Hype Investments Pty Ltd v Funk Coffee & Food Pty Ltd (No 2) - [2019] SADC 156

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
HYPE INVESTMENTS PTY LTD & ANOR v FUNK COFFEE & FOOD PTY LTD & ORS (No 2)
[2019] SADC 156
Judgment of His Honour Judge Tilmouth
8 November 2019
TRADE AND COMMERCE - TRADE PRACTICES AND RELATED MATTERS - ENFORCEMENT AND REMEDIES - ACTIONS FOR DAMAGES - CAUSATION
Following conclusions on liability of misrepresentations, this case returns to the court to resolve outstanding questions as to causation and damages.
Held:
1. The court has already conclusively determined questions of reliance and causation by finding the transaction would not have proceeded if the true position as to turnover of the subject business was made known.
2. Hype Investments is entitled to judgment for Capital losses assessed at $243,000.
3. Consequential expenses are awarded at $66,029.89.
4. Declaring the Franchise Agreements unenforceable pursuant to s87(2)(ba) of the Trade Practices Act.
5. Dismiss the cross-claims.
6. An award of damages is made in favour of Mr Sebastiano personally against the first to fourth defendants, jointly and severally, for lost wages of $76,341.
7. Order requiring the first to fourth defendants to indemnify him for such sum or sums as may be assessed by the Australian Taxation Office on that award pursuant to s87(2)(d) of the Trade Practices Act.
Hype Investments Pty Ltd and Sebastiano v Funk Coffee and Food Pty Ltd and Ors [2019] SADC 98; Misrepresentation Act 1972 (SA) s 7; Trade Practices Act 1974 (Cth) ss 51, 51AB, 75B(1)(c), 82, 82(2), 87(2)(b) and 87(2)(d); Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) cl 11(1); District Court Act 1991 (SA) ss 37, 39(1), and 39(3); Income Assessment Act 1997 (Cth) s 6.5; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; Sellars v Adelaide Petroleum NL; Poseidon Ltd v Adelaide Petroleum NL (1994) 179 CLR 332; South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191; MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR; Kenny & Good Pty Ltd v MGICA (1992) Ltd (1997) 77 FCR 307; Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413; Wealthsure Pty Ltd v Selig (2014) 221 FCR 1; Jamieson v Westpac Banking Corporation (2014) 283 FLR 286; Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; Henville v Walker (2001) 206 CLR 459; Chappel v Hart (1998) 195 CLR 232; Rosenberg v Percival (2001) 205 CLR 434; Travel Compensation Fun v Robert Tambree (2005) 224 CLR 627; Abigroup Contractors Pty Ltd v Sydney Catchment AUthority (No 3) (2006) 67 NSWLR 341; Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101; Australian Competition and Consumer Commission (ACCC) v South East Melbourne Cleaning Pty Ltd (in liq) (formerly Known as Coverall Cleaning Concepts South East Melbourne Pty Ltd) [2015] ATPR 42-503; Peek v Derry (1887) 37 Ch D 541; Toteff v Antonas (1952) 87 CLR 647; Doyle v Olby (Ironmongers) Ltd (1969) 2 QB 158; RRG Nominees Pty Ltd v Visible Temporary Fencing Australia Pty Ltd (No 4) [2019] FCA 686; Laudenback v Biedrzycki [1999] SADC 29; Kemp v Vettese [1999] SADC 60; Phoenix Security Pty Ltd v Papas Transport [2000] SADC 61; Corani & Corani v Wright, Wright and Basheer & De Conno Pty Ltd [2004] SADC 154; GP Transport (SA) Pty Ltd v Cavill Power Products Pty Ltd [2009] SADC 77; Graham v Freer (1980) 35 SASR 424; Micarone v Perpetual Trustees (1999) 75 SASR 1; JAD International Pty Ltd v International Trucks Ltd (1994) 50 FCR 378; Brown v Smith (1924) 34 CLR 160; Spence v Crawford [1939] 3 All ER 271; HTW Valuers (Central Queensland) v Astonland Pty Ltd (2004) 217 CLR 640; Pitcher Partners Consulting Pty Ltd v Nevilles Bus Service Pty Ltd [2019] FCAFC 119; S Gormley & Co Pty Ltd v Cubit [1964-5] NSWR 557; TN Lucas Pty Ltd v Centrepoint Freeholds Pty Ltd (1984) 1 FCR 110; Canavan v Wright [1957] NZLR 790; Warwick Entertainment Centre Pty Ltd v Alpine Holdings Pty Ltd (2005) 224 ALR 134; Slinger v Southern White Pty Ltd (2005) 92 SASR 303; Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; Rakic v John Lyng Insurance Building Solutions (Victoria) Pty Ltd (2016) 259 IR 47; British Transport Commission v Gourley [1956] AC 185; Protonotarios v Zapasnik (1982) 106 FLR 343; Daniels v Anderson (1995) 37 NSWLR 438; Atlas Tiles Ltd v Briers (1978) 144 CLR 202; Fox v Wood (1981) 148 CLR 438; Carapark Holdings Ltd v The Commission of Taxation (Cth) (1967) 115 CLR 653; Lonie v Perugini & Perugini (1978) 18 SASR 201; Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564; Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd (2000) 200 CLR 591; Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Ltd (No 2) [2017] FCAFC 99; Wheeler v Page and Harris (1982) 31 SASR 1; Nominal Defendant v Dighton (2012) 113 SASR 506; Yorke v Lucas (1985) 158 CLR 661; Fencott v Muller (1983) 152 CLR 570, referred to.
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; The Commonwealth of Australia v Amann Aviation (1991) 174 CLR 65; Cullen v Trappell (1980) 146 CLR 1, applied.
Hype Investments Pty Ltd and Sebastiano v Funk Coffee and Food Pty Ltd and Ors [2019] SADC 98; Warwick Entertainment Centre Pty Ltd v Alpine Holdngs Pty Ltd (2005) 224 ALR 134, discussed.

HYPE INVESTMENTS PTY LTD & ANOR v FUNK COFFEE & FOOD PTY LTD & ORS (No 2)
[2019] SADC 156
Contents
The issues
The defendant’s further submissions
The case at trial on reliance and causation
The defendant’s further submissions on causation
Analysis – Back Office
Breach of Franchise Code
Misrepresentation Act
Remedies
Value of the business
Consequential losses
Loss of wages – Mr Sebastiano
Declaratory orders
Interest and costs
The defendants’ cross-action
Liability against whom?
Summary and orders
The issues

It was anticipated these proceedings would return to the court for submissions on appropriate consequential orders and damages following delivery of the judgment on issues of liability.[1] The conclusion was drawn therein that the defendants made actionable misrepresentations with respect to the purchase of a café franchise in Flinders Street, Adelaide contrary to s 51 of the Trade Practices Act 1974 (Cth).[2]
[1] Hype Investments Pty Ltd and Sebastiano v Funk Coffee and Food Pty Ltd and Ors [2019] SADC 98, 19 July 2019 (hereinafter referred to as ‘the primary judgment’).
[2] Ibid [134]. The business is hereinafter referred to as ‘Funk Flinders Street’ as it was in the primary judgment.
In the meantime, the defendants filed further submissions purporting to demonstrate that the court did not make conclusive findings as to causation. It may be recalled that this case relates to the entry into the following principal agreements (hereinafter at times collectively referred to as the ‘Franchise Agreements’):[3]
·A Franchise Agreement dated 1 July 2009 between Funk Franchise and Hype Investments, for an initial term of five years with a right of renewal for a further five years.
·A Sale of Business Agreement entered into between Hype Investments and Funk Coffee & Food on 23 June 2009.
·A Licence Agreement between Funk Leasing and Hype Investments for the purposes of occupancy of the premises dated 1 July 2009, to expire on 16 August 2016. (This was in effect a sub or underlease granted with the consent of the landlord at that time, Insurance Australia Pty Ltd).
The second plaintiff Mr Sebastiano entered into various guarantees in support of these agreements.
[3] Ibid [6].
The defendants’ further submissions
The matter was set for submissions on 2 August 2019. Mr Roberts QC now appearing as lead counsel for the defendants, laboured the point that whilst the plaintiffs had proven reliance, they did not prove that had the misrepresentations ‘not been made they would not have entered the relevant transactions’.[4] Particular stress was placed on what was repetitiously described as a necessary ‘counter factual’ or ‘past hypothetical’ inquiry, focussing on ‘what the plaintiff would have done had he not relied on the representation’, or ‘how the plaintiffs would have acted had the representations not been made’, by reference to such authorities as Gates v City Mutual Life Assurance Society Ltd,[5] and Sellars v Adelaide Petroleum NL; Poseidon Ltd v Adelaide Petroleum NL.[6]
[4] Defendants' Further Submissions paras 5, 15 and 17, 1 August 2019.
[5] (1986) 160 CLR 1, 13.
[6] (1994) 179 CLR 332, 351-353, and Defendants' Further Submissions, para 14.
The submission founds on the premise that the case for the plaintiffs was conducted as a ‘no-transaction case’, that is to say had it not been for the defendants’ breaches, the plaintiffs would not have embarked on the subject transaction at all. So called ‘no transaction’ cases are of course regularly acknowledged in the case law; see for instance South Australia Asset Management Corporation v York Montague Ltd,[7] MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd,[8] and on appeals in Kenny & Good Pty Ltd v MGICA (1992) Ltd,[9] and Kenny & Good Pty Ltd v MGICA (1992) Ltd,[10] Wealthsure Pty Ltd v Selig,[11] and Jamieson v Westpac Banking Corporation,[12] to name a few in addition to the above authorities. As explained by Gaudron J in Kenny & Goode v MGICA (1999) Ltd:[13]
The critical question, assuming the representation is one that might reasonably be relied upon, is whether, but for that representation, he or she would have taken that action.
[7] [1997] AC 191, 198.
[8] (1996) 140 ALR 313, 373
[9] (1997) 77 FCR 307, 334E-F, 336B-D.
[10] (1999) 199 CLR 413, [61], [92], [111], [1119].
[11] (2014) 221 FCR 1, [227]-[231].
[12] (2014) 283 FLR 286, [113]-123].
[13] (1999) 199 CLR 413, 425-426.
It was further submitted that the evidence of Mr Sebastiano the sole Director of the first plaintiff Hype Investments Pty Ltd (hereinafter ‘Hype Investments), ‘regarding the correlation between gross profit and turnover was reliance evidence and not causation evidence’.[14]
[14] Defendants' Further Submissions.
The case at trial on reliance and causation
The case for the plaintiffs was pleaded as one of reliance, as well as causation, and more specifically that ‘they would not have entered into’ the subject agreements.[15] This stance was maintained in their written closing trial submissions.[16] There is not one single reference in the defendants’ written or oral closing submissions at trial to ‘no-transaction’, ‘counter factual’ or ‘part hypothesised’ contingencies as having any bearing on the outcome. The dual requirements of proof of reliance and causation in point of principle was duly acknowledged in the primary judgment.[17]
[15] Fourth Statement of Claim, paras [26], [27], [27A], [34D] and [48].
[16] Paras [239] and [254].
[17] Primary judgment [42].
The case for the plaintiffs with respect to these questions essentially came exclusively through the evidence of Mr Sebastiano. The narrative section of the primary judgment observes the core misrepresentation arising from Mr Sebastiano’s evidence was that he was told by the fourth defendant Mr Damaskos a Director of the Corporate defendant, that turnover was approximately $15,000 per week and consequently ‘I would be earning $2,000 a week … as long as it stuck to $15,000 or more’, that he was ‘only interested if the “numbers were to stack up” and the proposal ticked all the boxes’.[18] There was an express finding that Mr Damaskos accepted Mr Sebastiano made it plain to him that he was only interested ‘if the numbers stacked up and the other boxes were ticked’.[19]
[18] Ibid [9], [16].
[19] Ibid [16].
The evidence of Mr Sebastiano was that discussions to the above effect began in February 2009 when he was told ‘the store had been doing $15,000 a week since about the turn of the year …’.[20] His evidence-in-chief continued:[21]
A.… And at that point we - he took conversations a little bit further and said 'If you go further and you buy the store and you maintain $15,000 a week turnover you are pretty much guaranteed to put $2,000 a week in your pocket'.
Q.Did you say anything in response to that.
A.Not that I recall. I think I said 'Can I come back again next week and get another report?'
Q.The $15,000 a week and the $2,000 a week net profit, was that attractive to you.
A.It definitely was. That was double when I was earning as a sales rep.
[20] T60.10-.11.
[21] T60.20-.31.
Somewhat later his evidence continued:[22]
[22] T87.29-88.10.
Q.Why did you want to purchase the store.
A.From all the reports and everything that Arthur told me that I would be earning $2,000 a week.
Q.What about the nature of the business.
A.It is what I love doing. I have been in hospitality since I was 15 years old and I think I am generally good at it and I really enjoy what I do.
Q.Was that important that -
A.It was important it also provided a lifestyle for me and I would see my children at nights and weekends.
Q.In terms of the turnover you motioned what was important to you in relation to turnover or profit.
A.As long as it stuck to $15,000 or more we would finish with $2,000 a week in our pocket and that would be comfortable for us to live.
Q.How did that compare to what you were doing at the current time.
A.Similar sort of hours but twice the amount of income.
Q.When you were at Chase Agencies.
A.When I was at Chase Agencies, yes.
Soon after his counsel Mr Burnett SC directed him to the questions of reliance and causation:[23]
[23] T88.22-.37.
Q.What if you weren't going to make 2,000 a week or something, what would your position have been.
A.I probably wouldn't have gone through with the sale at all.
Q.Why not.
A.Because I was - would have been in a better position staying where I was at Chase Agencies.
Q.Why was the 15,000 important to you, the turnover.
A.The 15,000 was important because once all the expenses came out, again the numbers stacked up and the numbers that Joe Fanto provided as well stacked up, that it would leave the $2,000 a week as suggested by Arthur.
Q.Had you not purchased this store what would you have done.
A.I would have stayed at Chase a bit longer until the right opportunity came along.
Under re-examination this additional exchange was led on the topic:[24]
Q.… What did you base your intention to become the franchisee on.
A.On the basis of what reports I'd been given and what oral - I'd been told as well by Arthur.
Q.When you say 'what oral', what do you mean by that.
A.That's in oral confirmation that the store was doing $15,000 a week and would leave $2,000 a week in my pocket at that figure.
Q.If those figures changed or if you were told something different.
A.I probably would have reconsidered and not gone ahead.
[24] T345.18-.28. The reference to ‘Arthur’ in this passage is to Mr Damaskos.
Based on this evidence the court concluded Mr Sebastiano would not have entered into the Franchise Agreements but for the misrepresentations:[25]
It is to be recalled that Mr Sebastiano made up his mind to contract on the basis that he would be better off financially (as well of course for lifestyle considerations), but only if the figures ‘stacked up’. The undeniable fact is that the figures did not stack up, so that if Mr Sebastiano was exposed to the correct turnover figures, more likely than not he would not have proceeded. He knew that he needed at least $1,000 a week to level with his current income, so anything less was obviously unappealing. Weekly returns of between $12,000 and $14,000 were at best only likely to leave him in no better position financially than he already was. On that understanding of the circumstances, no reasonable person in the financial position of Mr Sebastiano at the time would have proceeded with the franchise arrangement.
And still later:[26]
It is clear from this evidence taken in the entire context of the dealings with Mr Damaskos over the course of time, that Mr Sebastiano was induced to enter into the Franchise Agreements on the strength of the understanding and reassurances that the 2009 turnover figures as were presented to him, in fact represented the present-day norm. On the above conclusions, he relied principally on the Weekly Sales Reports for February 2009, a proposition he appeared to accept at one point under cross-examination.
[25] Primary judgment [67].
[26] Ibid [74].
This conclusion was based on the unchallenged evidence of Mr Sebastiano himself. The action of the plaintiffs was upheld on the additional ground of the failure to correct the misleading turnover figures:[27]
Furthermore, the proven circumstances clearly gave rise to the reasonable expectation that the true trading figures would be disclosed. There was no reasonable basis for the position that the trading figures continued to be maintained at the February 2009 levels. This misrepresentation is proven to have induced Mr Sebastiano to rely on them when executing the Franchise documents. This conclusion is consistent with the approach taken by the trial judge in Southern White Pty Ltd v Slinger & Slinger, and upheld on appeal in Slinger and Anon v Southern White Pty Ltd. In that case the proven conduct was constituted by the failure to correct turnover figures at the time of contracting, was capable of misleading and deceiving, and on the basis of an ‘obligation to update the figures’.
The action for misleading and deceptive conduct based on inaccurate turnover figures must therefore succeed on the additional ground that those figures were provided knowing they would be relied on, by failing to correct the position in circumstances in which there was a genuine expectation the true figures would be disclosed.
[27] Ibid [76]-[77].
In respect of subsidiary allegations of misrepresentation concerning catering figures, the court found:[28]
It was undoubtedly the case that Flinders Street Funk no longer catered for SA Water and that turnover coincidentally fell as a consequence, as soon as Mr Sebastiano became the operator. Based on the findings made earlier, Mr Damaskos did nothing to notify the actual situation, or to correct any misunderstanding Mr Sebastiano was labouring under as to the maintenance of the February levels of catering.
Here once again, the circumstances give rise to a reasonable expectation that the figures between March and June 2009 would be corrected if the levels of catering were not maintained, particularly with the expected loss of significant custom. The fact that Mr Sebastiano visited the Funk Victoria Square café in April 2009 before it commenced trading on the 22^nd, and the fact that he knew it was in the SA Water building, did not obviously convey with it an appreciation of the fact that SA Water would be transferring its business to that store. Irrespective of that consideration, the fact remains that it is not reasonably open to impute knowledge in Mr Sebastiano that transfer of the SA Water catering business would occur. In any event his evidence that it did not occur to him is a reasonable one to accept in the circumstances.
Misleading or deceptive conduct is therefore proven on account of the failure to tell Mr Sebastiano of the situation planned for the SA Water catering at Flinders Street Funk.
[28] Ibid [84]-[86].

As a result of these primary findings, the court concluded:[29]
The plaintiffs have proven that misrepresentations were made as to average weekly turnover of around $15,000 per week and in failing to disabuse Mr Sebastiano of this understanding. These were actionable misrepresentations by understating weekly wage levels and failing to notify him that the SA Water catering was about to cease at Flinders Street Funk.
The weekly sales figures for the financial year shown graphically in Appendix A demonstrate that average sales for the first half of the 2009 calendar year were just under $13,000 per week. The weekly sales records for the period of six months post contract show that $15,000 per week was only obtained in weeks 21 and 22. As found already, the defendants have not established they had reasonable grounds for making such representations.
And:[30]
In light of the primary findings of fact made during the course of these reasons, the plaintiffs have proven misleading and deceptive conduct, in that the defendants misrepresented the Flinders Street Funk café as maintaining average weekly turnover of around $15,000 when it did not, and when there was no reasonable basis for it. Subsidiary claims for the failure to correct this state of affairs when there was a reasonable expectation that the defendants would do so, and in associated mispresentations as to weekly wages levels and as to proposed catering arrangements for SA Water, equally succeed. It is a matter for the plaintiffs whether they wish for further findings to be made under the Misrepresentation Act limb of their claim.
And finally it was held:[31]
The misleading and deceptive conduct caused the plaintiffs to enter into the Sale and Franchise Agreements and the Licence to Occupy through the agency of Mr Sebastiano. Those misrepresentations were calculated to induce Mr Sebastiano to enter into the contracts, and so the fair inference is that he was induced to do so.
[29] Ibid [118]-[119].
[30] Ibid [134].
[31] Ibid [120].
Based on these extracts from the trial evidence and from the primary judgment, active misrepresentations were clearly proven that weekly turnover was $15,000 a week and that Mr Sebastiano could expect to have up to $2,000 per week in his pocket, which Mr Damaskos continued to state would be the case.
Turning specifically to causation, as noted the conclusion was drawn that no reasonable person in the financial position of Mr Sebastiano would have proceeded with the Franchise Agreements.[32] Defence counsel did not criticise his evidence on this account. It follows from this review that the court has separately undertaken and completed the enquiries into both reliance and causation.
[32] Ibid [67], quoted earlier.
The evidence that Mr Sebastiano would not have transacted went unchallenged. Hence the conclusion that this was a case ‘in which it is shown a party would not have entered into a contract but for misleading and deceptive conduct …’.[33]
[33] Ibid [116].
It follows the court perfected findings in respect of both reliance and causation with respect to misrepresentations as to turnover as well as profit. The logical distinction between the anterior question of the proof of misleading or deceptive conduct and the question whether loss or damage was suffered was therefore maintained: Campbell v Back Office Investments Pty Ltd.[34]
[34] (2009) 238 CLR 304, [24].
The defendants’ further submissions on causation
Returning to the additional submissions, the position now taken on the defence side for the first time depends heavily on what fell from the High Court of Australia in Campbell v Back Office Investments Pty Ltd.[35] In order to understand the point it is necessary to traverse the quite unique facts of that case, so far as they are relevant to causation. Back Office involved actions for misrepresentation with respect to a share transaction under the Fair Trading Act 1987 (NSW). The trial judge held the claim failed because there was no reliance on the representations.[36] The Court of Appeal by a majority, considered the statutory test of causation was satisfied on the basis that shares would not otherwise be purchased.[37]
[35] (2009) 238 CLR 304, hereinafter referred to simply as ‘Back Office’.
[36] Ibid [49].
[37] Ibid [12]-[13], [52], [142].
The High Court unanimously reversed this conclusion on the basis, as expressed by French CJ, that there was:[38]
… no exploration at trial … whether Mr Weeks would have withdrawn from the transaction had he known only of the shortfall in Sales Revenue figures.
Mr Weeks controlled Back Office. In an affidavit as to what he would have done if he had known of inaccuracies in the financial information given to him, he deposed that he would not have entered into a Share Sale Agreement. He added the same in respect ‘of either or both’ of the alleged amounts owing to trade creditors and misstatements in the balance of a loan account.[39]
[38] Ibid [55].
[39] Ibid [145] (emphasis supplied in the joint judgment of Gummow, Hayne, Heydon and Keifel JJ).
As it transpired, the facts found at trial related only to an overstatement of sales revenue by $7,147, as indicated in the passage quoted from the judgment of French CJ above.[40] As the plurality judgment identifies, there was no evidence from Mr Weeks that he ‘would not have proceeded with the purchase if he had known only that the sales revenue … had been … less than estimated’.[41] Their Honours therefore concluded:[42]
What is important in the present case is that the evidence that was given by Mr Weeks about what he would have done if he had known more than he did was expressed in a way that distinguished between cases where knowledge of either of two matters would have meant he would not proceed and cases where he attached significance to knowledge of both of two matters. This being the only direct evidence on the subject it was not open to the Court of Appeal to infer, from its own assessment of the materiality of the representation and its own assessment of whether the representation was calculated to induce entry into a contract, that Mr Weeks would not have proceeded with the share purchase.
[40] Ibid [146].
[41] Ibid [147], Gummow, Hayne, Heydon and Keifel JJ.
[42] Ibid [147], emphasis supplied in the plurality judgment.
It is apparent then that Back Office turned on the very narrow factual foundation, that there:[43]
… was no exploration at trial of what Mr Weeks’ position would have been in these circumstances. There was no evidence from Mr Weeks that he would not have proceeded with the purchase if he had known only that the sales revenue for December 2004 had been $7,147 less than estimated.
That is to say Mr Weeks deposed to what he would have done in respect of unproven misrepresentations, but not as to what he would not have done in respect of proven – and rather minor – misrepresentations.
Analysis – Back Office
[43] Ibid [146].
Seizing upon this obviously unique factual matrix in Back Office, defence counsel argues the court here has not as yet made causation findings, and more particularly did not make findings as to the ‘net profit representations’. Consequently it was submitted that the court did not dispose of the inquiry on the past hypothetical (causation) as opposed to the plaintiff’s actual actions (reliance).[44] In this respect it was put that the turnover and net profit aspects of Mr Sebastiano’s evidence ‘both needed to be proved … for there to be a finding of causation’ and that the ‘plaintiffs have not proven that the Business was not generating $2,000 in net profit …’.[45]
[44] Defendants' Further Submissions [15].
[45] Ibid [25].
The latter contention cannot be maintained. Based on undisputed Exhibits comprised of actual Sales Reports for Flinders Street Funk eventually disclosed by the defendants and tabulated in the primary judgment,[46] the court concluded:[47]
It can be seen from these figures which in the event with one inconsequential exception, reproduce the actual Sales Reports, that average weekly earnings were at best under $13,000. Levels of $15,000 or more were only achieved in the last two weeks of February, and for the weeks of 30 March and 11 May. Average takings for the whole of February were $14,909.90, that is all but $15,000, relied on by the plaintiffs as constituting the core misrepresentation as to turnover. As is apparent, the actual trading figures painted a materially different picture. The average monthly sales for the 2008/2009 financial year are illustrated by the graph marked Appendix ‘A’ to these reasons.
And further:[48]
Since the actual sales figures do not support anything like weekly turnover of around $15,000 there was no reasonable basis upon which the stated representations of sustained average weekly earnings was supportable. These were clearly representations of existing fact, maintained and reported throughout the period leading up to franchise related contracts.
This contention is equally inconsistent with the defendants’ own accounting report prepared by Mr McPharlin which observes the ‘Flinders Street Store was consistently deriving turnover of around $12,000 per week’.[49]
[46] Primary judgment p 15.
[47] Ibid [45].
[48] Ibid [70].
[49] GST exclusive, Exhibit D15 para 3:20.
During the course of submissions as to damages, the defence proceeded to withdraw somewhat from the Table of turnover figures tabulated in the primary judgment, even though closing submissions on both sides were based on that Table without objection or criticism from defence counsel during the trial. The figures in the Table correlate with the primary Departmental Sales Reports found in Exhibit D17, with two minor exceptions identified in the Table.
Despite this, defence counsel sought to introduce a revised recalculated Table to that accepted at trial.[50] This was said to adjust the figures when trading was confined to a four-day week.[51] This submission was made despite the fact that the court itself confirmed the Tabled figures correlated with the Exhibits,[52] and in fact furnished the parties the opportunity to correct the exercise if necessary.[53]
[50] T36.31-38.23, 2 August 2019.
[51] T38.24-.33.
[52] Ibid T36.28-.36, Primary judgment, footnote 100.
[53] Ibid T58.11-.22.
Quite apart from these considerations, the two proposed Tables omit the January 2009 figures and one extends only to the week ending 11 May 2009. The supposed adjustments to reflect four day weeks overlooks the misrepresentation that average weekly turnover figures were around $15,000 per week, irrespective of the number of trading days. In some cases the figures derive from Transaction Reports rather than the primary Departmental Sales Reports.[54] The defence is accordingly bound by its conduct over the course of the entire trial: Port of Melbourne Authority v Anshun Pty Ltd.[55] It is for all these reasons that the ‘tender’ of the two Tables later proffered by the defence must fail.
[54] Ibid T99.30-101.19.
[55] (1981) 147 CLR 589, 598-599.
There are a number of other fundamental difficulties with the revised stance on causation. Firstly, the passages extracted from the primary judgment supported by the evidence cited or quoted above, together demonstrate the court made clear and comprehensive findings as to both causation and reliance. Secondly, these were based on an acceptance of the uncontested evidence of Mr Sebastiano.
Thirdly, the defence submission tends to elevate the unique facts in Back Office to propositions of law. Back Office simply involved the application of orthodox causation principles to idiosyncratic facts. Proof of causation failed simply because Mr Weeks did not depose to what he would do if the proven misrepresentation was made. In this instance evidence of causation was given with respect to both the turnover and profit misrepresentations, namely that weekly turnover was around $15,000 per week and consequently Mr Sebastiano could expect $2,000 in his pocket. The reason he transacted was precisely because this put him in a better financial position than he then was.[56] The conclusions drawn by the court were then clearly in respect of causation and clearly in respect of both turnover and profit aspects of the operative misrepresentations. The passages referred to by defence counsel to the contrary were simply narrative rather than deliberative sections of the primary judgment.[57]
[56] Primary judgment [23], [67], [120].
[57] Ibid [16], [26], defendants' reply on the issue of causation, para 16.
Fourthly, by seeking to extract and isolate each aspect of the misrepresentations and to fasten solely on the ‘$2,000 in your pocket’ component, has the capacity to invite error as McHugh J said in Butcher v Lachlan Elder Realty Pty Ltd.[58] Here a sufficient connection between the loss claimed and the proven misleading conduct was established by the acceptance of the evidence of Mr Sebastiano that he would otherwise have remained in his extant employment. This question is not one to be approached by the rigid or mechanical application of accepted causation principles: Henville v Walker.[59] The conclusion that Mr Sebastiano would not have proceeded to transact was no more and no less a common-sense application of those principles in the proven and objective circumstances of the case.
[58] (2004) 218 CLR 592, [109].
[59] (2001) 206 CLR 459, [96].
Fifthly, while it can be readily acknowledged that one must approach potentially ‘self-serving’ evidence in relation to past hypothetics with some scepticism, the potential for ex facto ‘retrospective evaluation’ was not in play here: compare Chappel v Hart,[60] and Rosenberg v Percival.[61] It was common ground that soon after taking over the business, Mr Sebastiano grew so concerned with actual turnover figures to the point that he called for a meeting with the defendants in early September 2009, for a second shortly thereafter, and that he continued to complain about it.[62] Furthermore, the undeniable facts that he considered selling the business as early as 2011 and again soon after in 2012, is consistent with his evidence that he would not have transacted in the first place. The evidence of Mr Sebastiano was in fact that within 12 months he became:[63]
[60] (1998) 195 CLR 232, 273-274.
[61] (2001) 205 CLR 434, [156].
[62] Primary judgment at [30], [51].
[63] T109.6-.12.
A.… pretty adamant that I wanted Arthur and Jo to buy the store back off me. I'd tipped in approximately $40,000, $50,000 out of my own pocket at this stage to keep the store going. I asked them to buy the store back for $440,000 from me.
Q.What was their response.
A.'We are not buying your store back'.
Mr Damaskos accepted this was the case:[64]
Q.Did he make an offer to you to buy back the business.
A.Yeah, I can't remember the - I think along the lines of 'What I paid for it, if you'd pay me back, I'll get out', but we weren't going to entertain that.
[64] T497.26-.29.
Sixthly, it pays to bear steadily in mind that ‘it is the purpose of the statutes, as related to the circumstances of particular cases that the answer to the question of causation is to be found’: Travel Compensation Fund v Robert Tambree.[65] As Gleeson CJ went on to explain in that case:[66]
Misrepresentation will rarely be the sole cause of loss. If, in reliance on information, a person acts, or fails to act, in a certain manner, the loss or damage may flow directly from the act or omission, and only indirectly from the making of the representation. Where the reliance involves undertaking a risk, and information is provided for the purpose of inducing such reliance, then if misleading or deceptive conduct takes the form of participating in providing false information, and the very risk against which protection is sought materialises, it is consistent with the purpose of the statute to treat the loss as resulting from the misleading conduct.
[65] (2005) 224 CLR 627, [30], and the authorities cited in footnote (20) thereof.
[66] Ibid [32].
On this topic Beazely JA suggested in Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3),[67] that if reliance is proven, the approach to causation becomes ‘to ascertain what would have occurred for the [representee] not to have engaged in conduct which was misleading’. Her Honour appears to have taken a similar view in Cummins Generator Technologies Germany GMBH v Johnson Controls Australia Pty Ltd,[68] in as much as she accepted the proposition that there was no inflexible rule requiring proof of a ‘no transaction’ or ‘different transaction’ case, considering rather that ‘it is necessary for a party to prove that in reliance on the misrepresentation it acted in a particular way that caused it loss … .’ Consequently, as her Honour acknowledged:[69]
… it was not necessary in a no transaction case that a claimant prove what alternative transaction would have been entered into. Rather, “[i]t may be sufficient for the plaintiff to prove that he or she would not have entered into the subject transaction”.
This is precisely the situation pertaining here. In this instance, as no other course of action was contemplated, the only reasonable response was not to transact.
[67] (2006) 67 NSWLR 341, [59].
[68] (2015) 326 ALR 556, [112], [133].
[69] Ibid [135] emphasis supplied by Beazley JA.
Seventhly, there is no reason to doubt the evidence of Mr Sebastiano on the topic of causation. In the first instance, an objective consideration of the circumstances at the time of contracting lead to the inevitable conclusion that he would not have proceeded if he knew the true state of affairs concerning the trading position. His evidence was otherwise assessed and considered as credible and reliable because it aligned with the contemporary pre-contractual documents and with the objective facts.[70]
[70] Primary judgment [27], [48], [55], [60], [69] and [71].
Eighthly, the defendants fail to deal with the remaining adverse conclusions concerning the conduct of the defendants. This comprises further misrepresentations as to wages, as to catering income and as to the breaches of the Franchising Code of Conduct.[71] As to the latter, once a breach of the Code is proven, there is inherently a breach of s 51AB of the Trade Practices Act giving rise to an action in damages under s 82 thereof.[72] This topic is considered again later.
[71] Ibid [78]-[81], [82]-[86] and [94]-[104] respectively.
[72] Ibid [89].
It is for these reasons that the defendants’ further submissions as to causation based principally on Back Office, are rejected. Having thus disposed of ‘liability’ issues, it is now possible to turn attention to damages.
Breach of Franchise Code
The court concluded that the defendants breached the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) (the Franchising Code).[73] Section 51AD of the Trade Practices Act provided:
51AD Contravention of industry codes
A Corporation must not, in trade or commerce, contravene an applicable industry code.
[73] Ibid [87]-[104].
Section 51AD lies within Part IV therein. Section 82 thereof provides that ‘a person who suffers loss or damage by the conduct of another person that was done in contravention of a provisions of Part IV ‘… may recover the amount of loss or damage …’ if caused by the contravention: Master Education Services Pty Ltd v Ketchell.[74]
[74] (2008) 236 CLR 101, [38].
That was a case involving a breach of clause 11(1) of the Franchise Code. This required an acknowledgement of the receipt and understanding of a disclosure document in Annexure 1 thereof. The issue was whether that breach rendered the Franchise Agreement illegal or unenforceable at common law. However, as the unanimous reasons of five judges of the High Court note:[75]
… It is not to be assumed in every case that a franchisee wishes to be relieved of their bargain. To render void every franchise agreement entered into where a franchisor had not complied with the Code would be to give the franchisor, the wrong-doer, an opportunity to avoid its obligations, and at the same time to place the franchisee in breach of obligations to third parties. A preferable result, and one for which the Act provides, is to permit a franchisee to seek such relief as is appropriate to the circumstances of the case. Some cases of non-compliance with cl 11 might involve substantial non-disclosure; others may only involve a failure to obtain the written statement, confirming that the franchisee has read and understood the disclosure document and the Code. This is such a case.
No question of damages for breach and hence no question of causation arose.
[75] Ibid [39].

The present case presents a breach of the ‘disclosure document’ provisions comprised of the virtual complete failure to provide the prescribed information on 1 June 2009.[76] The case for the plaintiffs succeeded on the footing that the breach constituted the failure to adhere ‘to prescribed disclosure requirements prior to entering into Franchise Agreements’, applying Australian Competition and Consumer Commission (ACCC) v South East Melbourne Cleaning Pty Ltd (in liq) (formerly Known as Coverall Cleaning Concepts South East Melbourne Pty Ltd),[77] and Spar Licensing Pty Ltd v MIS Qld Pty Ltd.[78] The former case concerned the imposition of pecuniary penalties pursuant to s 224(1) of the Australian Consumer Law, so that the question of causation did not arise either. The latter involved no more than setting aside a Franchise Agreement.[79]
[76] Exhibit P2, Tab 83.
[77] [2015] ATPR 42-503.
[78] (2014) 314 ALR 35, [40], [55], [82]-[83], [90].
[79] Ibid [1], [42], [51], [55] and [101].
Since a breach of the Franchising Code engages s 82 of the Trade Practices Act, when the prospect of damages arises that serves to pick up the established principles applying to an assessment of damages thereunder. As Gummow J wrote in Marks v GIO Australia Holdings Ltd,[80] s 82 stipulates as one of its five discrete elements, ‘a causal requirement that the plaintiff’s injury must be sustained “by” the contravention’. It therefore follows that the proven breach under the Franchise Code does not in and of itself sound in damages, unless that breach can be shown to have caused such damage. At first counsel for the plaintiffs appeared to suggest that a breach of the Franchise Code had resulted in an automatic right to damages, but he correctly conceded later that it did not.[81]
[80] (1998) 196 CLR 494, [95].
[81] T3.7-4.4, 30 September 2019.
The relevant breach here was the failure to comply with the disclosure requirements. The disclosure statement in question as given to the plaintiffs was dated 1 June 2009,[82] well after the actionable misrepresentations were made and oft repeated. There was nothing of itself in the disclosure statement that could have misled Mr Sebastiano (except by silence) and hence Hype Investments to enter into the Franchise Agreements, as it contained no affirmative content at all. To repeat the earnings information therein, merely read:[83]
19.     Earnings Information
        The Franchisor does not give earnings information about the Funk business.
        Earnings may vary between franchises.
[82] Exhibit P2, Tab 83.
[83] Primary judgment [93], Exhibit P2, Tab 83, p 658.
        The Franchisor cannot estimate earnings for a particular franchise.
Hence, although a breach of the Franchise Code was made good, there was no resultant damage within the meaning of s 82 of the Trade Practices Act. That breach was nonetheless evidentially systematic of a course of conduct comprising the failure to correct the misrepresentations.[84]
[84] Ibid [76]-[77], [84]-[86].
Misrepresentation Act
Hype Investments seeks parallel orders under the Misrepresentation Act 1972 (SA) for damages in the same sums as it does for the breaches of the Trade Practices Act. It submits such orders inevitably follow from the conclusion that misrepresentations were made, relied upon and caused damage. It is to be recalled the court refrained from making a final determination as to this cause of action, simply because the issue was not addressed on either side of the Bar Table.[85]
[85] Ibid [10] and [134].
The court did find ‘misrepresentation’ which ‘induced [Hype Investments] to enter into’ the Franchise Agreements within the meaning of s 7 of the Misrepresentation Act, for ‘loss suffered’ by it. As such the defendants become liable ‘in all respects as if the misrepresentation had been made fraudulently and were actionable in tort’. That has the effect of attracting the measure of damage set by the Court of Appeal (UK) in Peek v Derry.[86]
[86] (1887) 37 Ch D 541, 578, 585, 590 and 593-594, a decision famously overruled by the House of Lords on liability in Derry v Peek (1889) 14 App Cas 337.
Relying on a remark by Dixon J in Toteff v Antonas,[87] that actions in deceit damages are recoverable ‘in consequence of [a plaintiff] altering his position under the inducement’ and to the decision in Doyle v Olby (Ironmongers) Ltd,[88] to the effect that ‘there was no inflexible rule to the assessment of damages in deceit’, the proposition was advanced by plaintiffs’ counsel that they were entitled ‘to damages directly resulting from the transaction’, without more.[89]
[87] (1952) 87 CLR 647, 650.
[88] (1969) 2 QB 158, 167 and 168.
[89] T114.9-.14.2, 2 August 2019.
As findings were conclusively made with respect to both reliance and causation, it is strictly unnecessary to explore this question any further. In deference to counsel for the plaintiffs, the conclusion from the case law suggests this proposition is incorrect nonetheless and that it remains necessary to demonstrate both reliance and causation in order to become entitled to an award for damages under the Misrepresentation Act. Section 7 of the Misrepresentation Act does not erect a cause of action in deceit. Rather it sets a measure of damages comparable to those awarded at common law in deceit, once a breach of s 7 is shown to have caused loss as if the representation was made fraudulently: RRG Nominees Pty Ltd v Visible Temporary Fencing Australia Pty Ltd (No 4).[90]
[90] [2019] FCA 686.
Without exception the myriad of cases involving claims under the Misrepresentation Act inevitably require proof of reliance and causation, before an entitlement to damage arises, see for instance Laudenback v Biedrzycki,[91] Kemp v Vettese,[92] Phoenix Security Pty Ltd v Papas Transport,[93] Corani & Corani v Wright, Wright and Basheer & De Conno Pty Ltd,[94] GP Transport (SA) Pty Ltd v Cavill Power Products Pty Ltd,[95] and RRG Nominees Pty Ltd v Visible Temporary Fencing Pty Ltd (No 4).[96]
[91] [1999] SADC 29, [111]-[113], [289], [323].
[92] [1999] SADC 60, [84]-[86], [121]-[124], [154], [157]-[158].
[93] [2000] SADC 61, [55], [64].
[94] [2004] SADC 154, [86]-[89].
[95] [2009] SADC 77 [100], [115], [289], [323].
[96] [2019] FCA 686, [431], [449]-[450].
Further objection was taken by defence counsel to the merits of an action under the Misrepresentation Act, on the footing that ‘the plaintiffs are only entitled to damages under section 7 … if the Court does not grant rescission and declares that the contracts remain on foot’.[97] It was put to the court that on this interpretation the plaintiffs were first required to ‘make an election between pressing a claim for damages … or pursuing orders for rescission’.[98]
[97] Para 52 Defendants’ Further Submission.
[98] T163.37-164.19, 28 August 2019.
Section 7(1) of the Misrepresentation Act provides for primary relief by way of damages, whereas s 7(2) provides for defences based on establishing a belief in the truth of a representation. No such defence is established here. Section 7(2) however provides no defence to a claim for recession: Graham v Freer.[99]
[99] (1980) 35 SASR 424, 431.
In order to follow the submission further, it is necessary to set out the following sub-sections of s 7:
7—Damages for misrepresentation
…
(3)Where in any proceedings before a court, it is proved that a party to a contract has rescinded, or is entitled to rescind, the contract on the ground of misrepresentation, the court after consideration of the consequences of rescission, and the consequences of a declaration under this section, in the circumstances of the case, may, if it considers it just and equitable to do so, declare the contract to be subsisting and award such damages as it considers fair and reasonable in view of the misrepresentation.
(4)A declaration under subsection (3) has effect according to its terms and is a bar to rescission.
(5)Where a contract has been rescinded but is subsequently declared to be subsisting under subsection (3), the respective rights and liabilities of the contracting parties will be determined in all respects as if the contract had never been rescinded.
The defence construction involves a misinterpretation of these latter aspects of s 7. As observed in Micarone v Perpetual Trustees,[100] s 7 ‘has a wide operation’. As complementary provisions they are facultative of the wide-ranging powers the court is invested with. One purpose is to enable a party induced to enter into a contract by misrepresentation, to claim the full measure of damages despite the fact that party rescinded: JAD International Pty Ltd v International Trucks Ltd,[101] Brown v Smith.[102] The same applies when the court declares a rescinded contract to subsist. At common law that party was otherwise merely entitled to orders preventing a ‘defendant from enjoying the benefits … at the expense of an innocent plaintiff’: Spence v Crawford.[103] As the plaintiffs do not seek orders for rescission, their right to damages remains governed by s 7(1) of the Misrepresentation Act.
[100] (1999) 75 SASR 1, [572].
[101] (1994) 50 FCR 378, 385.
[102] (1924) 34 CLR 160, 164-166.
[103] [1939] 3 All ER 271, 279-281.
In the circumstances as found by the court, the plaintiffs were locked into continuing with the business: HTW Valuers (Central Queensland) v Astonland Pty Ltd,[104] to the point that they are entitled to ‘compensation for all loss flowing directly from the transaction without further limiting rules’: Pitcher Partners Consulting Pty Ltd v Nevilles Bus Service Pty Ltd.[105] In any case the act of renewal (or affirming) the Franchise Agreements does not disentitle the plaintiffs from recovering damages if that act was reasonably made, as was the situation here: S Gormley & Co Pty Ltd v Cubit,[106] TN Lucas Pty Ltd v Centrepoint Freeholds Pty Ltd,[107] Canavan v Wright,[108] Warwick Entertainment Centre Pty Ltd v Alpine Holdings Pty Ltd.[109]
Remedies
[104] (2004) 217 CLR 640, [66].
[105] [2019] FCAFC 119, [108].
[106] [1964-5] NSWR 557.
[107] (1984) 1 FCR 110, 118.
[108] [1957] NZLR 790, 799-800.
[109] (2005) 224 ALR 134, [71].
Value of the business
As a question of broad principle damages awarded under s 82 of the Trade Practices Act are not confined by analogy to other common law causes of action: Marks v GIO Australia Holdings.[110] The first head of damage claimed by Hype Investments is what its counsel Mr Burnett SC suggested might be regarded as an ‘orthodox calculation’ of the difference between what was paid for the business and its true value. This principle is well established by such cases as Potts v Miller,[111] Gould v Vaggelas,[112] Gates v City Mutual Life Assurance Society Ltd,[113] Marks v GIO Australia Holdings Ltd.[114] Nevertheless as Dawson J observed ‘… care must be exercised in the calculation of consequential losses to ensure that the same ground is not covered twice’.[115] The same point is made in Slinger v Southern White Pty Ltd.[116]
[110] (1998) 196 CLR 494, [15] and [38].
[111] (1940) 64 CLR 282, 297-299.
[112] (1985) 157 CLR 215, 220.
[113] (1986) 160 CLR 1, 12.
[114] (1998) 196 CLR 494, 525.
[115] (1985) 157 CLR 215, 266.
[116] (2005) 92 SASR 303, [90]-[92].
The base price for the purchase of Funk Flinders Street was $350,000. In reliance on the evidence of the accountant Mr Crase who valued the business as of the time of purchase at between $90,000 and $120,000, Hype Investments seeks an award under this head of $260,000, based upon the lowest figure in this range. Although the court preferred the evidence of Mr Crase over that of Mr McPharlin as to the value of the business at the relevant time, that is not decisive of the question of which figure is to be taken as conclusive of true value.[117] Mr Crase accepted ‘if someone paid $120,000 for the business as at 1 July 2009, that would be a fair price’.[118] The business was valued in 2011 at between $140,000 and $165,000 by the appraiser Mr Wood.[119] Hype Investments was in fact offered $300,000 for it in 2012, which it declined as ‘too low’. That was a decision driven by the depth of losses mounting up by then as ‘falling well below the purchase price and the amount of money … tipped in’ and as of 2012, because the ‘bottom line of loss was probably close to $150 - $200,000’, so that this offer was not reflective of market value.[120]
[117] Primary judgment [124]-[133].
[118] T384.29-.32.
[119] Primary judgment [121].
[120] Ibid [121], T113.1-.14, T306.36-.38, T305.35-.38, T659.25-660.23.
These historical events suggest if anything that the more accurate value of the business is towards the upper end of that suggested by Mr Crase. It can be accepted that Mr Crase based himself upon a Table of expenses provided in the Form 2 which did not take into account a rent-free period in July 2008. The figure for rent therein in fact covered a period of seven rather than eight months. However, this was a rather limited amount of about $5,000. It is difficult to see how that might affect his estimates, especially as he was not asked about it.
In the combined circumstances, it is appropriate to assess the true market value of Funk Flinders Street as of late June 2009 at $120,000. This yields a difference between what was paid for the business and its proper value, of $230,000 as an appropriate measure of loss under this head of damage.
Consequential losses
The next claim for damages lumped under the heading of ‘direct consequential losses’, relates to payments made at settlement and said to be costs incurred in the course of entering into the business and hence recoverable. The principle dictating recompense here derives from Murphy v Overton Investments Pty Ltd:[121]
The appellants had been induced by the respondent’s conduct to undertake an obligation which may, but need not, have been more onerous than the respondent’s representation led them to believe. When the respondent started to charge all the outgoings it was entitled to charge, the appellants suffered a loss. The amount of that loss was not to be determined, … only by comparing the financial position of the appellants according to whether they entered this lease or took some other accommodation. … The appellants suffered loss because of the continuing financial obligations they undertook …
[121] (2004) 216 CLR 388, [66].
Those expenses incurred by Hype Investments tabulate as follows:
.       $ 13,995.00 - Stamp duty for sale of the business
.       $ 2,034.89   - Miscellaneous fees and disbursements incurred on settlement
.       $ 40,000.00 - Franchise fee
.       $ 10,000.00 - Training fee under the Franchise Agreement
$ 66,029.89
As these are not disputed it is unnecessary to identify the underlying documents proving the payments.[122]
[122] Defendants’ submissions 23 September 2019, para 4.
Other expenses paid by Mr Sebastiano pre-contract are no longer pursued.[123] This is unsurprising since they lay outside the six-year limitation period imposed by s 82(2) of the Trade Practices Act.
[123] Plaintiffs' written submissions 23 September 2019, para 12. These are identified in the primary judgment [109].
Loss of wages – Mr Sebastiano
A separate claim is made for damages on behalf of Mr Sebastiano personally as second plaintiff in his own right. These are for the loss of wages foregone as a consequence of entering into the franchise arrangements. Expressed in another way, this claim is based on the lost opportunity to earn a level of income commensurate with that earned pre-contract. It is here that the prospect of impermissibly doubling up may arise. Otherwise the guiding principle is that he is entitled to damages only for the amount equivalent to that which he would have earned if the contract was performed: The Commonwealth of Australia v Amann Aviation.[124]
[124] (1991) 174 CLR 65, 80, 85, 100.
At the time of transacting he was employed as a sales representative with Chase Agencies.[125] His oral evidence that ‘$2,000 a week in our pocket … [was] … twice that amount of income …’ went unquestioned throughout the trial.[126] An award of this species of damage is claimed on the premise that he left a well paid job and entered into a contract on the basis of misleading conduct: Rakic v John Lyng Insurance Building Solutions (Victoria) Pty Ltd.[127]
[125] Primary judgment [8].
[126] T88.1-.10.
[127] (2016) 259 IR 47: [2016] FCA 430, [193], [198], [236]- [238], [248].
The assessment of loss in respect of this aspect of the claim is compounded by the fact that Mr Sebastiano received wages and distributions through Hype Investments in the period during which the Franchise Agreements were on foot between 1 July 2009 and 30 June 2015. In the six-year period in question the plaintiffs identify these as:[128]
·$ 72,622.00       in wages
·$ 97,509.00      trust distributions according to Hype Investments’ financial statements
·$130,555.00     trust distributions according to Hype Investments’ Tax returns
The total amounts thus received by Mr Sebastiano were either $170,131 based on the Trust’s financial statements, or $203,177 if based upon the tax returns.
[128] Plaintiffs’ submissions on orders, 1 August 2019, para 18.
Mr Sebastiano was employed at Chase Agencies from around August 2006. According to his Tax Returns, taxable income for the year ending 30 June 2009 was $62,023.[129] Based on this secondary material, the calculation is proffered that he would have earned $372,138; that is $62,023 per year over six years covering the terms of the Franchise Agreements. By deducting $97,509 or alternatively $130,555 actually received one way or the other and then wages of $72,622, the claim for Mr Sebastiano personally then becomes $202,918.60 or alternatively $168,961, excluding superannuation. No satisfying explanation was proffered as to why primary records such as income tax assessments were not adduced for this purpose.[130]
[129] Exhibit P4, Tab 238, p 2344.
[130] T21.9-22.32, 30 September 2019.
A further complication arises from the fact that in the period of employment with Chase Agencies, there was an additional Superannuation component of $33,957.60. It is not proven what the nature of the Superannuation benefit was, at whose cost, or with what employer contributions. That consideration is therefore excluded from the present calculations for lack of proper proof. On the plaintiffs’ calculations that leaves the claim for gross lost wages to $202,918.60.
Distributions to Mrs Sebastiano based on the financial records, or her Trust Tax Returns are irrelevant, due to the fact that she forewent regular employment with Klemich Real Estate whilst working full-time at Funk Flinders Street, without drawing a wage. In any case the above distributions include those made to her in any event.[131]
[131] Plaintiffs’ submissions on orders, para 18.
There are a number of additional factors potentially compromising these bare calculations. For example, on his own admission, Mr Sebastiano worked at the Café Noshery for around three months in late 2010 to early 2011.[132] There is no evidence that this excursion was successful or otherwise, what losses or profits were made, or what wages were paid to him, if any, so that it is impossible to assess in dollar terms what the consequences were. It is clear enough that he should not be compensated by the defendants for the minimum three months during this venture, or perhaps even over the 12 month period that Mrs Sebastiano worked at Funk Flinders Street. All that is known is that during this time and for an extended period, Mrs Sebastiano worked full time in Funk Flinders Street for which she received the abovementioned distributions and yet no wages.[133]
[132] Primary judgment [128].
[133] Ibid [128], T78.1-.10.
The position in Australia is that an assessment of damages for loss of earning capacity in personal injury cases is such that a reduction is made for the notionally payable amount of tax that would be paid on earnings: Cullen v Trappell.[134] This principle adopts the position taken by the House of Lords in British Transport Commission v Gourley,[135] which is to award ‘the injured party such a sum of money as will put him in the same position as he would have been …’. This principle ordinarily applies equally to pre-trial earnings loss: Protonotarios v Zapasnik,[136] Daniels v Anderson.[137]
[134] (1980) 146 CLR 1.
[135] [1956] AC 185, 197.
[136] (1982) 106 FLR 343, 251-252.
[137] (1995) 37 NSWLR 438, 585.

In their written submissions of 23 September 2019, the plaintiffs maintain the position that a different approach is applicable from claims in personal injury cases, so far as the incidence of Income Tax is concerned, because lump sum damages are exempt in that situation. Accordingly it was submitted that damages by way of compensation for lost income otherwise taxable, must be assessed according to the net loss by allowing for the income tax otherwise payable to the Australian Taxation Office. This is the reverse side of the principle adopted by the High Court in Cullen v Trappell,[138] which was that in assessing damages for personal injuries a court should take into account the income tax the plaintiff would have to pay on the earnings of which his injuries had deprived him. In that situation Stephen J considered in Atlas Tiles Ltd v Briers:[139]
… the first step will be to estimate in net terms the plaintiffs’ loss … applying the rate of tax appropriate to what would have been his taxable income, … This done, the damages to be awarded, … will be such a sum as will leave that amount of net loss in the plaintiff’s hand … after the incidence of tax on the award is borne.
[138] (1980) 146 CLR 1.
[139] (1978) 144 CLR 202, 236.
That rate of tax in this situation is however the measure of the additional tax occasioned by having to repay the gross amount in one lump sum. As Gibbs CJ said in Fox v Wood:[140]
… trial judge in assessing damages … must first determine what loss of earnings the plaintiff has suffered, using net earnings … [and] … then in effect the receipt of the lump sum award.
[140] (1981) 148 CLR 438, 441.
According to the Taxation Department Determination 93/48, compensation payments awarded as substitute for income is taxable income under s 6.5 of the Income Assessment Act 1997 (Cth): Carapark Holdings Ltd v The Commissioner of Taxation (Cth).[141]In that event as Bray CJ observed in Lonie v Perugini & Perugini:[142]
An award should be loaded to cover the excess tax resulting from the money being paid in one taxation year instead of being spread over the period of the loss.
[141] (1967) 115 CLR 653, 660.
[142] (1978) 18 SASR 201, 209 (footnotes omitted).
Once issues related to the incidence of tax were drawn to the attention of counsel in these proceedings, revised calculations were presented by the plaintiffs calculating income tax liability by reference to income tax rates sourced from the Australian Tax Office website.[143] On the assumption that Mr Sebastiano was liable to income tax on an award of this kind, the calculation is then made that he would incur a tax liability of $107,191.42 ‘by reason of the fact that he will receive the income in one year’, which is said to be $49,860.31 more than if he received the income of $62,023 annually over the six years in question.
[143] Plaintiffs' submissions dated 23 September 2019, paras 13-18.
Mr Burnett SC made reference to several cases in which claims for wages loss were awarded concurrently with capital loss claims. The first in point of time was Warwick Entertainment Centre Pty Ltd v Alpine Holdings Pty Ltd,[144] in which the Full Court of the Supreme Court of Western Australia held an award for lost wages was wrongly made as it amounted to ‘double recovery’ over and above a loss of profit claim, essentially for a lack of evidence on the topic.[145] As a question of principle however, the lead judgment of Steytler P explains:[146]
I have mentioned that the trial Judge awarded to Mr and Mrs Konig an amount of $125,166 by way of lost wages in addition to the amount awarded to Alpine by way of lost profits. Had the award for lost profits stood, this would have given rise to a double recovery as the Konigs would have taken their wages from the profits received. However, there remains the question whether, the award for lost profits having been set aside, the award for loss of wages should stand.
There is no doubt that, when a loss-making business is acquired in reliance on misleading conduct, that may result in the loss, by the purchaser, of the opportunity to earn wages elsewhere: see, for example, Gilchrist v ATS Amusements Pty Ltd (1982) 41 ALR 558 at 562, per Morling J; and O’Neill v Medical Benefits Fund of Australia Ltd (2002) 122 FCR 455 at 466 [29], per Carr, Moore and Marshall JJ. Moreover, where a lost chance is proved, damages can be awarded in respect of it even if there is a less than 50 per cent likelihood that the chance would have come to fruition: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 348 - 349. However, it is necessary for an injured plaintiff in that position to establish that wages could, were it not for reliance on the misleading conduct, have been earned elsewhere and that he or she would have taken advantage of any opportunity that presented itself: see, for example, Bateman v Slatyer (1987) 71 ALR 553 at 566, per Burchett J; and Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 at 479, 481, per Davies, Sheppard and Gummow JJ. Once that is established, mere difficulty does not relieve a court from the task of estimating the damages (Fink v Fink (1946) 74 CLR 127 at 143; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 at 411), but the amount of the damage must be proved with as much certainty as is reasonable in the circumstances: Ratcliffe v Evans [1892] 2 QB 524 at 532-533; O’Neill at 467 [33].
In this instance the plaintiffs did not prove a claim in lost profits as was the case in Warwick Entertainment Centre Pty Ltd v Alpine Holdings Pty Ltd.
[144] (2005) 224 ALR 134.
[145] Ibid [111]-[115], [132]-[133], [135], [149].
[146] Ibid [109]-[110].
Next in Genocanna Nominees Pty Ltd v Thirsty Point Pty Ltd,[147] Lander J made an award for lost wages for an infant school teacher who resigned from that line of work before entering into the purchase of a liquor store and video hire business,[148] on the understanding that they received no wages from the business,[149] awarded on the basis of ‘unpaid exertions’.[150] This was not a case however where capital losses were claimed. The situation was the reverse in Cameron v Goldtek Australia Pty Ltd,[151] as damages were awarded for operating costs associated with acquiring and running the business but not for lost wages, for lack of proof, the judge being unsatisfied that ‘had they not entered the business the Camerons’ would have engaged in employment’.[152]
[147] [2006] FCA 1268.
[148] Ibid [215], [332], [340], [377].
[149] Ibid [364], [387].
[150] Ibid [399].
[151] [1996] ATPR 41-513.
[152] Ibid [42]-[43].
Then in Congram and Ors v Rochdale Pty Ltd,[153] a case of misrepresentations as to turnover and profitability of a gourmet sausage franchise, the trial judge allowed an award for the time spent in running a business unpaid.[154] In Glover v Clark,[155] both the capital (or operating) and wages losses were allowed in respect of an action for misleading or deceptive conduct other than by reference to expected future profits.[156]
[153] Unreported, Federal Court of Australia, No Qld G83 of 1987, 17 March 1988, Spender J.
[154] Ibid [20]-[21].
[155] [2009] VCC 1867.
[156] Ibid [37]-[39].
The approach of the court in Guirgius Pty Ltd v Michel’s Patisserie System Pty Ltd (No 2),[157] was much the same,[158] on the basis that the applicants would not have entered into the Franchise Agreements by an award calculated by reference to transaction and fit-out costs, rather than anticipated profits.[159] No reason is apparent for taking a different course in principle here.
[157] [2019] QDC 11.
[158] Ibid [264]-[265], [271].
[159] Ibid [267], [278], [291]-[294].
Mr Sebastiano was plainly growing restless at Chase Agencies. His entry into the subject Franchise Agreements is symptomatic of that. As noted already, he soon ventured into another business, with unknown results. By then and not so long afterwards, his position was such that his options of embarking upon another venture were practically foreclosed, since his losses had deepened to the point that in order to duly mitigate, his most sensible option was to attempt to trade himself out of the declining situation. By the time Mr Wood expressed the view that the business should be marketed in the price range of between $160,000-$170,000, Mr Sebastiano was at the point that it was unfinancial for him to sell at such a price.[160] This is what the court concluded was precisely the situation.[161]
[160] Exhibit P2, Tab 149, p 1277, T113.11-.14.
[161] Primary judgment [121]-[122].
The evidence on this topic is somewhat imprecise and incomplete. Nevertheless, it is more likely than not that Mr Sebastiano would have left Chase Agencies within two years to pursue other options, on the contingencies of better income, better lifestyle, or even more likely, a combination of both. Since nothing is known of the Café Noshery venture and given the historical nature of his past business transactions and the wider economic environment, it is not open to assume that any such venture would succeed. At the same time within two years of operating Funk Flinders Street those options were spent and no longer available to him.
Bearing in mind the requirement for trial judges to ‘do the best they can with the materials available’: Commonwealth v Amann Aviation,[162] an allowance must be made for the contingency that other enterprises Mr Sebastiano may have embarked upon could have failed, or at the very least left him in no better financial position than he was at Chase Agencies. The trading history of Funk Flinders Street demonstrates how financially fickle such businesses can be and how dependent they are on regular and catering customers.
[162] (1991) 174 CLR 64, 83, 125.
The recommended sale price in Mr Wood’s report of 8 December 2011, placed average turnover per week at $12,771 for the year ended 30 June 2011 and at $11,704 for the year ended 30 June 2010, ‘based on the summary of the trading figures and the Owner’s indication of current trading’.[163] These returns are more or less what was achieved for the first six months of 2009, so the trading position did not improve despite the best efforts of Mr Sebastiano to increase earnings.[164]
[163] Exhibit P2, Tab 149, pp 1276-1277.
[164] Primary judgment [44].
In his report of July 2016, Mr Crase spoke of the inherent ‘competition and business risk’ in such enterprises.[165] Such risks were perhaps more acute in 2009 for the reasons pointed to by Mr McPharlin:[166]
3.43Business confidence in Australia was particularly low though 2008, reaching a low point around the time of the collapse of Lehmann Bros during the period that is known as the global financial crisis (GFC), but that by June 2009 business confidence had been restored to positive level.
3.44This period coincided with the Rudd government’s National Building and Jobs Plan which was announced in February 2009 and led to a major government funded economic stimulus including the Household Stimulus Package and Building the Education Revolution. These actions, together with the strong resources sector exports volumes and prices, led to the Australian economy avoiding recessionary conditions which adversely affected other world economies at that time.
He accepted under cross-examination that there was ‘very significant uncertainty as to what the effects of the crisis would be’ in 2009 and that ‘business conditions were adverse at the time’.[167] The issue concerning the burden of taxation is best left until an assessment is made and therefore liability for the payment of income tax crystallises. The remedy for that contingency is to make an order for indemnifying Mr Sebastiano for that loss or damage under s 87(2)(d) of the Trade Practices Act.
[165] Exhibit P10, para 5.18.
[166] Exhibit D15.
[167] T809.34-811.15, T813.4-.8.
In the result the guiding principle is that Mr Sebastiano is entitled to recover as damages a sum representing ‘the prejudice or disadvantage he has suffered in consequence of altering his position under the inducement of … misrepresentation …’: Toteff v Antonas.[168] In appropriate cases this can include the ‘necessity of working without financial reward’: Cut Price Deli Pty Ltd v Jacques.[169] Bearing in mind these several adverse exigencies, an appropriate assessment of contingency risks considered in a broad way, require an appropriate reduction.
[168] (1952) 87 CLR 647, 650.
[169] (1984) 49 FCR 397, 404.
To summarise, the situation so far as Mr Sebastiano’s claim to damages is concerned:
1Proof is based on secondary sources rather than the primary income tax assessment notices;
2There are unexplained differences in trust distributions as between the trust’s financial statements and its tax returns;
3No evidence was forthcoming as to any income tax levied on such distributions or in respect of Mrs Sebastiano’s personal tax returns;
4Estimates of tax liability on the base figure of $62,023.00 over the six years in question are made on historical taxation bracket rates in those years taken from the Australian Taxation Office’s website rather than the actual tax assessed.[170]
[170] T5.34-6.21, 30 September 2019, and Plaintiffs' Table 1.
Doing the best one can in these rather difficult and unsatisfactory circumstances, an assessment of loss proceeds by applying the above principles to this situation, as follows:
1Since actual income tax is not proven, a rounded figure of $60,000 per annum is used to allow for the potential of the disallowance of some items in the tax returns by the Australian Taxation Office;
2The historical rates of tax referred to by the plaintiffs’ counsel range between $11,704.48 and $12,456.90, which when rounded down averages $12,000 per year;
3This broad calculation brings net income for the six years in question to $288,000, i.e. $48,000 x 6. This is done because Mr Sebastiano was liable to pay income tax in any event;
4Deduct from this sum $130,555 actually received according to the most reliable documentary source of Hype Investments tax returns, which leaves a net figure of $157,445 (this method maintains consistency with the plaintiffs’ reliance on tax returns);
5Further deduct from this sum the $72,622 actually received as wages from the Funk Flinders Street business, giving a net sum of $84,823.
6Reduce this amount by 10 per cent to properly allow for the adverse contingencies discussed earlier, thus producing a net award of $76,341;
7Declare the first to fourth defendants liable to indemnify Mr Sebastiano for any amount the Australian Taxation Office assesses his liability to pay lump sum tax received in one taxation year on this award pursuant to s 87(2)(d) of the Trade Practices Act.
This assessment involves no ‘doubling up’ of the award for damages as was the case in Slinger v Southern White Pty Ltd,[171] for the reasons outlined earlier. This aspect of the case involves an independent loss, consequentially sustained as a result of entering into the Franchise Agreements over and above the award for Capital losses.
[171] (2005) 92 SASR 303, [90]-[96].
The point made by counsel for the defendants that Slinger stands for the principle that an award based on the true value of the business inherently takes account of future profits cannot be sustained, because the issue simply did not arise in that case. More to the point, the trial judge in fact made a ‘second award’ for loss of profits based on ‘a contractual warranty to the effect that the profit would be made by the business …’, a loss disallowed on appeal because no award was made for losses incurred in running the business, and because the contractual warranty point was not taken at trial or on appeal.[172]
[172] Ibid [86].
The further point was made on behalf of the defendants to the effect that anticipated losses of future profits is inherently brought into account in determining capital loss. There is at first sight some force in this submission, although it is apt to confuse – or conflate – the concepts of equity and revenue. The accountant Mr Crase calculated net trading loss of Hype Investments for the period ending July 2009 to September 2015 at $40,827 (excluding capital write-offs) and the shortfall between the actual trading performance of Funk Flinders Street and forecasted sales at between $292,846 and $873,707.[173] The estimate of the value of the business at between $90,000 and $120,000 is premised on the ‘fundamental valuation principle’ that ‘the value of any assets … is the present value of the future cash flow stream …’.[174] There is no question that this is other than accepted methodology. This was done by amortising annualised earnings before interest, tax and depreciation,[175] and in this instance without making ‘any notional wage adjustment in respect of owners wages’.[176]
[173] Exhibit P10, paras 1.7.3 – 1.7.5.
[174] Ibid 5.2.
[175] T383.38-384.7, T810.34-.36.
[176] T397.20-.38, T406.15-.19.
It may be acknowledged that the question as to the burden of taxation in relation to this issue was not advanced or pleaded by the plaintiffs. It was in fact raised by the court with the parties after judgment was reserved on the question of damages. Both sides were given ample opportunity to state their respective positions on the income tax implications, both orally and in writing. In this situation it is of no substantive consequence that it was not pleaded. Judges are required to decide cases in accordance with the law: Nescor Industries Group Pty Ltd v Miba Pty Ltd.[177] As observed above, Amann Aviation requires much the same thing.
[177] (1997) 150 ALR 633, 639.
Declaratory orders
The next ground of relief is for declaratory orders voiding the subject Franchise Agreements, either pursuant to s 37 of the District Court Act 1991 (SA), or alternatively, pursuant to s 87(2) of the Trade Practices Act. Whilst s 82 ‘is concerned with the recovery of an amount representing loss or damage, s 87 is concerned with compensation …’: Demagogue Pty Ltd v Ramensky.[178] As noted earlier, the latter section permitted the court to ‘void’ or ‘void ab initio’ contracts or arrangements entered into as the court thinks fit, under s 87(2)(a), or ‘refusing to enforce’ contracts under s 87(2)(ba). The exercise of such powers is discretionary, to be employed ‘in a manner conformable with the just … protection of the representee …’ and by an assessment of what appropriate relief is applicable: AWAD v Twin Creeks Properties Pty Ltd.[179]
[178] (1992) 39 FCR 31, 43, emphasis supplied by Gummow J.
[179] [2012] NSWCA 200, [43].
It was submitted that declarations of the kind sought are necessary to perfect the findings of the court, including those with respect to breaches of the Franchising Code of Conduct.[180] It was further submitted that it was appropriate to grant declaratory relief because the plaintiffs were left with no option other than to renew the Franchise Agreements in 2004, having nothing left to sell of any value, so that the amounts claimed under the cross-claims are thereby avoided.[181]
[180] Primary judgment [77], [86], [120], [104].
[181] Ibid [123].
It is to be doubted whether declaratory relief as sought voiding the original and the renewed sets of Franchise Agreements, has any utility if the cross-claim is dismissed. It is an established principle that ordinarily a court will decline to grant declaratory relief if it fails to serve any legitimate purpose or is of no utility: Ainsworth v Criminal Justice Commission[182] and Truth About Motorways Pty Ltd v Macquarie Infrastructure Investment Management Ltd.[183] This is particularly so when, as here, the contravening conduct has ceased and the relationship between the parties is at an end: Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Limited (No 2).[184]
[182] (1992) 175 CLR 564, 581-582.
[183] (2000) 200 CLR 591, [52].
[184] [2017] FCAFC 99, [3].

Defence counsel submitted declarations were unnecessary given the conclusion that in renewing the agreements, Mr Sebastiano on behalf of Hype Investments, had acted reasonably in doing so to minimise his losses.[185] In the circumstances, and in order to give effect to the proven misrepresentations, the most effective course is to declare the Franchise Agreements unenforceable pursuant to s 87(2)(ba) of the Trade Practices Act.
[185] Ibid [123].
Interest and costs
It is accepted by counsel during the course of submissions on damages, that issues of interest and costs be postponed pending specific findings in respect of what measure of damages in dollar terms, is appropriate under the respective heads of damage. In making their calculations the plaintiffs should also deal with the contingency of an award of interest by way of a lump sum under s 39(3) of the District Court Act.
The parties should specifically address the question of interest on judgment awarded to Mr Sebastiano personally with respect to lost wages. The principle that the level of pre-judgment interest under s 39(1) of the District Court Act is a matter for determination of the Judge in conjunction with the District Court Supplementary Rules 2014, for which the indicative rates provided for under r 208 is the cash rate of interest last set by the Reserve Bank of Australia plus 4 per cent, as that sum was not immediately incurred by way of damages, but progressively. It would appear therefore that the appropriate rate is to be halved to reflect that fact: Wheeler v Page and Harris,[186] Nominal Defendant v Dighton.[187]
[186] (1982) 31 SASR 1.
[187] (2012) 113 SASR 506.
The defendants’ cross-action
The defendants maintain an entitlement to an order for set-off under their cross-action. According to their written trial submissions, these were:[188]
·Funk Franchise $8,530.06 for royalty and marketing fees between 13 July and 18 September 2015; and $188,336.52 under the 2014 Franchise Agreement;[189]
·Funk Leasing for the failure to pay licence fees of $38,681.67 between 1 April and 27 August 2015; and 29 September 2014 and 31 January 2016 as rent and outgoings owed to Landlord Insurance Australia Ltd.[190]
[188] Defendants’ closing submissions, paras 129-133.
[189] Exhibit P3, Tab 186.
[190] Exhibit P2, Tab 112, Exhibit P4, Tab 199.
The claim relating to unpaid franchise fees is made on the footing that the 2014 Franchise Agreement was not rescinded. It is unclear whether the supposed waiver of up to $50,000 in royalties is factored in or not. Since it is proposed to declare the agreements unenforceable, the outstanding fees of $8,530.06 become unrecoverable, even putting aside the outstanding problem of the failure to prove the quantum of waived Royalty fees.
The further claim by Funk Franchising for unpaid royalty and marketing fees of $185,562.67 is prospective in as much as it depends on what it would have been entitled to under the 2014 Franchise Agreement, even though terminated on 18 September 2015. These were calculated by ‘extrapolating … average historical turnover’ over the full balance of the remaining term of that agreement from 1 July 2014 to 1 July 2019.[191] Franchising fees cannot be recovered post-termination since termination discharged any further liabilities thereunder.
[191] Defendants’ written submissions 8 October 2019, para 24.
A problem with the claim for licence fees is that such losses were not quantified, except by reference to invoices directed to Mr Sebastiano,[192] rather than those for which the defendants became liable pursuant to the under-lease in default of direct payment by the plaintiffs to the Landlord.[193] The Funk Leasing claims relying on tax invoices addressed to Mr Sebastiano at the Funk Flinders Street store of previously invoiced charges were merely headed ‘Property Owners CGU Insurance Australia Limited’.[194] Counsel for the defendants did not direct the court’s attention to any primary documents supporting such payments.
[192] Exhibit P4, Tab 199.
[193] Exhibit P1, Tab 48.
[194] Exhibit P4, Tab 189.
As reasoned above, the most appropriate manner of disposing of the cross-action in these circumstances is to declare the Franchise Agreements untenable pursuant to s 87(2)(ba) of the Trade Practices Act, in light of the primary conclusion of misrepresentations.
As to the Funk Franchising cross-claims under clause 3.1 of the renewed Franchise Agreement,[195] the term of the Franchise Agreement ceased when the right to occupy the premises expired on 18 September 2015, with termination. The store remained unleased in the period from then to 31 January 2016. Any ‘loss’ in that period was unexplained and therefore ‘self-inflicted’, since uninformatively according to Mrs Damaskos, only because ‘that’s the amount of time it took us to get back in there’.[196] Trading at Funk Flinders Street recommenced on 31 January 2016, however any loss of franchise fees from 1 February 2016 was caused by the failure of Funk Franchising to charge franchisee fees. These events therefore effectively broke the chain of causation.
[195] Exhibit P3, 186.
[196] T520.15-.23.
Still further, the Landlord resumed occupation of the premises in December 2017, in order to renovate the foyer.[197] The defendants therefore held no lease until entering into a new lease in October 2018 and therefore no right to underlease. There was no business operating Funk Flinders Street from December 2017 to October 2018.[198] As mentioned earlier, the Franchise Agreement and the Licence to Occupy were both terminated on 18 September 2015.[199]
[197] T719.13.
[198] T719.11, Exhibit P9.
[199] Exhibit P4, Tabs 229 and 230.
The defendants seek to counter these points by pointing to the 2014 Licence Agreement which contains an ‘independent and absolute indemnity’ by clauses 3.1 and 15 thereof, to which Hype Investments is a party or ‘Licensee’ and Mr Sebastiano as ‘Guarantor’. These respectively provide:[200]
[200] Exhibit P2, Tab 112, pp 979 and 984-985.
3.     Indemnity
3.1The Licensee hereby indemnifies the Licensor, all Related Entities of the Licensor and the Licensors’ agents, servants, contractors and employees from all demands, claims, actions, losses, damages, liabilities, costs and expenses of every kind including but not limited to:
(a)     any accident, loss or damage to Premises or death of or injury to any person whatsoever of any nature or kind in or near the Premises;
(b)     the Licensee’s due performance and observance of the Licensee’s obligations contained or implied in this Deed; and
(c)     any claims by the Lessor due to the non-performance of, or default under, the Lease.
…
15.1The Guarantor has requested the Licensor to enter into this Deed with the Licensee and the Licensor. In consideration of such grant:
(a)     the Guarantor guarantees to the Licensor the due performance and observance by the Licensee of all of the Licensee’s obligations contained or implied in this Deed.
(b)     the Guarantor indemnifies and agrees to always keep indemnified the Licensor in relation to any costs, loss or damage arising directly or indirectly from any breach or non-observance by the Licensee of its obligations in this Deed.
(c)     the Guarantor acknowledges and agrees that:
(i)this indemnity continues and the rights, remedies and recourse of the Licensor shall not be affected or prejudiced in at law or in equity and shall remain fully enforceable notwithstanding:
(A)The granting of a concession, indulgence or time to the Licensee;
(B)the neglect or omission to enforce any of the Licensor’s rights against the Licensee or any Guarantor of the Licensee’s obligations to the Licensee;
(C)     any variation, extension or renewal of this Deed;
(D)any transfer, assignment, sub-licence or parting with possession of the Premises; or
(E)any obligations for a party other than the Guarantor contained in this Deed which are void, voidable or unenforceable in part or in whole.
(ii)until the Licensee has duly performed, observed and fulfilled its obligations under this Deed the guarantee and indemnity continues and remains in full force.
(iii)the guarantee and indemnity will not be deemed to have been discharged if any payment by the Licensee is avoided in whole or part by the operation of Law so that the Licensor does not retain the benefit of the payment;
15.3The Licensor may, at its absolute discretion, undertake legal proceedings or seek enforcement of any right pursuant to this Deed against the Guarantor without first seeking recourse or making a claim against the Licensee.
…
These are however of no avail to the defendants, unless and until they prove the requisite ‘losses, damages, liabilities, costs and expenses’ as the case may be, which they have not.
Liability against whom?
It was correctly submitted on behalf of the defendants that there remains an outstanding issue as to liability with respect of the natural defendants. Mr and Mrs Damaskos each hold 50 per cent interest as Directors in the three Corporate defendants. The structure of Funk Franchising is explained in the report of Mr Crase at Tabs 19 and 20.[201] As Directors they are amenable to the conclusion that they were ‘a person involved in a contraction’ of s 82 of the Trade Practices Act. This provides:
[201] Exhibit P10.
PART VI – ENFORCEMENT AND REMEDIES
75B Interpretantion
(1) [Involvement in contravention] A reference in this Part to a person involved in a contravention of a provision of Part IV, IVA, IVB, V or VC, or of section 95AZN, shall be read as a reference to a person who:
(a)has aided, abetted, counselled or procured the contravention;
(b)has induced, whether by threats or promises or otherwise, the contravention;
(c)has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
(d)has conspired with others to effect the contravention.
In order to become involved in a contravention of this provision, a person must intentionally participate in the contravention: Yorke v Lucas.[202] This requires a close rather than remote involvement with the proven contravention: Fencott v Muller.[203]
[202] (1985) 158 CLR 661, 667-670, 673-674.
[203] (1983) 152 CLR 570.
A review of the evidence and the critical primary findings, disclose that Mrs Damaskos had very little to do of substance with the mispresentations made to Mr Sebastiano. On the other hand, very plainly Mr Damaskos was ‘directly … knowingly concerned in … the contravention’ and thereby falls squarely within s 75B(1)(c) of the Trade Practices Act. In contrast Mrs Damaskos was peripherally involved, making no direct misrepresentations on her own account. Furthermore, it is unproven that she was present when Mr Damaskos made the representations to Mr Sebastiano, let alone that she was knowingly and intentionally concerned in them, or indeed that she had knowledge of the essential elements of the proven contraventions. It follows that no order for damages or other relief can attach to her.
Summary and orders
For the above reasons it is proposed to enter judgment in favour of Hype Investments against the First, Second, Third and Fourth Defendants jointly and severally, pursuant to s 82 of the Trade Practices Act and s 7 of the Misrepresentation Act, as follows:
1In the sum of $230,000 for the difference between the value of the business and the sum paid for it.
2In the sum of $66,029.89 for transaction costs and consequential losses.
3Declaring the Franchise Agreements unenforceable pursuant to s 87(2)(ba) of the Trade Practices Act, or alternatively under s 37 of the District Court Act.
4Dismiss the cross-claims.
5Dismiss the action against Mrs Damaskos.
6An award of damages in favour of Mr Sebastiano personally against the above defendants, jointly and severally, for lost wages of $76,341.
7Order requiring the first to fourth defendants to indemnify him for such sum or sums as may be assessed by the Australian Taxation Office on that award pursuant to s 87(2)(c) of the Trade Practices Act.
Of course, final judgment cannot yet be entered until interest on these sums is assessed. The parties remain entitled to be heard now only as to that and as to costs. The plaintiffs are to have carriage of bringing in draft minutes of order consistent with these reasons.