Palis Victoria Pty Ltd v Gelare International Pty Ltd
[2015] FCCA 2785
•13 October 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| PALIS VICTORIA PTY LTD & ORS v GELARE INTERNATIONAL PTY LTD & ORS | [2015] FCCA 2785 |
| Catchwords: CONSUMER LAW – Misleading and deceptive conduct – admitted breaches of the franchising code – reliance – unconscionable conduct – equitable set offs – breaches of franchising agreement. |
| Legislation: Evidence Act 1995 (Cth) s.140 Fair Trading Act 1999 ss.9, 42, 145, 159, 75B, 158, 159 |
| Cases cited: Book: |
| First applicant: | PALIS VICTORIA PTY LTD ACN 147 615 754 |
| Second applicant: | PAUL GLASGOW |
| Third applicant: | LISA STARK |
| First respondent: | GELARE INTERNATIONAL PTY LTD ACN 060 171 851 |
| Second respondent: | FARID TORABI |
| Third respondent: | MINA TAKLA |
| File number: | MLG 2088 of 2013 |
| Judgment of: | Judge Riley |
| Hearing dates: | 6, 7, 8, 9, 10, 13 and 14 July 2015 |
| Date of last submission: | 14 July 2015 |
| Delivered at: | Melbourne |
| Delivered on: | 13 October 2015 |
REPRESENTATION
| Counsel for the applicants: | Michael Garner |
| Solicitors for the applicants: | Parke Lawyers |
| Counsel for the respondents: | Peter Mylne |
| Solicitors for the respondents: | MST Lawyers |
THE COURT ORDERS THAT:
Judgment on the claim be entered for the first, second and third applicants against the first, second and third respondents in the sum of $788,980.
The cross-claim of the respondents be dismissed.
Paragraph 3 of the amended application filed on 5 September 2014 be dismissed.
By 4:00pm on 5 November 2015 the applicants and respondents file and serve on one another any affidavit and written submissions as to costs and interest.
By 4:00pm on 12 November 2015 the applicants and respondents file and serve on one another any reply to the other’s affidavits, if any, and written submissions as to costs and interest.
The matter be adjourned to 20 November 2015 at 10.00am for hearing on the question of costs and interest.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 2088 of 2013
| PALIS VICTORIA PTY LTD ACN 147 615 754 |
First applicant
| PAUL GLASGOW |
Second applicant
| LISA STARK |
Third applicant
And
| GELARE INTERNATIONAL PTY LTD ACN 060 171 851 |
First respondent
| FARID TORABI |
Second respondent
| MINA TAKLA |
Third respondent
REASONS FOR JUDGMENT
Introduction
This is an application under the Trade Practices Act 1974 (Cth)[1] (“TPA”) and the Fair Trading Act 1999 (Vic) (“FTA”).
[1] Trade Practices Amendment (Australian Consumer Law) Act (No 2) 2010 item 6 of Schedule 7 which provides that the provisions of the Trade Practices Act 1974 which were in force prior to 1 January 2011 continue to apply to conduct which occurred prior to that date.
The second and third applicants (“Mr Glasgow” and “Ms Stark”) are domestic partners and the directors of the first applicant (“Palis”).
Ms Stark is also the secretary of Palis. The second respondent
(“Mr Torabi”) is the sole director and secretary of the first respondent (“GI”). The third respondent (“Mr Takla”) was a franchisee of GI.
Palis and GI entered into a franchise agreement in which GI was the franchisor and Palis was the franchisee. This case concerns events leading up to and following the entry into the franchise agreement.
The applicants seek damages for certain alleged misleading and deceptive oral and written representations made in 2010 in breach of s.52 of the TPA and s.9 of the FTA. The applicants also seek damages for unconscionable conduct allegedly engaged in by the respondents contrary to s.51AC of the TPA. The applicants allege that GI breached the franchising code in five respects. The applicants allege that Mr Torabi and Mr Takla have accessorial liability.
The respondents deny that the alleged oral representations were made and deny that their conduct was unconscionable. GI admits that it breached the franchising code in four respects and denies the fifth alleged breach. GI denies that the applicants relied on the written representations or the admitted breaches of the franchising code.
Mr Torabi and Mr Takla deny that they have accessorial liability.
In addition, GI raises two equitable set offs and a counter claim.
The first set-off concerns an alleged representation that Mr Glasgow would work full time in the franchised business. The applicants maintain that Mr Glasgow did work full time in the franchised business.
The second set-off concerns a settlement between Palis, GI and the landlord of premises where the franchised business operated.
Under the settlement, the landlord granted rent relief for the benefit of Palis. GI and Mr Torabi said they were led to believe that the settlement of that complaint would include a settlement of any issue between the applicants and GI and Mr Torabi. However, Ms Stark deleted a proposed term that would have provided a release as between the applicants and GI and Mr Torabi. GI and Mr Torabi said that they would not have lent GI’s name to the proceeding against the landlord, for the benefit of Palis, if they had understood that there would be any scope for later proceedings between the applicants and GI and
Mr Torabi. The applicants said that GI and Mr Torabi, by their agent, Mr Takla, were aware that the proposed term had been deleted and signed the settlement agreement anyway.
The counterclaim concerns alleged breaches by Palis of the franchise agreement. Palis says that GI cannot rely on those breaches in circumstances where Palis was induced to enter into the franchise agreement by the respondents’ misrepresentations and unconscionable conduct. The applicants seek declarations that certain provisions of the franchise agreement are void or unenforceable.
Sequence of events
The basic sequence of events and the major areas of dispute are as follows.
Mr Torabi formed GI in 1986 when he opened its first café in Fremantle, Western Australia. As at 30 June 2010, GI had expanded to have 18 cafés in Australia, three of which were run by GI directly and 15 of which were conducted through franchise agreements. The core product of GI cafés is its own brand of ice-cream, but the cafés also sell waffles, pancakes, yoghurt, vegan ice-cream, smoothies and coffee.
In August 2009, Takla Investments Pty Ltd, of which Mr Takla is the sole director, became the franchisee of a GI café at Westfield Doncaster Shopping Centre (“GD”). It was the first GI café in Victoria. The applicants also alleged that Mr Takla was GI’s State Representative for Victoria. However, the respondents denied that.
In May 2010, Tammy Schello, a leasing executive at Colonial First State Global Asset Management (“Colonial”), approached Mr Takla at GD. Ms Schello told Mr Takla that she was looking for good retailers to take up leasing opportunities at the Forest Hill Chase Shopping Centre. She said that Colonial was redeveloping level 3 of the complex and there would be retailers including JB Hi Fi, Rebel Sport and Hoyts. Mr Takla told Ms Schello that he was a franchisee and any decision to lease the site at Forest Hill would have to be taken by GI. Mr Takla also told Ms Schello that he was interested in running a second GI café.
In August or September 2010, Mr Glasgow applied for a job as Director of Operations with Lightning Source Australia Ltd.
He eventually got that job, and, in connection with it, spent two weeks in January 2011 in the United States of America.
On 3 August 2010, Ms Schello sent Mr Takla by email a proposal for a lease at the Forest Hill Chase Shopping Centre. On the same date,
Mr Takla forwarded the proposal to Mr Torabi by email.
On 13 August 2010, Mr Torabi signed on behalf of GI an offer to lease for five years a site at the Forest Hill Chase Shopping Centre. The lease offer indicated that the handover date would be 18 October 2010, the fitout period would be 28 days from that date and the commencement date would be 15 December 2010. The tenant was specified as GI. Also on 13 August 2010, Ms Schello sent Mr Takla by email a copy of the offer to lease.
On 19 August 2010, Ms Schello sent Mr Takla a letter that listed various terms of the proposed lease. It said that, among other things:
The Landlord does not agree to insert an exclusivity clause in the lease.
Mr Torabi made various to amendments to the letter by hand which he initialled. He signed the letter with a statement that he offered to lease the site on the terms specified in the letter. His amendments included the crossing out of the sentence quoted in the previous paragraph and the insertion of the words:
We require exclusivity similar to Bayside [Shopping Centre].
Mr Torabi gave evidence that the exclusivity clause he wanted would have ensured that the GI café would be the only café on level 3. Mr Torabi also added to the letter the words:
Please note the attached exclusivity page outlining terms as used by Bayside subject to franchiee(s) becoming the [guarantors] when found.
Mr Torabi attached to the letter a page containing a blank exclusivity clause which said, in part:
The Landlord will not during the Term lease any part of the Centre (other than the Premises) to a tenant where the lease provides that the main business activity to be carried on under the lease is to be [2 insert].
On 26 August 2010, Ms Schello sent Mr Takla another letter that set out the terms of the proposed lease for the site. The letter said that the landlord agreed to include a term in the lease as follows:
Subject to the Landlord’s standard exclusivity terms the Landlord will not during the term grant a lease on level 3 of the Centre to a third party where the main business activity is the retail sale of ice-cream and waffles.
In about September 2010, Mr Takla told Mr Torabi that he had been unable to secure the finance to proceed with a GI franchise at Forest Hill Chase Shopping Centre. Also in about September 2010, two friends of Mr Takla asked him about becoming GI franchisees. They lodged an application with GI. In late September or early October 2010, they met with Mr Torabi in Fitzroy.
Richard Warneke, who gave evidence for the applicants, was a business associate of Mr Glasgow and a university friend of Mr Takla. In October 2010, it was not uncommon for Mr Glasgow and Mr Warneke to meet twice a week at GD for coffee.
During 2010, Mr Glasgow had been thinking about buying a franchised business. He spoke to Mr Takla, in the company of
Mr Warneke, at GD in early October 2010 (“the early October meeting”). Mr Glasgow claimed, and Mr Takla denied, that Mr Takla told Mr Glasgow at the early October meeting the following things about the proposed GI café at Forest Hill Chase Shopping Centre (“GFH”):
a) it would be the only café on level 3 of the Forest Hill Chase Shopping Centre;
b) there would be a grand opening on level 3 on 15 December 2010;
c) level 3 of the Forest Hill Chase Shopping Centre would include the following stores:
i) TGI Friday;
ii) Hoyts, which was already in the shopping centre but was being refurbished and would open again on 15 December 2010;
iii) Timezone;
iv)
AMF Bowling, which was already in the shopping centre but was being refurbished and would open again on
15 December 2010 with the addition of Laser Tag;
v) JB Hi-Fi;
vi) Nando’s; and
vii) Rebel Sport;
d) Fit’n Fast Gym was not confirmed at that point, but contracts were in progress;
e) the GFH franchise would be in a better location than GD because GFH had better quality neighbouring tenants than GD and GD had competition from Max Brenner, which sells waffles, strawberries and chocolate;
f) GD was profitable; and
g) GD had a turnover of about $600,000 per annum.
Mr Takla claimed that, in early October 2010, Mr Glasgow had asked him what it was like running a GI café and said that he was interested in running one. Mr Takla claimed that he only said that he liked the franchise because he could run it on his own, there was limited food preparation and he liked making coffee. Mr Takla claimed that he did not discuss a GI franchise in detail with Mr Glasgow until late October 2010.
On 12 October 2010, GI and Colonial signed an agreement for a five year lease for the GFH café with an estimated commencement date of 15 December 2010. It included an exclusivity clause in the following terms:
The Landlord will not during the Term lease any part of level 3 of the Centre (other than the Premises) to a tenant where the lease provides that the main business activity to be carried on under the lease is to be the retail sale of ice cream and waffles.
Mr Glasgow and Ms Stark looked at the GI website in October 2010. They had been looking for a franchised business and thought GI was the opportunity they had been hoping for. GFH would be close to their home and would provide part-time work for Ms Stark’s daughter while she studied at university.
Mr Takla said that he had a meeting at GD with Mr Glasgow and
Mr Warneke in late October 2010 (“the late October meeting”).
Mr Glasgow disputed the timing and the content of the discussions at the meeting. Mr Takla exhibited to his affidavit some text messages suggesting that the meeting took place around 21 to 25 October 2010.
Mr Takla said that he told Mr Glasgow at the late October meeting that:
a) he was not a master franchisee of GI;
b) he had initially been interested in operating GFH, but now some of his friends were going through the application process with GI with a view to operating GFH;
c) if his friends could not proceed he would let Mr Glasgow know;
d) the cost of setting up such a franchise would vary depending on the size and extent of the fit out of the premises and whether the franchise was operated as a kiosk or from within a stand-alone store;
e) he had been told by Colonial that:
i) Hoyts, JB Hi-Fi, Timezone, a “big restaurant”, Nando’s, Rebel Sports and a gymnasium planned to open on that floor;
ii) AMF and a gambling venue would remain;
iii) Colonial was negotiating with TGI Friday but nothing had been finalised; and
iv) Colonial was unsure if the Pancake Parlour would take a tenancy;
f) there were lots of businesses at Doncaster Westfield that sold coffee and there was strong competition for the sale of coffee at Doncaster Westfield;
g) the margins on coffee sales were still good;
h) at Doncaster Westfield, Max Brenner is a competitor of GD and that when Max Brenner opened it had affected GD’s sales;
i) for this reason, Mr Torabi had begun negotiating with Colonial an exclusivity clause allowing GFH to be the only café which predominately sold waffles and ice-creams at GFH; and
j) the location of GFH was exactly what GI looked for (i.e. next to a cinema).
Mr Takla said that Mr Glasgow told him at the late October meeting that:
a) he really liked the Gelare concept as he liked waffles and coffee and would like to operate many GI franchises in Victoria;
b) if Mr Takla’s friends could not proceed with GFH, could Mr Takla “put in a good word” for Mr Glasgow because it was close to his home in Vermont;
c) he knows the Forest Hill Chase Shopping Centre well as it is his local shopping centre;
d) he was leaving his job and wanted to run a business; and
e) he had not run a business before but he and his partner were very experienced in retail.
Mr Glasgow claimed, and Mr Torabi denied, that he first met Mr Torabi between about 21 and 25 October 2010 (“the second late October meeting”). Mr Torabi said that he first met Mr Glasgow on
18 November 2010. Mr Torabi said in his second affidavit that:
I did not meet Paul until 18 November 2010. I never meet a prospective franchisee until after I had received their application for a franchise and, only then if I felt that the application was sufficiently meritorious to justify me have a meeting with the applicant.
Mr Glasgow claimed that Mr Torabi told him at the second late October meeting, and Mr Torabi denied saying, that:
a) GI was expanding in Victoria;
b) GFH would be GI’s second Victorian store;
c) he was also looking at other locations including Southland, Frankston, Chapel Street, Glen Waverly and Knox;
d) if Forest Hill was not available for Mr Glasgow, then other locations may be available;
e) the Forest Hill drawcards were TGI Friday, Hoyts, Timezone, AMF Bowling, Laser Tag, JB Hi-Fi, Nando’s and Rebel Sport and that each of these were confirmed as a tenant of level 3;
f) there would be a grand opening on 15 December 2010, and all of stores had contracted to be open for the grand opening other than one single store;
g) the rent offer he negotiated with Colonial was very good, having regard to all of the drawcards at Forest Hill and in comparison to other GI locations (though he did not state the amount of the rent that he had negotiated);
h) he had yet to sign the lease but that Colonial’s offer was great;
i) Mr Takla wanted GFH but Mr Takla did not have the money at the time;
j) GD was doing very well, but it did not have half of the drawcards that Forest Hill boasted;
k) GD was located next to the cinemas;
l)
the nearby shops were an Angus & Robertson book store,
a Groove Train restaurant, a Chinese restaurant and Max Brenner; and
m) the Forest Hill proposal was too good to refuse.
Mr Torabi said that, on 25 October 2010, he received an email from Ms Stark via the FranchiseBusiness.com.au website, which seems to be a site that advertises franchise businesses for sale. The message said:
Hi it’s Lisa again. I still haven’t received any information. Are you still in Melbourne.
That message suggests that there had been an earlier communication between Ms Stark and Mr Torabi, but neither party said when or what it was. In any event, Ms Stark said that she telephoned Mr Torabi on 27 October 2010. He agreed that she telephoned him about then.
Ms Stark said that the 27 October 2010 telephone conversation was of a preliminary and introductory nature. She said that Mr Torabi said that:
a) he could not give her details about the franchise business because she had not yet submitted an application form and, if she did so, she would be required to keep any information confidential; and
b) if the other applicant did not obtain finance, that would open the door for Mr Glasgow and Ms Stark to potentially become GI franchisees.
Mr Torabi said that he told Ms Stark in the 27 October 2010 telephone conversation that he was still waiting to hear whether the other applicants had been able to secure finance, but he would come back to her if they were unsuccessful.
Mr Torabi sent Ms Stark an email on 28 October 2010 which said that:
Dear Lisa
Thank you for your interest in Gelare franchise. It was also a pleasure speaking with you yesterday. I would have loved to meet you in person, unfortunately I was on a tight schedule in Melbourne.
As discussed we had a family interested in Gelare Forrest Hill. They had problem getting their loan approved by the bank. We have given them until 5 pm tomorrow to provide us with a letter from their bank. Should they fail to do so, I will be more than happy to discuss that location with you.
Attached please find a copy of our business application. We appreciate it if you can fill out this application and forward a copy to us at your earliest convenience …
Ms Stark replied by email later on 28 October 2010 saying:
Dear Farid,
Thank you for your email.
As mentioned to you, we are looking at a number of opportunities presently as we want to make some decisions prior to Christmas. It is important to us that we have something local initially while we learn the business. It is equally important that we enter into a company that can provide us with support in a growth strategy as our ultimate goal would be multiple sites around Victoria.
…
We are interested in going into a Franchise Business as we believe we have the skills and background to excel. Paul would like to be involved full time to develop a number of sites. I am happy to work
with him on Sales & Marketing, Finance & Legals.
…
Later on the same day, Mr Torabi emailed Ms Stark:
Hi Lisa
I have now advised the people whom we were considering that they are late and we have commenced speaking to other parties.
I appreciate it if you can forward your completed application as a matter of urgency.
I appreciate your prompt reply.
…
Later on 28 October 2010, Ms Stark, with Mr Glasgow’s instructions, completed the GI franchise application form and emailed it, together with Mr Glasgow’s curriculum vitae, to Mr Torabi. The questions on the application form and answers included the following:
Have you had any retail or franchise operational experience? If yes, please describe.
Yes. We have managed supply relationships to major franchise organisations …
…
What qualities do you have that you believe are valuable if you become part of the Gelare Franchise?
High levels of business acumen, sales and marketing expertise, extensive network (business, personal, political)
…
During your initial investigations, were you promised a particular turnover or profit by any person?
No, only estimates were provided in relation to Doncaster’s projected turnover of $600k per annum
…
Will you devote your full time to the business?
Paul will
Will your spouse be actively involved in the business?
Lisa will be active in sales, marketing, finance and legals
…
Who is your solicitor – for independent legal advice?
Name: Lou Farinotti
Firm: Holding Redlich
Mr Glasgow’s CV said that he had:
Proven senior management experience within a (sic) medium/large operations.
Mr Torabi said in his second affidavit that:
27.Upon reading the Franchise Application Form and Paul’s CV, I was impressed. I observed that:
a. Paul and Lisa were projecting themselves as successful business people, who were committed to what they do, who wanted to run their own business and understood the risks of doing so; and
b. Paul was currently employed as a Business Development Manager with Print Supply Management Pty Ltd.
28.Critical to my favourable assessment of this application was the statement that Paul would work full-time in the business. Had Paul or Lisa said that neither of them would have worked full-time in the business, I would have immediately informed them that their application was not successful, because I could not see them making any money if they employed others to do the work they would otherwise be required to do. This was something I later emphasised to Paul when I first met him on 18 November 2010 as referred to below. I was a little surprised that they would contemplate leaving what appeared to be well paid jobs to run a Gelare franchise, but felt this was something I could flesh out when I first met them.
On 2 November 2010, Mr Torabi provided to Mr Takla electronically a copy of documents described in these proceedings as:
a) the cash flow projections;
b) the break-even analysis;
c) the gross profit calculations; and
d) summary of set up costs
(“the financial documents”).
Mr Torabi also provided to Mr Takla electronically on 2 November 2010:
a) a signed copy of the first page of the disclosure document;
b) a signed copy of page 27 of the disclosure document; and
c) the disclosure document long form.
Mr Torabi said that he told Mr Takla not to give Mr Glasgow a soft copy of the financial documents because he did not want the figures to be manipulated by anyone.
Mr Takla said that he had the financial documents and the disclosure documents printed at Officeworks and separately bound. He said that he placed them in an envelope and gave them to Mr Glasgow at GD on 3 November 2010 (“the 3 November 2010 meeting”), saying only that they were from Mr Torabi.
Mr Takla said that, when he gave the documents to Mr Glasgow,
Mr Warneke was not with him. Mr Takla also said that he did not see Mr Glasgow opening the envelope. Mr Takla said that he had no discussion with Mr Glasgow about the documents in the envelope.
He said that he never had any discussion with Mr Warneke about the financial documents as Mr Warneke was not interested in being a franchisee.
However, Mr Takla did say that he had discussed with Mr Glasgow and Mr Warneke GD’s cost of goods sold as a percentage of net turnover at about the time of the late October meeting but not at that meeting. Mr Takla said that the percentage was around 22%.
Mr Glasgow said that, contrary to Mr Takla’s claims, at the
3 November 2010 meeting, Mr Takla said:
a) regarding the forecast sales for GFH, which is shown on the page titled “Break-even Analysis – Gelare Forrest Hill” and on the GFH cash flow projection page:
i) we have stated the forecast for GFH as $430,000 of annual sales;
ii) $430,000 is a very conservative number;
iii) the $430,000 annual sales figure is the average of GI’s sales at other GI outlets; and
iv) GI does not guarantee the revenue for GFH;
v) you do not have to worry as the forecast is a very conservative estimate for GFH because GD is achieving $600,000 and Forest Hill is a better location than Doncaster;
b) regarding the GFH cash flow projection page:
i) expenses included in the forecast cash flow were based on GI’s experience in operating GI stores;
ii) the cash flow figures included the GFH rent;
iii)
the costs were not mere estimates but were based on the actual costs of operating the 30 plus franchises and their
30 years’ experience;
iv) the expenses were not conservative, but the costs that would be incurred in operating GFH, if it was operating at an annual revenue of $430,000, based on the actual costs incurred at other Gelare outlets;
v) GD was larger than an average sized GI café;
vi) GD’s expenses were therefore proportionally higher based on the higher sales;
vii) GFH was a typically sized GI café, so that the expenses in the GI cash flow forecast for Forest Hill was not a guess or estimate, but simply a statement of the average of actual costs of other stores and Mr Glasgow could rely on them as the actual expenses GFH would incur;
c) regarding the GFH gross profit calculations page that showed a cost of goods sold at 21.4% (although this figure is incorrectly described as “gross profit” on the page):
i) his gross profit at GD was at 80 something percent;
ii) it was better than the gross profit of 78.6% that is stated in the GI gross profit calculations page.
d) regarding the page titled “Summary of set up costs – Gelare Forrest Hill, Victoria November 2010”, the set up costs for GFH would be approximately $294,938.60.
Mr Warneke gave a somewhat different account of that meeting,
but maintained that Mr Takla spoke to both him and Mr Glasgow about the content of the financial documents.
On 3 November 2010, Mr Takla provided to Mr Torabi by email a photograph of Mr Glasgow and Ms Stark.
Also on 3 November 2010, Mr Takla sent to Mr Glasgow by email the letter dated 26 August 2010 from Colonial and a generic draft lease and agreement to lease premises at Forest Hill Chase Shopping Centre.
The documents were not signed by GI. The draft lease did not provide for the tenant to be the only café on level 3.
On 5 November 2010, Mr Takla emailed to Mr Glasgow a draft franchise agreement and a disclosure document that had not been signed by GI as the franchisor.
After receipt of the financial documents on 3 November 2010,
Mr Glasgow prepared his own financial projection. He emailed it to Ms Stark on 8 November 2010. Mr Glasgow said in his first affidavit that:
For my financial analysis, I inserted an amount of $550,000 as the forecast cash sales. This was about half way between the $430,000 being what Mina said was the average sales of other Gelare outlets, and $650,000, which is what I assumed Gelare Forest Hill would achieve if it was to have sales in excess of Gelare Doncaster. [The halfway point is actually $540,000.]
There was a meeting on 18 November 2010 at GD that was attended by at least Mr Glasgow and Mr Torabi (“the 18 November 2010 meeting”). The applicants allege, and the respondents deny, that the meeting was also attended by Ms Stark and Mr Takla. Mr Torabi and Mr Takla said that Mr Takla merely performed introductions and provided coffee but otherwise took no part in the meeting. They said that Ms Stark did not attend the meeting at all. Mr Glasgow adopted Ms Stark’s summary of the meeting.
Ms Stark said, and Mr Torabi and Mr Takla denied, that, at the
18 November 2010 meeting, Mr Torabi said:
a) there was going to be a Grand Opening of level 3 of the Forest Hill Chase Shopping Centre on 15 December 2010, and all of the shops on that level, with the exception of one, and other than AMF Laser Strike, would be open for trade by the Grand Opening date;
b) the Grand Opening was a very important marketing and promotional date;
c)
the neighbouring stores on level 3 of the Centre were great, and included Balsamic, Hoyts, Timezone, AMF Bowling and
AMF Laser Strike, JB Hi Fi, TGI Friday, Nandos, Rebel Sport and Fit’n Fast Gym;
d)
he had never seen a better location for a GI franchise and it was unusual to have so many quality tenants in the one area,
and it was not a problem that TGI Friday would offer a dessert menu as well, as that store had a different type of customer and its coffee was awful, and the GI café would be offering takeaways as well to its customers so they could take its products to the movies with them;
e) because the proposed location of the GFH café was outside the cinema, and outside two major restaurants, and was in the main line of traffic between the escalators, the location of the site was ideal;
f) because the GFH café was going to be located in an entertainment area, there would be a constant flow of foot traffic day and night, and the neighbouring tenants would guarantee a high level of foot traffic;
g) the projected annual sales of $430,000 for the calendar year 2011 contained in the Cash Flow Projections was a “conservative” estimate based on what other Gelare stores had done;
h) the GD café would do $600,000 in sales for the 2010 calendar year, and had monthly sales of between $50,000 and $60,000;
i) the location of GD was not as good as the GFH location because GD was in direct competition with Max Brenner, a chocolate and coffee shop, and because GD was on the outskirts of the traffic centre and there were no other entertainment drawcards like Timezone, TAB and stores such as JB Hi-Fi and Rebel, unlike GFH;
j) there should not be a problem in GFH achieving the projected profit of approximately $76,300;
k) the statement on the GI website that:
High Yields. Depending on location and passing traffic, Gelare Ice Cream cafés can produce some of the highest dollar yields per square metre in the retail industry
was true, and this was Mr Torabi’s experience, and why else would he put it on the website;
l) Mr Torabi had 20 years of experience, and the figures provided in the financial documents, including the break-even analysis, were sound, and Mr Glasgow and Ms Stark could rely on them;
m) normally December and January were very strong months for GI stores, and he expected GFH to “hit the ground running”, and it was important that the café open on time;
n) the financial documents provided a reasonable estimate of the costs that Mr Glasgow and Ms Stark could expect based on what other GI stores were doing;
o) GFH would be the only café on level 3 of the Forest Hill Chase Shopping Centre, and Mr Torabi had negotiated an exclusivity term in the lease between GI and Colonial;
p) all GI franchises had done reasonably well and none had been unsuccessful; and
q) GI was very keen to expand and was marketing heavily in Victoria and was discussing opening stores in Chapel Street, Fountain Gate and other sites.
Ms Stark said, and Mr Torabi and Mr Takla denied, that, at the
18 November 2010 meeting, Mr Takla said:
a) the turnover for GD for the 2010 year would exceed $600,000 and GD was currently doing sales of between $50,000 and $60,000 per month;
b) GD was very profitable;
c) the Forest Hill location was a better location for a GI café than the location of GD;
d) GD had a competitor, Max Brenner, which served coffee and dessert, whereas GFH would not have competition from Max Brenner, and that was important;
e) because the proposed location of GFH was outside the cinema, and outside two major restaurants, and was in the main line of traffic between the escalators, the location of the site was ideal;
f) GFH would be very successful;
g) the financial information and figures provided in the financial documents were reasonable and the cost of sales would be about 21.4% of sales as stated in the cash flow projections; and
h) in relation to the fixed costs, estimated at 28.42% of sales in the cash flow projections, the numbers for GD were different, because GD had higher revenues than the $430,000 sales forecast for GFH, but the percentages were correct.
Ms Stark said, and Mr Torabi denied, that, as she and Mr Torabi were walking away from the 18 November 2010 meeting, Mr Torabi told Ms Stark that:
a) GFH would be ideally located, surrounded by all the ideal tenancies to generate traffic, and that he could not have wished for a better location; and
b) based on his experience he could not think that anything could go wrong and all the forecasts given to Mr Glasgow and Ms Stark were conservative.
Mr Torabi said in respect of the 18 November 2010 meeting:
41.The meeting on 18 November 2010 was just between Paul and me, although Mina did introduce and provide us with beverages while I chatted with Paul. …
42.The purpose of this meeting, in my eyes, was to effectively interview Paul so that I could form a view as to whether he would be [a] suitable franchisee. The only documents I took with me to this meeting were the Application Form and Paul’s CV. I did not take with me to the meeting copies of any of the documents Mina had provided to Paul on
3 November 2010, nor did Paul produce them, nor did we discuss them.
43.My conversation with Paul was along the following lines after Mina had introduced us and left to work behind the counter of his store:
a.Initially, I thanked Paul for agreeing to meet with me.
b.I said to Paul that:
i. Gelare International was proposing to open a store at Forest Hill which would be its second store in Victoria;
ii. I have not decided whether I will get a franchisee to own and operate the store or whether my company will run it as a company owned store; and
iii. The purpose of the meeting is for me to ask him some questions about himself and Lisa, their experience and plans so that I could decide whether they were worthy applicants to become a Gelare franchisee.
c.I then gave Paul some background in relation to Gelare International and the Gelare brand. … I said that the store at Doncaster was [the] first store in Victoria and that Mina runs it as a franchisee. I said I was hoping to open more stores in Victoria.
d.I said that I had read the application form and Paul’s CV and commented that it seemed that he and Lisa had successful business careers. Paul said that was correct.
e.I then said that, given that they both had successful careers in business, I was intrigued as to why they would want to own a run an ice cream business like Gelare.
f.I put to Paul that he would be earning a lot more money doing what he was doing in his job [than] what he might earn running a Gelare franchise. Paul said that he wanted to start something new and he was not in it for one shop but that he was looking at it as a stepping stone to open up more shops.
g.In response, I said that we would need to see how he went with the first store before considering further stores. Paul said that he understood that.
h.I mentioned that the application form and CV did not reflect any direct retail experience, working in and managing a retail store. Paul said he was very keen to learn.
i.I said that he needs to realise that the Gelare model does not work unless the owner works full-time in the business and is not distracted with other employment or business interests, otherwise wage costs will be too high and you will not make any money.
j.Paul said that he understood that was necessary and that he would work in and manage the store on a full-time basis.
k. I responded by saying that I was pleased to hear that as I have to be absolutely sure that this will occur, otherwise I will be left with an unhappy loss making franchisee and I might as well have run the store through my company. I said that I do not grant franchises to passive investors.
l.
In response, Paul repeated that he will be working
full-time in the store. He said it will be a family enterprise with his kids working in the store and Lisa, with her other work demands, doing some bookwork and other paperwork behind the scenes and maybe coming in to work at the store now and again.
44.Had Paul then told me that he had applied for a full-time job at Lightning Source (as appears from paragraph 32 of the Reply and Defence to Amended Cross Claim) and that if his application was successful he would have gone and worked for them (as he ultimately did), I would have terminated my discussion with him by telling him that I did not believe he and Lisa were suitable applicants and that I would not grant the franchise to them.
45.I was subsequently shocked when I found out Paul had obtained another job and more shocked recently to learn that Paul had received an employment contract from Lightning Force before he, Lisa and Palis Victoria signed the franchise agreement. The holding back of this information and of Paul’s intentions, whilst emphasising that Paul would work full time in the business, misled me. Had I known this was Paul’s intention I definitely would not have granted the franchise to Palis Victoria and would most likely have conducted the business as a company owned store.
Mr Torabi did concede that, at the 18 November 2010 meeting, and not at the second late October meeting, as Mr Glasgow claimed,
Mr Torabi:
a)
said that GFH would be GI’s second store in Victoria and
Mr Torabi would like more in Victoria;
b)
said that Colonial was pushing for GFH to open by
15 December 2010;
c) did not say that the rent had been negotiated; and
d) said that GD was doing well.
Mr Glasgow said in his first affidavit, under the heading, “Decision to proceed”, that:
40.After the meeting with Farid and Mina on 18 November 2010, I was keen to proceed to purchase the Gelare Forest Hill franchise. Lisa was to go through the process of obtaining necessary legal and accounting advice and obtaining the proper documentation.
On 19 November 2010, an email was sent from Mr Glasgow’s email account to Mr Torabi. It said, in part:
Hi Farid,
Thanks for your time yesterday, it was a pleasure to finally meet you.
As discussed this morning there are a few areas within the agreement that need alterations to and a couple of points we feel should have provision for. As you can appreciate, Lisa and I are preparing for worst case scenarios, to protect both our interests should anything happen. Contracts as you know are only ever referred to when things go wrong.
Both Lisa and I are very confident that everything will run extremely well and are prepared to commence training immediately. We will obviously sign the amended documents and transfer the required funds as soon as this takes place.
Please refer to the following points we need addressing before signing the contract.
We require the original lease agreement from Forrest Hill Chase as we only have the amended version. The version that you have is the same as the main one without shop details, names, etc..
…
Thanking you in advance
Paul Glasgow
Ms Stark said that she drafted and sent that email, even though it appeared to have been signed by Mr Glasgow and referred to her in the third person.
Mr Torabi replied by email on 19 November 2010 in the following terms:
…
Unfortunately, it will take time for me to sent (sic) you the actual lease. We have to activate some services and pay deposits, contracts, etc. We need to do them right now. There will be extra costs if we do them in our name and then transfer them to you. To be able to open in time I have to lodge everything today. The lease will be in our name and you will be the guarantor and will be issued a license by the Centre to occupy the premises.
…
… Furthermore, as I stated yesterday we need a definite yes or no from you.
At that time, Mr Torabi had already signed the agreement to lease the premises for GFH. In fact, he had done so more than a month earlier, on 12 October 2010.
Also on 19 November 2010, Ms Stark sought advice by email from her solicitors on the unsigned disclosure document, the franchise agreement and the generic lease that had been provided on
5 November 2010. Ms Stark told the solicitors in her email that she did not want them to nit-pick and she and her partner “would most likely proceed” with the franchise.
On 22 November 2010, when Ms Stark had not heard from her solicitors, she sent them an email stating:
Hi Lou,
The store opens on December 10th and the lease for the shop needs to be signed. We are under pressure to sign up today as a result. Are we okay to sign off subject to the 7 day cooling off period?”
A solicitor telephoned Ms Stark later that day and told her not to sign the franchise agreement until the lease was resolved.
On 22 November 2010, Mr Torabi sent Ms Stark, at her work email address, an email as follows:
Hi Lisa
Thanks for the update. We are pushing to have the shop open by 15th December. I understand some of the work that needs to be done at your end. However, we need to start training you right away. In order for us to wait until you have sorted out your arrangements, will be too late. However, to go forward we require a deposit of $50,000 immediately. Please deposit this amount into our account…
I would appreciate your prompt payment and advice. We will proceed with training schedule soon after.
On 23 November 2010, Ms Stark said she had a more detailed conversation with her solicitor in which, among other things:
a) the solicitor said, in respect of the disclosure statement, there were a number of matters incomplete;
b) he summarised the franchise fees;
c) he said that there were no financials of Gelare International attached to the Disclosure Statement;
d) they discussed the franchise agreement, but he had yet to review it in detail;
e) the solicitor said he had not fully reviewed the lease;
f) he said Ms Stark and Mr Glasgow would have no control over the lease, as typically franchisors negotiate the lease directly with the shopping centre and it was generally very difficult to negotiate terms with the shopping centres and it would be weighted in favour of the lessors; and
g) he would:
i) provide details of the omissions from the Disclosure Statement;
ii) provide written advice regarding proposed amendments to the franchise agreement; and
iii) provide further feedback on the lease once it had been properly reviewed.
On 23 November 2010, Mr Torabi sent an email to Mr Glasgow and Ms Stark saying:
Dear Lisa and Paul
Further to my email yesterday, we have not received a response from you as yet. As you appreciate and advised, the time is of essence and we have a lot of work ahead of us to get the shop up and running. For that matter we have now decided not to proceed any further with your application for the Forest Hill Chase Shopping Centre. We have already commenced hiring and training people and will run this store as company owned.
We hope to be able to accommodate you with other sites when they become available and if you are still available.
…
Ms Stark telephoned Mr Torabi on 23 November 2010 in response to his email of earlier that day. She said in her first affidavit that:
89.On or about 23 November 2010 at 3.27 PM, I had a telephone conversation with Farid for 5 minutes and 59 seconds. I expressed disappointment about receiving his email, dated 23 November 2010, and said that Paul and I wanted to be the franchisees at Gelare Forest Hill. I said that I was confident that Paul and I would be successful as Gelare Franchisees. I said that we had not paid the deposit of $50,000 but this was not because we are not interested.
I said I was holding off paying the deposit because all I had been provided was a generic lease and franchise documents and I was waiting for the lease and the Franchise Agreement in final form. I said that we are also waiting for the lawyers and the accountants to get back to us regarding the generic documents we had provided them.
…
90.Farid said that the $50,000 was refundable and if we were serious about proceeding we had to pay it immediately.
He emphasised that time was of the essence, the grand opening was to occur on 15 December 2010 and before then there was a whole heap of work of marketing training and fitout and equipment works which needed to be completed. Farid said that Paul would need at least 4 weeks’ training and could not commence training until the deposit was paid.
91.I asked, where is the lease and when can we have it? Farid said it was still being finalised. Farid said that as long as we can get the deposit through then Paul can start training and everything will be fine.
92.Farid said that, if we don’t sign the paperwork, then you will get the deposit back less incidental costs. He said that this is stated in the Disclosure Document. He said that he required that we sign the Disclosure Document if we were to go ahead.
Mr Torabi’s version of the conversation as described in his second affidavit is:
95.… Lisa said she and Paul were disappointed about the content of my email sent that day. She asked that I change my mind. She said:
a.Paul would be successful as a franchisee;
b. She and Paul will be 100% on board;
c. Paul had “quit his job to get this”;
d. Retail work is all she knows;
e.She and Paul each have great knowledge of the business world and her family is wealthy.
96.Lisa did not say she was holding off paying the deposit because she had not received the final documents and was waiting for their accountant and lawyer to get back to them about the documents.
97.In respect of paragraph 90 of Lisa’s First Affidavit, I agree with its contents although I did not say there would be a grand opening, or words to that effect.
98. As to paragraph 91 of Lisa’s First Affidavit:
a.She did not ask where was the lease and when she could have it or anything to that effect;
b.I did not say the lease was still being finalised, or words to that effect;
c.I did not say that so long as Gelare receives the deposit, Paul can start training and everything will be fine, or words to that effect.
99.I agree, as deposed in paragraph 92 of Lisa’s First Affidavit, that I said:
a.If they don’t sign the paperwork (I was referring the franchise agreement) they will get their deposit back less incidental costs; and
b.This is stated in the disclosure document;
c.I required them to sign the disclosure document if they were to go ahead.
100.As a result of these calls, I changed my mind and decided to grant Paul and Lisa the franchise if they paid the deposit straight away. I did so because:
a.Paul said that he had quit his job to take the franchise and said he would work full-time in the business which indicated to me that he was serious. This was 70% of the reason for changing my mind; and
b.Lisa had said at the start of the application process that money was not a problem for her and Paul and I took comfort in this that they were not putting “all their eggs in the one basket”.
101.Again, had I known that Paul had already applied for a job with Lightning Source and was intending to work full-time with that company, I would not have changed my mind and agreed to grant Paul and Lisa’s company (Palis Victoria) the Forest Hill franchise.
Ms Stark said in her first affidavit:
93.After this telephone conversation with Farid, I thought to myself okay, am I being overly cautious here? I thought to myself, there is this sense of urgency and if we are going to take this opportunity, we have to move fast. I decided to pay the deposit, as I thought it was refundable. I thought this because item 13.2 of the Disclosure Statement I received on 5 November 2010, stated the deposit will be refunded at any time during the cooling off period less related costs [or] expenses.
On 23 November 2010, Mr Glasgow and Mr Stark signed the disclosure document that had been provided to them by Mr Takla on
5 November 2010. Ms Stark emailed it to Mr Torabi that day.
On 24 November 2010, Ms Stark paid a deposit of $50,000 to GI. Later that day, Mr Torabi sent Ms Stark an email thanking her for the deposit and requesting payment of invoices which he attached, being:
a) $28,875 for a bank guarantee;
b) $9,625 for the first month’s rent; and
c) $2,200 for the design review fee.
On 25 November 2010, Mr Glasgow commenced training at GD.
That training continued for some weeks. During that time, he engaged other staff for GFH, and they were also trained at GD. One of the trainees was Ms Stark’s daughter, Rachel.
On 25 November 2010, Ms Stark received a letter from her solicitors stating:
In regards to the Disclosure document, there are a number of matters which the Franchising Code of Conduct requires to be answered which have not been addressed. This includes responses to parts 17A to 17D (see attached extract from the Code of Conduct). These questions are important as the shopping centre lease does extend on a month by month basis after the initial 5 year lease and they often let these run.
We suggest you request the Franchisor amend the Disclosure document & Franchise Agreement accordingly.
…
On 25 November 2010, Ms Stark told her solicitor by email that the franchisor had agreed to make the changes he had required and said further:
As per the Franchise Agreement, the lease is held by the Franchisor and has been signed, so there are no issues there.
We are guarantors only while the agreement is in force.
Also on 25 November 2010, Ms Stark emailed Mr Torabi saying:
Hi Farid,
We need to deal with some house keeping issues so we can move forward quickly.
Disclosure & Franchise Agreement
Our lawyers have advised that the documents we have are old versions as they do not comply with parts 17A to 17D of the Franchising Code of Conduct. I’m thinking your lawyer has given you an old version by mistake because these changes are universal and cover most of what I queried with you!. Either way, to comply with the Code, we need these clauses added to both documents. Please refer to the attached email / document. Can you please have these emailed urgently, so we can sign off quickly?
…
Lease
The copy we have does not have variables entered, such as basis for rent review, variable rents etc. Documents refer to the Invitation to Lease 3/8/10 which we presume covers these points. Could we please have a copy of this invitation or a copy completed lease document that you have executed? Understand that this is in the name of Gelare International with us as guarantors, but we just need to budget for increases, extras to make sure we have everything covered. We also want to incorporate shopping centre rules etc in our employee agreements.
…
Mr Torabi replied by email on 25 November 2010 stating that:
Dear Lisa
Thanks for the update. Here are our comments:
Disclosure & Franchise Agreement
I have forwarded your e mail to our solicitor for his comments.
…
Lease
No problem. Please find attached copies of our offer to lease and lease schedules. (We will copy the whole lease document, etc and will pass on to you later. It is a thick document containing all the disclosures and so on). We need to get the Centre to issue you with a license to operate under the lease as our franchisee. We can do that once we have all your papers and registration in place.
…
The documents attached to Mr Torabi’s affidavit were:
a) the lease offer dated 19 August 2010 from Colonial Mr Takla with handwritten amendments made by Mr Torabi regarding an exclusivity clause “similar to Bayside”;
b) the draft blank exclusivity clause Mr Torabi provided to Colonial on about 19 August 2010;
c) the first page of the “Agreement for Lease”, dated 12 October 2010, between GI and Colonial; and
d) a two page document headed “Information Table”, which was part of the agreement to lease.
Ms Stark said in her first affidavit:
109.I believed that the Lease had been signed because Farid said in his email, dated 25 November 2010 at 9.36am, “(We will copy the whole lease document, etc and will pass on to you later. It is a thick document containing all the disclosures and so on)”. I assumed that the hand-written notes initialled by Farid that he had provided to me had been accepted by the landlord and were contained in the lease. And Farid had promised to provide me the lease. Accordingly, I accepted that there was exclusivity that there would be no other café on level 3, as Farid had told me. However, as the lease documents provided to me in his email did not clearly show this, I made a mental note that I should ensure that I received a copy of the lease as had been promised.
Later on 25 November 2010, Ms Stark received an email from Maree Connor of GI that stated:
List of amounts already paid by Gelare International for Forest Hill.
Architects fees - $9900.00
Shopfitter deposit - $37672.50
Insurance - bus pak and Public Liability - $2170.00
Deposit on Material for Fitout pre order - $3489
Deposit on Furniture - $4784.45
Total to date $58,015.95 inc GST”
Ms Stark said in her first affidavit that she then realised that the $50,000 she had paid had not been held by GI as a deposit, as Mr Torabi had indicated, but had already been applied to expenses.
In her first affidavit, Ms Stark said that in late November 2010, she obtained financial advice in an email from her accountant. She said the email was undated and attached a “bundle of financial documents”, “circa 30 November 2010.” She said that the email said:
Stark – Gelaire
Model works IF the turnover gets to the level indicated, AND the gross margins are what they say they are.
Heavy reliance on franchiser data –
· new shop (will there be the required traffic?)
· Unknown (?) brand – do they really sell that many icecreams?
· Gross Margin – can costs be locked in?
· Shop overheads – rent & fit-out. Are these figures reliable?
Great business IF the sale vlume (sic) is there, AND the gross margin stays (inc franchise fees) AND rental remains uniform.
Oddly, the “email” exhibited to Ms Stark’s affidavit does not have the usual to, from, date and time. Rather, the content set out above is on an otherwise blank page, with no date, author or addressee. Additionally, the bundle of financial documents gives no indication of who prepared them, but some of them do state that they were prepared on 26 September 2012.
In any event, Ms Stark then instructed her accountant to establish Palis, which he did on 30 November 2010.
On 30 November 2010, Ms Stark received a four page letter of advice from her solicitors regarding the franchise agreement. It included advice on the draft lease but not the final lease that GI had entered into on 12 October 2010. Mr Torabi had still not provided the lease in final form to Ms Stark or Mr Glasgow.
On 2 December, 2010, Ms Stark emailed Mr Torabi saying that she had still not received “the agreement” from his solicitor. Mr Torabi replied by email the same day, saying:
Sorry for the delay. Please find attached blank copy of the franchise document and the disclosure. Please have them check out and get back to me. I can then give the go ahead to the lawyers to draw the documents for signing.
The attached disclosure document had not been signed on behalf of GI. It had some changes from the unsigned disclosure document provided on 5 November 2010.
On 3 December 2010, Ms Stark had a telephone discussion with her solicitors to the effect that:
as I was unable to provide Holding Redlich with the actual lease documents and had only provided them with the generic lease documents, they were only able to provide general advice, and that I should obtain a copy of the actual lease documents. Having said that, the lawyer said to me that the lease would be held by the Franchisor, and as it had already been signed, it was therefore not a matter of me being able to negotiate the terms of the lease.
Ms Stark said that, on 3 December 2010, GI issued an invoice to Palis Investments P/Ltd ATF Palis Family Trust for $73,651.15 for fit out costs. On 6 December 2010, Mr Torabi sent Ms Stark an email saying:
The centre is chasing the bank guarantee and other fees (please see below). Can you please arrange. I also need your feedback on the revised franchise document and the disclosure. Your prompt attention to both items is greatly appreciated.
Mr Glasgow said in cross-examination (T184) that he accepted a position with Lightning Source in early December 2010. He did not provide to the court any documentary evidence about when his job with Lightning Source started or the terms and conditions of the employment. He said that he commenced working for Lightning Source on 10 January 2011. He said that he was paid on a full time basis by Lightning Source. He said that he did not tell Mr Torabi about his job with Lightning Source because he had no reason to.
On 7 December 2010, Ms Stark sent Mr Torabi an email as follows:
The Disclosure document is essentially ok. A few issues:
This document acknowledges we have received:
A copy of the Franchise Code – which we have not to date,
Plus a copy of the Lease – not yet received
…
Later that day, Ms Stark sent Mr Torabi a further email as follows:
I still do not have a copy of the signed lease, which is referred to a fair bit in the Franchise agreement.
Can you please send me one asap. Can be sent by fax on the number below if that is easier or final version in soft copy
…
Agreement response will be through to you today.
…
Also on 7 December 2010, Ms Stark sent Mr Torabi an email setting out various proposed amendments based on advice Ms Stark received from Holding Redlich, and then saying:
…
If we can make these amendments, which should generally be okay I think given our conversations, we are happy to sign off and get going. Hafe a safe trip overseas and we look forward to seeing you in Melbourne on your return.
…
Mr Torabi said that, thereafter, discussions about the terms of the franchise agreement were conducted by his solicitor and Ms Stark via email.
Later on 7 December 2010, Ms Connor, from GI, sent Ms Stark an email attaching the Franchising Code of Conduct.
Also on 7 December 2010, Mr Torabi sent Ms Stark an email stating:
As you have noted, the disclosure document is a general document. The way it is written and between that and the franchise document, the extension of the franchise has been dealt with.
Maree has already e mailed you a copy of the franchise code.
The lease document is the same as the blank lease copy with the exception of the terms. We have already emailed you a copy of those terms. I will also post a copy of the lease to you, Please return to me when I leave Melbourne sometime next week.
Here is my suggestion to you for the rest:
A.Please let me know if you are happy with the contents of both Franchise deed and Disclosure.
B.Once you let me know, I can have the solicitor print and bind copies and sent for Signature. Since the lease is under Gelare International Pty Ltd, we also need to prepare a license to occupy the premises for you.
C.I will be in Melbourne on 13th December. And we can take care of the following:
1.No need for independent auditor report if I sign the disclosure stating that we are financial as of the end of June 2010.
2.I can pass on a copy of the actual lease to you
3.We can Sign all the documents at that time.
Please advise me promptly as I will be away as of tomorrow …”
On 7 December 2010, Ms Stark paid the $73,651.15 sought by GI in the invoice dated 3 December 2010. Ms Stark said that she made these payments because Mr Torabi had told her that any delay in the payments may delay the opening of the shop.
On 8 December 2010, Ms Stark paid to Colonial the $11,825 sought by GI in its invoice dated 24 November 2010 (for the first month’s rent) from her personal bank account.
On 8 December 2010, Ms Stark sent an email to Mr Torabi as follows:
Mina has advised Paul the store may not be able to open until the 20Th. We would like to be open by the 17th latest – also thinking of the shopping centre lease requirement. What can we do to help keep everything on track for the 17th latest – even if everything is not absolutely finished?”
Between 8 and 14 December 2010, Ms Stark and Mr Chong, GI’s solicitor, negotiated various amendments to the franchise agreement.
Ms Stark said in her first affidavit that she had a telephone conversation with Mr Torabi on 14 December 2010. He did not dispute that, though said he did not recall it. Ms Stark said that Mr Torabi said during the telephone conversation that:
Paul and I had to sign the Franchise Agreement on 15 December 2010 because the shopping centre would not let us trade if we had not already executed a licence to occupy. Farid said this could only be done after we executed the Franchise Agreement. Therefore, if we caused delay, by not signing the Franchise Agreement, even if the shop were ready, we would be unable to trade.
On 14 December 2010, Ms Stark printed the disclosure document and she and Mr Glasgow signed it and dated it 14 December 2010.
Mr Torabi said that, on 14 December 2010, he gave Mr Glasgow, at GD, the signed agreement for the lease in respect of GFH. The applicants disputed that, saying it was given to them after they signed the franchise agreement, on 15 or 16 December 2010.
The franchise agreement is dated 15 December 2010. It was signed by:
a) Mr Torabi on behalf of GI;
b) Mr Glasgow and Ms Stark on behalf of Palis; and
c) Mr Glasgow and Ms Stark on their own behalves.
The signatures of Mr Glasgow and Ms Stark, where they have signed on their own behalves, were witnessed by Mr Takla.
In her first affidavit, Ms Stark said that, on 15 December 2010, she, Mr Glasgow, Mr Torabi and Mr Takla met at GD and signed the franchise agreement, after Mr Torabi said various things to them.
Mr Torabi and Mr Takla denied that. Mr Torabi said in his affidavit evidence that:
a)
he did not meet Mr Glasgow and Ms Stark at all on
15 December 2010;
b) on 16 December 2010, at GD, Mr Glasgow gave him the franchise agreement that had already been signed by him and Ms Stark;
c)
Mr Torabi then signed the franchise agreement and gave
Mr Glasgow a signed copy of the disclosure document;
d) neither Mr Glasgow nor Ms Stark, who was not at the meeting, asked to review the financials; and
e) Mr Torabi told Mr Glasgow that the opening of GFH was delayed because work had to stop while the Hoyts Cinema was opening and the fit out contractors could not work for three days.
In his affidavit evidence, Mr Takla did not specify the date when the franchise agreement was signed. However, he said that Ms Stark brought it to GD, she and Mr Glasgow signed it in Mr Takla’s presence, he witnessed their signatures, and then Ms Stark left.
He said that, later, Mr Torabi came to GD and spoke to Mr Glasgow alone. It was unclear whether that was on the same day as the signing.
At the commencement of her oral evidence, Ms Stark corrected her affidavit evidence. She said that the meeting actually occurred, and the franchise agreement was actually signed, on 16 December 2010 rather than on 15 December 2010. Mr Glasgow did not make the same correction to his affidavit evidence. His affidavit said that the franchise agreement was signed on 15 December 2010 and that remained his evidence.
In any event, Ms Stark sent an email to GI’s lawyers on 15 December 2010 (CB3788) saying:
Please find attached the completed document which I have printed off, we have signed and will provide to Farid due to the imminent store opening. Please note, I have rectified all numbering due to continual issues – must be a problem in the file.
The document attached to the email was the franchise agreement.
The version attached to the email was not signed. In cross examination[2], Ms Stark said that she had sent the email before signing the franchise agreement and then realised that it had to be witnessed so did not actually sign the franchise agreement on 15 December 2010.
[2] T128.
In any event, Ms Stark said that, at the meeting on 16 December 2010, which Mr Torabi said she did not attend, Mr Torabi presented her and Mr Glasgow with the franchise agreement and said “you must sign these documents”. Mr Torabi denied that.
Ms Stark then said in her first affidavit:
I noticed that the last page of the Franchise Agreement was an acknowledgment that Paul and I had received financial and legal advice which we were expected to sign. It was very frustrating and disappointing to see this because we were being pressured to acknowledge something that was not true. I had been unable to provide the final Franchise Agreement or executed lease to Holding Redlich. Accordingly, during the meeting, while Farid and Mina were not looking, I removed that page from the Franchise Agreement.
Ms Stark said that Mr Torabi provided a copy of the lease at the meeting that she initially said was on 15 December 2010 but later said was on 16 December 2010. Mr Torabi said that he had provided the lease to Mr Glasgow on 14 December 2010.
There was no grand opening of level 3 of the Forest Hill Chase Shopping Centre on 15 December 2010 or at any other time. GFH did not open on 15 December 2010. However, there was an opening day for the Hoyt’s cinema on 15 December 2010, which meant that work had to stop on the fit out for GFH.
On 15 December 2010, the only stores on level 3 that were open were Hoyts, JB Hi-Fi, Rebel Sport, TAB and AMF, but without Laser Strike. Seven stores, plus GFH, were not open.
On 17 December 2010, the equipment for GFH arrived. However,
Ms Stark discovered that no one had arranged electricity for the store. She rang various electricity companies and was told that connection could occur in January 2011.
On 21 December 2010, Mr Takla was assisting Mr Glasgow at GFH and turned on a switch. There was power. He then proceeded to serve customers. It later appeared that GFH had been taking power from another tenant.
Ultimately, Palis spent $363,732.35 on start-up costs.
On 22 December 2010, Ms Stark looked at the lease for the first time. She said she had been unable to do so previously because she was busy with her full-time job and other commitments. At that point,
Ms Stark said that she noticed that:
a) the exclusivity clause only concerned other cafés that served ice-cream and waffles, which she felt was ridiculous;
b) there was no grand opening of the whole floor; and
c) the opening hours were:
i) Monday to Wednesday, 9.00am to 5.30pm;
ii) Thursday and Friday, 9.00am to 9.00pm;
iii) Saturday, 9.00am to 5.00pm; and
iv) Sunday, 10.00 am to 5.00pm,
which Ms Stark felt was too restrictive.
Ms Stark said that she attempted to contact her lawyers, but they were on Christmas break. She said she and Mr Glasgow considered cooling off under clause 26.1 of the franchise agreement. However, they noted that the 14 days ran from the earlier of:
a) entering into the franchise agreement; or
b) paying any money under the agreement.
Ms Stark said that, as she had paid $50,000 on 24 November 2010, and other monies later, she considered that the 14 day cooling off period had already expired.
GFH’s sales for January 2011 were $29,651 and for February 2011 were $20,408. These figures were significantly less than the average forecast monthly sales of $35,833.
Mr Glasgow spent two weeks in January 2011 in the United States having training for his new job with Lightning Source. Mr Glasgow said in his affidavit that:
Between 22 December 2010 and 8 June 2011, I worked extensive hours in the Forest Hill Gelare Café, other than the two weeks I spent in the US in January 2010.
In cross-examination (T184), Mr Glasgow said that he started working full time for Lightning Source as of 10 January 2011. He later said that, between 22 December 2010 and 8 June 2011, he was working full time at GFH, and later said that he was not working full time hours at Lightning Source. He said that, until 8 June 2011, his work for Lightning Source consisted of reading literature, participating in conference calls between 11pm and 1am and learning processes.
In re-examination (T189), Mr Glasgow said that, between
22 December 2010 and 8 June 2011, he worked at GFH from 5.30am until 12 midnight. He said that, after 8 June 2012, when he started working fulltime office hours at Lightning Source, he worked at GFH from 6am until 8am, one hour at lunch time, (Lightning Source was 10 minutes down the road) and from 6pm until midnight.
Ms Stark said in her first affidavit that:
Paul and I felt that Farid was not providing the support and assistance we required. Paul and I also felt that on most occasions when we experienced a problem, Farid would blame Paul, suggesting that Paul’s and my lack of experience or presence at the shop was the cause of the low sales. Paul and I decided that we should seek some rent relief, as the weekly sales of approximately $5,000 Gelare Forest Hill was achieving in February 2011 were insufficient to cover the wages, operating costs and rent of Gelare Forest Hill.
Ms Stark said in her first affidavit that Colonial had a responsibility to GFH for the following reasons:
a.Paul and I had been told that there was to be a grand opening of all stores (except one) on 15 December 2010, however, there was no grand opening of all stores on
15 December 2010.
b.Paul and I had been told that all of the stores, except for 1, would be open by 15 December 2010, however, not all of the stores on level 3 had opened. By the middle of February 2011, 8 of the 12 stores on level 3 were open. However, TGI and Balsamic accounted for approximately 30% of the lettable area of the entertainment area on level 3 and each had yet to open.
c.There was a lack of marketing of the level 3 entertainment area by Colonial.
d.Temporary power problems continued to disrupt Gelare Forest Hill. This caused Gelare Forest Hill to have no hot water and Gelare Forest Hill not being able to use all of the equipment concurrently. Our modem frequently did not work as a result of these issues. The lack of hot water also meant that equipment had to be washed in the dishwasher, which caused damage to the equipment.
e.The storeroom fit out was poor as stated in the City of Whitehorse Inspection Report, dated 21 January 2011.
We regarded Colonial as being responsible for this problem because we had paid Colonial for the cost of the fitout of the storeroom in accordance with the Agreement to Lease.
f.Various issues in respect of the Forest Hill shopping centre. These included:
i.Disruption to level 3 caused by continued works to unopened tenancies;
ii.Lack of signage on the outside of the Forest Hill shopping centre. Forest Hill shopping centre fronts Canterbury Road, however, there was limited signage of the entertainment centre on the front of the building;
iii.Disruption caused by works to the car park on the ground level…;
iv.Lack of signage on the ground floor car park to the car park on level 3…;
v.Escalators operated during limited hours;
vi.JB Hi-Fi’s alarm would activate. On three occasions, JB Hi-Fi’s alarm activated at about 5.30 pm and continued all night; Customers were not prepared to sit and have coffee while the alarm sounded…;
vii.Only about 30% of the lighting on level 3 was installed and turned on;
viii.JB Hi-Fi and Rebel Sport did not stay open during the “entertainment hours” but only during the shopping centre hours; and
xi.Air conditioning on level 3 was ineffective.
Consequently, Mr Glasgow and Ms Stark sought rent relief from Colonial. Mr Glasgow and Ms Stark sent an email on 21 February 2011 to GI, Colonial and various others addressing the above concerns.
There was a meeting with Colonial on 25 February 2011. It was attended by at least Ms Stark, Mr Torabi and Mr Takla. Ms Stark sought a 50% rent reduction. Colonial eventually offered a 25% rent reduction up to June 2011. Palis accepted that, subject to all stores being opened by then.
Ms Stark said that, during March 2011, GFH continued to have problems with its telephone line, which prevented the use of the EFTPOS facility and modem.
Ms Stark said that, during April and May 2011, GFH continued to have problems with its electricity, with one of the three circuits overloading often two or three times a day. She also said that there had been problems with the plumbing since opening. Ms Stark sent an email to Mr Torabi on 17 June 2011 saying that the store was closed due to electrical problems.
The applicants said in their written submissions on this point that:
The legal principles governing unconscionable conduct under section 51AC may be summarised as follows:
a.“unconscionability” for the purposes of section 51AC is a broader concept than unconscionability under the unwritten law and in equity;
b.it should not be read down to apply only to conduct that would traditionally be regarded as unconscionable according to equitable principles;
c.unconscionability has been described as “an open-ended concept”, and it has been said that as the section is intended to build on, and not be constrained by, decisions in equity, it is neither possible nor desirable to define its scope;
d.in order to be regarded as unconscionable, the conduct must be contrary to good conscience - to be tainted with moral obloquy - a factual question in each case based on the conduct involved;
e.the range of conduct that may constitute unconscionable conduct can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery and misleading conduct, depending on an examination of all the circumstances;
f.the context here is consumer protection directed at the requirements of honest and fair conduct free of deception. Notions of justice and fairness are central, as are vulnerability, advantage and honesty;
g.one of the matters specifically adverted to by Parliament (in section 51ASC(3)) is “the requirements of any applicable industry code”. Accordingly, non-compliance with the requirements of the Franchising Code by a franchisor or prospective franchisor is relevant to, and informs, the question whether it acted unconscionably in respect of its dealings with a prospective franchisee;
h.unconscionabilty does not necessarily require dishonesty (although if dishonesty is established, the conduct is likely be unconscionable).
See Paciocco v Australia and New Zealand Banking Group Ltd (2015) 321 ALR 584, [2015] FCAFC 50; Body Bronze International Pty Ltd v Fehcorp Pty Ltd (2011) 282 ALR 571, (2011) 34 VR 536, [2011] VSCA 196; Canon Australia Pty Ltd v Patton (2007) ATPR 42-183, (2007) 244 ALR 759, (2008) ASAL ¶55-177, [2007] NSWCA 246; Australian Competition and Consumer Commission v Seal-A-Fridge Pty Ltd (2010) 268 ALR 321, [2010] FCA 525; Tonto Home Loans Pty Ltd v Tavares [2011] NSWCA 389, 15 BPR 29,699; Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132, (2005) 56 ACSR 131, (2005) 23 ACLC 1989, [2005] FCAFC 226; Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51, (2003) 77 ALJR 926, (2003) ATPR 41-916, (2003) ASAL 55-098, (2003) Aust Contract R 90-160, (2003) 24(7) Leg Rep 2, (2003) NSW ConvR 56-059, (2003) 197 ALR 153, [2003] ANZ ConvR 323, (2003) Q ConvR 54-589, [2003] HCA 18; Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132, [2005] FCAFC 226; Director of Consumer Affairs Victoria v Scully (2013) 96 ACSR 455, (2013) 303 ALR 168, [2013] VSCA 292; Henderson v McSharer [2015] FCA 396; Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90.
The applicants said that the conduct of GI and Mr Torabi was unconscionable because:
a.Gelare International committed multiple serious breaches of the Franchising Code, including demanding and receiving significant non-refundable payments before providing the applicants with copies of the Franchising Code, a valid disclosure document and a copy of the franchise agreement in the form in which it was to be executed, thereby financially “locking in” the applicants as prospective franchisees before they had an opportunity to consider and obtain independent advice on the relevant transaction documents, including the Lease, which was integral to the franchise agreement.
b.Farid was knowingly involved in those contraventions.
c.This placed the applicants in a position of serious disadvantage vis-à-vis Farid and Gelare International in negotiating the Franchise Agreement.
d.This position of serious disadvantage was compounded by the failure by Farid and Gelare International to provide the applicants with all of the necessary information required by them to make an informed decision as to whether or not to enter into the Franchise Agreement (again in breach of the Franchising Code).
e.The applicants were not able to understand a very important document relating to the supply or possible supply of services by Gelare International, namely, the Lease, because they were not provided with a copy of the Lease in adequate time before they signed the Franchise Agreement and were not given an opportunity to consider its terms, and obtain legal advice in relation to it, before signing the Franchise Agreement. Indeed, Farid and Gelare International by their conduct ensured that the applicants were not given adequate time to consider the terms of the Lease, and they knowingly misrepresented very important terms of the Lease (the exclusivity provision/that there would be a Grand Opening) in their negotiations with the applicants.
f.Gelare International and Farid also committed a number of serious contraventions of the Trade Practices Act and the Fair Trading Act, making representations to the applicants which they knew were misleading and deceptive, namely:
i.the representation that the Gelare Café had the right to be the only café on level 3 of the Centre;
ii.the representation that there was to be a Grand Opening of the Centre on 15 December 2010;
iii.the representations as to the monthly and annual sales being achieved by the Doncaster Gelare café;
iv.the representation that the projected sales for the Forest Hill café of $430,000 per annum was based upon the average sales being achieved by Gelare’s other stores at the time; and
v.the sales and profit projections for the Forest Hill Gelare café, which they must have known were not made on reasonable grounds.
g.The applicants were profoundly misled by these misrepresentations, further exacerbating their position of disadvantage vis-a-vis Farid and Gelare International in negotiating the Franchise Agreement.
h.Further, Farid and Gelare International by the conduct described in sub-paragraphs (a)-(f) above, placed undue pressure on the applicants to enter into the Franchise Agreement, and their conduct was unfair.
i.Moreover, Farid and Gelare International’s conduct, as described above, was not honest and free from deception; it was, in short, conduct in bad faith.
j.Conversely, the applicants at all times in their dealings with Farid and Gelare International acted in good faith.
GI and Mr Torabi denied that their conduct was unconscionable. They relied on their arguments in relation to the misleading and deceptive conduct allegations. I come to the same conclusions in relation to those matters as set out previously.
The respondents also asked, rhetorically, why would Mr Torabi have said in an email on 23 November 2010 that he had decided not to proceed with the applicants’ application if he was being deceptive? As discussed above, the obvious answer is that he was putting pressure on the applicants to pay the $50,000 deposit or lose the chance to be franchisees at GFH
The lease was provided to Mr Glasgow on 14 December 2010, which was the day before he and Ms Stark signed the franchise agreement and two days before GI signed the franchise agreement. However, the lease was provided well after the applicants had paid over $135,000 to GI, about $85,000 of which was not refundable when paid, and the balance of which became non-refundable on 1 December 2010.
If Mr Glasgow and Ms Stark had looked at the lease when they received it on 14 December 2010, they would have seen that the exclusivity clause was not what they had been told it was prior to signing the franchise agreement on 15 December 2010. It was not put to them that they did look at the lease at that time. Ms Stark’s evidence was that she did not look at the lease until 22 December 2010. That evidence was not challenged and I accept it. Given the flurry of activity at that time, I find that claim plausible and her conduct in not immediately looking at the lease reasonable. The lease is about an inch thick.
Mr Torabi must have known on 12 October 2010, when he signed the lease, that the exclusivity clause was confined to another café that sold mainly ice-cream and waffles. It would have been very easy to convey that to Mr Glasgow and Ms Stark verbally or by email, even if
Mr Torabi did not want to provide the whole lease.
His failure to communicate that information prior to the applicants making non-refundable payments and becoming financially committed to the franchise agreement was unconscionable conduct on the part of GI.
I am not persuaded that GI and Mr Torabi’s conduct in relation to the grand opening representation was unconscionable. As discussed, that was a matter within the control of the landlord, Colonial. It was not clear when GI and Mr Torabi became aware that there was not going to be a grand opening of level 3. It appears that, ultimately, the only grand opening was of the Hoyt’s cinema on 15 December 2010. There may have been some misunderstanding amongst the respondents of what was involved in the grand opening. I am not satisfied that the respondents were dishonest or abused their position or otherwise behaved unconscionably in relation to the grand opening.
I consider that the other misrepresentations found above were unconscionable. As mentioned previously, the respondents did not claim that the relevant representations were true or that they had a reasonable basis for believing the representations as to future matters. In such circumstances, I consider that the other misrepresentations were unconscionable.
GI’s liability for conduct of Mr Torabi and Mr Takla
The applicants claimed that GI was liable for the conduct of Mr Torabi and Mr Takla. The respondents did not specifically dispute that.
Section 84(2) of the TPA provided that any conduct engaged in on behalf of a body corporate by a director or agent within the scope of his actual or apparent authority is deemed to have been engaged in also by the body corporate.
Mr Torabi was GI’s director and Mr Takla was its agent. Consequently, I accept that GI is liable for the conduct of Mr Torabi and Mr Takla discussed above.
Direct liability under the FTA
The applicants claimed that Mr Torabi and Mr Takla had direct liability under the FTA. The respondents did not specifically dispute that. Pursuant to s.9 and s.159 of the FTA, Mr Torabi and Mr Takla are directly liable to the applicants for their misleading and deceptive conduct discussed above. In Mr Takla’s case, that consists of his oral statements as discussed above. In Mr Torabi’s case, that consists of the misleading and deceptive statements contained in the financial documents as discussed above.
Accessorial liability for misrepresentations
Under s.82 of the TPA and s.159 of the FTA, damages may be recovered from the person by whose contravention loss or damage was caused or from any person involved in the contravention. Section 75B of the TPA and s.145 of the FTA provided that, among other things, a person was involved in a contravention if the person was in any way, directly or indirectly, knowingly concerned in or party to the contravention.
To be involved in a contravention, a person must have knowledge of the essential facts of the contravention: Yorke v Lucas (1985) 158 CLR 661. In Keller v LED Technologies Pty Ltd (2010) 185 FCR 449, (2010) 87 IPR 1, (2010) 268 ALR 613, [2010 ] FCAFC 55 at [336], it was said that, in a representations case:
To establish accessorial liability it must be established that the relevant person knew the representation was made and the facts which made it misleading or deceptive, or likely to mislead or deceive, or false. It need not be shown that the relevant person actually drew the conclusion that the representation was misleading or deceptive, or likely to mislead or deceive, or was false.
The respondents did not submit that Mr Torabi and Mr Takla were not knowingly involved in the relevant contraventions. I am satisfied that Mr Torabi was knowingly involved in the misrepresentations discussed above in the financial documents. I am satisfied that Mr Takla was knowingly involved in the misrepresentations discussed above in his oral statements.
First equitable set off: working full time
The respondents argued that there was an equitable set off arising from the applicants’ representation that Mr Glasgow would work full time in the franchised business. That representation was said to have occurred:
a) in writing, in the application form;
b)
in writing, in an email from Ms Stark to Mr Torabi on
28 October 2010; and
c)
verbally, at the meeting between Mr Glasgow and Mr Torabi on
18 November 2010.
I accept that those representations were made. The respondents maintained that, if they had known that Mr Glasgow was not going to work full time in the business, GI would not have entered into the franchise agreement with Palis and the claims the subject of this proceeding would not have eventuated.
The respondents said that Mr Glasgow did not tell the respondents prior to the franchise agreement being signed that he intended to take a full time job with Lightning Source. The applicants admitted that they did not tell the respondents that Mr Glasgow accepted a full time job with Lightning Source in December 2010. However, the applicants said that, notwithstanding Mr Glasgow’s full time job with Lightning Source, he also simultaneously worked full time at GFH.
Mr Glasgow said that, after GFH began operating on 20 December 2010, he took two weeks off to go to the USA to learn about Lightning Source. Ms Stark said that, in addition, he spent about three weeks in the USA in March 2011 and the two of them had about one week in Queensland at about that time. That was a total of six weeks away from GFH in its first five months. That does not accord with the usual understanding of full time work.
Mr Glasgow maintained that he was at GFH almost the whole time it was open until 8 June 2011, when he started working regular office hours at Lightning Source. After that, until GFH closed in October 2012, he claimed that he would work at GFH from about 6am until 8.30am, for one hour at lunchtime (Lightning Source was nearby) and from 5.30pm until midnight on weekdays and further hours on weekends. As discussed, I did not find Mr Glasgow to be an entirely credible witness. His claim to have worked two full time jobs simultaneously for more than a year strains credulity.
Mr Glasgow also claimed that the only reason he decided in May 2011 to take the full time job at Lightning Source was because, by May 2011, GFH was performing so poorly that he needed another source of income. However, he accepted the job with Lightning Source in December 2010. After that, and before May 2011, he had two trips to the USA, in January and March 2011, to be trained in the job. It is simply not true that he decided to take the job with Lightning Source in May 2011. He in fact said that he accepted the job in December 2010, though he claimed that Lightning Source did not open its Australian operations until 8 June 2011. It appears that Mr Glasgow meant that, if GFH had been more profitable, he may have relinquished his job at Lightning Source, after receiving training with them, before its Australian operations opened.
In any event, there were also a number of witnesses for the applicants who were casual employees at GFH. They said that Mr Glasgow worked extensive hours at GFH. However, none of them was at GFH at all the hours that Mr Glasgow claimed to be. Ms Stark’s daughter, Rachel Stark, said in her affidavit that Mr Glasgow was “always” at GFH when it was open, but then said that either she or Mr Glasgow was there when it was open. Obviously, “always” in Rachel Stark’s affidavit did not really mean “always”. Thomas Meer said that Mr Glasgow was “constantly in the store when it opened” and Mr Glasgow “was regularly in the store for long hours, especially in the first year”. This sort of evidence does not substantiate that Mr Glasgow actually worked full time at GFH. It is vague and does not provide the actual hours that he worked, such as timesheets or rosters might have done.
All in all, I do not accept that Mr Glasgow did work full time at GFH, either before or after 8 June 2011. However, the applicants maintain that, for other reasons, the equitable set off should not be accepted.
Firstly, the applicants argued that it was simply not true that GI would not have granted the franchise to Palis if Mr Glasgow had not indicated his intention to work full time at GFH. That was said to be demonstrated by the fact that GI gave the GD franchise to Mr Takla when he also had a Nando’s franchise in Wantirna. Mr Torabi said in cross examination that he was happy enough to allow Mr Takla to have the GD franchise even though he would not be working full time at GD due to his commitments at Nando’s. Mr Torabi also agreed in cross examination that he would have been happy for Mr Takla to take on the GFH franchise at the same time as he had the GD and Nando’s franchises, even though Mr Takla clearly could not have worked full time at GFH. Indeed, GI did give another franchise to Mr Takla, being the Highpoint store, which he operated from September 2011 until September 2013. That overlapped substantially with the time when Mr Takla ran GD, which was from August 2009 until December 2012.
Mr Torabi suggested that Mr Takla’s case was different to
Mr Glasgow’s because Mr Takla “was involved with Gelare”. I accept that Mr Takla was more experienced in running a Gelare franchise. However, I do not accept Mr Takla’s experience would have made such a difference that GI would have allowed him to run two Gelare stores and a Nando’s franchise simultaneously if the franchisee working full time in the business had been a genuine requirement.
That conclusion is bolstered by the fact that GI ran a number of its stores as company owned and operated stores in which there was no franchisee. Mr Torabi confirmed in cross examination that he was not bothered by the fact that there was no full time franchisee operating those stores.
In all the circumstances, including that I did not find Mr Torabi to be a credible witness, I do not accept that GI would not have entered into the franchise agreement with Palis if it had known that Mr Glasgow was not intending to work full time at GFH. For this reason, the first equitable set off must fail.
I also note that it seems likely that, even if Mr Glasgow had worked full time at GFH, it still would not have been profitable. That is because, when GI ran GFH as a company owned store, it only made annual sales of about $200,000.
Second equitable set off: terms of settlement
GI claimed that the applicants were estopped from bringing this proceeding because their conduct in asking GI to sign the application to the SBC against Colonial caused GI to assume that all matters relating to the lease and the franchise agreement as between the applicants and the respondents would be resolved by that application. Further, GI said that, if the applicants had not settled their claims against Colonial, GI could have joined Colonial to this proceeding and obtained an indemnity from them.
GI did not specify what the proposed indemnity would have concerned, or how Colonial might have been liable. However, to the extent that the indemnity might have concerned the grand opening representation, I have not found that the applicants suffered any loss and damage by reason of that representation. Consequently, the respondents have no liability by reason of that representation. I am not able to discern any other basis on which the proposed indemnity might have been relevant to this proceeding.
GI also claimed that Mr Takla attended the mediation “more as a bystander”. That is not so. The SBC records indicate that he attended as GI’s state representative. He signed the terms of settlement on behalf of GI and initialled the deletion of clause 5 on behalf of GI. He did so after speaking to Mr Torabi on the telephone and explaining the settlement to him.
Clause 5 would have released all parties, including the applicants and the respondents, from suits against each other if it had remained. GI argued that it was incumbent on Ms Stark to explain the effect of the deletion of clause 5 to Mr Takla. However, that is not so. GI arranged for Mr Takla to attend the mediation as GI’s representative, albeit at Ms Stark’s suggestion. As GI’s representative, he was taken to have had the necessary skills and authority to participate effectively in the mediation. He has a law degree, although he has never practised as a solicitor. It was not suggested that Ms Stark deleted clause 5 surreptitiously or said anything misleading about the effect of its deletion. I am not persuaded that her actions in deleting clause 5 showed a lack of conscience and good faith.
GI also argued that there was nothing for GI to gain from signing the settlement agreement with Colonial because all the benefit of the compromise (50% rent relief) went to Palis. Under the franchise agreement, Palis was required to pay GI for whatever rental was required under the lease. However, GI did stand to benefit indirectly from the compromise with Colonial, because the rent relief would have made GFH more profitable, or less unprofitable. That improved the prospects that Palis would have been able to continue as the franchisee at GFH without any complications of the sort that might have affected GI’s royalties or might have required GI to intervene in some way, such as when Mr Takla spent a week at GFH trying to improve its processes.
GI also said that Mr Torabi had said in an email to Ms Stark he would sign the application to the SCB on the basis that:
we all agree to abide by VCAT decision and not try to challenge or take it further.
GI suggested that, by asking GI to then sign the application to the SBC, Palis implied that it would not in the future take any legal action against GI. However, the statement in Mr Torabi’s email only concerned an appeal from the VCAT, or SCB, decision. It did not in any way purport to restrict the applicants’ ability to take proceedings against GI.
There is no other conduct or statement by the applicants that GI relies upon to found the second equitable set off. It does not seem to me that the conduct and statements complained of were in the clear, precise and unequivocal terms that are required to produce an equitable estoppel. Consequently, the second equitable set off must fail.
Clean hands
In addition to the matters stated previously, it is axiomatic that those who seek equitable remedies must come to court with clean hands.
In applying that rule, the New South Wales Court of Appeal said in Official Trustee in Bankruptcy v Tooheys Ltd (1993) 29 NSWLR 641 at 650:
The unmeritorious conduct which debars relief is not “general depravity”; it must be conduct which has “an immediate and necessary relation to the equity suited for”… On that test, the present case is one in which the relationship between the false representations and the equity sued upon is sufficiently close to establish the defence. There is a clear and close connection between the misrepresentations made to Tooheys and Tooheys’ willingness to participate in the transaction out of which the alleged estoppel arose.
In the present case, there is such a clear and close connection. GI’s misrepresentations induced the applicants to enter into the franchise agreement. The alleged equitable set offs arose out of the relationship established by the franchise agreement. GI’s misrepresentations and unconscionable conduct identified above were the type of unmeritorious conduct which debars equitable relief. Consequently, for this reason also, the two equitable set offs cannot succeed.
Counterclaim
GI counterclaimed against Palis for $44,756.04 for monies due and owing and for $243,244.61 for breach of contract. Both aspects of the counterclaim arose out of alleged breaches of the franchise agreement arising from the applicants walking away from GFH.
The applicants argued that, because of the respondents’ misconduct in inducing them to enter into the franchising agreement, they should be relieved of the consequences of breaching the franchise agreement pursuant to s.87 of the TPA and s.158 of the FTA. I accept that argument.
Damages
The applicants sought damages of $788,980. The respondents did not challenge the amount of damages sought. I presume that they have satisfied themselves that the amount is correct. However, pursuant to s.86AA of the TPA, this court only has jurisdiction to award damages of up to $750,000 under the TPA. There did not appear to be any applicable jurisdictional limit under the FTA. In any event, I would be assisted by the parties submitting minutes of orders reflecting these reasons, and making any submissions they see fit regarding the jurisdictional limit.
I certify that the preceding three hundred and ninety-seven (397) paragraphs are a true copy of the reasons for judgment of Judge Riley.
Associate:
Date: 13 October 2015
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