Fehcorp Pty Ltd v Body Bronze International Pty Ltd
[2009] VCC 1001
•6 August 2009
| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
CIVIL DIVISION
Case No. CI-08-02017
| FEHCORP PTY LTD | Plaintiff |
| ACN 123 989 051 | |
| v | |
| BODY BRONZE INTERNATIONAL PTY LTD | First Defendant |
| ACN 078 442 645 | |
| and | |
| SCOTT MENEILLY | Second Defendant |
| and | |
| BRIAN JOHN MITCHELL | Third Defendant |
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| JUDGE: | HIS HONOUR JUDGE SACCARDO |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 14, 15, 16, 17, 20 and 21 July 2009 |
| DATE OF JUDGMENT: | 6 August 2009 |
| CASE MAY BE CITED AS: | Fehcorp Pty Ltd v Body Bronze International Pty Ltd & Ors |
| MEDIUM NEUTRAL CITATION: | [2009] VCC 1001 |
REASONS FOR JUDGMENT
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Catchwords: CONTRACT – franchise agreement – whether entire agreement clause within franchise agreement operated to exclude prior agreements – repudiation of contract – measure of damages. TRADE PRACTICES – misleading or deceptive conduct – representations with respect to future matters – whether at time representations were made the defendants had reasonable grounds for making them – unconscionable conduct – liability of defendants under s.82(1) of the Trade Practices Act – declaration that franchise agreement was void ab initio.
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| APPEARANCES: | Counsel | Solicitors |
| For Fehcorp | Mr T Messer | Beveridge Eaton Lawyers Pty Ltd |
| For the First Defendant | Represented by the Third | Wisewould Mahony |
| Defendant | ||
| For the Second and | Self-represented | |
| Third Defendants HIS HONOUR: |
1 In this proceeding, the plaintiff, Fehcorp Pty Ltd (“Fehcorp”) seeks damages against the defendants arising out of the failure of a franchise business conducted by it. The first defendant, Body Bronze International Pty Ltd (“BBI”), conducts a business in which it operates and acts as franchisor of sun tanning salons which are identified by the name “Body Bronze”. At all material times:
• the second defendant, Scott Meneilly (“Meneilly”), was employed by BBI as its Chief Executive Officer; • the third defendant, Brian Mitchell (“Mitchell”), was the sole director and shareholder of BBI. 2 Fehcorp entered into a Franchise Agreement with BBI (“the Franchise Agreement”) on 29 March 2007, pursuant to which Fehcorp became the franchisee of a Body Bronze salon which was to be opened at the Chadstone Shopping Centre (“the Centre”). At all material times David Fehrer (“Fehrer”) was the sole director of Fehcorp and all transactions between the defendants and Fehcorp were conducted through him.
3 By reason of renovations being undertaken at the Centre, Fehcorp’s Chadstone salon was originally located in a temporary premises within the Centre (“the temporary salon”).[1] Subsequently, it commenced operating from a permanent location within the Centre on 13 October 2007 (“the permanent salon”). On 14 April 2008, Fehrer, upon arriving at the permanent salon, found that he had been locked out of the business by BBI. From that day, Fehcorp took no further part in the operation of the permanent salon or its franchise business.
[1] The temporary salon at Chadstone was opened on 24 April 2007
4 In this proceeding, damages are claimed against the defendants for losses incurred by Fehcorp. It is alleged that BBI:
(i) wrongfully took possession of the permanent salon;
(ii) wrongfully repudiated the Franchise Agreement.
5 Further, it is alleged by Fehcorp that this conduct constituted contraventions by each of the defendants of various provisions of the Trade Practices Act 1974 (“the TPA”) and or the Fair Trading Act 1999 (“the FTA”).[2]
[2] specifically, Fehcorp alleges breaches by the defendants of (i) s.51AC of the TPA and/or s.8A of the FTA; (ii) s.82(1) of the TPA and/or s.159(1) of the FTA
6 In their Defences, the defendants:
(i) deny the allegations made by the plaintiff that they have contravened any of the provisions of the TPA; (ii) assert that they were justified in taking possession of the permanent salon by reason of the breach by Fehcorp of its obligations under the Franchise Agreement; (iii) make a counterclaim against Fehcorp seeking the recovery of losses allegedly incurred by the first defendant by reason of the alleged breach by Fehcorp of its obligations under the Franchise Agreement. 7 The plaintiff was represented at the trial by Mr T Messer of Counsel. The second and third defendants were self-represented. At the commencement of the trial, I granted leave pursuant to Rule 1.17 of the County Court Civil Procedure Rules 2008 for the third defendant to appear on behalf of the first defendant.
The Establishment of the Franchise Agreement and its Failure
8 There is no issue in the proceedings that extensive negotiations took place between Fehrer and Meneilly prior to the execution of the Franchise Agreement, and that in the course of those discussions Fehrer had informed Meneilly that there was an upper limit of $250,000 in the funding available to Fehcorp to establish the proposed Body Bronze franchise.
9 Whilst Meneilly estimated that the likely expense involved in establishing the franchise, both with respect to set up and fit out expenses, would be a figure in the vicinity of $240,000 to $250,000,[3] having regard to:
[3] Exhibit A1
• Fehcorp’s inability to access any funds additional to the $250,000; • Fehcorp’s concern which had been expressed by Fehrer to Meneilly, that the set up and fit out costs might exceed $250,000, Meneilly contacted Mitchell, who authorised Meneilly to present to Fehrer an offer to the effect that, should Fehcorp’s set up and fit out costs in establishing its proposed salon exceed $250,000, any “overrun” would be financed by BBI on the basis of a loan made by BBI to Fehcorp (“the finance arrangement”).[4] This offer was accepted by Fehrer on behalf of Fehcorp.
[4] The offer was made in a conversation between Fehrer and Meneilly on 5 February 2007 and confirmed by a subsequent email – Exhibit A2
10 On 6 February 2007, a document entitled “Heads of Agreement”[5] was executed between Fehcorp and BBI. Relevantly, the document contained the following clauses:
[5] Exhibit D
“Without limitation on other terms and conditions to be included by BBI in the new Franchise Agreement, this agreement specifies the negotiated terms and conditions to be included in the new Franchise Agreement with regard to the new salon.”
“If costs exceed the budgeted $250,000, BBI will loan additional funds required at a flat interest rate of approximately 10 per cent. Incentives will be provided to pay off the loan early to save interest.”6
11 There is no issue between the parties that the purpose of these clauses was to embody in writing the finance arrangement
12 On 9 March 2007, Meneilly sent an email to Mr Mark Eaton, Fehcorp’s solicitor, which, in addition to other matters, contained the following statement:
“We have also agreed to support David unconditionally in regard to set up costs as we understand that the funds David has available may be a bit tight and we do not wish to see undue stress or failure to launch due to monetary issues. We have also agreed on 0 per cent interest on all money if paid back within a certain timeframe. This timeframe will be determined once we have established if and what the monetary amount is that has been loaned. An example of our financial support has already come with us agreeing to cover the $19,000 bank guarantee for an initial twelve-month term commencing 1st October.”7
13 On 29 March 2007, a Franchise Agreement8 was entered into between Fehcorp and BBI by which BBI became the franchisor and Fehcorp became the franchisee of a proposed Body Bronze salon to be established at the Centre.
14 The Franchise Agreement made no mention of the finance arrangement. Further, the Franchise Agreement contained the following term:
“This agreement constitutes the entire agreement between the parties as to its subject matter and supersedes all prior representations and agreements in connection with that subject matter and may only be altered in writing executed by the parties.”9
15 Following the execution of the Franchise Agreement, Fehcorp opened the temporary salon on 27 April 2007. It was necessary to open the temporary salon by reason of the fact that the Centre was undergoing renovations and the site from which the permanent salon would operate was not immediately available. The temporary salon operated until mid September 2007 and Fehcorp opened the permanent salon on 13 October 2007.
This paragraph within the Heads of Agreement will be referred to as the “Heads of Agreement Financing Clause”
Exhibit A9
Exhibit E
This paragraph within the Franchise Agreement will be referred to as “the Entire Agreement Clause”
16
Fehcorp incurred expenses in fitting out both the temporary salon and the permanent salon. No issue arises in the proceeding that the expenses incurred by Fehcorp in establishing and opening both the temporary salon and the permanent salon, were expenses to which the finance arrangement applied.[10]
17
On 29 November 2007, in response to a number of requests by Fehrer that BBI honour the finance arrangement,[11] BBI provided Fehcorp with an invoice for $13,559.79[12] in the following terms:
[10] An issue does arise in the proceeding as to whether various expenses alleged by Fehcorp to be appropriately categorised as fit out and set up expenses meet that description
[11] BBI made a number of payments with respect to fit out and set up costs incurred by Fehcorp. The requests were made both in writing – Exhibit G – and in the course a meeting was conducted between Fehcorp and Meneilly and Mitchell: T 112-114.
[12] Exhibit I
Loans to cover suppliers $3,000.00 Illuminated ceilings $2,000.00 Retail communications $4,000.00 Colonial First State[13] $4,555.79 [13] The property management service employed by the Centre
_________
$13,555.79
18 It is not in issue that each of these items, excluding the payment to Colonial First State Property Management (“Colonial”) which related to rent, involved the expenses incurred by Fehcorp in fitting out and setting up the permanent salon.[14]
[14] T 134-135
19 Further invoices were subsequently sent by BBI to Fehcorp as follows:
•
On 17 December 2007, for $2,049.27 in respect of “loans to cover supplier payments”
• On 31 December 2007,[15] in respect of: [15] Exhibit J
Interest on loans for supplier payments 28 November
to 31 December at 10 per cent per annum $120.25 Interest on loans for supplier payments 17 December to 31 December at 10 per cent per annum $7.71
[16] Exhibit K
• On 2 January 2008, for $128.77 in respect of “interest monies loaned between 20 November 2007 and 31 December 2007”.[16] 20 On 4 March 2008, BBI forwarded to Fehcorp a copy of a letter from Colonial which made a demand for a payment of $26,083.60. There is no dispute that this sum included $22,207.08 in respect of items appropriately categorised as being fit out and set up expenses associated with the development of the permanent salon. This sum was eventually paid by BBI to Colonial, and on 12 March 2008, BBI forwarded to Fehcorp an invoice[17] (“the March 2008 invoice”) for this amount and a demand was made by BBI that Fehcorp pay the invoice by 21 March 2008.
[17] Exhibit Q
21 Notwithstanding the demands made by Fehcorp that BBI classify the sum the subject of the March 2008 invoice as a loan pursuant to the finance arrangement,[18] BBI refused to do so.[19]
[18] Exhibit N and Exhibit O
[19] The reason for the first defendant’s refusal is in issue and is a matter which I will deal with in due course.
22 By reason of the impasse which arose between Fehcorp and BBI associated with the failure of Fehcorp to reimburse BBI the monies the subject of the March 2008 invoice, BBI took possession of the permanent salon on 14 April 2008 in purported reliance of Clause 27.4 of the Franchise Agreement.
23 From that date, Fehcorp took no further part in the operation of the permanent salon or its franchise business.
The Issues which arise for Determination
24 In this proceeding, the following issues arise for determination:
(i)
The effect of the Entire Agreement Clause upon the finance arrangement and the Heads of Agreement;[20]
(ii) The interpretation of the finance arrangement;[21] (iii)
Whether Fehcorp incurred fit out and set up expenses in establishing the temporary and permanent salons, in an amount which called into operation the finance agreement;[22]
(iv)
Whether at the time at which the March 2008 invoice was issued by BBI, BBI was not satisfied that Fehcorp’s fit out and set up costs had reached $250,000;
(v)
Whether BBI was justified in taking possession of the permanent salon by reason of the failure of Fehcorp to meet the March 2008 invoice;
(vi) Whether the conduct of BBI in: [20] The issue which arises is whether the Entire Agreement Clause operates so as to exclude Fehcorp from relying upon the finance arrangement and the Heads of Agreement.
[21] The issue which arises is whether the trigger point in respect of the operation of the finance arrangement which involved Fehcorp incurring $250,000 in fit out and set up costs was a figure which was to be calculated inclusive or exclusive of Fehcorp’s GST obligations and refund entitlements.
[22] namely a sum appropriately categorised as being more than $250,000
(a)
refusing to advance to Fehcorp a loan to meet the March 2008 invoice;
(b) taking possession of the premises was such that it involved breaches of the various provisions of the TPA
and the FTA relied upon by Fehcorp in this proceeding.[23][23] It is agreed between the parties that as the counterclaim made by BBI will arise only if the claim by Fehcorp is not made out, I will firstly determine the issues in the proceedings brought by Fehcorp and then if necessary determine the counterclaim brought by BBI. In this respect, I have given BBI leave to adduce further evidence with respect to the matters raised by it in its counterclaim.
The Effect of the Entire Agreement Clause upon the Finance Arrangement
25 In the Amended Defence filed on behalf of the defendants, it is asserted that the Entire Agreement Clause was such that the finance arrangement was superseded by the execution of the Franchise Agreement and thereafter could no longer be relied upon by Fehcorp.
26 In the course of the trial, both in their opening and closing submissions and in their evidence, each of the defendants withdrew from this position.
27 Meneilly said it was always his intention that the finance arrangement remained in place, notwithstanding the failure to incorporate the Heads of Agreement Financing Clause into the Franchise Agreement.
28 At paragraph 29 of his Witness Statement,[24] Meneilly said:
“Despite the fact that there was no mention at all of financial assistance in the final version of the Franchise Agreement (which was signed by both parties in March 2007), the intent was made very clear to me that if David exceeded $250,000 on setting up of the store, BBI would support him financially.”
[24] On 17 July 2009, I made an order that both Meneilly and Mitchell prepare Witness Statements which would stand as their evidence-in-chief.
29 At paragraph 30, when referring to the Heads of Agreement Financing Clause, Meneilly said:
“The omission in the Franchise Agreement was not intentional.”
30 Mitchell adopted a similar position to Meneilly. In his Witness Statement at page 2, Mitchell said:
“I did not want to run the risk of the franchisee running out of funds because the $250,000 had all been spent on fit out costs, with further fit out costs being incurred and no more money available to finish the fit out. My intentions were at all times to honour this commitment and promise. A little later on 29 March 2007 the Franchise Agreement was signed by both parties. This is Exhibit E. I did not realise at the time that the loan agreement between BBI and Fehcorp was not included in the Franchise Agreement, but even if I had, it would have made no difference to me because in my mind I had made a promise to David, and if the conditions of the agreement were reached then I would definitely fulfil my side of the agreement.”
31 Whilst the position adopted by the defendants, to which I have referred, effectively deals with the issue which arises as to the effect of the Entire Agreement Clause upon the finance arrangement; having regard to the fact that the defendants were not represented and that their Defence which relied upon the Entire Agreement Clause was not formally amended, I consider it appropriate to indicate my attitude to the Defence as pleaded by the defendants.
32 In circumstances which I find to have been established where:
(i) Meneilly and Mitchell made representations on behalf of BBI that BBI would loan to Fehcorp any funds in excess of $250,000 which were required to be expended in the fit out and set up of its franchise at the Centre; (ii) Fehrer made it clear to both Meneilly and Mitchell that the funds available to Fehcorp were limited to $250,000 and that Fehcorp required BBI’s support by way of a loan in respect of any fit out and set up expenses which exceeded that amount; (iii) Both the finance arrangement and the Heads of Agreement were entered into, with the latter document confirming the existence of the finance arrangement and proposing that the finance arrangement would be included as a term of the Franchise Agreement, the state of the law is such that it would not uphold a technical and abhorrent defence in which BBI, having prepared both the Heads of Agreement Financing Clause and the Franchise Agreement, then sought to rely upon the Entire Agreement Clause to avoid its obligation under the Heads of Agreement Financing Clause.
33 In this regard, I consider the observations made by Harper J in Billy Baxters (Franchising) Pty Ltd v Trans-It Freighters Pty Ltd,[25] as the statement of the law which pertains to such a defence.
[25] [2009] VSC 207 (28 May 2009), at paragraphs 9 to 11
The Interpretation of the Finance Arrangement
34 An issue which arises for my determination is whether the figure of $250,000, which was the trigger point at which BBI was to commence making loans to Fehcorp to cover fit out and set up costs incurred by it (“the trigger point”), was a figure which was to be calculated as inclusive of, or exclusive of, Fehcorp’s GST obligations and refund entitlements.
35 There is no dispute that this issue was not specifically raised by the parties prior to the execution of the Heads of Agreement or the entry into the finance arrangement. In their Defence, the defendants contend that both the finance arrangement and the Heads of Agreement lacked certainty, such that they are unenforceable. I do not accept this contention. In circumstances in which Meneilly proposed the agreement which subsequently became the franchise arrangement and drafted the Heads of Agreement Financing Clause, it ill behoves the defendants to subsequently take the point that the agreements lacked certainty. My role is to interpret the agreements, if possible, so that they give effect to the intention of the parties at the time that the agreements were formed.[26] Having regard to the evidence of the parties as to the circumstances in which the agreements were executed, about which there is little dispute, I do not consider that either the finance arrangement or the Heads of Agreement lacked certainty such that they were unenforceable.[27]
[26] Hawthorn Football Club Ltd v Harding [1988] VR 49
[27] This issue was not pressed by either Mitchell or Meneilly in their Witness Statements which I take to be an indication that it was not significant in their view
36 It is submitted on behalf of the defendants that the trigger point figure of $250,000 was clearly to be calculated on a GST exclusive basis.
37 In developing this submission, it was put by the defendants that the only reasonable meaning which could be applied to the finance arrangement was the requirement that Fehcorp spend the total funds available to it, and that for the purpose of this exercise it made no sense to ignore refunds of GST payments which Fehcorp was entitled to receive or had received.
38 In support of this contention, the defendants refer to the email from Meneilly to Fehrer of 7 February 2007[28] in which Meneilly advised Fehrer to organise an ABN which would enable him to obtain a refund of approximately $13,600 upon the initial $150,000 which was to be paid by Fehcorp in purchasing four sun beds and meeting the costs associated with the franchise fee and the sub-lease. I understand the defendants’ position to be that the fact that this email was sent to Fehcorp was evidence that the defendants intended Fehcorp to use all funds available to it, including any refunds of GST, in establishing the temporary and permanent salons,[29] and, accordingly, that the trigger point was calculated as being GST exclusive.
[28] Exhibit 6A
[29] Whilst I accept that the email might be used in the manner urged by Meneilly, the content of the email is also consistent with Meneilly seeking to assist Fehrer in circumstances in which Meneilly was aware that this was Fehrer’s first excursion into the operation of a business. Given the absence of any further evidence to support the position put by Meneilly, I do not find the content of the email to be persuasive on the issue.
39 In response it was put on behalf of Fehcorp that:
(i)
the finance arrangement was potentially unworkable if the $250,000 trigger point was to be calculated as inclusive of any GST reimbursements;
(ii)
the obligation upon BBI which arose by reason of the finance arrangement came into effect at the time at which Fehcorp had committed itself to spending more than $250,000 in fit out and establishment costs rather than the time at which the actual expenditure took place, and this position must lead to the result that the trigger point was to be calculated on a GST inclusive basis.
40 In my opinion, the only reasonable interpretation of the finance arrangement is that contended for by Fehcorp.
41 I arrive at this view for the following reasons:
[30] T 77
[31] The analysis contended for by BBI would potentially make the finance arrangement unworkable. For example, if Fehcorp had been provided with a competitive quotation which it wished to accept, pursuant to which all fit out and set up work and equipment needed to open both the temporary and permanent salons at the Centre would be undertaken for a fixed price of $270,000, Fehcorp would be required to have the funds available to meet the total cost associated with the quotation at the time at which it was presented with an invoice for payment. If the defendants’ contention as to the meaning of the finance arrangement was to be applied, Fehcorp would not be entitled to call upon BBI to provide any loan to assist it in meeting that portion of the quotation which exceeded $250,000 by reason of the fact that upon payment of the quoted sum of $270,000, it would eventually be entitled to a refund of that component of the $270,000 which comprised GST payments. (I have assumed for the purpose of the example that the full amount of $270,000 attracted GST charges and that Fehcorp’s refund would be equivalent to one-eleventh of that amount, namely $24,545).
(i) In the absence of any indication that the figure of $250,000 was to exclude the obligation of Fehcorp to meet GST expenses, I do not consider it appropriate to infer that such a term should be included; (ii) There is no dispute that Fehrer made it clear to Meneilly that his source of borrowings were “maxed out”[30] at $250,000. The purpose of the finance arrangement was to provide Fehcorp with security in the event that if it was required to find more than $250,000 to achieve an opening of the proposed salons, BBI would fund that requirement by way of a loan. It makes no commercial sense to interpret the finance arrangement such that it might require Fehcorp to find a source of funds additional to the $250,000 was available to it, in order to allow it to meet GST expenses, even if such expenses were to be met only on a short-term basis because they would eventually be the subject of a refund.[31] 42 For the above reasons, I am of the opinion that the only reasonable interpretation of the figure of $250,000, which was to act as the trigger point for additional funds to be loaned to Fehcorp by BBI, was that the figure was inclusive of, and not exclusive of, GST payments, and accordingly that the finance arrangement came into effect at the time at which Fehcorp committed itself to spending more than $250,000.
Did Fehcorp’s Fit Out and Set up Expenses Exceed $250,000?
(1) The Adequacy of Fehcorp’s Proofs as to its Fit Out and Set up
Expenses43 Considerable time was occupied during the course of the trial in the process of Fehrer giving evidence for the purpose of establishing the quantum of the fit out and set up expenses for which Fehcorp was liable as a result of the establishment of the temporary and permanent salons. The quantification of Fehcorp’s claim with respect to fit out and set up expenses is set out in Exhibit AA. The schedule contains in excess of two hundred items. The defendants do not challenge approximately eighty of these items.
44 As to the items which are the subject of challenge, BBI mounts its challenge on three bases, namely:
(i)
That in the absence of Fehcorp producing a receipt or an invoice, I should not be satisfied that the item claimed by Fehcorp was one which was either incurred or appropriately categorised as an establishment expense;
(ii)
That a number of items claimed by Fehcorp should not be categorised as establishment expenses;[32]
(iii)
That all costs incurred by Fehcorp should be considered to be exclusive of GST.[33]
[32] Mitchell contends that expenses incurred with respect to advertising, stationery, printing, WorkCover, supplies, uniforms and clothing are not appropriately classified as set up or fit out costs
[33] I have found against this contention
45 There is no issue that establishment expenses, whether fit out or set up, consist of those expenses reasonably incurred by Fehcorp in order to allow both the temporary and permanent salons to commence to trade.
46 Although Exhibit AA contains a number of items which might without explanation, be regarded as operating expenses,[34] I do not accept the position put to me by the defendants that these items should not be classified as set up or fit out costs even if they were necessarily incurred in order to allow the salon to open with resources and services commensurate with the expectation of its proposed clientele.[35] I do accept however that any ongoing expenses incurred in the operation of both the temporary and permanent salons, which fall into the categories in respect of which the defendants have taken issue, are not appropriately categorised as fit out and set up costs.
[34] for example, purchases of uniforms, purchases of towels, repeated purchases of small items from retailers such as Bowens, Kmart and Bunnings, and purchases from Office Works
[35] In this regard, there is no issue that the location of the salon at the Centre was a location in the largest shopping centre in the southern hemisphere and that the appropriate approach for Fehcorp to take in determining the nature of the services, equipment and fit out to be offered by him in the permanent salon was not to be niggardly – this was the effect of Fehrer’s evidence and was not challenged by Meneilly or Mitchell
47 It was Fehrer’s evidence that in preparing the costing set out in Exhibit AA, he included only the costs associated with the initial purchase of the product or service itemised, and excluded the costs incurred in any subsequent purchase.[36]
[36] T 254
48 Having had the opportunity of observing Fehrer both in the course of his evidence and his cross-examination, I formed the opinion that he was an impressive witness. I do not accept the assertion by the defendants that Fehrer’s record keeping should be criticised by reason of the absence of some invoices or receipts which relate to the items described in Exhibit AA. The vast majority of the expenses particularised in that exhibit are supported by copies of invoices and either: receipts for payment; the production of a cheque butt; or the production of a bank statement, which support the fact that a payment was made.
49 Fehrer gave evidence that at the time at which he entered the franchise, he purchased a software program known as MYOB and that he employed that program to keep track of the expenses incurred by him in the course of fitting out, setting up and operating, both the temporary and permanent salons.[37]
[37] Fehrer’s evidence was that Exhibit AA was prepared using that software program and calling up entries made by him into the program as expenses were incurred – T 180
50 Fehcorp provided a folder entitled “Chronological Summary of Expenses and Proof of Payment”, in which copies of invoices, receipts, bank statements and cheque butts were collated to support the vast majority of the items appearing in Exhibit AA. Given that the entry by Fehcorp of the Franchise Agreement was Fehrer’s first excursion into the operation of a business, I found Fehrer’s level of organisation to be impressive.
51 Fehrer gave detailed evidence which established the identity and reason for the purchase of virtually all of the items contained in Exhibit AA. Whilst in a few instances Fehrer could not recall the precise nature of a particular purchase,[38] he readily conceded that this was the case. He maintained however that with respect to each of the items contained in Exhibit AA, the purchase was appropriately categorised as a fit out or set up cost and it represented a one-off expense necessarily incurred by Fehcorp in establishing its salons at the Centre with levels of stock and services appropriate for their location and clientele.[39]
[38] for example, there were some sundry purchases from either Kmart or Bowens which related to items which Fehcorp could not identify
[39] T 298-299; T 306
52 The defendants contended in a general challenge to Fehrer’s evidence, that certain items of fit out were unnecessary.[40] I note that Fehrer was assisted when establishing both the temporary and permanent salons by Catherine Moore,[41] and that no evidence was adduced by the defendants that any of Fehrer’s business decisions, both with respect to the quantity or quality of his purchases in setting up both the temporary and permanent salons, were not supported by Ms Moore.
[40] for example, decorative features employed by Fehcorp in a temporary salon such as bowls to contain sanitising liquid and sweets, a bamboo screen, a quantity of towels purchased by Fehcorp, and the fit out of the beautician facilities offered by Fehcorp in the permanent salon
[41] who was described as his support manager
53 In the circumstances, I accept Fehrer’s evidence:
• that the items listed by him in Exhibit AA are appropriately categorised as fit out and set up expenses; • that each of the expenses listed in Exhibit AA were reasonably incurred by Fehcorp in establishing the temporary and permanent salons so that they met with the expectations of the potential clientele of both BBI and Fehcorp as to the ambience and services which should be available in a tanning salon located within the Centre.
(2) Findings as to whether Fehcorp’s Fit Out and Set up Expenses
Exceed the $250,00054 Notwithstanding the position taken by the defendants upon this issue, I am satisfied that pursuant to the finance arrangement, Fehcorp had, by mid October 2007 at the very latest, incurred liabilities which called into play the finance arrangement. In making this finding, I:
(i) accept Fehrer’s evidence upon this issue; (ii)
take into account my finding that the trigger point of $250,000 is calculated inclusive of GST.
Was BBI satisfied that Fehcorp’s Fit Out and Set up Expenses had Exceeded
$250,000?
(1) The relevance of the introduction of a New Salon Design and the necessity to open temporary and permanent salons upon Fehcorp’s expected fit out and set up costs 55 It was submitted on behalf of Fehcorp that, because it was required in establishing its franchise business at the Centre to fit out two salons, with the permanent salon involving a design which was more elaborate than that which had been costed prior to the entry by the parties of the finance arrangement, BBI was always well aware that Fehcorp was likely to incur considerably more than $250,000 in fit out and set up costs.
56 There is no issue that following the entry of the Franchise Agreement, the permanent salon was earmarked by BBI as being a “flagship salon” and as the first which would employ what was described by the defendants to Fehrer in an email dated 8 June 2007 as:
“A big leap forward with salon environment design so that Body Bronze has a clear design lead over anyone else in the industry. This is a big call but I am sure it can be done. Doing this will determine how all stores will be ‘cookie cut’ moving forward. The initial design process will be expensive and very detailed so we will no doubt only include you when most of the grunt work is out of the way. Obviously, BBI will be footing the bill for the entire design concept. You will still have the bill for adapting this design to suit your salon.”[42]
[42] Exhibit A10. This email was the first notice that Fehrer received that the proposed fit out of the permanent salon would be something different to that discussed between he and Meneilly prior to the entry of the Franchise Agreement, and which Meneilly had at that time estimated would involve fit out and set up costs of between $240,000 and $250,000.
57 The implementation of this new design concept, as might have been expected, did not proceed without the occasional hiccup, both with respect to delay and costing. The fact that the latter issue was becoming a concern to everyone involved, is evidenced by an email from Meneilly to Fehcorp dated 22 June 2007 indicating that a shop fitting company known as “A1” had provided a rough figure for a new “shell installation”.[43] The email ends with the following statement:
“$60,000 (ouch!) We have had him quote Mornington just a week or so ago for doing cubicles, doors, hinges, locks and painting so I will see what that was also.”[44]
[43] A1 was a company with which BBI was well familiar and which had in the past provided quotations sufficiently competitive to result in BBI employing it to fit out a number of its salons
[44] Exhibit A12
58 On 14 August 2007, A1 provided a total quote with respect to the fit out for the sum of $120,000.[45] Having regard to the fact that Fehcorp had initially paid to BBI $150,000,[46] if this quotation by A1 had been accepted, Fehcorp’s liability with respect to fit out and set up expenses would have been at least $370,000. This is without taking account of the costs incurred by Fehcorp in setting up the temporary salon, together with the many additional expenses Fehcorp would have incurred in purchasing items such as stock, furnishings and other items.
[45] Exhibit A16
[46] in accordance with the demand made by BBI as set out in Exhibit A5
59 Whilst the services of A1 were eventually not employed in establishing the permanent salon,[47] it was submitted on behalf of Fehcorp that BBI must have been well aware by the time the design process for the permanent salon had been completed that Fehcorp’s fit out and set up costs could not be kept below the $250,000 level.
[47] Both Fehrer and his father obtained red cards so that they could act as building supervisors and directly employ individual trades to perform the work required to fit out the permanent salon in order to save expenses – T 121; T 270
60 Fehcorp further develops its argument by drawing attention to BBI’s statement made in January 2007 that the establishment costs could involve expenditure of up to $250,000.[48]
[48] Exhibit A1 – this estimate was provided in respect of a salon set up pursuant to a more modest design than that to be employed in the permanent salon
61 Essentially it is the submission of Fehcorp that when account is taken of:
(i)
the cost estimates associated with set up and fit out provided by Meneilly to Fehrer in January 2007 of between $240,000 and $250,000;
(ii)
the fact that Fehcorp was required to set up a temporary salon and thereafter a permanent salon employing BBI’s new design concept;
(iii)
the estimates provided by A1 as to the cost of the fit out of a shell installation;
BBI must have considered it to be inevitable that Fehcorp’s establishment expenses would exceed the trigger point for the initiation of the finance arrangement and that by October 2007 it must have been satisfied that the trigger point had been reached.
62 The position put by Fehcorp with respect to this issue has considerable force. I am satisfied on the balance of probabilities that BBI must have been concerned from the time that it decided to proceed with its modified salon design that Fehcorp’s fit out expenses may well exceed the trigger point and that by mid October 2007, the combination of:
(i) the cost estimates which had been submitted for the implementation of the new design (ii) Fehcorp’s need to implement the new design and also to fit out both the temporary and permanent salons; (iii) the assertions by Fehrer that the trigger point had been reached;[49]
must have led BBI to the conclusion that this was probably the case.
(2) The relevance of the activities of BBI in providing Fehcorp with loans to meet its fit out and set up expenses[49] The spreadsheet provided by Fehrer, which is Exhibit A18, and Fehrer’s letter, which is Exhibit G, documented those concerns. The meeting early in October ( T112) involved a discussion in which Fehrer presented a number of invoices for the fit out of the permanent salon to Mitchell and Meneilly on the basis that he did not have the funds to meet them. In the course of the meeting Mitchell agreed on behalf of BBI to meet the costs associated with the invoices after directly negotiating with each contractor involved.
63 In September 2007, as quotations were received for the fit out of the permanent salon, Fehrer met with Meneilly and Mitchell and expressed his concern that the project was destined to exceed his available capital limit.[50] Fehrer gave evidence that in the course of this meeting, Mitchell told him that “funds were tight at Body Bronze” and that “he didn’t have any money to give me at that current point in time”.[51] The meeting was described by Fehrer as being quite heated.[52]
[50] T 110
[51] T 111
[52] T 110
64 Following the meeting, Meneilly sought details of Fehcorp’s expenses incurred as at that date[53] and Fehrer provided further information as to the expenses incurred by him as at 31 August 2007, which was set out in the spreadsheet.[54] It was Fehrer’s evidence that:
[53] Exhibit A17
[54] Exhibit A18
(i)
this document was provided by way of the response to a request by Meneilly that Fehrer provide the defendants with performance statistics from the salon, including total income from day one and total expenses;
(ii)
that for the above reason the spreadsheet he provided included items in the nature of operating costs which should not to be taken into account when calculating whether the $250,000 trigger point had been reached;[55]
(iii)
that in a subsequent meeting between he, Meneilly and Mitchell, it was suggested that Fehcorp seek additional finance via a low document loan and that it would be assisted in this activity by the defendants falsifying an invoice for the finance of a fictitious solarium bed.[56] Fehrer said that he refused this proposal and thereafter consulted a solicitor who assisted him to prepare a letter of demand which was sent to the defendants on 3 October 2007.[57]
[55] T 116
[56] T 118; this evidence was not challenged by Meneilly or Mitchell and speaks adversely as to their credit
[57] Exhibit G
65 The letter of 3 October 2007 clearly documents Fehcorp’s concern:
• that the set up costs which it was exposed to were likely to exceed $250,000; • that the defendants had indicated a reluctance to stand by the finance arrangement. 66 It was not disputed by the parties that following the receipt by BBI of the letter of 3 October 2007,[58] a meeting took place which was attended by Fehrer, his father, Meneilly, Mitchell and Alana Potter, who was a receptionist employed by Body Bronze (the fourth meeting).[59] At this meeting, it was Fehrer’s evidence that:
[58] Exhibit G
[59] T 122. The defendants did not take issue with Fehrer’s evidence on this point.
[60] T 123-124
• he provided to Meneilly and Mitchell further documentation setting out the costs incurred by him by reason of the delay in establishing the permanent salon; • Mitchell undertook to immediately pay 50 per cent of the outstanding costs of any trade that had been contracted by Fehrer and that he would negotiate individually with each of the contractors for the purpose of obtaining further time for the payment by BBI of any outstanding sums.[60] 67 Following this meeting, BBI commenced to make payments with respect to fit out expenses incurred by Fehcorp which it continued to do until March 2008. The cessation by BBI of this activity followed a meeting held in February between Fehrer, Meneilly and Mitchell in the course of which it came to the attention of Meneilly and Mitchell that Fehrer had approached other franchisees for the purpose of making a complaint as to the way in which BBI was conducting its franchise business.[61]
[61] Exhibit L is the letter prepared by Fehrer and signed by a number of co-franchisees, the content of which was discussed by the parties at this meeting. Both Meneilly and Mitchell were unhappy with the fact that Fehrer had taken this action. Meneilly in his Witness Statement commented: “David was working behind the back of the franchisor, rallying support from other franchisees, preparing a defamatory letter that was to be sent to the Franchise Council of Australia”. He continued: “His rallying act again only worked against him”.
68 It is submitted on behalf of Fehcorp that:
• the provision by Fehcorp to BBI of invoices it received from contractors employed to perform fit out works; • the payment of those invoices by BBI and the supply by BBI to Fehcorp of invoices referring to loans to cover suppliers[62] was evidence of BBI’s acceptance that the trigger point had been reached.
[62] Exhibit I
69 The defendants dispute this contention. Essentially it is their position that, at no time were they satisfied that the trigger point had been reached, and that between October and November, Fehcorp was loaned some $19,000 by BBI, not because it was required to do so by reason of the finance arrangement, but rather to prevent Fehcorp being exposed to “too much financial strain having just opened a new salon”.[63]
[63] See the second page of the Witness Statement of Brian Mitchell
70 I do not accept the defendants’ evidence in this regard for the following reasons:
(i)
Fehrer’s evidence as to the statements made by Mitchell in the course of the fourth meeting is consistent with Mitchell accepting that the trigger point had been reached;[64]
(ii)
The contemporaneous evidence by way of email and other correspondence does not support the contention that BBI made loans to the plaintiff notwithstanding the fact that it was not satisfied that the $250,000 trigger point had been reached.
(iii)
Given my previous findings as to the costs to which Fehcorp was being exposed having regard to the set up of the temporary salon and the fit out of the new salon, I consider the position put by BBI that it did not believe that the trigger point had been reached to be untenable;
(iv)
Having regard to the fact that there had been a downturn in the general levels of activity within the business undertaken by Body Bronze as the result of the adverse publicity associated with the “Clare Oliver incident”,[65] I do not accept that BBI or Mitchell would have been prepared to support Fehcorp in meeting set up expenses involved in establishing the permanent salon if Mitchell was not satisfied that Fehcorp’s funds had been exhausted and the trigger point had been reached.
[64] Fehrer’s evidence as to this meeting was not challenged either by Mitchell or Meneilly
[65] It was Mitchell’s evidence that at this time there was “not a lot of spare cash around” – see page 2 of his Witness Statement
71 For these reasons, I am satisfied that BBI’s action of commencing to pay invoices on behalf of Fehcorp and thereafter providing loans in respect of those invoices to Fehcorp, was undertaken because Meneilly and Mitchell accepted that the trigger point had probably been reached.
The Reason advanced by BBI for Discontinuing the Practice of Making Loans to Fehcorp
72 It is Fehcorp’s case that, by March 2008 BBI had accepted that the trigger point had been reached and that, in issuing the March 2008 invoice and failing to convert the sum the subject of the invoice into a loan, BBI was in breach of the finance arrangement.
73 It is BBI’s position however that the March 2008 invoice was issued because it was not satisfied that Fehcorp’s fit out and set up costs had reached $250,000.
74 It is put on behalf of Fehcorp that the communications which took place between the parties provide unequivocal support for Fehcorp’s case upon this issue. For this reason I will deal with these communications in some detail. It is not in issue that, other than for correspondence passing between the parties upon this issue, there was no other communication relevant to the issue. The chain of correspondence may be summarised as follows:
(i) On 4 March 2008, Mr Doug Dent (“Dent”), the financial controller for BBI, sent to Fehrer a letter in the following terms: “The attached letter has been received from the lessor. It appears that $26,083.60 is overdue in relation to your tenancy. Would you please advise us by the close of business today what you intend to do about this matter.”
(ii) In response, Fehrer, by letter dated 4 March 2008, wrote to BBI:
“My position with regard to this invoice is that I have originally spent $250,000 in setting up the Chadstone franchise as agreed. I direct you to Clause 15(g) of the Heads of Agreement signed and dated 6 February 2007 in that ‘Body Bronze International’ must cover this payment by way of loan.”[66]
[66] Exhibit M
(iii) In a further letter dated 5 March 2008, Fehrer wrote to BBI:
“Further to my letter yesterday, legally we are not under any obligation to pay the associated costs nor are we in a financial position to do so. The costs attributed to Colonial First State Property Management are associated with excess fit out costs. These costs are to be covered by Body Bronze International by way of loan as originally agreed. This understanding was stated in the Heads of Agreement and reinforced in an email sent by Scott Meneilly to my solicitor, Mark Eaton, of Beveridge Eton Lawyers on 9th March 2007. Retraction from this agreement would be considered as engaging in misleading conduct.”
(iv) In response, Dent, by letter dated 5 March 2008, wrote:
“Please understand that the Franchise Agreement supersedes all previous agreements including the Heads of Agreement and this is stipulated in the Franchise Agreement. In regard to Body Bronze International loaning you money, through direct negotiations with you since your permanent site has opened, we have paid invoices on your behalf totalling $19,253.05 and we have agreed that this money was provided to you on a loan basis and you are being charged an interest rate of 10 per cent.
Body Bronze has not agreed to loan you any further money and the amount owing to Colonial First State Property Management is now due and payable. If you will not pay this bill in its entirety by the end of today please let me know.”[67]
[67] Exhibit P
(v) Subsequently, on 12 March 2008, a further letter from Dent was sent to Fehcorp in the following terms:[68]
[68] The letter is Exhibit Q - It is not in issue that the March 2008 invoice was an invoice which related to costs incurred in respect of fit out works
“Further to our correspondence last week, you made it clear to us that you would not be paying the obligations to CFSPM referred to by the letter dated 20 February 2008 forwarded to you. Due to your non-payment of this we have paid a total of $22,207.08 and have subsequently attached an invoice of the same amount to you; without interest. Accordingly the attached invoice is due and payable on the 21st of this month.”69
(vi) On 27 March 2007, BBI, through their solicitors, Wisewoulds, served upon Fehcorp a Notice of Breach of Franchise Agreement. Paragraph F of the recital within the Notice asserted that Fehcorp had failed to pay Colonial the sum the subject of the March 2008 invoice in respect of fit out of the franchise premises.70
(vii) On 10 April 2008, Beveridge Eaton Lawyers, Fehcorp’s solicitors, wrote to Wisewoulds a letter asserting, amongst other matters, that:
•
BBI were obliged, pursuant to the Heads of Agreement, to meet fit out costs which exceeded $250,000 by way of a loan to Fehcorp;
•
The fit out costs incurred by Fehcorp had substantially exceeded the sum of $250,000;
• BBI had failed to advance the promised loan to Fehcorp; •
In the above circumstances, Fehcorp was not in breach of the Franchise Agreement.
(viii) Finally, the letter invoked the terms of Clause 31 of the Franchise Agreement and gave the following notice:
“(a) Parties to the agreement are in dispute. The nature of the dispute is the failure of your client to advance the promised loan and its conduct in serving the notice (“the dispute”). (b) The outcome that our client seeks is the withdrawal of the notice and the advance of the promised loan. (c) The action that our client thinks will settle the dispute is the withdrawal of the notice and the advance of the promised loan.”71
75 In response to this letter, Wisewoulds, by letter dated 11 February 2008, asserted that the Franchise Agreement contained the entire agreement between the parties and that it superseded all prior representations, including the terms of the Heads of Agreement and, further, that even if the Heads of Agreement did apply, the terms of Clause 15 of that Agreement were so unclear as to be unenforceable.
76 I consider it to be telling against BBI that, notwithstanding the assertion made:
• by Fehcorp by letter dated 4 March 2008 addressed to Meneilly;72 • by Fehcorp’s solicitors by letter dated 10 April 2008;73 that Fehcorp’s fit out costs exceeded $250,000, the defence now taken by the defendants that they were not satisfied that the trigger point had been reached, was never raised in correspondence passing directly from BBI to Fehcorp or from their solicitors to Fehcorp’s solicitors.
Exhibit Q
Exhibit S
Exhibit U
Exhibit M
Exhibit U
77
In the course of his evidence, I enquired of Mitchell if there was any evidence in the form of a document or discussion which followed the letter of 5 March 2008[74] which raised the issue that the real problem which existed in the defendants’ minds was that BBI had not been given proof that the threshold of $250,000 in payment of fit out costs by Fehcorp had been reached. Whilst in his response, Mitchell referred to conversations between himself and Fehcorp which clearly pre-dated the subject letter, he could not take me to any conversation, letter or document which supported the position adopted by the defendants in the course of the trial that the reason for the failure by BBI to advance further loan monies was anything other than that as expressed on behalf of the company by Dent on 5 March 2008.
78
In the course of his evidence, Mitchell said that he was unaware that Dent had made the statements contained in the letter of 5 March 2008. I do not accept this evidence. The fact that:
[74] Exhibit O
• the response by Dent was detailed, referred specifically to the Heads of Agreement and was copied to Meneilly; • the position taken by Dent in that letter was shortly thereafter adopted by Wisewoulds, the solicitors engaged by BBI; • the position taken by Dent was maintained by the defendants in their Defence and Counter Claim, which was the subject of numerous amendments; leads me to the conclusion that Mitchell must have been aware of the reason given by Dent for refusal by BBI to extend to Fehcorp the loan monies sought by it and that he either authorised it or adopted it.
Finding as to whether BBI wrongfully called upon Fehcorp to meet the March
2008 Invoice79 By reason of the findings and conclusions which I have set out above, I am satisfied:
(i) that at the time at which the March invoice was generated by BBI:
(a) it was satisfied that the trigger point had been reached; (b) it was obliged pursuant to both the finance arrangement and the Heads of agreement to loan to Fehcorp the monies the subject of the invoice; (ii) that the reason which BBI failed to continue to make payments in respect of Fehcorp’s set up costs and render loans to BBI in respect of those payments was not related to any concern by BBI that the trigger point had not been reached;[75]
[75] It was submitted by the plaintiff that the reason for the issuing of the March 2008 invoice was BBI’s disenchantment with Fehrer having regard to his activity in consulting other franchisees and preparing the letter of 14 February 2008 (Exhibit L). Whilst I consider there to be considerable force in this submission, it is not necessary for me to determine this point.
(iii) that in insisting that Fehcorp meet the March 2008 invoice, BBI wrongfully failed to comply with both the terms of the finance arrangement and the Heads of Agreement and that its subsequent conduct in locking Fehcorp out of the premises of the permanent salon was unjustified.
The Service of the Breach Notice
80 Mitchell gave evidence that the purpose of the service of the Breach Notice upon Fehcorp was, hopefully to bring Fehcorp to the table for constructive talks.[76] I do not accept this evidence.
[76] The third defendant’s Witness Statement, page 3
81 On 4 March 2008, Fehrer had written to BBI’s financial controller a letter which contained the following statement:
“You will note that I have attempted to arrange meetings on multiple occasions with BBI to discuss the issues with outstanding sub-contractor payments. I remain willing to do so at short notice.”
82 On 27 March 2008, BBI served upon Fehcorp the Breach Notice,[77] asserting in paragraph F of the Recital:
[77] Exhibit Q
“You failed to pay Colonial First State Property Management (CFSPM) the sum of $22,207.08 in respect of the fit out of the franchise as per the invoice dated 14 February 2008 (attached). We paid that amount to CFSPM on your behalf and on 12 March 2008 we issued you with an invoice for you to reimburse us that amount. You have failed to pay us the sum of $22,207.08 paid by us to CFSPM on your behalf due on 21 March 2008.”
83 The Notice continued to the effect that unless Fehcorp paid to BBI the monies particularised in the Notice, the Franchise Agreement would be terminated.
84 There is no suggestion in the evidence that the offer by Fehrer of 4 March 2008 to meet was ever taken up by the defendants. Rather it was met with the demands to which I have referred, for payment of the outstanding March 2008 invoice and the subsequent service of a Notice of Breach of the Franchise Agreement.
85 When Fehcorp’s solicitors gave notice of a dispute pursuant to Clause 31 of the Franchise Agreement on 10 April 2008,[78] the response of the defendants’ solicitors was, to assert BBI’s entitlement to take such action as it deemed appropriate having regard to the service of the Notice of Termination of Franchise Agreement, and thereafter to exclude Fehcorp from re-entering its premises. I consider the actions taken by the defendants to be the antithesis of activity designed to bring Fehcorp to a negotiating position. By reason of my earlier findings, I am satisfied that at the time that the Breach Notice was served by BBI it accepted that Fehcorp had exhausted the funds available to it. In these circumstances the purpose in serving the Notice must have been to bring the Franchise Agreement to an end.
[78] Exhibit U
The Misleading or Deceptive Conduct Claim
86 In substance, Fehcorp asserts that in making the representations which gave rise to the finance arrangement and thereafter:
(i) failing to incorporate the finance arrangement within the Franchise Agreement; (ii) incorporating into the Franchise Agreement the Exclusive Rights Clause; (iii) relying on the Exclusive Rights Clause to terminate the Franchise Agreement; (iv) failing to provide to Fehcorp the loan required to meet the costs associated with the March 2008 invoice, notwithstanding the fact that the trigger point for the making of that loan had been reached; BBI engaged in misleading and deceptive conduct in breach of s.52(1) of the
TPA.87 There is no issue in the proceeding that:
(a)
the representation that the BBI would honour the funding agreement was made by Meneilly and Mitchell on behalf of BBI;
(b)
the representation was one of considerable significance to Fehcorp, having regard to the limit of the funding available to Fehcorp, being $250,000;[79]
(c)
the representation was relied upon by Fehcorp and induced Fehcorp to enter the franchise.
[79] It was Feher’s evidence (T 77 ) which I accept, that in the absence of the defendants agreeing to the finance arrangement, Fehcorp would not have entered the franchise
88 Further, having regard to the discussions between Fehrer and Meneilly which resulted in Meneilly suggesting the possibility of the parties entering into an agreement by which BBI would fund fit out costs if they exceeded Fehrer’s expressed limit of $250,000, it is clear that BBI well appreciated the importance of the finance arrangement in influencing Fehcorp’s decision to enter the franchise.[80]
[80] The contrary to this position was never asserted on behalf of BBI
89 I accept the evidence of Meneilly and Mitchell that, at the time at which the representation which led to the finance arrangement was made, they intended to honour the representation and they believed that BBI possessed the means by which the representation could be honoured.[81]
[81] In this regard, I accept the evidence of Mitchell, that although funds may have been tight by reason of a downturn in the industry, both Mitchell and BBI had available to them sources of funding which they could access for the purposes of honouring the finance arrangement.
90 I am satisfied that the evidence establishes that, having regard to Fehrer’s financial position in which the resources available to him to establish his franchise business were effectively capped at $250,000, he would not have entered the Franchise Agreement without an unconditional assurance that the finance arrangement would be honoured.
91 This assurance was effectively provided by Meneilly in the email dated 9 March 2007 in which he reported to the plaintiff’s solicitors:
“We have also agreed to support David unconditionally in regard to set up costs as we understand that the funds David has available may be a bit tight and we do not wish to see undue stress or failure to launch due to monetary issues.”[82]
[82] Exhibit A9
92 It is put on behalf of Fehcorp that notwithstanding this assurance of “unconditional” support, Meneilly prepared a Franchise Agreement which:
(i) failed to incorporate the finance arrangement;[83] (ii) included the Entire Agreement Clause; [83] Notwithstanding the clear intention of the parties that such a term be included as evidenced by the Heads of Agreement which contained the term: “Without limitation on other terms and conditions to be included by BBI in the new Franchise Agreement, this agreement specifies the negotiated terms and
and that by doing so BBI placed itself in a position in which it could employ the Franchise Agreement to exclude the finance arrangement and the Heads of Agreement Financing Clause. It is asserted that this action constituted a breach of the “unequivocal” undertaking which the defendants represented would be honoured.
93 It is put on behalf of BBI:
(i) that at the time at which the finance arrangement was entered into it intended to honour that arrangement and that the failure to incorporate the finance arrangement within the Franchise Agreement was an innocent mistake; (ii) that notwithstanding the Exclusivity Clause of the Franchise Agreement, BBI’s intention to honour the finance arrangement continued and that the existence of this intention was evidenced by the fact that, by early 2008, BBI had lent to Fehcorp the sum of approximately $19,000 to cover fit out costs incurred by Fehcorp; (iii) that the failure by BBI to make loans to Fehcorp occurred by reason of the failure by Fehcorp to satisfy BBI that the trigger point for the implementation of the finance arrangement had been reached; (iv) that in failing to continue to make loans to Fehcorp, BBI did not contravene the terms of the Finance Agreement. 94 Contrary to these contentions, I have made findings:
(i)
that BBI was satisfied that the trigger point for the operation of the Finance Agreement had been reached and it was on this basis that it
conditions to be included in the new Franchise Agreement with regard to the new salon”.
commenced to make loans to Fehcorp pursuant to the finance
arrangement;(ii) that in failing to continue to make such loans, BBI was in breach of the finance arrangement.
95 Whilst it was Meneilly’s evidence that the failure to incorporate the terms of the finance arrangement within the Franchise Agreement was an innocent oversight, when that evidence is considered in context of the fact:
(i)
that notwithstanding the confirmation by Meneilly in the email of 5 February 2007[84] that BBI would finance any overrun in set up costs, the Heads of Agreement originally prepared by Meneilly which were attached to that email were silent on this issue;[85]
(ii)
the terms of the finance arrangement were omitted from the Franchise Agreement;[86]
(iii) the Franchise Agreement contained the Entire Agreement Clause;[87] (iv)
BBI relied upon the Entire Agreement Clause in refusing to convert into a loan the plaintiff’s debt to it which was the subject of the March 2008 invoice;
(v)
BBI asserted through Dent in an email copied to Meneilly that the loans provided by it to Fehcorp were not made pursuant to the terms of any agreement which pre-dated the Franchise Agreement but by reason of direct negotiations occurring after the opening of the permanent salon;[88]
[84] Exhibit A4
[85] It is not in dispute that the original Heads of Agreement document prepared by Meneilly did not contain the Heads of Agreement Financing Clause and that this clause was inserted at the request of the plaintiff when he attended the first defendant’s offices in Kew for the purpose of signing the Heads of Agreement.
[86] In my opinion it was more than a coincidence that the terms of the finance arrangement were excluded when Meneilly oversaw the preparation of both the Heads of Agreement and the Franchise Agreement, and that on each occasion the omission worked to the potential favour of BBI and the detriment of Fehcorp upon an issue of the utmost importance to the decision of Fehcorp to enter the Franchise
[87] which operated to exclude the terms of the finance arrangement and did so by reason of the failure to incorporate the finance arrangement within the franchise Agreement
[88] Exhibit P
I find Meneilly’s evidence on this issue to be unconvincing and I do not accept it.
96 Whether the intention of BBI to honour the finance arrangement continued at the time at which the Franchise Agreement was entered into,[89] is of little relevance if the cause of action under s.52(1) of the TPA is established by virtue of the findings which I have already made, and the intention of BBI is of no relevance.
[89] I have found this intention existed at the time the finance arrangement was entered into.
97 In BMW Australia Finance Ltd v Miller & Associates Insurance Broking Pty Ltd,[90] the following principles were set out as those which ought to be borne in mind in considering whether a breach of s.52(1) of the TPA has occurred:
[90] [2009] VSCA 117, per Robson AJA, at p.135
“(a) A distinction is drawn between a representation to identified individuals and a representation to the public;
(b) The conduct of the defendant must be viewed as a whole; (c) Whether or not conduct amounts to a representation is a question of fact to be decided by considering what was said and done against the background of all surrounding circumstances; (d) As to representations made to an individual, it is necessary to analysis the relevant conduct in relation to the applicant alone, bearing in mind what matters of fact each knew about the other as a result of the nature of the dealings, or which each is to be taken to have known;
(e) A corporation that has acted honestly and reasonably may nevertheless be rendered liable to pay damages if its conduct has in fact misled or deceived or was likely to mislead or deceive;
(f)
In order for conduct to contravene s.52, it is not necessary for the conduct to be the sole cause of a person being misled or deceived. …
(g)
it is sufficient that the conduct was a cause of the loss or damage sustained, in the sense that it materially contributed to the loss or damage.”
98 I accept that I should apply these principles in deciding whether BBI has acted in breach of s.52(1) of the TPA.
99 In Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre,[91] when considering the effect of s.52 of the TPA, Steven J observed that s.52(1) was:
[91] (1978) 140 CLR 216
“… concerned with consequences as giving to particular conduct a particular colour. If the consequence is deception, that suffices to make the conduct deceptive. Section 52(1) creates no offence, it only prescribes a course of conduct deviation from which may result in an order of the court, made under s.80 of the Act, forbidding further deviation in the future. The section should be understood as meaning precisely what it says and as involving no questions of intent upon the part of the corporation whose conduct is in question.”
100 In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd,[92] the Court went further, finding that there was nothing in s.52 that confined it to conduct which was engaged in as a result of a failure to take reasonable care, observing:
[92] (1982) 149 CLR 191
“… A corporation which has acted honestly and reasonably may therefore nevertheless be rendered liable to be restrained by injunction, and to pay damages, if its conduct has in fact misled or deceived or is likely to mislead or deceive. …”
101 In accordance with the statements made in the three cases to which I have referred, the intention of BBI at the time at which it made the representation the subject of the finance arrangement,[93] is irrelevant in determining whether a breach of s.52 of the TPA has occurred.
[93] namely whether it did or did not intend to honour that representation
102 In circumstances in which I have found that:
(i)
the representation was made by BBI that it would honour the finance arrangement;
(ii)
Fehcorp relied upon the representation and was induced by it to enter the Franchise Agreement;
(iii)
the finance arrangement was not honoured by BBI in circumstances in which it was obliged to do so;
I am satisfied that Fehcorp has established that BBI has been guilty of misleading and deceptive conduct as defined by s.52 (1) of the TPA.
The Effect of the Provisions of Section 51A of the TPA
103 The provisions of s.51A of the TPA have the following effect:
• If a representation is made with respect to a future matter in the absence of reasonable grounds for making the representation, the representation is regarded as being misleading. • In the absence of evidence adduced by the maker of the representation to the contrary, the maker will be deemed not to have had reasonable grounds for the making of the representation. • Section 51A of the TPA operates as an interpretation section and does not create a course of action. Its purpose is to facilitate proofs in cases involving misrepresentations as to future matters.[94] [94] See Miller’s Annotated Trade Practices Act (30th ed.), at paragraph 1.51A.5
104 In the present case, the plaintiff asserts that the provisions of s.51A of the TPA operate so as to deem the representation made on behalf of BBI that it would unconditionally honour the finance arrangement to be misleading because it was made in the absence of reasonable grounds.
105 I interpret the provisions of s.51A of the TPA as operating to impose upon BBI the onus of proving that there were reasonable grounds for making the relevant representation.[95] On the basis of the findings of fact which I have made, together with the reasons which I have given in support of my finding that BBI was in breach of s.52(1) of the TPA, I am not satisfied in circumstances in which the TPA imposes the onus upon BBI, that it has discharged the onus to establish on the balance of probabilities that the representation which was made as to a future matter was not misleading as at the time at which the Franchise Agreement was entered into.
[95] Skiwing Pty Ltd trading as Cafe Tiffany’s v Trust Co of Australia Ltd (Stockland Property Management Ltd) [2009] FCA 347; Re McGrath, Pan Pharmaceuticals Ltd (in liq) v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2
106 In these circumstances I am satisfied that the provisions of s.51A of the TPA operate so as to require a finding that as at the time the Franchise Agreement was executed, BBI made a representation with respect to a future matter which was misleading because it did not have reasonable grounds for making the representation that it would honour the finance arrangement unconditionally, and as such that BBI contravened the provisions of s.52(1) of the TPA.
The Claim under Section 51AC of the TPA
107 Fehcorp asserts that BBI was guilty of unconscionable conduct by reason of its activity in:
(a) denying its liability to advance to Fehcorp the monies the subject of the March 2008 invoice which it was required to advance pursuant to the finance arrangement; (b) serving the Notice of Termination of the Franchise Agreement and taking possession of the premises from which the permanent salon operated. 108 In essence, it is Fehcorp’s position that BBI in enforcing the strict contractual rights under the Franchise Agreement, in circumstances in which it had given an assurance that induced Fehcorp to enter the Franchise Agreement which involved the payment of the very invoice which BBI relied upon in its Breach Notice, was guilty of unconscionable conduct.
109 The term “unconscionable conduct” has been interpreted to apply to activity which involves serious misconduct or something clearly unfair or unreasonable;[96] activities which show no regard for conscience and are irreconcilable with what is right or reasonable[97] and activity which involves doing what should not be done in good conscience.[98]
[96] Cameron v Qantas Airways Ltd (1995) 55 FCR 147
[97] Qantas Airways Ltd v Cameron (1996) 66 FCR 246
[98] Australian Securities & Investments Commission (ASIC) v National Exchange Pty Ltd (2005) 148 FCR 132
110 I am satisfied that:
• At the time at which the finance arrangement was discussed and agreed upon, BBI was well aware that the funds available to Fehcorp to establish the proposed franchise business were limited and that they had an absolute ceiling of $250,000; • The agreement by BBI to enter the finance arrangement was of critical importance to Fehcorp’s decision to enter the franchise and BBI was well aware of this; • By reason of the meetings which were attended by Fehrer, Mitchell and Meneilly, BBI was well aware, during the period between the entry of the finance arrangement and the service of the Notice of Termination of the Franchise Agreement, that Fehcorp could not continue to operate the permanent salon if BBI failed to honour its commitment under the finance arrangement. 111 In considering this issue, I take into account the relative position of both parties: Fehcorp, which conducted its business through Fehrer, a young and relatively inexperienced businessman who BBI was aware had extended his level of debt to the limit of his financial resources; and BBI, which was a large and well-experienced franchisor which had ready access to the funds required by Fehcorp to complete the fit out of the temporary premises.
112 Taking into account the matters referred to above, in combination with the findings I have made in dealing with both the breach by BBI of s.52(1) of the TPA, and the circumstances in which BBI came to exclude Fehcorp from access to the permanent salon,[99] I am satisfied that Fehcorp has established a breach by BBI of the provisions of s.51AC of the TPA.
[99] I refer in particular to my findings in paragraphs 62;71 79; 85; 88 and 92;
The Liability of Meneilly and Mitchell by reason of S.75B(1) of the TPA
113 Section 75B(1) of the TPA provides:
(1) A reference in this Part to a person involved in a contravention of a provision of Part IV, … shall be read as a reference to a person who:
(a) has aided, abetted, counselled or procured the contravention; (b) has induced, whether by threats or promises or otherwise, the contravention; (c) has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or (d) has conspired with others to effect the contravention.”
114 The evidence clearly establishes that both Meneilly and Mitchell were intimately involved in:
(i) the negotiations which gave rise to the making of the finance arrangement;
(ii) the decision not to stand by Fehcorp with respect to the monies the subject of the March 2008 invoice by advancing to Fehcorp a loan in that amount.
115 Mitchell was the person through whom the first defendant operated. The first defendant’s decisions were effectively made by Mitchell.
116 Meneilly, as the first defendant’s Chief Executive Officer, clearly had a close working relationship with Mitchell. It was Meneilly who suggested to Fehrer that Mitchell may be prepared to enter into the finance arrangement and it was Meneilly who drafted both the Heads of Agreement and the Franchise Agreement. I am satisfied on the evidence that Meneilly agreed with and supported the decision by Mitchell that BBI should not advance to Fehcorp the loan required to meet the March 2008 invoice.
117 Having found BBI to be in breach of the provisions of s.52(1), s.51A and s.51AC of the TPA, I am satisfied that both Mitchell and Meneilly are appropriately described as persons who have been involved in the contraventions of those provisions of the TPA.
118 In these circumstances, having regard to the knowledge of, participation in and assent to, by both Meneilly and Mitchell, the activities involved in contravention of the provisions of the TPA in respect of which I have made findings against BBI,[100] I am satisfied that they are liable for those contraventions by reason of the provisions of s.75B(1) of the TPA.
[100] Yorke v Lucas (1985) 158 CLR 661; see also Hamilton v Whitehead (1988) 166 CLR 121; Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1985) 61 ALR 504
Outcome in the TPA Claims
119. By reason of the findings I have made, I consider it appropriate to make an
order declaring the Franchise Agreement to be void ab initio pursuant to
s.87(2)(a) of the TPA and to fix the damages to which Fehcorp is entitled in
the claim made by it against each of the defendants under the TPA on the
basis of the costs incurred by it by reason of its entry into the Franchise
Agreement which I assess as follows:
Expenses associated with fit out and set up costs
inclusive of legal fees $293,240.41 Interest payable on the Citibank loan of $180,000 $28,952.25 Interest payable on the Citibank loan for $45,149.97 $3,658.60 __________
$325,851.26[101]
[101] In assessing the damages which I have awarded to Fehcorp, I have relied upon the evidence of
The Breach of Contract Claim
119 As an alternative to the claim brought pursuant to the provisions of the TPA, Fehcorp seeks relief by reason of the breach by BBI of the finance arrangement and the Heads of Agreement Financing Clause. Having regard to the findings which I have made in this proceeding, it is clear that Fehcorp has established its cause of action in this regard.
120 In assessing the damages to which Fehcorp is entitled against BBI by reason of breach of contract by BBI, I consider it appropriate to measure the quantum of the damages upon the basis of the loss suffered by Fehcorp by reason of the costs and expenses reasonably incurred by it in establishing the salons which it operated under the Franchise Agreement. In adopting this approach, I do so by reason of the fact that I am satisfied that, having regard to the infancy of Fehcorp’s franchise business, it would not be possible for Fehcorp to demonstrate whether or to what extent the continuation of the franchise would have resulted in profit. In these circumstances I am of the opinion that an award of damages calculated in the manner in which I have indicated, is the most appropriate method of placing the plaintiff in the position which would otherwise have been the case, if the contract had been performed.102
121 Accordingly, I fix the damages to which Fehcorp is entitled in the alternative claim made by it against the first defendant in the sum of $325,851.26.
Fehrer not only as to the fit out and set up costs incurred by Fehcorp about which I have already commented upon but also as to the appropriate calculation of interest. The approach taken by Fehrer in calculating the interest associated with the main bank loan involved the addition of the interest charges set out in bank statements received from Citibank. I accept this process as being an accurate method of calculating the interest associated with that loan. As to the secondary loan, it was Fehrer’s evidence that a similar approach to the one just described was taken in calculating the interest associated with that loan. In respect of both loans, I accept Fehrer’s evidence that he (and thus Fehcorp) considered himself liable to meet the interest payments on the loans taken out by his father to allow Fehcorp to operate the franchise business. Whilst the claim was made with respect to expenses associated with a credit card facility employed by Fehrer to meet some expenses associated with the fit out of the permanent salon, I have not allowed the sum claimed in this regard. I considered the method required to isolate the credit card expenses by reason of the fitting out of the permanent salon and thereafter to calculate the interest component on these expenses, to be less reliable than the method employed to carry out the calculations involved in the other items of interest which I have allowed.
The Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64
The Counterclaim Brought by BBI
122
Having regard to the findings I have made in favour of the plaintiff, I dismiss the counterclaim brought by BBI.
123
I will hear submissions from counsel for the plaintiff as to the precise form of the judgment which should be entered in favour of the plaintiff and also as to interest and costs.
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