Lee, v and J. v Cut Price Deli Pty Ltd and Ors

[1989] FCA 692

IN THE FEDERAL COURT OF AUSTRALIA	I
QUEENSLAND DISTRICT REGISTRY	QLD G97 of 1989
GENERAL DIVISION

BETWEEN: VICTOR LEE

First Applicant

AND: JEANETTE LEE

1   .

Second Applicant

AND:  CUT PRICE DELI PTY LIMITED

First Respondent

AND:  CUT PRICE DELI FRANCHISING PTY LIMITED

Second Respondent

AND: ENZO SGAMBELLONE

Third Respondent

MINUTES OF ORDER

JUDGE MAKING ORDER:	PINCUS J.
DATE OF ORDER:
WHERE MADE:	BRISBANE
THE COURT:
(a)	pending trial. or other earlier order in these proceedings, the applicants henceforth pay the franchise fees payable to the second respondent in accordance with the construction of the franchise agreement pleaded in paragraphs 17(i) and 17(ii) of the statement of claim; and
(b)	pending trial or other earlier order in these proceedings, the applicants henceforth pay to Capalaba
Park Shopping Centre Pty Ltd the sum of $2,000 monthly in advance, the first such payment to be made on or

Upon the usual undertaking as to damages and on condition that -

before 1 November 1989 and to promptly notqfy in writing the solicitors for the respondents of the fact of each such payment having been made

1.   orders that the respondents, by themselves, their servants or agents, or otherwise howsoever, be restrained until trial or other earlier order from taking any step towards dispossessing the applicants from the premises known as shop 64, Capalaba Park Shopping Centre, or from taking any step to determine the franchise agreement referred to in the application herein;

THE COURT DIRECTS THAT:

2.    on breach of any condition, the restraint against the respondents will not ipso facto cease, but they may apply on short notice for discharge of the injunction;

3.   the respondentsf defence and cross-claim, if any, be filed and served by the 2 November 1989;

4.    reply and answer, if any, be filed and served by the 16 November 1989;

5.    discovery on oath take place by 30 November 1989;

6. . inspection of documents take place by 7 December 1989;

7.    the matter be further mentioned on Thursday, 14 December 1989 at 9.15 a.m.;

8.   costs of and incidental to the notice of motion be reserved.

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

'>

IN THE FEDERAL COURT OF AUSTRALIA	)
QUEENSLAND DISTRICT REGISTRY	1 QLD G97 of 1989
GENERAL DIVISION	1

BETWEEN: VICTOR LEE

First Applicant

AND:  JEANETTE LEE

Second Applicant

AND: CUT PRICE DELI PTY LIMITED

First Respondent

AND:  CUT PRICE DELI FRANCHISING PTY LIMITED

Second Respondent

AND: ENZO SGAMBELLONE

Third Respondent

PINCUS J . 19 OCTOBER 1989

EX TEMPORE REASONS FOR JUDGMENT

:,;,

This is an application for interlocutory relief in a claim by the disappointed purchasers of a franchised delicatessen	I '
! ~I
i '
business. They have' not sued the vendor to them, but respondents consisting of a franchisor (the second respondent) and parties	l :	1;:
associated with the franchisor.	j /
The event which has prompted the application for interlocutory relief is that recently an attempt was made on	,-
,.
behalf of the respondents to obtain possession the delicatessen which is leased, apparently by the first respondent (although I have not seen the lease), from the owner of the shopping centre in which the shop is located. The applicants say that it would be financially disastrous for them to lose possession of the delicatessen pendente lite.
They claim that they entered into the arrangement under the influence of misrepresentations which are discussed below. It should be added that the franchise agreement contemplated that there would be a sublease in favour of the applicants. That seems not to have occurred and there is some evidence that this was the fault of the respondents, but the matter is by no means clear.
Mr Gibson, who appeared for the respondents, admitted that there was a serious question to be tried on the issue of misrepresentation, or misleading conduct, but he argued strongly (and, if I may say so, persuasively) that the balance of convenience favoured the respondents.
Despite Mr Gibson's admission, it seems to me desirable to explain the nature of some part of the applicants' case against	the respondents and comment upon its strength. This is so because
the relief which is now sought is of an unusual character. It is contemplated that the applicants will be allowed to remain in possession as against the respondents without paying sums due to the respondents in respect of franchise fees and rent or, alternatively, franchise fees and licence fees in respect of the possession.
Mr Robin Q.C., who led Mr Fong for the applicants, said that the most important allegation made by the applicants was that it was represented to them before they had bought the business that they could expect a gross profit margin of at least 38%. The applicantsr case is that there is a chain of these franchised delicatessens which are run in accordance with fairly detailed instructions given by the franchisor; the applicants say that the franchisor should, from its experience, have a good idea of what gross profit margin can be expected.
The applicants appear to me to have a strong case on the question whether the relevant representation was made. It is said that the third respondent represented that the gross profits would amount to between 38% and 42% of the weekly turnover. This gains support from:

(i)  the document marked "B" which is in evidence, which was, as to relevant parts, prepared by the third tespondent and mentions the 38%;

(ii)  the fact that the third respondent admits in his affidavit

that he said the figure of 38% was achievable provided the franchisee adhered to "our system and recommended retail

prices, but that some franchisees were achieving as high as 42% through extra work"; the third respondent goes on to say in his affidavit that he added that bad managers were achieving less than 38%;

(iii) there are documents emanating from the respondents indicating that similar representations have been made to others. An example is a statement to t h ~ press, made about the time of the representations in question in this suit, suggesting that gross profit margins would be around 40%.

The next question is whether there is a good case in support of the view that the 38% representation was misleading. It seems to me that there is a prima facie case that the store is properly run by the applicants .and that it has achieved significantly less than 38%. In particular, the unaudited accounts relating to the business for the year ended 30 June 1988

show a gross profit of 32.6%.	The applicants say this has
recently improved.

It appears to me, however, that if the matter goes to trial much will depend upon what' gross profit percentage other franchisees were enjoying at the time of the negotiations in question, that is, towards the end of 1986. If it emerges that there was no reasonable basis for predicting that 38% would be achieved then the applicants are likely to succeed on this issue. The evidence so far given points towards a likelihood of success in showing misleading conduct, because the figures achieved have

been well under the 38%, at least until recently. However, it	must be appreciated that a fuller examination of the whole
question at the trial could produce a result quite different from that just spoken of.

A secondary, but still important allegation was that it

was falsely represented that a turnover of about $12,000 per week could be expected, initially. The third respondent admits that he mentioned $12,000 per week, but says that it qas in a different connection, set out in the third and fourth sheets of his affidavit. There seems to me to be no means of making even a provisional determination as to where the likelihood lies.

Further, from the figures presented by the applicant, they exceeded $12,000 turnover 13 times in the first 49 weeks and 26 times in the next 49, that is, about 40% of the time in about the first two years. These figures could not give one any confidence that the applicants would succeed on the question at the trial. However, there is some evidence that the immediately preceding proprietor was taking substantially less than $12,000. The significance of this is diminished, in that it is not disputed that the third respondent and the first applicant discussed the matter on the basis that the previous proprietor was not running the shop well.

I therefore conclude that as to the 38%, but not as to the $12,000, the applicants appear to have a case of considerable strength, so far as the evidence at this stage discloses.

Balance of Convenience

The matter comes down, as Mr Gibson said, to the question of the balance of convenience. The purchase price of the business was $175,000 plus stock at valuation. The applicants borrowed a great deal of money to purchase the business, and they have since become indebted for other sums paid to equip it better. They have not been able to make it pay well and; according to the evidence adduced on their behalf, there has been some discussion about selling it. The applicants say that the respondents will agree to a sale only if all claims by the applicants against the respondents are dropped.

Mr Gibson points out that the applicants have already received a notice of termination of the franchise under the relevant agreement, and he appears to suggest that the Court cannot, therefore, intervene. That appears to me not to be so. Assuming that the notice has not been waived, it is, in my opinion, within the Court's power to order that the respondents not disturb the applicants1 possession pendente lite. It seems to me, in general, that the Court is entitled to do, by way of interlocutory relief, what it might do in the event of ultimate success for the applicants, and as the authorities show, a wide range of orders seem to be permissible.

A greater difficulty, that is greater than the question

of notice of termination, is the matter of rent. I heard the case initially on the material which had been filed up to and including	16 October, but since then, some further material has been filed	on that point, and the material suggests that a representative of
the landlord has been making inconsistent statements with respect to the landlord's likely attitude towards further possession by the applicants.
It was contemplated by the franchise agreement that the applicants would become sub-tenants under a formal agreement, but that has never happened, the responsibility £or that important omission being unclear. What is clear is that the rent is substantially behind; the respondents say that over $54,000 was due to the end of September 1989. It is perhaps slightly inaccurate to speak of the "rent" being substantially behind, because the possibility is that technically the applicants do not owe rent, but they owe, certainly, substantial moneys in respect of the right to occupy the premises. The applicants claim, in effect, that the landlord was happy to leave them there, and asked me to infer that, but for the intervention of the respondents, there would have been no problem with the landlord. I am unable to reach any conclusion on that point.
In addition, it is alleged against the applicants that they owe a substantial sum for franchise fees. The pleading raises a question about the proper way to work the franchise fees out, and on the face of it, the applicants are correct on that. However, even assuming that to be so, it is not disputed that some thousands of dollars of franchise fees are due. Mr Gibson also urges upon me the view that, in the absence of a meaningful undertaking as to damages or suitable payment into Court, the
discretion should be exercised against the applicants. He uses the analogy of a mortgagor suing to restrain the mortgagee.
The leading Australian case on that topic is Inglis v. Commonwealth Trading Bank of Australia (1972) 126 CLR 161. In Town and Country Sport Resorts (Holdings) Pty Ltd v. Partnership Pacific Limited (unreported, 23 September 1988), the Full Court said, in effect, that in exercising a jurisdiction of the kind which I have just mentioned, the Court may gkant ir~terlocutory
relief not corresponding with the traditional rules. Then in Eltran Pty Ltd v. Westpac Banking Corporation (unreported, 15 November 1988), a mortgagor succeeded in persuading the Full Court that an injunction should go to restrain a mortgagee from selling, although there was no payment into Court and no finding that a meaningful undertaking as to damages could.be given. It appears to me that these cases significantly weaken what might once have been thought to be a strong argument in favour of applying the principle of the Inglis case to matters of this sort.
The problem of holding the status quo seems to me to have no completely satisfactory solution. My inclination is to grant interlocutory relief, however, for these reasons. Firstly, there is, as I mentioned, prima facie a strong case that the applicants were misled. Secondly, as a practical matter, unless they obtain some interlocutory relief, it may well be that whatever rights they have under the Trade Practices Act 1974, or otherwise, will be lost to them. It seems likely that they will be put out and be unable to pay their debts and may well go bankrupt before the case comes on. Thirdly, the facts concerning the obstacles to granting relief, namely franchise fees and the rent, are unclear at this stage. The amount of franchise fees due
is not quantified, and I would not be inclined to impose the payment of the past franchise fees, whatever they might be, as a condition of granting relief. I have in mind that the applicants should pay franchise fees which become due from time to time henceforth, in accordance with the construction of the agreements which they put forward.
The position with respect to the rental and the landlord is extremely obscure. It may be, as has been suggested during the course of argument, that the applicants are able to obtain the support of the landlord and to secure for themselves a direct relationship with the landlord. But the material which has been filed this morning on behalf of the respondents suggests otherwise.

I -

It is difficult, at this stage, to impose a sensible	1. 2
l - L

condition with respect to the rental.	The form of such an order	j
? '

is a matter which I would invite counsel to discuss, in an	..
:  ..

endeavour to agree upon it.	If they are unable to agree, I will	!	~
!
fix it myself.

What I propose to do is to enjoin the respondents from taking any step towards dispossessing the applicants or taking any	L
>
i
'-
further step by way of determining or enforcing determination of

. . 1 r

the franchise agreement until the trial of these proceedings or

further earlier order.	I. 1
t :
t ~

, ~

I propose, as I have mentioned, to make it a condition that henceforth, the applicants pay the franchise fees due	-~
3
.m.
according to the construction of the franchise agreement put	t -
! ~.
forward on their side. As to the question of payment of rental, I	!
I .
>I '
, ,

do not propose to impose a specific condition at this stage.	I	I'
I J

will, however, adjourn the matter generally to enable the parties	..
to discuss it in an endeavour to reach agreement on it.	m ~.
!
If the parties cannot reach agreemenfi, then it will be necessary for me to do the best I can on that question, but it may be hoped that when I have to undertake that task, there will be more satisfactory material before me as to the position of the landlord. To reiterate, then, I propose to enjoin the respondents in the terms I have mentioned, subject to a definite condition which I have mentioned as to the franchise agreement and subject to a condition to be agreed being fixed with respect to the rental.	\

I should add that, although Mr Robin said I should enjoin the applicants until trial, and I have done that, I have included the expression, as is usually done, "until further order" and I have done it in a particularly purposeful way here because it may be that events disclose that the interlocutory situation I prescribe is simply impractical.

(Note:  Mr Gibson read the following undertaking and orders into

the record:

"That upon the usual undertaking as to damages and on

condition that
(a)	pending trial or other earlier order in these proceedings, the applicants henceforth pay the franchise fees payable to the second respondent in accordance with the construction of the franchise agreement pleaded in paragraphs 17(i) and 17(ii) of the statement of claim.;

. .

i~-

(bj pending trial or other earlier !order in these proceedings, the applicants henceforth pay to Capalaba Park Shopping Centre Pty Ltd the sum of [blank] dollars	1 :
-,
,
. .

monthly in advance, the first such payment to be made on	.	.
or before 1 November 1989 and to promptly notify in
, =
.	'
writing the solicitors for the respondents of the fact	:.
1.
of each such payment having been made.	3	F-:
i

The court orders that the respondents by themselves, their servants or agents or otherwise howsoever be restrained until trial or other earlier order from taking any step towards dispossessing the applicants form the premises known as shop 64, Capalaba Park Shopping Centre or from taking any step to determine the franchise agreement referred to in the application herein.

The court directs that the respondentsr defence and cross-claim, if any, be filed and served by 2 November 1989, any ceply and answer, if any, by 16 November; discovery on oath by 30 November; inspection of documents by 7 December.")

r7

L .

L

HIS HONOUR:	I will make the orders which you suggest, with this	. .
! L
variation: firstly, that it be added that I direct that, on breach of condition, the restraint against the respondents will	i	- 4
! I
, ,-
i
not ipso facto cease, but they may apply on short notice for	i ~:
I. I

discharge of the injunction. Secondly, the sum to be inserted in

paragraph (b) relating to payment to the lessor will be $2,000.

:	ceriify that this and the	ptfced~ny	i "
I

pages ars a trua copy of the reasan$ for

: .

judgment herein of His	Wonbur
Mr. Justice Pincus

, , ~

:. . . S

Defed /q && , .?