McMahon McRae Pty Ltd v Alan Jones Pit-Stop Co-Operation Pty Ltd

[1988] FCA 615

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JUDGMENT No..!!d.&%..6&

C A T C H W O R D S

DAMAGES - misleading conduct by franchisor - recovery of trading

losses - whether attributable to representations - principles

- reduction for losses unconnected with misleading conduct.

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DAMAGES - whether benefit of tax losses to be taken into account.

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Trade Practlces Act 1974, ss.52, 59(2)

Federal Court of Australia Act 1976, s.51A

McMahon McRae Pty Ltd

v. Alan Jones Plt-Stop Corporation Pty Ltd & Ors

Qld G133 of 1986

I

PIMCUS J. BRISBANE

J

24 OCTOBER 1988

IN THE FEDERAL COURT OF AUSTRALIA	)
QUEENSLAND DISTRICT REGISTRY	1 QLD G133 of 1986
GENERAL DIVISION	)

BETWEEN: McMAHON McRAE PTY LTD	- .
.,.

Applicant

AND:  ALAN JONES PIT-STOP CORPORATION PTY LTD

First Respondent

AND: PETER FLEMING ANDERSEN

Second Respondent

AND:  ALAN STANLEY JONES

Third Respondent

I.IINUTES OF ORDER

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PINCUS ORDER: MAKIN JUDGE J. ? .

ORD R:  DATE OF 24 OCTOBER 1988

BRISBANE WHERE MADE: i _ .

THE COURT ORDERS THAT:

1.    the flrst and second respondents pay the applicant

the sum of $150,000; ..

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2. the applicant's costs of and first and second respondents pay the

incidental to the

proceedings, to be taxed.

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

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IN THE FEDERAL COURT OF AUSTRALIA	1
QUEENSLAND DISTRICT REGISTRY	1 QLD G133 of 1986
GENERAL DIVISION	1

BETWEEN: I4cMAHON McRAE PTY LTD

Applicant

AND: ALAN JONES PIT-STOP CORPORATION PTY LTD

First Respondent

AND:  PETER FLEMING ANDERSEN

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Second Respondent	i
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AND: ALAN STANLEY JONES

Third Respondent

PINCUS J 24 OCTOBER 1988

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REASONS FOR JUDGMENT

By this application it is sought to recover losses said

to have been incurred in establishing and conducting a tyre sa les

buslness in Cairns, North Queensland. The applicatlon sets out	29
allegations of misrepresentation, and eight allegations of breach

of warranty. The only allegations with which it	is necessary to	: I
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deal are those relating to the expected performance of the shop in

question, and the first respondent's flnancial position. Although

I set out a history of the dealings between the parties, the

i '	account which follows is not comprehensive, but deals principally
!	with matters relevant to the two sorts of representations
mentioned.
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2.

The persons principally involved in the events to be

discussed were Nr M.J. McMahon, a director of the applicant and real estate agent, H r Peter Andersen (the second respondent) who was principally responsible for negotiating with McI4ahon on behalf of the first respondent, and Mr Alan Jones, the racing car driver.

Jones, the third undisclosed terms during the course of the hearing. respondent, settled with the applicant on

In speaking

of "the respondents' in this judgment, I shall refer to the

remaining (first and second) respondents only. Jones' part in

bringing about the transactions of which the applicant complains

appears to have been relatively minor, except in the sense that he

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gave general encouragement and that	it was his fame which all	).	.
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partles hoped would assist in encouraging the public to buy tyres

from the shop in questlon, whlch was to be called "Alan Jones

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Pi t-S top"	.	:
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The federal content of the case	1 s that it is based	I
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principally upon ss.52 and 59 of the Trade Practices Act 1974.

The content of s.52 is well known. Section 59(2) read

at relevant times as follows: 

"Where a corporation, in trade or commerce, invites,

whether by advertisement or otherwise, persons to

engage or participate, or to offer or apply to

engage particlpate, or in a business activity

requiring the investment of moneys by the persons

concerned and the p rformance them by work of

associated	with	the	nvestment,	corporation	the
shall not make,	with	respect	the	o	profitability

risk or any or other material spect the of

business activity, a statement that is false or

misleading in a material particular."

It is not clear what, if anything, s .59(2) is intended

to add to s.52. Section 5 9 ( 2 ) forbids a corporation to make false

or misleading representations of certain kinds in trade or

commerce; s .52 (1 )	forblds a corporation to engage in any sort of
misleading or deceptive conduct in trade or commerce.	It is hard

to think of a false or misleading representation under s .59(2)

which would not amount to misleading or deceptive conduct under

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s.52. I propose to treat the case as depending upon s.52, as the

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applicant cannot succeed under	s .59(2)	if s.52	does not get it
home.

The matter was a complex one to try; owing to the able

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and concise presentation of the opposing cases by counsel,

however, the hearing was kept to a reasonable length. The trial

was on affldavit and that proved to be a convenient course; the
really contentlous questlons and especially disputed conversatlons

were thoroughly canvassed In cross-examlnatlon.

McMahon, a real estate agent living at Nerang near the

Gold Coast, set up a real estate business in the tourist resort f

Port Douglas, north of Cairns, in 1982 or 1983. However, he did

not know Cairns well and had no knowledge of retailing generally, or of tyre retailing In particular. He was introduced to Andersen

in April 1984, and was told that Jones, a former world champlon

(Formula 1) car driver, was going to lend his name to the

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promotion of	tyre retail businesses in opposition to the "Bob
Jane" outlets. Andersen,	as he told McMahon, had two Bob Jane

T-Mart stores and Jones one of such stores. Andersen expressed

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the view that he and Jones would run	a more successful operation
than that run by Bob	Jane, another former car racer.

There was then discussion about the possibility of

McNahon's purchasing a franchise for a tyre retailing business.

The conversation took place at Ashmore Road, Bundall, in an office

in premises where a tyre store owned by Andersen's family company operated. According to McMahon, Andersen told him that the gross sales of the store were between $50,000 and $60,000 per month, that the average tyre store had monthly overhead expenses of

$12,000 and operated at between	28% and 30% profit on gross sales,
having a net profit of between	$5,000 and $6,000 per month.

I Andersen agrees with the allegations just set out, with the exception of that relating to the net profit figure..

The dlfference between the parties about this point is not of great significance, for the net profit figure is derivable

!	by arlthrnetic from the others given, assuming that the expression
"overhead" covers all the runnlng expenses; on that basis, the
calculated profit should have been between $2,000 and $6,000 per
month.

McMahon told Andersen he would be interested in a

franchise in North Queensland, and Andersen suggested Cairns would

be the

logical asserted that the Bob Jane T-Mart store place to start. McMahon says that Andersen

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in Cairns was taking
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$120,000 per month, and that it was reasonable to expect that Alan Jones Pit-Stop store would take an

at least $60,000 per month.

Andersen admits having mentioned the figure	of $120,000 per month
in connection with a Bob Jane store	in Cairns, but says that was

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much later, after the franchise agreement the parties ultimately made was slgned, and that, having told NcItahon that he had heard that the Bob Jane store was taking the figure I have mentioned,

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said also that he doubted that the information was correct.	I .I
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I find myself unable to make a confident finding as to this allegation concerning the takings of the Bob	Jane store at

Cairns; the applicant therefore fails on that point. It appears to me that where there is no documentary support for a disputed allegation of oral representation, nor any compelling feature in the probabilities of the matter, the Court must be slow to hold

the applicant's onus to have been discharged. I believe McMahon

to have been, generally speaking, a falrly candid witness, but am

not satisfied that he recalled accurately the substance of all his

conversations with Andersen; years after the event, it would be

hard for any witness to do s .

Andersen also denies that on the occasion in question he t
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pro~ected a takings figure of $60,000 per month for the Cairns

store; he admits to having said that it	was "reasonable to expect
that a new AJP store would start at about	$40,000 per month".

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In May 1984, McMahon visited the same office and again

spoke to Andersen. There was on that occasion discussion of the

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assistance whlch would be given to McMahon if he took a franchise.

Andersen told Mcnahon that "they intended to become a national

corporation, and hoped to have forty stores open in two years".

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McMahon expressed intcrcst in opening a store in Cairns initially,

and subsequently in other northern Queensland cities.

About this time, McMahon was told that a franchise would

cost $100,000, but replied that he would be prepared to pay only

$70,000. Andersen indicated that would be enough and said a

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deposit of $5,000 would be required, with payment of a further

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$45,000 one month before the store opened, and the balance by way

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of monthly royalties. Later in May, McMahon went to see a loans

officer of the Commonwealth Bank, Southport and was told that the

bank would require feasibility figures in relation to the proposed I I.

franchise before approving a loan. However, McMahon also says I

that he "obtained a verbal approval, virtually	by a phone call to
the bank" about that time.

There seems to have been	a lull in the negotiations, for	I . .
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the next significant relevant event was about mid-July 1984,

perhaps on 19 July. Mcmahon and Andersen met	at the Bundall
office again when, as 1 s common ground, McMahon said	he wanted a
set of tradlng figures to be prepared for	a Cairns store; the

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figures were supplied by documents dated	2 4 July 1984, discussed
below.

Although McMahon did not mention it in his affidavit, he

in fact made	a written proposal to Andersen just before	he was
given the figures of	24 July just referred to.	McMahon, signing

on behalf of a company called Max J. McMahon Enterprises Pty Ltd
(Enterprises) wrote a letter dated 23 July 1984 to the first
respondent proposing that Cairns be "opened as soon as possible"

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and contemplating a period of eighteen months during which

Enterprises might open further stores in North Queensland at

Mackay, Townsville and Rockhampton. The letter suggested the cost

of the franchise be $70,000 for each store, payable as set out in

the l tter. McMahon's evidence about this proposal was

unconvincing. He said it was intended to "open negotiations with

Andersen"; but it was framed as an offer.

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It said:	i -
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"This agreement subject is to Commonwealth the

Trading Bank of Australla making funds available."

The parties are sharply at varlance in their respective

versions as to the stated purpose of the figures of 24 July.

McMahon says that he asked Andersen for the figures to present	to
the bank and Andersen admlts that. Counsel for the respondents
put to HcMahon that "you actual figures. These were figures done to	knew all the time that these were not

your specification."

In his affidavit Andersen says:

"I had mentioned to him at the initial meeting that

the Bundall store had inltially performed after its

opening at about the bench mark level for an AJP

store, that is to say $40,000.00 per month by way

of sales. At the m eting in July 1984 McMahon

asked me that he could show them to his bank. Her [sic] to provide a schedule of sales figures so

did

supply to figures me ask not showing the

anticipated return from a store in Cairns. Had he

asked me do it as at that to do that I would not have been able to

stage (being prior to the trip

McMahon and I made to Cairns) I had no comparative

basis for establishing such figures. McMahon told

me that he needed figures f o r a full financial year

and that, for easons to do with the financing

levels he required from the bank, the total of the

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approximate sho ld figures something like

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$790,000.00. ... He also asked me to produce

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figures approximate which an ad to al of

$790,000.00, as he needed the figures to total that

to amount of money to finance the be able to borrow the appropriate

sum in order

franchise McMahon

stated that he believed, due to his experience in

North Queensland, that these figures w r

obtainable."

What Andersen says he was asked to do then, was something of

rather dubious honesty, namely to produce a projection of the
likely returns from the Cairns store which purported to represent
his own opinion, but did not in fact do so - which was simply

14cMahon's opinion.

That opinion must necessarily have been very uninformed,

since McMahon had no special knowledge of Cairns or of tyre

retailing.	Andersen,	on	the	other	hand, had at	least	some
foundation In knowledge	and	experience	for	making	such	an	,'
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assessment. He had experience of tyre retalling in the south, and

by July 1984 he had experience of the performance of three Alan

Jones Pit-Stop tyre stores in Queensland, namely the Bundall store

as well as stores at Springwood and Kirra. More generally, his !.

business was to set up a chain of such stores throughout

Queensland and he may reasonably be assumed to have acquired a C'.

great deal of information about the feasibility of doing so.

The respondents' case on this point was intended to be ...

bolstered by the evidence of one G.F. Wilson, who is a director of

the first respondent. Wilson made an affidavit saying that at a

meeting between Andersen and McMahon, whose date he could not

recall, reference was made to figures produced in July 1984. The

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effect of the conversation, according to Wilson's affidavit,	was
that the	figures were requested by McMahon to be shown to

McMahon's bank to obtain finance and that they were higher than Andersen stated to McMahon, who "requested that they be recorded

as higher for his	own purposes".	Wilson says in his affidavit	' _
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that McMahon agreed with those propositions, saying, "Yes Pete I	i:
know that."	However, when Wilson was called and cross-examined on

the point, this story did not emerge. The closest Wilson went to

it was attributing to Andersen the statement "You know, Max, that

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I supplied those figures	at your request"	- that being common	!
ground.

In McMahon's evidence about this request, he claims that he desired the figures for two reasons:

l ' . . .	flrstly,	to	have	a commitment	from	Anderson
that	the	figures	and	the facts he was	telling	me,

he was prepared to put his name to; and secondly,

my bank asked me to obtain some figures for the

purpose of obtaining a $50,000 loan."

As a result of the request under discussion, Andersen

supplied to McMahon documents which are a central part of the

applicant's case.	One was a covering letter dated	24 July 1984
reading:

"Dear Max, ' I

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Attached you will find projected sales figures and , I .

expenses, we feel would be appropiate [sic] to a

site in Cairns.

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Hope you find this satisfactory and if any further

information is ecessary please don't hesitate in

contacting me." . .

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These expressions tend to favour the applicant's version of the

purpose of supplying the figures. The figures, supplied by a

document bearing the same date and also signed by Andersen, were

introduced by: I :

"Projected sales figures for a full financial year.

These figures being based on a new store in it's

[sic] first year of operation."

There followed a list of figures for the months from

July to June inclusive, the lowest being $50,000 and the highest

being $80,000; the total was $790,000.

The letter concluded:

"These figures should achieve a gross profit of 28%.

A 25% increase in the second year of operation with

an additional increase In figures in the following

year and stablising [SIC] thereafter."

Andersen says that the flgure of the monthly projected returns, was given to him by McMahon. I do $790,000, the total of

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not believe that. For one thing, lt seems more likely, if McMahon

were bent	on deceiving his bank, that	he would have suggested a	, ;J
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round figure. documents from which	I reject	Andersen's	story	that	the	genesis	of the	!
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I have just quoted was as he stated it to be.

I think the main reason the figures were asked for by McMahon w s I .,

to have Andersen commit himself to a projection. In reaching my

conclusion on this vital aspect of the case,	I have considered the	'	I-
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general credibility of Andersen as against that of McMahon. I do

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not believe McMahon to be the sort of man who would be likely to	,
request of Andersen a document designed to deceive McMahonrs bank.

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I have also taken into account the existence of the third document

concerning the same topic, referred to below.	i
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There is an oddity, pointed out by Mr Morrison for the

respondents, about McMahon's story concerning these figures. They

were, as I have mentioned, presented on 24 July 1984. McMahon

claims that Andersen told him that the figures were based on a

feasibility study. It was argued that McMahon could hardly think

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that any sensible feasibility study could be done, as to a distant city, in the few days between the request and production of the figures. The argument tends to impel one towards the conclusion

that McMahon knew that the figures could not have been anything

other than guesswork.

That point is further mentioned below.

It was common ground that the figures were produced in

connection with a proposal by McMahon to take four stores in North
Queensland, as earlier discussed.

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There came to be associated with the two documents of 24

July 1984 to whlch	I have referred	a third document headed
"Monthly Sales	& Net Profit Report". That related	to the proposed

Cairns store and set out figures for various items	of "semi-fixed
expenses" such	as rent, rates and taxes, and also figures for

items of commissions. The expenses listed variable xpenses uch as wages, salaries and . . I ,

in the document produced to the

Court totalled $13,230.	The evidence was, and I accept, that some
blanks in this third document were filled in by McMahon,	at least

partly from information supplled by' Andersen.

Mcr?ahon says that the document just mentioned was not

attached to those of 24 July 1984, but was produced in August

1984. Andersen appears not to remember its origin but does not

believe it was attached to the other two.

Apart from two items which were written in later, the

"Monthly Sales & Net Profit Report" seems to have been complete

when handed to McMahon; I accept that that occurred in August. In

my opinion, neither McNahon nor Andersen clearly remembered the

circumstances in which It was produced, but its existence is

another reason for my rejection of Andersen's story about

McMahon's purpose in asking for figures constituting projections

for the Cairns store; I think McMahon wanted this third document

for the same reasons as those which caused him to ask for the

figures of 24 July. It is unlikely that such a document would

have been produced merely to put the bank's mlnd at rest.

On the 8 August 1984, Jones, Andersen and McMahon met

for lunch on the Gold Coast, but there is, oddly, no evidence of

any discusslon about the proposal McMahon had signed on 23 July.

On 10 August, McMahon and Andersen met again and Andersen told

I4cMahon that he franchisee of an Alan Jones tore at

Woolloongabba had withdrawn and received his money back. It is

part of the applicant's case that the respondent made	a promise to
the applicant that it could do the same.	It appears to me that
there is no substance in that, legally; the alleged promise	was

neither part of any contract, nor a representation of any existing

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fact.

On 23 August 1984, the respondent, on whose behalf

Andersen signed, and Enterprises, on whose behalf McMahon signed, agreed in writing "regarding the terms and conditions listed below of the purchase of four Alan Jones Pit Stop franchises from the

Alan Jones Corporation". The agreement was along the	lines of the
proposal signed by McMahon on 23	July, i.e. it related to Cairns,

Townsville, Mackay and Rockhampton and contemplated a franchise

"premium" of $70,000 for each store. It was expressed to be

"conditional upon Max J. McMahon Enterprises exercising its rights

under this agreement by February 28th, 1986". It seems clearly

enough to have been void for lack of consideration.

On 21 August 1984, Enterprises and the first respondent entered into a written agreement under whlch Enterprises agreed to

take a franchise of a store to	be established at Cairns.	It does
not appear to	me that the terms of the agreement need to	be
mentioned beyond saying that	it gave the rlght to use	the name

"Alan Jones Pit-Stop" exclusively at Cairns, and to assistance	in
$5,000 and that was made.

training and management; also, it required an immediate payment of

Andersen says, and I accept, that in the following month

(September 19841, Andersen and McMahon went o Cairns to examine posslble sites for the store. Late in 1984, perhaps in December,

acI4ahon had some concern about the financial condition of the

first respondent. He told Jones that it had been ascertained that

the company had only $2 paid-up capital. He was reassured by

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Jones. McMahon also read in a mercantile journal (Dunn and

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Bradstreet) an entry which led him to think that the first

respondent had not paid a debt due to a glass merchant, and again

was reassured on that score. Nothing flowed directly from these

conversations concerning the first respondent’s financial

position, but they foreshadowed some later events referred to

below. ’ .

There is another incompletely-explained gap in the story

at this point. It appears that there were some inconclusive

dealings with the Kern Corporation Ltd, a well-known developer,

about leasing premises from that company. But whatever its cause,

the delay assists the respondents, as making the applicant’s case

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that the events of 1984 caused it to go into the venture seem less	!.
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probable.	I ’ I .

In March or April 1985, McMahon told a Mr and Mrs

Matchett, with whom he had been connected in his real estate

business, that he proposed to open an Alan Jones franchise in

North Queensland; they expressed interest. McMahon had in mind

bringing them Into the venture. About that time, McMahon’s

accountant, Mr K.W.C. Garvey, began to examine the possibility of

Mcwahon‘s taking a franchise for the Alan Jones store at

Woolloongabba, which had been opened in the preceding August.

However, the price asked ($150,000 franchlse fee) was thought by

McMahon to be excessive. McMahon went to Cairns and examined the

proposed site of the store there (Martyn Street) and decided	to go
ahead with that proposal.	He visited Cairns, on that occasion,

with Andersen and Matchett, when it was arranged that the first

respondent would take a lease of the property in question. On 30

May 1985, "heads of agreement" between Andersen, Matchett and

McMahon were prepared, apparently relating to the then proposed Woolloongabba franchise, but that document was never signed.

On 1 June 1985, Matchett phoned and told either McMahon or MrS McMahon that his accountants, Messrs Coopers and Lybrand, had doubts about the first respondent's financial ability to

discharge its obligations under a franchise agreement. Andersen,

when told	about this, took "absolute umbrage" and said in effect
that the first respondent	was financially sound. The information

was enough, however, to frighten off the Matchetts. McMahon

apparently regarded them as belng excessively cautious and did not

follow them out. About this time, McMahon told his accountant,

Garvey, that he proposed to go into a franchise store in Cairns

and showed him "some projections that he had received". It is an oddity of the case, and a dlfficulty for the applicant, that

I Garvey agreed to come into the venture almost straight away, with
no adequate investigatlon.

Andersen says that there financial difficulties in June

1985, but there was an "equity partner" coming in. That was

apparently one Tony Jeans, who was talking about paying $460,000 for 30% of the first respondent. McMahon asked Garvey, about the same time, to have a credit check done on the first respondent.

He was informed of the results; apparently they did not alarm him.

Early in June, the first respondent received a letter

dated 28 May 1985 from Touche Ross and Co., accountants,. who had

been studying the company's finances. Mr M.C. Maughan, of that . I firm, gave evidence that he began to act for the first respondent

in April 1984 and was the author of the letter, which gave a grim

picture of the first respondent's position; some detail of it must

be given.

The Touche results for the nine months ended ROSS letter dealt with the first respondent's

31 March 1985 and said they

showed a loss of $191,490.40 to that date, not including possible

bad debts of $42,111. It expressed a view that the probable

deficit - i.e. excess of liabillties over assets - was

$217,019.16, the assets being valued on the basis that the

corporation was	a	going concern. As to trade creditors, $21,665
had been due for	120 days, and $47,136 for 90 days; a total of

$289,376 was due	to trade creditors, only $106,245 having been due
for 30 days or less.	In addltion, sales tax of $17,258.62 was

outstanding, and an amount of $25,000 by way of loan advanced

pursuant to a letter of credit was due; Touche Ross understood it

was presently due. The accountants saw the immediate cash flow

requirements as totalling $284,757 and thought that	at	least
$170,000 of that sum must	be in the bank account prior to 31 May,

with the rest in no later than 21 June. They referred to a

"liquidity crisls", to the fact that minimal capital had been contributed by the proprietors, and raised questions as to the

directors' llability under the Companies Code (Qld). They pointed	.
out that:

"In summary the Code provides that where a company ,

incurs debts which it can not reasonably expect to

pay as and when those debts would normally ,fall

due then the payment of those debts may become the

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responsibility of the directors c mpany." he f , .

The respondent could not continue trading, then the deficit would be	accountants	expressed	the	opinion	that	if	the	first	. .
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substantially more than that shown in the balance sheet. The

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latter figure uncollectable debtors, written off leasehold improvements, and	was	$174,908, but	Touche Ross suggested	that	. .	..
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refundable	drawings	should	be	added	making	a total of $303,008.	I
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Maughan	elaborately	w s	cross-examined	about	this	1 ;
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document. In the light	of	the	first	respondent's	subsequent	l
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history, the alarm it expressed	was, in my opinion, reasonably	!
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justified. Although Andersen did	not, I think, receive a copy of	j

the letter

until reassurance about the first respondent's financial posltion, I am	somewhat	later	than	when	he	gave	McMahon	a	!	,:
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satisfied that he was well aware of the serlousness of the first	!
respondent's problems during the month leading	up to the crisis of
which the letter	speaks; he was in frequent touch with Touche

ROSS. Maughan gave evidence that unpald suppliers, concerned

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about the first respondent's solvency, used call Maughan and so he

"would have spoken	to Mr Andersen ... from time to tlme."	He also	L ,
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said that he discussed the first respondent's critical financial

position with Jones in late May 1985, but could not recall

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discussing that with Andersen because Maughan "would have assumed

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that he knew or he certainly did know because of the number of . ..

creditors and people that were pressmg for payment."

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It ensured the solvency of the company. In was suggested in evidence that Jones would have / ,

fact, he did not and on 4

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June (a week after the Touche ROSS letter was written) and

prompted no doubt by the sort of information which was contained in it, he decided that he would take no shareholding interest in

the company. p .

It is going ahead somewhat to recount the subsequent

financial history of the first respondent: in brief, in September

1985 a provisional liquldator was appointed, and then a scheme of

arrangement was entered into. The evidence before me was that
creditors would probably receive between 20 and 30 cents in the
dollar - a surprisingly good outcome, in view of the position as

set out in the Touche ROSS letter.

It attribute the first respondent's financial difflculties in part to	should be mentioned that Haughan was inclined to
"overheads". He spoke	of a $300,000 pleasure boat and expensive

motor vehicles. Whether or not the picture suggested by that

evidence - of a company which was being devastated by having to pay for high living on the part of the directors - is a complete one, it seems plain enough that on any test, the first respondent

was handsomely insolvent by June 1985. It is common ground that

its financial posltion then concerned McMahon and that he

discussed that sub~ect wlth Andersen. I am satisfied that had Mcl.Iahon been told the truth he would have proceeded no further,

and that his being reassured by Andersen was a cause of the Cairns

project proceeding. The way in which the reassurance was conveyed

was unclear from the evidence, but there can	be	no doubt that
there was one.

A considerable amount of evidence, it should be added,

.-

19.

was	directed to the precise financial position of the first
respondent in mid-1985.	None of it made me doubt the substantial

accuracy of Maughan's assessment as at 28 May 1985; in particular Maughan's subsequent retraction of his then opinion, in a report prepared for the purposes of this case, did not do so. I thought the report was rather slanted. A number of passages in it demonstrate this, but for present purposes it is enough to quote two.

"4.12 I wrote a letter dated 1985 May 29

Corporat on's concerning the fina cial

posi tlon. This letter was tabled at the

meetlng of directors on 11 June 1985. This

was the first ime that the contents would

have	been	known	to the	directors.	This	date
is	after	the	date	on which	t e	$45,000

balance of the 'premlum sum' was paid.

4.13 From professional my involvement with both

the Corporation and Alan Jones, and from my

involvement in the negotiations relating to

the sale of Alan Jone's [sic] shares in the

Corporatlon for a consideration dlscussed in

the sum of approximately $150,000, I say

that I know of no occasion when Alan Jones

would have held any doubts the to as

long-term financial the viability of

Corporation."

Insofar a s these paragraphs suggest that the letter of

28 may 1985 (the date in the report is wrong) must have been news to the directors, that was true only in the sense that they were	,
, .
not necessarily aware of the precise details.	It is clear from

Maughan's own oral evidence that well before 11 June 1985 the

financial position was becomlng perilous and this	was discussed
with directors.

Garvey discussed with McHahon, early in June, Garvey's

i

i

taking an interest rn the proposed shop at Cairns, as mentioned

I '

above. There was a meeting on 3 June between Garvey, McMahon and Andersen, at which a proposal that Garvey come in was discussed

and there was a suggestion that a	new franchise agreement be made
with a company in which Garvey would have	an interest. Either on
that day	or within a few days, NcMahon managed to persuade

Andersen to reduce the price of the franchise by $20,000, to

$50,000. On 4 June 1985, Enterprises paid the balance of $45,000 '.

by a cheque whlch was honoured the following day.

I !

On or about 11 June 1985, a trust deed was drawn up by

solicitors. At about the same time, the applicant was substituted !~

for Enterprises as the party to hold the franchise. A great deal

of evrdence was directed to the subject of precisely how that was	!.'
done, but it seems clear enough that the rather crude method	was

adopted of removing the last page of the "old" agreement and

, -

insertrny a new page with the appllcant's	name as franchisee. The	I >
r i
date was not altered.

These events glve rise to a curious point. The first	,
1 -
. J

franchise agreement made by Enterprises on 27 August 1984 was not,

of course, induced by Andersen's misleading statement concerning I '

the financial position of the first respondent; that statement

was not made until early June in the following year. I am

satisfied, however, that the applicant's decision to become, a _ .

party to the agreement on or about	11 June 1985 was caused, in	, , .
!
part,	by	Andersen's having reassured McMahon about the first

respondent's financial position. No-one would have b en

interested in although In business for only a short time, appeared to be paying for a franchise from a company which,>

..

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21.

i

..

on the , I .

brink of financial collapse.

I-

of course, the first respondent's having entered into

the new agreement with NcMahon NcRae Pty Ltd (the applicant)

~. .

supplanting that entered into in August	1984 with Enterprises was,
in a sense, a favour to Enterprises; the first respondent had	no
obligation to release Enterprises from the agreement	- or for that

matter, to reduce the franchise payment by $20,000. The fact

remains that a new agreement - was made with a new franchisee; it,

as the applicant, 1 s entitled (in my opinion) to r e l y upon

Andersen's misleading statement to McMahon about the first

respondent's financlal posltion as a cause of its undertaklng the

obligations imposed by the new franchlse agreement. It is not

fatal to the applicant's case, on that point, that McMahon was not acting for it when the misleading statement was made; what has to

be shown is a substantial causal connection between the statement

and the applicant's loss and that has been shown.

There was also	some analysis, at the hearing, of the	L .
. .

relationship between the applicant and Enterprises and discussion

of the question whether	(for example), since the applicant did not	. .
pay the $50,000,	it can sue the respondents as If it had	on,e so.

In my opinion the position is not in doubt: it was necessarily

I ' ,

I .-

implicit, when the applicant agreed t o replace Enterprises as the .

,:  .

franchisee, that it did so on the basis that it would reimburse

4 _.

Enterprises	for	the	xpenditures	incurred	to	acquire	the
franchise.

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22.

That follows from the ordinary "goes without saying"

rule, and is also assisted by the doctrine exemplified by Tulk v.

Moxhay (1848) 41 E.R. 1143 and Waring v. ward (1802) 32 E.R. 136

that one must take with	a benefit those burdens which attach to
it.

Were the statements misleading?

I have, as stated above, come to the conclusion ,that

Andersen and not Mcnahon supplied the figures in the document

dated 24 July 1984 to which I have referred. It showed sales

beginning at $50,000 for the first month (July) rising to a peak of $80,000 in December and finishing at $70,000 in June. It also asserted that there should be a gross profit of 28%.

At the time when the events in question occurred, s.51A of the Act, dealing expressly with representations	as to future
matters, had not been enacted.	It is clear, nevertheless, that
such projections as these may be proscribed by s.52.	The way in

which the case was put forward was not that the projections were

not fulfilled by events, but that Anderson had no reasonable basis

for them.

A direct path to that conclusion is open: I am

satisfied that the line of defence put forward by Andersen -

namely that the figures were set out by McMahon - was advanced

simply because Andersen knew the projections could not be

defended. 8 .

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. . . ..

23.   i:

On the date when the figures were given, there were

three Alan Jones Pit-Stop stores owned by franchisees or by the first respondent, namely those at Bundall, at Springwood and at

Kirra. Mr J.G. Briggs, a director of a company which ran the

Springwood store, was called. His evidence was that gross monthly

sales averaged approximately $40,000 for the first few months.

That appears to be rather an understatement; in the first full !

month, June	1984, the takings were under $40,000, but from then
until January 1985 they consistently exceeded	$40,000, the highest
figure being $53,297.

As to the other two stores, Bundall averaged well under

$50,000 for the twelve months from August 1983 to July 1984

inclusive, the highest month being $61,337 in February 1984;

Klrra's figures were $20,346 In April 1984, $35,934 in Hay and

$40,006 in June.

One difficulty in relylng upon these figures when making

projections must have been, of course, that the three stores
mentloned are geographically very remote from Cairns and there is

nothing to suggest that results achieved in South Queensland would

have been a good guide to those in Cairns, apparently already well

supplied wlth would, perhaps, have regarded the results of trading in South tyre stores. But a prospective new franchisee

I . .

Queensland as some indication of the attractlveness to the publlc of the "Alan Jones Pit-Stop'' name and of any other attributes of

the franchised shops conducted in accordance with the first

respondent's Whether Andersen, in giving the flgures set out advice. ' .

..

.l . :

2 4 .

in the

document of 24 July, relied upon the results of existing stores or

upon his judgment or on other matters, it was his obligation not

to advance these projections without a reasonable basis. It is my !

opinion that he did just that. Of course, the projected figures

were not achieved, but it is not that which makes them misleading,

but rather their having been plucked out of the air.

A second complaint made is that the estimated gross

profit of 28% was overstated. By "gross profit" is simply meant

the difference between the purchase price and selling price of the

goods. Neither 1 s fixed: the owner of a tyre store, whether by

taking advantage of bulk-buying by a chain, or by his own

negotiations, may favourably than other competing stores. be able to obtain discounts and buy more

As to the sales part of

I

the operation, of course	the public also demands dlscounts.	For
those reasons, a statement of percentage gross profit	is	of

llmited value; the percentage achieved depends upon	the matters
just mentioned, and more generally upon management policy:	it is

obviously possible to raise gross profit percentage by selling at

a

higher price, perhaps at the cost of achieving only a low

turnover.

All that having been said, there was in the evidence a

, .

foundation for estimated at an unreasonably high figure. For the year ended a finding that the gross profit stated was

30

June 1985, the Kirra store achieved only 23.6% gross profit, the Woolloongabba store 24 .6% and the Beenleigh store 25%. These figures relate, of course, to the financial year succeeding the I '

I

I .       . .

25.

date of the representation. However, in the absence of any evidence that trading conditions were markedly dissimilar in the previous year, an inference is open that a prediction of ,28% had no solid foundation.

According to Naughan information available to him (para.5.1 of his first report), the

was that 28% was the "standard figure

used by the Corporation for its	own internal budgeting purposes".
It turned out when Itaughan gave oral evidence that the statement was rather inaccurate.	He was asked whether there was

any document which disclosed that figure, and replied in the

affirmative. When then asked what the document was, he answered:

"From time toime, I saw reports prepared as

budgets f o r people ntering into, or respect - t o

supplied be to respective franchisees which ...

showed a gross profit rate of 28 per cent."

Apparently, all Maughan meant by "internal budgeting

purposes" was that similar projections had been made to other

prospective franchisees. As counsel pointed out, the reference to

"internal budgeting purposes" was misleading. In fact, no

internal document was produced to justify the prediction made to L ..

McMahon and, it appears, to others. I conclude that it was,

again, simply plucked out of the air.

I shall not attempt to analyse the accuracy of the . .

figures given for expenses, for I am satisfied that the monthly

turnover and gross profit projections were misleading.

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26.

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I :

It is unnecessary to say' more than has been said above about the misleading quality of Andersen's reassurance concerning	I	,
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the first respondent's financial position in early June	1985; the	..
!

first respondent's position was then desperate, but Andersen gave I

impression.	McMahon a contrary	8 .
L
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I have thus concluded that the written projection

I -

supplied by Andersen in July 1984 was misleading, as was his

statement about the first respondent's financial position in June

1985.   . .

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, L

i

As to the former, the applicant's case that	it entered	1 .
I-

into the franchise agreement in reliance upon the figures is less	-.
I

than overwhelming. Its having done so is to be treated as a I

decision made by both McMahon and Garvey.

As to McMahon, it is curious that he did not attempt to obtain from the flrst respondent, in the ample period of time

available to hlm, the results achieved by the	Alan Jones stores
which were opened before that in Cairns. One would have expected
that,	if he were concerned as to the likely returns from the
Cairns stores, he would have made It his business to find	out how

the Bundall, Springwood and Kirra stores had fared. The

Woolloongabba store was a special case. ..

It presented on 2 4 July 1984 were, on its case, given to McMahon very also goes against he applicant hat figures

I .

shortly after they were asked for and he did not trouble to

inquire by what means they had been derived.

The conclusion is open on these facts that HcMahon did not really take any notice of the July 1984 figures, realising

that no one could produce any accurate prognosis with respect to

the health of the Cairns business, and that the applicant simply	..
had to take a chance. The tendency to adopt that conclusion must be bolstered by consideration of Garvey's position; he seems to
have engaged	in nothing but the most cursory analysis of the

prospects before committing himself to take part in the project.

Not wlthout some doubt, I have, however, concluded that the presentation of the July 1984 figures was a significant cause

i

applicant's questlon. Although McMahon was by no means overborne by Andersen, having entered into the transaction in

of	the
I have derived the unpression that	he was inclined to be strongly

influenced by Andersen's opinlon, as he regarded Andersen as a

L i

I..
, .

very intelligent and apparently capable person. He	was, in short,
inclined to give too much weight to what Andersen said and	I think
his confldence in Andersen affected Garvey's attitude.	I believe
the applicant assumed Andersen's predictlon to have some "adequate
foundation" (Global Sportsman Pty Ltd	v. I4irror Newspapers Pty Ltd
(1984) 2 F.C.R.	82 at p.881, when It had none.

The applicant has less difficulty, on the issue of

causation, with Andersen's assurance about the first respondent's

financial position. Although McI4ahon suspected that the first

respondent might have at least temporary financial difficulties, he had, I am sure, no idea that it was in a financia,l crisis. Had

I .

I .

i

!

he	become	aware	of	the	Touche	ROSS opinion	about	the	first	.	,
I .

respondent's prospects, there would have been no question of the

applicant's	entering	into	the	venture.	It is	true, as was	put	,	,:
I,

forward on behalf of the first respondent, that the form of	:I
, -' , .
I.. .

franchise agreement used oes not in terms oblige the first , I

i .

respondent buy contemplates that franchisees may be able	o	goods	for	franchisees;	but	it	plainly	i
I ,

to take advantage of the

greater buylng contains a promise by the first respondent: strength of the first respondent. Clause 6.6

" t o assist FRANCHISEE to obtain the benefit of

bulk-buying discounts on PRODUCTS resulting from

bulk-buying of PRODUCTS by COMPANY".

More generally, interested in opening a tyre store under an agreement with no franchisee would have been likely to be

a

franchisor which was insolvent and required an immediate injection

of substantial cash to have any chance of survival.

I have therefore concluded that he applicant is

entitled to succeed; both the figures produced with the letter of

24 July 1984 and the assurance as to the first respondent's

financial position in June 1985 were misleading and were causes of

the applicant's loss, the extent of which must now be discussed.

Quantum

In my opinion, the franchise was worthless. In

considering its value, one should assume an informed buyer - i.e.

one not misled and I do not think such a buyer would have paid . I .

.\

,

3 .->

l

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2 9 .   ..~

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anything for a franchise granted by such a company as was the	.
subject of the Touche	ROSS letter. One approach, then, to the

, .

applicant's	damages is to award the franchise fee	($50,000) and
interest thereon. The applicant's claim	was	not, however, put

forward in the franchise fee, three other items:	that	way.	It	sought	an award	to	include,	as well as	.-
I :
I . .  I ?

Expenditure on leasehold improvements $13,500

, A

, I

Operating losses $139,806

Interest on debts owing to "partners'" companies $41,511. i

On the applicant's case, it is entitled to be awarded ,

those sums plus	the	franchise	fee,	making	a total	of	over	S	'
1

$250,000; the applicant concedes that an allowance should be made

for the value of the	goodwill of the	business	in	the	sum	of	8 -
$6,000.
* ,

The respondents would have	me assess damages along the	!
I I .
. ~ .

same lines, but reaching quite a different result. That is, the I .

respondents' submissions allowed, but put forward that they were much less than claimed	conceded	that	operating	losses should	be	! ,
i '
1..

by

i _ /

the applicant, when contended that nothing should be allowed	properly	assessed.	The	r spondents	also	, _
h...
r .

for interest on debts due	:.:
r

to the partners' companies, that the value of the business to be

I

taken off is not $6,000 (as the applicant contends) but $100,000, .

and	that	the	benefit	of	tax	losses	should be taken into account.	! ,
l .J

The applicant engaged one Norbert Calabro, a chartered i ' i

accountant with some experience in this sort of work, to prepare	r -
t
!
estimates of the damages and for other purposes. Although	I have
not, in the result, accepted Calabro's	figures,, I have found his
reports useful .

In Calabro's second report dated 10 December 1987, he

has calculated the loss as set out above - i.e. as including the

franchise fee ($50,000), the leasehold improvements ($13,500), the

operating losses "partners' companies" ($47,577); in addition he has added legal ($139,806) and interest on debts owing to

expenses in connection with the matter, of $32,023.

Mr Gibson for the applicant did not press the claim for legal expenses. It is necessary, then,	to	deal with the other
four heads of claim only.

1.   Franchise Fee

1 have already said th .at the f r anchise was worthless and

briefly explained why. It should be added that my opinion on the

value of the franchise is in accordance with Calabro's evidence

and that I do not believe that, on balance, the applicant obtained

any advantage from starting its store under the auspices of the

first respondent. ' .

On one view, however, nothing should be allowed for the franchise fee, because Maughan would have	me accept that the
business which has been bullt	up has a value of $100,000, more

franchise fee. balanci g the than , .

I

I	..
I.

,

'I . . . - . . ;.

31.

*:

I

If, as the respondents argue, the value of the business should be taken into account in their favour, :

I
I would not assess
L

it as being $100,000. One of the difficulties in estimating its

value as at the date of trial was that the applicant had no '. .

security of accountant called on behalf of the respondents, said in effect	tenure.	When	asked	about	this,	Mr R.J.F. Burns,	an	I.	.
:,

that if there were no lease and no prospect of a lease, then "any

business would be in dlre straits". The evidence was that the

applicant had arrangement with their proprietor. On in practice held the premises under an oral

4 June 1985, the first

i ,

respondent signed a document by which it "agreeds [sic] to

sublease" the premises in question to Enterprises (not to the

that Mcplahon said that "Alan Jones Corporation	document	contained	no terms	or	conditions.	.I
I '

applicant) but

U.S.A. or Alan Jones

Incorporated U.S.A."	had an option to buy the freehold. Calabro
said that the absence of	a lease "could go close to obliterating"

.. i,

any goodwill in the business and that seems to me to be right.	! .
.
I .

On the other business was advertised for sale hand, there was evidence that in 1986 the ' , I .

at $120,000. An offer of $70,000

_.

was received, but that was on the basis that the applicant would t .

discharge liabilities for leased plant so that, said Garvey, "we

would have of 1987 the profits were running at a monthly rate equivalent to	ended	wlth	zilch".	Calabro	suggested	that	at	the	end	I	S
L 1	. .
. A
...I
; :

about $20,000 per year, which he thought would give the business a .

I .

value of $40,000 - $50,000. Were it not for the fact that there was no lease nor assurance of	i
!

a lease, I should have thought those	i
, I
I '

figures to be too low.	However, as any purchaser would have had	L
; .;
to buy on the assumption that the business could be required to be	,	l .'
!
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i
i
i

closed and Calabro's estimate rather than that of Aaughan; the latter seems relocated at any time, I am inclined to accept.

_,

entirely to ignore the difficulty about occupancy of the premises.

I have come to the conclusion, however, that nothing L .

should be allowed against the franchlse fee for the value of the

business. Such value as it has is unrelated to the franchise fee;

on balance, as I have said, the applicant got nothing for the

franchise fee. The value of the business has been brought about

by the efforts of the applicant and those associated with it in

turning it around from the position reached in the 1985/86 year when there were losses of over $100,000, to a state in which it

was earning	a modest profit. They have, in my opinion, learnt
some lessons about the way to conduct such	a business and in

partlcular have come to appreciate that it can survive only by

encouraging customers to bring mechanical work, rather than merely

selling tyres. Maughan sought to use that against the applicant, saying that it had reached a satisfactory gross profit rate (up to

29.65%	for the period ending	31 October 1987) by eliminating
inefficiencies.	It seems clear, on the evidence, that	a more

!.

r .

important factor was a change in the emphasis of the business. I

prefer to take into	account, as a matter bearing on the assessment
of damages for	loss of earnings, the fact that the business has
become a modestly profitable one	- a circumstance which the

!:

I : .

applicant may derive advantage from by continuing to conduct	he
business or by selling it.

In the result, then, I propose to allow the $50,000

franchise fee and make no allowance for the value of the business, l .I

_. _ .

under this heading.

2. $139,806 Trading Losses

The Court is not bound by the first respondent's

concession about operating losses. The problem of damages for

such losses was discussed by Wilcox J. in Collins Marrickville Pty

- Ltd v. Henjo Investments Pty Ltd (1987) 72 A.L.R. 601 and (1987)

A.T.P.R. 40-782 and 40-822 - on appeal (1988) 79 A.L.R. 83.

There, the applicant bought a restaurant business on a

representation as to its seating capacity which was held to be

misleading; in that respect, the judgment of Wilcox J. was upheld in the Full Court. Wilcox J. also, in a separate hearing, dealt

with the question of damages ((1987) A.T.P.R. 40-822) and came to

I .

the conclusion that the proper order was one for avoidance of the

contract and other ancillary relief; the Full Court disagreed with

that and remitted the case for assessment of damages. The Full

Court did not, however, discuss in detail the views	of Wilcox J.	>	.
l '
as to the measure of damages.

The question which was agitated in the Collins

Marrickville case is of particular importance here, where the	L ,
respondent has urged with some cogency the view that in part the
I..
losses were due to inexperience and the like.

To summarize the rather lengthy passage in which Wilcox

J. discussed the question, his Honour said it was argued before him that the applicant was entitled to recover "damages only in

respect of those losses which relate directly to the subject of

:e , f

:  ..

misrepresentations". He accepted that, subject to one "possible :

reservation", holding that the authorities supported the view that

i

only losses flowing directly from the misrepresentation were	I	?
.. , .
allowable and not losses "occasioned by factors in connection with	. - I
I '

which there was no misrepresentation".

T

I 2

His Honour appeared to be of the view that the allowance i ,

of ull

tradlng attributable to there	losses	in	previous	cases	cited	by	him	was	I :
l

being, in those cases, "misrepresentations	I
, .

related to matters fundamental to the operation of the business".

r

The possible reservation Honour thought that perhaps damage "stemming from a latent defect I have mentioned was that his

. .,

I.  

..

sold misrepresentation upon that matter", but is recoverable ven if there is no

in the thing

he dld not express a

concluded view.	I.
1 '.

In the result, his Honour allowed 10% of trading losses

incurred for a llmited perlod only, the 10% representing the

t

extent to whlch the losses were attributable to the question	of	:l
: :

seating capacity.
The Full court accepted (pp.99, whom Burchett J. agreed) as correct the view of Wllcox	100 per Lockhart J. with

* ,
. .

J. that

trading losses should not	be allowed to	the extent that they were	.	c .
. ,

caused by factors having nothing to	do with misrepresentations as	, I
i
m .
to seating capacity. The	Court also declined to interfere with	i
-

the view of	Wilcox J. that	damages	representing	trading	losses	I .
!
I ,

should be awarded for only part of the trading period (p.104).

i
I. .

.-. i

It is not perfectly clear to what extent the Full Court

should be taken as having approved the statements of principle

made by Wilcox J.; the relevant views were treated as "findings"

in the reasons of Lockhart

J. (p.100).

To go back to

that damages for misrepresentation are based on the difference
between price and value: Gates v. The City Mutual Life Assurance

first principles, the ordinary rule is

Society Limited (1986) 160 C.L.R. 1 at p.12. That is, if by

misrepresentation an applicant is induced to buy a property, he

can recover the difference between what he has paid for it and its

true value. That difference does not necessarily reflect the

misrepresentation in any direct way. If, as in the Collins

Marrickville case, the misrepresentation is as to one aspect of

the business, the applicant does not ( a s I understand the rule)

recover merely the part of the difference in value which is

attributable to that representation turning out to be false. In

none of the High Court misrepresentation cases in which the matter

has been discussed is there any trace of such	a doctrine. Of
course, the orthodox rule can operate in favour of a respondent,
if the	applicant has, although misled, still got value for his
money.

To illustrate the dlfficulty which appears to arise

here, suppose an applicant, induced by a misrepresentation, buys a

business, runs it for a short time making heavy losses and then

resells it. Assuming the resale price represents the fair value

at the time of the applicant's purchase, on the orthodox measure

-

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36.

1

i '	the applicant would recover the difference between.the two prices,
not merely such part of it as was referable to the
misrepresentation. Why should a different rule apply to recovery
of his trading losses?

TO apply the same line of reasoning here, it may be that

acceptance of the view expressed in the Collins Harrickville case

would dictate a reduction in the amount of trading losses

available. The respondents in that connection were: most weighty matters relied upon by the

1.    The inexperience of Mcmahon and Garvey. Neither of them

knew anything of consequence about yres or, in

particular, about selling them. The impression I have

gained from the evidence is that the field is a very

competitive one, with no shortage of outlets. The view I .c

!

is certainly open that he prospect of novices . .

successfully starting a new business in an area already

well supplied with tyre stores would not be high. On

the other hand, McMahon and Garvey were given to

understand that the first respondent would give them

substantial help in establishing the business on a sound

footlng.

2.    The geographical separation of the management from the

store caused difficulties. No doubt Garvey and McMahon

hoped that the manager or succession of managers engaged

to run the store would have reduced the disadvantage

arising from the fact that they both live a long way ..

!

from Cairns. But in my opinion, it would have been much	.
easier for a Cairns resident to start such a business;

one aspect of this was, of course, the additional

travelling expenses incurred.

3 . General inefficiency. Mr Maughan, referred to above,

has in one of his reports suggested an adjustment in

favour of the respondents of $42,188 for management

inefficiencies made up as follows:

Advertising	$11,027
Freight and Cartage	$3,159
Motor Vehicle Expenses	$4,208
Telephone	$4,721
Travelling	$3,660
Wages	$15,407.

Maughan also contended that management inefficlency

requires another substantial adjustment, namely taking
gross profit to a notional 28%, a figure he says should

have been achieved.

An answer of a general klnd which may be made to these

contentions is that the wrongdoer takes hzs victim	as he finds
him.

An applicant in this sort of case cannot recover losses

due to lack of attention to the business or reckless wastage. In
my opinion, however, there was in this case nothing of that sort

proved. I am satisfied that there was an augmentation of the

losses on account of each of the three factors I have mentioned -

I.

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38.

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precisely how much lt is imposslble to assess with any pretence to

accuracy. But the Collins Marrickville case suggests, in my

.

opinion, that an allowance should be made in favour of the

respondents for those matters, none of them connected with the

misleading conduct I have found against the respondents, nor, <- ,,

indeed, with any of the other misleading conduct which was . j

alleged. . 9 .

8         .

Calabro's second estimate of trading losses (in exhibit

11) takes the trading results up to 31 October 1987, by which time

the business had become profitable. His total of $139,806 may be compared with the figure Maughan gives of $89,135 up to 30 April

1987. The difference is not merely with respect to times; Maughan

extracts from the figures items for interest, leasing	costs, legal
costs and travelling and adds depreciation.

It is, as It seems to me, unnecessary to explain my

views on all these aspects, but some indication of them should be

given.

maughan makes the same point about leasing costs and i
I ,

about interest, namely that the applicant was under-capitalised.	! '
. _i
L do not see that as having any substance.	It is common enough

I /

for small to medium-sized businesses, these days, to have very

small share capital and to use a combination of moneys advanced by -

>

I .

those interested in the company and outside finance; that	is what	I
:
I ,

occurred here. As to legal costs, it is my opinion that Maughan's

i

contention is correct. I understand the costs in question relate i

to the present litigation. As to travelling expenses - a ,

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39. - -

substantial sum In each year - I am of opinion that an allowance	. ^
has to be made in favour of the respondents.

Maughan (in exhibit 2 4 ) provided a second working of the

losses	claimed, taking into account matters other than those
mentioned in his first account of the losses,	referred to above.
Maughan reduced them to $55,500, from $89,135.	I have taken into

account the arguments in favour of these further adjustments, but

do	not find it necessary to discuss them in detail. Particular
reference should, however,	be made to the fact that an adjustment

of gross profit o 28% is one of the lements in thls

recalculation.	As I have explained, in my opinion the improvement
in the gross profit margin was,	at least in substantial part, due

to a change in the applicant’s mode of operation and not merely to

eliminating inefficiency.

It was also contended on behalf of the respondents that

an allowance should be made for the benefit of tax losses. I

gather from Garvey‘s evidence that what happened was that the

losses made by the applicant were “used“ by distrlbuting to the

applicant, as beneficiary under another trust, profits made by

that trust. However, not all the losses have been used	up in that
way and the applicant may hope	to take future advantage of them.

However, both as to the losses which have been used and I

as to those which have not, the matter is complicated by the

circumstance that it is not the applicant itself which used or

hopes to use the losses, but other entities. As to losses already ,

used, as I have explained, distributions have been made to the

...

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applicant with the (presumed) result that the trustee that made

those distributions was liable to pay tax on the relevant income

neither under	s.99 nor	under s.99A of the Income Tax Assessment
Act	- 1936, for the reason that there	was, in respect of that

income, a present entitled beneficiary under 5.97.	As to future
use of losses, presumably that will accrue	to the benefit, not of

the applicant itself, but of its beneficiaries. A further

complicating factor is, of course, that the benefits of tax losses

should not be taken into account to the extent that the relevant

damages are themselves taxable: Britlsh Transport Commission v.

Gourley [l9561 A.C. 185.

To extract a precise figure of tax benefit from this

complex of uncertainty is a task I have found impossible.	I have
nevertheless kept in mind the question of tax benefit from	losses

sustained, in fixing what I regard as a fair figure to compensate

the applicant for its trading losses. account other matters mentioned above, and in particular the I have also taken into

,. '

circumstances that the business has made some profits, that it has

some value and that matters unrelated to the representatlons ! .

complained of have been, in part, responsible for the losses.

In exhibit 2 4 , Maughan arrlves at a figure of $55,500 in

respect of operating losses. The figure on which I have fastened

is $60,000; although only sllghtly more, it is not really

comparable with Maughan's figure.

.

3 .   Leasehold Improvements

There is a degree of consensus between the accountants ,

r

on this issue.

The improvements which are either irrecoverable sum of $13,500 represents leashold

!

or only partially

recoverable on sale. Nevertheless, it seems to me wrong to make

4 .

.-
I .

separate allowance under this heading. Those improvements have no doubt been of use to the applicant in running the business; their

value has consistent with the approach taken above, of making no separate	not	been	totally	lost.	Further,	it	appears	to	me	I :
i :
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allowance for whatever value the business presently has, that no

~.

distinct allowance should be made for losses on leasehold

improvements.	..
I. .

Therefore, nothing will be allowed separately under this

heading.

4. Interest on Debts Owing to “Partners’ Companies”

The figure is said to be $41,511. Maughan’s criticism

of this allowance is that, as	I understand it, the partners’
companies had to Invest in something and they chose high risk
investment.

, . I

What In fact happened was that instead of producing

L .

positive returns, the buslness was making significant losses from

the start and had to be funded by loans from entities associated

with Mcmahon arrangement was made in respect of interest; although it was and Garvey. The evidence was that a specific

not

at arm's length, I am satisfied that interest is properly payable. . _ .

Section 51A of the Federal Court of Australia Act 1976 I ..

came into operation on 22 November 1984 and applies "in respect of

I

a cause of action that arises after the commencement of this

section". The applicant's cause of action arose after that date, because, although the first misleading statement was made earlier

than 22 November 1984, it did not affect the applicant until the

franchise agreement was made.

Section 51A requires the Court, unless good cause to the

contrary be shown,	in a case of this sort, to include	in the
judgment -

"(a) ... interest at such rate as the Court or the

Judge, as the case may be, thinks fit on the

whole or any part of the money for the whole

or any part of the period between the date

when the cause of actlon arose and the date

as of which judgment is entered; or

(b) without proceeding t o calculate interest in

accordance with paragraph (a), order that

there included be the in sum for which

judgment is given a lump sum in lieu of any

such interest."

....

Here, it is impracticable to act under (a), as to the $60,000, for no precise date can be fixed from which the interest should run. It appears to me a better course to act under (b). I propose to

make a lump sum award which is intended to compensate the

applicant in part for the lapse of time between the loss incurred

and the judgment. To do so will, as I see it, make .it

inappropriate to give any further award of interest. That sum

! 1 . '

43.

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wlll be $40,000.

It should be added that it was not disputed that

judgment, if any, should go against both the first and second

i

respondents - i.e. Andersen as well as the company: there is no

question of Andersen's not having been involved in the company's

I

of	contraventions	s.52.	)
Summary

1. The respondent Jones settled during the course of the hearing

and the application continued against the first and second
respondents only.

2.    Those respondents are liable under s.52 in respect of:

(i)    the figures in the document of 24 July 1984;

(ii)   the second respondent having reassured the applicant

about he first respondent's financial position

shortly before the applicant entered into a franchise

agreement with the first respondent.

3 . I assess damages in the sum of $150,000 made up of: ,

(i) $50,000 being the franchise fee;

(ii) $60,000 in respect of lost earnings:

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(iii) $40,000 interest. . . : , m .

There will be judgment for the applicant against the

first and second respondents in the sum of $150,000 with costs.

I certify that this and the 43

preceding pages are a true copy

the reasons of for judgment

herein of His Honour Mr.

Justice Pincus.

Associate

Dated 24 October 1988

Counsel for the applicant: Mr G.J. Gibson

Solicitors for the applicant: Rapp Hickey & Morgan

Counsel for the first and second

respondent:  Mr P.H. Morrison .

solicitors for the first and second

Macartney and Thynne respondents:

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