Australian Competition and Consumer Commission v Trayling

[1999] FCA 1133

FEDERAL COURT OF AUSTRALIA

Australian Competition & Consumer Commission v Trayling [1999] FCA 1133

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION v NORMAN SIDNEY TRAYLING

SG 130 OF 1998

O’LOUGHLIN J

20 AUGUST 1999
DARWIN (HEARD IN ADELAIDE)

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 130 OF 1998

BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant
AND:	NORMAN SIDNEY TRAYLING Respondent
JUDGE:	O’LOUGHLIN J
DATE OF ORDER:	20 AUGUST 1999
WHERE MADE:	DARWIN (HEARD IN ADELAIDE)

THE COURT ORDERS THAT:

1.Leave be granted to the Applicant to amend the Application herein as set out in the Amended Application being Exhibit “DB4” to the Affidavit of Donna Bowman sworn on 18 June 1999.

AND DECLARES THAT:

2.Norman Sidney Trayling, the Respondent, has been directly knowingly concerned in, and a party to, contraventions by ACN 069 828 619 Pty Ltd formerly known as A1 Mobile Radiators Pty Ltd (in liquidation) (hereinafter referred to as “the company”) of s 52 and subs 59(2) of the Trade Practices Act 1974 (Cth) (“the Act”) in the course of the company selling or granting franchises or sub-franchises for the conduct of mobile radiator repair and service businesses as set out in the amended statement of claim herein.

AND FURTHER ORDERS THAT:

3.The respondent be restrained from aiding or abetting or from being directly or indirectly knowingly concerned in, or a party to, a Corporation (in the course of it selling or granting franchises or sub-franchises for the conduct of mobile repairs and service businesses), publishing, broadcasting or making representations:

(a)as to any estimated earnings without disclosing to a prospective franchisee or sub-franchisee:

(i)the facts and assumptions on which the estimate is based;

(ii)the extent of inquiries and research undertaken by the franchisor and any other compiler of the estimate;

(iii)the period to which the estimate relates;

(iv)an explanation of the choice of the period covered by the estimate;

(v)whether the estimate includes depreciation, salary for the franchisee and the cost of servicing loans;

(vi)assumptions about interest and tax; and

(vii)financial information concerning those franchises which have not achieved estimated earnings.

(b)that the corporation has secured customers who are likely to place repeat orders for services to be provided by a franchisee or sub-franchisee unless the corporation identifies the customers and discloses all material information relevant to:

(i)the period over which the customers have made repeat orders;

(ii)the average weekly number of orders placed over the period referred to in (i) above;

(iii)the average weekly income derived from the orders placed over the period referred to in (i) above;

(iv)the number of franchisees or sub-franchisees amongst whom the orders placed by those customers may be distributed;

(v)the areas or regions in which the orders were placed;

(vi)any significant circumstance that may affect the future frequency of orders placed by those customers.

AND FURTHER DECLARES THAT:

4.The following persons have suffered loss or damage by reason of the conduct of the respondent and by reason of the matters set out in the amended statement of claim:

(i)Robert Ivan Harrison and Caron Mavis Hipwell;

(ii)Dean Eric Garlick and Bejay Garlick;

(iii)Mark Vincent de Largie and Shelley de Largie; and

(iv)John Kotrly.

THE COURT ALSO ORDERS THAT:

5.i. Pursuant to subs 87(1A) and par 87(2)(c) of the Act, the respondent refund to the persons named in par 4 above, as consumers who have suffered loss or damage by reason of the matters set out in the amended statement of claim, the following sums of money:

(a)The amount of $18,000 paid on 5 February 1998 by Robert Ivan Harrison and Caron Mavis Hipwell to the company for the purchase of a franchise for a mobile radiator repair and service business as detailed at par 38 of the affidavit of Robert Ivan Harrison sworn on 29 October 1998 and filed herein;

(b)The amount of $18,000 paid on 2 and 8 December 1997 by Dean Eric Garlick and Bejay Garlick to the company for the purchase of a franchise for a mobile radiator repair and service business as detailed in pars 8 and 11 of the affidavit of Dean Eric Garlick sworn on 4 November 1998 and filed herein;

(c)The amount of $23,500 paid on 17 May and 11 June 1998 by Mark Vincent de Largie and Shelley de Largie to the company for the purchase of a franchise for a mobile radiator repair and service business as detailed at pars 36 and 42 of the affidavit of Mark Vincent de Largie sworn on 16 November 1998 and filed herein; and

(d)The amount of $18,000 paid on or about 30 January and 5 and 11 February 1998 by John Kotrly to the company for the purchase of a franchise for a mobile radiator repair and service business as detailed in pars 21, 29 and 32 of the affidavit of John Kotrly affirmed 17 June 1999 and filed herein;

Together, in each case, with interest thereon pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth).

5.ii.         The respondent pay the costs of the applicant, including the applicant’s costs of investigating the conduct of the respondent as alleged in the amended statement of claim, which costs are to be taxed in default of agreement.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 130 OF 1998

BETWEEN:	AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant
AND:	NORMAN SIDNEY TRAYLING Respondent

JUDGE:	O’LOUGHLIN J
DATE:	20 AUGUST 1999
PLACE:	DARWIN (HEARD IN ADELAIDE)

REASONS FOR JUDGMENT

1. On 5 November 1998, the applicant in these proceedings, the Australian Competition and Consumer Commission, (“ACCC”) filed an application in this Court seeking declaratory orders and injunctive relief against A1 Mobile Radiator Repairs Pty Ltd (“A1 Mobile”) and Norman Sidney Trayling (“Mr Trayling”).  Mr Trayling was a director of A1 Mobile and its secretary and chief executive officer.  The relief sought by the applicant was initially based on the grounds appearing in the affidavits of:

   ·    Robert Ivan Harrison (“Mr Harrison”) sworn on 29 October 1998;

   ·    Dean Eric Garlick (“Mr Garlick”) sworn on 4 November 1998;

   ·    Maxwell Arthur Slee (“Mr Slee”) sworn on 4 November 1998;

2. Later further supporting affidavits were filed in the names of Mark Vincent de Largie (“Mr de Largie”) and John Kotrly (“Mr Kotrly”).

3. The deponent, Mr Slee was employed by the ACCC as an Assistant Director.  Based on the contents of Mr Slee’s affidavit, which have not been challenged at any stage of the proceedings, I find that A1 Mobile was a South Australian based trading corporation that had, during 1997 and 1998, been involved in the sale and supply of motor vehicle radiator repairs services in metropolitan Adelaide and elsewhere.  I further find that during that period, both the company and Mr Trayling operated a mobile radiator repair franchising operation and that, in the course of that operation, they made representations in newspapers and in promotional literature for the express purpose of inviting persons to purchase franchises or sub-franchises.

4. I also find that on various dates from December 1997 through to May 1998, A1 Mobile provided a copy of its information booklet to the deponents, Messrs Harrison, Garlick, de Largie and Kotrly, (“the franchisees”), that certain representations were made in that booklet, and that relying on those and other representations that were made by Mr Trayling, the franchisees were each induced into purchasing a franchise.

5. Based on the respective affidavits of each franchisee I find that:

   ·    Mr Harrison and his partner Ms Caron Mavis Hipwell, jointly purchased a franchise for $18,000

   ·    Mr Garlick and his wife Bejay Garlick, jointly purchased a franchise for $18,000

   ·    Mr de Largie and his wife, Shelley de Largie, jointly purchased a franchise for $23,500

   ·    Mr Kotrly purchased a franchise for $18,000

6. For the reasons that are set out hereafter I further find that A1 Mobile did not fulfil the representations that were contained in its information booklet.

7. By letter dated 9 September 1998, the ACCC wrote Mr Trayling advising him that it had received complaints from Messrs de Largie and Kotrly; it invited him to supply information in response to the complaints.  Mr Trayling replied by letter dated 25 September refuting any suggestions that either franchisee had any cause for complaint.  Both letters were lengthy and I do not find it necessary to refer to either of them in detail except in one respect.  In A1 Mobile’s information booklet, the following passage appears:

   “All of your bookings are supplied by us.  We have a full time bookings officer (Master Franchisee) on call.  This officer will quote the work for you, book the work for you and then order and deliver the parts.  Your day is planned, parts are ordered and the customer is waiting with the cash.”

8. Notwithstanding the clarity of that statement, Mr Trayling, in his response to the ACCC, asserted that the franchisees had been told that it was their responsibility “to canvass for work.”  I find that this response was a direct contradiction to the statement in the information booklet; the passage that I have quoted made it abundantly clear that a franchisee would have been entitled to assume that it would not be necessary for him or her to canvas for work:  the franchisee would have been entitled to assume that A1 Mobile’s advertising campaign and its promotional material (to the cost of which a franchisee was required to contribute) together with the work and contacts of the franchisor would have been sufficient to ensure a steady flow of work to a franchisee.

9. The matter first came before this Court on 25 November 1998.  On that date certain restraining orders were made with the consent of A1 Mobile and Mr Trayling, both of whom then had legal representation.  The thrust of those orders was to restrain A1 Mobile from making representations about estimated earnings, the source of work, the identity of likely customers and the earnings of other franchisees unless all material information relative to those subjects was included in the representations.  In the second part of the orders, a restraint was placed on Mr Trayling so that he would not aid or abet or knowingly be concerned in A1 Mobile breaching any of the orders that applied to it.  Further consideration of the proceedings was then adjourned to 14 December 1998, but on that date, by consent, there was a further adjournment to 11 January 1999.

10. On 11 January 1999 the proceedings were, once more, adjourned – to 8 February, on which date, orders were made for the filing of an amended statement of claim, defences and replies.

11. The ACCC filed its amended statement of claim on 16 February 1999. In view of the recent liquidation of A1 Mobile, it had decided to proceed only against Mr Trayling. It filed a notice of discontinuance against the company on the same day. The amended statement of claim also included the endorsement that the ACCC was bringing the proceedings on behalf of the franchisees (each of whom had given consent) pursuant to subs 87(1A) of the Trade Practices Act 1974 (“the Act”) upon findings of contraventions of the Act (as specified in the amended statement of claim). Mr Trayling failed to file his defence and, at the next directions hearing on 5 May, an order was made extending the time for the filing of his defence to 26 May 1999. On that same occasion, additional orders were made for the filing of a reply and for mutual discovery and inspection of documents.

12. On 18 June 1999 the ACCC filed the affidavit of Donna Bowman, an employee of the Commission.  Ms Bowman is the party having the care and conduct of this matter for the ACCC; she deposed that on 13 May the solicitors for the ACCC had served, by post, a sealed copy of the orders of the Court of 5 May 1999 on the solicitors for Mr Trayling; she added that the ACCC had not been served with any documents from Mr Trayling, notwithstanding the several orders of the Court for the filing of his defence.

13. On the same day, 18 June, there was a further directions hearing; on this occasion the solicitor for Mr Trayling informed the Court that he had been unable to obtain any instructions and he anticipated that his firm would be filing a notice that it was no longer acting for Mr Trayling – this in fact occurred on 23 June 1999.  On that last mentioned date, on the application of the ACCC, the matter was formally listed for hearing in the week of 5 July 1999 and by letter dated 1 July 1999, the Court wrote Mr Trayling informing him that the hearing would take place at 8.30 am on Wednesday 7 July 1999.  On that date, the matter was called on; there was no appearance by Mr Trayling and, on the application of the ACCC, the matter proceeded ex parte.

14. It should be recorded however that Mr Trayling wrote the Court on 1 July 1999 in which he said:

    “I ask you to draw the judge’s attention to some relevant matters.

    First I should confirm that I maintain that I did not make any misrepresentations to franchisees.  The franchisees who are represented by the ACCC could not make a success of their businesses for reasons unrelated to me or anything I said.

    Second the franchise fee paid by the franchisees was not wasted.  They got good value from it.

    The Company provided accommodation at its expense where necessary, provided training for a trade and also fitted out their vehicles, this we would value at $10,000 any further training was provided at no cost.”

    I was satisfied, having regard to the facts of this matter as set out above, that Mr Trayling had been given ample opportunity to oppose the orders that were sought by the ACCC and to attend Court and to make submissions on his own behalf.  It seemed to me to be appropriate, in the circumstances of the case, to allow the matter to proceed in his absence, based upon the affidavit evidence that had been filed by the ACCC.

15. The franchise scheme that was promoted by A1 Mobile and Mr Trayling centred upon a motor vehicle radiator repair service that could be carried out at a customer’s address.  The emphasis was on franchisees using either trailers or vans as mobile units.  It was intended that these units would be fitted out in such a manner that they would contain all necessary equipment and stock to perform “onsite” repairs and recores; provision was also made for the unit to be equipped so that replacement radiators could be installed when necessary.

16. The ACCC has submitted that, in the course of promoting and marketing the franchising scheme, Mr Trayling aided and abetted his company or was directly or indirectly knowingly concerned in, or a party to, his company engaging in conduct that constituted contraventions of s 52 of the Act and subs 59(2) of the Act. Section 52 provides:

    “(1)A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

    (2)Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1).”

17. Subsection 59(2) of the Act is in the following terms:

    “Where a corporation, in trade or commerce, invites, whether by advertisement or otherwise, persons to engage or participate, or to offer or apply to engage or participate, in a business activity requiring the performance by the persons concerned of work, or the investment of moneys by the persons concerned and the performance by them of work associated with the investment, the corporation shall not make, with respect to the profitability or risk or any other material aspect of the business activity, a representation that is false or misleading in a material particular.”

18. Each of the four franchisees who have been earlier identified entered into franchise agreements with A1 Mobile and paid the franchise fee.  They committed themselves to pay additional levies and fees, ostensibly to benefit from group advertising and to meet the expenses of their franchisor.

19. The misrepresentations that were proved by the ACCC were numerous.  They ranged in seriousness from those that were relatively minor to others that, in my assessment of Mr Trayling’s activities, were very serious.  I propose to mention only the most serious of the misrepresentations; they are those that related to the statements that were made by Mr Trayling with respect to the financial earnings of an existing franchisee and the financial earnings and the source of those earnings that would be enjoyed by the prospective franchisees.  Mr Trayling told Mr Harrison and Ms Hipwell of a franchisee who had earned approximately $13,000 income from his single franchised territory during his second month of operations and he said that all bookings for the work that they would undertake would be obtained by the company and channelled through to them; they would not have to canvas for any work.  The assurance of available work through the company was the central feature of the misrepresentations, but consequential misrepresentations included statements that they would earn “above average wages” and that they would be provided with support and backup, including access to advice about radiator repairs and servicing.

20. The promised work was not forthcoming.  Mr Trayling has said, in his letter to the Court, that it was the franchisees’ fault; but that cannot be correct.  Accepting the uncontradicted evidence of the franchisees, they paid over their money in the belief that they would not have to canvas for customers.  They were led to believe that the company already had customers or would obtain customers through its marketing and promotional activities.  The franchisees were entitled to think that their only commitment would be to attend to the physical tasks of repairing the customers’ radiators.  That was what induced them to part with their money.

21. In the case of Mr and Mrs Garlick, the comparable misrepresentation was that they would have to undertake “only a small amount of canvassing” because all of their work would be “supplied by the company”.

22. Mr and Mrs de Largie were also told that if they purchased a franchise their work would be “supplied by the company” and hence they “would not have to spend all their time getting work for the business.”

23. Mr Kotrly relied upon the same inducement.  He was told that if he purchased a franchise, all bookings for the work that he would carry out would be supplied by A1 Mobile.  This aspect of the franchise proposal particularly appealed to Mr Kotrly, who stated in his affidavit of 17 June 1999 that he has poor command of English.

24. These inducements were patently false; at no time was A1 Mobile or Mr Trayling in a position to give any of the franchisees work of the volume that had been promised.  These were the most fundamental statements because they represented the assurance of work that would, in turn, generate a cash flow and an income to the franchisee.  The representations about the source and supply of work were, in each of the four cases, misleading or deceptive; they were false and misleading in a material particular in that the promised amount of work was not forthcoming.

25. In the case of Mr Harrison and Ms Hipwell for example, only about one customer per week was supplied to them by either A1 Mobile or Mr Trayling in a period of seven months from March to October 1998.  Mr and Mrs Garlick suffered in the same way.  Very little work was supplied to them and they had to canvass extensively in their attempts to build up a viable business.  As for Mr and Mrs de Largie, they signed their franchise agreement on 11 June 1998 after which Mr de Largie underwent his training course.  He returned from Adelaide to his home in Western Australia on Sunday 28 June 1998, ready to commence work as an A1 Mobile Radiator franchisee.  Only one customer was supplied to Mr and Mrs de Largie by A1 Mobile and Mr Trayling during the ten-day period 29 June to 8 July 1998.  Mr Kotrly was treated in the same way.  In his affidavit dated 17 June 1998, he referred to a visit by a Mr Bernie Donohue to his home in Strathalbyn.  Mr Donohue was described as the “Master Franchisee” for Mr Kotrly’s area.  According to Mr Kotrly, the two men had the following conversation:

    “While I do not recall the precise words used, I do recall that the conversation then continued to the following effect:

    Donohue said:       “No one knows about A1 Mobile Radiator Repairs here so we have to make people aware of us – we have to go to workshops.”

    I was surprised at this.

    I said:“This is exactly what I didn’t want to do.  It says that A1 Mobile Radiator Repairs will provide all bookings and work is supplied and quoted.”

    Donohue said:       “Yes that’s right – but going out is better than sitting at home waiting.  It pays to go around and let people know who we are here.”

    We then left in my ute which had a canopy and A1 signage on it.

    From approximately 11 am on or about Wednesday 1 April 1998 Bernie Donohue and I went into pubs and shops in Strathalbyn .  We placed, with the owners’ permission, stickers in the shop windows.”

1. In the following ten days no customers’ work was provided by A1 Mobile or Mr Trayling to Mr Kotrly.

2. As to those representations about the supply or work to the franchisees, I find that they were made in the name of A1 Mobile and on its behalf and I further find that Mr Trayling was directly knowingly concerned in the Company’s contraventions of s 52 and subs 59(2) of the Act. I further find that Mr Trayling did not have a reasonable basis to believe those representations. I am satisfied that each of the franchisees has suffered loss and damages as a result.

3. As I have indicated there were other areas of complaint about the company and Mr Trayling.  Training was inadequate; advertisements had promised that all tools would be supplied together with a vehicle fit out.  In reality, few tools were supplied and vehicle fit outs were slow in coming.

4. The franchisees were given an “income guarantee” of $450.00 per week for the first two months of their operation of their franchise; that guarantee was never honoured despite the fact that none of the franchisees was able to generate that level of income.

5. The ACCC seeks declarations that Mr Trayling’s conduct has constituted contraventions of the Act and injunctions restraining him from engaging in like activities in the future. In my opinion, the declarations and injunctive orders should be granted. The ACCC, on behalf of the franchisees have also sought orders for the refund of the sums paid by them together with interest. I consider this to be a modest request; each of the franchisees has suffered materially as a result of Mr Trayling’s conduct.

6. There will be orders and declarations as set out in the attachment to these reasons.

I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O’Loughlin.

Associate:

Dated:             20 August 1999

Counsel for the Applicant:	Mr C Kourakis QC
Solicitor for the Applicant:	Australian Government Solicitor
No appearance for the respondent Norman Sidney Trayling:
Date of Hearing:	7 July 1999
Date of Judgment:	20 August 1999