O'Connor v Roadrunner Mobile Video Pty Ltd
[2006] FMCA 150
•9 February 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| O’CONNOR v ROADRUNNER MOBILE VIDEO PTY LTD & ORS | [2006] FMCA 150 |
| TRADE PRACTICES − Franchise agreement − failure to comply with franchising code − whether contravention by failure to comply with prescribed industry code − whether director knowingly involved in contravention by failure to comply with prescribed industry code – whether misrepresentations made concerning franchise − whether reliance on misrepresentations − whether damages caused by breach of franchising code. |
| Trade Practices Act 1976 (Cth) s.51AD,52,75B Trade Practices (Industry Codes-Franchising) Regulations 1998 (Cth) |
| Wardley Australia Limited v Western Australian [1992] 175 CLR 514 Yorke v Lucas (1985) 158 CLR 661 at 670 Thompson v Ice Creameries of Australia Pty Ltd (1998) ATPR 41-611 |
| Applicants: | CHRIS AND CHRISTINE O’CONNOR |
| Respondent: | ROADRUNNER MOBILE VIDEO PTY LTD & ORS |
| File Number: | MLG 829 of 2002 |
| Judgment of: | Phipps FM |
| Hearing dates: | 14 & 15 April 2005 |
| Last Submission: | 8 August 2005 |
| Delivered at: | Melbourne |
| Delivered on: | 9 February 2006 |
REPRESENTATION
| Counsel for the Applicant: | Mr J Catlin |
| The First Respondent appearing in person |
| The Second Respondent appearing in person |
| Counsel for the Third and Forth Respondent: | Mr Broadfoot |
| Solicitors for the Third and Forth Respondent: | Daly & Kernahan |
ORDERS
That the first and second respondent’s pay the applicant’s damages in the amount of $60,126.00 (including $20,000.00 by way of interest).
The application against the third and fourth respondent’s is dismissed.
The first and second respondent’s pay the applicant’s costs including reserved costs to be taxed in accordance with the Federal Court Rules.
The first and second respondent’s pay the third and fourth respondent’s costs fixed at $16,222.00.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 829 of 2002
| CHRIS & CHRISTINE O’CONNOR |
Applicant
And
| ROADRUNNER MOBILE VIDEO PTY LTD & ORS |
Respondent
REASONS FOR JUDGMENT
Introduction
On 30 April 2001 the applicants, Mr and Mrs O'Connor, entered into a franchise agreement with the first respondent, RoadRunner Mobile Video Pty Ltd. Under the agreement Roadrunner agreed to provide the O'Connors with equipment, including videos, training and assistance, and the right to use the Roadrunner name so that the O'Connors could operate a mobile home video hire business. The business offered home delivery of hire videos.
Cameron Marketing Pty Ltd entered into a Master Franchise Agreement dated 19 February 2001 with Roadrunner. That gave Cameron Marketing the right to sell Roadrunner franchises in Victoria and required Cameron Marketing to manage and supervise the franchisees. Notwithstanding this, it is clear that the franchise agreement was between Roadrunner and the O'Connors.
The O'Connor's business was not a success. They make two claims. They claim that they were induced to enter into the agreement by misrepresentations which constituted misleading and deceptive conduct under s.52 of the Trade Practices Act 1976 (Cth). They claim that, in breach of s.51AD of the Trade Practices Act, they were not provided with a disclosure document as required by the franchising code. Roadrunner acknowledges that it did not provide a disclosure statement.
Under the agreement Roadrunner was to provide an initial supply of videos. The O'Connor’s claim that the videos with which they were supplied were old and some did not work. They give this as a major reason for the failure of the business. The respondents claim that the O’Connors conducted the business badly. The respondents say that the business relied on making initial contact with potential customers who would then constitute repeat business. Initial contract was done by canvassers paid by Roadrunner, or in this case, Cameron Marketing. The canvassers door knocked in the franchise area asking if the people of the house were interested in home delivered videos. If they said they were, the name, address and telephone number were given to the O'Connors.
The respondents say that it was essential that once a canvasser had made contact, the O'Connors should call immediately at the house with literature and videos available in a car. The respondents say that what the O'Connors, and in particular Mrs O'Connor, did was not make an immediate contact, but subsequently telephone the potential customer, which was not the way to obtain the business.
Roadrunner Video had not prepared, and therefore did not give the O'Connors a disclosure statement as required by the franchising code. Nor did it give them a copy of the code or obtain written statements from them that they had obtained independent advice. This is a breach of s.51AD of the Trade Practices Act which requires that a corporation not contravene an applicable industry code.
The O'Connors claim:
a)Damages caused by the contravention of s.51AD of the Trade Practices Act. They claim that both Roadrunner Video and Cameron Marketing are in breach of s.51AD.
b)Damages caused by misrepresentations which are misleading and deceptive conduct under s.52 of the Trade Practices Act. They claim misleading and deceptive conduct by both Roadrunner Video and Cameron Marketing.
c)Damages from Mr Doherty, a director of Roadrunner Video and the second respondent, and Mr Cameron, the sole director of Cameron Marketing and the fourth respondent, for being knowingly involved in the contraventions under s.75B of the Trade Practices Act.
The claims under s.51AD and s.52 are pleaded as separate claims. Difficulties exist in looking at them separately. Section 51AD imposes a positive obligation on a prospective franchisor to provide the documents required by the franchising code. Conduct, which in the absence of this positive obligation, might not be misleading and deceptive under s.52, might be misleading and deceptive when the positive obligation is taken into account.
A particular issue in this case is the question of causation. The O'Connors received written information from Roadrunner Video and they say that after perusing the written information they decided to go ahead. The allegations of misleading and deceptive conduct include alleged misrepresentations in conversations during a meeting between the O'Connors, Mr Doherty and Mr Cameron. However, this was after the O'Connors say they had decided to go ahead. They say that what was said to them during the meeting reinforced what they had seen in the written material.
If the franchising code had been complied with the O'Connors would have received different written material and they would have been urged to obtain independent advice. An assessment has to been made of how that might have affected them.
Making of the Franchise Agreement
Two of the directors of Roadrunner Video in 2001 were Mr Ingersole and Mr Doherty, the second respondent. Mr Ingersole commenced a home video rental business in 1994 in Queensland. He was a fireman and had an orange juice delivery round as a part time job. He started asking his orange juice customers whether they would like home delivery of videos. They said they would. He borrowed money from a bank and commenced the business. That led to a meeting with Mr Doherty, who has had extensive involvement with the franchising of various sorts of businesses, and eventually the commencement of Roadrunner Video.
The business was successful in Queensland and Mr Ingersole and Mr Doherty decided to expand it in Victoria. They entered into a Master Franchise agreement for Victoria and New South Wales with Cameron Marketing.
The O'Connors answered an advertisement in The Age newspaper in April 2001. It reads:
Mobile Video Delivery
Earn $250 to $300 per day. Guaranteed income and customers. Prime areas. Total business setup. Training and support from national Company. Master Franchise also available
The O'Connors answered the advertisement and spoke to Mr Cameron. They were sent documents "RoadRunner Mobile Video Investment Guide ", "What is Franchising?" together with a covering letter on Roadrunner letterhead. The letter purported to be sent by "Charles Cameron Master Franchisee", but was sent and signed by Mr Doherty. Mr Cameron did not see it until after these proceedings had commenced. At the time, Mr Doherty was responsible for sales and marketing. The Investment Guide describes him as Managing Director.
A meeting was held on 30th April 2001 at the O'Connors’ home. The O'Connors, Mr Doherty and Mr Cameron were present. The franchise agreement was signed and the O'Connors gave Mr Cameron a cheque for $6,000 payable to Cameron Marketing. On 5 May 2001, they paid a further $25,572 to Cameron Marketing.
The O’Connors were sent videos, initially 191, and equipment and commenced trading. Mr Doherty spent a week assisting and training.
Misrepresentations
I will deal with the representations first because they affect consideration of the consequences of the failure to comply with the Franchising Code.
The statement of claim alleges these representations:
a)Roadrunner Video had undertaken extensive research in the franchise areas and there was a good market for the service in the Applicants’ territory;
b)Cameron Marketing had purchased and was operating a Master Franchise for Roadrunner Mobile Video Franchise in Victoria;
c)Franchisees of Roadrunner Video were making $750-$1,200 per week working between 25 to 35 hours a week working part-time;
d)Roadrunner Video would provide the O'Connors with a high level of backup and ongoing support;
e)Roadrunner Video would upgrade video movies on a weekly basis for the initial two months at no cost to the O'Connors;
f)Cameron Marketing was responsible for the promotion of Road Runner Video Services in Victoria;
g)Experienced canvassers of Roadrunner Video would be engaged to canvass on behalf of the O'Connors and Roadrunner Video and guaranteed 100 customers from the canvassing.
The research representation
The allegation in the statement of claim is that Roadrunner Video represented it had conducted extensive research in the franchise areas and that there was a good market for the service in the O'Connors’ territory. The particulars referred to the conversation. The way the case was conducted shows that the investment guide was at least part of the representation which the O’Connor’s relied upon.
The investment guide says that:
Individual territories have been carefully determined by university research taking into consideration relevant demographics such as age, income and distribution of the population.
Mr Ingersole and Mr Doherty had been engaged in an earlier franchise business, The Service Professionals. Its franchise businesses included video hire, car cleaning, gardening and housecleaning. The Service Professionals had done a study. Mr Doherty said he could not recall the people who performed the study but it was done by university graduates paid by The Service Professionals. It had been done in 1989. The report was not produced, but from the description given by Mr Ingersole and Mr Doherty it was not a university research project but something done for the business by university graduates.
The franchise area proposed for the O'Connor’s was the city of Knox. Mr Doherty had used the Internet to obtain population numbers and some other information about the city of Knox. He and Mr Cameron had driven around the area looking at the type of housing and area generally. Both Mr Ingersole and Mr Doherty said that the mobile video business works best in lower socioeconomic areas and areas where there are lots of flats or similar types of dwellings.
The O'Connor’s say that Mr Doherty said (and Mr Cameron confirms) that at the meeting on 30 April 2001, Mr Doherty said university research showed Boronia and Bayswater suburbs would be good because of the size of the area and low income. He said it would be a great area.
Mr Doherty’s other experience in Melbourne was in training Mr Cameron, as the master franchisee, in Roadrunner's systems. A video hire business had been established by Mr Cameron in the Chelsea and Edithvale areas, with Mr Doherty showing him how to do it.
Mr Doherty’s evidence was that franchise areas in Queensland were determined in a similar fashion.
The statement in the investment guide implies organised research based on organised study undertaken by a university. That, and nothing like it, had occurred. The research done, and the methods by which franchise areas were selected, does not match this description.
The statement in the investment guide and Mr Doherty's statement are statements of fact. They are wrong and so were misleading.
Cameron marketing as master franchisee
The representation that Cameron Marketing had purchased and was operating a Master franchise in Victoria was made by both Mr Doherty and Mr Cameron. The question is whether it was a misleading representation.
The statement might be misleading if it implied that Cameron Marketing and Mr Cameron had experience beyond what they did have. The O'Connors acknowledge that they were told by Mr Doherty that they were to be the first franchisees in Victoria. They were told by Mr Cameron that he had operated a video hire run in the Edithvale/Chelsea area. Therefore, they were told the extent of the experience of Cameron Marketing and Mr Cameron. The statement was not misleading.
Franchisees were making $750 to $1,200 per week
The representation was made. Mr Doherty and Mr Ingersole say it is correct. Mr Doherty said he had made more, and so had others. Mr Cameron and his brother-in-law, Mr Raphael, said that the business established in Edithvale and Chelsea had made an average of $150 per day after allowance for expenses working about five hours per day. Mr Cameron employed Mr Raphael to conduct the business.
Mr Raphael produced daily running sheets which showed what he took which are consistent with what he says. There is no reason to doubt his evidence.
The Representation is of an existing fact. The only evidence is from Mr Ingersole and Mr Doherty and their witnesses. It has not been shown that the representation was untrue.
Roadrunner would provide the applicants with a high level of backup and ongoing support; RoadrunnerVideo would upgrade the videos on a weekly basis for the initial two months
The letter of 23 April 2001 which accompanied the documents sent to the O'Connors contains this statement:
Once you have commenced your business Road Runner will upgrade movies on a weekly basis for an initial two months at no cost to you. You will receive total backup and support in all aspects of your business on an ongoing basis
This statement has to be read in the context of the investment guide. It contains a list of things which will be supplied. Under the heading "A Total Business Package" it states
Once you’re ready to get out on the road, you'll find everything in your package will enable you to operate effectively from day one. All your equipment and tools of trade will be supplied new and carry a full manufacturers guarantee.
Under these words there is a list of things which will be supplied including "300 video movies" and "300 movie jackets".
Under the heading "Backup and Support", the Investment Guide says that all our key personnel have had extensive experience in the industry and have spent the past 13 years developing and perfecting the system. It refers to backup and support being provided in a variety of ways through regular meetings, informative newsletters and memos, extensive advertising and customer liaison.
The representation about upgrading movies on a weekly basis was made. What Mr Doherty intended by that was that some, but not all, movies would be supplied initially and then the balance of 300 over the following weeks. 191 were supplied initially, in line with Mr Doherty’s expectations.
A reasonable expectation of the representation about upgrading movies on a weekly basis in the context of the statement in the Investment Guide is that 300 new video movies would be supplied initially and they would then be upgraded on a weekly basis for two months.
Roadrunner Video did not intend that this would happen. Mr Ingersole and Mr Doherty said that the movies supplied at the commencement of the business were recent and late releases. 300 movies were not supplied initially. What they intended to do, and what they did do, was supply the 191 movies initially, and then the balance over about two months. This was what they meant by upgrading on a weekly basis for two months. The movies they supplied, and what they intended to supply, were new releases and late releases. They describe what they mean by these terms. New releases are up to four months old and late releases are up to eight months old. They obtained them by purchasing them from video stores. A video store would purchase a large number of videos upon the film's release. They would rent them out overnight. As demand lessened, the video store would sell some of their copies and that is when Roadrunner would buy them. The video store might pay $100, Roadrunner would buy them for less. Mr Ingersole and Mr Doherty said that the economics of the Roadrunner business did not permit the purchase of new videos. The Roadrunner business would rent the movies for a week at $6 or $7.
The O’Connors’ evidence is that they asked about what happens with obtaining movies for hire. They said Mr Doherty said Roadrunner would provide 300 of the latest movies and then they would get more because they were the "first on board". This part of the O'Connors’ evidence is not dealt with by Mr Doherty. Mr Doherty was unrepresented and his affidavit does not deal with this part of the O’Connors’ evidence. Understandably, he was not cross examined on this point.
Mr Cameron says that Mr Doherty said that Roadrunner would provide the O'Connor's with 300 movies but not initially. Mr Cameron says Mr Doherty said there would be a build up to having 300 videos.
The allegation of this representation illustrates the difficulty in dealing with it as a s.52 claim independently of the claim arising out of the failure to provide a disclosure statement as required by the franchising code. Clause 9.1(2) of the Disclosure Document requires that there be details of the franchisor’s obligation to supply goods or services to the franchisee. The details in this case would be a description of new releases as up to four months old and latest releases as up to eight months old, the numbers of each, and that some would be supplied initially and the balance over a period of weeks.
Regulation 6A of the franchising code says that the purpose of the disclosure document is to give a prospective franchisee information from the franchisor to enable the franchisee to make a reasonably informed decision about the franchise, and to give the franchisee current information from the franchisor’s material to the running of the franchise business. The O'Connors, to Mr Doherty's knowledge, had never operated this type of business. In these circumstances, compliance with the requirement to give information about the goods to be supplied by the franchisor required a level of description which enabled the O'Connors to understand that they were receiving a certain number of movies up to four months old and a certain number of videos up to eight months old, and when they were receiving them.
Mr Doherty acknowledges that he was enthusiastic about the business. It is not necessary to make a finding about precisely what was said. The combination of documents and the enthusiasm which Mr Doherty acknowledges leads to a finding that the representation about the upgrading on a weekly basis is made out. The representation to the O'Connors was that they would receive 300 movies initially and they would then be upgraded over a period of weeks.
The representation is as to a future matter. Section 51A requires Roadrunner Video to establish that it had reasonable grounds for making the representation. The intention of Mr Ingersole and Mr Doherty was that Mr Doherty would provide the initial training, Mr Ingersole would select the videos and Mr Cameron would provide canvassing and the other support. There could not be regular meetings, no evidence was given about newsletters and there was no advertising and no intention to advertise.
Both Mr Doherty and Mr Ingersole lived in Queensland. Therefore, the immediate support would have to come from Mr Cameron. In fact, he sold the Master Franchise soon afterwards.
Mr Doherty's concept of a new or recent release was a period of up to four months old and a late release was up to eight months old. At the time of the O'Connors’ entry into the agreement, there is no evidence that they were told about Roadrunner Video’s methods of obtaining movies, that is by purchasing them, effectively second hand, from video shops.
What Roadrunner Video intended to provide by way of support does not meet the description of a high level of backup and ongoing support. Apart from Mr Doherty's initial training, Roadrunner Video intended that the support would be supplied by Mr Cameron. Mr Cameron had no experience, apart from the Edithvale and Chelsea business.
Roadrunner Video did not intend to supply 300 movies initially and then upgrade on a weekly basis. What it intended to do was to supply 300 movies, about 190 initially and the balance over a period of weeks. Consequently, the representation was false.
Other representations
The other representations are that Cameron Marketing was responsible for the promotion of Roadrunner Video services in Victoria, that experienced canvassers would be engaged on behalf of the applicant, and the first respondent guaranteed 100 such customers from such canvassing, and a designated area or territory would be granted to the applicants with the potential access to at least 30,000 customers.
Each of the representations was made. The Master franchise agreements made Cameron Marketing responsible for the promotion of Roadrunner Video services in Victoria. This representation is correct.
The representation about canvassers was made. It is a representation as to a future matter. Roadrunner Video had reasonable grounds for making the representation. The representation about a designated area was made. The area which Roadrunner Video intended to be the franchise area is the city of Knox. What evidence there is suggests that there were potentially 30,000 people in the area who might hire videos.
Inducement by misrepresentations
Ultimately, I consider that the question of causation must be considered in the overall context of the case which includes the absence of a disclosure statement. There is a certain amount of artificiality in dealing with causation in the context of the s.52 claim.
Evidence in chief was by way of affidavit. Christine O'Connor’s is a reasonably lengthy affidavit. Mr O'Connor's affidavit is short, confirming what Christine O'Connor says. Christine O’Connor describes talking to Mr Cameron and receiving the documents. She then says that they were impressed by Roadrunner's buying power, promise of competent training, good income and ongoing support. She said the fact that the guide stated that all territories were selected on the basis of university research was a huge factor in them deciding to join. She then says that she telephoned Mr Cameron, with her husband present, and told him of their intention to proceed. The appointment with Mr Doherty was then arranged.
Christine O’Connor describes the meeting and what was said, and then says that the discussions reinforced the glowing prospects suggested by the Investment Guide and confirmed in her mind the overall success of the business. The agreement was then signed.
The common law practical or commonsense concept of causation applies to claims under the trade practices act (Wardley Australia Limited v Western Australian [1992] 175 CLR 514 at 525, Mason CJ).
The OConnors say that they had decided to proceed based on the information they had received. The extent of the representation about research at that stage was the statement in the investment guide that "individual territories have been carefully determined by university research taking into consideration relevant demographics such as age, income and distribution of the population”. The representation about specific research in the Boronia and Bayswater suburbs had not been made at that point.
The representations about ongoing support and upgrading of videos had been made in the documents.
My overall impression is that when the O'Connors made their decision to proceed, absence of representations about university research, a statement that ongoing support will come from a recently appointed master franchisee and from people based in Queensland and the proper statement about how videos would be supplied would not have changed their minds. This is in the absence of the disclosure document, the strong incentive to obtain independent advice which compliance with the Franchising code would have brought, and the time to reflect, which again, compliance with the Franchising Code would have brought.
This finding means that the misleading and deceptive conduct claims as pleaded do not succeed.
No disclosure statement
Section 51AD of the Trade Practices Act provides that a corporation must not, in trade or commerce, contravene an applicable industry code.
The Trade Practices (Industry Codes-Franchising) Regulations 1998 (Cth) is the industry code applicable to franchise agreements. The franchise agreement between Roadrunner Video and the O'Connors meets the definition of franchise agreement in r.4.
Regulation 6 requires a franchisor to create a disclosure document before entering into a franchise agreement. Regulation 6B requires the franchisor to give a current disclosure document to a prospective franchisee.
If the franchise business has an expected annual turnover of $50,000 or more, the disclosure document must be in accordance with Annexure 1 of the code. In the documents the O'Connors received and the discussions on 30 April 2001, various income figures were referred to. The best guide of expected annual turnover for the O'Connors is what is contained in the Investment Guide. It contains a case study which is said to illustrate an average operator over a week, working a five day week, 20 days a month. It shows gross takings of $5,540 for a four-week period, a total in excess of $60,000 for a 48 week period. 48 weeks allows for four weeks off. It is consistent with the representation that franchise fees earned $750-$1,250 per week. Consequently, expected annual turnover of the O'Connor's franchise business was in excess of $50,000.
Regulation 10 requires a franchisor to give a copy of the Franchising Code of Conduct and the disclosure document at least 14 days before the prospective franchisee enters into a franchise agreement, or makes a non-refundable payment to the franchisor or an associate of the franchisor.
Regulation 11(1) requires that a franchisor must not enter into a franchise agreement unless the franchisor has received from the prospective franchisee a written statement that the prospective franchisee has received a reasonable opportunity to understand the disclosure document and the code.
Regulation 11(2) requires that before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee signed statements that the prospective franchisee has been given independent advice from an independent legal adviser, independent business adviser or independent accountant or has been told that advice should be sought but has decided not to seek it.
Clause 6 of Annexure 1 requires details to be given of existing franchise businesses, including names and addresses, and for each of the last three financial years the number of franchises transferred, ceasing to operate, terminated, not renewed or bought back.
A disclosure document would have informed the O'Connors of how many franchises there were. The O'Connors say that Mr Doherty told them at the 30 April meeting that there were 70 franchisees in Queensland. That is disputed. Mr Ingersole said there had been a total of 34. There were 17 at the time he swore his affidavit and four at the time of the hearing.
During the meeting on 30 April, Mr Doherty showed a PowerPoint presentation on his computer. The slide headed "On-going Support" said that ongoing support is provided by way of fortnightly meetings for general updates, special training seminars, regular contact through field visits and newsletters.
The slide headed "How Was Road Runner Started?" has dot points:
·The mobile video was created after 10 years of operation.
·The company was formed in 1997 with Daryl Doherty Managing Director.
·Daryl gained valuable franchise experience with The Service Professionals.
·Sold over 500 franchises throughout Australia.
·Road Runners system is a huge success.
Operators regularly earn between $750 to $1,250 per week with very flexible hours.
Read as a document with the opportunity to reflect on its meaning, the slide probably states that Daryl Doherty sold over 500 franchises with The Service Professionals, or perhaps with The Service Professionals and Roadrunner Video combined, possibly combined with one or more other businesses.
The O’Connors saw it as part of a Power Point presentation combined with Mr Doherty's enthusiasm for the business. They did not say what their reaction was to the PowerPoint presentation. Seeing it in the circumstances they did, they may have gained an impression of a large number of Roadrunner franchises. They say they were told 70, although that is disputed.
Mr Ingersole and Mr Doherty say the reduction in the number of franchises is because franchisees have not renewed as franchise agreements have expired. They say this is because of the litigation. However, Mr Doherty described a normal reaction of franchisees, which is that they are enthusiastic at the start, and then resent paying a franchisee fee to the franchisor because they think they are getting nothing for the fee. He called it the "glee and fee" reaction.
A reasonable inference is that in April 2001, there were Roadrunner Video franchisees in Queensland who had decided that they were not going to renew their franchises when they expired or who were otherwise unhappy with the business.
A legal adviser, business adviser or independent accountant giving advice to people, such as the O'Connors intending to enter into a franchise agreement, would advise them to make their own investigations. If the O'Connors had been given a copy of the code and a properly prepared disclosure document, and they were told that they would have to provide the statement required by r.11, it is probable that the O'Connors would have sought independent advice.
An independent adviser would probably have told them to contact a number of the franchisees in Queensland.
If franchises in Queensland were profitable as Mr Doherty asserts, and franchisees were as happy with the business as Mr Doherty says, the existing litigation in Victoria would be unlikely to deter them from continuing with their business.
Roadrunner Video called as a witness one existing franchisee out of four left. They did not call any of those who had failed to renew their franchises to say that they had done so only because there was litigation. The failure of the respondents, that is Roadrunner Video and Mr Doherty, to call any of the franchisees who had not renewed franchises leads to the inference that they would not have given evidence which supported Roadrunner and Mr Doherty.
If the O'Connors knew that there were franchisees in Queensland not intending to renew, or otherwise unhappy with the business, that, with other factors would mean an independent adviser would probably have advised them against entry into the agreement.
Other factors an independent adviser might have taken into account are that this was a business which had worked in and around Brisbane. It was untried in suburban Melbourne. An independent adviser might have suggested to the O'Connors that they ask for a copy of the university research which was referred to and ascertain if it applied to the Knox area. An independent adviser might have advised that they obtain information about the age and quality of the movies that they were to receive.
The letter the O'Connors received containing the Investment Guide and the other material is dated 23 April 2001. It came from Brisbane to suburban Melbourne. A reasonable inference is that they received it two or three days later. That means that they entered into the franchise agreement five or six days after they received the material. 14 days at least must elapse between a prospective franchisee receiving a disclosure document and copy of the franchising code and the entry into the agreement.
The information in the disclosure document, independent advice and the passage of time is likely to have modified the O'Connor's initial enthusiasm.
I find that on the balance of probabilities, if the O'Connors had been given a disclosure document and a copy of the franchising code and been informed that they would have to sign a document about independent advice as required by the Franchising Code, they would not have entered into the agreement with Roadrunner Video. That is, if there had not been a contravention of s.51AD of the Trade Practices Act, they would not have entered into the agreement with Roadrunner Video.
Cameron Marketing
The case against Cameron Marketing depends upon Cameron Marketing being the agent of Roadrunner Video. Neither Cameron Marketing nor Mr Cameron had any part in sending the initial documents to the O'Connors.
The Master Franchise agreement between Cameron Marketing and Roadrunner Video gives Cameron Marketing the right to use the Roadrunner system, trade name, mark and symbols in New South Wales and Victoria. It gives Cameron Marketing the right to grant franchises in Victoria and to sub-license the use of the Roadrunner system, trademarks and trade name.
The franchise agreement with the O'Connors was not entered into by Cameron Marketing exercising its right to grant franchises. The franchise agreement is made directly between Roadrunner Video and the O'Connors. Payment was made directly to Cameron Marketing. Some was retained by Cameron Marketing and the balance remitted to RoadRunner Video. That does not affect the nature of the agreement.
Since Roadrunner Video is the franchisor, Cameron Marketing did not have the obligation under the Franchising Code to give the O'Connors a copy of the code or a disclosure document.
Cameron Marketing had some responsibility towards the O'Connors in the running of the franchise business, but it was not the agent for the purpose of making the agreement, or for the purpose of any representations. Some representations are contained in the documents sent by Mr Doherty on behalf of Roadrunner Video. Neither Cameron Marketing nor Mr Cameron had any part in that. The statements made at the meeting of 30 April 2001, which are part of the misleading and deceptive conduct, were made by Mr Doherty on behalf of Roadrunner Video, not Cameron Marketing nor Mr Cameron. Roadrunner Video, as the franchisor, had the responsibility to prepare the disclosure statement. An essential part of the cause of the loss the O'Connors suffered is the failure to give them a copy of the Franchising Code and a disclosure document. Cameron Marketing had no responsibility to do so.
Mr Doherty
The cause of the O'Connors’ loss is the failure by Roadrunner Video to give them a disclosure statement and a copy of the franchising code and inform them they must make a written statement that they had obtained legal advice. This is in the context of the information they did receive.
The information that the O'Connor's received was, except for a small contribution by Mr Cameron, all given to them by Mr Doherty.
Mr Doherty was responsible for marketing and sales. He knew all the facts which constituted the misrepresentation that franchise areas were selected based on university research. He knew all the elements of the representations about ongoing training and support and the age and upgrading of movies.
There is no evidence that Mr Doherty either knew or did not know of the existence of the Franchising Code. Mr Ingersole gave some evidence inferring knowledge by him. When asked about information about existing franchises in the context of the Franchising Code, he said that information was being prepared.
The allegation is that within the meaning of s.75B of the Trade Practices Act, Mr Doherty:
a)aided, abetted, counselled or procured the contravention;
b)was directly or indirectly knowingly concerned in, or party to the contravention.
The decided cases are mostly in the area of misleading and deceptive conduct claims. To aid or abet requires an awareness of the facts that give rise to the contravention. To be a party to a contravention requires that a person have knowledge of the essential elements constituting the contravention (Yorke v Lucas (1985) 158 CLR 661 at 670). It is unnecessary to prove knowledge that there was a breach of the Act.
The concept of knowledge or awareness has to be applied in the context of s.51AD which puts a positive obligation on Roadrunner Video to give the O'Connors a disclosure document and otherwise comply with the Franchising Code. The person who undertook the responsibility of dealing with the O'Connors on behalf of Roadrunner Video was Mr Doherty. He knew which documents were given to the O'Connors. He knew that the documents given to the O’Connors did not contain names and contact details of existing franchisees. The same applies to all the other various categories of information that should have been in a disclosure document. Mr Doherty knew that the O’Connors did not give signed statements that they had been given advice from an independent legal adviser, independent business adviser or independent accountant or that they had been told that advice should be sought but had decided not to seek it.
The essential elements constituting the contravention by Roadrunner Video of s.51AD are that the O'Connor's were not given a document containing details of existing franchisees or the other information required. They did not give signed statements about independent advice. Mr Doherty knew all this, and he was the person who undertook the task for Roadrunner Video of having the O'Connors enter into a franchising agreement with Roadrunner Video. Within Roadrunner Video, he was the person who should have ensured that a Disclosure Statement was given to the O'Connors, and that signed statements about independent advice were obtained.
There is no evidence that Mr Doherty knew of the obligations of the Franchising Code. That does not matter. It is unnecessary to prove that he knew that his participation was a breach of the Act. He knew of all the essential elements constituting the contravention by Roadrunner Video of s.51AD. He was knowingly involved in the contravention, and so liable for any damages.
Mr Cameron
Mr Cameron was not involved in the contravention. He placed an advertisement in a newspaper and arranged and attended a meeting. He did not send the documents to the O'Connors. He attended the meeting and made some statements. He was not a director or employee of Roadrunner Video. Even if he knew that information was required, such as details of existing franchisees, had not been given to the O'Connors, his involvement goes no further than knowledge. The contravention is completed when the franchise agreement is entered into. Mr Cameron had no involvement in the entry into of the franchise agreement.
Damages
The O'Connor's claim damages:
a)Franchising agreement payment $ 33,572
b)Purchase of Station Wagon $ 4,600
c)Video purchases $ 1,568
d)Clothing $ 765
e)Stationery and sundry $ 288
f)Car Hire $ 325
g)Loss of income $ 35,000
h)Fuel $ 2,450
i)Motor Vehicle Insurance $ 500
j)Interest on Credit Card $ 1,950
k)Mobile Telephone costs $ 658
Total: $ 81,676
The evidence of damages is contained in the affidavit of Christine O’Connor. The principle is that the O'Connors should be put in the position that they would have been if they had not entered into the agreement.
Except for the loss of income, each of the payments they have made would not have been incurred if they had not entered into the agreement. On the other hand, they made some income. There is no evidence of what happened to the station wagon. Either they kept it or sold it. The partnership tax return shows that they claimed depreciation on two motor vehicles, the station wagon and a Nissan Skyline.
In Thompson v Ice Creameries of Australia Pty Ltd (1998) ATPR 41-611, Lehane J. allowed loss of profits as part of the damages where the applicants had purchased an ice cream shop franchise relying on representations which were found to be misleading or deceptive.
The evidence is that Mr O'Connor did not have employment. There is no evidence that Christine O’Connor had employment or was otherwise looking for employment.
The evidence suggests that the failure of the business was in part because the O'Connors did not run it properly. Cameron Marketing retained and paid canvassers who sought leads. The evidence of Mr Ingersole and Mr Doherty was that for the business to be a success, there needed to be immediate personal follow-up, that is, a person at the door offering to hire videos. Christine O'Connor was the one who did the work. She did not go to the addresses the canvassers gave her but, she said, telephoned and asked if they wanted to hire a video. Mr Ingersole and Mr Doherty said that that was not the way to get business. People would not respond to a phone call. What they would respond to was a person at the door offering a video for a week for a relatively modest amount of money.
Christine O’Connor produced the list of leads she had been given as a result of the canvassers’ work. Several of those people were called. They said they were not followed up. They are independent witnesses and have no reason for not telling the truth.
Consequently, the failure of business to make money was at least contributed to by the O'Connors.
I have found that the O'Connors would not have entered into the agreement if s.51AD had been complied with. The cause of their loss is the contravention of the section, not any subsequent business shortcomings. They would not have suffered the consequences of any failures in conducting the business if they had not entered into the agreement, and they would not have entered into the agreement if the section was complied with.
On the other hand, they would not have had the opportunity to make a profit if s.51AD was complied with. A commonsense approach is to be taken to the question of the assessment of damages. The partnership tax return for the year ended 30 June 2001 shows gross takings of $1,760. The business had been operating for three weeks so they had taken about $600 per week. After deduction of expenses, they made a loss of $1,474.
The Partnership tax return for the year ended 30th June 2002 shows gross income of $8,331 and a loss of $6,126 after payment of expenses. Part is depreciation on a motor vehicle already owned.
I assess damages by treating the trading history of the O'Connor's video hire business as returning a neutral result. They received some gross income. They made a net loss, but not all that was cash expenses.
They still had the station wagon. I do not allow its purchase cost. They claim interest on a credit card. No particulars are given. Interest can be dealt with adequately under statutory provisions.
Damages are:
a)Franchising agreement payment $ 33,572
b)Video purchases $ 1,568
c)Clothing $ 765
d)Stationery and sundry $ 288
e)Car Hire $ 325
f)Fuel $ 2,450
g)Motor Vehicle Insurance $ 500
h)Mobile Telephone costs $ 658
Total $ 40,126
There will be judgment against Roadrunner Video and Mr Doherty for $40,126. The claim against Cameron Marketing and Mr Cameron is dismissed.
I certify that the preceding one hundred and fourteen (114) paragraphs are a true copy of the reasons for judgment of Phipps FM
Associate: Sherryn Kwong
Date: 9 February 2006
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