Billy Baxters (Franchising) Pty Ltd v Trans-It Freighters Pty Ltd & Ors
[2009] VSC 207
•28 May 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 10305 of 2006
| BILLY BAXTERS (FRANCHISING) PTY LTD (ACN 089 180 156) | Plaintiff |
| v | |
| TRANS-IT FREIGHTERS PTY LTD (ACN 076 074 210) (as trustee for the Pollard Family Trust) AND OTHERS | Defendants |
And
| TRANS-IT FREIGHTERS PTY LTD (ACN 076 074 210) (as trustee for the Pollard Family Trust) AND OTHERS | Plaintiffs by Counterclaim |
| v | |
| BILLY BAXTERS (FRANCHISING) PTY LTD (ACN 089 180 156) | Defendant by Counterclaim |
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JUDGE: | HARPER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 2-6, 9-13 FEBRUARY 2009 | |
DATE OF JUDGMENT: | 28 MAY 2009 | |
CASE MAY BE CITED AS: | BILLY BAXTERS (FRANCHISING) PTY LTD v TRANS-IT FREIGHTERS PTY LTD & ORS | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 207 | |
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FRANCHISE – Chain restaurant - Claim by franchisor for unpaid fees and levies – Repudiation of franchise agreement - Execution of lease prior to execution of written franchise agreement – Whether statements about projected turnover and reasonableness of rent misleading and deceptive – Whether relied upon by franchisee – Whether unconscionable conduct – Whether an agreement to enter a franchise agreement existed at the time the lease was signed - Whether compliance with Trade Practices (Industry Codes – Franchising) Regulations 1998.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff/Defendant by Counterclaim | Mr P. Crennan | Macpherson &Kelley |
| For the Defendants/ Plaintiffs by Counterclaim | Mr G. Rice | Voitin Walker Davis as agents for DMAW Lawyers |
HIS HONOUR:
Introduction
Jetty Road in Glenelg, South Australia, is a prime tourist precinct on the outskirts of Adelaide. It embraces the Glenelg terminus of a tram running from the city centre to Glenelg beach. For this and other reasons it attracts large numbers of tourists, as well as many visitors from other parts of Adelaide. In early June 2004 the first defendant, Trans-It Freighters Pty Ltd, as a franchisee of the plaintiff, opened a Billy Baxters[1] restaurant at 20 Jetty Road in premises owned by a member of what is known in Adelaide as the Polites Group of companies. The opening was accompanied by high expectations of success. But the venture failed to meet those expectations. The plaintiff now claims unpaid royalties and an advertising levy - for both of which, it alleges, the franchise agreement made provision. For their part, the defendants assert that statements made to them by a representative of the plaintiff about likely turnover and profit led them to believe that a Billy Baxters franchise would open the doors of a highly successful enterprise. The statements, they say, were wrong. They also claim that the plaintiff is in breach of (a) certain provisions of the Trade Practices Act 1974 which deal with unconscionable conduct; and (b) the Trade Practices (Industry Codes – Franchising) Regulations 1998 (“the code”) which were made under the Act. What is - very sadly – certain, is that the franchise paved the way to financial disaster.
[1]There is no apostrophe in the name of the company, whereas its trade mark includes the expression “Billy Baxter’s”. I have adopted the form appearing in the name of the company, omitting the apostrophe in all cases except where its function as indicating the possessive is clearly appropriate.
It may be helpful to expand somewhat on that very brief background summary. The parties first met on 18 March 2004. A formal franchise agreement was later entered into – but, for reasons which have no particular relevance, this did not happen until 7 June. In the meantime, the fit-out of the premises in Billy Baxters livery had commenced in April, and had been completed before the business opened on 17 June. It is the plaintiff’s case that, proceeding under the firm expectation that a franchise agreement would be, but on the basis that it had not yet been, made between them, the parties during the course of May and June exchanged the pre-contractual documentation required by the law which regulates the relationship of franchisor and franchisee. They also prepared for the anticipated opening in June. Then, as from 7 June, the one and only franchise agreement between the parties came into effect.
The defendants’ case is, of course, very different. They maintain that, buoyed by being told by a representative of the plaintiff that he thought that the rent was affordable because the business would generate a turnover of some $1,300,000, and in the knowledge that they already had a (somewhat informal, but nevertheless binding) franchise agreement with Billy Baxters as from 23 March at the latest, they caused Trans-It Freighters to enter into the Jetty Road lease on 24 March. But the business did not turnover $1,300,000, the rent was not affordable, and the plaintiff had not by 23 March got the required pre-contractual paperwork in order. The plaintiff is therefore guilty of misleading and deceptive conduct, of failing to meet the pre-contractual obligations of a franchisor, and of unconscientious behaviour. And whereas in other circumstances the defendants may have been able to avoid the consequences of these delinquencies on the part of the plaintiff, in this instance they could not. After 24 March the defendants were tied to Billy Baxters come what may, because after that date they could not escape from the lease.
Billy Baxters is a chain of licensed cafés and restaurants “with a distinctive décor based on a cartoon character called Billy Baxter serving a range of light and main meals, mainly situated in shopping centres and shopping strips”.[2] According to the information given to prospective franchisees, its “business philosophy is to provide quick, efficient service, value for money meals and most importantly to have fun when doing so, constantly striving to exceed the customer’s expectations”.[3] When developing the concept, it was decided that “it had to be friendly, be a fun place, not too serious, with character and personality”.[4] The “design criterion is that the premises should feel warm, inviting and comfortable. Our intention is not to portray an exclusive look that may intimidate people”.[5]
[2]T.64.
[3]CB.1169.
[4]Ibid.
[5]CB.1172.
The Allegations
Billy Baxters’ Claim
In its further amended statement of claim filed on 5 February 2008 (“the statement of claim”) the plaintiff pleads that on or about 17 June 2004 it entered into a franchise agreement with the first defendant. It alleges that the agreement was to run for five years from 8 June 2004 to 7 June 2009, and obliged Trans-It Freighters Pty Ltd to contribute each week to an advertising fund maintained by the plaintiff. That contribution was set at 1% of the franchisee’s gross sales. The statement of claim goes on to allege, and the defendants do not dispute, that Trans-It Freighters Pty Ltd agreed to pay to the plaintiff, again weekly, a service fee calculated at 8% of such sales. The agreement provided for interest on any outstanding monies at 1.5% per month, to be calculated daily. But it is common ground that Trans-It Freighters Pty Ltd has not since November 2004 paid either the service fees or the advertising levy. As at 6 May 2007, the arrears for each (including in each case GST and an amount representing interest) is alleged to be, respectively, $225,104.77 and $28,155.03 - a total of $253,259.80.
The plaintiff also alleges that, by a “notice of termination” dated 7 May 2007, Trans-It Freighters Pty Ltd “terminated” the franchise agreement. The defendant admits that termination. As the context makes plain, however, the plea that the plaintiff ought appropriately to have included in its statement of claim was that, by the notice of 7 May, the first defendant repudiated the agreement. At all events, the statement of claim then proceeds to allege that, in breach of its obligations under the agreement, Trans-It Freighters failed from that date to conduct a Billy Baxters’ franchise at the Jetty Road premises. Instead, it operated another café known as the Drift Café Restaurant. The defendants accept that this is so.
The plaintiff, or so the statement of claim would have it, accepted the repudiation. As a consequence, the franchise came to an end on the date of the “notice of termination” - 7 May 2007. Hence there is no claim for weekly contributions after this time. On the other hand, the plaintiff seeks damages equal to the amount of the service fees (at 8% of the Drift Café Restaurant’s gross sales) which it claims have accrued but remain unpaid for the period beginning on 7 May 2007 and ending, two years later, on 7 June 2009.
The plaintiff also sues on the guarantees given on 17 June 2004 by the second and third defendants, Ross and Sue Pollard. They are husband and wife. Each is a director of Trans-It Freighters Pty Ltd. The claim here is for the amount allegedly owing by their company to the plaintiff, as well as for damages for its alleged breach of covenant for operating the Drift Café Restaurant.
The plaintiff initially raised a plea of misleading and deceptive conduct by Trans-It Freighters Pty Ltd in warranting that it had not relied on any representations before signing the franchise agreement. This was, it seems to me, an allegation of doubtful merit. It was based on the fact that the plaintiff’s franchise agreements contain a standard clause to the effect that, if any relevant representations were made by the plaintiff, the franchisee did not rely upon them. Having signed up to this, the first defendant in this case asserted in its defence and counterclaim that representations were made, that they were false, and that the defendants did rely upon them. So (as the plaintiff once contemplated arguing) the defendants’ statement – a statement which was incorporated into the franchise agreement - that they did not rely on any representations, was necessarily false; and, accordingly, misleading and deceptive. Yet, acting on the truth of the statement that there was no reliance, the plaintiff entered into the franchise agreement, which otherwise it would not have done.
That plea was (wisely, I think) not pursued at trial. Nor did the plaintiff press the plea that the Pollards aided and abetted Trans-It Freighters Pty Ltd in such conduct.
In my opinion, the law should not and does not permit the making of assertions such as those which the plaintiff by its statement of claim initially put into the arena. It is not only that there is an element of the unethical in making representations that are not true, or not strictly so, in the expectation that they will influence those to whom they are made - and do so to the benefit of the maker - and then have the intended recipients (and, therefore, intended victims) of those representations sign a document which (falsely) purports to disavow that influence.[6] More fundamentally, the plaintiff’s case as originally pleaded was necessarily based on the notion that, although it had made false representations (the point being that, if they were true, there would be no problem and therefore no need to raise this issue) it was nevertheless entitled not only to escape the consequences, but indeed to an order that the victim provide relief to the wrongdoer. This twisted logic would have it that the maker of the misrepresentation was entitled to rely on a statement - to be found in a contract, drawn by it, which was itself false - to the effect that the victim was not influenced by the falsity.
[6]See, for example, Oraka Pty Ltd v Leda Holdings Ltd (1997) ATPR 41-558 per Burchett J. His Honour there held that an agreement obtained by a misrepresentation cannot, by incorporating within itself a further misrepresentation falsely asserting that it was not procured by the means which were in fact employed, be dressed up as something it is not.
I do not know whether those who draw pleadings are becoming attracted to allegations of this kind. It would be regrettable were they to become fashionable. If there is a risk that this might be so, it is in my opinion appropriate for the courts to express their condemnation of the practice. Litigants should not be permitted routinely to claim relief on the basis that they made false statements (in circumstances in which they intended that reliance be placed upon them, as in fact it was); that they then had the person to whom the statement was made (i.e. the victim) sign a declaration to the effect that the representations did not form part of, or affect, the relationship; and that, this declaration having been relied upon by the maker of the original misrepresentation, the victim was bound by it – if necessary, to the point that the victim should be liable to provide relief of some kind to the original perpetrator. There may be the very rare case where allegations of this kind have substance. If so, such a case would require very careful and very specific pleading.
The Defendants’ Defence
In their amended defence dated 30 May 2008, the defendants admit (in effect – as it is drawn, the amended defence is not a model of truth or clarity in pleading, or of a sound knowledge of the law) the execution of the franchise agreement between Billy Baxters as franchisor and Trans-It Freighters Pty Ltd as franchisee. It is evidenced by the document dated 17 June 2004. They also admit that (i) they served the “notice of termination” dated 7 May 2007; (ii) the franchise agreement then came to an end; and (iii) since November 2004 they have not paid the service fees or advertising levy required by this agreement. But they contend that this does not matter because they are not liable to meet these charges.
The defence alleges that a separate franchise agreement was made before that of 17 June 2004. This earlier agreement is pleaded as having come into existence “on or about 23 March” that year. I shall refer to it as “the 23 March” agreement, although at different points in the case its date has been put at 18 March, or the following day, or 23 March. The differences are significant, because the defendants rely on representations some of which, on one view or another of those variously put forward by the defendants, were made after the contract came into existence.
At all events, as pleaded by the defendants, the 23 March agreement was partly written, partly oral and partly to be implied. And, by its inherent nature, it created between the plaintiff and the first defendant, Trans-It Freighters Pty Ltd, the relationship of franchisor and franchisee. In other words, it was – according to the defendants – a franchise agreement, or at the very least an agreement to enter into a franchise agreement. The code, in clause 4, defines a “franchise agreement” as follows:
(1) A franchise agreement is an agreement:
(a)that takes the form, in whole or part, of any of the following:
(i)a written agreement;
(ii)an oral agreement;
(iii)an implied agreement; and
(b)in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and
(c)under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:
(i)owned, used or licensed by the franchisor or an associate of the franchisor; or
(ii)specified by the franchisor or an associate or the franchisor; and
(d)under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:
(i)an initial capital investment fee; or
(ii)a payment for goods or services; or
(iii)a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
(iv)a training fee or training school fee;
but excluding:
(v)payment for goods and services at or below their usual wholesale price; or
(vi)repayment by the franchisee of a loan from the franchisor; or
(vii)payment of the usual wholesale price for goods taken on consignment; or
(viii)payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.
Although a plea in contract, the reference to the 23 March agreement is included only as part of the narrative: it is not said that that agreement itself conferred any rights in addition to those enjoyed under that of the following June, or that it relieves the defendants from any of the obligations by which they would otherwise be bound. Nor is it pleaded in the defence that this agreement contained any warranty about turnover or profit or anything else the breach of which caused damage. Indeed, the defence does not plead the terms of this agreement, let alone any failure to comply with them. The defendants only seek to rely on it because the code required that, before it was made, the plaintiff provide them with certain documents and information. This, according to the defendants, the plaintiff failed to do. There are, the defendants contend, consequences of such failure. These the plaintiff must now be required to suffer.
What is pleaded, in an extraordinary series of allegations, are the facts which allegedly give rise to the existence of the 23 March agreement. Insofar as that agreement is in writing, it is – according to the defence - to be found in a “Preliminary Franchise Application Form” dated 18 March 2004. I note that Mr and Mrs Pollard are the applicants named in that form; and it includes no reference to Trans-It Freighters Pty Ltd, the eventual franchisee.
There are other reasons why the preliminary franchise application form could not form part of any contract. In short, it is plainly designed to be, and is, nothing more than preliminary. Properly understood, it is not even an application. It contains no terms of anything. Indeed, there is to be found in the body of the document a declaration that “The completion of this report places no continuing obligation on either Billy Baxters or yourself”. Rather, the document notes that it “seeks relevant information about the applicant(s)”, and that some of this information “will assist us in determining your suitability as a franchisee”.
The preliminary franchise application form concludes with a statement to be signed by the applicants. By their signature, they agree that Billy Baxters may use the information in the form to assist it to assess their application for a franchise. Another note recites that “[i]n the event that you do not proceed with the franchise after payment of the initial deposit, the deposit will be refunded to you in full”. And even if the document did contain terms that might later have been incorporated into an agreement (which it did not) there is no allegation of any such subsequent occurrence.
The oral components of this agreement are said to be conversations which first occurred on 18 March 2004 between the Pollards and the plaintiff’s South Australian and West Australian Franchise Manager (Mr Phillip Mauviel). These were continued the next day. Yet the only reference in the pleading to the contents of the conversations is to words attributed to Mr Mauviel. He is alleged to have told Mr and Mrs Pollard that they (their company is not mentioned) “had been accepted by the plaintiff to operate the franchise at the premises”. Since there is no allegation that the Pollards made an offer (the “application” does not constitute such) there was, as a matter of strict legal analysis, nothing for the defendant to accept. If the words allegedly spoken were in fact said, they could amount to no more than the plaintiff’s acceptance of the fact that Mr and Mrs Pollard had the credentials necessary for them to become Billy Baxters’ franchisees.
That portion of the franchise agreement said to be implied is allegedly constituted by a succession of events and communications that occurred from 18 to 24 March 2004. These are, respectively: (i) Mr Mauviel telling Justin Menzies, the plaintiff’s National Operations Manager, by telephone in the presence of Ross and Sue Pollard on 18 March 2004 that he wanted to offer the franchise to them, and Mr Mauviel’s subsequent statement that they had been accepted, together with his congratulations on their being the new franchisees; (ii) the payment by the Pollards of a $3,000 deposit; (iii) the presentation of a “disclosure statement” to Mr and Mrs Pollard on 19 March naming Mr Mauviel’s own company, Mauviel Holdings Pty Ltd, as the tenant of 20 Jetty Road - with the Polites Group, or a member of it, being the landlord; (iv) a statement by Mr Mauviel at the 18 March meeting that Mauviel Holdings Pty Ltd had been thus named in order to secure the premises on an interim basis, but that the lease would if the Pollards so desired be in the name of a party nominated by them - and that the plaintiff would raise on their behalf with the landlord any queries they might have about the lease; (v) the matters stated in a facsimile sent to the landlord by Mr Menzies on 19 March 2004 essentially seeking time to work through the logistics of the lease with “the new franchisees”; (vi) an email from the plaintiff’s National Leasing Manager, Frank Kersten, to the landlord on 22 March 2004 in relation to the proposed lease documents; (vii) a statement by Mr Kersten at a meeting with the Pollards and the landlord on 23 March 2004 that it was appropriate for the Pollards to sign the “instructions for lease” identifying Trans-It Freighters Pty Ltd as lessee; and (viii) payment by the defendants on, respectively, 23 March and the following day, of the initial month’s rent together with legal fees.
None of these indicia support an inference that, on the balance of probabilities, a franchise agreement had been entered into by the parties to this proceeding, or any of them. First, the conversation surrounding Mr Mauviel’s congratulations is consistent with the conclusion that the defendant was prepared to treat with the Pollards on the basis that they met the plaintiff’s criteria for prospective franchisees; and that, while Billy Baxters expected that a franchise agreement would be reached, that remained for the future. In other words, Mr Mauviel’s congratulations may have been no more that an acknowledgment that the information provided by Mr and Mrs Pollard when they signed the preliminary franchise application form had been put to the use for which it was intended – with the result that the plaintiff was satisfied of their financial and other suitability as franchisees. The alternative conclusion – that an agreement had from that moment actually been reached – is no stronger. On the contrary, as the pleadings are drawn, it is less so, in part because there is no pleading that the defendants had made an offer. Rather, they had submitted a preliminary franchise application form which expressly provided that its completion placed no continuing obligation on them. There is nothing in the defence as pleaded to suggest that the defendants told the plaintiff that they were now prepared to accept the obligations of a franchisee; nothing, in other words, to suggest a meeting of minds.
So much for the first reason why the indicia as pleaded by the defendants do not support the inference that a franchise agreement had come into existence. The second is that the payment of the deposit was, for the reasons already set out, without any binding effect. Thirdly, the disclosure statement related to another transaction. Fourthly, securing the leasehold premises (assuming that they had been secured) was something that did not involve the Pollards; it was done by agreement between the landlord on the one hand and Mauviel Holdings Pty Ltd as the prospective tenant on the other. And this arrangement, as the pleading itself indicates, was effected precisely because there was at that time no agreement between the plaintiff and the defendants. Fifthly, a statement that Mr and Mrs Pollard could nominate the tenant was as consistent with a transaction involving a lease alone as it was with one in which an existing (as opposed to a prospective) franchise agreement was an integral part. Sixthly, the correspondence between the plaintiff’s National Leasing Manager and the landlord could be seen as no more than an acknowledgement by the plaintiff that it expected interests associated with Ross and Sue Pollard to become its franchisees – not that they were already such (after all, Trans-It Freighters Pty Ltd was not then the Pollards’ nominee). It is true that, in that correspondence, Billy Baxters described Mr and Mrs Pollard (but not Trans-It Freighters, which was not then in the picture) as “the new franchisees”. That, however, is explicable as being a conveniently shorthand description of persons whose credentials as franchisees had been approved, and with whom it was expected a franchise agreement would be made. Seventhly, Mr Kersten’s statement was, as pleaded, in the same category as that of his correspondence with the landlord. Likewise, and eighthly, the payments subsequently made by Mr and Mrs Pollard to the landlord and its lawyers were consistent with their expectation that a franchise agreement would come into existence in the (near) future. The alternative inference – that the relationship of franchisor and franchisee was already extant – although open, is (in all the circumstances as these are pleaded) less likely. It follows that the defendants, being the propounders of the alternative inference, cannot discharge the burden, which is on them, to prove on the balance of probabilities that the alternative inference is made out.
The position may be summarised thus. The allegation, which is enlarged upon in the counterclaim, is that on or about 23 March 2004 the parties entered into an franchise agreement or, at the least, an agreement to enter into a franchise agreement. This triggered two relevant requirements. The first is imposed by clause 10 of the code. It relevantly provides that at least 14 days before the entry into a franchise agreement or an agreement to enter into a franchise agreement, a franchisor must give to the franchisee a copy of the code and a “disclosure document” as described in clause 6(1) of the code.
The second requirement is imposed by clause 11. So far as is relevant, it provides that a franchisor must not enter into a franchise agreement or an agreement to enter into a franchise agreement without first receiving from the franchisee (i) a written statement that it (the franchisee) had received, read and had a reasonable opportunity to understand, the disclosure document and the code; and (ii) signed statements that it had either (a) been given - by an independent legal adviser, independent business adviser or an independent accountant - advice about the proposed franchise agreement, or (b) had been told to seek such advice but decided not to obtain it.
Even at this early stage in an examination of the parties’ strengths and weaknesses, it is possible to discern difficulties in the defendants’ case. To sustain the allegations in question, the defendants must prove the making, “on or about 23 March 2004”, of a franchise agreement, or an agreement to enter into a franchise agreement, between the plaintiff as franchisor and the first defendant as franchisee. On the pleadings, and on an examination of the documents to which they refer, that agreement is not made out. Indeed, even if all the facts alleged in the pleadings were made good, and the specified documentation were read in that context, the proposition that an agreement of any kind was made on or about that date could not be established. For the reasons set out above, the preliminary franchise application form could not constitute any written portion of an agreement; what is alleged as constituting its oral portion does not fit that role; and the implications said to complete the picture fail to do so.
It might be argued that the expression “agreement to enter into a franchise agreement” encompasses not only an agreement in the sense of a legally binding contract, but also some arrangement between those involved with it which has less than binding effect. I do not accept this argument. The code is intended to accord particular protection to potential franchisees who later become actual franchisees. There is no need to give such protection to those who never become contractually bound. To express the same concept in different words, the protection given by the code is protection against being put in a position where as a franchisee or potential franchisee you have an enforceable agreement against you without having had the benefits which clauses 10 and 11 of the code are designed to provide. Those who never become subject to a binding franchise agreement or agreement to enter into a franchise agreement will receive no benefit from the clauses in question. Hence there is no point in the application of those clauses to a non-binding arrangement or understanding.
The defendants admit that the franchise agreement was terminated following the sending of their “notice of termination” on 7 May 2007, although they attribute such termination to the notice rather than to the plaintiff’s acceptance of any act of repudiation. Indeed, they fail to address the proposition that the notice amounted to an act of repudiation the acceptance of which by the plaintiff had the effect of terminating the agreement.
The defendants do plead that a letter dated 20 April 2006 from their solicitors to the plaintiff preceded the notice of termination. This was, they allege, written pursuant to clause 29 of the code. That clause is to be found in Part 4 of the code, which as its heading indicates is concerned with “resolving disputes”. It requires the complainant to tell the respondent in writing: (a) about the nature of the dispute; (b) what outcome the complainant wants; and (c) what action the complainant thinks will settle the dispute. According to the defence as pleaded, the letter “made demand upon the plaintiff to remedy the defaults and wrongful conduct” identified in the letter. But these were not capable of being remedied because they concerned allegations that documents had not been delivered in time, or that misrepresentations had been made on the basis of which action had already been taken. It is therefore not surprising that, as the defence alleges, the plaintiff failed to institute remedial action. To the extent that it was a demand for rectification, the letter was useless.
In fact, however, the letter did not make any such demand. Indeed, it conformed more closely to clause 29 of the code than a fair reading of the defence would have the reader conclude. It referred to the purported failure of the plaintiff to comply with clauses 10, 11(1) and 11(2) of the code.[7] It also made allegations of misleading and deceptive conduct in relation to forecasts about future profit and turnover. These forecasts, according to the defence, were provided to the defendants by Mr Mauviel, and constituted misleading and deceptive conduct. The result was (according to the letter) a breach of s.52 of the Trade Practices Act 1974. Thus, as the letter put it, action was required on the part of the plaintiff “to settle the dispute”.
[7]These clauses require a franchisor to give a copy of the code, a “disclosure document” and certain statements to a prospective franchisee before the relationship reaches a certain point.
The defendants, in effect, put forward a five-point plan to which the plaintiff was to give effect. First, Billy Baxters was to take an assignment of the lease of 20 Jetty Road. Secondly, the franchise agreement was to be terminated. Thirdly, the franchisees (sic) were to be given a release. Fourthly, Mr and Mrs Pollard’s costs were to be refunded. And, finally, they were to be compensated for their trading losses.
As the final thrust of their defence, the defendants say that, as a consequence of the making of the 23 March agreement and the breaches of the code in doing so, together with the making by Mr Mauviel of certain misleading and deceptive representations, five in number, the plaintiff is estopped from relying on the “franchise agreement” – an undefined term, but clearly in this context referring to the agreement they allege as having been made on 23 March, not the later agreement of 17 June.
This pleading is an example of all too common sloppiness. As with a number of concepts which lawyers should, but do not, use with precision, estoppels arise only in certain reasonably well defined circumstances. Breaches of the code are, on this point, irrelevant. So are misrepresentations of the kind pleaded. If there were to be an estoppel it would only have arisen were the defendants to have been led by the plaintiff to believe that an agreement had been reached on 23 March, when in fact it had not. If, under the impression that an agreement had been made, the defendants entered into a lease by which they were disadvantaged, then an estoppel might have arisen. But this is not how the defence is drawn. As there pleaded, the estoppel is said to be founded in the making of the 23 March agreement (a classical non sequitur, given that the plaintiff is said to be estopped from denying the existence of an agreement which - so the particular argument goes at this point - never did exist) and on misrepresentations not about the existence of such agreement, but about the potential profitability of the franchised business.
The Defendants’ Counterclaim
The defendants then raise a counterclaim. In it, they make allegations which include those to which I referred when dealing with the pleading of the 23 March agreement. In their counterclaim, the defendants allege that, in breach of clause 10 of the code, the plaintiff failed to provide them, at least 14 days before they entered the franchise agreement or an agreement to enter into a such an agreement, with a copy of the code and a “disclosure document” as described in clause 6(1) of the code. They also plead that, in breach of clause 6(2) of the code, the disclosure document sent to them (too late) under cover of a letter dated 23 March 2004, did not contain the statement set out in clause 1.1(d) of annexure 1 of the code because it did not alert the defendants to their entitlement to a 14 day waiting period before entering the agreement, or to a seven day cooling off period after they signed the agreement.
The defendants also complain, again, about the plaintiff’s failure to comply with clauses 11(1) and 11(2) of the code. It is further alleged that, in breach of clause 11(1), the plaintiff entered the franchise agreement or an agreement to enter into a franchise agreement without first receiving from the franchisee a written statement that it had received, read and had a reasonable opportunity to understand, the disclosure document and the code. And finally it is claimed that, in breach of clause 11(2), the plaintiff entered the franchise agreement or an agreement to enter into a franchise agreement without first receiving from Trans-It Freighters Pty Ltd as franchisee signed statements that it had either (a) been given - by an independent legal adviser, independent business adviser or an independent accountant - advice about the proposed franchise agreement, or (b) had been told to seek such advice but decided not to obtain it.
The defendants contend that the breaches of the code about which they complain also amounted to a breach of s.51AD of the Trade Practices Act1974. That section provides that a corporation must not, in trade or commerce, contravene an applicable industry code. The defendants point to the alleged failure to comply with clauses 10 and 11 of the Trade Practices (Industry Codes – Franchising) Regulations. They also allege a breach of s.51AA, the effect of which is that a corporation must not, in trade or commerce, engage in unconscionable conduct. Alternatively, the defendants contend, there has been a failure to comply with s.51AC. This is a long section, the aim of which is to proscribe unconscionable conduct in the business transactions of corporations. The conduct thus categorised as unconscientious is identified in the pleading as the failure to serve (or, as the case required, receive) the requisite documents. At trial, however, it seemed to encompass as well pressure allegedly placed upon Mr and Mrs Pollard to enter a lease and a franchise agreement before being able adequately to assess whether or not it would be in their interest to do so.
The defendants also plead breaches of s.52 of the Trade Practices Act 1974. These breaches are said to arise out of five representations allegedly made by Mr Mauviel to Ross and Sue Pollard. He was then acting for and on behalf of Billy Baxters; and his representations were made both orally and in the form of a spreadsheet emailed to Mr and Mrs Pollard on 19 March 2004. They concerned: (a) the rental, described at one point by Mr Mauviel as being reasonable having regard to the projected turnover; (b) the projected annual turnover itself (represented at the relevant time as amounting to $1,300,000); (c) the first year’s sales which, according to the pleading, Mr Mauviel said at another time would amount in value to $1,365,000 excluding GST; (d) the net profit (said to be $175,732 in the first year); and, finally, (e) the rent payable under the lease with the Polites Group, which at a time other than the occasion of the making of the first representation was, having regard to the projected turnover, said to be reasonable.
There is a deal of overlapping in these allegations. The first and the last of the representations are effectively identical, and therefore one is merely repetitive of the other. And apart from a disparity of $65,000 in the relevant figures, the counterclaim does not assist the reader to understand what difference there is between the “turnover” the subject of the second representation and the “sales” the subject of the third. It is a safe assumption that there is in truth no material difference, and that the two representations are more accurately described as one. Indeed, the five representations boil down, in essence, to one: that the business would in its first year generate a turnover in the vicinity of $1,300,000; and this would be sufficient to enable the franchisee to pay the rent and leave them with a profit. (I am satisfied that Mr Mauviel accurately informed the defendants that that rent would be at what could properly be described as the going market rate of $160,000 per annum).
As representations about the future, s.51A of the Act applies to require that there be reasonable grounds for making them. But, the defendants contend, those reasonable grounds did not exist. According to the defendants, the representations were false and misleading, or were likely to mislead and deceive. Yet they relied upon them, believing them to be true. They thus entered into not only the 23 March 2004 agreement, but also (on 23 March 2004) an agreement for lease, and (on 24 March 2004) a memorandum of lease. In addition, they executed the 17 June 2004 franchise agreement and the guarantees, and established the business at Jetty Road. The defendants claim that, as a result, they suffered significant losses.
Billy Baxters’ Reply
In reply, the plaintiff relies on clause 19.4 of the 17 June 2004 franchise agreement. This clause provides, in effect, that the document in which it (clause 19) is found contains the entirety of the franchise agreement, that it merged “all prior discussions”, and that the parties would be bound only by those representations which were reduced to writing and signed by or on behalf of the party making them. In any event, or so the plaintiff pleads, no binding warranties or representations with respect to the subject matter of the agreement had been given or made. The plaintiff further says that none of the facts pleaded in relation to the 23 March agreement constitute an agreement or an agreement to agree under the code, or an agreement enforceable in law or equity. Nor did Trans-It Freighters Pty Ltd have any rights or obligations in respect of the franchise before 17 June 2004; and at no time before then did the parties consider themselves subject to contract. Mr Mauviel’s conduct was merely preparatory to entering legal relations between the plaintiff and Trans-It Freighters Pty Ltd. It says that, under cover of a letter dated 23 March 2004, it did provide to the defendants both a disclosure document, which substantively conformed with the requirements of the code, and a pro forma franchise agreement. It also contends that Mr Mauviel did not have actual or ostensible authority to make any enforceable agreement on its behalf.
The last point was not pursued at the trial. Nor should it have been. Mr Mauviel clearly had at least ostensible authority to do what he did, or is alleged to have done.
In its defence to the counterclaim, the plaintiff admits that the disclosure document sent on 23 March 2004 did not include a statement about either a 14 day waiting period or a seven-day cooling off period. But, it says, the purposes of the disclosure document under regulation 6A of the code were nevertheless met. The contents of the covering letter and the fact that a copy of the code was sent with it filled all the gaps – with the exception of the necessary reference to the seven-day cooling off period. But this last point was covered by clause 2.5 of the 17 June 2004 franchise agreement, which allowed the first defendant to terminate the agreement (which was executed by the first defendant on 10 May) by written notice served on Billy Baxters not more that seven days from 17 June. Moreover, the plaintiff contends that, in any event, the defendants waived any right to object to the absence in the disclosure document itself of the reference to the waiting period or the cooling off period. Alternatively, they are estopped from denying the sufficiency of the document. This is so because they provided an acknowledgement dated 10 May 2004 and because, until the issue of the counterclaim, Trans-It Freighters Pty Ltd conducted the franchise without raising these complaints.
The plaintiff seeks to answer the alleged contravention of s.51AA by asserting that the facts as pleaded do not disclose a cause of action. Nor, it contends, were the defendants in fact under a special disability or position of disadvantage readily apparent to the plaintiff. Equally, they were not so overborne that the entry of Trans-It Freighters Pty Ltd into the franchise agreement was the result of unconscientious behaviour on the plaintiff’s part.
In response to the alleged contravention of s.51AC, the plaintiff repeats the assertion that the facts as pleaded do not disclose a cause of action. Moreover, the defendants (i) were in relatively equal bargaining positions; (ii) were not required to comply with conditions that were not reasonably necessary for the legitimate interests of the plaintiff; (iii) were able to understand (and acknowledge they had understood) the documents sent to them; (iv) were not subject to any undue influence or pressure or unfair tactics by the plaintiff; (v) paid a fair and reasonable price for the franchise rights; (vi) were treated no differently to any other prospective or existing franchisee; and (vii) did not enter into the 17 June 2004 franchise agreement or the guarantees as a result of any material non-compliance with the code. Finally, it is said that the plaintiff acted in good faith.
The defence to the counterclaim next turns to the spreadsheet provided by Mr Mauviel on 19 March 2004. Its first point is without substance. It is that the spreadsheet was provided without the plaintiff’s knowledge or consent. Mr Mauviel, however, had ostensible authority to do what he did. In any event, the defence to counterclaim goes on to assert that, as was made clear in the disclaimer which accompanied the spreadsheet, the latter document was provided for information only; and it recommended that the recipient obtain independent advice. Thus the plaintiff could not be held liable for any errors or omissions. Moreover, as the covering email said, the spreadsheet had a limited purpose: to enable the defendants to test a range of variables, including different turnover figures. At the time it was provided, Mr Mauviel also furnished the defendants with the profit and loss statements for the plaintiff’s franchises at Norwood, Golden Grove and the Myer Centre. Accordingly, and contrary to the assertion of the defendants, the spreadsheet was not a representation about anything. Its purpose was “the provision of information and assistance by which the defendants could formulate their own opinion of a range of possible sales and profit figures and the relationship between them”.[8]
[8]Reply and Defence to Counterclaim, paragraph 12(c)(v)(CB.64).
The plaintiff also pleads, in effect, that the defendants are in any event precluded from relying on any of the alleged representations. This follows, they claim, because by clause 6.13 of the franchise agreement Trans-It Freighters Pty Ltd acknowledges, warrants and represents that: (a) before the agreement was signed it had been advised to obtain legal and accounting advice about the agreement and the business: clause 6.13.1(c); (b) it had not relied on any statement, representation or warranty made by the plaintiff, its agents or employees apart from statements or the like in the agreement itself: clause 6.13.1(d); (c) the success of the business depended on the company’s own efforts, and it assumed responsibility for its success or failure: clause 6.13.2(a); and (d) the plaintiff gave no guarantee of any return on investment, or of any profit: clause 6.13.2(b). As a result the defendants are estopped (or so the plaintiff contends) from alleging that, in reliance on the alleged representations, they entered into either the agreement or the guarantees. Moreover, Trans-It Freighters Pty Ltd in fact leased the premises, executed the franchise agreement, and conducted the business; and the Pollards gave their guarantees not only on the assumption (which did not eventuate) that their daughter and son-in-law would run the business, but also “having formed an independent opinion of the suitability of the site and the viability of a Billy Baxters franchise in that location”.[9]
[9]Reply and Defence to Counterclaim, paragraph 16(c)(CB.66).
The plaintiff pleads that any loss suffered by the defendants was caused by the manner in which they conducted the business. It also contends that, if the plaintiff is liable for any loss for contravention of s.52, it is an apportionable claim under s. 87CB. Others, including Mr Mauviel and the Polites Group (as the landlord), are concurrent wrongdoers. In those circumstances, the plaintiff is only liable for that portion of any loss for which it was responsible.
So much for the pleadings, and what they do or do not reveal of the case for each party. I now turn to the facts.
The Parties’ First Contact With Each Other
In about early March 2004 Mr Mauviel realised that the premises at 20 Jetty Road were vacant. He saw them as a potential Billy Baxters café. On 8 March 2004 he wrote an exploratory letter to Peter Murphy, an employee of the landlord, one of the Polites group of companies. An interchange began. Mr Mauviel gave evidence that the plaintiff was not prepared to pay the initial asking rental, although he did not specify what the opening bid had been. I accept his evidence that, following discussions with Mr Kersten, he offered a base rental of $160,000 per annum. On his assessment, given the shop’s size and location, and in light of the rentals being paid by the plaintiff’s other franchisees in South Australia, that represented market value.[10] A term of 10 years with appropriate reviews formed part of the package discussed in the ensuing dialogue with the landlord.
[10]T.67.
On 10 March 2004, Mr Mauviel placed the following advertisement in Adelaide’s major newspaper, The Advertiser: “BILLY BAXTER’S CAFÉ FRANCHISES AVAILABLE. We have [exciting] opportunities for new Franchisees at INGLE FARM, JETTY ROAD, CITY CROSS”.[11] Contact details were given. In his evidence, Mr Mauviel said that the response to the advertisement was “overwhelming” and that he was “inundated with enquiries about the Jetty Road site. I’ve never had such a positive response to any site of that magnitude ever”.[12] Among the respondents was the third defendant, Sue Pollard, who sent an email to Mr Mauviel that day on behalf of herself and her husband. It stated in part:
[We] have often thought that a Billy’s at the Bay would be wonderful for us. There are a lot of families who go to the bay and would enjoy dining at Billy Baxters.
We live at West Beach so that site would be wonderful for us. Could you please email me all the details.[13]
West Beach is 3 to 4 kilometres north of Glenelg.[14]
[11]CB.1182. The copy reproduced in the court book is of poor quality. I have taken it that the word “exciting” has been used, although it is difficult to decipher.
[12]T.69.
[13]CB.1183-4.
[14]T.584.
Mr Mauviel obliged. On 17 March 2004 he forwarded to Mrs Pollard an information pack together with an application form. In the accompanying email he told her that the new franchise at 20 Jetty Road had generated a lot of interest and the landlord wanted them to move quickly to secure the site. The anticipated capital required would be approximately $350,000 including the franchise fee. He added that “[i]f this opportunity excites you please act quick, there is a lot of information for you to assess and time is fast disappearing”.[15]
[15]CB.1183.
The information pack forwarded by Mr Mauviel promotes the Billy Baxter franchise program as one that will provide:
a unique opportunity to develop a close business relationship supported by our operation and corporate systems, whilst at the same time providing you with the flexibility to exercise your entrepreneurial skills and business acumen. … One of the advantages of becoming a franchisee is that you are never on your own.[16]
[16]CB.1166.
The document later continues:
Before you decide how you will enter the food industry there are a number of questions you should ask yourself.
o Are you prepared to work hard and make the commitment required to own your own business?
o Do you realize that all business ventures pose some risk?
o Have you researched franchising?
…
o Which location, how much area and how much rent should you pay?[17]
Nonetheless, the document states that no previous food industry experience is required “as we provide a comprehensive training program, assistance with start-up and ongoing management support”.[18] Among the benefits of joining the plaintiff’s team, it continues, is the provision of “a whole range of support services” including “selection of a prime site”. Under the heading “Site Location” the material notes that:
Ideal sites are within leading shopping centres of more than 50,000 sq. metres, prominent strip shopping and tourist precincts.
…
Sites need to have significant passing foot traffic, good exposure, high ceilings and can be located close to entrances and cinemas.[19]
[17]CB.1168.
[18]CB.1171.
[19]CB.1171.
The information pack specifies that the initial franchise fee is $45,000. This includes covering the cost of site selection and design of the new store.[20]
[20]CB.1173.
The Meeting on 18 March 2004
On Thursday 18 March 2004 the Pollards met Mr Mauviel outside the vacant shop at 20 Jetty Road. During this meeting the first two of the five misrepresentations which are pleaded in the defendants’ counterclaim were, according to the defendants, made by Mr Mauviel. They concerned the turnover of the business. The defendants allege that during this meeting Mr Mauviel said that the proposed rent of $160,000 per annum plus GST was reasonable, having regard to the projected turnover of the franchise. This was the first representation. The subject of the second was the projected turnover itself. According to Mr and Mrs Pollard, Mr Mauviel told them that in the first year of operation turnover would be $1,300,000.[21]
[21]Paragraphs 11.1 and 11.2 of the Amended Defence and Counterclaim filed 2 June 2008 (CB.356).
The context in which these representations were made is of course relevant. Starting with Mrs Pollard, I turn to the relevant evidence, adding – where I think it appropriate to do so - some observations of my own.
Sue Pollard’s Account
According to Mrs Pollard, Mr Mauviel began the meeting with a presentation about Billy Baxters, using his laptop for that purpose. They told him that, having seen the advertisement in the newspaper and having discussed the prospect with their daughters, they were interested. They said they held a Boost Juice franchise at West Lakes shopping centre. This was managed by one of their daughters. For his part, Mr Pollard ran a transport company. Mrs Pollard was its bookkeeper. Mrs Pollard says that Mr Mauviel was pleased to learn that the Pollards had experience with a franchise because the pressure was on to get the site signed up and he did not have the time to explain “the ins and outs to you”.[22]
[22]T.333.
Mrs Pollard says that she and her husband were concerned when told that the rent would be $160,000. Given that they were paying $58,000 per annum for their Boost Juice franchise, they thought that $160,000 was “just exorbitant to us, for a site on Jetty Road or not, it was a lot of money”.[23] Mr Mauviel indicated that this was the market rent for that area. When the Pollards said that the business would have to be turning over a lot to carry that liability, Mr Mauviel assured them that it could be done. Mrs Pollard then gave the following evidence:
Ross said "well, how much do you think this site will be turning over? " And he said "oh, I really can't say that". And Ross said "well, you must have some idea", and he said "well, yes, yes, I do actually". And I can remember him standing up, gesticulating like this across the square and saying "oh, look at this", he said, "yep, yep for sure, you will be doing 1.3 million in the first year", he said as a matter of fact he said in excess, well in excess of 1.3 million in the first year. And then Ross said "oh, right. Well how do you come to that figure? " And he said "well, the store at Norwood is doing 1.1, Cavill Avenue [sic][24] is doing 2.3, 5", I can't remember exactly what it was. He said this store is going to be more like Cavill [Mall]. He said that, you know, if we go somewhere in the middle, he said you will be doing that easy. We still even after he said that … came back to the rent figure. You know, this rent is really high.[25]
[23]T.333.
[24]Cavill Mall is Billy Baxter’s outlet on the Gold Coast.
[25]T.334.
Mrs Pollard and her husband were, she said, upbeat about the venture. They told Mr Mauviel that it sounded good, and that they would have no trouble obtaining finance.[26] Later that day, Mrs Pollard returned the preliminary franchise application form, together with a deposit.[27] Although they discussed with Mr Mauviel the cost of the fitout and the need for them to pay for staff training before the restaurant opened, they did not at this stage have any information about expenses such as the cost of goods, electricity or finance. Mrs Pollard conceded in cross-examination that they therefore were not in a position to form a view about the profit the restaurant might make although, she said, her husband “is pretty good with things like that”.[28] She also conceded that, despite what she had written in her email to Mr Mauviel of 10 March, she and Mr Pollard had never, before that date, discussed operating any kind of restaurant, let alone a Billy Baxters’ franchise.[29]
[26]T.452.
[27]T.333.
[28]T.458.
[29]T.584-5.
At some point in the conversation, Mr Mauviel said, “Well, I think I have found my new franchisees, but I have just got to make a phone call to get the nod”. After making the call, which he later told them was to Mr Menzies, he said to the Pollards: “Yes, you are the new franchisees of Jetty Road: congratulations”; and then he shook their hands.
From that moment, Sue Pollard - as she told the Court - regarded herself and her husband as the franchisees for the Jetty Road site.[30] On any view, that reaction was premature. They had no lease, and although they did not doubt that an application for finance would succeed, that step too remained to be consummated.[31] All that had happened was that she had returned the (inappropriately named) preliminary franchise application form, which carried in large print and in capital letters the message that its completion by prospective franchisees placed neither them nor Billy Baxters under any continuing obligation. The information in it was designed to assist Billy Baxters to determine the financial suitability of those (prospective) franchisees. By his congratulations, Mr Mauviel indicated that a favourable determination about their financial suitability had been reached. The Pollards had never made an offer, and had never discussed the terms of any agreement. Most importantly, they had not settled the terms of a franchise agreement with the plaintiff. When these considerations are coupled with the fact that they had not examined in any detail or at all the expenses which the business would have to meet before it returned anything to their pockets, one comes to the inevitable conclusion that, had Billy Baxters then told Mr and Mrs Pollard that they were contractually bound to the plaintiff as its franchisees, they would have disagreed. As their later behaviour showed, they did not want to be rushed into signing a lease of 20 Jetty Road; and it would therefore be remarkable were they to accept that they were bound to Billy Baxters before they had secured the very premises from which they wished, and intended, to trade.
[30]T.341.
[31]T.355.
On the other hand, it is clear that both sides expected that a deal would be done. Before the meeting concluded, Mr Mauviel told them he would do everything he could to help them. This included supplying them with a spreadsheet, in the form of a template such as that which he provided to prospective franchisees such as the witness Colin Bates, a Billy Baxters’ franchisee from Bateman’s Bay. According to Mrs Pollard, he said that he would send this to them “and you can put in all your own projections”.[32] Later she elaborated, saying:
… he said I have got these tools, I have got this template you will be able to put your income, expenditures in, I will help you with it. But I will send this through to you.[33]
[32]T.337-8.
[33]T.468.
Ross Pollard’s Account
Mr Pollard gave evidence that he did not have much involvement with Mr Mauviel before the meeting on 18 March 2004 – he left that up to his wife. Nor does he appear to have seen either the email of 17 March or the information pack that was attached to it.[34] On 18 March Mr Mauviel told them that, as a prime site, he was keen to secure the premises for Billy Baxters. The landlord, however, had someone else interested. They would need to move fairly quickly. Given its location in a particularly good area, he was extremely confident that it would be a success: indeed, the flagship for Billy Baxters. So enthusiastic was he about the venture that he told the Pollards that if he did not find a suitable franchisee, he was prepared to take it on himself.[35]
[34]T.517.
[35]T.539.
Mr Pollard described the rent as “a rather frightening figure”.[36] Mr Mauviel nevertheless reassured them on more than one occasion that it would not be a problem because they would turn over in excess of $1,300,000. While Mr Mauviel said this figure was arrived at having regard both to the turnover of $1,100,000 generated by the franchise owned by him at Norwood Parade and that of the Gold Coast store at Cavill Mall (being $2,300,000 to $2,500,000), the figures meant nothing to Mr Pollard.[37] He did not take the reference to a turnover of “in excess of $1,300,000” as a guarantee – he would have accepted actual turnovers that were 10 or 20 per cent out – but he maintained that the steps taken by the defendants from that day forward were “all based on the fact that the store would do in excess of $1,300,000”.[38]
[36]T.518.
[37]T.594.
[38]T.626-7.
According to Mr Pollard, Mr Mauviel was told that the Pollard family operated a transport business and a Boost Juice bar. In response, he said that was good “because … this thing is going to happen fairly quickly, and I don't have time to explain the ins and outs of franchising, and you guys obviously know something about it. So if I had somebody who was raw I would have to spend a lot more time explaining these things”.[39] They discussed the likely fitout cost and “logistical things” such as how much to allow for staff training, as well as the franchise fee and the means by which the Pollards would raise the necessary funds. On the other hand, important issues remained unsettled. One example was the date of commencement of the franchise. Another was how long it would run; and yet another, what they could require the franchisor to do.[40] Nor did they discuss at that meeting the likely costs of operating the restaurant.[41]
[39]T.518.
[40]T.587.
[41]T.594.
Mr Pollard’s evidence about the telephone call to Justin Menzies, Mr Mauviel’s subsequent congratulations, and his own satisfaction that he and his wife were now the franchisees, accords with that of Sue Pollard. He was rather vague about what, if anything, Mr Mauviel said at the conclusion of the meeting about providing further materials to them – the bookwork was something that Mrs Pollard dealt with – although he remembered something about templates and Mr Mauviel sending them the profit and loss statements for the latter’s other franchise stores.[42] At one point in his evidence, however, Mr Pollard stated that Mr Mauviel told Sue Pollard that he would send them “information that would confirm what he was telling us that day”.[43]
[42]T.520, T.597-8.
[43]T.568.
Phillip Mauviel’s Account
Mr Mauviel’s memory of the meeting held on 18 March 2004 is that, after the Pollards told him about their trucking business and the Boost Juice store at West Lakes, they added that their involvement with these two businesses meant “they were very confident in their understanding of franchising and commercial documents such as franchise agreements and leases and were very confident with their interpretation and understanding of these documents and the procedures and systems that go with that”.[44] They were, he said, very excited and positive about the venture and indicated they had been thinking about a Billy Baxters at Glenelg for five years.
[44]T.71.
This, it will be recalled, is consistent with Mrs Pollard’s email of 10 March, in which she said that she and her husband had “often thought that a Billy’s at the Bay would be wonderful for us”. It is also significant that, in the same email, Mrs Pollard referred to the fact that they lived at West Beach – which is a suburb close to Glenelg, and from which they might be expected to have acquired a good knowledge of the Glenelg environment. Indeed, as Mr Pollard said in his evidence, he had been familiar with Glenelg for 20-odd years.[45] At the least, Mr Mauviel was entitled on the basis of the initial email from Sue Pollard on 10 March to assume that the Pollards had given their proposed venture some thought on the basis of their background knowledge.
[45]T.585.
Mr Mauviel gave evidence that “the Pollards suitability to be a franchisee was ascertained virtually at that first meeting, they had a wealth of business experience and they put forward a very sound plan of how they were going to run the business with their son-in-law and their daughter. There was no reason to suspect they wouldn't be a suitable franchisee”.[46] He says he was told that it was the Pollards’ intention that they would with their son-in-law be hands-on operators.[47] (But this expectation was not fulfilled - it is common ground that the son-in-law withdrew from the venture soon after it opened.)
[46]T.122.
[47]T.71.
Mr Mauviel cannot remember what he said about the rent or the likely turnover of the Jetty Road business. However, he did remark that:
Obviously it's a greenfield site, what the turnover of the store is going to be is an unknown commodity but what we can do is have a look at how other stores are performing, in particular other stores in similar sort of precincts to use as an information tool to assist in the assessment of how the business could potentially perform.[48]
He told the Pollards that his store at Norwood Parade was doing about $1,100,000 a year in sales while, on the Gold Coast, Cavill Mall was doing about $2,300,000 a year. He could not recall the Pollards expressing concern about the level of rental and whether the store would be able to support it. Had they done so, however, he:
… would have said to them, an ideal benchmark for rental to be affordable is 15 per cent of turnover, rental is about 15 per cent of turnover, that's your maximum benchmark. So then they have to determine whether they believed the business can turn over enough turnover for rental to be 15 per cent of turnover.[49]
He certainly concluded that rent of $160,000 plus GST could be supported by the turnover that he expected the business would generate. In conveying this to Mr and Mrs Pollard, he would at the same time (he maintained) have told them to make their own independent assessments. He could not recall saying that the turnover would exceed $1,300,000 a year;[50] but he thought he would have told the Pollards that in order to afford a rental of $160,000 a year plus GST, the business would need to turn over such an amount.[51] He was nevertheless, and somewhat inconsistently with the above, adamant that he would not make any representations about what the sales would be; his role was to provide as much information as possible for them to make their own independent assessment of whether the business could turn over the sales needed for it to be viable.[52]
[48]T.72.
[49]T.89.
[50]T.91, 111, 118-9, 125.
[51]T.91, 111.
[52]T.92, 110.
Mr Mauviel denied that he told the Pollards at the conclusion of the meeting that he would email to them details of the projected turnover for the Jetty Road store. Rather, he said he would email them the profit and loss statements from a selection of stores for them to look at and, as a kind of template, “a projection sheet for them to be able to assess the viability of the business which … was for them to play around with different turnovers. It was never a projection for that store”.[53]
[53]T.125.
After the 18 March Meeting
At 2.12 pm on 18 March, Mrs Pollard sent to the plaintiff proof of payment of an initial deposit of $3,000.[54] She forwarded at the same time the completed “Preliminary Franchise Application Form” which, together with the information pack, had been sent to her by Mr Mauviel on 17 March. As noted in paragraph [19] above, that form provides that the initial deposit was fully refundable upon request. It further explains that the deposit “is required to ensure that you have genuine intentions to becoming a franchisee” and that if the Pollards do not proceed with the franchise, the deposit will be refunded in full within 14 days of a written request for its return.[55] It also states in a prominent position on the page relating to the applicant’s financial information, and in block letters, that: “The completion of this report places no continuing obligation on either Billy Baxters or yourself”.[56]
[54]Although the application form refers to a deposit of $1,000, there was no dispute that the Pollards sent $3,000 to the plaintiff. It appears that the larger sum was requested following a change to the plaintiff’s procedure to increase the amount of the deposit. (T.126) Nothing turns on this point.
[55]CB.1203.
[56]CB.1205.
The 19 March 2004 Spreadsheet
The following day at 9.38 am Mr Mauviel sent an email to Mrs Pollard attaching a document entitled “Jetty Road.xls”. Given its importance in this proceeding, it is worth setting out the text of the email in full:
Hello Suzie & Ross,
Attached is a spreadsheet to help you in your calculations. There are 3 pages to the programme. Enter your info on to the income statement page and the breakeven and cashflow will calculate themselves automatically.
I have confirmed that the rental is $160,000 Gross (including outgoings etc).
Play around with the turnovers. The employment expense is inclusive of workcover and GST and is indicative of a store run under management. Therefore in your calculations if there are to be family members and or owner operators in the business this would usually be accounted for already in this calculation.
Please contact me with any queries. Sorry about the disclaimer at the bottom, but legally I have to do it!
Regards,
Phillip Mauviel
Disclaimer:
The information provided is for information purposes only. Although upmost [sic] care has been taken in the preparation of these figures, the provider of this information cannot be held liable for any error or omission. The provider of this information recommends you seek independent advice.[57]
[57]CB.1208.
The email is inconsistent with the proposition that the parties already had an agreement to which each was committed. If an agreement had been made, why would Mr and Mrs Pollard still have calculations to do, and why would Mr Mauviel be forwarding to them a spreadsheet to assist them in that task? The clear object of the exercise, in my opinion, was to help Mr and Mrs Pollard assess the attractiveness of the franchise proposal.
The email is likewise inconsistent with the proposition that by attaching the spreadsheet Mr Mauviel was making anything more than indicative representations about the turnover or profitability of the business – representations which reflected his expectation about the turnover, to be sure, but nothing more than that. The profitability of the business, as is true of any retail business, depends upon much more than turnover. And here, as the email acknowledges, factors personal to the operators of the business are relevant – factors such as whether (to adopt Mr Mauviel’s expression) they are to operate the business under management; and the cost of any finance they require. Consistently with this, Mr Mauviel, in effect, instructs Mr and Mrs Pollard to “play around with the turnovers” and make their own calculations by entering their own information, after which the spreadsheet will effect the appropriate adjustments to the bottom line.
Mr Mauviel gets no marks for adding the silly apology about the disclaimer. Even although the apology detracts from the force of that disclaimer, however, it does not transform it into an averment that the reader is to take the spreadsheet for that which it is not. It is not, and cannot be, anything more than that which the email says it is: an aid for the Pollards to use in making their calculations. As such, it reflects Mr Mauviel’s belief about the likely level of turnover; but none of the other figures (except rent) purport to have any greater connection with reality than as being indicative. And even the figures going to turnover are subject to being “played around with” by Ross and Sue Pollard. They are not put forward as being definitive.
Any sensible response to the spreadsheet would, in my opinion, have the persons responding insert their own figures (other than rent) in each box, and thus come to their own conclusion about the likely profitability of the business. In this way the spreadsheet would, to adapt Mr Mauviel’s words, help them with the calculations that are necessary before informed decisions can be made. At the same time, it is highly pertinent that the disclaimer itself states that the utmost care has been taken in the preparation of the figures.
The spreadsheet in question[58] is headed “Income Statement – 12 Months Year 1” and shows figures for June through to May. The total sales are shown as $1,365,000, while the gross sales are $982,800. The spreadsheet then sets out 15 categories of operating expenses totalling $807,088. The total income before taxes is shown as $175,732.
[58]CB.1209.
The next page of the attachment is headed “Break-Even Analysis – 12 Months Year 1”.[59] It postulates “projected sales” of $1,365,000; puts forward figures for indirect and direct costs of operating the business; includes the amount of $1,120,927.78 as representing break-even sales; and concludes with an indicative profit during the period of $175,732.00.
[59]CB.1210.
The final page[60] is headed “Cash Flow Forecast – 12 Months”. In a column headed “Pre-Start” it includes a figure of $40,000 for net sales, as well as figures for monthly net sales and GST collected. The total receipts are shown as $1,541,500.
[60]CB.1211-1212.
The defendants argue that, by providing the spreadsheet to them on 19 March, Mr Mauviel made representations over and above the two made at the meeting of the day before. It will be remembered that, according to the defendants, the first of these two concerned the “reasonable rental” (“the first representation”); and the second concerned Mr Mauviel’s projected turnover of $1,300,000 (the “second representation”). The additional representations, which the defendants assert were made when the email and its accompanying spreadsheet were received on 19 March, were that sales for the first year of the franchise would amount to $1,365,000 excluding GST (the “third representation”); and that the net profit for the first year of the franchise would be $175,732 (the “fourth representation”).[61]
[61]Paragraphs 12.1 and 12.2 of the Amended Defence and Counterclaim filed 2 June 2008 (CB.357).
This spreadsheet was the subject of a great deal of controversy at the trial of this proceeding. The defendants maintain that the document clearly confirms what according to them was the statement made by Mr Mauviel the previous day to the effect that the projected turnover of the business would be in excess of $1,300,000. The contention made by the plaintiff through Mr Mauviel is very different. It is that the document was merely that which he promised he would provide to the Pollards for use as a template: “a very simple pre done tool”[62] for them to use to assess the viability of the business. He explained that the spreadsheet was:
… devised by myself [and] used internally in my businesses as a budgeting tool to assist in the forecasting of the profitability and to give my managers help in managing their restaurants more effectively for me. What they also became was a very useful tool to … work out the potential viability and profitability of any operation of this type. … [I]t's all based on percentages which are derived from industry benchmarks and our own experience.[63]
The purpose of giving the spreadsheet to the Pollards was to allow them to get an indication of how the store would perform with different turnovers “so they could assess whether they wanted to do or not to do the business”.[64] Mr Mauviel’s evidence was that:
the way that the spreadsheet has been programmed is you enter your sales along the top line, and it does all the rest of the sheets simultaneously for you, so the only line you have to touch is the sales column, and all the rest of the percentages, calculations and formulas across all three pages all calculate automatically.[65]
[62]T.154.
[63]T.73.
[64]T.154.
[65]T.164.
The covering email sent by Mr Mauviel is entirely consistent with his description of the purpose of the spreadsheet. It is similarly consistent with the evidence given by both him and Mrs Pollard about what Mr Mauviel said, at the end of the meeting the previous day, he would email to them. The email refers to the attached spreadsheet to “help you in your calculations”. It invites them to enter their information on to the income statement page and to “play around with the turnovers”. Or, in the words ascribed to him by Mrs Pollard, as quoted in paragraph [60] above: “I have got this template you will be able to put your income, expenditures in”.
Of all the 250 or so individual figures it contains, covering receipts and payments, the email confirms only the rent. Each figure impacts upon the most important of all – the profit or loss at the end of the period. It is impossible to accept that Mr and Mrs Pollard took each of them as fixed (and they do not suggest that they did). The spreadsheet, after all, is all about what might, as opposed to what would, be. There is also the disclaimer, which is followed by a statement that the Pollards should “seek independent advice”.
In my opinion, Mr Mauviel sent this document not as a representation of the turnover (and profit) the business would realise, but merely as a tool to assist the Pollards. The reference to a turnover in excess of $1,300,000 over 12 months is explicable on two bases. First, that, as the Pollards must have understood, only a turnover of that order could maintain the viability of the restaurant. Secondly, that Mr Mauviel was confident that a turnover in that amount was attainable. The Pollards, however, contend that they were entitled to read more into the document than that.
The defendants did not have regard to what Mr Mauviel said in the covering email. It was, they contend, overtaken by a telephone call made by him to Mrs Pollard shortly after it was sent. According to Mrs Pollard, Mr Mauviel then told her that the spreadsheet was on its way, and that "you don't have to worry about putting your own figures in, I have done it all for you".[66] The only mention made by Mr Mauviel of the covering email was to apologise for the disclaimer and express the hope that it did not offend them. Importantly, however, Mrs Pollard volunteered under cross-examination that Mr Mauviel “didn’t say ‘disregard this covering email.’ He never said those words”.[67]
[66]T.338
[67]T.475
At all events, Mrs Pollard and her husband ignored the recommendation to seek independent advice, just as – at that time - they ignored the instruction to enter their own information and ”play around with the turnovers”. Nor did she think it odd that Mr Mauviel should say over the telephone something which was inconsistent with the whole tenor of the very email he had just sent; she did not think about it deeply at the time. Yet the question is obvious. Why would he tell them in an email to enter their own information into the spreadsheet attached to it, and to “play around with the turnovers”, and then, while the email was in transit, telephone its recipients to tell them not to worry about putting in their own figures because he had done it all for them? Even without the conflicting advice contained in the email, the statement that “he had done it all for them” is, at least on the evidence called in the trial, inapposite: there was, for example, no evidence before me that Mr Mauviel was told what the Pollards’ labour costs would be. This was something which the Pollards might or might not know, albeit not with certainty because we a talking of the future; but Mr Mauviel would not be even in that position, unless they told him. Yet there the labour costs were, in the spreadsheet, in more or less precise amounts.
Mr Pollard’s evidence was that he too allowed the inconsistency to pass unnoticed; he saw the figure of $1,365,000, and he took that to confirm Mr Mauviel’s statement that the business would turn over in excess of $1.3 million.[68] He was not, at this time, aware of his wife’s telephone conversation with Mr Mauviel.[69]
[68]T.600.
[69]T.632.
For his part, Mr Mauviel denies that he told Mrs Pollard not to worry about putting in their own figures. I accept his denial. He says the purpose of the conversation would have been to “tell her how the spreadsheets work, what she needed to do with them”.[70] In my opinion, this is much closer to the truth than the evidence given by her on this point.
[70]T.153.
Notwithstanding Mr Kersten’s recommendation of a 10 day period in which to get legal advice, the Pollards signed a copy of the lease from which such a provision was absent. I also find that, even though Mr Kersten was on speaker phone during the meeting of 23 March 2004, and that Mr Mauviel was present, it was Mr Pollard who negotiated with the landlord about the redevelopment clause. As noted above, Mr Kersten had requested it be deleted. The landlord disagreed. Mr Pollard suggested a period of 7 years, because he was not happy about the landlord being able to redevelop the site during the term of their five year lease. The landlord accepted Mr Pollard’s compromise.[100]
[100]T.578-9.
In the meantime, on 22 March 2004, the Pollards had met briefly with their accountant, Graeme Tull, to discuss the appropriate entity to use for the new business. The meeting was rushed; Mr Tull had another big project running that needed his attention. He was too busy to advise them on that day, but he spoke by telephone with Mr Pollard on the morning of 24 March. During this conversation, he advised the Pollards to operate the business through the family trust using Trans-It Freighters Pty Ltd as the trustee.
The Pollards did not seek from their accountant, and were not given, any advice about the viability of the new venture. This, they say, was because they were “happy with what Phillip Mauviel had told us, had assured us”.[101]
[101]T.567.
A copy of the “instructions for lease” document, completed in handwriting by the landlord, was faxed to the Pollards on 23 March 2004. They then signed it.[102] On the same day they paid to Polites Group Nominees Holdings Pty Ltd the sum of $14,666.66, representing the first month’s rent. They also then paid $1,770.00 to Fittock & Co, solicitors, towards legal services and disbursements, followed within 24 hours by the balance of $1,344.00.[103]
[102]CB.987-990.
[103]CB.991-994.
The next day, Wednesday 24 March 2004, Mr Murphy visited them at their home. He had a copy of the lease for them to sign, which they did on that day.[104] No representative from the plaintiff was then present. The initial period of the lease was five years, commencing on 19 April 2004. There were options for two further five year periods. It was at the meeting with Mr Murphy on 24 March that, in accordance with the advice previously given by Mr Tull, the name of the lessee was changed from the entity earlier nominated by the Pollards (R & S Pollard Pty Ltd) to Trans-It Freighters Pty Ltd.[105]
[104]CB.999-1023. This copy in the court book is missing every second page.
[105]T.580.
Mr and Mrs Pollard contended that Mr Kersten told them that they could go ahead with executing the lease. Mr Kersten denied it. His evidence was that it is the plaintiff’s standard procedure for all leases to be viewed and vetted by its in house lawyers before they are executed by the franchisees. In the absence of some contractually binding restriction, however, Billy Baxters cannot prevent a potential a franchisee from signing a lease before the vetting is complete.[106]
[106]T.257.
I find that Mr Kersten did not tell Mr and Mrs Pollard that it was in order for them to execute the lease. He was, in my opinion, a reliable witness. In any event, advice to the effect that it was in order to sign the lease would have flown in the face of his direction, set out in his email of 22 March and not the subject of any amendment, that the lease was to be subject to the approval within 10 days of the lessee’s and franchisor’s solicitors. There is no hint in the evidence of any reason why he would orally contradict his position as expressed in writing.
It is clear that, if there was any pressure to execute the lease, that pressure had its source with the landlord. On the evidence before me, I accept on the balance of probabilities the inference that by 19 March the landlord knew that whatever (non-binding) arrangements it might have made with Mr Mauviel or his company, another prospective franchisee of Billy Baxters was now being put forward as the prospective lessee. In these circumstances, it was to the landlord’s tactical advantage to threaten the franchisees with the spectre of another prospective lessee (Hudson’s Coffee) taking on the lease at the same, or possibly a more attractive, rental. The landlord sought to exploit that advantage.
To an extent, Billy Baxters reflected, and deflected onto Mr and Mrs Pollard, the concerns of the Polites Group. At the same time, the plaintiff sought to ameliorate that pressure. Thus, when Mr Pollard indicated he did not want to sign any documents on Friday 19 March 2004, Mr Mauviel desisted from any attempt to get him to do so. The plaintiff, through Mr Menzies and Mr Kersten, took steps to slow down the process and introduce a period during which the Pollards could seek advice. Moreover, Mr Pollard demonstrated himself to be someone who would not be pushed into doing something he did not want to do. But in the end, and without seeking to take advantage of the possibility of a delay of up to ten days, he and his wife executed the lease; and the plaintiff’s representatives were not present when they did.
For these reasons, any claim that the plaintiff unconscientiously put pressure on Mr and Mrs Pollard to sign the lease, and that they succumbed to that pressure, without which they would have held out, is not established. I likewise find that the plaintiff did not act unconscientiously, or in breach of s.51AA or s.51AC of the TradePractices Act.
Establishing the Business
At the time that the defendants executed the lease, no written franchise agreement existed between them and the plaintiff. Yet, over the following period until the official opening of the Jetty Road restaurant on 8 June 2004, steps were taken by the defendants to obtain finance, pay for the fitout of the premises, engage staff and generally prepare for the commencement of the business. Part of that process was to complete the paperwork required by the plaintiff for the execution of the written franchise agreement, which in the event commenced on 17 June 2004.
By letter dated 23 March 2004 a bundle of documents was sent by the plaintiff to the Pollards. Those documents included a copy of a “disclosure document”, the code and a pro forma franchise agreement.[107] The letter is clearly designed to be sent to prospective franchisees. In the Pollards’ case, it acknowledges receipt of a $3,000 “fully refundable deposit” and confirms that the recipients “intend to franchise”. It speaks of the need to advise the ACN and registered business address of any company to be used “if you will be purchasing the franchise business under a company name”. It also states: “If you decide not to proceed with the purchase of the above store, we require return of all documents to us”.[108] In relation to the code, the letter states:
It is a requirement under the franchising code of conduct that you retain the disclosure document for 14 days prior to signing any franchise agreement. At this stage, we would be pleased if you could sign the last page of the disclosure document (“acknowledgement of receipt”) and return only the receipt to our office. You must insert the date that you received the disclosure document on the acknowledgement of receipt before returning.
It would appear that the Pollards actually received this letter on 1 April 2004.[109]
[107]CB.1234.
[108]CB.1235.
[109]File note CB.1236; T.531.
Mrs Pollard gave evidence that she regarded the reference to not proceeding with the franchise “as a joke”. If so, her attitude doubtless reflected the fact that she and her husband had already executed the lease, and so were tied to 20 Jetty Road for five years from 19 April. Being tied to the lease, the defendants contend that they were also tied to Billy Baxters.
Which, on an initial view of things, is true - to a point. On the other hand, no franchise agreement was in place, and I therefore find that the Pollards had no contractual obligation to the plaintiff. Had they wished to open another food outlet in the leasehold premises, they could (I find) have done so. It is true that the lease contained a reference to the premises being used as a Billy Baxters outlet, but that was inserted at the insistence of the plaintiff, not the landlord; and the evidence suggests, and I accept, that the latter would have been content were the property to be let (at an acceptable rent) to Hudson’s Coffee, or some other kind of café or restaurant. The evidence also suggests, and I also accept, that there were other food outlets in the vicinity, that the rent for 20 Jetty Road was at market rates, and that it was possible, from that part of Glenelg, profitably to operate a café or restaurant. The lease aside, Pollards’ hands were not, as at 1 April 2004, tied.
The disclosure document received by the Pollards on 1 April supports this conclusion. It contains a number of warnings on the front page, including the following:
A franchise agreement is legally binding on you if you sign it.
Take your time, read all the documents carefully, talk to other franchisees and assess your own financial resources and capabilities to deal with the requirements of the franchised business.
You should make your own enquiries about the franchise and about the business of the franchise.
You should get independent legal, accounting and business advice before signing the franchise agreement.
It is often prudent to prepare a business plan and projections for profit and cash flow.[110]
Mr and Mrs Pollard both signed the acknowledgement of receipt of that document.[111]
[110]CB.954.
[111]CB.976.
The next step was to obtain finance. To this end, Mr and Mrs Pollard, together with their daughter Cassie, prepared a business plan for the Pollard Family Trust to submit to the Bank of South Australia.[112] In late March 2004 Mr Pollard wrote to Steve Caruso of that bank requesting a $340,000 facility for the shop fitout, $40,000 for working capital and $20,000 for contingencies.[113] This document was based in part on business plans for the Goolwa and Myer franchises which were sent by Mr Mauviel to Mrs Pollard.[114] The document states that the success of Billy Baxters’ franchises in precincts such as that at Jetty Road “is demonstrated by the results achieved at the franchised outlets at Norwood Parade, SA and Cavill Mall, Qld”. While the former is said to achieve takings of $26,000 per week, the latter averages $75,000 per week. It then says:
Using these two stores as a model, with Cavill Mall representing the style of business that matches the Jetty Road precinct, combined with the sales of Norwood Parade to fathom a South Australian influence, we expect the Jetty Road outlet when up and running to comfortably turnover $25,000-$30,000 per week.
[112]CB.374-386.
[113]CB.1178. The letter is undated but the evidence suggests it was sent in late March 2004 (T.350, 370).
[114]T.358, 410.
The business plan notes that the business will be run with family members and full time and casual staff. The family members were to be Mr and Mrs Pollard, Shayne Hourigan (then the Pollard’s prospective son-in-law), and their daughters Cassie and Kristi. Mr Hourigan, having experience in his parent’s restaurant, would be store manager, while Cassie would take 3 month’s leave from her position as manager of their Boost Juice franchise to “help with the transition period” and then would divide her time between the two outlets.
Under the heading “Market Research” the document states that the Pollards have been looking for a site for a Billy Baxters café “for some time” and were excited at the opportunity to open such a restaurant at Jetty Road. Glenelg is described as “the largest tourist precinct in SA”, with 20 Jetty Road at its heart, positioned to cater “not only … for the huge tourist trade but also for the burgeoning residential expansion which is going on in the Glenelg area”. The Pollards promoted their prospective outlet to the bank as one that would offer “a type of restaurant service that is sadly missing in the area” - a niche not addressed by the many up market restaurants - namely, a family restaurant. They referred to “our research” as showing “a large percentage of residents eat out in the Glenelg area”, and identified five main demographics to target in addition to tourists – “the locals, the retired locals, the working affluent and the very affluent and … the youth market”.[115] They noted that, while there are many cafés and restaurants on the Jetty Road strip, no other family restaurant “offers the style, quality, price and variety of the menu that Billy Baxters does”. Then, in a conclusion that warrants repetition in full, they informed the bank that:
Glenelg is a vibrant coastal community, recognised for its quality, lifestyle, dynamic investment opportunities and a desirable place to live, eat, work and visit.
The amount of visitors to Holdfast Bay, both domestic and international, was 2.37 million in 2002 and 2.4 million in 2003. Based on South Australia’s total annual visitor expenditure, tourism spending in Holdfast Bay was estimated to be $195 million in 2003 – this had increased from $150 million in 2001.
No other eatery in the area has Billy Baxter’s vibrant colours and cartoon character or family friendly menu. Billy Baxter’s menu has variety, great consistent quality and reasonable pricing.
Oh, and did I mention the incredible coffee …[116]
[115]CB.379.
[116]CB.382.
One of the appendices to the Business Plan was an income statement spreadsheet for the first 12 months.[117] Mrs Pollard gave evidence that it was created after she copied the spreadsheet emailed to her by Mr Mauviel on 19 March. It differs significantly from the original spreadsheet. First, the amounts for sales for each month have been reduced, giving a total sales figure not of $1,365,000 but of $1,230,000. In particular, the projected sales for the first month, June, have been substantially reduced from $110,000 to $70,000, while those for July have dropped from $110,000 to $80,000. There have been corresponding adjustments to the cost of goods sold. The gross profit is now said to be $885,600. Next, there are adjustments to the employment expenses to reduce the total to $430,500 from the figure of $477,750 shown in the document sent by Mr Mauviel. Allowance has also been made for rent free periods for the months of July, August and September, thereby reducing the rent expense from $160,008 to $120,006. The figures for electricity have been changed from a static allowance of $1,500 per month to show a higher, seasonally adjusted, rate from October to April, and lower amounts for the other months. Other adjustments have been made to the figures for franchise fees, the advertising levy and uniforms, while an additional figure of $3,600 is now allowed for “accountancy/legal fees”. The new document shows an operating loss of $4,914 for June, rather than a profit of $10,386. Yet the total operating income is not significantly different from that shown in the original document, even though the sales have been reduced: $173,984 compared to $175,732. This would seem to be due largely to reductions in the employment expenses, as well as to the effect of the rent free period - and to the effect of the reduced projected turnover in causing a concomitant reduction in the franchise fees. Finally, a total of $19,200 is now provided for bank interest as well as $30,000 for a chattel mortgage. The result is a cumulative net income of $143,984, rather than $175,732.
[117]CB.383.
Mrs Pollard gave evidence that the adjustments to the spreadsheet were made both by her and by her husband.[118] In part, they were responding to a query by the bank’s Mr Caruso about the projected turnover figure of $1,365,000. He asked if they “could come in a little bit more conservative”, and suggested that they “tone it down just a little bit”.[119] Given that the bank had something that Mr and Mrs Pollard wanted to get, they took Mr Caruso’s suggestion on board. As a consequence, according to them, they for the first time critically examined Mr Mauviel’s figures, and in the process amended the amounts assigned to such expenses as electricity, accountancy and legal fees, bank interest and the chattel mortgage.[120]
[118]T.369.
[119]T.465.
[120]T.417-8.
In my opinion, all this is consistent only with the conclusion that, of all the figures appearing in the spreadsheet originally sent by Mr Mauviel on 19 March, the defendants relied only on the final turnover. But this exception, important though it is, carries with it equally important qualifications. Ross and Sue Pollard relied on Mr Mauviel’s estimate of the turnover, but as one element only in a much wider set of considerations which weighed upon them when deciding to accept the plaintiff’s offer to become Billy Baxters franchisees. That estimate was what they thought it was: his honest expression, based upon reasonable grounds, of that which the café was capable.
Limited in that way, their reliance was justified. I find that Mr Mauviel did believe that a well-run Billy Baxters business, at that location, would in its first year turn over something in the vicinity of $1,300,000. Of course he could not guarantee this. And equally, as Mr Pollard accepted, Mr Pollard knew that such a guarantee could not be given. The latter anticipated a degree of divergence, which – as he said in his evidence - might be as much as 20% less than $1,300,000.
But Mr and Mrs Pollard had formed their own assessment of the business that their Billy Baxters café would attract. They went to some lengths to impress upon the bank that they had made such an assessment. Hence the reference in their submission to the bank to “our research”. It is true, as I find, that Mr Mauviel’s opinion influenced them. But it will be remembered from Mrs Pollard’s evidence (as recounted in paragraph [55] above) that they asked for his opinion, he hesitated, they pressed him, and then he gave it. Importantly, however, it was his opinion, honestly held. Having given it in response to the request from the Pollards to do so, he shortly afterwards (in his email of 19 March 2004) told them to make up their own minds – or, to put it in his words, “play around with the turnovers”.
It follows that Mr Mauviel’s estimate of the turnover of the business in its first year of operation was intended to be but one factor to be taken into account by Ross and Sue Pollard. Nevertheless, it was made for the purpose of influencing their decision; and I find that it did. It was therefore misleading, even as a mere projection about the future, unless it were based upon reasonable grounds.
I find that they did use the spreadsheet as a tool, as suggested by Mr Mauviel, and did “play around with the turnovers”. They did so for each month. There was a consequential adjustment to the twelve-month total. I further conclude that they could not reasonably rely, and did not in fact rely, on the net income figure of $175,732 in the original spreadsheet. They are quite intelligent enough to appreciate that, given the uncertainty of the operating expenses which would need to be tailored to provide for their own circumstances (for example borrowing costs, staffing structures and the rent free period) they could not accept the figures included by Mr Mauviel as anything more than a base from which to make their own calculations about the likely profitability of the business. This is perhaps exemplified by the fact that, in adjusting the spreadsheet for the purposes of their application to the bank, they took into account seasonal effects – something Mr Mauviel did not do. That omission alone must have demonstrated to Mr and Mrs Pollard that his figures did not purport to be anything more than indicative of the categories (and to an extent the scale) of items that should be taken into account in working out whether or not the business was an attractive proposition.
I find for these reasons that what is pleaded by the defendants as the fourth misrepresentation - that the business would make a net profit of $175,732 in its first year of operation - was not made in those terms; and even if it had been made, the defendants did not rely upon it.
Mr Mauviel nevertheless represented not only that in his opinion the business would return a profit in that initial period, but also that the rent sought by the landlord was reasonable, and that the turnover which the business would generate, some $1,300,000, would support the rent and therefore keep the business profitable.
The context in which those representations were made is important. If the evidence of Mr and Mrs Pollard is accepted, Mr Mauviel did not initially refer to their responsibility to undertake their own (appropriate) enquiries before making up their minds. Nevertheless, that was the thrust of subsequent statements which were either made by or on behalf of the plaintiff or (not quite the same thing) contained in documents prepared by the plaintiff and given to the defendants. The message was that they should base any decisions upon their own research, albeit while taking Mr Mauviel’s opinion – which, as I find, he expressed to them - into account. The Myer Centre document, which the defendants propound as incorporating the terms of their initial franchise agreement, said this, or to this effect, in paragraph 6.13.1. The email sent to Mr and Mrs Pollard at 9.38 am on 19 March likewise said so, and in any event is explicable only on that basis. And the disclosure document repeated the message. It is one which also accords so directly and fundamentally with common sense that at one level it should not have required any repetition.
This conclusion has significance when one seeks to assess whether or not there were reasonable grounds for the representations made by Mr Mauviel. Mr and Mrs Pollard were told that those representations were not to be accepted without question, but rather that they were responsible for making up their own minds. The question of importance in this context - whether the representations were reasonably based - must be assessed in that light. It is one thing to tell a prospective franchisee, or leave a prospective franchisee under the misapprehension, that representations about the future are inherently reliable, and may be accepted at face value and without further enquiry. If that be the situation in which the prospective franchisee is left, the reasonableness of the grounds for the representation(s) will be assessed very strictly. The test will not be so strict when, as here, two other facts must be taken into account. First, that the defendants were on several occasions told, in effect, that they were not to rely only upon one source of information or advice. Secondly, that they were by Mr Kersten’s email of 22 March given an opening by means of which they could have acquired the time and opportunity to obtain that additional assistance.
By letter dated 13 April 2004 the Bank of South Australia offered the defendants a facility totalling $478,584. This consisted of a new overdraft of $300,000, a fully drawn advance of $134,000, an existing overdraft of $40,000, and an existing bank guarantee of $4,584.[121] On 15 April 2004, the defendants accepted this offer.[122] On that day, too, Mr Pollard had a conversation with the plaintiff’s counsel, Eleanor Colaso, during which he said he would “advise in writing that finance approved.”[123] Mr Menzies spoke with either Mr or Mrs Pollard on 28 April to confirm such approval, and then instructed Ms Colaso to send them the franchise agreement to be signed.[124] Mrs Pollard emailed Mr Mauviel on 2 May 2004 confirming that finance arrangements had been completed.[125]
[121]CB.1051-1057.
[122]CB.1058.
[123]CB.1236; T.222-3.
[124]CB.1237.
[125]CB.1238.
In the meantime, the fitout of the restaurant had started on 19 April 2004 and took approximately six weeks.[126] It was a standard fitout. The Pollards gave evidence that it was organised by Jeanette Rosadoni, a contractor with the plaintiff, under the direction of Mr Mauviel.[127] The franchisees had very little input.
[126]T.335.
[127]CB.360, 541.
The franchise agreement was sent to the defendants under cover of letter dated 3 May 2004 which stated “We confirm that you intend to franchise the abovementioned store”. It later continues:
We suggest that you seek your own independent legal, business and accounting advice before signing the documentation.[128]
Mrs Pollard did not take any notice of either of these sentences; by the time they received this letter, “everything was done and dusted”.[129] The letter also requests payment of the $45,000 franchise fee.
[128]CB.1239.
[129]T.361, 456.
Clause 6.13.1 of the franchise agreement provides that the franchisee acknowledges, warrants and represents that:
6.13.1 Prior to Signing
Prior to the signing this Agreement, it has:
(a)been advised by the Franchisor to carefully read and ensure that it understands the provisions of this Agreement;
(b)been advised by the Franchisor to seek independent and specific advice from a taxation adviser concerning the likely taxation consequences of investment in the Franchised Operation pursuant to this Agreement and, accordingly, has not received from or relied upon any representations by the Franchisor, its officers or agents whom the Franchisee acknowledges are not qualified to provide taxation advice;
(c)been advised by the Franchisor to seek independent legal and accounting advice with respect to this Agreement and all other aspects of the Franchised Operation; and
(d)not relied upon any statement, representation or warranty made by the Franchisor, its officers or employees other than as set out herein.[130]
[130]CB.1539.
The defendants signed the franchise agreement and the guarantee and indemnity on 10 May 2004.[131] The Pollards also signed a franchisee’s/guarantor’s statement in which they acknowledged receiving the disclosure document and the code at least 14 days before entering into the agreement and that they had a reasonable opportunity to understand them.[132] They further signed part B of the solicitor’s certificate in which they acknowledged being advised to seek advice from a solicitor and elected not to do so,[133] as well as part B of the business adviser’s certificate and part B of the accountant’s certificate both in similar terms.[134]
[131]T.532.
[132]CB.1570.
[133]CB.1572.
[134]CB.1574, 1576.
The signed documents were returned to the plaintiff by 13 May 2004,[135] while the franchise fee was paid by 18 May.[136] There was some confusion connected with the plaintiff’s signing of the agreement. In the end, it came into effect on 17 June 2004.
[135]CB.1246.
[136]CB.1247.
The Operation of the Business
The restaurant was to commence full trading on Tuesday 8 June 2004, but due to a problem with the coffee machine and the inexperience of the staff, it did not open to the public until the following day. When it did happen, the opening was a disappointment. Mr Mauviel described it “very soft”.[137] Mrs Pollard was more blunt: with hindsight, it was a “dreadful time to open”. She explained:
Glenelg is right by the beach, and the wind blows off the sea, comes straight down that area, it is like a wind tunnel. People stay in doors, not many people on the street at all. Not in restaurants, not in shops.[138]
[137]T.139.
[138]T.364.
The defendants encountered other problems with the business. They say that limited parking in Glenelg and vigilant inspectors were a disincentive for diners. The configuration of the restaurant proved an impediment: the shop front was relatively narrow (although not any narrower than its neighbours) and the bar too close to it, with the result that there was little open space at the front of the restaurant for diners. The overall impression therefore was of a long narrow venue with little relationship to the street and passing foot traffic. Although there was outside dining, the defendants encountered problems with obtaining permits for a permanent outside umbrella or awning to provide shade. Instead, they made do with smaller umbrellas provided by suppliers. Despite the reference in their business plan to the “vibrant colours” of the Billy Baxters look, which would set their shop apart from the “many up market restaurants that don’t cater for kids or families”,[139] by about May 2005 they decided that the red and yellow theme was too gaudy. Discussions were held with the plaintiff about changing the colour scheme, but they came to nothing. Changes were made to the menu in May 2005 to cater for evening dining.
[139]CB.379 and 382.
Despite the efforts of the Pollard family, the business made ongoing losses.
Conclusion
For reasons already given, the defendants cannot make good their claim that, because the plaintiff failed to comply with clauses 10, 11(1) and 11(2) of the code, they were entitled to terminate the franchise agreement. That claim stands or falls on the existence or otherwise, as at 23 March 2004, of a franchise agreement or agreement to enter into a franchise agreement. No such agreement was then in existence. The claim therefore fails.
There is an issue whether the plaintiff did comply with the relevant clauses of the code in respect of the execution of the franchise agreement dated 17 June 2004. The plaintiff concedes that the disclosure document which was sent to the Pollards under cover of a letter dated 23 March 2004 did not contain the mandatory reference to the fact that franchisees are entitled to both a waiting period of 14 days before entering into a franchise agreement, and a cooling off period of 7 days after such an agreement is signed. But a reference to the waiting period was contained in the covering letter, and the franchise agreement itself provided for the prescribed cooling off period. I therefore do not think that there is anything in this point. I note further that the plaintiff received an acknowledgement that, at least 14 days before entering the franchise agreement, the Pollards received the disclosure document, and had read - and had a reasonable opportunity to understand - that document and the code. As noted above, the plaintiff also received a solicitor’s certificate, a business adviser’s certificate and an accountant’s certificate, all signed by the Pollards and dated 10 May 2004, in which they certified in each instance that they had been recommended to seek advice from each professional and had elected not to do so.
The defendants claim that the plaintiff acted unconscientiously. As pleaded, that contention was based on the alleged failure to comply with clauses 10, 11(1) and 11(2) of the code. There was no such failure. This claim cannot, therefore, be sustained. During the trial, however, the defendants altered – or, rather, added to - their line of attack. They alleged that the plaintiff acted unconscientiously in putting pressure on them to sign the lease of the 20 Jetty Road premises in which, it was anticipated, the business would be conducted.
The plaintiff did stress to the defendants that delay might mean that the lease would be granted to another lessee. I find that the plaintiff believed, on reasonable grounds, that that was the case. By this means, however, the defendants were put under some pressure. At the same time, the plaintiff persuaded the prospective landlord to extend its deadline; it told the defendants, in writing, that they should take time to make their own assessment of the viability of the business; and – most importantly – it proposed that the lease be subject to vetting by the defendants’ legal advisors, with 10 days being allowed for that purpose. That proposal was made by Mr Kersten, a person described by counsel for the defendants in his final address as someone upon whom his clients relied for advice about the lease. “They sought”, he said “no other advice”. He was, counsel continued, “an appropriate person for them to rely on solely, and they did so”.[140]
[140]T.797.
In these circumstances, the allegation that unconscientious pressure was applied by the plaintiff to the defendants is not made good.
There remains the question of the five representations which the defendants insist were misleading. The five, when analysed against the evidence called in support of the defendants’ allegations, amount to a contention that Mr Mauviel told them that he anticipated a turnover for the business of $1,300,000 (which the defendants accepted as meaning more or less) and that that turnover would enable the business to meet its rental commitments and return a profit.
I am satisfied that Mr Mauviel did make statements to that effect. He believed that, as predictions about a greenfields site in an area he assessed to be well suited to the proposed Billy Baxters restaurant, they would turn out to be accurate. He was asked by the defendants to tell them what he believed. He responded. He was honest in his response. But his prediction was wrong.
In these circumstances, the issue is whether the plaintiff can meet the requirement, imposed by s.51A(2) of the Trade Practices Act, that - unless it adduces evidence to the contrary - any representation about the future shall be deemed to have been made without there being reasonable grounds for making it.
The representations made by Mr Mauviel were intended to, and did, influence the defendants in deciding to become Billy Baxters franchisees. But they were not intended to stand alone. Mr Mauviel made it clear that Mr and Mrs Pollard were to make their own enquiries. It follows that they were to weigh whatever Mr Mauviel might have said about the viability of the business against the other evidence on that point. It is in this context that one must evaluate the reasonableness of the grounds upon which Mr Mauviel based his predictions, and the reasonableness of the period allowed for the defendants to make their assessments.
Not that these considerations are of great materiality here. There were reasonable grounds upon which Mr Mauviel could conclude that a Billy Baxters outlet in Jetty Road Glenelg was likely to be profitable. In the first place, he established (and his evidence on this point was not challenged) that the asking rent was at market rates; and this in a location that embraced many restaurants – 50 to 60, according to the defendants.[141] He was entitled to think that most of them were profitable, and that a Billy Baxters restaurant would comfortably fill a niche in that market.
[141]T.817.
Secondly, as the defendants’ business plan itself attests, Glenelg is the largest tourist precinct in South Australia, but without a Billy Baxters restaurant in an area in which, according to the Pollards’ statement to the bank, an outlet of that character “is sadly missing”. On this basis, as the defendants informed the bank, the anticipated turnover in the first 12 months of operation was $1,230,000 and the anticipated profit was $143,984.
This evidence was, in effect, common ground. It follows that I had before me evidence to support the proposition that there were reasonable grounds for making the representations which were made by Mr Mauviel. Section 51A(2) is satisfied.
Each of the allegations made by the defendants in answer to the plaintiff’s claim has, for the reasons set out above, failed. The defendants’ purported termination of the franchise agreement amounted, in these circumstances, to a repudiation of it, which repudiation was accepted by the plaintiff. The plaintiff’s claim for unpaid advertising levies and service fees must therefore be upheld. The principal amount involved under these heads is said in the prayer for relief in the statement of claim to be $253,259.80. I have been informed by the parties that the quantum is agreed, although I do not know whether the agreed figure and that appearing in the prayer for relief are the same. At all events, it having been agreed, and there being no dispute about the terms of the guarantee given by Mr and Mrs Pollard, there must be judgment against each defendant for the agreed amount, together with interest. I will order the taking of all necessary accounts from 7 May 2007, and that the first defendant pay to the plaintiff the amount found to be due once those accounts have been taken. The plaintiff is also entitled to interest and costs. The counterclaim will be dismissed.
The formal orders of the Court will include orders that there be judgment for the plaintiff; that the counterclaim be dismissed; that the defendants pay to the plaintiff the sum of $253,259.80, or such other sum as is agreed, with interest; that all necessary accounts be taken for the period 7 May 2007 – 7 June 2009; that the first defendant pay to the plaintiff such monies as may be due to the plaintiff on the taking of those accounts, together with interest; and that the defendants pay the costs of the plaintiff as taxed on a party/party basis, or as agreed.
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