these conversations, at which she was not present, was second hand, having been told of the conversations by her husband.

107 On the other hand, whilst those parts of Mr Johnson's affidavit denying that he gave any assurance of a free relocation etc., were received into evidence, Mr Johnson was not called as a witness. Peterson J placed some weight on this fact. His Honour said at [9] and [10]:

In respect of evidence identifying conversations between Mr Pilgrim and Mr Johnson or Ms Coles, for example, the absence of evidence from the respondents in that regard is a powerful reason for finding in Mr Pilgrim's interests. While countervailing propositions were put in cross-examination by counsel, those propositions can, in the absence of supporting evidence, amount to no more than ideas. In the absence of an agreeable response from a witness, they cannot establish facts.

10 This left the evidence in the unusual position where the evidence of Mr Pilgrim, although unsatisfactory in many respects, was not put in issue save to the extent of cross-examination. Without seeking to diminish the impact of cross-examination where it was effective, the consequence must be that evidence of Mr Pilgrim which asserts the content of conversations with Mr Johnson, for example, which has not been impugned by cross-examination, must be accepted as evidence of truth in the absence of a finding that the witness could not be believed on his oath. This is a case when Jones v Dunkel (1959) 101 CLR 298 inferences may properly be drawn, that, for example, Mr Johnson's evidence on these conversations would not have assisted him.

108 We note that Peterson J was concerned with Mr Pilgrim being an unsatisfactory witness and indeed, that some of his evidence was "truly incredible". There was also his Honour's concern with Mr Pilgrim's reading difficulties and the late revelation about this matter in the proceedings. Peterson J was obviously alert to the difficulty of accepting all of Mr Pilgrim's evidence and said that he approached it cautiously. His Honour was also obviously aware of the outcome of Mr Pilgrim's cross-examination.

109 This is an appeal in the strict sense. Thus, whilst we might have taken a different view about the factual findings concerning the relocation representation we are unable to conclude that the findings by Peterson J in this respect were not open to him or that his decision was necessarily contrary to compelling inferences: See the discussion in Humphries v Cootamundra Ex-Services and Citizens Memorial Club Limited [2003] NSWIRComm 211 at [98] to [103] in relation to the approach regarding appellate review of findings of fact and credit and with which we respectfully agree.

110 In his cross-examination, whilst he agreed that Mr Johnson was going to do his best to obtain a free relocation, Mr Pilgrim disagreed with the proposition repeatedly put to him that Mr Johnson did not guarantee that result. That left the evidence somewhat ambiguous. Notwithstanding that ambiguity and the unequivocal disagreement on Mr Pilgrim's part with the proposition that there was no guarantee, Mr Johnson was not called as a witness. In those circumstances Peterson J was entitled, on the evidence as a whole, to accept Mr Pilgrim's evidence that he was promised a free relocation and to draw the adverse inference that he did against Mr Johnson and Oraka. We do not consider Peterson J erred in finding that there was a promise by Mr Johnson of a free relocation and refurbishment.

111 The next consideration is whether the promise or representation by Mr Johnson induced the Pilgrims into buying the franchise. Peterson J referred to Mr Johnson's promise to the Pilgrims of the free location and refurbishment prior to their entering into the arrangement, as "an obvious inducement". We consider that his Honour regarded the promise or representation as an inducement to enter into the franchise arrangement and that such a conclusion was open to his Honour on the evidence.

Liability of Oraka and Mr Johnson in relation to capital loss claim of $185,000

112 There can be no liability as far as Oraka and Mr Johnson are concerned in relation to his Honour's findings that Oraka regained the business at no cost. This finding was an admitted error on his Honour's part. We consider, however, Oraka and Mr Johnson must share with Wendy's the liability in relation to the capital loss claim and in that respect there was no error by Peterson J.

113 It is clear on the evidence that Mr Johnson was keen to be rid of Mr Madeley and wanted the Pilgrims to buy the franchise. His Honour found that Mr Johnson promised, or falsely represented, to the Pilgrims that he would arrange for a free relocation and refurbishment and that this was an obvious inducement to the Pilgrims to obtain the franchise. Oraka and Mr Johnson, in our opinion, shared the same failings as Wendy's in being in a dominant position under the franchise agreement and in not taking reasonable steps to find a solution to the Pilgrim's financial difficulties in circumstances where we consider the demands on the Pilgrims to upgrade the image of the store, on top of meeting the costs of relocation, were unreasonable.

114 The promise or false representation by Mr Johnson that he would arrange for free relocation, etc., and the failings by Oraka and Mr Johnson to take reasonable steps to assist the Pilgrims out of their financial difficulties, which Mr Johnson and Oraka had at least in part created by placing the Pilgrims in a position where they had to meet the unexpected cost of relocation, etc., contributed to the decision by the Pilgrims to agree to surrender the business in October 2000 to Wendy's and to incur significant losses as a result.

The apportionment of liability in relation to the capital loss claim

115 At [26] of his second supplementary decision Peterson J stated:

26 As to the concept of contribution as between the respondents in respect of the $185,000 value of the business, I consider Wendys' submissions to be correct. The case was not conducted by any party on the basis that contribution was a matter in issue. It was never identified as such and no evidence was called by any respondent, on any issue including this suggested issue. The basis for a joint and several order against the relevant respondents is the connection each had with the subject matter. The observation I made in my supplementary judgment of 13 September 2002 that "It is clear enough that the major contribution in this respect ought be Wendys . . ." was predicated upon the established fact that the business was handed back to Wendy's and not to Oraka or Mr Johnson. However, the facts surrounding those events were not put in evidence. It is impossible for me to know whether any particular level of contribution ought be made by either party, or indeed, whether my observation would be ultimately correct in the light of any relevant evidence on the issue of contribution. Of course, it may be that the whole value of the order with respect should be attributable to Wendy's and no other respondent but that is a matter I am unable to finally determine in these proceedings. Were I to attempt to do so, it would be no more than guessing at the result.

116 The Pilgrims submitted on appeal that Oraka should be responsible for the full payment of the capital loss claim of $185,000 plus interest on the basis that the Pilgrims were induced by the "relocation representation" into acquiring the franchise in the first place. Oraka contended that such an outcome was not open in these appeal proceedings for a number of reasons including that the Pilgrims' new contention was never part of their case at first instance.

117 The amended summons, however, indicated that it was pleaded that the contract was unfair in the requisite sense because, inter alia:

(a) the Applicants were induced to purchase the business on the basis of representations made to them by the Respondents which were either deceptive or misleading or were otherwise recklessly made in particular, the Second Respondent through the Third Respondent and others including Coles falsely or recklessly represented to the Applicants that the cost of relocation of the original premises would not have to be paid by them ...

118 With some reservation, we do not propose to disturb his Honour's finding that liability in relation to the capital loss claim rests on a joint and several basis with Wendy's, Oraka and Mr Johnson. We are in no better position than his Honour was at first instance to make any precise assessment about respective contributions as between the respondents regarding the capital loss claim.

119 We consider however, that a finding to the effect that Wendy's, Oraka and Mr Johnson are jointly and severally liable is not inconsistent with our view regarding their respective culpability and that such an order is just in the circumstances of the case.

The amount of the capital loss claim

120 The claim by the Pilgrims in their amended summons was $185,000 less an amount for fixtures, fittings and chattels such resulting amount to compensate for the loss of goodwill in the business. The amount of $185,000 was comprised of $72,460 on account of plant, fittings and chattels, $92,540 on account of goodwill, and a cash payment of $20,000. Arising out of proceedings before Maidment J in October 2000 the Pilgrims and Wendy's reached agreement as to the basis upon which the Pilgrims would surrender the premises to Wendy's. That agreement provided that Wendy's would acquire the plant, equipment, fittings and stock from the Pilgrims at an agreed valuation ($23,646.93), which would be offset against outstanding franchise fees owed to Wendy's of $36,277.07.

121 In his first supplementary judgment, Peterson J referred to the proceedings before Maidment J in the following terms at [14]-[15]:

14 During the course of the supplementary submissions, reference was made to consent orders made in the proceedings by Maidment J on 3 November 2000 dismissing a motion by consent and also noting an agreement between the applicants and Wendy's relating to the manner in which the applicants' equipment installed in the premises might be disposed of, particularly by way of possible purchase by Wendy's. This was a matter not the subject of any evidence in the proceedings and, according to Mr Kerr's submission, was not material upon which any reliance could be now placed.

15 It would seem to follow that had Wendy's purchased some of the equipment in the premises then a payment to the applicants of a sum otherwise embracing, through the virtual purchase price, the value of that equipment might be a double payment. However, I propose to accede to the proposition that the material is not in evidence and accordingly ought not be utilised for any present purpose. This seems to me to be particularly appropriate where the recovery of the purchase price was utilised as a means of achieving a form of restitution which reflected that the level of earnings received would be unfair otherwise.

122 We consider his Honour erred in two respects. Firstly, the information regarding the value of the equipment at surrender and the amount of outstanding franchise fees was in evidence before his Honour. Secondly, notwithstanding that his Honour used the purchase price of $185,000 as a means of achieving a form of restitution that reflected that the level of earnings received would be unfair otherwise, the fact was that the Pilgrims received $23,646.93 for the plant, equipment, etc. That this was set off against outstanding franchise fees and that the Pilgrims did not receive this money in the hand is not relevant, in our opinion, because no issue was taken that there was anything unfair about the debt owed by the Pilgrims in the form of outstanding franchise fees. Moreover, we note that by voiding the contract or arrangement ab initio, Peterson J appears to have extinguished any right of Wendy's to pursue the outstanding fees, thereby compounding the error in awarding $185,000.

123 In our opinion, Peterson J erred in not discounting the amount of $185,000 by the amount received by the Pilgrims for plant, equipment, etc. We consider that amounted to double counting. Moreover, we have strong reservations about the correctness of his Honour awarding the whole of the $185,000 in circumstances where the claim was for goodwill only, which was a sum of $92,540. However, whilst we propose to discount the $185,000 figure by the amount received by the Pilgrims for plant, equipment, etc., we do not propose to limit the award made by his Honour to goodwill given his Honour's approach of dismissing the wages claim and using the purchase price as a benchmark for determining what was just compensation in the circumstances of the case. This was an approach open to his Honour.

The amount of the relocation claim

124 Senior counsel for Oraka and Mr Johnson contended that his Honour erred in awarding $70,000 to the Pilgrims in restitution for the cost of relocation. It was claimed that the $70,000 figure included amounts of $12,300 that the Pilgrims spent on a new car and $11,000 spent on a new soft-serve machine, neither of which had anything to do with relocation. As to the motor vehicle his Honour found that "while it was painted in colours related to the business, [it] was essentially for the personal use of Mr Pilgrim." This finding reflected the evidence. The vehicle was, in our view, purely a discretionary purchase by Mr Pilgrim and it could not be said that there was any obligation or requirement to purchase it as a consequence of relocation and, therefore, it could not be said Mr Pilgrim incurred any expense in relation to the purchase of the vehicle arising out of the arrangement with Oraka and Mr Johnston. The circumstances surrounding the purchase of the soft-serve machine are less clear and we are in no position on the evidence to exclude the cost of the machine from the cost of relocation. Subtracting the cost of the car from the $70,000 figure leaves an amount of $57,700.

125 Oraka and Mr Johnson also submitted that the Pilgrims were relieved on about 29 August 1995 of their obligation to pay a refurbishment levy of 2.5 per cent of turnover expressly on account of the cost of relocation. It was submitted this should have been set off against any liability on account of relocation.

126 Oraka and Mr Johnson did put in issue in the proceedings below that the cost of relocation should be set off against the deferral of the refurbishment levy. However, it was only put in issue in the most tangential way. Perhaps this explains why there was no reference at all to the levy-offsetting question as an issue in any of the judgments of Peterson J.

127 The difficulty we have in dealing with this issue on appeal is that there is no evidence as to what was the sum attributable to the levy foregone. In other words, there was no evidence as to the net benefit (or detriment) over the period from 1995 to 2000 that is said to have flowed to the Pilgrims out of this arrangement that could be used to discount the cost of relocation. In this regard, we note that the levy effectively increased from 2.5 per cent to 3.5 per cent as part of the offsetting arrangement. Further, as we earlier observed, given the relocation to new premises at a cost to the Pilgrims of $60,000 it would seem that in agreeing to the offset relating to refurbishment neither Wendy's nor Oraka were making much of a concession in any event. We do not propose to interfere with the decision at first instance to the extent of discounting the relocation claim by an amount in consideration of the levy offsetting arrangement.

SUMMARY OF FINDINGS

128 It is appropriate that we summarise our findings on appeal as follows:

1. The arrangement between Wendy's and the Pilgrims was unfair but not on any basis connected with the fact that the franchise was surrendered to Wendy's and that Wendy's gained the business for nothing.

2. Peterson J did not err in finding that Mr Johnson made a promise or false representation to the Pilgrims that the business would be relocated and refurbished at no cost to the Pilgrims. His Honour found that by that promise or representation the Pilgrims were induced into acquiring the franchise business in the first place and his Honour was correct in that finding.

3. Peterson J did not err in finding unfairness in relation to the contract or arrangement between the Pilgrims and Oraka and Mr Johnson so that Oraka and Mr Johnson became jointly and severally liable with Wendy's to provide restitution of a sum representing a capital loss by the Pilgrims. There was no unfairness on the part of Oraka or Mr Johnson in connection with the surrender of the business to Wendy's.

4. Peterson J did not err in the manner in which he apportioned liability as between Wendy's and Oraka and Mr Johnson in relation to the capital loss claim.

5. Peterson J erred in determining the liability of Wendy's and Oraka and Mr Johnson for the capital loss claim to be an amount of $185,000. The correct sum, discounted by the amount received by the Pilgrims for plant, equipment, etc., is $161,353.07.

6. Peterson J erred in making orders against Oraka and Mr Johnson that they pay the amount of $70,000 to the Pilgrims in restitution for the cost of relocation and refurbishment. The correct amount, discounted for the vehicle purchased by the Pilgrims, is $57,700.

COSTS

129 Penultimately, we should refer to the issue of costs. The appellants have had a measure of success but a very limited measure. Their attacks on the foundations of the Orders made against them have failed. Wendy's was unsuccessful in the fresh evidence application. The active respondents have substantially succeeded in the proceedings. They should, therefore, have 90 per cent of their costs of the appeal.

ORDERS AND DIRECTIONS

130 We make the following orders and directions:

1. Leave to appeal in Matter Nos IRC 7014 and 7075 of 2002 is granted.

2. To the limited extent identified in this decision the appeals are upheld.

3. The orders made by Peterson J on 22 November 2002 are varied by deleting the amounts "$185,000" and "$70,000" and substituting the amounts "$161,353.07" and "$57,700" respectively, with the consequent adjustments to be made in relation to the amounts of interest awarded by his Honour.

4. The parties or, in the absence of agreement - the appellants, are to file and serve short minutes of order reflecting this judgment within 21 days.

5. The parties shall, within 21 days, file short minutes of consent orders in respect of the stays granted in the orders of the President of 20 December 2002 and, in the absence of agreement, to have the matter listed before a member of the Full Bench for determination.

6. In Matter No IRC 7014 the appellants shall pay 90 per cent of the costs of the first and second respondents. There is no order as to costs in relation to the third respondent.

7. In Matter No IRC 7075 the appellant shall pay 90 per cent of the costs of the first and second respondent. There is no order as to costs in relation to the third respondent.

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LAST UPDATED: 15/03/2004