Funk Coffee and Food Pty Ltd v Hype Investments Pty Ltd and Sebastiano
[2021] SASCFC 28
•24 June 2021
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
FUNK COFFEE AND FOOD PTY LTD & ORS v HYPE INVESTMENTS PTY LTD AND SEBASTIANO
[2021] SASCFC 28
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, the Honourable Justice Kelly and the Honourable Justice Livesey)
24 June 2021
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS - MISLEADING OR DECEPTIVE CONDUCT GENERALLY
The appellants appeal against the decision of a Judge of the District Court upholding the respondents’ claims that the appellants engaged in misleading or deceptive conduct contrary to s 52 of the Trade Practices Act 1974 (Cth) (Trade Practices Act) and misrepresentations under s 7 of the Misrepresentation Act 1972 (SA) and granting relief in favour of the respondents.
The claims arose in relation to the defendants’ conduct in the course of the sale of a café and catering business located at 80 Flinders Street, Adelaide (the Business). After a series of negotiations commencing in February 2009, in June of that year, the respondents resolved to purchase the Business and signed a Sale Agreement, a Franchise Agreement and a License Agreement (the Agreements). At trial, the Judge found that the respondents were induced to enter the Agreements by virtue of a series of express and implicit misrepresentations made by the fourth appellant on behalf of the appellants.
The trial Judge found that the appellants had misrepresented that:
•the Business had been turning over $15,000 per week since early 2009 (the Turnover Representation);
•the appellants could expect a net profit of $2,000 per week (the Profit Representation);
•the Businesses catering clients would continue to be serviced by the Business and that the plaintiff had the opportunity to increase the catering turnover of the business, without disclosing that one of the Businesses catering clients, SA Water, would be serviced by Funk Victoria Square after it opened in April 2009 (the Catering Representation); and
•wage levels stood at specified levels, consistent with those stated in a Form 2 (the Wage Representation).
Held, per Kelly and Livesey JJ (Kourakis CJ agreeing), dismissing the appeal:
1.The Profit and Turnover Representations were inextricably bound up in the one, compendious representation. The representation was to the effect that it was only if turnover was $15,000 per week that there would then be a profit of $2,000 per week. That is consistent with the way the case was run at trial.
2.The Profit Representation was a representation as to the future within the meaning of s 51A of the Trade Practices Act. Accordingly, the onus lay with the appellants to prove reasonable grounds for making the Profit Representation. The appellants failed to demonstrate reasonable grounds for the making of the Profit Representation.
3.The interrelationship between the Turnover and the Profit Representations has the effect that if the Turnover Representation was falsified, so too was the Profit Representation.
4.In this case, one cannot separate out aspects of the defendants’ conduct and suggest that there was reliance on some conduct, but not all of it. The evidence accepted by the trial Judge was to the effect that there was reliance on all of the respondent’s conduct, including statements made which addressed both the Profit and Turnover Representations.
5.The Turnover and Profit Representations were made from February 2009, before the Agreements. The Turnover and Profit Representations were relied upon and were causative of the plaintiff’s losses. There is ample evidence, independent of the second respondent’s evidence, that supports this conclusion. This was a “no transaction case” as the plaintiffs would not have entered into the transactions had the misrepresentations not been made.
6.Although the trial Judge erred in finding that the Catering Representation was a misrepresentation, it was a “subsidiary” claim for which no damages were awarded.
7.By failing to account for the wages of an employee who was paid in cash, the Form 2 understated the wage expenses of the Business. In these circumstances, it cannot be said that there was no evidence capable of sustaining the trial Judge’s finding that the Wage Representation was an operative cause of the plaintiff’s loss.
8.There is a fundamental difference between the capital loss suffered by the first respondent on the acquisition of the Business and the second respondent’s lost opportunity to obtain a market wage. Compensation payable to the first respondent for the first loss does not, and cannot, compensate the second respondent for the loss sustained by him. The appellants’ claim that there was double recovery must be rejected.
Trade Practices Act 1974 (Cth) s 51, s 51A, s 52, s 82; Misrepresentation Act 1972 (SA) s 7, referred to.
Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) (2006) 67 NSWLR 341; Bowler v Hilda Pty Ltd (1998) 80 FCR 191; Campbell v Back Office Investments Pty Ltd (2009) 238 CLR 304; Crouch v The Bloody Mary Group Pty Ltd [2020] SASC 68; Cummings v Lewis (1993) 41 FCR 559; Hype Investments Pty Ltd & Anor v Funk Coffee and Food Pty Ltd & Ors [2019] SADC 98; Hype Investments Pty Ltd & Anor v Funk Coffee and Food Pty Ltd & Ors (No 2) [2019] SADC 156; Sykes v Reserve Bank of Australia (1998) 88 FCR 511, discussed.
Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276; Berry v CCL Secure Pty Ltd (2020) 94 ALJR 715; Blatch v Archer (1774) 1 Cowp 63; Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; Campbell v Back Office Investments Pty Ltd (2008) 66 ACSR 359; Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45; Dominelli Ford v Karmot Auto Spares (1992) 38 FCR 471; Equity Access Pty Ltd v Westpac Banking Corporation [1990] ATPR 50,943; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; Gould v Vaggelas (1985) 157 CLR 215; Hype Investments Pty Ltd & Anor v Funk Coffee and Food Pty Ltd & Ors (No 3) [2020] SADC 1; Rosenberg v Percival (2001) 205 CLR 434; Slinger v Southern White Pty Ltd (2005) 92 SASR 303; Stone v Chappel (2017) 128 SASR 165; Swiss Re International SE v Simpson (2018) 354 ALR 607; Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177; Ting v Blanche 1993) 18 ALR 543; Trade Practices Commission v Lamova Publishing Corporation Pty Ltd (1979) 42 FLR 60, considered.
FUNK COFFEE AND FOOD PTY LTD & ORS v HYPE INVESTMENTS PTY LTD AND SEBASTIANO
[2021] SASCFC 28
Full Court: Kourakis CJ, Kelly and Livesey JJ
KOURAKIS CJ: I would dismiss the appeal for the reasons given by Kelly and Livesey JJ and for the following brief additional reasons.
Section 51A(1) of the Trade Practices Act 1972 (Cth) (Trade Practices Act) is a substantive provision which, by way of an irrebuttable presumption, provides that a representation of future fact made by a corporation, when it does not have reasonable grounds for making the representation, is misleading and therefore a contravention of s 52 of the Trade Practices Act. Section 51A(2) of the Trade Practices Act, on the other hand, is an aid to proof which casts an evidentiary burden on the corporation to ‘adduce evidence to the contrary’, that is to say, evidence that it had reasonable grounds to make the representation. The purpose of s 51(2) of the Trade Practices Act is to relieve the plaintiff of the burden of disproving, on the balance, all theoretically available reasonable grounds for the representation.
The defendants did adduce evidence to the contrary in the form of the alleged turnover in February 2009 and the profit figures for 2008. However, the evidence referred to in the judgment of Kelly and Livesey JJ establishes, on the balance of probability, that the grounds identified by the defendants were not reasonable. In short, the turnover in the month of February alone, especially because of the unexplained spike in that month, could not reasonably found the unequivocal statements of a continuing turnover at that level. As to the profit, the reliance on the 2008 figures, which did not factor in the full extent of wages costs and franchise fees, was also unreasonable.
On the issue of causation, I add only that the evidence of Mr Sebastiano was that he would not have purchased the franchise but for the representation as to turnover and profit, because in this case both representations were inextricably linked. His evidence was that the misrepresentations gave him the assurance which he needed to enter into the transaction. The plaintiffs therefore proved their loss on the basis of a no transaction case.
KELLY and LIVESEY JJ:
Introduction
The appellants (defendants) appeal against the decision of a Judge of the District Court upholding the claims of the respondents (plaintiffs) that the defendants engaged in misleading or deceptive conduct contrary to s 52 of the Trade Practices Act 1974 (Cth) (Trade Practices Act) and misrepresentations under s 7 of the Misrepresentation Act 1972 (SA) (Misrepresentation Act), so as to induce their entry into a Sale Agreement, a Franchise Agreement and a Licence Agreement and granting relief by way of an award of damages in their favour.[1]
[1] As the events that gave rise to these proceedings occurred in 2009, Schedule 2 of the Competition and Consumer Act 2010 (Cth) (known as the Australian Consumer Law) was not yet in force. Accordingly, the Trade Practices Act 1974 (Cth) is the legislation relevant to this appeal.
For the reasons that follow, we would dismiss the appeal.
Factual Background
The parties
Contractual relationship between the parties
The issue at trial and the judgment entered
The grounds of appeal
Grounds 1–3: The Turnover and Profit Representations
Ground 1: Conflation of the Turnover and Profit Representations
The respective cases
The evidence
Conclusion and findings on Ground 1
Grounds 2.1 and 2.2: Falsity of the Profit Representation
The respective cases
Conclusion and findings on Grounds 2.2 and 2.3
Grounds 2.3 and 2.4: Assessment of Causation
The evidence
The respective cases
Conclusion and findings on Grounds 2.3 and 2.4
Ground 3: Finding that the Turnover Representation was misleading
The evidence
The respective cases
Conclusion and findings on ground 3
Ground 4: Reliance and causation
The respective cases
Conclusion and findings on Ground 4
Ground 5: The Catering Representation
The evidence and the trial Judge’s findings
Conclusion and findings
Ground 6: The Misrepresentation Act claim
Ground 7: Breach of the Franchise Code
Ground 7A: Misrepresentations as to wages
Ground 8: Calculation of loss
Conclusion and orders
Factual Background
The parties
The first defendant, Funk Coffee & Food Pty Ltd (Funk Coffee) is the owner of a café and catering business located at 80 Flinders Street, Adelaide (Funk Flinders Street or the Business). It is one of a number of cafés operated as a part of a franchise system known as “Funk Coffee + Food”. Several other “Funk Coffee + Food” branded cafés operate in close proximity to one another in the Adelaide CBD, with other cafés located on Frome Road and Waymouth, Pirie, Grenfell, King William and Angas Streets, as well as on Victoria Square (Funk Victoria Square). The second defendant, Funk Franchise Pty Ltd (Funk Franchise) is the franchisor of the “Funk Coffee + Food” franchise system.
The third defendant, Funk Leasing Pty Ltd (Funk Leasing) oversees the leasing operations of the Funk Group.
The fourth defendant, Mr Arthur Damaskos, is and was at all material times, a director of Funk Coffee, Funk Franchise and Funk Leasing.
The first plaintiff, Hype Investments Pty Ltd (Hype Investments) is the trustee for the B Sebastiano Investments Trust. The second plaintiff, Mr Benjamin Sebastiano, is the sole director of Hype Investments.
Contractual relationship between the parties
In early 2009, Mr Damaskos and Mr Sebastiano commenced negotiations with respect to the sale of Funk Flinders Street. On 11 February 2009, Mr Sebastiano entered into a confidentiality agreement. Following this, in March 2009, he received a Form 2 in the form prescribed under the Retail and Commercial Leases Act 1995 (SA).[2] Mr Sebastiano was then provided with Funk Flinders Street’s turnover figures for the four-week period comprising February 2009. The plaintiffs relied on these documents to support their claim that the defendants materially overstated the turnover of the business.
[2] Hype Investments Pty Ltd & Anor v Funk Coffee and Food Pty Ltd & Ors [2019] SADC 98, [5]. These reasons are referred to as the “First Reasons” and a second set of reasons, addressing causation and damages, are referred to as the “Second Reasons”, Hype Investments Pty Ltd & Anor v Funk Coffee and Food Pty Ltd & Ors (No 2) [2019] SADC 156.
On 14 May 2009, Mr Sebastiano signed what was referred to as the “Prior Representation Statement”. In that statement, he acknowledged that the turnover figures he had seen for the business were as follows: “Form 2 = $12,000 p week since Feb 09 = $15,000 p/week avg”.[3] He also indicated that the net income expected each week was between $1,000 and $2,000.
[3] First Reasons, [60].
On 23 June 2009, Hype Investments purchased Funk Flinders Street under the Business Sale Agreement. Mr Sebastiano guaranteed the obligations of Hype Investments under the Sale Agreement. On 1 July 2009, Mr Sebastiano became the franchisee of Funk Flinders Street under the Franchise Agreement between Funk Franchise and Hype Investments. The Franchise Agreement was for an initial term of five years with a right of renewal for a further five years.[4] Mr Sebastiano also guaranteed Hype Investments’ obligations under the Franchise Agreement. That same day, Hype Investments was licensed by Funk Leasing to occupy the Flinders Street premises and operate the business.
[4] First Reasons, [6].
The legal relations between the parties were governed by the following agreements:[5]
· the Sale Agreement between Hype Investments and Funk Coffee concluded on 23 June 2009;
· the Franchise Agreement between Hype Investments and Funk Franchise signed 30 June 2009; and
· the Licence Agreement between Hype Investments and Funk Leasing dated 30 June 2009.
[5] Appellants’ Chronology (Respondents’ Revision), p 16.
Settlement took place on 1 July 2009, when Hype Investments paid a total of $412,489.89 including stamp duty and conveyancing fees.[6] This sum comprised the purchase price for the business, plus stock and goodwill, franchise fees and franchise training fees. In addition, the Franchise Agreement provided for the payment of royalty fees of 5 per cent of gross weekly revenue and a 2 per cent marketing contribution, levied on the same basis.[7]
[6] First Reasons, [7].
[7] First Reasons, [7].
That same day, Mr Sebastiano commenced operating the business. He had spent the two previous days in the café during a handover period, as well as a week or two immediately beforehand as a training period.
The issue at trial and the judgment entered
The primary issue at trial was whether the plaintiffs were, by virtue of a series of express and implicit misrepresentations made by Mr Damaskos on behalf of the defendants, induced to enter into the Sale Agreement, the Franchise Agreement and the Licence Agreement.
Those alleged misrepresentations can be distilled as follows:
1.An express representation by Mr Damaskos that the business was turning over $15,000 per week since early 2009 (the Turnover Representation).
That representation was made by:
(i) The provision to the plaintiffs of four Weekly Department Sales Reports in February 2009 showing weekly sales at that time of approximately $15,000 per week.
(ii) In discussions between the plaintiffs and himself, Mr Damaskos repeatedly stated that between February 2009 and the date of signing the agreements on 23 June 2009, the Business was turning over $15,000 per week.
(iii) After providing the Form 2 on 1 March 2009, Mr Damaskos made an implied representation to the plaintiffs that the Business was no longer doing $12,000 to $13,000 per week as shown on the Form 2, but was now consistently turning over $15,000 per week.
2. Express and implied representations made by Mr Damaskos that the plaintiffs could expect a net profit of $2,000 per week (the Profit Representation).
3.That the Funk Flinders Street catering customers would continue to be serviced by Funk Flinders Street (the Catering Representation).
4. A representation that the plaintiffs had the opportunity to increase the catering turnover of Funk Flinders Street while failing to disclose that after it opened in April 2009, the Funk Victoria Square would service SA Water’s catering needs (the Catering Representation).
19 After hearing from the parties, the trial Judge ordered relief in favour of HypeInvestments against the defendants, jointly and severally, pursuant to s 82 of the Trade Practices Act and s 7 of the Misrepresentation Act. Orders were later made in respect of interest and costs, and judgment was entered in the following terms:[8]
[8] Hype Investments Pty Ltd & Anor v Funk Coffee and Food Pty Ltd & Ors (No 3) [2020] SADC 1, [17]‑[18].
There be judgment in favour of Hype Investments Pty Ltd against the First, Second, Third and Fourth defendants jointly and severally, pursuant to s 82 of the Trade Practices Act and s 7 of the Misrepresentation Act:
1In the sum of $230,000 by way of general damages.
2In the sum of $163,000 interest on the principal sum awarded in paragraph 1 above.
3In the sum of $66,029.89 for transaction costs and consequential losses.
4In the sum of $39,700 for interest on the principal sum awarded in paragraph 3 above.
5Declaring the following agreements unenforceable pursuant to s 87(2)(ba) of the Trade Practices Act, or alternatively under s 37 of the District Court Act:
· Franchise Agreement dated 1 July 2009 between Funk Franchise and Hype Investments, for an initial term of five years with a right of renewal for a further five years.
· Sale of Business Agreement entered into between Hype Investments and Funk Coffee & Food on 23 June 2009.
· Licence Agreement between Funk Leasing and Hype Investments for the purposes of occupancy of the premises dated 1 July 2009, to expire on 16 August 2016.
· Renewed Franchise Agreement dated 4 August 2014.
6Dismissing the cross-claims.
7Dismissing the action against Mrs Damaskos, with no order either in favour or against Mrs Damaskos as to costs.
8A separate award of damages is made in favour of Mr Sebastiano personally against the First, Second, Third and Fourth defendants jointly and severally for lost wages of $76,341.00 and in addition thereto of $27,000 for interest thereon.
9A further Order requiring the First to Fourth defendants to indemnify Mr Sebastiano for such sum or sums as may be assessed by the Australian Tax Office on the above awards for damages and interest pursuant to s 87(2)(ba) of the Trade Practices Act.
10The plaintiffs have their costs as agreed or taxed on a party/party basis jointly and severally against the First to Fourth defendants inclusive.
In the result, the judgment in favour of Hype Investments amounts to $498,729.89, whereas that in favour of Mr Sebastiano comes to $103,341. Judgment is entered accordingly.
(footnotes omitted)
The grounds of appeal
The defendants advanced nine grounds of appeal. Those grounds of appeal can be summarised as follows:
1.The trial Judge erred in law in conflating the Turnover and the Profit Representations.
2.The trial Judge erred in finding that the defendants falsified the Profit Representation.
3.The trial Judge erred in finding that the Turnover Representation was misleading.
4.The trial Judge erred in the calculation of loss by confusing the question of reliance with that of causation.
5.The trial Judge erred in finding that the defendants engaged in misleading and deceptive conduct in failing to inform the second plaintiff that Funk Victoria Square would be servicing SA Water’s catering needs.
6.The trial Judge erred in finding that the plaintiffs’ claims under the Misrepresentation Act were made out.
7.The trial Judge erred in finding that the defendants breached the Franchise Code in failing to comply with the disclosure requirements.
8.To the extent that the trial Judge found that the Wage Representation and Catering Representation were operative causes of the plaintiffs’ loss, that these findings were erroneous and unsustained by the evidence.
9.The trial Judge erred in calculating the loss suffered by the second plaintiff, Mr Sebastiano.
Grounds 1–3: The Turnover and Profit Representations
Broadly, Grounds 1 to 3 of the Revised Grounds of Appeal challenge the trial Judge’s findings in relation to the Turnover Representation and the Profit Representation.
In particular, the defendants challenge the trial Judge’s finding that, in the sale of the Business, Mr Damaskos represented to Mr Sebastiano that the Business’ weekly takings averaged $15,000 since February 2009 and that the appellants failed to correct the turnover figures in the face of an “obligation to update the figures”.[9]
[9] First Reasons, [71], [77].
Ground 1: Conflation of the Turnover and Profit Representations
Ground 1 is as follows:
The learned judge erred in law in conflating (at [67] and [70] of the First Reasons and at [19], [24], [25], [30] and [31] of the Second Reasons) the representation as to turnover of $15,000 per week (Fifth Statement of Claim at [23.2]) and profit of $2,000 per week (Fifth Statement of Claim [23.4]) in circumstances where the concepts are both factually and conceptually distinct.
The plaintiffs pleaded that the defendants made express representations both orally and in writing that:
1. the average weekly turnover of Funk Flinders Street from early 2009 was on average, $15,000 per week;
2.the plaintiffs could expect turnover of more than $15,000 per week; and
3.the plaintiffs could expect a net profit of approximately $2,000 per week.
The plaintiffs’ pleaded case was that these representations were made between early February 2009, down to the date of signing the Franchise Agreement on 30 June 2009.
The written representations were said to be the September Quarterly Wage Figures provided to Mr Sebastiano by Mr Damaskos in the first, second and third weeks of February 2009. It was also alleged that oral representations were made between February 2009 until the dates of the signing of the agreements on 23 June 2009 and 30 June 2009, on dates Mr Sebastiano was unable to specifically recall.
Mr Sebastiano’s evidence was consistent with the pleaded case.
The respective cases
The defendants submitted that the plaintiffs’ case at trial was that two separate and distinct representations were made to Mr Sebastiano, namely the Profit Representation and the Turnover Representation. They argued that the trial Judge made findings with respect to the Turnover Representation, but not the Profit Representation.[10] According to the defendants, these two representations needed “to be addressed separately” by the trial Judge, and the trial Judge should have, when assessing causation, made findings in respect of the making of the Profit Representation, and whether it, in contradistinction to the Turnover Representation, was false.[11]
[10] Appellants’ Revised Written Submissions, [17].
[11] Appellants’ Revised Written Submissions, [18].
The plaintiffs’ case was that the Profit and the Turnover Representations were “related concepts” because,[12] as the trial Judge paraphrased, the representation made to Mr Sebastiano was to the effect that if he could maintain a weekly turnover of $15,000, he could expect $2,000 “in his pocket”:[13]
The interest of Mr Sebastiano became aroused if it meant less hours of work and no weekend or night work; a prospect representing a significant change for him as he had two young children he hoped to spend more time with. Nevertheless, he indicated that he purchased principally because ‘(F)rom all the reports and everything Arthur told me that I would be earning $2,000 a week ... as long as it stuck to $15,000 or more’. He indicated several times that he was only at all interested if the ‘numbers were to stack up’ and the proposal ticked all the boxes. Mr Damaskos agreed that Mr Sebastiano made that plain to him his interest was only ‘if the numbers stacked up and the other boxes were ticked’. In the event, Flinders Street became the first Funk café the defendants franchised.
(footnotes omitted)
[12] Respondent’s Revised Written Submissions, [3.1]-[3.4].
[13] First Reasons, [16], [23].
And, as the trial Judge identified, Mr Damaskos conceded this under cross‑examination when he said:[14]
… it is probable that if the store was run in the way we ran it on that sort of turnover, it would leave $2,000.
[14] Trial Transcript, p 570-571.
The plaintiffs therefore submitted that:
The essence of the profit representation … was that if turnover was maintained at $15,000, then Mr Sebastiano would be guaranteed $2,000 profit. The premise of the profit representation was that turnover was currently averaging $15,000 and that it would continue to do so. According to what Mr Damaskos himself was representing, if the turnover was not $15,000, then profit would not be $2,000.
(emphasis in original)
Accordingly, the plaintiffs’ case was that the trial Judge did not conflate the concepts, but correctly treated them as two, necessarily inter-related representations.
The evidence
It is apparent from Mr Sebastiano’s evidence that the Profit Representation was linked with the Turnover Representation during the second meeting that Mr Sebastiano had with Mr Damaskos in February 2009, and was consistently made until the signing of the agreement on 24 June 2009:[15]
A. Not that I recall, but at that point I recall we had a brief conversation about turnover.
Q. And what the conversation about turnover. The conversation was that the store had recently been doing $15,000 a week, it had been turning over $15,000 a week and hence why he said to me ‘If you come in later in the week I can give you a report’ and show me that.
Q. Did he say from what period it had been turning over -
A. Since about the start of the year, approximately since about the start of the year.
[15] Trial Transcript, p 58.
Mr Sebastiano said that it was highly likely that he received the September Quarterly figures during that meeting.
The following Friday, Mr Sebastiano and Mr Damaskos again met at Funk Flinders Street. Mr Damaskos gave Mr Sebastiano the first of the February Weekly Sales Reports. Mr Sebastiano gave evidence of the following conversation:[16]
A. At that point we started discussing numbers a bit further. Arthur had indicated that the store had been doing $15,000 a week since about the turn of the year. He handed me -
Q. You said he indicated, is that something he indicated or said -
A. He said it. He clearly said that the store had been doing $15,000 since about the start of the year. He handed me the report to show me that that's exactly what it was doing, or around that mark. He made reference to how strong the catering was, that it was an important part of the business. And at that point we - he took conversations a little bit further and said ‘If you go further and you buy the store and you maintain $15,000 a week turnover you are pretty much guaranteed to put $2,000 a week in your pocket’.
[16] Trial Transcript, p 60.
Although Mr Damaskos and Mr Sebastiano agreed to meet again the following Friday, they met some 10 days later on the Monday week, and the third sales report was handed over. Mr Sebastiano gave evidence of the following conversation:[17]
A. The discussion again focused around the $15,000 mark, it wasn't as high as the $15,000 as indicated but you could see it was still kind of consistently around the mark, catering had dropped a little bit but it was generally still a solid number.
Q. Is that something Mr Damaskos said or is that something that you took from what was provided to you.
A. No, no, he said it was still a solid number but not as close to the $15,000 as previous.
[17] Trial Transcript, p 61.
The two began discussing a sale price and, in that context, Mr Sebastiano said the following conversation took place:[18]
A. The conversation kind of went along the lines of seeing it is doing $15,000 a week now and it is going to leave you the $2,000, given that it cost me about the 295, 300 K to set up, with some goodwill in there, the guarantee of $2,000 a week, I am looking at about 440,000, $440,000 was very clear that he said that he wanted for the store. He also did say that because I was possibly potentially going to be the first franchisee he would look at moving on that slightly but not a lot.
[18] Trial Transcript, p 63.
Mr Sebastiano gave evidence of another conversation in the context of having already received the third weekly sales report in February 2009, when he said Mr Damaskos again told him about a weekly turnover of $15,000 and a weekly profit of $2,000:[19]
A. Once again, Arthur reiterated the point of the $15,000 had been achieved, again a bit of a focus on the catering, that the catering was an important part of the store and at this point he made reference to the $2,000 again but this time it was very clear -
Q. The $2,000 meaning.
A. $2000 being left over, again a $15,000 turnover, the guarantee of $2,000 would be there, the net profit. He made reference to it this time by, sort of, tapping his pocket so.
[19] Trial Transcript, p 64.
Mr Sebastiano said he had numerous discussions with Mr Damaskos between February and the signing of the agreements in June. In that context, at one of those meetings, Mr Damaskos said that if Mr Sebastiano was able to get more catering clients, he may be able to increase turnover.
Reading the Form 2 dated 16 March 2009 alarmed Mr Sebastiano because it showed a weekly turnover of only $12,000. He said that he had a meeting with Mr Damaskos about those figures three or four days after it was signed. At that meeting, Mr Sebastiano said Mr Damaskos told him:[20]
A. … So we have caught up for a coffee again. I was a bit alarmed at that stage that the Form 2 was only showing the $12,000 or around that $12,000 mark and at this point Arthur again said ‘Don't worry too much about the Form 2 figures. You have seen that the store is doing $15,000 a week by the reports I have given you. Don't worry too much about that. Go on the figures that I have given you’.
Q. Did he explain why the Form 2 figures were different from the weekly figures.
A. He mentioned that the building had filled up with people, catering had increased, Santos was full and that the store since the turn of the year generally picked up trade.
[20] Trial Transcript, p 71-72.
Mr Sebastiano said that he then put the figure of $15,000 per week since February 2009 into the Form 2, relying on what Mr Damaskos had said, as well as the sales reports he had received for the February period.
Mr Sebastiano explained that the statement he made in the Form 2 that “we have had discussions regarding current turnover and the possibility of increased turnover as owner operator at the current Funk location” referred to the figures of $15,000 per week turnover and $2,000 per week given to him by Mr Damaskos. He was then asked what he had meant by recording that he expected to earn a net profit of $1,000 to $1,500 per week from the franchise business:[21]
[21] Trial Transcript, p 82-83.
Q. When you say ‘the current turnover’ you are referring to what figure.
A. The $15,000 as written in question 2.
Q. And the net profit.
A. The $2,000 a week left over.
Q. And the possibility of increased turnover.
A. To $17,000 as written in the cash flow forecast.
Q. On p.608 in the third to last box you've written ‘$1,000 to $1,500 net’.
A. Yes.
Q. What are you referring to there.
A. So if there was to be $2,000 left over and I took $1,000 as a wage it would leave $1,000 as net profit. But then if I increased the turnover to $17,000 it would potentially leave a profit of $1,000 to $1,500 net.
Q. Do you recall how you got this document the prior representation statement.
A. It was handed to me by Joanna I’m pretty sure.
Q. You’ve signed it on 14 May 2009….
Mr Sebastiano said he received no response to the Prior Representation Statement signed on 14 May 2009 from either Mr or Mrs Damaskos.
The defendants criticised the plaintiffs about that evidence, arguing that it was irreconcilable with the alleged representation made by them that the net profit would be $2,000 per week.
However, the plaintiffs argued that it was entirely consistent with Mr Sebastiano’s expectations that, after taking into account his own wages as proprietor, that would be the approximate net cash flow position. The plaintiffs argued that Mr Sebastiano’s evidence was supported by his own cash flow document in which he had set out as outgoings “wages – staff” and “wages – proprietor” to arrive at the net cash flow position. The plaintiffs submitted before the trial Judge, and the trial Judge obviously accepted, that that was what Mr Sebastiano was referring to in that statement in the Prior Representation Statement.
Curiously, but tellingly, apart from criticising that evidence, the defendants never challenged Mr Sebastiano’s evidence on that topic in cross‑examination.
The tenor of Mr Sebastiano’s evidence thereafter is that, in various conversations and contexts between April and June 2009, the precise dates of which he could not recall, Mr Damaskos returned to the proposition that Funk Flinders Street was consistently making $15,000 per week and that Mr Sebastiano could expect a weekly net profit of $2,000. The evidence about this was admittedly somewhat vague. The high point may be in the following passage:[22]
[22] Trial Transcript, p 83-84.
Q. In the period from April to June 2009 how often were you meeting with Mr Damaskos.
A. Possibly once a week still.
Q. What about Mrs Damaskos.
A. Not as often. No, very rarely.
Q. And in those meetings from April through to the signing of the sales agreement was anything discussed in relation to the turnover or the profit.
A. Arthur still kept saying about the $15,000 a week, ‘you'll still put $2,000 a week in your pocket’.
Q. Specifically what did he say in terms of - what words did he say.
A. Still along the lines of ‘15 grand a week. We are still doing 15 grand a week. You'll put 2 grand in your pocket’. It was the same conversation over and over.
Q. And those conversations were at the - sorry, you said -
A. Always at Flinders Street.
It is plain from the evidence of Mr Sebastiano that the net profit representation was always tied to the average weekly turnover of $15,000 per week. The tenor of Mr Sebastiano’s evidence was that the $2,000 per week net profit was the “bottom line” as far as he was concerned:[23]
Q. In terms of the turnover you motioned what was important to you in relation to turnover or profit.
A. As long as it stuck to $15,000 or more we would finish with $2,000 a week in our pocket and that would be comfortable for us to live.
Q. How did that compare to what you were doing at the current time.
A. Similar sort of hours but twice the amount of income.
[23] Trial Transcript, p 88.
Mr Sebastiano’s evidence was supported by the documents he produced, including the business plan prepared in April 2009 which referred to an objective of growing current turnover from $15,000 to $17,000 by the end of 2009, and the assumptions stated in the cash flow report including the use of $15,000 in the cash flow report as the basis for the cash flow.
Conclusion and findings on Ground 1
The plaintiffs are correct in submitting that the Profit and Turnover Representations were inter-related. The two figures of $15,000 per week turnover and $2,000 per week profit were always inextricably bound up in the one, compendious representation. That reflects the way the case was fought in the Court below. Both parties’ submissions at the conclusion of the evidence proceeded on the basis that the two representations were, so to speak, “two sides of the one coin”. The trial Judge appears to have implicitly accepted that approach.[24] The trial Judge was correct to treat them as connected. Given the course of evidence and the conduct of the trial, the trial Judge did not fall into error in treating the Profit and Turnover Representations as inter-related.
[24] First Reasons, [9], [17], [23], [60] and [69]-[72].
It would have been preferable if the Judge’s findings on each of the Profit and Turnover Representations had been made distinctly and separately. Nonetheless, the trial Judge was necessarily referring to the Profit Representation as well as the Turnover Representation in his reasons. Accordingly, the trial Judge did not erroneously conflate the Turnover and the Profit Representations, nor did he err by failing to separately consider the Profit Representation. In context, he considered both. Ground 1 should be dismissed.
Grounds 2.1 and 2.2: Falsity of the Profit Representation
Grounds 2.1 and 2.2 are as follows:
2.In consequence of ground 1, and in any event, the learned judge erred in law or alternatively in fact:
2.1 in finding falsification of a representation as to profit of $2,000 per week in the absence of:
2.1.1any evidence supporting a finding that the profits earned in the business in 2009 preceding settlement were less than $2,000 per week;
2.1.2 any finding that the profits were in fact less than $2,000 per week;
2.1.3alternatively, in so far as [67] of the First Reasons contains an implicit finding that profits were in fact less than $2,000 per week, in the absence of any basis for, or reasons justifying, such a finding;
2.2 in failing to find that a representation of profits of $2,000 per week was not falsified by a finding that revenue was less than $15,000 per week, in (further) circumstances where:
2.2.1the 2009 turnover figures preceding the settlement of the transaction found by the judge at [44] of the First Reasons to be less than $15,000 per week exceeding, or were at least no less than, the turnover for the September 2008 quarter which the judge found at [17] of the First Reasons showed an average profit figure of $2,000 per week for that quarter;
2.2.2the cash flow budget prepared by the plaintiff’s accountant referred to at [18] of the First Reasons, which was based upon turnover figures of approximately $15,000 per week, showed a weekly profit figure exceeding $2,000 per week;
….
The respective cases
The defendants submitted that it was not open to the trial Judge to find that the Profit Representation was false for the following reasons:
25.1 First, there was no evidence whatsoever that the net weekly profits earned in the Business prior to 1 July 2009 were less than $2,000. The respondents did not adduce any evidence to prove what the net weekly profit was, or what earnings were available to the proprietor, in respect of the period from February to June 2009.
25.2 Secondly, the September 2008 Quarter Figures show an average profit figure of $2,000 per week for that quarter, based upon an average weekly turnover of $12,907.
25.3 Thirdly, the cash flow budget prepared by Mr Sebastiano’s accountant Mr Fanto (Cash Flow Budget) was based upon the Form 273 and the February Weekly Department Sales Reports, and it showed a weekly net profit of well in excess of $2,000 on an average weekly turnover of $15,000.
As to Ground 2.1.3, the defendants submitted that the trial Judge’s finding that “weekly returns of between $12,000 and $14,000 were at best only likely to leave him in no better position financially than he already was”, was not only unsupported by the evidence and lacking evidence capable of supporting it, but was also not a finding about the falsification of the Profit Representation, as no such representation was ever found to have been made. Their final submission in relation to this ground was that “such a finding … needed to be supported by adequate reasons”.[25]
[25] Appellants’ Revised Written Submissions, [25.4]-[25.5].
The plaintiffs submitted that Grounds 2.1.1 and 2.1.2 were misconceived in so far as it was suggested that specific evidence was required before a finding could be made that the profits earned preceding settlement were $2,000 per week.[26] It was their case that, as the representation was made concerning a future matter, under s 51 of the Trade Practices Act, the defendants bore the onus of adducing evidence to show that there were reasonable grounds for making the representation.[27]
[26] Respondents’ Revised Written Submissions, [3.10].
[27] Respondents’ Revised Written Submissions, [3.10], relying on Trade Practices Act 1974 (Cth), s 51A.
On the appeal, senior counsel for the defendants submitted that the effect of s 51A is evidentiary, rather than legal, and simply requires that there be some evidence that the making of the representation was reasonable.[28] At that point, the defendants submitted, the onus returns to the plaintiffs to prove that the representation was not reasonable.
[28] Appeal Transcript, p 48.
Nevertheless, the defendants contended that the Profit Representation was a representation as to existing fact, not a future matter. They relied on the trial Judge’s findings in the following passages of the First Reasons:[29]
Since the actual sales figures do not support anything like weekly turnover of around $15,000 there was no reasonable basis upon which the stated representations of sustained average weekly earnings was supportable. These were clearly representations of existing fact, maintained and reported throughout the period leading up to franchise related contracts.
The evidence of Mr Sebastiano was consistent and supported by the contemporary documents, to the point that it is proven on the balance of probabilities that it was represented to him the weekly takings of Flinders Street Funk consistently averaged $15,000 since February 2009. This was a representation as to existing facts and circumstances. The claim in misleading or deceptive conduct is therefore made out.
[29] First Reasons, [70]-[71].
As to Ground 2.1.3, the plaintiffs submitted that, “on any proper analysis”, the following paragraph of the trial Judge’s reasons comprises a “finding of falsity” with respect to the Profit Representation:[30]
It is to be recalled that Mr Sebastiano made up his mind to contract on the basis that he would be better off financially (as well of course for lifestyle considerations), but only if the figures ‘stacked up’. The undeniable fact is that the figures did not stack up, so that if Mr Sebastiano was exposed to the correct turnover figures, more likely than not he would not have proceeded. He knew that he needed at least $1,000 a week to level with his current income, so anything less was obviously unappealing. Weekly returns of between $12,000 and $14,000 were at best only likely to leave him in no better position financially than he already was. On that understanding of the circumstances, no reasonable person in the financial position of Mr Sebastiano at the time would have proceeded with the franchise arrangement.
[30] Respondents’ Revised Written Submissions, [3.11] and First Reasons, [67].
The plaintiffs submitted that, as the Turnover Representation was falsified, a finding that the Profit Representation was also falsified was “entirely reasonable”.[31] They emphasised that the defendants had otherwise led no evidence to suggest any reasonable basis for making the Profit Representation.
[31] Respondents’ Revised Written Submissions, [3.11].
In support of this submission, the plaintiffs relied on paragraphs [78]-[81] of the First Reasons, where the trial Judge analysed the Form 2, one of only a few “formal” documents which disclosed the profits of the business.
The plaintiffs relied on the trial Judge’s finding that the Form 2 understated wages by $669.20 per week due to the failure to include the wages of Ms Turtur in the records. This demonstrated, they said, that the defendants had no reasonable grounds to represent that the plaintiffs could expect to receive a profit of $2,000 per week.[32]
[32] Respondents’ Revised Written Submissions, [3.12].
As to Ground 2.2.1, the plaintiffs argued that the defendants’ attempt to rely on the September 2008 Quarter Figures was misguided: the document was “incomplete, inaccurate, for a different period and not backed up by source documents”.[33] In these circumstances, they submitted, the trial Judge was correct not to embark upon the analysis suggested by Ground 2.2.1.
[33] Respondents’ Revised Written Submissions, [3.13].
The plaintiffs also contended that a critical analysis of the September 2008 Quarterly Figures shows that it supported their case and the trial Judge’s findings at [67] of the First Reasons. When evaluating the truth of the Profit Representation, they said that the relevant profit is not that earned by the defendants, but the profit to be earned in the future. Accordingly, the September 2008 Quarterly Figures must be adjusted to take into account the fees payable by Mr Sebastiano under the Franchise Agreement. This, they submitted, explains the handwritten notation of “7% - 5 + 2” in the margin of the September 2008 Quarterly Figures.[34]
[34] Respondents’ Revised Written Submissions, [3.14].
The plaintiffs explained that the September 2008 Quarterly Figures were incomplete and, when analysed against other documents, “it is apparent that some of the missing expenses were considerable”.[35] The plaintiffs contended that three adjustments were required to be made to the September 2008 Quarterly Figures in order to render them an accurate representation of the turnover and profits of the Business:
1. Inclusion of the insurance, flowers and plant expenses, the costs of which were more fully explained in an email dated 9 April 2009;
2.Re-calculation of rent expenses as the September 2008 Quarterly Figures included the rent-free month of June 2008, which had the effect of understating the average rent; and
3.An adjustment of wages from $42,396.65 per quarter to $51,205.05 per quarter which, when WorkCover and superannuation are included, results in a total annual adjustment of $39,415.83.
[35] Respondents Revised Written Submissions, [3.15].
Finally, in arguing that Ground 2.2.1 should be dismissed, the plaintiffs relied on the fact that the defendants did not ever disclose a 2009 Profit and Loss Statement for Funk Flinders Street, notwithstanding that Mr Damaskos confirmed that Profit and Loss Statements were prepared for each store for each financial year ending 30 June 2009.
Whilst a Profit and Loss Statement for all five stores was disclosed, it showed that, on a consolidated basis, the five stores had made a loss in both the 2008 and 2009 financial years. The plaintiffs submitted that given that the consolidated financial report showed that the Funk Group had made a loss in circumstances where one store had made a substantial profit, and another only a small profit, and given that the plaintiffs did not make a profit in their first year, the “inescapable inference” to be drawn was that the defendants had materially overstated the profits of Funk Flinders Street.[36]
[36] Respondents’ Revised Written Submissions, [3.18].
As to Ground 2.2.2, the plaintiffs simply submitted that the cash flow statement prepared by their accountant was based on the four weekly sales reports for the month of February 2009 which were, as the trial Judge observed, an unrepresentative sample that distorted turnover.
Conclusion and findings on Grounds 2.2 and 2.3
The pleaded representation, and the representation found to be made, was that “the First Plaintiff could expect to make a net profit of approximately $2,000.00 per week”.[37] Clearly, this was a representation about the profit the plaintiff could expect to receive from the Business. The Profit Representation was pleaded and pressed as a representation as to a future matter.
[37] Fifth Statement of Claim, [23.4].
Accordingly, s 51A(1) of the Trade Practices Act is relevant. The question therefore becomes whether the defendants had a reasonable basis for making the Profit Representation, not whether the trial Judge had a basis for finding that the Profit Representation was falsified, as suggested by the defendants on appeal.
Section 51A(1) of the Trade Practices Act provides that where a corporation makes a representation with respect to a future matter, and it does not have reasonable grounds for making the representation, the representation will be taken to be misleading:
(1) For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.
Section 51A(2) provides that unless the representor adduces evidence of reasonable grounds for the marking of the representation, it is deemed not to have had reasonable grounds for making it:
(2) For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.
Two views have been expressed about the operation of s 51A. The first is that it is of evidential significance only,[38] and the second is that it is of substantive significance, effectively creating a defence of acting reasonably in relation to representations as to any future matter.
[38] See, eg, Cummings v Lewis (1993) 41 FCR 559 (Sheppard and Neaves JJ).
In Cummings v Lewis, Sheppard and Neaves JJ expressed their “provisional view” that s 51A is an evidentiary, rather than a substantive, provision:[39]
Our provisional view is that s 51A of the Trade Practices Act and its counterparts such as s 41 of the Fair Trading Act, are evidentiary provisions, not directed at what a party must plead … Sections such as s 51A are designed to facilitate proof. They affect the onus of proof but they are not part of the law which provides for the cause of action for which sections such as s 52 provide.
[39] Cummings v Lewis (1993) 41 FCR 559, 567-568.
In Bowler v Hilda Pty Ltd, s 51A was categorised as an “evidentiary deeming provision”:[40]
Section 51A is a deeming provision designed to facilitate proof that the conduct pleaded had the requisite character of misleading conduct. Section 51A is an evidentiary deeming provision which reverses the onus of proof. It is not a substantive defence (Lake Koala Pty Ltd v Walker [1991] 2 Qd R 49 at 58). In my opinion, the provisional view expressed by the Full Court in Cummings v Lewis at 567-568 to this effect ought to be affirmed.
[40] Bowler v Hilda Pty Ltd (1998) 80 FCR 191, 215 (Cooper J). Heerey J accepted the view expressed in Cummings v Lewis: at 206.
In Sykes v Reserve Bank of Australia, Heerey J appeared to have accepted that s 51A will have substantive effect:[41]
… the question posed by s 51A is whether the representor had reasonable grounds for making the representation. If it did not, the representation “shall be taken to be misleading”. The ordinary s 52 misrepresentation is treated as misleading or deceptive even if the representor is innocent of fraud or negligence.
Section 51A, a subset of s 52, applies that strict liability to representations as to future matters. The only difference is a concession in favour of representors. Liability is avoided – in contrast to the ordinary s 52 case – if the representor had reasonable grounds for making the representation. Subject only to that, a representor as to a future matter cannot be heard to say that the occurrence or non-occurrence of the future event was unpredictable, any more than the s 52 representor can say that the untruth of his or her representation was not reasonably expected.
[41] Sykes v Reserve Bank of Australia (1998) 88 FCR 511, 514.
While the authorities tend to take the position that s 51A is an evidentiary provision, there is a recurrent theme that it nonetheless has a substantive effect. In our view, if the defendant under s 51A(2) displaces the presumption by proving that reasonable grounds exist, that will operate as a defence to a claim made under s 51A.[42] The authorities emphasise that whether a representation will be regarded as concerning a future matter, rather than a representation about the present state of mind of the representor (or both), will depend upon “its proper characterisation in the context in which it was made”.[43] In addition, a representation as to a future matter “does not lose that character merely because it implies a representation as to [the] present state of mind” of the representor.[44]
[42] See, eg, Ting v Blanche (1993) 18 ALR 543; Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276, [43]-[46] (Emmett J).
[43] Sykes v Reserve Bank of Australia (1998) 88 FCR 511, 521 (Heerey J).
[44] Sykes v Reserve Bank of Australia (1998) 88 FCR 511, 521 (Heerey J).
Given the context in which Mr Damaskos was speaking with Mr Sebastiano, and the nature of the statements he made, this is not one of those cases where it can fairly be said that Mr Damaskos was merely expressing his present view about trading: clearly he was indicating what Mr Sebastiano could expect from the Business. Whether Mr Damaskos was guilty of fraud or negligence was not relevant. The issue is whether Mr Damaskos had reasonable grounds for making these representations.
On the evidence and findings made, the defendants cannot demonstrate reasonable grounds for making the Profit Representation.
The Form 2 is incapable of sustaining the Profit Representation. By failing to account for the wages of Ms Turtur, the Form 2 understates the wage expenses of the Business by $669.20 per week. Even if the wage expenses in the Form 2 were correct, the document would still be unable to support the Profit Representation as once the franchise fees payable by the plaintiffs were factored in, the annualised earnings before interest, tax, depreciation and amortisation were $37,267,[45] significantly less than the amount necessary to support a net profit of $2,000 each week.
[45] AB5, Tab 72, p 1378.
As for the September 2008 Quarterly Figures, the issue is not merely the accuracy of the figures themselves, but how those figures were repeatedly orally supplemented by Mr Damaskos. To consider the accuracy of the September 2008 Quarterly Figures in isolation would not do justice to the repeated oral representations made by Mr Damaskos that the plaintiffs “could expect to make a net profit of approximately $2,000.00 per week”. It is these oral statements upon which the plaintiffs’ built their case, not merely the accuracy (or otherwise) of the September 2008 Quarterly Figures. Regardless, and as the trial Judge found, these were “incomplete” and based on source documents that were no longer available, and therefore unable to be verified.[46] Like the Form 2, they failed to account for the wages of Ms Turtur and therefore, like the Form 2, cannot be regarded as evidencing reasonable grounds for making the Profit Representation. [47]
[46] First Reasons, [17].
[47] First Reasons, [81].
In circumstances where the Form 2 and September 2008 Quarterly Figures provide no basis for making the Profit Representation, and the defendants have otherwise failed to demonstrate reasonable grounds for that representation, Grounds 2.1.1 and Grounds 2.2.1 must be dismissed.
Ground 2.2.2 must also be dismissed. The cash flow budget prepared by the plaintiffs’ accountant was based on what he was told by the plaintiffs, which was in turn based on the oral representations made by Mr Damaskos. The plaintiffs’ understanding of the turnover and profits of the Business conveyed to their accountant was derived from the representations made by the defendants. Accordingly, the plaintiffs’ accountant prepared the cash flow budget based on flawed information. These calculations were underscored by the Turnover and Profit Representations. The documents cannot be relied upon to support the truth of the Profit Representation. Further, in so far as the accountant’s calculations were based on the February 2009 Weekly Sales Reports, they cannot be regarded as reliable, as the February reports were simply not a representative sample of the turnover of the business.
When considering the arguments in respect of Grounds 2.1.2 and 2.1.3, it is useful to again set out in full the paragraph of the trial Judge’s reasons to which that ground relates:[48]
It is to be recalled that Mr Sebastiano made up his mind to contract on the basis that he would be better off financially (as well of course for lifestyle considerations), but only if the figures ‘stacked up’. The undeniable fact is that the figures did not stack up, so that if Mr Sebastiano was exposed to the correct turnover figures, more likely than not he would not have proceeded. He knew that he needed at least $1,000 a week to level with his current income, so anything less was obviously unappealing. Weekly returns of between $12,000 and $14,000 were at best only likely to leave him in no better position financially than he already was. On that understanding of the circumstances, no reasonable person in the financial position of Mr Sebastiano at the time would have proceeded with the franchise arrangement.
[48] First Reasons, [67].
As earlier indicated, although it would have been preferable if the trial Judge’s findings in respect of each of the representations had been made separately and explicitly, this passage is necessarily based on the contention that profits were less than $2,000 per week because turnover was only $12,000 to $14,000 per week. That is, as the Turnover Representation and the Profit Representation were intertwined, it was only if turnover was $15,000 per week would there then be a profit of $2,000 per week.
It is the interrelationship between the two representations that provides the basis for the finding that the Profit Representation was falsified. This has the effect that a finding that the Turnover Representation was falsified necessarily means that the Profit Representation was also falsified.
The defendants’ conduct in the pre-trial disclosure stage clearly affected the trial Judge’s assessment of their evidence:[49]
This fraught chain of pre-trial disclosure shows both obfuscation and great reluctance on the part of the defendants to produce documents directly relevant to the case at all … The course of events suggests they were equally reluctant to disclose very much to Mr Sebastiano in the course of their negotiations and to rely principally on the favourable figures contained in the February 2009 returns.
[49] First Reasons, [58].
The trial Judge also considered the issue of the re-sale of the Funk Flinders Street. In January 2019, the defendants were again advertising the Funk Flinders Street for sale, and were once again stating that it was turning over $15,000 per week, in circumstances where the Sales Reports demonstrated this was not so. The trial Judge observed that Mrs Damaskos was evasive when questioned about the advertisements, denying authorising them, before accepting that they were misleading.[50]
[50] First Reasons, [68].
Accordingly, the trial Judge had an adequate basis for finding, and found, that the Business’ profits were in fact, less than $2,000 per week. Ground 2.1.3 must be dismissed.
Grounds 2.3 and 2.4: Assessment of Causation
Grounds 2.3 and 2.4 relate to the trial Judge’s findings on causation. The appellants contend that the trial Judge erred:
2.3in assessing the question of causation of a misleading representation as to turnover (at [30] of the Second Reasons) by reference to the effects of an overstatement of profit (and the second respondent’s evidence to that effect) in circumstances where:
2.3.1 for the reasons set out in ground 1, it was an error to conflate the two;
2.3.2 for the reasons set out in ground 2.1, there was no finding as to profit levels, nor any basis for a finding of falsification of a representation as to profit;
2.3.3 the judge (at [30]) of the Second Reasons) misapprehended the causation evidence of the second respondent concerning the counter-factual as being directed to the turnover representation when in fact he was concerned only with the business generating $2,000 in profit.
2.4in alternative to ground 2.3, in failing to find, consistent with the decision in Campbell v Back Office Investments Pty Ltd (2009) 238 CLR 304, that the second respondent had relied upon two representations (turnover and profit), only one of which was found to be, or capable of being to be found to be, misleading (turnover).
…
The evidence
In examination-in-chief, Mr Sebastiano gave evidence about why he wanted to purchase the Business:[51]
Q. Why did you want to purchase the store.
A. From all the reports and everything that Arthur told me that I would be earning $2,000 a week.
Q. What about the nature of the business.
A. It is what I love doing. I have been in hospitality since I was 15 years old and I think I am generally good at it and I really enjoy what I do.
Q. Was that important that -
A. It was important it also provided a lifestyle for me and I would see my children at nights and weekends.
Q. In terms of the turnover you motioned what was important to you in relation to turnover or profit.
A. As long as it stuck to $15,000 or more we would finish with $2,000 a week in our pocket and that would be comfortable for us to live.
[51] Trial Transcript, p 87.
He also gave evidence about his desire to increase the turnover of the Business:[52]
[52] Trial Transcript, p 66-67.
Q. Was there discussion about whether you could improve the turnover or not.
A. Yeah, I was very keen to improve the turnover.
…
Q. What was that and who was that discussion between.
A. That was myself and Arthur. He specifically made reference to the Hender Consulting building across the road that he didn't think that anyone was - any one of the Funks was doing the catering to that building so could be a potential target for extra catering and general - being a hands-on operator picking up the business in general, increasing sales like that.
Q. Was the amount discussed what the increase would be from and too.
A. From $15,000 to possibly $17,000.
Q. Who said those.
A. That was myself and Arthur having that conversation.
Q. I know it is hard, what did he say.
A. I think along the lines of 'If you can go and get some more catering you could possibly pick up actual turnover.'
Q. Beyond -
A. Beyond the $15,000 that it is already doing.
Soon after, his counsel directed him to questions relevant to issues of reliance and causation:[53]
Q. What if you weren't going to make $2,000 a week or something, what would your position have been.
A. I probably wouldn't have gone through with the sale at all.
Q. Why not.
A. Because I was - would have been in a better position staying where I was at Chase Agencies.
Q. Why was the $15,000 important to you, the turnover.
A. The $15,000 was important because once all the expenses came out, again the numbers stacked up and the numbers that Joe Fanto provided as well stacked up, that it would leave the $2,000 a week as suggested by Arthur.
Q. Had you not purchased this store what would you have done.
A. I would have stayed at Chase a bit longer until the right opportunity came along.
[53] Trial Transcript, p 88.
In re-examination, the following evidence was led from Mr Sebastiano:[54]
Q. … What did you base your intention to become the franchisee on.
A. On the basis of what reports I'd been given and what oral - I'd been told as well by Arthur.
Q. When you say ‘what oral’, what do you mean by that.
A. That's in oral confirmation that the store was doing $15,000 a week and would leave $2,000 a week in my pocket at that figure.
Q. If those figures changed or if you were told something different.
A. I probably would have reconsidered and not gone ahead.
The respective cases
[54] Trial Transcript, p 345.
The parties’ submissions in relation to Grounds 2.3.1 and 2.3.2 have been outlined earlier in this judgment.
In relation to Ground 2.3.3, it is the defendants’ case that the trial Judge misapprehended the causation evidence of Mr Sebastiano concerning the counter‑factual as being directed to the Turnover Representation when, in fact, he was concerned only with whether the business generated $2,000 in profit. The passage in the reasons with which the defendants take issue is as follows:[55]
Mr Sebastiano’s concern over turnover and expenses was such that he called for and prepared an agenda for a meeting with Mr and Mrs Damaskos in early September 2009. Their response was that external circumstances were ‘out of their control … the Global Financial Crisis … the weather … school holidays …’. Mr Sebastiano produced the photocopied pages of the catering diary during a second meeting in late September, for which he again prepared an agenda. His request to return the business to them for the same price as was paid for it was refused, however some Royalty relief was given. It was suggested by both Mr and Mrs Damaskos that this was in the order of close to $50,000, or up to one-and-a half years of rebates, although no attempt was made to quantify this by formal proof.
(footnotes omitted)
[55] First Reasons, [30].
The defendants submitted that turnover was, in isolation, not of any significance to Mr Sebastiano. They contended that turnover was only of importance in so far as it affected his earnings or profit. They pointed to the absence of any evidence to the contrary to support their case.
The plaintiffs did not explicitly deal with Ground 2.3 in their written submissions on the basis that it was repetitive, instead relying on their submissions addressing Ground 4 where they rejected the contention that turnover was not of any significance to Mr Sebastiano’s decision to purchase the business. On their case, it was “at least a materially contributing factor to the decision to acquire the franchise”.[56] They submitted that the evidence supports the inference that Mr Sebastiano would not have acquired the Business had he been told the true turnover figures.
[56] Respondents’ Revised Written Submissions, [3.41].
As to Ground 2.4, the plaintiffs simply submitted that it must fail as it was based on the premise that the Profit Representation was true.[57]
Conclusion and findings on Grounds 2.3 and 2.4
[57] Respondents’ Revised Written Submissions, [3.20].
As Grounds 1 and 2.1 have been dismissed, it follows that Grounds 2.3.1 and 2.3.2 must also be dismissed. The question is whether the trial Judge misapprehended the causation evidence of Mr Sebastiano as being directed to the Turnover Representation when in fact he was concerned only with the Business generating $2,000 in profit (Ground 2.3.3) or, in the alternative, that the trial Judge erred because he did not find find that the plaintiffs had relied on both representations (Ground 2.4).
The defendants’ contentions must be rejected.
The reliance on Campbell v Back Office Investments Pty Ltd is misplaced.[58] Senior counsel for the defendants emphasised that, on the facts of that case, there had been scant evidence about what might have occurred if the true position had been known. Some evidence going to the counter-factual was set out in an affidavit where the deponent said that he would not have entered into the relevant transaction “had he been aware ‘of either of these matters or both of them together’”, in circumstances where only one of the matters referred to had been shown to be false or misleading.[59] Accordingly, by analogy, it was argued that in this case, the plaintiffs’ claims must fail because they had only given evidence through Mr Sebastiano that they had relied on the Profit Representation, not the Turnover Representation, and there was no finding that the Profit Representation was false.
[58] Campbell v Back Office Investments Pty Ltd (2009) 238 CLR 304.
[59] Campbell v Back Office Investments Pty Ltd (2009) 238 CLR 304, [145]-[147] (Gummow, Hayne, Heydon and Kiefel JJ).
We have already found that the Profit Representation was false. We shall return to that. However, it is first appropriate to emphasise that in Campbell v Back Office Investments Pty Ltd the High Court warned that concentration on misrepresentation or reliance:[60]
… must not be permitted to obscure the need to identify contravening conduct (here, misleading or deceptive conduct) and a causal connection (denoted by the word “by”) between that conduct and the loss and damage allegedly suffered. As McHugh J also pointed out in Butcher,[61] with particular reference to s 52 of the Trade Practices Act, but with equal application to s 42 of the Fair Trading Act:
“The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself.[62] It invites error to look at isolated parts of the corporation’s conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deduced from the whole course of conduct.[63]…
(emphasis in original)
[60] Campbell v Back Office Investments Pty Ltd (2009) 238 CLR 304, [102] (Gummow, Hayne, Heydon and Kiefel JJ).
[61] Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592, [109]. See also the judgment of the Court in Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45, [200].
[62] See Equity Access Pty Ltd v Westpac Banking Corporation [1990] ATPR 50,943, 50,950 (Hill J); see also Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177, 202-203 (Deane and Fitzgerald JJ).
[63] See, eg, Trade Practices Commission v Lamova Publishing Corporation Pty Ltd (1979) 42 FLR 60, 65‑66 (Lockhart J).
In this case, one cannot separate out aspects of the defendants’ conduct and suggest that there was reliance on some of their conduct, but not all of it. The evidence which was accepted by the trial Judge was clearly to the effect that there was reliance on statements made by Mr Damaskos which addressed both the Profit and Turnover Representations.
Campbell v Back Office Investments Pty Ltd requires that the causal effect of the conduct as a whole be considered. The High Court also acknowledged, in terms that apply equally to the Trade Practices Act, that “reliance is not a substitute in the context of the Fair Trading Act for the essential question of causation”.[64] In some cases, however, reliance will demonstrate that misleading conduct has had the requisite causal effect. So, in this case, the evidence of Mr Sebastiano was clearly to the effect that, but for the representations made by Mr Damaskos, he would not have entered into the contracts. The trial Judge was entitled to accept that evidence.
[64] Campbell v Back Office Investments Pty Ltd (2009) 238 CLR 304, [143] (Gummow, Hayne, Heydon and Kiefel JJ), citing with approval observations made by Giles JA in the Court of Appeal in Campbell v Back Office Investments Pty Ltd (2008) 66 ACSR 359, [44].
In any event, it cannot be said that Mr Sebastiano was concerned only with whether he received profits of $2,000 per week. As already indicated, the turnover of the Business was important and intertwined with the profits of the business. There are a number of matters that point to this. First, Mr Sebastiano stated in his oral evidence that he wanted to use weekly turnover of $15,000 as a baseline, and was interested in the opportunity to increase turnover.[65] That evidence is supported by the Business Plan, which noted Mr Sebastiano’s objective of increasing the current weekly turnover of $15,000. Further, the Cash Flow Budget used the $15,000 turnover figure as a base.
[65] Trial Transcript, p 66-67.
Mr Sebastiano also gave evidence to the effect that he was concerned when he received the Form 2 because it showed turnover at only $12,000 per week, and he sought reassurance from Mr Damaskos that the Business was actually turning over $15,000 per week. Further, after taking over the Business, Mr Sebastiano soon expressed concern that he was not turning over $15,000 per week, as had been represented to him. That is not the conduct of a man concerned only with profit.
Ground 2.3.3 must be dismissed.
Ground 2.4 is premised on the notion that the trial Judge found that the plaintiffs relied on both the Profit and the Turnover Representations, in circumstances where he failed to find that the Profit Representation was falsified.
As has been explained, a consequence of the finding that the Turnover Representation was falsified was that it necessarily followed that the Profit Representation was also falsified. The Profit Representation and the Turnover Representation were inter-related: if turnover was $15,000 per week, profit would be $2,000. Therefore, if turnover was less than $15,000 per week (as it was), then profit would not be $2,000 per week. That is implicit in the reasoning of the trial Judge.
Accordingly, Ground 2.4 must fail because the Profit Representation was falsified.
Ground 3: Finding that the Turnover Representation was misleading
Ground 3 addresses the trial Judge’s finding that the Turnover Representation was misleading:
3.The learned judge erred in law and fact in finding that the representation as to turnover was misleading in circumstances where:
3.1 the analysis of falsification of a turnover representation (at [44] and [45] of the First Reasons) was flawed in that:
3.1.1once Public Holidays and part-weeks are excluded, the turnover was equal to, or not materially divergent from, a turnover of $15,000 per week;
3.1.2the turnover generated in the month of January 2009 did not contradict any representation (see [44] and [51] of First Reasons];
3.1.3in refusing to receive submissions on the topic of falsification of the representation as to turnover (at [28] of the Second Reasons) the judge confused a submission with evidence.
3.2it was an error of law (at [76]-[77]) of the First Reasons), and a misapprehension of the decision in Slinger v Southern White Pty Ltd (2005) 92 SASR 303, to find an “obligation to update the figures”.
The evidence
At paragraph [44] of the First Reasons, the trial Judge reproduced the following table provided by the plaintiffs in their written closing:[66]
[66] First Reasons, [44].
Week Beginning Trading Days Actual Turnover inc. GST GST Turnover exc. GST 5/01/2009 5 $10,925.36 -$961.03 $9,964.33 12/01/2009 5 $12,414.74 -$1,087.21 $11,327.47 19/01/2009 5 $12,866.23 -$1,128.18 $11,738.05 26/01/2009 4 $11,722.99 -$1,013.02 $10,709.97 2/02/2009 5 $14,800.39 -$1,296.63 $13,503.76 9/02/2009 5 $13,895.28 -$1,230.09 $12,665.19 16/02/2009 5 $15,621.71 -$1,362.28 $14,259.43 23/02/2009 5 $15,322.24 -$1,255.21 $14,067.03 2/03/2009 5 $13,551.23 -$1,195.74 $12,355.49 9/03/2009 4 $11,693.39 -$1,031.33 $10,662.06 16/03/2009 5 $14,690.80 -$1,300.71 $13,390.09 23/03/2009 5 $12,712.29 -$1,118.76 $11,593.53 30/03/2009 5 $16,949.4 -$1,254.87 $15,695.07 6/04/2009 4 $11,160.40 -$984.33 $10,176.07 13/04/2009 4 $10,231.70 -$899.81 $9,331.89 20/04/2009 5 $14,024.45 -$1,229.83 $12,794.62 27/04/2009 5 $13,899.92 -$1,222.47 $12,667.45 4/05/2009 5 $13,355.45 -$1,182.89 $12,172.56 11/05/2009 5 $15,728.50 -$1,272.33 $14,456.17 18/05/2009 5 $11,901.17 -$1,048.08 $10,853.09 25/05/2009 5 $12,041.31 -$1,062.39 $10,978.92 1/06/2009 5 $12,385.98 -$978.85 $11,408.13 8/06/2009 4 $9,824.83 -$871.43 $8,953.40 15/06/2009 5 $13,176.34 -$1,164.20 $12,012.14 22/06/2009 5 $13,315.02 -$1,077.46 $12,237.56 29/06/2009 2 $4,856.91 -$409.49 $4,447.42 Avg per week for whole period $12,809.95 -$1,101.49 $11,708.46 Avg/wk for Jan 2009 $11,982.33 -$1,047.38 $10,934.96 Avg/wk 2: Mar to 30 Jun 2009 $12,527.20 -$1,072.50 $11,454.70
Notably, the figures used for weekly turnover in this table are consistent with the financial source records and the figures reproduced by the defendants’ expert, Mr McParlin, in his report.[67]
[67] Appeal Book, Tab 36; Appeal Book, Tab 75, Appendix 4, p 1741.
The table is not adjusted to reflect four day weeks as doing so “overlooks the misrepresentation that average weekly turnover figures were around $15,000 per week, irrespective of the number of trading days”.[68] The table shows that the average weekly turnover for the period between 5 January 2009 and 29 June 2009 was $12,809.95, including GST.
[68] Second Reasons, [28].
The analysis of weekly turnover for the 2009 calendar year shows that the average weekly turnover for that year was $13,052.38 (including GST), with the average weekly turnover for the period between March and June of that year being $12,966.94 (including GST). It also shows that weekly turnover only exceeded $15,000 on a handful of occasions in that year (as emboldened):
Week Beginning Trading days Actual Turnover inc. GST GST Turnover exc. GST Month Av. Wkly Sales (inc. GST) Av. Wkly Sales (excl. GST) 5/01/2009 5 $10,925.36 $961.03 $9,964.33 January
$11,982.33
$10,934.96
12/01/2009 5 $12,414.74 $1,087.27 $11,327.47 19/01/2009 5 $12,866.23 $1,128.18 $11,738.05 26/01/2009 4 $11,722.99 $1,013.02 $10,709.97 2/02/2009 5 $14,800.39 $1,296.63 $13,503.76 February
$14,909.91
$13,623.85
9/02/2009 5 $13,895.28 $1,230.09 $12,665.19 16/02/2009 5 $15,621.71 $1,362.28 $14,259.43 23/02/2009 5 $15,322.24 $1,255.21 $14,067.03 2/03/2009 5 $13,551.23 $1,195.74 $12,355.49 March
$13,161.93
$12,000.29
9/03/2009 4 $11,693.39 $1,031.33 $10,662,06 16/03/2009 5 $14,690.80 $1,300.71 $13,390.09 23/03/2009 5 $12,712.29 $1,118.76 $11,593.53 30/03/2009 5 $16,949.94 $1,254.87 $15,695.07 6/04/2009 4 $11,160.40 $984.33 $10,176.07 April
$13,251.28
$12,133.02
13/04/2009 4 $10,231.70 $899.81 $9,331.89 20/04/2009 5 $14,024.45 $1229.83 $12,794.62 27/04/2009 5 $13,889.92 $1222.47 $12,667.45 4/05/2009 5 $13,355.45 $1,182.89 $12,172.56 May
$13,256.61
$12,115.19
11/05/2009 5 $15,728.50 $1,272.33 $14,456.17 18/05/2009 5 $11,901.17 $1,048.08 $10,853.09 25/05/2009 5 $12,041.31 $1,062.39 $10,978.92 1/06/2009 5 $12,385.98 $978.86 $11,407.13 June
$12,294.88
$11,255.02
8/06/2009 4 $9,824.83 $871.43 $8,953.40 15/06/2009 5 $13,176.34 $1,164.20 $12,102.14 22/06/2009 5 $13,315.02 $1,077.46 $12,237.56 29/06/2009 5 $12,772.24 $1,107.38 $11,664.86 6/07/2009 5 $12,460.92 $1,097.20 $11,363.86 July
$12,605.44
$11,523.44
13/07/2009 5 $12,181.55 $1,084.61 $11,096.94 20/07/2009 5 $12,232.64 $1,080.48 $11,152.16 27/07/2009 5 $13,546.66 $1,065.71 $12,480.95 3/08/2009 5 $12,753.69 $1,127.40 $11,626.29 August
$12,900.94
$11,758.65
10/08/2009 5 $12,092.83 $1071.64 $11,021.19 17/08/2009 5 $13,294.26 $1,174.58 $12,119.68 24/08/2009 5 $13,462.97 $1,195.55 $12,267.42 31/08/2009 5 $14,120.34 $1,116.09 $13.004.25 7/09/2009 5 $12,909.08 $1,140.24 $11,768.84 September
$13,413.54
$12,277.42
14/09/2009 5 $13,408.30 $1,186.78 $12,221.52 21/09/2009 5 $13,529.01 $1,195.94 $12,333.07 28/09/2009 5 $13,100.95 $1,041.55 $12,059.40 5/10/2009 4 $9,454.03 $830.89 $8,623.14 October
$11,321.37
$10,324.77
12/10/2009 5 $10,677.20 $949.54 $9,727.66 19/10/2009 5 $12,555.50 $1,097.73 $11,457.77 26/10/2009 5 $12,598.75 $1,108.25 $11,490.50 2/11/2009 5 $12,544.82 $994.79 $11,550.03 November
$13,686.44
$12,514.38
9/11/2009 5 $12,805.97 $1,106.83 $11,699.14 16/11/2009 5 $14,305.56 $1,252.34 $13,053.22 23/11/2009 5 $15,089.40 $1,334.28 $13,755.12 30/11/2009 5 $16,168.30 $1,294.97 $14,873.26 7/12/2009 5 $14,306.40 $1,265.07 $13,041.33 December
$13,893.21
$12,701.56
14/12/2009 5 $14,651.95 $1,289.71 $13,362.24 21/12/2009 4 $10,446.27 $916.88 $9,529.39 Av. Weekly Sales for Whole Period $13,052.38 $1,124.62 $11,927.76 Av. Weekly Sales for 2/3/09 – 30/06/09 $12,966.94 $1,111.27 $11,855.67 Av. Weekly Sales for 2/3/09 – 1/05/09 $13,225.96 $1,142.07 $12,083.88
On the pleadings, evidence and the findings this was, in truth, a “no transaction” case. As was explained in Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3), one does not inquire into what might have occurred had nothing been said, but rather what might have occurred had there been no misleading conduct:[101]
The purpose of the statute, inter alia, is to provide relief for persons who suffered loss by contravening conduct. In this case, the question of causation is not answered by merely excising the contravening conduct from consideration and asking what the position would have been if nothing had been said. As I said in the preceding paragraph, that may have the effect of neutralising the contravening conduct in circumstances where the legal norm breached by the respondent is one that is directed to preventing persons suffering detriment in the particular circumstances of the case: see Henville v Walker, per McHugh J (at 502 [133]) ...
…
Rather, what has to be done is to ascertain what would have occurred for the respondent not to have engaged in conduct which was misleading. In my opinion, that would require that the existence of the plan be disclosed. This can be tested, in my opinion, by contrasting that response with the response argued for by the respondent – namely, saying nothing about the plan. In the latter case, a number of possibilities emerge, including that the appellant might have had a claim for non-disclosure, or there being no statement about plans in the tender document, might have insisted upon undertaking its own investigations. But the Court does not need to, not [sic] should it engage in, speculation as to the possibilities: see generally Downs v Chappell [1997] 1 WLR 426 at 441; [1996] All ER 344 at 359, where Hobhouse LJ said that it was:
In general, irrelevant to inquire what the representee would have done if some different representation had been made to him or what other transactions he might have entered into if he had not entered into the transaction in question. Such matters are irrelevant speculations (see, for example, United Finance Co v Addison & Co Ltd [1937] 1 All ER 425 at 429).”
As there was a plan, and as it contained material information, its existence should have been disclosed to the appellant: see Smith v Noss and Smith v Moloney, discussed above.
[101] Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) (2006) 67 NSWLR 341, [57]-[59] (Beazley JA, with whom Ipp and Tobias JJA agreed).
The defendants cross-examined Mr Sebastiano to the effect that he had already made up his mind to go ahead with the transaction no later than 11 February 2009, the date the confidentiality agreement was signed. However, despite extensive cross-examination of Mr Sebastiano on that topic, the consistent effect of his evidence was that no final, irrevocable decision was made to sign the Sale Agreement until on or about 14 May 2009, the date the Prior Representation Statement was signed.[102] That is what the trial Judge effectively found – to again reiterate:[103]
It is to be recalled that Mr Sebastiano made up his mind to contract on the basis that he would be better off financially (as well of course for lifestyle considerations), but only if the figures ‘stacked up’. The undeniable fact is that the figures did not stack up, so that if Mr Sebastiano was exposed to the correct turnover figures, more likely than not he would not have proceeded. He knew that he needed at least $1,000 a week to level with his current income, so anything less was obviously unappealing. Weekly returns of between $12,000 and $14,000 were at best only likely to leave him in no better position financially than he already was. On that understanding of the circumstances, no reasonable person in the financial position of Mr Sebastiano at the time would have proceeded with the franchise arrangement.
[102] Trial Transcript, p 178.
[103] First Reasons, [67].
It is significant that the Turnover and Profit Representations were made from February 2009 onwards. They were made before any agreements were entered. They were relied upon. These misrepresentations preceded the contracts and were causative of the plaintiffs’ losses.
There was, in any event, ample evidence, independent of Mr Sebastiano’s oral assertions, supporting the conclusion that he relied on the advice given to him. As has been emphasised:[104]
… the potential limitations of self-serving evidence of plaintiffs in relation to hypothetical scenarios are well known. A number of authorities have emphasised the need to scrutinise the objective circumstances in reaching a conclusion as to what a plaintiff would have done had they not been misled.[105]
[104] Crouch v The Bloody Mary Group Pty Ltd [2020] SASC 68, [342] (Doyle J).
[105] Stone v Chappel (2017) 128 SASR 165, [359]; Rosenberg v Percival (2001) 205 CLR 434, [26], [155]‑[158], [221]; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, [146]; Swiss Re International SE v Simpson (2018) 354 ALR 607, [538]-[542].
In this case, there is the evidence of what was conveyed to Mr Sebastiano and relied upon by him, both orally by Mr Damaskos and in the Weekly Sales Reports, when completing the sale in late June 2009. Apart from Mr Sebastiano’s own evidence, the documentary evidence tendered at the trial, including the business plan prepared by Mr Sebastiano in April 2009, and the handwritten cashflow prepared by Mr Fanto, all used Mr Damaskos’ $15,000 a week turnover figure.
Mr Sebastiano was cross-examined about the Prior Representation Statement, and in particular, the meaning of the figures that he inserted as to his expected net income:
Q. In the second box on p.605 you've written 'Form 2 $12,200 per week, since February '09 $15,000 per week average'.
A. Yes.
Q. First of all, where did you get the Form 2 figure from.
A. Well the Form 2 figure was provided to me from Arthur or Joe, so I don't recall exactly who of them passed it on to me but one of them had handed that to me.
…
Q. What about the other figure.
A. That was clearly stating the fact that since February 2009 the store was doing $15,000 a week as confirmed by Arthur in the sales reports and as confirmed by him vocally.
Q. Then you say on p.606 in relation to the second to last box 'Has any person made any statement or promises' in relation to four dot points and you have ticked yes.
A. Yes, that's correct.
Q. Then you then in the next box say 'We have had discussions regarding current turnover and the possibility of increased turnover as owner operator at the current Funk location'.
A. That's correct.
Q. When you say 'the current turnover' you are referring to what figure.
A. The $15,000 as written in question 2.
Q. And the net profit.
A. The $2,000 a week left over.
Q. And the possibility of increased turnover.
A. To $17,000 as written in the cash flow forecast.
Q. On p.608 in the third to last box you've written '$1,000 to $1,500 net.
A. Yes.
Q. What are you referring to there.
A. So if there was to be $2,000 left over and I took $1,000 as a wage it would leave $1,000 as net profit. But then if I increased the turnover to $17,000 it would potentially leave a profit of $1,000 to $1,500 net.
The defendants did not challenge Mr Sebastiano in cross-examination about what he was referring to in the Prior Representation Statement. The trial Judge accepted Mr Sebastiano as a witness of truth. Accordingly, it was open to the trial Judge to find that what Mr Sebastiano put into the Prior Representation Statement was consistent with his evidence about the representations as to net income and weekly turnover made to him by Mr Damaskos and that he had relied on them.
The trial Judge’s conclusion that the plaintiffs would not otherwise have proceeded with the purchase of the business was open to him. As the Court explained in Dominelli, the combination of objective facts and circumstances can sometimes be more compelling than a self-serving statement.[106] Whilst that applies to this case, there is no reason to doubt the evidence given by Mr Sebastiano.
[106] Dominelli Ford v Karmot Auto Spares (1992) 38 FCR 471, 483 (Beaumont, Foster and Hill JJ).
The preferable view of Mr Sebastiano’s evidence extracted above is that it supports his case generally. That is, that he continued to rely on what Mr Damaskos said concerning weekly turnover and net profit throughout the whole period down to the signing of the agreements on 24 June 2009.
Wage expenses in the September 2008 Quarterly Figures and the Form 2 were understated. One of the rosters was handed over in early February 2009, and another was only handed over at settlement. Mr Sebastiano and Mr Damaskos then had a discussion about that roster, during which Mr Damaskos admitted that Ms Turtur was paid in cash.
In the circumstances, it was open to the trial Judge to conclude that the Wage Representation was made because the wage expenses were understated in the September 2008 Quarterly Figures. Although the roster handed over after settlement is not relevant to the question of either reliance or causation, it does show why, with hindsight, the wages and expense representations made by the appellants in the earlier documents were both false and misleading.
Ground 4.1 must be dismissed.
Accordingly, Ground 4.2 must also fail, as it is predicated on a finding that the plaintiffs resolved to purchase the business by reference to the September 2008 Quarterly Figures without regard to the impugned representations. It was open to the trial Judge to find that the plaintiffs relied on those oral representations when signing the agreements, particularly given that those representations preceded the agreements.
Ground 4.3 must also be dismissed. As stated, this was a “no transaction” case. The plaintiffs would not have agreed to the transaction had the misrepresentations not been made. That this was the plaintiffs’ case is demonstrated by their pleadings and the evidence given by Mr Sebastiano in chief. As the trial Judge found, “the undeniable fact is that the figures did not stack up, so that if Mr Sebastiano was exposed to the correct turnover figures, more likely than not he would not have proceeded”.[107]
[107] First Reasons, [67].
Ground 5: The Catering Representation
Ground 5 challenges the trial Judge’s finding that the defendants engaged in misleading and deceptive conduct in failing to inform Mr Sebastiano that Funk Victoria Square would be servicing SA Water’s catering needs (the Catering Representation):
5.The learned judge erred in finding that “[m]isleading or deceptive conduct is therefore proven on account of the failure to tell [the second respondent] of the situation planned for the SA Water catering at Flinders Street Funk” (First Reasons at [86]), in circumstances where:
5.1 the judge erred in finding that SA Water was a catering customer of the Business prior to the start of March 2009 (and relevantly in February 2009), when there was no evidence to support such a finding (at [82]);
5.2 the judge erred in finding an “obligation to update the figures” (cf [85] of the First Reasons);
5.3 any representation regarding SA Water had no causative effect (cf [83] of the First Reasons), and no finding as to causation is made.
It is the defendants’ case that, in making the finding of misleading conduct on this aspect of the plaintiffs’ case, the trial Judge made a number of errors including the erroneous finding that the Business was providing catering to SA Water in February 2009. They say that in consequence, the trial Judge erroneously found that income derived from this catering was included in the catering income in the February 2009 Weekly Department Sales Reports, which Mr Sebastiano relied upon, despite there being no evidence that this was so.
The evidence and the trial Judge’s findings
The state of the evidence at trial regarding the Catering Representation was sparse and far from unequivocal. The defendants correctly submitted that the trial Judge’s finding that the defendants engaged in misleading or deceptive conduct was against the weight of the evidence.
In oral evidence, both Mr and Mrs Damaskos said that SA Water was only a catering customer of Funk Flinders Street for a short period of time before the Victoria Square Funk store opened on 22 April 2009. Mrs Damaskos gave evidence in cross-examination that this “short period of time” was only three to four weeks. The Weekly Department Sales Reports for February 2009 therefore could not have included any catering income from SA Water, as SA Water was not a catering client of Funk Flinders Street at that time.
In cross-examination, Mr Sebastiano said that sometime in April 2009, Mr Damaskos told him that a new Funk Café would be opening in the SA Water Building on Victoria Square.[108] However, Mr Sebastiano also said that there was no discussion as to whether SA Water was a catering customer of Funk Flinders Street.[109] He only became aware of the fact that SA Water was previously a catering customer of Funk Flinders Street “a couple of months” after he took over the business in July 2009, when he went back through the catering diary and saw catering bookings for SA Water.[110]
[108] Trial Transcript, p 69.
[109] Trial Transcript, p 69.
[110] Trial Transcript, p 69.
Mr Sebastiano gave evidence that, prior to taking over the Business, he was told only that CGU, Bupa and Santos were catering clients of Funk Flinders Steet.[111] He said that the issue of the SA Water catering was only discussed with Mr Damaskos in September 2009, after Mr Sebastiano had noticed that SA Water had disappeared from the catering diary after May 2009.[112] Mr Sebastiano claimed that Mr Damaskos’ only response was to say that Mr Sebastiano needed “to go out and find new catering clients”.[113]
[111] Trial Transcript, p 69.
[112] Trial Transcript, p 102-103.
[113] Trial Transcript, p 103.
However, in cross-examination, Mr Sebastiano was asked whether he was told by Mr Damaskos in April 2009 that, once Victoria Square Funk opened, SA Water’s catering would be done by the Victoria Square store. Though he did not recall that conversation, he conceded that it was “highly possible” that it occurred.[114] He also conceded that Mr Damaskos “may have mentioned” that SA Water was a catering client in April 2009.[115]
[114] Trial Transcript, p 289.
[115] Trial Transcript, p 252.
It is pertinent to note that, apart from the odd “spike” in catering figures for two weeks in February and one week in May 2009, the weekly sales reports show that, as from approximately November 2008, the average weekly catering figures were reasonably stable at about $1,000 or more per week for the whole of the period from July 2008 to December 2009.
Conclusion and findings
Given that the evidence on this matter was at best uncertain, it is difficult to understand on what basis the trial Judge concluded that the variation in catering figures was attributable to SA Water during the relevant period.
The trial Judge appears to have applied the principle in Blatch v Archer to conclude (implicitly at least) that the defendants could and should have produced documentary evidence to corroborate their evidence that SA Water only became a catering client shortly before the Victoria Square Funk opened in April 2009.[116]
[116] Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 (Lord Mansfield): “It is certainly a maxim that all evidence is to be weighed according to proof which it was in the power of one side to have produced, and in the power of the other to have contradicted”.
That finding is surprising because there was no challenge to Mr Damaskos’ evidence that he gave the catering diary to Mr Sebastiano at handover. Mr Sebastiano did not deny that he had lost the catering diary and that the only remnants of it in his possession were the photocopies he produced for the limited period of April and May 2009.[117]
[117] Trial Transcript, p 93.
Apart from the catering diary (or rather, the photocopied excerpts tendered), there was no suggestion that there was any other way of identifying the catering clients by reference to the weekly sales reports. When that evidence is weighed against the evidence of the weekly turnover figures for the whole of the period between July 2008 and March 2020, it is not clear on what basis the trial Judge concluded that turnover fell as a consequence of Funk Flinders Street no longer catering for SA Water as soon as the plaintiffs took over the store.[118]
[118] First Reasons, [84].
The evidence of Mr Sebastiano’s discussions with Mr Damaskos on the topic of SA Water catering are equivocal. It is not now possible to know from the evidence when SA Water first became a client of Funk Flinders Street and there is nothing in the evidence to contradict the evidence of the Damaskos’ that this occurred only shortly before the opening of Victoria Square Funk on 22 April 2009.
Accordingly, the trial Judge’s finding that the Catering Representation had been proved was against the weight of the evidence, and Ground 5 must be upheld.
However, in circumstances where it was not suggested that this error affected final relief, this ground is of little practical significance.
To be clear: damages concerning the amount paid for the Business were awarded by reference to the difference between the true value of the Business and what the plaintiffs paid for it.[119] That is what was described by the trial Judge as the “capital loss” and it was determined by reference to the actual profit and turnover of the Business, not what was represented, still less the Wage and Catering Representations. This reflects the tortious measure of damages: the amount necessary to place the plaintiffs into the position they would have been but for the contravening conduct. That is often regarded as an appropriate guide in misleading conduct cases.[120]
[119] Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, 12 (Mason, Wilson and Dawson JJ).
[120] Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281, 290 (Brennan, Deane, Dawson, Gaudron and McHugh JJ); Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, 6-7, 14 (Mason, Wilson and Dawson JJ).
The claims in relation to the Wage and Catering Representations were “subsidiary” or stand-alone claims for which no damages were awarded.[121] Whilst appeal Ground 5 succeeds, it does not affect the plaintiffs’ entitlement to relief.
Ground 6: The Misrepresentation Act claim
[121] See First Reasons, [134]; Second Reasons, [106].
Ground 6 is that, for the reasons set out in Grounds 1 to 5, the trial Judge erred in finding that the plaintiffs’ claims under the Misrepresentation Act were made out:
The learned judge erred in finding that the respondents’ claims under the Misrepresentation Act 1972 (SA) (MR Act) had been made out (Second Reasons at [46]):
6.1for the reasons set out in grounds 1 to 5; and
6.2in any event, the judge erred in construing s 7 of the MR Act (Second Reasons at [53]).
As the plaintiffs’ claim under the Misrepresentation Act was a parallel, alternative claim to their claim under the Trade Practices Act, the defendants submitted that judgment on the Misrepresentation Act claims should be set aside only if the appeal in respect of the Trade Practices Act claims succeed.
As the grounds relating to the Trade Practices Act are dismissed, Ground 7 must also be dismissed.
Ground 7: Breach of the Franchise Code
Ground 7 challenges the trial Judge’s finding that all of the defendants, including Mr Damaskos, contravened the Franchise Code and s 51AD of the Trade Practices Act.[122] That is despite the fact that s 51AD is expressed as applying only to corporations.[123] The plaintiffs did not advance any case at trial that the Disclosure Document provided by Funk Franchise prior to plaintiffs’ entry into the Franchise Agreement was misleading or that, in providing the document, that Funk Franchise engaged in misleading or deceptive conduct.
[122] Second Reasons.
[123] “A corporation must not, in trade or commerce, contravene an applicable industry code.”
The trial Judge was of the view that the defendants were required to disclose a number of particular matters in the Disclosure Document and contravened the Franchise Code by failing to do so.[124]
[124] Second Reasons, [41], [43].
The trial Judge concluded that no loss was suffered by the plaintiffs as a result of this contravention, meaning that the contravention did not found any basis for relief under s 82 of the Trade Practices Act.[125]
[125] Second Reasons, [44].
Therefore, even if the defendants were to succeed on this ground, it has no effect on the outcome of the appeal or the quantum of damages because no relief was awarded by the trial Judge on this claim.[126]
[126] Second Reasons, [44].
On appeal, the defendants’ case was that the Judge erred in finding a breach of the Franchise Code, and in turn, a breach of s 51AD, by failing to state what information was actually required to have been disclosed in the Disclosure Document. They argue that it was incumbent upon the trial Judge to identify which subclauses within clause 19.5 the defendants are alleged to have contravened, and why, including by identifying the information that they were required to provide in the Disclosure Document, over and above that which they had already provided in writing.[127]
[127] Appellants’ Revised Written Submissions, [66].
The trial Judge clearly erred in finding that Mr Damaskos breached s 51AD of the Trade Practices Act in circumstances where that provision applies only to corporations. However, as the trial Judge found that all defendants breached s 51AD, including the corporate entities, it cannot be said that this error has any substantive effect on the outcome of the appeal.
The defendants’ assertion that the trial Judge gave inadequate reasons for his finding regarding s 51AD of the Trade Practices Act must be rejected. The trial Judge clearly explained this aspect of the claim, evidenced by his Honour’s analysis of the Franchise Code, the relevant case law and the submissions of the parties.[128] The trial Judge also reasoned that the “scant level of disclosure” provided in the disclosure document did not constitute “information from which the historical or future financial details of a franchise can be assessed”, as was required by Clause 19.3 of Annexure 1.[129]
[128] First Reasons, [89]-[104].
[129] First Reasons, [89]-[104].
In the circumstances, Ground 7 must be dismissed.
Ground 7A: Misrepresentations as to wages
The defendants sought leave to amend the Notice of Appeal to include an additional ground that the trial Judge erred in finding that the Wage and Catering Representations were an operative cause of the plaintiffs’ loss in circumstances where there was no evidence to support this finding.
The defendants also emphasised that the trial Judge erred in finding that Mr Sebastiano’s handwritten notes on the Form 2 are calculations of “average weekly wages” in circumstances where Mr Sebastiano gave evidence that these calculations related to total rent and outgoings.
Although the trial Judge erred in describing these handwritten notes as referring to the “average weekly wages”, this appears to have otherwise had no substantive bearing on the trial Judge’s findings.
The most important of the passages attacked by the defendants is as follows:[130]
The plaintiffs have proven that misrepresentations were made as to average weekly turnover of around $15,000 per week and in failing to disabuse Mr Sebastiano of this understanding. These were actionable misrepresentations by understating weekly wage levels and failing to notify him that the SA Water catering was about to cease at Flinders Street Funk.
The weekly sales figures for the financial year shown graphically in Appendix A demonstrate that average sales for the first half of the 2009 calendar year were just under $13,000 per week. The weekly sales records for the period of six months post contract show that $15,000 per week was only obtained in weeks 21 and 22. As found already, the defendants have not established they had reasonable grounds for making such representations.
The misleading and deceptive conduct caused the plaintiffs to enter into the Sale and Franchise Agreements and the Licence to Occupy through the agency of Mr Sebastiano. Those misrepresentations were calculated to induce Mr Sebastiano to enter into the contracts, and so the fair inference is that he was induced to do so.
[130] First Reasons, [118]-[120].
The defendants contended that the reference in the first paragraph to wages and catering is necessarily incorporated in the reference in the third paragraph to “misleading and deceptive conduct”. It is true that the first paragraph purports to summarise why the Turnover Representation is misleading. However, this comes long after the primary findings made regarding the Turnover and Profit Representations referred to earlier.
In so far as this draws on the Catering Representation, it is wrong for the reasons just given. In so far as it refers to the Wages Representation, the most significant finding is that the Form 2 did not disclose the wages of one employee, therefore under-recording wages by $669.20 per week. Consequently, the trial Judge found that the Form 2, as well as the September 2008 Quarterly Figures, could not be relied upon in determining the profits the plaintiffs could expect to receive.
Further, upon handover, the plaintiffs were paying $4,800 per week in wages (including superannuation and WorkCover), an amount which roughly exceeds the amount disclosed in the Form 2 by the amount of the wages excluded. Contrary to Ground 7A.1, this evidence clearly points to the fact that the employee’s wages had not been recorded in the Form 2.
In these circumstances, it cannot be said that there was no evidence or reasoning capable of sustaining the trial Judge’s findings that the Wage Representation was an operative cause of the plaintiffs’ loss. This issue was and remains relevant as to why the defendants failed to show reasonable grounds for making the Turnover and Profit Representations for the purposes of s 51A of the Trade Practices Act, for the reasons earlier given. On this basis, it was indirectly part of the material on which the plaintiffs relied and which was causative of the decision to enter into the contracts which led to the plaintiffs’ losses.
The Catering Representation was not pressed by the defendants as part of their arguments on this aspect of the appeal, whether in writing or orally.
In these circumstances, we think that the better view of the third paragraph of the trial Judge’s reasons extracted earlier is that it is referring to the Turnover and Profit Representations, which are the subject of the second paragraph referred to above. Given the explicit findings earlier made by the trial Judge,[131] he is not to be taken to be suggesting that the Wages or Catering Representations were separately relied upon or causative of the plaintiffs’ loss.
[131] First Reasons, [67].
We grant permission to press Ground 7A in so far as it concerns the Wages Representation, but otherwise dismiss this ground of appeal.
Ground 8: Calculation of loss
Ground 8 relates to the trial Judge’s assessment of the plaintiffs’ loss. The defendants submitted that the trial Judge erred in finding that that assessment of damages “involves no ‘doubling up’ of the award for damages”. [132]
[132] Second Reasons, [86].
It is the defendants’ case that the award of damages to Mr Sebastiano amounts to double compensation because the basis upon which the trial Judge found that Hype Investments had suffered a loss of $230,000 was based on the evidence of the plaintiffs’ expert who included the Businesses’ payment of a market wage to its owner/operator in his calculation of the value of the Business. Accordingly, the defendants submitted, the trial Judge “doubled up” in awarding Mr Sebastiano damages for the loss of opportunity to earn a market value wage where such an amount was already incorporated into the award to Hype Investments.
There is a fundamental difference between the capital loss suffered by Hype Investments and Mr Sebastiano’s lost opportunity to obtain a market wage. Compensation payable to Hype Investments for the first loss does not, and cannot, compensate Mr Sebastiano for the second loss sustained by him.
The defendants’ assertion of double recovery must be rejected. As the purchaser and operator of the Business, the plaintiffs needed to pay someone to manage the Business. The fact that it was the purchaser, Mr Sebastiano, who managed the Business does not affect the calculation of the proper valuation of the Business for the purposes of determining the capital loss. When calculating the plaintiffs’ capital loss, the cost of paying a manager to run the Business must be taken into account. The plaintiffs’ expert gave evidence that his valuation of the business would have been unaffected if the manager’s wage was excluded.[133] Accordingly, it cannot be said that the trial Judge erred in separately awarding damages to different plaintiffs for both capital losses and loss of opportunity to obtain a market wage, which those plaintiffs had, respectively, sustained.[134]
[133] Trial Transcript, p 406.
[134] See Berry v CCL Secure Pty Ltd (2020) 94 ALJR 715, [64]-[65] (Gageler and Edelman JJ).
Ground 8 is dismissed.
Conclusion
The appeal must be dismissed. We will hear the parties on costs.
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