Chamakala v 7-Eleven
[2009] VCC 1796
•27 March 2009
| IN THE COUNTY COURT OF VICTORIA | Revised |
(Not) Restricted
AT MELBOURNE
CIVIL DIVISION
APPLICATIONS
Case No. CI-08-00727
| VARGHESE PYNADATH, POLACHAN | Plaintiff |
| PYNADATH, THOMAS LIUKOSE | |
| CHAMAKALA & ORS & JMJ TRADERS PTY | |
| LTD. | |
| v | |
| 7 - ELEVEN STORES PTY LTD | Defendant |
| JUDGE: | JENKINS |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 13, 14, 15, & 17 October 2008 |
| DATE OF JUDGMENT: | 27 March 2009 |
| CASE MAY BE CITED AS: | Chamakala v 7-Eleven |
| MEDIUM NEUTRAL | [2009] VCC 1796 |
| CITATION: |
REASONS FOR JUDGMENT
Catchwords: Claim pursuant to section 52 of the Trade Practices Act 1974 and section 9 of the Fair Trading Act 1999; false and misleading representations alleged to have caused disputation between owners of franchise business with consequent fire sale and loss.
| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Clarke | Chadwicks |
| For the Defendant | Mr S.R. Horgan | Slater & Gordon |
TABLE OF CONTENTS
Background..........................................................................................................................3
Nature of Proceedings ........................................................................................................3
The Representations ...........................................................................................................4
Witnesses.............................................................................................................................5
Evidence...............................................................................................................................5
Analysis of the Alleged Representations ..........................................................................5
Causation ...........................................................................................................................16
The decision to sell the franchise ...................................................................................17
Assessment of Damages ..................................................................................................19
Conclusion .........................................................................................................................22
Orders.................................................................................................................................22
Evidence for the Plaintiff.....................................................................................................2
Purchase of 7-Eleven Franchise ......................................................................................2
The Franchise Agreement................................................................................................2
24 February 2005 .............................................................................................................3
Default notice dated 15 March 2005.................................................................................4
Franchisee reply dated 21 March 2005 ............................................................................5
Congratulatory letter dated 30 March 2005 ......................................................................7
Meeting dated 10 May 2005.............................................................................................7
Weekly Communications Recap dated 10 May 2005 .......................................................8
Meeting late May 2005 with Sue Owen ..........................................................................10
Sale of business .............................................................................................................12
Letter dated 7 November from 7-Eleven ........................................................................13
Evidence for the Defendant ..............................................................................................14
Expert Evidence.................................................................................................................18
HER HONOUR:
Background
1 In August 2004 three friends, Thomas Chamakala [also known as Chamakalayil] [“Thomas”], Varghese Pynadeth [“Varghese”] and his brother Polachan Pynadath [“Paul”] incorporated a company JMJ Traders Pty Ltd [“JMJ Traders”] through which they purchased a 7-Eleven franchise to operate a store in Sunbury. In March 2005 JMJ Traders received a notice of default under its Franchise Agreement. A dispute arose between Thomas, Varghese and Paul as a consequence of which they decided that they could no longer operate the business together and the franchise was sold in October 2005.
Nature of Proceedings
2 By Statement of Claim dated 25 July 2006 and originally issued in the Supreme Court, Thomas, Varghese, Paul and JMJ Traders all claim to have suffered loss and damage by reason of the making of certain representations by the Defendant 7-Eleven Stores Pty Lty [“7-Eleven”].
3 The Plaintiffs claim that the representations were made in trade and commerce, and that they were misleading and deceptive or likely to be misleading and deceptive in breach of section 52[1] of the Trade Practices Act 1974 [the “Act”] and section 9 of the Fair Trading Act 1999.
[1] Misleading or deceptive conduct (1) A corporation shall not, in trade or commerce, engage in conduct
4 As a consequence of the representations the Plaintiffs claim that the partnership in JMJ Traders was dissolved and the Sunbury store franchise was sold at a loss and an additional loss of opportunity. An expert report of Mark Lipson dated 22 November 2006[2] calculates the losses at $111,000.00 for loss of goodwill and $507,500.00 for loss of profit.
[2] (CB150-161)
5 Although proceedings were first instituted in the names of the three individuals and their incorporated franchisee JMJ Traders; Thomas, Varghese and Paul have agreed that both Varghese and Paul withdraw from any proceedings against the Defendant.
The Representations
6 The representations alleged to have been made fall into two categories as follows:-
First, that $1,100 was debited to the cash wages account.[3] This representation is said to arise out of a Weekly Communications Recap dated 10 May 2005 and an Expense Report dated 4 May 2006 [the “cash wages withdrawal representation”]; and
[3] St/Claim Para 5; CB 13-15
Secondly, that Varghese had failed to ring up sales of 14 slurpies on 24 February 2005 [the “transaction recording representation”]. This representation is said to have been:
a)
made initially in a telephone call from Bryan Kennett [“Kennett”] to Paul in the last week of February 2005;
b) repeated in the Breach Notice delivered 16 March 2005;[4]
[4] St/Claim paras 6 & 7
c) repeated in a telephone call between Kennett and Varghese on 5 May 2005 when Kennett told Varghese that he was the one who conducted the sales and that he should look at video tapes for himself;[5] d) repeated on 10 May 2005 when Kennett said that Varghese had pocketed the money for the slurpies by not recording the sales;6 and e) repeated on 10 May 2005 by Kennett in the Weekly Communications Recap. [5] St/Claim para 8
7 By its Defence dated 20 September 2006 7-Eleven makes the following admissions:
a)
that it represented that 14 slurpies had not been correctly recorded through the cash register on 24 February 2005;
b) that a Breach Notice was served on 16 March 2005;
c)
that the Weekly Communications Recap on 10 May 2005 was annotated by Kennett as alleged; and
d)
on the day of settlement of the purchase of the Sunbury store franchise by JMJ Traders there was an error in relation to the debiting of $1,100 from its store account. Those monies and interest were repaid to JMJ Traders’ store account in March and April 2006.
8 Otherwise, 7-Eleven denies making the representations alleged and states further that even if made, such representations are not actionable.
9 7-Eleven further denies that anything it did has caused any loss and damage to the Plaintiffs. Further, it says that the Plaintiffs in fact sold the franchise for a price well in excess of the original purchase price and that JMJ Traders earned a substantial income in the period during which the Plaintiffs conducted the business.
Witnesses
10 On behalf of the Plaintiffs, evidence was given by Thomas; Varghese, Paul and Mark Lipson of Sothertons.
11 On behalf of the Defendant, evidence was given by Bryan Kennett District Manager for 7-Eleven; and his former wife Lynette Kennett.
Evidence
12 I have summarised the evidence of the parties in some detail. In order to come to a view upon the issues raised in this case it has been necessary to consider the timing and circumstances of various acts, omissions, correspondence, and conversations of and between all concerned parties. The summary of evidence is contained in Annexure 1.
Analysis of the Alleged Representations
13 There is no issue that 7-Eleven was clearly engaged in trade or commerce for the purpose of Section 52 of the Act. The business franchise was purchased and operated by JMJ Traders, an incorporated company in which Thomas, Varghese and Paul held equal shareholding and control. The representations relied upon related to the alleged acts or omissions of one or more persons responsible for the management of the business. The representations were said to have caused such disharmony and distrust between the shareholders that they caused JMJ Traders to sell the business in circumstances where a loss was incurred and future opportunity for profit forfeited.
St/Claim para 9
14
Defence Counsel questioned any right of action by the individual Plaintiffs where the loss is alleged to have been incurred by the incorporated franchisee. I agree. Although clearly JMJ Traders can only act through its directors and authorised representatives, in the circumstances of this case it is not apparent on what basis any of the individual shareholders may claim compensation for an alleged civil wrong committed against the company.
15
Defence Counsel further submitted to the effect that the representations relied upon in the Statement of Claim were not supported by evidence. I agree. Furthermore, there is a paucity of objective evidence in relation to the timing, circumstances and content of a number of alleged complaints and enquiries said to have been made by Thomas, Varghese and/or Paul following the making of the alleged representations.
16
First in relation to the cash wages withdrawal representation, the Statement of Claim[7] alleges that… On or about the 10th day of August 2004 the defendant
[7] paragraph 5
provided a statement of settlement alleging that the JMJ Traders had received
from the defendant a payout in the sum of $1,100 to the cash wages account
17 In their further and better particulars of Statement of Claim the Plaintiffs state that the settlement statement referred to was partly in writing and partly to be implied and to the extent that it was in writing is constituted by a Weekly Communications Recap dated 10th May 2005 and an Expense Report from the Defendant to the Plaintiffs dated 4th May 2006.
18 The content and circumstances of the alleged representation and the response of the Plaintiffs do not substantiate the claim: In particular, I note the following:
a)
A document dated 4 May 2006, is already well after the sale of the Sunbury franchise business which settled in January 2006;
b)
The Expense Report which appears at page 128 of the Court Book bears the print out date 10-08-2006;
c)
No Expense Report or other settlement statement or financials [as described by Varghese] was produced by the Plaintiffs as having been received prior to the sale of the business;
d)
It is not apparent as to precisely when the Expense Report was first received by JMJ Traders or in what form. In his evidence Varghese said that they received “financials” a few days after settlement from which he became aware of the $1100 debit. He further states that he enquired about this matter with Kennett and at his request Varghese arranged for Paul to submit a written information request. No evidence was given by Paul about such written request and no written request was tendered into evidence;
e)
On the Plaintiffs evidence, Varghese and Paul were made aware of the $1100 debit within a few days of the settlement and while Thomas was still overseas. Varghese immediately queried it. There is no other evidence as to what discussions if any took place between Varghese, Paul and/or Thomas about this debit when the information first became available. Thomas gave evidence that the $1100 debit was first brought to his attention upon his return in February 2005. However, this matter was not formally raised again with 7-Eleven until 10 May 2005 or some nine months after settlement;
f)
The Expense Report records a debit at the store on the day of settlement but does not otherwise specify to whom the amount was paid or credited;
g)
There is no evidence that 7-Eleven had any intention to mislead or deceive JMJ Traders by the Expense Report;
h)
There is no evidence that the Expense Report represents a default or that a default notice issued as a consequence of any of its contents;
i) There is no representation that the debit was made by the Plaintiffs; and
j) The sum of $1,100 and interest of $210.67 was credited to the store account in March and April 2006 so that ultimately no loss has been suffered. 19 I accept the evidence of Kennett to the effect that the Weekly Communications Recap merely recorded what had been said between the parties. Accordingly, there is no basis upon which this document per se purports to misrepresent or deceive the Plaintiffs. Indeed it has been co- signed by Varghese and Paul as a correct record. I also accept that the evidence of Kennett provides the only reasonable explanation as to why 7- Eleven ultimately made an adjustment for $1100 in favour of JMJ Traders.
20 Equally, I accept that it is inexplicable why 7-Eleven took as long as it did to finally make such adjustment. It is also inexplicable as to why that adjustment was not made until after the sale of the business and indeed subsequent to the final settlement of that business. These matters all point to a lack of diligent and timely investigation of this Expense Report item, at the very least from 10 May 2005. It is also inexplicable as to why 7-Eleven did not either properly explain or indeed explain at all why an adjustment was ultimately made in favour of JMJ Traders. However, in my view the subsequent poor communication and dilatory investigation by 7-Eleven does not constitute the original representation as false or misleading. At worst it was an inadequate accounting record, which by reason of the timing of the changeover of both the vendor and purchaser and the register systems, made it ultimately impossible for 7-Eleven to confirm by whom the withdrawal was received.
21 Secondly, in relation to the transaction recording representation, the Breach Notice essentially advises that JMJ Traders is in default under the Franchise Agreement by reason of its failure to record all sales in accordance with the terms of that Agreement. The Franchise Agreement provides to the effect that the franchisee must record on the register all sales as and when they occur, that is, at that time when the goods are provided and money received. It is a default of this nature which the Breach Notice advises has occurred on that date and between the times specified. The Notice then states…. we are
calling these defaults to your attention so that you will have another opportunity to comply with the agreement and by reporting all your actual
sales for your store… The Notice then invites discussion about the matter and
a response within seven days. It is noteworthy that:
a)
the Notice does not assert that any particular sale or sales have never been recorded;
b)
There is no explicit or implicit representation of theft or any other wrongdoing of that nature in the Default Notice;
c)
There is no assertion in the Notice or any other document that any of the Plaintiffs behaved dishonestly;
d)
There is no assertion in the Notice that 7-Eleven is forthwith entitled to terminate the Franchise Agreement or that it has any intention of doing so;
e)
The explanation contained in the Reply was, according to Kennett, accepted by 7–Eleven who would not have taken the matter further but for the matter being raised on behalf of the franchisee on 10 May 2005;[8] and
f)
The Default Notice was ultimately withdrawn by letter dated 7 November 2005 with an acknowledgment that 7-Eleven was unable to verify the information provided to it about the failure to process payment for the slurpees.[9]
[8] Tr244 L5-22
[9] Tr244 L1-4
22 The evidence of the Plaintiffs in relation to the Default Notice and their action taken as a consequence of it was most unsatisfactory and does not support a causal connection with the decision to sell the business. In particular:
a)
On Paul's evidence, he was initially advised by Kennett in late February 2005 that they would get a warning in writing very soon because someone was not recording sales. Paul then stated that he advised Varghese that Kennett told him that the guy on the till was not recording sales and there was an issue concerning 14 large slurpees;
b)
On Varghese’s evidence, he immediately contacted Kennett who told him to check the security camera;
c)
The evidence of both Paul and Varghese as to the precise timing of the receipt of this information from Kennett was vague, whereas Kennett gave evidence that he telephoned and spoke to Paul the next day, that is 25 February and related information which had been provided to him and recommended that he examine the video recording;
d)
The significance of the timing of the initial contact is that, on Kennett’s evidence, it would be well within the time when video surveillance of 24 February would still be available. In view of the nature of the alleged default I accept that it is far more likely that Kennett would have telephoned the franchisee the next day, being the first available opportunity he would have had to contact them about it. No satisfactory explanation was given as to why the video surveillance was not examined at this stage;
e) Following service of the Default Notice;
1)
Varghese says that he immediately contacted Kennett about it and was told that he was the person observed to be pocketing money;
2)
Paul also says that he immediately contacted Kennett about it and was told that there was no mystery buyer and this could end the business Agreement. Paul also overheard the conversation between Kennett and Varghese in which Varghese was told that he was not recording sales and to watch the video surveillance;
f)
In his evidence Kennett denies the content of these conversations as alleged. In my view the evidence of Kennett is far more likely. The allegations made by Varghese and Paul are inconsistent with the terms of the Default Notice and with the earlier conversations alleged to have been made in late February;
g)
The Reply makes no reference to any telephone conversations and only responds directly to the Default Notice;
h)
It is also somewhat curious that having been aware of the contents of the Default Notice, Varghese gave evidence that he departed for overseas on 21 March, the date of the Reply, without being made aware of the contents of such Reply;
i) In his evidence Varghese purports to question the explanations given by Paul, although upon cross-examination he accepted that those explanations reflected Paul's understanding and experience;
j)
The response of Thomas to the Reply was also curious. Thomas admitted that he believed the explanation given by Paul and that 7- Eleven were not seeking to terminate the franchise.[10] After the Reply Thomas knew that nothing else was required of the franchisee.[11] However he later disbelieved his partners when 7-Eleven failed to retract its Default Notice;
k)
The account given by each of Thomas, Paul and Varghese as to what was said on 10 May 2005 varies both as to their respective accounts and as to what they each said under evidence in chief and cross- examination. Thomas also initially gave evidence that he viewed the video surveillance [referring to 24 February] and subsequently under cross-examination he confirmed that the security footage is only retained for three days so that he could not view it.
[10] (T37 L3-6)
[11] (T38 L9-10)
23 It is significant that the Reply implicitly admits that the default as alleged may have occurred, but denies any deliberate failure to record sales and otherwise provides an explanation as to why this may have occurred. Furthermore, JMJ Traders takes the opportunity to alert 7-Eleven to the fact that it has been experiencing ongoing problems, particularly by reason of having to operate with one cash register only.
24 It is significant that Kennett was not cross-examined about:
a) His evidence that his notation made in the Weekly Communications Recap that Varghese was at the point of sale was information advised to him by Thomas and Paul; or b) Varghese’s assertion that Kennett had told him and/or his partners that he had pocketed the money [an assertion which is also not contained in the Statement of Claim]. 25 I note that Plaintiff’s Counsel, submitted in his final address, that he did cross examine Kennett on the question of pocketing the money as follows:[12]
7-Eleven were aware that it had caused a lot of angst between the parties,
weren't they?---I'm not aware of that…No.
You were aware that during all this period of time that Varghese was furious
about the fact that he had been told that he had been pocketing money?---
On 10 May he was furious, yes.
You were to investigate it, weren't you, according to the letter of 10 May?---
No, I was investigating the first point, not the second point.
[12] Tr 223-224
26 In my view the cross examination did not expose this issue at all. Kennett was not asked directly when or whether he ever stated that Varghese had pocketed the money and his above reply is equally consistent with either Thomas and/or Paul having made such accusation.
27 I accept Defence Counsel's submission to the effect that the Plaintiffs and Thomas in particular seek to rely upon a subjective interpretation of the alleged representations which is otherwise inconsistent with the contractual relationship between the parties and other objective events. The Default Notice, which reports a failure to record transactions during a specified period has apparently been interpreted as an allegation of theft and implied threat to terminate the Franchise Agreement, which is patently not the case. It would appear that Thomas wanted Varghese to disprove that he had stolen money[13] and in doing so has lost sight of the purpose of the Default Notice and the comprehensive answer that had been given (and apparently accepted). Thomas conceded that there was no further issue.[14]
[13] (T40 L24, T41 L8-9)
[14] (T41 L10 – T42 L3)
28 Following the Reply, 7-Eleven did not communicate further to expressly confirm that they accepted the franchisee’s explanation. At worst this may constitute a lack of communication on the part of 7-Eleven. However, such omission does not visit upon the original Notice a false and misleading statement. Objectively, 7-Eleven accepted the Reply and the matter was at an end from its point of view. Even accepting the evidence of Varghese that he requested that Natalie Dalbo investigate and report back, there is nothing in such request which makes the original Notice false and misleading, particularly in the context of the Reply and the ongoing relationship between 7-Eleven and JMJ Traders.
29 Furthermore, and most significantly, there is no other written notification from the Plaintiffs, which documents their concerns that there is an insinuation of misconduct by one of their staff; or their expectation that this matter was being further investigated.
30 In the meantime, a 7-Eleven representative is carrying on normal visits to the Sunbury store; 7-Eleven issues a letter of congratulations to JMJ Traders; and 7-Eleven approves Varghese as a purchaser for a further franchise business. In short, there is no objective evidence of any ongoing dissatisfaction by 7- Eleven, in the operation of the business or any person associated with the business.
31 Equally in the case of the Expense Report, there is no representation of theft or other improper behaviour on behalf of any person associated with the franchisee.
32 In relation to the Franchise Agreement, there are detailed provisions relating to: events which would constitute an event of default; the giving of notice of such default; the remedy of any default; and the circumstances where the franchisor may be entitled to terminate the Agreement. In the event of a termination of the Agreement, there is no suggestion that a franchisee is thereby libel to forfeit its interest.
33 In the circumstances of this case there is no suggestion that 7-Eleven was not entitled to issue a default notice in the circumstances which are specified in the Default Notice. There is no suggestion that 7-Eleven was not acting bona fide in serving such Notice.
34 The Default Notice sought to advise the franchisee of a circumstance which on its face clearly constituted a breach. 7-Eleven sought an explanation and confirmation that the franchisee would comply with the terms of the Franchise Agreement in future. The Reply directly addressed the event of default and in doing so provided an explanation as to why future breaches of a similar nature may be unavoidable in the kinds of circumstances cited.
35 In my view the Reply was appropriate and on its face clearly understood and addressed the purported event of default. Although there was no further correspondence from 7-Eleven which expressly accepts the contents of the Reply and formally advises that no further action would be taken, in fact no further action was taken and 7-Eleven continued to deal with the franchisee in a normal commercial manner. In particular, Kennett continued to attend the Sunbury store on a fortnightly basis.
36 In my view it is significant that following the Reply there is no other correspondence whatsoever emanating from the Plaintiffs either in relation to the Default Notice or in relation to the Expense Report. Whereas, by letter dated the 30 March 2005, within two weeks of the Reply, 7-Eleven had issued a congratulatory letter in relation to the franchisee's performance. Furthermore the district manager continued to attend the Sunbury store on a regular basis without either the slurpees issue or the wages withdrawal issue being raised until the meeting of 10 May.
37 In his final address Plaintiff’s Counsel submitted that the Defendant’s letter of 7 November 2005 withdrawing the Breach Notice, together with the evidence of Lynette Kennett [who could not confirm that she counted 14 slurpees not being recorded] proves that the initial Notice was wrong right from the start… I reject this submission for the following reasons:
a) Whether or not 7-Eleven reported that 14 slurpees had not been recorded or some other approximate number is not of itself material. The essence of the Default Notice is that there was a failure to record a number of sales within a given time period, when and as they occurred. Mrs Kennett’s evidence supported that event of default and her evidence of between 10- 15 slurpees not being recorded is substantially consistent with the notification in the Default Notice. There was no material misrepresentation or deception on this basis; and b) The withdrawal letter must be considered in the context of other evidence. The author of the letter was not called as a witness. Kennett, who did give evidence, did not know what motivated it or why it needed to be written. Kennett understood that 7-Eleven could not objectively prove what had happened, according to their record keeping and that was always going to be the case. The only evidence was the eyewitness evidence that gave rise to the Notice in the first place. Although the motivation for the letter of 7 November remains unclear, one likely explanation is that 7-Eleven chose to formally close the matter, in view of concerns previously raised on behalf of the franchisee. Until that happened, the Default Notice was based upon information received and the Reply to it was consistent with the Default Notice. 38 Kennett confirmed that the Default Notice relied upon an eyewitness account given by Lynette Kennett, an experienced former 7-Eleven franchisee. There is no evidence that this information was never in fact given to 7-Eleven; there is no evidence that such information when supplied was false, or fabricated or vexatious. According to Kennett, the only investigation that 7-Eleven could have been referring to in their withdrawal letter was an interrogation of the system. Accordingly, in my view the letter of 7 November is not evidence of itself that a misrepresentation was made in the Default Notice.
39 Plaintiff’s Counsel further submitted that 7-Eleven did not divulge to the franchisee the source or circumstances of its information. While any party in the position of the Plaintiffs might be irritated by not knowing the source of the information, that fact does not address whether there was a misrepresentation made. In any event, Kennett said that he did advise them at some stage that it arose because an observation had been made and reported.
40 I accept Defendant Counsel’s submission that it was reasonable for 7-Eleven to act upon the information it received for two reasons: First, there was no competitive advantage or disadvantage for Kennett or his wife to be disclosing information that was vexatious or misinformed; and Secondly, the informant had previously managed franchises and could be expected to have known of the significance of transactions not being recorded immediately.
41 I accept Defence Counsel's submission that the comments of Nettle J have particular application to the circumstances of this case when His Honour said:
… conduct is only misleading or deceptive if it is capable of inducing error. Whether it is misleading or deceptive is therefore a question of fact to be determined in the context of the known facts and circumstances. In the end, conduct, cannot be characterised as misleading or deceptive unless it conveys a misrepresentation. And if the circumstances of its communication, and the state of knowledge of the recipient, are such as to prevent misrepresentation, it matters not that in other circumstances the result could have been different.[15]
[15] Steutel v Kimple [2005] VSCA 312 @ para 45
42 Accordingly I am not satisfied that any of the representations relied upon by Causation[16]
[16] Defence Counsel in his final submissions provided a concise statement of the law so far as it is relevant to this case, which I largely adopt.
43 Loss or damage is causally connected to a contravention of section 52 of the Act in the sense required by section 82 of that Act if the conduct materially contributed to the loss or damage. It is not necessary that the conduct be the sole, principle or dominant cause. The conduct needs only to be one of the causes of the applicant suffering loss and damage.[17] Put another way, if the impugned conduct is a material cause of the claimed loss or damage, it is actionable notwithstanding that there may also be other causes.
[17] I & L Securities v HTW Valuers (2002) 210 CLR at 121-2 per Gleeson CJ and at 128-9 per Gaudron, Gummow and Hayne JJ; Henville v Walker (2001) 206 CLR 459 at 469 per Gleeson CJ, at 480 per Gaudron J, at 493-4 per McHugh J and at 508-9 per Hayne J.
44 Causation is essentially a question of fact to be determined by reference to commonsense and experience.[18] There must be a sufficient nexus between the conduct complained of and the loss or damage suffered. The impugned conduct must be shown to be the real or material reason for the loss and damage allegedly suffered.19
[18] March v Stramare (E&MH) Pty Ltd (1991) 171 CLR 506
45 Thomas agreed that 7-Eleven notified the franchisee on one occasion only of alleged failure to record transactions amounting to a total sale value of $28. Thomas conceded that this incident in conjunction with the accounting record which indicated a withdrawal of $1100 on account of wages, which could not be matched to a banking entry, was the whole basis for Thomas losing faith in his partners and being concerned about losing his investment.
46 Even if any representations could be characterised as misleading or deceptive in any way, I am not satisfied that any such representations relevantly caused the sale of the franchise by JMJ Traders in the sense required by section 82.
47 In my view the belief acquired by the individual Plaintiffs, Thomas and Varghese in particular, was irrational and there is no causal relationship proven with anything done or said on behalf of 7-Eleven.
48 Defence Counsel correctly points out that there may be many kinds of representations which may either induce a purchaser to purchase a business or cause the sale of the business. However, here the alleged subject matter of the representations is not the business itself but the conduct of one of the directors and shareholders of the company which owns the business.
49 Furthermore, the context in which a statement is made must be viewed in the context of the relationship between the parties to determine whether it is misleading and deceptive conduct.20 In this case 7-Eleven were exercising their contractual right under the Franchise Agreement, to notify the franchisee of an event of default. There was no representation of pocketing money or theft or stealing.
50 While Varghese and Paul gave evidence that they advised representatives of 7-Eleven in meetings at their head office of disputes occurring between the “partners” there is no evidence of any written advice to that effect or that the operators of the business might be forced to sell the franchise if 7-Eleven could not answer their queries concerning the Default Notice and Expense Report.
The decision to sell the franchise
51 In my view there was conflicting evidence in relation to the timing of the decision to sell the franchise; and the timing of when and why Varghese ceased to be an operative within the business and his decision to purchase another franchise, on one account in advance of the decision to sell the Sunbury franchise.
52 Thomas was in fact away for a substantial period of the operation of the Sunbury franchise. He was not present at the settlement of the franchise on 10 August 2004 and did not return to Australia until late February 2005. He left Australia again in late May 2005 returning 3 months later. Accordingly between August 2004 and August 2005 he was in Australia for approximately 3 months only during which time there is evidence that he did work in the Sunbury store and his wife also worked there while he was overseas. He attended the meeting at the store on 10 May 2005 but did not attend any other meeting and did not give any evidence of other conversations with representatives of 7-Eleven.
53 Thomas said to the effect that he gave his partners the option of buying him out or selling the business and that he was worried about losing his
Steutel v Kimple [2005] VSCA 312 at [26-28], [34], [37]
Steutel v Kimple [2005] VSCA 312 at [22] per Chernov J
investment.[21] Varghese contradicted this version and said that Paul and
Thomas told him he had to leave.[22]
[21] (T16 L25-29 and similarly T23 L2-4)
[22] (T96 L23-27)
54 It is unclear as to when the individual Plaintiffs decided to sell the business. It is also unclear as to when the business was placed on the market for sale. I also accept Defence Counsel's submission that the decision to sell the franchise when they did was not properly explained in the context of either the Franchise Agreement or the circumstance of Varghese purchasing another franchise. In particular:
a) Paul initially said that they all agreed to sell the business about three weeks after the meeting of 10 May. Under cross-examination Paul said that the decision was made after a meeting at 7-Eleven head office, maybe in July 2005; b) Although the timing is again unclear, from his evidence Varghese seems to say that he ceased active involvement in the business from about the end of June and was then planning to purchase another business [which he did by 9 September 2005]. Varghese could not remember when they agreed to sell the business although he also said the decision was made by the end of May or early June;[23] c) Thomas gave equally imprecise evidence about the timing of the decision to sell the business. Initially he said it was in October and then he subsequently said it was about September 2005; [24] and d) Varghese admitted that 7-Eleven gave approval for him to purchase another franchise.[25] He then purchased the Bayswater franchise on 9 September 2005 with another family and appears to admit that any breakdown of the partnership had nothing to do with the sale of the Sunbury store.[26] [23] (T96 L30-31)
[24] (T20 L11-17)
[25] (T122 L3-4)
[26] Tr 112 L 25-27
55 There is no evidence that Thomas was ever at risk of losing his investment and any such apprehension on his part cannot be reasonably visited upon 7- Eleven or anything which it said in the Default Notice.
56 In view of the evidence of Thomas to the effect that he was indifferent as to whether he was bought out or the business was sold, there was no explanation given as to why the latter course was chosen.
57 The evidence in relation to the reasons for selling the Sunbury franchise was confusing and contradictory. Even accepting that there was some dispute between the individual Plaintiffs which caused disharmony in the operation of the franchise business, there are other objective factors which indicate that the reason to sell the business was motivated by factors other than the alleged misrepresentations. In particular, I note that :
a) During the latter half of 2005 the business was expanding, operating profitably and was favourably recognised by 7-Eleven – all positive factors which are consistent with a decision to realize their investment and maximise return in the short term; b) Thomas remained overseas for a substantial proportion of the operating period of the franchisee's business; and c) Varghese had purchased the Bayswater store by September 2005. Assessment of Damages
58 If the representations made by 7-Eleven were misleading or deceptive and a cause, in the sense described above, of the franchise being sold then the franchisee JMJ Traders might be entitled to any loss it suffered by reason of that sale. The conventional application of section 82 of the Act would allow the recovery of actual loss on the sale and recovery for a loss of opportunity of earning profits in the future.[27]
[27] Sellars v Adelaide Petroleum NL (1994) 174 CLR 332 at 353; The Commonwealth v Cornwell (2007) 229 CLR 519 at 532 and Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 at [117] per Nettle JA.
59 The Statement of Claim alleges a loss on sale of the 7-Eleven store as $42,500, although there is no detail provided as to how this figure is calculated. The Plaintiffs also rely on an the expert witness statement28 and evidence of Mark Lipson. In my view the methodology employed by Mr Lipson is erroneous. In particular I am troubled by the following:
60 I accept that Mr Lipson did not set out in his report the facts upon which he predicated his calculations, namely that a rushed or distressed sale of business had occurred.
61 Furthermore I accept that he did not have the proper facts upon which to base an opinion that this sale was other than achieving a market price on 25 October 2005.
62 Furthermore, for the reasons raised by Defence Counsel, I am troubled by the basis upon which Mr Lipson purported to calculate the value of goodwill for the Sunbury business as at October 2005 and the calculation of loss of profit.
63 While Mr Lipson relied upon correlated figures between prospective sale figures and turnover, he chose not to refer to the objective figures of the original goodwill and turnover of the business, and a comparison of that ratio to the sale goodwill [actually achieved] and turnover.
64 In my view there is no objective evidence that the sale of the Sunbury business in October 2005 was otherwise than a sale on market and conducted in the normal course of selling a business. Accordingly, I am satisfied that the sale price properly reflects the goodwill applicable to the business at that time. On that basis the franchisee clearly made a gain on its original purchase price enabling repayment of borrowed monies and a return to shareholders upon their original investment. In addition Directors drew fees and the Directors and their wives drew salaries.
65 There are two relevant pieces of evidence otherwise:
First, Varghese said he negotiated a cheaper price than that which was advertised and bought the franchise because he thought he was getting a good price – which merely indicates that advertised sale prices are not necessarily realized; and
Secondly, Kennett said that it is not uncommon to have a disparity between the ratio of goodwill and turnover between businesses in different locations, in particular the CBD and suburbia or country locations.
66 Kennett had operated three franchises in the Geelong area over a ten-year
(CB150)
period and he was aware that the ratio of values achieved for goodwill over sales in rural locations such as Geelong, Bacchus Marsh and Melton can be significantly lower than stores in suburban Melbourne which are lower again than stores in the CBD. Although the figures relied upon by Mr Lipson included stores from each of these geographic categories, he made no specific analysis of the kind of variability identified by Kennett.
67 In my view it was inadequate and potentially misleading to refer only to “asking values” as a substitute for comparable sale evidence. Furthermore, his assessment of loss of goodwill on sale was predicated upon their having been a fire sale without any knowledge or analysis of the circumstances of such sale. In particular, there was no evidence that the sale was at anything other than the market price.[29] I am not satisfied that the evidence of Mr Lipson proves any loss of goodwill upon sale.
[29] (T136 L30 – T138 L15, T139 L17 – T140 L4, T140 L24 – T141 L30)
68 In relation to the assessed loss of profits claim calculated by Mr Lipson, there were also a number of concerns raised by Defendant’s Counsel which in my view were not adequately addressed. I note that Mr Lipson did not use the full expenses or correct net income figures for the franchisee;[30] and the loss of income analysis performed was admitted to replicate, to some extent, his goodwill calculation.[31] In any event, any such assessment must be discounted to take account of future exigencies.
[30] (T144 L21 - T146 L14)
[31] (T151 L26 – T153 L3)
69 However, most significantly, I am not satisfied that there is any proper basis for a claim for damages under the head of loss of future earnings. While Mr Lipson conceded that the assessment of the sale price for the business is calculated by reference to the future maintainable earnings for that business, it is not clear to me why the Plaintiffs should also be entitled to an amount reflecting loss of chance. I accept Defendant Counsel’s submission that the present case is on an entirely different footing from the calculation of damages caused by a wrongful termination of a franchise agreement. In such a case what a plaintiff loses is the ability to sell the franchise on the market at the date it was wrongly terminated. In this case, the Plaintiffs were not deprived of any such right and in my view there can be no right to future loss of earnings in addition to the sale price of the business at market.
Conclusion
70 not
balance of probabilities that:In my view, for the detailed reasons outlined above, I am satisfied on the b) any such representations were misleading or deceptive;
c) there is any correlation between any such alleged representations and any purported reliance upon them as causing a sale of the business; or d) there is any credible basis for the losses as alleged.
Orders
71 Judgement be entered for the Defendant.
72 The Proceedings are otherwise dismissed.
After hearing the parties on the question of costs the parties made further written submissions following which orders were made.
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Summary of Evidence
Evidence for the Plaintiff
73 Varghese migrated to Australia in June 2000 and his brother Paul arrived in 2003. Thomas migrated to Australia in 2004. Thomas and Paul knew each other through their respective wives, who taught together in South Africa. When Thomas and his wife first arrived in Australia both Varghese and Paul provided temporary accommodation to them. The three families were good family friends.
Purchase of 7-Eleven Franchise
74 The three friends decided to go into business together. They researched various options for about 3-4 months and decided upon a 7-Eleven franchise. They examined the list of sites for sale from the 7-Eleven head office site and then selected a store in Sunbury because of its growth potential. The total purchase price was $350,000 comprising: $245,00 goodwill, paid to the Vendor; a franchisee fee of $80,000, paid to 7-Eleven to operate the business for 10 years; and training fee of $5,000, also paid to 7-Eleven. In addition, the franchisee was required to open an account for the purpose of stocking the business. Initially about $45-$50,000 was paid into this account.[32]
[32] Varghese gave a stock value figure of about $60,000 – Tr 77
75 Thomas, Varghese and Paul each contributed equally, about $70,000[33] from their respective savings and borrowed the balance, approximately $200,000. The Franchise Agreement was signed on 9 July 2004[34] and the purchase of the business was settled on 10 August 2004.
[33] In fact the contributions of each partner was $66,591 – Tr 50;
[34] CB 22 & 111
76 The franchise was purchased in the name of JMJ Traders. The Directors and shareholders were listed as Thomas, Paul and Varghese and their respective wives.[35] As at 1 October 2008 the shareholding of the company remained unchanged while Thomas and his wife remained Directors.[36] Although there was an agreement between the partners which provides to the effect that Thomas and his wife alone would continue the current proceeding, such agreement did not provide for the transfer of shares in JMJ Traders.[37]
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[35] CB 108-109
[36] Tr 26-27 Ex 1
[37] Ex 4
77 Both Paul and Varghese attended settlement while Thomas was overseas. Also present were the vendors, representatives from 7-Eleven: Bryan Kennett District Manager for that store, Natalie Dalbo Operations Manager and stock takers. Kennett continued to attend the store as a training officer for the first 3-5 days to supervise the operation of their business.
78 About 2-3 weeks later, when they received “the financials” of the settlement, Varghese said they became aware of an amount of $1100 which had been credited to their account but which they could not identify. Varghese first inquired about this matter to the district manager [Kennett] and was asked to write an information request. Paul then sent a written information request and then Varghese made enquiries about this sum.
79 Varghese initially worked 5 days per week in the business, mainly ordering and checking the stock. Paul worked at the operating level, mainly ordering and shelving and a morning shift at the till almost every day.
The Franchise Agreement
80 The Franchise Agreement provides for a profit sharing between the franchisee and 7-Eleven. Accordingly, there were strict requirements placed upon a franchisee to record all stock purchases and sales and report this information to 7-Eleven. Article 20 of the Franchise Agreement provides:38
The franchisee shall prepare all forms and furnish to 7-Eleven daily reports of all sales receipts.
81 Such information is required for stock keeping purposes and to enable 7- Eleven to calculate its profit share.
82 When any product is purchased at 7-Eleven the barcode is scanned and the transaction automatically reported electronically to 7-Eleven. A reconciliation is conducted every three months by 7-Eleven. However, in the case of the sale of Slurpees, there is no bar code on the cup and the sale is recorded by pressing a button marked “slurpee”. If the button is not pressed, 7-Eleven will not know, at that stage, that the sale has occurred. Any missed sales or lost cups will be identified at the next three monthly audit and the franchisee will be charged for any unaccounted cups.
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83 Slurpees are sold in marked cups, which are supplied by 7-Eleven. If slurpees are sold, when reported to 7-Eleven it can calculate how many cups are left in the store and will determine either how many cups have been thrown out or how many slurpees have been sold and whether there is a need to re-stock.
24 February 2005
84 Varghese said that on 24°February 2005 he was working in the Sunbury store but not at the counter.
85 Paul said that he received a phone call from Kennett three or four days later in which Kennett advised… There was someone who was not recording sales in your store and you will get a warning in writing very soon." Paul told Kennett…
it can't happen because I was there, my brother is there and the staff is there.
It can't happen.3986 Paul advised Varghese that there was an issue concerning 14 large slurpees not having been recorded at the point of sale. Paul said that Kennett told him that the guy on the till was not recording the sales. Paul denied being told that it was a tall male of Indian descent wearing a business shirt. Paul denied saying that he told Kennett that it was Varghese at the point-of-sale on 24 February. He said his brother was at the shop and a member of staff was at the till.
87 Varghese immediately contacted Kennett who told him to check their security camera. He did so but found that the surveillance of the relevant day had already been wiped out.
88 Thomas said that he trusted his partners to operate the business in his absence but when he returned to Australia in February 2005 there were two issues brought to his attention:
First, the sum of $1100 was shown in a document headed “Expenses Report”40 for 10 August 2004 representing an amount of cash wages or additional drawings. However, this amount was not reflected in JMJ Traders bank account; and
CB 47
Tr 178
CB 128
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Secondly, there was an allegation that 14 slurpees had not been recorded.
89 Thomas agreed that the Expense Report does not indicate whether the vendor or purchaser debited this amount or who was responsible for recording this item. 7-Eleven ultimately reimbursed the amount of $1100 plus interest of $210.67 to JMJ Traders account after the business was sold.
Default notice dated 15 March 2005
90 By letter dated 15 March 2005 [the “Default Notice”] 7-Eleven advised JMJ Traders as follows[41]:
This letter is to notify you that you are in default under your Franchise Agreement dated 9th July 2004, (the Agreement”) between you and 7- Eleven Stores Pty Ltd (7-Eleven) for failure to record all sales as per Article 20 (b)(i)B. You have failed to record sales on the cash register as follows:
24.02.05 Between 3-5pm 14 Large Slurpees @ 2.00 = Retaill Value $28.00 Under the Agreement 7-Eleven is entitled to receive 57% of the gross profits generated by your operation of Store No. 1161D. When a Franchisee sells merchandise without recording the sale on the cash register, 7-Eleven is denied its contractual share of the gross profit. All that 7-Eleven requires is that the Franchisee records all sales on the cash register pursuant to the Franchise Agreement.
We feel that you have the potential to operate a well-run store which enhances the 7-Eleven image and therefore we are calling these defaults to your attention so that you will have another opportunity to comply with the Agreement and by reporting all your actual sales for your store.
7-Eleven has no desire to end its relationship with you as long as you comply with the terms of the Agreement. We would be happy to discuss these matters with you at your earliest convenience in order to attempt to amicably continue our relationship. However, we must hear from you within seven days"
[41] CB 131
91 The Default Notice is signed by Ian McKenzie Senior District Manager and Bryan Kennett District Manager and was served personally by Kennett upon
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Paul and Thomas at the Sunbury store on 16 March 2005.
92 When Varghese saw the letter from 7 Eleven dated 16 March 2006 he again telephoned Kennett to make an appointment to discuss the matter. It was in this conversation that Varghese says that Kennett told him that he was the one who had pocketed the money. A meeting could not be arranged before Varghese left for overseas on 21 March.
93 Paul also said that he immediately contacted Kennett asking him who did this and whether there was a mystery shopper. He was told there was no mystery shopper but that they had all the evidence and it could end the business agreement. Varghese also spoke to Kennett and Paul overheard him being told that he was the one not recording sales and to watch the video surveillance.
94 Thomas saw the Default Notice [42] as a result of which he was concerned that his partners may be stealing money from the business; and the business and his investment in it may be at risk.
[42] CB 131
95 Thomas agreed that according to the terms of this Notice, 7-Eleven did not want to terminate the Agreement and indeed at the end of the previous year the franchisee had been awarded a Certificate for achieving record weekly sales.[43]
Franchisee reply dated 21 March 2005
[43] Tr 37
96 By letter dated 21 March 200544 [“the Reply”] Paul responded to the Default Notice on behalf of JMJ Traders as follows:
We acknowledge the receipt of your above letter and would like to bring to
your notice the following facts:
1. We are convinced that none of our employees or franchisee never
made any deliberate attempt for not to record the sales at any time any day.
2. Many times we are experiencing difficulties to record all the sales
before attending the next customer due to reasons such as
a) System hangs up (frozen) in middle of the transaction
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b) difficulty to manage the busy hours with one cash register/system. (Please note that this store was operated with two cash registers
until we took over as a new franchisee)c) customers who do not want to wait in the long queue at holding the exact change often leave the money at counter while the staff busy
with the customer in front of the queue.
The previous district manager was fully aware of these difficulties. So he told us to collect the payments and later to record sales in such situations. We have always made sure that all such collections are recorded at least by end of each shift.
Our sales figures speak of our loyalty and integrity. We are proud to present an increased sales figure even when at the decreased customer count on comparison with previous year. So we feel that we mutually benefited in this new relationship compared to the previous one. We would have always felt encouraged if these factors are taken into consideration for sending a letter that questions our integrity and loyalty.
97 Paul gave evidence as to each of the circumstances outlined in the Reply as a reason why the sales may not have gone through as required. Paul agreed that the letter responded to the Default Notice as required and he believed that he had satisfied 7-Eleven at that stage.
98 Varghese said that the Reply was made by Paul and Thomas while he was overseas. Varghese had no input into the Reply and did not agree with all of its contents. In particular he denied ever being informed by one of the district managers that if ever they were too busy simply collect the money and ring it later. Under questioning from the Bench Varghese agreed that he was advised by Paul that this was the case. He agreed the system would hang up occasionally but only for a minute or two and it would not be a complete explanation why 14 slurpees were not recorded.
99 Thomas agreed he was aware of the Reply and believed the explanation given, but when 7-Eleven failed to retract the Default Notice he disbelieved his partners.
CB 132
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Summary of Evidence
100 Thomas annotated the Notice with the words…7-Eleven's letter not supported with mystery shopper…by which he agreed that he had been told that they did not have a “mystery shopper’s report”.
Congratulatory letter dated 30 March 2005
101 On 30 March 2005 the following congratulatory letter was received by JMJ Traders from Sue Owen Operations Manager for 7-Eleven:[45]
Just a short note to congratulate you on your strong performance reported by your store across the 4 day Easter break. Your store was up 15.85% on the same period last year… The preparation and planning you and your
staff put into being stocked up and ready to trade really has paid off. Well
done! Let's work towards maintaining this positive trend over the coming
cooler months.
[45] CB 162
102 Thomas agreed that this letter indicated that 7-Eleven was pleased with the franchisee’s trading performance. 7-Eleven also issued the business with a certificate complimenting it on its increased sales.46
103 Thomas also agreed that the matter raised in the Default Notice and the $1100 adjustment were not raised again until he spoke to Kennett when he attended their store for a weekly meeting in May.
Meeting dated 10 May 2005
104 Varghese said that upon his return from overseas he again attempted to arrange a meeting with Kennett but without success. According to Varghese, the three partners next saw Kennett on 10 May 2005 when he attended the store to arrange the plan of the cool room. They asked Kennett to explain what happened and in front of the three of them he said that Varghese had pocketed the money and that 7-Eleven could cancel the Agreement. Varghese was very angry and immediately called head office leaving a message for Sue Owen chief operations manager. He denied being told by Kennett how important it was to ring up all of the sales as and when they occurred.
105 In relation to the slurpies, Thomas asked him: Has something like that really
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happened?" Kennett replied, "Yes." Thomas asked: "Are you sure?" and Kennett replied, "Yes."47 He said it is Varghese who did it, who pocketed the money. You can check on the camera.48 [referring to the security camera in the store]. Thomas admitted that the security cameras were owned and controlled by the franchisee.49 Paul gave evidence that he overheard a conversation between Thomas and Kennett to like effect.
Weekly Communications Recap dated 10 May 2005
106 At the request of one of the Plaintiffs, Kennett made the following note on the Weekly Communications Recap, which was then signed by Paul and Varghese as a true record:50
3. There was a payout done on the 10-8-04 for $1200 for cash wages.
Varghese would like some more information e.g. what time."
4. On the 24.02.05 between 3-5pm Varghese was the POS failed to record
sales for 14 larger slurpees. We have issued a breach letter on the 16/3/05
to notify the franchisee that they were under default of the agreement to
record all sales.
107 Paul denied asking Kennett to write that it was Varghese at the point of sale. He agreed that Varghese was upset to see his name written on the note, which had been written while he was elsewhere in the store.
108 Thomas said that he had checked the security footage between 3 and 5 pm on the day in question before the meeting with Kennett but could not find anything. I can see the sales and things, but I didn't see anything of this nature, this allegation or anything. Yes, I think so, yes.51 He then said that the security footage is only retained for 3 days before being over written. He told Kennett that he could not see anything on the security footage.
109 After the meeting Thomas said that he immediately alerted Varghese that he had been identified as the person at the counter. Varghese then attempted to speak to the District Manager, Senior Manager National Manager and
CB 190 relating to the week ending 31 December 2004
Tr 13 L22-27
Tr 14 L3-8
Tr 29
CB 133 – which also records te attendees as Paul and Varghese, without mention of Thomas.
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Chairman but he failed to prove that the allegations were wrong.
110 Under cross examination Thomas gave a different account. He agreed that at the May meeting Kennett merely noted the fact that the franchisee had been served with a Default Notice; he wrote down why it had been served; and that Varghese was at the point of sale [cash register]. Thomas also agreed that he was aware that both Paul and Varghese had for some time been trying to get another cash register approved by 7-Eleven and that the absence of a second register was a reason given as to why the slurpees might not have been recorded in a timely manner.
111 In relation to the video footage he now conceded that he did not view the footage of the actual day in February because by the time the Default Notice was received this had been over written.
112 In relation to the $1100, Thomas initially said that he was told by Kennett that it had already been paid in your account.52 Under cross examination he agreed that Kennett did not say that but that he would look into it.53 Paul said that he understood that cash had disappeared on their first day of business and they did not know who took the money from the store.
113 The three individual Plaintiffs agreed that Kennett did not raise the issue of the slurpees or the $1100 at the 10 May meeting. Rather it was Thomas and Varghese who raised these matters with him.
114 Paul gave evidence that following the meeting on 10 May 2005 relations between the three men deteriorated, Thomas and Varghese in particular, and Thomas said that he wanted to sell the business. About three weeks after 10 May the three men agreed to sell the business. Paul said that Thomas no longer trusted them and that was the reason they agreed to sell the business, although they were doing very well in the beginning.
115 Later in his cross-examination Paul said that the decision to sell the business was made after the meeting in the head office, maybe in July.
Tr 15
Tr 13 L22-27
Tr 42 L 20-23
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Meeting late May 2005 with Sue Owen
116 Varghese and Paul attended a meeting at head office in the next week[54] with Mr McKenzie senior district manager, Kennett and Sue Owen at which Varghese raised two matters: their need for an additional cash register, to which 7-Eleven agreed; and the Default Notice. Varghese told the 7-Eleven representatives that the Default Notice was causing many problems within the partnership and that he had been asked to stand aside until the matter was resolved. Varghese asked for details of the alleged incident but did not get a definite reply. Paul did not attend any further meetings with 7-Eleven.[55]
[54] Paul thought the meetinf was about 4-5 weeks later
[55] Tr 88-90
117 Varghese next had a meeting with Mr Russell, Chairman of 7-Eleven who came to their store on about 30 June with Natalie who assured him that she would look into the matter.
118 In the meantime Varghese assured his partners that he would keep away from the business and he started thinking about buying another business - this would have been end of May and early June. He then attended a meeting at head office with Len Campbell in relation to the purchase of a new business. While there he went to Natalie's office and enquired about the investigation. Varghese was negotiating to purchase another business by mid July. He agreed that after perusing the 7-Eleven listing of businesses for sale he negotiated directly with the prospective vendors of the Bayswater franchise. Once an agreement was entered into he then had to obtain the approval of 7- Eleven. Varghese agreed that he was approved as a prospective franchisee of the Bayswater store prior to receiving the notice of withdrawal of the Default Notice. He agreed that he was not reliant upon receipt of such withdrawal in order to secure the purchase of another business. He just wanted to clear his name. Varghese agreed that he was not concerned that the Sunbury franchise be terminated.
119 Subsequently he made further calls to Natalie to enquire about the investigation. He spoke again to Natalie at a franchise conference in September and was told…” your case is first priority.” However, she did not come back to him. In the meantime he purchased a franchise in Bayswater.
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Varghese continued to try to contact Natalie and eventually was called to a meeting at which she gave him the withdrawal letter dated 7 November 2005.[56] Varghese had no prior warning from 7-Eleven about this letter of withdrawal and immediately advised his former partners of the contents of the letter.
[56] CB 137
120 Varghese could not remember when the partners decided to sell the business but it was after heated arguments between themselves.
121 Thomas did not attend any further meetings with representatives of 7-Eleven or have any other dealings with them. He again went overseas at the end of May 2005 returning about 3 months later. During that period he told Varghese and Paul of his concerns that they may be stealing from the business and that … Either you must clear your name or I want to get out from this business to
save - you know, you can pay me out or you can sell the business.[57]
…Varghese told him that he had done nothing wrong and he was meeting with the Defendant… I can't find a reason why 7-Eleven has to make
allegations that they … paid 1,100, which is not there, and then they said
slurpees sold and it is not recorded.[58] No further advice was forthcoming from 7-Eleven so Thomas became convinced that the two brothers were stealing from the business and in October 2005 he told them to either buy him out or sell the business. Thomas subsequently said it was about September that the partners agreed to sell the business which was then listed through 7-Eleven for sale.
[57] Tr 16
[58] Tr 17
122 Thomas agreed that his wife continued to work in the business whenever she could and did not raise any concerns with him.
123 Prior to the sale of the business Thomas was not informed by 7-Eleven that they had withdrawn the allegations and he received no further advice from Kennett as to the payment of the $1100.
124 Thomas agreed that between the date the Default Notice and the sale of the business there was no further written communication from 7-Eleven about
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such failure to record either on the February occasion or any other occasion.[59]
[59] Tr 68
125 Paul agreed that 7-Eleven never asked them to sell their business and never Sale of business
126 On 25 October 2005 JMJ Traders sold the franchise to Naderita Pty Ltd. The Heads of Agreement for Sale of Business were in a standard form provided by 7-Eleven to the vendor on 20 October 2005. By letter dated 10 November 2005 from 7-Eleven to JMJ Traders, 7-Eleven acknowledged the sale and confirmed that the changeover date for the store was 31 January 2006.
127 The evidence as to when the business was placed on the market does not correlate with the actual date of sale in that Thomas gave evidence that the business was offered to the market in October by being listed for sale on the 7-Eleven site for a few months. There was one interested party with whom they negotiated directly. Thomas said that they took the best price they could obtain at the time. Varghese had already bought another business and had reduced his hours working in the Sunbury store.
128 When sold the sale price component for goodwill was $312,500 which Thomas agreed represented a gain of $67,500 on the purchase price. This amount was divided equally between the partners. He also agreed that 7- Eleven did not ask or require JMJ Traders to sell the business and there was no discussion with Kennett about sale of the business. Paul said they could not go on any longer and did not sell the business for the best price.
129 An analysis of the JMJ Traders accounts indicates that over the 20 month period of operating the business JMJ Traders made an overall loss of $12,000 [$37,000 loss in the first year and $25,000 profit in the second year]. Thomas agreed that at the date of sale JMJ Traders had no reasonable expectation of earning any substantial profits in the business.60
130 Thomas agreed that his return from the conduct of the business and sale comprised the following:
a) Wages totalling about $11,000;
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b) Director fees totalling about $18,000;
c) An increase in his shareholder equity of about $38,000; and d) Return on stock of about $12,000.
131 Thomas agreed that he was prepared to be paid out by his partners for his original contribution but they chose to sell the business and Varghese purchased another franchise.
132 Varghese believed that he made a loss given that he ran the business without much in the way of wages.
133 Varghese agreed that he and his wife were appointed Directors of Melind Agencies Pty Ltd on 21 September 200461 which on 9 September 2005 purchased the 7-Eleven franchise in Bayswater.62 He agreed that he bought the Bayswater franchise before the Sunbury franchise had been sold.
134 Paul said that the sale proceeds were handled by Varghese and he could not remember how much she received. He agreed that he withdrew as a Plaintiff from this proceeding and he believed that he had resigned wholly from the company JMJ Traders.
Letter dated 7 November from 7-Eleven
135 On 7 November 2005 7-Eleven issued a letter to JMJ Traders as follows:63
On 15 March 2005 a breach letter was issued claiming that sales as detailed below were not recorded correctly through the Point of Sale…The breach letter had been issued as a result of information received from a visitor to the store. Regrettably the information received had not been properly investigated to ascertain the legitimacy of the claim. Upon further investigation it appears that between 3-5 pm on 24.02.05 a total of 13 large slurpees had been processed through the Point of Sale, and that the information provided to us was in fact incorrect.
Tr 52
Ex 2
Ex 3
CB 137
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issuing of this breach letter has caused to you. I unconditionally withdraw
the breach notice and again apologise for the issuing of this notice in error.I would like to sincerely apologise for the unnecessary angst that the mutual commitment to working together to increase profitability in the store and enhance the 7 Eleven brand. 136 I will deal with Kennett’s evidence concerning this withdrawal letter below.
Evidence for the Defendant
137 Bryan Kennett gave evidence that he bought a 7-Eleven franchise in Geelong in 1990 and over a 10 year period he and his wife managed three franchises which he sold by mid-2000. He has since been working for 7- Eleven as a training officer and district manager.
138 On 24 February 2005 his wife Lynette, who worked as a representative for Cadbury, attended the Sunbury 7-Eleven store looking at stock. She later telephoned Kennett to advise him that while waiting to speak to the store manager, who was serving customers at the counter, she noticed that there were 14 slurpees which had not been rung up onto the register. When a customer came to buy a slurpee the operator would put the money on top of the register rather than ringing it through. She described the operator as a tall male of Indian descent wearing a business shirt. She was in the store between 3 and 5 pm. Kennett reported this information to his senior district manager [Ian Mackenzie] and the State manager [Sue Owen]. Next day he telephoned the Sunbury store and spoke to Paul. Kennett related the same information which he had been told.
Paul said that there were two people in the store at that point in time, that there was a staff member and Varghese was in the store and that Varghese - given the description, that would have been Varghese… I actually asked him to look at the video recording of the store and to try and identify who would have been on himself.64
139 Kennett advised Paul that he would be bringing out a Breach Notice which he did on 16 March when Paul and Thomas were present in the store. Kennett
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Summary of Evidence
said that at no stage did he accuse anyone of stealing or theft or pocketing money. Upon serving the Breach Notice he explained what it meant and that all sales needed to be recorded through the point of sale at the time the customer stands in front of them. The next thing that happened was that 7- Eleven received the Reply.
We see it as a response to our previous letter and that 7-Eleven does believe that these things can happen…No further action was contemplated.65
140 Kennett confirmed that the Breach Notice was still not withdrawn because …
with the information that we had, they did not record the sales when the
customer gave them the money66…In Kennett’s view there was nothing further to investigate because accepting the franchisee’s letter in reply, … the sales
still weren't rung up when the customer gave them the money… If a customer walks up to the counter, gives you the money, at that point in time it needs to be rung up into the register. Not put on top of the register, rung up into the register. That is the point. It is as simple as it needs to be processed when the customer gives you the money.
141 Kennett continued to visit the store on a regular basis. He and Paul had general conversations by phone and at the store about the Breach Notice.
142 On 10 May he attended the store for the purpose of a cool room Planagram. In private conversations a meeting had been requested and Kennett suggested that it would also be a good time for such meeting. Kennett initially spoke to Thomas and Paul with Varghese arriving later. In addition to the Planagram two main items were discussed:
a) the Expense Report for the second fiscal period of 200567 includes an item cash wages, additional drawing, $1100 which had been entered on the cash register and uploaded from there on 10 August 2004, being the date of settlement. It has no time indicated so that it is not clear whether it happened before or after the changeover of ownership of the store. No
Tr 208
Tr 210
Tr 234
CB 128
ANNEXURE 1
Summary of Evidence
default notice issued and this item was never being queried by 7-Eleven. Kennett confirmed that Varghese sought more information about this item; and
b) Kennett discussed the Default Notice with Paul and Thomas and again conveyed the information which he had been given by his wife and referred to the earlier conversation with Paul on 25 February when Paul had alluded to the operator being Varghese. Paul and Thomas then asked him to write in the Recap that it was Varghese at the point of sale. Varghese was not present when this happened and became very upset when he learned that his name had been identified. Kennett merely told him that his name was the name given to him as the one at the point of sale at the time. 143 After this meeting Kennett did not have any occasion to deal with these issues again directly with the Plaintiffs. Kennett tried to research the query concerning the $1100. Kennett next dealt with the Plaintiffs during his normal store visit, about two weeks later, but there was no further conversation about the slurpee issue.
144 Sometime in June, Paul and Varghese attended a meeting with Kennett; Ian McKenzie and Sue Owen for the purpose of arranging a new POS cash register as they were still having difficulties serving their customers properly. Nothing was said about the sale of the franchise either at this stage or any future stage .
145 Kennett agreed that Varghese was approved to purchase a second store. The Sunbury store was going ahead successfully, increasing its business all the time … The company was happy for him to be a franchisee in the system.
They did run quite a good store, Paul and Varghese, in the Sunbury store and that's what we look at when they apply for a second store, is whether they stock the store well, keep it clean and run a good store.[68]
[68] Tr 240
146 The Breach Notice was issued because someone in the store observed the sale of slurpees not being rung up at the time the customer handed over the money, not because the sales were never rung up. Kennett confirmed that the Reply, while providing an explanation and confirming no deliberate failure,
ANNEXURE 1
Summary of Evidence
was still consistent with the Default Notice and there was no further investigation which could be conducted to verify the situation. 7- Eleven were satisfied with the explanation provided, so there was no reason to withdraw the Notice. 7-Eleven would not usually respond to a reply, unless it was not satisfied with it.
147 Kennett confirmed that he did not personally investigate the sales records at 7-Eleven to see whether the 14 slurpee's had in fact been recorded - he gave it to his seniors to do that and it appears that this did not occur until November, shortly before the withdrawal letter was issued. By this stage records had been archived and it was not possible to get a detailed timely account of transactions. Accordingly they could not confirm whether any slurpee sales had not been recorded.
148 In any event Kennett explained that an examination of the records at the relevant time would still not identify if any slurpee sales that had not been recorded without knowing the total number of slurpees sold that day. Kennett was not responsible for the November withdrawal letter and could not explain why it was issued.
149 In relation to the $1100 cash withdrawal, Kennett asked for this matter to be investigated by their IT department. On the settlement day the POS register systems were changed over. The old system remained running in the store until early afternoon and was then removed and replaced by a new system. The debit was rung through the old system from which information was hard to retrieve. 7-Eleven could not identify a time when the debit was recorded. Accordingly, 7-Eleven could not confirm whether the vendors or JMJ Traders were operating the business at the relevant time. In this circumstance Kennett said that 7-Eleven elected to reimburse JMJ Traders for the debited amount plus interest. Kennett agreed that this was never explained to the Plaintiffs…
we were always still looking for it
150 In relation to the sale of a business, Kennett explained that when a franchisee proposes to sell its business they will normally approach Len Campbell the franchising manager who will arrange for the sale to be listed in their book. Sometimes franchisees advertise privately but they usually choose not to pay the extra money. As part of his weekly visits to stores Kennett is aware of the
ANNEXURE 1
Summary of Evidence
sales turnover of these businesses. In his experience the correlation between goodwill and sales turnover varies between different suburbs. In particular, outlying areas such as Bacchus Marsh, Melton, Sunbury and Geelong achieve a lot less for their stores than in metropolitan areas. In the central business district the goodwill achieved for the same turnover can be nearly double that in the outer suburbs.
151 Lynette Kennett confirmed the evidence of Kennett so far as it related to her. On 24 February 2005, while attending the Sunbury store she observed 15-20 students purchase slurpees and moneys were placed on the top layer of the register without the button being pressed on the register. A taller gentleman who did not wear a name badge or uniform, was at the register and then another gentleman in a uniform was in the store. She subsequently spoke to the person at the register about her own business and when she left the store she noticed the moneys were still on the ledge of the register. She said there would have been a substantial amount not rung up, between 10-15, but she did not count 14. She later reported what she had seen to her husband but was never asked to make a written report. Having previously operated a franchise she was aware of the obligations to record transactions.
Expert Evidence
152 Mark Lipson Accountant was instructed on behalf of the Plaintiffs to assess and calculate loss and damage arising from the sale of the franchise business. In his report[69] he makes two calculations:
[69] CB 157-161
[70] (paragraph 7.18)
a) Loss of goodwill caused by the sale of the business on 25 October 2005, which he assessed at $111,000; and b) Loss of profits by reason that JMJ Traders were required to sell the franchise in October 2005 rather than operate the business for the term of the Agreement until June 2014, which he assessed at $507,500.[70]. 153 In relation to the calculation of loss of goodwill, he confirmed that:
a)
he was instructed that the franchisee was required to sell its business, because the partners were in dispute and could no longer work together.
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Summary of Evidence
Accordingly he was instructed to provide an opinion on the value of goodwill of what this business could have been sold at on the basis that there was no fire sale or no circumstances that caused the vendors to be anxious and to sell the business as quickly as possible;
b)
His report also assumed that all of the facts in the Statement of Claim were proved correct;
c)
He was told the partners made a rushed sale although he did not know when they made the decision to sell or precisely when the business was placed on the market;
d)
He did not analyse their sales methodology at all and accepted their instruction that the business was sold quickly. His calculations therefore were predicated upon a distressed sale;
e)
His method of calculating the value of the goodwill as at the time the business was sold was wholly reliant upon a list of goodwill provided for a number of other 7-Eleven stores listed for sale by 7-Eleven as at 27 November 2005.71 Mr Lipson took these figures as a reasonable estimate or expectation of sale prices, although this data reflects the goodwill sought by prospective vendors rather than actual sale prices achieved;
f)
He did not have any date regarding final sale prices and did not know what if any sales were achieved or for how long businesses remained on the market;
g)
By graphing the goodwill sought for a range of stores he calculated a goodwill which equated to the sales level achieved at the Sunbury store. He agreed that the most appropriate method of determining goodwill for the Sunbury store as at 25 October 2005 would be to determine what the market value of that store and its goodwill was on that day, being what a willing but not overly anxious seller in the market would sell to a buyer who was ready willing and able to purchase at a reasonable price;
h)
He confirmed that the Sunbury business was on the market at that particular time and that it was quite possible that the business was in fact sold in the usual and ordinary means;
ANNEXURE 1
Summary of Evidence
i) He did not compare the goodwill paid by JMJ Traders [when the franchise was purchased] against either the goodwill actually achieved on sale or the goodwill which he assessed at the time of sale. He makes no reference to the original purchase price in his report;
j) He agreed that when a business is valued, one methodology is to use the future maintainable earnings of the business; k) He agreed that the market value of a 7-Eleven franchise is essentially its goodwill value which is represented by its chance of earning future profits. Accordingly an assessment of the goodwill value incorporates a value for future profits; and l) When he analysed goodwill and sales figures from the 7-Eleven data he established a strong linear relationship from which he could then project a certain level of goodwill from a certain level of sales. The average ratio of goodwill to sales for the sampled 7-Eleven stores was about 28% compared to the 22% achieved upon the sale of the Sunbury store. If the same ratio were applied to the Sunbury sales figures then Mr Lipson calculates a goodwill value for the business of $423,500. 154 In relation to the calculation of expectation loss:
a) He agreed that the franchise might otherwise have terminated earlier or other eventualities occur within the franchise period; and b) He took as his base figure the July 2005 to January 2006 profit figures, and extrapolated that forward to get a full year net income of $97,860. He used the second period of operation so as to exclude one-off fees and costs that are usually incurred in the first financial year. 155 Mr Lipson did not rely upon the company accounts [which relate to the franchise business solely] but rather used figures supplied by 7-Eleven which had not been adjusted for any additional expenses incurred by JMJ Traders.
CB 183-186
that is misleading or deceptive or is likely to mislead or deceive.
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