Jacques, C.R. & Ors. v Cut Price Deli P/L

Re: CHRISTIAN ROGER JACQUES; and CATHERINE MAY JACQUES and POURQUOI PAS PTY
LIMITED
And: CUT PRICE DELI PTY LIMITED; CUT PRICE DELI FRANCHISING PTY LIMITED and
ENZO SGAMBELLONE
No. QG66 of 1990
FED No. 199
Trade Practices Number of pages - 68

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Spender J(1)

CATCHWORDS

Trade Practices - misleading and deceptive conduct - false or misleading statements - sale of franchise to conduct delicatessen as part of chain - written and oral representations - representations regarding future performance and present belief in future performance - no reasonable and proper basis for future projections - representations involving statements of opinion found to convey that opinion was honestly held upon rational grounds involving an application of expertise - other representations not capable of amounting to misleading conduct - 'puffery' - vagueness - negotiations over many weeks between experienced business people with legal and accounting advice - sale of franchise conduct in trade or commerce - whether statements relied on by purchasers - inducement - credit of witnesses - measure and calculation of damages - primary entitlement difference between value of business at the relevant time and purchase price - measure of consequential losses - additional losses fairly attributable to the misleading conduct.

Trade Practices Act 1974 ss. 51A, 52, 87

Federal Court of Australia Act 1976 s. 51A

Concrete Constructions (N.S.W.) Pty Limited v. Nelson (1990) 169 CLR 594

Gates v. The City Mutual Life Assurance Society Limited (1986) 160 CLR 1

Gould v. Vaggelas (1984) 157 CLR 215

Bateman v. Slatyer (1987) 71 ALR 553

O'Brien v. Smolonogov (1983) 53 ALR 107

Pappas v. Soulac (1983) 50 ALR 231

Re Kuringai Co-operative Building Society (No. 12) Ltd (1978) 36 FLR 134

Bevanere Pty Ltd v. Lubidineuse (1985) 7 FCR 325

Netaf Pty Ltd v. Bikane Pty Ltd (1990) ATPR 41-011

Neilsen v. Hampston Holdings Pty Ltd (1986) ATPR 40-686

Smith v. Land and House Property Corporation (1884) 28 Ch D 7

HEARING

BRISBANE, 24-28 June 1991; 1, 2, 4 July 1991; 15, 16, 19 August 1991; 14, 15 October 1991 and 3 March 1993 #DATE 12:3:1993

Counsel for the applicants: Mr T.W. Quinn

Instructed by: Shun Wah and Galvin

Counsel for the respondents: Mr J. Hamilton QC with Mr Francey

Instructed by: Snelgrove and Partners

ORDER

THE COURT ORDERS THAT:

Judgment be given for the applicants against the respondents for $243,000.00.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

SPENDER J In these proceedings the applicants claim, inter alia, damages for conduct said to be in breach of s. 52 of the Trade Practices Act 1974 ('the Act') in respect of their entry into a "Cut Price Deli" delicatessen franchise.

The amended application also seeks that the franchise agreement and instruments relating thereto; the sub-lease of premises granted by Cut Price Deli Pty Limited ('Cut Price Deli') to Pourquoi Pas Pty Limited ('Pourquoi Pas'), a company of which Mr and Mrs Jacques are shareholders and directors; and the guarantee by Mr and Mrs Jacques be declared void. Further, the amended application seeks orders the effect of which is to refuse to enforce those agreements and instruments, to terminate their operation and effect; and to require the respondents to procure a release of the applicants from liability in respect of a chattel lease over the plant and equipment, fixtures and fittings of Shop 15A, Noosa Junction Shopping Centre (the premises the subject of the sub-lease and in respect of which the franchise agreement was made) and, on such release being procured, the applicants to give to the respondents possession of the shop.
In the events that have happened, the primary question is of entitlement to damages.
The corporate respondents operate a chain of delicatessens. The joint managing directors of the corporate respondents are a Mr Enzo Sgambellone, the third respondent, and his brother-in-law, a Mr Frank Rechichi.
In 1987 Mr Sgambellone's primary responsibilities were the selection of sites suitable for Cut Price Delis and the sale of Cut Price Deli franchises to persons who wished to become franchisees. He had been engaged in those responsibilities since 1982. From April 1984 the General Manager of Cut Price Deli was Mr Harry Malovany, an accountant. The business was founded in 1974 and Mr Sgambellone commenced licensing and franchising various outlets in 1979. According to Mr Malovany, some franchise outlets have been sold up to three or four times since 1979 and the total sales are of the order of 300. Up until 1987, sales had totalled approximately 109.
The first respondent, Cut Price Deli, carries on the business of operating shops that sell delicatessen products, which are referred to as 'company shops', and also grants franchises to third parties to carry on business under the Cut Price Deli name, in shops which are referred to as 'franchised shops'. These shops are typically located in shopping centres in which Cut Price Deli takes a lease, and where a shop is franchised, grants a sub-lease to the franchisee. As at June 1991 there were 153 shops operating in New South Wales, Victoria, Queensland and New Zealand, of which 138 were franchised shops and 15 were company shops. The combined turnover then was approximately $100 million per annum, and the Cut Price Deli group employs a large number of people, taking into account those employed in franchised shops. Throughout the years of operation, the majority of company shops have made losses, a fact which according to Mr. Malovany is attributed to the performance of shop managers.
In May and June 1987 Cut Price Deli published a series of advertisements in newspapers in New South Wales in the following terms:

" DELICATESSAN - CUT PRICE DELI UNIQUE FRANCHISE OPPORTUNITY We currently have over 110 CUT PRICE DELI outlets throughout Australia and require further Franchisees for future sites at BALLINA, BIRKENHEAD POINT, NOOSA, QUEANBEYAN, TAMWORTH. The following franchises are also available for sale: ASHFIELD, AUBURN, BANKSTOWN, GREYSTANES, REDFERN, WENTWORTHVILLE, WINSTON HILLS, also GOULBURN AND DARWIN. If you desire to purchase and own your own business, the potential exists to make substantial returns on your investment as well as recouping your outlay within 2 years. The sale price varies between $160,000 and $300,000 and accordingly substantial capital or security and a good credit rating are essential requirements. Expert management support and operation training together with extensive advertising and Group purchasing power make these businesses a most attractive investment. All inquiries are welcome by those who may wish to be part of a team enjoying our dynamic growth and success. Contact Mr. Enzo Sgambellone

CUT PRICE DELI PTY. LTD. "

and there followed a series of telephone numbers.

The present litigation arises out of the negotiations leading to the acquisition of the Cut Price Deli franchise at Noosa and its subsequent operation. It is probable that it was the advertisement that appeared in the Sydney Morning Herald on 30 May 1987 which led to the discussions between the applicants and the respondents and to the present litigation.
Christian Jacques met his wife, Catherine Jacques, in Noumea in 1977. Since 1975 he has been involved in the restaurant and food business in France, New Caledonia and in Australia in a capacity of a restaurateur. In 1979 Mr Jacques left France and came to Australia and with his wife operated a restaurant business called "Pourquoi Pas" located in Sydney. In 1984 that restaurant was sold and a new restaurant was opened. That second business was sold just prior to Mr and Mrs Jacques taking over the Cut Price Deli franchise at Noosa Junction in Queensland. Mrs Jacques is a qualified schoolteacher who ceased teaching in 1979. From 1973 she was engaged in conducting her own businesses, primarily restaurants, and since 1979 has been involved solely with restaurants and with the Cut Price Deli at Noosa.
Notwithstanding that different dates are nominated in their respective affidavits, I think it likely that in response to the advertisement of the Cut Price Deli group on 30 May 1987, Mrs Jacques telephoned one of the numbers referred to in the advertisement and spoke with Mr Sgambellone. There are serious differences in the recollections of Mr Sgambellone and Mr and Mrs Jacques as to the number of meetings, who was present at them, and the dates on which they occurred. It is now accepted by the applicants that the first meeting was in early June but the applicants' recollection is that both Mr and Mrs Jacques attended that meeting with Mr Sgambellone and it was at that first meeting that a handwritten document containing statements concerning turnover and profit margins was written by Mr Sgambellone. Mrs Jacques says she attended a later meeting by herself and her affidavit evidence was to the effect that she personally handed over a cheque for the deposit at one of the meetings. Mr Sgambellone, on the other hand, says that the first meeting was on 2 June 1987 with Mrs Jacques alone and that a week later she attended with her husband, and it was at that second meeting at which both Mr and Mrs Jacques were present that the document was written by him and given to the Jacques. Mr Sgambellone says that there was a further meeting on 8 July 1987 at which a Mr Igor Loutkovsky (an accountant who assisted the Jacques with the finance and purchase of the franchise) and Mrs Jacques was present. He further says that in September 1987 there was a meeting which Mrs Jacques attended with her solicitor, who was introduced by the name Lesley Aboud. Mr Sgambellone said she was a woman in her late twenties or early thirties. In fact, the Jacques had a solicitor, Leslie Abboud, acting for them in respect of the franchise but he at no time attended any meeting with Mrs Jacques at which Mr Sgambellone was present.
While the finding is not crucial, it seems to me more probable that there was an initial telephone contact between Mrs Jacques and Mr Sgambellone and that was followed by a meeting, probably on 9 June, at which Mr and Mrs Jacques were present and at which Mr Sgambellone spoke at considerable length about the Cut Price Deli system and the Noosa project and in the course of which he prepared the handwritten document as to turnover, profit margin, expenses and anticipated profit. Subsequent to that there was a meeting at which Mr Loutkovsky and Mrs Jacques attended on Mr Sgambellone, but I am satisfied that there was no meeting as Mr Sgambellone says which was attended by a woman who was the Jacques' solicitor.
The crucial meeting is the meeting with Mr Sgambellone attended by both Mr and Mrs Jacques. In addition, Mr Malovany and a Mr Douglas Blakeley (who was the Queensland State Manager for Cut Price Deli when Mr and Mrs Jacques moved into the franchise at Noosa), have a direct importance in relation to the resolution of the primary issues thrown up by the litigation.
It is convenient to deal with the issues on the basis of ten broad categories and to identify the claims by the applicants in respect of each category and the response by the respondents.
The onus of proof is on the applicants to prove the representations on which they rely; that those representations bear the character proscribed by s. 52 of the Act; that the representations were an inducing factor in their decision to enter into the various agreements; and that as a consequence of the conduct in breach of s. 52 of the Trade Practices Act they have suffered loss. It is for the applicants to prove the extent of that loss or damage.
The allegations of the applicants of conduct in contravention of s. 52 of the Act cover the following matters:

1. Turnover

2. Gross Profit

3. Profitability

4. Group Purchasing Power

5. Advertising

6. Rebates

7. Melbourne Businessman

8. Purchase Price Split-up

9. Delivery Problems

10. Shopping Centre Leasing

Section 52 of the Act provides:
" (1) A corporation shall not, in trade or commerce, engage

in conduct that is misleading or deceptive or is likely to mislead or deceive.

(2) Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of sub-section (1). "

Before turning to a precise delineation of the issues, it is helpful to refer to the document which, it is common ground, was written by Mr Sgambellone and given to the Jacques on the occasion of their conversation with him concerning the purchase of the Noosa franchise. The front page of that document is as follows:

NOOSA

T/O 10.000 12.000 G/PROFIT 38% $3.800 $4.560 RENT 500 500 WAGES H and W. 7% 700 840 W/PAPER 100 110 ELECT 110 110 INS 50 50 TELE 20 20 MAINT. 30 30 CLEANING 20 20 F. FEE 5% 500 600 TOTAL EXP. 2030 2280 G/PROFIT 3800 4560 NETT $1770 $2280 PER ANNUM $92.040 $118.560

LEASE $110.000 OVER 5 YEARS = $650 P/W

CASH $90.000

200.000

On the reverse of that foolscap page in Mr Sgambellone's handwriting is as follows:

INV $90.000

NETT $1770

LESING (sic) 650

NETT $1120. P/W

PER ANNUM $58,240

TURNOVER
19. The applicants allege that the respondents represented that under the applicants' management Shop 15A in the Noosa Junction Shopping Centre would trade with a turnover of at least $10.000.00 per week. The applicants further allege that the respondents represented that they believed that that shop managed by the applicants would trade with a turnover of at least $10,000.00 per week. These allegations are denied by the respondents. They say that in about June 1987 Mr Sgambellone said to the applicants words to the effect:
" ' I believe the shop will do $10,000 per week' saying that

he based the figure of $10,000 on what he had been told that Franklins should do and on the Respondents' experience of Franklins relative to Cut Price Deli shops. "

In the pleadings the respondents also assert that the applicants were told as to the anticipated $10,000 weekly turnover:<`
" I can't guarantee anything, but I believe it should do

$10.000. It may do more and I believe that it should achieve $10,000. Being a new shopping centre it may take some months to get going but it seems to be a pretty good centre. "

The applicants further assert that they were told that the turnover would increase within a very short period to $12,000.00 and would thereafter continue to increase. They also assert that the respondents represented that they believed that Shop 15A managed by the applicants would enjoy an increase in the weekly turnover within a very short period of time to $12,000.00 per week and would thereafter continue to increase. In the further amended defence the respondents say that concerning the figure of $12,000.00 Mr Sgambellone said:
" Look here, I've done the figures based upon $10,000 and

$12,000 per week. I've put in the $12,000 in so that you could compare the two. I believe that over a period the $12,000 should be reached. I don't know how long. "

The applicants assert that the delicatessen never had anything like a turnover of the $10,000.00 per week referred to by Mr Sgambellone and was incapable of achieving any sum substantially greater than $7,000.00 per week, and they further say that a turnover of $12,000.00 per week has not in fact been achieved and cannot be reached.
I note that with respect to the representations regarding a turnover of $10,000.00 per week and an increase in turnover to $12,000.00 per week, the applicants allege that the respondents represented that the delicatessen would trade with a turnover of at least $10,000.00 per week, which would increase to $12,000.00 per week, and further that the respondents believed that the premises managed by the applicants would trade with a turnover of at least $10,000.00 per week, increasing to $12,000.00 per week.
Insofar as turnover is concerned, the allegation is first, a representation as to a future matter, namely, that the future turnover would be of a certain order and, secondly, a representation as to present fact, namely, a present belief as to the trading potential of the shop.

GROSS PROFIT
25. The applicants allege that it was represented to them that under their management the Noosa shop could trade with gross profits between 38% and 42% of the weekly trading figures and further that the respondents believed that the premises so managed would trade with gross profits between 38% and 42% of the weekly trading figures.

The respondents deny that they represented that under the management of the applicants the premises at Noosa could or would trade, or that they believed that it could or would trade, with gross profits between 38% and 42% of the weekly turnover figure. They admit that Mr Sgambellone told the applicants that franchisees had achieved gross profits of 32%, 34%, 36%, 37%, 40% and 42% and also said that the applicants should be able to achieve 38%.
The applicants say that the gross profit margins represented were not achieved nor were they capable of being achieved. The respondents admit that the Noosa franchise has not traded with gross figures in that range but deny that the shop was incapable of trading with a gross profit of up to 38%.
I accept that a representation that a shop "could trade" at a certain turnover or profit margin is a representation as to the future trading capacity of the shop. Such a representation is to be contrasted with an assertion that a delicatessen "would trade" at a certain turnover or profit margin. The latter is a prediction about the future trading of the delicatessen at those premises. I accept further that an allegation that a shop would trade at a certain turnover or at a certain profit margin involves a representation with respect to a future matter, to which the provisions of s. 51A of the Trade Practices Act apply. In contrast, an allegation that the respondents, or some of them, represented that they "believed" that a shop would trade or could trade at a certain level is a representation about that person's present state of mind and s. 51A has no application. The onus would then be on the applicants to prove that the representation was untrue in that the representor did not at that time hold the belief alleged.
Section 51A of the Act relevantly provides:
" (1) For the purposes of this Division, where a corporation

makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.

(2) For the purposes of the application of sub-section (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.

..."

There is no doubt that the figure of a weekly turnover of $10,000.00 was discussed in the meetings between the applicants and Mr Sgambellone. A crucial question is the characterisation of what was said concerning that represented turnover. It is clear that Mr Sgambellone had a very great deal of experience concerning the sale of franchises. I am satisfied that he would have been aware of the significance of his statements to prospective purchasers in their decisions to purchase. Mr Sgambellone would have known that where he made predictions as to what the likely turnover or profit margin might be, the persons to whom his statements were made were entitled to believe that, because of his very considerable experience, there was a reasonable and proper basis on which his predictions were proffered and that he not only believed in what he said about a particular franchise's projected performance, but that there was also a proper and reasonable basis for the claims that he made. (See Global Sportsman Pty Ltd v. Mirror Newspapers Pty Ltd (1984) 2 FCR 82 at 88; James v. Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347 at 372; Brown v. Raphael (1958) 1 Ch 636 at 642-3; 644 and 648-9).

In Smith v. Land and House Property Corporation (1884) 28 ChD 7, the vendors of a property stated that it was let to "Mr Frederick Fleck (a most desirable tenant)..." In fact, the tenant's rent was in arrears and he was not a desirable tenant. It was held that this was not a mere expression of opinion, but contained an implied assertion that the vendors knew of no facts leading to the conclusion that the tenant was not a desirable one; and that, in the circumstances, there was a misrepresentation.
Bowen LJ said at 15:

" In considering whether there was a misrepresentation, I will first deal with the argument that the particulars only contain a statement of opinion about the tenant. It is material to observe that it is often fallaciously assumed that a statement of opinion cannot involve the statement of a fact. In a case where the facts are equally well known to both parties, what one of them says to the other is frequently nothing but an expression of opinion. The statement of such opinion is in a sense a statement of a fact, about the condition of the man's own mind, but only of an irrelevant fact, for it is of no consequence what the opinion is. But if the facts are not equally known to both sides, then a statement of opinion by the one who knows the facts best involves very often a statement of a material fact, for he impliedly states that he knows facts which justify his opinion. "

In Bateman v. Slatyer (1987) 71 ALR 553, Burchett J said at 559:

" It is of course clear law that a statement of opinion cannot be regarded as false or misleading, or as misleading or deceptive, simply because it turns out to be incorrect: Global Sportsman Pty Ltd v. Mirror Newspapers Pty Ltd...But such an opinion may convey that there is a basis for it, that it is honestly held, and when it is expressed as the opinion of an expert, that it is honestly held upon rational grounds involving an application of the relevant expertise. "

In the present circumstances, in my view it is implicit in Mr Sgambellone's predictions that he knew facts which justified those predictions or estimates.
If there was reason to be cautious about accepting the accuracy of his predictions, the circumstances called for that to be clearly expressed to the recipients of his predictions.

PROFITABILITY
36. The applicants make a number of allegations under this head, including that the respondents represented that the applicants could conduct the delicatessen profitably whilst paying outgoings and that the respondents represented that they believed the applicants could conduct the business at Shop 15A profitably whilst paying outgoings.

The respondents say there was a reasonable basis for believing that the applicants could conduct the delicatessen business at Noosa Junction profitably.
Further, the applicants say that it was represented to them that they could conduct the business in such a way that they would receive a profit of $58,240.00 net in the first year of operation and that the respondents believed that they could so conduct the business. The respondents deny that there was any warranty as to net profit and say that they had reasonable grounds for believing that the applicants could so conduct the business, but they say that the precise figures of net profit would be dependent on a number of factors, some of which were in the applicants' control and several of which were outside the respondents' control.
In a similar vein is the assertion by the applicants that it was represented by the respondents that the applicants could conduct the business profitably such that they would be able to sell the business at a profit and that the respondents believed that that was the case. Again the respondents say there were reasonable grounds for believing that the business could be conducted profitably and such that the applicants would be able to sell the business at a profit, but say that there was never at any stage a guarantee that that would be the position.
There is a further allegation by the applicants that it was represented to them that by purchasing the delicatessen franchise they could recoup their outlay within two years of operation. The respondents say in respect of that allegation that the representation made by them was to the effect that a lot of franchisees had told Mr. Sgambellone that they had got back in approximately 2 years any money that they had actually put in themselves and further, that Mr Sgambellone, in the calculation given to the applicants, demonstrated that on a projected weekly turnover of $10,000.00, after expenses there was a net profit of $1,100.00 per week, after paying for leasing, thereby demonstrating the potential for recoupment of $90,000.00 over two years.
The applicants assert that it was represented to them that by purchasing a Cut Price Deli franchise they could make a substantial return on their investment. The respondents say that Mr Sgambellone "told the Applicants that some franchisees get very good money back and, that this statement was made giving examples of franchisees building up turn-over thereby increasing the goodwill of the franchise and in turn increasing its resale value. "
In response to this class of allegations, the respondents say that the allegations by the applicants are not capable of amounting to misleading conduct within the meaning of the Act, by reason of their lack of precise content, whether this be put on the basis of 'puffery' or vagueness or the lack of ability to measure whether or not the representations have been fulfilled. The respondents do not seek to deny that the document prepared by Mr Sgambellone amounted to an indication that it was possible to make from the shop a profit as defined within the terms of the document. It was submitted that one is permitted to deduct from the gross profit only those items set out in the document and no other items. It was submitted there were written-in assumptions of the document on which the representation was based.

SHOPPING CENTRE LEASING
43. The applicants say that Mr Sgambellone told them that the shopping centre in which the delicatessen was located was 75% leased.

In answer to this the respondents say that in June 1987 Mr Sgambellone told the Jacques that the shopping centre in which the delicatessen was located was 75% leased according to the leasing agents.
The respondents say that in June 1987 Mr Sgambellone told Mrs Jacques that she should go to Noosa, look at the shopping centre, and that the Jacques should make their own assessment after talking to the business agents and to the leasing agents for the centre, and that in about September 1987 Mrs Jacques was told by Mr Sgambellone that all the shops in the centre had not been let and further, in November 1987 Mr Sgambellone had told either Mr or Mrs Jacques that the projected turnover of $10,000.00 per week might not be reached because all the shops in the centre had not been let and, if the applicants desired, the respondents would release them from their contracts and take the shop over and run it themselves.
The respondents admit that at the time of the discussions between Mr Sgambellone and the Jacques the shopping centre was not leased to a 75% level, nor was it leased at that level at the time the shopping centre opened. They say, however, that the Jacques were told about this shortfall before the applicants entered into the franchise agreement and guarantee, and before they commenced business in the shop and that the respondents offered to release them from their contractual obligations by reason of the vacancy of shops in the centre, but that the Jacques refused.

OTHER AREAS OF COMPLAINT
47. The other categories of complaint can be summarised somewhat tersely.

As to group purchasing power, the applicants asserted that they were told that the group purchasing power of the Cut Price Deli group made the investment an attractive one, that that power would confer discounts so as to provide cheaper prices than prices available to sole traders. They assert in respect of advertising that they were told that extensive advertising would make the investment an attractive one and that two-fifths of the 5% franchise fee would be spent on advertising.
As to rebates, the applicants assert that the respondents failed to inform them that the corporate respondents had entered into an agreement with suppliers whereby the first and/or the second respondent would receive a percentage of the total sales to Cut Price Deli stores constituting a direct benefit to them and a detriment to the franchisees by increasing the cost of goods supplied. Further, the applicants say that the respondents failed to disclose to them that the system of the Cut Price Deli group involved the use by the respondents of the group purchasing power to obtain discounts on the prices of goods purchased by the respondents from group suppliers.
In summary, the respondents answer is that, until April 1990, there was no differentiation between Cut Price franchised stores and Cut Price company stores in respect of rebates or special discounts and that there was no failure to disclose suppliers' rebates on franchisee purchases.
It was also asserted by the applicants that they were told by Mr Sgambellone that they needed to act quickly because there was interest by a Melbourne businessman. The answer by the respondents is an admission that Mr Sgambellone told the applicants that a Melbourne businessman was also interested in the Noosa shop. The matter was not a matter of prediction but a matter of actual fact, but in any event was not capable of constituting misleading or deceptive conduct being intended and taken at the time of its making as being a salesman's puff. The respondents say that given the time frame of the negotiations, there was no inducing quality in what was said concerning interest by a Melbourne businessman.
The statement of claim alleges that the respondents represented that the applicants' outlay of $200,000.00 would be dispersed as to $70,000.00 to the first or second respondent and as to $130,000.00 to Gold Coast Refrigeration for the purchase of plant and equipment. The respondents say that the total price was always $200,000.00, that the fit-out costs would be between $110,000.00 and $120,000.00, with the balance of the $200,000.00 being payable to the respondents for goodwill; the fit out cost was ultimately $117,694.00 and that the arrangement of a finance lease for $130,000.00 for the cost of fit out was done by the applicants so as to have additional funds available to them.
It was also asserted by the applicants that there was a representation by Mr Sgambellone that there would be no delivery problems and, contrary to that representation, there were considerable problems with delivery and supply of product. The respondents deny that there were considerable problems with the delivery and supply of products, and insofar as there were any problems they assert that those problems were caused by the applicants' failure to maintain proper communication with the suppliers.
In respect of each of the allegations of misleading and deceptive conduct constituted by the representations I have detailed, it is prudent to bear in mind the observations by Fisher J in Pappas v. Soulac Pty Ltd (1983) 50 ALR 231, which was a case involving an allegation by the applicants that they had been induced to purchase a shopping centre by misleading statements by the respondent. Each case of course falls to be determined on its own facts, but his Honour's observations at 234-5 are apposite:
" For the purpose of determining whether any of the

respondents engaged in misleading conduct, statements can not be assessed in isolation but in the overall context of the negotiations. ... It is important to appreciate that many of the statements alleged or admittedly made by Mr. Spencer were wholly or in part statements of opinion, not capable of being objectively proved to be true or false. They were also essentially the type of introductory comments, in the nature of puffery, made at the start of negotiations for the purpose of attracting the interest of a possible purchaser. As such they became irrelevant or of little, if any, significance when detailed information is subsequently given a fortiori, to a potential purchaser with commercial experience. To the extent that they are essentially puffery, it is proper to be reluctant to elevate them to the status of potentially misleading conduct. The comments of Holmes J on this aspect, which he denotes as a rule of law, in Denning v Darling, 20 NE 107 at 108-9, referred to in Donald and Heydon: Trade Practices Law vol 2, p 539, are on point: 'The rule of law is hardly to be regretted, when it is considered how easily and insensibly words of hope or expectation are converted by an interested memory into statements of quality and value when the expectation has been disappointed. "

The comment of Holmes J is of course no rule of law but it is a caution as to an evaluation of human conduct.
Concerning the allegation that Mr Spencer had orally represented that the shopping centre was a good investment for the applicants and that it was a good shopping centre, his Honour said at 238:
" At best, however, it was again a statement of opinion, the

type of puffing which would normally fall from a selling agent and which was incapable of being proved to be correct or incorrect. Mr. Spencer did not dispute that he made general statements of this nature, but it is impossible to assess them as material representations of fact. Likewise in the light of the relatively long period during which the parties were negotiating, and the experience of the applicants and their children, it is not possible to assess them as misleading conduct. "

Acting on those thoughtful and sound observations, I do not find that the representations by the respondents in relation to group purchasing power, advertising, rebates, the Melbourne businessman in the wings, the purchase price split-up, or the delivery problems, relevantly constituted misleading or deceptive conduct inducing the applicants to enter into the franchise agreement and related instruments. The representations as to group purchasing power and advertising have not been shown to be false in any relevant respect and in the context in which they were made, in my view, have not been shown to constitute conduct that is misleading or deceptive, or likely to mislead or deceive. As to rebates, I am not satisfied that there was the concealment alleged, particularly having regard to the contemporary documentary material plainly evidencing the existence of the payments by suppliers to the corporate respondents. The claimed misrepresentation concerning a purchase price split-up is not made out, particularly having regard to the evidence of Mr Jacques, and there is no basis in my view for concluding that a representation that there would be no delivery or supply problems experienced by the applicants should they take the Noosa franchise, was not an honestly held view and reasonably based at the time of its making.
While there may be room for argument as to the degree of interest by a "Melbourne businessman" in taking up the Noosa franchise, it is clear that there was some interest by persons in that regard but, in any event, I am not satisfied that statements made by Mr. Sgambellone concerning that aspect of the matter were more than puffery and understood by the applicants to be in that category of statement. This view is fortified by the fact that the negotiations occupied many weeks and there was the involvement of both legal and accountancy advisers. In the circumstances, I am not satisfied that this aspect of the representations involved s. 52 conduct and in any event I am sure that it was not an inducing factor in the applicants' decision to enter into the agreements in October 1987.
It is necessary therefore to turn to the remaining issues between the parties. I have already referred to the caution which Courts should exercise in deciding to treat as conduct within s. 52 statements made between business people of experience in the course of negotiation, particularly where the parties have access to legal and accounting advice and the transaction proceeds over weeks rather than in a very short time frame; see also the observations of Gummow J in Elders Trustee and Executor Company Limited v. E.G. Reeves Pty Ltd (1988) 20 FCR 164.
Of course, a contravention of s. 52 need not be the sole or primary inducement to enter into the transaction.
The task is to look at the evidence as a whole and determine whether the conduct found to be engaged in was conduct that was misleading or deceptive or likely to mislead or deceive and whether that conduct did induce, in the sense of being a factor in the entry into the agreements and whether that resulted in the suffering of loss or damage by the applicants and, if so, what was the amount of such loss or damage.
Before turning to the resolution of the principal areas of dispute, it is convenient to deal with the submission by Mr Hamilton QC, senior counsel for the respondents, that the transaction in this case did not fall within s. 52 of the Act.
This section is contained in Part V of the Act, which part is headed "Consumer Protection". As to what is conduct "in trade or commerce", the cases show some divergence. The width of the expression was discussed by the Full Court of the Federal Court in Re Kuringai Co-operative Building Society (No. 12) Ltd (1978) 36 FLR 134 (see per Bowen CJ at 139 and per Deane J at 167).
In O'Brien v. Smolonogov (1983) 53 ALR 107, the Full Court of the Federal Court (Fox, Sheppard and Beaumont JJ) held that a private sale of a parcel of rural land was not a transaction in trade or commerce. However, in Bevanere Pty Ltd v. Lubidineuse (1985) 7 FCR 325, the Full Court of the Federal Court held that the sale of a cosmetic clinic by a company which was not engaged in the business of selling such capital assets was nevertheless a transaction in trade or commerce, O'Brien v. Smolonogov (supra) being distinguished on the basis that the land which was sold in that case was not used for any business activity.
Subsequent to those decisions, the High Court in Concrete Constructions (N.S.W.) Pty Limited v. Nelson (1990) 169 CLR 594 held that the phrase "in trade or commerce" in s. 52 has a restricted operation. Mason CJ, Deane, Dawson and Gaudron JJ said at 603:
" ...it is plain that s. 52 was not intended to extend to all

conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purposes of, its overall trading or commercial business. Put differently, the section was not intended to impose, by a side-wind, an overlay of Commonwealth law upon every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities. What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character. "

Consistent with the decision of the Full Court in Bevanere v. Lubidineuse (supra), of which I was a member, in my opinion the conduct of the respondents in this case was conduct "in trade or commerce".
Even if, in the light of the observations of the High Court in Nelson, there might be room to question whether a 'one off' sale of a business is conduct in trade or commerce, I have no doubt that the conduct in this case was conduct "in trade or commerce".
Cut Price Deli, in the advertisement which led to the Jacques acquiring the Noosa franchise, represented:
" We currently have over 110 CUT PRICE DELI outlets throughout

Australia and require further Franchisees for future sites at BALLINA, BIRKENHEAD POINT, NOOSA, QUEANBEYAN, TAMWORTH. The following franchises are also available for sale: ASHFIELD, AUBURN, BANKSTOWN, GREYSTANES, REDFERN, WENTWORTHVILLE, WINSTON HILLS, also GOULBURN AND DARWIN. If you desire to purchase and own your own business, the potential exists to make substantial returns on your investment as well as recouping your outlay within 2 years. "

The respondents are in the business of buying and selling franchise opportunities on a very extensive scale. A feature of each franchise sold was that the respondents would receive 5% of gross sales as a franchisee fee, as well as a rebate paid to them by suppliers on the value of sales to the franchised delicatessens.
This transaction was of a type regularly engaged in by the respondents and the source of very significant turnover. In this context the "Cut Price Deli Franchise Statement" sent by the solicitors for the respondents to the solicitors for the applicants contained the statement under the heading "Business Experience":
" The Licensor of Cut Price Deli Franchising Pty Limited, Cut

Price Deli Pty Limited, has been in the business of operating and franchising delicatessens since its incorporation in 1983...The Company operates no businesses other than the operation and franchising of delicatessens. The registered office and office bearers of Cut Price Deli Pty Limited are the same as those of Cut Price Deli Franchising Pty Limited shown in this statement. "

In my view, therefore, the conduct of the corporate respondents established by the evidence is conduct "in trade or commerce", and if that conduct is properly to be characterised as misleading or deceptive, or likely to mislead or deceive, that conduct is in contravention of s. 52 of the Act.
I turn now to what was represented concerning turnover, gross profit margins, profitability and shopping centre leasing, and how the representations found in those respects are properly to be characterised. The issue of profitability, other than in the general statements with which I have already dealt, is in truth a function of turnover and gross profit margin, although the nature and amount of expenses is also a component. This category is in a sense subordinate to the first two.
These questions turn in large measure on the credit of the respective witnesses. I will deal in some detail with the evidence in relation to each matter, but I give by way of preface my general observations of the main witnesses.
I accept Mrs Jacques as generally an honest and reliable witness, particularly as to the content of conversations. There are aspects of her evidence which suggest an element of obsessive concern about the conduct of the respondents. Amongst other ways, this is demonstrated by the reliance on the question of non-delivery of goods and the suggestion that part of the moneys raised by lease finance in some way had been misappropriated by the respondents. In the same way, the case of the applicants that the goods generally provided by Cut Price Deli were more expensive than those available to a sole trader was not at all borne out by the evidence and is contrary to Mrs Jacques' instructions to her own solicitors, where, in complaining of one instance where bacon could be obtained cheaper than from Cut Price Deli, she said:
" I should note however, that generally we have been able to

buy supplies cheaper than elsewhere."

I have approached her evidence conscious of the possibility of overstatement and exaggeration, born of her view of the respondents' conduct.

Mr Jacques has some difficulty of comprehension in English, and I specifically note that the literal transcription of his answers does not convey a necessarily reliable picture of the tenor of his answer. He was much more than Mrs Jacques prone to an obsessive overstatement of his complaints.
Mr Sgambellone suffers from a hearing problem and his facility in English is also such as to require caution concerning the interpretation of his answers, particularly in cross-examination. He impresses as a man of energy and conviction but it is impossible on the evidence to conclude that he has not in a large measure reconstructed what in his view must have happened, distilling that reconstruction from a very large number of interviews with a very large number of prospective franchisees in different contexts and times. The reliability of much of his evidence and explanations has to be seriously discounted.
This is no more clearly illustrated in the instance of his claim that Mrs Jacques was accompanied to one of the meetings by her solicitor, a woman, where the true position was that the Jacques had acting for them one Leslie Abboud, a solicitor whose name appears on a number of the contractual documents and instruments in relation to the franchise transaction. Mr Abboud at no stage accompanied Mrs Jacques to any meeting at which Mr Sgambellone was present. No acceptable explanation of this egregious error on Mr Sgambellone's part was advanced, and the only charitable explanation available is that in some way Mr Sgambellone has confused this meeting with one of the very many others concerning franchises with which he has been concerned.
I am satisfied that, contrary to the claims by Mr Sgambellone, at all times the position of the Jacques was that they intended to move to Queensland and that at no time did they have or represent to Mr Sgambellone an intention or interest in the acquisition of the Pennant Hills Cut Price Deli shop then owned by Mr Greg Riley, who was known to the Jacques.
Mr. Loutkovsky, who was called by the respondents notwithstanding that he was the person to whom Mr Riley had referred the Jacques when they sought information from him concerning the operation of his Cut Price Deli franchise, was so manifestly unreliable that the respondents conceded "we cannot put him forward as a witness whose oral evidence was of high credit".
In my opinion, the assessment of Mr Loutkovsky is substantially worse than that implicit in that concession. The errors and inconsistencies in his evidence were so serious that he is not worthy of credit, so much so that I even have difficulty in accepting those parts of his evidence which are contrary to the respondents' case.
Mr Malovany, on the other hand, was a man of confident mien, who gave his evidence with some precision and who is, it appears, a man given to recording important matters. I express some reserve concerning a man who tape records conversations of complaints by franchisees and arranges for a transcript of those telephone conversations to be made, and respectfully query whether the concern for meticulous recording is the prime motivation of such conduct. There is room for the view that to a not inconsiderable degree Mr Malovany's role was one of damage control. In my view, the transcripts of those telephone conversations are very much double edged weapons and they contain an element of near contemporary corroboration of important parts of the applicants' case.
Mr Malovany's evidence on the existence of a proper basis for a representation of a profit margin of 38% was wholly unconvincing, and almost derisory. Mr Malovany claimed that he asked Mrs Jacques "Have you checked out the - any calculations that you've received?" He said that he asked this question not being sure what she had received. The following exchange then occurred:
" And were you suggesting to Mrs Jacques that perhaps she

ought check them out, or were you inquiring as to whether she had checked them out?---No. No, Mr Quinn, I was certainly suggesting she must check them out. It's everyone who buys a business; it's their responsibility to check anything out. Just because a person puts something down on a piece of paper doesn't mean that it's to be believed. You have to make your inquiries, and I told her that. That's your company's philosophy, is it, Mr Malovany?---It's my philosophy as well, Mr Quinn, yes.

Caveat emptor, is that a phrase you've heard, Mr Malovany?--- Yes, Mr Quinn.

That's what you live by, is it?---Well, let everyone beware. Let the buyer and the purchaser, and the seller, and everyone beware, yes, Mr Quinn. Black and white isn't black and white, Mr Quinn. "

In his affidavit Mr Sgambellone said that in May of 1987 he received a phone call from Mr Henk Spee from Raine and Horne seeking to place a Cut Price Deli in the shopping centre. Mr Sgambellone claims that he asked Mr Spee "What is the projected turnover of Franklins?", to which Mr. Spee, the salesman for the centre, said "Franklins have projected about $200,000 per week". Mr Spee gave evidence in which he demonstrated a capacity to turn a hazy or absent recollection into an art form but, in my opinion, even if there was a statement made by Mr Spee to that effect to Mr Sgambellone, it does not provide a sufficiently sound foundation on which to base a conviction to a prospective franchisee that the Cut Price Deli in that shopping centre would have a turnover in excess of $10,000.00 per week. In Mr Sgambellone's oral evidence, however, he was asked:
" Are you quite sure that you didn't say to the Jacques that

your source of information in connection with Franklins was from within Franklins itself? "

to which he answered:

" One of them was from within Franklins itself. "

It was put to him that in his affidavit he said he got the information from Mr Spee, to which he replied that he got the information from Mr Spee as well. On being told that Mr and Mrs Jacques said in their affidavits that he had told them that he had got the information from Franklins, he answered:
" I could have got the information from Franklins as well.---

Well, did you or didn't you?---I would say 'yes', at that stage'yes'. "

He says that in 1987 when he talked to Franklins:
" I've talked to them about several centres that we're in to

see how we are performing and Noosa could have been mentioned as well. "

When asked why he didn't say that in his affidavit, he said:

" Well, it could have been overlooked."

He says that he was informed by somebody inside Franklins that:
" Noosa was projected if it was going to be fully let it was

going to turn over $200,000. per week. "

He was then asked:

" If it was fully let?"

to which he said:

" They were talking about a projection. They were confident of doing $200,000. if the centre was going to be fully let."

He was asked:

" Who was the person you spoke to in Franklins about the

turnover at - or the projected turnover for Noosa in 1987?

to which he said:

" I think it was Alan Frew. "

Mr Frew swore an affidavit in these proceedings which is silent as to whether there were any communications by him with Mr Sgambellone concerning turnover or projected turnover at Noosa in 1987.
It is a curious feature that notwithstanding a vast amount of information from franchisees and the keeping of records, no analysis was then made to assist the company in its dealings with prospective franchisees. The method of assessment at best for the respondents is a broad brush rule of thumb based on a salesman's assessment of what a major tenant might achieve, or on what somebody in that major tenant's organisation estimates that tenant might achieve if the centre was to be fully let.
I do not accept the evidence of Mr Stephen Ross that he had a discussion with Mr Jacques regarding a rebate of 4% when Mr Jacques was in training. His evidence that the rebate has been 4% since 1986 is inconsistent with the other evidence that it was only 2% in 1986 and is inconsistent with the admission by the respondent in Exhibit 2 that there was a rebate of 2% up to and including December 1987.
I will turn to the aspects of the valuation evidence of Mr Schoch, Mr Edmonds and Mr Wayland later.
As to the questions of turnover, gross profit margins and profitability, I am satisfied that the figures presented by Mr Sgambellone to the Jacques were given, not on the basis of optimistic theoretical possibilities, but were presented to them as realistically based estimations of the turnover and gross profit margins that the Jacques would achieve and that the figures presented to them in the joint meeting both as to turnover and profit margins and expenses were figures on which they could confidently plan.
The question of whether there was a reasonable basis for those estimations and predictions is an important matter, but I am quite satisfied that it was represented to the Jacques that the turnover of the Noosa shop would be $10,000.00 per week. I reject the evidence of Mr Sgambellone as to the qualifications and cautions which he says accompanied his figures. I accept Mrs Jacques' evidence that Mr Sgambellone told them that the turnover figure was based on figures that he had obtained from Franklins and that his experience was that the Cut Price Deli would return 7% of what Franklins turned over and only 5% of what Coles turned over, the explanation for the difference being that Coles Supermarkets had a delicatessen as part of their supermarket.
I am satisfied that many of the matters on which Mr Sgambellone made predictions had their basis ultimately in broad brush rule of thumb estimations. The purchase or sale price of a franchise was repeatedly said to be a twenty times multiple of turnover, so that if a shop turned over $10,000.00 per week, the sale price would be $200,000.00. This rule of thumb is obviously quite rough and ready, because the value of a shop would depend not only on turnover but on gross profit margin; if the turnover were constant at $10,000.00 the value of the shop would depend very much on whether the profit margin was 32% or in the late 30s or 40% or 42%. Similarly, the rule of thumb in relation to anticipated turnover from anecdotal evidence of Franklin's turnover multiplied by a bald percentage.
I am satisfied that the document, in providing calculations based on a turnover of $10,000.00 and $12,000.00, was not prepared by Mr Sgambellone on the basis that that was merely a prediction and that no reliance could be placed on those estimates. It is not irrelevant, in my view, that the presentation by Mr. Loutkovsky to the National Australia Bank for finance on behalf of the Jacques, dated 11 September 1987 contains the statement:
" Cut-Price Deli Pty Limited have placed a value of $200,000

on the Noosa Franchise on the basis of an anticipated weekly turnover of $10,0000.

This turnover is based upon a population (regular 17,000) and growth survey of Noosa Heads and surrounding area. The anticipated turnover compares favourably with existing areas that our practice handles in places such as Goulburn and Grafton with similar populations. "

It is also noted that in respect of that projection that:

" Gross Profit is calculated at 38% - current average. "

Mr Loutkovsky says he got this information from Mr Sgambellone.

In addition to the handwritten series of figures produced by Mr Sgambellone, which is crucial to this aspect of the matter, there is documentary evidence which is relevant to the resolution of these matters. The assistance this evidence provides is not all in the same direction. I refer to only some of the documents.
It is plain from a letter of 20 July 1987 posted on 22 July 1987 that Mrs Jacques' recollection of handing over a deposit to Mr Sgambellone at a meeting with him was incorrect.
One exhibit, being a plan of the shopping centre, has notations by Mr Sgambellone on it, made as a result of a telephone call with Mr Spee. This plan has endorsed on it, amongst other things, a Chandlers store and a McDonalds store. They can sensibly only be interpreted on the evidence as leads, or a wish list by the salesman for letting, but were represented in much firmer terms by Mr Sgambellone.
Mr. Malovany's letter to the respondents' solicitors on 11 August 1987 includes the statement:
" The Franchisee has asked it (the franchise fee) to be three

and a half percent from outset and then 5% once shop does $10,000.00 per week. We have advised Agreement must state 5% and whilst we are reluctant to put any other agreement in writing we confirm if there are any trading problems through no fault of the Franchisees we will give assistance with the franchise % fee. " (my emphasis)

There were complaints made by the applicants in 1988. In a letter dated 2 June 1988, Mr Jacques, having referred to their difficulties and to averaging only $7,000.00 per week, said:
" We entered this franchise on the basis of two things:

(1) That the shop would have a turnover of $10,000.00 per week (this was discussed in full with Enzo in conferences before purchase of Franchise with Mr. Loutkovsky our present accountant. When asked of possibility of shop not having these takings, Enzo himself told us that Cut Price Deli would not be interested in anything less than the figures that were given according to their survey. Nor would it be profitable for Cut Price Deli P/L or the Franchisee. We understood we paid $20,000 for every $1,000 turnover per week. This was all based on information given by yourselves from survey you supplied us with.

(2) We were also given the information the Centre was fully leased. As of today, 2nd of June, ten shops are still empty. "

A letter from Mr Jacques to Cut Price Deli of 5 June 1987 was in similar terms and concluded:
" On your instructions we have ceased paying rent but

obviously Centre Management is not happy with this. We cannot see our way clear to continue trading at a loss. As stated we entered into this Franchise agreement on the basis of a $10,000 week turnover and a fully occupied Centre. We would respectfully ask you how you intend to resolve this issue as the situation is now desperate. We would ask you kindly to treat this matter as urgent, and give us a reply within 14 days. "

As to the projections document, calculations are based both on $10,000.00 and $12,000.00 weekly turnover. 38% was the gross profit figure selected for the making of the calculations. Rent was taken at $500.00 per week. This was in fact wrong, but is not the subject of complaint by the Jacques. The words "Wages H and W 7%" appear before the figures "700 840". I think it unlikely that the explanation for this entry is that Mr Sgambellone told the Jacques that the husband and wife working would receive $700.00 per week in wages in addition to the $92,000.00 per annum shown as profit, as the Jacques claim. I think it more likely that what was said by Mr Sgambellone was that with husband and wife working, the wages of outside staff could be kept to 7% or $700.00 per week. I accept also that the figures at the foot of page 1, "Lease $110,000" and "Cash $90,000" totalled as "$200,000" point to the basis of the conversation having been that the Jacques would contribute $90,000.00 cash towards the project and that the financed element would be $110,000.00 through chattel leasing. This is supported by the reference to "INV $90,000", being a reference to the amount invested at the top of the second page, as the basis for showing a net return after finance charges of $58,240.00 per annum. It is in this context that the claim was made that, on an "investment" of $90,000.00 there would be a recoupment, on the basis of takings of $10,000.00 per week, in two years.
The Cut Price Deli Franchise Statement furnished to the solicitors for the Jacques in August 1987 contained the statement, after a series of figures had been given:
" These figures are only estimates. There is no assurance

that you will do as well. If you rely upon these figures you must accept the risk of not doing as well."

The memorandum also makes a reference to an estimate in the vicinity of 7% for outside labour employed by a "franchisee operating his shop himself (i.e. not employing a salaried manager). "

A telephone conversation recorded by Mr Malovany with Mrs Jacques records that Mrs Jacques complained that the Jacques "paid $20,000.00 plus for a shop that was supposed to take 10". This in my view reinforces the confidence generated by Mr Sgambellone in the reliability of his estimates. Mr Malovany's reply is to the effect that "we believed that it was a genuine situation at the time" and, in a later telephone conversation, "the cold hard facts is what you paid for we all anticipated...".
The integrity of the projections depends both on the turnover figures and the gross profit figures and the basis on which each of them was offered. I do not accept the evidence of Mr Sgambellone that, in giving these figures, he indicated to Jacques they could not be treated with confidence or that he said anything like "I can't guarantee anything, but I believe it should do $10,000." The tenor of his representation concerning turnover was that he had information available to him on which he could make a confident prediction as to the turnover, on which the Jacques might rely.

The basis of that prediction, claimed by Mr Sgambellone, and attempted to be supported by Mr Malovany, is not in my view a reasonable basis.
I am satisfied that the figure of a $10,000.00 turnover was offered without Mr Sgambellone having any reasonable basis to believe that that would in fact be achieved. The evidence of Mr Sgambellone in this regard, to some of which I have earlier referred, was unconvincing.
Similarly, I am satisfied that there was no acceptable basis on which Mr Sgambellone could honestly and reasonably say that the gross profit margin would be at least 38%. Mr Sgambellone justifies his reference to 38% on the basis of his own experience in 1982 and subsequent anecdotal reports from a handful of franchisees. Particularly having regard to the information available to Cut Price Deli from which direct calculations might be made, the offered justification for the 38% figure is such that I am satisfied that there was no genuine belief that 38% would be achieved as a gross profit margin.
The actual position was able to be exposed. Mr Sgambellone accepted that in the period January to June 1987, of the sixteen franchised shops in Queensland, twelve of them had an average turnover of under $10,000.00 and only four had a turnover of over $10,000.00, and that with company shops the position was drastically worse, some of them being down to around $3,000.00 per week.
Based on an analysis of weekly trading summaries for Queensland stores for the Cut Price Deli group in the period January 1987 to June 1987, Mr Schoch, an accountant, deduced that the average gross profit percentage for the six months period was 33.3% on average weekly sales of $9,023.00. No store achieved a gross profit return of 38% to 40%. Only one store had weekly sales of above $10,000.00.
The "Franchise Statement" forwarded to the Jacques prior to execution of the franchise agreements and related documents, refers under "Stock Purchases" to a profit margin of 38-42%, and there follows calculations adopting an average of 40%. It seems to me that this contemporaneous document in a sense corroborates the applicants' case that Mr Sgambellone's oral representations were no less fulsome than those referred to in the franchise statement. It is also of interest to note that a later document, the "Disclosure and Explanatory Memorandum", refers to a range of 30-40%, and there is a reference in that document to a register maintained which shows gross profit information, which information is not before me in evidence.
An article in the October 1986 edition of Australian Business refers to Mr Sgambellone and Mr Rechichi and contains a reference by a franchisee to gross margins varying between "39 to 45 per cent". In a magazine advertising franchise opportunities and which features a photograph of Mr Sgambellone and Mr Rechichi, it is said of Cut Price Deli:
" Cut Price Delis typically achieve takings of between

$17,000-$20,000 per week with a gross margin of 38 per cent."

There is also a reference in that article to a combined franchise/royalty fee and advertising levy of 5% payable on gross sales, and the statement:
" Returns: The gross profit of a Cut Price Deli outlet is 38

per cent, which should produce a net of around 18 per cent after all expenses.

Contact: Mr Enzo Sgambellone, Telephone: (02) 502:1122. "

As to the experience of Cut Price Deli with individual franchisees providing an adequate base for an estimation of 38% gross profit margin, Mr Malovany mentioned a number of franchisees who indicated a gross profit figure of 38% in his presence and the presence of Mr Sgambellone. Those names included a Mr Stratikopolous and a Mr Mario Zonta. Mr Zonta was one of the names mentioned by Mr Sgambellone.
In cross-examination however, Mr Malovany recalled that Mr Zonta, in the context of other Federal Court litigation, said that his average gross profit each year was 32%. Mr Malovany admitted that in the course of preparation for that case, Mr Zonta told him that his average gross profit each year of operation was 32%. In respect of Mr Stratikopolous, Mr Malovany admitted that Mr Stratikopolous said in 1987 that he was prepared to accept an average gross profit of between 32-35%. Mr Malovany in cross-examination admitted that he had sworn an affidavit in those proceedings saying in respect of his own shop that the shop had been averaging a gross profit between 32-34% for the years ending '87, '88 and '89. I should note that that shop is a managed shop.
Mr Greg Riley, who was called on behalf of the applicants, was awarded the Shop of the Year Award in 1986. I infer that this award was by the respondents. In that year his gross profit margin was 33%. His evidence supports the Jacques' in that there was never any discussion by them as to the possibility of their purchasing his franchise at Pennant Hills; contrary to the evidence of Mr Sgambellone and Mr Loutkovsky. The shop was sold in March 1988, but Mr Riley says that he first thought of selling that shop in September 1987.
Mr Malovany admitted that he had no idea of the gross profit percentage of shops achieving more than $10,000.00 per week nor of shops achieving less than $10,000.00 per week and that the company had never made any gross profit calculations on data from franchisees before October 1989. Mr Loutkovsky (for what it is worth) said that the figure of 38% gross profit margin included in the finance application was included on the basis of information provided by Mr Sgambellone.
I am satisfied that the gross profit margin of 38% as a minimum was represented by Mr Sgambellone as a gross profit margin on which the applicants could realistically rely. I am further satisfied that there was no reasonable basis for his making that estimation and I am satisfied that he did not believe, and had no reasonable grounds for believing, that that gross profit margin would be achieved by the Noosa store.
Of course the question of turnover and profit margin are necessarily interrelated. I am satisfied that the substance of the representation by Mr Sgambellone to the Jacques was that, based on information available to him, which because of his experience in and knowledge of the industry was extensive and credible, the Noosa shop would achieve a turnover of $10,000.00 and a gross profit margin of no less than 38% and that they could plan their purchase with confidence in reliance on those estimates.
This conduct was conduct by the corporate respondents in trade or commerce in contravention of s. 52 and the third respondent, Mr Sgambellone, was knowingly concerned in it.
I am satisfied that the representations concerning turnover, gross profit margin and profitability were matters which induced the Jacques and the second applicant to enter the agreements they did. That was their purpose, and in my opinion, that purpose was accomplished.
The final category concerns the question of shopping centre leasing.
Mr Sgambellone in cross-examination was asked:
" ...what did you say to the Jacques about the letting of the

premises? "

to which he replied:

" When they came to see me in 1987, in June, I was told by

Henk Spee that the centre at that stage was 75% let and at the time of opening in November it should be fully let. "

I am satisfied that it was obvious to the Jacques shortly before the opening of the centre that the centre was seriously underlet. I think it likely that Mr Blakely was involved in a discussion to the effect that if the applicants desired the respondents to release them from their contracts the respondents would do that and take over the shop and run it themselves. Given the timing and circumstances of that conversation, the Jacques were put in a very difficult position. In my opinion it was by no means unreasonable for them to attempt to make a 'go' of the project as it confronted them and attempt to achieve from the unpromising position as it then presented something approaching what they had been told would be the position. I find it particularly significant that an offer in similar terms was not made when it became plain that neither the turnover nor profit margins which had been the basis on which the Jacques had entered into the agreements were able to be achieved.
In the view I take of the matter, the primary factors leading to the Jacques' decision to enter into the various agreements were the representations concerning turnover and profit margin, with the consequent profit making capacity of the enterprise. The representation as to the degree of leasing in June 1987 is not a matter that I am prepared to hold was one which of itself induced them to make the decisions they did. By this, I mean that while the degree of leasing would be a relevant aspect, particularly to turnover, it was not a contributing factor in the applicants' decision to go ahead.
Prior to the decision to move to Queensland, the Jacques had adopted a young daughter. I am satisfied that it was not their intention that Mrs Jacques work the long hours that she did in fact work in the shop. The history of the performance of the shop demonstrates a significant underachievement of the represented performance. In a real sense, the applicants were 'locked in', and I accept that any deficiency was not the result of incompetent or inexperienced management on the part of the applicants. No such accusation was ultimately pursued.
The agreement for grant of franchise and the franchise agreement in evidence before me are both dated 12 October 1987 as is the deed of agreement for sublease. The applicants have not exercised the option of renewal in the franchise agreement nor have they exercised the option of renewal in the deed of agreement for sublease.
The relationship created by the franchise agreement terminated on 8 November 1992 and the head lease by the first respondent from the landlord expired on 9 November 1992; the first respondent has no longer any right to occupy the shop. The applicants have continued to occupy the premises since 9 November 1992 but have ceased trading under the Cut Price Deli name. A delicatessen business is conducted from the premises by the applicants under a monthly tenancy directly from the landlord.
The evidence suggests that the equipment lease has been paid out by the applicants and the equipment is now the property of Pourquoi Pas and is maintained on the premises at the shopping centre. It appears also that the landlord of the premises is prepared to grant a lease for a further term of five years on the same rental as was payable in the last year of the expired lease. That possibility has not been taken up pending the outcome of this litigation.
The question of relief in this case presents real difficulties. The Noosa delicatessen never performed at the represented rate either as to turnover or as to profit margin. Considerable personal time and effort by both Mr and Mrs Jacques was put into the business in an attempt to achieve what had been represented to them. Mr Quinn, counsel for the applicants, acknowledged that the value of the business had increased during the period it was operated as a franchise and said in the course of submissions:
" The passage of time, due to the blood, sweat and tears of

the Jacques, has improved the value of the asset. "

In the course of the trial the application was amended effectively to seek rescission of the franchise agreement and other instruments pursuant to s. 87 of the Act. There would have been real difficulties, given the occupancy by the Jacques over an extended time and of the arrangements that had been made during that period, in making orders the effect of which would be that the Jacques would 'hand back' the delicatessen business to the respondent. The position now, however, is that no question of maintenance of an unsatisfactory personal relationship, such as a franchisee/franchisor relationship, complicates the position.
There is no cross-claim by the respondents. I propose to give judgment in a monetary sum to the applicants, but make no order pursuant to s. 87 save to indicate that any amounts that may be owing pursuant to the franchise agreements and related documents by the applicants to any of the respondents not be pursued.
The evidence in respect of damages on both sides suffers from significant defects.
On behalf of the applicants, Mr William Schoch, a chartered accountant, was called. It should be said at the outset that the primary basis of the claim formulated by Mr Schoch was as follows:
" Damages have been calculated on the basis of putting the

franchisees in the financial position they would have enjoyed if the statements made had been true. The damages calculation is based on the differences between the profit which has been derived from the business and that which would have been derived if the representations had been true. "

One aspect of this approach is revealed in Mr Schoch's dealing with the statement contained in the advertisement for the franchise:
" If you desire to purchase and own your own business the potential

exists to make substantial returns on your investment as well as recouping your outlay within 2 years. "

He said of this statement:

" In my opinion, (that) representation ...represents that the

potential exists to make substantial returns. After paying business expenses including a working salary for the franchisees on which to live it is possible for the purchase price to be recouped within two years. If for example the franchisees outlaid $200,000 you could get that back within two years even after deducting your business expenses and a living expense salary. Such a rate of return is 50% per year even excluding a return for salary. After salaries for 2 owners is included of say $79,040 p.a. the return would be 89% p.a. on the amount outlaid. The return on investment includes return on trading profits and on the capital value of the investment should the franchisees choose to sell their franchise business. "

After difficulties with this approach had been canvassed in the course of the trial, in final submissions three further calculations were advanced, each on the basis of termination of the franchise agreements and containing a large component said to be the reasonable wages for Christian and Catherine Jacques. As the detailed calculations of Mr Schoch show, the figure for reasonable wages is based on, in Mr Jacques' case, calculating award wages for 76 hours per week on the basis of 38 hours at ordinary rates, 3 hours at 1 1/2 rates, and the balance at double time; and a similar basis for Mrs Jacques based on weekly hours of 54 hours per week.
In my view, this approach is quite unrealistic. A reasonable proprietor, rather than notionally pay himself for more than 30 hours at double time, would employ a person for 38 hours at ordinary rates. The whole exercise has a large measure of unreality about it.
I am, however, satisfied that the wages actually paid, being drawings of $400.00 per week is not at all a true reflection of the time and effort of both Mr and Mrs Jacques in attempting to operate the business.
The position is further complicated because, while the business did not operate as represented, it did not after the first seven months operate at an actual loss, if one accepts the basis that the only amount paid to the Jacques was the weekly drawings of $400.00.
Mr Schoch said the actual trading results were as follows:

Nov 1987 to 30 Jun 1988 loss (12,283) loss 1 Jul 1988 to 30 Jun 1989:

Net profit per accounts 17,321 Add back wages:

Catherine and Christian 8,320 25,641 profit 1 Jul 1989 to 30 Jun 1990:

Net profit per accounts 11,238 Add back wages:

Catherine and Christian 37,543 48,781 profit 1 Jul 1990 to 17 May 1991

Net profit for accounts 3 Add back wages

Catherine and Christian 12,760 12,763 profit Total actual three years

six and one half months $74,902

I note in relation this aspect of the matter that there is in the primary case for the applicants a claim for loss of trading profits calculated as follows:

Represented $352,329 Actual $ 74,902 Loss of trading profits $277,427

In my opinion, however, these trading figures do not adequately reflect an amount for wages properly to be paid to Mr and Mrs Jacques.
The respondents recognised the underperformance of the Noosa delicatessen. I have already referred to letters in June of 1988 from the Jacques indicating the long hours worked and the poor returns. On 9 November 1988, Mr Jacques wrote saying:

" Following the instructions of Mr SGAMBALLONE and Mr MALOVANY as early as April this year, the rent on Cut Price Deli Noosa was not paid for the months of May, June, July (part of) and August 1988. The trading of this store has never reached Mr Sgamballone's projected figures and due to poor trading, as you are aware, we not only could not pay the rent but borrowed further to keep the shop operating. It is not possible for us to borrow further and we already have a struggle paying existing commitments. We see no possibility of our repaying now or even increasing monthly repayments to cover this debt. "

On 8 August 1989, an officer of Cut Price Deli wrote to Mrs Jacques stating, inter alia:

" ...I have fully investigated the financial situation on your shop results and can advise that it has been decided to continue the $50.00 per week franchise fee arrangement up to the end of this calendar year at which time it is felt that, based on improvement noted to date, you will be in a position to revert to the 5% franchise fee charge. "

On 1 February 1990 Mrs Jacques wrote to Mr Ash Baillie, the Legal Manager of Cut Price Deli, and said:

" Since our meeting in August, our figures are up an average of 14.8%. If we compare with our '88 figures (September 17%, October 22%, November .06% and December 20%) we can ask 'Why'? "

She then refers to school holidays and more people because of the pilots' dispute and increased costs. She says:

" ...we are in exactly the same situation as last year. "

She said that the Noosa shop is trading normally for only 17 weeks out of 52. She said, importantly:

" We had bought this shop on the figures of minimum $10,000 per week, and two years later we are approaching these figures. After these two years these figures, with inflation, price rises etc should now be over $12,000. We have appreciated your generosity for the franchise fee of $50-00 per week and naturally we don't expect this for eternity. "

She made proposals that the franchise fee for takings over $10,000.00 per week be 2.5% and with a lower percentage for lower takings.

Mr Baillie replied on the same day, putting a counter proposal that the franchise fee up to $8,000.00 turnover be $50.00 per week, it be 1% where the turnover is up to $10,000.00, 2% to $11,000.00, 3% to $13,000.00 and 4% above that. Mr Baillie indicated:

" Cut Price Deli is prepared to back date the above re-structure until December, 1989 and requires now your written acknowledgement and acceptance together with the December fees, as reconstructed, at $1,010.49. "

Those matters have to be brought into account when considering what is in fact the loss or damage that the applicants have suffered as a result of the misleading and deceptive conduct in contravention of s. 52.
This is not a case where the business was not making some profit and the question being whether it was reasonable for the applicants to continue conducting the business at a loss. Nor is it a question of for how long the applicants should have remained in a loss-making situation.
In my opinion, if it were simply a case of the applicants receiving the difference between what was paid and the value at the time of entry into possession, there would be a serious under-estimate of the loss and damage they had suffered. I respectfully agree with the observations of Wilcox J in his dissenting judgment in Netaf Pty Ltd v. Bikane Pty Ltd (1990) ATPR 41-011 at 51,233 in respect of the awarding of interest under s. 51A of the Federal Court of Australia Act 1976. The awarding of interest under s. 51A is a recognition that the applicants have been out of pocket by reason of having to pay an excessive amount for the business. There is no element of additional loss or consequential loss in the sense with which I am presently concerned in an award of interest under s. 51A. Wilcox J said of an award of interest under s. 51A, upon a figure estimated to be the difference between what was paid for the business and what it was really worth at the date of purchase, as follows:

" The award was appropriate because the misrepresentations made by the second appellant on behalf of the first appellant had caused Bikane to pay an excessive amount for the business. To the extent of the difference between the two figures, Bikane incurred a capital loss. That loss was suffered in November 1985. Therefore, it was appropriate to award interest to Bikane as compensation for being out of pocket, to the extent of that amount, between November 1985 and the date of judgment. That course would have been equally appropriate if no trading loss had occurred. "

The evidence of Mr Philip Edmonds, a valuer called on behalf of the respondents, has very serious deficiencies and I was not impressed by Mr Edmonds, his methodology or his valuations. Exhibit 86 is a valuation of the business as at 10 November 1987, that valuation being amended to $150,000.00. The basis of that valuation and his second valuation which was as at 15 August 1991 and in respect of which he placed a value of $200,000.00 on the business, relied on the following:

" A survey of Cut Price franchisees trading outside Franklin Stores has indicated that they are achieving turnovers equal to an average of 5.36% of Franklins' turnover. "

This was used as the basis of his valuation independently of any question of profit margins of the various stores. In both cases Mr Edmonds adjusted the indicating trading results for stock and income leakage, with the consequence of adding $350.00 per week to turnover and $400.00 per week to gross profit. Mr Edmonds said:

" The profitability of the business as indicated by the financial statements of the Second Applicant require adjustment in order to arrive at what may be accepted as the actual profitability of the business to be used for the purposes of determining the value of the business. "

His valuation proceeds on the basis that the owners would take stock worth around $50.00 per week for their own consumption and $350.00 per week of the cash takings for non-business purposes. In my opinion the basis of his valuation is unsatisfactory and the assumptions he makes unsupported by the evidence.
In Neilsen v. Hempston Holdings Pty Ltd (1986) ATPR 40-686, Pincus J referred to the difficulties of assessment of damages in a context not dissimilar from the present; his judgment provides considerable assistance. In the context of Mr Edmonds' approach, Pincus J made observations which are wholly appropriate in the present circumstances. His Honour said at 47,547:

" There was a suggestion at the hearing that the claimed losses in running the business should be discounted on the basis that such losses may not be truly stated. Experience suggests that, as mentioned above, it is common enough for accounts of businesses to reflect a degree of bias on the part of the proprietor in his own favour and it may be thought unrealistic to assess damages as if business people were not commonly influenced, in their keeping of records, by tax considerations. However, it is in my view clear that, at least in this case, no discount should be made in respect of that matter. While the failure to make a discount may often lead to an applicant's being, in truth, overcompensated, it would seem unorthodox to make an arbitrary reduction in the losses claimed to cover the general likelihood that, in many cases, the accounts may exaggerate the loss. Here the applicant has put forward the figures as being correct and there is neither evidence, nor any specific reason, to justify a contrary finding. "

In this particular case there was not the slightest suggestion put to the Jacques that any 'skimming' occurred, let alone that it was of the order of $350.00 per week. I accept the honesty of the figures.
Mr Edmonds at both dates estimated the value of the plant and equipment on a going concern basis at $130,000.00, notwithstanding that the plant and equipment would be some nearly four years older at the time of the second valuation. As to the figure of $130,000.00, Mr Edmonds did not "even attempt to make a break-up". To a suggestion that the figure was plucked out of the air, he said:

" Well, not plucked out of the air, based on my experience of business. This is what I feel it would be worth. "

As to a figure of 12% which Mr Edmonds thought was an appropriate figure for the global cost of wages, his explanation why he arrived at a figure of 12% rather than 10%, was both illuminating and quite unsatisfactory. He said that he had made no attempt to identify time spent by the proprietors in this particular business. He said:

" I had a feeling for the amount of time they probably would spend, but I didn't know. "

The basis of his 1987 valuation is first to reach a valuation obtained by deriving the weekly turnover for the delicatessen by adopting the rule of thumb "5% of Franklins turnover", then adopting the rule of thumb "20 X weekly turnover" (a method of valuation which has in my opinion no inherent validity). By this method, he arrives at a figure of $170,300.00. He then uses a capitalisation method to arrive at a figure of $131,950.00. He then arrived at a figure of $151,125.00 by adding those two figures together and dividing by 2. I reject this as a satisfactory method to value a business.
As to the rule of thumb of "20 X weekly turnover" as a basis for a valuation, the schedule produced during addresses of the sales history from 1981 to 1990 shows that 73 shops sold for a sum which is less than would have been produced if one applied the formula.
Further, there is also in that document a dissection of sales before June 1987, which indicates that 27 were sold at less than what the formula would suggest and 33 sold at more than what the formula would suggest. Even the circumstance that there is a rough parity between those that undersold according to the formula and those that oversold according to the formula, provides no support for the correctness of that rule of thumb as a method of valuation. By way of example, if there are two hotels in a town and one sells for $100,000.00 and another sells for $500,000.00, it would be wrong to say that the value of a hotel in that town was $300,000.00.
Mr Edmonds in his evidence also indicated that while depreciation may be a business expense for tax purposes, it was not a relevant consideration for valuation purposes. Mr Edmunds adopted a multiplier of 2 1/2 X net profit before tax, both at 1987 and in the 1991 valuation. He accepted that interest rates in 1987 were very considerably higher than in 1991 but thought it appropriate to adopt the same multiplier notwithstanding the different economic environments and costs of finance and interest.
In summary, I simply do not accept Mr Edmonds' valuations as providing any useful assistance in this case at all.
The respondents called a chartered accountant, Mr Michael Wayland. Mr Wayland made criticisms, which I consider valid, of the methodology of Mr Schoch in some respects, particularly in relation to superannuation and motor vehicle expenses and expressed a preference that, if a market value of a business can be determined, it should be used in preference to a theoretical accounting approach. But his evidence did not have the effect of rescuing in the slightest way the transparent deficiencies of Mr Edmonds' valuations.
I turn now to the assessment of damages.
The facts of this case differ from those in Netaf Pty Ltd v. Bikane Pty Ltd (supra) in that that case was concerned with a situation where there were trading losses. This is a case where there was (at least in the absence of a proper recognition for proprietors' wages) a small trading profit for most of the period after an initial loss in the first seven months. The level of those unadjusted profit figures was very modest and quite disproportionate to the represented returns. Had appropriate adjustments been made for proprietors' wages, it is likely in my view that there would have been trading losses.
Contrary to the primary submission by the applicants, in cases of this sort the measure of damages is ordinarily that adopted in tort not that in contract: Gates v. The City Mutual Life Assurance Society Limited (1986) 160 CLR 1. The authorities in respect of this familiar but nonetheless difficult problem are reviewed by the majority (Sheppard and Pincus JJ) in the appeal in Netaf Pty Limited v. Bikane Pty Limited (1990) ATPR 41-011, and it is unnecessary to repeat everything that was there said. I think it important however to note the observations of Gibbs CJ in Gould v. Vaggelas (1984) 157 CLR 215 where his Honour said at 221-222:

" If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself, and must ensure that no additional compensation is given for losses when those losses, or the probability of their occurrence, has already been taken into account in determining the value of the business. "

See also Munchies Management Pty Ltd v. Belperio (1989) ATPR 40-926 and Henjo Investments Pty Limited v. Collins Marrickville Pty Ltd (1989) ATPR 40-968.

I note the caution by their Honours in Netaf Pty Limited v. Bikane Pty Limited (supra) at 51,223, where Sheppard and Pincus JJ said:

" We reiterate that, where a purchase has been induced by misleading conduct, it is not enough, in order to recover losses subsequent to the purchase, to prove that but for the misleading conduct or as a partial consequence of it, the agreement to purchase would not have been made; that is so in every successful application of that kind. It is not the law that in every such case the party held to have been engaged in misleading conduct (who may have acted quite innocently) becomes the insurer of the other's success and prima facie liable to indemnify him against the consequences of the purchase. As the trial Judge said in the present case:

' To recover a loss sustained in the business, the applicant must show more than that it was sustained in the conduct of that business; for to show only that is to establish what is perfectly consistent with the loss having arisen from his own misguided management decisions, or even total neglect.' "

Any suggestion in this case that the poor performance of the delicatessen business was due to incompetence or inexperience or any factors subjectively within the control of the applicants was expressly disavowed, so that a consideration which troubled Burchett J at first instance in Netaf v. Bikane is not here present.
At 51,224 Sheppard and Pincus JJ said:

" ...a trial Judge should award that sum which, in his view, is shown to constitute reasonable compensation for the harm done by the wrongdoer. We respectfully express the view that the primary entitlement, on the authorities, is to the difference between the price and the value at the time of the purchase; the question whether further losses should be allowed is to be determined having regard to the circumstances of each individual case. "

A trial judge has to be careful of the risks of undercompensating an applicant and, equally, overcompensating an applicant.
As to the primary entitlement, in my opinion, the value of the business as at November 1987 was $120,000.00. The business was not profitable at that time and the figure that I accept as the value of the business is quite close to the cost of plant and equipment and fit out of the premises. If there be any softness in this valuation it is in favour of the respondents, in the sense that in my opinion, the value of the business was no higher than $120,000.00 as at November 1987. I propose to allow that sum as the primary entitlement on the authorities, and interest, pursuant to s. 51A of the Federal Court of Australia Act at 15% from 10 November 1987 to judgment.
In my opinion there are additional losses fairly attributable to the misleading conduct. To restrict the amount of the award to that primary entitlement would be a serious undercompensation of the applicants.
It was reasonable for the applicants to attempt to keep the business going and to improve its profitability. In so doing, both Mr and Mrs Jacques expended very large amounts of time and energy for which their drawings are quite an inadequate recompense. I think it right notionally to correct that situation, for a period of two years after purchase, by which time, according to the letter of Mrs Jacques, the business was operating at a turnover of the order of that represented. The decision by the applicants to 'soldier on' means that there must be a point at which what might be referred to as additional losses flowing from the misleading conduct ends.
As the correspondence indicates, in an attempt to keep the business afloat, further borrowings were made. I think an amount of $20,000.00 is a fair figure to allocate for this aspect. In addition, I am of the opinion that an amount of $40,000.00 representing a conservative assessment of the value of labour expended but not recompensed by drawings by Mr and Mrs Jacques in the two years subsequent to November 1987, can fairly be regarded as an amount which I may properly award so as to give reasonable compensation for the harm done by the respondents. In reaching that figure I have had regard to the actual hours worked, the relevant award rates at the lowest hourly rate, the amount of drawings, and apply a very significant discounting.
I assess damages as follows:

$80,000.00 being the difference between the price and value of the business at the time of purchase, together with interest at 15% from 10 November 1987 to 12 March 1993, which I round to $64,000, giving a sub-total of $144,000. $20,000.00 being a component of additional or consequential loss, and representing further funds supplied by the applicants to keep the business going, together with interest at 15% from 10 November 1988 to 12 March 1993, which I round to $13,000, giving a sub-total of $33,000. I select 10 November 1988, because the further injections were over a period of time. $40,000.00 as a further such component, representing an amount for the proper cost of the labour of Mr and Mrs Jacques after drawings in respect of the two years from 10 November 1987. I will award interest at 15% from 10 November 1988 to 12 March 1993, to reflect that this broad brush figure is in respect of the two year period from 10 November

1987. I round this to $26,000. This sub-totals $66,000.

I was referred to Practice Note 66 of the Supreme Court of New South Wales issued by the Chief Justice, Mr Justice Gleeson on 12 February 1991 which lists rates of interest for the purposes of a number of New South Wales Acts relevant to periods from 1 January 1974 to 28 February 1991. I infer from that Practice Note that interest rates have varied not inconsiderably over the period relevant to my consideration and I think it appropriate in all the circumstances to adopt a rate of 15% as I have indicated, under s. 51A of the Federal Court of Australia Act.
Those figures total $243,000.00. I give judgment for the applicants against the respondents for $243,000.00. That amount I consider to be reasonable compensation for the loss and damage suffered by the applicants as a result of the misleading and deceptive conduct of the respondents.
I will hear the parties as to any further orders that I should make, and as to costs.

[1993] FCA 199

12 MARCH 1993