Gabjet Pty Ltd v Funk Franchise Pty Ltd

[2021] SADC 88

DISTRICT COURT OF SOUTH AUSTRALIA

(Civil)

GABJET PTY LTD & ANOR v FUNK FRANCHISE PTY LTD & ORS

[2021] SADC 88

Judgment of his Honour Judge Slattery  

2 August 2021

CONTRACTS

EQUITY - GENERAL PRINCIPLES - FRAUDULENT AND INNOCENT MISREPRESENTATION

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - DUTIES AND LIABILITIES OF OFFICERS OF CORPORATION - OFFENCES - FALSE OR MISLEADING STATEMENTS OR INFORMATION

TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION  - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS

The Victoria Square store

On 17 June 2016, the applicant Gabjet Pty Ltd agreed to purchase from Funk CBD Pty Ltd a Funk franchise business operated from premises in Victoria Square, Adelaide. Between 17 June 2016 and 14 July 2016, Gabjet Pty Ltd agreed to enter into: a franchise agreement with Funk Franchise Pty Ltd and a license to occupy with Funk Leasing Pty Ltd.

Gabjet Pty Ltd contends that at the time of and prior to the entry into these agreements, at least eleven financial representations were made by Funk Franchise Pty Ltd and Funk CBD Pty Ltd all of which were misleading, and which were made in trade and commerce.

Gabjet Pty Ltd contends that in reliance upon this and other misleading conduct of those respondents, it entered into the Victoria Square sale and purchase agreement, the franchise agreement for the Victoria Square store and a license to occupy the Victoria Square store and as a result, it has suffered loss because, on a proper assessment, the value of the business which it purchased for $410,000 was nil and the only benefit it obtained was the written down value of the plant and equipment, fixtures and fittings of that business.

Gabjet Pty Ltd contends that the loss it suffered was caused by the conduct of the respondents.

Gabjet Pty Ltd further contends that as the guiding hands and minds of each of the respondent companies, each of Mrs Joanna Damaskos and Mr Arthur Damaskos and so Funk Coffee and Food Pty Ltd, Funk Leasing Pty Ltd and Funk Franchise Pty Ltd were knowingly concerned in or aided and abetted the breaching conduct of Funk CBD Pty Ltd in and about the procurement of Gabjet Pty Ltd to purchase the business and to enter into the franchise agreement.

Gabjet Pty Ltd further contends that as a result of its reliance upon the breaching conduct of the respondent corporations and the individuals, it is entitled to recoup its assessed loss being the difference between the amount paid for the business and the actual value of the business, namely nil. It further contends that it is entitled to recover from the respondents the amount of its trading losses for the period to 13 November 2018, being the date upon which the respondents repossessed the Victoria Square premises and recommenced operating the business at those premises.

Following the repossession of the business on 13 November 2018, the respondents have not accounted to Gabjet Pty Ltd for the value of any asset belonging to Gabjet Pty Ltd of which it took possession on 19 November 2018.

Gabjet Pty Ltd further contends that the Franchising Code of Conduct under the Competition and Consumer Act had application to the circumstances of the granting of the franchise by Funk Franchise Pty Ltd.

In the period between 2010 and 2013, Kindred Group Pty Ltd was a franchisee of Funk Franchise Pty Ltd having purchased the business from the respondent, Funk Franchise Pty Ltd.

In 2012, Kindred Group Pty Ltd alleged that Funk Franchise Pty Ltd had engaged in misleading conduct in making representations to the Kindred Group Pty Ltd which induced it to purchase the Victoria Square store, requiring it to repurchase that business or proceedings would be issued.

In 2013, Funk Franchise Pty Ltd entered into a deed of settlement with Kindred Group Pty Ltd for the repurchase of the Victoria Square store and the Angas Street store for payment to Kindred Group Pty Ltd of the sum of $805,000 together with the discharge of liability of Funk Franchise Pty Ltd.

In its disclosure document, Funk Franchise Pty Ltd represented to Gabjet Pty Ltd that it had repurchased a business of the Victoria Square store and later orally informed Gabjet Pty Ltd that the repurchase occurred because Kindred Group Pty Ltd were mismanaging the businesses. Funk Franchise Pty Ltd failed to inform Gabjet Pty Ltd about why Kindred Group Pty Ltd ceased to operate those businesses as required by items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code.

Gabjet Pty Ltd contends that if it had been properly informed of the circumstances in which the previous franchisee had ceased to operate, it would have had the opportunity to make enquiries of the officers of Kindred Group Pty Ltd and ascertain the true position about the termination of the franchise arrangements between Frunk Franchise Pty Ltd and Kindred Group Pty Ltd.

Whether Funk Franchise Pty Ltd failed to comply with the requirements of items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code.

Whether the conduct of the respondents in providing the financial information, in making the financial representations and the other conduct was misleading conduct for s 18 of the Australian Consumer Law.

Whether Gabjet Pty Ltd relied upon that conduct and, induced thereby, entered into the Victoria Square sale and purchase agreement, the franchise agreement and the license to occupy.

Whether Gabjet Pty Ltd has suffered loss and damage resulting from its reliance upon the conduct of the respondents and the individuals.

Whether in breach of s 75B of the Competition and Consumer Act 2010, Mrs Damaskos and Mr Damaskos and so Funk Coffee and Food Pty Ltd, Funk Leasing Pty Ltd and Funk Franchise Pty Ltd were knowingly concerned in or aided and abetted Funk CBD in engaging in conduct in breach of s 18 of the Australian Consumer Law.

Whether the loss and damage suffered by Gabjet Pty Ltd was caused by the respondents’ breach of s 18 of the Act.

Whether Gabjet Pty Ltd has suffered loss and damage in the amount claimed or in any other amount and if so, what amount.

Whether the respondents are entitled to an order on their counterclaim.

Held:

1. Funk Franchise Pty Ltd failed to comply with the requirements of items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code by failing to inform Gabjet Pty Ltd of the circumstances in which the previous franchisee, Funk Group Pty Ltd ceased to operate the Victoria Square store.

2. The statement by the respondents that they terminated the franchise arrangements with Kindred Group Pty Ltd because of mismanagement of the Victoria Square store were untrue and misleading; as a consequence, Gabjet Pty Ltd made no enquiries of Kindred Group Pty Ltd and lost the opportunity to obtain an understanding about why Kindred Group Pty Ltd terminated its franchise arrangements with Funk Franchise Pty Ltd.

3. The whole of the conduct engaged in by the respondents including but not limited to the provision of the financial information and the making of each of the representations to Mr Emanuele and so to Gabjet Pty Ltd occurred in trade and commerce and was misleading conduct for s 18 of the Australian Consumer Law.

4. Mr Emanuele, and so Gabjet Pty Ltd, relied upon that misleading conduct.

5. Induced by the misleading conduct, Gabjet Pty Ltd executed the Victoria Square sale and purchase agreement, the franchise agreement and the license to occupy.

6. Gabjet Pty Ltd has suffered loss and damage as a result of its reliance upon the misleading conduct engaged in by the respondent.

7. The loss and damage suffered by Gabjet Pty Ltd was caused by the breaching conduct engaged in by each of those respondents.

8. Each of Mr Damaskos and Mrs Damaskos and so Funk Coffee and Food Pty Ltd, Funk Leasing Pty Ltd and Funk Franchise Pty Ltd were knowingly concerned in or aided and abetted the breaches of Funk CBD Pty Ltd.

9. The loss and damage suffered by Gabjet Pty Ltd may be calculated by the deduction from the sum paid by Gabjet Pty Ltd for the purchase of the Victoria Square store plus fees less the value of the business at the time, namely the written down value of the plant and equipment, and the fixtures and fittings.

10. Gabjet Pty Ltd is further entitled to an assessment of its loss following the conversion by the respondents after 19 November 2018 of the plant and equipment, fixtures and fittings owned by it at that date.

11. Gabjet Pty Ltd is not entitled to an order for the recovery of its trading losses.

12. The respondents are entitled to orders upon their counterclaim.

13. The court will hear the parties further in relation to the final calculation of the damages payable to Gabjet Pty Ltd, the calculation of interest and on costs.

The Waymouth Street store

On 10 October 2016, Mrs Damaskos of the respondents provided to Mr Emanuele a business profile document containing financial information for the Waymouth Street store conducted by Funk Coffee and Food Pty Ltd for the period between 1 July 2015 to 30 June 2016, and 1 July 2016 to 30 September 2016.

The Waymouth Street financial information disclosed significant trading losses for the Waymouth Street store before attribution of any amount for the cost of franchise fees after the costs incurred for the full year of trading as at 30 June 2016.

The Waymouth Street financial information discloses a very small trading profit for the same store before the attribution of any amount for the cost of franchise fees and other costs for the period 1 July 2016 to 30 September 2016; after the attribution of franchise fees and other costs for that period, the Waymouth Street store would have traded at a substantial loss.

On 29 March 2017, Funk Franchise Pty Ltd entered into a franchise agreement with Jetgab Pty Ltd and a license to occupy the premises at 27 Waymouth Street, Adelaide. On 29 April 2017, Jetgab Pty Ltd entered into a sale and purchase agreement for the purchase of the Waymouth Street store from Funk Coffee and Food Pty Ltd as trustees for the A&J Damaskos Family Trust, for the sum of $225,000 on a walk in walk out basis.

Settlement on the sale and purchase of the Waymouth Street store occurred on 12 July 2017.

Whether any of the financial information supplied to Mr Emanuele and relied upon by Jetgab Pty Ltd was misleading and whether Jetgab Pty Ltd or Mr Emanuele relied upon this information on deciding to purchase the Waymouth Street store.

Whether Jetgab Pty Ltd has suffered loss as a result of any conduct engaged in by Funk Coffee and Food Pty Ltd as vendor in breach of s 18 Australian Consumer Law.

Whether Mr and Mrs Damaskos engaged in conduct amounting to being knowingly concerned in or aiding and abetting any breaching conduct by Funk Coffee and Food Pty Ltd.

Whether in any event, Jetgab Pty Ltd is entitled to an order for the value of its plant and equipment, fixtures and fittings seized by Funk Franchise Pty Ltd on 19 October 2018, the date upon which it took possession of the Waymouth Street store.

Whether Funk Coffee and Food Pty Ltd is entitled to an order on its counterclaim.

Held:

1. The Waymouth Street financial information disclosed that the Funk business conducted there was, at best, marginal and most likely to be trading at a loss and was of no value.

2. Jetgab Pty Ltd and Mr Emanuele were in possession of that information for a period of about 6 months prior to the execution of the sale of business agreement for that store and for 7 months before settlement upon that sale and business contract.

3. The financial information supplied by Funk Coffee and Food Pty Ltd as trustee for the A&J Damaskos Family Trust disclosed only a limited amount of financial information for a business that was then offered for sale but was of no or of minimal value.

4. The decision of Jetgab Pty Ltd to purchase the business for $225,000 on a walk in walk out basis was not caused by any misleading conduct on the part of Funk Coffee and Food Pty Ltd.

5. Mr and Mrs Damaskos were not knowingly concerned in any breach by Funk Coffee and Food Pty Ltd in relation to the Waymouth Street premises.

6. The applicant Jetgab Pty Ltd is not entitled to a remedy under s 18 Australian Consumer Law.

7. The applicant Jetgab Pty Ltd is entitled to be recompensed the value of its plant and equipment, fixtures and fittings seized by Funk Coffee and Food Pty Ltd on 19 November 2018.

8. The respondent Funk Coffee and Food Pty Ltd is entitled to an order on its counterclaim.

The court will hear the parties further in relation to the calculation of the amount of damage payable to Jetgab Pty Ltd, any amount payable to Funk Coffee and Food Pty Ltd, the calculation of interest and of costs.

Australian Consumer Law s 4, s 18, s 20, s 236, s 237, s 243; Australian Competition and Consumer Act 2010 (Cth) s 51ACB, s 51ACA, s 75B, s 82, s 87; Franchising Code of Conduct ; Misrepresentation Act 1972 (SA) s 7; The Competition and Consumer (Industry) Codes – Franchising Regulations 2014 (Cth), referred to.

Briginshaw v Briginshaw (1938) 60 CLR 336; Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170 ; Macks v Viscariello [2017] SASCFC 172 ; Master Education Services Pty Ltd v Kerchel (2008) 236 CLR 101; Travel Compensation Fund v Tambree & Ors (2005) 224 CLR 627; Chappel v Hart (1998) 195 CLR 232; Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2005) 221 CLR 568 ; March v E & M H Stramare Pty Ltd (1992) 175 CLR 514 , discussed.

Director General of Department of Community Services; Re Sophie [2008] NSWCA 250; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 ; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 ; SPAR LicenDing Pty Ltd v MIS Qld Pty Ltd [2014] FCAFC 50 ; Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 ; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 ; Global Sportsmen Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCA 82 ; Barnes v Forty Two International Pty Ltd [2014] FCAFC 152; Australian Competition & Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; Fitzgerald v Penn (1954) 91 CLR 268 ; Henville v Walker [2001] HCA 52 ; Creatives Landscape Design Centre Pty Ltd v Platz BC 8908450 12 September 1989; Khneiger v Cookson [2009] SASC 203, considered.

GABJET PTY LTD & ANOR v FUNK FRANCHISE PTY LTD & ORS
[2021] SADC 88

Civil

1. There are two applicants in this action, Gabjet Pty Ltd (“Gabjet”) and Jetgab Pty Ltd (“Jetgab”). Each of those companies is owned and controlled by Mr Giuseppe (Johnny) Emanuele (“Mr Emanuele”). The company Gabjet was formerly the operator and franchisee of a Funk Coffee and Food store in Victoria Square, Adelaide. Jetgab was formerly the operator and franchisee of a Funk Coffee and Food store in Waymouth Street, Adelaide.

2. Each of those applicants as franchisees of the two franchise businesses, operated under separate franchise agreements and traded as Funk Coffee and Food respectively.

3. The applicants contend that the defendant franchisor Funk Franchise Pty Ltd (“Funk Franchise”) terminated each agreement and that such termination was wrongful. As a consequence, the wrongful termination was to be treated as a repudiation which was accepted by the applicants and is therefore to be treated, on the applicants’ case, as a wrongful termination which gives a remedy in damages. The respondents deny this contention and also deny that there was any act of acceptance.

4. The company Funk Franchise has always carried on the business as a franchisor of a franchise business called “Funk Coffee and Food”. It was the franchisor of the Victoria Square franchise and the Waymouth Street franchise.

5. The company Funk Leasing Pty Ltd (“Funk Leasing”) is the under lessee of the Victoria Square premises pursuant to a memorandum of lease with the lessor CCES Inc. Gabjet occupied the Victoria Square premises under a licence agreement with Funk Leasing and with the consent of the lessor. The company Funk Coffee and Food Pty Ltd (“Funk Coffee and Food”) was the lessee of the Waymouth Street premises under a lease made with the lessor of those premises and until about 30 June 2017, operated a business under the Funk Coffee and Food franchise system name from the Waymouth Street premises. Funk Coffee and Food also acts as the trustee of the A&J Damaskos Family Trust which is the discretionary family trust of Mr Arthur Damaskos (“Mr Damaskos”) and Mrs Joanna Damaskos (“Mrs Damaskos”).

6. The company Funk CBD Pty Ltd (“Funk CBD”) operated a Funk Coffee and Food franchise business from the Victoria Square premises up until about 19 July 2016. The individuals Mr Damaskos and Mrs Damaskos have and always been the directors of each of the four companies.

7. As will become clear, each of Mr and Mrs Damaskos were intrinsically involved in the business at Victoria Square and Waymouth Street. They were responsible for the making of all of the arrangements, through their various companies, for the establishment of the stores at those premises, the creation through the firm of solicitors, DC Strategy, of the franchise system and the decisions about if and when particular stores would be franchised. They control the trustee of the A&J Damaskos Family Trust. They are the guiding hand and mind of these companies and their actions, as directors, are the actions of the company.

8. I will initially focus my comments upon the applicant Gabjet. That company alleges that the respondents engaged in misleading conduct and unconscionable conduct in connection with the entry by Gabjet into the franchise agreement for the Victoria Square store and conduct in breach of the Franchising Code of Conduct (“the Code”). It is on that basis that Gabjet seeks its remedy in damages from the respondent companies which each deny the allegations and deny that there are any remedies available including for damages.

9. At all material times, Gabjet was owned and controlled by Mr Emanuele and it conducted the Victoria Square Funk Coffee and Food franchise business between 22 July 2016 and 15 November 2018. The franchise agreement under which it operated that business was dated 20 July 2016 and from on or about that date, Gabjet purchased the existing business of Funk Coffee and Food from Funk CBD which had previously been the operator of that business. In order to take a franchise of that Victoria Square premises, it was necessary for Gabjet to enter into a franchise agreement with Funk Franchise.

10. The Victoria Square business was purchased by Gabjet by an agreement dated 17 June 2016. The agreement was made with Funk CBD, the owner of the business and the purchase price was $410,000. The evidence on the topic about how Funk CBD calculated its purchase price for the Victoria Square store at a sum of $410,000, is described below.

11. The process of the calculation of this price is intrinsically involved with the misleading conduct alleged by the applicants. At the outset, the respondents provided to the applicants a document entitled “Financial Information” (“Financial Information document”). It disclosed financial results for three periods of trading by Funk CBD but only one full year ending 30 June 2016. This disclosed an amount said to be available to an operator of $126,380.77 from trading for the year. Mr Pasquale Versace (“Mr Versace”) was retained as the selling agent, he was given the Financial Information document and was asked to advise on the value and to calculate the asking price for the business. Mr Versace used the Financial Information document as the basis for his calculation using the capitalisation of earnings methodology. He applied a multiplier of 3.2 to the sum of $391,780.77 and the rounded-up sale price was set at $410,000.00. The content of the Financial Information document was axiomatic to the calculation of the sale price through this method of valuation. As I describe below, the vendor knew that the figure of $391,780.77 could not be justified and it was not sustainable. It was wrong.

1. The agreement for the purchase of the Victoria Square store was conditional on the entry by the purchaser Gabjet into a franchise agreement with Funk Franchise. After receiving a disclosure document, Mr Emanuele caused Gabjet to enter into the purchase arrangement for the Victoria Square premises. He personally signed the guarantee of the performance of Gabjet. On 20 July 2016, Mr Emanuele signed for Gabjet and for his own right as guarantor a licence to operate the Victoria Square premises. Upon the entry into the franchise agreement, a liability fell upon Gabjet to then pay an initial franchise fee of $30,000.

2. Jetgab purchased the Waymouth Street store from Funk Coffee and Food for $225,000 under an agreement made on 28 April 2017. On 7 March 2017, Jetgab received a disclosure document in respect of a franchise arrangement and on 29 March 2017, Mr Emanuele signed the Waymouth Street franchise agreement for Jetgab and also a guarantee of the obligations of Jetgab under it. On the same day, Mr Emanuele signed a licence to occupy the Waymouth Street premises for Jetgab and in his own right as a guarantor. Jetgab then paid an initial franchise fee of $30,000.

3. On 8 October 2018, Funk Franchise served upon Gabjet a breach notice dated 5 October 2018. On the same day, Funk Franchise issued a breach notice to Jetgab also dated 5 October 2018 in respect of the Waymouth Street store.

4. By notice dated 13 November 2018, Funk Franchise sought to terminate the Victoria Square franchise agreement and the Waymouth Street franchise agreement for an alleged failure to remedy defaults under the notices delivered.

5. There is a dispute between the parties whether on 5 October 2018 Funk Franchise was in a position to deliver a breach notice or any form of termination notice to Gabjet or Jetgab.

6. The resolution of that issue requires a consideration of the parties’ pleaded cases and the whole of the evidence. I will turn first to the pleadings.

   The Victoria Square store

7. Mr Versace, as principal of Versace Business Services, was retained by Funk Franchise to procure a new purchaser for the Victoria Square store. Although I will develop this later in detail, this was not the first occasion in which this business was advertised for sale externally. It had earlier been owned under largely the same franchise arrangements by a company called Kindred Group Pty Ltd (“Kindred”). The relationship between the Funk Group Companies (Funk Group) and Kindred ended in the background of threatened legal proceedings made by Kindred. There was a settlement reached between Kindred and the Funk Group under which the threat of legal proceedings was withdrawn, the businesses returned to the Funk Group in consideration of a payment of $805,000 made by the Funk Group to Kindred. I will return to this topic in detail later when discussing the evidence. One important feature of this circumstance of the threatened legal proceeding made by Kindred is that the settlement and its circumstances were not disclosed by the Funk Group to Mr Emanuele, Gabjet or Jetgab. I will return to that topic later in this judgment.

8. Mr Emanuele saw the advertisement and made an enquiry of Mr Versace. There were negotiations between Mr Emanuele and Mr Versace, as the respondents’ agent which followed. At the completion of those negotiations, Mr Emanuele signed a Victoria Square franchise agreement and a Victoria Square sale of business agreement. In the course of negotiating those agreements, Mr Versace sent to Mr Emanuele a document entitled “Business Profile 250 Victoria Square” which included a page entitled “financial information (10/13-31/12/15)”. On 16 June 2016, Mr Versace sent to Mr Emanuele a further copy of the same material together with additional draft information for the period 1 January 2016 to 31 March 2016. The applicants contend that this information was obviously and substantially incomplete and was misleading.

9. The Victoria Square financial information to 31 December 2015 was annexed to the business sale agreement signed by Gabjet on 17 June 2016. The financial information to 31 March 2016 was not included in that Annexure. There is no apparent reason why that was the case but I do not think that anything turns on that failure.

10. This financial information document is at page 920 of the tender book Exhibit P2. There are three columns of result being “sales less cost of sales” (gross profit); “less overhead expenses” (net profit); an add back credit reflecting the salary for a manager and a deduction of the total of 7% of the gross turnover of the business as reported for the cost of the franchise and marketing fees. The net result is described as an amount available to an owner/operator.

11. The three financial periods described on the face of the document are: first, the period between 2 October 2013 and 30 June 2014; second, the period between 1 July 2014 to 30 June 2015; and third is described as Q1 and Q2 2016 and may be assumed to cover the period between 1 July 2015 and 31 December 2015. The gross profit figures are achieved by the turnover figures less the cost of goods sold. Looking at each of the columns for 2014, 2015 and the first half of the 2016 year, the cost of goods sold as a percentage of turnover is 32.2%, 31.4% and 30.1%. The gross profit percentage is 67.8%, 68.6% and 69.9%. These figures are in a relatively stable continuum. The level of the percentage of cost of goods sold is almost identical but is falling across the three years. The level of the gross profit percentage as a percentage of turnover is increased to, statistically, 70% by the end of the first half of the 2016 financial year. The importance of the continuum of stability of these figures is that they convey to a reader the results of a stable business that has been able to maintain its gross profit percentages notwithstanding the usual exigencies that may be experienced by the operator of such a business. These figures do not suggest or imply the involvement of any other person or entity in the conduct of the business, the cost of whom or which should be but are not included in the overhead expenses of the business.

12. At the bottom of the expenses column and under the amount allegedly available to the owner, there are two asterisks. It reads as follows:

    ** Funk Group expenses excluded

13. I am unable to identify where on the Financial Information document those asterisks appear. I raised that with counsel during the trial. Neither counsel was able to elucidate where those asterisks may be found, so that a reference point for them could be identified. There was no explanation within the document of the meaning of “Funk Group Expenses.” I was later told and it is now accepted that Funk Group expenses are cleaning expenses and expenses such as the washing of tea towels. Although these were not calculated as a gross sum or as a percentage of the full amount of overheads, it was accepted that these are very small expenses, and, for example, are not material.

14. A list of expenses is set out below the gross profit figure. There is no indication within that list that any particular expenses have been included or excluded or that the figure of expenses do not reflect all of the expenses actually incurred. That is, there is no indication within the figures that they are incomplete or that these expenses may have been involved in the generation of gross profit or the net profit figures. The business profile document[1] states on the first page that the document is provided as background information to assist in preparing a detailed business plan and to assess its own expectations of performance, expenses and any future capital requirements.

    [1]    Business profile document, Exhibit A2, vol 1, tab 2.

15. At many levels, this is a curious opening paragraph because the document itself speaks of gross profits, net profits and the add back of a notional manager’s salary. None of this suggests any inaccuracy in the presented information or that, for example, an inquiry must be made about the very accuracy of the figures provided. For the reasons that I develop below, the true position was very different such that a properly and truthfully informed potential purchaser would be required to investigate and verify almost the whole of the figures produced by the respondents.

16. The net profit figure is then disclosed as a percentage of turnover for the three years, the net profit percentages are 14.1% for the 2014 year, 15.8% for the 2015 year and 15.4% for the first half of the 2016 year. These percentages are consistent with the increasing level of the gross profit as a percentage of turnover and the reduction in the cost of goods sold as a percentage of turnover. The slight reduction in the first half of the 2016 year may be explained by the fact that there was insufficient of the full trading period to make a proper calculation. This information discloses an increasing level of profitability, called a net profit figure. For the 2014 period (2 October 2013 - 30 June 2014) the amount is $78,697.53. For the full 2015 period the figure is $117,818.54 and for the first two quarters of the 2016 year, the net profit figure is $61,386.14, which may be annualised to about $120,000 after allowing for seasonal differences

17. Within the list of the overhead expenses, there are particular expenses which are obviously not included. These include an interest expense and the cost of depreciation which of course is not an outgoing but is properly to be taken into account having regard to the age of the plant and equipment. However, as obvious as those exclusions may be, the expression “net profit” is misleading because as the respondents’ own expert, Mr Opie said in evidence, the figure represented here as being generated by sales less cost of sales less overheads are not the net profit figure at all. It is more accurately described as earnings before the cost of interest depreciation tax and amortisation (EBITDA). The incorrectness of the description “net profit” is then compounded by the adding back of the cost of a manager’s salary.

18. There is then an amount said to be available to an owner/operator and that Funk Group expenses are excluded. It is unclear at a first glance why Funk Group expenses are not defined to include, for example, depreciation, interest and other such expenses. Also, there is no information as to why the financial information to 31 March 2016 which was then available to the Funk Group was not also included in the annexure.

19. Mr Emanuele alleges that there were many representations conveyed by this Financial Information document.

20. The first allegation is that this Financial Information document conveyed the meaning that the business in Victoria Square was reasonably capable of being viable when operating under the franchise system (First VS Financial Representation). Mr Emanuele alleges and Funk Group denies that Funk Group represented that it derived a substantial net profit for the 2014, 2015 and 2016 years or alternatively that a business conducted from the Victoria Square site under this franchise arrangement would derive a substantial profit plus a salary for a franchisee as a manager (Second VS Financial Representation). There are some important features about the issue of the manager’s cost. In the Financial Information document which is disclosed, the manager’s costs are added back as a credit after the derivation of the net profit. Taking the 2015 year as an example, this would mean that the manager’s cost of $60,828.99 could be added back to the net profit figure of $117,818.54 giving a total of $178,647.53.  From that would be deducted the 7% franchising fee of $52,346.76 leaving an amount allegedly available to an owner operator of $126,300.77 from a full year of trading.

21. There are some obvious and distinct anomalies with this information. The first and perhaps most pronounced is to credit a manager’s cost is inappropriate accounting. The value of a business must, in the ordinary course, take into account the cost of a manager’s salary. The process of valuation of a business must always take into account the manager’s cost otherwise there is no real comparator when it is known that a person would not necessarily borrow money or contribute money to purchase the business but could otherwise, and separately and without incurring such cost, obtain employment elsewhere. Therefore, in the usual accounting approach, it would be necessary to make provision for the cost of a manager’s salary in the derivation of profit. Otherwise, the figure of net profit would be artificially inflated.

22. The second anomaly is that the bottom line assessment is described as “available to owner operator” and three separate figures for each of the financial periods are disclosed. That figure cannot be correct for a number of reasons. First, what is described as Funk Group expenses are excluded. There is no suggestion that the expenses which would be incurred in cleaning and the cost of tea towels for a particular shop would not be incurred by a new operator. However, having including asterisks for Funk Group expenses, there is no asterisk to indicate that the amount available to the owner operator does not take into account what might be described as the usual expenses by an owner operator. I will discuss this matter further later in these reasons. When account is taken of the prospect of other expenses being incurred such as interest and the cost of depreciation being taken into account, the amount available to the owner operator must be less than the figure there disclosed. 

23. Thirdly, the applicant alleges and the respondents deny that this Financial Information document also represented that if the business was conducted reasonably and there was a franchisee manager employed, the amount of $126,000 could reasonably be expected to be available after the salary of the franchisee manager had been accounted for in the way proposed (Third VS Financial Representation). It is further alleged that the Financial Information document represented that if the period between 1 July 2015 and 31 December 2015 an amount of $64,000 would be derived as a trading profit available to an operator after a proprietor’s salary of $30,531.33 was taken into account (Fourth VS Financial Representation). This is also denied. 

24. In relation to the draft Victoria Square financial results,[2] it is alleged that there is a representation that for the period 1 January 2016 to 31 March 2016 an amount of $28,793.88 would be available after a salary of a proprietor of $15,265.64 was taken into account which is also denied (Fifth VS Financial Representation).

    [2]    Exhibit P2, p 921.

25. In relation to the 30 June 2015, and in relation to the representation conveyed by the financial information for that full financial year, the applicant alleges and the respondent accepts that a sum of $117,818.54 would be generated as net profit from the year of trading (Sixth VS Financial Representation). That is accepted by the respondents only so far as it was exclusive of any optional or Funk Group related expenses. It is also alleged that for the period 1 July 2015 to 31 December 2015, (the third column: Q1 and Q2 2016) that a business trading from Victoria Square made a net profit of $61,386.14 (Seventh VS Financial Representation). The respondents admit this allegation but only so far as those amounts were exclusive of group related expenses, cleaning costs and supplies for cleaning (Eighth VS Financial Representation).

26. The applicants assert and the respondents deny that the financial information carries the following further representations namely: that in the financial year ending 30 June 2015 the Victoria Square business incurred overall expenses of $395,172.72; (Ninth VS Financial Representation) that for the period 1 July 2015 to 31 December 2015, the Victoria Square business paid expenses of $214,556.05; (Tenth VS Financial Representation) that during the period 1 January 2016 to 31 March 2016, on the draft figures, the Victoria Square business incurred overall expenses of $110,119.10 (Eleventh VS Financial Representation).  These allegations are admitted but only to the extent that it was exclusive Funk Group expenses and apart from Funk Group optional expenses. It is known that Funk Group expenses, which were included were only that which is being described as cleaning expenses of a very minor amount. Funk Group saw fit to make an exclusion and to identify it.  In the ordinary course, the provider of information should and will attempt to provide as much information as is necessary to inform the reader and insofar as there are exclusions, to identify them.  The identification of one exclusion amongst many may mislead a reader who may misapprehend that it is the only exclusion applicable. All of that may depend upon the sophistication of the reader of the information. The document identifies an amount available to an owner operator.  That must be adjusted according to the amount of the exclusion of the Funk Group related expenses. However, as the evidence developed, there were a number of other expenses that potentially were excluded such as, for example, the cost of depreciation and interest costs. In the ordinary course, it may be expected that the proprietor of a business may be incurring interest costs from time to time. 

27. There is then what may be described as an overarching feature of the content of the document which derives from the overall effect of the document. It may be described as the creation of either a positive or negative view of the business according to the content of the document. This statement of financial information shows a decreasing level of cost of goods sold as percentage of turnover. It shows an increasing level of gross profit. It shows an increasing level of net profit as a percentage of turnover and an increasing amount available to an owner as a percentage of turnover and as a percentage of net profit. These figures create a very favourable impression of the business. An objective reader of this information would reasonably obtain the view that the business is successful, it is profitable, its turnover is increasing, its costs of goods sold as a percentage of turnover is decreasing, it enjoys an increasing level of gross profit and net profit and that an amount available to an owner operator who is an investor will increase over time.

28. Gabjet contends and it is not put in issue that the respondents were operating in trade and commerce when providing the Victoria Square financial information.  Gabjet contends that the representations were misleading and deceptive and insofar as the representations were as to future matters, there were no reasonable grounds to make the representations and they were known to be false and were made recklessly by the respondents. It is contended that in truth, the Victoria Square business did not derive a substantial net profit, nor did it derive a lower profit.  Gabjet also contends that the franchise business was not reasonably capable of deriving a substantial profit plus a salary for a franchisee manager.  The respondents deny all of these contentions. The respondents also deny that Gabjet reasonably conducted the business and incurred losses in so doing. 

29. Kindred previously operated two franchise stores: first the Victoria Square store and later the Angas Street store.  I will develop the detail later in these reasons but it is known that Kindred made allegations against the respondents of misleading conduct connected with the financial information which it alleges induced Kindred to purchase the Victoria Square business and to purchase the Angas Street business, which caused substantial losses.  An action was threatened.  The dispute was resolved by the respondents agreeing to repurchase the two businesses for $805,000.  The applicants contend and the respondents deny that they were not informed of the respondents’ dispute with Kindred.

30. The respondents assert that Kindred did not conduct the Victoria Square store effectively or reasonably. That plea is incorrect and cannot be justified. Kindred threatened action against the respondents and following negotiations, the respondents agreed to take two businesses back from Kindred, one in Victoria Square and one in Angas Street and to pay a large amount of money. I am satisfied on the evidence that Kindred conducted the Victoria Square store effectively. Any contention of the respondents to the opposite is wrong.  The respondents also contend that none of the representations made to the applicants were false and were reasonably made in respect of contemporaneous trade and profit information then available to the respondents. I also consider this contention to be without foundation having regard to the evidence before the court.  It is not open to the respondents to contend that the representations were reasonably made and only in respect of contemporaneous trade and profit information. I will return to that issue later. 

1. The respondents also contend that Gabjet did not conduct the Victoria Square business reasonably, just as it contends that Kindred did not conduct the Victoria Square efficiently and effectively. The respondents also agree that the Funk Group expenses within the financial information provided to Mr Emanuele were excluded from the documentation. It is said that they were optional expenses and were required to be investigated and included by any person who was conducting the purchase of the business. It is said that these costs are not standard or absolute costs of operation and the applicant Gabjet incurred unnecessary expenses such as IT costs, staff costs, bank interest costs and car expenses.  Any further expenses incurred by Gabjet were not incurred by the respondents in the conduct of the Victoria Square business.

2. In relation to other representations and in particular in relation to the third, fourth and fifth representations, the applicants contend and the respondents deny that there were no reasonable grounds to make the representations, they were known to be false to the respondents. The applicants also contend and the respondents deny that the financial information contained material overstatements about what could reasonably be expected to be generated from the business, not all costs for a reasonable franchisee were included and so it gave a false picture of profitability and viability and many expenses that were generally day to day expenses were not included. Those costs were reasonably necessary to be incurred in order to operate a franchise business.  Also, it is alleged that the disclosed costs were lower than would be incurred by a franchisee because of the special purchasing arrangements enjoyed by Funk Group within its own peculiar arrangements.

3. On the sixth, seventh and eighth Victoria Square financial representations, the applicants contend and the respondents deny that the profit amount was materially overstated. On ninth, tenth and eleventh Victoria Square financial representations, the applicant Gabjet contends and the respondents deny that the overall expenses were materially understated. The applicant contends and the respondents deny that those representations concerning the Victoria Square business were calculated to and did induce Gabjet to purchase the business, that Gabjet was misled and was induced by the information that was received, it relied upon the representation and that the connection between the information it received and these representations caused it to purchase the Victoria Square business. That conduct it is alleged contravened s 18 of the Australian Consumer Law (ACL). Alternatively, Funk Franchise or Funk CBD was knowingly involved in the contravention as were Mr and Mrs Damaskos who were involved in the contravention of s 18 of the ACL by Funk Franchise or Funk CBD. This was because the sale agreement was conditional upon Gabjet and Funk Franchise entering a franchise agreement. To become a franchisee, Gabjet needed to purchase the business. Funk Group had a vested interest in Gabjet becoming a franchisee because of the benefits it would receive as a franchisor and it would receive the purchase price of $410,000. Mr and Mrs Damaskos were involved in the preparation of the Funk Group financial information and they provided the Funk Group financial information to Mr Versace. They knew of the Funk financial information being included within the sale agreement. Mrs Damaskos always actively involved herself in the monitoring and supervision of the business including from commencement. This also included the transfer to Kindred, the repurchase from Kindred and then the transfer to Gabjet. Mr Damaskos was similarly involved. Mr and Mrs Damaskos as directors were responsible for the financial information, they signed off on the accounts of the companies and they signed off on the accounts of the trusts that were operating at the time.

4. Notwithstanding the admissions of the involvement of Mr and Mrs Damaskos, the respondents deny that each of the companies and Mr and Mrs Damaskos knew of the representations being made. It is difficult to reconcile that denial in light of the knowledge of Mr and Mrs Damaskos and the companies of the activities leading to the transfer to Kindred, the repurchase from Kindred and the transfer to Gabjet.  Similarly, the respondents deny that the Funk companies, Mr and Mrs Damaskos and the A & J Damaskos Family Trust through its trustee were aware of the representations and that they were intended to induce Gabjet to enter into the Victoria Square franchise. This is even though the respondents admit that Kindred was a former Victoria Square franchisee and that it ceased to operate on or about 1 October 2013.  In relation to Kindred, the respondents admit the dispute, the claims and the settlements but deny that the repurchase of the business was connected with claims of Kindred that the financial information given by Funk to Kindred was misleading. That contention is also wrong for the reasons which I will develop below. The repurchase from Kindred occurred following a claim by Kindred that Funk had engaged in misleading conduct by understating the costs of goods sold and the level of salaries paid to employees in the Victoria Square business. The respondents deny that the information provided to Kindred was misleading for the same reasons as the information provided to the applicants was misleading. Similarly, the respondents deny that in relation to all of the misleading information, Funk Franchise, Funk CBD, Mrs Damaskos and Mr Damaskos were knowingly concerned in the breach by overstating the trading performance. They deny that the course of conduct was engaged in for a purpose of receiving a benefit namely fees, royalties, marketing and funds and that Funk Coffee and Food and Funk CBD shared in the benefit and Funk Franchise, Funk CBD, Mr Damaskos and Mrs Damaskos aided and abetted, induced or conspired or were knowingly concerned in the Victoria Square representation.

5. The applicant Gabjet says that absent the representations then the deal would not have proceeded. Similar allegations are made in relation to the Waymouth Street store. There are some universal allegations made in relation to the franchise agreement.

6. The respondents dispute the contentions of the applicants about their right to terminate from 16 October 2018. They deny that there was any bona fide dispute or that it failed to implement the correct dispute resolution process and so contend that the termination is effective. The applicants contend that the repudiation of the franchise contract thereby enunciated is accepted by them and seeks remedies. It also contends that there was non-compliance with item 27 of the Code which is a requirement for a reasonable notice for an intention to terminate for breach and that the 14-day time period given was unreasonable. Also, the applicants contend and the respondents deny that the rent and outgoings were only due for a 12-day period, that Funk Group was aware of real concerns about the electricity and advertising costs and the use of the marketing fund and the allegation that in relation to the Waymouth Street store the electricity charges were excessive. The contravention notices are therefore invalid because of contraventions of the Code and Funk Franchise therefore contravened s 51ACB of the Competition and Consumer Act 2010 (“CCA”).

7. All of these allegations are denied including that the applicant suffered loss and damage. The wrongful conduct is also accepted as repudiatory.

8. The applicant alleges that there was a misrepresentation within the disclosure document required to be produced under the Code.  Schedule 13 of the Code requires a declaration by a franchisor whether a particular franchise shop or business has been previously franchised. There was no declaration in the Schedule B of the disclosure document that there had been an earlier franchisee, Kindred, whereas in a different part of the disclosure document reference is made to Kindred as a prior franchisee.

9. Therefore, in the disclosure document there was a disclosure of Kindred.  In the same document at Schedule B there is a declaration that the Victoria Square store had not earlier been franchised. The document is obviously inconsistent and the respondents contend that the applicants were not misled.  The applicant contends that this constituted a misrepresentation because the business had earlier been franchised to Kindred. In her evidence, Mrs Damaskos says that the failure to make this disclosure in the Schedule B document was the work of solicitors because she had given them the correct information and they were the authors of the document. There was no pleading to this effect. The respondents also contend that the entries were inconsistent and these inconsistencies were obvious to any reader of the document. Also, the applicant received advice from solicitors and all information about Kindred was also provided in the business profile document provided by the respondents to the applicant. On the respondents’ case, there was sufficient information available to indicate that there was a prior franchisee and that Gabjet made its own decision to proceed to purchase regardless of whatever was done correctly or incorrectly by the respondents.

10. Gabjet contends that it was not aware of any earlier franchise to Kindred, that it did not read paragraphs 6.4 to 6.6 of the disclosed document and if Mr Emanuele had known of the prior franchise agreement with Kindred, he would have attempted to make contact with Kindred before entering into the franchise agreement. Mr Emanuele would also have sought solicitor’s advice regarding the position of Kindred, he would have contacted Kindred and if he received any adverse feedback, it was unlikely he would proceed. Gabjet also pleads that it would not have been incorporated and would not likely have proceeded to purchase.  As a result, Gabjet has suffered and damage because of the conduct of Funk Franchise.

11. Alternatively, the company Jetgab would not have been incorporated and would likely not have proceeded. As a result, Gabjet has suffered loss and damage because of the conduct of the Funk Group. These allegations are all denied by the respondents.

12. The applicant also contend that the Victoria Square disclosure document does not comply with the Code requirements because it does not comply with comply with item 8(3) of the Code. Annexure 1 of Schedule 1 of the Code requires a statement of whether the site previously was franchised in the prior ten years and if so the details and circumstances of its cessation of operations. The disclosure document at Schedule B says that Victoria Square was not previously franchised. There was no detail in relation to the Kindred business including its name, the duration of its operation, who were its directors and managers and it contains no detail of the circumstances in which Kindred ceased to operate, why it did so and whether this was on account of any material dispute. It is alleged that Funk thereby contravened s 51ACB of the CCA. Those allegations are merely denied by the respondents and there is no positive case pleaded.

13. Gabjet contends that if it had known of these facts, it would likely have made sufficient enquiries such that it was likely to have not proceeded with the purchase of the franchise business. If it did not proceed it would not have suffered the losses. Annexure 1 of Schedule 1 of the Code requires disclosure of businesses purchased in the last three financial years. The Waymouth Street store was repurchased in the last three financial years but this was not disclosed. This the same as for the Victoria Square store.  If that had been disclosed, the purchase of the Waymouth Street store would likely not have proceeded.

14. The applicant also contends there was a cumulative effect of the disclosure document representations, the prior franchisee Code contraventions and the franchisee bought back Code contravention. If not for them, information would have been discovered and it would be unlikely for the purchasers to proceed. It would have been known that the Funk Group had repurchased three franchises between November 2012 and October 2013. It would have found that Kindred ceased as franchisee in the midst of a legal dispute and were paid out.  The applicant would have sought legal advice from solicitors. If Gabjet had not proceeded, neither then would have Jetgab.

15. Allegations are also made in relation the marketing fund. Two percent of weekly growth revenues are required to be paid in a marketing fund. In breach, Gabjet has not spent the marketing fund. This is a breach of s 51ACB of the CCA. In further breach, there was a failure to comply with s 15(1) of the Code about the financial statements for the financial years ending 30 June 2017 and 30 June 2018. There was insufficient detail of the receipt of the Fund and this is a further contravention of s 51ACB of the CCA. This was also a failure to act in good faith because the respondents did not make the required monetary contributions to the Funk Marketing Fund or properly administer the funds so this was in breach of item 6 of the Code. Mr and Mrs Damaskos, Funk CBD and Funk Coffee and Food were knowingly concerned in these breaches. For the same reasons, all of those matters, when taken separately or together constitute unconscionable conduct.

16. The financial information adds back the manager’s salary and the deduction of the franchise and marketing fee which provides a prediction of an amount that might be available to an owner operator.[3] I have earlier expressed my views about the inherent contradictory nature of those entries. Leaving that issue aside, there is an element of a prediction of a future event or matters arising in the future because this is a forecast to induce a prospective franchisee to purchase a business based upon an expected level of profit that might be received after the adding back of the manager’s cost. This was something that might eventuate in the future. Under s 4 of Schedule 2 of the ACL, unless there are reasonable grounds for representation in relation to the future math and unless evidence is adduced to the contrary, if I am not satisfied that there was sufficient evidence adduced to the effect that there was a reasonable basis for the representation, that representation is taken to be misleading.

    [3]    Exhibit P2, p 920.

17. Before proceeding to consider the evidence, it is appropriate that I give a summary of the information available concerning the relevant trading of the Victoria Square store. I will for the moment put aside the question of the Waymouth Street store.

18. These documents are gathered in Exhibit A3. It is appropriate that I discuss those documents first, although I will more specifically discuss them in the context of my decision below.

    Documents in Exhibit A3

19. The first document is the Financial Information document.  I have earlier discussed this in some detail. I have identified the turnover figures, the cost of goods sold figures, the gross profit figures and the various percentages. I have identified that in this document, the costs of goods sold as a percentage of turnover reduced from 32.3% in the period between 2 October 2013 and 30 June 2014 to 30.1% in the period ending 31 December 2015. I have earlier identified that gross profit as a percentage of turnover increased from 67.8% in the period 2 October 2013 to 30 June 2014 to 69.9% in the period ending 31 December 2015.

20. I have also identified that the overheads which are then deducted do not include a number of usual overheads that might be seen such as accounting expenses, the expense of depreciation, the cost of interest and other expenses. The figures that are reported show that net profit as a percentage of turnover in the first period ending 30 June 2014 was 14.1% whereas it rose to 15.8% in the period ending 30 June 2015.  I have also identified that there was an add back of the cost of the manager’s salary, which would otherwise have been included within the wages figure reported as an overhead, and then there was a deduction of the 7% franchise and marketing fee from gross profit. This then achieved an amount available to an owner operator. Funk Group expenses were excluded. The evidence suggests that this was an amount of $5,000 per year. If these accounts were audited (and they were not) the amount of $5,000 per year would not have been a material item and would have been ignored.

21. One of the outstanding features of this document is the overall impression that it creates about the Victoria Square store. That impression is one of positivism: that the store is increasing its level of sales, decreasing its costs of goods sold as a percentage of turnover and that its profitability is increasing. It also creates the impression that an amount available to an owner operator may be calculated by taking the net profit figure, adding back in as an asset the manager’s cost, deducting the franchise and marketing fee from gross revenue and then achieving an amount available to an owner operator. The figure is fundamentally wrong because it could never identify an amount available to an owner operator without having taken into account all of the expenses that might be incurred by an owner operator and the Funk Group expenses which are identified are not material.

22. The same considerations apply to the draft document at Exhibit A2 page 921 which is the turnover for the period January to March 2016.  The second document in Exhibit A3 is the content of Exhibit P2 at page 291. It is described as the Funk CBD profit and loss spreadsheet for Victoria Square for 2013 to 2014, 2014 to 2015 and 2015 to 2016 financial years. For the period between 2 October 2013 and 30 June 2014, the trading profit derived is $60,704.33.  This of course is different from the figure shown on the financial information[4] of $78,607.53.  It also has an item of an interest expense paid to Funk Franchise but no amount is shown. Wages are also described as a service fee and a note to the account states that wages and superannuation expenses are paid by Funk Coffee and Food and Funk CBD.  Therefore, the question of the amount of the service fee must be assessed against the breakdown of the fee and the allocation of the fee to, for example, wages, superannuation and any other service charge payable to Funk Coffee and Food by Funk CBD. The same considerations apply for the 2015 financial year. The trading profit is identified as $111,131.35.  This is less than the figure of $117,818.54 shown in the financial information.[5] This spreadsheet[6] also makes allowance for ASIC fees, accounting fees and interest expenses to be paid and so the document is therefore incomplete. The same considerations apply to the 2016 year[7] and so the same comments relate to the question of the wages and service fees payable, the ASIC fees, accounting fees, bank account fees and interest expenses payable.  No net profit is shown but only a trading profit. To that extent, those documents are incomplete.

    [4]    Exhibit P2, p 920.

    [5]    Exhibit P2, p 920.

    [6]    Exhibit P2, p 2919.

    [7]    Exhibit P2, p 2926.

23. Tab 3 of Exhibit A3 commences with Funk CBD Profit and Loss Statement for year ended 30 June 2014 (2 October 2013-30 June 2014). The sales match the earlier documents. There is no opening stock. The purchases are the same and there is a credit ($8,000) for closing stock.  The gross profit from trading is therefore slightly increased by that credit for closing stock but this is no more than a timing issue.

24. The expenses include bank charges, general expenses and then what is described as service charges. There is no separate item for wages. If that charge is compared to the wages charge in, for example, the financial information[8] which is identical to the spreadsheet amount[9] it is apparent that there is a charge of $17,000 over and above wages. This is because the total service charge is $197,601 whereas the wages charge on the earlier documents is $180,870.66.  It is apparent that the charge of $17,000 over and above the wages figure is for services provided. The profit before income tax is therefore reduced to $68,704.

    [8]    Exhibit A2, p 920.

    [9]    Exhibit A2, p 2914.

1. The next document is the Funk CBD Profit and Loss Statement for the year ended 30 June 2015.[10] The sales figure is the same, there is a credit for the opening stock as a deduction, then a deduction for the same amount of purchases but then a further credit of $8,000 in respect of closing stock. It is a little curious that as between two years, the stock figure could be exactly the same. However, the gross profit from trading remains the same and thus the credits and debits in relation to opening and closing stock are merely accounting entries which balance.

   [10] Exhibit A2, p 2922G.

2. In relation to overheads, there is for the first time an entry for depreciation. Inexplicably, there was no entry for the cost of depreciation in the 2014 accounts.[11] There is then a separate account for general expenses as well as an account for interest paid in the amount of $21,870.  Again, inexplicably, there was no interest paid expense shown in the 2014 accounts.[12]  There is then a service charge of $241,660. This may be compared with the wages figure on the earlier financial information of $220,693.61.[13] These figures disclose that over and above the wages figure, there is a further charge made by an entity to Funk CBD in the amount of at least $21,000 and presumably in relation to services supplied by that other entity to Funk CBD. There is no note in the accounts indicating by whom the services were provided or to whom or what the amounts were paid. This is a fee for services supplied. Having regard to that addition, and other expenses, the profit before income tax is reduced to $80,125[14] when compared to the figure on the financial information document of $117,818.54.[15] 

   [11] Exhibit A2, p 2915.

   [12] Exhibit A2, p 2915.

   [13] Exhibit A2, p 920.

   [14] Exhibit A2, p 2922G.

   [15] Exhibit A2, p 920.

3. The final document behind tab 3 of Exhibit A3 is the departmental trading and profit and loss statement of Funk CBD for the year ended 30 June 2016.  There is a total trading figure for the year of $820,685. There is the same debit and credit for opening stock and purchases and an identical figure in respect of the previous year for accounting fees, which is perhaps unusual. There are then increased figures for bank charges, reduced figures for cleaning, a depreciation expense which is now reduced to $448 from $11,373.  The difference is unexplained in the evidence. The only likely explanation is that the depreciation amount for the 2015 year had written down the value of the plant and equipment to almost nil thus explaining the very low depreciation figure of $448 in the 2016 year.  However, the evidence before the Court in relation to the plant and equipment would not support that explanation. 

4. The insurance cost in both years of $1,811 is identical.  This suggests an apportionment of a general insurance charge in the same amount to each of the entities. However, that is not necessarily accurate because the question of risk is the basis of apportionment.

5. The interest paid figure is reduced from $21,870 in 2015 to $16,421 in 2016. The service charges are increased from $241,660 in 2015 to $284,371 in 2016.

6. When a comparison is made to the financial information document, wages disclosed for the half year, to 31 December 2015 are $120,000. [16]  If annualised, this would give a total wages figure of about $240,000. The figure of $284,371 disclosed within the actual financial returns, indicates that the service charges include other charges imposed upon Funk CBD for services supplied to Funk CBD which are not identified. The net profit for the full year is disclosed at $91,484.[17]  The profit for the half year disclosed in the financial information is $61,386.14.  These figures are obviously anomalous.

   [16] Exhibit A2, p 920.

   [17] Exhibit A3, tab 3; Exhibit A2, p 2927.

7. Tab 4 of Exhibit A3 are the compilation reports for Funk CBD signed by the directors which show that for the 2014 year, there was no profit before income tax. In the context of a service entity, and a trading entity within a trust arrangement, that is not necessarily significant.  The sales are identified as $892,005[18] whereas the sales recorded in the profit and loss statement were $558,607;[19] purchases are increased from $179,391 to $293,598; the level of closing stock credit is doubled; the gross profit from trading is changed from $387,216 to $614,417; and bank charges and cleaning expenses are increased. There is an entry for depreciation of $8644 and apart from other items being increased including, for example, light and power from $600 to $11,748, service charges are increased from $197,601 to $299,726.  The profit and loss statement discloses that there is no profit before income tax for that 2014 year.

   [18] Exhibit A2, p 2912D.

   [19] Exhibit A2, p 2915.

8. A balance sheet is also disclosed.[20] Current assets are the usual cash and inventories. The non-current assets disclose plant and equipment of $137,757 which comprise land and building, property improvements less accumulated depreciation and plant and equipment less accumulated depreciation. The plant and equipment is valued at $40,610 and after depreciation is $33,943.  Intangible assets are valued at $805,000 which apparently reflect an amount for goodwill.  In light of the fact that the company has not generated a taxable profit then in the ordinary course, some assessment would be made of the carrying value of intangibles in the form of goodwill. Having regard to the requirement of the Australian Accounting Standards there must be considerable doubt about whether the carrying value of intangibles may be justified. The derivation of this figure is obvious. This is the amount paid to Kindred on the repurchase of the business in 2013. But it is just as apparent that this is not a figure reflecting value. It is the figure at which Kindred was prepared to settle with the respondents on its claim for misleading conduct. That claim derived from the falsity of the representations made by the respondents which induced Kindred. This figure has been used by the respondents as a balancing figure within its balance sheet.

   [20] Exhibit A2, p 2912E.

9. Tab 5 of Exhibit A3[21] is the compilation report for Funk CBD for the period 30 June 2015. There is no profit before income tax report and sales are recorded at $1,208,541 whereas on the financial information[22] they are recorded as $747,810.88.  Accountancy fees are identified and there is a significant increase in depreciation from $8,644 to $20,758 in respect of written down assets worth $33,000. The interest expense is increased from $10,388 to $43,740, the cost of light and power is doubled, management fees are increased from $113,000 to $116,000, rent is increased by $45,000 and service charges are increased by $90,000. There is no note to the accounts identifying which charges are included within the service charges entry. The figure of $388,059 may be compared to the financial information[23] of wages of $220,693.61 and the service charges in the profit and loss statements[24] of $241,660.  It is apparent that there is a service charge of $150,000 over and above that amount but there is no explanation how that service charge is calculated. The intangible asset of goodwill, continues to be carried at $805,000.  The carrying of goodwill at an unchanged value again fails to comply with the obligations under the Australian Accounting Standards which require that goodwill must be assessed on a diminishing basis. 

   [21] Exhibit A3, p 2920.

   [22] Exhibit A2, p 920.

   [23] Exhibit A2, p 920.

   [24] Exhibit A2, p 2922G.

10. Tab 6 of Exhibit A3 is the consolidated profit and loss statement for Funk CBD for the 2016 year.  Sales are recorded as $1,314,019 and a capital loss on sale of non-current assets of $359,324 is also recorded.  This leads to a loss before tax of $359,325.  In that context, in the overhead expenses column, service charges are increased from $388,059 in the 2015 year to $519,155 in the 2016 year.[25] In the same document, rent is increased from $163,743 to $224,882 but depreciation is reduced from $20,758 to $2,258.  Interest paid is also decreased from $43,740 to $32,842.  Light and power is again increased to $23,323 from $22,993.  Although a management fee of $116,539 was charged in the 2015 year, no management fee is charged in the 2016 year. 

    [25] Exhibit A3, tab 6; Exhibit A2, p 2930A.

11. The sale of the business is reflected in the write down of the value of goodwill in the balance sheet.  However, a review of the figures within the overhead column of the profit and loss statement discloses that the service charges are increased by 34% between 2015 and 2016. There is no explanation of to whom the service charges are payable. There is no correlation between the total amount of the wages paid and the total amount of the service charge.

12. The first trading year in the Victoria Square premises for Gabjet ended on 30 June 2017. In that year, although sales were increased to $804,661, the cost of goods sold was also increased to $319,904.[26]  Gross profit from trading was $484,757.  Total overhead expenses were $563,919 and thus there was a loss before income tax of $79,162.  The major item of expense was wages of $242,835.  There was an interest expense of $11,466.

    [26] Exhibit A2, p 2267B.

13. In the 2018 year, sales were again increased to $834,603, costs of goods sold decreased to $319,182 and gross profit from trading was $515,421. Of the overhead expenses, there was a reduction in cleaning charges, a small increase in consultancy fees, an increase in franchise fees payable due to the increase in gross turnover; there was a small increase in interest paid of $4,000, an increase in light and power of $5,000; a small increase in rent of $4,000 and an increase in wages of $40,000.  The loss before income tax was $105,036.  On the balance sheet, invested costs of the business continued to be carried at the purchase cost however trade creditors increased from $54,000 to $137,000, bank loans increased from $213,000 to $279,000 and there was some reduction in shareholders loans.  Total liabilities increased from $570,000 to $716,000 and there was a deficiency of capital of $184,199. 

14. In the 2019 year,[27] income from sales was $314,825, costs of goods sold was $113,607 and gross profit from trading was $201,218.  The total overhead expenses were $233,900 and there was a loss before tax of $32,682. 

    [27] Exhibit A3, tab 16; Exhibit A2, p 2269.

15. There are some significant features arising from a comparison of these financial statements that require comment.  The first is that the Funk CBD statements must be seen in the context of a trust arrangement. That may explain some of the charges made against that company which are recorded in the overhead expenses but there is no evidence to that effect before me.  The second is that there was substantial charges being made upon Funk CBD whilst it operated the Victoria Square premises. These were brought to account only in the consolidated accounts and led to a reporting of no profit from trading. The evidence satisfies me that the Funk Group provided a number of services to Funk CBD and appear only to have properly accounted for the expenses of those services in the consolidated accounts. They were not accounted for in the financial statements initially produced to the applicant Mr Emanuele.  The services in respect of which the charges are made within the consolidated accounts are services required to be provided by or to Funk CBD.  These are expenses that would ordinarily be incurred by Funk CBD in the conduct of the business of the Victoria Square store and the other Funk businesses that it operated.  A number of things follow. First, if a proper accounting is made of those expenses, the level of overhead expenses must increase due to the proper adjusted amount of those expenses.  The converse of that position is that a failure to record those expenses in respect of services actually being provided means that for each of these Funk businesses an inaccurate picture of the level of overhead expenses actually being incurred by that entity is presented.  It also follows that for the services being provided, there is a cost properly to be attached as the expense of the provision of the services. A proper accounting would require the inclusion of the costs of those services in the overhead expenses. A failure to so include means that there is a failure to report those expenses which leads to inaccurate accounts.

16. As a result, even if the applicant increased the amount of turnover in the business, it would still be necessary to make adjustments to the costs incurred in generating that further turnover because of the further expenses that are incurred.  This compounds the effect of not identifying the cost of those services within the accounts that are provided for the business. 

17. For these reasons, I am satisfied that, without more, there is a very serious doubt about the accuracy of the figures provided by the respondents to the applicants within the financial information. This is because there is evidence before me that Funk CBD incurred a higher level of costs of operation of its company owned stores that were paid through service charges which it discharged but which were not necessarily charged to the operation of the individual store.  The Victoria Square store was one such store and it was the flagship store of the Funk franchise system.  As I discuss below it generated about 62% of the gross revenues of Funk CBD.  There is no evidence that Funk CBD made a separate charge upon the Victoria Square store for these expenses which it paid to Funk Coffee and Food as trustee for the A & J Damaskos Family Trust.  I will return to this topic later.

    The factual background

    Mr Johnny Emanuele

18. The principal witness called on behalf of the applicant is Mr Giovanni Peter Emanuele, usually called Mr Johnny Emanuele. The CV of Mr Emanuele is admitted to evidence.[28]

    [28] Exhibit P2, 92A-92D.

19. From 1988 onwards, Mr Emanuele held a number of roles within a political party.  Prior to 1993 he was employed in the office of a shadow minister for two and a half years and then was involved with campaigning for and assisting the minister with her portfolio work.  From 1993 to 2014, Mr Emanuele was employed in his family’s business of an ISUZU franchise. At that time, ISUZU had about 50 to 60 franchise stores operating in South Australia and Mr Emanuele’s family owned stores at Burton, Port Augusta, Whyalla, Roxby Downs, North East Road Windsor Gardens and Lonsdale.  The dealer principal of these stores was Mr Emanuele’s father.

20. His initial work was in sales and then he progressed to sales management of the sales team at Burton.  He was set monthly targets of sales and part of his remuneration package was connected with achieving the sales targets.

21. Mr Emanuele’s father passed away in 2012 and there was then a readjustment of the arrangements of all of the ISUZU franchises operated by the family.  Mr Emanuele’s brothers took over those stores within an existing family arrangement. He had an option to remain within the family business but he chose not to pursue that option and decided to pursue his fortunes elsewhere.

22. From 2014, Mr Emanuele was self-employed in purchasing and auctioning ex-army equipment, such as jeeps, trucks, Mac trucks, trailers and pallets.  From 2014 to 2015 he was employed for a period of nine months by Manheim Auction House (Manheim), which is a national auction house dealing in heavy vehicles, plant, machinery, cars and salvaged vehicles.  He was responsible for truck machinery and plant in South Australia.

23. Sometime in February 2016, Mr Emanuele left Manheim and started looking for separate business opportunities, particular franchise opportunities.  The idea of having a franchise was appealing to Mr Emanuele because he was familiar with his father’s involvement in the ISUZU franchises and so he was familiar with franchise systems.  He had not previously operated his own business. 

24. In his search, he saw an advertisement by Versace Business Services advertising that the Funk Victoria Square café business was for sale. Mr Emanuele rang Mr Versace on 20 May 2016 and there was a conversation about the business opportunity.[29] On the same date, Mr Versace sent to Mr Emanuele an email attaching a document entitled ‘Business Profile 250 Victoria Square’ which included on the title page financial information for the period between October 2013 and 31 December 2015.[30]  This business profile document was provided by Mr Versace as agent on behalf of the company Funk Franchise and Funk CBD.  It was said to be only a preliminary document.  In the email, Mr Versace informs Mr Emanuele that:

    You will see in the business profile that because this franchise is a company store, and being sold by the franchisor, there are some savings.

    [29] Exhibit A2, tab 30, p 429.

    [30] Exhibit A2, tab 30, p 428.

25. Mr Emanuele understood the expression ‘company store’ meant that the store was owned by Funk CBD or Funk Franchise.

26. The front page of the document states that the document is provided as background information to assist Mr Emanuele to determine his level of initial interest in the Funk franchise.[31]  It is provided to assist Mr Emanuele and his business advisors in preparing a detailed business plan, to conduct his own evaluation of the business and to form his own views.  It then said that he should conduct his own market research and assess his own expectations of performance, expenses and any future capital requirements.

    [31] Exhibit A2, tab 30, p 431.

27. The front page then goes on to say that the information contained within the document is historical and unaudited, the franchisor reserves the right to amend the information and the business profile document can only be distributed to professional advisors, it cannot be distributed generally and Mr Emanuele must not directly approach any staff, customers or suppliers of the business without permission of the franchisor.  If Mr Emanuele does not intend to proceed to purchase the business, he must return the business profile document which, at all times, remains the property of Funk Franchise. 

28. Some of these statements are anomalous and slightly inconsistent.  The information is said to be historical and unaudited but it does not suggest that it may not be relied upon and it may be distributed to the business advisors and consultants retained by Mr Emanuele and upon which he may obtain advice.  It would logically follow that such advice would be obtained upon the figures within the document itself and that having read that document, there would be no reason for Mr Emanuele not to accept the accuracy and reliability of the information contained within it. 

29. There was then an executive summary.[32] It states that the business commenced in May 2009 and has been trading as Funk Coffee and Food – Victoria Square.  It says that the franchisor took over on 2 October 2013, suggesting a prior operator of the business but, for example, that could be another company in the Funk Group. It sets out the gross turnover for the 2015 financial year of $747,811 with an adjusted net profit of $126,301 and there is no suggestion that there needs to be any other adjustment to the gross turnover figures or the adjusted net profit figures.  The average reader would understand that these two figures were those which had been achieved by Funk at the time that it operated the business.  The asking price for the business was $450,000.  There are also other costs to be paid for legal costs for the franchise agreement, the initial franchising fee of $30,000 and an initial training fee of $10,000.  These were all exclusive of GST.

    [32] Exhibit A2, tab 30, p 432.

30. Mr Emanuele said that he printed and read the document including the executive summary.  His principal interest was in the turnover of the business and the asking price.  He did not notice the entries about the business commencing in May 2009 and the franchisor taking over on 2 October 2013.  These things did not mean anything particularly to him. I am satisfied that his position would have been very different if the contract and then the termination of Kindred was disclosed.

1. In relation to the Victoria Square store, I am satisfied that the Funk Group has made misrepresentations within the disclosure document, it has not properly reported about previous franchisees of the Victoria Square store and it has not properly reported in relation to the purchase back of the Victoria Square store. In relation to each of those three items, it is in breach of the requirements of the Code. It has not enjoyed the protections that are built into the provisions of the Code.

2. I am satisfied that the failures of the Funk Group in relation to the requirements of the Code were endemic and reflected the difficulties associated with the franchise system used by the Funk Group. These failures affected the decisions that were made by Mr Emanuele when he resolved to acquire the Victoria Square business such that, if he had known the true position, I am satisfied that he would not have gone ahead with that purchase.

3. I have earlier dealt with the question of the marketing fund. I am satisfied on the evidence that for a period of two years, and in breach of the requirements of the Code and the franchise agreements, the Funk Group failed to make proper contributions to the marketing fund. In evidence, I was informed by Mrs Damaskos that the issue was raised with solicitors and she was informed that it was not necessary to restore the fund but only to make prospective contributions. At the time this evidence was given, I expressed significant reservations about its accuracy. Her evidence was that the Funk Group followed the advice of its solicitors and did not restore the fund. The failure to make the payments into the fund is a breach of the Code. I am unable to accept as credible or reliable, this evidence of Mrs Damaskos that the advice of the solicitors was not to restore the fund. This evidence was a waiver of the privilege attaching to that advice but it was not confirmed by the solicitors. By the time this evidence was given those solicitors had withdrawn and a new set of solicitors was appointed as solicitors on record.

4. The applicant made significant submissions in relation to the question of unconscionability. In light of the findings that I have already made, I do not think it is either helpful or necessary that I consider those matters.

   Assessment of damages

   Causes of Action: Findings

5. I am satisfied of the following:

   The Victoria Square financial representations.

   1.The applicant pleads a first Victoria Square financial representation in relation to a future matter. In light of my findings below, I do not find it necessary to decide whether or not there has been a representation in relation to a future matter. I have dealt with the matter on the basis of the balance of the Victoria Square financial representations as pleaded.

   2.Based upon my findings about the Victoria Square financial representations, the respondents represented and the applicant Gabjet understood that the Victoria Square business produced a substantial net profit during the years ended 30 June 2014, 30 June 2015 and 30 June 2016, as well as generating a salary for a franchisee.[689]

   [689] The second Victoria Square financial representation: Third Statement of Claim paragraph 28E.

   3.In the period ended 30 June 2015, the business traded from the Victoria Square premises under the franchise arrangement did, after payment of the manager’s salary, generate a net profit of around $126,000.[690]

   [690] The third Victoria Square financial representation: Third Statement of Claim paragraph 28E.3.

   4.That for the period between 1 July 2015 and 31 December 2015, if the Victoria Square store had been reasonably traded under the franchise arrangement and the franchisee was employed as a manager of the business, then an amount of $64,000 would have been available to the owner after payment of the salary of the franchisee manager.[691]

   [691] The fourth Victoria Square financial representation: Third Statement of Claim paragraph 28E.4.

   5.In the period between 1 January 2016 to 31 March 2016, if the Victoria Square store had been conducted reasonably under the franchise arrangements and if the franchisee was employed as a manager, then on draft figures available an amount of about $28,000 would be generated for the benefit of the franchisee.[692]

   [692] The fifth Victoria Square financial representation: Third Statement of Claim paragraph 28E.5.

   6.For the financial year ended 30 June 2015, the Victoria Square store generated a net profit of $117,818.54.[693]

   [693] The sixth Victoria Square financial representation: Third Statement of Claim paragraph 28E.6.

   7.In the period between 1 July 2015 to 31 December 2015, the Victoria Square store generated a net profit of $61,386.14.[694]

   [694] The seventh Victoria Square financial representation: Third Statement of Claim paragraph 28E.7.

   8.In the period between 1 January 2016 to 31 March 2016, the Victoria Square store generated on draft figures, a net profit of $27,486.18.[695]

   [695] The eighth Victoria Square financial representation: Third Statement of Claim paragraph 28E.8.

   9.For the year ended 30 June 2015, the Victoria Square store incurred or paid overall expenses of $395,179.72.[696]

   [696] The ninth Victoria Square financial representation: Third Statement of Claim paragraph 28E.9.

   10.In the period between 1 July 2015 to 31 December 2015, the Victoria Square store incurred expenses of $214,556.05.[697]

   [697] The tenth Victoria Square financial representation: Third Statement of Claim paragraph 28E.10.

   11.In the period 1 January 2016 to 31 March 2016, the Victoria Square business paid overall expenses, on draft figures, of $110,119.10.[698]

   [698] The eleventh Victoria Square financial representation: Third Statement of Claim paragraph 28E.11.

   12.For the financial year ended 30 June 2015, the Victoria Square business incurred or paid wages of $220,693.61.[699]

   [699] The fourteenth Victoria Square financial representation: Third Statement of Claim paragraph 28E.14.

   13.For the period between 1 July 2015 to 31 December 2015, the Victoria Square business paid wages of $119,979.33.[700]

   [700] The fifteenth Victoria Square financial representation: Third Statement of Claim paragraph 28E.15.

   14.These representations were made in trade and commerce in connection with the inducement of Mr Emanuele, and then for Gabjet to purchase the Victoria Square business.

   15.Each of the first to tenth and 14^th and 15^th Victoria Square financial representations were false or misleading for the following reasons:

   i.The Victoria Square store was not reasonably capable of being a viable business to operate under a franchise system; both Gabjet and Kindred were unable to generate the profit represented to them by the respondents and in the case of Gabjet, sustained losses. In the case of Kindred, notwithstanding every effort made by it, and despite increased sales, its costs of goods sold percentage could not be reduced below 32% and could not match the representations made to it by the respondents.

   ii.The Victoria Square business conducted by Funk CBD did not derive a substantial net profit in any of the years ended 30 June 2014, 2015 or 2016 or alternatively its net profit derived was significantly lower than that as shown in the Victoria Square financial information.

   iii.A franchisee business from the Victoria Square store could not derive substantial profit plus a salary for the franchisee.

   iv.Gabjet did conduct the Victoria Square business reasonably but, notwithstanding, incurred overall losses.

   v.The Victoria Square financial information referred to the expression “**Funk Group expenses excluded**” but there was no specification of which group expenses were excluded and which administrative expenses were included or excluded within the financial records. A proper account of the actual expenses incurred by Funk Coffee and Food and Funk CBD, the financial returns for Funk CBD in relation to the operation of the Victoria Square store would have provided a complete and accurate representation of its profitability. The absence of the inclusion of those expenses means that the business derived either a loss or a small profit that was substantially less than was shown in the Victoria Square financial information.

   vi.The failure to include all of the Funk Group expenses within the Victoria Square financial information means that the financial information given to the applicants was misleading. The appropriate inclusion of all of those expenses would have disclosed to the applicants that the Victoria Square business could only generate a very small profit or alternatively a loss.

   vii.The third, fourth and fifth Victoria Square financial representations:

   (i)Materially overstated the amount that the business could reasonably have been expected to generate under a franchise arrangement with the respondents;

   (ii)Did not reflect the whole of the costs and expenses reasonably necessary to be incurred by a franchisee in the operation of the business and which were in fact incurred by the Funk Group in and about the operation of the Victoria Square business.

   (iii)Meant that the costs of goods sold figure within the Victoria Square financial information was lower than that would have been incurred by a franchisee in operating that business because Funk CBD, as part of the Funk Group obtains benefits as part of the Funk Group including for supplies at prices that are not attainable by the franchisee and also obtained the benefit of other cost savings.

   viii.In relation to the sixth, seventh and eighth Victoria Square financial representations, the profitability of the business conducted from Victoria Square premises was as a result materially overstated.

   16.The Victoria Square financial representations were made to Mr Emanuele and were relied upon by Gabjet in entering into the Victoria Square franchise arrangements. They were not corrected and as a result, Gabjet was misled or deceived by those representations. It was induced to enter into the contract in reliance upon them and as a result, Funk Franchise and Funk CBD have contravened s 18 in Schedule 2 of the ACL, the CCA 2010.[701] Gabjet would not have entered into the transaction to purchase the Victoria Square store absent the representations made to it by the respondents.

   [701] It is unnecessary that I continually set out in full the reference to Schedule 2, Australian Consumer Law. Hereafter, I will refer only to s 18 ACL.

   17.The respondents Mr Damaskos and Mrs Damaskos were the Directors and controlling hands and minds of Funk CBD and Funk Franchise. They were involved in the preparation of the Victoria Square financial information, in its provision to its agent for delivery to prospective purchasers and arranged for the annexation of that Victoria Square financial information to the sale of business agreement.

   18.Mr Damaskos was involved in and largely controlled the day to day operation of the companies in the Funk Group and Mrs Damaskos was actively involved in the day to day office administration bookkeeping and accounting functions for the businesses that formerly operated the Victoria Square premises when owned by Funk CBD and when it was formerly owned and operated by Funk Coffee and Food before the sale to Kindred. She was also involved in the day to day administration and bookkeeping for Funk Coffee and Food in its capacity as the trustee of the Damaskos Family Trust all of the other Funk businesses operated as corporate stores by Funk CBD and Funk Coffee and Food.

   19.Both of Mr Damaskos and Mrs Damaskos were responsible for the information contained in the annual financial statements prepared by those companies for the content of the Victoria Square financial information and each of them knew of the Victoria Square financial representations. Each of them knew of the misleading nature of that information. Their conduct was calculated to induce Gabjet to enter into the Victoria Square sale and business agreement and to become a franchisee in the system. Each of them were involved in the misleading information provided to Kindred and in the generation of the settlement with Kindred in relation to the alleged misleading conduct alleged by Kindred in and about its entry into a franchise arrangement with Funk Coffee and Food in 2010.

   20.Funk Franchise, Funk Leasing, Funk Coffee and Food, Mr Damaskos and Mrs Damaskos were each knowingly involved in and a party to the overstatement of the profitability and viability of the Victoria Square business at the time that it was sold to Gabjet by Funk CBD. That conduct was engaged in for the purpose of companies in the Funk Group receiving funds from Kindred and funds from Gabjet under the Victoria Square sale and business agreement. The individuals were the sole directors of the Funk companies and were their guiding hands and minds. The companies were the corporate manifestation of the relationship between Arthur and Joanna Damaskos.

   21.Each of Funk Franchise, Funk CBD, Funk Leasing, Funk Coffee and Food, Mr Damaskos and Mrs Damaskos aided, abetted, counselled or procured the Victoria Square financial representations conduct and were directly knowingly concerned in the Victoria Square financial representation conduct by Funk CBD. Each of them are liable for the Victoria Square financial representations.

   22.In accordance with the requirements of the Code, a franchise disclosure document said to be prepared as at 31 October 2015 was delivered to Mr Emanuele.  It is dated 21 September 2015. In Schedule B on page 22 of the document, it states that the site has not previously been franchised. That is incorrect. The site had previously been franchised from 2010 to 2012 by Funk Coffee and Food to Kindred.

   23.Elsewhere in the disclosure document in Schedule A,[702] there is purported compliance with items 6.4 to 6.6 of Annexure 1 of Schedule 1 of the Code. It discloses that the Funk Coffee and Food Victoria Square business was bought back by the franchisor from Kindred on 2 October 2013. It also discloses the purchase back of the Angas Street store from Kindred on the same date.

   [702] Schedule A, p 7.

   24.Items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code require that in a separate document to be provided with the disclosure document, must be provided about whether a site has been franchised in the previous 10 years, the details of that business and the circumstances in which the previous franchisee had ceased to operate. Items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code have not been complied with by the Funk Group.

   25.Schedule B of the Victoria Square disclosure document is wrong and is misleading. The store had previously been franchised to Kindred and that is disclosed in the disclosure document. The details required by items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code about the Victoria Square store were not provided. As a result, Mr Emanuele and Gabjet were not put on notice that the purchase back of the Victoria Square store took place in circumstances where Kindred had made allegations of misleading conduct against the respondents and in order to obviate legal proceedings connected with that store, the respondents had purchased that store and the Angas Street store back from Kindred.

   26.Although the statement within Schedule A of the disclosure document is technically correct, when it is combined with the failure by the respondents to comply with items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code, the information contained within the disclosure document and the Annexure are misleading. First, the statement within Schedule B that the site had not previously been franchised is demonstrably incorrect. It is also inconsistent with Schedule A. The information contained within Schedule A although strictly technically correct, is misleading because of a failure to comply with items 13.2 and 13.3 of Annexure 1 of Schedule 1 of the Code which requires Mr Emanuele and Gabjet to be informed of the circumstances in which the previous franchisee ceased to operate.

   27.If Mr Emanuele and Gabjet had been informed of those circumstances and in light of the other inconsistencies within the disclosure document, Mr Emanuele would have had the opportunity to make enquiries with Kindred. Those enquiries would have elicited an allegation of the misleading conduct of Funk Coffee and Food and of the difficulties associated with the conduct of a franchise business from the Victoria Square store. Mr Emanuele lost the opportunity to make those enquiries in those circumstances.

   28.The position could not reasonably be put any higher than the loss of an opportunity because the name of Kindred was included in the disclosure document and Mr Emanuele did not seek out the officers of that company. That opportunity was lost but it also remains that he did not make those enquiries from the outset because of the misleading conduct of the respondents. 

   29.The result would have been the same even if Mr Emanuele had difficulty in making contact with the proprietors of Kindred. The evidence of Mrs Bueti was that that company remained registered and operating in the years following 2013 and as at 2016, could have been ascertained by a simple company search. Mr Emanuele or Gabjet would not have had any difficulty in making contact with Mrs Bueti. If they had done so, they would have ascertained that Kindred terminated its relationship with Funk Franchise as a result of a legal dispute and in order to obviate that dispute, there had been a buy back of the Victoria Square store and the Angas Street store from Kindred.

   30.Mr Emanuele would have also ascertained that the representations made to Kindred by Funk Coffee and Food prior to its entry into the franchise arrangements in 2010 were not sustainable, were misleading and, at least implicitly, Funk Coffee and Food accepted that it had engaged in misleading conduct at the time that there was an agreement to purchase the businesses back from Kindred. He would have also ascertained that the trading of Kindred was not profitable or was profitable only to a minimal and unacceptable level having regard to the risk of capital. He lost the opportunity to ascertain all of those matters.

   31.Gabjet has suffered loss and damage caused by its reliance upon the contravening conduct of the Funk Group and Mr and Mrs Damaskos because Gabjet would not have entered into the transaction for the purchase of the Victoria Square store in the absence of the representations upon which it relied.

   32.In the maintenance of the marketing fund, the respondents are in breach of item 31(2) of the Code.

   33.I make orders against Funk Franchise, Funk CBD, Funk Coffee and Food, Funk Leasing and Mr Arthur Damaskos and Mrs Joanna Damaskos pursuant to s 82 of the CCA and pursuant to s 236 of the ACL in relation to the Victoria Square financial representations conduct, the breach notice code contravention, the Victoria Square disclosure document misrepresentation, the previous Franchisee Code contravention, the Franchisee Bought Back Code contravention, the Marketing Fund Clause 31(2) Code contravention and the Marketing Fund Clause 15(1)(b) Code contravention for damages to be assessed. I make order under s 75B of the CCA that each of Mr Damaskos and Mrs Damaskos, Funk Leasing, Funk Franchise and Funk Coffee and Food were knowingly concerned in each of the branches of Funk CBD. An order for the payment of damages may be made against them pursuant to s 82 of the CCA.

   34.Before proceeding to an assessment of damages, it is necessary to identify a number of matters. The first is that a claim is made for recoupment of trading losses from the Victoria Square store. The quantum of these losses was challenged by the respondents however, based upon the evidence that I have received, and based upon the Agreed Facts, I am satisfied that for the Victoria Square premises, the trading losses for the year ended 30 June 2017 was $79,162; for the year ended 30 June 2018 were $105,036 and for the year ended 30 November 2018 they were $32,682. There were amounts on the respondents’ cross claim which were not challenged. In relation to the Victoria Square store, these amounts were for $7,815 and an amount unpaid to Fleurieu Milk of $5,000. I have decided not to allow these trading losses. Although they were relevant to only one full year of trading namely for the 30 June 2018 year and otherwise were for part years and I am not satisfied that any criticism could be made of Gabjet for maintaining the business for that period of time.

   35.I consider that the proper assessment of damages is that postulated by Mr Crase which is on the basis of a “no transaction case” as I have found above. The only possible value received by Gabjet was the written down value of its plant and equipment. In the ordinary course, an applicant would remain in possession of those assets and hence a deduction would be made for the value received. Here Gabjet has been put out of the assets when the Funk Group went back into the Victoria Square store in 2016.  As a result, the loss on that aspect of the claim is the equivalent of the value of that asset at the time.

   36.On this assessment of damages that I have made, I consider that there is no entitlement to claim trading losses. Gabjet is entitled to recoup the amount of its capital loss as if the business had not been purchased (or purchased for the correct value). Trading losses cannot logically be for the claim of Gabjet because it is restored to its correct position.  Trading losses must then logically be for its own account.

   37.I would allow the loss claim in relation to the amount of $7,815 as disclosed on the respondents’ cross claim and the amount $5,000 unpaid to Fleurieu Milk.  There has been no challenge to these claims and they are for the account of Gabjet.

   38.I have earlier dealt with the situation concerning the plant and equipment, fixtures and fittings of the Victoria Square store. The respondents went back into possession of that store. The respondents did not account to the Gabjet for the value of the plant and equipment, fixtures and fittings which were seized at the time that repossession occurred. In the report of Mr Crase the fair market value of those goods at the time of the repossession was $47,915.[703]  I will hear the parties further on that issue.

   [703] First investigating accountant’s report of Crase Consulting, paragraph 10.5; Exhibit P2 Volume 18, page 4694.

   39.The assessment of damages suffered by Gabjet is calculated as follows:

   i.Loss on amount paid on purchase of the Victoria Square business: $410,000, less the fair value of plant and equipment, fixtures and fittings on the date of purchase;

   ii.Less set off in relation to the cross-claim: $7,815;

   iii.Less amount owing to Fleurieu Milk: $5,000;

   iv.Plus the initial franchise fees and training fees paid for Victoria Square: $40,000;

   v.Plus the legal fees relating to the acquisition of the businesses and franchises for Victoria Square: $3,569; and

   vi.Plus the proper assessment of the value of the plant and equipment, fixtures and fittings of the Victoria Square store at fair market value on the date of repossession of the business.

   40.For the reasons given, I have reached the conclusion that the losses sustained by Jetgab in relation to the Waymouth Street business are, apart from the value of the plant and equipment, fixtures and fittings seized by Funk Coffee and Food, not attributable to the actionable conduct of the respondents. If I am wrong about that, I would assess the damages as follows:

   i.Purchase price for the Waymouth Street business: $225,000, less the fair value of plant and equipment, fixtures and fittings, at the date of purchase;

   ii.Less unpaid amount to Fleurieu Milk: $7,500.

   iii.Plus the initial franchise fees for Waymouth Street, and initial training fees for Waymouth Street: $40,000.

   iv.Plus the legal fees relating to acquisition of businesses and franchises for Waymouth Street: $3,693.

   v.Plus the proper assessment of the value of the plant and equipment, fixtures and fittings at fair market value for the Waymouth Street store on the date of repossession of the business.

1. It follows that the counterclaim in relation to the action by Jetgab in relation to the unpaid amount to Fleurieu Milk is found as proved. The counterclaim is allowed at $7,500.

2. I would allow the plant and equipment, fixtures and fittings claim in relation to the Waymouth Street store on the same basis.

3. I will hear the parties as to the value of the plant and equipment, and fixtures and fittings at each of the two stores, costs and interest.