Latull Investments Pty Limited v Albert

[2005] FMCA 1777

FEDERAL MAGISTRATES COURT OF AUSTRALIA

LATULL INVESTMENTS PTY LIMITED v ALBERT
 & ANOR [2005] FMCA 1777

TRADE PRACTICES – Misleading and deceptive conduct – representation made to induce a franchisee to enter into a distribution agreement – representations misleading in material particulars – no reasonable basis for representations as to future expectations.

Fair Trading Act 1987 (NSW), s.42, 68
Federal Magistrates Court Rules 2001 (Cth)

Trade Practices Act 1974 (Cth), ss.52

Australian Competition and Consumer Commission v Albert [2005] FCA 1311
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216

Applicant: LATULL INVESTMENTS PTY LTD

First Respondent: DANIEL ALBERT

Second Respondent: GREG ZIMBULIS

File Number: SYG1379 of 2005

Judgment of: Driver FM

Hearing date: 30 November 2005

Delivered at: Sydney

Delivered on: 22 December 2005

REPRESENTATION

Counsel for the Applicant: Mr Muston

Solicitors for the Applicant: Marsdens Law Group

No appearance by or on behalf of the First Respondent

The Second Respondent appeared in person

CORRECTED ORDERS

1. The first respondent’s response filed on 1 September 2004 is dismissed, pursuant to rule 13.03(2)(b) of the Federal Magistrates Court Rules 2001 (Cth).

2. The respondents are to pay damages to the applicant in the sum of $148,000.

3. The respondents are to pay interest up to judgment at the rate of 10 percent on and from 29 July 2003.

4. The respondents are to pay the applicant’s costs of and incidental to the application pursuant to the Federal Magistrates Court scale of costs.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG1979 of 2005

LATULL INVESTMENTS PTY LTD

Applicant

And

DANIEL ALBERT

First Respondent

GREG ZIMBULIS

Second Respondent

REASONS FOR JUDGMENT

Introduction and background

1. This is an application seeking damages for asserted breaches of s.52 of the Trade Practices Act 1974 (Cth) (“the TPA”) or alternatively, s.42 of the Fair Trading Act 1987 (NSW) (“the Fair Trading Act”). The applicant relies upon an amended application filed on 6 August 2004 and an amended statement of claim filed on the same day. There were originally four respondents but the proceedings were discontinued against the first and last respondents. Asserted breaches of contract and asserted breaches of the franchising code of conduct were not pursued against the remaining respondents.

2. The essential allegations against the remaining respondents are contained in paragraphs 25-27 of the amended statement of claim.  They are, in brief, that by a series of misleading and deceptive representations the applicant was induced by the respondents to enter into a contract for the distribution of a computer file storage device known as “Datavault”.  The applicant asserts that the respondents falsely represented that:

   a)the product was fully developed and ready to be distributed;

   b)assistance and training would be supplied as part of the distribution agreement;

   c)the product would be launched through a comprehensive national public relations campaign;

   d)that as at 16 June 2003, the product was fully developed and available in two formats, home and business packages;

   e)there would be an $800,000 launch of the product for advertising, PR and promotion in October 2003;

   f)the Datavault company held national accounts with “larger stores”;

   g)entry into the distribution agreement would produce a good income stream through the sale of the product and an ongoing profit from storage sold;

   h)the product was being stocked by Dick Smith, Tandy Electronics, Officeworks, Harvey Norman and the Newsagents Federation of Australia;

   i)the applicant would earn $240,926 in the first year of the agreement;

   j)the product would be launched on 1 October 2003; and

   k)the product was in existence as at 16 June 2003.

3. It is common ground that the computer product was never released for retail sale and that the applicant derived no income from it.  The applicant company paid $140,000 on entering into the distribution agreement and seeks that amount in damages, plus interest and costs.

4. The now first respondent (Daniel Albert) filed a defence on 1 September 2004.  He was at that time represented by solicitors.  On 23 February 2005 the solicitors filed a notice of ceasing to act for him[1].  On 11 July 2005 I ordered Mr Albert to file and serve on the applicant and the second respondent an address for service within 14 days.  That order was served upon him at his last known place of residence in accordance with another order made by me on that day.  Mr Albert did not comply with that order.  He also failed to appear at the hearing of these proceedings on 30 November 2005.  I treated his defence as a response for the purposes of the Federal Magistrates Court Rules 2001 (Cth) and dismissed it on account of his non compliance with my order. The matter proceeded against him on an undefended basis.

   [1] They also ceased to act for the now second respondent, Mr Zimbulis.

5. The now second respondent (Mr Zimbulis), through his solicitors, filed a defence on 3 September 2004. Essentially, he denies making the representations alleged to have been made by him and denies any misleading or deceptive contact contrary to the TPA or the Fair Trading Act.

6. Latull Investments relies upon the affidavit of its owner and managing director, Christopher John Biggs.  Exhibited to that affidavit is a substantial bundle of documents.  Mr Biggs was cross-examined by Mr Zimbulis (who appeared on his own behalf following the withdrawal of his solicitors) and was unshaken in any of his affidavit evidence.

7. Mr Zimbulis relied upon his own affidavit filed on 5 May 2005.  That affidavit is briefly and only responsive to the affidavit of Mr Biggs.  Mr Zimbulis was cross-examined on his affidavit.  He stated that he was the sales manager on behalf of the Datavault Company with whom the applicant contracted but was not an employee of the company.  He had no financial interest in the company.  In response to questions from me, Mr Zimbulis said that he was engaged by Mr Albert (representing the Datavault Company) on an oral agreement for the provision of services as an independent contractor.  He was engaged to sell distributorships for the Datavault product.  He was paid commission of 10 per cent of distributorship fees received by the Datavault Company.  He had no role in the management of that company.

8. Mr Zimbulis admitted that some of the denials contained in his affidavit were inaccurate.  He admitted several conversations with Mr Biggs leading up to his company entering into a distributorship contract with Datavault.  He admitted discussing sales revenue for the product with Mr Biggs and the anticipated “take up rate” for the product.  He could not recall the detail of most conversations but maintained his denial of many words attributed to him.  He conceded that the product was never launched in the sense that it was never made available for retail sale.  He conceded that he now knows that no sales material was given to Mr Biggs.  He conceded that Mr Biggs was never given any product to distribute.  He thought that Mr Biggs had received some marketing and sales support but he was unable to say specifically what was provided.  He conceded that Mr Biggs would have relied upon representations made by him and Mr Albert before entering into the agreement on behalf of Latull Investments with Datavault but maintained that his representations were different from the terms attributed to him by Mr Biggs. 

9. Mr Zimbulis stated that, at the time he made representations to Mr Biggs he believed them to be true.  He stated that, at the time he made his representations, he believed that the product was being developed and believed that it would be successful.  Over time, it became apparent to him that there were developmental problems with the product which ultimately led to it never being released for retail sale.

10. Mr Zimbulis said that he sold somewhere between 12 and 30 distributorships for the product.  He was unaware of any refunds being made by Datavault to distributors for distributorship fees paid to Datavault.

11. I received as a matter of public record the decision of Jacobson J in Australian Competition and Consumer Commission v Albert [2005] FCA 1311. Those were proceedings taken by the ACCC against Mr Albert and Mr Zimbulis in relation to a range of conduct including the promotion of the Datavault product. At [13] His Honour found that Datavault failed to comply with the franchising code of conduct prior to entering into franchise agreements. At [15] His Honour found that Mr Albert and Mr Zimbulis made various oral and written statements to franchisees and prospective franchisees. These statements indicated a high level of demand in the market for services provided by various companies (including Datavault), provided an indication of the profitability and risk that a franchisee might expect, and the level of support which will be provided by the companies to the franchisees, including expenditure on national advertising campaigns and arrangements which it had negotiated with various retailers. At [16] His Honour found that Mr Albert and Mr Zimbulis did not have in their possession market research that established an extensive demand for the company’s services, nor did they have a reliable or reasonable basis for the sales data and financial models provided to the prospective franchisees (which was also contrary to s.59 of the TPA). In addition, Mr Albert and Mr Zimbulis did not have arrangements in place, nor budgeted for, national advertising and public relations campaigns, and neither did the companies have arrangements in place with retailers. His Honour found that representations that the franchisee’s business activities could be carried out at their place of residence were misleading.

12. On 30 November 2005 I made orders against Mr Albert for damages, interest and costs on an uncontested basis. 

Submissions

1. Mr Muston, for Latull Investments, submits that I should accept that the asserted representations were made by Mr Zimbulis and that the representations were false and known to be false at the time they were made.  To the extent that the representations were representations as to a future event, Mr Muston submits that there was no reasonable grounds for those representations.  He submits that Mr Zimbulis’ own evidence in cross-examination shows that he had no real idea about the retail arrangements that were asserted. 

2. Mr Zimbulis submits that he believed the representations he concedes making were accurate at the time they were made.  A functioning product existed and he did not become aware of developmental problems until after the representations were made.  He submits that there was no need for him to make false claims.  He submits that there was no promise of future earnings and that he was careful to disclaim any guarantee of future earnings.  He submits that his representations were made in good faith based upon what he was told by Mr Albert.

Reasoning

1. I have no doubt that the evidence of Mr Biggs should be accepted.  He was unshaken on any of it under cross-examination, whereas Mr Zimbulis provided effectively no evidence in chief and made substantial concessions under cross-examination.  Exhibited to Mr Biggs’ affidavit are written representations made by the Datavault Company, Mr Albert and by Mr Zimbulis.  In particular, Mr Zimbulis sent an e-mail to Mr Biggs on 16 June 2003 in which he represented that the Datavault product was an existing and developed product representing an exciting business opportunity.  He stated that:

   Datavault distributors share in significant returns from retail sales and enjoy recurring revenue from customers – year in, year out!

2. At the time, there was no developed product and no retail sales.  There never were any retail sales.  I am fortified in my view as to the evidence by the findings of Jacobson J in ACCC v Albert.  Those findings were made by consent.  Mr Zimbulis asserts that he had “no option” but to consent to those findings as he could not afford to fight the case taken against him by the ACCC.  The findings are not at a level of specificity that could give rise to an issue estoppel but they provide support and encouragement to the view as to the facts that I have independently formed.

3. Mr Zimbulis was engaged by Mr Albert on behalf of Datavault to sell distributorships. That was all he was to do. He was engaged as an independent contractor in a personal capacity. He promoted a distributorship to Mr Biggs, acting on behalf of Latull Investments, and made representations intended to persuade Mr Biggs that Datavault represented an exciting business opportunity that would produce a very attractive income stream to distributors. While no guarantees were given, Mr Zimbulis did represent to Mr Biggs that income of several hundred thousand dollars per annum could be anticipated. There was no reasonable basis for any representation as to the income that might be anticipated because there was no developed product and never was a developed product capable of being released for retail sales. Mr Zimbulis also misrepresented the arrangements for the promotion and launch of the product and the support that would be provided. In doing so, he may well have relied upon what he was told by Mr Albert. He may well have not known that the representations he made were false at the time he made them. However, it is not necessary for the applicant to prove that Mr Zimbulis intentionally made a false representation. In order to succeed in an action based upon an asserted breach of either s.52 of the TPA or s.42 of the Fair Trading Act, it is only necessary that the applicant prove that, when tested objectively, the conduct was misleading or deceptive or likely to mislead or deceive: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 223. On the available evidence, referred to above, that has been amply proven.

4. I find that the representations alleged to have been made by Mr Zimbulis to Mr Biggs were made.  I further find that those representations were false and misleading in material particulars and that Mr Biggs relied upon them when he entered into the distributorship agreement on behalf of Latull Investments.  Latull Investments paid $148,000 for the distributorship agreement.  The agreement was worthless.  No product was provided for retail sales and no product was ever launched for retail sales.  Latull Investments suffered a total loss of its investment.  It should receive damages in the sum of $148,000 plus interest from the date of entry into the distributorship agreement up to judgment at the rate of 10 per cent.  It should also receive its costs of these proceedings.

5. Mr Zimbulis acted in a personal capacity as an independent contractor. He was in no way responsible for the actions of the Datavault Company. Latull Investments does not seek to take advantage of the extended operation provisions of the TPA. In the circumstances, Mr Zimbulis cannot be held liable to Latull Investments under the TPA. However, the same liability arises under s.68 of the Fair Trading Act and it is open to me to make orders against him under that Act in the accrued jurisdiction of this Court.

6. I will make the same orders against Mr Zimbulis that I have already made against Mr Albert.  The orders made against Mr Albert have not been entered and can be amended to reflect the joint and several liability of both respondents.  I will amend the orders accordingly.

I certify that the preceding twenty (20) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate: 

Date:  22 December 2005