Cuadro and ANOR v Global Pre-Paid Communications and ORS (No.2) - [2004] FMCA 31

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CUADRO & ANOR v GLOBAL PRE-PAID COMMUNICATIONS & ORS (No.2)

[2004] FMCA 31

TRADE PRACTICES – Whether there was a breach of ss.51A or 52 Trade Practices Act – where third respondent sole director of company – where director imbued with knowledge contained in company document “Info Pack” – whether inferences drawn from photograph in the info pack overrode written representations contained therein – where the nature of the product central to the success of the machines significantly altered since time of purchase – where the machines sold consequently of little use – whether the third respondent had knowledge of this impending change at the time the representations were made to the applicant – whether there had been a representation that the machines were a ‘one stop shop’ – whether there had been a representation that the market for pre-paid cards would continue to expand – whether there had been a representation that the machines would be placed at high volume locations – whether there had been a representation that the machines were highly durable – whether if the above representations were made the third respondent had actual knowledge of them – quantification of the damages under s.82 Trade Practices Act.

Trade Practices Act 1974 (Cth), ss.51A, 52, 75B, 82

Yorke v Lucas [1985] 158 CLR 661
King v GIO Australia Holdings Limited (2001) FCA 308

Applicant:

CELSO CUADRO & ANOR

First Respondent:

GLOBAL PRE-PAID COMMUNICATIONS PTY LTD

Second Respondent:

RUSSELL FIELDING

Third Respondent:

FRANK YATES

File No:

SZ 902 of 2003

Delivered on:

13 January 2004

Delivered at:

Sydney

Hearing date:

13 January 2004

Judgment of:

Raphael FM

REPRESENTATION

Solicitors for the Applicant:

Hassett Dixon

Counsel for the Respondent:

Mr G McVay

Solicitors for the Respondent:

McConnell Jaffray Lawyers

ORDERS

The third respondent is to pay the applicant damages assessed in the sum of $5,000 pursuant to s.82 of the Trade Practices Act 1974 (Cth) for breach of s.52 of that Act by the first respondent in respect of which he is liable pursuant to s.75B of the Act.
The third respondent is to pay 75% of the applicants’ costs assessed in the sum of $12,500 in total.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SZ 902 of 2003

CELSO CUADRO & ANOR

Applicant

And

GLOBAL PRE-PAID COMMUNICATIONS PTY LTD & ORS

Respondent

REASONS FOR JUDGMENT

Mr and Mrs Cuadro together operate the Casula Mall Post office. Mr Cuadro has had some difficulties health-wise. In about April 2002 he saw an advertisement in a weekend newspaper regarding business opportunities with vending machines of pre-paid mobile telephone recharge cards. The advertisement had been placed by a company known as Global Pre-paid Communications Pty Limited ("Global"). Mr and Mrs Cuadro contacted that company and an appointment was made for them to meet a representative, Mr Fielding.
Mr and Mrs Cuadro attended the offices of Global on or about 30 April 2002 where they were handed a document which has become exhibit 1 in these proceedings and described as a “Global Express Dispenser Info Pack” (“The Info Pack”). They read the document and were then subjected to a sales pitch from Mr Fielding, some of which repeated representations made in the Info pack.
The Info pack describes the growing market for the use of pre-paid mobile telephone services and leveraging off that the growth of outlets which provide the key to operating such a service. In April 2002, it is generally accepted, the method by which a person recharged their pre-paid mobile telephone was to purchase a charge card which had imprinted upon it under a removable seal a code number that was given to the mobile telephone company which then credited the holder's account with the value of the card. One of the benefits of the machine being sold by Global was that it claimed to be "one-stop shop" that could dispense cards from all the major mobile telephone communicators. A reference to one-stop shop appears in exhibit 1 and a photograph of the machine also appears bearing those words.
Mr and Mrs Cuadro decided on the strength of the matters put to them by Mr Fielding to purchase two of these machines. They were told by Mr Fielding that the machines would be placed in the Parramatta Leagues Club and the Marconi Club. They were also told that the machines were durable and required little servicing. A document was given to Mr and Mrs Cuadro which set out that a successful location for one of these machines would achieve ten sales per day. That document stated:
“These figures are an example only of a machine in a successful location and do not represent any guarantees.”
Unfortunately for Mr and Mrs Cuadro the machines which they purchased did not achieve the success which they expected. There were several reasons for this. Firstly, and these reasons are not given in any order of priority, Mr Fielding was unable to secure a site in the Parramatta Leagues Club and in place of that the University of Western Sydney was chosen. Secondly, it transpired that the applicants could not order Optus cards from Global. The applicants were able to obtain Optus cards and for some months put Optus cards in their machines but after a while no Optus cards were permitted to be dispensed in this manner. Thirdly, the machines were not durable or reliable, they broke down frequently and Mr Cuadro was required to make frequent attendances upon them. Finally, the whole method of dispensing pre-paid mobile charge cards was done away with in favour of the current system whereby sales outlets have machines which produce a paper receipt containing the code numbers that would have been placed on the cards and which are used by customers to telephone their service provider in order to recharge their accounts.
The Cuadro machines have been removed from their sites. They are at present in storage. Mr and Mrs Cuadro spent approximately $28,500 on the two machines, they paid rental on the sites and they had expenses involving servicing and insurance. The business enterprise proved a disaster for them.
Mr and Mrs Cuadro commenced proceedings against Global as first respondent, Mr Fielding as second respondent and Mr Yates, the sole director of Global, as third respondent. They are seeking relief under s.52 of the Trade Practices Act and, as against Mr Yates, relief under s.75B. They filed affidavits but during the course of the proceedings Global went into voluntary administration or liquidation and Mr Fielding became impossible to find. There remained only the claim against Mr Yates, the governing mind of the company.
In the application filed on 22 May 2003 the applicants set out in paragraph 7 a series of representations upon which they rely to establish their claims. When the proceedings commenced Mr McVay, who appears on behalf of the third respondent, intimated that he proposed to make an application of the nature of “no prima facie case” at the end of the evidence of the applicants. He correctly pointed out that it has been clear law since the decision of the High Court in Yorke v Lucas [1985] 158 CLR 661 at 670 that to be regarded as participating, a person must have knowledge of the essential elements constituting the contravention. Mr McVay argued that there was no evidence which would tie Mr Yates to that knowledge.
I considered that submission and I gave a short ex tempore judgment in which I found that I could infer that Mr Yates was imbued with the knowledge of what appeared in the info pack, but I was not prepared, on the evidence before me, to make a finding that Mr Yates knew about any other representations made by Mr Fielding. I was slightly ambivalent about one of the representations concerning Optus cards.

I noted that it was not stated within the info pack that Optus cards are available, even though a photograph showed Optus cards. I pointed out that under the heading "The Equipment", the info pack stated:
"GPC will supply you with a number of our Global Express dispensing units. These machines will offer ...... Vodafone, Telstra, Virgin and Global pre-paid mobile top up cards and international calling cards."
I took the view that this, the firm statement, overrode any assumptions that could be obtained from a glance at the photograph including the banner which was attached to it and which became exhibit 4. In any event the point may be moot because it is not denied that the machine could dispense Optus cards or that the two applicants were able, from their own resources, to obtain such cards and did so.
The effect of my finding was that the only representations upon which I believed a claim could be directed at the third respondent were those numbered 7(a), 7(b), 7(d) and 7(g). The other representations were not made by Mr Yates or appeared in documents which the applicants have been unable to satisfy me were within the knowledge of Mr Yates.

I will deal with each of the offending representations in turn.
The representation under paragraph 7(a) is that:
“The Global Express vending machines were profitable investments because of the fact that prepaid mobile telephone products from all of the four major service carriers, that is, Optus, Telstra, Vodafone and Virgin could be sold from the same machine making it a "one-stop shop".
Mr Bors argues that people who purchased a machine on the basis of such a representation would assume they would be allowed to sell cards from those service providers; but that representation was false insofar as at some point in the future a purchaser might be precluded from selling Optus cards and in fact these purchasers were. The difficulty which I have in making a finding in favour of the applicants in respect of this representation is that I have no evidence that as at April 2002 the company had any knowledge that at some point in the future a purchaser of the machines might be precluded from selling Optus cards.
I have no evidence that Mr Yates was in possession of that knowledge and I am satisfied that knowledge "in these circumstances means actual or not constructive knowledge": King v GIO Australia Holdings Limited (2001) FCA 308. I have carefully perused the evidence in chief of Mr and Mrs Cuadro in their affidavits. They do deal with discussions between the company through Mr Fielding and themselves concerning the purchase of Optus cards but they do not go so far as to indicate anything from which I could even infer Mr Fielding, let alone Mr Yates knew about the pending position with Optus.
I would also say, as I believe I already have, that in fact pre-paid mobile telephone products from all the four major service carriers were able to be sold from the machines and were sold from the machines at least for a short period of time and thus the representation there made does not seem to me to have been inaccurate.
The second representation is found under s.7(b):
"The market for pre-paid telecommunications cards was one of the fastest growing in Australia and that it would continue to expand for some time to come."
The info pack does not use those exact words, under the heading, Australia's Fastest Growth Industry it states:
"Mobile telecommunications is one of the fastest growing industries in Australia with substantial growth projected for years to come."
But I think it is not unreasonable to infer from the balance of the matters contained in that document that the representations set out in 7(b) could be implied. Mr Bors argues in respect of this representation that because it was apparently dependent upon independent market research, the respondent Global had a duty to have carried out additional research or to have provided the applicants with information that charge cards were old technology and were being phased out.
Mr Bors and I agreed that the appropriate way to put this was that:
"There was a duty to disclose any information the company had as to the changing nature of the physical product."
The important words are "any knowledge they had." I have no doubt that it would be misleading and deceptive for a company to make representation concerning a product if it was aware that this product was rapidly becoming a dinosaur. But again, there is no evidence that the company or Mr Yates personally had such knowledge. The applicants could have produced articles, trade information or stockbrokers' research that might have made this point and which they could have said would be within the knowledge of persons or companies such as Global. But they did not.
I would state here that in paragraph 9(b) of the pleadings the following appears:
"Optus had made an industry announcement in June 2001 that it would progressively scale down its sales of pre-paid mobile products to third party wholesalers to the point where by as of the end of 2001 it would no longer sell pre-paid mobile telephone products via third party wholesalers and retailers."
That is an assertion made in pleadings, it is not proof. The announcement was not tendered nor was it added to the affidavit of either Mr or Mrs Cuadro. Even if it had been, it would not have gone so far as to establish what has now occurred in the industry.
Paragraph 7(d) states:
"if the Applicants purchase “Global Express” machines, the Respondent would organise that the machines be placed on site at high-volume locations."
In regard to this representation Mr Bors says that it must be read in conjunction with a document that is found at annexure A to Mrs Cuadro's affidavit. That document indicates that a successful location, as defined by Global, is a location which achieves 10 sales per day. The evidence from Mr and Mrs Cuadro is that the machines which were installed at UWS and at Marconi never achieved more than 30 sales per week and therefore, they were not in successful locations.
Firstly, I believe there is some problem about the use of the document because there is no evidence as to who produced it, only that it was given to the applicants by Mr Fielding. It was not established that Mr Yates had actual knowledge of it and it is not actual knowledge that I would be prepared to impute to him in the manner in which I have imputed the knowledge of the Info pack. It is contained on a plain piece of paper, which bears the name, Global Express, but no other form of logo.
However, even if I were to accept that the representation must be read in conjunction with this document, the document itself does not guarantee 20 sales per day or that every location within which a machine is placed will achieve 10 sales per day. The company promised in the Info pack to secure "the best retail locations" but it is clear from that document that the first choice might not be the best and the machines should be moved around after a period of time.
There is considerable evidence in Mrs Cuadro's affidavit about the location of the machinery, particularly between paragraphs 10 and 20 but it would seem from that that the negotiation concerning the placement of the machines was carried out by Mr Fielding. I have difficulty in sheeting home to Mr Yates actual knowledge of any breach that might have occurred in this regard.
The final representation is that the machines were highly durable, contained in paragraph 7(g). That representation was made in the Info pack and is therefore the responsibility of Mr Yates. The evidence would appear to indicate that the machines were not durable and were constantly breaking down. This is a straight breach of s.52 and does not involve any representation of a future fact under s.51A.
Mr Cuadro in his affidavit indicates that durability was an important matter for him. In paragraph 4 he says he was interested in this kind of business opportunity because he had some health problems. Mr Cuadro was not cross examined about these statements and I think it follows that I can accept that he relied upon that statement and was induced to enter into the agreement upon the basis of it.
Because I have found that Mr Yates, as the guiding light of the company, must be held to be responsible for the production of the Info pack and therefore was a person knowingly concerned with any breach of s.52 arising out of a misrepresentation made therein it would seem to me that liability for the misrepresentation concerning the durability of the machinery must be placed upon him under s.75B.
The difficult question that must now be considered is the nature of the damages under s.82. If the machines had been of the type that dispensed cards that were still available then one could see the manner of approaching damages. But the fact is that, as I understand the evidence, even if these machines were now in perfect working order they would be of little use because none of the phone companies utilise the cards. Therefore the inability of the machines to live up to their expectations has more to do with market forces than with their lack of durability. But there would have been a period when the machines could still have been used and I think Mr and Mrs Cuadro are entitled to be compensated for that.
Mr Bors, when arguing for damages on the basis of all the representations which are held to be the responsibility of Mr Yates, suggested that the appropriate measure of damage was the refund of the purchase price and presumably interest thereon. Damages in relation to the lack of durability must be looked at with those limits in mind. Doing the best I can with the very small amount of information before me I would find that Mr Yates should be liable to Mr and Mrs Cuadro in the sum of $2500.00 for each machine, namely $5000.00.
I have heard the parties on costs. I am sensible of the fact that these proceedings were commenced at a time when there were two other respondents and that it may well have been that had those respondents been available different decisions would have been made. I am equally sensible of the fact that the applicants have only succeeded on one head of misrepresentation and that the respondent was required to meet all nine.
I think in all the circumstances the appropriate order is that the respondent should pay 75% of the applicants’ costs. The costs order will be that the third respondent is to pay 75% of the applicants’ costs assessed in the sum of $12,500 in total.

I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: