Gabjet Pty Ltd & Anor v Funk Franchise Pty Ltd & Ors (No.2)
[2022] SADC 28
•11 March 2022
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
GABJET PTY LTD AND ANOR v FUNK FRANCHISE PTY LTD AND ORS (No.2)
[2022] SADC 28
Judgment of his Honour Judge Slattery
11 March 2022
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - COSTS
The Principal judgment in this action was delivered on 2 August 2021. By an application dated 22 September 2021, the applicant Gabjet Pty Ltd sought orders for the reopening by the Court of findings made on whether Gabjet Pty Ltd is entitled to an order for trading losses and for the assessment of those losses.
Held:
The judgment of the Court of 2 August 2021 is a final judgment on the topic of the recoverability of the trading losses suffered by Gabjet Pty Ltd. The application is dismissed.
The parties seek differential orders for costs based upon the judgment of 2 August 2021 in respect of the positions of Gabjet Pty Ltd and Jetgab Pty Ltd. The applicant Gabjet Pty Ltd contends for an order for indemnity costs in its favour.
Held:
The applicants Gabjet Pty Ltd and Jetgab Pty Ltd are entitled to recover 80 % of the costs of the action which assessment includes the costs of the application of 22 September 2021 and in relation to the argument on costs.
Franchise Code of Conduct; Competition and Consumer (Industry Codes – Franchising) Regulation 2014, referred to.
Gabjet Pty Ltd & Anor v Funk Franchise Pty Ltd & Ors [2021] SADC 88; HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; Potts v Miller (1940) 64 CLR 282, considered.
GABJET PTY LTD AND ANOR v FUNK FRANCHISE PTY LTD AND ORS (No 2)
[2022] SADC 28
I delivered my first judgment in this action on 2 August 2021 and for present purposes, I will assume a familiarity with that judgment and all of the facts and issues therein canvassed. I will not repeat the contents of it except where necessary here.
There are two principal applicants in the proceedings, Gabjet Pty Ltd and Jetgab Pty Ltd and both were owned and controlled by Mr Giovanni (Johnny) Emanuele (“Mr Emanuele”). Gabjet Pty Ltd purchased the Victoria Square store of Funk Coffee and Food and Jetgab Pty Ltd purchased the Waymouth Street store of Funk Coffee and Food. Claims were made by Gabjet Pty Ltd in relation to misleading conduct and other wrongs committed in connection with its purchase of the Victoria Square store. It also claimed for other losses. Similar claims were made by Jetgab Pty Ltd concerning the purchase of the Waymouth Street Store.
In my first judgment, I accepted the claim of Gabjet Pty Ltd in relation to the purchase of the Victoria Square business and assessed losses in the amount of $440,000 less the fair value of plant and equipment, fixtures and fittings as of the date of purchase. I made other consequential orders. I rejected the claims of Jetgab Pty Ltd in relation to the purchase of the Waymouth Street store although I made some consequential orders surrounding the seizure of and use made of those assets after re-entry.
In relation to the claims of Gabjet Pty Ltd, I did not allow the claims for consequential trading losses. I considered that in the peculiar facts of this action, such a claim was illogical. This finding and its sequelae now form part of the basis of an application brought by Gabjet Pty Ltd.
By interlocutory application dated 22 September 2021, Gabjet Pty Ltd Pty sought the following orders in relation to my judgment of 2 August 2021:
1.This application be made returnable to the hearing scheduled for 9.00 am on 7 October 2021;
2.The first applicant have leave to rely upon further submissions on the question of trading losses;
3.The judgment of his Honour Judge Slattery delivered on 2 August 2021 be varied to award additional damages to the first applicant in the sum of $204,065 or in such other sum as may be awarded by the court in respect of trading losses suffered by the first applicant in the operation of the Funk Victoria Square business;
4.Such further or other orders as this Honourable Court deems fit.
The application was made on the grounds set out in an accompanying affidavit sworn by Christopher Andrew Bruce dated 21 September 2021.[1] On the 20 day of October 2021, I heard further submissions by the parties in connection with this application.
[1] Seventeenth affidavit of Christopher Andrew Bruce sworn 21 September 2021, FDN 148.
The respondents’ response to this application was that the court had made its decision about all aspects of damages and there was no basis upon which I may revisit the judgment of 2 August 2021.
For the reasons which follow, I refuse the application of Gabjet Pty Ltd and Jetgab Pty Ltd on the issue of trading losses. I find there is no basis upon which I may vary any award in relation to damages made by me in my judgment of 2 August 2021. I am satisfied that my judgment on those topics is a final judgment and my reasons are set out below. These reasons assume a thorough understanding of all the material canvassed in my judgment of 2 August 2021.
Background
This action was commenced in this court on 18 day of December 2018 by an application by each of Gabjet Pty and Jetgab Pty Ltd for injunctive and other relief. Each company was previously the franchisee of a Funk Coffee and Food Franchise store in Victoria Square and on Waymouth Street, Adelaide respectively. Each of them had been removed from possession of those stores by the master lessee thereof and they sought orders to be restored to their positions as franchisee of those two stores.
At that time, the head sublessee for the Victoria Square and Waymouth Street stores was Funk Leasing Pty Ltd, a company controlled by the fifth and sixth respondents, Arthur and Joanna Damaskos. Each of Gabjet Pty Ltd and Jetgab Pty Ltd were the franchisees of the two business respectively under franchise agreements dated 20 July 2016 (Victoria Square) and the 29 March 2017 (Waymouth Street). Each of Gabjet Pty Ltd and Jetgab Pty Ltd occupied these premises under license to occupy agreements: for Gabjet Pty Ltd this was dated on or around 20 July 2016 (Victoria Square) and for Jetgab Pty Ltd dated 29 March 2017 (Waymouth Street).
The fundamental basis for the interlocutory claims then made by Gabjet Pty Ltd and Jetgab Pty Ltd concerned allegations about misleading conduct by the vendors and their servants and officers allegedly occurring at the time of the purchase of these franchise businesses.
A fair summary of the applicants’ cases was that the misleading conduct alleged concerned conduct of commission and omission. Conduct of the first type involved the alleged misrepresentations within particular documents such as financial documents about the performance of the business and other similar oral representations separately. The alleged conduct of the omission concerned the failure of the respondents to inform the applicants upon their enquiry or in the circumstances where disclosure should have been made of matters pertinent to the operation of those stores. An example is the alleged treatment of other expenses incurred in the operation of the Victoria Square store but taken up in other operating entities. In time, these applications for interlocutory relief did not proceed and the claims of Gabjet Pty Ltd and Jetgab Pty Ltd were amended to claims for damages and declarations connected with the alleged misleading conduct of the franchisor or vendors of these two businesses. As a result, Gabjet Pty Ltd and Jetgab Pty Ltd remained out of the businesses formerly operated by them with the result that Funk Franchise Pty Ltd took possession of the plant and equipment, fixtures and fittings in those two businesses respectively without making any payment therefore to Gabjet Pty Ltd and Jetgab Pty Ltd.
Victoria Square Business: some background
On 20 May 2016, the agent Mr Versace sent to Mr Emanuele the “Business Profile 250 Victoria Square” document containing financial information about the performance of the Victoria Square business dated to 31 December 2015. Mr Emanuele sought accountant’s advice about this information and later discussed it with the agent and Mr and Mrs Damaskos who, on 3 June 2016, provided to him the Funk Franchise documentation. On 17 June 2016, Gabjet Pty Ltd executed the sale of business agreement for the purchase of the Victoria Square business. On 28 June 2016, the vendor’s solicitors sent to Mr Emanuele, the franchise agreements for execution and he obtained his own solicitor’s advice on those documents on 1 July 2016. They were executed by Gabjet Pty Ltd on 20 July 2016.
On or about the same day, a licence to occupy the Victoria Square premises was executed by Gabjet Pty Ltd. From 22 July 2016, Gabjet Pty Ltd commenced to trade from the Victoria Square store after having paid the sums of $410,000 for the business, a franchise fee of $30,000 and a training fee of $10,000. I have found that the actual value of the business was nil subject to adjustments for the value of plant and equipment, fixtures and fittings upon which I have now received further submissions. My reasons and my decision on that topic are set out below.
About ten weeks after the settlement on the sale of the Victoria Square business, Mrs Damaskos made a first approach to Mr Emanuele to consider purchasing the Funk Franchise store in Waymouth Street. At that time, Mrs Damaskos sent to Mr Emanuele a document entitled “Business Profile 76 Waymouth Street Adelaide” which contained financial information connected with the operation of that store for the period 1 July 2015 to 30 June 2016 and for 1 July 2016 to 30 September 2016. The second bundle of document records only the financial results for a quarter of the year of trading.
In my judgment, I considered this financial information and I held that it reflected a business which had sustained losses from trading without having paid a franchise fee and that on no basis could it be said that the business had a value because of the trading losses that it had incurred.
At the time that this approach was made, Gabjet Pty Ltd had not traded in the Victoria Square business for one full quarter of one year. It had settled on its purchase on 22 July 2016. The evidence of Mr Emanuele was that due to difficulties in the “point of sale” system used by the business vendor and “inherited” by him, he had real doubts about the accuracy of the financial information produced by the financial records generated within the computer system of the Victoria Square store. His main concern was that the system did not properly record the cost of goods sold so that, in turn, there was not a proper understanding of the true stock position and its carrying cost. The resultant concern was that the profit of the Victoria Square business could not be accurately known because of the spreadsheet system employed by the respondents for the recording of costs of sales in their own point of sale system. Gabjet Pty Ltd contended that, as a result, it could not accurately assess its own financial position and needed to amend this system in order to obtain completely accurate financial information. It commenced that task from the outset.
Mr Emanuele accepted in his evidence that Gabjet Pty Ltd did not know whether, in that period, it was making a profit from trading. I was satisfied that it never made a profit from the trading in that store and so much is reflected in the content of my first judgment. I was satisfied that expenses always exceeded income and the capital position of the business was always fraught because it was continually diminished by the incurring of trading losses. This was because the company relied on the maintenance by Mr Emanuele of shareholders loans recorded as current related party liabilities which were not to be called up for payment within 12 months. I will deal with these aspects later, but they emphasise the fundamental weakness in the position of Gabjet Pty Ltd. Cash outgoings always exceeded cash incoming of the Victoria Square business no matter how well the business was operated by Gabjet Pty Ltd from the commencement.
In my first judgment, I have accepted that Gabjet Pty Ltd was not satisfied with the financial information that it was generating from the system it inherited from Funk CBD Pty Ltd in the Victoria Square store and it set about to expend money to improve those systems. It is accepted that some improvements to the system were able to be made through a software consultant employed by Gabjet Pty Ltd.
I have made findings concerning the claims of Jetgab Pty Ltd and the store on Waymouth Street. I rejected the claim of Jetgab Pty Ltd primarily on the basis that the financial information provided to it disclosed a business that was quite obviously insolvent, which had been trading at a loss, which had a severe capital deficiency, and which could not otherwise justify any payment or value which, sometimes is called a value for goodwill. I have used this form of expression deliberately because the accepted process of calculation of the value of a business and so its business assets, for example, is usually reflected in a figure for net maintainable earnings and the use of a multiplier. There are other methods employed depending upon the circumstances of the business, its assets and the market. Irrespective, I was satisfied that the Waymouth Street business had no value and so much must have been apparent to an observer from the beginning. There was no net present value in that business. It could not sustain a maintainable earnings assessment. This was the opinion of Mr Crase which I accepted. This assessment only worsens when it is known that if the business was to be operated under a franchise agreement, then the franchisor would require payment in the amount equivalent to 7% of the gross turnover of the business as a franchise fee. This impost would further reduce the gross and net income figures of the business. This in turn would deleteriously affect the assessment of what might be paid for the business by a purchaser at arm’s length, such as Jetgab Pty Ltd.
As well, the Waymouth Street store operated under the same internal financial reporting system as operated at Victoria Square. I have adopted a consistency of approach and it may be accepted that this reporting system also required the expenditure of further time, work and money if it was to be brought into the same standard as Mr Emanuele required for the Victoria Square store. That would be known from the outset. Also known by Mr Emanuele was the inaccuracies that he perceived in the Victoria Square system would be repeated in the Waymouth Street store. Consequently, the actual financial position of the Waymouth Street store was potentially worse than could be assessed from the available financial accounts which already showed an insolvent business which was valueless.
Notwithstanding that on any objective view, the Waymouth Street business was worthless, the asking price communicated by Mr and Mrs Damaskos to Mr Emanuele was $350,000.00. Negotiations then commenced and by 29 March 2017, a purchase price of $225,000.00 was agreed to be paid. Also agreed to be paid was an initial franchise fee of $30,000.00 and there was also an initial training fee of $10,000.00, both exclusive of GST. The total outgoing exclusive of GST paid for the purchase of this business amounted to $265,000.00.
The purchase of this second business was therefore negotiated by Mr Emanuele within 6 ½ months of commencing operating the Victoria Square store. He was aware that he could have no confidence in the reporting system of the Victoria Square store, that he could not assess its financial position from time to time with any accuracy but he was prepared to proceed with the purchase of a business for $265,000 that was insolvent and which may reasonably be expected to suffer the same defects in its reporting system. He had not resolved the defects in the financial reporting system for the Victoria Square store when he arranged for the purchase of the Waymouth Street store.
Settlement on the purchase of the Waymouth Street business occurred almost exactly twelve months after the settlement of the Victoria Square store. As is clear from my findings, this fact is significant. Mr Emanuele was the guiding hand and mind of both Gabjet Pty Ltd and Jetgab Pty Ltd which were the purchasers of the businesses; they were the corporate manifestations of Mr Emanuele. The negotiation process for the purchase of the Waymouth Street business was conducted over the period of about 6 ½ months and during that time the Victoria Square business incurred a reported trading loss which for reasons I discuss below is most likely understated. This is a significant issue in my finding on damages and informs my findings about Gabjet’s claim for trading losses. It is a singularly factual issue; it is peculiar to this case.
Mr Emanuele gave evidence at trial that he planned to use the better cooking facilities and space at the Waymouth Street store as an adjunct to assist the services provided to customers at the Victoria Square store. How that was to be done and on what basis is not disclosed on the evidence. There is no evidence that this plan was ever implemented. Another part of the same plan was for the interchangeability of staff between the two stores according to needs. There was planned to be an aspect of symmetry between each of those stores and so a planned interdependence. Again, there is no evidence that this interchangeability of staff ever occurred. The evidence before me indicates that the two stores operated quite separately. Both were insolvent businesses and both failed to generate a profit.
None of these plans could explain on any objective basis how a purchaser could reasonably form a view that the Waymouth Street purchase price could be established at $265,000.00. Mr Emanuele embarked upon the process of the purchase of that store within 10 weeks of commencing trading at Victoria Square.
In my judgment of 2 August 2021, I rejected the claims of Jetgab in relation to the purchase of that store as a result. The store did not trade at a profit and made extensive trading losses. In my view, nothing that was done and perhaps could be done by Jetgab to bring the business into profit sufficiently to sustain it.
Similarly, although I have not made criticisms of the manner in which Gabjet operated the Victoria Square store, it did not operate that store at a profit at any time subsequent to its purchase, and particularly up to and following the purchase by Jetgab of the Waymouth Street store. In his evidence, Mr Emanuele said that he did not have a clear understanding of the precise trading position of Gabjet because of the difficulties encountered with the point of sale system. I accepted that Mr Emanuele formed the view that he did not have what he considered to be necessary clarity about the most accurate financial position of the Victoria Square business from the internal records then being generated within Gabjet. Notwithstanding he did not know its financial position, the Victoria Square business did not generate a profit from trading. It was not a profitable business to operate. This was largely the same position that was experienced by Kindred Pty Ltd when it operated the Victoria Square store. However, in comparison, the losses sustained by Gabjet were greater than those sustained by the Kindred Group Pty Ltd largely because of the higher overhead costs sustained by Gabjet.
The first trading profit and loss account and financial statements for Gabjet were prepared for the period ending 30 June 2017 financial year. These disclosed a loss before income tax of $79,162.00. This document contains errors as it does not disclose an amount for the expense of depreciation of the plant and equipment in the store. The asset of plant and equipment is carried in the balance sheet at $16,835.00. The agreed fair market value of plant and equipment and fixtures and fittings for the Victoria Square as at 17 June 2016 was $63,770.00. The difference between these two figures potentially discloses a write down of those assets to $46,935.00. That difference is well above an ordinary rate of depreciation of assets and no such costs of depreciation has been disclosed. This treatment appears to disclose an assessment by the Director of the need to reassess the value of that asset. In the usual course, this will occur when the known financial performance of the business will not justify a higher carrying value of the asset which is intrinsic to the performance of the business. So much may be accepted when it is known that before depreciation, the trading losses for the year were $79,162.00. Taking the cost of depreciation into account, the trading loss figure would fall within the range of that loss amount and the sum of $100,000.00.
That loss figure is separately verifiable from the balance sheet for 30 June 2017. In making these comments, I reiterate that the balance date figures are simply that: a financial picture as presented on the balance day but they still convey considerable information about the company’s trading performances especially in the cash area which is and has always been an indication of the health of the business. It is common for cash statements to be prepared monthly and sometimes weekly for the purpose of allowing a proprietor to match invoicing and outgoings so that a proprietor may know whether enough cash is being generated to pay short and medium term outgoings. There is no particular sophistication to this approach and as a matter of simple arithmetic Gabjet was suffering a deficiency of around $1,500 per week ($79,162 ÷ 52). That income deficiency is as a result of an overall trade deficiency, but it is appropriately informative when it is known that expenses are understated (cost of depreciation) as I have explained above.
On this balance date, there was $5,553.00 cash at bank and trade debtors were in the amount of $21,712.00. There is no evidence about what these trade debtors comprised and their collectability. Trade creditors were recorded at $54,349.00 and there was a GST liability of $26,743.00. The business is therefore trading at a substantial loss. Assuming only for the sake of discussion that trade creditors were all collectable, current liabilities in the form of trade creditors are double the readily available assets of the business. It is not an epiphany that this business was not generating sufficient cash to pay its immediate outgoings by a factor of almost 100%. There is no evidence that it ever traded at a profit.
The business also continued to carry an intangible of investment of cost of $446,751.00 in its balance sheet. On the performance of the business, there is no basis to carry an intangible asset at the investment cost of the business. In the ordinary course the intangible assets are amortised over the life of the asset. They are generally written down over time as with any other asset. In this case the value of the business was nil and it had no intangible assets. An appropriate adjustment to the carrying figure for intangible assets would increase the deficiency of assets over liabilities. This adjustment reflects the reality of the situation that the business had no value and is another indicator of endemic insolvency.
This is reflective of the cash basis assessment of the business performance. On the current liabilities side, current bank loans are recorded at $213,895.00 and it must be assumed that these bank loans were kept within the borrowing terms. There are then separate current liabilities of loans secured ($35,000.00) and loans to related parties ($4,478.00) and GST provision ($26,743.00). Total current liabilities amount to $334,466.00. This is to be compared to a business purchased at a total cost of $446,751.00 which generates a loss before depreciation of $79,162.00 in its first year of trading.
Shareholders loans were recorded in the sum of $251,571.00 as non-current liabilities. That is the usual treatment of such loans and therefore they are not to be called up for payment within twelve months. This description of non-current loans, and the treatment in the accounts, does not distract from the obvious facts that on the performance of the business those loans could not be paid, regardless of timing and that was a matter which Mr Emanuele was fully aware.
In making those observations, I reiterate my acceptance that balance date figures are not generated by accountants until well after the balance day. The preparation of tax returns and lodgement requirements usually provides the impetus for production of such accounts which will often require several iterations. The issue here is that overlain upon this information was the perceived inability of Mr Emanuele to obtain accurate financial information at the point of sale that all of the expenses of the Victoria Square business were being properly recorded and matched against income. As well, the cash performance of the business discloses that outgoings exceeded income of an average rate of up to $1,500 per week. That issue and its sequelae occupied a significant amount of the time of Mr Emanuele, however that statement overlooks a rather stark and obvious fact. In its trading, the business had a deficiency in ready cash to pay its creditors. It was accumulating trade creditors without generating sufficient income to discharge those debts and at the same time Mr Emanuele said that he could not be certain of the accuracy of the point of sale system.
Very early within the same period, Mr Emanuele entered into the process of consideration of and then arranged for the purchase of the Waymouth Street store in the factual background that I have described in my first judgment. The financial records of the Victoria Square store[2] satisfy me that the income and the capital positions of that business as reflected in the company accounts were hopelessly deficient; the business always traded at a substantial loss and so its capital position was always poor and deteriorating. Expenditure was reported at seventy percent of total income before taking into account the cost of goods sold. That expenditure figure does not record an amount for the cost of depreciation. Once that figure of income is reduced by the amount of purchases, (without making any adjustment for depreciation), a loss before income tax of $79,162.00 is disclosed.
[2] Exhibit A2, volume 9, p 2261 F et seq.
There are also other indications that the business was always unsustainable. For example, rent in the amount of $125,400.00 disclosed in the accounts amounts to 26% of gross profit from trading indicating at least that the performance in sales cannot justify that level of rent. Bank charges are reported at $8,566.00. There are no notes to the account and it is not clear to what these bank charges relate. At least some aspect of these charges must relate to the interest cost of funds borrowed. However, there is a separate item of interest paid to other persons paid or corporations in the amount of $11,466.00.
Current liabilities disclose bank loans in the sum of $213,896.00, other secured loans in the sum of $35,000.00 and loans to related parties in the amount of $4,478.00 reduced by a capital payment of $16,153.00 during that year.
Shareholders loans are then reported in the amount of $251,700.00. These are loans made by Mr Emanuele personally and were used to purchase the business (for a total price of $446,751.00). The only entry where interest attributable to that loan may be recorded in trading and profit and loss statement, is at the entry ‘interest paid-other persons/corporations’. The sum disclosed is $11,466.00. If that payment was made connected with loans to shareholders, the applicable interest rate would be 4.55% per annum. It is known that this interest sum was not and could not be paid by the business although that fact was not in and of itself fatal to the applicants’ position.
Notwithstanding, an objective proper assessment of the position of the business and its performance must take into account every notional aspect of income earned and expenditure/liabilities incurred. The business could not ever generate sufficient income to cover the costs incurred by it in the operation of the business. The cost of funds provided by proprietors and recorded as non-current loans is as much a liability as repayments required to be made in bank borrowings. Any other approach risks an inaccurate result.
From the outset, no payments were or could be made from the business to Mr Emanuele in relation to this shareholder’s loan. This is not merely a balancing item that would not or could not be completely comprehended until after a balance date. That is, this is an actual liability that was known from the outset. There is no suggestion that this loan could be capitalised through the purchase of shares and therefore not incur any aspect of interest. It was a liability fully comprehended by the company and there are at least two principal reasons for reaching that conclusion. In order to know how a business is performing, it is necessary to be aware of and to notionally at least attribute a cost of the borrowed capital employed in the purchase of the business. A proprietor must then be mindful of the performance of the business and the level of its income and expenses on an appropriately regular basis because when it is incurring losses, the effect of failing to pay the cost of all borrowed capital employed in the purchase of the business compounds the financial deficiencies of the business. As a consequence, it then becomes more difficult for the business to recover its position financially because without some extraordinarily dramatic change in fortune and business turnaround, the business continues to operate under the compounding burden of debt, capital deficiencies and losses.
In that background, Mr Emanuele embarked upon the process of the purchase of the Waymouth Street store. He saw the financial information and records of that business which for reasons set out in my first judgment, disclosed a business with no value and certainly not one that could command any payment over and above the written down value of the plant and equipment, fixtures and fittings, reduced further according to a valuation to be given by an expert such as Mr Jamie Codling. That Mr Emanuele thought there would be complementarity between the physical resources of the businesses is both misguided and to an extent delusional. The entry into the negotiations for, and then the decision to purchase the Waymouth Street store occurred over a period of some eight to nine months and principally in the first year of the operation of the Victoria Square store. There was a compounding effect of this conduct due to the failure of Mr Emanuele to properly comprehend the trading performance of the Victoria Square store; the inability from the outset of that store to generate sufficient income to pay its outgoings based upon its sales performance; its inability to satisfy actual and notional costs of capital employed in its purchase; and his inability to comprehend that if proper attention was paid to the available financial information he would need to give earnest consideration to his future involvement in the business. It is known that this is the approach taken by the Kindred Group Pty Ltd.
Instead, Mr Emanuele caused Jetgab Pty Ltd to be incorporated and to purchase the Waymouth Street store for a premium where that store was worthless.
In those very peculiar and quite unique factual circumstances, it is illogical to allow the claim of the applicant for trading losses in relation to the Victoria Square store. That finding is not a finding at large. The authorities in relation to claims for consequential trading losses are well understood and bind me and my considerations here. The decision that I have made is based upon those factual circumstances which pertain in this matter. They are wholly connected with the conduct of Mr Emanuele that take this matter outside the operation of the usual principles in relation to consequential trading losses.
For the avoidance of doubt, I accept the applicant Gabjet Pty Ltd put its case for losses based upon the authority of HTW Valuers (Central Qld Pty Ltd) v Astonland Pty Ltd.[3] On the facts of the matter, I have assessed loss on the Potts v Miller[4] approach. As I explained in my first judgment and as I have set out above, that assessment was employed because of the particular factual circumstances of the matter.
[3] (2004) 217 CLR 640.
[4] (1940) 64 CLR 282.
If I am wrong in my assessment, then it is appropriate that I express some views on the allowance for such losses on the facts of this case. For the reasons above discussed, it is appropriate to limit the trading losses assessment to one period of trading, in the first year. In the usual way, that figure should be reduced in order to cover exigencies of trade that have connection only to Gabjet Pty Ltd. I would round up the figure of losses to the sum of $75,000.00. I consider that by the end of the first trading period, Mr Emanuele did or should have fully understood the precarious position of the business of Gabjet and that it could not continue to operate without fundamental changes to the obligations to make payments to the franchisor and in relation to rent and outgoings. The business was not profitable.
In those circumstances, I am unable to accept the submissions of the applicant about revisiting the decision I have made about consequential losses. I am satisfied that in order to do so, it would be necessary to reagitate arguments that I have already considered and upon which a decision has been made. I am satisfied that the process of decision making in that regard has been complete. I am also satisfied that the Court has not proceeded on any misapprehension of fact or law in a significant respect which could not be attributed solely to the neglect or default of the party seeking the rehearing. I also consider that having regard to the public interest in maintaining the finality of litigation, I would not burden the respondent with the uncertainty as well as additional costs and delay in attempting to reassess damages as contended for by the applicant.
I turn then to the of the question of assessment of damages. I am content to assess interest once the primary judgment amounts have been determined. That is the approach which is common to the parties. There are several aspects of these claims and I have made some allowances in my first judgment. One complaint relates to set offs for various amounts connected with a cross claim and for Fleurieu Milk. I have made my findings upon those matters and I am not inclined to disturb them.
In other submissions on damages, the applicants have contended that the value of the fit-out plant and equipment at the Victoria Square store be valued on an auction rather than a fair market value basis. They rely upon the finding that I have made that the business at the Victoria Square premises was not viable. It contends that the auction value is the appropriate value. However, there is no evidence before me about this auction value and it is conceded by the applicant that it was not assessed.
I am unable to accept this submission of the applicant. The evidence is within Exhibit A11 which discloses that the fair market value of the fit out for the Victoria Square premises was $64,500.00 as of 17 June 2016 and was $57,900.00 at the 15 November 2018. The fair market value of the plant and equipment for the Victoria Square premises as at 17 June 2016 was $63,770.00 and $47,915.00 as at 21 November 2018.
The applicant also makes a claim for payment of marketing fees. I have found that the respondents failed to contribute the sum of $128,000.00 to the marketing fund in the period between 1 January 2015 and 30 June 2017. This failure contravened paragraph 31(2) of the Franchise Code of Conduct.[5] The first submission of the applicant is that it should be refunded all of the fees paid towards the marketing fund. At trial, I rejected that submission. I accepted that the respondents acknowledged the error made by them in relation to the marketing fund and much later rectified that error by restoring to the fund. The applicants submit that it has suffered loss and damage equivalent to the benefit of the underpaid amount proportional to the number of stores if it had been paid. It gives the example that if the underpayment was $10,000.00 and there were ten stores then, each store had been deprived of $1,000.00 of marketing benefit. The applicant calculates that during the 2016-2017 financial year, there were thirteen Funk stores and when an apportionment has been made, the applicant suffered an approximate loss of $2,972.00 (rounded up).
[5] Competition and Consumer (Industry Codes – Franchising) Regulation 2014.
One aspect of the evidence led by the respondents about that failure to pay contributions to the marketing fund was connected to a purported reliance upon advice from solicitors that all that was required was that the fund be restored in futuro. The solicitors were not called to give evidence and by that stage, the solicitors had terminated their retainer with the respondents. I have entertained very grave doubts about the accuracy of this evidence from the respondents.
The intention of the marketing fund is obvious and its purpose is to provide marketing services for all of the stores in the group with the intention of increasing the turnover of those stores. A limitation of funding has the immediate consequence of a limitation of marketing activity. There is no evidence about what result may be expected from the expenditure of money upon marketing but common sense dictates a curtailment of a marketing program will have some unspecified adverse effect upon the proprietors of the stores. Although there is no particular evidence upon which I may rely in formulating an amount of loss, I am satisfied that I may use a broad axe approach when assessing a loss in this respect. Doing the best I can, I think that the applicant is entitled to an assessment of damages rounded down to the sum of $2,000.00 in relation to each business. In those circumstances my calculation of the loss suffered by the applicant is as follows:
1. Purchase of Victoria Square business
Amount paid
$410,000
Less value of fit out and plant and equipment at time of purchase
($128,270)
Subtotal
$281,730
2. Initial franchise fees – Victoria Square store
Upfront franchise fee
$30,000
Initial training fee
$10,000
Subtotal
$40,000
3. Legal fees relating to acquisition of business and franchise
Subtotal
$3,569
4. Fit out and plant and equipment at date of termination/repossession
Fit out
$57,900
Plant and equipment
$47,915
Subtotal
$105,815
5. Marketing fees
Subtotal
$2,000
Total
$433,114
In accordance with the terms of my judgment, in relation to Jetgab, I assess the loss and damage as follows:
1. Fit out and plant and equipment at date of termination/repossession
Fit out
$32,000
Plant and equipment
$39,185
Subtotal
$71,185
2. Marketing fees
Subtotal
$2,000
3. Cross claim
Less set off on cross claim
$46,479
Fleurieu Milk
$7,500
Subtotal
($53,979)
Total
$19,206
I turn to the question of costs. None of the parties filed any Rules-based offer on costs, nor did they deliver any informal costs offer.
On the issue of costs, the respondents have sought to tender and read three further affidavits: of the respondent Joanna Damaskos; the first sworn 15 November 2021[6] and the second of Joanna Damaskos sworn 10 December 2021;[7] the respondents also seek to read the affidavit of the solicitor Tasman Wylie sworn 21 December 2021.[8]
[6] FDN 160.
[7] FDN 161.
[8] FDN 163.
I refused to allow the tender and reading of these affidavits into evidence at the hearing before me on 9 February 2022. I said then that I would publish my reasons. These are those reasons.
In its first written submissions, dated October 2021, Gabjet and Jetgab contended in paragraph 2 as follows:
2. The applicants respectfully contend that having regard to the overall outcome of this matter and various misconduct in unreasonable conduct by the respondents in connection with the proceedings, it is in the interest of justice that there be a single order as to costs – in terms that the first, fourth, fifth and sixth respondents pay 85% of the first applicant’s cost on an indemnity basis.
The applicants contend that such costs are to be agreed or taxed on the basis they include the costs and disbursements invoiced to Gabjet and or Jetgab. I will proceed on the basis that the intention of the applicants Gabjet and Jetgab is that there be one order as to costs on the claims of both of them that the first, fourth, fifth and sixth respondents pay 85% of their costs on an indemnity basis. This is the way the costs argument before me proceeded.
In support of the application for indemnity costs, the applicant companies relied upon the alleged misconduct of the respondents in the litigation, they being the unsuccessful party in the litigation by Gabjet Pty Ltd and, to a much lesser extent, Jetgab Pty Ltd.
In the findings made by me about the claims made by Gabjet, the applicants relied upon my findings about the evidence given by Mrs Damaskos. The applicants contend that her evidence constitutes misconduct or plainly unreasonable conduct in the prosecution of the defence of the respondents that, in turn, protracted the proceedings. On that basis, the applicants contend that an order for indemnity costs is appropriate. It was in that context and on that basis that in the hearing before me on 9 February 2022, the respondents sought to read those three affidavits.[9]
[9] FDN 163.
These affidavits purport to address findings made by me in the first judgment of 2 August 2021. An issue in the pleadings concerned a document called “the Victoria Square disclosure document” that was provided to the applicant Gabjet by the respondents. Gabjet contends that the document contained a number of misrepresentations and was misleading. One such misrepresentation involved the inclusion in a Schedule B to that document of a statement that the Victoria Square store had not earlier been franchised. That statement was untrue.
The relevant discussion in my judgment[10] is at [530]-[545] as follows:
[530] The first communication Mrs Damaskos had with the solicitors in relation to the potential franchise to Mr Emanuele, was an email sent from Mrs Damaskos to the solicitors dated Monday 27 June 2016.[11] This was only the second time the communication had been had with Mr Emanuele after he had completed a franchise application form.[12] The disclosure document was provided to Mr Emanuele on 3 June 2016, accompanied by an email letter signed by Mrs Damaskos, addressed to Mr Emanuele.[13] This was delivered after Mr Emanuele had completed the franchise application form, but he had not yet been approved as a franchisee. When the disclosure document was provided to Mr Emanuele, the generic document was prepared by the solicitors. It was in a PDF form. Mrs Damaskos said that she had made no changes to the PDF document. As I understood her evidence, she was attempting to persuade me that she could not make arrangements for the amendment of a PDF document. However, she said that the generic document was updated in 2015, and was submitted to Mrs Damaskos once it was finalised at that time.[14] The document that had been sent to Mr Emanuele was the finalised generic document settled by Mrs Damaskos.[15]
[531] Mrs Damaskos said that the document she sent was the template document. It was a generic document. She could not recall whether there was an option A and option B in Schedule B, however, it had to include those options because the generic document was not for a specific store, but she assumed so. [16]
[532] She was then taken to the document sent to Mr Emanuele.[17] It shows that in Schedule B, the second option is filled in, that is the site has not been previously franchised. Mrs Damaskos was asked to explain this. She said that she did not know why DC Strategy had updated the document in that way.[18]
[533] This document is to be found in Exhibit A2 Tab 1A commencing at page 32A. Within that document are a number of schedules. Schedule A is to be found at page 32A. Schedule A[f] describes the franchise business bought back by the franchisor. Disclosure is made of a purchase back by the Funk Group of the Funk Coffee and Food Victoria Square premises and the Funk Coffee and Food Angas Street premises in 2 October 2013. There is then a Schedule B which is to be found at page 32W of the Exhibit. It reads as follows:
Schedule B SB franchise site FS.
Where applicable, this Schedule B sb will record whether the territory or site to be franchised to the franchisee has been subject to a previous franchise granted by the franchisor.
[10] [2021] SADC 88.
[11] Exhibit A2, vol 3, tab 61, p 933.
[12] Exhibit A2, tab 20.
[13] Exhibit A2, vol 3, tab 41, pp 683-872.
[14] T924.10-14.
[15] T924.34-37.
[16] T925.18-35.
[17] Exhibit A2, p 778.
[18] T927.6-.11.
[534] Below that entry is a box. The box carries the heading as follows:
Site or Territory previously franchised?
[535] Within the box the following entry is to be found:
This site has not been previously franchised.
[536] A further copy of this document is to be found at Tab 41 of Volume 3. Mrs Damaskos agreed that a copy of the disclosure document was provided to Mr Emanuele as at 3 June 2016.[19] She said that when producing that document, the generic form had been produced and that had been updated by the solicitors DC Strategy in late 2015.[20] The document was a PDF and she made no changes to the PDF document. The document was updated by DC Strategy and that firm submitted it to her once it had been finalised.
[19] T923.32.
[20] T924.1-4.
[537] Exhibit A18 was an earlier draft of the disclosure document prepared in 2015 by the solicitors. Mrs Damaskos said that the document sent to Mr Emanuele was the final copy of the October 2015 disclosure document that had been finalised by the solicitor.[21] Mrs Damaskos said that this document had to be updated annually and she used the generic version for the update and then provided it to Mr Emanuele.
[21] T924.25-27.
[538] She was asked whether, in completing the Schedule B that she identified that there were two alternatives: that the site or territory had been previously franchised or that it had not been previously franchised. Mrs Damaskos denied that she gave consideration to that question and said that she sent the generic copy of the document along with the other templates including a copy of the Code and a copy of the franchise agreement template on 3 June 2016.[22] She could not recall what was in Schedule B; it was merely the generic document. It was then put to her that in Schedule B where the box is filled in to state that the site had not previously been franchised, that that was a change that she had made to the generic disclosure document finalised in late 2015.[23] Mrs Damaskos denied that proposition. She said that the template document was finalised in October 2015. She then said that she could not amend that document that comes from DC Strategy unless it is an editable form for the changes per the initial draft if they wanted her to add comments.[24] As I understood this evidence of Mrs Damaskos, it would only be if the solicitors asked her to make changes or add comments that she would make any changes to the generic form of the document that had been prepared by the solicitors and sent by her. Earlier in her evidence, Mrs Damaskos had said that the generic version completed in late 2015 could not include in Schedule B whether or not the site had been franchised because it was relating to a specific site. Mrs Damaskos said that she did not know why the solicitors had updated the generic copy.[25]
[22] T925.14-22.
[23] T926.1-6.
[24] T926.7-11.
[25] T927.8.
[539] I detected that this response raised a difficulty within the solicitor and client relationship because the statement within the disclosure document in Schedule B that the site had not previously been franchised is incorrect and potentially misleading I considered that there was a potential conflict between solicitor and client which, if unresolved amounted to an actual conflict. At this time this evidence was given, no issue was raised by the respondents’ counsel. I considered that the matter had to be resolved. I therefore asked the following questions:
HIS HONOUR
Q. Do you think they might have updated it without your instructions.
A. Yes, your Honour, because I don't - I don't actually physically go in and update this. I can't update that without it being track changed. The document that comes to me is the final version, I can't edit a final version.
Q. So you didn't give instructions for the amendment to be made -
A. No.
Q. - from the template.
A. No.
Q. But you would accept that the amendment has been made -
A. Yes.
Q. - in that it now reads 'This site has not been previously franchised'.
A. Yes.
Q. So are you saying the solicitors did that of their own account.
A. Yes.
Q. Without your instructions.
A. Yes.
[540] The evidence of Mrs Damaskos was that, without instructions, the solicitors had, on their own account, inserted an entry into a disclosure document prepared for the respondents which was misleading.
[541] This in turn raised a number of quite difficult issues. The first, the ongoing relationship between DC Strategy as solicitors and the respondents as clients. The second, was the issue of the credibility of the witness. The third, was the question of the continuation of the trial in the then circumstances having regard to that evidence.
[542] In that background, the following exchange took place:[26]
[26] T927.32 – 928.33
HIS HONOUR: Do you need to get instructions, Mr Belperio?
MR BELPERIO: Yes, I can take instructions, but I -
HIS HONOUR: It's being alleged against your solicitors, in respect of a matter which is of vital importance to this trial, that they've amended a document without instructions and have done so in a way which is going to be alleged to be misleading.
MR BELPERIO: Yes.
HIS HONOUR: They have to consider their position.
MR BELPERIO: Yes.
HIS HONOUR: I don't want to overdramatize this but I also don't want anyone to be left out on warning.
MR BELPERIO: Yes. Could I ask for a short break?
HIS HONOUR: Five minutes?
MR MUNT: Before we break, can I ask one further question?
HIS HONOUR: Yes, certainly.
XXN
Q. Mrs Damaskos, I took you to vol.3 and in particular to tab No.61, which is an email from yourself to Mr Mak and Andrew Barr of 27 June 2016.
A. Yes.
HIS HONOUR: I'm sorry, what tab did you say it is?
MR MUNT: 61.
XXN
Q. And your instructions were that this was the first time that you had communicated with DC Strategy in relation to the prospective franchise to potentially be taken by Mr Emanuele.
A. Yes.
Q. So why then would there have been any basis for DC Strategy to have made any change to the generic disclosure document before you provided it to Mr Emanuele in your email of 3 June 2016.
A. You'd have to go back and ask the solicitors of the time, that are no longer at DC Strategy unfortunately, but I haven't ever asked them to put that in and I believe that was the generic document that was forwarded to me.
[543] There was a break for 15 minutes for counsel to obtain instructions. Upon resumption, I received the following submissions:[27]
[27] T928.36-930.20.
HIS HONOUR: Mr Belperio.
MR BELPERIO: Your Honour, I've taken limited instructions. If it pleases the court, I'm happy for the cross-examination to proceed and I propose to take fuller instructions at the end of the cross-examination from both of my clients, which will enable an assessment as to whether there is, in fact, a conflict.
HIS HONOUR: That merely underscores the problem. I understand what you're saying to me, but I have evidence now, I have evidence that's now been given to me three times in relation to something. It's going to be put to me that that's not true. It's going to be put - it may not be put to the witness, but if that's so, then there is a significant element of credibility involved in that, which will be put to me is to infect the whole of the evidence, or a substantial part of the evidence. If that evidence is known to be untrue and is known to be untrue by your instructing solicitor, she has a duty to me to tell me something.
MR BELPERIO: Yes.
HIS HONOUR: And she has a duty to act in a particular way, and if she acts in a particular way, I'll completely understand it and I'll understand your position, but to delay is to compound the problem.
MR BELPERIO: Yes. There is a difficulty, your Honour, there is no-one at DC Strategy. No-one works there now who worked in 2016, as a lawyer, I'm instructed.
HIS HONOUR: I think the only appropriate thing for me to do is to say to you that to proceed is fraught because of the problems of the compounding of what might be the difficulties created by the evidence. I think I can only say that and do no more, but I'm not assisted by you telling me that there's nobody there. One might imply from that that there might be a presumption of regularity in relation to instructions, for example. If the evidence is wrong, then where does that take this trial and where does this take the question of the credibility of the witness?
MR BELPERIO: Yes.
HIS HONOUR: That's my concern.
MR BELPERIO: Yes. Given your Honour's comments, is it appropriate to break until tomorrow morning?
HIS HONOUR: Yes. People ask for 15 minutes and I say 'You probably need three hours, and you might want to go and talk to somebody'. Look, I think we should break until tomorrow morning.
MR BELPERIO: Yes, thank you, your Honour.
HIS HONOUR: Mr Munt.
MR MUNT: I'm in your Honour's hands. Obviously I'd prefer to -
HIS HONOUR: I know you would.
MR MUNT: - proceed. Can I move to another topic?
HIS HONOUR: No. No, because you would have anyway, but that's the point.
MR MUNT: Yes, your Honour.
HIS HONOUR: You don't need any more answers, on the issues that I'm raising. I have to ensure regularity, and as I've said, I'm going to ensure that nobody is left on a limb. They have to have the chance to have a mature reflection and come back to me
[544] On the following day, the trial resumed. I was informed by counsel that instructions had been obtained. I was informed of the following matters:[28]
[28] T932.1-934.12.
MR BELPERIO: As a result of what transpired yesterday afternoon my instructing solicitors are only prepared to continue to act on certain terms and those terms are not acceptable to the clients with the consequence that I'm unable to appear on instructions from my instructing solicitors. As I said, it pertains to the terms of engagement upon which my instructors are prepared to continue.
My proposal, if it pleases the court and I'm in the court's hands, is that the respondents to this action be given an opportunity to consider who their new - as your Honour knows, there are town agents, Hume Taylor on file but they've had no involvement, really at all, it's been DC Strategies as the solicitors.
If it please the court my proposal is that we continue on 6 October with the eight days set aside by which time the clients will have had an opportunity to get new instructors. The respondents' preference actually was to finish at least the cross-examination of Ms Damaskos. I'm just not sure how that would be probable.
HIS HONOUR: It's not I don't think. I have some bad news about that. I've negotiated with the Chief Judge last night, I won't know until the end of the day today whether that time's available. As part of that negotiation I'd carved out more time next week, so I'd shifted away Wednesday morning, that's gone. So I had more time next week. In light of what the chief was saying to me about time. Leave that with me but you're first application is to seek leave to withdraw.
MR BELPERIO: On behalf of my instructing solicitors, yes.
HIS HONOUR: You no longer have instructions to be retained to put the respondents' case in this trial.
MR BELPERIO: Yes.
HIS HONOUR: And you would seek to withdraw.
MR BELPERIO: Yes.
HIS HONOUR: You have my leave. Mr Belperio, I'm very grateful to you for the position you've taken and I'm very grateful to you that you've had some difficult decisions to make and that the relation between bench and bar is sacrosanct and you've fulfilled your duty and I'm very grateful. You have my leave to withdraw.
MR BELPERIO: Thank you.
HIS HONOUR: Mr Munt?
MR MUNT: My only comment would be that I appreciate DC Strategy have been the primary solicitors. There are, however, town agents that are on record as solicitors for the respondents. Mr Belperio is, of course, fully prepared in relation to the matter. In my submission there should be no obstacle, given the extent to which the cross-examination has already proceeded, for, at a minimum, the cross-examination to be completed next week with the town agents remaining to be on record or other -
HIS HONOUR: Stop there. The town agents are town agents for their principal. Their principal is DC Strategy.
MR MUNT: Yes.
HIS HONOUR: The town agent's position is no different from their principal and I fully understand the position of DC Strategy because I referred to it yesterday. Therefore I cannot be with you on that argument.
MR MUNT: Thank you.
HIS HONOUR: The best I can do is bring you back on Monday afternoon and get a report back in relation to where we are in the matter.
MR MUNT: Thank you.
HIS HONOUR: Someone needs to act quickly, it's not you, it's the respondents need to act quickly at least to get their house in order and to tell me what's proposed. If possible I will use everybody weapon in my armoury - or every effort, is a better expression - every effort to carve out those days from 6 October to finish this matter. You would anticipate the difficulties of that but there is sufficient time, one might think, between now and then. However, I've got to manage this.
MR MUNT: I understand.
HIS HONOUR: You'll have an application for costs which I will hear and I will give full consideration to in all respects. I don't think we should ventilate that now.
MR MUNT: No, I agree.
HIS HONOUR: I think what we should do is adjourn the matter until 2.15 on Monday.
[545] I was therefore given to understand that the firm of solicitors DC Strategy were only prepared to continue to act on particular terms. I was told that those terms were not acceptable to the respondents including Mrs Damaskos. Therefore, DC Strategy terminated the instructions given to counsel on the basis that they were would no longer continue on the terms of engagement and from which the instructions had been given to counsel.
Following these exchanges, there was then an adjournment from August until October 2020 to enable new solicitors to be instructed and for the appropriate retainer to be settled between those new solicitors and counsel. In my opinion, this was sufficient time within which further instructions could be given about this topic, the controversy concerning which led to the adjournment of the trial. As my first judgment makes clear, Mrs Damaskos was aware that the statement within Schedule B, that the proposed franchise store had not previously been franchised, was untrue. That was known to both her and the other directors of the respondents from the outset. The evidence given by her that the content of Schedule B was in error, was not an epiphany on the day that she gave evidence. There was ample opportunity in the very long lead up to the trial of this action for that issue to have been identified and resolved. This is particularly the case where allegations are made against solicitors by the clients which amount to misconduct. In this action, there had been robustly fought interlocutory hearings about a number of issues in the proceedings concerning discovery and the production of relevant documents. It was not contended that at the time Mrs Damaskos gave evidence, she discovered for the first time the inaccuracy of the documents. The Court was not assisted by any further evidence from Mrs Damaskos on this topic.
If permission was granted to read the affidavits into evidence, there would then need to be further examination in chief and then cross examination of Mrs Damaskos. An application could have been made at the recommencement of the trial in October 2020 for that to occur. No such application was made and Mr Belperio continued to appear as counsel for the respondents on instructions of the new firm of solicitors, Hume Taylor & Co. On the state of the evidence, a decision was made by the respondents not to lead further evidence from Mrs Damaskos on the point. That was a matter for those respondents. No submission has been made that it was not possible at that time to make an application to lead further evidence in chief from Mrs Damaskos on the topic and for there to be cross examination having regard to that further evidence. That is, no basis was then put that the information then possessed by the respondents could not have been made the subject of an application to lead further evidence. That is a decision that has been made by the respondents at the time.
In that background and in the background of the other evidence of the respondents in the trial, I reached my conclusion and delivered judgment on 2 August 2021. I discussed the evidence of each witness in some detail and where necessary, made findings on the creditworthiness of the evidence of those witnesses. I employed my usual approach of not placing excessive emphasis upon credit findings, and I focussed upon the findings of fact that led to the conclusions that I reached. It was only where necessary that these were accompanied by credibility findings.
From [547] in my judgment of 2 August 2021,[29] I did make credit findings about the evidence given by Mrs Damaskos. I initially dealt with her evidence about the Schedule B. I found that her evidence on the topic was not creditworthy. I then developed reasons why I did not accept the other evidence of Mrs Damaskos and I will assume a knowledge of the content of the paragraphs of my judgment from [548] onwards.
[29] [2021] SADC 88.
My dissatisfaction with the evidence of Mrs Damaskos was broadly based as that discussion refers and arose from my dissatisfaction about her evidence on a number of disparate topics and documents. At [549], I said I would not accept, without further proof, that a solicitor would unilaterally amend a document without instructions. No such evidence was given despite the delay of several months between the time when the issue first arose, the adjournment and then the recommencement of Mrs Damaskos giving her evidence in cross examination.
I have read the content of the three affidavits FDN 160, FDN 161 and FDN 163. Each purport to address the credit findings that I have made about Mrs Damaskos connected with the document given to the applicant Gabjet including Schedule B. The purpose of the affidavits is said to be connected with the application by Gabjet for indemnity costs as I have described above. The respondents submit that the affidavits are connected only with the issue of the level of costs payable by them in the action. One point of focus of Gabjet in this submission in support of the claim for indemnity costs are some of the findings I have made about portion of the evidence given by Mrs Damaskos. The contentions of Gabjet are that these findings are a sufficient basis for this court to make an order for indemnity costs in favour of Gabjet. My reading of the affidavits reveals that they purport to disclose a factual basis which better explains the position of Mrs Damaskos and casts a better light upon her evidence.
I consider that there are at least three errors in this approach. The first is that if this material was relevant, there was ample opportunity for it to have been obtained in the adjournment between 28 August 2020 and the resumption of the trial on 6 October 2020. There has been no application by Mrs Damaskos to lead further evidence about the topic that caused such a dramatic change to the relationship between the respondents and their former solicitors.
The second follows the first. The application is, in the main, an attempt, after judgment, to explain away the circumstances which, in part, led to those findings. As I made clear at [548] of my judgment, my dissatisfaction with the evidence given by Mrs Damaskos was very broadly based and was also connected with a broad range of other pieces of evidence which were inconsistent with versions that she gave on so many topics. I was not satisfied that even if those documents were accepted, it would have made any difference at all to my assessment of the position of the respondents.
The third is that as I said at [544] of my judgment, at a time after Mrs Damaskos had given evidence, that the firm of solicitors have, without instructions inserted an untrue statement into the Schedule B document, those solicitors were only prepared to continue to act on certain terms that were not acceptable to the respondents. That issue therefore pertained to the terms of the engagement upon which the instructing solicitors were prepared to continue. It is unnecessary to do more than say that in their professional position, the firm of solicitors were not prepared to continue to act except upon a certain factual basis. Those terms were not accepted. It is also difficult to see how those solicitors could ever have continued to act in the proceedings. They faced an irreconcilable conflict of interest. On the one hand, they were accused of amending a document in a way which constituted misleading conduct. No application was then made by Mrs Damaskos to give evidence that this was the case and for her to face cross examination on that topic. If it was the case that those solicitors had made that error, then they had a conflict of interest and could not continue to act. But that was not the way the position developed despite that conflict. Rather, the solicitors were only prepared to continue to act on a certain factual basis which was not acceptable to the respondents.
The court was told about the terms upon which the solicitors were prepared to act but not the factual basis. I consider that for the respondents to have informed the court of this situation highlights the difficulties created by the conflict in which those solicitors were placed.
Also, there is no affidavit from the firm of solicitors DC Strategy addressing this issue. In the result, it would be necessary for there to be a further trial within the trial in which multiple issues arise including disclosure of the solicitor’s files, privilege arguments and disputes about cross examination to name only a few.
Those easily identifiable difficulties are not in and of themselves a reason to refuse the application. Their importance is that they underscore the difficulties facing the respondents’ submission that the content of the affidavit material may be quarantined to the issue of the determination about costs. That determination necessarily must, on the respondents’ application, proceed on a factual basis different from the judgment in the action. That is both inappropriate and fails the test of logic because, to employ an analogy from property law, its “metes and bounds” could not be defined or controlled.
It was for those reasons that I refused to allow the respondents to read those affidavits into evidence.
I then turn to the principal submissions on costs. The applicant contends that it is entitled to an order for costs on an elevated basis because the standard award of costs on a party/party basis would be insufficient in all of these circumstances. It therefore seeks its costs on an indemnity basis. It contends that the respondents have protracted the proceedings, that the respondents have misled the court and have plainly acted unreasonably in the litigation. Again, I point out that there is no evidence that such conduct pertained to the claim of Jetgab. Therefore, the principal submission of the applicants on that basis is fraught.
I have earlier set out portions of my judgment from [546]. These disclose my criticisms of the evidence given by Mrs Damaskos about how Schedule B of the Victoria Square disclosure document was completed. I did not accept her evidence which I thought was demonstrably wrong, without credibility and of doubtful truth. I then went on to make other findings about her evidence based upon my assessment of the evidence generally. I made other consequential findings about the evidence given by Mrs Damaskos on this topic which were highly critical of Mrs Damaskos: viz at [822] and at [943]. The subject of this criticism was one topic amongst many that were canvassed in cross examination of the respondents’ witnesses. In the main, I found much of the evidence led from the respondents’ witnesses to be unsatisfactory. As I have earlier pointed out, when Mr Damaskos was pressed about a number of aspects of his evidence, he readily agreed with the propositions put to him about the deficiencies in the Business Profile Document (viz Exhibit P2, vol 1, tab 2) (judgment at [602] et seq) and that information requested by Gabjet could have been provided but was withheld or not supplied.
Arguendo, something was sought to be made by the applicants about a number of other items of evidence. There was a particular focus upon the evidence led by the respondents which sought to make good criticisms of the manner in which the Victoria Square store operated under Gabjet. This evidence did not achieve its stated aim. It took less than an hour of hearing time and it did not require much consideration. That is not a basis for an elevated costs order against a party leading such evidence about a pleaded issue but which failed. That said, I accept that this evidence falls into a different category than the evidence given by Mrs Damaskos about which I made such strident criticisms and about which there was a longer than usual cross examination.
The applicant Gabjet also applies for an elevated costs order based upon the respondents’ attitude to disclosure/discovery. There is some background that must be explained. During 2019, I was asked by the docket judge to hear and determine a very broadly based application for further and better disclosure brought by Gabjet against the respondents. I made many of the orders sought by Gabjet where the respondents contended that the application was not soundly based and that the disclosure made by the respondents was sufficient. This is only a portion of the background to which I have earlier referred about there being very vigorously fought interlocutory hearings in relation to a number of matters. Gabjet did not fully succeed on its application and I made an order that it have 75% of its costs of the application. As I have said, the essential basis of the application was that, for example, the respondents have not made full discovery of the operating and financial statements of the Victoria Square business at the time that it operated that business. To that point, the respondents had wrongly refused to make discovery of those documents connected with its operations of the store during that time. The proper interest of Gabjet was that it wished to compare the actual results recorded by the respondents in the operation of the business against the representations made by it leading to purchases of the Victoria Square business by Gabjet.
In effect, Gabjet now submit that the disclosure made following such application showed not only that the respondents had failed to make proper disclosure but that its vigorous opposition to that application was misconceived (viz the judgment at [115]-[116]). At one level, I have already dealt with the question of costs of the application and by the orders already made on the topic of costs. I accept that position but this contention of the applicants travels upon different ground. The material discovered following that application was pivotal in many respects because it disclosed the poverty of the discovery made by the respondents up to that time as well as the asinine attitude of the respondents to questions submitted by Gabjet about further financial information which it sought prior to the time of entering into the contract to purchase the Victoria Square store. I accept that this material was not produced in discovery and then only after long correspondence between solicitors and then a vigorously fought interlocutory application.
I also found that the denials of Mrs Damaskos about the ability of the respondents to provide the requested specific financial information about the operation of the Victoria Square store were misconceived: she was a qualified accountant with a long commercial background and she was aware that upon request, that information could have been readily provided by the firm BCFR, the accountants who prepared the financial statements of the respondents.
Gabjet then relies upon what it describes as a significant findings: the sale price of the Victoria Square store could not be justified in light of all of the information possessed by the respondents; the Business Profile document was deliberately misleading compounded by the refusal to provide requested financial information; the falsity of the suggestion that Kindred had mismanaged the Victoria Square store; the falsity of the evidence about the operation of the store by Kindred Pty Ltd and the resolution of the claims by Kindred against the respondents for misleading conduct leading to Kindred Pty Ltd purchasing the Victoria Square store; the understatement of the costs of goods sold and the wages figures; and the calculated way in which the respondent acted to induce Gabjet.
Gabjet also complains about the conduct and approach of the respondent to the litigation which, it contends, went beyond a reasonable approach. This included making many unsubstantiated allegations against the Kindred Group Pty Ltd and its management of the business which was then repurchased from that entity by the respondents.
Gabjet contends that when all of these matters are considered together, a conclusion may be reached that, in this trial, the respondents engaged in misconduct or plainly unreasonable conduct and that an indemnity costs order is justified.
Jetgab for its part, contends that it has succeeded on a number of claims although it has failed in its principal claim for misleading conduct but will be successful in obtaining a monetary judgment and claims for declaratory relief. For the avoidance of doubt, it is in the same position as Gabjet in relation to equitable compensation for the value of the fixtures and fittings and plant and equipment. As well, I have found that clauses 15(1)(b) and 31(2) of the Code and the Good Faith Obligation in the Code have been contravened. Jetgab, as well as Gabjet, are entitled to declaratory relief in relation to those contraventions and those connected with the marketing funds.
Again for the avoidance of doubt, I was and am satisfied that the respondent wrongfully terminated the Jetgab franchise agreement although, in time, Jetgab, (as for Gabjet) accepted that repudiation and confined its remedy to a claim for damages.
I will take all of these matters into account in assessing the issue of costs including my assessment of the time spent in the trial on each of those topics. It will be necessary for the parties to bring in further draft minutes of order to reflect these reasons.
I have also taken into account all of the submissions made by Gabjet and Jetgab at [68] et seq of the primary costs submissions of 21 October 2021.
In considering the costs submissions of the respondents, it is not necessary to consider paragraphs 1-15 thereof insofar as they relate to the application to read further affidavit material on the issue of costs. I have set out my reasons on that topic earlier in these reasons.
On the application for indemnity costs, the parties agree that the applicable principles are generally understood and are settled.
The first general principle is that each case will turn on its own peculiar facts. So much is obvious when assessing reasonableness. That question will always give rise to variable results because unreasonableness or misconduct which may excite the jurisdiction may be evidenced throughout the whole proceedings or in part only. Where part of a proceeding is affected, sometimes a more difficult decision is to be made because very often, the effect of such conduct is lost in the overall consideration of a larger volume of evidence. That is why the approach of the court must be to look at the overall effect so that if a proceeding is conducted unreasonably, it will be necessary to identify, for example, dishonesty as misconduct or some other factual basis that means that such conduct satisfies the epithet of misconduct sufficient to ground the jurisdiction.
The misconduct must be connected to litigation such that, for example, it prolongs the litigation. This is but one example. In this context, the court is required to closely examine the nature, course and conduct of litigation as a whole. This is necessary for a number of reasons, two principal reasons being that such an assessment can only be made when a holistic view of the whole action is taken; and the second is that the entitlement to costs historically has commenced always with a presumption in favour of an order for party/party costs. This historical development can be traced largely to the acceptance of a difference between party/party costs and solicitor/client or indemnity costs and the reasons therefore, and the recognition of an entitlement to an elevated order for costs in only particular circumstances. The foundation of that common law rule is the acceptance of the usual costs order being for party/party costs. Although in recent times the distinction has become a little blurred, it is generally accepted that a party/party costs order reflects the appropriate measure of costs that should be paid by the unsuccessful party to the successful party. It has never been viewed as a costs indemnity and there are many obvious reasons including reasons of public policy why that is and should remain the rule.
As a result, the focus remains on the conduct of the impugned parties. As I said to the parties arguendo, that a party may take a very vigorous approach to defending an action is not a basis for such an order, nor is an adverse credit finding or an adverse order on a late disclosure application a basis for making such an order. A vigorous defence is not evidence of a misconceived approach. A dispute requiring resolution on an interlocutory basis falls under the same rubric and for the same reasons.
Subject only to two matters discussed below, I am not satisfied that in this case, the applicants or the applicant Gabjet is entitled to an order for indemnity costs and is entitled to an order for party/party costs of the proceedings.
The first matter of exclusion concerns two separate matters. One concerns the evidence given by Mrs Damaskos. In my judgment, I have described in detail my deep dissatisfaction with this evidence of Mrs Damaskos. These findings disclose that significant portions of this evidence was demonstrably wrong but also, that on any basis, Mrs Damaskos was aware or reasonably to have been aware of the infelicity and incongruity of this evidence. These include her evidence about the Schedule B discussed above, her evidence about the Kindred Group Pty Ltd, about the availability of financial records of the Victoria Square operation, about the absence of proper reporting of the total of goods sold and the expenses of that business which she was aware of at least from the time of the dispute with Kindred Group Pty Ltd and then her misleading conduct about the dispute with Kindred Group Pty Ltd in that background. During the course of evidence, it became necessary for the respondents to appoint new solicitors for the reasons I have already explained. In that very narrow set of circumstances, in light of the whole of the background that I have discussed above, I consider that the applicant Gabjet would in the ordinary course, be entitled to an order for indemnity costs for the period of the trial from the commencement of the respondents’ case until the end of the cross examination of Mrs Damaskos.
The second principal issue concerns the overall orders for costs. It appears that each party accepts that an overall percentage figure for costs across the successful claims of Gabjet and the claims of Jetgab to the extent that it was unsuccessful is appropriate. Each party has made detailed submissions which I have taken into account. The respondents contends that an order for 50% of the party/party costs of the trial is the appropriate order given that the substantive claims of misleading conduct brought by Jetgab failed.
The applicable authorities disclose that the process is not mathematical and include my overall impressions of the trial and the disposition of issues within the trial. A broad axe approach may be used and I think that is the appropriate approach here.
In their submissions, the respondents focussed upon what were said to be the failures of Jetgab in its claims. I am unable to completely accept that submission. As my judgment discloses, Jetgab has succeeded in obtaining a number of remedies even though it failed in its principal misleading conduct case. As well, the overall impression may be obtained that the Jetgab case occupied comparatively little court time.
Although I have formed the view that Gabjet Pty Ltd has an entitlement to an order for indemnity costs in relation to the issues that I have identified, I consider that one order for costs in relation to the whole proceedings is the more appropriate way to proceed having regard to my overall impressions and accepting that this is not a mathematical process. Ultimately, it is a matter for the exercise of my discretion. In that exercise, I have taken into account all of the submissions put to me. I have canvassed almost all of them above. In that background, I would refrain from making any order for indemnity costs but rather content myself with making one order for costs of the proceedings. That order for costs takes into account all of the relevant circumstances and as it were, the “unders and overs” issues that relate to costs that were put to me by the parties in their costs submissions.
In that background, I consider that the appropriate order for costs of the proceedings is that the respondents pay 80% of the costs of trial on a party/party basis. This order includes any order for the costs incurred by any party in the application of Gabjet Pty Ltd of 22 September 2021 and the argument on costs.
I have deliberately not set out in these reasons any consideration of the orders that are required to be made having regard to my findings in relation to the judgment and in relation to costs. It will be necessary for there to be a further directions hearing and for the parties, prior to that hearing, to bring in either agreed or separate minutes of order to reflect these reasons. Those minutes of order must reflect the order for costs in favour of both applicants for 80% of the costs of the action, on a party/party basis.
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