Kellcove Pty Ltd v Australian Motor Industries Ltd & Anor Borderland Investments Pty Ltd & Ors v Thiess Toyota Pty Ltd
[1990] FCA 306
•06 JULY 1990
Re: KELLCOVE PTY LTD; WILLIAM JAMES KELL; IONA PTY LTD; DAVID EWEN SARGOOD;
PARES ESTATE PTY LYD; BORDA PTY LTD; PRESTRIE PTY LTD; BORDERLAND INVESTMENTS
PTY LTD; DELAUNEE PTY LTD (formerly known as KEN CALLEC INVESTMENTS) and KAPIA
HOLDINGS PTY LTD
And: AUSTRALIAN MOTOR INDUSTRIES LTD (now known as TOYOTA MOTOR SALES LTD);
THIESS TOYOTA PTY LTD (now known as TOYOTA MOTOR SALES AUSTRALIA LIMITED);
BORDERLAND INVESTMENTS PTY LTD; BRIAN DAVID LLOYD; DELAUNEE PTY LTD (formerly
known as KEN CALLEC INVESTMENTS) and KAPIA HOLDINGS PTY LTD
Nos. VG385 of 1987 and VG153 of 1989
FED No. 306
Trade Practices - Negligence - Contract
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Woodward J.(1)
CATCHWORDS
Trade Practices - misleading conduct - company holding franchise from distributors to sell motor vehicles - further capital required - report by distributors to potential investors in company about likely profitability - whether representations misleading - whether relied on - effect of disclaimer - causation - limitation of actions.
Negligenge - whether duty of care owed by maker of report person having special information and experience - effect of disclaimer - causation - whether duty of care owed in allocation of vehicles to dealers - whether breach of duty.
Contract - whether representation about profitability amounted to warranty in absence of other contractual relations between representors and representees - whether distributor's method of allocating vehicles to dealers was pursuant to original written contract, a variation of that contract, an implied term, or without contractual force whether there was an implied term that distributors would prevent one dealer from encroaching on the territory of another - whether there was a breach of any such term.
Trade Practices Act 1974 ss 51A, 52, 59, 75B and 82
HEARING
MELBOURNE
#DATE 6:7:1990
Counsel for the applicants and cross-respondents: Mr P R Hayes QC and Mr S P Whelan
Solicitors for the applicants and cross-respondents: Purves Clarke Richards
Counsel for the respondents and cross-claimants: Mr J E Middleton
Solicitors for the respondents and cross-claimants: Freehill Hollingdale and Page
ORDER
In application No. VG385 of 1987
1. The application be dismissed.
2. There be no order as to costs.
In application No. VG153 of 1989
1. The application be dismissed.
2. There be no order as to costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
These two actions, which have been heard together, arise from the unsuccessful running of a Toyota franchise business in Albury/Wodonga in 1984-85. Both actions are against the respective Toyota companies which at that time sold commercial vehicles ('Thiess Toyota' or 'Thiess') and passenger vehicles ('AMI'). When it is intended, in these reasons, to refer to both companies together, the name 'Toyota' is used.
The first action brought in this Court was VG385 of 1987, in which a group of investors in the franchise business, known as 'Brian Lloyd Toyota' in Wodonga and, for a time, as 'Albury Toyota' in Albury, sued for alleged misrepresentations and breaches of warranty said to have been made to them late in 1984, by Thiess Toyota and AMI, concerning the future prospects of the business and other related matters. The investors claim that they were induced by the alleged misrepresentations, and acted on the faith of the warranties, when they put moneys into the business which were eventually lost when it had to be sold. Some of the moneys had been invested in shares in the company which owned the franchise, Borderland Investments Pty Ltd ('Borderland'), but most were advanced to that company by way of loans.
In this action there is a cross-claim by the respondents, seeking indemnity or contribution from Borderland and its managing director, Brian Lloyd.
The second action, VG153 of 1989, is brought by Borderland and related companies alleging breach of contract and negligence in the way in which Thiess Toyota allocated vehicles to Brian Lloyd Toyota for sale to the public. In particular, it alleges that a system of computer allocation known as "Turn to Earn" departed from announced procedures and was not competently or fairly applied. As a result, Brian Lloyd Toyota suffered loss and damage. Although these allegations are directed primarily against Thiess Toyota, AMI is also alleged to have been implicated and the action is brought against both companies.
This second action was begun in the Supreme Court of Victoria and transferred to this Court by order of Vincent J on 26 April 1989, pursuant to the complementary State and Commonwealth Jurisdiction of Courts (Cross-Vesting) Acts 1987. It was later amended in the course of the hearing, by leave, to add a claim that the contract between Borderland and the respondents contained an implied term that the respondents would act in good faith towards each of its respective dealers and would take steps to prevent one dealer carrying on business in the allotted area of another. It was alleged that a firm called H A Jacob and Sons Pty Ltd ('Jacobs') which held the dealership for a rural area north of Albury/Wodonga, based on the small town of Walla Walla, had encroached on Borderland's territory in ways which were contrary to the agreements between the respondents and their respective dealers, and the respondents had taken no sufficient steps to stop Jacobs from doing so. This had resulted in a substantial loss of business by Borderland.
In each of these actions, by agreement of the parties, only questions of liability are to be determined at this stage.
THE INVESTORS' ACTIONIt is convenient to deal first with the action by Kellcove and others, VG385 of 1987. Although they invested through family companies, the investors directly involved were Malcolm Blair, an investment adviser who brought the group together, David Alexander Ramsden, David Ewen Sargood, John Charles Drummond and William James Kell. Each lost sums varying between $68,200 and $81,005 in their unfortunate venture. They all gave evidence, and I accept them all as honest witnesses.
BackgroundThe central figure in these proceedings is Brian Lloyd. Since he played such a pivotal role in the events with which I am concerned, it is convenient to record at the outset my view both as to his credibility and as to his capacitites as manager of a substantial vehicle dealership.
I have no doubt that Mr Lloyd gave his evidence honestly; he was perfectly willing, for example, to admit his own shortcomings. On the other hand I often had the impression that his words were running ahead of his thoughts, and that some answers were given almost recklessly, or at least with insufficient care. At times he seemed to make concessions too quickly, or in unnecessarily wide terms. For these reasons I treat his actual words with some caution, while being prepared to accept the gist of his evidence as being truthful, and accurate within the usual human limitations of imperfect understanding at the time and faulty memory over several years.
So far as his abilities are concerned, Mr Lloyd struck me as a person with great drive and nervous energy, full of ambition and enthusiasm and a very hard worker. I have no doubt that he is an excellent salesman. On the other hand, I would have doubts about his abilities as a manager over the medium to long term, particularly if things were not going well. I would expect him to be easily depressed, and to lose interest over time in a venture that was only performing moderately. In this connection I am conscious of his many changes of job (some 10 or 12) in a comparatively short working life (14-15 years). He showed signs of considerable strain in the witness box, both in evidence-in-chief and under cross-examination which was never hostile. If I were asked to sum up my impression of him in a single phrase, I would say his was a volatile personality. It must also be remembered that, at the time of the events in question, he was only 29 or 30 years of age.
Mr Lloyd gave evidence about the events leading up to the disputes which have arisen. He began working for Thiess Toyota in November 1982. Before that he had worked for the Ford Motor Company "involved in handling franchises and in assisting dealers". His job with Thiess Toyota was as Dealer Development Manager, "which involved analysing the performance of all the franchise dealers and ensuring that they complied with what was expected of them by Toyota and also to assist them wherever possible to make a success of their business." While engaged in that work, Mr Lloyd was given the task of conducting a market survey of the Albury/Wodonga area. He said,
"How I became involved in the Wodonga situation was that the Albury/Wodonga PMA (prime market area) was probably the most important performing Toyota franchise in Victoria and was of major concern to Toyota ... one of my job functions was to analyse the district and come up with recommendations as to what needed to be done and in the course of that study, it became obvious that the owner of the business wished to sell and I thought it was a marvellous opportunity."
Mr Lloyd went on to explain that the area was one in which Toyota faced very strong and well-established competition. In fact the Albury Toyota business had failed more than once in previous years. He suggested several reasons for these failures. One was that there were a great number of other Toyota dealers within close proximity, of which the most significant was Jacobs at Walla Walla. Another factor, apart from the powerful competition from other dealers selling Holdens, Fords, and Mitsubishis, was that the current owners of the Toyota business, two brothers called Quinliven, lived in Western Australia and "ran the business by remote control".
In his written application for the Wodonga dealership, dated 13 May 1983, Brian Lloyd showed his date of birth as 4 March 1955. He stated his reasons for applying for the dealership:
"Having had first hand knowledge of Toyota's potential in the market place and having analysed many Toyota dealerships, I believe that Wodonga is the most attractive proposition that has become available. I believe in my ability to make Wodonga successful."
An internal memorandum of Thiess Toyota from the District Sales Manager, Mr E Slatter, to Mr P J Huysman, the State Manager, was prompted by Mr Lloyd's application. That memorandum, dated 27 May 1983, refers to the market history for commercial vehicles in Albury/Wodonga as showing an average annual market of 597 vehicles. Of these Toyota obtained sales of some 16.6% in Albury and 18.1% in Wodonga in the apparently recent, but unstated, period chosen for that comparison. The report went on to say that, if a franchised dealer were to be appointed in Wodonga, he must be prepared to operate from a good site on the Hume Highway. The memorandum concluded,
"If we have two franchised dealerpoints, they will through aggression improve market penetration; detraction will be to Walla Walla north of Albury who achieved 33.91% for 1982 and a major penetration to Albury. In the struggle for penetration, Albury and Wodonga will react like a set of scales with one dealerpoint being down and the other remaining very strong or we could end up with 2 weak dealers. Concern to the company should be prostitution of our product and eventually losing Walla Walla and Albury or Wodonga. Ideally a new dealerpoint should be found for both cities and one that we can manually control. The advantage to us to have two dealerpoints in this twin city would be to provide maximum service and parts as a convenience to the Toyota buyer."
Mr Lloyd explained, in his evidence, that when he took up the dealership on 8 June 1983, he became the Toyota dealer in Wodonga franchised to sell both commercial and passenger vehicles, which he had to obtain from Thiess Toyota and AMI respectively. At this time there was a dealership in Albury and there were several others which sold vehicles in the Albury/Wodonga area. This was referred to in the trade as "pumping in" to the relevant dealership area. Much the most significant source of pumping in was the Jacobs business at Walla Walla.
It will be necessary to consider this question of pumping in in greater detail later in this judgment; it is sufficient at this stage to say that Mr Lloyd explained that it was entirely permissible for one dealer to sell a vehicle to a person living in the area of another dealer provided that the initiative for the purchase came from the buyer rather than the seller. A seller was entitled to advertise in a publication having general circulation in the region, and this could well bring him sales outside his own PMA. However it would be wrong for a dealer to establish sales premises or service facilities, or to employ 'spotters', in another dealer's area. It would also be wrong for him to advertise in a newspaper or other publication which was not distributed widely in his own area.
Mr Lloyd also explained that there was an intention when he took up his dealership that, in due course, Toyota would adopt what was known as the "Blacklock strategy". This was a reference to the fact that the Ford company had originally operated through three dealerships in the Albury/Wodonga area, but had closed down two of them and concentrated its operations, very successfully, upon Blacklock's of Wodonga. He said that this strategy was discussed at Thiess Toyota while he was working there and was certainly known to Mr Huysman who signed his letter of appointment. This was the explanation for the reference in the internal minute of 27 May 1983 to "a new dealerpoint .... for both cities".
After opening his business on 1 July 1983, Brian Lloyd embarked upon an advertising campaign, which he referred to as "very heavy advertising" and "extremely expensive". As a result of this campaign, Toyota's market share and the number of Toyotas sold in the Albury/Wodonga area rose significantly. However, as Mr Lloyd said, "You could not make money, but you could sell a lot of Toyotas". Also, as he conceded and other witnesses attested, the high-powered advertising campaign did not appeal to more conservative people, many of whom were put off by it.
There was no doubt as to the liquidity problems which Brian Lloyd's business encountered from the outset. He had had to borrow extensively to finance both the establishment of his new premises on the Highway and his expensive advertising. His running costs were also high, and it became apparent that he needed a further injection of capital to enable the business to develop. He entered into an arrangement with a Mr Callec to go into partnership with him, and early in 1984 that came about. On 26 April 1984, Callec and Lloyd made a joint application to take over the Albury franchise in addition to Wodonga. They were successful in their application, and opened Albury Toyota on 1 May 1984. Mr Lloyd said,
"When I bought Albury Toyota I asked the factory to shut it straight away so I could follow the Blacklock strategy. I did not have the cash to keep Albury Toyota. They insisted I give it a go and I went and spent close enough $50,000 on a massive advertising campaign. This was direct mail to every household in Albury/Wodonga in May or June of 1984."
There are two points of explanation required about this evidence. First, the reference to "the factory" is a common way of describing Toyota's head offices in Dandenong. Secondly, it is understandable that Mr Lloyd should speak in the singular about his investment in Albury because the partnership only lasted until August 1984, when Mr Callec withdrew from it, thereby creating even greater liquidity problems for Mr Lloyd.
In their joint application for the Albury dealership, Lloyd and Callec said, among other things,
"Albury is controlled by an absentee owner through an operating company, Albury Cars Pty Ltd. Since Brian Lloyd took over, Wodonga has increased Toyota penetration dramatically. Albury has a history of below average sales performance..... The proposal is to buy out Albury Cars and introduce Ken Callec into the business initially with a 20 percent equity which will be increased to 50 percent by the 1st September, 1985. Brian Lloyd intends to concentrate on the business management and promotional aspects with Ken Callec responsible for the day to day operations of the dealerships."
The application went on to explain that the partners intended to establish a holding company to be known as Borderland Investments Pty Ltd which would be the only shareholder of two separate companies which would operate the Wodonga and Albury dealerships.
An internal AMI minute from a Mr Egan to Mr Farley, the National Dealer Development Manager for Toyota, dated 19 April 1984, considered the joint Albury/Wodonga application. After drawing attention to the estimate of sales in the application, which was thought to be unduly optimistic, and the extent of Brian Lloyd's indebtedness, together with the fact that Ken Callec was only bringing into the business new equity capital of $25,000 along with a loan of the same amount, the minute concluded,
"To properly assess the proposal, a projected financial statement would be required but it is certain that the resultant working capital calculation would reveal a need for substantially greater funding. On the basis of the information provided and the points outlined above, I do not believe that the operation is viable."
In spite of this assessment a further internal minute dated 27 April 1984 from Mr Shepherd, the State Manager for AMI in Victoria, and again addressed to Mr Farley, recommended the approval of the application. The memorandum said,
"The main purpose of pursuing this particular ownership is to secure the combination of Brian Lloyd and Ken Callec. It is our opinion that this combination of business and promotional skills and proven motor industry retail experience will provide us with excellent representation in the area. ....
We enclose the applicants' profit budgets. Gross profit is based on $950 per unit for 20 new passenger and commercial vehicles for each dealership. The applicants forecast is based upon their own historical performance and knowledge of the area. Reference to the P.M.A. market history shows that the figure of 480 new Toyota sales in the Albury/Wodonga area is achievable based on the penetration made by Brian Lloyd Toyota. Based on 1983 market figures, this will give us a Toyota share of 14.75% in passenger compared to the Dealer Earned Ratio of 18.05% and 30% for commercials compared to the Dealer Earned Ratio of 31.60%.
In summary, our request for your endorsement of this application is based on the expectation that the applicants will obtain for Toyota a market share in excess of rural average."
(The 'dealer earned ratio' or 'dealer penetration' is the percentage of all vehicles of all makes sold in the PMA which is sold by the dealer.)
The projected profits shown by Lloyd and Callec in their application represented $1,200 on average for each new vehicle registered. Mr Egan had noted that the range for similar volume category dealers in New South Wales was $300 to $700 per vehicle.
Asked if anyone from AMI had told him of the reservations expressed in these memoranda, Mr Lloyd replied that two officers of Thiess had told him that there was not sufficient working capital and it was a dangerous venture. He went on,
"I showed them a contract I had entered into with a fellow named Peter Daley who was going to inject a further $100,000 into the business by taking over the service business. I also told them that all I was buying Albury for was to shut it so they could have the Blacklock's concept they wanted and I would move the Albury and Wodonga facilities both from sub-standard facilities into a very nice facility as soon as I had closed Albury."
It is interesting that, in a memorandum from Thiess Toyota to AMI dated 18 May 1984, Thiess Toyota suggested that among the conditions of granting the Albury/Wodonga dealer agreement should be:
"1. The current split parts and service facility must be consolidated on a single site in Wodonga.
2. The new facility in Wodonga must be adequate to service the combined market in Albury and Wodonga"
Thus it seems, from this and other evidence, that Thiess was supporting the Blacklock strategy while AMI was not.
Following the break-up of his partnership with Callec, Brian Lloyd's business was in severe difficulties. Asked by his counsel how he would describe the financial health of his dealership in about September 1984, Mr Lloyd said,
"We were very, very financially ill....because we had not closed Albury and our expenses were very high. .... I was making the sales they wanted. I was more concerned about the bottom line than the sales volume."
Mr Lloyd went on to agree that the problem as at September was not so much the number of vehicles he was selling, as how much it was costing him to sell them.
So far as the sales for the second half of 1984 are concerned, these are the subject of an agreed statement of facts. It is convenient to set them out together with the 1985 sales. The agreed statement is in the following terms:
"5. (a) According to the financial records of Brian
Lloyd's companies sales in the second half of 1984 were as follows:- 7/84 8/84 9/84 10/84 11/84 12/84 6mth total
ALBURY
pass 5 7 17 7 36
comm 6 10 8 6 30
TOTAL 11 17 25 13 66
WODONGA
pass 9 4 5 7 17 15 57
comm 15 15 17 14 11 17 89
TOTAL 24 19 22 21 28 32 146
COMPOSITE
pass 14 11 22 14 17 15 93
comm 21 25 25 20 11 17 119
TOTAL 35 36 47 34 28 32 212
(b) According to the financial records of Brian Lloyd's companies sales in 1985 were as follows:-
WODONGA ALBURY Pass Comm Total Total Pass and Commercial July 85 - Dec 85
-------------------------------------------------------------
1/85 11 12 23< 18
2/85 6 22 28
3/85 10 24 34
4/85 16 11 27
5/85 16 13 29
6/85 9 12 21
7/85 8 15 23
8/85 6 10 16
9/85 9 24 33
10/85 2 9 11
11/85 6 6 12
12/85 4 12 16
103 170 273
(c) Small discrepancies between the sales bulletins and the financial records occur as a result of differing allocations of sales at the end of one month and the commencement of the next month."
Mr Lloyd went on to say that, at this time, his average direct expenses each month were running at about $36,250, whereas they should have been more like $24,000. Similarly, indirect expenses were running at just under $15,000 and should have been about $12,500.
In addition to these high expenses, Mr Lloyd was also, as he said, extremely conscious of the deficiency of his working capital. He said that probably the most pressing debt which he had at the relevant time was the sales tax he owed. He was almost $200,000 behind with his payments. There was also a personal loan of $50,000 which he should have repaid, as well as moneys owing to AGC, which was financing his purchase of new vehicles - referred to in evidence as his 'floor plan'. Mr Lloyd said that his situation was made some $150,000 worse by the pull-out of his partner Ken Callec and the fact that Toyota forced him to rescind the arrangement he had for the sale of his service facility.
Some time in September, Mr Shepherd, the Victorian State Manager for AMI, and Mr Dennis, the Business Manager, flew up to Wodonga to see what Toyota could do to assist Mr Lloyd with his problems. As a result of this visit they made some floor plan assistance available. In other words they allowed him to purchase new vehicles for sale at better than the normal terms of payment.
The seriousness of the situation in the months of September and October 1984 is probably best summarized in a letter which Brian Lloyd sent to Mr Shepherd on 22 October 1984.
In that letter Mr Lloyd began by summarizing the current competition in the area from dealers in vehicles other than Toyota. He referred particularly to Blacklock's Ford which was based in Wodonga, with a small sales outlet in Albury, and was proving very successful. He went on to say, "Toyota is represented in the immediate surrounding area by:
1. Jacobs of Walla.
2. Jacobs of Henty.
3. Coopers of Corowa.
4. Upper Murray Autos of Corryong.
5. Holbrook Toyota.
6. Wangaratta Motors.
7. Yarrawonga Toyota.
All these dealerships are within a one hour drive of Albury/Wodonga and Corowa. Corryong and Walla in particular attract a fair degree of patronage from my area and pump-in significantly.
Toyota has more representation in the area than any other franchise.
I attach copies of my August financials for the Albury and the Wodonga outlets and you will note that the combined cost amounts to $87244 whereas the combined gross amounts to $69998. Obviously either I must achieve an increase in income or a major reduction in expenses and I must act quickly. I believe I am achieving a satisfactory volume so my expenses are the area I must reduce.
A study of the past five years performance of the Albury/Wodonga P.M.A shows the following;
Year 1979 1980 1981 1982 1983 1984
Aug. Y.T.
Total Passenger and Commercial
Market 2441 2284 2336 2434 2090 1680
Toyota Registrations:
(Passenger and Commercials) 262 285 280 297 379 331
Toyota Penetration 10.7 12.5 12.0 12.2 18.1 19.7
Albury Toyota Retails 223 270 224 231 321 321
Earn Ratio 9.1 11.8 9.6 9.5 15.4 19.1
Pump-in 39 15 56 66 58 10
I feel you will agree that since my appointment in July 1983
Toyota's market share has improved substantially and pump-in factor has been virtually negated.
The expenses can only be reduced substantially by reducing the Albury dealerpoint to a branch operation and centralising our operation in Wodonga. While this may on the face of it appear extreme the fact that the Albury dealerpoint is poorly located and a relocation would be necessary in the future anyway makes this decision inevitable."
Mr Lloyd went on to give further arguments based on local considerations, for the reduction of the Albury operation to a branch of that in Wodonga. He also set out certain proposals for the expansion of the Wodonga operation.
After consideration, Toyota agreed to the closing of the Albury dealership, which took place about the end of October 1984.
Mr Lloyd said in his evidence that, at this time, he was under great pressure because he had recently bought an expensive house in Albury and his wife was expecting their first child. His counsel asked him,
"The business was insolvent? -- Totally, yes. Had you lost your faith in the ability to make it work? -- We had gone from being the greatest heroes in the world to I felt that I had failed terribly.
....
Had you lost confidence in your ability to make the dealership work? -- I still thought I could make it work.
Were you still talking optimistically about your plans to make it work? -- Yes, I was. I was looking for every possible means to inject funds and cut the expenses. I was desperate to cut the expenses."
Counsel then referred to the first of the investors who had lent money to Brian Lloyd in October 1984. This was Mr Blair who invested in Mr Lloyd's business through his family company, Prestrie Pty Ltd, the seventh applicant.
Referring to the evidence set out above, counsel asked,
"Was that the climate in which you spoke to Mr Blair before he made his first temporary loan? -- That was the climate, yes. You expressed to him your optimism for the future? -- The future for Toyota was marvellous at that stage. The future of that dealership, that area of Albury/Wodonga was so positive, it was as positive as Toyota's hopes for the future."
Mr Blair gave evidence that he is a licensed dealer in securities and met Brian Lloyd soon after he opened his Wodonga dealership, when he purchased a vehicle from him. That began a friendly relationship, in the course of which Mr Lloyd did a number of share transactions with Mr Blair, who was impressed by his generally business-like approach to share dealings. Mr Blair said that it was probably in late September or early October that Brian Lloyd came to him and said that he was having some temporary cash flow problems and needed additional working capital. He asked if Mr Blair knew of any local investors who might be interested in coming into the business; he said that two Toyota dealers, Henry Wilson and Graham Werner were prepared to join the business and he wanted, if he could, to find some local businessmen who would help to retain local control of the venture.
Mr Blair said that, because of his previous dealings with Lloyd, and his ownership of Toyota vehicles and belief in the future of Toyota, particularly its commercial vehicles in country areas, he thought this was an opportunity which would give his wife and himself a chance to diversify their investments. After some discussion with his wife, he agreed that they would make a loan to Mr Lloyd in the sum of $43,000 which could later be converted to equity shares. The money was advanced as to $37,000 in cash and the balance by transferring ownership of a vehicle which was then being driven by Mrs Blair. By way of security for this loan, it was later agreed that the Blairs would have a document of sale relating to used cars held by Brian Lloyd which were more than seven years old and so not of interest to AGC as security for its lending. The Blairs recognised that the security was not very sound because the used vehicles were constantly changing, so they regarded the document as a token of good faith, rather than as a readily enforceable security.
Having decided to make the loan himself, Mr Blair next spoke to Mr David Ramsden, who also made a short term loan of $43,000, with the same nominal security, on 15 November 1984. The Blair loan had been made on 16 October 1984. Mr Blair later spoke, in sequence, to Mr Sargood, Mr Drummond, and Mr Kell. Each of them eventually made investments in the Toyota dealership which took effect early in the New Year. All five investors contributed further funds in the second half of 1985. However it was immediately after Mr Ramsden had made his loan, and before any of the other investors contributed any funds, that the vital 'Dennis document' came into existence. This document is central to the applicants' claim in this action and will need to be considered in some detail.
The Dennis documentMr Lloyd said in his evidence that, in about October and November 1984, he was in very regular contact with Mr A J (Tony) Dennis, Business Manager for both AMI and Thiess Toyota, about the way the dealership was progressing. The Lloyds' child was born in late October and Mr Lloyd said that he was then under enormous stress and his wife was "worried silly about the situation". He went on, "we needed someone to advise us just whether this business was viable and whether we could stay in it". Mr Dennis agreed, in his evidence, that this was the initial purpose of the exercise his advice was being sought by Brian Lloyd.
Mr Dennis agreed to come to Wodonga over a weekend and do a detailed analysis of Brian Lloyd's operation. He arrived either late on Friday or early on Saturday, 16 November 1984. He brought with him some computer records showing the average expenses of other Toyota dealers, the sales records for all makes of cars in all districts, and notes about Brian Lloyd Toyota which he had made a few weeks earlier, when he had been consulted about the closure of the Albury dealership. He stayed overnight at Brian Lloyd's house, but spent all Saturday in the office at Brian Lloyd Toyota. Mr Lloyd turned the administration office over to him, produced all his record books, and from time to time answered particular questions. However, he and his sales staff remained in the front part of the building dealing with customers throughout the day. Mr Dennis continued working on the records on Saturday night and worked at the Lloyd's house on Sunday morning.
In addition to working on the books of account, Mr Dennis had some discussions with Mr Lloyd about the question of Daley and the service operation. As a result of these discussions, Mr Lloyd agreed to see Daley on the Sunday morning and tell him finally that the proposed sale of the service operation could not proceed and his $100,000 would be returned to him.
After Dennis had finished the first draft of his report, some time during the day on Sunday, he had a long conversation with Brian Lloyd, his wife and his two senior salesmen, around the dining table. He went through his report in some detail and, as a result of his findings, Lloyd and the salesmen agreed that they should continue to develop the business and, in particular, Lloyd should try to find additional capital. At some stage during the day, or possibly even earlier, it must have become clear to Mr Dennis that his working papers were going to provide the basis for a case to be put to other potential investors. He could have had no doubt about it when he finally signed ten or eleven separate copies of his report after it was typed out.
Mr Lloyd said that, in the course of the discussions with the salesmen, they raised the issue of the pump-in from Jacobs of Walla Walla, and pressed Mr Dennis as to why the factory allowed Jacobs to conduct its business as it had been doing. Mr Dennis' reply was to say that,
"You guys are mad about this, you are paranoid about this. This is not a problem. Its going to go away."
At another point on the Sunday afternoon, after the meeting with the salesmen, Mr Lloyd's accountant, Stan Walter from Price Waterhouse, was asked to come to the house, which he did. He then had a discussion with Mr Dennis about Lloyd's financial position.
Over dinner that night there was a another long discussion between Brian Lloyd, his wife and Mr Dennis about the various options that were open. These included selling the business, finding local shareholders, additional financing from Toyota, and bringing in Graham Werner as a part shareholder.
Mr Dennis said that there was a positive value in the business and that they could get out of it now if they wished to do so; but he felt that Brian Lloyd was a good dealer and could still make it go. The problem really was a total lack of capital. If that capital was available, the business would be viable.
After dinner, Mr Dennis completed his hand-written report and Mrs Lloyd agreed to type it out which, until well into the night, she proceeded to do. On the Monday morning Mr Lloyd went with Dennis to the dealership, where they made ten or eleven copies of the report which Mr Dennis then signed.
When it had become clear the night before that the document would be given to potential investors, and following a telephone conversation which he had with someone in Melbourne - it might have been Mr Farley - Mr Dennis insisted on the insertion of a disclaimer at the front of the document. That disclaimer was in the following terms,
"NOTICE OF DISCLAIMER The projections, budgets and other data contained in this document have been prepared after exhaustive analysis of the subject dealer's books of account and after studying all relevant market data. The writer has attempted to justify all major items from his knowledge of the Victorian dealer network and in particular, dealer points of similar new vehicle volume.
HOWEVER, neither the writer nor his Company nor any employee of the Company undertakes responsibility in any way whatsoever to any person in respect to any data contained herein, including any errors or omissions however caused.
A.J. Dennis
Business Management Manager Victorian Division
AMI/Thiess"
The document, apart from the disclaimer page, consisted of 18 pages of detailed figures and explanatory statements.
The most relevant parts of the document read as follows:
"BRIAN LLOYD TOYOTA ALBURY/WODONGA
ANNUAL SALES EXPECTANCIES
Estimates are based on projected 1984/85 market for the area.
Total passenger market as at September, 1984 (9 months) shows 1316 with commercials at 632.
Analysing these results we anticipate a total market of 2407 units for 1984.
Dealership market share has been based on the following assumption:
* It is a condition of Toyota's Franchise Agreement that
Brian Lloyd Toyota maintain a sales penetration equivalent to our rural market average to maintain absolute franchise rights to this prime market area. Current Toyota rural average penetration - 19.44%. Dealer actual penetration year to date has amounted to 19.7% and with consideration to the quality of the Dealer facility, operator and staff, would consider this share to be maintained.
NEW VEHICLES
Estimated total market 2407
Toyota Share 19.44%
Units 468"
.......
"ESTIMATED GROSS PROFIT
NEW VEHICLE DEPARTMENT
Unit Sales 468
Gross Profit per unit $950
Total Gross $444,600
Based on past dealership performance and equivalent sized
Toyota rural operation (Dealership YTD average $1082)."
Later in the document under the heading SUMMARY OF DEALERSHIP OPERATION, Mr Dennis showed:
Gross profit estimate $1,048,950 Total operating expenses $787,180 Net operating profit $261,770
After certain other minor allowances, and deducting a salary of $35,000 for the dealer, this left a net profit (before tax) of $234,370, and a net profit after tax of $124,215. In a footnote Mr Dennis said,
"EXPENSES
In most instances, expenses have been estimated on dealership history, and market data. Due to the operational changes from a dual outlet to one operation, these expenses have been adjusted to reflect this change."
On a further page under WORKING CAPITAL REQUIREMENTS, Mr Dennis set out a calculation which, omitting the details, showed as follows:
One month's expenses: $71,900
Sundry Debtors (1.5 months) $69,400
Replacement Parts Stock
1 month's Cost of Sale Parts $35,000
Used Vehicle Inventory
Total and value $251,000
LESS: Floor Plan AGC 66% $167,000 $84,000
$260,300
It is convenient at this point to set out some further paragraphs of the Statement of Agreed Facts tendered by the parties. They are directly relevant to the Dennis document. Those paragraphs are:
1. In the nine months to September 1984 there had been a
total new vehicle market of 1,948 being 1,316 passenger and 632 commercial.
2. The Dennis document anticipated a total market for all
vehicles in Albury Wodonga in 1984 of 2,407 vehicles. In fact the total market for 1984 was 2,619 vehicles. It stated Toyota's then current rural average penetration to be 19.44%.
3. The Dennis document stated that the dealer's actual
penetration (or earn rate) in the year to date was 19.7%. In fact the earn rate for the Albury Wodonga dealers in 1984 was approximately 16.4%.
4. The total month by month Albury-Wodonga dealers' Toyota
sales in 1984 to October according to Theiss official sales bulletins and document 66 were - January 34 February 50 March 38 April 24 May 36
June 42
July 42
August 35 September 37 October 39
5. (Details of Brian Lloyds records of sales have already
been set out above).
6. As at 30 September 1984 the Albury-Wodonga dealers earn
rate excluding Tallangatta was 17.3% but including Tallangatta was 16.8%. As at 30 June the earn rate was 17.9%.
7. (a) Over the nine months to September 1984 the actual
sales of Toyota vehicles by the Albury Wodonga dealers averaged 37.5 vehicles per month.
(b) In the period May, June, July, August when Brian Lloyd controlled Albury Wodonga sales averaged 38.75 vehicles per month.
(c) For the period October, November and December sales average was 32.6 vehicles per month.
(d) The average monthly sales by the Albury Wodonga dealers in the twelve months to December 1984 was 36.3 vehicles.
8. The sales of passenger vehicles by the Albury/Wodonga
dealers for the months of January, February, March and April 1984 averaged 20.25. The average for May, June, July, August, September and October 1984 was 17 vehicles. In August, September and October 1984 the average was 16.3 vehicles.
9. Sales bulletins number 376/84 416/84 439/84 41/85 and
118/85 being for the months of August, September, October, November and December 1984 showed that Brian Lloyd's earn rate for commercial vehicles went from 27.1% in August to 27.8% in September to 26.8% in October to 26.5% in November to 26% in December.
10. Jacobs earn rate for commercial vehicles went from
123.4% in August 1984 to 131.4% in September to 132.5% in October to 134.1% in November to 133.3% in December.
11. The following table compares Lloyd's actual July to
September 1984 performance with Dennis' projection and the actual 1985 performance.
ITEM LLOYD DENNIS 1985
Monthly new vehicles sales 39 39 24
(17.5 Albury) (21.5 Wodonga)
Gross profit per new vehicle $981 $950 $942
Monthly used vehicle sales
(retail) 21 30 25
Gross profit per used vehicle
(retail) $1218 $950 $957
Monthly used vehicle sales
(wholesale) 39 20 24
Gross profit per used vehicle
(wholesale) $58 ($75) ($104)
Parts sales $32,933 $45,000 $43,518
Service sales $14,000 $15,553
Finance and Insurance income $4670 $5000 $6022
Monthly average direct
expense $72,482 $53,094 $70,499
Monthly average indirect
expense $14,683 $12,504 $13,749
Average monthly total expense $87,165 $65,598 $84,248"
The weeks following the Dennis document
Immediately after returning to Melbourne, on 21 November 1984, Mr Dennis wrote an internal memorandum for the senior officers of AMI and Thiess Toyota.
This memorandum read as follows:
"ALBURY/WODONGA
Situation is highly volatile.
Subject to full disclosure the present situation is seen to be as follows:-
Trading Loss
Outstanding cheques $146,000 Capital injection 86,000 Asset revaluation 88,000 Further capital injection 40,000 360,000 Gain in equity 100,000 Trading Loss $260,000
To increase the working capital of the business interest has been expressed by 5 investors willing to contribute $43,000 each for a 10% share of the operation. This, together with the selling off of real estate will increase the working capital.
Increase in Working Capital
5 x $43,000 $215,000 Less 2 x $43,000 already injected 86,000 129,000 Due from Sale of Albury property 55,000 (Settlement 23/11/84) Increase in (finance) by AGC 40,000 (When sale of previous Wodonga property is made) -------- Total injection $224,000 These funds with be applied as follows:
Outstanding cheques 146,000 Overdue creditors 30,000 $176,000 Effective injection $48,000
This will still leave the operation very tight on working capital however, far stronger than the operation was previously and conceivably able to trade out of the situation.
What we need to come to grips with is the fact that this would leave us with a Wodonga only outlet with Albury being the larger market.
An analysis of the PMA shows the following:-
Passenger only
TOTAL MARKET
SEPT 1981 1982 1983 1984 YTD
ALBURY 1168 1046 1023 886
WODONGA 539 696 604 430
MARKET SHARE
SEPT 1983 1984 YTD
ALBURY 93 86
WODONGA 109 97
DEALER ACTUAL SALES - PASSENGER ONLY 1983 1984
MONTH 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
ALBURY 9 1 13 4 6 5 13 6 5 17 7 7 8 9 4 8 9 7 6 5 11 19
WODONGA 5 2 2 3 3 1 14 31 18 8 11 11 14 20 9 9 8 14 9 6 5 3
TOTAL 14 3 15 7 9 6 27 37 23 25 18 18 22 29 13 17 17 21 15 11 16 22
B. LLOYD - B. LLOYD - WODONGA ALBURY and WODONGA
The attached displays the above graphically.
It would appear that what is important is not the location of the dealership but the operator.
It is recommended that the dealer proceed with the shareholder investment provided a full disclosure to the investors is made and the investors approved by AMI and Thiess.
The appointment is not absolute but conditional upon:-
1. The maintaining of market share to at least rural
average in both Albury and Wodonga PMA's.
2. The dealership have representation in Albury
particularly as regards service and parts supply by December, 1986.
A.J. Dennis
Dealer Business Management"
Within a few days of the creation of the Dennis document, Brian Lloyd received another report on his financial affairs and prospects. This came from his accountant, Mr Walter of Price Waterhouse, and was dated 22 November 1984. It was no doubt prompted by Mr Walter's involvement in discussions on the previous Sunday.
The report consisted of a Consolidated Balance Sheet as at 31 October 1984, Reconstruction Proposal and Comments and a Consolidated Balance Sheet after Reconstruction. The crucial item in the report was that it showed a working capital deficiency of $304,423. After bringing into account fixed assets totalling some $700,000, and goodwill of $155,000, the balance sheet showed assets exceeding liabilities by about $47,500.
The proposed reorganisation was based upon the sale of capital assets, including the house which Brian Lloyd was buying, the paying out of loans, so far as possible, and the purchase back from Mr Daley of the service business. From all these transactions it was hoped that there would be a net increase in cash of $165,000.
Under the heading of Capital Reconstruction it was suggested that the ordinary shares held by the Lloyd family trust should be converted to preference shares and sold to AMI for about $100,000. There would then be an allocation of 6 parcels of 43,000 ordinary shares to each of the Lloyd family trust and the proposed investors. The payments for these shares, together with the repayment by the Lloyd family trust of a loan to it of some $60,000, was supposed to produce additional cash funds totalling $275,000 approximately. If all these adjustments were made, there would then be a working capital surplus, after reorganisation, of $88,000.
The reaction of Brian Lloyd and Mr Blair to this Price Waterhouse document was to conclude that the business was not viable. They had not realised that the deficiency in working capital was as great as $300,000.
Mr Lloyd said of the Price Waterhouse document:
"Well Tony did not have access to the balance sheet figures. He was doing a viability of the business, of the trading operation. His analysis of the cheque books and the outstanding accounts and the items in the dealership did not show a deficiency of $304,000. We had a heart attack when we saw that.
.....
I did and I know that Malcolm Blair did. Malcolm drove to Melbourne to see me at 3am in the morning, or a shocking time in the morning, when he saw how bad the situation really was, to say with that amount of current liabilities in the business, there was not enough investment, we could not survive."
After they had discussed the matter, it was definitely the view of each of them that the business would have to be sold.
Mr Lloyd then gave evidence about a meeting which he and Mr Blair attended at Toyota, which he believed was on 29 November 1984. He said,
"From memory .... I had made an appointment to see the factory to advise them at 10 o'clock and Malcolm drove down very early that morning so he could be in attendance."
They met Tony Dennis who, as we have seen, had authority, subject to direction of his principals, to speak for both Toyota companies. Mr Lloyd said,
"We presented the balance sheet and we went through the figures and said that it was a hopeless situation, that obviously it was a hopeless situation and there was some discussion as to how long the place could physically keep the doors open and there was discussions about Toyota assistance as far as Toyota funding or buying equity or how we could convert those current liabilities into either capital or into deferred liabilities and as the meeting went on we left not as hopeless as we had gone in there but we still said: Look, at this stage here is a letter of notice, at this stage it is just desperate, here is a letter saying we want out."
Mr Lloyd went on to say that the Dennis document was produced at that meeting and discussed again in detail. When asked "What did Mr Dennis say about it", Mr Lloyd replied,
"He said that the business was a very viable business, that I had run out of capital but that had nothing to do with the viability of the Albury/Wodonga PMA and it was a very good franchise and it was a great idea and it was a shame because it was one of the best areas that Toyota had."
In spite of these discussions, Brian Lloyd continued to believe he would have to sell the business, and this was what he finally told Tony Dennis. This was confirmed in a letter from Dennis to Lloyd dated 29 November 1984 which read:
"This letter is to confirm your decision to sell.
With interest shown in the purchase of this operation we envisage a settlement should be effected within a 60 day period. We will be pursuing all avenues to assist you in this matter and assure you of our attention and assistance at all times."
Brian Lloyd wrote to Tony Dennis, on 3 December 1984, a short letter which read,
"As discussed last Thursday, I hereby confirm my request to you to introduce prospective purchasers so that the above business can be sold.
I would like to take this opportunity to thank you for your efforts."
On 5 December 1984, Mr E Slatter, the relevant District Sales Manager of Thiess Toyota, visited Wodonga and had a lengthy discussion with Peter Weir, the AGC branch manager for Albury. In a memorandum to the Victorian Sales Manager, Mr S K Lotter, dated 7 December 1984, he recorded this account of the visit:
"I spoke in depth with Peter Weir ... to learn the following;
1. AGC are very concerned that the dealership in under-capitalised.
2. Pleased with cash flow, written business and trading.
3. The dealership has been close to conversion a number of times and has been saved by action from Peter Weir.
4. Peter states that if the situation happens again AGC will close on the dealership.
However they are pleased with the overall performance of sales and profitability and are confident Wodonga will trade out of its current financial position with careful implemented management. They apparently have met with major creditors who say they are not concerned with the current situation at this point of time.
Creditors owed $90,000 approx. AGC have 80% equity in the facility and real estate, and are prepared to increase this to 90%.
They also suggest the real estate should be sold (converted to cash), giving the dealership ready capital to trade. .....
Brian has told me he dismissed a number of his staff, reducing the number to 19 (sales staff = 4), and that he is now off his ego trip realising the seriousness of it all. ......
Compounding problems is the name of the dealership around the area. Peter Weir states that it is not good and Brian agrees with this, mainly brought about by Brian's portrayed high profile - problems with his staff being disloyal and they spreading rumours around the town and to the dealer network.
Walla are hell-bent on destroying Albury/Wodonga and making innuendos to the public, dealer network and myself, and saying to me that the info. comes from within this Branch, business acquaintances and the staff of Brian Lloyd; (Mr Slatter then set out 7 particular allegations which he had been told about).
This last paragraph pertaining to Walla may read as being malicious and of little importance; however, I feel that as District Manager I must ensure that you are fully aware of circumstances surrounding Albury/Wodonga. I also understand from Neville Jacob and Tony Dennis that Walla has put its hand up for Albury and from Neville, they are preparing a submission."
In a further memorandum between the same officers of Thiess Toyota dated 11 December 1984, Mr Slatter said;
"Spoke with Peter Gillies 7th December re this subject to learn the outcome of the meeting on Thursday 6th December between Brian Lloyd and AGC.
Brian was to be informed Friday afternoon at the Preston office of the decision.
1. AGC did not approve injection of funds by the four investors.
2. AGC would not advance any further additional injection of funds.
3. AGC will recommend that Brian sells. ......."
Meanwhile, at AMI, Tony Dennis prepared a memorandum for Mr Shepherd, dated 14 December 1984, in the following terms:
"Brian Lloyd Toyota - Wodonga Brian is currently restructuring his balance sheet to allow sufficient working capital to be provided.
This can be achieved by the transferring of some current liabilities to deferred liabilities by the approval of various institutions allowing a deferment of their debts; in particular AMI and Thiess allowing his parts account to be converted to capital loans on which a repayment structure can be negotiated. Also the sales tax department allowing deferment of $208,209 owing on sales tax.
It would appear the investors are prepared to proceed subject to the necessary arrangements with the sales tax department and AMI/Thiess being approved and confirmed. The sales tax department are willing to negotiate subject to approval of shareholders and AMI/Thiess deferring their debts. (Then followed some calculations leading to the conclusion that the total repayments of principle which would be required each month for this restructuring would be $17,644.) The whole restructuring exercise is dependant upon AMI and Thiess support by allowing his current indebtedness of $82,000 to become a deferred loan.
marketing programs of Toyota which included not advertising in the Albury area.
I have already dealt with this question in some detail. Jacobs could not be prevented from advertising in the Border Morning Mail, which genuinely circulated in its PMA, even though the major part of its circulation was in Albury/Wodonga. Toyota studied the position carefully and, I believe, did its best to apply its rules or conventions in a consistent fashion.
5. It could have required a certain level of facilities in
Walla so that Jacobs would be competing on equal terms with Brian Lloyd.
This question has also been dealt with above. Given the nature of the Walla dealership, I do not believe that Toyota acted unreasonably in failing to insist on the construction of city-type showrooms.
6. It could have given notice and then ultimately
terminated the dealership.
This possibility was contemplated by Toyota as a result of the matters which Brian Lloyd brought to the notice of the companies at the meeting of 4 September 1985. It had also been threatened earlier, on 5 July 1985, in a letter.
However I think it must be remembered that, from Toyota's point of view, Jacobs' was a highly successful operation. Although part of its success was due its ability to intrude into other dealers' territories, its aggressive methods, and good reputation for after-sales service, must also have helped it to compete effectively against other makes of vehicle. The business was long established and obviously had an excellent name in the area of agricultural machinery; it was natural that Toyota would wish to build upon this reputation. Furthermore, when challenged, Jacobs always had an answer for any apparent misdeeds. This made it very difficult for Toyota to discipline the company even if it had appropriate means at its disposal. I do not think it was unreasonable for Toyota to stop short of actual termination of the dealership on any of the grounds that might have been available to it. And yet this was the only obvious sanction at its disposal.
The other suggestion made by counsel was that the allocation to Jacobs might have been deliberately reduced in a particular month or months as a form of punishment for wrong-doing.
This may have been an appropriate solution to the problem if it had been possible to identify clearly some breach of the Dealer Agreement or other clear misconduct. However, this does not seem to have been a tactic which was employed by Toyota to bring difficult dealers into line and it may simply be that it did not occur to anyone in authority that this would be an appropriate course to take. In any event, as I have said, it was very difficult to establish conclusively any specific wrong-doing on the part of Jacobs. It is clear from the evidence that other dealers quite often bent or broke the rules at times - as Brian Lloyd himself seems to have done with his mail advertising in June 1985. Such complaints were a constant irritant to Toyota. Jacobs, it seems, offended more often than others because of its geographic location and aggressive marketing tactics.
In all the circumstances I am not satisfied that there were any clear steps which should have been taken by Toyota to prevent Jacobs intruding into the Albury/Wodonga PMA and which were not taken when they should have been. It would have been necessary for any such action to have been taken by about July or August of 1985 if it was going to have any effect. I think that by September the situation of Brian Lloyd Toyota had become so desperate that nothing Toyota could have done to limit Jacobs' intrusions would have saved the company.
Accordingly, I can find no breach by the respondents of any legal duty owed to the applicants, and this claim must also fail.
COSTSIn these matters, although the respective applicants have failed on all points, I do not think it would be fair and just that costs should follow the event as they normally do in such cases. I have a great deal of sympathy for the investors and, to a lesser extent, for Brian Lloyd.
I think they had understandable grounds for believing that they had not been fairly treated by Toyota in relation to the three major issues raised. I therefore believe the institution and pursuit of these proceedings was entirely reasonable.
The arrangements between Toyota and its dealers are loaded heavily in favour of Toyota. It retains a considerable degree of control over the activities of its dealers by, for example, the setting of targets and the maintenance of strong pressure to reach or exceed those targets. There is also the application of its requirements as to the quality of the dealership's buildings and the numbers of its staff. On the other hand most, if not all, of the financial risk of the individual dealership is taken by the franchisee.
So far as the investors' claim is concerned, it is clear that Toyota was pleased to retain Brian Lloyd as one of its dealers, provided that the investors produced the necessary capital to re-invigorate the failing business. Toyota saw the risk to the investors, but did nothing to deter them from the venture. Its main concern was to ensure that, if the venture failed, Toyota would not be liable.
As I have found, I do not believe that Toyota was under any legal obligation to warn the investors against becoming involved; nor do I think that it was under a moral obligation to do so, because the known risks were obvious enough. However, since I believe that one of the major reasons for the failure of the venture was the lack of vehicles supplied by Toyota, partly through no fault of its own, but probably also due in part to inefficiencies in its Turn to Earn system, and because another reason for failure was the incursion of Jacobs, whose aggressiveness suited Toyota quite well although it was unfair to neighbouring dealers, I believe that the applicants were fully justified in bringing these proceedings and that it would be unjust if they were to suffer further by having to pay Toyota's costs.
There will accordingly be judgment for the respondents in both actions, but with no order as to costs.
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