Garrett v Selise Pty Ltd
[2010] VCC 1762
•10 December 2010
| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST – GENERAL DIVISION
Case No. CI-10-02078
| STEVEN GARRETT | First Named Plaintiff |
| -and- | |
| SHARRON WALTON | Second Named Plaintiff |
| v | |
| SELISE PTY LTD | First Named Defendant |
| (ACN 124 297 874) | |
| -and- | |
| PHILLIP BRYCE-JOHNSON | Second Named Defendant |
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| JUDGE: | HER HONOUR JUDGE KENNEDY |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 25, 29, 30, November 2010; 1 December, 2010 |
| DATE OF JUDGMENT: | 10 December 2010 |
| CASE MAY BE CITED AS: | Garrett & Anor v Selise Pty Ltd & Anor |
| MEDIUM NEUTRAL CITATION: | [2010] VCC 1762 |
REASONS FOR JUDGMENT
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Catchwords: franchising agreement – whether the franchising code of conduct applies – whether, in the alternative, representations made under s52 Trade Practices Act 1974 or just “puffery”- whether counterclaim for licence fee sustained in absence of profits
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. M. Dean | McMahon Fearnley |
| For the Defendants | Mr Bryce-Johnson | |
| HER HONOUR: |
1 By an agreement dated 29 May 2009, Selise Pty Ltd (Selise) granted a licence to Steven Garrett and Sharron Walton to market and distribute a product described as “Urgent Loans” (the first agreement). Mr Garrett and Ms Walton paid a licence fee of $55,000 under the first agreement. Subsequently on 22 June 2009, Selise granted Mr Garrett and Ms Walton another licence to market and distribute a product described as “Moneyscope” (the second agreement). Both products related to the provision of short term business and investment caveat loans and first and second mortgage products. The second agreement also included “commercial finance.”
2 Mr Garrett and Ms Walton claim that Selise has breached clauses 6(1), 6B, 10 and 11 of the Franchising Code of Conduct (FCC) in respect of the two agreements which were contraventions of an “applicable industry code” and hence a breach of s51AD of the Trade Practices Act 1974 (TPA).[1] Further, that Mr Phillip Bryce-Johnson, a director of Selise, is a person who aided, abetted, counselled or procured or has been directly or knowingly concerned in, or party to, the contraventions. They seek orders against Selise declaring the agreements void and for orders against both defendants for damages for the licence fee paid of $55,000.[2]
[1] Pursuant to s51ACA(1) an “applicable industry code” includes the prescribed provisions of any “mandatory industry code.” A “mandatory industry code” means an industry code declared by regulations under s51AE to be mandatory. Pursuant to regulation 3 of the Trade Practices (Industry Codes-Franchising) Regulations 1998 the FCC is a mandatory industry code for the purposes of s51AE of the TPA
[2] See paragraph 12 of the Plaintiffs’ Supplementary Submissions dated 1 December 2010
3 In the alternative, the plaintiffs claim that they relied upon various representations made to them by Mr Bryce-Johnson to the effect that if they entered into the first agreement Selise would general “significant leads” and the Selise website “leads galore.” Further, that Mr Bryce-Johnson would “turn on the tap for Perth.”[3] On this basis the plaintiffs also seek orders that the first agreement is void and for orders against both defendants for payment of $55,000.
[3] Statement of Claim dated 12 May 2010 para 18
4 An earlier claim that Selise breached clauses 7.1 and 7.2 of the second agreement was abandoned in opening.[4]
[4] In opening Counsel for the plaintiffs formally abandoned paras 24, 25, 26, 27(c), and 28(b) and (c) of the Statement of Claim
5 The defendants deny that the relevant agreements are “franchise agreements” within the meaning of clause 4 of the FCC and also deny the making of the representations.
6 Selise also counterclaims for the licence fee of $66,000 due under the second agreement.[5] However the plaintiffs, in addition to relying on the contraventions of the FCC, say that the licence fee - which is payable “out of initial profits”[6] - has not become due given no profits were made.
[5] Selise was given leave to file a late counterclaim on this basis on 29 November. A proposed claim based on an alleged failure of the plaintiffs to use their “best endeavours” to market and distribute the product was also not pursued by the defendants
[6] See clause 1.1 definition of “licence fee,” and Item 8 of Schedule 1 of the second agreement
7 Accordingly, the issues are:
in relation to the FCC contraventions
(a) are the agreements franchise agreements within the meaning of Clause 4
of the FCC?(b) if yes, has the FCC been contravened? (c) if yes to (a) and (b), was Mr Phillip Bryce-Johnson involved in the
contravention(s) for the purposes of s75B of the TPA?;(d) if yes to (a) and (b) , what remedy is appropriate? in relation to the alleged misrepresentations did Mr Bryce-Johnson, on behalf of Selise, make the representations referred to in paragraph 18 of the Statement of Claim and, if yes, are those representations actionable under s52TPA?
in relation to the Counterclaim should the Counterclaim be dismissed even if the FCC does not apply and the
agreements are not declared void?
Background
parties
8 Mr Garrett’s occupation was given as “bathroom renovations” and he had no experience in the finance industry. Ms Walton, his partner, works in the catering department of an offshore company and also had no experience in loan funding or accounting.
9 Mr Bryce-Johnson, the second defendant, is the director of Selise, the first defendant and a qualified software engineer. He claimed that he “entered the finance industry” in 2004 by putting refinancing packages together. Mr Bryce- Johnson did not appear on the first day of the trial after advising court staff that he was unwell whereupon the case was adjourned to 29 November 2010.
10 Both defendants were unrepresented by legal practitioners. On 1 July 2010, His Honour Judge Anderson gave leave to Mr Bryce-Johnson to represent Selise in the proceeding on condition that he remained a director and shareholder of Selise and his fellow director and shareholder did not object. His Honour also required the co-director, Mrs Wendy Bryce-Johnson (the second defendant’s wife), to be notified of her right to object. At the commencement of the resumed hearing on 29 November, I ascertained that these conditions were met and, with no objection by Mrs Bryce-Johnson or the plaintiffs, confirmed the right of Mr Bryce-Johnson to represent the first defendant.
11 Mr Bryce-Johnson thereupon appeared and was given the right to cross examine, call evidence and make submissions (oral and written).
preliminary to contracts
12 On about 22 May 2009 the plaintiffs attended an expo in Perth for franchises and small businesses. They met with a Mr Reiter who was present at an exhibit marked “Urgent Loans” The precise association of Mr Reiter and Mr Bryce Johnson is a little unclear, but Mr Reiter was the shareholder and director of “Credit Able Pty Ltd” which ultimately provided many of the “indicative funding proposals” referred to, below. The plaintiffs were told that “urgent loans” was a funding product and that Mr Reiter had clients in Melbourne who were ready to provide lending to people who found it hard to get loans. The plaintiffs were interested and agreed to a further meeting.
13 A further meeting then took place on about 28 May at the Perth Hyatt between the plaintiffs, Mr Reiter and Mr Bryce-Johnson. At this meeting the plaintiffs allege that Mr Bryce-Johnson made various representations to the effect that it was a case of “turning on the tap” (which is contested). The plaintiffs were then given a copy of a contract for “Urgent Loans” to take away. There was also some discussion about the “Moneyscope” product which provided larger loans.
14 On about 29 May the plaintiffs again met at the Hyatt. Some minor changes were made to the first agreement which was then executed in the foyer of the hotel. The plaintiffs did not receive any legal or accounting advice prior to signing the first agreement. Some 3 days later they also paid the $55,000 licence fee payable under that agreement.
15 Some time later, Mr Reiter went to Perth to train the plaintiffs for approximately 35 minutes. At this time he also offered them a Moneyscope Licence which was signed at that time. Mr Garrett’s evidence was that the plaintiffs were also handed a bundle of documents which included a script, a preliminary questionnaire; a dictionary of financial terms; and an “urgent loans business and marketing plan” (all contained in “exhibit F”).
16 On advice from Mr Bryce-Johnson, the plaintiffs then incorporated a company, Walett Pty Ltd, on 9 June 2009 and registered a business name, “SOS Commercial Loans” on 18 June 2009 in the name of this company. They also set up a website under the name of SOS Commercial loans and ran a banking account under this name. Loan application questionnaire documents tendered in court were also in the name of SOS Commercial Loans.
contract terms
17 Under each agreement the Licensor granted the plaintiffs an exclusive right to market and distribute the “Product” within the “Territory” for the duration of the Term and any Further Term (clause 2). The Licensor was described as Selise Pty Ltd “dba Urgent Loans” in the first agreement and Selise Pty Ltd “dba Moneyscope” in the second agreement. The reference to “dba” was said to be a reference to “doing business as” by Mr Bryce-Johnson. The plaintiffs were obliged to pay a “Licence Fee” in each case (clause 6). However, their remuneration, in the form of a “client service fee,” was wholly dependent on a loan application being “finalized” between lender and borrower (clause 7.1 in each case).
18 In the first agreement, the “Product” was defined as “Urgent Loans” short-term business and investment Caveat loan, first & second mortgage products and other such instruments as available. The “Territory” was somewhat ambiguously defined as “number two” and the term was five years with one further option of five years.
19 In the second agreement, the “Product” was defined as “Moneyscope” Short- term business and investment Caveat loan, Commercial Finance, First & Second mortgage products and other such instruments as available. The “Territory” was defined as Western Australia and the term was five years with one further option of five years.
20 The terms of the agreements will be explored further, below.
21 Mr Garrett also gave evidence as to the way the agreements worked in practice. Briefly, the plaintiffs would call brokers/borrowers who needed money quickly and forward a loan application document to them for completion; they would then forward the completed form to Urgent Loans/ Moneyscope; Urgent Loans/Moneyscope would then come back to the plaintiffs saying “yes or no.” If yes, the plaintiffs would receive an “indicative funding” offer which specified a commitment fee which Mr Garrett claimed was payable whether the borrower ultimately got the loan or not. Any completed proposals then went back to the lender for final approval though none were ever finally processed in this way. If they were finalised there was then a further fee payable.
22 Although the commitment fee was not defined in the first agreement it was defined in the second agreement as an amount “between 10 and 12.5% of the net loan amount (as negotiated and agreed between the Licensor and the borrower) which is paid by the borrower for processing and arranging the loan, such amount being payable to the Licensor upon drawdown of the loan funds by the borrower.” This tends to suggest that the fee should not have been payable if there was no drawdown, contrary to the suggestion of Mr Garrett. However, given the question of the commitment fee was not a live issue in the case, it is unnecessary to take the matter further.
subsequent
23 The plaintiffs’ evidence was that they received only three leads from Mr Bryce- Johnson. Further, that only three persons ever paid the commitment fee and that no loans were ever finalised. The plaintiffs received no commissions under either agreement.
24 The evidence of Mr Bryce-Johnson was that no-one else took up a licence for Urgent Loans or Moneyscope in Western Australia after May/June 2009.
Evidence
25 Both Mr Garrett and Ms Walton were called. Although there were aspects of their testimony that were vague, they presented as straightforward witnesses whose evidence I generally accept.
26 Mr Bryce-Johnson was also called and was given the opportunity, and did, adopt a handwritten statement. He also supplemented this written statement with some oral evidence, particularly directed to what occurred at the meetings, and was cross examined.
27 The evidence of Mr Bryce-Johnson was less than forthcoming. For example, when asked about the nature of the financial obligation secured by a fixed and floating charge to Credit Able Pty Ltd against the assets of Selise (on 18 June 2009) he said that the financial obligation was “yet to be determined.” He also claimed that a company he was involved in entitled “Virtual Private Networks Pty Ltd” had been “possibly” liquidated.
28 His evidence as to the documents he prepared and that were handed to the plaintiffs at the training session was also unsatisfactory. This was particularly so in relation to a document described as a “Business and Marketing Plan” document. Mr Bryce Johnson gave evidence that he had obtained this document from a bookstore on the internet and that the recipient could “insert their name.” It included the extraordinary claim that “we expect growth to increase by 120% per year” when there was no foundation for suggesting this figure. Mr Bryce-Johnson’s explanation for this was that this was “quite possibly that’s what they [the plaintiffs] would put in.” The “Plan” also contained a table which specified that the projected cash flow of the specified company would grow to over $7 million by 2006. This figure was also without any foundation but was inserted by Mr Bryce-Johnson because this figure was “on the Excel template when we got it.”
29 Overall then, I am unable to be satisfied that the evidence of Mr Bryce- Johnson may be generally relied upon and, to the extent necessary, have preferred the plaintiffs’ evidence. Nevertheless, the case is largely to be determined on the contents of the documents adduced rather than my views generally as to credit or as to the wisdom of entering into these agreements.
Alleged Breaches of FCC
Whether FCC applies
30 Pursuant to clause 5(1) the FCC applies to a “franchise agreement entered into on or after 1 October 1998.” Clause 4 of the FCC provides for the meaning of a “franchise agreement” as follows:
“4 Meaning of franchise agreement
(1) A franchise agreement is an agreement :
(a)that takes the form, in whole or part, of any of the following :
(i) a written agreement;
(ii) an oral agreement;
(iii) an implied agreement; and(b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and
(c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol :
(i) owned, used or licensed by the franchisor or an associate of the
franchisor; or
(ii) specified by the franchisor or an associate or the franchisor; and
(d) under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example :
(i) an initial capital investment fee;...”
31 It is clear that (1)(a) applies in this case to both agreements as the agreements are both written.
32 Under both agreements the Licensee was also obliged to pay a Licence Fee (clause 6 in each case) so that (1)(d) is also satisfied.
33 It therefore remains to consider clause 4(1)(b) and (c).
34 In this context, Mr Bryce-Johnson emphasized[7] that the FCC did not apply since:
[7] See in particular in his written statement marked as Exhibit 1
•
no “system or marketing plan” was provided since all that was provided was a suite of forms and a loan lodgement service;
• the plaintiffs carried on business under their own name; •
clause 4.10 of each agreement provided that there was no franchisee relationship.
Clause 4(1)(b)
35 As Bennett J noted, in Capital Networks Pty Ltd v .au Domain Administration Ltd[8] , clause 4(1)(b) has a number of components. They are:
[8] [2004] FCA 808 at [97]
(a) A person (referred to as a franchisor) grants to another person (referred to as a franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia; (b) The right to carry on business is granted under a system or marketing plan; (c) The system or marketing plan must be determined, controlled or suggested by the franchisor. 36 The first element appears readily satisfied.
37 Thus, pursuant to clause 2 of each agreement the Licensor grants to the Licensee the exclusive right to “market and distribute” the Product as defined. In such circumstances I find that the agreements provide for the grant of a right to carry on the business of “offering, supplying or distributing” goods or services in Australia as required; the concept of “distributing” being specifically included.
38 The next issue is whether the right to carry on business is granted under a “system or marketing plan.”
39 Pursuant to clauses 3.1 in each case the Licensor agrees to make available to the Licensee all necessary materials, documentation and information required by the Licensee to market and distribute the Product within the Territory.
40 Clause 3.2 of the first agreement then reads as follows:
3.2 These materials shall include the following:
(a) URGENT LOANS Product disclosure & Licensee Information booklet; (b) URGENT LOANS Operations Guide; and (c) URGENT LOANS Loan Application package.
41 Clause 3.2 of the second agreement similarly reads:
3.2 These materials shall include the following:
(a) Moneyscope Product disclosure & Licensee Information booklet; (b) Moneyscope Operations Guide; and (c) Moneyscope Loan Application package.
42 Pursuant to clause 5(a) of the first agreement the Licensee warrants that it “shall market” the Product and provide all necessary literature and product disclosure information in accordance with the best practices Urgent Loans Operations Guide and further that the information it provides “shall accord with” and comply with the Urgent Loans Operations Guide. Clause 5(a) of the second agreement includes a similar provision save that “Moneyscope” is substituted for “Urgent loans.”
43 A difficulty in the case is that the materials specified above were not in evidence. Thus, there is nothing to suggest that the materials specified under the first agreement were ever provided to the plaintiffs. Moreover, the evidence of Mr Bryce-Johnson was that the “Moneyscope materials” never in fact came into existence.
44 Nevertheless, I am required to make a judgment as to whether an agreement is a “franchise agreement” before it becomes operative and by reference to its terms.[9] Moreover, details of the system or marketing plan need not even be in existence at the time the agreement is reached.[10]
[9] Rafferty v Time 2000 West Pty Ltd (No 4) [2010] FCA 725 at [240] citing ACCC v Kyloe Pty Ltd [2007] [2007] FCA 1522 at [56]
[10] [2010] FCA 725 at [241]
45 This approach presents some difficulties particularly given the plaintiffs in this case appear to have been provided with no “system or plan” at all in the result. Nevertheless, the terms of the agreements do appear to contemplate the use of some “system or marketing plan.”
46 Some of the factors relevant to whether there is a system or marketing plan within clause 4(1)(b) are identified in Capital Networks Pty Ltd v .au Domain Administration Ltd[11] and in the decision of ACCC v Kyloe[12] (which latter case was cited by Mr Bryce-Johnson). They are also applied in the decision of Rafferty v Time 2000 West Pty Ltd.[13]
[11] [2004] FCA 808 at [103] – [110]
[12] [2007] FCA 1522
[13] [2010] FCA 725
47 There are factors present in those cases which do not apply to the present case. However, there are factors which do apply. In particular:
•
the agreements contemplate the provision by the Licensor of prescribed forms (clause 4.3)[14];
•
the agreements require the Licensee to gather from the client information necessary for the Licensor to assess the client application in accordance with the Urgent Loans/ Moneyscope Operations Guide and to pass on such client applications and information to the Licensor in a timely manner. (clause 4.4)[15] ;
•
there is a detailed compensation structure dependent on the act of the Licensor in that a “Client Service Fee” is only paid where a loan application is finalised between lender and borrower (clause 7.1) after assessment by the Licensor at its “complete” and “unfettered” discretion (clauses 3.4 and 4.5) [16];
•
although there is no provision of assistance in conducting “opportunity meetings” the agreements contemplate that the Licensor agrees to provides such assistance as may be required on an “as-needs” basis in respect of the distribution and marketing of the Product (clause 13)[17];
[14] [2010] FCA 725 at [260]
[15] [2010] FCA 725 at [260]
[16] [2010] FCA 725 at [249];
[17] [2010] FCA 725 at [249]
48 Critically, the agreements are distinguishable from that considered in ACCC v Kyloe[18] where there was no requirement to obtain information and pass it on, nor was there any compensation arrangement suggested. Instead, it appeared that the sub-distributors in that case were free to run their businesses as they pleased as independent parties with little control exercised under the relevant agreements. In such circumstances, the arrangements were found to bear the hallmarks of a distributorship.[19] This is to be contrasted with the agreements in this case wherein the profitability of the Licencee is directly dependent on whether a loan application is “finalised” after an assessment dependent on and undertaken by the Licensor.
[18] [2007] FCA 1522 at [48]
[19] [2007] FCA 1522 at [61]
49 I am thereby satisfied that the right to carry on business is granted under a “system or marketing plan” pursuant to both agreements.
50 I am further satisfied that “the system or marketing plan” contemplated is one “substantially determined, or suggested” by the franchisor. At the very least the system or marketing plan was “suggested” by the Licensor given it was the Licensor who was to make the materials available under clause 3.1 in each case.
Clause 4(1)(c)
51 Clause 4(1)(c) provides that a franchise agreement is an agreement under which the operation of the business “will be” substantially or materially associated with a particular trade mark, advertising or a commercial symbol.
52 Both agreements contain a definition of “Trade Marks” as meaning the registered trade marks and trade mark applications listed in Schedule 3. However, while the third Schedule of the second agreement contains a reference to “Moneyscope: Application No: 1140986 Registered” there is no such reference in the first agreement. The cover of the first agreement, however, contains a logo with a quarter circle and arrow above the words “Urgent Loans Boutique Private lending” while the cover of the second agreement contains the word “moneyscope” inside a broken circle.
53 Significantly, although clause 8.1 of each agreement makes provision for “the right to make use of” the Licensor’s trademarks, logos and/or trade names attaching to the Product, the agreements do not provide that such symbols “will be” deployed in running the business.
54 The provisions in the agreements in this case can also be distinguished from the agreement in the Kyloe case which provided that the products “shall be sold under the Trade Marks...”[20]
[20] [2007] FCA 1522 at [15] per sub-clause (r)
55 When I raised this concern during the hearing, Counsel for the plaintiffs submitted that the agreements contemplate that the operation of the business will be substantially or materially associated with an “advertising or a commercial symbol” as there would otherwise be little point imposing restrictions on the use of the same (as is done in clauses 8.2 and following). However, the restrictions on the use of the symbols are clearly there to protect the Licensor in the event that the Licensee makes use of its rights to use such trademarks logos or names. They only contemplate that the relevant symbols “may be” used not that they “will be used” as is contemplated by clause 4(1)(c).
56 Mr Bryce-Johnson also relied on the terms of clause 4.10 which provided that the Licensee shall conduct its business “as an independent proprietor and as the Licensee’s own business and not as an agent, partner, joint venturer, sub- contractor, franchisee or servant or employee of the Licensor.”
57 Although I accept that the question of whether an agreement is a franchise agreement is to be resolved by application of the FCC definition “and not by reference to any preconceived notions of other agreements which are not ordinarily understood to be franchise agreements”,[21] this clause tends to fortify my views that the agreements did not require the deployment of another’s name through a trade mark, advertising or commercial symbol.
[21] Rafferty v Time 2000 West Pty Ltd [2010] FCA 725 at [219]
58 Moreover, to the extent the subsequent conduct of the parties in this case may be utilised,[22] it also tends to fortify my construction of both agreements in this case. Thus, as indicated already, the plaintiffs set up their own company and operated the business under their own business name. The loan applications produced are also in the name of SOS Commercial Loans. The plaintiffs therefore clearly regarded themselves as able to market the product under their own name without deployment of the “urgent loans” or “moneyscope” advertising or commercial symbol.
[22] And see discussion in Cheshire and Fifoot’s Law of Contract 9th edition at [10.16]
59 The above matters therefore fortify the non-application of clause 4(1)(c) which is apparent from a natural reading of the terms of the agreements themselves in any event. The evident purpose of the FCC is that its protection will only be extended in circumstances where the franchisee will potentially build the good will of the franchisor’s business by using the franchisor’s trade mark, advertising or a commercial symbol. They do not apply where a franchisee has the option of operating autonomously pursuant to a trade mark, advertising or commercial symbol of its own choice.
60 It follows that I do not accept that clause 4(1)(c) applies.
61 The result is that the FCC does not apply to the agreements.
Other matters
62 In the light of my finding that the FCC does not apply, it is unnecessary to further consider the question of contravention and remedy.
63 However, for the sake of completeness I will briefly record my views.
64 Firstly, the plaintiffs did establish breaches of clauses 6(1), 6B, 10 and 11 of the FCC if the FCC had applied.
65 Thus, Mr Garratt gave evidence that he did not receive a disclosure statement or the FCC. He also did not receive drafts of the agreements 14 days prior to execution (in the case of the first agreement he said the gap was 3 days; in the case of the second agreement he claimed a gap of a “couple of days”). Nor was there any evidence that Selise received a signed statement about legal advice pursuant to clause 11(2).
66 Mr Bryce-Johnson also generally accepted that he did not create the documents required under the FCC because he believed there was “no need for us to do it.”
67 However, I would not be prepared to find that Mr Bryce-Johnson was “involved in” the contraventions for the purposes of s75B TPA.
68 In Yorke v Lucas[23] the High Court said that knowledge of the essential elements making up the relevant contravention must be proved in order to establish liability under s75B(1)(a) or (c).
[23] (1985) 158 CLR 661 ( at 667 and 671 per Mason ACJ, Wilson, Deane and Dawson JJ; at 677 per Brennan J)
69 In Rafferty[24], Besanko J set out the essential matters which constitute or make up the contravention of s51AD which included knowledge that the FCC applies to the relevant agreement.
[24] [2010] FCA 725 at [334]
70 The evidence of Mr Bryce-Johnson, was that, although he was aware that there was a franchising code of conduct, he had:
“ discussed that with our solicitor and they’re a very good practice in the area and they advised us that this was all that was needed because there was no requirement for the people to trade under their own name, we weren’t mandating that they had to report to us or file anything and that was-that was what we did.”
71 The thrust of his evidence was that he believed the FCC did not apply to the agreements on advice from a solicitor although he did not produce an invoice from this solicitor.
72 Although as previously set out, I had some general issues with reliability of the defendant’s evidence, I accept this evidence. It was consistent with the defendants’ original pleading and his submissions in court that he did not believe the FCC applied.
73 In such circumstances, I do not accept that he had knowledge that the FCC applies to the relevant agreements such as to make him liable under s75B even if the FCC applied.
74 The remaining issue, then, would be the question of relief. However, in Master Education Services Pty Ltd v Ketchell[25] the High Court considered whether a contravention of s51AD resulted in the franchise agreement being illegal and unenforceable at common law and decided that this was not the result (at[117]).
[25] (2008) 236 CLR 101
75 An agreement might still be struck down pursuant to s87(2) of the TPA. However, notwithstanding the clear breaches of the FCC in this case I am not generally satisfied that the agreements should be struck down.
76 There were suggestions that the provision of a disclosure statement[26] might have put the plaintiffs on notice, inter alia, that a judgement had already been entered against Selise in 2009; that the other officer of Selise, Mrs Bryce- Johnson, had qualifications in childcare; and that Moneyscope was not even owned by Selise.
[26] Which the plaintiffs conceded “probably” didn’t need to be in the longer form Annexure 1 but only needed to be in the shortened form of Annexure 2 given it could not be shown that the franchised business had an expected annual turnover of $50,000 or more- see clause 6(2)(a) of the FCC
77 However, no evidence was led to the effect that the plaintiffs would not have entered into the agreements had they been aware of these matters. Rather, given the evident enthusiasm for the venture evinced by the plaintiffs in this case, I am unable to be confident that they would not have gone ahead even had the FCC provisions been complied with.
78 I also note that the features present in the Rafferty case do not apply here. Thus, I am unable to find that, had the FCC been complied with, the plaintiffs would have sought legal advice. Nor that they would have necessarily followed that advice if it had been not to enter into the agreements. [27] Indeed the evidence was that the plaintiffs did not obtain legal advice though the agreements actually contain an acknowledgment that the licensee was advised to obtain independent advice (clause 19.2 in each case). Mr Bryce- Johnson also alleged that the plaintiffs were advised to obtain legal advice.
[27] Cf [2010] FCA 725 at [269]
79 If it was necessary to consider, I would not be prepared to strike the agreements down. However, it is unnecessary to say more given my finding that the FCC does not apply in any event. Given this finding, the claims of the plaintiffs pursuant to the FCC are not sustained.
Alleged Representations
80 At the first meeting at the Hyatt with Mr Bryce-Johnson, Mr Garrett alleged that the following occurred:
“What was said by the both of yourself in relation to the proposal?---Mr Johnson pretty much repeated what Tim Reiter spoke about which was a lot of work in Perth, it was a case of turning on the tap, they couldn't cope with the demand of work so the sooner they got people in Perth and I believe they were looking to get six or seven franchises in Perth. Yes, it was a case of turning on the tap, setting up a website and the work was going to come rolling in and my concerns were also reassured because one of my first questions again to Mr Johnson was I don't have a history in finance and nor does Sharron and that wasn't a problem because they could order paperwork, the whole office procedure was set and they got the clients but obviously we'd got to look for more clients as well.
Sorry?---Obviously we've got to look for more clients as well which we did.”
81 Mr Garrett’s evidence was also that he would not have entered into the agreement in the absence of these oral statements because he was assured the leads were there and this was going to give him plenty of time to understand the business more fully.
82 The evidence was somewhat vague in character. Moreover, Ms Walton’s evidence was slightly different to the effect that “they’d be able to provide us with ‘leads galore’ was one of the statements along with they would also set up a website for us which would help “turn on the tap.” She also said that if she hadn’t been told “the things” by Mr Johnson at the Hyatt she would not have entered into the agreements as she was not looking to get into the finance industry: “We were just looking that day and because we just got swept up on the enthusiasm of Phillip Bryce Johnson and Tim Reiter how much money there was to be made and how easy it was so we- like I say we were gullible obviously and greedy also...”
83 Mr Bryce Johnson generally denied the making of the representations. He also disagreed that only three leads were provided and said there were “other things we did to give them pointers.”
84 In the light of my difficulty with the defendant’s evidence I generally prefer and accept the plaintiff’s evidence. That evidence is also generally corroborated by the terms of an email of 14 October 2009 wherein Mr Garrett alleged that Phillip had not “turned on the tap for Perth.”
85 In such circumstances, I accept that Mr Bryce-Johnson suggested he could “turn on the tap” and further that he said words to the effect that he had lots of “leads.”
86 However, a question arises as to whether any of the representations were statements in the nature of “puffery”. In relation to this question each of the representations falls to be considered in the light of the particular facts and “in the light of the ordinary incidents and character of commercial behaviour.”[28]
[28] General Newspapers Pty Ltd v Telstra Corp (1993) 45 FCR 164 at 178 per Davies and Einfeld JJ
87 in my view the representations, such as they were, were little more than general introductory statements or “puffery” designed to attract the interest of the plaintiffs. They were the kind of puffing one might ordinarily expect to be made during the commencement of negotiations to sell a franchise and are incapable of being proved to be correct or incorrect. Thus, it is not possible to test objectively whether or not a tap was “turned on” and whether there were leads “galore.”
88 The alleged representations are also similar to statements found by Kenny J to be puffery in the case of Sanders[29] to the effect that the relevant business therein was “extremely successful”; and an “attractive investment”; and that the respondent would organise an “aggressive marketing campaign.”
[29] Sanders v Glev Franchises Pty Ltd [2002] FCA 1332 especially at [272]
89 In my view the alleged representations in this case, then, should not be elevated to the status of potentially misleading conduct.
90 It follows that the plaintiffs have not established the making of any actionable representation pursuant to s52 of the TPA and that I reject the plaintiffs’ claims based on the making of the alleged representations.
Counterclaim
91 Pursuant to clause 6 of the second agreement, the Licensee shall pay to the Licensor “the Licence Fee.” However, “Licence Fee” is defined as the fee “payable” by the Licensee to the Licensor “as set out in Item 8 Schedule 1.” (clause 1.1). Item 8 states that the Licence Fee is “$60,000 plus GST to be paid out of initial profits.”
92 The evidence of the plaintiffs was that no payments were ever received in relation to the urgent loans agreement or the moneyscope agreement. This is supported by the bank statement produced in the name of SOS Commercial for the period 30 June 2009 until 29 November 2010. This maintained a zero balance with the exception of one reversed entry of $6000 which Ms Walton explained was entered in error.
93 The plaintiffs also produced telephone accounts relating to the running of the business: a Telstra account for the landline and internet; an optus account for mobiles which were used for communications with potential clients; and an Ozetel account for a 1300 number which was diverted to all three numbers. Ms Walton’s evidence was that these accounts were paid and that the amounts totalled over $1500.
94 It follows that, if anything, the business made a loss, and that no profits were made under the second agreement.
95 In those circumstances, I accept the submissions of the plaintiffs that no Licence fee is payable “as set out in Item 8 Schedule 1” which specifies that such fee is only to be paid out in circumstances where there are “profits.” In the absence of any profits, no licence fee is payable.
96 In these circumstances, the Counterclaim should be dismissed.
Conclusion
97 The plaintiffs have not established any entitlement to relief on the basis of contraventions of the FCC since the FCC does not apply to the agreements.
98 The plaintiffs have also not established any entitlement to relief for misleading or deceptive conduct as they have failed to establish the making of any actionable representations.
99 The first defendant has also not established an entitlement to a Licence Fee to be paid “out of initial profits” pursuant to the second agreement given no profits were made.
100 It follows that the Claim and the Counterclaim should be dismissed.
101 I will hear from the parties on the question of costs
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