Jones, M.C. v Glen Houn Holdings Pty Ltd (in liquidation)
[1985] FCA 351
•26 JULY 1985
Re: MARK CAMPBELL JONES
And: GLEN HOUN HOLDINGS PTY. LIMITED (IN LIQUIDATION) and KEVIN JOHN ROBINSON
No. G 360 of 1983
Trade Practices
(1985) ATPR para 40 - 604
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Neaves J.
CATCHWORDS
Trade Practices - consumer protection - Invitation to participate in business activity - Statements as to profitability and gross turnover of proposed business - Whether person making statements recklessly indifferent to truth of those statements.
Trade Practices Act 1974, ss.59(2), 75B, 82
HEARING
CANBERRA
#DATE 26:7:1985
ORDER
There be judgment for the applicant against the first and second respondents in the sum of $21,187.90.
The respondents pay the applicant's costs of the application.
JUDGE1
The applicant, Mark Campbell Jones, claims to recover against Glen Houn Holdings Pty. Limited (In liquidation), the first respondent, and Kevin John Robinson, the second respondent, in respect of loss or damage alleged to have been suffered by conduct of the respondents that was done in contravention of sub-section 59(2) of the Trade Practices Act 1974 (Cth). That sub-section provides -
"(2) Where a corporation, in trade or commerce invites, whether by advertisement or otherwise, persons to engage or participate, or to offer or apply to engage or participate, in a business activity requiring the investment of moneys by the persons concerned and the performance by them of work associated with the investment, the corporation shall not make, with respect to the profitability or risk or any other material aspect of the business activity, a statement that is false or misleading in a material particular."
Alternative bases for the claim were set out in the statement of claim filed on behalf of the applicant on 22 November 1983 but those alternative bases were not pursued.
When the matter came on for hearing neither the first nor the second respondent was represented or took any part in the proceedings. There was on the file, however, a defence to the applicant's statement of claim filed on behalf of the second respondent on 23 May 1984. It should, perhaps, be noted that on 4 April 1984 the Supreme Court of New South Wales granted leave, pursuant to sub-section 401(2) of the Companies (New South Wales) Code, to the applicant to proceed with the present application against the first respondent which was in liquidation.
In support of his claim the applicant relied upon statements contained in certain advertisements inserted by the first respondent in the "Sunday Telegraph" newspaper published in Sydney and statements made to him by the second respondent.
The first respondent, at the material time, carried on the business of dealing in video cassette tapes. It carried on that business under the style "G.H. Video Mart". The second respondent was a director of the first respondent and managed its business.
The applicant gave evidence that he saw an advertisement in the "Sunday Telegraph" newspaper on 12 June 1983, the advertisement being in the following form -
"VIDEO
UNIQUE CASH
FLOW OPPORTUNITY
Join the winning team.
EXISTING STORES: Wagga Wagga, Bathurst, Orange, Lithgow, Queanbeyan, Nowra, Condobolin, Kandos, Bellingen, Grafton, Forbes, Pt Macquarie, Temora, Kempsey, Regents Park, Boolaroo, Junee, Newcastle, Wollongong, Gordon, Parramatta.
NEW STORES OPENING: Cobram, Dubbo.
STORES NOW AVAILABLE IN ALL CITY AND COUNTRY AREAS
You WILL double your investment in 8 weeks.
VIDEO - THE WORLD'S FASTEST GROWING INDUSTRY.
Glenhouns unique package allows you to double or even triple your investment in a few weeks. Join the winning team. Investment opportunities from only $6,500.
RING NOW 498-6299
Monday-Friday
GH VIDEO MART
A Division of Glen Houn Holdings Pty. Ltd."
The applicant sought further details of the investment opportunity by telephoning the number given in the advertisement. On 16 June 1983 he was informed by a person, not otherwise identified, who had responded to his request for further details that the amount of $6,500 mentioned in the advertisement was sufficient only for a person wishing to add a video collection to an existing business and that, if the applicant wished to start a new business, he would need to invest a larger sum.
Having read an identical advertisement in the "Sunday Telegraph" newspaper the following Sunday, 19th June 1983, the applicant arranged to go to the offices of the first respondent on or shortly after 20 June 1983 and there spoke with the second respondent. He informed the second respondent that he wished to discuss setting up a video business. The second respondent asked how much money did he, the applicant, have to invest. According to the applicant, the second respondent said that the applicant would need to "at least purchase their $13,000 video package plan to start a business from scratch". He further said that for the investment of that amount the company would provide the applicant with 100 titles plus a number of other items included in the package. He also told the applicant that he should consider purchasing a further 50 titles, the additional cost being $80 per title or $4,000.
According to the applicant the meeting lasted some hours during which he raised many questions about the viability of such a business. He said that the second respondent informed him that if he opened a business with 150 titles he would "have a successful business from the beginning" and that the applicant "could expect a turnover of $800 per week from the time (the business) opened and within a short time that would increase to around $1,000 per week". According to the applicant the second respondent quoted what he, the applicant, regarded as very impressive figures as to the turnover of some of the stores that the first respondent had in its chain and about the success of a home video package that the first respondent's sales team were selling to the public. There was also discussion about the obtaining of finance to commence the business, the second respondent stating that finance could be arranged through Custom Credit Corporation Limited. The applicant informed the second respondent that he had looked at the possibility of starting a video business in the Balmain area and had made enquiries of various real estate agents about possible premises. The second respondent said that he would need to inspect the proposed premises and he would then give his advice as to whether he considered the site suitable.
Following this discussion the applicant proceeded to look at the feasibility of opening a business and continued enquiries into possible locations. He arranged to inspect a shop in Balmain in company with the second respondent. According to the applicant the second respondent said
"that the location was good, right in the shopping centre; and with a bit of work on the shop itself it could be made quite suitable; and he went on to say that he would make sure that the shop itself was well decorated and plenty of posters and displays; and he promised me any manpower I needed to assist in renovating."
Asked what enquiries he had made the applicant answered -
"Well, I had gone into existing video stores, particularly ones that were operating nearest to me, and seen how they were operating, the titles that they had on their shelves, observed the people going in and out of the shop at different times, spoken to somebody in the shop nearest to where I was planning to open and asked various questions about their business. They were the main things. Also, I looked at trying to find a location in a particular part of the suburb that I was planning to open, namely right in the shopping centre."
The applicant agreed he had made no enquiries concerning the turnover or profitability of the businesses to which he referred. He said he had spoken to one operator "who gave me the impression that they were doing extremely well". There were two shops already in business renting video cassette tapes in the near vicinity of the premises at which the applicant commenced his business, one about four blocks away and the other distant about half a mile. The applicant said everyone he spoke to said that business was booming.
On 27 June 1983 an agreement was signed between the applicant and the first respondent the terms of which were as follows -
"(1) GLENHOUN shall sell 100 movies, 100 blank movie covers, signwriting, 50 movie catalogues, shelving, initial advertising and promotion for Thirteen Thousand Dollars ($13,000.00)
(2) GLENHOUN agrees to exchange each calendar month from the owner's stock on hand 30% of the video movie library stock owned by MARK CAMPBELL JONES and exchanged from GLENHOUN at a cost of Ten Dollars ($10.00) per movie per month and MARK CAMPBELL JONES agrees to accept such exchange.
(3) MARK CAMPBELL JONES agrees to display the name G.H. VIDEO-MART in a prominent position associated with the video movie library and will abide by any reasonable request made by GLENHOUN in this regard.
(4) Additional video movies are to be purchased by MARK CAMPBELL JONES from GLENHOUN at a cost of eighty dollars
($80.00) per movie.
(4a) Additional video machines and software and accessories are to be purchased by MARK CAMPBELL JONES at the cost paid by GLENHOUN plus 5%.
(5) MARK CAMPBELL JONES agrees to purchase all video machines and video movies from GLENHOUN.
(6) That the said parties will be bound by the terms of this agreement for the fixed term of one year from the date of commencement which date is deemed to be Twenty Seventh June, 1983 (27.6.83) The agreement shall thereafter continue for further periods of one year at the option of MARK CAMPBELL JONES and GLENHOUN. This option will be granted provided this agreement has been adhered to by MARK CAMPBELL JONES.
(7) All monies are payable to GLENHOUN HOLDINGS PTY LIMITED ten (10) working days prior to the scheduled opening date which is deemed to be Wednesday 13th July, 1983."
The agreement bears endorsements that the applicant had also purchased 50 movies at an agreed price of $4,000 and that the first respondent had received from the applicant payment of the sum of $17,000.
At the time of signing the agreement the applicant handed to the second respondent a list of 150 titles of video cassette tapes which he wished to have to open the business.
The applicant on the same day, 27 June 1983, entered into an agreement with Custom Credit Corporation Limited whereby the applicant borrowed the sum of $5,053 at an interest rate of 28.8 per centum per annum. The whole amount of principal with interest, namely $6,564 was repayable by 24 monthly instalments of $273.50. Of the principal sum borrowed, $5,000 was payable to the first respondent, the balance being the amount of the premium under a related policy of life assurance.
The applicant took a lease of the premises at Balmain from 1 July 1983 at a monthly rental of $827.30. At the commencement of the lease a letting fee equal to one month's rent was payable. The applicant remained the lessee of the premises until 31 August 1984. The total amount paid by him under the lease was $2481.90.
The applicant spent money on fittings and fixtures for the shop which opened for business on 13 July 1983. Video cassette tapes, 150 in number, were delivered to the premises on that day but the cassettes delivered contained only 47 of the titles which the applicant had specified in the list handed to the second respondent on 27 June 1983. The applicant complained to the second respondent that many of the cassettes were in poor condition and that others were of little interest to the public. Subsequently a further 20 titles were delivered to the premises but, according to the applicant, these were "even worse than the titles that had originally been delivered".
Tendered in evidence were sheets from the cash book maintained by the applicant in respect of the business. The takings of the business as recorded, covering the period from 13 July 1983 to 10 August 1983 inclusive, were -
13 July 1983 to 17 July 1983 $162.50
Week ending 24 July 1983 379.45
Week ending 31 July 1983 238.00
Week ending 7 August 1983 128.00
8 and 9 August 1983 30.00
$937.95
On 3 August 1983 the applicant wrote to the first respondent in the following terms -
"I refer to the franchise agreement between us for the establishment and operation of the Balmain G.H. Video Mart being the agreement constituted by the document signed between us on 27 June 1983 and the various other terms and conditions agreed between us.
Because the representations concerning the turnover and profitability of the business made by you to induce me to enter into this agreement were not correct I hereby rescind the agreement between us. All stock and fittings are held by me for delivery to you in return for the sum of $17,000.00 paid to you less an adjustment for your costs of signwriting.
This action is also in accordance with your agreement made in consideration of my entering into the franchise arrangement that if the business did not perform as represented you would re-acquire it from me.
I propose that we settle the rescission of the franchise agreement by me delivering the stock and fittings in return for the said money on Friday 5 August at the premises at 302A Darling Street, Balmain."
A meeting took place between the applicant and the second respondent on 3 August 1983. According to the applicant, Mr Robinson began by stating that he was not going to give the applicant his money back. During the course of the conversation that followed Mr Robinson offered to raise the turnover of the business to $500 per week although he did not indicate how this was to be done apart from saying that he would do some canvassing in the area for sales of the house video package that his company was promoting.
Following that meeting, the first respondent wrote to the applicant a letter dated 4 August 1983 signed on its behalf by a Mr I. Hamilton who was described as the company's accountant. The letter read -
"Further to our meeting of 3 August 1983 we are sorry to hear that your business has not reached your expectation.
We wish to confirm our discussions and advise that this company is prepared to put in canvassers to promote the library with the view of increasing your turnover to $500.00 minimum per week.
When this turnover is reached we will have a further meeting to discuss the future of your shop.
We look forward to hearing from you regarding this proposal."
A further meeting with the second respondent was arranged for 5 August 1983 but that meeting did not take place, the second respondent informing the applicant that he was unable to attend.
The applicant claims damages of $21,187.90 particulars of which are as follows -
"1. Capital $12,000.00
2. Loan and interest 6,564.00
3. Business cards 87.00
4. Address labels 30.00
5. Rubber stamp 18.00
6. Further labels 30.00
7. Stationery cabinet and till 200.00
8. Electrician 137.00
9. Security grills 826.00
10. Rent (1.7.83 to 1.9.83)
($827.30 per month x 3) 2,481.90
11. Printing 60.00
12. Extra advertising (City Express) 200.00
13. Carpet 777.00
24,187.90
Less 3,000.00
Total $21,187.90"
The amount of $3,000 for which credit is given represents the amount realised by the applicant on the sale of the 147 video cassette tapes that remained in the shop when the business ceased trading.
The applicant said in evidence that he understood from reading the advertisements and from the second respondent's statements that he could double his investment of $17,000 in eight weeks and that the business would have a turnover of $800 per week from its inception with that figure subsequently increasing. It is, of course, apparent that, even if the turnover were $1,000 per week and no allowance were made for the expenses of running the business, the total receipts of the business over eight weeks of trading would be only $8,000.
Mr Neal Crisford gave evidence that he was the managing director of a company called Degbane Pty. Limited which traded under the name "Dr What Video". He said that, before becoming managing director, he had been general manager of that company for 18 months and that, prior to that, he had had approximately 10 years' retail experience in that business in New South Wales. He further said that in July and August 1983 he was familiar with the operation of retail outlets selling or hiring video cassette tapes in the Sydney metropolitan area. Asked whether in his opinion a retail store at Balmain with 150 video cassette tapes would be able to generate a gross weekly turnover of $800 to $1,000 a week, Mr Crisford said that it would be possible to do so but only at the busiest time of the year, that is during the Christmas - New Year period, and only if the tapes available were of the top movies available at the time. He expressed the opinion that in 1983-84 a retail store at Balmain could probably gross $400 a week in July with an increase of up to 20% in holiday periods over Christmas - New Year and in May and September. Asked whether in his experience it would have been possible in 1983 to double an investment of $17,000 in eight weeks in a retail shop of the nature of that operated by the applicant at Balmain, Mr Crisford said it would have been impossible. Asked on what basis he formed that opinion, he said -
"Well, with the video industry, with running a video store, there is (sic) two very important things to do - with any retail business. The first thing is to get the customers into the store by the right sort of promotions. The second, of course, is once a customer, you get them into the store, is to keep them there and keep them coming back as satisfied customers. The only way you would possibly do that is to improve the level of stock in your store continuously and it is very important to buy new releases - that is things that have been released straight from the distributors - as well as picking up second-hand products if you can pick them up cheaply to boost your range. If the store was making - even if the store was making $800 a week, as he was told it would make, by the time the expenses were paid - the rent, the wages - being a seven day a week business till late at night, no one can work seven days a week. You would have to bring in probably casual wages and pay someone. Because of that this would bring in expenses, plus your lighting, your stationery costs - which are high in videos. Those other costs would probably bring in around the $800 mark - at the minimum $600. That means he would only allow $200 to put back into new stock and that buys him two new movies, because a new release straight from the supplier is around the $80 mark. That then means you could only buy two new releases. Now, most customers would look at between ten and twenty per cent of the movies in your store. If you have 150 movies, say, at the most they would want to view thirty per cent of them depending on the quality of the movie. That means that once a customer came in there, of 150 movies at the very most he would want to view 50 movies. So, what would happen is that eventually, if you did not get any new movies in, you would run out of new stock. So, you would have to have probably ten new movies in every week to satisfy each customer. So, two is not enough. So, you would never increase your stock at all, your previous stock. If he had paid $100 for the new releases, for the movies he originally bought, and as he said they were worth about $20. So, from day one the value of his investment has reduced down to where it is only valued at about $3,000. The only way that investment can be improved is the addition of new stock, and at two cassettes a week, of course, it would not improve. It would not double in any way. In fact, by the time he lost cassettes through cassettes not returning, which you lose, especially as you increase your turnover; damaged cassettes - cassettes get damaged in people's machines - you lose more than two a week just in that way alone. Even in a well run computer controlled business, you still lose that amount of cassettes. So, under those figures he would never actually improve his level of stock; and as he was never improving, also not putting any income away, there is no way his business would improve. In fact, on those sort of figures it would go backwards because he would lose the customers that he had established by not having the new movies in the shop."
Having examined the list of titles supplied to the applicant by the first respondent, Mr Crisford expressed the opinion that the gross weekly turnover which the applicant could have achieved with those titles in July 1983 was of the order of $300 - 350 with some increase in that figure over the Christmas - New Year period.
The applicant relied on the representation contained in the advertisement published in the "Sunday Telegraph" newspaper that the investment would be doubled in eight weeks and the oral representations made by the second respondent that the business would be profitable and would generate a weekly gross turnover of $800 increasing to $1,000.
I accept the applicant's evidence of what was said to him by the second respondent and find that representations were made as to the turnover and profitability of the proposed business. Those representations were, as were the representations contained in the advertisements, clearly representations of a kind falling within sub-section 59(2) of the Trade Practices Act 1974 (Cth) and were, as I find, relied upon by the applicant in reaching the decision he did to enter into the agreement with the first respondent on 27 June 1983.
To succeed in his claim the applicant must establish that the statements relied upon were false or misleading in a material particular. As the statements were forecasts or predictions as to the future, the applicant must show that the person making the statements did not believe that the forecasts or predictions would be satisfied or was recklessly indifferent concerning them: see Thompson v. Mastertouch T.V. Services Pty. Ltd. (1977) 15 ALR 487 at p 495; Reardon v. Aquajet Holdings (S.A.) Pty. Ltd. (1982) ATPR 40-328 at p 43, 994. It is not sufficient to show, as he did, that it became apparent in the first few weeks that the business was operating that the forecasts or predictions would not be fulfilled and indeed, were not capable of being fulfilled.
However, accepting as I do the evidence of Mr Crisford to which I have already referred, the inference is clearly open that the second respondent, in making the representations as to the profitability and turnover of the proposed business venture, could not conscientiously have believed in the truth of those representations and was recklessly indifferent concerning their truth. That inference may the more readily be drawn because of the failure of the second respondent to give evidence as to the basis upon which the representations were made. It is also, I think, significant that, at the meeting with the applicant on 3 August 1983 and in the first respondent's letter of that date, there is no assertion that the weekly gross turnover of the business could be increased to $800. The only figure mentioned was $500 and what was said to justify the attainment of even that figure was far from reassuring.
I, therefore, find that the representations made by the first respondent and by the second respondent on its behalf were representations with respect to the profitability or risk of the proposed business activity within sub-section 59(2) of the Trade Practices Act 1974 (Cth) and that those representations were false. I also find that the second respondent was a person involved in the contraventions of sub-section 59(2) by the first respondent: see sections 75B and 82.
Upon those findings the applicant is entitled to damages to reimburse him for the moneys lost as a result of entering into the agreement with the first respondent on 27 June 1983. I assess those damages at $21,187. The applicant should have judgment against the first and second respondents for that sum together with his costs of the application.
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