Pirtek Fluid Systems Pty Ltd v Kaydon Holdings Pty Ltd

Re: PIRTEK FLUID SYSTEMS PTY LIMITED
And: KAYDON HOLDINGS PTY LIMITED; JOHN WALTER PAULL and HELEN LYNETTE PAULL;
PIRTEK FLUID SYSTEMS PTY LIMITED; PIRTEK AUSTRALIA PTY LIMITED; PIRTEK (WA)
PTY LIMITED; PETER BRIAN DUNCAN; WALTER GREGORY DAVEY and BARRY JOSEPH PIKE
No. G701 of 1990 and No. G138 of 1991
FED No. 534
Trade Practices
22 IPR 117

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies J.(1)

CATCHWORDS

Trade Practices - misleading or deceptive conduct - franchise agreement for distribution of hoses and other hydraulic equipment - franchisee in financial difficulties - whether insufficient support by franchisor - whether misleading financial forecasts by franchisor - whether a breach of the franchise agreement.

HEARING

SYDNEY

#DATE 30:8:1991

Counsel and Solicitors for the Applicant, : Mr J.v Nicholas instructed by
First, Second, Third, Fourth, Fifth and Messrs Williams Niblett
Sixth Cross-Respondents and Third and Fourth Cross-Claimants:

Counsel and Solicitors for the Respondent,: Mr D. Clyne instructed by
First and Second Cross-Claimants and Messrs Friedman and Bonomelli Seventh and Eighth Cross-Respondents

JUDGE1

These two proceedings have been consolidated. In G701 of 1990, Pirtek Fluid Systems Pty Limited ("Pirtek") sues Kaydon Holdings Pty Limited ("Kaydon") seeking a declaration that a franchise agreement made between them on 12 October 1988 was validly terminated by Pirtek on 6 December 1990, an injunction restraining Kaydon from carrying on business under the name "Pirtek" or any like name, and seeking damages and moneys due under the franchise agreement and consequent upon its termination. In G138 of 1991, Pirtek seeks a declaration that Kaydon and its two directors and shareholders, Mr J.W. Paull and Mrs H.L. Paull, are in breach of a restrictive covenant of the franchise agreement and an order restraining them from carrying on business in breach of the covenant and damages for their doing so.

In a cross-claim, Kaydon and Mr and Mrs Paull allege that, prior to the entry into the franchise agreement, there had been misrepresentations on the part of Pirtek which constituted a breach of s.52 of the Trade Practices Act 1974 (Cth). The cross-claim also seeks damages for breach by Pirtek of the franchise agreement, damages for fraudulent and/or negligent misrepresentation, and orders under s.87 of the Trade Practices Act, including an order that there be a declaration that Mr and Mrs Paull be released from all obligations pursuant to guarantees and indemnities executed by them. No matter is raised by way of defence to Pirtek's claim save the matters relied upon in the cross-claim. It is alleged that, by reasons of the matters raised in the cross-claim, the franchise agreement was not validly terminated.
At the hearing, Pirtek was represented by Mr J.v Nicholas of counsel. Kaydon and Mr and Mrs Paull were represented originally by Mr D. Clyne of counsel. However, after 5 days of hearing, and presumably because of financial restraints, Mrs Paull sought and was granted leave to represent Kaydon, Mr Paull and herself. Mrs Paull's cross-examination of Pirtek's witnesses was, in fact, impressive. Mrs Paull had a good grasp of the points on which questions should be asked, she asked questions efficiently and she was strong in insisting that her questions, as asked, be answered.
Pirtek is a distributor of hoses, hose connections and other hydraulic equipment. The head office and principal base of the business is in Sydney. Pirtek first established the distribution network in Sydney in 1980 and, in 1985, it commenced to establish franchised areas and to distribute through franchisees. Pirtek itself operates or controls some distribution centres at the retail or service level; but for the most part, Pirtek, for a fee, franchises an operator to use the Pirtek name and distribute Pirtek products within a franchised territory. In 1988, and during the period with which we are concerned, Pirtek had as its Chairman Mr Ron Clark, as its Managing Director Mr Peter Duncan and as its Sales Manager Mr W.G. Davey.
By early 1988, Pirtek had established a retail and service centre at Welshpool to the southeast of Perth city. The centre was operated by a subsidiary, Pirtek (WA) Pty Limited ("Pirtek WA"), and was managed by Mr B.J. Pike. Mr Paull became a mobile serviceman in the Welshpool depot. In 1988, he particularly serviced the area around Fremantle and in the area along the coast both to the north and south of Fremantle.
Mr Paull had had matrimonial difficulties and he was not then married to Mrs Paull. He and Mrs Paull married in October 1988. For convenience, I shall use their married name. Mr and Mrs Paull became close friends with Mr and Mrs Pike. Mr Pike and Pirtek were interested in expanding the Pirtek business in Western Australia during 1988. The grant of franchises at Kalgoorlie and at Osborne Park to the northwest of Perth city were under consideration. Mr Pike encouraged Mr and Mrs Paull to take on a franchise in the Fremantle district.
Mr Pike introduced Mr Paull to Mr Davey and to Mr Peter Duncan and those gentlemen subsequently met Mrs Paull. After some months' consideration, Pirtek decided that a Fremantle franchise should be granted. Mr and Mrs Paull decided to take the franchise. On 12 October 1988, the franchise was formally granted to Kaydon under a franchise agreement of that date. Supporting guarantees and indemnities were given by Mr and Mrs Paull. Kaydon conducted the business from November 1988. Ultimately, on 6 December 1990, when sums totalling $204,189 were owing to the Pirtek organisation, Pirtek gave notice of the termination of the franchise. Kaydon continued to operate the business into March 1991. At a time when proceedings were on foot in this Court and at a time when Pirtek was seeking interlocutory relief, Kaydon sold its business and stock to a company connected with a cousin of Mr Paull. No copy of the agreement for sale is in evidence.
The affair has been an unhappy and financially disastrous one for all parties concerned. It is particularly to be regretted that no settlement was reached in late 1990 when there was a business and assets which Pirtek could have recovered. It is also to be regretted that, at a time when the matter was before the Court, Mr and Mrs Paull decided to sell the business and stock, thus putting an end to any slight remaining hope of settlement and frustrating the Court's attempt to provide justice by appointing an early hearing date. But that is how matters have turned out.
I would not attribute the debacle to any one particular factor. However, I should comment on one or two aspects that may have been contributing factors.
The first is the territory itself. Mr Pike, who was successful in developing Welshpool, and later successful in developing Osborne Park, and who later took an interest in a new franchise based on Mandurah, thought the Fremantle territory to be suitable for Mr and Mrs Paull. Mr Davey, who had been involved in the marketing of hoses and other hydraulic equipment since 1976 and who was responsible for creating Pirtek franchises, thought that the territory was suitable. And so did Mr Peter Duncan. So also did Mr Paull, who worked the area as a serviceman for Welshpool. So it could not be said that there was anything misleading or deceptive in the creation by Pirtek of the Fremantle franchise.
But in fact Mr Paull had more difficulty with the area than had been anticipated. It is therefore a possibility that this area, in which large organisations occupy the coastal strip to the south of Fremantle and in which there is not a great deal of industry inland, was a difficult area to develop.
At the request of Mr and Mrs Paull, Kaydon was granted an exclusive territory over the whole of the area to which the Fremantle franchise applied. Mr Paull in fact worked a greater area. At his request, the formal area was twice increased, once to include an area extending north to Cottesloe and once to include an additional area to the south. Mr and Mrs Paull became very concerned when in 1990 Pirtek later created the Mandurah franchise, thereby taking away some of the area from which Kaydon received business. If the creation of the Mandurah franchise was thought to be a breach of contract by Pirtek by way of constituting a lack of proper support by Pirtek, I reject the submission. The Mandurah franchise, when created, was outside the territory franchised to Kaydon.
An effect of the fact that Mr Paull worked an area larger than the franchise and, in particular, developed an area to the south of the franchise, was that the running costs of the mobile vans were high, considerable time was spent in travel and the line of communication between the mobile servicemen and Kaydon's premises was lengthy. Thus, costs and administrative difficulties were increased. Whether Mr Paull would have been more successful had he concentrated on his base area is not a matter on which I could express any view.
A second and indeed probable contributing factor to the problem was the failure of Mr and Mrs Paull fully to understand and manage their own business. Thus, Mr Paull chose not take a managerial role in the office of Kaydon but to work as a mobile serviceman, seeking to attract business in the field. As Mr Paull said in his evidence:-

"I'm a person who operates with his hands not a bloody pencil pusher."

And in answer to questions concerning the disposition of the proceeds from the sales of stock after the termination of the franchise, Mr Paull gave this evidence:-

"The proceeds of sale were paid to the company, were they?---Whether they were or - I don't believe we collected them all, I have no idea. I don't really understand all this type of garbage. Do you read this as garbage?---Well, I don't know much about it, I'm a service technician, not an accountant."

Whilst I would not criticise Mr Paull for spending his time in the field, if that is what he thought it best to do, I think it is likely that his lack of a complete grasp of the financial aspects of the business and his failure to deal personally with stock and like problems which appear to have arisen, and indeed inevitably arose in the operation of the business, may have magnified such difficulties as arose.

Similarly, although Mrs Paull has an excellent presence and is obviously an intelligent and capable person with a knowledge of office administration and office systems, she seems to have a rather naive understanding of business.
Mrs Paull was inclined to dramatic actions and responses when a more competent manager may have dealt with the problems in a practical, straightforward way. An attitude of Mrs Paull to Pirtek was that there was some business information known to Pirtek which would overcome Kaydon's problems but which the officers of Pirtek did not communicate. An example appears in the following questions which Mrs Paull put to Mr Davey:-

"So, you're saying you realise that the problem was the sales and the overheads and the debt that the Fremantle franchise is in now?---That appears to be the case, yes.

You've assisted by extending the credit terms?--- Yes, we've provided the finance necessary for the continuance of the business. I'm saying to you that that problem - that is the result - this is the result now. You were aware of the sales and the overheads, yet you still extended the credit terms?---To assist the franchisee, yes, we did.

Mr Davey, with your business experience surely you must know that that's not the way to go all the time, there has to be drastic measures taken?---Such as?

I don't know, I'm not experienced. You are the experienced one. I'm asking you?---The measures that were taken were the correct measures at the time."

It seems to me that many problems had their foundation not in a lack of advice from or action by Pirtek but in the failure of both Mr and Mrs Paull fully to understand their own business. I am satisfied that there was no specific advice or information which any person in the Pirtek organisation could have given which would have overcome the problems which Kaydon faced.

Another factor which played a part was that elements of personality difference intruded into the events which occurred. When the matter of a franchise was first mentioned, Mr Pike was very supportive and promised to assist Mr and Mrs Paull in getting started. However, in about August 1988, Mr Pike was removed from the management of the Welshpool centre, apparently because of monetary irregularities which had been discovered. Mr Pike was, nevertheless, offered and he accepted the Osborne Park franchise. Mr Davey, who was very annoyed as to what had occurred at Welshpool, still regarded Mr Pike as a capable operator, as indeed he proved again with the Osborne Park franchise. So when Kaydon commenced its business, Mr Pike was himself fully engaged in developing the Osborne Park franchise, just to the north of the Fremantle territory. Moreover, during the period with which we are concerned, Mr Pike separated from his wife and his friendship with Mr and Mrs Paull came to an end. The new manager of Welshpool, Mr Eric Duncan, a brother of Mr Peter Duncan, advised Mr and Mrs Paull that there had been financial irregularities at Welshpool and that they would be wise not to have anything to do with Mr Pike, and they did not.
Accordingly, Mr and Mrs Paull not only received no assistance from Mr Pike, and indeed did not ask for any, but they found that he was a competitor and were troubled by some incursions into Kaydon's territory for which they thought Mr Pike was responsible.
Mr and Mrs Paull, particularly Mrs Paull, also had a personality conflict with Mr Eric Duncan. Mr Eric Duncan came to Welshpool with little experience in the business. In his early months as Manager he had much to learn and was scarcely in a position to advise Mr and Mrs Paull. As time went by, Mr and Mrs Paull came to dislike Mr Eric Duncan and that feeling was reciprocated. When, in late 1990, Mr Clark directed Mr Eric Duncan to spend some time in Kaydon's business with a view to ascertaining what were the problems and what steps ought to be taken to overcome them, Mr Duncan undertook the task without enthusiasm and, within a few days, Mrs Paull ordered him to leave the premises.
There are many references in the cross-claim to Mr Eric Duncan, it being alleged that he was not helpful and indeed incompetent. However, I reject the allegation that there was any breach of contract in this respect on the part of Pirtek. Mr Davey, who was supported in this respect by Mr Peter Duncan, gave evidence that Mr Eric Duncan was a competent manager of the Welshpool business. Mr Davey rejected the contention that Mr Duncan was sent to Sydney to be reprimanded. He also rejected the contention that Mr Eric Duncan had been removed as State Manager for Western Australia. He gave evidence that, as the business of Pirtek expanded in Western Australia, it was decided to establish a distribution centre separate from the Welshpool centre, which had previously handled distribution throughout Western Australia, and that accordingly in early 1990 Mr Davey was appointed the first State Manager for Western Australia. Mr Davey thereafter visited Western Australia on a regular basis.
I am satisfied that by employing Mr Eric Duncan as Manager of its Welshpool depot Pirtek in no way breached its franchise agreement with Mr and Mrs Paull. I accept that there were personality differences between Mr and Mrs Paull on the one part and Mr Eric Duncan on the other, which was an inhibiting factor so far as Kaydon was concerned, but it does not seem to me that any breach of contract was involved.
As affairs turned out, Mr and Mrs Paull felt somewhat isolated. Their franchise territory was adjoined by the Osborne Park, the Welshpool and later by the Mandurah territories. Mr Pike was involved with the Osborne Park and Mandurah franchises while Mr Eric Duncan managed the Welshpool centre. Mr and Mrs Paull considered that there were unjustified incursions from time to time from the adjoining area. From time to time they felt themselves to be in need of advice and lacking in assistance which they felt they did not obtain. It does not seem to me that any of these matters establish a claim against Pirtek.
Before turning to the claims, I should mention one witness, Mr G.L. Keys, a chartered accountant, who was called on behalf of Kaydon and Mr and Mrs Paull. Mr Keys was a partisan witness who, rather than give the objective and impartial evidence one expects of a chartered accountant, so identified himself with his clients that he set out to argue their case for them. Indeed, he used the pronoun "we" so often when giving evidence about the Kaydon business that it was necessary to bring to his mind that he should speak objectively and independently. I have not found his evidence to be helpful, indeed it was misleading. Even his estimate of the damages suffered by the respondents: net liabilities incurred $222,867, net loss of wages $11,104, loss of profit expectations, loss of profit $236,224 and loss of franchise value $164,552, a total of $634,747, was not the estimate of an expert approaching the matter with an open mind.
The claim made by Kaydon and by Mr and Mrs Paull is based upon s.52 of the Trade Practices Act which reads inter alia:-

"(1) A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive."

Section 51A(1) amplifies this by providing:-

"For the purposes of this Division, where a corporation makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading."

The representations said to constitute misleading and deceptive conduct are also relied upon as fraudulent or negligent misrepresentations.

Before turning to the specific matters stated in the cross-claim, I should mention two allegations which I infer from the presentation of Kaydon's case. The first is the suggestion that it was misleading and deceptive of Pirtek to have offered the franchise to Mr and Mrs Paull when it was known that Mr and Mrs Paull were inexperienced in business. As to this, I put no blame on Pirtek. The recommendation came from Mr Pike, who became a close personal friend of Mr and Mrs Paull. Mr Pike knew Mr and Mrs Paull well and he knew the business. Mr Davey and Mr Peter Duncan both met Mr and Mrs Paull and thought them to be suitable people. Mr Davey and Mr Peter Duncan were experienced in setting up young persons such as Mr and Mrs Paull as franchisees. On the face of the matter, Mr and Mrs Paull were a presentable, energetic young couple. Mr Paull was successful as a mobile technician. Mrs Paull was familiar with office administration. Mr and Mrs Paull both undertook a course in business administration to qualify them for the task. They seemed to have the right attitude. From Pirtek's point of view, they would have seemed qualified to undertake the franchise.
Mrs Paull also claimed that Pirtek should not have granted the franchise when Pirtek knew that she and Mr Paull had so little capital. It is certainly true that Mr and Mrs Paull had insufficient capital to commence a business in respect of which interest had to be paid on the liability for the stock acquired. They could not have financed it. But in this franchise Pirtek was prepared to be generous. Pirtek did not even require payment of the $20,000 franchise fee or charge interest thereon. Pirtek did not charge interest on any sum outstanding by Kaydon for stock. It was not lack of capital which caused the business problems. And there was certainly no reason for Mr and Mrs Paull to borrow more money from their bank at the commencement of the business. Such a borrowing would have involved the incurring of interest which was not incurred when Pirtek extended credit without interest. I do not accept the evidence of Mr Keys who thought lack of capital to be a significant point. It was not lack of capital but the inability of Mr Paull to increase the level of sales beyond $40,000 per month which led to this litigation.

Mr Pike thought that this would be a good opportunity for Mr and Mrs Paull to commence a business and that they could do so with Pirtek's support. After consideration, Mr and Mrs Paull were also content to take the chance offered to them. It is true that Mr Pike and Mr Davey had it in mind that the arrangement would benefit Pirtek as well as Mr and Mrs Paull. But that does not found a claim under s.52 or a claim for fraudulent or negligent misrepresentation.
On 28 July 1988, Mr Davey wrote to Mr and Mrs Paull setting out what he described as "an in depth analysis of the cost and possible returns associated with Fremantle." Mrs Paull has submitted that the analysis was not "in depth", but it was a detailed analysis and prognosis and seems to me to answer the description.
I now comment upon the alleged misrepresentations in that document. The first is that:-
"(a) Each of the 27 existing Pirtek franchises is profitable"
Mr Davey gave evidence that that statement expressed his understanding of the franchises at the time when he made that statement, a time before annual accounts for the 1987/8 year had been lodged with Pirtek. Mr Keys gave evidence that he saw the annual accounts of 13 Pirtek franchises, the only accounts available to him and that, of those 13 franchises, 3 showed losses for the 1987 year, 6 showed losses in the 1988 year and an additional 2 showed losses for the 1987 and the 1988 years.
On examination, however, this evidence turned out not to put forward a prima facie case of misrepresentation. One of the franchises, Mascot, was selected at random for examination. This was said by Mr Keys to be unprofitable for 1987 and 1988. On examination, although the accounts for the 1988 year showed a loss of $10,000, one could not ascertain whether the business was profitable or not unless one knew something more about the business, e.g., how much of the salaries and wages went to persons in control of the business and how much of the superannuation payment of $16,078 was optional expenditure. Mr Keys conceded this point and conceded that the taxation result achieved for an entity which was conducting a business was not in general a good guide as to whether the business was profitable.
Mr Clyne, whilst he was appearing, was given notice by the Court that this allegation was an important allegation and that, if he alleged that a franchise was unprofitable, then he should identify that franchise and prove the point. No such franchise was identified.
I do not take the word "profitable" in Mr Davey's memorandum to convey that a company or other structure operating a franchise must necessarily have finished with a taxable profit for the 1988 year, or even that a particular franchise may not have financial difficulties from time to time. The word "profitable" is a well understood word and is not to be read in a technical sense.
Mr Davey gave this evidence inter alia in answer to questions put by Mrs Paull:-
"And at least eight had showed losses...?---No, the statement of the
27 profitable centres related to the fact that reported to me by each
centre on a monthly basis the sales levels that they were achieving
less reasonable expenses produced profits at those centres which
would have given a return to the investor.
But they display the losses, Mr Davey, and your statement was based
on beliefs and assumptions from phone calls from either franchisees
or their employees or whoever phoned you at that time. Did you not
have records when you were setting up franchises to monitor how these
people are going and where overheads are, how high they are and what
expenses are being incurred?---Most of the franchise - the franchise
centres that reported to me reported sales that were in line with
projections, gross profit percentages that were in line with
reasonable percentages - in fact the industry average is very high -
and expense levels which were, given reasonable expenses... .
...
Your affidavit states that you assumed, believed and felt that these
centres were profitable?---My affidavit states that it was my belief
at the time of writing the letter that all of the centres were
trading profitably. The belief was based upon the knowledge of
operations of the various centres and the communications I had on a
daily basis with owners and employers of the various centres. I did
have the practice at that time of writing the letter to speak
regularly with the owners of the businesses. In the course of
discussing them I was informed concerning the sales turnover and the
gross profit recovery of each of the centres, and formed the opinion
that they were profitable, given reasonable levels of overhead."
As can be seen, Mr Davey did not make his statement on the balance of the annual accounts, which, in any event, were not available for the 1988 year, but on the basis of monthly returns and his conversations with franchisees.
Certainly, Mr Davey introduced an element of his own, namely "reasonable expenses". But I cannot draw the conclusion that Mr Davey made his statement dishonestly or without a reasonable basis. The statement made was clear and was in writing. It seems to me that, if Mr Davey did not have reasonable grounds for his statement, that is a matter which could readily have been proved by identifying the franchise or franchises said not to be profitable and by calling for the relevant accounts and demonstrating that Mr Davey's evidence was wrong. But that course was not taken. Reliance was merely placed upon a bundle of miscellaneous financial documents which were put in evidence by Mr Clyne.
Mr Keys gave evidence that three centres disclosed losses in 1987, Footscray, Beechleigh and Blacktown. I have not seen the Footscray accounts but Beechleigh showed an almost doubling of sales during the 1987/88 year and a net profit for that year. Similarly, Blacktown increased its sales five times during the 1988 year and had a net profit in that year. Accordingly, none of these centres cast doubt upon Mr Davey's statement.
Mr Keys identified five centres as showing losses for the 1988 financial year. Of these, Wollongong appears to me to have returned a net profit for the year. North Sydney's accounts showed a net loss of only $891.57. I have not located accounts for Townsville save a graph which shows that, in the 1988/89 year, monthly sales rose from $6,000 in July 1988 to $34,000 in June 1989. This centre presumably commenced business only shortly before 1 July 1988. Penrith discloses a loss for the 1988 year but there is amongst the documents a report which appears to have been made by the franchisees which indicates that the business was purchased by the franchisee on 1 July 1987 at a time when it was operated as a sideline to another business venture. After that, the current franchisees sought to increase sales and this had been done. Estimates for the forthcoming periods were set out. These estimates showed a dramatic increase in sales for the forthcoming years and greatly increasing net profits, commencing with a net profit of $19,000 for the six months to 30 June 1988. Accordingly, the franchisees had undertaken the task of dramatically increasing sales. In fact, its sales for the year were substantially in excess of those which had been planned. The business appears to have been, if not profitable, at least flourishing and in the course of development. The final centre mentioned in this group was Milperra. I have not located any accounts. However, there are two documents in the exhibit. One is a report on the Milperra branch which appears to have been made by the Directors in about October 1987. It deals with a number of problems but includes comments such as "It is considered that this franchise has enjoyed a prosperous 12 months although hampered by a few problems. Turnover has shown a steady increase particularly in the last 4 months." There is also a graph of sales for the 1988/1989 year which shows an increase from July 1988 of just under $60,000 per month to a little over $90,000 per month in June 1989. I cannot draw the conclusion that the franchise was not "profitable" in the sense used by Mr Davey.
Mr Keys also relied upon the centres of Mascot and Geelong which he said were unprofitable for both the 1987 and 1988 financial years. I have already dealt with Mascot in respect of which Mr Keys conceded when asked that one could not tell whether Mascot was profitable without going behind the accounts. The Geelong centre was, according to Mr Davey, a part of a much larger business. Its accounts do show losses for the 1987 and 1987 years but its total sales for 1987 were only $46,180 and for 1988, $94,039. It was too small an operation for the accounts to provide any guide to the accuracy of Mr Davey's comment.
I am satisfied that the statement by Mr Davey did represent his view at the time, and was based on reasonable grounds. I am not satisfied that the statement was misleading or deceptive.
Another alleged misrepresentation is that:-
"(b) Each of the 27 existing Pirtek franchises was well supported

in every aspect of daily business activity."

Pirtek arranged its business so that its head office personnel, particularly Mr Davey, Mr Peter Duncan, Mr Clark and the accountant, Mr Smith, were available to give advice when requested. In addition, of course, Pirtek was constantly concerned itself with the crux of the business, the licence to distribute particular goods and the prices thereof. That was the task which head office undertook.
A feature of the case which has impressed me is the prompt response which Mrs Paull usually obtained to significant letters and faxes which she sent to Pirtek in Sydney, other than her early request for information. In the first few months the name of Pirtek Fremantle may not have been in Pirtek's computer. But, it seems to me that otherwise Pirtek made itself available when asked. In addition, Head Office maintained a supervisory role as to what was occurring in each of the franchises. This seems to me to satisfy the words "well supported".
Mrs Paull alleged that this did not occur in Western Australia. But the issue is whether the representation was misleading or deceptive when it was made. At that time, Mr Pike was managing Welshpool and he proposed to assist Mr and Mrs Paull with their business. I see nothing wrong with the statement when it was made. The statement is not affected by such later problems as arose between Mr Eric Duncan and Mr and Mrs Paull.
A further alleged misrepresentation is that:-

"(c) Preferential finance arrangements were available to Pirtek's franchisees through the ANZ and National Banks."

Mr Davey gave evidence that he had arranged with the ANZ Bank and with the National Bank to support Pirtek franchisees and to provide preferential finance wherever appropriate. In fact, Pirtek's accountant, Mr Smith, went with Mr and Mrs Paull to see the Manager of their ANZ branch to arrange an overdraft for Kaydon.
Mrs Paull alleged that the interest rates given to Kaydon by the ANZ Bank were not preferential but there is no evidence as to what Kaydon's or preferential rates were and certainly no evidence that Kaydon's rates were not appropriate having regard to the circumstances including the risk involved. Mrs Paull also alleged that the Bank Manager failed to advise them properly as to the lease finance on the mobile units with the result that Kaydon paid more than it should have. But these matters do not counter Mr Davey's evidence that Pirtek had made special arrangements with the franchise department of the ANZ Bank and the National Bank. It has not been shown that the statement was wrong.
Of more significance is the allegation that the following were misrepresentations:-

"(d) The `Proposal' contained therein was an accurate financial assessment of:

(i) The cost components to be incurred in the establishment of the Fremantle franchise;

(ii) the sales likely to be made by the Fremantle franchise;

(iii) the costs of overheads to be incurred in the running of the Fremantle franchise;

(iv) the net pre-tax profit to be made by the Fremantle franchise in the first 3 years of trade was: Year 1 $23,100.00

Year 2 $47,720.00

Year 3 $64,704.00"

The first of these matters seems to be a minor matter. Mr Davey recommended that "working capital should total $40,000.00 minimum, on the basis of one and one - half months debtors plus two months overhead cost". Mrs Paull alleged that no allowance was made for the establishment costs of $18,000, of which detailed particulars were given as to $14,000 set out elsewhere in the statement. The analysis made it clear that there would be establishment costs and detailed such matters as building signs, stationery, painting etc. which would have to be paid out on establishment. The $40,000 was sufficient to cover this.
As I have said, as Pirtek did not charge interest on the debt for stock, the amount that had to be available for stock did not really matter. It seems to me that the $18,000 establishment cost and the minimum working capital of $40,000 were not misleading or deceptive estimates.
The allegation as to the estimate of sales is more important. Mr Davey estimated that, over a 12 months period, sales were to commence at $20,000 per month rising to $45,000 per month. He estimated total sales for the first 8 months at $210,000 and for 12 months at $370,000. In fact, on the figures before the Court, although the sales for some months were less than anticipated, the sales for the first 8 months totalled approximately $210,000 and for 12 months totalled $369,284. At the end of the 12 months' period, the sales were averaging about $40,000 per month. In the period 1 July 1989 to 30 June 1990, the sales were $485,266. Mr Davey gave evidence that he had arrived at his estimate from his long experience in the industry. Having regard to the sales that were achieved, I am not satisfied that his estimate was unreasonable or that he did not have reasonable grounds for it. If there is any criticism of this aspect of the analysis, it must be that no allowance was made for bad debts. However, that aspect of the matter was not raised.
The last figure in Mr Davey's estimate was $45,000 for the month, suggesting a continuing increase in sales. Mr Paull was unable to increase the sales beyond an average of $40,000 per month. However, I am not able to come to any conclusion as to whether this was due to the franchised area or the manner in which Mr Paull operated in it.
The next allegation is that the cost of the overheads was understated. Mr Keys gave evidence criticising aspects of Mr Davey's analysis. Mr Keys said, for example, that no allowance was made for superannuation which was at the time compulsory. However, evidence tendered on behalf of Pirtek shows that the payment of 3% superannuation was not compulsory in July 1988. In general, the items of expenditure which would be incurred were correctly stated by Mr Davey. I do not propose to discuss each of the smaller items of insurance, cleaning and the like, which were criticised by Mr or Mrs Paull. The amounts which Mr Davey estimated were clearly stated and, in my view, were not misleading or without a reasonable basis. Mr Keys' criticism of these sums and indeed the criticisms of Mr and Mrs Paull seem to be arrived at principally by working back from the higher expenditure which Kaydon incurred. But of course Mr Davey was simply making a prognosis as to the future based upon his knowledge of the hydraulic hose business.
The major differences between the analysis and what occurred is that Mr and Mrs Paull employed more staff than Mr Davey had intended, he installed mobile telephones rather than radios and he and his servicemen travelled more extensively than Mr Davey had in mind. But, by the time Kaydon executed the franchise agreement, Mr and Mrs Paull knew that the rent and labour costs would be higher than Mr Davey had estimated and they anticipated that the vehicle running expenses and the telephone expenses would be higher. They were not misled by Mr Davey's estimates in this respect.
Mr Keys criticised Mr Davey's statement on two grounds which are not raised by the cross-claim. The first ground is that, according to Mr Keys, Mr and Mrs Paull did not have sufficient capital to commence the business. As I have mentioned earlier, I think this was not a valid criticism. Pirtek was prepared to support the business and to do so without charging interest. It is nothing to say that Mr and Mrs Paull did not have enough capital to establish a business if ordinary commercial terms applied.
Another criticism made by Mr Keys was that Mr Davey's analysis did not include a cash-flow projection. I agree with that observation and I have already mentioned that Mr Davey made no allowance for bad debts notwithstanding that his figures for sales were receivables, not receipts. However, Mr Davey's analysis was drawn up for the assistance of two people who were not expert accountants. The analysis gave them much useful information in a form which they could understand. I could not make any finding against the analysis in this respect. Indeed, the cross-claim does not raise the point.
In respect of all these matters save the wages to which I shall shortly turn, I am not satisfied that the statement was not a reasonable prognosis based upon long experience. These figures were, of course, simply an estimate, made at a time before the business had commenced and not in the light of actual events.
One figure which stands out as important is the estimate made by Mr Davey of wages of $5,200 per month. Mr Davey explained in his document that "Wages are projected on a 3 man staff level being the two operators of the mobile units and the franchisee." It was thus clear from Mr Davey's analysis that he anticipated that the business would be managed by Mr Paull who would have two mobile servicemen out in the field. The remuneration allowed for each was put at quite a low level.
In his evidence, Mr Davey explained that, in this as in other cases, he did not expect the franchisee's wife to work in the business in the early stages and that he expected that in the early stages Mrs Paull would continue working and would do the paperwork, that is to say, the entries into the computer, of an evening or on a Saturday morning as occurred with other couples who were commencing franchise business. Mr Davey had it in mind that Mrs Paull would continue to work and receive her wage and that Mr Paull would be the manager of the business. Mr Davey said that he did not make allowance for overtime for the mobile technicians for, in practice, work out of hours was charged for at extra rates which covered the extra labour costs and, in any event, was usually done by the franchisee in the early stages. I am not satisfied that Mr Davey's prognosis was unreasonable or without a reasonable foundation.
As it happened, Mr Paull thought, as he said in evidence, that the estimate of sales would be easily reached, for he had worked in the area. Moreover, he considered his best work to be in the field. Therefore, he took with him from Welshpool another mobile serviceman and an employee who was familiar with stock. Mr Paull paid those two employees more and drew more for himself than the sums which Mr Davey had estimated. It soon became apparent that one of the Paulls had to be in the office. Accordingly, Mrs Paull left her job and became office manager. She also drew a substantial wage from an early date. So there were 4 employees, not 3, working full time in the business and receiving more per month than Mr Davey had allowed. The wages increased when the storeman and the mobile technician serviceman were paid substantial over-award or overtime payments and finally, for a considerable period, another mobile serviceman was employed with a view to building up the business. So the business had 5 full-time employees, all receiving a substantial income.

The wages bill averaged about $11,000 per month, not $5,200 per month. This of course was not what Mr Davey had in mind. In particular, Mr and Mrs Paull took more money out of the business in the early stages than Mr Davey intended. His analysis, if read fairly, would have indicated that there was not much income for the franchisee in the early stages of the business. Mr and Mrs Paull were, however, much more confident about the business than that, buoyed as they were by the enthusiasm which Mr Pike had engendered and by the sales which Mr Paull had been able to achieve whilst working out of Welshpool.
In my opinion, Mr Davey's estimate of expenditure was not misleading or deceptive, not fraudulent and not negligent. Mr Davey's estimates were clearly set out. The amount of the wages which he estimated could not have misled Mr and Mrs Paull for Mr Paull was at the time a mobile serviceman who knew what such a serviceman and indeed other persons working in the enterprise would expect to receive. But while Mr Davey expected that there would be a careful start to the enterprise and that Mrs Paull would maintain her employed position, the Paulls were more confident and thus incurred greater expenditure.
The next aspect that is challenged is the "net pre-tax profit", the end result of the calculations. Mr Davey's estimate of the gross profit margin on sales was fair and the only accounts for Kaydon which are in evidence disclose a loss of $25,544 for the 8 months to 30 June 1989 but a profit of $24,359 for the year ended 30 June 1990. Having regard to the additional sums which Kaydon paid to Mr and Mrs Paull over and above that estimated by Mr Davey, these figures are not so far out of Mr Davey's estimate that I could be satisfied that his prognosis was not reasonable or was not based on reasonable grounds.
Mr Davey's analysis has stood up well against the facts of the case. Leaving aside the wages, the number of employees and vehicle expenses, which were matters on which Mr and Mrs Paull elected to move in a direction of their own, Mr Davey's estimates are close to what actually occurred.
It is fair to say that, looking at the figures which Mr Davey put forward, I would myself conclude that the business was a marginal proposition and that there was a reasonable risk in the enterprise. But what Mr Davey was doing, no doubt in the interests of Pirtek, was to give Mr and Mrs Paull an opportunity which they might otherwise not have had. It seems to me that this was a fair offer by Pirtek.
The next alleged misrepresentation in Mr Davey's letter is the statement "we operate nationally under a full franchise licensing system that provides considerable benefit to the participants". Mr and Mrs Paull contend that no benefit was obtained from the franchise system and that, on occasions, Pirtek's prices were higher than the prices of competing equipment. However, I am satisfied from the evidence the Pirtek organisation, which principally distributed products for which Pirtek held an exclusive licence, was a successful organisation. That is not to say that the Pirtek organisation was able to match or undercut the price of all competing equipment. However, the organisation has continued to grow and has been able to compete successfully in the marketplace. Mrs Paull conceded in her evidence that, "The Pirtek system is good." I am satisfied that Mr Davey's statement was not misleading or deceptive.
The next allegation is that, on 11 August 1988, Mr Peter Duncan represented to Mr and Mrs Paull that Kaydon could achieve significant savings by virtue of the bulk buying power of the combined number of Pirtek franchises. I accept Mr Duncan's evidence that 80% of Pirtek products were branded products of high quality, often more expensive than competing products. Mr Duncan's evidence was that he referred to the benefits of "bulk buying" in the context of goods and services such as advertising, insurance and printing. I am not satisfied that Mr Duncan's statement was not misleading or deceptive. The nature of Pirtek products and their prices was well known to Mr Paull.
It is next alleged that Mr Pike, on several occasions, represented that he would assist with the administration of the Fremantle franchise and would attend at the Fremantle franchise to help with its establishment. Both Mr and Mrs Paull agreed in cross-examination that Mr Pike was perfectly honest in making those statements and that his intentions were good when he said that he would help. But for reasons I have mentioned, because of his dismissal from Welshpool and the breakup of the friendship between Mr and Mrs Pike and Mr and Mrs Paull, Mr Pike did not assist with the establishment of the new business and he was not asked to do so. Those facts do not establish misleading and deceptive conduct on his part.
Therefore, I reject the allegations based upon a breach of s.52 of the Trade Practices Act and upon the principles of negligence and fraudulent misrepresentation.
Before I discuss the claims based upon breach of contract, it is necessary to review briefly the facts which occurred in the operation of the franchise.
The business commenced in November 1988. Mr and Mrs Paull had been assisted by Mr Pike to select suitable premises. Mr Trevor Smith, Pirtek's accountant, attended with them at their bank. Mr Peter Duncan's daughter had shown Mrs Paull how to operate the Pirtek software, software which implemented a means of stock control. When possession was taken of the premises, Mr Peter Duncan spent two days assisting Mr Paull to set up his business. Mr Gary Hobbs of Pirtek spent one day in the Kaydon premises.
Small problems arose right from the start. Kaydon acquired two service vehicles, but not through Pirtek in Sydney. Mr Paull arranged for the vehicles to be acquired and fitted out in Perth. In the result, the lease finance was arranged through the bank for the original cost of the vehicles, not upon their total cost as fully fitted. Apparently additional expense was incurred by reason of having separate leases for the vehicles rather than having a consolidated lease. I cannot see anything in this matter for which Pirtek is responsible. The lease finance was arranged by the bank.
Mr Paull considered that some of the stock originally delivered was unnecessary and of little use. However, by arrangement with Pirtek, the usual initial supply of stock had been reduced so as to keep Kaydon's obligations as low as possible. I do not see any breach of contract in this respect. Mr and Mrs Paull were also dissatisfied with deliveries by Pirtek WA. The stock when delivered was unsorted or intermingled and had to be sorted out before being put on the stock shelves. Mr and Mrs Paull spoke to Mr Eric Duncan about this but obtained little relief. Mr and Mrs Paull even supplied their own plastic bags to Pirtek WA so that the goods could be delivered in smaller parcels. It appears that this matter was never fully resolved and that deliveries from Pirtek WA were more difficult to deal with than deliveries direct from Pirtek. It does not seem to me that this matter raises any issue under the franchise agreement. The evidence does not establish that Kaydon was treated any differently from the other franchises, Kalgoorlie and Osborne Park.
As Mr Paull spent most of his time in the field, there was a need to maintain a presence in the office. Accordingly, Mrs Paull gave up her job and commenced full time in the business as from January 1989. It was suggested that Mrs Paull's involvement became necessary because of the lack of assistance from Pirtek and Pirtek WA. In particular, it was said that Mr Pike did not assist in the business as he had promised to do. I am satisfied, however, that Mrs Paull's involvement was necessitated by the role which Mr Paull undertook for himself. It was unrealistic to think that either he or Mrs Paull did not have to supervise the business from Kaydon's premises or that he and Mrs Paull could avoid having day to day involvement in the control of stock and the control of the finances of the businesses. It was never Pirtek's task to do that.
From an early time, Mrs Paull tended to dramatise her communications with Pirtek. For example, this fax was sent on 24 February 1989.

"HELP

Date : 24/2/89 Fax number :

To : Gary/Peter/Joe From : Helen Reference : Info Gary,

We have still not rec'd any info or memos on anything ie discontinued stock availability new lines technical info. Please give us some backup we are at present trying to function unaided.

In fact we have never recd a memo of any kind to date as discussed with Gary?"

There were some documents which Mrs Paull had not received. It appears that, for some reason, it was some months before Kaydon received regular mailings and brochures. Nor did Kaydon receive for some time the Pirtek procedures manual and an adequate supply of letterhead etc. But one would have thought that a telephone call to an appropriate member of the organisation would have been much more effective than the cry for help to three people.

A further fax on 11 April 1989 read, inter alia:-

"Gary, can you please arrange memo to advise us of procedures when ordering. (Also W/pool). ...

Can we please get some sort of system going so we all know whats going on and maybe avoid these situations - Urgent answer please."

Yet, Mr and Mrs Paull knew what the system was and how to order goods. Mrs Paull seemed unable to deal calmly with all the problems of the type which invariably occurred in such a business.

In June 1989, there was an exchange of correspondence respecting a customer who usually dealt with Welshpool on the basis of up to 60 days credit. That client became upset with the Fremantle franchise and wrote to Pirtek stating that unless Mrs Paull withdrew her request for 30 day terms the client would commence dealing with a competitor. That lead to a letter from Mr Peter Duncan to Mr Paull and a response from Mrs Paull of which the opening sentence was "I would like it known that never before have I felt so angry, insulted and disillusioned."
On 20 June 1989, Mrs Paull wrote to Mr Duncan stating inter alia:-

"Both John and myself have given a lot of thought to our situation over the past few days and have also looked very closely at figures and sales etc.

Our problems started very early with the stuff-up of our leases etc. reasons being

a) Lack of experience with lease agreements etc (John and myself)

b) Lack of experience in drawing up leases of this sort by National Bank, Spearwood. Instead of having 1 lease we ended up with 3 and also had to pay for signwriting on vans and numerous other items which if worded correctly would have gone into lease package. c) Lack of direction from Franchisor in way of advice regarding the procedure for leases. (We do realise that like us you assumed the bank knew what they were doing.) d) Budget costs were quite a bit below actual costs incurred, as discussed with Gary Hobbs on his visit early 89.

The above is now water under the bridge and as mentioned we have taken stock of the situation and also sought advice from a Professional Business Advisor, and as we were aware our biggest problem is our sales are too low to pull us out of our present position. We were not aware however just how much our sales had to increase to rectify this situation. ...

You mentioned should we feel the need for assistance to give you a call. We are calling. Our problem is immediate funds (cash flow again). We would prefer not to increase our overdraft any further as this problem is only short term. What we were hoping is that you would see your way clear to defer $2500 and $212 payments to Pirtek for stock etc and new van equipment for 3 months, recommencing in September. This would alleviate the pressure considerably. We do understand we have received extras from Pirtek Sydney that other Franchisees have not and it goes against the grain to request even more time on these already generous terms."

One notices the recitation of the problems with respect to the leasing of the mobile vans, a matter which was arranged between Mr and Mrs Paull and their own bank. The only actual request for assistance contained in a letter was a request for financial assistance. That was responded to on the following day with the information that that extra credit would be granted and the request that financial details including budgeted sales figures and budgeted expenses should be provided to Pirtek.

Over this period, the outgoings were in general higher than Mr Davey had anticipated. Mr Paull covered a wider area than Mr Davey had had in mind and he installed phones instead of radios so the phone bill was higher. In addition, Mr and Mrs Paull's own vehicle, an Escort van, was included in the business and its running expenses and insurance came out of the business. Apparently the lease costs, which were mentioned more than once in the course of the hearing, were no more than Mr Davey's estimate.
In May 1989, Mr Paull engaged another mobile serviceman and acquired a third mobile van.
On 21 June 1989, Mr Paull wrote to Mr Peter Duncan requesting that the formal franchised area be extended north to Cottesloe. This was subsequently arranged.
By the end of June 1989, sales were increasing in line with Mr Davey's program. The sales for the first eight months coincided with Mr Davey's estimate. The sales for June 1989 were $49,694 and for July 1989 were $58,386. However, sales thereafter slipped back and the average remained at $40,000 per month. Accounts for Kaydon for the first eight months up to 30 June 1989, drawn up by Mr and Mrs Paull's accountant, showed a loss for the period of $25,000.00. During this period, Mr and Mrs Paull had drawings totalling $27,422.
In about November 1989, Mr and Mrs Paull attended a conference or convention of Pirtek franchisees held in New South Wales and had the opportunity of discussing the business with other franchisees. Mr and Mrs Paull were granted an award for presentation. Mr and Mrs Paull expressed pleasure in belonging to the Pirtek organisation.
Because of her concerns as to the business, Mrs Paull sought advice from her former employer, Mr Boyd, and he installed a computer system whereby income and expenditure were projected for each month in the future. When the actual results for each month were known, they were recorded as actual income and actual receipts. Maintenance of this system was time consuming, probably more elaborate than the business required. The system did not, in any event, provide a complete guide to financial management for it did not take account of accrued but unpaid income or outstanding liabilities.
Because of continuing concerns, Mr Boyd made a study of Kaydon's business. On 26 November 1989, he wrote to Mr and Mrs Paull that either the turnover had to be increased or the expenditure reduced. Mr Boyd wrote "it is essential you do something now before you get into serious difficulties with your creditors." Mr Boyd's recommendation was that expenditure be cut and that one staff member should be dismissed and the third van should be sold. Mr Boyd also recommended that Mr and Mrs Paull reduce their own salaries.
This recommendation was adopted to the extent that Mr and Mrs Paull reduced their own salaries for some months. When in January 1990, one van was written off in a road accident, it was not replaced. But in general, Mr Paull thought that the better course of action to take was to increase sales. In his evidence, Mr Davey also said that the proper course was to work harder to increase sales.
On 15 January 1990, Mrs Paull sent a fax to Mr Peter Duncan requesting that the fee of 2.5% of gross monthly sales not be charged. She received an immediate response granting that request. On 15 February 1990, Mr Davey wrote to Mr and Mrs Paull saying that the need to develop the sales levels at Fremantle was recognised. Mr Davey said that he had been appointed WA State Manager and that Mr and Mrs Paull could communicate freely with him concerning the daily operation of their franchise. Mr Davey said that he had arranged for Mr Gary Hobbs to visit for several days during the week of 19 March to advise them. Mr Davey said that he was obtaining price information concerning competitors in the area and would make a special concession to Fremantle for a particular volume business. Thereafter, Mrs Paull communicated regularly with Mr Davey, even to the extent of sending weekly reports. Mr Davey visited Perth every few weeks.
The accounts for Kaydon for the year ended 30 June 1990 showed a profit for the year of $24,359. It is agreed, however, that the accountant who drew up the accounts probably in error included an amount received from insurance for the van that had been written off, though it is impossible to obtain an exact reconciliation. It is agreed that the sales should be reduced from $492,030 to $485,266. In addition, Mr Keys alleged that there were items of expenditure which ought to have been included. Mr Keys said that the accounts should have included a provision for holiday pay and a provision for bad debts. I would not, however, conclude that the accounts were incorrect in these respects. Allowances for long service leave and holiday pay could have been included but the annual accounts of this small new business were not wrong because they were not included. As to a provision for bad debts, it is not uncommon for smaller businesses to include only debts actually written off in the accounting period. No such debts were written off by Kaydon before 30 June 1990.
For our purposes, the significance of the accounts is how they compare with Mr Davey's estimates of 28 July 1988. As I have already indicated, his estimate stands up reasonably well as against the figures actually achieved. Items such as allowances for long service leave and holiday pay and for bad debts are irrelevant in this respect. Mr Davey did not include them in his analysis. That is not to say, of course, that bad debts were not a relevant factor to be considered when assessing the state of the business.
An aspect of the business which should be noted is that, despite the software provided by Pirtek and despite the installation of Mr Boyd's more complex financial system, it seems impossible to determine Kaydon's precise revenue for the year. The parties are agreed that the accountant who drew up the accounts, who was the accountant for Mr and Mrs Paull, seems to have overstated the receivables. Mr Keys gave evidence as to a complex calculation which he had done which had arrived at a figure a little less than $470,000. Mr Keys' explanation did not sound persuasive and neither Mrs Paull nor Mr Nicholas thought it to be correct for they are agreed upon the figure of $485,266. I do not understand what it was about Kaydon's accounting system which made this task a difficult one.
The accounts as at 30 June 1990 show Receivables of $92,049 and Stock of $65,107, a total of $157,156, while Trade Creditors were $120,174 and Overdraft $39,627, a total of $159,801. Accordingly, Kaydon was not in a bad way. However, Kaydon suffered from the fact that its expenses were too high for its revenue. There was no profit buffer to take account of bad debts, slow receipts, increasing stock levels and the like.

Mr and Mrs Paull were nevertheless confident and, in August 1990, increased their own salaries.
In late July 1990, at about a time when the creation of a Mandurah franchise was being considered, Mr Davey wrote to Mr Paull to say that the area of the Fremantle franchise had been extended to include a "Zone of Promotion which included the Rockingham area and that Fremantle was also granted a specific area at Boddington." Mr and Mrs Paull were, however, at the time, receiving reports of incursions into the territory for which they thought Mr Pike was responsible. They thought that Mr Davey should stop such incursions. Mr Paull himself drew a map which he thought Mr Davey should send to Mr Pike. However, Mr Davey considered that that map included area that was not part of the Fremantle area.
There is in evidence a list of the incursions which Mr and Mrs Paull alleged had occurred and for which they alleged either the Welshpool centre or Mr Pike was responsible. Mr and Mrs Paull did not seem to be able to deal with or stop these incursions. From time to time, they complained, either to Pirtek WA or to Pirtek. The evidence shows that when complaints were made to the officers of Pirtek some action was taken with a view to stopping the incursions. Thus, there is in evidence a letter from Mr Davey to Mr Pike stating:-

"Reference Trintus - Mandurah I have received a fax from John Paull indicating that Stuart is working in the Rockingham Naval Base area. This fact is indicated to him from a current Fremantle customer.

Please ensure that the territory boundaries outlined within our agreements are strictly observed. Fremantle should be contacted on every occasion that service work is required within their area by customers in any other zone."

It seems to me that by supporting Kaydon in this way, Pirtek took all steps that reasonably could be expected of it. The protection of the franchised area was, of course, primarily the responsibility of Kaydon.

Mr and Mrs Paull were upset when Kaydon created the Mandurah franchise and did not offer it to them. Mr Paull had worked the area to the south of Kaydon's area and relied upon it for income. Mr and Mrs Paull commenced to discuss their problems with a solicitor, Mr Friedman of Friedman and Bonamelli.
Throughout 1990, the moneys due by Kaydon to Pirtek for stock increased alarmingly. Although the sum due by Kaydon to Pirtek WA decreased from $92,119 to $78,086, the sum due to Pirtek grew:-

Month Debits Credits Balance 1990 January 2860 3195 15792 February 17436 2500 30728 March 1553 32281 April 2068 5000 29349 May 22831 52180 June 2327 54507 July 8339 62846 August 8983 71829 September 19631 91460 October 16233 107693 November 4031 111724 December 111724

I assume that this increase was due in part to an increase in stock levels. Mrs Paull in her address mentioned a change to stock procedures which required Kaydon to maintain three months' stock and also the fact of the establishment by Kaydon of a stock at Boddington. I assume that there must also have been a significant increase in Kaydon's receivables. But other factors probably played a part. The evidence does not enable me to draw any conclusion on this matter.

In about September, the Chairman of Pirtek, Mr Ron Clark, became concerned about Kaydon's account.
On 12 September 1990, Mrs Paull sent the following fax to Mr Peter Duncan:-

"Peter,

Had a call from Ron Clarke last week regarding finances. What is going on? On your last visit you said `You will do whatever is necessary to ensure Fremantle continues.' I then get the impression from Ron Clarke that things are not ok and our managerial skills are being questioned. You did not mention a ceiling on finances at anytime. You have also had copies of our cash flow and yearly budget immediately upon request, nothing has ever been held back."

On the same day, Mrs Paull sent this fax to Mr Peter Duncan:-

"We are having increasing problems with supply from Welshpool. We've had a couple of large installation jobs lately which could not be forseen (sic). We are trying desperately to increase business and keep customers happy. This is very difficult with the problems and lack of leadership we have and still are experiencing in WA. On a bad day we've got Buckley's chance of getting parts from W/P., depends on moods. You then expect us to only purchase through the system.

Franchising is supposed to reduce not increase the problems experienced in the set up and general running of a business.

P.S. This is not directed at Eric."

On 13 September, Mr Duncan replied, stating inter alia that he required monthly profit and loss accounts, copy of monthly bank statements and a breakdown of all monthly cheques written.

Mr Peter Duncan came to Perth and discussed the business with Mr and Mrs Paull.
Subsequently, Mr Ron Clark came to Perth. He directed Mr Eric Duncan to spend some time in the Kaydon business to see how it was going. As I have already mentioned, after a few days, Mrs Paull ordered Mr Duncan to leave the premises. Mr Clark spoke at length with Mr and Mrs Paull. Unfortunately, at that stage, Mr and Mrs Paull were annoyed about a number of matters. They had already spoken with Mr Friedman. In the course of a conversation, Mrs Paull said to Mr Clark that Kaydon would not make any further payments for stock until matters were sorted out.
Mr Clark returned to Sydney and, after discussing Kaydon's position with Mr Peter Duncan and others, came to the conclusion that the franchise should be terminated.
On 8 November 1990, Pirtek sent a letter of demand calling for payment of the $205,000 then owing to Pirtek and Pirtek WA. On the same day, Mr Clark wrote to Mr and Mrs Paull to say that, having regard to the amount outstanding "and Helen's advice last night that your Company does not wish to make any further payments until the present difficulties are resolved I have no alternative but to advise that, until further notice, all future deliveries of product must be on a C.O.D. basis only."
There were apparently communications between Pirtek and Mr Friedman and offers and counter-offers were put forward. It seems a pity that an offer that Mr Davey and Mr Duncan said was agreed on Pirtek's part was not clearly put to Mr Friedman or, if put, was not communicated to and accepted by Mr and Mrs Paull. In any event, the parties did not resolve their differences.
On 7 December 1990, notice of termination of the franchise was given. Thereafter, Kaydon continued to carry on the business and for some time stock was supplied by Pirtek on a cash only basis.
Pirtek instituted the first of its proceedings and, in early 1991, sought an interlocutory injunction. When the matter first came before me, without deciding that motion I expressed the view that the parties should work towards an early date for hearing.
At the end of February 1991, Kaydon moved its business to other premises within the area. It ceased to use the name "Pirtek" but transferred its telephone number so that it continued to receive the calls directed to Pirtek Fremantle. Kaydon and Mr and Mrs Paull became in breach of the restrictive covenants imposed on them. Later, Kaydon sold its business to a company operated by a cousin of Mr Paull.
From the date of termination of the franchise, moneys were received by Kaydon from the sale of stock, from the sale of the business and from the receivables. No part of the receipts was paid to Pirtek.
The first claim for breach of contract is based upon Cl. 6A of the franchise agreement which provides inter alia:-

"The prices charged by the Franchisor shall be in the order of general market prices prevailing from time to time."

It is alleged that Pirtek charged Kaydon a price for products greater than the prevailing market price. However, few details have been provided specifically in this context. The provision does not mean that Pirtek undertook to match the price offered by every competitor. The evidence does not establish that, as a whole, Pirtek prices were not competitive. And the evidence does not establish that Kaydon was charged any more for Pirtek products than other Pirtek franchisees. Indeed, the evidence tends to show that the Fremantle franchise was given special discounts when they seemed to Pirtek to be justified.
The next claim is made under Clause 4C of the franchise agreement which provides inter alia:-
"The Franchisor shall supply at least one member of its
supervising personnel to assist the Franchisee for at least five
(5) days during the first month of operation of the Business."
It was said that Pirtek did not supply one member of its supervising personnel for at least five days during the first month of operation. However, as I have said, the Fremantle franchise commenced with three persons who had had experience working for the Welshpool centre. There was no need for supervising personnel to be present as if the franchisee were new to the operation. What was done by Pirtek in permitting Mr Paull to take with him two members of the Welshpool centre and in providing the personal assistance of Mr Duncan and Mr Hobbs, as well as that of Mr Smith who attended the Bank with Mr and Mrs Paull and of Mr Duncan's daughter who attended at the home of Mr and Mrs Paull to demonstrate how the computer software worked, sufficiently complied with Pirtek's obligations in this respect. The precise terms of the clause were not complied with. However, in the light of what occurred, no damages flowed from that.
It is also alleged that there was a breach of Cl.4C, namely that:-

"The Franchisor shall continue to furnish the Franchisee with such assistance (in connection with the operation of the business) as the Franchisor, in its sole discretion, deems necessary. Assistance will consist of visits, advice and guidance with respect to the following: a) methods and procedures for the sale of the products and services within the `PIRTEK FLUID CONNECTORS' Hose Service Centre and from Mobile Sales and Service Units; b) new categories of products as the Franchisor may approve, from time to time to be offered for sale by `PIRTEK FLUID CONNECTORS' Hose Service Centre franchisees; c) formulating and implementing local advertising and promotional programs at the expense of the Franchisee;

d) the training of his employees at the expense of the Franchisee;

e) sales and merchandising techniques and proper customer relations; and

f) general operating procedures for the operation of the Business."

I see no breach of this provision, not only because the clause imposes a discretionary obligation but also because throughout the time Pirtek did provide all its franchisees with advice and assistance of the type there specified. Mr Paull did not need training in the methods and procedures for the sale of Pirtek products and services for he was familiar with the business. As to new categories of products, Kaydon was given information about them as were all other franchisees. Mr and Mrs Paull had complaints about the advertising which they said benefitted Welshpool and not Pirtek Fremantle. However, there was no breach of contract by Pirtek. Training was not required for any of the employees of Kaydon other than perhaps Mrs Paull and she was given assistance in relation to the operation of the computer program. Kaydon was given general advice and sales and merchandising techniques and general operating procedures in the same way as were other franchisees. It is true that Kaydon did not supply the operating manual and letterheads etc for some months but I do not see this as a breach of the clause giving rise to a claim for damages.
The next allegation is that there was a breach of Cl.4A of the franchise agreement which provides:-

"The Franchisor will use all its best endeavours to carry on and conduct its business in a proper and efficient manner."

Particulars of breach given of this clause are as follows:-

"In breach of the said term Pirtek has:

(a) failed to instal and maintain a suitably qualified person to manage and control Pirtek's business in Western Australia;

(b) failed to instal and maintain a suitable person to manage and control Pirtek's business in Western Australia;

(c) failed to remove Pirtek's Western Australian manager, Eric Duncan, when requested to do so by Kaydon and when it was necessary to do so in order that Pirtek meet its obligations pursuant to Clause 4A of the Franchise Agreement;

(d) failed to reprimand and/or give direction to or control the said Eric Duncan in the performance of his duties as Pirtek's Western Australian manager;

(e) failed to prevent and permitted the continued incursions by other franchisees into Kaydon's franchised territory;

(f) failed to prevent and permitted the continued delivery of parts to Kaydon where such parts had been deliberately mixed up by Pirtek's Western Australian representative;

(g) failed to promptly and efficiently deliver parts as requested by Kaydon from time to time;

(h) failed to promptly and efficiently supply Pirtek parts to Kaydon and in their stead supplied to Kaydon non-Pirtek parts;

(i) failed to pass on to Kaydon savings effected by Pirtek by virtue of bulk purchases in respect of parts supplied to Kaydon;

(j) failed to properly advise and guide Kaydon in its daily business;

(k) failed to support Kaydon in its daily business;

(l) wrongly advised Kaydon to incur higher levels of debt;

(m) failed to closely and accurately monitor Kaydon's business activities;

(n) failed to closely and accurately advise and guide Kaydon;

(o) failed to adjust its prices for products supplied by it to Kaydon when it became apparent to Pirtek that its prices for its parts were uncompetitive;

(p) failed to assist Kaydon with the establishment of the Fremantle franchise;

(q) failed to warn Kaydon that it was entering into the franchise agreement under-capitalised;

(r) failed to respond positively to Kaydon's advice that it was experiencing sales insufficient to enable Kaydon to achieve that level of sales required to meet its operating expenses."

As to paras (a) and (b), the evidence shows that, after Mr Pike's removal, Mr Eric Duncan was appointed Manager of Pirtek WA. Mr Davey was appointed State Manager for Western Australia in early 1990. Thereafter, Mr Davey visited Western Australia regularly. There was no breach of Cl.4A in this respect. Mr Pike and Mr Eric Duncan were successful managers of Pirtek WA and Mr Davey was a successful marketing manager for Pirtek and was well versed in establishing and assisting franchisees. In the period with which we are concerned, the Pirtek business grew in Western Australia. There is no evidence from any other Western Australian franchisee that the Pirtek management was inadequate.
As to paras (c) and (d), they are based upon the view that Mr Eric Duncan was Pirtek's Manager for Western Australia. I accept Mr Davey's evidence that he did not hold this position and I accept also that Mr Davey's evidence that Mr Eric Duncan has been a competent and successful Manager of Pirtek WA.
As to para (e), I am of the view that the officers of Pirtek did all that was required to be done by them with respect to the alleged incursions. When the matter was brought to their notice, they took steps by writing to or speaking with the person allegedly responsible. But it was not Pirtek's responsibility to stop all incursions. If some customers preferred to deal with Welshpool and Osborne Park rather than with Pirtek Fremantle, the responsibility lay on Kaydon to protect its own territory.
As to paras (f), (g) and (h), there is no evidence that goods were deliberately mixed up so as to incommode Kaydon. It appears that there were problems with the manner in which stock was delivered by Pirtek WA and sometimes with the time taken for delivery. But I cannot conclude that Pirtek was thereby in breach of its obligation to carry on its business in a proper and efficient manner. Mr and Mrs Paull were not satisfied with the assistance and service which they obtained from Pirtek WA. But Pirtek carried on its business properly and efficiently notwithstanding that there were occasions on which the service given to Mr and Mrs Paull was less than perfect.
As to para (i), Kaydon did get the benefit of the arrangements which Pirtek made for products. That was a regular incident of the Pirtek business.
As to paras (j), (k), (l), (m) and (n), it is sufficient to say that Pirtek gave to Kaydon whatever assistance it could and maintained a supervisory eye over Kaydon's affairs. But in the end the business was Kaydon's and was run by Mr and Mrs Paull. It does not seem to me that there was anything further that Pirtek could or should have done in this respect.
As to para (o), I am satisfied that Pirtek did adjust its prices from time to time so that it remained competitive and that, on occasions, it gave special discounts to enable particular business to be obtained. But it was not Pirtek's function to undercut all competing products. As to para (p), Pirtek did assist Kaydon with the establishment of the Fremantle franchise. As to para (q), Mr Davey recommended what he thought was a sufficient level of capitalisation. It was not undercapitalisation but lack of profits which caused subsequent problems.
As to para (r), I am not satisfied that there was any specific step that Pirtek could have taken with respect to the level of sales and the level of operating expenses. Mr Davey would have recommended that endeavours be made to increase the sales. Mr Smith commented that the operating expenses were too high. It was for Mr and Mrs Paull to make their own decision about this.
There is a further specific claim that Pirtek permitted its servants, agents and employees to carry on business in Kaydon's exclusive territory. But the proof is to the contrary, namely that Pirtek took steps to stop incursions when they were brought to its notice. Another claim is that Pirtek failed to take adequate steps to prevent incursions. However, I have already dealt with this matter.

There is also a claim based on Cl.6A(h) which provides that "the franchisee at its option may permit the franchisee to return slow moving stock". However, the only evidence about this matter is that Kaydon received some stock on the establishment of the business which it thought was unnecessary. To assist Kaydon, Pirtek had already reduced the opening stock from the level that Pirtek thought should be held. I see no breach of contract with respect to this matter.
It is also claimed that Pirtek did not, in accordance with Cl.4B, provide a training program for the nominated manager of Kaydon, Mr Paull. However, there is no evidence that Mr Paull sought such a training program. He was already experienced in the business.
There is a further specific claim with respect to the operations manual which was not supplied for some months. I see no breach of contract such as would give rise to a claim for damages. It is also claimed that Pirtek failed or neglected to provide information to Kaydon which was reasonably necessary for the proper operation of the franchise business. However, the evidence discloses that requests for information were promptly answered. Pirtek did not withhold information which Kaydon ought to have had.
I am of the opinion therefore that no breach of contract has been established.
It follows that the cross-claim must be dismissed. In this event, Pirtek is entitled to the substance of the relief it seeks. When handing down these reasons, I shall ask counsel to address me on the form of the orders.

[1991] FCA 534

30 AUGUST 1991