Gardner Corporation Pty Ltd v Zed Bears Pty Ltd
[2003] WASC 13
GARDNER CORPORATION PTY LTD -v- ZED BEARS PTY LTD & ORS [2003] WASC 13
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2003] WASC 13 | |
| Case No: | CIV:1864/1996 | 19-22 & 25 NOVEMBER 2002 | |
| Coram: | STEYTLER J | 23/01/03 | |
| 34 | Judgment Part: | 1 of 1 | |
| Result: | Krishell entitled to damages in the full amount of its loss | ||
| B | |||
| PDF Version |
| Parties: | GARDNER CORPORATION PTY LTD ZED BEARS PTY LTD (ACN 069 020 640) KRISHELL PTY LTD (ACN 069 038 213) RONALD ALEX STENNING JEAN STENNING DENIS ALAN MYERS NOREEN HAZEL MYERS ZED BEARS PTY LTD KRISHELL PTY LTD CHARLES DANIEL GARDNER |
Catchwords: | Trade practices Misleading or deceptive conduct by franchisor Loss and damage Causal connection between contravention of Trade Practices Act 1974 and loss and damage suffered by franchisee Turns on own facts |
Legislation: | Trade Practices Act 1974, s 52, s 59(2), s 75B, s 82, s 87 |
Case References: | Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 Gould v Vaggelas (1985) 157 CLR 215 Henville v Walker (2001) 206 CLR 459 I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 192 ALR 1 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353 Alati v Kruger (1955) 94 CLR 216 Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 40-822 Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd (No 2) (1987) 16 FCR 410 Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307 Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 Manwelland Pty Ltd v Dames & Moore Pty Ltd (2001) ATPR 41-845 Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305 Tefbao Pty Ltd v Stannic Securities Pty Ltd (1993) 118 ALR 565 Toteff v Antonas (1952) 87 CLR 647 Yorke v Ross Lucas Pty Ltd (1983) 68 FLR 268 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
ZED BEARS PTY LTD (ACN 069 020 640)
First Defendant
KRISHELL PTY LTD (ACN 069 038 213)
Second Defendant
RONALD ALEX STENNING
Third Defendant
JEAN STENNING
Fourth Defendant
DENIS ALAN MYERS
Fifth Defendant
NOREEN HAZEL MYERS
Sixth Defendant
(BY ORIGINAL ACTION)
ZED BEARS PTY LTD
First Plaintiff
(Page 2)
KRISHELL PTY LTD
Second Plaintiff
AND
GARDNER CORPORATION PTY LTD
First Defendant
CHARLES DANIEL GARDNER
Second Defendant
(BY COUNTERCLAIM)
Catchwords:
Trade practices - Misleading or deceptive conduct by franchisor - Loss and damage - Causal connection between contravention of Trade Practices Act 1974 and loss and damage suffered by franchisee - Turns on own facts
Legislation:
Trade Practices Act 1974, s 52, s 59(2), s 75B, s 82, s 87
Result:
Krishell entitled to damages in the full amount of its loss
Category: B
(Page 3)
Representation:
Original Action
Counsel:
Plaintiff : No appearance
First Defendant : No appearance
Second Defendant : No appearance
Third Defendant : No appearance
Fourth Defendant : No appearance
Fifth Defendant : No appearance
Sixth Defendant : No appearance
Solicitors:
Plaintiff : No appearance
First Defendant : No appearance
Second Defendant : No appearance
Third Defendant : No appearance
Fourth Defendant : No appearance
Fifth Defendant : No appearance
Sixth Defendant : No appearance
Counterclaim
Counsel:
First Plaintiff : No appearance
Second Plaintiff : Mr P A Kyle
First Defendant : Dr J T Schoombee
Second Defendant : Dr J T Schoombee
Solicitors:
First Plaintiff : No appearance
Second Plaintiff : Kyle & Co
First Defendant : Bruce Havilah & Associates
Second Defendant : Bruce Havilah & Associates
(Page 4)
Case(s) referred to in judgment(s):
Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653
Gould v Vaggelas (1985) 157 CLR 215
Henville v Walker (2001) 206 CLR 459
I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 192 ALR 1
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322
Case(s) also cited:
Akron Securities Ltd v Iliffe (1997) 41 NSWLR 353
Alati v Kruger (1955) 94 CLR 216
Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) ATPR 40-822
Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd (No 2) (1987) 16 FCR 410
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413
Manwelland Pty Ltd v Dames & Moore Pty Ltd (2001) ATPR 41-845
Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274
Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305
Tefbao Pty Ltd v Stannic Securities Pty Ltd (1993) 118 ALR 565
Toteff v Antonas (1952) 87 CLR 647
Yorke v Ross Lucas Pty Ltd (1983) 68 FLR 268
(Page 5)
1 STEYTLER J: This is the latest chapter in a lengthy dispute between Gardner Corporation Pty Ltd ("Gardner Corporation") and its managing director, Mr Charles Gardner, on the one hand, and two companies, Zed Bears Pty Ltd ("Zed Bears") and Krishell Pty Ltd ("Krishell") and their directors (to all of whom I shall refer "the defendants"), on the other.
2 The directors of Zed Bears are Mr Ronald Stenning and Mrs Jean Stenning and the directors of Krishell are Mr Denis Myers and Mrs Noreen Myers. The dispute arose out of the sale by Gardner Corporation to Zed Bears and Krishell (together "the franchisees") of what was referred to as a "Gardner Electronics" franchise. That sale was effected by way of an agreement dated 14 May 1995 ("the Franchise Agreement") made between Gardner Corporation as franchisor and Zed Bears and Krishell as franchisees. By the terms of that agreement each of the directors of Zed Bears and Krishell guaranteed to Gardner Corporation the due and punctual performance by those companies of the terms and conditions of the Franchise Agreement. They also guaranteed the due payment by those companies of money owing in respect of all goods and services supplied by Gardner Corporation to them as franchisees.
3 Not long into the operation of the Franchise Agreement matters began to deteriorate, culminating eventually in the commencement of proceedings against the defendants by Gardner Corporation. In those proceedings, Gardner Corporation contended that the franchisees had breached the Franchise Agreement and claimed damages accordingly. It also claimed the price of goods sold and delivered by it to the franchisees and outstanding franchise fees and advertising levies which, it said, were payable pursuant to the terms of the Franchise Agreement.
4 The franchisees and their directors (who had been sued in their capacity as guarantors) disputed that there had been any breach of the Franchise Agreement. Moreover, they contended that they had been induced to enter into the Franchise Agreement by misleading and deceptive conduct on the part of Gardner Corporation in breach of s 52 and s 59(2) of the Trade Practices Act 1974 ("the Act") and that Mr Gardner was knowingly concerned in that conduct. They sought a declaration under s 87 of the Act that the Franchise Agreement was null and void from its inception and also damages to compensate them for losses which, they said, had been suffered by them in the course of the unprofitable operation of the franchise business.
5 By an order made by Heenan J on 25 August 1998, issues of liability were ordered to be separately determined, with issues of quantum to be
(Page 6)
- referred to an inquiry. This order was made at the suggestion of the parties and with their consent.
6 Not without some unease (it being no easy matter to separate out issues of liability from issues of quantum in a case of this kind), I embarked upon the trial of the issues of "liability" at the end of 1998. After a trial which spanned some 15 days, I gave judgment on 13 April 1999. I found that the defendants were jointly and severally liable to pay to Gardner Corporation the prices charged by it for goods sold and delivered by it to the franchisees pursuant to the Franchise Agreement and also to pay to Gardner Corporation outstanding franchise fees and advertising levies payable by them under that agreement up to and including 9 August 1996. By agreement between the parties the question of what amounts were so payable, including interest, were referred to a Master for determination.
7 So far as the counterclaim was concerned, I found that Gardner Corporation had engaged in conduct in breach of s 52 of the Act and that Mr Gardner had been knowingly concerned in that contravention and was therefore a person involved in the contravention for the purposes of s 82 of the Act (as to which see s 75B thereof). However, I found that only Krishell and its directors (and not Zed Bears and its directors) were entitled to succeed in the counterclaim for damages. That was so because Gardner Corporation's misleading conduct played no part, not even a minor part, in contributing to the decision made by Zed Bears and Mr and Mrs Stenning to enter into the Franchise Agreement and, hence, was not a cause of losses suffered by them in the course of trading by the franchisees. Krishell and Mr and Mrs Myers, on the other hand, did rely on and were induced by Gardner Corporation's misleading conduct in entering into the Franchise Agreement. I consequently made orders relieving Krishell of its obligations under or pursuant to the Franchise Agreement from 10 August 1996 (the significance of that date will later appear) and relieving, also, Mr and Mrs Myers of their obligations as guarantors as and from that date. I found that it would be impractical to restore the parties to their original position, more particularly in circumstances in which only Krishell and Mr and Mrs Myers had succeeded in their counterclaim. The question of Krishell's entitlement to damages was stood over for further hearing and determination.
8 Now, more than three and a half years later, that hearing has taken place. In the interim, Zed Bears has become insolvent and Mr and Mrs Stenning have been made bankrupt (having been declared to be so on 14 September 1999). Also, the Master has determined those questions
(Page 7)
- which were referred to him. He has found that Krishell and Mr and Mrs Myers are liable to pay to Gardner Corporation an amount of $65,235.29, being the price of goods sold and delivered to the franchisees, together with interest on that sum of $6,070.90. He has also found that they are liable to pay the sum of $9,818.07 in respect of unpaid advertising levies, together with interest on that sum of $724.14, and the sum of $15,606.16 in respect of outstanding franchise fees, together with interest thereon amounting to $1,104.94. He has also suggested, without making any concluding finding in that respect, that Krishell and Mr and Mrs Myers should be required to pay interest on the total amount of $98,559.50 at the rate of eight per cent per annum from 10 August 1996 to 13 September 1997 and at the rate of six per cent per annum thereafter until judgment.
Relevant findings made in the course of the earlier hearing
9 It remains for me, now, to deal with the issue of damages arising under Krishell's counterclaim against Gardner Corporation and Mr Gardner (to whom I shall refer, together, as "Gardners"). In order to do that it is necessary for me to repeat some of the findings which I have previously made and which have led to this point.
10 I previously found, firstly, that Mr Gardner had been responsible for preparing, on behalf of Gardner Corporation, a document headed "Electronics Franchise" which contained a good deal of information with respect to Gardner Electronics franchises. That document (to which I shall refer as "the franchise document") was given to the franchisees. It contained a representation (to which the parties have referred as "the profit level representation") to the effect that each store would "be placed to attract a yearly sales turnover of $520,000 plus" by the end of its first year of operation and that, "Once at that level of sales, the expenses are such that an annual net income (pre-tax) of $166,000 should be earnt [sic] by the franchisee". I have found that that representation was misleading and that there was no supportable basis for suggesting that the figure of $166,000 "should" be earned by a franchise business of the kind referred to (essentially a relatively small business operated by the franchisor with the aid of one assistant) on a sales turnover of $520,000.
11 Next, I have found that Mr Gardner, as the person responsible for compiling the franchise document and providing it to the franchisees, was, as I have said, knowingly concerned in the contravention and therefore a person involved in it for the purposes of s 82 of the Act read with s 75B thereof.
(Page 8)
12 I found that the figures contained within the franchise document were, as Mr Gardner frankly acknowledged, intended to be relied upon and that they were relied upon by Krishell and Mr and Mrs Myers in making the decision to enter into the Franchise Agreement and to invest money accordingly. I should mention, in this respect, that counsel for Gardners had contended that reliance could not have been placed on the franchise document in circumstances in which the intending franchisees did not intend to run the franchise on the basis of a single operator with one assistant, that being, as I have said, the basis for the projection in the franchise document. I was unable to accept that submission. While I accepted that the intending franchisees never proposed to run the franchise on the basis of that model (they wished to run a bigger store on the basis of a more ambitious model), I found that Mr and Mrs Myers nonetheless took comfort from, and were impressed by, the statement that even a franchise which was operated in that more limited way should return a good profit and that this belief played a real part in inducing them, through Krishell, to acquire and operate the Fremantle franchise together with Zed Bears.
13 I have, in my earlier reasons, recited in some detail the background leading up to the acquisition of the Fremantle franchise and also the events which took place during the course of its operation. It is necessary to repeat a little of what I have previously said.
14 In about October 1994, when Mr Stenning first developed an interest in acquiring the Fremantle franchise, Gardner Corporation had sold a number of franchises in respect of its business, being primarily that of a vendor of car sound and electronic systems and accessories, other electronic products and mobile telephones. Gardner Corporation itself operated a business in Cannington but had sold franchise rights in Fremantle, Morley, Midland, Innaloo, Balcatta, Mandurah, Melville, Kelmscott, Joondalup and Canning Vale.
15 The Fremantle franchise had, until 1994, been operated by a company associated with a Mr Graeme Harwood. It had been extraordinarily successful under Mr Harwood's management. However, Mr Harwood had got into trouble with the law and had been invited to spend some time in one of Her Majesty's prisons. His business was consequently sold to a company known as Tsalach Pty Ltd which fell, very quickly, into financial difficulty. Mr Stenning became aware of this and immediately became interested in acquiring the Fremantle franchise. He did not have the financial capacity to do this on his own and so it was that he eventually approached Mr and Mrs Myers.
(Page 9)
16 In the early part of 1995 Tsalach closed its Fremantle business. Notwithstanding the best efforts of Mr Stenning, the intending franchisees could not acquire a lease over part of the premises from which the franchise had previously traded, being premises at 1 and 3 Queen Victoria Street, Fremantle. 1 Queen Victoria Street was owned by a company known as CPA Automatic Transmissions Pty Ltd. 3 Queen Victoria Street was owned by a company associated with Mr Harwood. The part of the premises over which Mr Stenning had attempted to secure a lease was that at 1 Queen Victoria Street.
17 When they learned of Mr Stenning's failure to secure the lease of those premises, Mr and Mrs Myers, who had always been a good deal more cautious, as regards the acquisition of the Fremantle franchise, than Mr and Mrs Stenning had been, lost interest. However, Mr and Mrs Stenning were ultimately able to obtain other premises at 61 Queen Victoria Street and Mr and Mrs Myers, after inspecting them, agreed that they were suitable. A lease of those premises was signed on 12 April 1995 and, on that date, the franchisees took possession of them. Three of Tsalach's former employees were engaged and they assisted with the fit-out of the premises. One of these left on 1 May 1995 and was replaced by an experienced salesman. On 28 April 1995 Krishell had made a capital contribution of $30,000 and, on 9 May 1995, it made a further capital contribution of $20,000. As I have mentioned, the Franchise Agreement was entered into on 14 May 1995. Each of Krishell and Zed Bears was jointly and severally liable for the debts of the business.
18 The Stennings and the Myers agreed that the operation of the business was to be left to Mr Stenning. This was so notwithstanding that he had had no experience in operating a business of that kind. As I have mentioned in my earlier reasons, he had previously been in business as a finance consultant.
19 The Fremantle franchise developed a large turnover under Mr Stenning's stewardship. Its trading figures for the first months of its operation demonstrate a high level of sales. However, its accounts show that it ran at a loss. The accounts for the year ended 30 June 1995 show total sales of $111,838.34 and a net loss of $34,359.12. The accounts for the year ended 30 June 1996 show a net loss of $114,336.41 on total sales of $848,701.55.
20 By August 1996 the franchisees had decided that the business could not carry on trading in its present form. They had decided that it could not be profitable, at least for so long as it remained a Gardner Electronics
(Page 10)
- franchise. On 9 August 1996 Mr Myers wrote to Gardner Corporation on the franchisees' behalf, terminating the Franchise Agreement. By that time the business was in a parlous situation. Its accounts for the period 1 July 1996 to 14 August 1996 (there are no accounts for the period which ended on 9 August 1996) demonstrate that there had been sales of $66,168.58 producing a total loss of $118,330.08. This large loss over that very short period is largely accounted for by various "write-downs" made by Mr Stenning. These included a write-off of obsolete stock, a write-down in the value of property, plant and equipment, a write-off of the value which had previously been ascribed to the purchase of the franchise and a write-off of some uncollectable trade debts. There were then outstanding creditors of the business who were entitled, in all, to over $195,000 (including money owed to Gardner Corporation). The business then had current assets worth only about $70,000. Zed Bears appears to have had no assets other than its interest in the business and it seems that Mr and Mrs Stenning were themselves in a difficult financial situation.
21 Notwithstanding their difficult financial position, Mr and Mrs Stenning wanted to continue in business, through Zed Bears, after 9 August 1996, but not as a Gardner Electronics franchisee. Mr and Mrs Myers, on the other hand, did not want anything more to do with the business or anything to do with any replacement for it. Consequently, Zed Bears alone opened a new business in the same premises under the name "New Guard Electronics" and then (after Gardner Corporation complained about the use of that name) under the name "New Deal Electronics".
22 Because Mr and Mrs Myers considered this to be their best means of minimising their losses, they (and Krishell) agreed with the Stennings and Zed Bears that Zed Bears could make use of the remaining assets of the former business in the course of operating its new business from the existing premises, upon the condition that the profits from the new business would be used to defray outstanding liabilities of the former business. Mr Myers said in evidence (and I accept) that he was then confident that the new business would be able to defray those liabilities.
23 As matters turned out, Zed Bears' new business, too, proved to be unsuccessful and it ultimately closed down. However, Zed Bears was, in the intervening period, able to reduce, to some extent at least, the outstanding liabilities of the former franchise business.
(Page 11)
The reasons for the failure of the business
24 Not surprisingly, during the trial a good deal of time and attention was devoted to the question why the franchise business failed. Gardners offered a number of suggestions in that respect, none of which had, in their counsel's submission, anything to do with the falsity of the profit level representation.
25 The first of these was that the Fremantle franchise deviated, to some extent, from Gardner Electronics' "core product range", in that it concentrated on sales of cellular or mobile telephones, which were less profitable than sales of other products. Mr Gardner, in his evidence at the trial, said in this respect that only a very small profit, or perhaps no profit, might be made on the sale of a mobile telephone and that it was only after the telephone was connected to the particular carrier, whether Telstra or Optus, that anything would be paid to the seller of the telephone by way of commission. He said that the business would have done better to concentrate on other products. Moreover, the significant reliance of the business on this part of its trade did lead to problems when, during the currency of the operation of the Fremantle franchise by Krishell and Zed Bears, the Gardner Electronics Group changed telephone carriers. The Group had initially dealt with Telstra, but later changed to Optus, resulting in the loss of accrued and ongoing commissions in respect of customers who had bought cellular phones and who had (as all of them had) been connected to Telstra's network. Mr Stenning, who had supported the change, had believed that many of his customers would also agree to change from Telstra to Optus. Had those customers agreed to make the change, the business may well have profited significantly from it. According to Mr Gardner, Optus had promised to pay a "churn" fee of about $100 per customer who switched from Telstra to Optus. However, very few customers agreed to make the change, with the result that the loss of accrued commissions from Telstra was counterbalanced by only a few "churn" fees, which Mr Gardner categorised as "insignificant".
26 Next, Gardners pointed to the fact that the Fremantle franchise was subjected to competition from Mr Harwood's store which reopened from the premises at 3 Queen Victoria Street. While that store traded in competition to the Fremantle franchise virtually from the time at which Krishell and Zed Bears commenced its operation, the fact is that, once Mr Harwood was released from prison in February 1996 (a good deal earlier than either Mr Gardner or Mr Stenning had anticipated), the competition became considerably more fierce, it being common cause that Mr Harwood was a formidable competitor. This competition, together
(Page 12)
- with other competition in Fremantle from a business which had opened under the name "Audiocom" in mid-November 1995 (or, as Mr Stenning thought, in January 1996), was said to have significantly impacted upon the turnover of the Fremantle franchise.
27 Gardners also contended that Mr Stenning's management of the Fremantle store left something to be desired. He was said to have been far too "bullish" in his approach, not to have taken advantage of training and other assistance offered to him by Gardner Corporation, to have bought too many products from other suppliers when those products offered lower profit margins than those which were supplied by Gardner Corporation, to have deviated from Gardner Corporation's recommended prices and to have sold products too cheaply. He was also said to have expanded the size of the Fremantle store, during the currency of the franchise, but not to have increased its street frontage or street exposure. Finally, he was said to have incurred unnecessary expenses, including expenses brought about by the employment of more staff than the business could support and to have deviated from Gardner Electronics' policies in some relatively minor respects.
28 There is no doubt that the business did rely heavily upon its trade in cellular telephones. However, as Mr Stenning pointed out, this was not because of any conscious decision on his part, but rather because many of his customers asked for cellular telephones. He was simply meeting a market demand. Nor is there any doubt that the profitability of the Fremantle franchise was affected, to some extent, by its heavy reliance on cellular telephone sales which, as I have said, were less profitable than other products. However, the substantial turnover which the business was able to achieve in this area seems, to some extent at least, to have offset the lower profitability of these products. It was only once the change was made from Telstra to Optus (in the early part of 1996) that the reliance on cellular telephone sales proved to have been a significant drawback, because of the loss of accrued and ongoing commissions and the fact that many of the business' customers did not wish to make the change, thereby preventing the business from earning "churn" and other fees in respect of them.
29 Also, the increased competition was undoubtedly a factor in reducing the turnover and profitability of the business. Strong competition self-evidently tends to have that effect on a rival business and the competition offered by Mr Harwood was particularly strong.
30 For the rest, it is difficult to draw any firm conclusions.
(Page 13)
31 While there was some evidence that the store did sell a few of its products very cheaply, there is nothing to suggest that this was done on any large scale or that it was not necessary in order to compete effectively with the store run by Mr Harwood. Such evidence as there was went either to a few isolated sales of individual products (in respect of which, as Mr Stenning pointed out in evidence, there could have been any number of explanations) or to a lower overall profit margin than might have been expected, which was largely explained by the substantial turnover in cellular phones.
32 Also, while there was some evidence of purchases from suppliers other than Gardner Corporation, there was little to suggest that this had any major impact on the profitability of the business, at least if the trade in mobile phones was put to one side. Nor is there anything to suggest that the goods so acquired were acquired for any reason other than consumer demand.
33 As to the issue of street frontage, if it be assumed that the absence of a larger street frontage or greater signage affected the business, there is nothing at all in the evidence to say just how significant that effect was on its overall profitability.
34 As to the issue of unnecessarily incurred expenses, Mr Stenning conceded that, with the benefit of hindsight, the business had employed more people than it could support and had taken on more space than ultimately proved to be justifiable. However, the effect of his evidence was that experienced staff had been employed in an attempt to boost the turnover of the business, and therefore its profitability, and he had believed it to be reasonable, at the time, to employ the people concerned and to take on the additional space, more particularly when regard was had to the large turnover which the Fremantle franchise had been able to generate under Mr Harwood's stewardship and even during the period when it was operated by Tsalach. While some other expenses were said to have been unnecessary or unnecessarily high (and there was conflicting evidence in this regard), there was little to say that these had any significant effect on the profitability of the business or, without the wisdom which comes with hindsight, that they were unreasonably incurred. It may be worth noting, in this respect, that Mr Gardner himself said in evidence at the trial that he had learned from experience in his own business that, as turnover increased, the gross profit went down and that his business "always had a balancing act trying to keep a good GP with a reasonable turnover …".
(Page 14)
35 The other matters of complaint by Gardner Corporation were, as I have said, relatively minor (it was said that employees of the business had failed to wear "company ties" and that they had been permitted to smoke in the shop). However, these complaints were not pursued with any vigour and there is nothing to suggest that, insofar as the evidence established them, they impacted, at all, on the profitability of the business.
Krishell's claim for damages
36 Krishell's claim for damages is very simple. It seeks to recover the total of what it has paid by way of capital contributions to the business and in order to satisfy creditors of the business, less what little it has recovered.
37 The total amount which has been paid by it is $129,932.28. On 27 April 1995 it paid an amount of $4000 in respect of "set up" costs for the store. I have earlier mentioned that, on 28 April 1995 and on 9 May 1995 respectively, it paid amounts of $30,000 and $20,000 by way of capital contributions. These sums were used for the purchase of stock. Further capital contributions of $10,000, $20,000 and $5000 were paid by it on 10 August 1995, 22 November 1995 and 20 January 1996 respectively. In May and August 1996 it settled debts owed to two creditors of the business, being a debt of $7504 owed to a company, Telepacific Pty Ltd, and paid by Krishell on 14 May 1996 and a debt of $10,057.39 owed to a company, TDJ Australia Pty Ltd, and paid by Krishell on 6 August 1996. After the closure of the franchise business Krishell paid two other outstanding debts of that business. On 22 November 1996 it paid an amount of $4958.78 owed to a business known as Force Cellular Accessories and on 27 August 1999 it paid an amount of $18,412.11 in settlement of an overdraft which had been extended to the business by BankWest.
38 Krishell has been repaid only $20,000, leaving it with a loss of $109,932.28. If there is added to this sum the sum of $98,559.50 payable by Krishell to Gardner Corporation as certified for by the Master, there is said to be a total loss of $208,491.78, plus interest. That is the amount claimed by Krishell, together with interest from the various dates of payment to the date of judgment.
The defences to Krishell's claim
39 Gardners deny that any amount is payable by them to Krishell. They raise a number of contentions in this regard.
(Page 15)
40 The first of these is that there is nothing in the evidence to support the proposition that the loss suffered by Krishell was a direct consequence of the misleading conduct relied upon by it. Counsel for Gardners submitted, in effect, that the only consequence of reliance upon the profit level representation was that Krishell acquired a franchise business which was capable of generating a profit, albeit perhaps a smaller profit than that which had been represented. He submitted that what Krishell and Zed Bears acquired was the right to start, and run, a franchise business in a group comprising profitable franchisees, albeit the profits were, in some cases, small. He contended that, once it was accepted that the business was capable of generating a profit, there was no causal link to the losses claimed.
41 Linked to this contention was the further contention that the projected profitability related only to a "model" franchise business of the kind which I have earlier described and that Mr Stenning, in running the business on behalf of Krishell and Zed Bears, did not rely, at all, on that model, and hence on the representation as to its profitability, but deviated materially from it. That being so, the submission went, the causative effect of the inducement was "exhausted" when Krishell and Mr and Mrs Myers entered into the Franchise Agreement.
42 Gardners' third contention was that the losses suffered by Krishell were the result of causes which were independent of the profit level representation, being the incompetent manner in which Mr Stenning ran the franchise business, or adverse events which occurred and which were unforeseen as at April 1995 (when the profit level representation was made and relied upon), or a combination of the two.
43 In contending that Mr Stenning mismanaged the business, eight factors are relied upon by Gardners. All of these have previously been mentioned. Firstly, Mr Stenning is said to have been too "bullish" in his approach to running the business, causing the business to overreach itself. Secondly, Mr Stenning is said to have refused training, notwithstanding his inexperience. He is also said to have refused assistance in the form of advice from Gardner Corporation. The fourth factor is said to have been Mr Stenning's excessive concentration on the sale of mobile telephones. The fifth is said to have been his practice of discounting too heavily and of charging inadequate mark-ups. The sixth is that he employed too many staff and incurred unreasonable expenses in the course of operating the business and the seventh is his expansion of the premises without getting increased signage. The eighth, and last, is said to be that he bought too many products from suppliers other than Gardner Corporation.
(Page 16)
44 The unforeseen adverse events relied upon by Gardners are said to be the switch, by the Group, from Telstra to Optus in the early part of 1996, Mr Harwood's release from gaol in February 1996, the opening, by Audiocom, of its business in mid-November 1995 and the fact (not previously mentioned) that telephone prices came down during 1995.
45 Next, Gardners contend that the manner of calculation of the damages claimed by Krishell is flawed because it ignores the value of the assets of the business when it ceased trading, including the value of goods received from Gardner Corporation but not paid for.
46 Gardners also contend that Krishell cannot rely, in claiming its damages, upon the impecuniosity of Zed Bears and the Stennings. They submit that this arose well after August 1996 and that losses caused by this are, in any event, too remote.
47 Gardners' penultimate contention is that, if the damages sought by Krishell are to be awarded, this will, in effect, be to order rescission ab initio, so far as Krishell is concerned, when there is no justification for an order of that kind.
48 Their final contention is that any losses suffered by Krishell should be determined as at 30 June 1996. This contention is supported by three propositions. The first is that it was then known by Krishell that the business was in serious trouble, with the consequence that the business should then have been sold or surrendered. The second is that, from 1 July 1996 or, at the latest, the beginning of August, the business ordered no more goods from Gardner Corporation and effectively ceased to trade as a Gardner Electronics franchisee, with the consequence that any damages suffered thereafter are too remote. The third is that the accounts of the business for the period which ended on 14 August 1996 are unreliable.
The applicable principles
49 I will address each of those contentions in turn. However, it is appropriate first to set out some of the applicable principles of law. These might best be gleaned from two recent decisions of the High Court, being Henville v Walker (2001) 206 CLR 459 and I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 192 ALR 1.
50 It must firstly be recognised that s 82 of the Act is the source of Krishell's entitlement to damages and that the only express guidance given
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- as to the measure of those damages is to be found in the concept of causation in the word "by": Henville, [18], per Gleeson CJ. That section contains no other express limitation on the kinds of loss and damage that might be recovered under it. As McHugh J pointed out in I & L Securities, it also contains no express indication that some kinds of loss or damage are to be regarded as too remote to be compensated. While the courts have used principles applied in awarding damages in tort and contract as a guide, analogies of that kind "cannot be substituted automatically for the flexible and general language of s 82" (I & L Securities, at [84], per McHugh J).
51 Moreover, as McHugh J said in Henville, at [163], contravening conduct will seldom, if ever, be the sole cause of a person suffering loss and the Act directs attention to the question whether that conduct was a cause and "does not require, or permit, the attribution of some qualification such as 'solely' or 'principally' to the word 'by'" (McHugh J, (ibid) and see also I & L Securities, at [25], per Gleeson CJ).
52 It is irrelevant, for the purposes of s 82, that an applicant's conduct was a cause of its loss unless the Court can find that that loss is divisible into parts and that the respondent's conduct did not cause one or more of those parts: I & L Securities, [69]. A court cannot apportion the loss or damage suffered by the applicant in accordance with the parties' culpability: see Henville and I & L Securities, [69]. It is crucial to bear in mind the distinction, when considering s 82, "between part of the loss, in the sense of a distinct and separate portion of the whole loss, and playing a part in the sustaining of the entire loss": I & L Securities, [89], per McHugh J. As was pointed out by McHugh J (ibid), all members of the Court recognised the distinction in Henville ([36] and [41], per Gleeson CJ, [66], [67] and [70], per Gaudron J, [94], [106] and [121], per McHugh J, [153], per Gummow J, and [166], per Hayne J) although the majority and minority Justices there differed as to whether part of the loss was in fact caused by the respondent in that case.
53 If a defendant's breach has "materially contributed" to the loss suffered, it will be regarded as a cause of that loss even if other factors played a more significant role in producing it. McHugh J, in Henville, [106], said, in this respect, that:
"As long as the breach materially contributed to the damage, a causal connection will ordinarily exist even though the breach without more would not have brought about the damage. In exceptional cases, where an abnormal event intervenes between
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- the breach and damage, it may be right as a matter of common sense to hold that the breach was not a cause of damage. But such cases are exceptional."
54 Also, nothing in s 82 (or s 87) permits a court to make orders which will compensate someone who has suffered loss or damage by conduct in contravention of a relevant provision of the Act for only part of that loss or damage when the balance of that loss or damage will not be, or has not been, remedied by the making of some other order under s 87. While there may be cases where it will be possible to say that some of the damage suffered by a person following contravention of the Act was not caused by the contravention, cases in which it will be necessary and appropriate to divide up the loss that has been suffered and attribute parts of it to particular causative events are likely to be rare because the relevant question is whether the contravention was a cause of (in the sense of materially contributed to) the loss: I & L Securities, [62], per Gaudron, Gummow and Hayne JJ. Further, it is only in a case where it is found that the alleged contravention did not materially contribute to some part of the loss claimed that it will be useful to speak of what caused that separate part of the loss as being "independent" of the contravention: I & L Securities, (ibid) and Henville, [140].
55 Finally, as was said by Gaudron, Gummow and Hayne JJ in I & L Securities, at [50]:
"If the causal link between injury and contravention is established, the measure of the compensation for which the section provides, and to which the person bringing the action is entitled, is the amount of the loss or damage sustained, not some lesser amount. In particular, it follows from the decision in Henville v Walker… that there is nothing in s 82(1), in other provisions of the Act, or in the policy of the Act, to suggest that a claimant's carelessness may be taken into account to reduce the amount of the loss or damage which the claimant is entitled to recover under s 82(1)."
- (See also Henville, at [135], where McHugh J said that, where a person contravenes the Act and induces a person to enter upon a course of conduct that results in loss or damage, an award of damages that compensates for actual losses incurred in embarking on that course of conduct best serves the purposes of the Act and should ordinarily be awarded).
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The contention as regards the lack of any "direct" consequence
56 That brings me back to the contentions which have been raised in answer to Krishell's claim. I propose, first, to deal with those contentions which assert that Krishell's losses were not a direct consequence of the profit level representation because the franchise acquired by Krishell and Zed Bears was capable of generating a profit and because the misrepresentation related to a franchise business which was differently modelled than that operated by Krishell and Zed Bears.
57 Counsel for Gardners pointed first to the fact that the profit level representation was made in the context of a store operating "with a franchisee working full-time together with one installer/helper" and to the fact that that representation was found to have been misleading because the experience of the existing franchisees had demonstrated that the net return to the proprietor, before tax, was likely to be significantly less than the amount represented, even if a turnover of $520,000 should be achieved. He then pointed to the fact that there was no evidence that, at or after the date of the misrepresentation, any franchisee other than Zed Bears and Krishell did not trade profitably, even if, in some cases, the profit was very small. He contended that, given this circumstance, and given that the franchisees based the Fremantle franchise on a different model than that upon which the misrepresentation was based, there was no sufficient basis for holding Gardners liable for Krishell's losses.
58 I have earlier said that it is true that Mr Stenning operated the business on a basis which deviated from the model contemplated by the franchise document and that Krishell and Mr and Mrs Myers were content to let him do so. Mr Stenning had seen the large turnover and very significant profits which the business had been able to generate when being operated by Mr Harwood and he wanted to replicate that position as quickly as he could. It was for that reason that he took on additional staff. However, the fact remains that Mr and Mrs Myers, and Krishell, were induced by the profit level representation to embark upon the franchise business. While they probably knew that Mr Stenning proposed to run the store on a more ambitious basis than that suggested by the model on which the representation was based, the fact is that they were comforted by the notion that even a more modest franchise business was capable of generating a very healthy profit. It was that belief, founded upon the profit level representation, which induced them to take the risk of acquiring the franchise and operating the business.
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59 Counsel for Gardners pointed, in support of his contentions, to Mr Stenning's evidence that he had aimed at a turnover of at least $1,000,000 in the business' first year of operation, more than double that stated in the franchise document, and that he had set his levels of employment accordingly. However, none of this can mean that, in taking the risks they did, Krishell and Mr and Mrs Myers were not induced by their belief that franchises in the Gardner Electronics Group were likely to be highly profitable. As I have said, the fact remains that, were it not for that inducement, they would never have invested in, and been party to the operation of, the business. Moreover, the business operated by them was essentially that the subject of the misrepresentation, albeit it was run on a somewhat more ambitious basis.
60 I have said that the business was able to achieve a good turnover. Counsel for Gardners contended that this turnover should have resulted in a profit. He put forward various calculations which assumed a gross profit of 33.33 per cent, being one which was generally achievable by a franchise store operating in the Gardner Electronics franchise system. However, the fact is that the turnover, while good, did not generate a profit. Moreover, the turnover fell away with increased competition and the switch from Telstra to Optus. It must, in the end, be accepted that Krishell, and Mr and Mrs Myers, undertook a risky business venture (and Mr and Mrs Myers knew of Mr Stenning's lack of experience in running a business of this kind) which resulted in a loss and that their decision to embark upon that venture was made because of their expectation that a high level of profit might be generated by even a small franchise business, this expectation being regarded by them as sufficient to justify taking the risk. The fact that the franchisees operated on the basis of a model that proved to be more ambitious did not deny or neutralise the operative effect of the misrepresentation (using the words of McHugh J in Henville, [495]). The misrepresentation remained operative at all material times. Had there been no misrepresentation, Krishell and Mr and Mrs Myers would not have embarked upon the course that they took and the loss that they suffered would have been avoided. The loss was consequently a direct result of the misrepresentation (cf Henville, above, [134], per McHugh J). As Brennan J pointed out in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 356 - 357 (in a passage referred to by Gleeson CJ in Henville, at [14]):
"When conduct done in contravention of s 52 of the Act consists in the making of false representations inducing a person to act …, the relevant loss or damage may flow from that person's own act … and only indirectly from the other person's
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- contravening conduct. In such a case, the person's own act … is a link - not a break in the chain of causation … and the amount of the loss is recoverable by the person who suffered it."
61 Moreover, at the time at which the profit level representation was made, Mr Gardner knew of Mr Stenning's ambitious nature and also of his lack of experience in operating a business of the kind proposed to be set up. In those circumstances the prospect of his running the business at a loss was, in my opinion, readily foreseeable. Also, I have earlier said that Mr Gardner acknowledged that the representation was intended to be relied upon and that he knew that it might be relied upon by Mr and Mrs Myers.
62 Finally, as was said by Hayne J in Henville, [162], the conclusion that a person suffered loss neither requires nor permits consideration of some third or intermediate position in which that person undertook some project or transaction other than the one it did.
The contentions as regards mismanagement and unforeseen adverse events
63 Gardners' next broad contention, that relating to the alleged mismanagement and "unforeseen adverse events", to some extent overlaps their first contention.
64 So far as the alleged mismanagement is concerned, it seems to me, on all of the evidence, that Mr Stenning made a number of mistakes in the course of his operation of the business, as he acknowledged. However, I am not prepared to find that there was any mismanagement on his part sufficient to break the chain of causation (cfGould v Vaggelas (1985) 157 CLR 215 at 267).
65 He was, as I have said, inexperienced in the operation of a franchise of this kind, as Mr Gardner knew. While I accept that he did not take all of the assistance and training which was offered to him, because of his own exuberance and self-belief, there is really very little in the evidence, in the end, to suggest what impact, if any, this had on the ultimate profitability of the business and I am not prepared to find, insofar as it might matter, that it had any significant impact. I have earlier canvassed the reasons for the failure of the business and it seems to me that a lack of training had little to do with any of these.
66 Next, the evidence does not establish that anyone on behalf of Gardner Corporation urged Mr Stenning to be more modest in his
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- undertakings, at least until such time as the business began to experience problems. The first documented comments of this kind were made by Mr Gardner only on 20 May 1996, when Mr Gardner told the Stennings that it was imperative for them to keep their overheads below their income (although he also then acknowledged "that times are quiet and that we have had some trouble changing from Telstra to Optus") and on 18 June 1996, when Mr Gardner made a number of handwritten comments on a list of monthly expenses faxed to him by Mr Stenning. Indeed, when, on 4 September 1995, Mr Stenning informed Mr Gardner that the business had committed to spend some $50,000 to $55,000 in expanding its premises, being an expenditure which, he said, the business "could very well live without … at this time", Mr Gardner responded with a note of congratulations, saying that it was a "good move".
67 Nor did the evidence establish that Mr Stenning should have realised that he was wrong, at the time at which he made his decision with respect to the number of staff to be employed, in believing that he might achieve a turnover of over $1,000,000 per year and that the business would make a profit from that turnover. I have mentioned that its predecessors had achieved high turnovers and that, under Mr Harwood's guidance, the business had been very profitable indeed. It was consequently not unreasonable for Mr Stenning to have believed that he might, with the aid of more staff, achieve a turnover (and a profit) greater than that suggested in the profit level representation. Indeed, until other factors affected the business, a significantly higher turnover was achieved, albeit the profit levels did not achieve expectations largely because of the high level of sales of low margin cellular telephones. While Mr Stenning may well have been slow in reducing staff numbers when matters began to deteriorate, it is, in my opinion, somewhat unfair to be too critical of him for having delayed so drastic a decision until he was sure that it was absolutely necessary. It may also be worth mentioning that the ratios of the business as between wages and turnover and as between rent and turnover were comparable to, and indeed better than, ratios appearing in a projection dated 21 August 1995 prepared by Gardner Corporation in respect of its Cannington store upon the assumption that it was operated "as a fully established franchise totally run under management".
68 While there was, as I have earlier mentioned, evidence of some other expenses being higher than was necessary (and of some wasted expenditure, as, for example, an amount of $5,000 which, through no fault of Mr Stenning's, was wasted when the owner of the leased premises refused to honour an agreement to construct three car bays at the premises), these were relatively insignificant and the complaints in this
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- respect were not pursued with any real vigour. Perhaps the most significant of them was the contention that the premises from which the franchisees operated should not have been expanded. However, there is, once again, little to suggest that that decision should have been known to have been wrong at the time at which it was made and, as I have said, it was one with which Mr Gardner was then in agreement (although he has since said that he did not know "how much rent it entailed"). While the failure to get increased signage may have had some impact upon the turnover of the business, there is, as I have previously said, no evidence of how significant that impact might have been.
69 As to the alleged over-emphasis on cellular telephones, I have earlier said that, on Mr Stenning's evidence (which I can see no reason not to accept in this respect), the business was simply meeting a market demand. Also, this emphasis seems only to have led to significant problems after the switch was made from Telstra to Optus (I will return to this below), with adverse consequences which, it seems, had not been expected by Mr Stenning or by Gardner Corporation. Moreover, Mr Stenning's evidence established that the business carried a range of other, more profitable, products but was unable to sell as many of them as it would have liked. Mr Gardner confirmed that this was said to him by Mr Stenning during the operation of the business. It also appears from a memorandum sent by Mr Stenning to Mr Gardner in November 1995, in which Mr Stenning said that the "phone reliant" business had unsuccessfully "tried to place more emphasis on car sound etc". Counsel for Gardners was unable to point to any evidence that the business could have sold a greater number of such products.
70 As to the alleged purchase, by the business, of too many products from suppliers other than Gardner Corporation and its alleged practice of discounting too heavily, the evidence in both respects was somewhat equivocal.
71 So far as the business' product mix was concerned, Gardners' proposition was essentially that the profit margin on products supplied by others was lower than that on products supplied by Gardner Corporation and that the purchase of too many of those products affected the overall profitability of the business. However, the evidence did not go so far as to establish that the business acquired products from others at a higher price than they could have been acquired from Gardner Corporation. Nor did it go so far as to establish, other, perhaps, than in the case of isolated incidents, that the business made a deliberate choice not to acquire products from Gardner Corporation when it could have done so in cases in
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- which that would have produced a higher profit margin. Rather, as Mr Stenning said, the business supplied products in accordance with its customers' demands and those products were acquired from whichever of the authorised suppliers, including Gardner Corporation, was the cheapest. I have no reason to doubt his evidence in that respect. While he did, in the concluding period of the business' operations, stock less products from Gardner Corporation, this was (as Mr Gardner confirmed in evidence) because the business was then on "stopped credit" because of the level of its debt.
72 Gardners relied, also, upon the evidence of Mr Russell Morgan, a chartered accountant who had, at Gardners' request, carried out an analysis of the accounts of the business. In reports prepared by him, in particular one dated 23 October 1997, Mr Morgan concluded that, over the year which ended on 30 June 1996, the business achieved a higher level of sales at the expense of maintaining its gross profit margin, contrary to what it had done in its early months of trading. He said that the result achieved for the full year might be attributable to selling a high volume of lower gross margin products, or price discounting, or a combination of both. He also concluded that the margins on products supplied by suppliers other than Gardner Corporation were lower than on those supplied by Gardner Corporation.
73 However, as Mr Morgan acknowledged, regard must be had to the fact that the business had a high turnover in cellular telephones which had a low profit margin (whether supplied by Gardner Corporation or anyone else) and most of these were provided by suppliers other than Gardner Corporation. Sales of these products consequently go a long way towards explaining the lower profit margins on products other than those supplied by Gardner Corporation and also explain the low average profit margin in respect of goods sold generally by the business.
74 While Mr Morgan also said that the profit margin achieved by the business in respect of goods supplied by Gardner Corporation was lower than might have been expected, thereby providing some evidence of discounting, there was nothing in the evidence to suggest that any such discounting was not justified by local competition. I have earlier mentioned that the business experienced significant competition, in particular, from Mr Harwood's business and also from Audiocom.
75 In any event, so far as all of the aforegoing issues are concerned, it is important to bear in mind that, as I have earlier mentioned, it is irrelevant, for the purposes of s 82 of the Act, that an applicant's conduct was a cause
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- of its loss unless the Court can find that the loss is divisible into parts and that the respondent's conduct did not cause one or more of those parts: I & L Securities at [69]. I have earlier mentioned that, in I & L Securities at [89], McHugh J mentioned that it is crucial, when considering s 82, to bear in mind the distinction between part of the loss, in the sense of a distinct and separate portion of the whole loss, and playing a part in the sustaining of the entire loss. Similarly, Callinan J, in that case (at [216]), referred to the distinction between cases in which there was "one indivisible loss" and cases in which "discrete amounts, or indeed discrete types of loss, were caused by, and could readily be attributed to, discrete acts or omissions by or on behalf of the parties". As McHugh J said, in Henville, at [106]:
"If the defendant's breach has 'materially contributed' (Bonnington Castings Ltd v Wardlaw [1956] AC 613 at 620, per Lord Reid) to the loss or damage suffered, it will be regarded as a cause of the loss or damage, despite other factors or conditions having played an even more significant role in producing the loss or damage."
77 As will already be apparent, McHugh J did recognise that there might be exceptional cases in which an abnormal event which intervenes between the breach and the damage is such as to lead to the consequence, as a matter of commonsense, that the breach should not be seen as a cause of the damage, but said that such cases are exceptional. I am not persuaded that, in this case, any "abnormal" event intervened. With the benefit of hindsight, wrong decisions were made by Mr Stenning, but these were ordinary business decisions made in the course of the operation of the business by a person who was, and who was known to be, inexperienced in the running of a business of that kind. They were not such, in my opinion, as should be found to have been so incompetent as to have broken the causal connection between the loss claimed and the contravening conduct.
78 In this case, the whole of the loss claimed by Krishell would not have occurred but for the misrepresentation and there was no item of loss which could, in my opinion, properly be separated out and attributed to
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- some other cause. This case is to that extent analogous to that of Henville, in which Hayne J said [160]:
"First, it is necessary to identify the loss sustained by the appellants. The loss which the appellants suffered is a single sum. It is the amount by which their expenditures exceeded their receipts. Several different items must be taken into account in computing the amount expended and the amount received, but the loss is the single sum remaining after receipts are subtracted from expenditures. Further, the whole of that loss was brought about by the decision to proceed with the project …".
"The conclusion that the appellants suffered loss requires comparison between the position in which the appellants found themselves after the project was finished, and the position in which they would have been if, instead of relying on what they were told by the respondents, they had not undertaken the project. It does not invite attention to what would have been their position if an accurate estimate … had been given by the respondents (Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 514 - 515, [48] - [52]). Moreover, the conclusion that the appellants suffered loss neither requires nor permits consideration of some third or intermediate position in which the appellants undertook some project or transaction other than the one they did."
80 Much of what I have said is equally applicable to Gardners' contentions as regards the existence of the allegedly "unforeseen adverse events". It seems to me that all of the events relied upon in this respect were events of a kind which were generally foreseeable in the course of the operation of a business of the kind undertaken and which can be categorised as falling within the realm of ordinary business risks.
81 As to the switch from Telstra to Optus, this was a decision made by the Gardner Electronics Group as a whole, albeit Mr Stenning had pressed for the change to be made, and while, with the benefit of hindsight, it proved to have been a wrong decision, there was nothing abnormal or unforeseeable about it. Wrong decisions are often made in the ordinary course of business, sometimes with disastrous consequences. The risk
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- that a wrong decision would be made, whether by Mr Stenning or by the franchise group as a whole, was one of those which Krishell, and Mr and Mrs Myers, were induced to take by the profit level representation.
82 As to competition from other businesses, Mr Gardner knew that Mr Harwood would, at some time, be released from gaol and he warned Mr Stenning of this prospect. The fact that Mr Harwood was released earlier than had been anticipated by Mr Gardner and Mr Stenning (who had thought that prisoners were required to serve the full length of any sentence of imprisonment imposed upon them) was not, in my opinion, particularly significant. Similarly, competition, generally, might readily have been anticipated and there was nothing surprising about that offered by Audiocom.
83 That leaves only the fact that telephone prices began to fall in 1995. Such evidence as there was of this fact did not go so far as to suggest that profit margins also reduced during that period. Mr Anthony Maio, a public accountant having some experience in this area, gave evidence in this respect on behalf of Gardners. He said that, while the prices of mobile telephones dropped, he "wouldn't say" that retailers made less profit from sales of those telephones. Whatever may be the position in this regard, this, too, was an ordinary risk run by any business and was, once again, one of those risks that Krishell, and Mr and Mrs Myers, were induced to take.
The impecuniosity of Zed Bears and Mr and Mrs Stenning and the value of the assets of the business in August 1996
84 That brings me to Gardners' contentions that they cannot be held liable for consequences which followed from Zed Bears' and Mr and Mrs Stenning's impecuniosity and that the claim for damages should take account of the value of the assets of the business as at 9 August 1996, including some stock which had been supplied by Gardner Corporation.
85 The first of those contentions seems to have been put upon the basis that the impecuniosity of Zed Bears and the Stennings was something which should be taken to have broken the chain of causation or to be an independent cause of Krishell's loss such as should not, as a matter of law, be made the responsibility of Gardner Corporation and Mr Gardner. However, the risk that the Stennings and Zed Bears would become impecunious was, in my opinion, readily foreseeable (cf, in this respect, Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 at 658 - 659, there referring to the impecuniosity of the plaintiff himself). I
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- have already mentioned that Zed Bears had no other assets than its interest in the business. The Stennings, when they lodged a franchise application with Gardner Corporation in March 1995, disclosed that they had only limited assets comprising a relatively modest unit in Claremont (which they valued at $250,000), cash of around $54,000, a motor vehicle which was leased from a bank and in which they had very little equity, some superannuation entitlements held by Mrs Stenning and household and personal effects. Mr Stenning, in the application, disclosed to Gardner Corporation that he had previously been bankrupt, having been discharged from bankruptcy in 1990. Moreover, the risk that Zed Bears and the Stennings would become impecunious was, once again, one of the risks which Krishell and Mr and Mrs Myers were induced to run as a consequence of their reliance upon the profit level representation.
86 The second contention appears to overlap the first and also to rest upon the assumption that Krishell did not act reasonably in choosing not to require Zed Bears to join with it in liquidating the assets of the business and immediately winding up the relationship between the two companies on 9 August 1996.
87 I have previously said that, when, by 9 August 1996, Mr and Mrs Myers, and Krishell, were faced with a choice of winding up a business which had plainly failed, liquidating its assets and paying out creditors or entering into the arrangement with Zed Bears and Mr and Mrs Stenning in fact entered into by them, they chose the latter course. They did so because they thought it to be the lesser of two evils. I have mentioned that Mr Myers said that he believed that Mr Stenning (more accurately Zed Bears) would succeed in reducing the debts of the business over time. Subsequent events proved him to be right in this belief, although Zed Bears' new business, which was profitable for a while, ultimately failed, leading, in the end, to Zed Bears' insolvency and to the bankruptcy of Mr and Mrs Stenning. As at 14 August 1996 (the situation could not have been very different five days earlier) the business had current liabilities of $195,855.61 (the sum of $105,196.09 reflected in its accounts as at that date plus the further sum of $90,659.52, being the amount, exclusive of interest, which has since been found to have been owed to Gardner Corporation). As matters transpired, Krishell has been required to pay only $40,932.28 to creditors, although it remains jointly and severally liable to pay to Gardner Corporation the amount which has been found to be due to it.
88 It is also true, of course, that, because of Zed Bears' insolvency and the bankruptcy of the Stennings, Krishell is unable now to obtain any
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- contribution from them and that such assets as the business had on 9 August 1996 have since been lost. However, as to the inability now to obtain any contribution, such evidence as there was in this respect indicates that Zed Bears was set up solely in order to acquire and operate the franchise business and that it had, as I have said, no other assets of its own. It was consequently unable to make any contribution, whether by way of repayment of capital or payment of creditors, on 9 August 1996 or, for that matter, at any other time, other than by way of profits generated from the new business. I should say, in this last respect, that there is no suggestion that it did not do all that it could reasonably have done to reduce the debts of the former business by use of such profits as were, at least initially, produced by the new business. Indeed, Mr Stenning's evidence, to which I refer below, suggests that it did do all that it could in that respect.
89 Mr and Mrs Stenning, too, appear to have been in a precarious financial situation by 9 August 1996. Mr Stenning said in evidence that he and Mrs Stenning were then "hard pressed to stop … [themselves] from being put out of business" and, in effect, that it had been no easy feat to keep trade creditors "at bay" for as long as the new business had done so and to pay off those creditors who had been paid off. He added that he and Mrs Stenning had to "live and eat and rent a home and run a car". Consequently, to the extent that the Stennings were themselves liable to make any contribution (and there was no evidence that they had given any guarantees to Krishell in respect of Zed Bears' performance of its obligations or that they had given any guarantees to any creditor of the business other than Gardner Corporation), it seems unlikely that they were then in any position to do so (and nor was there any submission to the contrary).
90 As to the loss of the assets of the business, these were valued at only $77,865.39 on 14 August 1996, including an amount of $8,000 in respect of items of property, plant and equipment which were later sold for an amount of around $1,000 or $1,200. Also, Mr Stenning said in evidence (without challenge) that, had the business closed its doors on 14 August and liquidated its stock, it would have been "lucky" to realise one third to one half of its value. Moreover, the accounts show that the business then had, in addition to the current liabilities to which I have earlier referred, non-current liabilities of $13,240.55 (after allowing for the deduction of an amount of $3,367, to which I shall later refer).
91 When regard is had to this evidence, it seems to me that, faced with the circumstances as they then existed, Krishell and Mr and Mrs Myers
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- acted reasonably in choosing to enter into the arrangement arrived at on about 9 August 1996 in an attempt to mitigate their loss. If, which is at least doubtful, they were unsuccessful in their attempts to mitigate, that is no bar to recovery. A plaintiff is entitled to recover losses reasonably incurred in mitigation even though the resulting damage is in the event greater than it would have been had the mitigating steps not been taken: Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322, at 356, per Samuels JA, with whom Moffitt P and Reynolds JA were, in this respect, in agreement, and McGregor on Damages, 15th ed (1988), par 276.
92 Counsel for Gardners also advanced an argument which, as I understood it, was to the effect that a claim for loss based upon the amount of payments made, less receipts, is inappropriate in circumstances in which there was an ongoing contract between the person engaging in the misleading conduct and the victim of that conduct. It was submitted that the effect of such a claim is that, from the perspective of the person engaging in the conduct, the business becomes "a financial black hole", requiring the representor to repay to the victim all moneys "poured into it" by the victim, "regardless of the accounting within the business for such payments, or what actually happened to them". An award of this kind was also said to be inconsistent with authorities which provide that a claimant for "restitutional type damages" must itself make restitution or give credit for benefits received.
93 It is quite true that a person who has engaged in misleading conduct is not required, as a matter of course, to reimburse all losses suffered by his victim as a consequence of reliance, by the victim, on that conduct in acquiring, or setting up, a business. Only those losses which are materially contributed to by the breach, in the sense described in the authorities to which I have earlier referred, will be recoverable. However, in this case, for the reasons which I have already given, the losses claimed by Krishell were materially contributed to by the misleading conduct of Gardner Corporation. Also, those losses do take account of benefits received. The only benefit received by Krishell was the repayment of the sum of $20,000, to which I have earlier referred. Such assets as were acquired by the business (and not by Krishell) as a consequence of Krishell's contributions have since been entirely lost, as I have explained. There is consequently nothing more in respect of which credit could or should be given.
94 Nor is that situation altered, in any respect, by the fact that there was, until 9 August 1996, a continuing contract between Gardner Corporation
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- and Krishell. If it is suggested (as I understood it to be) that Krishell cannot claim damages in the amount of the payment which it is now required to make to Gardner Corporation in respect of goods previously sold and delivered by Gardner Corporation to the business without giving credit for the value of the goods so supplied, then the suggestion is, in my opinion, fallacious. Krishell's claim in that respect is not a restitutionary claim; it is one for damages under s 82 of the Act made in circumstances in which, as I have said, the assets of the business (including stock supplied by Gardner Corporation) have since been lost, both in the course of the unsuccessful trading of the business and following upon Krishell's reasonable attempts to mitigate its loss by entering into the arrangement with Zed Bears to which I have earlier referred.
The argument that the award amounts to rescission ab initio
95 That brings me to the argument that an award of damages of the kind sought, coupled with the relief which I have earlier given, effectively amounts to an order for rescission ab initio, so far as Krishell and Mr and Mrs Myers are concerned. This argument, if I understand it correctly, seems to me not to advance the case of the defendants by counterclaim in any respect. There is a broad power to grant relief under s 87 as well as under s 82. Of course, as Gaudron, Gummow and Hayne JJ pointed out in I & L Securities, at [53], the reference, in s 87, to compensating "in whole or in part" for the loss or damage requires consideration of the compensatory effect that "the order or orders concerned" will have. However, as their Honours also said (ibid), the words "in whole or in part" do not suggest that the combination of orders that a court makes should do less than provide for full compensation for all loss and damage that is not prevented by the making of the court's orders. Nor, of course, should the combination provide for more than full compensation for the loss and damage suffered. However, the orders which I have made, even if coupled with an order awarding to Krishell the full extent of its financial loss, would not result in any over-compensation. Rather, the combination of those orders is, in my opinion, both appropriate and necessary in the circumstances of this case.
The "remoteness" argument
96 The next argument is that to the effect that the damages claimed by Krishell are too remote. I have said that this argument depends upon the proposition that it was known, by 30 June 1996, that the business was in serious trouble and should therefore have been sold or surrendered and
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- upon the proposition that, from about that date, the franchisees had, in any event, effectively ceased to trade as such.
97 As to the first of those propositions, it is true that the business was in trouble by 30 June 1996. Its proprietors were then faced with the difficult decision of whether to trade on or to attempt to sell or surrender the business (always assuming that a sale was possible, there having been no evidence as to that). They chose to trade on for a short period, Mr and Mrs Stenning having, in May 1996, endeavoured to put together what Mr Stenning then referred to as "a viable package of restructuring so that … [the business could] continue trading and meet … [its] liabilities". I am not persuaded that there was anything unreasonable in that decision to trade on (or in the fact that they had not terminated the business prior to that date, the business by then having been operating for not much more than 12 months) or that it should have the consequence that the losses suffered after that date should not be recoverable. It should be borne in mind, in this respect, that Mr Myers saw the business' accounts for the period which ended on 30 June 1996 some time later, albeit still in July 1996. As I have said, the business continued to trade on for only a very short time after that.
98 As to the second proposition, even if it was so that, from 1 July 1996, the franchisees ordered no more goods from Gardner Corporation (and this did not clearly emerge from the evidence), the failure to order goods from Gardner Corporation towards the end of the life of the business was, on the uncontradicted evidence of Mr Stenning, a product of the fact that the franchisees could no longer get credit from Gardner Corporation because of the debt which was then owed by them to it. Insofar as the business then continued to purchase stock from other suppliers (Mr Stenning had told Mr Gardner, in a memorandum dated 8 May 1996, that he had "agreed to hold stock levels at there [(sic) their] current level until we have reviewed the entire situation"), these were authorised suppliers. There is consequently no basis for the suggestion that the franchisees had, by 30 June 1996, ceased to trade as such.
The contention that the accounts for the period ending 14 August 1996 were unreliable
99 That leaves only the contention that the accounts for the period which ended on 14 August 1996 are too unreliable to form a basis for the calculation of Krishell's losses.
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100 I am not persuaded that there is any substance to that contention. In the course of his evidence Mr Stenning said that, subject to the deletion of an amount of $3,367.08 shown as a non-current liability under the heading "Optus - discount stock clawback" and subject to the inclusion, as a current liability, of the amount now found to be due to Gardner Corporation, his "strong opinion" is that the accounts are fair and accurate. Nothing has been pointed to which causes me to doubt that he is right in forming that opinion. It is important to bear in mind, in this respect, that Mr Stenning said that the accounts were prepared by him in December 1996 or January 1997 with the aid of some hindsight. He said that nothing had since occurred to make him doubt their accuracy, including the accuracy of the various "write-downs" to which I have earlier referred, save that, as I have earlier mentioned, the non-current assets in the form of property, plant and equipment in fact ultimately realised an amount of only around $1000 to $1200 when they had been revalued, in the accounts, at $8000.
101 Mr William Dunstan, a chartered accountant who has for many years been the accountant for Mr and Mrs Myers and Krishell, was content to accept the accounts as accurate when he received them on Krishell's behalf (although he made no attempt to audit them), subject to some queries which, he said, were answered with "commonsense answers".
102 It is also important to bear in mind, in this respect, that there is no dispute as regards the fact that Krishell has paid all of the sums which it says that it has paid or as regards the fact that it has received back no more than the amount for which it has given credit in claiming its damages. Nor is there any real dispute as regards the proposition that, as at 9 August 1996, Krishell had no realistic prospect of recovering any contribution from Zed Bears. It was also not suggested that anything could then have been recovered from Mr and Mrs Stenning, so far as they were liable to make a contribution. Had the assets of the business then been sold (and there was no real dispute as to the value of the assets of the business as at that stage) and had the creditors of the business then been paid out (and, once again, there was no serious challenge as to the then value of the creditors, save that the amount owing to Gardner Corporation was understated), Krishell might very well have been worse off than the position in which it now finds itself.
103 I am consequently not persuaded that any adequate basis has been put forward to make me doubt the accuracy of any relevant aspect of the accounts of the business as at 14 August 1996 or to make me doubt that Krishell has suffered the losses claimed by it.
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Conclusion
104 It follows that Krishell is entitled to damages in the full amount of its loss, comprising the sum of $109,932.28 to which I have earlier referred plus the amount, once paid, which it has been found by the Master to be liable to pay to Gardner Corporation. I propose, consequently, to make orders accordingly. I will hear further from the parties as to the form which those orders might most conveniently take and also as regards the questions of interest and costs.
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