Rafferty v Time 2000 West Pty Ltd (No 4)
[2010] FCA 725
•13 July 2010
FEDERAL COURT OF AUSTRALIA
Rafferty v Time 2000 West Pty Limited (No 4) [2010] FCA 725
Citation: Rafferty v Time 2000 West Pty Limited (No 4) [2010] FCA 725 Parties: PATRICK CAMPBELL RAFFERTY, SANTORA HOLDINGS PTY LIMITED ACN 128 467 550 and KARAVILLE HOLDINGS PTY LIMITED ACN 009 439 178 v TIME 2000 WEST PTY LIMITED ACN 127 893 270, TIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED ACN 127 853 614, TIME 2000 OPERATIONS (AUSTRALIA) PTY LIMITED ACN 128 700 541, EMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG), STEPHEN GERARD DONOVAN and MADGWICKS File number: SAD 122 of 2008 Judge: BESANKO J Date of judgment: 13 July 2010 Catchwords: TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for misleading and deceptive conduct – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where fifth respondent was a natural person and second, third and fourth respondents were corporations associated with him – where fifth respondent made representations to first applicant that prototype portable accommodation unit was under construction in China
Held: application allowed – representations as to prototype materially contributed to applicants entering into agreements – the applicants’ entry into the agreements was sufficient to establish that they suffered loss or damage – the fifth respondent was liable as being “knowingly concerned” in the contravention under s 75B(1) of the Trade Practices Act 1974 (Cth).
TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for breach of s 51AD – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where no disclosure documents provided as required if the agreements were a franchise agreement under the Franchising Code of Conduct – whether the agreements or one or more of them was a franchise agreement or agreement to enter into franchise agreement under Franchising Code of Conduct – whether agreement granted the right to carry on the business of offering, supplying or distributing goods or services under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor within clause 4(1)(b) of the definition of franchise agreement
Held: application allowed – agreements provided for matters such as a centralised bookkeeping and recordkeeping computer operation, the reservation to the franchisor of the right to screen and approve promotions, the prohibition of repackaging of products, suggested retail prices by the franchisor, a comprehensive advertising and promotional program by the franchisor, the division of a state into marketing areas, the establishment of sales quotas and the restriction on the sale of products without the franchisor’s consent – the fifth respondent was not liable as being “knowingly concerned” in the contravention under s 75B(1) of the Trade Practices Act 1974 (Cth).
TRADE PRACTICES – application for relief under s 159 of the Fair Trading Act 1999 (Vic) for misleading and deceptive conduct – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where sixth respondent was a firm of solicitors and had prepared the relevant agreements – where the agreements or one or more of them had been held to be a franchise agreement and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the sixth respondent had engaged in misleading or deceptive conduct by failing to advise the applicants that the Franchising Code applied.
Held: application dismissed – the applicants did not have a reasonable expectation that the sixth respondent would advise them on whether the Franchising Code applied – the sixth respondent owed a duty of confidence to the second to fifth respondents and the failure to disclose was not deliberate.
TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for breach of s 51AD – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where the agreements or one or more of them had been held to be a franchise agreement and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the sixth respondent was “knowingly concerned” in the contravention of s 51AD under s 75B(1) because they drafted the agreements.
Held: application dismissed – the sixth respondent did not know all essential matters that made up the contravention because they did not know that the Franchising Code of Conduct applied to the agreements.
CONTRACT – claim for breach of retainer – where the second to fifth respondents had retained the sixth respondent to draft agreements relating to the sale of portable accommodation units – where the agreements or one or more of them had been held to be franchise agreements and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the sixth respondent had adequately advised the second to fifth respondents as to Franchising Code of Conduct
Held: application dismissed – uncontradicted evidence that the sixth respondent had adequately advised the second to fifth respondents.
TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for breach of s 51AD – where the agreements or one or more of them had been held to be franchise agreements and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the second to fifth respondents could claim a contribution or indemnity from the sixth respondent by reason of s 75B(1) of the Trade Practices Act 1974 (Cth)
Held: application dismissed – s 75B(1) of the Trade Practices Act 1974 (Cth) does not enable the court to make orders for contribution or indemnity – the sixth respondent was not knowingly involved in the contravention of s 51AD for the purpose of s 75B(1) of the Trade Practices Act 1974 (Cth).
Legislation: Corporations Act 2001 (Cth) s 131
Customs Act 1901 (Cth) s 233B
Evidence Act 1995 (Cth) ss 97, 99, 100
Fair Trading Act 1999 (Vic) ss 9, 159
Federal Court Rules O 5 r 12(2), O 29 r 2, O 33 r 18
Trade Practices Act 1974 (Cth) ss 51AD, 52, 75B, 87
Trade Practices (Industry Codes — Franchising) Regulations 1998 (Cth)Cases cited: ACCC v IMB Group Ltd [2003] FCAFC 17 cited
ACCC v Kyloe Pty Ltd [2007] ATPR 42-194 discussed
Adler v Australian Securities and Investments Commission (2003) 179 FLR 1 cited
Ashbury v Reid [1961] WAR 49 referred to
Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd [1985] ATPR 40-538 referred to
Bowler v Hilda Pty Ltd [2000] FCA 899 cited
Butt v Tingey (1993) ATPR (Digest) 46-110 discussed
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 referred to
Capital Networks Pty Ltd v .au Domain Administration Limited [2004] FCA 808 discussed
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 referred to
Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 cited
Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1999) 155 ALR 714 referred to
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 discussed
Fencott v Muller (1983) 152 CLR 570 referred to
Gakora Pty Ltd v Montgomery Jordan & Stevensen Pty Ltd [1986] ATPR 40-722 referred to
Giorgianni v R (1985) 156 CLR 473 cited
Gould v Vaggelas (1985) 157 CLR 215 referred to
Henville v Walker (2001) 206 CLR 459 discussed
Heydon v NRMA Ltd (2000) 51 NSWLR 1 discussed
I and L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 discussed
John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1993] ATPR 41-249 discussed
Jones v Dunkel (1959) 101 CLR 298 cited
Kabwand Pty Ltd & Ors v National Australia Bank Ltd [1989] ATPR 40-950 discussed
Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054 discussed
Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 discussed
Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1 discussed
Nescor Industries Group Pty Ltd v Miba Pty Ltd (1997) 150 ALR 633 discussed
Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd [1994] ATPR 41-135 cited
Pico Holdings Inc v Voss [2004] VSC 263 discussed
Quinlivan v ACCC (2004) 160 FCR 1 cited
R v Kelly (1975) 12 SASR 389 discussed
R v Lam (1990) 46 A Crim R 402 discussed
Re La Rosa; Ex parte Norgard v Rodpat Nominees (1991) 31 FCR 83 discussed
Rhone-Poulenc Agrochimie SA and Anor v UIM Chemical Services Pty Ltd and Anor (1986) 12 FCR 477 referred to
Ridgway v Consolidated Energy Corporation Pty Ltd [1987] ATPR 40-754 referred to
Rosenberg v Percival (2001) 205 CLR 434 cited
Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 discussed
Smith v Chadwick [1884] 9 App. Cas 187 discussed
Smith v Maloney (2005) 92 SASR 498 cited
Software Integrators Pty Ltd v RoadRunner Couriers Pty Ltd (1997) 69 SASR 288 discussed
Sutton v A J Thompson Pty Ltd (in liquidation) (1987) 73 ALR 233 discussed
Warner v Elders Rural Finance Ltd (1993) 41 FCR 399 citedWheeler Grace & Pierucci Pty Ltd v Wright [1989] ATPR 40-940 cited
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 discussed
With v O’Flanagan [1936] 1 Ch 575 referred to
Yorke v Lucas (1985) 158 CLR 661 followedDates of hearing: 11, 12, 13, 14, 15, 18, 19 January 2010 Place: Adelaide Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 358 Counsel for the Applicants: Mr R J Whitington QC with Mr J M Cudmore Solicitor for the Applicants: Cosoff Cudmore Knox Counsel for the First Respondent: The First Respondent did not appear Counsel for the Second to Fifth Respondents: Mr M E Hoile Solicitor for the Second to Fifth Respondents: Cowell Clarke Counsel for the Sixth Respondent: Mr M Keith Solicitors for the Sixth Respondent Mouldens
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
SAD 122 of 2008
BETWEEN: PATRICK CAMPBELL RAFFERTY
First ApplicantSANTORA HOLDINGS PTY LIMITED ACN 128 467 550
Second ApplicantKARAVILLE HOLDINGS PTY LIMITED ACN 009 439 178
Third ApplicantAND: TIME 2000 WEST PTY LIMITED ACN 127 893 270
First RespondentTIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED ACN 127 853 614
Second Respondent/Second Cross-claimantTIME 2000 OPERATIONS (AUSTRALIA) PTY LIMITED ACN 128 700 541
Third Respondent/Third Cross-claimantEMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG)
Fourth Respondent/Fourth Cross-claimantSTEPHEN GERARD DONOVAN
Fifth Respondent/First Cross-claimantMADGWICKS
Sixth Respondent/Cross-respondent
JUDGE:
BESANKO J
DATE OF ORDER:
13 JULY 2010
WHERE MADE:
ADELAIDE
THE COURT ORDERS THAT:
1.Each party is at liberty to make submissions on the final orders to be made in light of these reasons.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
SAD 122 of 2008
BETWEEN: PATRICK CAMPBELL RAFFERTY
First ApplicantSANTORA HOLDINGS PTY LIMITED ACN 128 467 550
Second ApplicantKARAVILLE HOLDINGS PTY LIMITED ACN 009 439 178
Third ApplicantAND: TIME 2000 WEST PTY LIMITED ACN 127 893 270
First RespondentTIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED ACN 127 853 614
Second Respondent/Second Cross-claimantTIME 2000 OPERATIONS (AUSTRALIA) PTY LIMITED ACN 128 700 541
Third Respondent/Third Cross-claimantEMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG)
Fourth Respondent/Fourth Cross-claimantSTEPHEN GERARD DONOVAN
Fifth Respondent/First Cross-claimantMADGWICKS
Sixth Respondent/Cross-respondent
JUDGE:
BESANKO J
DATE:
13 JULY 2010
PLACE:
ADELAIDE
REASONS FOR JUDGMENT
INTRODUCTION
The parties
The applicants in this proceeding are Mr Patrick Rafferty, Santora Holdings Pty Limited (“Santora”) and Karaville Holdings Pty Limited (“Karaville”).
Sometime before the events giving rise to this proceeding Mr Rafferty was a part owner and operator of a business that manufactured and supplied equipment for mineral sampling and testing. He established that business in 1983 and it was known as ESSA. The business expanded over the years and went through several name changes and a merger with another company. The business is now known as Essa Australia Limited. Mr Rafferty is no longer involved with Essa Australia Limited.
Santora was incorporated in the State of Western Australia on 14 November 2007. The directors of the company are Mr Rafferty and persons and entities associated with him. The shares in Santora are held by Karaville.
Karaville was incorporated in the State of Western Australia on 13 February 1990. The directors of the company are Mr Rafferty and his wife. They also hold the shares in the company.
Except where it is necessary to identify a particular person or entity, I will refer to Mr Rafferty, Santora and Karaville as the applicants.
The respondents in the proceeding are Time 2000 West Pty Limited (“T2W”), Time 2000 Systems (Australia) Pty Limited (“T2SA”), Time Operations (Australia) Pty Limited (“T2OA”), Embleton Limited (“Embleton”), Mr Stephen Donovan and Madgwicks.
T2W was incorporated in the State of Victoria on 8 October 2007. The directors of T2W are Mr Rafferty and Mr Donovan. The shareholders of T2W are Santora (1,700,000 shares) and T2OA (1,769,487 shares).
T2SA was incorporated in the State of Victoria on 4 October 2007. The director and secretary of the company is Mr Donovan. The shares in T2SA are held by Almere Pty Ltd, which is a company based in Hong Kong.
T2OA was incorporated in the State of Victoria on 29 November 2007. The director and secretary of the company is Mr Donovan. The shares in T2OA are held by Welltron Limited, which is a company based in Hong Kong.
Embleton was incorporated in Hong Kong on 1 June 2007. The corporate director of the company is Almere Limited.
Mr Donovan has experience in real estate and property development. He owned and controlled a group of companies which I will refer to as the Time 2000 group.
Madgwicks is a firm of solicitors which carries on practice in Australia including in the State of Victoria.
Almere Limited was incorporated in Hong Kong on 14 March 2007 and Mr Donovan is the director of the company.
It is alleged by the applicants that Time 2000 Services Limited (formerly Welltron Limited) is a company incorporated in Hong Kong and which has Almere Limited as its sole corporate director. Time 2000 Pty Ltd was incorporated in the State of Victoria on 11 July 1997. The directors of Time 2000 Pty Ltd are Mr Donovan and Ms Kamila Runkowska. Ms Runkowska married Mr Donovan and is now Ms Kamilla Donovan. Gemhall Holdings Pty Ltd is the sole shareholder of the company.
Time Developments Pty Ltd was incorporated in the State of Victoria on 22 May 1987. The director of the company is Mr Donovan and he holds the shares in the company.
Gemhall Holdings Pty Ltd was incorporated in the State of Victoria on 10 June 1994. The director of the company is Mr Donovan and he holds the shares in the company.
The events which give rise to the applicants’ claims and to the cross-claims took place between May 2007 and May 2008. They involved a business venture between Mr Rafferty, Santora and Karaville on the one hand, and T2SA, T2OA, Embleton and Mr Donovan on the other. It was agreed between the parties that the business venture would be carried out by a company which would be incorporated for that purpose. T2W was incorporated for the purpose of carrying out the business venture. It is the first respondent, but it took no active part in the proceeding.
I will refer to T2SA, T2OA, Embleton and Mr Donovan as the Donovan respondents except where it is necessary to distinguish between them.
The business venture involved the sale of Modular Accommodation Units, or MAUs as they were referred to in the evidence. MAUs are buildings, and the proposal was that the business would arrange for them to be manufactured in China and then sold in Australia. Embleton allegedly held a number of patent applications, innovation patents and provisional patent applications in Australia and elsewhere in relation to MAUs.
Mr Rafferty described the advantages associated with MAUs in his evidence. He said that they were affordable, easy to install and did not require extensive on-site labour to make them operational. The latter matter was a distinct advantage where accommodation was required in remote areas. Although Mr Donovan did not give evidence in the trial, an email from him was tendered in evidence and in the email he describes the advantages of the MAUs as follows:
“The unique patented intellectual property enables the cost effective manufacture of sophisticated building units in China. We attach two of our presentations for your information and hope they are of interest.
Our patent allows us to exclusively utilise container shipping and distribution infrastructure to deliver high performance buildings which fold open on-site thereby minimising the inefficient and expensive Australian labour component. The buildings have all plumbing, electrical and mechanical systems including kitchens, Bathrooms and other joinery (housed within the container dimensions and) factory finished and tested in China. The buildings will be delivered with a national accreditation by the BCA, as such the buildings will be considered as an appliance with national certification.
Our Patents are unique in enabling the assembly of buildings from China which provide habital [sic] internal volumes with the width ranging from 6m up to 8.4m. This ability to deliver luxury factory finished products via existing Containerised Shipping and Trucking networks will ensure that we enjoy competitive advantage.”
The evidence before me was to the effect that the parties envisaged that MAUs would be constructed in different sizes and with different finishes and would be sold into different markets. Two markets in particular were the subject of evidence in this case, namely, the market for mining accommodation and the market for tourist or rural accommodation. In the typical case, an MAU for mining accommodation would consist of three bedrooms within a 40-foot module, while an MAU for tourist accommodation would consist of one bedroom within a 20-foot module. The MAU for tourist accommodation would have a better finish than the MAU for mining accommodation and may include features such as a verandah. As I understand it, this is what the parties expected in the typical case, but there was nothing to prevent an MAU for mining accommodation being a different size and having as good as, or better, finish than an MAU for tourist accommodation. It seems that it would depend on what the customer wanted. What is important, however, for the purposes of the applicants’ claim against the Donovan respondents for contraventions of s 52 of the Trade Practices Act 1974 (Cth) (“TPA”) is that the basic features, and therefore perceived advantages, of an MAU were the same whatever use they were to be put to.
The business venture between the applicants and the Donovan respondents was established by three agreements. First, there was a Heads of Agreement which was executed on or about 5 October 2007 (“HOA”). The parties to this agreement were T2SA, Embleton, Mr Donovan and Mr Rafferty. Secondly, there was a Joint Venture and Shareholders’ Agreement which was executed on or about 23 November 2007 (“JVSA”). The parties to this agreement were T2OA, Santora, Mr Rafferty and T2W. Thirdly, there was a Rights Agreement executed on or about 19 December 2007 (“RA”). The parties to this agreement were T2SA, T2W, Embleton, Mr Rafferty, Santora and Karaville. All three agreements were prepared by the firm Madgwicks which was acting as the solicitors for the Donovan respondents.
The business venture was not a success. It had come to an end by as early as May 2008. T2W never arranged for the manufacture of an MAU and never sold an MAU.
A summary of the claims made by the parties
The applicants’ claims are set out in a Further Amended Application (“Application”) and a Further Amended Statement of Claim (“Statement of Claim”). During the course of the trial I allowed some relatively minor amendments to the Statement of Claim. I refused an application which was made at the conclusion of the applicants’ opening, to amend the Statement of Claim in a more substantial way. I delivered reasons for that ruling during the course of the trial.
The relief sought in the Application is as follows:
“On the grounds stated in the accompanying Statement of Claim, the applicant claims:
As against the first to fifth respondents, relief pursuant to sections 82 and/or 87(1) and 87(2) of the Trade Practices Act 1974 (Cth) as follows:
1.That the Heads of Agreement, the Joint Venture and Shareholders’ Agreement and the Rights Agreement be set aside.
2.The applicants be repaid the following sums subject to and upon the terms of the orders set out hereinafter:
2.1as to $200,000 to the first applicant (‘Rafferty’);
2.2as to $500,000 to Karaville Holdings Pty Limited (‘Karaville’); and
2.3as to $1,000,000 to Santora Holdings Pty Limited (‘Santora’) and/or Karaville.
3.The second to fifth respondents shall do all things reasonably necessary to ensure payment out to the applicants or their nominees of the moneys held to the credit of first respondent (‘T2 West’) in the following bank accounts:
3.1in the name of T2 West with Commonwealth Bank of Australia Account No 066107-104054419;
3.2in the name of Time 2000 Tourism (North West) Pty Ltd with National Australia Bank Limited Account No. 853427-858528252.
4.Upon payment of such moneys the applicants shall forthwith pay and discharge all bona fide creditors of the T2 West from the proceeds of the bank accounts referred to in paragraph 3 (‘the Proceeds’) and in the event of doubt or dispute between the applicants and the second to fifth respondents as to the amount of the debt of any such creditor there shall be liberty to apply to the Court for further orders and directions, including an order for an inquiry.
5.Upon payment of such creditors the applicants shall forthwith notify the second to sixth respondents of the balance remaining from the Proceeds of the said bank accounts.
6.The second, fourth and fifth respondents shall jointly and/or severally pay to the applicants the following monies:
6.1as to Rafferty, the difference between $200,000 and Rafferty’s proportionate share of the Proceeds after payment out as provided for in paragraph 3.1 above and payment of creditors as provided in paragraph 4 above;
6.2as to Karaville, the difference between $500,000 and Karaville’s proportionate share of the Proceeds after payment out as provided in paragraph 3.2 above; and
6.3as to Santora and/or Karaville the sum of $1,000,000.
7.Upon payment by the first, second, fourth and fifth respondents as provided in paragraph 2 above:
7.1the shares of Santora in T2 West be cancelled; and
7.2Rafferty provide to T2 West by its director the fifth respondent (‘Donovan’) a notice of resignation as a director of T2 West.
As against the sixth respondents, relief as follows:
8.That the sixth respondents (‘Madgwicks’) do pay pursuant to section 82 and/or 87 of the Trade Practices Act 1974 (Cth) the respective sums specified in paragraph 6 hereof to the applicants stipulated in paragraph 6.
9.In the alternative to paragraph 8, that Madgwicks pay by way of damages pursuant to section 159 of the Fair Trading Act (Victoria) the respective sums specified in paragraph 6 hereof to the applicants stipulated in paragraph 6.
10.Such other or further relief as the Court deems fit.
11.Interest.
12.Costs.
13.That the parties have liberty to apply generally.”
The applicants plead two causes of action against the Donovan respondents.
First, they allege that the Donovan respondents contravened an applicable industry code within s 51AD of the TPA. The applicable industry code was the Franchising Code of Conduct (“Franchising Code”) which is the Schedule to the Trade Practices (Industry Codes — Franchising) Regulations 1998 (Cth). The applicants’ case is that the contravention arose because the agreements (either taken separately or any one of them in conjunction with other or others of them) constituted a “franchise agreement” and a “franchise system” within the TPA and the Franchising Code, and the Donovan respondents did not comply with the Franchising Code.
Secondly, they allege that the Donovan respondents made a number of false representations to them which induced them to enter into the agreements and that the Donovan respondents thereby engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive, within s 52 of the TPA. The pleaded representations were as follows:
(1)that the Donovan respondents, or one or more of them, had entered into a contract with an entity known as “BMA” said to be associated with BHP Billiton Limited, for the purchase by that entity of approximately 100 modular building units;
(2)that the Donovan respondents, or one or more of them, had entered into a contract with a company in China known possibly as Duowie or CIMC for it to manufacture modular building units in China;
(3)that a prototype modular building unit was being manufactured in China and would be available to T2W in China before Christmas 2007;
(4)that a prototype modular building unit was being manufactured in China and would be available to T2W in China by the end of January 2008.
The fourth representation was allegedly made some time after the third representation.
The applicants also plead two causes of action against Madgwicks. Both relate to the alleged contravention of s 51AD of the TPA by the Donovan respondents. First, they allege that by failing to advise them that the agreements would, if executed, constitute a “franchise agreement” and a “franchise system”, Madgwicks engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive, within s 9 of the Fair Trading Act 1999 (Vic) (“FTA”). They claim relief against Madgwicks under s 159 of the FTA. Secondly, the applicants allege that Madgwicks was involved in the contravention of s 51AD of the TPA by the Donovan respondents within s 75B(1) of the TPA.
T2OA has brought a cross-claim against Mr Rafferty. The company pleads one cause of action against Mr Rafferty, namely, that he breached and repudiated the JVSA.
The Donovan respondents have brought a cross-claim against Madgwicks. They plead two causes of action against Madgwicks. First, they allege that Madgwicks acted in breach of their contract of retainer in that the firm failed to provide proper and complete advice with respect to the Franchising Code. Secondly, they allege that if they contravened s 51AD of the TPA, Madgwicks was knowingly concerned in the contravention under s 75B(1) of the TPA and that they are entitled to relief against Madgwicks.
Madgwicks have brought a cross-claim and raised a setoff against the Donovan respondents. That cross-claim or setoff relates to legal fees of $315,369.05 allegedly owed by the Donovan respondents to Madgwicks. On 30 November 2009, I ordered that, pursuant to O 5 r 12(2) and O 29 r 2 of the Federal Court Rules, there be a separate hearing and determination of that issue and that it be subsequent to the hearing and determination of the remaining issues.
THE FACTS
A convenient starting point is a summary of the three agreements.
Under the HOA, the parties agreed that a new company would be incorporated to market, sell and install MAUs in the State of Western Australia and in the Northern Territory for short term accommodation in the tourism and rural accommodation sectors and for remote area laboratories for use on mining sites (recitals C and D, clauses 4 and 7). The “Territory” is defined as:
“the state of Western Australia and the Northern Territory, Australia but excluding an area comprising a radius of 15 kilometres from the central business district of Perth”.
In the HOA the proposed company is referred to as “Time 2000 (WA/NT) Pty Ltd or similar”. The company which was in fact incorporated was T2W. It is convenient to summarise the HOA as if it referred to T2W.
Under the HOA, Mr Rafferty agreed to pay into the trust account of Madgwicks, who were the lawyers for T2SA, what was called a seed fee of $200,000 immediately, and that seed fee would be paid to T2W on its incorporation (clause 2). T2W was to use that money to defray the costs and expenses of forming the company, the costs and expenses of engaging consultants to prepare documentation and commence working drawings for the prototype (as defined) and the costs and expenses of preparing the HOA and initial drafts of other agreements contemplated by the HOA. If the HOA was terminated the seed fee was to be paid to T2SA; it was not repaid to Mr Rafferty.
The HOA provided that T2SA was to hold 51 per cent of the shares in T2W and a company to be incorporated by Mr Rafferty was to hold the other 49 per cent. The decisions of shareholders were to be made by simple majority (clause 4). The board of directors of T2W was to comprise one director appointed by T2SA and one director appointed by the company to be incorporated by Mr Rafferty. The first directors were to be Mr Donovan and Mr Rafferty.
The parties agreed that the company to be incorporated by Mr Rafferty would pay $1,000,000 to the trust account of Madgwicks as a licence fee pending execution of a Rights Agreement and upon execution of the Rights Agreement the money would be paid to Embleton (clause 6.1). The company which was in fact incorporated by Rafferty was Santora and again it is convenient to summarise the HOA as if it referred to Santora. Under the HOA, the parties agreed that Santora would also pay $500,000 as working capital into an account to be established by T2W (clause 6.1). The parties agreed that Santora could be required to pay up to a further $3.3 million on the occurrence of certain events specified in the HOA and according to the times prescribed by the HOA for the production of modular building units (clause 6.3).
The HOA contemplated the execution of a Shareholders and Venture Agreement (clause 5.1) (in fact, as I have said, a Joint Venture and Shareholders Agreement was executed) and a Rights Agreement (clause 5.2). On the face of it, T2W was not bound to enter into a Rights Agreement with Embleton; it could request Embleton to do so (clauses 5.2 and 8.1). By contrast, Embleton undertook to enter into a Rights Agreement if requested by T2W (clause 8.1). It also undertook that, if requested by T2W to enter into a rights agreement, it would “comply with any applicable pre-contract requirements of the Franchising Code of Conduct”. Clauses 5.2 and 8.1 are in the following terms:
“5.2If T2WANT requests Embleton to enter into a Rights Agreement as contemplated by clause 8, the parties shall use reasonable endeavours to ensure that the Rights Agreement is concluded on or before 1 December 2007.”
“8.1 Undertaking by Embleton
(a)Embleton is a party to this agreement solely for the purpose of giving this undertaking and having the right to enforce any rights or claim in relation to the Time 2000 IP.
(b)Upon request by T2WANT, Embleton undertakes that it will:
(i)comply with any applicable pre-contract requirements of the Franchising Code of Conduct; and
(ii)subject to having complied with such requirements, offer to enter into a Rights Agreement with T2WANT on the terms set out in clause 8.2.”
The “Rights” which were to be the subject of the Rights Agreement were defined as:
“… the rights that Embleton undertakes to grant to T2WANT (pursuant to a Rights Agreement if T2WANT requests Embleton to enter into the Rights Agreement) for exclusive use of the Time 2000 IP in the industry markets within the territory.”
The HOA contained detailed provisions specifying the terms and conditions which were to be included in the Rights Agreement. The Rights Agreement was to include a provision that Embleton grant T2W limited rights to use its intellectual property (clause 8.2(a)) and a provision that T2W use reasonable endeavours to design and build the prototype in China within three months of the date of the HOA (clause 8.2(b)). The prototype was defined in the HOA as a prototype of, or similar to, the Modular Accommodation Unit shown in the plan which was a schedule to the HOA (clause 1.1). The plan showed an MAU which, in the typical case, would be suitable for tourist or rural accommodation and not one which, in the typical case, would be suitable for mining accommodation. The Rights Agreement was to include a provision that Mr Donovan have an absolute discretion to scrutinise proposed sales by T2W at his option on a project by project basis and to approve or deny any product (clause 8.2(c)).
Clause 8.2(d) of the HOA provided that the Rights Agreement must include provisions that T2W shall (among other things):
“(ii)use and promote the trademark and the design concepts contained in the Time 2000 IP;
(iii)promote and protect the Time 2000 brand;
(iv)establish a business development capacity to identify and solicit customers for the purchase of modular accommodation units; and
(v)develop and design suitable products for the Industry Markets within the Territory.
…
(vii)seek design compliance approval from Embleton;
(viii)seek quotations from and contract with Embleton approved panel of manufacturers that are satisfactory to T2 WA/NT;
…
(x)coordinate a project specific production licence from Embleton in respect of each project order placed with a manufacturer;
…
(xiii)establish display unit(s) and employ required sales persons;
…
(xv)comply with the policies and procedures as defined by Embleton;
…
(xix)[achieve agreed sales targets specified in the agreement]
(xx)prepare and maintain proper financial records with assistance from Deloitte in an Embleton approved format and hold these available to Embleton at all times.”
Clause 8.2(f) also provided that:
“T2 WANT acknowledges that a fee equal to 10% of the price charged to T2 WANT by the manufacturer will be payable by the manufacturer to Embleton.”
The HOA indicated that the Rights Agreement:
“shall otherwise be on the terms on which Embleton enters or intends to enter into other Rights and/or Franchise Agreements in relation to the Time 2000 IP.”
Mr Rafferty paid a sum of $200,000 into Madgwicks’ trust account on 8 October 2007. Even though the RA was not executed until 19 December 2007, Karaville, at Mr Donovan’s request, paid the sum of $1,000,000 into Madgwicks’ trust account on 14 November 2007.
I turn now to the JVSA.
Recital E in the JVSA records that Mr Rafferty, on behalf of Santora, paid the sum of $200,000 in accordance with the HOA. Clause 5.2 placed an obligation on Santora to pay the sum of $1.5 million to T2W, being $1 million for the rights under the Rights Agreement (in fact that sum had already been paid before the JVSA was executed) and $500,000 to be used by T2W as working capital. There was also provision for further payments of up to $3.3 million by Santora to T2W (clause 5.3). The JVSA provided that T2OA was to hold 51 per cent of the shares in T2W and Santora was to hold 49 per cent of the shares (clauses 4.1 and 5.6). The directors of T2W were to be Mr Donovan as chairman and Mr Rafferty as managing director and chief executive officer. The JVSA provided that Mr Rafferty was to continue as the managing director for three years (clause 8.1). In the event of the board of directors being deadlocked, the chairman (Mr Donovan) had a second or casting vote (clause 8.8). The JVSA provided that Mr Rafferty, as managing director, would be personally liable for the obligations of T2W. As far as I can see, the JVSA contains provisions with respect to a prototype which are similar to those contained in the HOA. In clause 37 of the JVSA each party acknowledged that he or it had had the opportunity to seek legal advice in respect of the terms and conditions of the agreement. One effect of the HOA and the JVSA was that the Donovan respondents controlled T2W both at board and shareholder meetings.
I turn now to the RA.
Under the RA, T2W was to pay what is called a “once-off” licence fee of $1,000,000 to T2SA in consideration of the Licence granted to it by T2SA. It appears that what had happened prior to the execution of the RA is that Embleton agreed to grant to T2SA an exclusive licence to use and exploit its intellectual property in Australia. The sum of $1 million paid by Santora into Madgwicks’ trust account was to be paid to T2SA on behalf of T2W (clause 4). T2SA granted the Licence to T2W and, for the purpose of giving effect to the Licence, T2W was entitled to use the Core IP and any relevant Developed IP (clause 2(a)). T2W agreed that T2SA “may at any time grant other licences provided that such licences do not apply to the Industry Markets within the Territory” (clause 2(b)).
The Licence was defined in the RA as the exclusive right granted to T2W by T2SA to:
“(a) design MAUs (for the purpose given in (c));
(b)arrange manufacture and importation of MAUs (for the purpose given in (c)); and
(c)promote, market, sell and install MAUs within the Industry Markets in the Territory during the Term”
(Clause 1.1)
The “Core IP” and the “Developed IP” were defined in the RA as follows:
“Core IP means the following intellectual property:
(a) Embleton Limited Patents and/or Patent Applications:
Country
Type
Application No
Title
Australia
Patent Application
2004205265
Interactive Building Module
Australia
Innovation Patent
2007101006
Interactive Building Module
Hong Kong
Patent Application
07015080.3
Interactive Building Module
China
Patent
ZL03108696.9
Interactive Building Module
China
Patent Application (Divisional)
200710140985.8
Interactive Building Module
Japan
Patent Application
2000-606855
Interactive Building Module
Europe
Patent Application
06013371.7
Interactive Building Module
Canada
Patent Application
2,366,306
Interactive Building Module
USA
Patent Application (Continuation-in-Part)
11/143,877
Interactive Building Module
USA
Patent Application (Continuation-in-Part)
11/933,379
Interactive Building Module
Australia
Provisional Patent Application
2007902634
Improvements in Building Modules
Australia
Provisional Patent Application
2007904797
Method and Apparatus for Erection of Buildings
(b) Embleton Limited Trademarks:
Time2000
T2
Australia Trade Mark 1173883 (T2 Logo)”
“Developed IP means all Intellectual Property which constitutes a modification, enhancement, improvement, alteration, amendment, development, extension or supplement to, or is otherwise ancillary or relates directly or indirectly to, the Core IP;”
Clause 3 dealt with the permitted use of the Core IP. It was in the following terms:
“3 (a) T2W is only permitted to use the Core IP for the purpose of the licence. T2W must not without the prior written consent of T2SA use the Core IP for any other purpose, or within any other market outside the Industry market or within any area outside the Territory.”
The term, “Industry Markets” was defined in the RA as the markets for the supply of modular accommodation units for short term stay accommodation for the purposes of national park accommodation, caravan parks and rural accommodation (excluding the supply of such units for use as motels, hotels, truck stop accommodation, aged care and/or retirement village accommodation except where agreed by T2SA) and remote-area laboratories for use on mining sites.
“Term” was defined to mean the life of the Patents, and “Territory” was defined to mean the Northern Territory and the State of Western Australia excluding an area comprising a radius of 15 kilometres from the central business district of Perth.
In view of the issues in this case, the provisions in the RA which deal with the control T2SA may exercise over T2W and which deal with the prototype are important.
As to the issue of control or potential control, the RA placed certain obligations on T2W in connection with its proposed business of promoting, marketing, selling and installing units within the Industry Markets in the Territory during the Term. Those obligations related to the design and manufacture of the MAUs (clause 8), the marketing and sales of the MAUs by T2W (clause 9), the achievement of specified sales targets (clause 10) and the conduct by T2W of its business operations (clause 13.1).
The effect of clause 8 of the RA was that T2W was to design the units and they were to be manufactured in China. T2W was required to comply with reasonable design requirements of T2SA and with all reasonable directions of T2SA as to quality control in the design and manufacture of MAUs (clause 8(b)(i) and (g)). The manufacturers of units were to be approved and licensed by T2SA (clauses 8(b)(ii) and (iii)). T2W acknowledged and agreed that a manufacturer would pay a fee to T2SA, or a related party, equal to 10 per cent of the price charged by the manufacturer to T2W (clause 8(h)).
Clause 9 of the RA provided that T2W must, if and when required by T2SA, give prominence to the trade marks and trade and brand names associated with the Core IP and the Time 2000 Image in all promotional material referring to the MAUs (clause 9.1(a)). The Time 2000 Image was defined in clause 1.1 of the RA as follows:
“Time 2000 Image means the distinctive image, reputation and presentation of the Core IP, T2SA and any Related Party of T2SA and/or Licensee from T2SA. The words ‘Time 2000’ and any related images and trade marks, brand names incorporating ‘Time 2000’ and ‘T2’, logs, slogans and colours associated with the Core IP are features of the Time 2000 Image.”
The RA provided that T2W must at all times use its best endeavours to promote, sell and protect the MAUs and that it must establish display unit(s) and employ sales persons as reasonably required by T2SA from time to time for T2W to fulfil its obligations under the RA (clause 9.1(b) and (c)). The MAUs developed and designed by T2W must be acceptable to T2SA (clause 9.2(a)). T2SA was given a discretion to scrutinise proposed sales by T2W to customers on a project by project basis and to approve or refuse any project (clause 9.3(b)). Clause 9.3 was in the following terms:
“9.3 Sales orders
(a)notwithstanding anything in this agreement, T2W must notify T2SA at least fourteen (14) days before entering into any agreement or accepting any order to sell MAUs in respect of a Project;
(b)T2SA or its nominee, shall have an absolute discretion to scrutinise proposed sales by T2W to customers on a Project by Project basis and to approve or refuse any Project.”
Clause 10 dealt with sales targets. The target for gross sales revenue for year one was $15,000,000 and for year two was $18,000,000. A failure by T2W to achieve sales targets could lead to termination of the RA by T2SA.
Clause 13 dealt with the conduct of T2W’s business operations and provided, among other things, that T2W was required to comply with the policies and procedures as required by T2SA from time to time, was to prepare and maintain proper financial records with assistance from Deloitte in a format and on a financial management system approved by T2SA and hold those available to T2SA at all times and was to comply with all reasonable directions of T2SA as to quality control in the manufacture and marketing of the units (clause 13.1(a), (e) and (f)).
As to the prototype, it was defined in the RA in a similar way to how it had been defined in the HOA and JVSA. T2W was under an obligation to use reasonable endeavours to build the prototype in China within three months of the date of the RA (clause 7(a)). T2W was obliged to meet the costs of manufacture and of complying with other obligations under clause 7 (clause 7(i)) and T2W was required to comply with all reasonable directions of T2SA as to quality control in the design and manufacture of the prototype (clause 7(g)).
Finally, the provisions of clause 12 of the RA should be noted. It is in the following terms:
“12. Parties will enter into Franchise Agreement if required by T2SA
The parties agree and acknowledge that, if at any time T2SA forms the view that the Franchising Code of Conduct applies or might apply to the arrangement between the parties, the parties will sign such documents and do such acts as may be necessary to enter into a Franchise Agreement under which T2SA or its nominee is the Franchisor and T2W is the Franchisee and, save as may be necessary to comply with the provisions of the Franchising Code of Conduct, the terms and conditions of the Franchise Agreement will otherwise be similar to the terms and conditions of this Agreement.”
On or about 19 January 2008, Santora, having received the moneys from Karaville, paid $500,000 to T2W.
The principal witness called by the applicants was Mr Rafferty. He appeared to me to be an honest witness with a fairly good recollection of events, although his recollection was not perfect. I have considered his evidence in light of all the evidence in the case. I have concluded that for the most part I should accept his evidence. I have carefully considered his evidence in light of the evidence of Ms Donovan (Mr Donovan, although available, did not give evidence) and his evidence of regliance and those two particular topics are dealt with below (at [119]-[125] and [129]-[133]). There were some relatively minor inconsistencies between Mr Rafferty’s evidence and Mr Levy’s evidence. They are also addressed below (at [193]). Although I have made findings on those matters in accordance with Mr Levy’s evidence, that fact does not cause me to doubt that, generally speaking, Mr Rafferty was an honest and reliable witness. In those circumstances, unless otherwise qualified, I make findings in accordance with his evidence.
Mr Patrick Rafferty acted on his own behalf and on behalf of Santora and Karaville. His evidence deals with the events leading up to the execution of the agreements and of his attendance at various meetings during which he alleges Mr Donovan made the representations set out above (at [28]). Mr Rafferty also gave evidence of the actions he and others took under the agreements.
Prior to May 2007, Mr Rafferty was not aware of the Franchising Code and he knew nothing of its requirements.
In May 2007, Mr Rafferty and Mr Geoff Luff were friends and business partners. It was through Mr Luff that Mr Rafferty first heard of Time 2000 and Mr Donovan. In May 2007, Mr Luff invited Mr Rafferty to a lunch where he said an “exciting business opportunity” would be discussed. Mr Rafferty did not attend lunch at Maurizio’s Restaurant in Northbridge, Perth, but he did go there in the middle of the afternoon. There were two stages to the discussions which took place. On that afternoon, at the first stage, Mr Rafferty met with Mr Luff and Mr Jon Brunner and he was introduced to the concept of MAUs. He was given or shown some drawings, floor plans, elevations and photographs of the units, and, either at that point, or at the second stage of the meeting, he was shown a video demonstrating the assembly arrangement of the units and how it was proposed they would be delivered and assembled on site. Mr Rafferty was told by Mr Luff in the presence of Mr Brunner that the cost to build the units in China and to ship them to Australia was less than $20,000 per room and that the expected sale prices of the units varied from between $70,000 and $90,000 per unit depending upon size and configuration.
The second stage of the meeting commenced with the arrival of Mr Donovan and Mr Detsis. Mr Rafferty was told that Mr Donovan was the principal of Time 2000 Developments (“T2D”), Mr Detsis was the marketing manager and Mr Brunner was the chief executive officer. The parties discussed MAUs and, in particular, cost per square metre, selling prices and market opportunities. At some stage during the meeting, Mr Donovan told Mr Rafferty that a prototype three room accommodation unit was being manufactured in China at that time as a prototype for BMA for use in their Dysart Project in Queensland. From the discussions, Mr Rafferty understood “BMA” to be a reference to an alliance between BHP and Mitsubishi. (Other evidence in the case establishes that BMA operated or was proposing to operate a coalmine in Dysart in Queensland.) A little later, Mr Donovan told Mr Rafferty the name of the Chinese manufacturer of the prototype (he cannot now recall the name which was mentioned) and that it was a business based near Beijing in China. Mr Donovan also told Mr Rafferty that he had met with BHP, Rio Tinto and FMG and that his negotiations with each of them were at an advanced stage.
A second meeting involving, among others, Mr Rafferty and Mr Donovan, was held in Melbourne in June 2007. Mr Brunner and another employee of Mr Donovan or one of his companies, Mr Angus Koch, collected Mr Rafferty and Mr Luff from the airport and drove them to a hotel in Chapel Street where they were staying. Some time after they had arrived at their hotel they went to a restaurant in Chapel Street where they met Messrs Donovan, Detsis, Koch, Brunner and a Mr John Beyer. Mr Rafferty was told that Mr Koch was the operations manager of Time 2000. At this dinner, Mr Donovan said to Mr Rafferty that the MAUs were “being made in China”. Mr Donovan said that he was getting a prototype made that they would be able to show to prospective buyers. Mr Donovan said to Mr Rafferty that BMA wanted a number of units and Mr Rafferty’s best recollection is that he said 96 units. Mr Donovan also said words to the following effect:
“The mining module prototype is now being manufactured in China for BMA. We will be able to show prospective buyers this unit while we are progressing other designs, but at least they will be able to see the quality we will be offering. Once they see this we will be flooded with orders.”
On the next day, there were further discussions between Mr Donovan and Mr Rafferty and during those discussions Mr Donovan told Mr Rafferty (probably at a lunch at a restaurant in the Docklands) the following:
1.Prototypes of the MAUs would be ready to view by Christmas 2007.
2.He expected construction of the MAUs in China to be completed within six weeks of final selection of fittings by an individual client.
3.Two prototypes would be built; one would be delivered to Perth and the other to Melbourne.
4.A company, Mr Rafferty thinks it might have been “CIMC”, had been engaged to manufacture the prototypes. I think it is fair to say, having regard to all the evidence, that Mr Rafferty has no clear recollection of the name of the manufacturer mentioned at various times; it could have been Duowie or it could have been CIMC. On this occasion, Mr Donovan used words to the effect that he had engaged a company called CIMC or Duowie (and in Mr Rafferty’s oral evidence he was reasonably sure it was not Duowie) to manufacture the prototypes.
5.On several occasions, Mr Donovan spoke about an order for 96 units for BMA. He said words to the effect that they had a trial order for MAUs to be delivered to BMA’s Dysart operations in Queensland.
On the following day, Mr Rafferty, Mr Luff, Mr Donovan and others went to lunch at a winery on the Mornington Peninsula. The lunch was a social occasion but during the lunch a number of business matters were discussed by Mr Rafferty, Mr Donovan, Mr Luff and Mr Brunner. The first matter discussed was the territory or area which would be the subject of the proposed venture. The second matter discussed was the market which would be the subject of the proposed venture and, in particular, whether it would include the mining sector. Eventually, it was agreed the proposed venture would include the caravan, tourism and rural sectors, but that it would not include the mining sector. In the course of the discussions on that matter, Mr Donovan said that he was in the advanced stages of negotiations with other parties and he named BMA in particular. Mr Donovan told Mr Rafferty that although BMA was based in Queensland and therefore outside the territory which had been agreed, BHP was particularly interested in a global approach to a contract with T2D. He told Mr Rafferty that BHP was interested in obtaining 5,000 three-bedroom workers’ units per annum. He told Mr Rafferty that a contract had been entered into with BMA for approximately 96 three-bedroom units at $180,000 each.
At this point Mr Luff and Mr Brunner left the discussion group and Mr Rafferty and Mr Donovan were left, as Mr Rafferty put it, “to iron out the details”. They discussed the income to be paid to Mr Rafferty to conduct the business and the amount to be invested by Mr Rafferty. Mr Donovan told Mr Rafferty that he would have to prepare a “marketing strategy” and that every sale, marketing concept and price had to be consistent with Time 2000’s plans, approved by him and be based on the licensed intellectual property. Mr Donovan told Mr Rafferty that they would have to act quickly “as he was very close to production”. The parties discussed the payment of profits and the formation of a company and the payment of profits through the payment of dividends.
At this time, Mr Rafferty noted that the only contribution Mr Donovan appeared to be making was to pay for the cost of the prototype and that appeared to him to be odd. However, Mr Rafferty could see the prospect of a quick and good return on his investment.
Mr Rafferty did not know of the structure of Mr Donovan’s companies. As far as the intellectual property rights were concerned, Mr Rafferty was given a list of the patents and patent applications. He asked for the patents and patent applications themselves, but those documents were never given to him.
The next day, Mr Rafferty and Mr Luff left Melbourne.
Mr Rafferty and Mr Luff returned to Melbourne on or about 21 June 2007. Mr Rafferty had discussions with Mr Brunner at the offices of Time 2000. It appears that nothing of real significance was discussed during this trip.
On 21 July 2007, Mr Rafferty received an email from Mr Koch. The message which is part of the email is in Mr Donovan’s name. It contains a description of the respondents’ business and plans. In the course of the message Mr Donovan states:
“We confirm that our company is well advanced in the commercialisation of a manufactured building system with global reach.
The unique patented intellectual property enables the cost effective manufacture of sophisticated building units in China. We attach documents for your information and hope it is of interest. More will follow in subsequent emails. Please print them to view with ease.”
There were a number of drawings of MAUs attached to the email. In addition, there was a document apparently prepared by Deakin University setting out details of a proposed feasibility study involving what is described as “BHP/Time 2000 Intelligent Sustainable Mining Village”.
On 27 September 2007, Mr Rafferty attended a meeting at the offices of Deloitte Touche Tohmatsu (“Deloitte”) in Melbourne. Deloitte was acting for Mr Donovan and his companies. Mr Donovan was present, as were Mr John Downes of Deloitte and Mr Graeme Levy and Ms Sue Harris of Madgwicks. The discussion included a discussion about territory and the markets which were to be the subject of the proposed venture. Mr Rafferty said that the fact that there were to be other territories with other people involved was discussed and some names were mentioned. Mr Rafferty was told that some people were possibilities while others were ready to sign. On this topic, Mr Rafferty said that Mr Donovan said words to the following effect:
“If you come upon a potential sale you can discuss the situation with me on a project-by-project basis and I will decide on the outcome. I see no reason why sales outside your territory would be an issue anyway until there are other franchises in other states and you wanted to sell in their territory.’
…
The other territories being envisaged at this point are Queensland, New South Wales, South Australia and Victoria/Tasmania. I am close to signing deals in Queensland and Victoria/Tasmania and have prospects lined up for the other territories.
…
I want to float the Time 2000 business at some stage after all the other territories are signed up.”
Mr Levy said words to the following effect:
“Payments from other people in relation to other territories will mirror your agreement.
…
Stephen, through his companies, will have overall control of where the product is sold, how it is marketed and to whom it can be sold.”
There was discussion about financial matters and ownership of the company to be incorporated to carry on the business. Mr Rafferty believed that Mr Donovan would effectively receive $5,000,000 in licence fees for five territories plus 51 per cent of the territory companies without making any financial contribution to those companies. Mr Rafferty said that there was a discussion about a potential float of the Time 2000 business.
Mr Rafferty said that there was some discussion about what would have to happen if the proposed venture involved a franchise. He cannot remember precisely what was said or by whom. He said that he was told that the proposed arrangement did not involve a franchise.
Mr Rafferty said that at the meeting at Deloitte the use of his proposed initial contribution of $200,000 for engineering drawings was first raised. He said that he thought the initial prototype was “already in the works” and the initial prototypes were already done. He thought that must be a reference to the new design.
Mr Rafferty lent Mr Donovan the sum of $50,000 on or about 16 August 2007. This payment was viewed by the parties as a down payment on the $200,000 to be paid by Mr Rafferty under the HOA.
Mr Rafferty had time to consider a draft Heads of Agreement and indeed he made some written comments about the document to Mr Donovan and Mr Levy. However, he did not obtain legal or financial advice in relation to the proposed Heads of Agreement.
Mr Rafferty executed the HOA on or about 5 October 2007. At that time, he believed that there was a prototype for the MAUs under construction in China and that it would be complete and available to be inspected before Christmas 2007. He also believed that Mr Donovan was in the advanced stages of discussions with investors interested in other territories.
On 8 October 2007, Mr Rafferty paid the sum of $200,000 referred to in clause 2 of the HOA. In a separate transaction Mr Donovan repaid the $50,000 he had borrowed from Mr Rafferty.
I turn now to the events which occurred after the execution of the HOA and before the execution of the JVSA on 23 November 2007.
On 15 October 2007 Mr Rafferty opened an office for the business operations of T2W. He paid expenses, including travel expenses, and the rent from his own funds and he purchased office furniture. He arranged for his son, Tom, to work in the business.
Mr Rafferty also arranged for his niece, Ms Shelley Davis, and a Mr Bernard Worthington, to work as commission only operatives. Their job was to identify and contact prospective customers. Ms Davis was based in Katherine in the Northern Territory, and Mr Worthington was based in Perth, Western Australia. Mr Rafferty said that loosely they were each allocated responsibility for the territory they were based in, but were free to work jointly if they wished.
Nitmiluk Tours was a tourism business based near Katherine in the Northern Territory. In the middle of October 2007, Ms Davis identified the possibility of a contract with that business for the purchase by the business of tourism units for an ecotourism venture at or near Katherine Gorge. Mr Rafferty was told that the general manager of Nitmiluk Tours was seeking a meeting between representatives of Time 2000 and the board of Nitmiluk Tours at Katherine on 31 October 2007. It was agreed by Mr Rafferty and Mr Donovan that Mr Donovan would attend the meeting and that he would give a Powerpoint presentation at the meeting. It was agreed that Ms Davis and Mr Worthington would attend the meeting for training purposes. Mr Rafferty paid Mr Worthington’s travel expenses. Mr Rafferty decided not to attend the meeting because of the costs involved were he to do so.
Ms Davis and Mr Worthington spoke to Mr Rafferty the day after the meeting and gave him a report of what had occurred. I refer to their evidence below (at [106]- [118]).
Mr Donovan had a conversation with Mr Rafferty after he had returned from the Northern Territory. Mr Donovan said that the presentation had gone over very well and that he believed Nitmiluk Tours would be placing an order for 10 spa units by 15 November 2007 at $70,000 per unit. When asked whether Nitmiluk Tours would want to see a prototype before placing the orders, Mr Donovan said words to the following effect:
“They are willing to place the order so manufacture of the structures can commence and by the time they see the prototype before Christmas in China, we will be ready to offer the fit out they require. We will also have to fly at least two of the Jawoyn representatives to China to view the prototypes. Will the new company be prepared to pay for this?”
Mr Rafferty said that he did not think that would be a problem.
On 29 October 2007, Mr Rafferty received from Mr Donovan a report of that date by an organisation called Mobile Architecture and Built Environment Laboratory dealing with an energy consumption analysis and acoustic evaluation of the BMA Time 2000 Module.
In the middle of November 2007, Mr Rafferty travelled to Melbourne with Ms Davis and Mr Worthington. During his visit he met with Mr Donovan. He asked him when the prototypes would be completed. Mr Donovan told him that they would not be ready before Christmas, but that they would be ready by the end of January 2008. They would be shipped to Australia by the end of February 2008. The conversation was along the following lines:
“Mr Rafferty: When will the prototypes be completed?
Mr Donovan: They will not be ready before Christmas, but they will now be ready by the end of January.
Mr Rafferty: Shipping to here by the end of February.
Mr Donovan: Yes.”
Mr Rafferty said that he was concerned to ensure that the prototypes would be completed by the end of January 2008. He feared that if they were not they would be caught up in the Chinese New Year and not completed until after February 2008.
Between the date of the execution of the JVSA (that is, 23 November 2007) and the date of execution of the RA (that is, 19 December 2007), Mr Donovan continued to tell Mr Rafferty that the prototypes would be ready by the end of January 2008. Mr Rafferty believed that Mr Donovan had an agreement with an organisation called CIMC or Duowie (as I have said, he was quite unclear as to which) to manufacture the prototypes. He said that he did not know that Mr Donovan did not have an agreement with any manufacturer to manufacture the prototypes.
On 15 December 2007, Mr Rafferty received a copy of an email sent by Mr Donovan to a third party. The email refers to a recent trip to China by Mr Donovan. It suggests that on that trip Mr Donovan “set in place” a manufacturing relationship with Duowie Corporation and had the agreement of a business called B & Q Retail and Wholesale Distributors to sponsor Mr Donovan’s project and prepare all schedules of fixtures and fittings for the prototypes and manage the supply chain on behalf of the project.
Mr Rafferty said that the statement in this email about a manufacturing relationship with the Duowie Corporation was consistent with his understanding at the time. It was only later that Mr Rafferty learnt that there was no agreement with the Duowie Corporation. He referred to an email sent to him on 14 March 2008 with an attachment containing a copy of an email from Mr Brunner to a Mr Leong Kok Yin dated 3 December 2007. That shows quite clearly that, as at 3 December 2007, no plans or drawings had been sent to the Duowie Corporation because that company had not yet signed a confidentiality deed.
By Christmas 2007, Mr Rafferty was unhappy with Mr Donovan because every time he asked Mr Donovan for a commitment about when the prototype would be available he was told it would be ready in about six weeks. In early January 2008, Mr Rafferty began to suspect that a prototype was not being constructed. It became clear to him from his discussions with the architects and engineers that the prototype was some way from being ready to be manufactured.
By about the third week in January 2008, it was clear to Mr Rafferty that the prototype would not be ready by the end of January. He spoke to Mr Donovan and asked him to send him a program setting out the work required to complete the prototype. A program was prepared by Hassells, a firm of architects, and sent to Mr Rafferty. It showed a scheduled completion date in June 2008 and it did not identify a manufacturer. It is clear from the evidence that that prototype relates to the prototype for tourist accommodation not the prototype for mining accommodation. Mr Rafferty said by that time the two types of prototype were becoming blurred.
By late February or early March 2008, Mr Rafferty was convinced that Mr Donovan was not telling him the truth about the status of the prototype. In early March 2008, Mr Brunner told Mr Rafferty that Mr Donovan had decided not to go ahead with the Duowie Corporation and that he was now in discussion with Sunscape and Bluescope.
At about this time, Mr Rafferty, Mr Worthington and Mr Donovan travelled to China to meet with manufacturers. Mr Rafferty attended a meeting with Madame Wong Kong of Sunscape and a meeting with Bluescope. Mr Rafferty said that it was apparent to him that Mr Donovan was still trying to convince each of them to manufacturer the units.
On his return from China, Mr Rafferty had another conversation with Mr Donovan about when the prototypes would be available. Mr Donovan told him that they would be ready in August 2008. There was a discussion about money and, in the course of that discussion, Mr Donovan accused Mr Rafferty of embezzlement. Thereafter, the relationship between Mr Rafferty and Mr Donovan broke down and they ceased to have any direct dealings with each other.
Mr Rafferty, on his own behalf and on behalf of Santora and Karaville, sought legal advice from the firm, Cosoff Cudmore Knox, in or about May 2008. On behalf of the applicants, Cosoff Cudmore Knox wrote to Madgwicks, who, at that time, were acting on behalf of the Donovan interests, by letter dated 23 May 2008. One of the assertions in the letter was that the Franchising Code of Conduct applied to the HOA and the RA, that the Franchising Code of Conduct was a mandatory industry code under the TPA, and that the HOA and the RA were illegal and void ab initio. Cosoff Cudmore are acting for the applicants in this proceeding.
The applicants paid a total of $1,700,000 under the agreements. The sum of $200,000 was paid into the trust account of Madgwicks and certain expenses were paid. The balance, which Mr Rafferty believes is about $100,000, was paid into a National Australia Bank account in the name of T2W. The sum of $500,000 designated in the agreements as being for working capital was paid by Mr Rafferty into a Commonwealth Bank account in the name of T2W. A sum of approximately $314,000 remains in that account and a sum of $25,000 is in a term deposit account. The sum of $1,000,000 was paid into the trust account of Madgwicks and thereafter it was distributed as follows:
1.Time Developments Pty Limited: $200,000.
2.T2SA: $300,000.
3.Time 2000 Pty Limited: $250,000.
4.Gemhall Holdings Pty Limited: $250,000.
Mr Rafferty said that he did not obtain legal or financial advice in relation to the agreements. Prior to May 2008 he was not aware of the Franchising Code or any requirement for a disclosure document. He was never given a disclosure document by Mr Donovan or any other person or entity.
Mr Rafferty said that before the detailed terms of the HOA were discussed, someone, he could not remember who, asked him if he wanted to obtain legal advice. He said that he did not think things had “got that far yet”. Neither Mr Donovan nor anyone else from the respondents suggested to Mr Rafferty that he obtain legal advice.
Mr Worthington gave evidence for the applicants. He was an honest witness and I accept his evidence. Mr Worthington is a valuer and property consultant. He has had substantial experience in dealing with property in Western Australia and, in particular, in the mining regions and the north west of Western Australia. He is a personal friend of Mr Rafferty, and he has known him for eight to ten years. One of Mr Rafferty’s sons is married to his daughter.
In September 2007, Mr Rafferty spoke to Mr Worthington and told him that he had entered into an agreement to obtain the rights to sell MAUs in the State of Western Australia and in the Northern Territory. He asked Mr Worthington for his assistance. Mr Worthington agreed and he became a Regional Sales Manager. He was to be remunerated by commissions on sales.
Ms Davis is Mr Rafferty’s niece. For some time prior to her involvement in the venture which is the subject of the agreements, she had worked in Katherine in the Northern Territory. Mr Worthington understood that she had been engaged by T2W on a similar basis to his engagement.
Mr Worthington went to the Northern Territory on 30 October 2007. He understood that he was to meet Ms Davis and Mr Donovan in Katherine. There were to be a series of meetings with potential customers of MAUs. Mr Worthington, Ms Davis and Mr Donovan were to meet with representatives of an organisation called Nitmiluk Tours.
Mr Worthington met Mr Donovan at the airport in Darwin and they drove to Katherine. During the trip to Katherine, Mr Donovan told Mr Worthington that he had a company in China near Beijing arranged to build the MAUs and Mr Donovan called the company “Do Wei” or similar. Mr Worthington does not recall Mr Donovan specifically saying that he had a contract with Do Wei, but he did tell Mr Worthington about the business and manufacturing process of Do Wei in substantial detail.
At about 8.00 am on 31 October 2007, Mr Worthington, Ms Davis and Mr Donovan met with two representatives of a local women’s group which was looking at the possibility of accommodation for a women’s short term shelter at Timber Creek. After that meeting, Mr Worthington, Ms Davis and Mr Donovan met with representatives of Nitmiluk Tours. Those representatives included Mr Clive Pollack, who Mr Worthington understood to be the chief executive officer of the business Nitmiluk Tours, Mr Brian Kittel, the chief financial officer, and Mr John Ah Kit, the chairman. Ms Davis had identified Nitmiluk Tours as a potential customer and Mr Worthington understood that they were interested in purchasing as many as 80 MAUs as tourist cabins over two potential sites. Mr Donovan made a presentation to the representatives of Nitmiluk Tours. He offered to provide each unit at a price of $70,000 fully furnished. In the course of the presentation, Mr Donovan said that a prototype was being built in China and that he could guarantee to have a display prototype “here” by the end of February 2008. Mr Donovan said that he could arrange for the whole village to be installed by May or June 2008 at the latest. Mr Pollack said words to the effect that subject to the representatives of his organisation carrying out an inspection of the prototype which was satisfactory and subject to agreement with plans, specifications, final costing and a fit-out schedule, Nitmiluk Tours were, in principle, happy to proceed with an initial order of accommodation units. Mr Pollack said that Nitmiluk Tours wished to receive the plans and specifications and fit-out schedule within two weeks. Mr Pollack said that Nitmiluk Tours would be interested in 40 units by way of the first stage. There was also discussion about finishes and the dimensions of the units. It was clear that Nitmiluk Tours were looking at MAUs of a high standard.
After the meeting with Nitmiluk Tours, Mr Worthington, Ms Davis and Mr Donovan drove to Darwin. That evening they had dinner with a person who was a representative of the Federal Government and a person from Connell Wagner who were consulting to the government. The meeting concerned the possible purchase of MAUs for housing, as part of the Federal Government’s intervention in indigenous communities in the Northern Territory. During the course of that meeting, Mr Donovan told those present that he had sold 40 units to Nitmiluk Tours that morning. That concerned Mr Worthington because he considered it to be untrue.
In late November 2007, Mr Worthington went to Melbourne with Mr Rafferty. They met Mr Donovan. During the course of the meeting, Mr Donovan told them that a prototype of the MAU was “being built” by “Do Wei”.
In late January or early February 2008, Mr Worthington became concerned about the lack of progress with the MAU prototype. By then, it was clear that no prototype would be available in February 2008, as Mr Donovan had promised Nitmiluk Tours. They had a meeting with Mr Downes of Deloitte and expressed their concerns about the lack of progress. They then had a meeting with Mr Downes and Mr Donovan.
In late March or early April 2008, Mr Worthington learned for the first time that “Do Wei” were not contracted to manufacture the MAU prototypes and that, to that date, no company had been contracted to manufacture the prototypes.
In mid April 2008, Mr Worthington, Mr Rafferty and Mr Donovan went to China. They met Madam Wong Kong who represented Sunscape. After the meeting, Mr Donovan had a further meeting with Madam Wong Kong. That night, Mr Donovan told Mr Worthington and Mr Rafferty that he had “signed up” Sunscape. The next day, Mr Worthington, Mr Rafferty and Mr Donovan met with representatives of Bluescope. It was clear from the meeting that Bluescope had not yet signed a confidentiality agreement.
Ms Davis also gave evidence for the applicants. She too was an honest witness and I accept her evidence. Ms Davis said that she commenced working as a consultant for T2W in about October 2007. She expected to be compensated solely by commission on sales. Ms Davis said that during the meeting with the representatives of Nitmiluk Tours, one of the representatives said words to the effect that Nitmiluk Tours wanted to have units on site for the beginning of the tourist season which was in April 2008. Mr Donovan said that a prototype was being built and he said that a display prototype would be available in China by December 2007. There was some discussion about flying the representatives of Nitmiluk Tours to China around the first week of February 2008 so that they could inspect the prototype. There was discussion about that being done at Time 2000’s expense. Mr Donovan said that the units would be available for inspection by then. There was discussion about whether the units would be available by 1 April 2008. The representatives of Nitmiluk Tours said that it would be acceptable if units could be available on site by 1 May 2008. Mr Donovan assured the representatives that this could be done. Ms Davis said that during the meeting with the representatives of the Federal Government that evening Mr Donovan took out the business card of Mr Ah Kit and put it on the table and said words to the effect that “an order has been received today from this person for 40 units”. Ms Davis said she knew this statement to be untrue.
In her oral evidence, Ms Davis said that she recalled a breakfast meeting with representatives of the Timber Creek Community Council at the All Seasons Hotel. That took place before the meeting with the representatives of Nitmiluk Tours. The representatives of the Timber Creek Community Council were interested in accommodation for an aged care facility. During the course of the meeting, Mr Donovan said that a prototype for the BMA units was currently being built in China. There was discussion as to whether a unit of that nature would be sufficiently robust for aged care accommodation. Ms Davis also said in her oral evidence that at the meeting with the representatives of the Federal Government, Mr Donovan said that a prototype was being built in China and that the prototype would be available for viewing in December. Mr Donovan referred to the prototype as the BMA prototype. He spoke to some drawings when giving his explanation of the BMA prototype.
The only direct evidence against Mr Rafferty’s version of events was given by Ms Donovan. I put to one side for the moment some minor inconsistencies between Mr Rafferty’s evidence and that given by Mr Levy. Those inconsistencies are dealt with below (at [193]).
Ms Donovan was the only witness called by the Donovan respondents. Mr Donovan did not give evidence at the trial. He was available and, in fact, he sat in Court for most of the trial.
Ms Donovan said that she attended a dinner in mid-June 2007 at the CNF Café in Chapel Street, South Yarra, Melbourne. The persons present at the dinner were Mr Rafferty, Mr Luff, Mr Donovan, Mr Brunner, Mr Detsis, Mr Koch and herself. Ms Donovan said that there was a discussion about the accommodation units and the modules that Mr Donovan was developing. Mr Donovan told those present that he had attended a meeting with Mr Frances Price from BHP. Mr Donovan said that the meeting had gone well. He said that Mr Price would contribute $200,000 for a prototype to be used for a mining village. He said that this was subject to approval of the plans. The prototype would be used as a display unit at BHP’s coal mining site to allow BMA to test it. Mr Donovan said that the idea of the unit was that it would comprise three rooms to be occupied by single men. Mr Donovan said that Mr Price had said that he would like to be involved in Mr Donovan’s mobile accommodation unit concept. Ms Donovan does not remember Mr Donovan saying that any such units were being built at that time. Mr Donovan did say that he had instructed Idle Architects and Cardno Engineers to commence preparing the required plans. Mr Donovan said that he had hoped the module could be built by Christmas and he said words to the effect of “we will see how things will go”.
Ms Donovan attended the lunch at the winery on the Mornington Peninsula. There were about 20 people present. Ms Donovan said that a number of bottles of wine were brought out during the course of the lunch. She recalls Mr Rafferty drinking a fair amount and that by the end of the lunch he was slurring his words. At about 4.00 pm, Mr Rafferty, Mr Luff, Mr Donovan and Mr Brunner went to another area. Mr Luff and Mr Brunner came back to the table. Mr Rafferty and Mr Donovan spoke by themselves for about three minutes. After the lunch, members of the group went to the Imperial Hotel. The group at the Imperial Hotel were Mr Rafferty, Mr Luff, Mr Donovan, Ms Donovan, Mr Koch and Ms Donovan’s sister, Anya. Ms Donovan said that Mr Rafferty and Mr Luff were drinking heavily. At some point, the group moved to a Greek restaurant to have dinner. They were joined by a man in a cowboy hat. The drinking continued. Ms Donovan does not recall anyone talking much about business. She said that Mr Rafferty became very drunk and fell off his chair. I should add that Mr Rafferty said that he did not have any more to drink than anyone else on that day.
Ms Donovan attended a lunch in March 2008 in Melbourne. Mr Rafferty, Mr Donovan and a Chinese delegation were present. In addition, Mr Downes, Mr Levy and Mr Worthington were present.
The principal significance of Ms Donovan’s evidence appears to be her recollection of what her husband said at the dinner at the CNF Café.
I have carefully considered Ms Donovan’s evidence. It does not cause me to doubt Mr Rafferty’s honesty or reliability. His evidence is consistent with what Mr Donovan said to him both before and after the dinner at the CNF Café. It is possible that Mr Donovan made the comments attributed to him by Ms Donovan but Mr Rafferty did not hear them. That seems unlikely having regard to Mr Rafferty’s recollection of what was said. In my opinion, Ms Donovan must be mistaken in her recollection.
There is not a great deal of authority on the level of involvement required in order to establish that a party was “knowingly concerned in” or “party to” a contravention within s 75B(1)(c).
In Butt v Tingey (1993) ATPR (Digest) 46-110 a claim was made that a solicitor had been knowingly concerned in a contravention of s 52 of the TPA. The solicitor had been retained by Blu-Binda Marina Pty Ltd. Blu-Binda had entered into a contract to sell a motor vessel to the respondent. Blu-Binda had accepted part-payment from the respondent in the form of money and an old vessel which Blu-Binda had promptly sold. Blu-Binda failed to deliver the new vessel to the respondent. The respondent sought return of the funds provided and an assurance that they would not be distributed. The solicitor for Blu-Binda wrote to the respondent by facsimile indicating that the funds would not be disbursed. In fact, the funds had already been applied to Blu-Binda’s overdraft facility.
At first instance, the solicitor was held liable. This decision was overturned on appeal by Neaves and Beazley JJ (Davies J dissenting). The majority held that the solicitor in question did not have actual knowledge that the funds had been applied to the overdraft. Their Honours also held that the evidence did not establish that the solicitor was doing anything more than conveying to the respondent’s solicitors the essence of the instructions he had received. Davies J, in dissent, held that, by giving his authority as a solicitor to the facsimile and letter, the solicitor had knowingly assisted Blu-Binda to mislead and deceive the respondent.
In Nescor Industries Group Pty Ltd v Miba Pty Ltd (1997) 150 ALR 633, Davies J said (at 641):
“Agents may be held to be in breach of the statutory provision either because they are directly responsible for the misleading information or because the fact that the information has come from them has added something to its weight and authority”
In John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1993] ATPR 41-249, Davies, Heerey and Whitlam JJ upheld a decision at first instance that a real estate agent was liable under s 75B(1)(c). The agent had provided to the purchasers a brochure produced by the vendors which contained misrepresentations as to the net lettable area of the property. The agent claimed that it was not “knowingly concerned” because it had merely passed on the information. The Court said (at 41,359):
“In our opinion an estate agent which holds itself out as, amongst other things, ‘consultants to institutional investors and to developers of major properties’ would not be regarded by potential purchasers of properties as merely passing on information about the property ‘for what it is worth and without any belief in its truth or falsity’.”
Their Honours placed particular reliance on the fact that the misrepresentations related to the net lettable area which “stands on a different footing from the puffery which often accompanies the sale of real property” because it is a figure of “hard physical fact” (see 41,359).
The meaning of the phrase “knowingly concerned” has been considered in the context of criminal offences. The old s 233B(1)(d) of the Customs Act 1901 (Cth) prohibited a person being knowingly concerned in the importation of a prohibited import. In R v Tannous (1987) 10 NSWLR 303, the New South Wales Court of Criminal Appeal considered the meaning to be given to the phrase “knowingly concerned” as it appeared in s 233B(1)(d). Lee J (with whom Street CJ and Finlay J agreed) indicated that what was required was more than just knowledge, but also some act or omission which implicated or involved the accused by establishing a physical connexion between him and the offence (see 308). His Honour said (at 308-309):
“I agree with counsel for the appellant when he submits that a mere state of mind which merely amounted to the appellant being interested in or concerned ‘about’ the venture, for whatever reason, would not be sufficient to constitute the concern of which the section speaks. The ‘concern’ to which the section speaks is not a concern personal to the appellant in the sense of being in his mind, but it is a concern which can be demonstrated objectively by reference to his association, whatever it may be, with the importation. It must be shown that he is ‘concerned in’ not just ‘concerned about the importation’… Before he could be convicted under the section he would have to do something to connect himself with or involve himself in the importation.”
Lee J, in reaching his conclusion, cited with approval comments made by the Full Court of the Western Australian Supreme Court in Ashbury v Reid [1961] WAR 49. That case involved the application of s 54(1) of the Forestry Act 1918-1954 (WA) which prohibited aiding, abetting, counselling or procuring or being directly or indirectly concerned in the commission of a forestry offence.
In R v Kelly (1975) 12 SASR 389, the Full Court of the Supreme Court of South Australia considered the meaning of the word “concerned”. Hogarth ACJ, Mitchell and Zelling JJ said (at 400):
“The word is no doubt deliberately chosen to cover a wide range of activities since it would be well-nigh impossible to define more closely the various acts which could go towards the fulfilment of a plan for the importation of prohibited articles.”
In R v Lam (1990) 46 A Crim R 402 (NSW CCA), Gleeson CJ cited this passage with approval. The Chief Justice said (at 405):
“The expression ‘concerned in’ is of general import and it is impossible to state with precision what it comprehends. It is necessary to consider the facts and circumstances of the particular case.”
In this case, Madgwicks did not argue that their level of participation in the contravention did not meet the requirements of s 75B(1) and therefore it is not necessary for me to consider this question any further. I have mentioned the authorities to illustrate that the determination of the issue very much turns on the facts of the particular case.
Madgwicks submitted that they were not liable to the applicants under s 75B(1) because they did not have the required level of knowledge. The contravention in this case is a contravention of s 51AD of the TPA, and that came about because of a failure to comply with the requirements of clauses 10 and 11 of the Franchising Code.
Madgwicks no doubt knew that some of the Donovan respondents were corporations and that they were acting in trade or commerce. They knew of the terms of the agreements. They knew that there was a Franchising Code, and they knew that the Donovan respondents took no action to comply with it. The applicants submitted that this knowledge was sufficient to render Madgwicks liable under s 75B(1).
Madgwicks submitted that, in order for them to be liable under s 75B(1), the applicants had to show that they knew the Franchising Code applied to the agreements and that that is an essential element of the knowledge requirements under the subsection. Madgwicks accept that it is not necessary for the applicants to show that they knew that there was a contravention of the Act.
In Yorke v Lucas (1985) 158 CLR 661 (at 667 and 671 per Mason ACJ, Wilson, Deane and Dawson JJ; at 677 per Brennan J) the High Court said that knowledge of the essential elements making up the relevant contravention must be proved in order to establish liability under s 75B(1)(a) or (c).
Brennan J (as his Honour then was) said (at 677):
“But section 75B(a) does require knowledge of the acts constituting the contravention and of the circumstances which give those acts the character which s 52 defines, namely, ‘misleading or deceptive or ... likely to mislead or deceive’.”
In a misleading and deceptive conduct case it has been held that knowledge that the conduct amounts to a contravention is not required, but knowledge of the circumstances that make the conduct misleading or deceptive is required: Wheeler Grace & Pierucci Pty Ltd v Wright [1989] ATPR 40-940 at 50,257 per Lee J (Neaves and Burchett JJ agreeing); Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd [1994] ATPR 41-135 at 42,204 per French J; Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1 at 11 per Moore J (Mansfield J agreeing); Adler v Australian Securities and Investments Commission (2003) 179 FLR 1 at 68-69 per Giles JA (Mason P and Beazley JA agreeing).
In Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1, Moore J said (at 11):
“Liability as an accessory (in circumstances where the contravening conduct of the principal was making false or misleading representations) does not depend on an affirmative answer to the question whether the alleged accessory knew the representations were false or misleading. All that would be necessary would be for the accessory to know of the matters that enabled the representations to be characterised in that way.”
In Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 Gummow, Hayne and Heydon JJ said (at 74 [48]):
“The trial judge rightly held that it was necessary to find that McAuliffe and Law participated in, or assented to, the companies’ contraventions with actual knowledge of the essential elements constituting the contraventions. The Rural Press parties complained that he failed to make particular findings, but they are in fact inherent in his reasoning. In the end the argument was only that McAuliffe and Law ‘did not know that the principal’s conduct was engaged in for the purpose or had the likely effect of substantially lessening competition ... in the market as defined’. It is wholly unrealistic to seek to characterise knowledge of circumstances in that way. Only a handful of lawyers think or speak in that fashion, and then only at a late stage of analysis of any particular problem. In order to know the essential facts, and thus satisfy s 75B(1) of the Act and like provisions, it is not necessary to know that those facts are capable of characterisation in the language of the statute.”
In Pico Holdings Inc v Voss [2004] VSC 263, Mandie J of the Victorian Supreme Court had to consider whether the sole director and majority shareholder of a company could be held liable under s 75(1)(c) of the TPA. Pico Holdings Inc had made two loans to the company in question and the company had defaulted on those loans. Pico Holdings Ltd claimed that the company had engaged in misleading and deceptive conduct because it had made representations that shares provided as security for the loans were unencumbered when in fact they were subject to a charge held by the National Australia Bank.
Mandie J held that Mr Voss was not liable under s 75(1)(c) of the TPA because, although he was aware of the charge, he was not aware that the relevant shares were encumbered by that charge. His Honour said (at [150]):
“I am satisfied that Mr Voss knew of the making of the representation, in that he had signed and sent the Promissory Note. Nor was it in issue that he knew of the existence of the NAB charge. I do not think that Mr Voss’s knowledge of the existence of the NAB charge is sufficient of itself. In my opinion, it was an essential element of the contravention that the Dominion Wines shares were encumbered by the NAB charge and it is that matter which Pico had to prove was known by Mr Voss. I do not think that Pico has established that Mr Voss knew that the Dominion Wines shares were encumbered by the NAB charge.”
The knowledge required is actual knowledge: Yorke v Lucas (1985) 158 CLR 661 at 667 per Mason ACJ, Wilson, Deane and Dawson JJ; Butt v Tingey (1993) ATPR (Digest) 46-110 per Davies, Neaves and Beazley JJ; Quinlivan v ACCC (2004) 160 FCR 1 at 4 per Heerey, Sundberg and Dowsett JJ. Constructive knowledge appears to be insufficient, despite the support it has received in some of the authorities: Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd [1985] ATPR 40-538 at 46,397 per Toohey J; Gakora Pty Ltd v Montgomery Jordan & Stevensen Pty Ltd [1986] ATPR 40-722 at 47,917 per Wilcox J; Ridgway v Consolidated Energy Corporation Pty Ltd [1987] ATPR 40-754 at 48,189 per Fox J. Although actual knowledge is required, it can be inferred from dishonest or deliberate ignorance (Giorgianni v R (1985) 156 CLR 473 at 482-483 per Gibbs CJ; at 495 per Mason J; at 507-508 per Wilson, Deane & Dawson J; Bowler v Hilda Pty Ltd [2000] FCA 899 at [78] per Finn J) or from wilful blindness (ACCC v IMB Group Ltd [2003] FCAFC 17 at [135] per Cooper, Kiefel and Emmett JJ).
In my opinion, in this case the essential matters which constitute or make up the contravention of s 51AD of the TPA are as follows:
1.a corporation;
2.the corporation acting in trade or commerce;
3.the three agreements and the terms and conditions of those agreements;
4.the Franchising Code applies to or in relation to the agreements; and
5.the provisions of the Franchising Code were not complied with.
Madgwicks had knowledge of the matters referred to in paragraphs 1, 2, 3 and 5, but, for the reasons earlier given (at [186]-[192]) not of the matter in paragraph 4. In those circumstances, they do not have the required knowledge for the purposes of s 75B(1). I have considered whether to include the matter identified in paragraph 4 is, in effect, to require the applicants to prove that Madgwicks knew that there was a contravention. That would be contrary to the authorities. The argument that that is the effect of including paragraph 4 is perhaps supported by the fact that on the face of it the matter is a matter of law. In the end, I have decided that, even if it is but a short step from the matters listed above to a requirement of knowledge of a contravention, the matter in paragraph 4 is an essential matter within the authorities and that it must be concluded that Madgwicks had knowledge of it before they are held liable under s 75B(1).
The applicants’ claim against Madgwicks based on s 75B(1) of the TPA must be dismissed.
THE DONOVAN RESPONDENTS’ CLAIM AGAINST MADGWICKS
Breach of retainer
There were various letters of retainer between the Donovan respondents and Madgwicks. There is no dispute about the fact that the Donovan respondents retained Madgwicks and that Madgwicks provided advice and assistance in relation to the transactions involving the applicants.
In their pleadings, the Donovan respondents plead the terms of the retainers and the duties that arose under the retainers. They plead the work carried out by Madgwicks and the two letters of advice provided by Madgwicks to them dated 1 October 2007 and 11 October 2007 respectively.
The breaches of retainer pleaded by the Donovan respondents are critical. They are as follows:
“8.Had Madgwicks properly discharged the General Retainer and the Rafferty Retainer, Madgwicks would have advised the cross-claimant as to the consequences to the cross-claimants should it subsequently be found that Agreements constituted a franchise agreement.
…
10.Madgwicks failed to advise and warn, or adequately advise and warn or alternatively to adequately advise or warn the cross-claimants of the risks attached to the agreements or any of them being found to be a franchise agreement.
Particulars
At no time prior to the entry into of any of the agreements did Madgwicks advise or warn, or alternatively adequately advise or warn, the cross-claimants that one or more of the agreements could, if found to be a franchise agreement for the purposes of the Code, be made void by the order of the Court pursuant to section 87 of the Trade Practices Act or that part or all of the funds paid under or in relation to one or more of the agreements could be ordered to be refunded.”
The breaches of retainer pleaded against Madgwicks relate not to a failure to draw the agreements in a particular way, or to provide advice as to whether the agreements as drawn involved a franchise agreement, but rather, a failure to advise as to the consequences of it being held that the agreements involved a franchise agreement. In other words, the complaint about the work carried out and advice provided by Madgwicks is quite specific. The alleged breach is a failure to provide advice as to the consequences of a matter raised with the Donovan respondents.
The Donovan respondents plead that had they been advised “as to the consequences to [them] should it subsequently be found that Agreements constituted a Franchise Agreement” then they would have complied with the Franchising Code or they would have structured the transaction and the agreements such that they did not contravene the Franchising Code.
Mr Donovan did not give evidence. Mr Levy and Ms Harris gave evidence. The claim by the Donovan respondents based on the breach of retainer faces two difficulties.
First, Mr Levy and Ms Harris gave evidence that they did advise Mr Donovan about the consequences of the agreements being held to be or to involve a franchise agreement. That advice is not contained in any of the written advice given by Madgwicks. Nevertheless, the evidence of both Mr Levy and Ms Harris was that they did advise Mr Donovan of the consequences of the Franchising Code applying to the agreements and, in particular, that the “deal” would be set aside. That evidence was not contradicted by Mr Donovan. I see no reason not to accept it and the breaches of retainer alleged by the Donovan respondents are not made out.
Secondly, there is no evidence from Mr Donovan to the effect that he would have acted differently had he been advised of the consequences of the Franchising Code applying to the agreements (Smith v Maloney (2005) 92 SASR 498 at 514-515 [51]-[52]). I do not need to make a final decision as to whether this difficulty is fatal because of my conclusion as to the first matter.
In his closing address, counsel for the Donovan respondents submitted that Madgwicks were obliged to advise the Donovan respondents on the RA and that the firm should have advised the Donovan respondents that the RA was a franchise agreement and of the requirements in the Franchising Code. That is not the case which is pleaded against Madgwicks and it is not a case that I think should be entertained at this stage having regard to the way in which the trial was conducted.
Section 75B(1) of the TPA
The Donovan respondents submitted that if they were liable to the applicants in relation to the alleged contravention of s 51AD of the TPA then Madgwicks were involved in the contravention within s 75B(1) of the TPA. The Donovan respondents sought relief against Madgwicks under s 87 of the TPA.
This claim must be rejected for two reasons.
First, the claim cannot be maintained, having regard to the fact that it is based on the Donovan respondents being the primary contraveners. I would follow the same approach as that taken by French J (as his Honour then was) in Re La Rosa; Ex parte Norgard v Rodpat Nominees (1991) 31 FCR 83. In that case, his Honour said (at 88):
“It was stated from the Bar table that there is no authority on the question whether s 87(1A) can be invoked to provide for indemnity or contribution under the Trade Practices Act. In my opinion, the reason for that scarcity is that the proposition is untenable. Section 87(1A) contemplates an application by ‘a person who has suffered or is likely to suffer loss or damage by conduct of another person ... in contravention of a provision of Part V’. Now it was contended that this would extend to a person who has suffered a judgment for contravention of the Act in which contravention another person was involved. But the Act contemplates that the applicant for relief under s 87(1A) is not the person who contravenes the relevant provisions of Pt V. That becomes clearer when it is seen that, before the court can make an order under this subsection, it must consider that the order or orders will compensate the person who made the application. And to the extent that s 87(2)(d) is relevant, it does not define the categories of person who may seek damages. In my opinion, there is no mechanism in s 87, nor in the Act generally, which would enable the court to make orders for contribution or indemnity against other contravenors of the Act or persons involved in the primary contravention.”
Secondly, the claim must fail for the reasons I have given in relation to the applicants’ claim against Madgwicks based on s 75B(1) of the TPA.
Conclusions
My conclusions are as follows.
First, I state my conclusions on the applicants’ claims against the second to fifth respondents.
Time 2000 Systems (Australia) Pty Limited, Embleton and Mr Donovan are liable to the applicants for contraventions of s 52 of the Trade Practices Act 1974 (Cth). Time 2000 Systems (Australia) Pty Limited and Embleton are primary contravenors and Mr Donovan is liable as a person involved in the contraventions (s 75B(1)). Time 2000 Operations (Australia) Pty Limited is a proper party for the purposes of the relief claimed by the applicants. The orders sought in paragraphs 1 to 7 inclusive of the Further Amended Application seem to be both within the scope of s 87 and appropriate, but I will hear the parties generally as to final orders.
Embleton and Time 2000 Systems (Australia) Pty Limited are also liable to the applicants for a contravention of s 51AD of the Trade Practices Act 1974 (Cth). They are liable as primary contravenors. Mr Donovan is not a person who was involved in the contravention of s 51AD. The cross-claim by Time 2000 Operations (Australia) Pty Limited against Mr Rafferty must be dismissed.
Secondly, I state my conclusion on the applicants’ claims against the sixth respondent.
The applicants’ claims against the sixth respondent under s 9 and s 159 of the Fair Trading Act 1999 (Vic) and under s 75B(1) of the Trade Practices Act 1974 (Cth) must be dismissed. In the circumstances, it is not necessary for me to consider the sixth respondent’s submissions concerning proportionate liability under the Wrongs Act 1958 (Victoria).
Finally, I state my conclusions on the claims of the second to fifth respondents against the sixth respondent.
Those claims, being claims based on breach of retainer and involvement in the contravention of s 51AD of the Trade Practices Act 1974 (Cth), must be dismissed.
I will hear the parties as to final orders, costs and any other matters.
I certify that the preceding three hundred and fifty-eight (358) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate:
Dated: 13 July 2010
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