Brotherson v Hursle Pty Ltd [2013] QDC 257

DISTRICT COURT OF QUEENSLAND CITATION: Brotherson v Hursle Pty Ltd [2013] QDC 257 PARTIES: IAIN BROTHERSON and KRISTY BROTHERSON (plaintiffs) v HURSLE PTY LTD (first defendant) and BRIAN FREDERICK SMALLWOOD (second defendant) FILE NO/S: D2701/2011 DIVISION: PROCEEDING: Trial ORIGINATING COURT: District Court at Brisbane DELIVERED ON: 16 October 2013 DELIVERED AT: Brisbane HEARING DATE: 19-23 August 2013 JUDGE: McGill SC DCJ ORDER: Judgment that the defendants pay the plaintiffs $202,732.58 inclusive of interest. Counterclaim dismissed. CATCHWORDS: TRADE PRACTICES – Misleading and Deceptive Conduct – representations in brochures and orally – whether made – whether misleading or deceptive - whether relied on. CONTRACT – Breach – whether plaintiffs prevented performance of contract by defendant – whether defendant repudiated contract – defendant in breach – plaintiffs entitled to terminate, and not liable for breach. ACN 070037599 Pty Ltd v Larvik Pty Ltd [2008] QCA 416 – cited. Butcher v Lachlan Elder Realty (2004) 218 CLR 592 – cited. Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 – considered. -- 1 of 37 -- 2 Culligan v Aco Pty Ltd [2009] NSWCA 290 cited. Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199 – applied. I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 – applied. Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 – applied. Steutel v Kimple Pty Ltd [2005] VSCA 312 – applied. Watson v Foxman (1995) 49 NSWLR 315 – cited. COUNSEL: J P Morris for the plaintiffs B D Du Plessis for the defendants SOLICITORS: Johnsons Solicitors for the plaintiffs Michael O‟Brien Lawyers for the defendants. [1] By a contract in writing executed by the plaintiffs on 21 July 2010 and by the first defendant on 7 July 2010, the first defendant granted to the plaintiffs a franchise to operate and conduct a coffee van business in a territory in Lismore in New South Wales for a term of five years: Exhibit 1 Tab H. The agreement provided for a one- off franchise fee of $135,000 plus GST to be payable to the first defendant, and for royalty fees1 and data tracking system access fees to be payable monthly in certain amounts. The plaintiffs paid the franchise fee to the defendant, and for a time operated the franchise business in Lismore, but the business was never successful and ultimately it was abandoned by the plaintiffs: p 62. [2] The plaintiffs claim they are entitled to damages from the first defendant for breach of the Trade Practices Act 1974, for breach of contract and for negligent misrepresentation; they also seek damages from the second defendant, under the Trade Practices Act on the basis that he was a person knowingly concerned in the breaches of the Act by the first defendant. The first defendant has counterclaimed for damages for breach of contract. The parties have reached agreement on damages, that if the plaintiffs are successful the amount recoverable will be $200,000 with interest at $47.94 per day after 19 August 2013, and if the first defendant is successful in its counterclaim the damages will be $52,884.81 together with interest accruing at $12.68 per day from 19 August 2013. [3] Ultimately only the claims for damages under the Trades Practices Act or for breach of contract were pressed by the plaintiffs. Pleadings [4] The plaintiffs alleged and the defendants admitted that on 6 April 2010 the second defendant provided to the plaintiffs six identified documents which contained 1 This fee was not payable in the first six months and if the cups per day sold exceeded 150 for the month, it was refunded: special condition re clause 5.1(b); clause 9.3. -- 2 of 37 -- 3 certain statements set out in some detail in paragraph 6 of the statement of claim: the documents are respectively documents E, A, B, C, D, and F of Exhibit 1, the bundle of documents for the trial. The plaintiffs also alleged in paragraphs 8, 10, 12, 13 and 14 that various oral representations were made by the second defendant on various occasions between 9 April and June 2010; the defendants admit that the second defendant made the statement alleged in paragraph 10(b), but otherwise deny that the statements alleged in each paragraph were made, and say that various other statements were made on the occasions identified. [5] The plaintiffs alleged in paragraph 15 that by making those written and oral statements the first and second defendants represented certain things. The representations alleged in paragraphs 15(d), (j), (l), (q), (r), (t) and (u) were admitted, but the remaining representations alleged were denied, on the basis that no such representations had been made in those terms. Paragraphs 16 and 17 of the statement of claim alleged that those representations were intended by the defendants to be relied on by the plaintiffs, and that they were made in trade or commerce; there appears to be no specific response to these allegations in the defendants‟ defence, and they are therefore taken to be admitted: UCPR r 166(1). [6] The plaintiffs alleged that they entered into the franchise agreement in reliance on the representations made by the defendant to the plaintiffs. The defendants put reliance in issue, and relied on a “no representations” clause in the franchise agreement, that the plaintiffs had been given advice by an independent legal adviser and an independent accountant, and that the plaintiffs had been told by the first defendant to seek independent business advice but decided not to seek that advice. The plaintiffs alleged that the representations relied on in paragraph 15 were misleading and deceptive, for various reasons set out in some detail in the pleading. In response, the defendants relied on what they had previously alleged as to the extent of any representations made, and deny that any representations in fact made were untrue. [7] It was also alleged, in fairly general terms, that the second defendant was a person knowingly concerned in the contravention of the Act by the first defendant. This was denied, also in fairly general terms, but in circumstances where the evidence discloses that the first defendant is essentially the alter ego of the second defendant, where all the relevant communications were between the plaintiffs and the second defendant, and where any relevant knowledge or intention was the knowledge or intention of the second defendant, there is in fact in this case no real issue that if there was a contravention of the Act by the first defendant the second defendant was knowingly concerned in it. [8] Paragraph 62(g) of the statement of claim also invoked s 51A of the Trade Practices Act, in so far as the representations relied on were representations as to a future matter; it was alleged that the defendants did not at the relevant time intend or possess the necessary resources or capabilities to make good on the representations pleaded. In response the defendants alleged that, in so far as the representations were as to future matters, they had reasonable grounds for making the representations. These issues were a fact litigated at the trial, and it is not necessary at this stage to consider the adequacy or otherwise of these pleadings. The plaintiffs -- 3 of 37 -- 4 also alleged that there was a breach of the franchising industry code by the first defendant, in failing to have the plaintiffs execute certificates of receipt of disclosure and of advice prior to the execution of the franchise agreement. This was denied by the defendants. The breach the plaintiffs alleged was not the failure to disclose prior to the signing of the contract, but that the defendants did not obtain the certificates required under the code to be obtained before the contract was signed at that time, obtaining instead backdated certificates after the franchise agreement had been signed. This was relied on as a breach of s 51AD of the Act, though it strikes me as being at most a technical breach. [9] It was also alleged that the first defendant was in breach of contract by failing to take any or adequate steps to determine whether or not the territory offered was capable of sustaining the franchise, failing to provide the plaintiffs with a territory that was capable of sustaining the franchise, failing to provide the plaintiffs at handover with a franchise that had attained 100 cups a day in sales, failure to build up the customer base for the plaintiffs to the 100 cup guarantee and failure to provide the plaintiffs with adequate training in accordance with cl 17 of the contract. This was denied in general terms by the defendants. Background [10] In April 2010 the plaintiffs were working in Canberra, both for the same employer. The male plaintiff was the number two person in the company (p 11), while the female plaintiff was working on a part-time basis, from home: p 60. The couple had young children. There was some salary packaging involved in their remuneration, but together they were earning at least $100,000 per annum, with the potential to earn up to $12,000 more by way of bonuses: p 12, p 60. They maintained that they were happy in this work and that their positions were secure: p 14, p 61. The female plaintiff however came upon the first defendant‟s website, and became interested in the idea of a franchise from the defendant. This involved using a van fitted out with the equipment necessary to make espresso coffee and the various derivatives of it, which would drive around to businesses where such coffee was not readily available, and supply customers. A differentiating feature of this service was that the operator sought to co-opt someone from the business to collect the orders for coffee, so that, instead of customers just coming out to the van, the operator would collect an order from this person, make up the necessary coffees, and bring them in for the people ordering them to come and collect them. [11] The female plaintiff registered interest on the website, and as a result the second defendant emailed her the documents in Exhibit 1, tabs B to F.2 There must then have been a phone call between him and the male plaintiff, as a result of which a second email was sent almost immediately thereafter, enclosing the document in Exhibit 1, tab A.3 The male plaintiff said that they read these documents, and noticed certain things about them which they found attractive, particularly the family friendly hours; the documents suggested that the work day began at about 2 Female plaintiff p 62; Exhibit 15; second defendant p 69. 3 Female plaintiff p 62; second defendant p 69-70; Exhibit 16. There were some other enclosures, not in evidence. -- 4 of 37 -- 5 8 a.m., and would be finished at about 3 p.m., so that children could be met and supervised after school: p 14-19; p 63. [12] One of the things referred to in this material was the defendant‟s “100-cup guarantee”.4 In the first of these documents, it was said that the guarantee “means the franchisor guarantees a turnover of 100 sold cups in a day, prior to handover of the business. The 100 cup guarantee ensures that each franchise continues on with a cash flow positive operation.” The financial data on p 16 indicates that there is a $30,000 fee paid in addition to the franchise fee, as a business establishment fee, if the franchisee takes the 100 cup guarantee option. The document at tab E says on p 3: “100 cup guarantee on turnover, which means we build your customer base for you.” Then on p 4 it is said of the guarantee: “During the initial training period we work with you to build your business, establish your customer base and define your daily run. We guarantee that prior to handover your new business will have achieved a turnover of at least 100 cups of coffee sold in a day.” [13] The disclosure document at tab G clause 19.4(e) says: “While the franchisor guarantees a turnover of 100 cups in a day during the training and handover period, no long-term turnover guarantee applies and individual results may vary. Some businesses may turnover more or less than 100 cups in a day following handover and results will depend on the individual‟s ability to master the skills required to operate the business.” [14] There was a dispute before me as to just what the “100 cup guarantee” meant. Interestingly, although the disclosure document implies that there was a guarantee, the draft contract which was sent to the plaintiffs by the defendants contained no provision embodying that guarantee.5 Indeed, that draft franchise agreement contained in cl 47.1 a provision stating: “No representations or promises of any kind had been made by Espresso to induce you to sign this agreement except those specifically stated in this franchise agreement and the disclosure document that has been delivered to you.” [15] There was no reference to the 100 cup guarantee in the draft franchise agreement, and the only reference in the disclosure document was the statement in cl 19.4(e) referred to earlier, and this was obviously not the only representation made by the defendant to the plaintiffs in relation to the 100 cup guarantee. Indeed, there were a large number of other representations made, and arguably making this statement was in itself misleading and deceptive conduct. I shall return to the significance of this clause in relation to any possible defence to claims under the Act. As it happens the plaintiffs insisted on the inclusion of a term in relation to it,6 which appears in the document in Exhibit 8 tab H p 35, where there is a special condition relating to cl 17.1 in the following terms: 4 For example, Exhibit 1 tab A p 6; tab E p 4; tab G cl 19.4(e). 5 Second defendant p 63. 6 Male plaintiff p 37; second defendant p 7. -- 5 of 37 -- 6 “The franchisor will ensure and assist the franchisee to achieve the 100 cup sales per five day week quota as advertised in the 100 cup guarantee on the Espresso To Go website.” [16] That clause in terms refers to the website; a printout of some material from the website became Exhibit 26, but the printout appears to have been made on 21 August 2013. One of the pages refers to what is described as “100 cup start-up – each new Espresso To Go mobile coffee franchise comes with a 100 cup start-up turnover. Prior to handover, your new business will have the ability to achieve a turnover of 100 cups of coffee sold in a day.” There was no evidence that this was in the same terms at the relevant time, and I strongly suspect it was not. There was no direct evidence as to what was said on the website at the relevant time about the 100 cup guarantee, but I am prepared to infer that it was consistent with the material which was emailed to the plaintiffs. [17] The second defendant seemed keen to give evidence about what the 100 cup guarantee meant (p 56-59), though obviously his subjective intention as to the meaning of this expression is irrelevant for the purpose of interpreting it, and accordingly evidence of what he thinks it means is inadmissible. There was however evidence from him that he had communicated this to the plaintiffs prior to the contract being signed, and that evidence is admissible: he said that he told them that this meant that a turnover of 100 cups was achieved on one day prior to “handover”, that is to say the guarantee was met as soon as there was one day on which 100 cups were sold: p 29, p 82, p 55. The plaintiffs did not agree with this, and indeed said that there was some discussion that the guarantee would not be met just because on some particular occasion there were more than 100 cups sold, perhaps for some special reason.7 The male plaintiff said that he told the second defendant that he wanted the guarantee to be of turnover of at least 100 cup sales for a normal five day week. [18] In my opinion what is significant is that the statements about 100 cups per day speak of it as a “turnover” of 100 cups per day. The concept of “turnover” in my opinion implies some regularity, and if one reads the passages quoted they indicate that what is being spoken of is a level of turnover which has reached 100 cups per day. What is spoken about is not sales on one occasion, but rather the existence of turnover at a particular level. That is something which can only be meaningfully determined by reference to sales over a period of time. To say that the business has a particular level of turnover is different from saying the business happened to achieve a particular number of sales on one particular day. [19] It is ultimately unnecessary for me to express a concluded opinion on the meaning of this expression, since even on the meaning contended for by the defendants the plaintiffs‟ business never achieved “100 cups sold in a day”. It seems to me that what is significant about these passages is more that they speak about the defendant‟s building the business so that when it has reached a certain size it will be handed over to the franchisee, whereas the franchise agreement makes no reference 7 Male plaintiff p 74, p 83. The second defendant accepted that a day when for some special reason there was one sale which took the total over 100 cups would not count: p 7. -- 6 of 37 -- 7 to any handover of business, and simply contemplates that the franchisee will start up and operate its business under the franchise system. Of course the draft contract made no reference to the 100 cup guarantee. [20] The fact that the defendant forwarded a draft contract which made no reference to this strongly suggests that at the time the documents promising a 100 cup guarantee were sent out they were misleading and deceptive insofar as they spoke about the terms on which the first defendant would contract with the franchisee. Ordinarily a reference to a guarantee indicates that what is being spoken about is the making of a firm commitment for which responsibility would be taken.8 Accordingly, for the franchisor to represent that it guaranteed something in my opinion indicated that what was intended was that this would be the subject of the contractual arrangement between the parties. Whether it is characterised as a representation of a current intention that any franchise agreement entered into would incorporate a guarantee, or whether it is characterised as a representation as to a future matter, namely the terms of any franchise agreement ultimately entered into, it is plain that at the relevant time the intention of the defendants was that what would be offered was a franchise agreement which did not incorporate a 100 cup per day guarantee. In such circumstances, to speak in this material of the first defendant‟s offering a 100 cup guarantee was in itself misleading and deceptive conduct, though that is not relied on in this proceeding, because ultimately the contract did incorporate the 100 cup guarantee, at the insistence of the plaintiffs. Lead up to the agreement [21] One of the things that the plaintiffs looked at was a profit matrix in Exhibit 1, tab F, which showed the gross income, costs, gross profit and expenses to produce a profit after expenses but before tax for sales of 0, 100, 150, 175 and 200 cups per day. The figure for 150 cups per day was just over $100,000, which was about the income the plaintiffs already had, and they said that from their point of view the business had to be doing better than this to be worthwhile.9 Indeed, they said that they sought to negotiate a 150 cup per day guarantee in place of the 100 cups per day guarantee referred to in the defendants‟ material (p 27), and there are contemporaneous emails confirming that they wanted this, although it was clear that the defendant never agreed to it. [22] After the receipt of the initial emails, the male plaintiff on 8 April 2010 sent an email with a number of questions, confirming the plaintiff‟s need for the higher income level and asking about a higher cup per day guarantee: Exhibit 3. This was followed later that evening by a further email with a particular question: Exhibit 4. The following day there was an answer to that question in an email from the second defendant: Exhibit 5. There was no written response to the others. The male plaintiff was a bit vague about when the first phone call occurred, but he thought that it occurred prior to the first email.10 He said that during it the second defendant mentioned the fact that they had 44 franchises throughout Australia, and that the 8 Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199 at [92]. 9 Male plaintiff p 24; female plaintiff p 66, p 71. 10 Male plaintiff p 25, p 91. -- 7 of 37 -- 8 franchises averaged 160 cups per day of coffee sold.11 He said some people did more than that, some over 200 cups per day. [23] The male plaintiff said there was a further phone call which he thought was a couple of days later, when he spoke to the second defendant about his job, and some of his other personal circumstances. He said the second defendant spoke positively about the business and said there were examples of franchisees who were selling 180 or 190 or more in their first few days: p 27. The male plaintiff asked for a 150 cup per day guarantee, but the second defendant would not agree with that, saying that he would initially not want 150 customers a day because his speeds would be the issue, he would not be able to make coffee fast enough to satisfy the customers.12 Presumably it was after this conversation that there was a further email sent to the second defendant on 13 April 2010: Exhibit 6. The email referred to “your response”, but it is not clear whether this was an oral response or simply the previous email from the second defendant of 9 April. This email advised that they were looking at the Ballina/Lismore region, and included some further questions. [24] The male plaintiff said that there were a number of phone calls after Exhibit 6 on 13 April, but he could not recall the dates or it seems much about what was said in any particular call. There were some further negotiation about the level of the guarantee, and some discussion about doing a feasibility study in Lismore and Ballina, and he said the second defendant said that off the top of his head both sites would be good but there needed to be a formal feasibility study: p 30. He recalled that in May there was a visit to a franchise at Murwillumbah, which there was some discussion about. [25] On 18 April 2010 there was a further email, from the female plaintiff to the second defendant: p 66; Exhibit 17. It referred to a number of questions, including how the feasibility test would be carried out on a given area, and sought the names of franchisees they could talk to. The content suggests that by this stage the discussions about the level of the guarantee had occurred, and the plaintiffs were no longer pressing for a 150 cup guarantee. The defendant said that in response he phoned and explained about the different vans, and said he nominated Gary Smith and Jarrod Maxwell as franchisees they could talk to: p 72. Neither plaintiff recalled being told those names, and Mr Smith did not mention any contact in his affidavit: Exhibit 28. [26] The male plaintiff said there was an arrangement made for him to see the franchisee at Murwillumbah. There was an email from the female plaintiff to the second defendant on 21 April 2010 advising that 7 May would suit, and seeking documentation which could be provided for them to go through with a lawyer: p 68, Exhibit 18. In response the franchise documents, being the blank franchise agreement, the disclosure document which is Exhibit 1 tab G, and a blank disclosure document receipt were emailed to the plaintiffs.13 The male plaintiff said that in the visit they caught up with the franchisees on their run, and had a look at the van, 11 Male plaintiff p 26; the second defendant denied this, p 33. 12 Male plaintiff p 27; second defendant p 80, but see p 34 line 33, which appears to be inconsistent. 13 Second defendant p 73, Exhibit 18. -- 8 of 37 -- 9 tasted the coffee and had what he described as a brief chat with the franchisees, though he said there was not much conversation because he did not want to interfere with their doing their job: p 31. He said that the second defendant told him that this was the lowest performing franchise, that the franchisees were old and slow but that they were still averaging about 107-108 cups per day: p 32.14 [27] Subsequently in June 2010 (p 35) there was a phone call to the female plaintiff from the second defendant advising of the outcome of the feasibility studies of Lismore and Ballina. He told her Lismore was so good he could put three vans into there, there was only one van there at the moment which was for sale and nobody knew of it: p 70. He also spoke positively of Ballina, but said that Lismore was so good that he was only willing to give them half of Lismore as the plaintiffs‟ territory, and that they would only need half. She said she was really happy to hear this, and would not have signed the franchise agreement if aware that a feasibility study had not been done: p 72. [28] The male plaintiff then telephoned the second defendant to speak to him directly about the outcome of the feasibility study. He said that the second defendant told him that there was incredible fat or juice in Lismore and he could put in three vans there, whereas Ballina though good was not as good, and he could only put two vans in there: p 33. He said in effect that the second defendant spoke very positively about Lismore, that there was only one other van as competition and that no-one had heard of him, and his business was for sale, so he was not a threat. He said there was also another van in Ballina which was also for sale. He said that the study had exceeded his expectation, and indeed Lismore was so good that he could not give them the franchise for the whole town, but only for half the town. [29] The second defendant denied saying these things (p 39-40), and said that he told the male plaintiff that there were two vans already operating in Lismore, but there was room for a third, and that Lismore was a better market than Ballina: p 5, p 39-40. He said that 100 cups per day was achievable, but it would take longer in a place like that: p 4, 5. Ultimately when the franchise agreement was entered into it did not specify the franchise area by means of a map in the usual way, but provided as one of the special conditions on p 34: “The territory will be equivalent to half of the Lismore region. However the boundaries are to be determined by the franchisee and franchisor during the initial six month period.” [30] There was also a provision inserted giving the plaintiffs the option to transfer to Ballina at their discretion at no cost or penalty, with the first defendant to give them this opportunity before granting any franchise in the Ballina region: Exhibit 1 Tab H p 34. There was obviously some negotiation of these and other special conditions before the franchise agreement was signed in July, but it was after the plaintiffs were told of the outcome of the feasibility study that they decided to go ahead with a franchise from the defendants. 14 See also female plaintiff p 68, where she seemed to be talking about a phone call. As to the visit to Murwillumbah: see p 68-9. The defendants disputed much of this, as discussed below. -- 9 of 37 -- 10 Credibility [31] I should say something in a general way about the credibility of the main witnesses, the two plaintiffs and the second defendant. Generally I was impressed by the two plaintiffs in the witness box. I consider that both of them gave their evidence in a very straightforward and credible manner. They made concessions where it was appropriate to do so when being cross-examined15, but they were obviously strongly of the view that they had been badly treated, and rejected with convincing detail important aspects of the defendants‟ case that was put to them in cross-examination. Nothing emerged from the cross examination of the plaintiffs which caused me to have any doubt about their general reliability as witnesses. [32] On the other hand, I was generally not impressed by the second defendant as a witness. On one occasion he asserted that at no stage did he know what the average sales of the franchisees were, or what his franchisees would sell in a week (p 34) despite the fact that he had available a wealth of statistical information in the form of the cup sales data provided by all franchisees by the GPS monitoring system, and because the franchises were all buying their consumables from him. When however it was pointed out to him that there was on his American website a statement that his Australian franchises sold almost 40,000 cups of coffee per week (Exhibit 25) he claimed this statement was made on the basis of the number of disposable cups that he sold to them for such sales: p 51-53, p 71.16 Given that he only had 17 to 25 franchisees at the time this statement was made (p 72), they would have had to be selling an average of 1,600 cups per week or more to justify that figure, a number which is obviously fanciful, given that no attempt was made to justify the proposition that the franchisees were selling on weekdays an average of 160 cups per day.17 But apart from that, his two statements are plainly inconsistent. [33] The evidence of the second defendant about the “feasibility study” was also quite defensive: pp 58-61. He asserted that he had a mathematical formula but was extremely reluctant to reveal it (p 61), which was ultimately explained by the fact that the formula – 350 business will support one franchise – was obviously silly, since on its face it was independent of the size of the businesses, and ready availability to them of alternative sources of espresso coffee. Obviously his reluctance to reveal it was not prompted by the fact that it was a wonderful trade secret, but by the fact that it was embarrassingly rudimentary. There is also the consideration that his own account of what he did by way of a feasibility study could not possibly be thought to have lived up to the representations about the nature of such a study which were included in the written documents. [34] It also seemed to be extraordinary that he made no attempt to preserve any records of the plaintiffs‟ trading results: p 68. The explanation was that his computer 15 E.g. male plaintiff p 5. 16 Eventually; when first asked he conceded that at the time he could not possibly say that the sales per week were 40,000: p 53. That I suspect was the honest answer, and I was not impressed by his later attempt to improve upon it. 17 Even with the benefit of a V8 Supercars event at the weekend, a franchisee would reach 1600 only if selling 160 cups per day during the week, and this would have been an exceptional weekend for one franchisee: p 71. -- 10 of 37 -- 11 program overwrote the records after about three months (p 81), but it must have been readily apparent well before this franchise had been operating for three months that it was in serious trouble, and that there was a real prospect of a dispute, and at least the possibility of litigation arising out of it. There is also the consideration that the cautious and measured statements he claims to have made to the plaintiffs from time to time stand in marked contrast to the emphatically positive content of the written documents which he was sending them, and indeed of the marketing material included in the operators manual which was provided to them during their training after they had signed the franchise agreement. The plaintiffs‟ evidence, that he was as enthusiastic in his oral statements as he was in his written statements, is obviously more plausible than his evidence. [35] There was a substantial difference which I have already identified between the plaintiffs and the second defendant as to their conversations in relation to the outcome of the feasibility study. It seems to me that a major difficulty in the way of accepting the second defendant‟s version is that it does not explain how it came about that the franchise agreement provided for a territory which was only half of Lismore, something readily explained by the plaintiffs‟ version. The second defendant referred to the plaintiffs‟ wanting to preserve the opportunity to move to Ballina (p 6), which is dealt with in a special condition, but on his account the franchise agreement should have provided for a territory consisting of the whole of Lismore. Furthermore, on the basis of the second defendant‟s mathematical formula, Lismore is capable of supporting five coffee van runs, so that, allowing for the two that were already there, if this formula really worked the defendant could have put three vans into Lismore, as the plaintiffs said he had claimed. In these circumstances the defendant‟s version of this conversation is quite implausible. [36] There was also a conflict between the female plaintiff and the second defendant as to whether he asked her to backdate the certificates after they had signed the franchise agreement. The exchange of emails at the time however (Exhibits 19, 20) seemed to me to be much more consistent with the female plaintiff‟s version, that she was asked by the second defendant to backdate documents. It would be odd if she had referred to backdating in her email otherwise, and odd that the second defendant made no response to this reference if he had not in fact asked her to backdate the documents. The second defendant claimed that there had been no previous issues with a franchisee in relation to the franchising code (p 47) when in fact there had been previous litigation in which the franchisee had alleged breaches of the franchising code. He claimed that in the first few days Ms Taylor would avoid potential cornerstones on the basis that a new franchisee would not be able to cope with them (p 75), a proposition which not only sounds illogical but was contradicted by Ms Taylor in her evidence: p 103. [37] It is unnecessary to multiply examples. Overall my assessment of the second defendant was that he was an unreliable witness whose evidence I would not accept unless it was supported by independent reliable evidence, or inherently probable; I cannot think of an example for the latter. In matters where the plaintiffs‟ evidence is in conflict with the evidence of the second defendant, I prefer the evidence of the plaintiffs. With regard to the other witnesses, I have dealt elsewhere with the evidence of Ms Ball. With regard to Ms Taylor, I am a little weary about her -- 11 of 37 -- 12 evidence because of her claim to be unable to recall whether she resigned or was asked to leave (p 89), something I would expect her to remember given that it only happened about two and a half years ago, but generally I thought her evidence was plausible as far as it went, which was not very far; evidently she had little recollection of her dealings with the plaintiffs. [38] With regard to Mr Smith, I have identified one feature of his evidence which must be wrong. There is also the consideration that, although I indicated a willingness to receive his evidence by telephone from America, he evidently did not do what was necessary in order to make telephone contact with the court. In his affidavit he was somewhat critical of the attitude of the male plaintiff, though it seems to me that his criticism does little more than reflect his awareness that the male plaintiff was concerned and upset by the fact that the turnover was nothing like 100 cups per day. He was very vague in his criticisms of the male plaintiff‟s approach to the business, although he did say that in March there were three sites, which he named, which the plaintiffs dropped, although they “had yielded a decent amount of cup sales”. The male plaintiff was taken to this evidence and he convincingly refuted it; two of the sites nominated were never established run sites, the plaintiff‟s van was essentially not welcome at one of them, and they were not incorporated into the run, and the third site was dropped because only about a couple of cups of coffee were being sold there, and it involved a good deal of travel to include it in the run: p 45-6. In the circumstances I prefer the evidence of the male plaintiff to that of Mr Smith, and am not persuaded that there was anything in particular that the male plaintiff was doing wrong in operating or marketing the business, or that Mr Smith could have achieved sales of 100 cups per day in Lismore had the male plaintiff been more cooperative. Representations alleged [39] Paragraph 15(a) referred to a representation that all relevant information had been disclosed to the plaintiffs. What was relied on was a statement in one of the documents emailed by the second defendant, Exhibit 1, Tab A, p 3, that the business plan “provides all the relevant information regarding an Espresso To Go franchise”. There is no doubt that that representation was made, though the information contained in that business plan was information about Espresso To Go franchises in the abstract, rather than information which was specific to the franchise at any particular location. Paragraph 61 alleged that the representation in paragraph 15(a) was misleading and deceptive because the defendants had failed to disclose information about the number of existing mobile coffee vans operating in the Lismore area. This is an allegation in relation to information about a franchise specifically at Lismore, and the written representation relied on was obviously not a representation which was specific to Lismore; at the time the document was provided the defendants had no idea that the plaintiffs were interested in a franchise in Lismore. It follows that this part of the plaintiffs‟ case is not made out. [40] The next series of misrepresentations were alleged in relation to the feasibility study. Those in 15(b), (c) and (d) were representations that a feasibility study would be conducted on the area in question prior to the franchise agreement being entered into, as a general proposition. In written submissions on behalf of the -- 12 of 37 -- 13 defendants it was conceded that these representations were made, but it was said that they were true. The plaintiffs essentially rely on written representations in relation to these matters. The document in Exhibit 1, Tab A on p 6 says “A feasibility study is undertaken on each area, at which time pertinent data is collected including the number and type of business, number of staff, demographic profile of the staff and typical hours worked (shift or otherwise). This data is used to calculate the turnover and growth potential of the area to ensure if it fits within company guidelines.” The plaintiffs also rely on document Exhibit 1, Tab E at p 7 which relevantly stated: “We conduct a feasibility study on each area and collect data such as the number and type of business, number of staff, demographic profile of the staff and the typical hours worked (shift or otherwise). We then mathematically calculate the turnover and growth potential of the area to determine if it fits within our stringent guidelines. Our territory selection process draws on years of experience and utilises our proven formula to identify the best available operating territories for our franchisees.” [41] The representations alleged in paragraphs 15(b), (c), and (d) were based on the written materials, except for the aspect that the territory would be one capable of sustaining 150 plus cups a day in sales. This was alleged to have been made orally, but it seems to me that there was no evidence from the plaintiffs that prior to the feasibility study being undertaken, there was any representation that the study to be undertaken would be directed to ascertaining specifically whether the area in question was capable of sustaining 150 plus cups a day in sales. Accordingly this allegation is not made out. In other respects however, the representations in those three paragraphs were made. [42] These representations were as to a future matter, because at the time they were made they referred to what would occur in the future, before a franchise agreement was entered into. Accordingly s 51A of the Act applies, and they are taken to be misleading and deceptive unless the defendants had reasonable grounds for making them at the time they were made. As to this, the trial proceeded essentially on the basis of an examination of what actually occurred by way of a feasibility study, which depended upon the evidence of the second defendant. There were no documents put in evidence which revealed anything about the content or process involved in undertaking this particular “feasibility study”. The defendant‟s evidence was direct to the way in which he conducted this particular feasibility study, but I think it is fair to conclude that the process involved on this occasion was the standard process used by the second defendant when conducting such a feasibility study, and reflected the second defendant‟s intention as to the nature of any feasibility study to be undertaken at the time the written representations were made in early April 2010. [43] On the defendant‟s own evidence the “feasibility study” which he undertook in relation to Lismore was manifestly fatuously superficial. The second defendant said that he did an internet search from which he was able to ascertain the total number of businesses in the Lismore area as 1,800, that he visited the area and called on a number of businesses, and that he had a “formula” which consisted of the proposition that 350 businesses in an area would support one run.18 On the basis of 18 Second defendant p 3, p 58-62. -- 13 of 37 -- 14 that formula, the Lismore area would support a number of runs, derived by dividing the number of business in the area by 350, (5). [44] There was no evidence that data was collected as to the type of businesses, or the number of staff for each business, or the total number of staff overall, let alone any data about demographic profile of the staff, or any information about typical hours worked. In addition, there was no evidence of any mathematical calculation of turn over and growth potential to determine if the area fitted within stringent guidelines. There was no evidence that there were any stringent guidelines apart from the proposition that any 350 businesses in an area were regarded as sufficient. It follows that, taking the defendant‟s evidence at face value, what was represented in the documents as to the content of a feasibility study which would be carried out was misleading and deceptive because the defendant did not have any reasonable basis for saying that there would be a feasibility study which gathered the information said to be gathered, or analysed it in a meaningful way. In those circumstances, in my opinion the making of these representations was clearly misleading and deceptive conduct. [45] This I think is a matter of some significance, because the feasibility study is presented in the documents as a sophisticated exercise which is capable of identifying in advance whether an area is going to be successful for a business of this nature. The exercise described by the defendant would be completely inadequate for that purpose. The defendants‟ marketing material spoke of the process of building a run by reference to “cornerstones”, which are described as substantial businesses where a relatively large number of sales can be made each day when the van calls.19 These are said to be the foundations of a run, and the object of good run design is to identify cornerstones and incorporate them into the run in an efficient way so as to minimise the number of stops needed in order to sell as much coffee as can be sold in the time available. [46] That all makes perfect sense, but is obviously incapable of application in an area which does not include any significant number of businesses which would be cornerstones as described. On the defendant‟s account, no attempt was made to ascertain whether there were any businesses in Lismore which would fit that description, let alone whether there were sufficient to provide the necessary foundation for a run structured in the way contemplated in the marketing material. Merely to ask how many businesses there are in the area does not in my opinion say anything meaningful about the potential market for a franchise of this nature. [47] It is obvious that potential customers for a business of this nature represent people who have a particular workplace, where the van will be coming at a time when they are likely to be wanting to drink coffee, where coffee (or at least espresso coffee) is not going to be readily available to them. It follows that businesses located within easy walking distance of a café or other business where espresso coffee is available are not going to be of any relevance to a franchise such as this, and need to be excluded from such calculations. There is also the consideration that, as emerged in the evidence from time to time, it is not simply a matter of pulling up the van 19 Exhibit 14, Marketing Program section, p 2. -- 14 of 37 -- 15 somewhere and selling coffee to anybody who walks up; it is necessary to go specifically to business premises in order to sell coffee to people at those premises, because of licensing requirements of the local authorities. This is another reason why businesses located in a CBD would be effectively off limits for a coffee van. [48] The other side of the equation of course is competition. It emerged when the plaintiffs began their run in Lismore that there were already two operating coffee vans in Lismore: p 46. The defendant said he knew that that was the case before he went there (p 72, p 5) but I accept that he told the plaintiffs that there was only one van there. Obviously the capacity of a particular area to operate a coffee van franchise successfully will depend on the level of competitions from other coffee vans. It would be possible of course for a feasibility study to identify a particular area as being suitable on the basis that there was no van competition, and by the time the franchise was granted and began to operate one or more competing vans had started up, but there was no suggestion that was the explanation for the situation in Lismore. The true position seemed to be that there was no serious attempt by the second defendant to ascertain the penetration of existing competitors in Lismore.20 [49] I should also say that all of this depends on acceptance of the second defendant‟s evidence as to the content of such enquiries as he made into such a business in Lismore. No documents were disclosed or produced at the trial by the defendants in relation to the feasibility study said to have been undertaken for Lismore.21 On the basis of his evidence, there were some notes taken (p 58), but even those were not retained, or at least not disclosed and produced at the trial. For reasons I have indicated elsewhere, I otherwise have doubts about the second defendant‟s reliability as a witness. I am not prepared to accept his evidence about the “feasibility study” and find positively that he did do the things that he said he did, but it is sufficient for the purpose of resolving this aspect of the case to say that, assuming he did do those things, what was undertaken was not a “feasibility study in the manner represented”. Since that was the representation relied on, it is I think strictly speaking unnecessary to determine whether what the second defendant did could be characterised as a “feasibility study” at all, but if it were necessary to decide that, in my opinion, what was done was too superficial to justify that description. The term “feasibility study” implies some process of scientific rigour and systematic analysis of relevant data which has been collected, and that is not what occurred in this case, on the second defendant‟s evidence. [50] The representation in paragraph 15(e) was a representation as to the outcome of what was said by the second defendant to have been a feasibility study conducted in Lismore. The evidence of the plaintiffs22 was that the second defendant had spoken to each of them and each said that the representations as to the outcome of the feasibility study in paragraph 15(e) were made, other than the reference in subparagraph (iv) to the territory attaining at least 150 plus cups a day in sales. Neither plaintiff referred to such a statement being made expressly by the second defendant in that conversation. 20 He conceded he did not even record what proportion of the 20 or so businesses he claimed to have spoken to said they already had a coffee van calling: p 81. 21 All he had was a bill showing that the had spent the nights of 11 and 12 May at Ballina: Exhibit 24. 22 I have referred to this evidence earlier: male plaintiff p 33, female plaintiff p 70. -- 15 of 37 -- 16 [51] The second defendant‟s version of the conversation was quite different23; for reasons I have given elsewhere I reject that version. I accept that the second defendant spoke in glowing terms about Lismore‟s prospects, that he said it could support three vans, that there was only one other van operating which was for sale and no one knew about it, and that the plaintiffs would need only half of Lismore for their franchise. The last proposition follows from the statement that Lismore was such a good area that the defendant could only give the plaintiffs half of the town, but the clear implication was that that was all that they would need. [52] The plaintiffs‟ attempt to operate the franchise business in Lismore were spectacularly unsuccessful, and their turnover was not built to 100 cups per day or anything like that, either with the assistance of Ms Taylor, the person initially provided by the first defendant as a franchise support manager, or with the assistance of Mr Smith, said to be a very successful franchisee, who was provided subsequently on a number of occasions. [53] Ms Taylor gave evidence and there was nothing in her evidence to suggest that there was anything that the plaintiffs were doing wrong which would have prevented them from being able to build up the business to that level had there been a potential in Lismore for a business of that level: p 99. Mr Smith did not give oral evidence. An affidavit of his suggested that there were some deficiencies in the way in which the male plaintiff was undertaking the business,24 but in circumstances where there was no significant improvement in the turnover and during the period when Mr Smith was providing guidance25, I am not prepared to find that there were any deficiencies in the way the male plaintiff was conducting the business which adversely impacted on the level of turnover achieved by it. [54] In the circumstances it seems quite clear from the plaintiffs‟ experience that at the time they were attempting to establish their business Lismore did not have a capacity to sustain a franchise with a turnover of 100 cups per day or anything like that. Implying the presumption of continuance I accept that that was the situation as well at the time when the second defendant reported to the plaintiffs on his “feasibility study” of the area. At that time therefore Lismore could not support one Espresso To Go franchise, let alone three, half of Lismore would not be an adequate territory for a Espresso To Go franchise, and accordingly the representations which I have found were made were misleading and deceptive. This I think was also a significant matter, because it is clear from the plaintiffs‟ evidence that they regarded the positive outcome of the feasibility study as a significant matter in relation to their decision to enter into the franchise agreement. [55] The issue of a potential turnover of 150 plus cups per day remains to be determined and can be conveniently determined by reference as well to the representation pleaded in paragraph 15(f). This representation was alleged to have been made orally, and there was a conflict of evidence as to whether this was said. The 23 Second defendant p 4, 5, p 31: “it could handle a third van”. 24 Exhibit 28, para 9, 23. 25 During the three weeks he was there in February-March 2011 (Exhibit 28) the average cup sales per day were 59, 63 and 51: Exhibit 22. Higher average cup sales were achieved without him in early December (66) and in early June 2011 (67). -- 16 of 37 -- 17 plaintiffs‟ version of this is consistent with the proposition that the second defendant told the plaintiffs that they would not be able to cope with sales of 150 cups per day initially, as a reason why he would not give a guarantee of sales of 150 cups per day.26 Nevertheless, both plaintiffs spoke of being assured by the second defendant in oral conversations that the plaintiffs would soon be turning over 150 cups or more per day. The male plaintiff said that the second defendant said to him, in the context of negotiating the special conditions giving a period of six months before the royalty fee became payable, that six months was “way more than you need to get 150, you are not going to have a problem”: p 36. The female plaintiff also said that the second defendant said to them “you guys will be at 150 within no time. We get you your 100. You guys are going to get to 150 in no time, but if you really want us to come back and help you to do that, we‟ll do that at a fee, but you‟ll have it within no time”: p 72. [56] The second defendant denied making those statements to the plaintiffs (p 31), or saying anything like this, except that he did agree that the franchise agreement was amended at the request of the plaintiffs to incorporate the term about providing assistance to increase sales to 150 cups a day. It is therefore necessary to resolve this on the basis of making a finding as to credibility, bearing in mind the consideration that a finding that there has been misleading and deceptive conduct is a serious matter, so that such a finding should not be made on the basis of oral evidence alone unless it is clearly established.27 [57] The background of the plaintiffs indicates that they were enjoying a combined income of over $100,000 per annum in their previous employment, and in those circumstances, based on the calculator provided by the defendant, they needed to be selling over 150 cups per day in order to be generating a level of profit from this business comparable to their income from their current employment.28 This financial position is established by payslips from each of the plaintiffs, although they require some interpretation.29 Further, contemporaneous emails indicate that the plaintiffs wanted to be assured that they would have a turnover of 150 cups per day, because they confirm that at some stage at least they sought an increase in the guarantee spoken of in the defendant‟s material: Exhibits 3, 6. The defendant agreed that he was told that this was the level of income they needed, and were aiming at: p 32-3, p 56. That the plaintiffs had a target of in excess of 150 cups per day is also confirmed by the two provisions in the franchise agreement inserted at their request, the provision confirming the availability of extra assistance to reach that target, and the provision giving a royalty holiday for six months to give them time to reach that target. [58] Hence there is a good deal of contemporaneous documentation and objective material to support the plaintiffs‟ evidence that they wanted a business which would turn over at least 150 cups per day, because they were not interested in a franchise otherwise as it would not generate a level of income broadly comparable with their 26 According to the male plaintiff p 27; the second defendant denied saying this: p 34, but see p 80. 27 Watson v Foxman (1995) 49 NSWLR 315 at 318-9; ACN 070037599 Pty Ltd v Larvik Pty Ltd [2008] QCA 416 at [30]. 28 They concluded that they needed 150 cups per day: male plaintiff p 24, p 35; female plaintiff p 71. 29 Male plaintiff Exhibit 2, p 13: female plaintiff Exhibit 23, p 47. -- 17 of 37 -- 18 current income. That I think provides objective, contemporaneous confirmation of the position of the plaintiffs, and it is a small step from that point to conclude that they would have been unlikely to have decided to enter into this franchise agreement unless there had been the sort of assurance that they say the second defendant provided, that the franchise business would be able to meet their requirement of a turnover of 150 cups per day once their ability to process sales at that speed had developed with experience. Under these conditions, it would be logical to expect that the plaintiffs would not have entered into the franchise agreement unless it was sold to them by the second defendant on this basis; on the other hand, given the existing financial circumstances of the plaintiffs, it is I think quite unlikely that they would have been interested in taking on a franchise simply on the basis that the only assurance offered was as to a turnover of 100 cups per day. [59] The defendant‟s account of what he says he said to the plaintiffs about the level of business sounded suitably careful and restrained, and having seen the plaintiffs in the witness box I simply do not accept that they would have entered into a franchise agreement if the defendant had in fact said to them what he says he said to them about the potential of this business. On that basis therefore I consider that the proposition that the defendants represented to the plaintiffs that they would attain sales of 150+ cups per day inside six months in the Lismore area was established to the appropriate level of confidence to use that finding as a basis for a finding that the making of that representation was misleading and deceptive. [60] That was a representation as to a future matter, so that it is a matter for the defendants to show that they had reasonable grounds for making that representation. It did not appear to me that any attempt was made by the defendants to show that in relation to this representation.30 The defence pleaded and argued was that there was no such representation made. Once I have found to the contrary, it seems to me that it necessarily follows that the making of that representation amounted to misleading and deceptive conduct on the part of the first defendant. In any case, it is I think clear that in fact the first defendant had no reasonable basis for making such a representation about the situation in Lismore, bearing in mind the inadequacy of the “feasibility study” process as discussed earlier, and the absence of actual demand which was subsequently demonstrated by the failure of the plaintiffs‟ business. [61] The representations pleaded in paragraph 15(g) are three representations in relation to the Murwillumbah franchise, one representation in relation to Espresso To Go franchises generally, and one representation as to the plaintiff‟s prospects in Lismore which is caught up with the issue of the representation about 150+ cups per day. I do not think that it adds anything to the earlier conclusion and essentially regard paragraph 15(g)(v) as surplusage. As to the representations made about the Murwillumbah franchise, this was supported by oral evidence from both plaintiffs. The defendants‟ case in relation to these representations was simply that they were not made: p 36. 30 The second defendant conceded he had no basis for such an assertion: p 57. -- 18 of 37 -- 19 [62] Apart from the evidence of the plaintiffs and the second defendant, there was also evidence from one of the franchisees, Ms Ball. She said that she and another woman had purchased a franchise around the end of 2009 (p 21), and that when they started Christine Taylor had been with them and had done the marketing and built the turnover up to about 80 cups per day by the time when she left after about four weeks: p 22. She left at that time because the two of them were comfortable making that number of cups per day and were not wanting more growth in the business at that stage. They still have the franchise, and are now making between 100 and 120 cups per day, though to achieve this number they start work at 6 a.m. and work until about 2-2.30 p.m.: p 23. She said that she recalled the plaintiffs coming to see them, and that when they did her recollection was that the male plaintiff had asked how many cups per day they were making and one of them said they were making between 80 and 100, that there was a question about whether that turnover was enough to support two salaries, and that she said she thought that if they had to borrow money to pay for the franchise that level of income would not support two salaries and pay off the loan: p 24. [63] This evidence is inconsistent with the evidence of both of the plaintiffs, and was not directly supported by the evidence of the second defendant, although he said that when the plaintiff was talking to these franchisees he moved away to give them the opportunity to talk in private: p 75. There was also some inconsistency between her evidence to me and what she had said in an affidavit she swore in February 2012, Exhibit 27. That affidavit said that the question about cup numbers was asked and the same answer was given, but otherwise the plaintiffs asked each of them whether they were happy with their decision to buy the franchise, and each of them said that they were happy and spoke in positive terms of the training they had received from Ms Taylor.31 There is nothing in the affidavit about the business supporting two salaries with or without a loan. She also said there that there was a discussion between the plaintiffs and the second defendant in her hearing about the van and its features, but that he had not spoken about the number of cups sold by their business or the success of their operation in comparison with other franchises. [64] Apart from that inconsistency, at one point in cross-examination Ms Ball said that she was not aware of the legal proceeding until she was contacted by the defendants‟ current solicitor: p 26. This was not the solicitor who prepared the affidavit which was filed on behalf of the defendant. Before the affidavit was produced Ms Ball did recall swearing the affidavit in February 2012, but then sought to explain the inconsistency with her earlier evidence by saying that she was probably not aware at that time that there was a court proceeding happening: p 29. I have some difficulty in understanding how a person could swear an affidavit of this nature and not appreciate that there were court proceedings on foot, and the proposition that the witness had spoken only to the current solicitor about the matter, in the sense of the dispute between the parties, was obviously not correct. That answer was given in response to a question about whether the witness had spoken to the second defendant about the matter. When challenged about the absence of the comment about two salaries, the witness said that she was pretty certain that it did happen, but that she had neglected to put it in the affidavit. She 31 No reference was made in the oral evidence to the various favourable things which were said about Ms Taylor in the affidavit. -- 19 of 37 -- 20 also said that her basis for saying that the plaintiffs had asked about the number of cups that she sold was that it was a very common question that people ask: p 27. That is not a particularly compelling basis for concluding that these people asked her that question and received the particular answer she nominated. [65] Overall I am wary about the reliability of the evidence of Ms Ball, and I had the distinct impression that she was trying to be of assistance to the defendants in her evidence: for example when she was being led up to the meeting with the plaintiffs, counsel for the defendants sought to elicit evidence from her of a conversation she had had before the meeting with the second defendant, which was obviously inadmissible. After an exchange between me and counsel for the defendant, he abandoned that line of questioning, and went directly to any conversation with the plaintiffs, and in an unresponsive answer Ms Ball went on to say a number of things helpful to the defendants which she obviously could not properly say of her own knowledge: p 24, lines 17-21. There is also the consideration that, if the plaintiffs had actually been told that these franchisees were only selling 80 to 100 cups per day, it does not make sense that they would have been willing to enter into a franchise agreement with the first defendant. [66] I therefore prefer the evidence of the plaintiffs about the visit to Murwillumbah and the encounter with the franchisees there. I think it more probable that, before the meeting with the franchisees, the second defendant did say that they were old and slow and the worst performing franchisees, to discourage the plaintiffs from asking about the turnover level, and then, when the plaintiffs did not do so, he felt free to nominate a figure of 107 as the average cups sold32, a figure which, if Ms Ball‟s evidence as to the actual level of turnover at the time was truthful (and I can think of no reason for her to understate that) was probably a deliberate lie on his part, since he would have had access through the computerised reporting system to the actual level of turnover being reported by them.33 [67] I accept therefore that the representations referred to in paragraphs (g)(i) and (ii) were made; neither plaintiff gave evidence of the making of the representation in paragraph (g)(iii). Neither of these were representations as to future matters; the question is whether they were true at the time they were made. There was no evidence about whether Murwillumbah was in fact the worst performing franchise, and accordingly the plaintiffs did not show that making the first representation was misleading or deceptive. However, on the basis of the evidence of Ms Ball, the second representation was misleading and deceptive. [68] With regard to the representation about the average sales of franchises, both plaintiffs gave evidence that the figure of 160 cups per day was mentioned by the second defendant during telephone conversations34, and I accept that evidence. This representation was closely related to the representation about the capacity of the franchise area in Lismore to support sales of 150 cups per day or more, and the reasoning which leads me to accept the plaintiffs‟ evidence about that representation 32 The female plaintiff said he said this when they were back in his car: p 93. 33 He admitted he had no reason to believe they were selling an average of 107 cups per day at that time: p 37. 34 Male plaintiff p 26; female plaintiff p 67. -- 20 of 37 -- 21 supports the plaintiffs‟ evidence about this representation also. The defendants‟ case was simply that this was not made; no attempt was made to justify the accuracy of that representation. When cross-examined about the level of business at the time, the second defendant asserted that he simply had no idea what the average turnover of the franchisees was at the time: p 34. I find that very hard to believe, but even if it is true, it seems to me that to represent that there is a particular average level of turnover when one has no idea what the average level of turnover is is misleading and deceptive conduct. [69] The next representation in contention is that in paragraph 15(h), that “the first defendant guaranteed that prior to handing over the franchise to the plaintiffs the first defendant would have established a predetermined run and secured a customer base which saw the franchise attaining at least 100 cups per day in sales.” This representation was denied although the plaintiffs rely on statements in the documents that the defendants sent to the plaintiffs, particularly Exhibit 1 tab A and tab E. A precise statement in these terms does not appear in those documents. The former document on p 6 says, in relation to the option providing the 100 cup guarantee: “The business is established by the franchisor to a turnover of 100 cups sold in a day. The franchisee continues with a fully operational business that is already turning a profit. … [The 100 cup guarantee] means the franchisor guarantees a turnover of 100 sold cups in a day, prior to handover of the business. The 100 cup guarantee ensures that each franchise continues on with a cash flow positive operation.” Page 9 lists the advantages of the Espresso To Go franchise as including “franchisees walk into a turn-key, cash flow positive business.” Page 11 said inter alia: “Franchisees are trained in their own territory, on their own customers gaining valuable real life experience. Importantly during the training period, the franchisor builds the franchisee‟s business and keeps it operating profitably ensuring a seamless handover.” Page 14 listed among the benefits of an Espresso To Go franchise: “Exclusive territories. Turnkey operation. Customer base and daily route established prior to handover. Unique „100 cup guarantee‟ (options 3 and 4). Turn a profit from day one of operation.” [70] The latter document said at p 3, “An Espresso To Go franchise incorporates an exclusive operating territory with a predetermined run and customer base, which we establish on your behalf.” Later on the same page it said: “Your Espresso To Go mobile café franchise is a turn-key operation. … 100 cup guarantee on turnover, which means we build your customer base for you. A comprehensive training program inclusive of … a minimum two weeks‟ on the job training in your territory.” On p 4 it is stated: -- 21 of 37 -- 22 “During the initial training period we work with you to build your business, establish your customer base and define your daily run. We guarantee that prior to handover, your new business will have achieved a turnover of at least 100 cups of coffee sold in a day. Essentially you‟ll take on a business that is established, fully operational and most importantly, profitable from the outset.” On p 6 there is reference to the training including two weeks‟ on the job training, with the statement: “During your training we „take care of business‟, acquiring customers, building the run and keeping your business profitable for a virtually seamless handover.” On p 7 under the list of key features there are the statements: “Turn-key operation. Customer base and daily run established prior to handover. Unique 100 cup guarantee. Turn a profit from day one of operation.” [71] In my opinion it is reasonable to conclude that the effect of what was said in those passages quoted is appropriately summarised in paragraph 15(h), and indeed paragraph 15(i) of the Statement of Claim. The latter alleges a representation that: “The first defendant would provide the plaintiffs with a virtually seamless handover of a profitable franchise attaining at least 100 cups a day in sales.” [72] I should add that although I have quoted extensively, here and elsewhere, particular passages from particular written documents provided by the defendants to the plaintiffs, I am conscious of the fact that the question of whether there has been a breach of the Act has to be determined in the light of all the documentation and the whole course of conduct of the defendants, and not by reference to particular documents or particular parts of documents viewed in isolation.35 I am quoting these particular passages only because they seem to be the ones most relevant to this issue, but I am taking the whole of the evidence into account when making findings about whether there was in particular respects misleading or deceptive conduct by the defendants. Broadly speaking, the defence case was that the effect of the statements which might otherwise have been misleading or deceptive in the written documents was neutralised by explanations given orally by the second defendant to the plaintiffs. Generally the second defendant‟s version of these explanations was disputed by the plaintiffs, and for reasons given elsewhere I prefer the evidence of the plaintiffs. [73] The submissions on behalf of the defendants were directed first to the concept of what was meant by the 100 cup guarantee, an issue I have already addressed. The submissions did not address the issues raised by this representation, of the establishment of a predetermined run and securing a customer base producing a particular level of sales in a day prior to handover. 35 Butcher v Lachlan Elder Realty (2004) 218 CLR 592 at [109]; Campbell v Backoffice Investments Pty Ltd (infra) at [102]. -- 22 of 37 -- 23 [74] These representations describe a process which was not reflected in the draft franchise agreement: that is, that the franchisor would build the business and then hand over to the franchisees a business which had attained a turnover of 100 cups sold in a day. The franchise agreement simply talks about the franchisees being permitted, and indeed expected, to operate the franchise business within the franchise area essentially from day one: cl 3.1, cl 13.1(a). Under the franchise agreement it is the franchisee who has the obligation to increase the business: cl 13.1(h). In relation to training there is an obligation on the first defendant in cl 15.1(d) to provide “an initial training program” which is presumably the obligation expounded in a little more detail in cl 17.1, which is to provide “approximate three weeks, or as required, training in the operation of the business, such training to be conducted in the hours set by Espresso. By the end of training, the franchisee must attain and display the skills of any nature whatsoever which Espresso, at its reasonable discretion, believes are necessary in order to successfully conduct the business.” [75] Clause 17.3 permits the training to be held in such a location as nominated by Espresso, so that there is no right on the part of the franchisee under the franchise agreement to the on-site training referred to in the promotional material. Under cl 17.1, the obligation is on the franchisee to attain the required level of proficiency during the training period provided by the first defendant. There appears to be no reference in the franchise agreement to the concept of “handover”, or any provision for the franchisor to build the business before it is handed over to the franchisee once it has already attained a particular level. There appears to be a complete disconnect between the passages to which I have referred in the promotional material and the actual terms of the draft franchise agreement supplied by the first defendant. The matter however is complicated by the fact that, at the plaintiff‟s insistence, there was a special condition inserted in the franchise agreement at p 35: “The franchisor will ensure and assist the franchisee to achieve the 100 cup sales per five day week quota as advertised in the „100 cup guarantee‟ on the Espresso To Go website.”. [76] The reference on p 7 of the document at tab E to “customer base and daily run established prior to handover” seems to have been interpreted as meaning that the daily run would be determined prior to the commencement of operation of the business36, but I do not think that was the way in which it was represented by the documentation as a whole. The daily run was said to be established “prior to handover” not prior to the time when the franchisees turn up in the territory, and in the document at tab E on p 4 it is explained that the process of establishing the customer base and defining the daily run will occur during the initial training period. It seems to me that what is described in the publicity material is clear enough, and it does not involve the existence of a predetermined run prior to the commencement of the onsite training period, but rather that the run will be developed during the training period so that by the time of handover it will be established in a way which generates a turnover of 100 cups per day. This involves the process of finding the customers and building them into a run, and (hopefully) engineering the run so as to improve its overall performance and efficiency, which 36 Male plaintiff p 20, female plaintiff p 32. -- 23 of 37 -- 24 is to occur under the control of the finance support manager during that training period. [77] There is nothing inherently wrong in such an arrangement, and indeed on its face it seems quite an attractive arrangement from the point of view of potential franchisees. The problem is simply that the draft franchise agreement did not reflect what was promised in that publicity material, in terms of the respective obligations of the franchisor and the franchisee. In that respect it was misleading and deceptive, but the thrust of the plaintiffs‟ complaints in relation to this is that the first defendant never in fact developed the business to the point of a turnover of 100 cups in a day, or even to the point where there was a day on which 100 cups were sold. The problem here for the plaintiffs is that merely establishing that the 100 cup guarantee was never met does not mean that the representations identified in these paragraphs were shown to amount to misleading or deceptive conduct. Insofar as they were representations as to the terms of the franchise agreement that the first defendant proposed that the parties would enter into, the representations were misleading and deceptive, but that did not produce any loss because in fact a term was inserted in the contract which protected the plaintiffs‟ position in relation to the 100 cup guarantee. In short, it seems to me that a case of misleading and deceptive conduct is not made out in respect of these representations. [78] Paragraph 15(j) is admitted on the pleading: defence paragraph 8(c). This allegation however does not go anywhere, since the plaintiffs have not pleaded or proved that making this representation was misleading and deceptive. The representation in paragraph 15(k) was that “the first defendant would obtain and provide all licences to operate the franchise.” This representation was contained in one of the documents forwarded by the defendants, Exhibit 1, tab E on p 3 where it is said that the franchise “comes complete with… all permits and licences to operate (where required).” The plaintiff said that in fact they were required to obtain a licence from the local authority to operate the business within Lismore, and it follows the necessary licences had not in fact been obtained by the first defendant for the plaintiffs.37 Further, the franchise agreement provides in cl 13.1(m) that the obligations of the franchisee include “to obtain at its own endeavour and expense all such consents, licences and permissions as may be necessary to the operation of the business…”. That clause was in the draft franchise agreement forwarded by the defendants to the plaintiffs. [79] The proposition in the publicity material is a statement as to what would happen in the future, and accordingly it is a matter for the defendants to show that they had reasonable grounds for making that representation. Given the terms of the draft Franchise Agreement forwarded by the defendants, and the fact that they did not in fact do anything with a view to obtaining for the plaintiffs the necessary licence, I find that the defendants did not have reasonable grounds for making that representation, and that this amounted to misleading or deceptive conduct on their part. It was submitted for the defendants that this complaint was neutralised by the fact that the invoice for the licence was never submitted to the first defendant for payment. That I think is not the point: the representation was that the business would come complete with any necessary licence. It did not do so, there was no 37 Male plaintiff p 58; p 39. -- 24 of 37 -- 25 indication that the defendants ever did anything with a view to ensuring that it would do so38, and the terms of the draft Franchise Agreement indicate that the defendants‟ true intention was that it would be up to the plaintiffs to get any necessary licence. In those circumstances what was said in the publicity material was misleading and deceptive, even if the defendant would have paid the cost of obtaining the licence had an invoice been submitted to it, a proposition which is unsupported by any evidence independent of the mere word of the second defendant, something on which I am in circumstances not prepared to rely. [80] The representation in paragraph 15(l) was admitted on the pleadings. The representation is concerned with the provision of training prior to handover. This is caught up with the question of the operation of the 100 cup guarantee, and the concept of handover which features in the publicity material but not in the Franchise Agreement. On the basis of the publicity material handover is something that occurs once the 100 cup a day guarantee has been satisfied. The second defendant said that as far as he was concerned there was a further requirement, that the franchise support manager be satisfied that the franchisees were able to cope without further assistance: p 59, p 26.39 Whether or not that was the case, given the operating results the plaintiffs‟ franchise never achieved “handover”, so on the face of it the defendant had a continuing obligation to provide “training”, that is to say to do the things referred to in the publicity material, to continue to build the business and develop the run until that guarantee was met. That never occurred. [81] For reasons referred to earlier, however, it does not matter whether the terms of the draft Franchise Agreement have the effect that in this respect the content of the publicity material was misleading and deceptive, and there is no evidence to suggest that it was not in fact the intention of the first defendant at the time that the franchise development manager, Ms Taylor, would come to the franchise and continue to work with the plaintiffs until the business had reached the point where the guarantee was satisfied. The fact that Ms Taylor went on holidays before that point had been reached does not in itself render the making of that representation misleading and deceptive, since it appears that Ms Taylor would when she returned from holidays have resumed the training and the development of the business for the plaintiffs but for their reaction to her.40 This representation was therefore not misleading or deceptive. [82] The next representation alleged was in paragraph 15(m), that most franchises work 30 hours per week from 8:00am to Noon and from 1:30pm until 3:30pm Monday to Friday, and that this is what would be required of the plaintiffs to achieve 150+ cups per day. There are two aspects to this representation; references in the documents provided to the hours that one would work, and the oral representations. Exhibit 1, tab A says on p 9: “An Espresso To Go franchise requires an average commitment of around six hours per day for the Monday to Friday operation. This is equivalent to only 30 hours a week… Most franchisees work from 8:00am till Noon and from 38 The second defendant simply assumed that no licence was necessary: p 55. 39 The evidence of Ms Taylor was not consistent with this: she said that she would stop the on-site training when the second defendant told her to: p 88. 40 Whether that would have achieved a turnover of 100 cups per day is another matter; it is clear Lismore was not then capable of supporting such a franchise. -- 25 of 37 -- 26 1:30pm to 3:30pm. The hours are flexible and franchisees can structure their daily run to suit individual requirements.” Further the document says on p 14 among the benefits of an Espresso To Go franchise: “Flexible hours (as little as six hours per day).” The document at Tab E said on p 6: “Most operators work from 8:00am to Noon and from 1:30pm to 3:30pm. The hours are flexible and you can arrange your daily run to suit your individual requirements.” [83] In terms of oral representations, the male plaintiff said that the second defendant spoke to him about selling 30 cups per hour for four hours in the morning having a lunch break and then going back and doing more, and that he said a total of six hours a day with 30 cups per hour came to 180 cups per day: p 34.41 The female plaintiff said that he said the average working time was 8:30am to 12:30pm, and then a break and then a couple more hours in the afternoon: p 67. This confirmed the publicity material in relation to the working hours, but did not deal specifically with the sale of 150 cups per day in that period. [84] The second defendant denied that he said these things, but it occurs to me that it would be unsurprising if he had said those things because it is essentially what was said in the publicity material, and indeed in the operator‟s handbook which he issued later to the plaintiffs: Exhibit 14. The exhibit is not paginated through, but on p 3 of the section headed “Marketing Program” there is the statement: “A typical run commences around 8:00am and winds down around midday. 80% of your sales will take place in the morning. The run then picks up again at around 1:30pm to 3:30pm, when you would turn over the remaining 20% of sales.” On the same page an example is given of a run which starts at 8:00am. On p 4, under the subheading “Turnover Targets” there is the statement: “For a 150 cup per day turnover, you need to average at least 25 cups per hour i.e. six hours (work per day) x 25 (cups per hour) = 150 cups.” That proposition, which is mathematically indisputable, clearly implies that 150 cups per day can be achieved over a working day of six hours, which given the statement that most runs commence at 8:00am, would be entirely consistent with the representation alleged. That the second defendant had this material in his operator‟s handbook provides support for the plaintiffs‟ evidence that this is what they were told, and makes it unlikely that they were told something different. The submission on behalf of the defendants was that this was mere puffery which could not be relied upon by a perspective franchisee. There is nothing in my opinion about these representations to indicate that they were puffery, or would have been understood as mere puffery by someone in the position of the plaintiffs who was reading them.42 [85] The defendants did not allege that this representation if made was true. For what it is worth, the only other franchisees who gave evidence testified to starting work at 6:00am.43 For the defendants it was submitted that there was no representation that the plaintiffs would not need to work before 8:00am, and that in any event this 41 In this passage the reference to 30 cups per hour is shown in the transcript as 13 cups per hour, but that was an error in transcription: the witness said 30 cups per hour. 42 Applying the general approach adopted in Downey v Carlson Hotels (supra) at [91], [92, in a somewhat different context. 43 Ball p 23; Reimeis p 10. His evidence was opened as being led for a specific purpose, and I ruled that on that basis was irrelevant, but took the evidence on a precautionary basis. -- 26 of 37 -- 27 representation was not said to apply during the start up period, when the run was still being built. If one characterises the start up period as the period until there was a turnover of 100 cups per day, the whole of the time the plaintiffs were operating this franchise they were in the start up period. Nevertheless, I think that the clear purport of the representations in relation to hours worked by “most operators” is that this is a business which can be operated properly by someone working from 8:00am. That was a matter which was of some particular significance to these plaintiffs, because of the male plaintiff‟s desire to have a job where he could start at 8:00am because of family commitments: p 84. [86] The real problem here however was not that the business could only be operated successfully if one started well before 8:00am, but rather that the business could not be operated successfully in Lismore whenever one started. Nevertheless, the issue about hours worked came up in another way. An affidavit by Mr Smith sworn 10 February 2012 said that on about 15 February he had a conversation with the male plaintiff who told him that he did not do any business before 8:00am due to family commitments, to which he replied that you need to be flexible: Exhibit 28, paragraph 16, 17. The run records, Exhibit 1, tab J began on 14 February 2011 and on that day the first entry shows a start time of 7.28 a.m. and the first stop Rous Road, Goonellabah, where however, no coffee was sold. On 15 February there was a start time of 7.31 a.m. and the first stop at 9 Highland Crescent, Goonellabah, where again no coffee was sold. On 16 February the start time was 7.26 and the first stop was Rous Road again and this time eight cups were sold. An examination of the subsequent entries shows that not infrequently a stop at Rous Road was the first stop of the day, and there were generally a number of cups of coffee sold there, but that was not invariably the case; sometimes the first stop was shown somewhat later and somewhere else, and sometimes the first stop was at Rous Road but no coffee was sold. [87] The plaintiffs were not cross-examined about the content of this information, so it is difficult to know what the explanation for this is, but the position may simply be that the Rous Road stop was a somewhat uncertain one which might or might not produce some sales worth having, and it might well have been dropped if the plaintiffs were running late.44 Perhaps if they made no sales the equipment might not have been turned on at that point. It does seem to me however that this record is not on its face consistent with the affidavit of Mr Smith, since it shows that in fact the plaintiff was starting work about half an hour before 8:00am at that time.45 [88] There is no evidentiary basis to conclude that the franchise in Lismore would have been successful, either at the 100 cup level or 150 cup level, if the plaintiffs had been prepared to start earlier than 7:30am. I think the true position really is that Lismore was just not a suitable site for this business, and that was independent of the question of hours worked. There is really no sufficient evidentiary basis to conclude that the representations about hours worked amounted to relevant misleading and deceptive conduct. 44 The male plaintiff said that at one point he went two days a week to a nursing home at 7.30, but this was not shown to refer to those entries: p 19. Later he added another pre-8 a.m. stop: p 26. 45 This indicates that the evidence of Mr Smith in this affidavit is not reliable. -- 27 of 37 -- 28 [89] Paragraph 15(n) was the representation that “the average franchise completes 120 sales per day by noon”. The plaintiffs relied on the documents in Exhibit 1 at tab A pp 9 and 14, tab D and tab E at pp 6 and 7, but none of these contained a representation to the effect pleaded in this paragraph. This allegation is not made out. The representation in paragraph 15(o) was that “most franchises operate on a predetermined run (set by the first defendant) of 5-8 kilometres and that this would be in keeping with what would be provided to the plaintiffs.” I have already said something about the concept of a “predetermined” run. As to the length of the run, the document at tab D when giving typical running costs summary says: “most runs equal 5-8 kilometres per day or 40 kilometres per week.” I do not think however that it necessarily follows that there was a representation that the plaintiffs would be able to achieve either 100 cups per day or 150 cups per day with a run of that length in a particular territory, in this case Lismore. [90] The plaintiffs‟ complaint about this statement seems to be bound up with the complaint about the failure of the territory to produce a turnover of 100, or indeed 150 cup sales a day, although the plaintiffs did complain that there was a lot of driving involved in getting around the run that they had.46 The real difficulty here is that there was no evidence that the representation that the average length of runs of franchisees was significantly different from 5-8 kilometres, and overall I am not persuaded that there has been any misleading or deceptive conduct proved in relation to this representation. [91] The representation in paragraph 15(p), about the capacity of the plaintiffs easily to make a particular operating profit, is closely related to the representation about the capacity of the plaintiffs to achieve 150+ cup sales per day, to which I have already referred. Such a level of sales translates to a profit of the order alleged, on the basis of the defendants‟ profit matrix Exhibit 1 tab F. This representation however really does not add to the case against the defendants. [92] Paragraph 15(q) was a representation that the first defendant would provide for the plaintiffs a franchise support manager who would “establish the run and satisfy the pre-handover guarantee, work closely with the plaintiffs to grow the franchise, monitor the plaintiff‟s progress, provide assistance to the plaintiffs where requested and/or necessary, and be available to the plaintiffs 24/7.” The making of this representation was admitted on the pleadings: defence paragraph 8(c). The defendants say that this representation was not misleading and deceptive because at the time it was made the intention was to make available Christine Taylor as franchise support manager. She was employed by the first defendant in that position, and the intention was that she would do the various things referred to in that paragraph, though there may have been an expectation that her services would not have been called on at strange hours. [93] The defendants say that Ms Taylor was available, except when she went on leave, and that the reason she did not return to continue to help the plaintiffs was that they had insisted on someone else. There is some conflict of evidence involved here as to the plaintiffs‟ position in relation to Ms Taylor. The male plaintiff said that he 46 See for example male plaintiff p 47. -- 28 of 37 -- 29 found her attitude annoying, because of an emphasis on what might be described as “positive mental approach”, and what appeared to be a lack of systematic approach to the process of building the business: pp 47-8. No doubt to some extent this was based on the assumption that she would have come to Lismore armed with the first defendant‟s feasibility study, containing the sort of information represented about that study to the plaintiffs, and a plan based on an analysis of potential customers. That of course did not happen, because no such study was ever undertaken, and insofar as the second defendant found out anything about potential coffee van customers in Lismore, he did not pass any of it on to Ms Taylor: p 95. Her approach was it seems essentially one of just driving around looking for potential customers, and when she came upon any, to try them out. [94] I suspect that the plaintiff‟s level of frustration was associated with the fact that the business was just not developing, that is, that on this particular occasion Ms Taylor‟s method was not working,47 I expect because the two existing vans were meeting such demand as existed in Lismore. The male plaintiff complained that for example Ms Taylor had him say positive things out loud over and over, as a means of encouraging him to think positively about the business: p 48. Interestingly, Ms Taylor did not recall having done that, but said that it did sound like the sort of thing that she might do: p 94. He said on the Thursday before Ms Taylor finished he telephoned the second defendant and complained about this, said that it just did not appear to be working, he was going backwards, he felt he was being abandoned, this was not what he had been promised and not what he had paid for: p 50. In response the second defendant had told him what had been reported to him was that he was fast, likeable and that he would be right and it was just a matter of keeping going. The plaintiff did complain about Ms Taylor‟s approach, but he denied that he asked that she not return: p 24. Instead, he said he was told subsequently by the second defendant that Ms Taylor had been sacked because of complaints about her, that he was training a new franchise support manager but that he would be on his own until then until she was trained: p 52. [95] The second defendant said that the male plaintiff had complained to him about Ms Taylor and did not want her back (p 11), and for that reason he did not send her back, but he had no one else to send, since Ms Taylor was the only franchise support manager. He said that she left this employment in December (p 12), and he did then begin to train another person to take over that position. In the meantime, he provided another franchisee who had been successful to assist the plaintiffs. Ms Taylor said that she left the first defendants‟ employment in December of 2010 (p 85), but she could not recall whether she resigned or whether she was sacked or the circumstances surrounding her leaving: p 89. That sounds very odd; this was not all that long ago, and I would have expected her to recall something of that nature. [96] In any case, whatever in fact happened and whatever the rights and wrongs of the situation, Ms Taylor said that the ordinary practice was that she would stay with the franchisee until the franchise was established, and that she would do the various things referred to in the representation: p 87. It seems to me that at the time the representation was made Ms Taylor was available and no doubt expected to remain 47 The same approach seems to have been successful elsewhere: Taylor p 98-9. -- 29 of 37 -- 30 available to be able to satisfy any obligation to provide a franchise support manager, and accordingly the defendants in fact had a reasonable basis for making the representation pleaded, which was a representation as to a future matter. Accordingly there was no misleading and deceptive conduct about the making of this representation. [97] The representation alleged in paragraph 15(r) was that the first defendant would provide to the plaintiff “ongoing 24/7 assistance”. This was also admitted on the pleading, and was clearly associated with the representation about the franchise support manager, since there is nothing in the material to suggest that assistance was to be provided by anyone else on this basis. For the same reasons it is not shown that there was misleading or deceptive conduct in relation to this representation. Paragraph 15(s) alleged a representation that goods and materials provided would be of merchantable quality and fit for their purpose. This representation was not pressed on behalf of the plaintiffs, and it is sufficient to say that it has not been shown that there was any representation in those terms or to that effect in fact made. [98] Paragraph 15(t) alleged a representation that “the first defendant would be provided with access to, and the benefits of, the GPS tracking system and software.” On its face this allegation does not make a lot sense, but it is apparent from paragraph 61(p) of the Statement of Claim that there was a mistake in the pleading, and that the representation which was intended was that the plaintiffs would be provided with this. There was a GPS tracking system made available, but the plaintiffs maintained that they were not initially provided with the password necessary for them to log on to the system so that they could download information from it.48 It appears that the problem here was simply one of a mix up; there was a password provided to them, but they thought that that password simply activated the transmitter on the van,49 when in fact it could also be used to log on to the system and get the information. Once they raised this issue, the first defendant did confirm that that same password could be used for that purpose, and in February the plaintiffs began to get access to the system in this way.50 I am not persuaded that the first defendant did not always intend to provide franchisees in general and the plaintiffs in particular with access to the GPS tracking system data, at least on a current basis51, and I accept that at the time this representation was made the first defendant had reasonable grounds for making it. [99] Finally it was alleged in paragraph 15(u) that there was a representation that the first defendant undertook to actively market and promote event services and delegate event enquiries to the plaintiffs. Presumably this was intended to refer only to enquiries originating from the franchise area, and again this representation was admitted in the defence. This was also a representation as to a future matter, so that strictly speaking it was a matter for the first defendant to show that it had reasonable grounds for making this representation. In fact no evidence was lead in relation to 48 Male plaintiff p 56; Exhibit 8; female plaintiff p 79-80. 49 They used it on the van to log into the system and fed in sales numbers regularly until late May 2011: male plaintiff p 9, Exhibit 1 tab J. 50 Hence the documents in Exhibit 1 tab J. 51 The system apparently was set up in such a way that the franchisees could not access non-current data (p 80), so that for practical purposes they had to log on every day to access the information, a curious restriction, but there was no particular complaint about it. -- 30 of 37 -- 31 this by the first defendant, so it did not discharge this onus, and I find that the making of this representation was misleading and deceptive. [100] In summary therefore I find that the representations in paragraph 15(a), (b), (c) except in respect of the figure of 150 cups a day, (d), (e) except for paragraph (vi), (f), (g)(i) and (ii), and (vi), (h), (i), (j), (k), (l), (m), (o) except in respect of the run being predetermined, (p), (q), (r), (t), and (u) of the Statement of Claim were made by the second defendant on behalf of the first defendant. In summary, I find that there was misleading and deceptive conduct in making the representations in paragraph 15(b), (c), (d), (e), (f), (g)(ii) and (iv), (k), and (u) to the extent found. In respect of the other representations made, either they were not shown to be misleading and deceptive conduct, at least in a way which was relevant to the plaintiff‟s case, or the allegation was not pressed on behalf of the plaintiffs. Reliance [101] The male plaintiff said that, in deciding to enter into the franchise agreement, he relied on the fact that the defendant had said he had done a feasibility study which indicated that Lismore was a favourable site for a franchise, that the study involved an expert mathematical formula, on the promise of the 100 cups per day guarantee, that the business would be established for them by the defendant, so that it was a “turn-key” operation, and that their system had never had a failure: p 37. He also relied on the representations that they would be able to sell 150 cups per day or more once their speeds have improved to the point where they could make that much coffee, on the provision of a franchise support manager to provide support on a 24/7 basis (p 38) and on the fact that the customer base would be established prior to handover: p 39. The female plaintiff said that they would not have had entered into the franchise agreement if there had not been a feasibility study carried out in Lismore, she would not have entered into the franchise agreement if there were no 100 cup guarantee, or if aware that they would not have a franchise support manager available 24/7 to provide assistance as required, or if aware that the defendant would not establish the run prior to handover: p 72. She also relied on the working hours stated in the document at Tab A: p 19. This evidence was not significantly shaken during cross-examination, and I accept it. [102] Both plaintiffs also said that they were impressed by the propositions that the Murwillumbah franchise was achieving over 100 cups a day in sales, and that the average sales of all franchises was 160 cups per day, as referred to earlier. These representations were clearly an important part of making the plaintiffs favourably disposed towards the idea of entering into the franchise agreement, because they supported the idea that the franchise would be able to provide the level of cup sales which they wanted to achieve, namely a level of at least 150 cup sales per day. For the reasons that I have referred to earlier, I think it clear that the plaintiffs would not have entered into the franchise agreement unless they had believed that this business would be able to produce that level of turnover, and accordingly representations to them which were important in their coming to that belief can also be said to have been relied upon by them in entering into the franchise agreement. -- 31 of 37 -- 32 [103] It follows that the representations (to the extent found) in paragraphs 15(b), (c), (d), (e), (f) and (g) were relied on by the plaintiffs in entering into the franchise agreement. There was no evidence that the plaintiffs particularly relied on the proposition that the first defendant would obtain and provide all licences to operate the franchise, or that the first defendant would actively market and promote event services and delegate event enquiries to the plaintiffs. The fact that the plaintiffs did not themselves obtain a licence from the local authority suggests that they assumed that the first defendant had in fact obtained any necessary licences, but the franchise agreement which was provided to them expressly provided that obtaining licences was a matter for the franchisee, and they said that they went through the terms of this agreement with a solicitor: p 69. In these circumstances, I am not persuaded that they relied on the misleading representation that the first defendant would obtain and provide all licences to operate the franchise. There was no evidentiary basis for a finding of reliance in relation to the representation about marketing and promoting event services and delegating enquiries. [104] Apart from obtaining legal advice on the franchise agreement, which would not have been particularly relevant to most of the misleading representations, the plaintiffs also obtained advice from their accountant.52 It does not however follow that they did not rely on the representation made by the defendants in entering into the agreement. It is possible to rely on more than one source of information or advice in deciding to enter into a particular contract, and the fact that they had some expert advice did not exclude reliance on the defendant.53 It was not shown that they received any advice from their accountant which would have had the effect of breaking the chain of causation from the representations of the defendant: for example, advice that the defendant‟s representation should be disregarded, but that the accountant‟s analysis showed that the proposed franchise business was a good one. The plaintiffs did not obtain the advice of a business advisor, so presumably the accountant was not also a business adviser, and I assume that a solicitor did not purport to give business advice. [105] The plaintiff‟s case is that they entered in to the contract because of misleading and deceptive representations made by the defendants. For the purpose of assessing this it is necessary to have regard to the combined effect of all of the representations found to have been made which have also been found to be misleading and deceptive, to the extend that there is some proper evidentiary basis for concluding that the matters were relied on. But it is also necessary to consider whether it has overall been proved that it was the making of the misleading and deceptive representations which can be said to have caused the plaintiffs to have entered into the agreement.54 In this regard, the evidence of the plaintiffs taken overall indicates that the relevant representations were central to their decision to enter into the franchise agreement, and accordingly I find that the plaintiffs did enter into the franchise agreement because of the misleading and deceptive conduct of the defendants. 52 The question of what advice they received was not explored at all during the trial. 53 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at [31], [57], [124]. 54 Steutel v Kimple Pty Ltd [2005] VSCA 312 at [49] per Nettle JA, and cases there cited. -- 32 of 37 -- 33 [106] The defendants pleaded in paragraph 12(b) of the Amended Defence the terms of cl 47 referred to above, the “no representation” clause. It is clear that parties cannot contract out of the provisions of the Trades Practices Act, and that, if in fact representations have been made, a term in a contract that there have not been any made will be ineffective. This is not a case where there was a clear statement that representations should not be relied on, or contractual agreement that representations made by one party of the contract were not relied on by the other party in entering into the contract, matters which, although not conclusive, are certainly relevant to the question of whether there has in fact been reliance on any particular representation which was made.55 [107] In the present case there clearly were numerous representations made by the defendants to induce the plaintiffs to enter into the franchise agreement56, and indeed putting such a clause in a draft franchise agreement could almost be said to amount in itself to misleading and deceptive conduct on the part of the defendants. Ultimately no persuasive argument was advanced on the behalf of the defendants that the clause in some way barred the plaintiffs‟ case, and plainly it does not. The submissions on behalf of the defendants also drew attention to a number of authorities establishing that what really mattered was causation rather than reliance, and that it was necessary to prove actual causation from the breach in order to establish a right to recover compensation, without any presumptions of fact in favour of the plaintiffs.57 [108] Reliance was placed on Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, a case where the respondent said that he relied on two particular statements in documents provided by the appellant in purchasing shares in it. The respondent‟s case was that both statements were misleading and deceptive, but only one of them was proved to have been. The High Court was not persuaded that causation had been proved, in circumstances where there was no evidence that, had the representation which was not shown to have been misleading been made but the other one not made, the respondent would not have purchased the shares. That case however was concerned with a very different factual situation from the present58, and apart from being a useful reminder that there must be a proper evidentiary basis for finding causation in misleading conduct cases, I do not consider that it produces the result that the plaintiffs have not shown causation in the present case, even though their case extended to allegations of misleading and deceptive conduct which ultimately were not made out. I do not consider that the case is authority for the proposition it is necessary to show that the misleading and deceptive conduct was the only thing relied on in entering into the transaction which produced the loss said to have been caused by the misleading and deceptive conduct. 55 Campbell v Backoffice Investments Pty Ltd (infra) at [130]; Downey v Carlson Hotels Asia Pacific Pty Ltd (supra) at [80]-[84]. 56 The second defendant admitted that he intended the documents provided to the plaintiffs to be relied on: p 32. 57 Campbell (infra) at [102]; Downey (supra) at [75], rather than [60] as stated in the submissions in writing, which does not appear to relate to this issue; Culligan v Aco Pty Ltd [2009] NSWCA 290 at [45], [46]. 58 The relevant evidence, on analysis, did not in fact support the inference that the breach found caused the loss, because the respondent would not have entered into the contract had it not occurred: [145-147], [150]. -- 33 of 37 -- 34 Breach of the franchising code [109] Section 51AD in Part 4B of the Trade Practices Act 1974 prohibited a corporation from contravening an applicable industry code. It was not disputed that there was an industry code applicable here, the franchising code of conduct, and the defendants conceded that there were breaches of its requirements, in that the first defendant did not give the plaintiffs the franchise agreement in the form in which it was to be executed at least 14 days before they entered into the franchise agreement in breach of cl 10(c), had not received a written statement that the prospective franchisees had received the disclosure document and the code before entering into the franchise agreement in breach of cl 11(1)(a) of the code, and had not received a written statement that the prospective franchisees had been given certain advice, or had been told that advice should be sought but had decided not to seek it, before entering into the franchise agreement in breach of cl 11(2) of the code. [110] The draft franchise agreement was forwarded under cover of an email on 21 April 2010, along with the disclosure document and the disclosure document received form, and a form in relation to advice: Exhibit 18. The female plaintiff said these documents were forwarded to their lawyers: p 85. There were subsequently some negotiations about the terms of the agreement, and some special conditions inserted at the request of the plaintiffs59, before it was executed by the second defendant on behalf of the first defendant on 7 July 2010, and by the plaintiffs on 21 July 2010. [111] Prior to the execution of the franchise agreement, the plaintiffs had in fact received the disclosure document and certain advice, but they had not provided a written acknowledgment that they had done so as required by the code. Nor had they provided the written acknowledgment in relation to the receiving of advice. This occurred only after the franchise agreement had been entered into. I accept that the second defendant did ask the plaintiffs to backdate those documents, and that occurred. [112] The fact that the code was not complied with does not however render the franchise agreement illegal and void; rather it means that there was a breach of the provision of the Trade Practices Act, which gives rise to the remedies provided by that Act for breach: Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101. However, as counsel for the defendants submitted, the plaintiffs had not proved that any loss or damage was suffered by the breach of the Act in this respect. It is I think fair to say that the breaches in this case were only technical, and in these circumstances there was obviously no actual loss suffered because of those breaches. Accordingly, the breaches of the franchising code in my view are irrelevant in these proceedings. In the present case, because of the technical nature of the breaches, that does not really matter, but it does occur to me that it is a somewhat unsatisfactory situation if no adverse consequences flow from a breach of the code unless the franchisee can prove actual loss as a result of that breach. 59 Second defendant p 6. -- 34 of 37 -- 35 Case in contract [113] It was alleged by the plaintiffs that the first defendant breached the terms of the contract between them by failing to take adequate or any steps to determine whether the territory offered was capable of sustaining a 100 cup per day franchise. There was however no contractual obligation on the first defendant to take steps to determine whether or not the territory offered was capable of sustaining such a franchise, so no breach is shown in this respect. It was then alleged that the first defendant was in breach in failing to provide the plaintiff with a territory that was capable of attaining at least a 100 cup per day franchise. Again I think this mistakes the effect of the contractual guarantee which arose because of the special condition on p 35 of the contract, that “the franchisor will ensure and assist the franchisee to achieve the 100 cup sales per five day week quota as advertised in the 100 cup guarantee on the Espresso To Go website.”60 That had the effect of giving contractual force to the 100 cup guarantee, so that it was a breach of contract for the first defendant to fail to develop the business to the level of a turnover of 100 cup sales in a day, but there is nothing in the contract about the first defendant‟s providing a territory which was capable of such development, and accordingly strictly speaking there was no breach as alleged in paragraph 69(b). [114] On the face of it the first defendant never developed the plaintiffs‟ business to a level where the 100 cups per day guarantee was satisfied, but the difficulty with the allegation in paragraph 69(c), that there was a breach of contract in failing to provide the plaintiff at handover with such a franchise, is that it assumes that handover had occurred. The contract says nothing about handover, but the significance of handover arises because of the use of that term in the promotional material, and hence (presumably) the equivalent use of that term in the material on the Espresso To Go website at the time of the contract. In that context, handover is plainly something which occurs when the 100 cup per day turnover has been developed, so that it seems to me that strictly speaking there never was a handover in this case. [115] There are necessarily some difficulties in trying to determine the contractual effect of inserting a special condition which incorporates into a contract, which simply allows the franchisee to run a business within a defined territory, a term which assumes that the business would be built up by the franchisor and handed over to the franchisee once it achieved a certain size, but it seems to me that there must have been at least a contractual obligation to obtain the turnover of 100 cups per day. That I think is better expressed the way it is expressed in paragraph 69(d) of the Statement of Claim, that there was a breach in “failing to build up the customer base for the plaintiffs pursuant to the 100 cup guarantee.” Since the guarantee was never satisfied, and (as discussed below) the first defendant abandoned any effort to satisfy it, the first defendant was clearly in breach of the contract in that respect. [116] The final breach alleged was in failing to provide the plaintiff with adequate training and further training and assistance pursuant to clauses 17.1, 17.2 of the contract. Clause 17.1 imposed an obligation to provide the franchisee with approximately 60 Exhibit 1 Tab H; emphasis added. -- 35 of 37 -- 36 three weeks, or as required, training in the operation of the business. It seems to me however that if one counts the time spent by Mr Smith and the time spend by Ms Taylor a total of more than three weeks training was in fact provided, so there was no breach of this clause. As to clause 17.2, this imposed an obligation on the franchisee to participate in further training considered necessary by the first defendant from time to time, but did not impose an obligation on the first defendant to provide any further training, so there was necessarily no breach of that clause. Accordingly there was no breach of contract as alleged in paragraph 69(e). Remedy [117] In the present case, once it has been established that there was misleading and deceptive conduct on the part of the defendants and that that caused the plaintiffs to enter into the franchise agreement, it follows that the plaintiffs are entitled to recover compensation in respect of the loss that they have suffered as a result. In circumstances where quantum has been agreed between the parties, it is not necessary therefore for me to say anything further except that the plaintiffs are therefore entitled to recover the agreed amount as damages under the Trade Practices Act. The position is the same in relation to damages for breach of contract; once I have found that there was a contract and that the first defendant breached it, the plaintiffs are entitled to damages for breach of contract in the agreed amount. [118] As I mentioned earlier, there was no issue in fact litigated about whether the second defendant was knowingly concerned in the breach of the Act by the first defendant; the first defendant was essentially a one man company, and the second defendant was that one man. All relevant representations were made either orally by the second defendant personally, or in documents sent to the plaintiffs by the second defendant personally, and any knowledge relevant to the question of whether conduct was misleading and deceptive was held by the second defendant personally. Accordingly damages under the Act are recoverable from both defendants. Counterclaim [119] The first defendant has counterclaimed against the plaintiffs for damages for breach of the franchise agreement, on the basis that the plaintiffs were not entitled to terminate the franchise agreement, and that by purporting to do so they have themselves breached it. It was alleged that the first defendant had not breached the franchise agreement, but I have already found against that submission. It was further submitted that nevertheless the plaintiffs had failed to give the notice required in terms of s 30.1 of the agreement, so that there was no entitlement on the part of the plaintiffs validly to terminate the franchise agreement. I accept that no such notice was given, and it follows that there was no entitlement on the part of the plaintiffs to terminate the franchise agreement under cl 30 of the agreement. That does not mean that there was no entitlement to terminate the franchise agreement. The true position is that the first defendant repudiated the franchise agreement, and in those circumstances the plaintiffs were entitled to accept that repudiation and terminate the agreement. -- 36 of 37 -- 37 [120] The repudiation consisted of the first defendant‟s persistent failure to comply with its contractual obligation to satisfy the 100 cup guarantee, and indeed its abandonment of efforts to do so. It was said that the first defendant was prevented from satisfying the guarantee by the plaintiff‟s refusal to continue with training under Ms Taylor. I do not accept that the plaintiffs ever said that they were in effect refusing to have Ms Taylor back; I prefer their evidence, that they indicated some unhappiness with her approach, and expressed a preference for someone else, and that the second defendant expressed sympathy for that position, and used that as an excuse not to send her back.61 He then sent Mr Smith, who appears to have been there for something like three weeks overall, but even Mr Smith‟s efforts were quite unable to satisfy the 100 cup guarantee. There was no suggestion that Mr Smith was sent away by the plaintiffs; ultimately he left because of an apparent recognition by him, and indeed by the second defendant, that the guarantee was never going to be satisfied in Lismore. The plaintiffs were never provided with a replacement franchise support manager.62 [121] The second defendant attempted to have established an alternative run, in Oxley, which the plaintiffs could take over. I am not persuaded that there was ever any agreement between the plaintiffs and the first defendant to accept the Oxley run in substitution for the run in Lismore. I accept the male plaintiff‟s evidence that, after speaking to the person who was supposed to be developing the run for him, he decided that there would be no advantage in such a change, and lost interest in perusing that option: p 66. It is apparent that once he did so, the defendant lost interest in attempting to satisfy the guarantee. [122] The guarantee was in my opinion an important term of this contract, and in circumstances where the first defendant, even after several months, had not satisfied the guarantee, and had abandoned any attempt to satisfy the guarantee, I consider that this behaviour amounted to repudiation of the contract by the first defendant. In these circumstances the plaintiffs were entitled to accept that repudiation and terminate the contract, and I find that the effect of what they did was to achieve that result. In circumstances where the contract came to an end because the first defendant‟s repudiation was accepted by the plaintiffs, the first defendant cannot recover damages for breach of contract. Accordingly the counterclaim is dismissed. [123] There will therefore be judgment that the first and second defendants pay the plaintiffs $202,732.58 dollars. Unless another order is appropriate, as to which I will hear submissions when the reasons are delivered, I will order the first and second defendants to pay the plaintiffs‟ costs of and incidental to the action to be assessed. The counterclaim should be dismissed, also with costs to be assessed. 61 Taylor p 89. There was no evidence that, if they had been told there was noone else, they would have refused to have her back. 62 Second defendant p 44. -- 37 of 37 --