Barbaras House and Garden Bateman v Slatyer
[1987] FCA 81
•25 FEBRUARY 1987
Re: RICHARD VINCENT BATEMAN and GEORGINA GAY BATEMAN And: BARBARA JEAN
SLATYER; HARVEY JOHN SLATYER; GRAHAM WALTER TIEKLE and BARBARA'S HOUSE &
GARDEN (RETAIL) PTY. LIMITED
No. NSW G351 of 1985
Trade Practices
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Burchett J.
CATCHWORDS
Trade Practices - ss. 52 and 59(2) - Sale of franchise to conduct retail store as part of chain - Representations involving statements of opinion found to convey that the opinion was honestly held upon rational grounds involving an application of expertise - Defence that contract included acknowledgement that applicants had not been induced by any representations, clause held ineffective against Trade Practices Act - Directors liable as persons involved in contraventions - Appropriate measure of damages in case where applicants continued to trade for several years though incurring losses - Applicants bound by unexpired lease - Broad view appropriate in assessment of damages - Matters to be taken into account - Variation of agreement under s.87.
Trade Practices Act 1974, ss.52 and 59(2)
Global Sportsman Pty. Ltd. v. Mirror Newspapers Pty. Ltd. (1984) 2 FCR 82
James v. Australia and New Zealand Banking Group Ltd. (1986) 64 ALR 347
Petera Pty. Ltd. v. E.A.J. Pty. Ltd. (1985) 7 ATPR 46884
Yorke v. Lucas (1985) 59 ALJR 776; 61 ALR 307
Enzed Holdings Ltd. v. Wynthea Pty. Ltd. (1984) 57 ALR 167
Gould v. Vaggelas (1985) 157 CLR 215
Gates v. City Mutual Life Assurance Society Ltd. (1986) 63 ALR 600
Neilsen v. Hempston Holdings Pty. Ltd. (1986) 65 ALR 302
HEARING
SYDNEY
#DATE 25:2:1987
ORDER
There be judgment in favour of the applicants against each of the first, second, third and fourth respondents in the sum of one hundred and twenty-nine thousand, three hundred and twelve dollars ($129,312-00).
The franchise agreement referred to in the amended statement of claim made between the applicants and the fourth respondent be varied to the extent necessary to exclude any obligation the applicants may be under pursuant to the terms of the said franchise agreement to make any further payment and to exclude any other obligation of the applicants to the fourth respondent thereunder.
The first, second, third and fourth respondents pay the applicants' costs of and incidental to the proceedings, to be taxed if not agreed.
NOTE: Settlement and entry of orders is dealt with in Order 36
of the Federal Court Rules.
JUDGE1
The applicants claim that the fourth respondent was guilty of contraventions of s.52 and s.59(2) of the Trade Practices Act 1974, and that the first respondent Mrs. Slatyer, the second respondent Mr. Slatyer, and the third respondent Mr. Tiekle, who were the fourth respondent's directors and were all actively engaged in its business, were persons involved in those contraventions within the meaning of s.82 as interpreted by s.75B.
The applicants are husband and wife. Mr. Bateman is and was at all relevant times employed by Qantas Airways as a flight attendant. Mrs. Bateman, when she thought her children had reached a sufficient age, sought suitable employment, and obtained work in a shop conducted by the fourth respondent (which I shall call "the company") at Birkenhead Point. The company specialised in the retail sale of decorative household goods and furnishings. Mrs. Bateman became friendly with the three directors and came to be regarded by them as a suitable person to manage such a shop. She was in due course transferred to the position of Manager of an associated shop at Bondi, and later still, and more briefly, as Manager of another at Double Bay. In these positions, although she was conducting the shops during their hours of opening, and monitoring their stocks, she worked under a considerable degree of supervision, and I am satisfied that she had no real understanding of their true financial position. Rather she made the dangerous acquisition of a little knowledge of apparently flourishing activities.
In the second half of 1982, when Mrs. Bateman had been working for the company for some two years, the company became involved in the vigorous promotion of franchises to operate "Barbara's House and Garden" stores in New South Wales and beyond. The promotion was portrayed as the natural expansion of an outstandingly successful business, but financial statements tendered in evidence suggest it was in fact an attempt to keep a foundering business afloat by getting in substantial franchise fees.
Just before Christmas 1982 Mr. and Mrs. Slatyer told Mrs. Bateman, whose work at Double Bay was coming to an end because a franchisee was taking over, that they did not have any position to which to transfer her. Mr. Slatyer suggested that she could work as manager in a new Hurstville store to be opened by a franchisee. Shortly after Christmas, Mrs. Bateman told Mr. Tiekle that she would be submitting her resignation. Mr. Tiekle said he would not accept it, and then informed Mrs. Bateman that the proposed franchisee for Hurstville had proved unsatisfactory, and suggested that she and her husband (who was then in London on his duties as a flight attendant) might take the franchise. When Mrs. Bateman replied that she did not think they could afford it, Mr. Tiekle responded:
"Well, when Rick (i.e. Mr. Bateman - all the parties were by then on friendly terms) gets home get him to ring me and tell me what assets you have, and we will figure it out from there."
About mid-January 1983, when Mr. Bateman had returned, he telephoned Mr. Tiekle to say he did not think they could afford to take a franchise of a store. Mr. Tiekle asked him to call with a list of his assets, and a couple of days later Mr. and Mrs. Bateman did call at the Birkenhead premises of the company, where they met Mr. Tiekle and Mr. and Mrs. Slatyer. The conversation was with Mr. Tiekle because Mr. and Mrs. Slatyer, particularly Mrs. Slatyer, were interrupted from time to time by telephone calls. Mr. Bateman said he owned a house at Maroubra jointly with his brother (an inheritance from one of their parents), and also a terrace house in Surry Hills and some land at Dubbo, subject to some outstanding debt. The house at Maroubra was where Mr. and Mrs. Bateman lived. Mr. Tiekle said words to the effect:
"You can afford to buy this franchise."
Mr. Bateman said he was quite apprehensive, but Mr. Tiekle insisted that he should borrow as much money as he could "because it would all be paid back within twelve months", and that he should have "no worries, all this will be paid back within twelve months, there was nothing to worry about." He gave Mr. Bateman a document, which was referred to in evidence as a "cash flow", to take to the bank to obtain a loan, suggesting the National Bank City Tattersalls Branch on the basis that "they were aware of the figures that other stores were doing." Mr. Bateman said that Mr. Tiekle told him "the figures on the cash flow were the figures that I would do in the shop. He then said that we would do better than those figures in the shop, that we would do $785,000 plus turnover in the Hurstville shop". At that time Mr. and Mrs. Slatyer were also present. Mr. Tiekle said, too, there would be a net profit of $70,000 plus on the gross annual turnover. He claimed expertise in respect of cash flow predictions and the selection of sites for "Barbara's House and Garden" stores, and he asserted that the proposition involved no risk of losing money. He described the chain of franchises as "a completely proven concept".
Mr. Bateman went to the City Tattersalls branch of the National Australia Bank with the cash flow document, which he showed to a Mr. Cameron, the branch manager. Mr. Cameron apparently said he thought the figures were unrealistically high, as a result of which Mr. Bateman returned with the document to Mr. Tiekle at his Birkenhead Point office. He told Mr. Tiekle what Mr. Cameron had said, to which Mr. Tiekle replied "that Mr. Cameron knew nothing about the turnover of the shops and the figures that they would do", but that he would provide an amended cash flow document for the bank's purposes. Nevertheless he asserted that Mr. Bateman "would actually do better figures than were on that cash flow."
About a day later, Mr. Bateman received from Mr. Tiekle the amended document which did show significantly lower figures. Mr. Tiekle reiterated that there was no risk of him losing money on this venture, and that all debts would be repaid within twelve months. Mr. Bateman went back to the bank, which granted a loan of $50,000 plus an overdraft facility of $15,000. That facility was in due course fully drawn.
On the Saturday after they were told the loan would be recommended to the bank's head office, Mr. and Mrs. Bateman went out to inspect the site of the proposed store. It was at the downstairs back of a new small shopping centre at Hurstville, still substantially unoccupied, across a road from a Westfield Centre. Mr. and Mrs. Bateman were concerned about the site, which did not seem to them to be attracting people to its vicinity. They went to Birkenhead Point again, and spoke to Mr. and Mrs. Slatyer and Mr. Tiekle on the following Monday. There was a discussion about the location of the proposed shop, Mr. Tiekle saying it was the best rent negotiation he had ever done, and that every site he had selected had proved to be excellent. He said he had researched the Hurstville site, which met all the criteria for a "Barbara's House and Garden" store. He added:
"People will flock there as soon as they know there is a "Barbara's House and Garden" shop in that complex, people will flock there."
Mr. Bateman had had no prior experience of a retail shop, and Mrs. Bateman's only experience had been that gained in the employ of the company. They deferred to the judgment of Mr. and Mrs. Slatyer and Mr. Tiekle. Mr. Bateman signed the franchise agreement, although for some reason Mrs. Bateman did not do so until considerably later. They entered into possession of the shop shortly prior to 6 April 1983, when it commenced trading.
From the beginning the performance of the shop was dismal, although Mrs. Bateman worked in it six days a week and Mr. Bateman devoted to it virtually all the time available to him in his substantial rest periods as a flight attendant between tours of duty overseas. Mr. Bateman made numerous trips to Birkenhead Point to talk to Mr. Slatyer and Mr. Tiekle about the shop's figures, which were greatly below those projected. Mr. Tiekle told him that the shop was being affected by the incompleteness of the new shopping centre, and that once the coffee shop at the front had opened its doors the figures would pick up. In fact the coffee shop did not open until the following January. Mr. Tiekle also suggested that Mrs. Bateman was "over spending". According to Mr. Bateman's evidence he was given no help to any solution, but he added, disarmingly, that after speaking to Mr. Tiekle "for some reason or other, I do not know why, I did feel better."
In addition to the other representations to which I have referred, Mr. Slatyer and Mr. Tiekle had told Mr. Bateman prior to his signing the agreement that if he and his wife wished to sell the business at any time, because of the burden of running such a business with children, they would be able to sell this business very quickly. In about September, Mr. Bateman asked Mr. Tiekle to put the shop on the market. Mr. Tiekle persuaded him to change his mind, saying Christmas was coming up, that a very big Christmas turnover could be expected, and that Christmas would fix all of the problems they had had throughout the year. In fact the Christmas result was well below the projected figure, which Mr. and Mrs. Bateman had been told would be exceeded, and the shop traded to the close of the calendar year 1983 at a loss. It has continued to do so, and has never traded at a profit.
Early in 1984, Mr. Bateman again asked Mr. Tiekle to put the shop up for sale, because as he said he was "going out the back door". Mr. Tiekle disputed that this was so. He said he would have no problem that he could foresee in selling the shop, that he received letters from people seeking franchises, and that he would endeavour to sell the shop. During the ensuing months, Mr. and Mrs. Bateman continued to carry on business, but no intending buyers ever spoke to them. In July 1984, Mr. Bateman called on Mr. Tiekle with a letter from the National Australia Bank requesting a profit and loss statement. Mr. Bateman had obtained such a statement from the accountant who was acting for Mr. and Mrs. Bateman, which showed a loss for the 1983-4 year of about $30,000, on top of a loss for the three months to 30 June 1983 of about $25,000. Mr. Tiekle looked at the profit and loss statement, and said:
"You cannot send that in to the Bank."
Mr. Bateman said:
"What am I supposed to do?"
Mr. Tiekle replied:
"Won't your accountant doctor it up?"
I comment on this conversation that it seems to me Mr. Tiekle implicitly accepted the profit and loss statement as correct. At the same time his suggested remedy presupposed that the business was to continue to be carried on. This is important, because in other circumstances it might be said that the duty of a claimant to take reasonable steps to mitigate his losses might have required Mr. and Mrs. Bateman to attempt to bring their losing business operations to an end promptly. There would have been difficulties about this, to which I shall refer in due course, but this conversation suggests that, in any case, the company through its director Mr. Tiekle was approbating their continuance in a business in which the respondents were much more expert than the applicants. The approbation was more than tacit, for Mr. Tiekle suggested that it might be a good idea to refinance the shop and that this should be done through the Royal Bank of Canada with which the company had dealings. However, he later said that on the figures given by Mr. Bateman he would "not have a hope of getting refinance through the Royal Bank of Canada," and that he "would have to accept the fact that (he) had made a bad business decision". Mr. Bateman asked whether there had been any prospective buyers, and was told there had been a number, but that they had not liked the site. Some two or three weeks after this inconclusive discussion, Mr. Bateman had a meeting with Mr. Slatyer, who also discussed the matter upon the basis the business would continue, suggesting that he would arrange for some special advertising to support the Hurstville store, in particular advertising on the steps of Hurstville railway station. This was in fact done. Mr. Bateman continued regularly to see the directors of the company to discuss the problems of the store, and continued to trade, but at a loss, and in the following year, 1985, yet another suggestion was made by Mr. Slatyer to enable the store to carry on business. This suggestion was that there should be a partnership worked out involving the respondents themselves in the business. A document was actually drawn up by solicitors, which was handed to Mr. Bateman at Birkenhead Point on 1 November 1985, but this proposal came to nothing. On 29 November 1985 the present application was instituted.
The amended Statement of Claim alleges that the applicants were induced to purchase the franchise of the Hurstville store as a result of the misleading or deceptive conduct of the respondents, and as a result of statements, with respect to the profitability or risk or other material aspects of the business activity, that were false or misleading in material particulars. Among the representations alleged were that the business would have a gross sales turnover in the vicinity of $785,000 per year, that the profits would be in the vicinity of $70,000 per year, that there was no risk of loss, that the respondents had researched the site, as experts, and it satisfied all the requirements for such a store, that the concept was proven, and that all loans obtained to set up the business would be repaid within one year. There are other allegations which it is not necessary to discuss, for I think each of those I have mentioned has been made out. Some parts of the accounts given in evidence by Mr. and Mrs. Bateman, upon examination, understandably show some minor variations, but each of them impressed me as an acceptable witness. Where they differed, I think Mr. Bateman's recollection of the discussions is probably more reliable. Although none of Mr. and Mrs. Slatyer and Mr. Tiekle gave evidence, each of them was available to do so, and appeared at the hearing in person. I gave Mr. Tiekle leave, at the request of all three of them as the directors of the company, to appear for the company also. While the respondents thus suffered the disadvantage of a lack of legal representation at the hearing, the Statements of Defence had been filed at a time when solicitors were acting, and raised what appeared to be the appropriate issues.
The failure of the respondents to give evidence in denial of the specific allegations made by Mr. and Mrs. Bateman is of course a significant matter, and enables some inferences which I think may fairly be drawn from the evidence in favour of the applicants to be drawn with greater confidence: Jones v. Dunkel (1959) 101 CLR 298.
The respondents argued that the cash flow documents could not be regarded as containing or confirming a representation that the Hurstville store would achieve an annual turnover of or exceeding $785,000, or that it would return a net annual profit of or exceeding $70,000. It was suggested (though without the support of any evidence) that the cash flow documents related to an average store. However, it is proved that assertions were made to the applicants based on those documents, as I have already outlined. The figure of $785,000 for gross sales is clearly stated in the first version of the projection, and the net profit calculated in accordance with it is actually very much in excess of the $70,000 figure given by Mr. Tiekle. Furthermore, the documents were handed to Mr. Bateman to take to the Bank in respect of an application for a loan for this particular project. Mr. Tiekle's statement that the branch of the bank, to which he directed Mr. and Mrs. Bateman, already had figures for other stores suggests that further figures, not relating to the particular store the subject of the application for the loan, would have been unnecessary. It thus tends to confirm that the cash flow projection was provided as a representation to the bank of what had already been represented to the applicants, that this particular store was expected to achieve the figures set out. The copy of the first version of the document admitted into evidence does bear a handwritten note "for average shop", but this note appears clearly to have been added in a different ink, and Mr. Bateman swore it was not written on the document which he received. The document is under the common seal of the company, but no evidence was tendered by the respondents to contradict Mr. Bateman's statement. In any case, there is the evidence of specific statements, made after the bank had queried the optimism of the projection, that the figures shown would be exceeded.
It is of course clear law that a statement of opinion cannot be regarded as false or misleading, or as misleading or deceptive, simply because it turns out to be incorrect: Global Sportsman Pty. Ltd. v. Mirror Newspapers Pty. Ltd. (1984) 2 FCR 82 at 88. But such an opinion may convey that there is a basis for it, that it is honestly held, and when it is expressed as the opinion of an expert, that it is honestly held upon rational grounds involving an application of the relevant expertise. (See James v. Australia and New Zealand Banking Group Ltd. (1986) 64 ALR 347 at 372; Geale v. Glenhoun Holdings Pty. Ltd. (1985) 7 ATPR 46970 at 46978-9.) In the present case, on all of the evidence, I find that these representations were conveyed, and that they were false. I think no serious attempt at all was made to establish a basis for the figures contained in the first cash flow projection, or indeed in the second, and the directors of the company, who had had considerable experience in enterprises of this kind, and had suffered large trading losses (if receipts in the 1983 year attributable to franchises are excluded) in each of the year to 30 June 1982 and the incomplete year to 30 June 1983, could not have believed that the figures were soundly based. The loss in the year ended 30 June 1982, in which there was no franchising, was $130,192. The reaction of Mr. Tiekle when Mr. Cameron questioned the reliability of the first cash flow document is very significant. He did not attempt to justify it to the bank. What he did was to tell Mr. Bateman (who trusted him, and was without business experience) that the bank did not know the facts, and then provide for the bank much reduced figures. Had there been a sound basis for the original projection, Mr. Tiekle would certainly have demonstrated as much to the bank. I think the evidence positively sustains the conclusion that there was no such basis, and the failure of the directors to give evidence enables me to draw that conclusion with confidence.
Senior counsel for the applicants sought to rely also on evidence that the company produced for other prospective licensees, in respect of other sites, cash flow projections sufficiently similar to what was represented to the applicants to suggest, in his submission, that the reality was the projections could not possibly have reflected a genuine individual assessment of the prospects of each site. In particular, evidence was led that a Mr. Rhodes received from Mr. Tiekle in about January 1983 a cash flow projection for a proposed franchise at Sylvania which was very similar to the first projection given to Mr. Bateman and nominated exactly the same figure of $785,000 as the total of gross sales for one year. Then on 9 March 1983 Mr. Tiekle gave a Mr. P. Hopper a document setting out a cash flow projection which he said was for a site at Strathpine, Queensland, proposed to be the subject of a franchise. Mr. Hopper's evidence was that Mr. Tiekle expressly said "that was a cash flow that had been designed specifically for the Strathpine shop." This document, which was in similar form to that initially given to Mr. Bateman, also showed the figure of $785,000 total sales, and it showed a total net profit of $69,400, substantially lower than the figure shown in the first cash flow projection document handed to Mr. Bateman, but almost identical with the $70,000 orally represented to Mr. Bateman. It is difficult to think that a location in Queensland, a location in a suburban shopping centre relatively close to Sydney, and a location in an outer suburban shopping centre of Sydney could all have had attributed to them upon a sound basis projected annual sales totalling the same figure of $785,000. However, the cash flow projections were not the subject of expert evidence or detailed analysis, nor was any expert evidence led to compare the three sites in question. In view of the conclusion I have already expressed, I have not found it necessary to reach a decision as to the effect, if any, of this further evidence.
As for the representations that there was no risk of loss, that all loans obtained to set up the business would be repaid within one year, and that the concept was proven, the evidence is that the company had only commenced franchising in September 1982, a few months before these representations were made. In the financial year to 30 June 1982 the "Barbara's House and Garden" stores had operated at a large loss, and in view of the directors' close involvement in the activities of the company it is impossible to suppose that they were unaware that the operations in the then current year were again showing a large loss, except that it was in the process of being counterbalanced by the injection of large sums received from franchising. Yet the impression deliberately sown in Mr. Bateman's mind was that the retailing enterprise represented by the "Barbara's House and Garden" chain was "a completely proven concept," and that therefore there was no risk of his losing money in the venture, and all moneys he borrowed could be rapidly repaid.
Having regard to these matters, as well as to the matters I have already discussed in relation to the cash flow projections, I am satisfied that the directors had no basis for the assertion that there was no risk of loss or the prediction that all loans obtained to set up the business would be repaid within one year or, if the statement that the concept was proven be regarded as merely a matter of opinion, for the assertion of such an opinion. I am satisfied that all three of them must have known the situation. What had been "proven" was that the concept of franchising was capable of returning large sums to the franchisor. In the circumstances, to invite persons to join the company as franchisees upon the basis that they would get the benefit of a proven concept was akin to the invitation to join in a treat which the Walrus and the Carpenter extended to the oysters in Through the Looking Glass.
On the whole of the evidence, I am also satisfied that the representation concerning the expert assessment of the site as satisfying all the requirements for a "Barbara's House and Garden" store was misleading. Expert evidence was given by a Mr. Leyshon, who was well qualified by training and experience to express an opinion about the suitability of a retail site. He has had extensive experience advising major retailers and proprietors of shopping centres concerning suitable locations for retail operations. No expert evidence was called to contradict the views he expressed, and I accept them. Mr. Leyshon categorically stated:
"I consider that the location of the Barbara's House & Garden store in the Crosswalk Centre (i.e. the subject store) is quite unsuitable."
He also said:
"The franchise location in the Crosswalk Centre Hurstville does not meet any of the criteria which I consider should be applied to choosing a site for a store in the Barbara's House & Garden chain."
Mr. Leyshon's evidence is of course supported by the inexperienced observations of the applicants prior to the opening of the store, and by their evidence of how the site in fact turned out. At the same time Mr. Leyshon's opinion suggests that the poor results achieved need not be attributed to any failing in the applicants.
The view might be taken that the statement that the site met all the criteria for a "Barbara's House and Garden" store was a statement of fact, which was simply wrong. But in the absence of evidence that the statement was made by reference to a fixed set of criteria, I think the better view is it was a statement of expert opinion. In that case, it nevertheless conveyed a representation that there were such criteria and that there was a sufficient basis upon which the opinion was honestly held that all those criteria were met. In the light of the whole of the evidence, including the uncontradicted evidence of Mr. Leyshon, I think the company did not have a sufficient basis on which to make such a representation.
A special defence is raised in the pleadings under clause 29 of the franchise agreement which reads as follows:
"This Agreement contains the entire understanding and agreement of the parties hereto concerning the matters herein contained. The Franchisee agrees and acknowledges that he has not been induced to enter into this Agreement in reliance upon, nor as a result of, any statements, representations, warranties, promises or inducements, whatsoever, whether oral or written, and whether directly related to the contents hereof or collateral thereto, made by the Franchisor, its officers, directors, agents, employees or contractors."
It is argued that this clause provides a sufficient shield to protect all the respondents against the applicants' claim.
A very similar clause was relied upon as a defence in Petera Pty. Ltd. v. E.A.J. Pty. Ltd. (1985) 7 ATPR 46884, a decision of Wilcox J. At 46887, after pointing out that such a clause would not operate to defeat an action in deceit in relation to conduct antecedent to a contract, and citing authority for that proposition, his Honour referred to a number of cases in which an analogy was seen between an action under s.52 and an action for deceit, and concluded:
"Whatever may be the effect of (such a clause) in relation to an action brought in contract, in which reliance is placed upon an alleged warranty or condition not included in the contract of sale, that clause should not be allowed to defeat a claim based upon sec.52."
I respectfully agree with Wilcox J. In Galloway v. Mapmakers Pty. Limited, an unreported decision of my own given 5 September 1985, I referred to the Petera Pty. Ltd. case and held that "such an acknowledgement cannot take a case of misleading conduct out of the Act." See also Byers v. Dorotea Pty. Ltd. (1987) ATPR 48222.
It should be clear from the foregoing that I am satisfied the applicants have made out a case that the company contravened s.52 and s.59(2) of the Trade Practices Act. The next question is whether the directors were involved in the contravention within the meaning of ss.75B and 82. To establish that they were, the applicants (for the purposes at least of sub-ss. (a) and (c) of s.75B) must show intentional participation with knowledge of the essential elements of the contraventions: Yorke v. Lucas (1985) 59 ALJR 776; 61 ALR 307.
So far as Mr. Tiekle is concerned, the evidence is that each of the representations proceeded out of his mouth or was contained in a document given by him to the applicants. So far as Mr. and Mrs. Slatyer are concerned, the evidence is that each of them participated in the meetings in which the representations were made, though each, and particularly Mrs. Slatyer, left from time to time to answer the telephone or because of some other interruption, but always to come back. Mr. Bateman specifically stated that Mr. and Mrs. Slatyer were present when Mr. Tiekle said, with reference to the figures shown in the initial cash flow projection, that the applicants would do better than a turnover of $785,000 in the Hurstville shop. It was also his recollection that both of them were present when Mr. Tiekle stated that the applicants "would make $70,000 plus net profit." In cross-examination by Mr. Slatyer, Mr. Bateman said that in the same meeting when Mr. Tiekle represented to the applicants that the site met all the criteria for a "Barbara's House and Garden" store, Mr. Slatyer himself had dismissed his (Mr. Bateman's) concern about getting into debt and about the problems of the site, saying "you don't know what you're talking about; we know everything about site selection." Mrs. Bateman gave evidence expressly confirming that Mr. Slatyer had intervened to this effect in that conversation.
Apart from the actual presence of Mr. and Mrs. Slatyer at the conversations, as directors actively involved in the business of the company with Mr. Tiekle one would expect that they would be aware of the cash flow projection which issued under the seal of the company, and did not issue as an isolated occurrence but conformably with a practice evidenced in respect of other negotiations with intending franchisees. They, as well as Mr. Tiekle, must have been aware of the trading results to which I have already referred, and must have been involved in the decision of the company to offer franchises in respect of "Barbara's House and Garden" stores. One of the ways in which that decision was implemented was by the preparation of a brochure headed with the name of the company and the words: "WHY A BARBARA'S HOUSE AND GARDEN FRANCHISE?" It is a very probable inference that all directors were aware of the terms of this brochure. The evidence shows it was in existence or under preparation at the time of the negotiations with the applicants, since one copy came into the possession of the partner of a Mr. Dear about the end of 1982, and another was given to a Mr. Hopper on 9 March 1983. The brochure refers to a "proven marketing formula". It states among other things:
"BARBARA'S HOUSE AND GARDEN STARTED FRANCHISING IN SEPTEMBER, 1982 AFTER A VERY SUCCESSFUL SIX YEARS RETAILING IN SYDNEY. THE SUCCESS OF OUR FIRST SMALL SHOP IN MCMAHONS POINT LED TO A CHAIN OF SIX SHOPS WITHIN FIVE YEARS. DURING THESE YEARS VALUABLE KNOWLEDGE AND EXPERIENCE WERE COLLECTED AND USED TO FORMULATE AN EFFECTIVE RETAIL TRADING COMPANY, CAPABLE OF MAINTAINING A LEADING MARKET SHARE IN OUR CHOSEN AREA OF RETAILING.
HAVING CREATED A SUCCESSFUL MARKETING FORMULA AND HAVING LEARNED TO AVOID THE PITFALLS, IT WAS A LOGICAL STEP TO CONTINUE OUR EXPANSION PROGRAMME THROUGH FRANCHISING. ...
LESS OBVIOUS BUT NO LESS IMPORTANT IS (sic) OUR CRITERIA FOR THE LOCATION, POSITION, DESIGN, SIZE, LAYOUT AND POTENTIAL CONSUMER ACCEPTANCE OF A STORE. PREDICTING TURNOVER AND CONSEQUENTLY, HOW MUCH RENT THE STORE CAN BEAR, CAN ONLY BE ACHIEVED ACCURATELY WITH EXPERIENCE AND PAST PERFORMANCE IN A SIMILAR AREA OR LOCATION. ...
THE RIGHTS TO A FRANCHISE AREA RATHER THAN A PARTICULAR STORE, IS DESIGNED TO PROTECT A FRANCHISEE BY ENSURING THE AREA IS LARGE ENOUGH TO SUPPORT A BARBARA'S HOUSE AND GARDEN OUTLET. ...
A FRANCHISE ENABLES YOU TO BE A MEMBER OF THE EXCITING AND FAST GROWING HOME DECORATION MARKET WITH BARBARA'S HOUSE AND GARDEN AND TO SHARE IN OUR BUSINESS PHILOSOPHY OF ALWAYS SUPPLYING GOOD DESIGN AT GOOD PRICES."
The bringing into existence of the brochure suggests that when Mr. Tiekle described the chain of franchises as "a completely proven concept", claimed to predict the turnover which would be achieved by the applicants, claimed to make a judgment about the suitability of the site on the basis of criteria for a "Barbara's House and Garden" site and, without referring to the continuing losses sustained by the "Barbara's House and Garden" stores, made statements calculated to assure the applicants that a "Barbara's House and Garden" store would in fact be very successful, he was not steering the company in a direction of his own but was following a course previously plotted by its directors.
Having regard to these considerations, and the failure of Mr. and Mrs. Slatyer to give evidence denying any of the facts pointing to their participation or rebutting the inferences arising from those facts, I am satisfied that not only Mr. Tiekle but each of them was, with one exception, a party involved as an intentional participant with the requisite knowledge in each of the contraventions of the Act which I have found occurred. The sole exception is that I do not think the applicants have discharged the onus of showing that Mrs. Slatyer knew that the representation that the site had been researched expertly and that it satisfied all the requirements for a "Barbara's House and Garden" store was other than correct.
I have not overlooked the argument referred to in Yorke v. Lucas (61 ALR at p 313) that a person by whose own acts a company incurs vicarious responsibility may not be properly described as an accessory to its contravention of the Act, but I accept Enzed Holdings Ltd. v. Wynthea Pty. Ltd. (1984) 57 ALR 167 at 178 and James's case (supra, at 383) as authorities in favour of the rejection of that argument. In any case, the terms of s.75B are not limited to sub-ss. (a) and (c). I hold that Mr. Tiekle is liable pursuant to that section.
In this case there is no need to discuss at any length the question of inducement. I am satisfied that the applicants entered into the franchise agreement, and accepted an assignment of the lease of the shop, as a result of the misleading and deceptive conduct, and the statements which were false and misleading in material particulars, which I have found established. It is true that the assignment of the lease was only signed by Mrs. Bateman many months after the opening of the store, and that at that time she was aware of facts pointing to at least some of the respects in which the representations had been misleading. However, her husband had signed the document at the time the business opened, a substantial sum had been raised by mortgage of her husband's property for the purposes of the business, substantial sums were tied up in it, and it seems to me the eventual signature was but a consequence, for her as well as for her husband, of their entry into the business upon the inducements I have found. Also, on the evidence the representations were continued, and I am satisfied that she was still influenced by them. I do not think she had arrived at any clear understanding as to why what had been said to her by persons whom she trusted, and with whom she was on terms of friendship, had not up to that time been borne out. Cf. Gould v. Vaggelas (1985) 157 CLR 215 at 228.
The appropriate measure of damages to apply, in a case involving misleading or deceptive conduct and the making of false statements, has been recently considered in the High Court in Gates v. City Mutual Life Assurance Society Ltd. (1986) 63 ALR 600. In the joint judgment of Mason, Wilson and Dawson JJ. at 607 reference was made to the measure of damages in deceit as stated by Dixon J. in Toteff v. Antonas (1952) 87 CLR 647 at 650:
"In an action of deceit a plaintiff is entitled to recover as damages a sum representing the prejudice or disadvantage he has suffered in consequence of his altering his position under the inducement of the fraudulent misrepresentations made by the defendant."
The joint judgment comments:
"As his Honour then pointed out, it is a question of determining how much worse off the plaintiff is as a result of entering into the transaction which the representation induced him to enter than he would have been had the transaction not taken place. This entitles the plaintiff to all the consequential loss directly flowing from his reliance on the representation (Potts v. Miller (1940) 64 CLR 282 at 297-8; Doyle v. Olby (Ironmongers) Ltd. (1969) 2 QB 158), at least if the loss is foreseeable (see Gould v. Vaggelas (1985) 157 CLR 215 at 224)."
At p.609 the joint judgment states:
"The courts are not bound to make a definitive choice between the two measures of damages (i.e. the measure in contract and the measure in tort) so that one applies to all contraventions to the exclusion of the other. However, there is much to be said for the view that the measure of damages in tort is appropriate in most, if not all, Pt V cases, especially those involving misleading or deceptive conduct and the making of false statements. Such conduct is similar both in character and effect to tortious conduct, particularly fraudulent misrepresentation and negligent misstatement."
In Doyle v. Olby (Ironmongers) Ltd. (supra, at 167) Lord Denning M.R. said of the measure of damages in fraud:
"The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement."
He specifically referred to consequential losses "in trying to run a business which has turned out to be a disaster for (the plaintiff)." In that case the plaintiff was allowed consequential losses over a period of three years, the Court considering he had not acted unreasonably in continuing to attempt to carry on the business for so long. Lord Denning M.R. at 167 said:
"It is a case for assessing damages at large, much as a jury would do."
Sachs L.J. said at 171 that the Court "should approach the matter on a broad basis".
In Gould v. Vaggelas (supra) a majority of the High Court held that in a case where trading losses flowed directly from a fraud the measure of damages adopted in Doyle's case was appropriate. As to whether the trading losses did flow directly from the misrepresentations in that case, or were due to the plaintiff's own unreasonable conduct in continuing to operate a losing business, Brennan J. at 256 said:
"The company was not obliged to close the business or sell the resort when, or if, it was found to be less profitable than it had been represented to be. A decision to carry on the business in which the company had invested more than $2 million is not lightly to be regarded as unreasonable even if, with hindsight, the prospect of trading profitably is seen to have been small."
Both Doyle's case and Gould v. Vaggelas were referred to in the joint judgment of Wilson, Deane and Dawson JJ. in Burns v. M.A.N. Automotive (Aust.) Pty. Ltd. (Full High Court, unreported, 16 December 1986) as cases where "the injured party was tricked into buying a business" and "was locked into a situation from which he could not escape". In a situation where that could not be said, they rejected an entitlement to damages in contract for losses which, it was held, need never have been incurred.
In Neilsen v. Hempston Holdings Pty. Ltd. (1986) 65 ALR 302 at 313 Pincus J. said:
"It does not follow from Gould v. Vaggelas, as I read that case, that the necessary causal link between losses associated with running the business and the misleading statements may be held to exist only so long as the applicant remains misled. He may reasonably take the view that, rather than sell straight away at a considerable loss, his interests are better served by holding on in the hope of an improvement."
Similarly, in Corbidge v. The Bakery Fun Factory Fun Shop Pty. Ltd. (1984) 6 ATPR 45677 at 45690 Woodward J. held that an applicant bound by the terms of a lease could not be said to have acted unreasonably in continuing to trade after "it had become clear that the business was most unlikely to become profitable".
In a number of cases it has been pointed out that, in claims of this kind, it may be appropriate to take a broad view of the assessment of damages, which are not always capable of precise calculation: Doyle's case (supra); Brown v. Jam Factory Pty. Ltd. (1981) 53 FLR 340 at 354; Yorke v. Ross Lucas Pty. Ltd. (1982) 69 FLR 116 at 131; Chippendale Printing Co. Pty. Ltd. v. Spunaline Pty. Ltd. (1985) 7 ATPR 47137 at 47142; A.J. Thompson Pty. Ltd. v. K.L.K. Manufacturing Pty. Ltd. (1986) ATPR 47875 at 47890; Neilsen v. Hempston Holdings Pty. Ltd. (supra, at 317); Remedios v. Kentucky Homes Pty. Limited (unreported, Pincus J., 11 July 1986); and see Burns v. M.AN. Automotive (Aust.) Pty. Ltd. (supra, at 7) where Gibbs C.J. said:
"The truth is that the evidence is such that the assessment of damages in the present case is little better than guesswork."
In that situation the plaintiff suffered the consequences of the Court's inability to allow for some items for which allowance might have been made had the evidence been less "confused and imprecise". But except in such an extreme case, a court will do its best to estimate where it cannot precisely ascertain. "(C)ourts ... are called upon ... every day," as Woodward, Toohey and Pincus JJ. said in their joint judgment in Commonwealth of Australia v. Henderson (unreported, 30 May 1985), "to do the best they can with the material before them."
In the present case, it has been proved that in the quarter of a year to 30 June 1983 a loss was sustained of $25,584-00, that in the year to 30 June 1984 there was added a loss of $29,018-00 and in the year to 30 June 1985 yet another loss of $20,294-00. Losses appear to have continued since at a somewhat lower rate and the applicants claim a further sum of $14,811-00 in respect of the year to 30 June 1986.
In addition, the applicants' counsel argues that I should allow some $58,000-00 for payments yet to be made under the lease of the shop and a separate lease in respect of shop fittings. The lease of the shop will continue to run until 28 February 1988, and will involve payment of significantly larger amounts than those claimed. Further, counsel argues I should allow a sum of $65,000-00 in respect of the cost of entry into the franchise and setting up the shop, that being the amount borrowed from the bank for this purpose. Finally, counsel claims I should allow a sum of $55,000-00 described as "losses on current stock", and a sum of $16,800-00 as lost wages in respect of the time and effort put in by Mr. Bateman during his rest periods after tours of duty overseas. The total amount thus claimed is $284,587-00.
As regards the claim for losses on current stock, this was argued on the footing that stock held at 30 May 1986 would require to be disposed of and that the winding-up of a business running at a loss would involve the forced sale of the stock. However, there was no suggestion that the business was in fact being wound-up, nor was there any evidence that the best method of disposal, in order to achieve the highest return, would in the particular circumstances be by way of a forced sale. The evidence left it a matter of guesswork what such a sale, if held, would return to the applicants. In any case, counsel's argument, as put, depended upon the assumption that it was appropriate for the business to have continued until 30 May 1986 and for me to assess damages on that footing. For reasons to be discussed when I deal with the question of the applicants' trading losses, I do not think the assumption is correct. Nor does the evidence permit me to assess any reasonably precise figure to be applied as at any other date. In this regard, the onus being on the applicants, I should only allow an amount which I can fairly estimate as the minimum of the loss, not a figure which if the applicants had proved their case more precisely might have been proved, but might on the other hand have been shown to be too high.
So far as the claim for lost wages is concerned, there is no evidence that Mr. Bateman was previously earning wages during his time off, or that he would have done so in any other circumstances than those of the franchise in question. Therefore I do not think lost wages is an appropriate claim to allow in this case. However, an item of damage to be taken into account, though not capable of precise calculation, is the burden of the compulsion under which Mr. and Mrs. Bateman found themselves, as a result directly flowing from the contraventions I have found proved, to make particular efforts, over and above what would ordinarily have been required, in attempting to rescue the business. I think I may take this into account by declining to deduct from the trading losses claimed an amount of $5,000 drawn by Mr. Bateman from the business for private purposes. Cf. Yorke v. Ross Lucas Pty. Ltd. (supra).
As for the fixtures and fittings, the applicants' claim is based on the balance of lease payments to be made up to March 1987, the expiry date of the lease of these items. There is a residual value of $5,000 under the terms of the lease, but there is little else in the evidence to indicate what the value of the fixtures and fittings may be. The evidence does not show what other purposes the fixtures and fittings would usefully serve apart from their use in the particular kind of shop presently operated. In the circumstances of this case, it seems to me the appropriate approach to the assessment of damages, as regards this item, is to allow the rental as an expense in the calculation of losses for the period during which losses are allowed, but to make no further allowance one way or the other. If the items have a value over and above the further payments made and to be made after that date, that value may well be counterbalanced by other obligations in respect of the shop such as the obligation to restore and repaint under the lease of the premises.
The applicants do not claim the full amount of the rental payments to be made under the lease of the premises to the end of the term. In the submission he put to me, senior counsel stated:
"It is recognized that the term of the rental is unrealistic as a measure of damages. However in the light of the evidence about the site, it must be accepted that difficulty will be experienced in re-letting the shop. Accordingly the damages have been calculated by allowing six months for this purpose, viz; 6 x $7600 = $45600."
There are of course difficulties whatever approach one takes to this problem. The fundamental difficulty is that there was no evidence adduced in the applicants' case of any attempt to renegotiate the lease, or to obtain the landlord's consent to a change of use of the premises or to an assignment or an early termination of the lease. The evidence shows that Mr. Tiekle, who negotiated the lease, and Mr. Slatyer were experienced at negotiating leases of retail shops, as well as in the conduct of such shops. Evidence was also called in the case of the respondent Mr. Slatyer from a leasing consultant who was a former leasing executive of Westfield Limited, but he was not cross-examined to suggest, nor was it suggested by any other witness, that the rental of the applicants' shop was not an appropriate rental.
In that situation, I do not think I should regard this shop as incurably stricken with unprofitability, but simply as unprofitable for the present type of business. Of course, the lease restricts its use to such a business; however, the plight of the applicants is hardly likely to advantage their landlord, and neither a sensible change of use nor an appropriate assignment can be ruled out as impossible in the absence of evidence. An assignment was at one time contemplated by Mr. Bateman and Mr. Tiekle.
The question then is for how long, in the circumstances of this case, could the applicants have continued to sustain losses in the conduct of the shop, while remaining entitled to claim that those losses flowed directly from the respondents' contraventions of the Trade Practices Act? The cases I have already discussed afford guidance, but ultimately the question must be answered upon the evidence in this particular case. A number of aspects of that evidence unite to support the view that the applicants should not be regarded as unreasonable in persisting for quite a substantial period in an attempt to trade their way out of trouble. In the first place, although I am not satisfied that ultimately their position was beyond other remedy, it was clearly very difficult. The lease did contain a covenant restricting the use of the shop, and its term was five years. They had mortgaged for the purposes of that particular business the property which was their home and in which Mr. Bateman's brother (who had consented to the mortgage) had a half interest. They could not easily extricate themselves from a situation which had been brought about by the misrepresentations of the respondents. Furthermore, both Mr. Tiekle and Mr. Slatyer actively encouraged them to continue trading, and at least for a lengthy period the misrepresentations were effectively continued. Even as late as November 1985 the respondents were still endeavouring to enter into arrangements with the applicants to secure the continuance of the business. It is a possible view that the applicants were entitled, at least until then, to act as the respondents themselves clearly desired.
But I have come to the conclusion that what the applicants have established is that it was reasonable to continue at least until a fair trial had been made of Mr. Slatyer's promotion of the shop by special advertising, particularly at Hurstville railway station. This was first mooted some weeks after the conversation with Mr. Tiekle in July 1984, when he had suggested attempting to continue in business in the shop by persuading an accountant to "doctor" the profit and loss statement in order to secure an extension of bank credit. The advertising must have taken some time to arrange, and a further period must have been required for its effects to become apparent. The period up to Christmas 1984 seems an appropriate period during which to assess this effort to reverse the fortunes of the shop. After that, it seems to me the applicants might have been expected to approach their landlord seeking appropriate variations of the lease, and to set about endeavouring to find an assignee prepared to take the shop upon some basis acceptable to the landlord. Of course that process may have been quite lengthy, even if successful, and, however effected, an assignment would have been likely to have resulted in some further losses in respect of current stock. The fact that no attempts of this kind were made, and the fact that there was no evidence of the landlord's attitude or of the kinds of business to which the site was suited, make it impossible to reach precise conclusions. Doing the best I can on the evidence before me, I think it is appropriate to allow the losses proved to have been incurred up to 30 June 1985, but without allowing any further figure for loss in respect of the stock as at that date, on the footing that if I were to reduce the period in favour of the respondents (as I would otherwise be inclined to do) I would have to make some such further allowance, and that these aspects approximately cancel each other out.
The respondents submitted that in view of the heavy reliance of the business on imported products and the collapse of the Australian dollar, I could not be satisfied the losses sprang from the misrepresentations. But it was conceded that the impact of the exchange rates changes would have been felt rather in the 1984 year, while the business lost from the beginning. Furthermore, the test of liability for the losses is whether they flowed directly from the misrepresentations, not whether there was no other contributing factor. The respondents also argued that there was an overlap between the claim for setting up expenses and the claim for trading losses in the first three months. The applicants' accountant conceded that there may have been some setting up expenses included in the trading figures for that period. Apart from this problem, it was not suggested that there was any doubling up involved in the claim for capital expenses and the claim for trading losses.
In an attempt to estimate the amount of setting up expenses which may have been charged to the trading account in the first three months, I have calculated the loss which would have been incurred in that period on the assumption that the rate of loss was the same as over the ensuing twelve months. On this footing the loss would have been $7,254. But, of course, the business would probably have lost at a higher rate in the initial months, before its presence became known in the area. Also, there is specific evidence that both the applicants and the respondents considered the business was adversely affected, until 4 January 1984, by the empty appearance of the front of the building where the showpiece shopfront had been intended to be a coffee shop which remained unoccupied. Therefore the losses incurred in the year ended 30 June 1984 are likely to have been incurred more heavily in the first half of the financial year than in the second. That this was so is also borne out by the improved, though still losing, trading results of the following year. Taking these factors into account, and doing the best that I can, I allow an amount of $15,000 only for trading losses of the first three months. To that figure I add the trading losses of the ensuing two financial years, arriving at a total for trading losses of $64,312. In addition, I allow the previously mentioned figure of $65,000 capital thrown away.
I have considered whether I should make some reduction for the benefit of an available tax deduction in respect of the trading losses sustained by the applicants. See Neilsen v. Hempston Holdings Pty. Ltd. (supra, at 315-317), but cf. Milner v. Delita Pty. Ltd. (1985) 61 ALR 557 at 576. I think it would clearly be inappropriate to do this in the present case, in which there seems no prospect of profits to be enhanced by a tax deduction. Accordingly, it is unnecessary for me to consider whether such an allowance should generally be made in cases of this kind.
In the result I award the applicants damages in the sum of $129,312 plus costs. In addition, I think it is appropriate I should order that the franchise agreement between the applicants and the fourth respondent be varied to the extent necessary to exclude any obligation the applicants may be under, pursuant to the terms of the said franchise agreement, to make any further payment, and to exclude any other obligation of the applicants to the fourth respondent under the franchise agreement. Similar orders were made in Corbidge's case (supra, at 45690) and Milner v. Delita (supra, at 581). See also Mr. Figgins Pty. Ltd. v. Centrepoint Freeholds Pty. Ltd. (1981) 36 ALR 23. I make the additional orders in the exercise of the powers conferred by s.87 of the Trade Practices Act, and having regard to the particular matters taken into account in the assessment of damages.
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