Brotherson v Hursle Pty Ltd
[2013] QDC 257
•16 October 2013
DISTRICT COURT OF QUEENSLAND
CITATION:
Brotherson v Hursle Pty Ltd [2013] QDC 257
PARTIES:
IAIN BROTHERSON
and
KRISTY BROTHERSON
(plaintiffs)
v
HURSLE PTY LTD
(first defendant)
and
BRIAN FREDERICK SMALLWOOD
(second defendant)
FILE NO/S:
D2701/2011
DIVISION:
PROCEEDING:
Trial
ORIGINATING COURT:
District Court at Brisbane
DELIVERED ON:
16 October 2013
DELIVERED AT:
Brisbane
HEARING DATE:
19-23 August 2013
JUDGE:
McGill SC DCJ
ORDER:
Judgment that the defendants pay the plaintiffs $202,732.58 inclusive of interest. Counterclaim dismissed.
CATCHWORDS:
TRADE PRACTICES – Misleading and Deceptive Conduct – representations in brochures and orally – whether made – whether misleading or deceptive - whether relied on.
CONTRACT – Breach – whether plaintiffs prevented performance of contract by defendant – whether defendant repudiated contract – defendant in breach – plaintiffs entitled to terminate, and not liable for breach.
ACN 070037599 Pty Ltd v Larvik Pty Ltd [2008] QCA 416 – cited.
Butcher v Lachlan Elder Realty (2004) 218 CLR 592 – cited.
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 – considered.
Culligan v Aco Pty Ltd [2009] NSWCA 290 cited.
Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199 – applied.
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 – applied.
Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 – applied.
Steutel v Kimple Pty Ltd [2005] VSCA 312 – applied.
Watson v Foxman (1995) 49 NSWLR 315 – cited.COUNSEL:
J P Morris for the plaintiffs
B D Du Plessis for the defendants
SOLICITORS:
Johnsons Solicitors for the plaintiffs
Michael O’Brien Lawyers for the defendants.
By a contract in writing executed by the plaintiffs on 21 July 2010 and by the first defendant on 7 July 2010, the first defendant granted to the plaintiffs a franchise to operate and conduct a coffee van business in a territory in Lismore in New South Wales for a term of five years: Exhibit 1 Tab H. The agreement provided for a one-off franchise fee of $135,000 plus GST to be payable to the first defendant, and for royalty fees[1] and data tracking system access fees to be payable monthly in certain amounts. The plaintiffs paid the franchise fee to the defendant, and for a time operated the franchise business in Lismore, but the business was never successful and ultimately it was abandoned by the plaintiffs: p 62.
[1]This fee was not payable in the first six months and if the cups per day sold exceeded 150 for the month, it was refunded: special condition re clause 5.1(b); clause 9.3.
The plaintiffs claim they are entitled to damages from the first defendant for breach of the Trade Practices Act 1974, for breach of contract and for negligent misrepresentation; they also seek damages from the second defendant, under the Trade Practices Act on the basis that he was a person knowingly concerned in the breaches of the Act by the first defendant. The first defendant has counterclaimed for damages for breach of contract. The parties have reached agreement on damages, that if the plaintiffs are successful the amount recoverable will be $200,000 with interest at $47.94 per day after 19 August 2013, and if the first defendant is successful in its counterclaim the damages will be $52,884.81 together with interest accruing at $12.68 per day from 19 August 2013.
Ultimately only the claims for damages under the Trades Practices Act or for breach of contract were pressed by the plaintiffs.
Pleadings
The plaintiffs alleged and the defendants admitted that on 6 April 2010 the second defendant provided to the plaintiffs six identified documents which contained certain statements set out in some detail in paragraph 6 of the statement of claim: the documents are respectively documents E, A, B, C, D, and F of Exhibit 1, the bundle of documents for the trial. The plaintiffs also alleged in paragraphs 8, 10, 12, 13 and 14 that various oral representations were made by the second defendant on various occasions between 9 April and June 2010; the defendants admit that the second defendant made the statement alleged in paragraph 10(b), but otherwise deny that the statements alleged in each paragraph were made, and say that various other statements were made on the occasions identified.
The plaintiffs alleged in paragraph 15 that by making those written and oral statements the first and second defendants represented certain things. The representations alleged in paragraphs 15(d), (j), (l), (q), (r), (t) and (u) were admitted, but the remaining representations alleged were denied, on the basis that no such representations had been made in those terms. Paragraphs 16 and 17 of the statement of claim alleged that those representations were intended by the defendants to be relied on by the plaintiffs, and that they were made in trade or commerce; there appears to be no specific response to these allegations in the defendants’ defence, and they are therefore taken to be admitted: UCPR r 166(1).
The plaintiffs alleged that they entered into the franchise agreement in reliance on the representations made by the defendant to the plaintiffs. The defendants put reliance in issue, and relied on a “no representations” clause in the franchise agreement, that the plaintiffs had been given advice by an independent legal adviser and an independent accountant, and that the plaintiffs had been told by the first defendant to seek independent business advice but decided not to seek that advice. The plaintiffs alleged that the representations relied on in paragraph 15 were misleading and deceptive, for various reasons set out in some detail in the pleading. In response, the defendants relied on what they had previously alleged as to the extent of any representations made, and deny that any representations in fact made were untrue.
It was also alleged, in fairly general terms, that the second defendant was a person knowingly concerned in the contravention of the Act by the first defendant. This was denied, also in fairly general terms, but in circumstances where the evidence discloses that the first defendant is essentially the alter ego of the second defendant, where all the relevant communications were between the plaintiffs and the second defendant, and where any relevant knowledge or intention was the knowledge or intention of the second defendant, there is in fact in this case no real issue that if there was a contravention of the Act by the first defendant the second defendant was knowingly concerned in it.
Paragraph 62(g) of the statement of claim also invoked s 51A of the Trade Practices Act, in so far as the representations relied on were representations as to a future matter; it was alleged that the defendants did not at the relevant time intend or possess the necessary resources or capabilities to make good on the representations pleaded. In response the defendants alleged that, in so far as the representations were as to future matters, they had reasonable grounds for making the representations. These issues were a fact litigated at the trial, and it is not necessary at this stage to consider the adequacy or otherwise of these pleadings. The plaintiffs also alleged that there was a breach of the franchising industry code by the first defendant, in failing to have the plaintiffs execute certificates of receipt of disclosure and of advice prior to the execution of the franchise agreement. This was denied by the defendants. The breach the plaintiffs alleged was not the failure to disclose prior to the signing of the contract, but that the defendants did not obtain the certificates required under the code to be obtained before the contract was signed at that time, obtaining instead backdated certificates after the franchise agreement had been signed. This was relied on as a breach of s 51AD of the Act, though it strikes me as being at most a technical breach.
It was also alleged that the first defendant was in breach of contract by failing to take any or adequate steps to determine whether or not the territory offered was capable of sustaining the franchise, failing to provide the plaintiffs with a territory that was capable of sustaining the franchise, failing to provide the plaintiffs at handover with a franchise that had attained 100 cups a day in sales, failure to build up the customer base for the plaintiffs to the 100 cup guarantee and failure to provide the plaintiffs with adequate training in accordance with cl 17 of the contract. This was denied in general terms by the defendants.
Background
In April 2010 the plaintiffs were working in Canberra, both for the same employer. The male plaintiff was the number two person in the company (p 11), while the female plaintiff was working on a part-time basis, from home: p 60. The couple had young children. There was some salary packaging involved in their remuneration, but together they were earning at least $100,000 per annum, with the potential to earn up to $12,000 more by way of bonuses: p 12, p 60. They maintained that they were happy in this work and that their positions were secure: p 14, p 61. The female plaintiff however came upon the first defendant’s website, and became interested in the idea of a franchise from the defendant. This involved using a van fitted out with the equipment necessary to make espresso coffee and the various derivatives of it, which would drive around to businesses where such coffee was not readily available, and supply customers. A differentiating feature of this service was that the operator sought to co-opt someone from the business to collect the orders for coffee, so that, instead of customers just coming out to the van, the operator would collect an order from this person, make up the necessary coffees, and bring them in for the people ordering them to come and collect them.
The female plaintiff registered interest on the website, and as a result the second defendant emailed her the documents in Exhibit 1, tabs B to F.[2] There must then have been a phone call between him and the male plaintiff, as a result of which a second email was sent almost immediately thereafter, enclosing the document in Exhibit 1, tab A.[3] The male plaintiff said that they read these documents, and noticed certain things about them which they found attractive, particularly the family friendly hours; the documents suggested that the work day began at about 8 a.m., and would be finished at about 3 p.m., so that children could be met and supervised after school: p 14-19; p 63.
[2]Female plaintiff p 62; Exhibit 15; second defendant p 69.
[3]Female plaintiff p 62; second defendant p 69-70; Exhibit 16. There were some other enclosures, not in evidence.
One of the things referred to in this material was the defendant’s “100‑cup guarantee”.[4] In the first of these documents, it was said that the guarantee “means the franchisor guarantees a turnover of 100 sold cups in a day, prior to handover of the business. The 100 cup guarantee ensures that each franchise continues on with a cash flow positive operation.” The financial data on p 16 indicates that there is a $30,000 fee paid in addition to the franchise fee, as a business establishment fee, if the franchisee takes the 100 cup guarantee option. The document at tab E says on p 3: “100 cup guarantee on turnover, which means we build your customer base for you.” Then on p 4 it is said of the guarantee:
“During the initial training period we work with you to build your business, establish your customer base and define your daily run. We guarantee that prior to handover your new business will have achieved a turnover of at least 100 cups of coffee sold in a day.”
[4]For example, Exhibit 1 tab A p 6; tab E p 4; tab G cl 19.4(e).
The disclosure document at tab G clause 19.4(e) says:
“While the franchisor guarantees a turnover of 100 cups in a day during the training and handover period, no long-term turnover guarantee applies and individual results may vary. Some businesses may turnover more or less than 100 cups in a day following handover and results will depend on the individual’s ability to master the skills required to operate the business.”
There was a dispute before me as to just what the “100 cup guarantee” meant. Interestingly, although the disclosure document implies that there was a guarantee, the draft contract which was sent to the plaintiffs by the defendants contained no provision embodying that guarantee.[5] Indeed, that draft franchise agreement contained in cl 47.1 a provision stating:
“No representations or promises of any kind had been made by Espresso to induce you to sign this agreement except those specifically stated in this franchise agreement and the disclosure document that has been delivered to you.”
[5]Second defendant p 63.
There was no reference to the 100 cup guarantee in the draft franchise agreement, and the only reference in the disclosure document was the statement in cl 19.4(e) referred to earlier, and this was obviously not the only representation made by the defendant to the plaintiffs in relation to the 100 cup guarantee. Indeed, there were a large number of other representations made, and arguably making this statement was in itself misleading and deceptive conduct. I shall return to the significance of this clause in relation to any possible defence to claims under the Act. As it happens the plaintiffs insisted on the inclusion of a term in relation to it,[6] which appears in the document in Exhibit 8 tab H p 35, where there is a special condition relating to cl 17.1 in the following terms:
“The franchisor will ensure and assist the franchisee to achieve the 100 cup sales per five day week quota as advertised in the 100 cup guarantee on the Espresso To Go website.”
[6]Male plaintiff p 37; second defendant p 7.
That clause in terms refers to the website; a printout of some material from the website became Exhibit 26, but the printout appears to have been made on 21 August 2013. One of the pages refers to what is described as “100 cup start-up – each new Espresso To Go mobile coffee franchise comes with a 100 cup start-up turnover. Prior to handover, your new business will have the ability to achieve a turnover of 100 cups of coffee sold in a day.” There was no evidence that this was in the same terms at the relevant time, and I strongly suspect it was not. There was no direct evidence as to what was said on the website at the relevant time about the 100 cup guarantee, but I am prepared to infer that it was consistent with the material which was emailed to the plaintiffs.
The second defendant seemed keen to give evidence about what the 100 cup guarantee meant (p 56-59), though obviously his subjective intention as to the meaning of this expression is irrelevant for the purpose of interpreting it, and accordingly evidence of what he thinks it means is inadmissible. There was however evidence from him that he had communicated this to the plaintiffs prior to the contract being signed, and that evidence is admissible: he said that he told them that this meant that a turnover of 100 cups was achieved on one day prior to “handover”, that is to say the guarantee was met as soon as there was one day on which 100 cups were sold: p 29, p 82, p 55. The plaintiffs did not agree with this, and indeed said that there was some discussion that the guarantee would not be met just because on some particular occasion there were more than 100 cups sold, perhaps for some special reason.[7] The male plaintiff said that he told the second defendant that he wanted the guarantee to be of turnover of at least 100 cup sales for a normal five day week.
[7]Male plaintiff p 74, p 83. The second defendant accepted that a day when for some special reason there was one sale which took the total over 100 cups would not count: p 7.
In my opinion what is significant is that the statements about 100 cups per day speak of it as a “turnover” of 100 cups per day. The concept of “turnover” in my opinion implies some regularity, and if one reads the passages quoted they indicate that what is being spoken of is a level of turnover which has reached 100 cups per day. What is spoken about is not sales on one occasion, but rather the existence of turnover at a particular level. That is something which can only be meaningfully determined by reference to sales over a period of time. To say that the business has a particular level of turnover is different from saying the business happened to achieve a particular number of sales on one particular day.
It is ultimately unnecessary for me to express a concluded opinion on the meaning of this expression, since even on the meaning contended for by the defendants the plaintiffs’ business never achieved “100 cups sold in a day”. It seems to me that what is significant about these passages is more that they speak about the defendant’s building the business so that when it has reached a certain size it will be handed over to the franchisee, whereas the franchise agreement makes no reference to any handover of business, and simply contemplates that the franchisee will start up and operate its business under the franchise system. Of course the draft contract made no reference to the 100 cup guarantee.
The fact that the defendant forwarded a draft contract which made no reference to this strongly suggests that at the time the documents promising a 100 cup guarantee were sent out they were misleading and deceptive insofar as they spoke about the terms on which the first defendant would contract with the franchisee. Ordinarily a reference to a guarantee indicates that what is being spoken about is the making of a firm commitment for which responsibility would be taken.[8] Accordingly, for the franchisor to represent that it guaranteed something in my opinion indicated that what was intended was that this would be the subject of the contractual arrangement between the parties. Whether it is characterised as a representation of a current intention that any franchise agreement entered into would incorporate a guarantee, or whether it is characterised as a representation as to a future matter, namely the terms of any franchise agreement ultimately entered into, it is plain that at the relevant time the intention of the defendants was that what would be offered was a franchise agreement which did not incorporate a 100 cup per day guarantee. In such circumstances, to speak in this material of the first defendant’s offering a 100 cup guarantee was in itself misleading and deceptive conduct, though that is not relied on in this proceeding, because ultimately the contract did incorporate the 100 cup guarantee, at the insistence of the plaintiffs.
[8]Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199 at [92].
Lead up to the agreement
One of the things that the plaintiffs looked at was a profit matrix in Exhibit 1, tab F, which showed the gross income, costs, gross profit and expenses to produce a profit after expenses but before tax for sales of 0, 100, 150, 175 and 200 cups per day. The figure for 150 cups per day was just over $100,000, which was about the income the plaintiffs already had, and they said that from their point of view the business had to be doing better than this to be worthwhile.[9] Indeed, they said that they sought to negotiate a 150 cup per day guarantee in place of the 100 cups per day guarantee referred to in the defendants’ material (p 27), and there are contemporaneous emails confirming that they wanted this, although it was clear that the defendant never agreed to it.
[9]Male plaintiff p 24; female plaintiff p 66, p 71.
After the receipt of the initial emails, the male plaintiff on 8 April 2010 sent an email with a number of questions, confirming the plaintiff’s need for the higher income level and asking about a higher cup per day guarantee: Exhibit 3. This was followed later that evening by a further email with a particular question: Exhibit 4. The following day there was an answer to that question in an email from the second defendant: Exhibit 5. There was no written response to the others. The male plaintiff was a bit vague about when the first phone call occurred, but he thought that it occurred prior to the first email.[10] He said that during it the second defendant mentioned the fact that they had 44 franchises throughout Australia, and that the franchises averaged 160 cups per day of coffee sold.[11] He said some people did more than that, some over 200 cups per day.
[10]Male plaintiff p 25, p 91.
[11]Male plaintiff p 26; the second defendant denied this, p 33.
The male plaintiff said there was a further phone call which he thought was a couple of days later, when he spoke to the second defendant about his job, and some of his other personal circumstances. He said the second defendant spoke positively about the business and said there were examples of franchisees who were selling 180 or 190 or more in their first few days: p 27. The male plaintiff asked for a 150 cup per day guarantee, but the second defendant would not agree with that, saying that he would initially not want 150 customers a day because his speeds would be the issue, he would not be able to make coffee fast enough to satisfy the customers.[12] Presumably it was after this conversation that there was a further email sent to the second defendant on 13 April 2010: Exhibit 6. The email referred to “your response”, but it is not clear whether this was an oral response or simply the previous email from the second defendant of 9 April. This email advised that they were looking at the Ballina/Lismore region, and included some further questions.
[12]Male plaintiff p 27; second defendant p 80, but see p 34 line 33, which appears to be inconsistent.
The male plaintiff said that there were a number of phone calls after Exhibit 6 on 13 April, but he could not recall the dates or it seems much about what was said in any particular call. There were some further negotiation about the level of the guarantee, and some discussion about doing a feasibility study in Lismore and Ballina, and he said the second defendant said that off the top of his head both sites would be good but there needed to be a formal feasibility study: p 30. He recalled that in May there was a visit to a franchise at Murwillumbah, which there was some discussion about.
On 18 April 2010 there was a further email, from the female plaintiff to the second defendant: p 66; Exhibit 17. It referred to a number of questions, including how the feasibility test would be carried out on a given area, and sought the names of franchisees they could talk to. The content suggests that by this stage the discussions about the level of the guarantee had occurred, and the plaintiffs were no longer pressing for a 150 cup guarantee. The defendant said that in response he phoned and explained about the different vans, and said he nominated Gary Smith and Jarrod Maxwell as franchisees they could talk to: p 72. Neither plaintiff recalled being told those names, and Mr Smith did not mention any contact in his affidavit: Exhibit 28.
The male plaintiff said there was an arrangement made for him to see the franchisee at Murwillumbah. There was an email from the female plaintiff to the second defendant on 21 April 2010 advising that 7 May would suit, and seeking documentation which could be provided for them to go through with a lawyer: p 68, Exhibit 18. In response the franchise documents, being the blank franchise agreement, the disclosure document which is Exhibit 1 tab G, and a blank disclosure document receipt were emailed to the plaintiffs.[13] The male plaintiff said that in the visit they caught up with the franchisees on their run, and had a look at the van, tasted the coffee and had what he described as a brief chat with the franchisees, though he said there was not much conversation because he did not want to interfere with their doing their job: p 31. He said that the second defendant told him that this was the lowest performing franchise, that the franchisees were old and slow but that they were still averaging about 107-108 cups per day: p 32.[14]
[13]Second defendant p 73, Exhibit 18.
[14]See also female plaintiff p 68, where she seemed to be talking about a phone call. As to the visit to Murwillumbah: see p 68-9. The defendants disputed much of this, as discussed below.
Subsequently in June 2010 (p 35) there was a phone call to the female plaintiff from the second defendant advising of the outcome of the feasibility studies of Lismore and Ballina. He told her Lismore was so good he could put three vans into there, there was only one van there at the moment which was for sale and nobody knew of it: p 70. He also spoke positively of Ballina, but said that Lismore was so good that he was only willing to give them half of Lismore as the plaintiffs’ territory, and that they would only need half. She said she was really happy to hear this, and would not have signed the franchise agreement if aware that a feasibility study had not been done: p 72.
The male plaintiff then telephoned the second defendant to speak to him directly about the outcome of the feasibility study. He said that the second defendant told him that there was incredible fat or juice in Lismore and he could put in three vans there, whereas Ballina though good was not as good, and he could only put two vans in there: p 33. He said in effect that the second defendant spoke very positively about Lismore, that there was only one other van as competition and that no-one had heard of him, and his business was for sale, so he was not a threat. He said there was also another van in Ballina which was also for sale. He said that the study had exceeded his expectation, and indeed Lismore was so good that he could not give them the franchise for the whole town, but only for half the town.
The second defendant denied saying these things (p 39-40), and said that he told the male plaintiff that there were two vans already operating in Lismore, but there was room for a third, and that Lismore was a better market than Ballina: p 5, p 39-40. He said that 100 cups per day was achievable, but it would take longer in a place like that: p 4, 5. Ultimately when the franchise agreement was entered into it did not specify the franchise area by means of a map in the usual way, but provided as one of the special conditions on p 34:
“The territory will be equivalent to half of the Lismore region. However the boundaries are to be determined by the franchisee and franchisor during the initial six month period.”
There was also a provision inserted giving the plaintiffs the option to transfer to Ballina at their discretion at no cost or penalty, with the first defendant to give them this opportunity before granting any franchise in the Ballina region: Exhibit 1 Tab H p 34. There was obviously some negotiation of these and other special conditions before the franchise agreement was signed in July, but it was after the plaintiffs were told of the outcome of the feasibility study that they decided to go ahead with a franchise from the defendants.
Credibility
I should say something in a general way about the credibility of the main witnesses, the two plaintiffs and the second defendant. Generally I was impressed by the two plaintiffs in the witness box. I consider that both of them gave their evidence in a very straightforward and credible manner. They made concessions where it was appropriate to do so when being cross-examined[15], but they were obviously strongly of the view that they had been badly treated, and rejected with convincing detail important aspects of the defendants’ case that was put to them in cross-examination. Nothing emerged from the cross examination of the plaintiffs which caused me to have any doubt about their general reliability as witnesses.
[15]E.g. male plaintiff p 5.
On the other hand, I was generally not impressed by the second defendant as a witness. On one occasion he asserted that at no stage did he know what the average sales of the franchisees were, or what his franchisees would sell in a week (p 34) despite the fact that he had available a wealth of statistical information in the form of the cup sales data provided by all franchisees by the GPS monitoring system, and because the franchises were all buying their consumables from him. When however it was pointed out to him that there was on his American website a statement that his Australian franchises sold almost 40,000 cups of coffee per week (Exhibit 25) he claimed this statement was made on the basis of the number of disposable cups that he sold to them for such sales: p 51-53, p 71.[16] Given that he only had 17 to 25 franchisees at the time this statement was made (p 72), they would have had to be selling an average of 1,600 cups per week or more to justify that figure, a number which is obviously fanciful, given that no attempt was made to justify the proposition that the franchisees were selling on weekdays an average of 160 cups per day.[17] But apart from that, his two statements are plainly inconsistent.
[16]Eventually; when first asked he conceded that at the time he could not possibly say that the sales per week were 40,000: p 53. That I suspect was the honest answer, and I was not impressed by his later attempt to improve upon it.
[17]Even with the benefit of a V8 Supercars event at the weekend, a franchisee would reach 1600 only if selling 160 cups per day during the week, and this would have been an exceptional weekend for one franchisee: p 71.
The evidence of the second defendant about the “feasibility study” was also quite defensive: pp 58-61. He asserted that he had a mathematical formula but was extremely reluctant to reveal it (p 61), which was ultimately explained by the fact that the formula – 350 business will support one franchise – was obviously silly, since on its face it was independent of the size of the businesses, and ready availability to them of alternative sources of espresso coffee. Obviously his reluctance to reveal it was not prompted by the fact that it was a wonderful trade secret, but by the fact that it was embarrassingly rudimentary. There is also the consideration that his own account of what he did by way of a feasibility study could not possibly be thought to have lived up to the representations about the nature of such a study which were included in the written documents.
It also seemed to be extraordinary that he made no attempt to preserve any records of the plaintiffs’ trading results: p 68. The explanation was that his computer program overwrote the records after about three months (p 81), but it must have been readily apparent well before this franchise had been operating for three months that it was in serious trouble, and that there was a real prospect of a dispute, and at least the possibility of litigation arising out of it. There is also the consideration that the cautious and measured statements he claims to have made to the plaintiffs from time to time stand in marked contrast to the emphatically positive content of the written documents which he was sending them, and indeed of the marketing material included in the operators manual which was provided to them during their training after they had signed the franchise agreement. The plaintiffs’ evidence, that he was as enthusiastic in his oral statements as he was in his written statements, is obviously more plausible than his evidence.
There was a substantial difference which I have already identified between the plaintiffs and the second defendant as to their conversations in relation to the outcome of the feasibility study. It seems to me that a major difficulty in the way of accepting the second defendant’s version is that it does not explain how it came about that the franchise agreement provided for a territory which was only half of Lismore, something readily explained by the plaintiffs’ version. The second defendant referred to the plaintiffs’ wanting to preserve the opportunity to move to Ballina (p 6), which is dealt with in a special condition, but on his account the franchise agreement should have provided for a territory consisting of the whole of Lismore. Furthermore, on the basis of the second defendant’s mathematical formula, Lismore is capable of supporting five coffee van runs, so that, allowing for the two that were already there, if this formula really worked the defendant could have put three vans into Lismore, as the plaintiffs said he had claimed. In these circumstances the defendant’s version of this conversation is quite implausible.
There was also a conflict between the female plaintiff and the second defendant as to whether he asked her to backdate the certificates after they had signed the franchise agreement. The exchange of emails at the time however (Exhibits 19, 20) seemed to me to be much more consistent with the female plaintiff’s version, that she was asked by the second defendant to backdate documents. It would be odd if she had referred to backdating in her email otherwise, and odd that the second defendant made no response to this reference if he had not in fact asked her to backdate the documents. The second defendant claimed that there had been no previous issues with a franchisee in relation to the franchising code (p 47) when in fact there had been previous litigation in which the franchisee had alleged breaches of the franchising code. He claimed that in the first few days Ms Taylor would avoid potential cornerstones on the basis that a new franchisee would not be able to cope with them (p 75), a proposition which not only sounds illogical but was contradicted by Ms Taylor in her evidence: p 103.
It is unnecessary to multiply examples. Overall my assessment of the second defendant was that he was an unreliable witness whose evidence I would not accept unless it was supported by independent reliable evidence, or inherently probable; I cannot think of an example for the latter. In matters where the plaintiffs’ evidence is in conflict with the evidence of the second defendant, I prefer the evidence of the plaintiffs. With regard to the other witnesses, I have dealt elsewhere with the evidence of Ms Ball. With regard to Ms Taylor, I am a little weary about her evidence because of her claim to be unable to recall whether she resigned or was asked to leave (p 89), something I would expect her to remember given that it only happened about two and a half years ago, but generally I thought her evidence was plausible as far as it went, which was not very far; evidently she had little recollection of her dealings with the plaintiffs.
With regard to Mr Smith, I have identified one feature of his evidence which must be wrong. There is also the consideration that, although I indicated a willingness to receive his evidence by telephone from America, he evidently did not do what was necessary in order to make telephone contact with the court. In his affidavit he was somewhat critical of the attitude of the male plaintiff, though it seems to me that his criticism does little more than reflect his awareness that the male plaintiff was concerned and upset by the fact that the turnover was nothing like 100 cups per day. He was very vague in his criticisms of the male plaintiff’s approach to the business, although he did say that in March there were three sites, which he named, which the plaintiffs dropped, although they “had yielded a decent amount of cup sales”. The male plaintiff was taken to this evidence and he convincingly refuted it; two of the sites nominated were never established run sites, the plaintiff’s van was essentially not welcome at one of them, and they were not incorporated into the run, and the third site was dropped because only about a couple of cups of coffee were being sold there, and it involved a good deal of travel to include it in the run: p 45-6. In the circumstances I prefer the evidence of the male plaintiff to that of Mr Smith, and am not persuaded that there was anything in particular that the male plaintiff was doing wrong in operating or marketing the business, or that Mr Smith could have achieved sales of 100 cups per day in Lismore had the male plaintiff been more cooperative.
Representations alleged
Paragraph 15(a) referred to a representation that all relevant information had been disclosed to the plaintiffs. What was relied on was a statement in one of the documents emailed by the second defendant, Exhibit 1, Tab A, p 3, that the business plan “provides all the relevant information regarding an Espresso To Go franchise”. There is no doubt that that representation was made, though the information contained in that business plan was information about Espresso To Go franchises in the abstract, rather than information which was specific to the franchise at any particular location. Paragraph 61 alleged that the representation in paragraph 15(a) was misleading and deceptive because the defendants had failed to disclose information about the number of existing mobile coffee vans operating in the Lismore area. This is an allegation in relation to information about a franchise specifically at Lismore, and the written representation relied on was obviously not a representation which was specific to Lismore; at the time the document was provided the defendants had no idea that the plaintiffs were interested in a franchise in Lismore. It follows that this part of the plaintiffs’ case is not made out.
The next series of misrepresentations were alleged in relation to the feasibility study. Those in 15(b), (c) and (d) were representations that a feasibility study would be conducted on the area in question prior to the franchise agreement being entered into, as a general proposition. In written submissions on behalf of the defendants it was conceded that these representations were made, but it was said that they were true. The plaintiffs essentially rely on written representations in relation to these matters. The document in Exhibit 1, Tab A on p 6 says “A feasibility study is undertaken on each area, at which time pertinent data is collected including the number and type of business, number of staff, demographic profile of the staff and typical hours worked (shift or otherwise). This data is used to calculate the turnover and growth potential of the area to ensure if it fits within company guidelines.” The plaintiffs also rely on document Exhibit 1, Tab E at p 7 which relevantly stated: “We conduct a feasibility study on each area and collect data such as the number and type of business, number of staff, demographic profile of the staff and the typical hours worked (shift or otherwise). We then mathematically calculate the turnover and growth potential of the area to determine if it fits within our stringent guidelines. Our territory selection process draws on years of experience and utilises our proven formula to identify the best available operating territories for our franchisees.”
The representations alleged in paragraphs 15(b), (c), and (d) were based on the written materials, except for the aspect that the territory would be one capable of sustaining 150 plus cups a day in sales. This was alleged to have been made orally, but it seems to me that there was no evidence from the plaintiffs that prior to the feasibility study being undertaken, there was any representation that the study to be undertaken would be directed to ascertaining specifically whether the area in question was capable of sustaining 150 plus cups a day in sales. Accordingly this allegation is not made out. In other respects however, the representations in those three paragraphs were made.
These representations were as to a future matter, because at the time they were made they referred to what would occur in the future, before a franchise agreement was entered into. Accordingly s 51A of the Act applies, and they are taken to be misleading and deceptive unless the defendants had reasonable grounds for making them at the time they were made. As to this, the trial proceeded essentially on the basis of an examination of what actually occurred by way of a feasibility study, which depended upon the evidence of the second defendant. There were no documents put in evidence which revealed anything about the content or process involved in undertaking this particular “feasibility study”. The defendant’s evidence was direct to the way in which he conducted this particular feasibility study, but I think it is fair to conclude that the process involved on this occasion was the standard process used by the second defendant when conducting such a feasibility study, and reflected the second defendant’s intention as to the nature of any feasibility study to be undertaken at the time the written representations were made in early April 2010.
On the defendant’s own evidence the “feasibility study” which he undertook in relation to Lismore was manifestly fatuously superficial. The second defendant said that he did an internet search from which he was able to ascertain the total number of businesses in the Lismore area as 1,800, that he visited the area and called on a number of businesses, and that he had a “formula” which consisted of the proposition that 350 businesses in an area would support one run.[18] On the basis of that formula, the Lismore area would support a number of runs, derived by dividing the number of business in the area by 350, (5).
[18]Second defendant p 3, p 58-62.
There was no evidence that data was collected as to the type of businesses, or the number of staff for each business, or the total number of staff overall, let alone any data about demographic profile of the staff, or any information about typical hours worked. In addition, there was no evidence of any mathematical calculation of turn over and growth potential to determine if the area fitted within stringent guidelines. There was no evidence that there were any stringent guidelines apart from the proposition that any 350 businesses in an area were regarded as sufficient. It follows that, taking the defendant’s evidence at face value, what was represented in the documents as to the content of a feasibility study which would be carried out was misleading and deceptive because the defendant did not have any reasonable basis for saying that there would be a feasibility study which gathered the information said to be gathered, or analysed it in a meaningful way. In those circumstances, in my opinion the making of these representations was clearly misleading and deceptive conduct.
This I think is a matter of some significance, because the feasibility study is presented in the documents as a sophisticated exercise which is capable of identifying in advance whether an area is going to be successful for a business of this nature. The exercise described by the defendant would be completely inadequate for that purpose. The defendants’ marketing material spoke of the process of building a run by reference to “cornerstones”, which are described as substantial businesses where a relatively large number of sales can be made each day when the van calls.[19] These are said to be the foundations of a run, and the object of good run design is to identify cornerstones and incorporate them into the run in an efficient way so as to minimise the number of stops needed in order to sell as much coffee as can be sold in the time available.
[19]Exhibit 14, Marketing Program section, p 2.
That all makes perfect sense, but is obviously incapable of application in an area which does not include any significant number of businesses which would be cornerstones as described. On the defendant’s account, no attempt was made to ascertain whether there were any businesses in Lismore which would fit that description, let alone whether there were sufficient to provide the necessary foundation for a run structured in the way contemplated in the marketing material. Merely to ask how many businesses there are in the area does not in my opinion say anything meaningful about the potential market for a franchise of this nature.
It is obvious that potential customers for a business of this nature represent people who have a particular workplace, where the van will be coming at a time when they are likely to be wanting to drink coffee, where coffee (or at least espresso coffee) is not going to be readily available to them. It follows that businesses located within easy walking distance of a café or other business where espresso coffee is available are not going to be of any relevance to a franchise such as this, and need to be excluded from such calculations. There is also the consideration that, as emerged in the evidence from time to time, it is not simply a matter of pulling up the van somewhere and selling coffee to anybody who walks up; it is necessary to go specifically to business premises in order to sell coffee to people at those premises, because of licensing requirements of the local authorities. This is another reason why businesses located in a CBD would be effectively off limits for a coffee van.
The other side of the equation of course is competition. It emerged when the plaintiffs began their run in Lismore that there were already two operating coffee vans in Lismore: p 46. The defendant said he knew that that was the case before he went there (p 72, p 5) but I accept that he told the plaintiffs that there was only one van there. Obviously the capacity of a particular area to operate a coffee van franchise successfully will depend on the level of competitions from other coffee vans. It would be possible of course for a feasibility study to identify a particular area as being suitable on the basis that there was no van competition, and by the time the franchise was granted and began to operate one or more competing vans had started up, but there was no suggestion that was the explanation for the situation in Lismore. The true position seemed to be that there was no serious attempt by the second defendant to ascertain the penetration of existing competitors in Lismore.[20]
[20]He conceded he did not even record what proportion of the 20 or so businesses he claimed to have spoken to said they already had a coffee van calling: p 81.
I should also say that all of this depends on acceptance of the second defendant’s evidence as to the content of such enquiries as he made into such a business in Lismore. No documents were disclosed or produced at the trial by the defendants in relation to the feasibility study said to have been undertaken for Lismore.[21] On the basis of his evidence, there were some notes taken (p 58), but even those were not retained, or at least not disclosed and produced at the trial. For reasons I have indicated elsewhere, I otherwise have doubts about the second defendant’s reliability as a witness. I am not prepared to accept his evidence about the “feasibility study” and find positively that he did do the things that he said he did, but it is sufficient for the purpose of resolving this aspect of the case to say that, assuming he did do those things, what was undertaken was not a “feasibility study in the manner represented”. Since that was the representation relied on, it is I think strictly speaking unnecessary to determine whether what the second defendant did could be characterised as a “feasibility study” at all, but if it were necessary to decide that, in my opinion, what was done was too superficial to justify that description. The term “feasibility study” implies some process of scientific rigour and systematic analysis of relevant data which has been collected, and that is not what occurred in this case, on the second defendant’s evidence.
[21]All he had was a bill showing that the had spent the nights of 11 and 12 May at Ballina: Exhibit 24.
The representation in paragraph 15(e) was a representation as to the outcome of what was said by the second defendant to have been a feasibility study conducted in Lismore. The evidence of the plaintiffs[22] was that the second defendant had spoken to each of them and each said that the representations as to the outcome of the feasibility study in paragraph 15(e) were made, other than the reference in subparagraph (iv) to the territory attaining at least 150 plus cups a day in sales. Neither plaintiff referred to such a statement being made expressly by the second defendant in that conversation.
[22]I have referred to this evidence earlier: male plaintiff p 33, female plaintiff p 70.
The second defendant’s version of the conversation was quite different[23]; for reasons I have given elsewhere I reject that version. I accept that the second defendant spoke in glowing terms about Lismore’s prospects, that he said it could support three vans, that there was only one other van operating which was for sale and no one knew about it, and that the plaintiffs would need only half of Lismore for their franchise. The last proposition follows from the statement that Lismore was such a good area that the defendant could only give the plaintiffs half of the town, but the clear implication was that that was all that they would need.
[23]Second defendant p 4, 5, p 31: “it could handle a third van”.
The plaintiffs’ attempt to operate the franchise business in Lismore were spectacularly unsuccessful, and their turnover was not built to 100 cups per day or anything like that, either with the assistance of Ms Taylor, the person initially provided by the first defendant as a franchise support manager, or with the assistance of Mr Smith, said to be a very successful franchisee, who was provided subsequently on a number of occasions.
Ms Taylor gave evidence and there was nothing in her evidence to suggest that there was anything that the plaintiffs were doing wrong which would have prevented them from being able to build up the business to that level had there been a potential in Lismore for a business of that level: p 99. Mr Smith did not give oral evidence. An affidavit of his suggested that there were some deficiencies in the way in which the male plaintiff was undertaking the business,[24] but in circumstances where there was no significant improvement in the turnover and during the period when Mr Smith was providing guidance[25], I am not prepared to find that there were any deficiencies in the way the male plaintiff was conducting the business which adversely impacted on the level of turnover achieved by it.
[24]Exhibit 28, para 9, 23.
[25]During the three weeks he was there in February-March 2011 (Exhibit 28) the average cup sales per day were 59, 63 and 51: Exhibit 22. Higher average cup sales were achieved without him in early December (66) and in early June 2011 (67).
In the circumstances it seems quite clear from the plaintiffs’ experience that at the time they were attempting to establish their business Lismore did not have a capacity to sustain a franchise with a turnover of 100 cups per day or anything like that. Implying the presumption of continuance I accept that that was the situation as well at the time when the second defendant reported to the plaintiffs on his “feasibility study” of the area. At that time therefore Lismore could not support one Espresso To Go franchise, let alone three, half of Lismore would not be an adequate territory for a Espresso To Go franchise, and accordingly the representations which I have found were made were misleading and deceptive. This I think was also a significant matter, because it is clear from the plaintiffs’ evidence that they regarded the positive outcome of the feasibility study as a significant matter in relation to their decision to enter into the franchise agreement.
The issue of a potential turnover of 150 plus cups per day remains to be determined and can be conveniently determined by reference as well to the representation pleaded in paragraph 15(f). This representation was alleged to have been made orally, and there was a conflict of evidence as to whether this was said. The plaintiffs’ version of this is consistent with the proposition that the second defendant told the plaintiffs that they would not be able to cope with sales of 150 cups per day initially, as a reason why he would not give a guarantee of sales of 150 cups per day.[26] Nevertheless, both plaintiffs spoke of being assured by the second defendant in oral conversations that the plaintiffs would soon be turning over 150 cups or more per day. The male plaintiff said that the second defendant said to him, in the context of negotiating the special conditions giving a period of six months before the royalty fee became payable, that six months was “way more than you need to get 150, you are not going to have a problem”: p 36. The female plaintiff also said that the second defendant said to them “you guys will be at 150 within no time. We get you your 100. You guys are going to get to 150 in no time, but if you really want us to come back and help you to do that, we’ll do that at a fee, but you’ll have it within no time”: p 72.
[26]According to the male plaintiff p 27; the second defendant denied saying this: p 34, but see p 80.
The second defendant denied making those statements to the plaintiffs (p 31), or saying anything like this, except that he did agree that the franchise agreement was amended at the request of the plaintiffs to incorporate the term about providing assistance to increase sales to 150 cups a day. It is therefore necessary to resolve this on the basis of making a finding as to credibility, bearing in mind the consideration that a finding that there has been misleading and deceptive conduct is a serious matter, so that such a finding should not be made on the basis of oral evidence alone unless it is clearly established.[27]
[27]Watson v Foxman (1995) 49 NSWLR 315 at 318-9; ACN 070037599 Pty Ltd v Larvik Pty Ltd [2008] QCA 416 at [30].
The background of the plaintiffs indicates that they were enjoying a combined income of over $100,000 per annum in their previous employment, and in those circumstances, based on the calculator provided by the defendant, they needed to be selling over 150 cups per day in order to be generating a level of profit from this business comparable to their income from their current employment.[28] This financial position is established by payslips from each of the plaintiffs, although they require some interpretation.[29] Further, contemporaneous emails indicate that the plaintiffs wanted to be assured that they would have a turnover of 150 cups per day, because they confirm that at some stage at least they sought an increase in the guarantee spoken of in the defendant’s material: Exhibits 3, 6. The defendant agreed that he was told that this was the level of income they needed, and were aiming at: p 32-3, p 56. That the plaintiffs had a target of in excess of 150 cups per day is also confirmed by the two provisions in the franchise agreement inserted at their request, the provision confirming the availability of extra assistance to reach that target, and the provision giving a royalty holiday for six months to give them time to reach that target.
[28]They concluded that they needed 150 cups per day: male plaintiff p 24, p 35; female plaintiff p 71.
[29]Male plaintiff Exhibit 2, p 13: female plaintiff Exhibit 23, p 47.
Hence there is a good deal of contemporaneous documentation and objective material to support the plaintiffs’ evidence that they wanted a business which would turn over at least 150 cups per day, because they were not interested in a franchise otherwise as it would not generate a level of income broadly comparable with their current income. That I think provides objective, contemporaneous confirmation of the position of the plaintiffs, and it is a small step from that point to conclude that they would have been unlikely to have decided to enter into this franchise agreement unless there had been the sort of assurance that they say the second defendant provided, that the franchise business would be able to meet their requirement of a turnover of 150 cups per day once their ability to process sales at that speed had developed with experience. Under these conditions, it would be logical to expect that the plaintiffs would not have entered into the franchise agreement unless it was sold to them by the second defendant on this basis; on the other hand, given the existing financial circumstances of the plaintiffs, it is I think quite unlikely that they would have been interested in taking on a franchise simply on the basis that the only assurance offered was as to a turnover of 100 cups per day.
The defendant’s account of what he says he said to the plaintiffs about the level of business sounded suitably careful and restrained, and having seen the plaintiffs in the witness box I simply do not accept that they would have entered into a franchise agreement if the defendant had in fact said to them what he says he said to them about the potential of this business. On that basis therefore I consider that the proposition that the defendants represented to the plaintiffs that they would attain sales of 150+ cups per day inside six months in the Lismore area was established to the appropriate level of confidence to use that finding as a basis for a finding that the making of that representation was misleading and deceptive.
That was a representation as to a future matter, so that it is a matter for the defendants to show that they had reasonable grounds for making that representation. It did not appear to me that any attempt was made by the defendants to show that in relation to this representation.[30] The defence pleaded and argued was that there was no such representation made. Once I have found to the contrary, it seems to me that it necessarily follows that the making of that representation amounted to misleading and deceptive conduct on the part of the first defendant. In any case, it is I think clear that in fact the first defendant had no reasonable basis for making such a representation about the situation in Lismore, bearing in mind the inadequacy of the “feasibility study” process as discussed earlier, and the absence of actual demand which was subsequently demonstrated by the failure of the plaintiffs’ business.
[30]The second defendant conceded he had no basis for such an assertion: p 57.
The representations pleaded in paragraph 15(g) are three representations in relation to the Murwillumbah franchise, one representation in relation to Espresso To Go franchises generally, and one representation as to the plaintiff’s prospects in Lismore which is caught up with the issue of the representation about 150+ cups per day. I do not think that it adds anything to the earlier conclusion and essentially regard paragraph 15(g)(v) as surplusage. As to the representations made about the Murwillumbah franchise, this was supported by oral evidence from both plaintiffs. The defendants’ case in relation to these representations was simply that they were not made: p 36.
Apart from the evidence of the plaintiffs and the second defendant, there was also evidence from one of the franchisees, Ms Ball. She said that she and another woman had purchased a franchise around the end of 2009 (p 21), and that when they started Christine Taylor had been with them and had done the marketing and built the turnover up to about 80 cups per day by the time when she left after about four weeks: p 22. She left at that time because the two of them were comfortable making that number of cups per day and were not wanting more growth in the business at that stage. They still have the franchise, and are now making between 100 and 120 cups per day, though to achieve this number they start work at 6 a.m. and work until about 2-2.30 p.m.: p 23. She said that she recalled the plaintiffs coming to see them, and that when they did her recollection was that the male plaintiff had asked how many cups per day they were making and one of them said they were making between 80 and 100, that there was a question about whether that turnover was enough to support two salaries, and that she said she thought that if they had to borrow money to pay for the franchise that level of income would not support two salaries and pay off the loan: p 24.
This evidence is inconsistent with the evidence of both of the plaintiffs, and was not directly supported by the evidence of the second defendant, although he said that when the plaintiff was talking to these franchisees he moved away to give them the opportunity to talk in private: p 75. There was also some inconsistency between her evidence to me and what she had said in an affidavit she swore in February 2012, Exhibit 27. That affidavit said that the question about cup numbers was asked and the same answer was given, but otherwise the plaintiffs asked each of them whether they were happy with their decision to buy the franchise, and each of them said that they were happy and spoke in positive terms of the training they had received from Ms Taylor.[31] There is nothing in the affidavit about the business supporting two salaries with or without a loan. She also said there that there was a discussion between the plaintiffs and the second defendant in her hearing about the van and its features, but that he had not spoken about the number of cups sold by their business or the success of their operation in comparison with other franchises.
[31]No reference was made in the oral evidence to the various favourable things which were said about Ms Taylor in the affidavit.
The guarantee was in my opinion an important term of this contract, and in circumstances where the first defendant, even after several months, had not satisfied the guarantee, and had abandoned any attempt to satisfy the guarantee, I consider that this behaviour amounted to repudiation of the contract by the first defendant. In these circumstances the plaintiffs were entitled to accept that repudiation and terminate the contract, and I find that the effect of what they did was to achieve that result. In circumstances where the contract came to an end because the first defendant’s repudiation was accepted by the plaintiffs, the first defendant cannot recover damages for breach of contract. Accordingly the counterclaim is dismissed.
There will therefore be judgment that the first and second defendants pay the plaintiffs $202,732.58 dollars. Unless another order is appropriate, as to which I will hear submissions when the reasons are delivered, I will order the first and second defendants to pay the plaintiffs’ costs of and incidental to the action to be assessed. The counterclaim should be dismissed, also with costs to be assessed.
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