Donut King Australia P/L v Barber & Ors No. Scgrg-98-1199 Judgment No. S241

DONUT KING AUSTRALIA PTY LTD v BARBER & ORS

[1999] SASC 241

Full Court: Doyle CJ, Duggan J and Debelle J

DOYLE CJ. In my opinion the appeal should be allowed, and the matter should be remitted to the trial judge for further consideration. I agree with the reasons of Duggan J for so concluding. There is nothing that I wish to add to those reasons. I agree with Debelle J that estoppel may be an alternative way of arriving at the conclusion that the appellant is bound by P41.
DUGGAN J. The appellant, Donut King Australia Pty Ltd (DKA), has developed a system for the marketing of takeaway food. The company has set up a franchise system which enables franchisees to utilise its marketing methods so as to sell standard products prepared in accordance with instructions provided to the franchisees.
Sequin Close Pty Ltd (Sequin Close) entered into a master franchise agreement with DKA. Sequin Close was referred to in this agreement as “the master franchisee”. The agreement authorised Sequin Close to enter into sub-franchise agreements with franchisees desirous of operating Donut King outlets. In accordance with that authorisation, Sequin Close entered into a sub-franchise agreement with the respondents (the plaintiffs) Mr and Mrs Barber so as to enable them to open a Donut King outlet in the Myer Centre, Rundle Mall.
The plaintiffs’ venture was not a success. They issued a notice of termination of the sub-franchise agreement and vacated the outlet. They then commenced the present action in the District Court of South Australia against DKA, Sequin Close and David Nicholas Bell (Mr Bell), a director of Sequin Close. The case for the plaintiffs was based on breach of contract and misleading and deceptive conduct. The plaintiffs were successful in relation to each of these causes of action and were awarded the sum of $214,927 by way of damages. This award was based upon the finding of misleading conduct contrary to s52 of the Trade Practices Act 1974. The present appeal is against the finding of liability in contract and under the Trade Practices Act. Other grounds of appeal relate to the assessment of damages.
The deed incorporating the master franchise agreement was executed on 8th March 1994. According to its terms Sequin Close was appointed master franchisee for an initial term of five years in consideration of a fee of $40,000. South Australia was included in the territory in which the master franchisee was to operate.
Although Sequin Close was given the power to grant franchises, the franchisees had to be approved by DKA which also laid down strict guidelines for the manner in which the outlets were to be operated. Under the terms of the master franchise agreement Sequin Close was required to select suitable sites for outlets, screen franchisees and train those appointed as franchisees. Fifty per cent of the fees payable by franchisees were to be paid to DKA.
The commencement date of the plaintiffs’ franchise was 7th August 1995. The term of the franchise was five years with a renewal term of five years. An initial franchise fee of $30,000 was payable as well as a fee of $10,000 for “Initial Training Support”. The agreement stipulated that an ongoing franchise service fee was payable at the rate of six per cent of weekly gross sales, but this fee was to be not less than $100.00 per week. In addition, rent for the site was payable to the operator of the Myer Centre.
The plaintiffs commenced business at the outlet on 8th August 1995. They encountered various difficulties associated with the business which are discussed later in these reasons. Sequin Close also experienced problems in its role as master franchisee and on 12th January 1996 DKA terminated the master franchise agreement. The plaintiffs were then advised that Sequin Close’s interest in the sub-franchise agreement had been assigned to DKA.
In the period leading up to the execution of the sub-franchise agreement on 29th June 1995 the plaintiffs became concerned about a number of aspects relating to the negotiations. They had received a draft sub-franchise agreement for perusal. Although the proposed term of the franchise was for five years with a right of renewal for a further five years, they were anxious to secure from the Myer Centre a lease of the outlet for a corresponding period of ten years. They had not seen a copy of any lease. They were also concerned about future rent increases, what outgoings they would be liable for and the extent to which they would be responsible for the fees of the architects who designed the layout of the premises at which they were to operate.
The plaintiffs consulted a solicitor and, on her advice, Mr Bell was asked to sign a letter on behalf of Sequin Close which provided the plaintiffs with a remedy in the event that Bell was unable to meet certain demands which they imposed. The letter (P41) reads as follows:
“Mr G & Mrs C Barber  29/6/95
92 Marian Road
Glynde   5070
I confirm that you will have the right to terminate your franchise agreement (with no financial detriment to you) if I am unable to secure for you a right to occupy the shop premises on the following terms:
Term:                 5 yrs commencing 7/8/95 with 5 yr right of renewal
Rent:.................. $62,500 pa for first year with rent reviews no greater CPI or 5%
Outgoings:NIL, except promotional fund of $1,850 pa
Electricity:........ at rates charged by ETSA
Other terms:      usual terms for the Myer Centre
Additionally, architects fees will not exceed $4,500.00.
In the event that you terminate the franchise agreement as a result of my inability to secure the above terms then I will reimburse to you forthwith all costs & fees you have paid to Sequin Close P/L or Donut King Australia and all other reasonable expenses you have incurred in respect of or arising out of this Agreement.
Yours faithfully
(signed)
for and on behalf
of Sequin Close P/L
PS.... In addition to the above, I will use my best endeavours to obtain a letter from the Myer Centre confirming that you are to have the right to access 24 hours per day.
(initialled)”
The plaintiffs claim that the letter P41 forms part of the sub-franchise agreement which was signed by them on the same occasion. Furthermore, they claim that all rights and obligations arising out of the sub-franchise agreement (including those contained in P41) passed to DKA pursuant to the assignment following upon the termination of the master franchise agreement. The plaintiffs terminated the sub-franchise agreement on 7th May, 1996 and looked to DKA for the reimbursement which they claimed to be entitled to as a result of the undertakings given in P41.
The learned trial judge found that Sequin Close failed to obtain a five year lease of the premises with a right of renewal for five years; that the plaintiffs were charged certain outgoings in addition to those specified in P41; and that the architects’ fees were in excess of the maximum stipulated in the letter.
These findings by the learned trial judge were not challenged, but DKA denied that it was liable for any default on the part of Sequin Close. It claimed that P41 recorded a collateral agreement entered into between the plaintiffs and Mr Bell on behalf of Sequin Close. It was argued at the trial that Sequin Close did not incur any obligations or liability by reason of the assignment, but that even if it did, its obligations were limited to the sub-franchise agreement contained in the document exhibit P42. The learned trial judge rejected these arguments. He concluded that the letter P41 was incorporated into the sub-franchise agreement and that the obligations of Sequin Close under that agreement became the responsibility of DKA by reason of the assignment.
The first issue to be decided is the status and effect of P41. The plaintiff’s solicitor said in evidence that she wrote out P41 for Mr Bell to sign. She said that the plaintiffs would not sign the franchise agreement until he had done so. Mr Barber said in evidence that P41 was signed while they were in the solicitor’s office for the purpose of signing the sub-franchise agreement. They signed the sub-franchise agreement after Mr Bell signed the letter.
Mr Clayton QC, for DKA, relied on clause 12.8 of the sub-franchise agreement which provides as follows:
“Entire Agreement. This Agreement contains the entire agreement and understanding between the parties as to the subject matter of this Agreement and merges all prior discussion between them and neither of the parties shall be bound by any conditions definitions warranties or representations with respect to the subject matter of this Agreement other than as expressly provided in this Agreement as duly set out or subsequent to the date of this Agreement in writing and signed by a proper and duly authorised representative of each party. The Franchisee expressly acknowledges that the Master Franchisee has not made any representation to the Franchisee as to turnover or profitability of the Franchised Operation.”
Clause 1.1.2 provides:
“Agreement” means this franchise agreement and includes its recitals, schedules, appendices, annexures and any amendments from time to time in writing to this Agreement.”
It is obvious that the terms of a contract or agreement may be contained in more than one document. The question in the present case is whether the undertakings and remedy given in the letter P41 were intended to be part of the sub-franchise agreement despite the existence of the “entire agreement” provision in clause 12.8. This clause is of a type commonly used to achieve certainty between the contracting parties. In most cases there would be no reason to look elsewhere if the parties gave such a clear indication of their intention that the document expressed the entire agreement. But it remains necessary to determine the intention of the parties, albeit by resort to objective standards, and in the present case the two documents P41 and P42 must be considered in the context of the circumstances in which they were prepared and signed.
P42 was prepared before the meeting in the solicitor’s office on 29th June 1995. When the parties were assembled the issues eventually dealt with in P41 were discussed. P41 conferred a right to terminate the sub-franchise agreement if the lease terms specified by the plaintiffs were not secured. It provided a ground of termination in addition to those set out in P42. The obligations arising from the undertakings in the letter were to take effect immediately. In my view the clear intention of the parties was that these undertakings were to be included as terms in the sub-franchise agreement which was the next document to be signed on the same occasion. The actions of the parties evidenced an intention to create an exception to the “entire agreement” clause which was not anticipated at the time P42 was prepared.
The next question is whether the obligations incurred by Sequin Close as a result of its agent signing P41 were assigned to DKA. Clause 9.14 of the sub-franchise agreement states that, in the event of the termination of the master franchise agreement, Sequin Close’s “right, title and interest” in the sub-franchise agreement should be assigned to DKA at the election and direction of DKA. The sub-franchise agreement also states that written notice by DKA to the sub-franchisee is sufficient to effect the assignment. It must be remembered, however, that DKA is not a party to this agreement. There is also a reference to assignment in the Franchise Disclosure Document (P22) which was given to the plaintiffs by DKA’s agent, Chilman Bila Pty Ltd. Clause 5.7.9 of that document provides:
“You should note that in the event that the Master Franchise Agreement between Donut King Australia Pty Limited and the Master Franchisee should terminate or expire for any reason then the rights and obligations of the Master Franchisee may be assigned to Donut King Pty Limited or its nominee.”
It would appear that there was no written assignment. However DKA served an undated combined notice of termination of the master franchise and notice of assignment (P97) on the plaintiffs which stated:
“1..... Donut King Australia Pty Ltd has by notice to Sequin Close Pty Ltd terminated the Master Franchise Agreement.
2.Donut King Australia Pty Ltd has elected to take an assignment to itself of the Master Franchisee’s interest in the Shop Sub-Franchise Agreement and accordingly such interest has been assigned as and from the date of this notice.
3...... In the premises, Gary Barber and Christine Marjorie Joan Barber as Franchisees are obligated to Donut King Australia Pty Ltd under the Franchise Agreement from the date of the giving of this notice as if Donut King Australia Pty Ltd was the Master Franchisee named under the Shop Sub-Franchise Agreement.
4.Accordingly, you are hereby directed to pay all monies under your Franchise Agreement to our account - National Australia Bank, 8 Scarborough Street, Southport, Qld, 4215. Account Name: Donut King Australia Pty Ltd, ACN 050 288 705 ATF The Donut King Unit Trust - Administration Account. BSB: 084 923 Account No: 51880-0272.”
The evidence supports the contention of counsel for the plaintiffs that the plaintiffs, by their conduct, agreed to an assignment on these terms and looked to DKA to perform the obligations under the sub-franchise agreement.
There was discussion in the course of argument as to whether this court should apply what Megarry V-C referred to in Tito v Waddell(No 2) [1977] Ch 106 at 302 as “the pure principle of benefit and burden”. He held that there was a doctrine, both in law and equity, that a person who took the benefit of a transaction must also assume the burden thereof. The content and ambit of the asserted doctrine is uncertain and its applicability as a general principle was doubted in GIO (NSW) v KA Reed Services Pty Ltd [1988] VR 829. The so called doctrine has been criticised in Meagher, Gummow and Lehane, Equity Doctrines and Remedies (3rd ed) para 320 although it was applied by Young J in Rural & Agricultural Management Ltd v West Merchant Bank Ltd 14 ACLC 11.
In my view it is unnecessary for the plaintiffs to rely on any such doctrine. There is no need to resort to the general principle referred to by Megarry V-C in cases where the benefits and burdens from the contract or property which is the subject of an assignment are either specifically assigned or where they are so intertwined as to render it obvious that one could not pass without the other. Megarry V-C made this clear in Tito v Waddell when he said (ibid at 302):
“... I also think that this principle [the pure principle of benefit and burden] is distinct from the conditional benefit cases, and cases of burdens annexed to property. Although language speaking of benefit and burden is sometimes used in the latter classes of cases, I do not think it is really apt, and it is liable to confuse. In such cases the rule is really a rule of ‘all or none,’ an inelegant but convenient expression that may be used for brevity. A burden that has been made a condition of the benefit, or is annexed to property, simply passes with it: if you take the benefit or the property you must take it as it stands, with all its appendages, good or bad. It is only where the benefit and the burden are independent that the pure principle of benefit and burden can apply.”
The disclosure document given to the plaintiffs prior to entering into their agreement with Sequin Close refers to the “rights and obligations of the Master Franchisee” being assigned to DKA in the event of a termination between DKA and Sequin Close. There is no privity between DKA and the plaintiffs in the case of the Master Franchise agreement or the Disclosure Document, but the commercial reality of an assignment in these circumstances would require a transfer of both rights and obligations on either side. The learned trial judge listed various ongoing obligations which were required of the Master Franchisee under the sub-franchise agreement. They included providing management, sales and administrative advice from time to time to the plaintiffs, providing further training methods and techniques developed by the company as and when required, applying all marketing contributions received from the plaintiffs to a national marketing fund, providing ongoing technical information and assistance to the plaintiffs and to sponsor meetings between the various franchisees.
The effect of the sub-franchise agreement is to grant ongoing rights vested in the sub-franchisee to use the name, logos and other insignia of DKA and the DKA system to conduct the franchised operation in consideration of the proper performance by the master franchisor of its obligations. As Megarry V-C observed in Tito v Waddell (ibid at 297):
“... the more closely the obligations are linked to the rights, the easier it will be to construe the instrument as granting merely qualified rights.”

If the rights are conditioned in this sense, then the conditions should pass as part of the assignment. In my view this is what occurred in the present case.

But there is another way of looking at the matter. Against the background of being informed in the Disclosure Document that both rights and obligations would be assigned in the event of a termination of the agreement between DKA and Sequin Close, the plaintiffs were subsequently advised by DKA that its agreement with Sequin Close had been terminated and that DKA had elected to take an assignment to itself of the interest of Sequin Close in the sub-franchise agreement. The notice of assignment advised them that, as franchisees, they “are obligated to Donut King Australia Pty Ltd under the Franchise Agreement from the date of the giving of this notice as if Donut King Australia Pty Ltd was the Master Franchisee named under the Shop Sub-Franchise Agreement”. This was an instruction to the plaintiffs that DKA was to stand in the shoes of Sequin Close for the purposes of the sub-franchise agreement. It is true that the notice emphasised the plaintiffs’ obligations, but in the light of the conditional nature of the obligations to which reference has already been made, the intention of DKA and the plaintiffs to be inferred from their dealings is that DKA was to take the place of Sequin Close in the agreement, being entitled not only to the fulfilment by the plaintiffs of their obligations, but being required to perform its own obligations under the agreement. As I have pointed out, the plaintiffs accepted this position by their conduct and there was a novation of rights and obligations. For its part, DKA assumed the role of liaising with and advising the plaintiffs in the conduct of their business. For their part, the plaintiffs understood that they were to pay all monies due under the sub-franchise agreement to DKA.
In my view, it follows that DKA was bound by the terms of the sub-franchise agreement, either by way of an assignment or novation, and that the agreement to which it was bound included the undertakings set out in P41.
The breach of undertaking by Mr Bell upon which the plaintiffs placed particular reliance at trial was the fact that he did not secure for them a right to occupy the leased premises in the Myer Centre for a term of five years with a renewal for a further five years as stipulated in the letter P41. It is not disputed that Sequin Close failed to arrange for a lease in these terms. However DKA argued that the plaintiffs, by their conduct, waived compliance with the undertaking.
In my view this argument must be rejected. The plaintiffs’ solicitors were provided with a draft under-lease on 2nd August 1995. The term of the under-lease in the draft was for five years. There was no mention of the renewal. The plaintiffs commenced business on 8th August 1995 and traded until 7th May 1996 when they gave notice to terminate. The plaintiffs complained in the notice of being required to pay outgoings in addition to those stipulated in the letter P41 and that the architects’ fees were higher than the maximum referred to in the letter. No mention was made of the failure to secure the term of the lease on the basis stipulated for by the plaintiffs. DKA claims that the right to terminate was not exercised promptly and that any rights arising from the failure to secure the option to renew the lease were waived by the plaintiffs’ conduct in continuing in business for approximately nine months.

According to the evidence of Mrs Barber, the five-plus-five year term was important to the plaintiffs because one term of five years would not have been enough to make a success of the business. One of the business loans which they secured was taken out over 10 years so as to match the expected lease period. She said she understood that Mr Bell was handling the lease with the Myer management.
I am of the view that the evidence does not support the assertion that the plaintiffs waived their right to the benefit of the undertaking which they had been given. It is not of any significance that they commenced trading without securing the extended lease. They were entitled to expect that Mr Bell would pursue this issue with the landlord. It is to be inferred from P41 that Mr Bell would so act. They did not have any lease in writing when they commenced trading and it was not as though they had been told that they would not be given a right of renewal. Mrs Barber was not sure whether she raised this issue with Mr Bell after they occupied the premises. However, there were other concerns and complaints which seem to have occupied the minds of the plaintiffs from the time they commenced business. The fact that they did not press the issue is not a consideration which indicates acquiescence or election. In my view, the plaintiffs remain free to pursue whatever rights they might have by reason of the failure to secure the five year lease with a right of renewal for five years.
However the right of the plaintiffs to reimbursement in the event of a breach of any of the undertakings in the letter is somewhat restricted. The principal right given by P41 is the right to terminate the agreement. Reimbursement is restricted to “all costs and fees you have paid to Sequin Close P/L or Donut King Australia and all the reasonable expenses you have incurred in respect of or arising out of” the agreement. I think the expenses must be limited to amounts actually expended. They would not include losses such as trading losses or any amount in lieu of wages which the plaintiffs might otherwise have earned. Nor would they include loss of use of the monies applied to the business.
Although the learned trial judge found that DKA was obligated to the plaintiffs by reason of the failure of Sequin Close to satisfy its obligations under P41, he did not pursue the issue of reimbursement. Instead, he found that DKA was liable to the plaintiffs by reason of misrepresentations made by Mr Bell which constituted misleading conduct contrary to s52(1) of the Trade Practices Act 1974. He added that, in his view, a similar liability arose under the Fair Trading Act of 1987.
There is a point which must be dealt with before considering the issue of misleading conduct. The trial judge found that liability for the misrepresentations attached to DKA by reason of the conclusion which he reached that Mr Bell acted with the apparent authority of DKA. This finding is contested by DKA. In response, the plaintiffs claim that Mr Bell had actual authority to act as the agent of DKA and, alternatively, that he was clothed by DKA with apparent authority to act on their behalf in making the representations.
Clause 12.1 of the Master Franchise Agreement purports to exclude the relationship of principal and agent. However statements of this nature are not determinative of the matter. (Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 at 587; Commissioner of Taxation v Krakos Investment Pty Ltd (1995) 61 FCR 489 at 495.) It is necessary to look at the substance of the relationship. If the relationship is ambiguous, a statement of the type contained in clause 12.1 might assist in removing the ambiguity. (Australian Mutual Provident Society v Allan (1978) 52 ALJR 407 at 409.)
Broadly speaking, the relationship of agency occurs where one person agrees to act on another’s behalf so as to affect that other person’s relations with third parties. (Bowstead & Reynolds on Agency (16th ed) 1-001) In the present case the nature of the relationship between DKA and Sequin Close is to be determined by reference mainly to the master franchise agreement (P4), a business plan prepared by DKA’s trading company Retail Food Group Australia (P6) and the various tasks which Sequin Close agreed to undertake. As observed previously, DKA appointed Sequin Close as master franchisee with authority to appoint sub-franchisees and to contract with them in its own right. Fifty per cent of the fees payable by the franchisees were to be paid to DKA.
However, despite the fact that the sub-franchisees contracted with Sequin Close, DKA retained considerable control over the manner in which both Sequin Close and the sub-franchisees carried on business. DKA involved Sequin Close in the promotion of what was referred to in the master franchise agreement as the “Master Franchised Operation” and which was defined in the agreement as “the business of developing the Donut King System in the Territory in accordance with this agreement”. Clause 5.1 of the agreement provides:
“The Master Franchisee shall diligently search for and screen potential Franchisees within the Territory at its cost. The Master Franchisee shall devote its full time and attention to the Master Franchised Operation and shall exert its best efforts to promote the establishment of successful DONUT KING Franchises throughout the Territory. The search for sites and screening of Franchisees shall be conducted in such reasonable manner as specified by the Company in the Confidential Operations Manual or otherwise. In particular, but without limiting the generality of the foregoing, the Master Franchisee shall:
5.1.1......... generate at the Master Franchisees’ reasonable expense public relations material to be placed (if required) in media distributed within the Territory;
5.1.2answer all serious responses to such publicity and enquiries concerning DONUT KING franchises to be located within the Territory;
5.1.3......... conduct such investigations of all potential DONUT KING Franchisees as may be reasonably necessary to determine those qualified applicants for franchises who are capable of acquiring and operating a DONUT KING franchise;
5.1.4obtain from such qualified applicants for franchises such application forms, personal information, financial statements and other documents and data as may be reasonably required by the Company and to carry out approved credit checks;
5.1.5......... provide to potential Franchisees only such information and documents as approved by the Company; and
5.5.6submit to the Company for final approval details on the proposed fit out of all sites, details of proposed Franchisees and, at the request of the Company, details as to the proposed premises and the lease terms and conditions of the proposed premises.”
All franchisees had to be approved by DKA and Sequin Close was required to submit to DKA relevant information in this regard. The premises upon which franchised operations were to be conducted had to be approved by DKA and the terms of the agreements between Sequin Close and the franchisees also required DKA’s approval. Clause 5.4 provides:
“The Master Franchisee shall provide to each of its Franchisees all continuing assistance and services it is required to provide pursuant to the Franchise Agreement specified by the Company (‘the Franchise Agreement’) and the Confidential Operations Manual, and such additional advice and assistance as may reasonably be required, from time to time, by the Company.”
The master franchisee was required to ensure that all franchisees used only those products and ingredients which were approved by DKA. Clause 6.1.1 deals with promotion. It provides that the master franchisee is required to:
“... actively promote the Master Franchised Operation within the Territory and to promote the mutual business interests of the Company and the Master Franchisee and without limiting the generality of the foregoing shall cause to be provided all such services as the course of business may require and to employ sufficient staff to enable the provision of such service.”
Paragraph 5 of the Business Plan (P6) prepared by the Retail Food Group states:
“The major functions of the Master Franchisee will be to:- locate new sites and negotiate leases, source suitable franchisees, manage payment of royalties to Head Office, to supervise existing stores and work with franchisees to obtain maximum performance from stores.”
These arrangements indicate that Sequin Close was given a role which went beyond its function to contract independently with sub-franchisees. DKA was intent on promoting its franchised operations and ensuring that the individual businesses were conducted in the precise manner laid down in its instructions to the master franchisee. It was in this context that Sequin Close was required to promote, recruit and supervise.
In my view there is an analogy to be drawn between the recruiting function of Sequin Close in the present case and the role of the insurance agent considered by the High Court in Colonial Mutual Life Assurance Society Ltd v The Producers and Citizens Co-operative Assurance Company of Australia Limited (1931) 46 CLR 41. It is true that in the event of a contract resulting from the agent’s endeavours in that case, the agreement would be entered into between the insurance company and the insured. However, the following comments by Dixon J on the authority of the insurance agent would seem to be applicable also to the role of Sequin Close:
“If the view be right which I have already expressed, that the ‘agent’ represented the Company in soliciting proposals so that he was acting in right of the Company with its authority, it follows that the Company in confiding to his judgment, within the limits of relevance and of reasonableness, the choice of inducements and arguments, authorized him on its behalf to address to prospective proponents such observations as appeared to him appropriate. The undertaking contained in his contract not to disparage other institutions is not a limitation of his authority but a promise as to the manner of its exercise. In these circumstances, I do not think it is any extension of principle to hold the Company liable for the slanders which he thought proper to include in his apparatus of persuasion.
The wrong committed arose from the mistaken or erroneous manner in which the actual authority committed to him was exercised when acting as a true agent representing his principal in dealing with third persons.” (supra at 50)
These observations are also an answer to clause 6.3 of the master franchise agreement which stated that master franchisee is -
“Not to make any representations statements or warranties about the Master Franchised Operation or any DONUT KING business other than those permitted or implied by this Agreement or which the Company may first authorise in writing.”
Furthermore, this clause acknowledges that authorised representations might be made by Sequin Close about the Master Franchised Operation and particular Donut King businesses. In the light of Sequin Close’s role in promoting the franchised operation generally it is not surprising that representations would be made and this consideration underscores the role of Sequin Close as a promoter of DKA’s interests.
For these reasons, I am of the view that Sequin Close was the agent for DKA when performing the duties imposed upon it in matters such as promoting the franchised operation, recruiting, supervising and advising franchisees.
It is unnecessary to decide whether, in the event that Sequin Close was not the agent for DKA, it was nevertheless clothed with apparent authority. Suffice it to say that the plaintiffs’ case in this respect was based on Mr Bell’s role as promoter of the franchised operation, his use (with the knowledge of DKA) of Retail Food Group notepaper and the impression given in promotional material provided by DKA that he was the contact at the office of the Retail Food Group for South Australia and the Northern Territory. On the other hand it was stated in the Disclosure Document given to the plaintiffs by DKA that the master franchisee was an independent business, not an agent, partner or employee of the franchisor. I repeat, however, that it is unnecessary to decide the question of apparent authority.
I have said that the trial judge found that DKA was liable to the plaintiffs by reason of misrepresentation which constituted misleading conduct under the Trade Practices Act. The judgment culminated in an order in the following terms:
“That pursuant to Section 87 of the Trade Practices Act 1974 the defendants and each of them do pay to the plaintiffs the sum of $214,927.00 for the purpose of compensating them for the loss suffered by them by reason of a contravention of Section 52 of the said Act.”
However there is a difficulty with the judgment at this point. The misrepresentations relied upon by his Honour are not made clear in his reasons. The only alleged misrepresentation which he specifically identifies as such is said to arise from paragraph 5.7.9 of the Disclosure Document P22. The paragraph which is set out above deals with the assignment of the “rights and obligations” of the Master Franchisee to DKA. Earlier in his judgment the trial judge expressed the view that if the words of the notice of assignment (P97) exclude any obligation that Sequin Close owed to the plaintiffs, then there must have been a misrepresentation in paragraph 5.7.9 of the Disclosure Document.
No such representation was pleaded and there appears to be no evidence that the plaintiffs relied upon the alleged misrepresentation. The statement in para 5.7.9 might be relevant to the question as to what was effected by reason of the assignment, but, even if there had been reliance on it, it is difficult to see that the statement could have been causative of the main categories of loss claimed by the plaintiffs.
After drawing attention to paragraph 5.7.9 of the Disclosure Document the trial judge reviewed the evidence which led him to the conclusion that Mr Bell was the agent of DKA. He then said:
“And so the misrepresentations made to them by Mr Bell before the Franchise Agreement was entered into are misrepresentations made by Donut King and they were misrepresentations which were made contrary to the Trade Practices Act and as such they are actionable.
Furthermore those misrepresentations were also made by Mr Bell as agent for the Master Franchisee, Sequin Close.”
Nothing was said at this point in the judgment to identify what misrepresentations were found to have been made. It is unclear whether his Honour is there referring to misrepresentations said to arise out of the Disclosure Document or some alleged misrepresentations made by Mr Bell in respect of other matters.
Mr Whitington QC, for DKA, invited us to have regard to findings made elsewhere in the judgment and to infer that these were the misrepresentations upon which the learned trial judge based his order for relief. However the basis of his Honour’s conclusions is not readily apparent from the passages to which our attention was drawn. Mr Whitington pointed out that the trial judge found that Mr Bell had told the plaintiffs they would have to start working at 6.00 am. There was evidence that they were required to commence at 4.00 am. His Honour found that Mr Bell told the plaintiffs that the upper limit of their costs in setting up the business would not exceed specified amounts for various items and that they could expect the costs to be lower. There was no discussion in the judgment as to how the actual expenses compared with those referred to by Mr Bell. Mr Whitington then referred to other representations concerning the importance of the Myer shop outlet and the manner in which the kiosk would be constructed. There are no accompanying findings as to the true position or the fact of any reliance in respect of these matters.
Mr Whitington then drew the court’s attention to two alleged misrepresentations which he particularly emphasised. The trial judge found that Mr Bell stated to the plaintiff that the lease would run for five years with a right to renew for a further five years. This statement was made at an early stage in the negotiations. The trial judge then pointed out that on the same day as making this statement Mr Bell made a written offer to the leasing agent of the Myer Centre to lease the premises for a term of five years only and that at no time was a right to renew for five years secured. The trial judge did not go on to say that this was a misrepresentation. However Mr Whitington suggested that such a finding could be inferred.
The plaintiffs were aware at the time they entered into the agreement with DKA that a right of renewal at the end of the first five years had not been secured. This was why they stipulated that Mr Bell should sign P41 giving them the right to terminate if he could not secure a lease on the terms required by the plaintiffs. There was no misrepresentation to the effect that a right of renewal had been obtained. Any finding of misleading conduct in relation to the renewal of the lease would have to be based on some other misrepresentation or statement. I can find no such statement in the evidence.
The other alleged misrepresentation upon which Mr Whitington placed particular reliance relates to turnover. Mr Whitington drew attention to the following findings of the trial judge:
“Mr Bell also told the plaintiffs that the annual rental was $62,000 per annum and that that rent was based on a percentage of the estimated turnover which would be achieved by the plaintiffs under the franchise.
On 6 April 1995 Mr Bell sent what he described as a recent Profit and Loss Account for Donut King Castle Plaza. He said that the account shows lower than average percentages shown in the Disclosure Document for rent and wages. It transpires that the account was not in fact the Profit and Loss Account for Donut King Castle Plaza. Rather it was a Profit and Loss Account constructed by Mr Bell from particulars obtained by him from Mr Voss, the franchisee of Castle Plaza Donut King, for the period from 1 July 1994 to 31 December 1997 [sic] (Exhibit P18). In his evidence, Mr Voss said that that particular period was the best result that he had ever achieved, either before or since.
The purpose for which those figures were supplied by Mr Bell to the plaintiffs was to enable Christine to prepare a cash flow budget for presentation to their banks with a view to borrowing funds to provide sufficient capital needed to commence the business.
I find that Mr Bell knew that that was the purpose.”
Mr Whitington argued that there was evidence in relation to statements made as to the estimated turnover which would support a case of misleading conduct. Again, however, it is not clear from the reasons for judgment that this was a misrepresentation relied upon by his Honour in order to reach the conclusion that misleading conduct had been established. Furthermore the factual findings necessary to support such a case are not apparent from the trial judge’s reasons. There is a real issue as to whether anything said by Mr Bell amounted to misleading or deceptive conduct, particularly in view of the cautionary advice in relation to projected financial results which is given in the Disclosure Document. If damages are to be awarded under the Trade Practices Act it will be necessary for the trial judge to make clear findings as to any misrepresentation or misrepresentations constituting misleading conduct and the loss, if any, attributable to such conduct.
In the absence of a clear identification of the basis upon which misleading conduct was found and without further findings of fact, it is not possible for this court to adequately assess the ultimate conclusions of the trial judge. It would be inappropriate for this court to attempt to make the necessary findings of fact for itself. It is my view, therefore, that the appeal should be allowed, the orders of the trial judge set aside and the matter remitted to the trial judge for further consideration in the light of these reasons.

It is my view that the plaintiffs are at least entitled to be recompensed by DKA in accordance with the rights conferred by P41 which were incorporated into the sub-franchise agreement. However consideration will also have to be given to the question as to whether the plaintiffs are entitled to an award of damages under the Trade Practices Act.
There is a final matter which should be mentioned. The learned trial judge accepted the evidence of Mr McPharlin, the accountant called by the plaintiffs on the issue of loss. In his reports which were tendered, Mr McPharlin listed various items of expenditure and financial loss claimed by the plaintiffs. The trial judge said he accepted Mr McPharlin’s report, but did not make a finding that the evidence proved the financial details relied upon by Mr McPharlin. Mr Clayton QC argued that there was no primary evidence to establish a number of items of loss relied upon by Mr McPharlin. Mr Whitington QC submitted that the evidence was sufficient in this regard. In situations where the evidence is contested it is not sufficient to simply adopt the report of the expert witness on the assumption that the financial information upon which it is based is correct. In the circumstances it would be appropriate for the trial judge at the further hearing of the matter to make findings on any such items which are in dispute.

DEBELLE J. I have had the advantage of reading the draft reasons of Duggan J. With one reservation, I agree with the substance of those reasons.
While I agree that DKA is bound by P41, I have reservations whether that is in consequence of an assignment or novation of the sub-franchise agreement. Instead, DKA is, I think, estopped by the terms of its own documents and by its conduct from contending that it is not bound by P41. Clause 11.3 of the Master Franchise Agreement between DKA and Sequin Close provided that, upon termination of that Agreement, Sequin Close shall forthwith assign to it all of its rights and interests in all franchise agreements to which it is a party as well as other agreements. It was in these terms:
“ASSIGNMENT OF MASTER FRANCHISE UPON TERMINATION OR EXPIRATION
Upon termination or expiration of the Master Franchise Agreement hereof, for any reason, and by either party, the Master Franchisee shall forthwith assign to the Company or its nominee(s) all of its right, title and interest in and to all Franchise Agreements to which it is a party, including those Franchise agreements regarding businesses operated by the Master Franchisee and all leases subleases and licenses of premises used in connection with the operation of Franchisees’ business. The Master Franchisee hereby appoints the Company’s secretary as its attorney in order to effect such assignments and the Master Franchisee shall direct all its Franchisees to accept and acknowledge such assignments.”

By cl 9.14 of the sub-Franchise Agreement, the plaintiffs contracted that, upon termination of the Master Franchise Agreement, the interests of the Master Franchisee (that is to say, the interests of Sequin Close) in the Agreement between it and the plaintiff shall be assigned to DKA and the plaintiffs “shall be obligated to” DKA from the date notice is given of the assignment or such other date as DKA specified.

Finally, there is cl 5.7.9 of DKA’s Franchise Disclosure Document which provides:
“You should note that in the event that the Master Franchise Agreement between Donut King Australia Pty Limited and the Master Franchisee should terminate or expire for any reason then the rights and obligations of the Master Franchisee may be assigned to Donut King Australia Pty Limited or its nominee.” (Emphasis added)

It will be noticed that this clause does not limit the rights and obligations to those under the Master Franchise Agreement. Before DKA had terminated the Master Franchise Agreement it was aware of P41. That is apparent from a report dated 19 December 1995 from Mr Crapper to DKA. DKA did not terminate the Master Franchise Agreement until 12 January 1996. Thereafter, DKA and the plaintiffs continued to deal with one another. Although aware of the existence of P41, DKA did not, at the time of the assignment, assert that it was not bound by it. It was not until the plaintiffs relied on P41 that DKA asserted it was not bound. By its conduct DKA induced the plaintiffs to believe that it was bound by P41. Its conduct was reinforced by the terms of the agreements to which I have referred and in particular by the terms of cl 5.7.9 of the franchise disclosure document.

[1999] SASC 241

11 June 1999