Sanders v Glev Franchises Pty Ltd - [2002] FCA 1332

FEDERAL COURT OF AUSTRALIA
Sanders v Glev Franchises Pty Ltd [2002] FCA 1332
TRADE PRACTICES – franchise agreement – whether pre-contractual representations constituting misleading and deceptive conduct – whether representations made – whether commendatory puffery – whether reasonable grounds for representation as to future matter – whether representations as to past and present matters untrue – reliance – collateral warranties – negligent misstatement
Trade Practices Act 1974 (Cth), s 51A, s 52, s 82(1)
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 referred
Ting v Blanche (1993) 118 ALR 543 discussed
Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR (Digest) 46-179 referred
Banque Commerciale SA, en liquidation v Akhil Holdings Limited (1990) 169 CLR 279 applied
Cummings v Lewis (1993) 41 FCR 559 applied
Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525 distinguished
General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164 applied
Pappas v Soulac (1983) 50 ALR 231 followed
Hanave Pty Ltd v LFOT Pty Ltd [1998] FCA 1051 referred
Kaytonruby Pty Ltd v Glev Franchises Pty Ltd [1998] FCA 650 referred
Sykes v Reserve Bank of Australia (1998) 88 FCR 511 applied
Gardner Corporation Pty Ltd v Zed Bears Pty Ltd [1999] WASC 1043 referred
Lobendhan v West Perth Investments Pty Ltd [1998] FCA 1257 referred
Holz v Lane [2002] WASCA 164 referred
Tomlinson v Cut Price Deli Pty Ltd (1995) ATPR (Digest) 46-151 referred
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 applied
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 applied
Fried v Dixie Holdings Pty Ltd [2000] FCA 1048 referred
Gould v Vaggelas (1985) 157 CLR 215 applied
Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 applied
Tepko Pty Ltd v Water Board (2001) 206 CLR 1 referred
SanSebastian Properties Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 referred
JOHN EDWARD SANDERS & ANOR v GLEV FRANCHISES PTY LTD & ORS
VG 418 of 1992
KENNY J
29 OCTOBER 2002
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

VG 418 OF 1992

BETWEEN:

JOHN EDWARD SANDERS
First Applicant

CHRISTOPHER ZIENKIEWICZ
Second Applicant

AND:

GLEV FRANCHISES PTY LTD
First Respondent

GABRIEL CHRISTOU
Second Respondent

LEO REYES
Third Respondent

JUDGE:

KENNY J

DATE OF ORDER:

29 OCTOBER 2002

WHERE MADE:

MELBOURNE

THE COURT ORDERS THAT:
1. The application be adjourned to a date to be fixed.
2.On or before 12 November 2002, the parties file and serve proposed minutes of orders and any submissions they wish to make in support of the minutes.

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

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

VG 418 OF 1992

BETWEEN:

JOHN EDWARD SANDERS
First Applicant

CHRISTOPHER ZIENKIEWICZ
Second Applicant

AND:

GLEV FRANCHISES PTY LTD
First Respondent

GABRIEL CHRISTOU
Second Respondent

LEO REYES
Third Respondent

JUDGE:

KENNY J

DATE:

29 OCTOBER 2002

PLACE:

MELBOURNE

REASONS FOR JUDGMENT
a: introduction

This proceeding arises out of the purchase, in 1990, of franchises by the applicants, John Sanders and Christopher Zienkiewicz, and Russell Taylor (who is not a party to the proceeding). The first respondent, Glev Franchises Pty Ltd (“Glev Franchises”) is the franchisor for a chain of pizza outlets known as “Pizza Haven”. The applicants have claimed that the respondents made numerous misrepresentations during the pre-contractual negotiations and that these misrepresentations induced them to enter into franchise agreements, as a result of which they have suffered loss and damage.
By one of these franchise agreements, Glev Franchises conferred a franchise to operate a Pizza Haven business at Bentleigh (a suburb of Melbourne). This is referred to below as the Ormond franchise. The alleged misrepresentations concern only the applicants’ purchase of the Ormond franchise.
Pursuant to the Ormond franchise agreement, the applicants set up and began operating a Pizza Haven store at Bentleigh in late October 1990. The business was unprofitable, and two years later the applicants sold the franchise back to Glev Franchises, having allegedly incurred losses attributable to the respondents’ misdescription of the potential of the Ormond store and the Pizza Haven chain.
b: the case as pleaded
An initiating application commencing this proceeding was filed on 6 November 1992. It is unnecessary to set out the protracted procedural history of the litigation. It suffices to note that there have been about 10 versions of the statement of claim, and consequential and non-consequential amendments to other pleadings.
The applicants have put their claim for loss and damage in a number of ways. They have alleged (a) misrepresentations that were misleading and deceptive in contravention of s 52 (read with s 51A) of the Trade Practices Act1974 (Cth) (“TPA”); (b) breaches of warranties and collateral warranties; and (c) negligent misstatements. The latest statement of claim also included a claim for damages for breach of the Ormond franchise agreement but this claim was not ultimately pursued.
The substance of the alleged representations allegedly made by the respondents was that the Ormond franchise would be profitable and a good investment. These representations are the basis for all the causes of action pleaded by the applicants against the respondents. The details of these representations are set out below.
The applicants relied primarily, however, on s 82(1) of the TPA, read in conjunction with s 52. Section 52 of the TPA prohibits a corporation from engaging in conduct in trade and commerce that is misleading or deceptive, or that is likely to mislead or deceive. The words “engage in conduct” include the making of representations about a past, present or future matter. It was conceded, or not in issue, that the first respondent was a corporation engaged in trade and commerce, and that Gabriel Christou was a director of the first respondent. The applicants claimed that the first respondent, principally by Gabriel Christou, contravened s 52 by making certain representations with respect to past, present and future matters.
In order to make out their case under s 52 in respect of each pleaded representation, the applicants needed to establish (1) that the representation was made; (2) that, viewed objectively and subject to s 51A (see below), the representation was misleading or deceptive or likely to mislead or deceive; and (3) that they relied on the representation in the sense that it operated as an inducement for them to enter the Ormond franchise agreement. In order to be compensated for any loss and damage under s 82(1) of the TPA, the applicants needed to establish a causal connection between the respondents’ conduct and the loss for which they sought compensation: see, e.g., Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, at 525-6 per Mason CJ, Dawson, Gaudron and McHugh JJ.
In relation to the representations allegedly made with respect to future matters, the applicants relied on s 51A of the TPA. Where a corporation makes a representation with respect to a future matter without reasonable grounds for making the representation, s 51A deems the representation to be misleading for the purposes of s 52. As Hill J said in Ting v Blanche (1993) 118 ALR 543 (“Ting v Blanche”), at 552:
What s 51A does, in a practical sense, in cases where it applies, is to cast the burden of proof upon the respondent corporation who has made a representation about a future matter to show that in making that representation it had reasonable grounds for so doing.
An applicant does not have to establish as a part of his cause of action that the respondent corporation did not have reasonable grounds for making the representation. Subsection 51A(2)
throws the evidentiary burden on a respondent to establish that grounds for making the representation existed and in the absence of such evidence the deeming provision has the consequence that the representation is taken to be misleading. Section 51A does not create an independent cause of action separate from s 52 and other sections in Pt V of the Act but rather casts the burden of proof on the respondent and if that burden is not discharged then a breach of s 52 is established by the applicant proving the representation as to the future matter and the fact that it did not come to pass.
See Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR (Digest) 46-179 per Goldberg J, citing Ting v Blanche at 552.
In the most recent version of their defence, the respondents
(a)denied the representations;
(b)relied on disclaimers contained in acknowledgements dated 5, 12 and 21 September 1990 and in the Disclosure Document (see below); and
(c)admitted that they made oral representations; but
(d)asserted that they had reasonable grounds for making any representations they made as to future matters; and
(e)asserted that any representations they made as to past or present matters were in substance true; and
(f)denied that the applicants relied on the representations made by them.
The respondents also maintained that, if the applicants had suffered loss and damage, then it was caused by their own conduct; and that the applicants had failed to mitigate their loss and damage. It is unnecessary at this stage to refer in any detail to the applicants’ reply to the respondents’ defence.
The respondents also cross-claimed for $5,000 in respect of legal costs and stock. They submitted, however, that this claim should not be considered at this stage of the proceeding (which was concerned only with their primary liability). The claim should, they said, be considered at the assessment stage of the proceedings. As the applicants did not oppose this course, I have proceeded on this basis.
c: the facts
(i)The Christous’ Pizza Haven business
In October 1984, the second respondent, Gabriel Christou, and his three brothers (Evan, Bill and Louis) opened an eat-in and take-away restaurant at Glenelg in South Australia, under the name “Pizza Haven”. From the beginning, Gabriel worked full-time in the business. Evan began working full-time in the business in August 1985. Bill joined in January 1986, and Louis, in January 1987. The restaurant seated about 120 people. Take-away sales comprised about 20% of sales.
In July 1985, the Christou brothers expanded the business to include home deliveries of pizzas. They subsequently opened five more Pizza Haven outlets. These outlets were located in or near Adelaide, at Christies Beach (October 1985); Colonel Light Gardens (December 1985); Findon (March 1986); Glenunga (July 1986); and Modbury (October 1986). Employee managers managed these five new stores. Unlike the Glenelg restaurant, the new outlets focussed on home delivery and take-away sales of pizza.
(ii)Development of the Pizza Haven Franchise
Franchise Developments Pty Ltd (“Franchise Developments”), which was liquidated in 1997, provided franchise consultancy services. The Christous approached Franchise Developments in 1986, to discuss the development of a Pizza Haven franchise.
Evan Christou met Bruce Robinson, an employee of Franchise Developments, in Melbourne on 17 September 1986. Five days later, Robinson met Evan and Bill Christou, in order to obtain information about the Pizza Haven business. Towards the end of September (around 24 September 1986) Franchise Developments submitted a “Franchising Feasibility Programme”, which included a proposal for a “Feasibility Study” and the creation of a “Franchising Programme”.
Another employee of Franchise Developments, Tino Bettiol, met Evan, Bill and Gabriel Christou in Adelaide on 3 October 1986, in order to obtain further information about their business operations. About a fortnight later, Franchise Developments submitted an initial draft of a “Pizza Haven Franchise Feasibility Study” (“the feasibility study”). Franchise Developments subsequently revised the draft following a meeting with the Christous in Adelaide on 23 October 1986.
The revised version of the feasibility study was dated November 1986 and consisted of about 51 pages. The study described its first two objectives in the following terms:
1.The primary objective of this study is to examine the feasibility and scope of applying franchising to the Pizza Haven retail home delivery and take-away business as an effective strategy to increase and secure Pizza Haven’s presence in the South Australian market and expand nationally by initially penetrating the Victorian market.
2.If effective, franchising should enable the Pizza Haven organisation to expand its retail base and generate additional income in the form of Franchise Fees and Service Fees (Royalties) … .
In discussing the ‘franchisability’ [sic] of the Pizza Haven stores, the feasibility study said:
The most important single test of the franchisability of any business is its financial viability. The projected franchisee financial performances shown in … this Study indicate that a franchised Pizza Haven store can be a very profitable venture for the franchisee. The estimates … show that a franchisee could realistically expect to earn annual profits ranging from $16,000 to over $70,000 plus their drawings.
In assessing the financial attractiveness of a franchise opportunity it is necessary to consider the investment requirements. … [T]his Study … indicates that a franchisee would need to invest between $54,000 to $56,300 to establish a new store under the Pizza Haven banner.
…
… The franchisee financial model in … the Study shows that the franchisee’s business could comfortably support a service fee of 5.5% of gross sales and an advertising contribution, equal to 5.0% of gross sales respectively. … .
The feasibility study contained what was called a “Franchise Profit Projections” table, which set out five levels of weekly sales: $4,000, $4,500, $5,000, $6,000 and $7,000. In relation to each level, the table set out the cost of sales (24.5% of sales); operating expenses (including “leasing” and “salaries and wages”); and annual net profit (before interest and taxes) ranging from $3,310 (in relation to level 1 - $4000) to $71,900 (in relation to level 5 - $7,000).
In connection with the Victorian market, the feasibility study noted:
Victoria as a more heavily populated state has potential for in excess of twenty regional Pizza Haven stores, if the same population criteria is applied [as in South Australia]. It is difficult to determine the exact number of Melbourne metropolitan Pizza Haven stores. Given Pizza Haven’s location criteria and target markets, Franchise Developments envisages scope for at least twenty to twenty-five Pizza Haven stores in the Melbourne metropolitan area.
The Victorian market is currently proliferated by a large number of independent pizza stores, with Pizza Hut being the only pizza chain with any significant market share. … .
The study made a number of recommendations, which included a recommendation for the development of “a formal franchise programme”.
In November 1986, Franchise Developments submitted a proposal to prepare a franchise programme. The proposal was duly approved. By April 1987, Franchise Developments had completed a document called “Pizza Haven Franchise Programme” (“the franchise programme”).
The franchise programme consisted of well over 100 pages. The programme declared that its aim was
to facilitate expansion of the Pizza Haven base of home delivery and take-away stores by recruiting suitable franchisees who will commit their funds to establish their business within the Pizza Haven group.
The franchise programme proposed a corporate structure, which the Christou brothers were to adopt. Glev Pty Ltd (“Glev”), which was incorporated in 1986, was to own all non-franchised Pizza Haven stores; to supply goods and management services to Glev Franchises; to service the franchisees on behalf of Glev Franchises; and to operate the central commissary at Glenelg. Glev Franchises was to grant Pizza Haven franchises; collect service fees and franchise fees; pay management fees to Glev for the provision of services; and pay royalties to the Christous for trade mark use. The result was that, since 1987, Glev Franchises has carried on the business of promoting, marketing, advertising, granting, selling and administering a chain of franchises under the name and style “Pizza Haven”. Glev has continued to operate the company-owned stores and the central food commissary for the Adelaide stores, and to provide head office support.
In connection with “Franchisee Capital Requirements”, the franchise programme reiterated that the “expected capital requirements for a new Pizza Haven store franchise” was a total estimated franchise investment of $54,030 - $56,360. An accompanying note advised that:
The total estimated investment before any leasing is:-

$ $

Estimated total (after leasing) 54,030 - 56,360

Less         Leasing 1,600 - 1,600

52,430 - 54,760

Add          Equipment

                Motor vehicles
41,500 - 41,500

17,000 - 17,000

total investment (before leasing) $110,930 - $113,260

Under a heading “Franchisee Profit Projections”, the following appeared:
A. The franchisee profit projections shown on the following page are based on Pizza Haven’s existing company-owned stores and Franchise Development’s experience in retail franchises.
B. The franchisee profit projections have been adjusted for a franchise situation. Explanatory notes accompany the profit projections.
There was a “Franchisee Profit Projections” table in the same form as in the feasibility study, save that the cost of “salaries and wages”, which had previously ranged from 37.7% to 29.3% of sales, was reduced to 35.1% to 27% of sales. The cost of insurance and motor vehicles was also less in the new table, although the cost of leasing had increased. The annual net profit before interest and taxes ranged from $10,660 (in relation to level 1 - $4000) to $83,030 (in relation to level 5 - $7000). An accompanying note advised:
The net profit is an operating profit. It does not take into account any taxes. The net profit is after the franchisee’s drawings of $25,000 per annum and after leasing has been accounted for.
No depreciation has been allowed for in the figures.
The franchise programme recommended that Pizza Haven grant “exclusive territorial rights to its franchisees”, and that a thorough investigation of proposed territories be undertaken. The programme remarked:
Determining the ideal size of the franchise territories can be a difficult task because different areas and locations have varying potential.
…
When examining potential franchise territories, a number of factors must be analysed, such as:-
-population of the drawing area and the socio-economic structure of the area,
-the growth rate of the area,
-the level of competition,
-geographical barriers such as hills, rivers and highways,
-the proximity and likely interference with other Pizza Haven stores,
-distance from Pizza Haven’s Head Office and commissary … and
-the likely success of the franchise.
Around this time, Franchise Developments also prepared a Disclosure Document, which was to be given to potential franchisees.
(iii)Franchising in South Australia
The first ‘pilot’ franchise Pizza Haven store was opened at Enfield in December 1986. During the period 1987 to 1989, other franchise stores were opened in South Australia. They were:
1987
April               Elizabeth
July                Murray Bridge
October          Payneham
  O’Halloran Hill
December      Fulham
1988
March   Blackwood

During the same period, the following company stores were opened:
1987
February        Salisbury
April               Brighton
1988
September      Semaphore
1989
Port Pirie
As at September 1990 (when the applicants entered franchise agreements with Glev Franchises) there were 7 franchised stores and 10 company stores in operation in South Australia. In September 1990, these 17 stores had weekly turnovers ranging between from about $3,500 to nearly $14,000 (at Glenelg, but see below). The average South Australian store sales turnover as at September 1990 was $6,085 per week. Generally speaking, in South Australia, Pizza Haven had successfully competed against other pizza chains, such as “Pizza Hut”, “Dial-a-Dino’s” (subsequently taken over by Pizza Hut) and “Pizza Express”. (Issues were raised in this case about the profitability of the Pizza Haven chain. These issues are discussed below.)
(iv)Franchising in Victoria
In 1989, after five years trading in South Australia, the Christou brothers decided to open franchise outlets in Victoria. They believed that Pizza Haven would have to compete in Victoria against only one other pizza chain operator, namely, Pizza Hut. In March 1990, Gabriel Christou moved from Adelaide to Melbourne to set up the Victorian operations, although all the brothers apparently participated in developing a plan for dividing Victoria into franchise territories. They subsequently provided Franchise Developments with a map of Melbourne, showing the territories that they proposed should be franchised. Franchise Developments was engaged to act in the recruitment of franchisees for Victoria, although the choice of a franchisee was subject to the approval of Gabriel Christou. The third respondent, Leo Reyes, an employee of Franchise Developments, was involved in selecting potential franchisees and marketing the Pizza Haven franchises.
The first advertising for Pizza Haven franchisees for Victoria occurred in the second half of 1989. A franchise Pizza Haven store opened at Dandenong on 10 June 1990. From 1990 to 1991, a further 19 franchise stores were opened in Victoria. They were:
1990
June               Vermont
July                Elsternwick
  Blackburn
August            Oakleigh
  Werribee
  Knox
October          Ormond
November      Chadstone
December      Ringwood
  Croydon
1991
January          Carrum
  Syndal
March            Bendigo
  Balwyn
  Templestowe
April               Collingwood
  Prahran
July                Black Rock
  Malvern
As at September 1990, there were apparently 7 Pizza Haven franchise stores operating in the Melbourne metropolitan area. As at 11 September 1990, the Vermont, Dandenong, Werribee and Knox stores had opening sales of between $4,197 and $6,510 (although no store had been operating for more than three months, and Werribee and Knox for between two and three weeks only).
About January 1991, Glev Franchises appointed Tulloch and Associates Pty Ltd (“Tulloch”) as its Victorian Master Franchisor. (Glev Franchises and Tulloch concluded a written agreement on 23 October 1991.) Tulloch acted on behalf of Glev Franchises in granting franchises and was responsible for the management of the Victorian operations.
(v)October 1989 Disclosure Document
In 1989, Franchise Developments reviewed the Disclosure Document that it had prepared for the Christous two years before. The revised Disclosure Document, which was used for Victoria, was dated October 1989 (referred to below as “the Disclosure Document”).
The Disclosure Document consisted of some 32 pages, and fell into two parts. In the first part, a covering page bore the Pizza Haven logo and the description “Pizza Haven Franchises, Franchise Disclosure Document”. Under this heading, there appeared the following:
The attached information has been prepared to help you make a decision. Study it carefully. While it includes some information about your contract, don’t rely on it alone to understand your contract. Read all of your contract carefully. Buying a franchise is a serious undertaking. Take your time to decide. It is strongly recommended that you show your contract and this information to your advisors, such as a solicitor and an accountant before signing the franchise agreement.
The second part of the Disclosure Document also bore the Pizza Haven logo but was entitled “Pizza Haven Franchise Prospectus Franchising Investment Requirements and Profit Projections”. Beneath this heading, there appeared the same warnings as set out above, save that the word “strongly” did not appear in the last sentence.
The Disclosure Document affirmed:
To maintain a high profile, Pizza Haven has developed a strong market image and name with its ongoing advertising and marketing programme.
…
Pizza Haven’s target market is substantial.
…
The growing financial returns from all the Pizza Haven stores continues to reinforce the growth and size of the pizza market and the dominant role Pizza Haven will continue to maintain in the future.
…
The directors and management team of the Pizza Haven business provide a strong and experienced support base for the Pizza Haven group.
…
Pizza Haven’s main business is the home delivery of pizzas that are freshly cooked in just seven minutes, and delivered within 30 minutes of ordering.
…
Total freshness is what makes Pizza Haven pizzas different – and better.
…
Pizza Haven utilises a variety of marketing mediums with major emphasis on leaflet distribution, radio, television and the print media.
The Disclosure Document informed a prospective franchisee that:
The franchisee is required to pay an initial Franchise Fee upon execution of the Franchise Agreement. At the time of writing, the initial Franchise Fee was $30,000 for a new franchised Pizza Haven store.
…
Each Franchisee is required to pay a weekly Royalty Levy equal to five and a half per cent (5.5%) of each week’s total gross sales.
…
All franchisees are required to pay a weekly Advertising Contribution, calculated at the rate of five per cent (5.0%) of each week’s total gross sales.
…
[T]he Franchisee will pay for any advertising and marketing costs incurred by the Franchisor in connection with the Franchisee’s opening promotion.
…
The Pizza Haven franchisees are granted the exclusive rights to operate a Pizza Haven store in an area … which the Franchisor considers a Pizza Haven business can be operated.
…
[F]ranchisees are required to purchase all stock items necessary for the Pizza Haven business from the Franchisor if available from the Franchisor.
The Disclosure Document also informed a prospective franchisee that he or she was required to devote a minimum of 40 hours per week to the business.
The Disclosure Document described the obligations of Glev Franchises as being:
i)Location advice.
ii)Provide one supervisory person to work with the Franchisee for at least ten days during the franchisee’s first two months of business.
iii)Management, Sales, Administration, Operational and Technical advice.
iv)Conduct advertising campaign and other promotional activities.
v)Establish an advertising fund for all franchisee advertising contributions to be paid into.
vi)Equipment advice.
vii)Provide information regarding the successful operation of the Franchised Operation, together with any new developments and improvements to the Franchised Operation.
viii)Provide the Franchisee with initial training and standard training material.
ix)Layout, design and colour scheme for the store and delivery vans.
x)Advice on preparation of the Franchisee’s accounting system.
xi)Supply stock to the Franchisees.
xii)Convene meetings.
xiii)Not to grant a similar franchise in the franchisee’s territory.
xiv)Arrange installation of the telephone lines.
The second part of the Disclosure Document gave information on “Franchisee Capital Requirements” and “Franchisee Profit Projections”. An itemised account of Capital Requirements indicated that “Total Estimated Capital Requirements” were $75,000 - $77,000. An accompanying note acknowledged, however, that:
The actual cost of site establishment will vary depending on the condition and location of each site.
Under the heading “Franchisee Profit Projections”, the Disclosure Document advised:
The figures on the following page are estimates. The figures are based on the experience of Pizza Haven in its company owned and franchised stores.
Pizza Haven does not represent or warrant that all franchisees will achieve the results shown on the following pages, since results in any particular case will depend on the ability and work performed by the individual franchisee, strict operational control and location and amongst other factors.
The notes to the franchisee profit projections are given to enable your independent financial advisors to examine the soundness of the information and to determine on your behalf, the projected results of your particular franchise. It may take up to twenty four months to fully establish a store that has no trading history.
Pizza Haven strongly recommends that you rely upon independent financial advice and make up your own mind.
The Profit Projections are current as at October, 1989.
A “Franchise Profit Projections” table (“the profit projections table”) followed. This was similar in form to those contained in earlier Franchise Developments documents (namely, the feasibility study and the franchise programme). The newest table differed from the earlier tables in some respects, however. It set out four levels of weekly sales: $5,000, $7,000, $9,000 and $12,000. In relation to each level, it set out the costs of sales (25% of sales); operating expenses (including “Advertising”, “Leasing”, “Rent & Outgoings”, “Royalty”, “Salaries & Wages - Staff”. “Total Annual Franchisee Income” (replacing annual net profit) ranged from $56,240 (in relation to level 1 - $5,000) to $206,250 (in relation to level 4 - $12,000). In contrast to the earlier tables, the operating expense, “Salaries & Wages”, no longer provided for a payment to the franchisee. Accompanying notes informed the prospective franchisee, amongst other things, that the “Total Annual Franchisee Income”
is as operating result. It does not take into account any taxes or depreciation. The income is after the leasing of equipment ($48,000) and one to three motor vehicles.
In relation to “Salaries & Wages - staff”, another note informed the prospective franchisee, in tabular form, that the projection was based upon operating expenses for (1) permanent staff from $13,000 (annual sales - $260,000) to $31,200 (annual sales - $624,000); (2) casual staff from $2,910 (annual sales - $260,000) to $8,740 (annual sales - $624,000); and (3) drivers from $33,700 (annual sales - $260,000) to $74,960 (annual sales - $624,000).
d: the applicants
Before turning to the differing accounts of events and what was said in negotiations, it is helpful to describe the characteristics of the three individuals who were buying the franchises. This is relevant to an appreciation of their evidence generally and, more specifically, to the issue of reliance, which is discussed hereafter.
In 1990, the applicants and Taylor were employed as production supervisors at Philip Morris Ltd (“Philip Morris”). The applicants and Taylor had, therefore, some managerial skills. Taylor also had direct experience in fast food management. Between 1979 and 1986, he had worked with the McDonald’s franchise as an assistant store manager at various stores and then, between 1984 and 1986, as a store manager for McDonald’s at its Elsternwick outlet. He left McDonald’s in 1986 to work at BWN Industries as a manufacturing manager. (During his three years there, he met Troy Skilling, then a purchasing clerk but later a manager for Pizza Hut at Elsternwick. Skilling was attracted from his Pizza Hut position to manage the applicants’ Ormond store.)
Taylor met the applicants when he started work at Philip Morris in April 1990. He and they worked closely together on afternoon shift and started discussing the possibility of investing in a business venture. As it turned out, the applicants determined to borrow 100% of the funds for their commercial venture. They and Taylor saw an opening with the new Pizza Haven franchise chain and, by September 1990, they had plans to open a number of outlets and run them under management. According to Sanders, Taylor was “going to have a closer regard to the running of the business, particularly the start-up stage, as he had had some convenience food experience”. In his witness statement, Taylor said:
In July 1990, we decided to start looking at businesses to buy or invest in and run under management, with us having daily input, using our management/supervisory skills we had built up at Phillip Morris and in our previous employment.
The applicants gave evidence to similar effect.
e: witnesses
The evidence relating to the negotiations for the Ormond franchise is contained in the witness statements (verified on oath at trial) of the applicants, Taylor, Gabriel and Louis Christou, and Leo Reyes. Each witness was cross-examined. Save for Louis Christou, all these witnesses’ accounts of the pre-contractual events and discussions were selective in varying degrees, and coloured by a desire to support their own interests. The interests of the parties was plain enough (notwithstanding that Gabriel Christou and Leo Reyes were no longer resident in Australia). Although Taylor had no direct or financial interest in the outcome of the case, his propensity to colour his evidence in the applicants’ favour was also clear enough, springing perhaps from a desire to vindicate his role in the venture. He was not a totally independent bystander to these events.
The general unreliability of the evidence of these witnesses was exacerbated by the fact that they were purporting to recall details of conversations of more than a decade ago and, generally, without any reliable documentary assistance. Louis Christou, an honest witness, clearly stated that he could recall little of the detail of the relevant meetings.
Further, there were, as appears below, other significant doubts about the credibility of Zienkiewicz; and Gabriel Christou’s volubility in evidence tended to indicate that he was reconstructing his evidence as he went along and endeavouring to avoid giving exact answers to precise questions.
In summary, wherever possible, I have sought to resolve conflicts in these witnesses’ accounts by reference to documentary material or the inherent probabilities of the case. Where this has been impossible, it has been necessary to resort to concepts of onus of proof: it was for the applicants to satisfy the court on the balance of probabilities that their version of the events and discussions should be accepted. In the absence of documentary support, as appears below, I have been unable to accept that they satisfied this onus.
As appears below, there is less need to comment upon the evidence of other witnesses in the proceeding. They included Graeme Hughes, Roderick Young, Evan Christou, Troy Skilling, Geoffrey Sincock, Anthony Watson, Alan Tulloch and Aubrey Whitear. Some, like Hughes, were honest in expressing the limitations of their evidence. Where appropriate, I have indicated below the extent to which I have accepted or rejected their evidence.
f: the representations
(i)When was the initial meeting with Reyes?
About August 1990, Taylor noticed two advertisements in “The Age” newspaper. One concerned a franchising exhibition to be held in Melbourne and the other was for the Pizza Haven franchise chain. In its advertisement, Pizza Haven called for persons with “$30,000 plus asset backing”, interested in acquiring a Pizza Haven business. This advertisement nominated Leo Reyes at Franchise Developments as the contact person.
There was disagreement between the parties about the chronology of meetings thereafter which led to the conclusion of the Ormond franchise agreement. The relevant written evidence consisted of (a) Reyes’ diary; (b) Franchise Developments’ documentation check list; (c) signed acknowledgments and correspondence passing between Franchise Developments and Taylor; and (d) Zienkiewicz’s diary.
The following discussion concerns the sequence of events that resulted in Reyes’ first meeting with Sanders and Taylor, and his subsequent meeting with both the applicants and Taylor.
Taylor and Sanders went to the franchising exhibition in Melbourne in 1990, where, according to them, they spoke to a representative of Franchise Developments about Pizza Haven. In their witness statements, they maintained that they had attended the exhibition in August (or even July) 1990, and that they had spoken to Reyes when they were there.
Sanders’ evidence was that they first met Reyes before the franchising exhibition, and that they and Zienkiewicz had attended a second meeting with Reyes on 5 September 1990. Sanders maintained in cross-examination that he and Taylor had met Reyes prior to the exhibition, and that they “had bumped into him again at the Old Exhibition Buildings”.
Taylor’s evidence was to the effect that he telephoned Reyes after the exhibition to arrange a meeting with him, and that he and Sanders had their first meeting with Reyes at Franchise Developments as arranged in this telephone call. In cross-examination, Taylor conceded that he could not in fact recall either the date of the exhibition or the date of his first meeting with Reyes. Nor could he recall whether it was Reyes whom he and Sanders met at the exhibition. Taylor conceded in cross-examination that his first meeting with Reyes might have occurred in September 1990 since he could not recall the precise date.
Leo Reyes, who had started working for Franchise Developments in January 1990, gave a different account of his first meeting with Sanders and Taylor. In so doing, he relied upon a work diary, which he maintained in 1990 and 1991. In this diary, he recorded details of meetings and the like with, amongst others, potential franchisees and their advisers.
Reyes had no recollection of meeting the applicants or Taylor in July or August 1990. In his first witness statement, he stated:
I have got a good record of dates of meetings by reference to a detailed diary which I kept of all meetings conducted with franchisees. I recorded some details of meetings in my diary. In particular, I often recorded the time of meetings, the names of people who attended the meetings and certain details about the stage reached in the documentation process. I would sometimes note the receipt of a franchise application in my diary and often I recorded when franchise agreements were signed and when the sale was completed. I was not precise in always recording each of the matters to which I have referred above. For example, when a group of people attended a meeting with me, I sometimes recorded the name of only one person in the group, as was the case in the present matter.
A copy of Reyes’ diary was in evidence. A diary note for 5 September 1990 indicates that at 11.00 am on that day, Reyes met with “Russell Taylor” and “John S”. In connection with this entry, Reyes said (again in his first witness statement):
My diary note indicates that I first met with Mr. Taylor and Mr. Sanders at 11 a.m on 5 September 1990 (the reference in my diary is to ‘John S’). I cannot recall our prior contact on the telephone, although we must have had a conversation to fix a meeting. I cannot, for example, recall whether I spoke to them originally in response to their seeing an advertisement. There had been a promotional event at the then newly opened Pizza Haven store in Elsternwick, which I attended on 13 July 1990 (as indicated by my diary to meeting [sic] potential franchisees in Elsternwick …). Arising from that event, there were a number of enquiries which I processed from people who attended. It is possible that Mr. Taylor and Mr. Sanders contacted me following this event. Mr. Zienkiewicz was not in attendance at this meeting on 5 September 1990. I have recorded in my diary the name of Mr. Taylor (and his telephone number), by way [of] making a note of a planned meeting. I added ‘John S’ later using two different pens for ‘John’ and then ‘S’. I cannot explain why two different pens were used for the ‘John S’ entry, but the entry itself shows me that someone else attended the meeting, being ‘John S’ (ie. Mr. Sanders). It was my practice at the time to record the name of every person who attended a meeting with me. I can remember this meeting occurred in a small (and cramped) conference room at FD’s offices, and that there were three people (including myself) in attendance. We sat around a small round conference table.
Reference to Reyes’ diary confirms that he had an evening appointment at Elsternwick on 13 July 1990.

Reyes maintained that the franchising exhibition was not held in July or August 1990 but, rather, between 6 - 9 September 1990. This too is consistent with the entries in his diary for these days. His diary does not record any trade exhibitions in July or August 1990. In his first witness statement, Reyes said:
I remember a franchising trade exhibition in 1990, which I attended on a daily basis on behalf of FD, which had an FD branded stand. I probably spoke to hundreds of people during the exhibition, and I may have spoken to the Applicants or Mr. Taylor, but the exhibition did not commence until after our first meeting on 5 September 1990 … .
Counsel for the applicants pressed Reyes, in cross-examination, as to whether he could, in truth, recall who attended the meeting on 5 September 1990 (i.e., almost ten and a half years before Reyes gave his evidence.)
Counsel: How do you know that?
Reyes: Because, I mean, as soon as I know the case of the person we talking about, I remember coming out, I remember seeing them sitting there, I remember getting into the first room, the only one available. I remember the three of us being there perfectly well.
Sometime later in Reyes’ cross-examination, Reyes and the applicants’ counsel had the following exchange:
Counsel:         You recall meeting Mr Taylor and Mr Sanders on 5 September?
Reyes:            Yes.
Counsel:         But you say Mr Zienkiewicz was not there, don’t you?
Reyes:            Yes.
Counsel:         What is the basis of your saying that? Do you have an independent recollection?
Reyes:            Again, I’m saying, you know, when I’m confronted by my diary, the documents they had signed and all that, particularly because they came through, they were one of the sales we made, yes, I do remember that he wasn’t there.
Counsel:         So you say you’ve looked at your diary and you’ve refreshed your memory from your diary and ‑ ‑ ‑?
Reyes:            And also flashes come in that he wasn’t there on the first meeting.
Counsel:         Well, I put it to you that he was there. I take it that you continue to dispute that?
Reyes:            Yes.
In this instance, I prefer Reyes’ evidence, supported as it is by the diary he kept at the time of the events with which this case is concerned, to the evidence of Sanders and Taylor. Reyes’ diary contained no record of any earlier meetings with the applicants and Taylor. There was nothing in the evidence on this issue to indicate that Reyes’ evidence was unreliable. There was, moreover, a documentary checklist dated 24 September 1990 that had been completed by Reyes, which tended to confirm his account of the dates and sequence of events.
I find, as Taylor for his part conceded, that neither Taylor nor Sanders had any independent recollection of the relevant dates, nor, indeed, of the order of some of the events to which they referred in their evidence. Their lack of recollection is, in large part, attributable to the passage of time.
Substantially for the reasons advanced by the respondents’ counsel in closing submissions, I reject the proposition that the applicants established that the Elsternwick store opened on 5 September 1990 and, having regard to Gabriel Christou’s evidence, this fixed the meeting with Gabriel and Louis Christou (discussed below) as occurring at this date. By the close of the hearing, it had become clear that the Elsternwick store in fact opened in July 1990, a date that favoured neither the applicants nor the respondents.
I find, on the balance of probabilities, that the franchising exhibition was held between 6 - 9 September 1990 and that Taylor and Sanders (and not Zienkiewicz) had an initial meeting with Reyes at the offices of Franchise Developments on 5 September 1990. At this meeting Reyes gave Taylor and Sanders a copy of the Disclosure Document and Taylor signed an Acknowledgment of Receipt of Financial Information (“the first acknowledgement”).
Between the meeting on 5 September 1990 and the next meeting (which, as set out below, I accept was on 12 September 1990), Taylor (and possibly one of the applicants) visited the Elsternwick and the Knox stores. At or after 5 September 1990, Reyes invited Taylor to an official opening of a Pizza Haven outlet, either at Knox or Elsternwick. (The evidence is unclear.) According to Taylor, he and Zienkiewicz went to the opening and met Gabriel Christou there, as well as the store franchisee, and “had a store tour”. According to Reyes, he also invited Taylor to see a store in operation (semble, either at Knox or Elsternwick).
(ii)When was the second meeting with Reyes?
According to Reyes (whose evidence is supported by an entry in his diary), Sanders and Taylor met him again at Franchise Developments on 12 September 1990. On this occasion, Zienkiewicz accompanied them. At this meeting, the applicants and Taylor lodged applications for two franchises. They also gave Reyes a bank cheque dated 11 September 1990 for $2,000 (being the refundable deposit on two franchise territories). As the Disclosure Document instructed, the cheque was made out to Franchise Developments Trust Account. At this meeting, they were also given a copy of a franchise agreement, and Taylor signed an “Acknowledgment of Receipt of Franchise Agreement” (“the second acknowledgement”).
Sanders’ evidence was that he completed and signed his franchise application on 10 September 1990. Zienkiewicz said that he completed his application on 11 September 1990. Neither of them nominated a preferred territory in their applications.
Taylor’s application was completed and signed on 11 and 12 September 1990. In his application, beside the words “preferred area”, he wrote:
Springvale (1)
Fountain Gate/Narre Warren (2)
Ormond (3)
Within the application, beside the words “Position applied for”, there also appeared the words “Pizza Haven – Ormond and Springvale”.
In his application, Sanders indicated that his spouse would be actively involved in the business for four days per week, two hours per day. He also indicated that he, Zienkiewicz and Taylor were each to have a one-third interest in the business. Zienkiewicz stated in his application that his spouse would be involved two hours per day. He did not indicate the number of days in the week when she would work. Taylor indicated that his wife would be involved three days a week, four hours per day. All three applicants stated that they had an accountant and a solicitor. The applicants stated that at that time they each had two young children, and Taylor stated that he had one very young child.
Zienkiewicz also kept a diary in 1990. His diary contains no entries for the relevant period that might concern any meeting with Reyes. Zienkiewicz deposed, however, that he made some notes at the back of his 1990 diary about “a week or two” after the discussion with Reyes (and Louis and Gabriel Christou) at a meeting on 5 September 1990. The notes commenced:
Meeting Franchise Developments
G Christou, L Christou, L Reyes, S Sanders, R Taylor, C Zienkiewicz
1)Buying power – can’t beat commissary
2)L Christou – asked questions mainly – job, family, expectations
3)G Christou will be in store to help if we don’t achieve sales.
4)Leo Reyes backed up all claims by Gabriel – profit, sales, buying power.
5)What about competition – not a problem can’t compete against buying power.
6)~~Paid deposit and signed papers~~
refundable $2000 next week
7)Had to buy two territories seeing we were investors
8)Look promising – sounds very good
9)Deposit to be returned if we change our minds
At the foot of this page, Zienkiewicz had also written:
Would do any thing to make sure stores achieved $4,000 – which was break even for store under management – would be in store after month and make sure
Lou – did all marketing research – told us about computer system which would revolutionise business and make it idiot proof
Asked questions about Dominos because we [wanted to know] also how they would compete.
On the opposite page Zienkiewicz had written:
1)Why Pizza haven
2)Any mark [up] on purchases if so what is it
3)What if we don’t achieve sales
4)What if we change our mind
5)Will our shift working affect business
6)What training is provided
There is nothing in these notes to corroborate Zienkiewicz’s claim that they concerned a meeting on 5 September 1990.
Zienkiewicz gave evidence that he looked at these diary notes in the course of preparing his first witness statement in June 2000. He also gave evidence that, some four years prior to trial, he had altered his diary by adding entries to it. This was done at the offices of his solicitors and, so he said, in an effort to consolidate information in relation to this case. He explained that he had found some handwritten notes at the bottom of the boxes in which his diary was kept, and that he had written the contents of the notes into the diary and destroyed the notes. He had informed his solicitor of what he had done only 6 months before trial. His evidence was that only the first and third of the three passages set out above had been written at a time shortly after a meeting with Reyes (and the Christous). This was confirmed by comparing the diaries in the form in which they were discovered to the respondents (prior to the changes made by Zienkiewicz) with the diaries as now exhibited in evidence.
As the respondents’ counsel observed, an analysis of these diary entries supported the conclusion that the notes made in 1990 (the unamended version) concerned a meeting on 12 September 1990. Originally the notes included, at par 6, “Paid deposit & signed papers”. The applicants and Taylor paid the deposit of $2,000 (and lodged their franchise applications) on 12 September 1990. Zienkiewicz subsequently crossed out these words and wrote in “$2,000 refundable next week”. I find that Zienkiewicz deleted this entry from his diary because it was inconsistent with the version of events that he wanted to maintain. This finding bears upon his credit generally (see below).
As the applicants’ counsel noted, the credibility of Gabriel Christou’s statements about dates was diminished by the respondents’ failure to discover or produce a diary, which, according to him he kept in 1990 and remained in existence (in Thailand where he was living). As already stated, however, on this topic of dates, I accept the respondents’ account, since it is supported by some contemporaneous documentary evidence.
I have dealt with this question of dates in some detail for two reasons. First, the witnesses’ evidence on the point illustrates the effect that the passage of time has had upon their ability to recall matters of detail and, secondly, because the parties relied on the timing issue in connection with the further issue of reliance.
The difference between the applicants’ and the respondents’ chronology was important in this sense. On the applicants’ account, they had a second meeting with Reyes, which also involved Gabriel and Louis Christou, on 5 September 1990. If this were so, then they completed their franchise applications after speaking with the Christous, and it is possible that whatever the Christous said to them affected their decision to apply for the two franchises. If the respondents’ account is accepted, however, the second meeting took place on 12 September 1990, by which time the applicants had completed their applications and, save perhaps for the nomination of Ormond, Taylor had completed his application. I interpolate that I accept that part of Taylor’s application (which involved the addition of Ormond) was completed or amended during the meeting with Reyes on 12 September 1990. This sequence of events indicates that, at a time after 5 September and before 12 September 1990, the applicants and Taylor had decided to apply for two franchise territories, and had made some decisions about their preferred territories. The Christou brothers did not, therefore, instigate their applications for two territories. This is relevant to my rejection of the applicants’ case in relation to some of the representations (see below).
(iii) What was said at the meeting on 5 September 1990?
a) Sanders’ evidence
In his first witness statement, Sanders described the initial meeting with Reyes (in the company of Taylor) in the following terms:
Leo gave us a history of the Pizza Haven operations in Adelaide and of the four Directors, the Christou brothers. He gave details of the rapid growth of Pizza Haven to the current strength of 17 operating stores. He also described expansion into Victoria and said that the franchise territories were selling fast. He said that we could get in on the ground floor of the franchise business that was ideal for investors. Leo said that market research had been done in Melbourne that confirmed that the market was ready for a second major pizza franchise. He said this research was also used to determine the size of franchise territories. He said this was done to ensure that all franchisees would get an area that would sustain profitable levels of turnover. As this meeting was concluding, Leo screened a video of a commercial he said was currently running on Adelaide television. He said that this commercial would be screened in Melbourne when 8 stores were operational. He then said that a new commercial may be produced for the Victorian launch if that was needed.
In cross-examination, Sanders said that at this interview, which lasted about 30 minutes:
Leo Reyes showed us into a room. He started the conversation talking initially about franchising. We’d identified ourselves as investors, not as owner operators. Leo Reyes then started to talk about franchising as an ideal opportunity for investors to get into. After a moment or two we then began speaking about Pizza Haven, that he was handling Pizza Haven; that Pizza Haven was an ideal investment for people like ourselves to get into. He talked about the buying power that Pizza Haven was able to bring to bear. He talked about the group advertising in that, the strength of a dollar in a franchise, advertising campaign was better than an owner operator could bring to bear to support his business. He then spoke in brief terms about substantial market research that had been undertaken for Pizza Haven and that the territories had been, as a result of this market research territories had been mapped out in the Melbourne area and this was an ideal investment for investors like ourselves to become involved in for all those number of reasons.
I interpolate that Sanders had not referred to the “buying power” issue in his witness statement and, as he conceded in answer to a question from counsel for the respondents, “buying power” really became a significant issue after the applicants had opened the Ormond store. As will be seen, Taylor did not mention this particular issue in his account of this meeting with Reyes.
b) Taylor’s evidence
Taylor’s account of this first meeting with Reyes only partially supported the account given by Sanders. In his witness statement, Taylor described the meeting in these terms:
[H]e [Leo Reyes] gave us an information pack, which included a glossy brochure and some promotional leaflets. We watched a video of a Pizza Haven advertisement which had been run on television in Adelaide. We said to [Leo Reyes] that we wanted to be investors and that we did not want hands on operational roles, although we said we would have some day to day dealings in the business, but would be looking for a store manager to run the business.
In cross-examination, it became clear that Taylor was unable to recall much about his discussion with Reyes on 5 September 1990 (or, indeed, at any other time around this date).
Taylor did not dispute that, on 5 September 1990, he signed a document, on behalf of himself and the applicants, headed an “Acknowledgment of Receipt of Financial Information”. This was the first acknowledgement referred to above. The first acknowledgement read:
Franchise Developments Pty Ltd acts as agents for our franchisor clients in the selection of their franchisee.
The information provided to you has been approved by the franchisor and we believe it to be correct. However, you must understand that being selected as a franchisee is not a guarantee of success. Your results will depend upon the amount of effort you apply to the business and strict adherence to the system of operation of the franchisor. You or the franchisor may fail. When you go into business you must accept the risk of failure.
We strongly recommend that you seek independent legal, commercial and financial advice. Take your time. Read all the information carefully and make sure any questions you have about the franchise are answered to your satisfaction.
Signing this form does not obligate you or the franchisor in any way. It is an acknowledgment that you have received financial information and disclosure documentation regarding the franchise and a copy of this form.
Taylor could not recall, however, exactly what he was given at the time he signed this document. He said, in cross-examination,
I was given a pack of documents but I can’t remember exactly what was in them at that stage when I signed for them.
He could not recall Reyes reading out either the first acknowledgement or the Disclosure Document (or any part of these documents) at this meeting. Nor could he recall whether he was encouraged to get independent advice in relation to the information that he was given. When counsel for the respondents asked him whether the profit projections table in the Disclosure Document were shown to him at this time, Taylor answered:
I can’t remember whether they went through the whole document when I signed for it or whether it was given to us as a pack.
What Taylor did recall in cross-examination was that he and Sanders had told Reyes that they were going to run their business under management.
It was an investment opportunity that we would have some overseeing in.
When asked how was he able to recall telling this to Reyes, Taylor answered:
The issue of us buying the business was to be investors and not be hands-on in the business full-time.
He added:
Every discussion that we had with Leo and further down the track was that we were investors, right, we were not hands-on managers. From my point of view it was very clear that we were not going to be working full-time in the business, it was to be investors in the business with an overseeing role.
Taylor also recalled informing Reyes that his aim was to own two or three Pizza Haven stores, and that he planned to approach a Pizza Hut store manager to act as a day-to-day operations manager for a multiple store operation, although he could not recall whether he had said anything about the manager he had in mind (who at that time was running a Pizza Hut store in the Bentleigh area).
c) Evidence of Reyes
In his first witness statement, Reyes gave a detailed account of the 5 September 1990 meeting, which took, he said, about 90 minutes. He said:
By way of introduction, I asked questions of Mr. Sanders and Mr. Taylor, such as what work they did, whether they were married with children, why they were looking at franchising and what their plans were for a franchise. I can recall Mr. Taylor saying that he was experienced in franchising, and that he had managed a McDonald’s outlet for some years. I can remember that this information impressed me as to his suitability. We also talked about Phillip Morris, where they told me they worked in managerial roles. In fact, I had worked there and we chatted about my time there. I can recall there was some discussion about their wives wishing to work in a franchised business. I can recall thinking that Mr. Sanders and Mr. Taylor seemed to have a good management background … .
In talking with Mr. Taylor and Mr. Sanders, I recall going through the usual procedure which I followed with every potential franchisee. I talked about franchising in general. I then talked about FD, and our role in assigning franchises, and I gave information about FD’s clients. I then talked about Pizza Haven in general terms, ie. the franchise opportunity was in connection with a pizza home delivery chain which had been operating successfully in Adelaide and was expanding into Melbourne.
I can recall I had a map at the meeting which showed a division of territories for Melbourne. The map has been provided to FD by Pizza Haven with the territories allocated. I estimate that the map was about 1.5 metres by a metre in size. This map was used to copy territory maps for franchise agreements. The map was marked with territories which had been already been allocated with a red sticker on the territory. I cannot remember any details concerning the discussions about territories, beyond showing the map with what was available.
… I mentioned to Mr. Sanders and Mr. Taylor that I was acquiring a Pizza Haven store myself, and that I was keen on the Pizza Haven franchise concept.
Also at the time of this meeting, I had access to Pizza Hut sales information and household details … . I cannot recall precisely how I got this information, but we had been dealing with people who were franchisees for Pizza Hut and who provided this information at the time. … .
I recall discussing the Pizza Haven map and the Pizza Hut turnover information with Mr. Sanders and Mr. Taylor. I said that the areas not marked on the map with a red sticker were available. … . I said that the Pizza Hut turnover, which I believe I showed to them …, showed that an established Pizza chain was operating what appeared to me to be a successful business in Melbourne, and that I believed there was room for a new chain in the Melbourne market.
I also mentioned that the franchisor organised a live to air (on FM radio) store promotion for new franchisees, which it was about to do for a new store in Knox.
I also showed Mr. Taylor and Mr. Sanders a video of an advertisement for Pizza Haven which had been screened in South Australia, which I said showed the campaigns undertaken by Pizza Haven. I said that Pizza Haven was a good marketer of its product, and had utilised radio and television and leaflet campaigns in South Australia, and that it had plans to do the same in Victoria.

Reyes said that he gave Sanders and Taylor the Pizza Hut information simply to enable them to see how a competitor was trading,
[b]ecause that’s what we had and that’s to sort of compare how other business were operating in the area. It didn’t mean that you were going to actually achieve those figures.
Reyes’ evidence was that he in fact read out parts of the Disclosure Document at the meeting.
I started by going to the Table of Contents. I read out the whole of the Table of Contents. I then went through each section in the document. I did not read every word of the document but rather I took the gentlemen to specific sections. In particular, I identified who the directors of Pizza Haven were, the related companies to the franchisor, the background of the company and the Pizza Haven concept. I then went to the summary of the franchise agreement and specifically spoke about the franchise fee, the royalty, advertising contributions; basically I spoke to each of the items referred to in the summary section. It took me about an hour to go through the whole of the disclosure document, in this point by point way. I had my own copy of the document from which I read, and I very likely gave to Mr. Taylor and Mr. Sanders a copy of the document to follow.
In his witness statement, Reyes said that he could specifically recall reading the warning that preceded the profit projections table before taking Sanders and Taylor to the table itself. He said that he “specifically spoke to Level 1”.
I said that the projection information was based on the performance of Pizza Haven stores, but that the figures given were projections and not actual figures. I said that the disclosure document, including the projection information, had been prepared by FD from information supplied by Pizza Haven, in particular information arising from Pizza Haven’s experience in South Australia, the chain having been in operation there for a few years.
When he had finished his reading, Reyes stated that he not only read out the warning preceding the table but also the other warning statements in the Disclosure Document.
I usually read out these cautionary references at the end of going through the disclosure document because at the end of the process I had potential franchisees sign an acknowledgment … .
Reyes said that he read out the first acknowledgment before it was signed by Taylor in his presence. He noted that:
I wrote on the acknowledgement ‘after interview please’ … which was a note to the secretary to send a standard follow up letter.
Reyes also stated that he provided Sanders and Taylor with a copy of the franchise application.
I said that if an application was to be lodged, a refundable payment of $1,000 would be required, such money to be repaid if the application did not proceed.
He added:
I have looked at the documents from FD’s file which confirm the provision of the disclosure document on 5 September 1990 … . [T]his document bears my writing.
In cross-examination, Reyes acknowledged that he knew that Sanders and Taylor wanted a franchise as an investment, and that they intended to employ a manager to carry on the day-to-day running of the business. Reyes also said that they told him that their spouses would be involved.
Reyes did not shrink from the proposition that at the time he believed a Pizza Haven franchise to be a very good product. Of the product he said:
I love it.
I bought one myself.
(Reyes and his wife acquired a Pizza Haven franchise (the Syndal territory) on 12 September 1990.)
Reyes maintained that, at the first meeting with Sanders and Taylor, he had given them the whole of the Disclosure Document and not, as Zienkiewicz said, simply the second part on “Franchisee Capital Requirements” and “Franchisee Profit Projections”. In cross-examination, he said that he spoke about the Disclosure Document during the last 10 - 15 minutes of the interview,
going through what was the directors, the companies related, the small definitions about the actual agreement, you know, like 5 per cent royalty, if that was the one – I can’t remember – or the initial franchise fee, all those sort of things, and then showing the cost of calling it Pizza Haven, right, okay. That happened there, showing what it was, and those are your projections. Next to your projections you have your explanation of what each of those were: ‘This is for you to take to your financial advisers, read the front part,’ … . Read the front part aloud, I had them sign the receipt of financial information.
This account differed from his witness statement. When asked to explain himself, he stated that the whole interview was “an hour and a quarter, an hour and a half” and that it took him 10 minutes to take prospective franchisees through the Disclosure Document,
but if somebody would make an inquiry about a point itself, well, that would probably have been another 20 minutes. The meeting itself took an hour and a quarter to an hour and a half – the meeting itself. We show the video. That took something like 10 minutes itself.
In the course of cross-examination, it became clear that, notwithstanding his detailed witness statement, Reyes did not have an independent recollection of a number of the matters to which he referred, including the provision of the Disclosure Document and the first acknowledgement. Rather, Reyes reconstructed a large part of his account of this meeting from the documents that he had seen (such as his diary, the first acknowledgment, the Disclosure Document) and from what he recollected was his usual practice at the time in recruiting franchisees for Pizza Haven.
For example, the applicants’ counsel asked Reyes whether he actually remembered when he gave the applicants the Disclosure Document. He responded:
Well, there was a process of giving a disclosure document in the first meeting. So I must have given them a disclosure document.
If I wouldn’t have given them the disclosure document I wouldn’t have the acknowledgment signed.
The applicants’ counsel also asked whether he actually recalled showing the video of the Adelaide television advertisement, and Reyes said:
Yes. I used to show it to people, that video.
In answer to the applicants’ counsel’s question,
You told them what the current state of Pizza Haven franchising was in Victoria. Is that correct?
Mr Reyes responded,
Probably, yes. Sorry, I can’t remember exactly.
Bearing in mind the natural effect of the passage of time on memory, it is unsurprising that none of the participants in the meeting of 5 September 1990 could recall precisely what was said on that occasion. Presumably, after introductions had been made, Reyes told Sanders and Taylor something about Franchise Developments and Pizza Haven, and the prospective franchisees explained something of themselves. I accept too, as Taylor and Reyes said, that the prospective franchisees told Reyes that they were proposing to invest in a franchise or franchises and to employ a manager to run the business on a day-to-day basis. Presumably, Reyes also told them about the Pizza Haven product, Pizza Haven’s past history and existing position in and proposed plans for Victoria. As Reyes conceded in cross-examination, he probably told them that Pizza Haven had been operating successfully in Adelaide. It seems likely too that Reyes showed Sanders and Taylor a map of the available territories (since they were considering becoming franchisees of a territory or territories). All agreed that Reyes showed a video of an advertisement appearing on Adelaide television. Probably too Reyes showed them the Pizza Hut information to which he referred (since that information showed that Pizza Hut was trading well and he had it in his possession at the time).
I accept too that, at some time during the meeting on 5 September 1990, Reyes gave the prospective franchisees an information pack containing part or the entire Disclosure Document, and that Taylor signed the first acknowledgment. Reyes apparently spent between 10 and 15 minutes discussing the Disclosure Document in an interview that presumably occupied at least an hour (given the number and nature of the matters discussed). At some time too, he discussed the requirement to pay the $1000 deposit in respect of each franchise.
(iv)After the 5 September meeting
After the meeting on 5 September 1990, Sanders, Zienkiewicz and Taylor discussed their plans further. In his witness statement, Taylor said:
[W]e felt that the food business was a good business to get into because, as [Reyes] had explained to us, and as [Sanders] and I explained to [Zienkiewicz], there was at that time only one pizza chain in Melbourne, after Pizza Hut had bought out Dinos. In other words, the market was there for a second pizza delivery chain to come to Melbourne.
Reyes subsequently sent a letter dated 5 September 1990 to Taylor. The letter was in the following terms:
Dear Russell,
Just a short note to record our recent meeting.
Franchise Developments is working with Pizza Haven as agents assisting and advising on the selection of its franchisees.
As you know Pizza Haven is a well developed and proven home delivery pizza shop backed by experienced management and marketing personnel.
The concept has a proven track record of profitability in the shops which are currently operating in Adelaide. Pizza Haven plan to expand into many high profit areas throughout Australia.
You have been provided with complete financial information on the business and as I discussed with you the requirements necessary to be selected as a Pizza Haven owner-operator.
I’m sure you will appreciate that not all applications are successful but should you be selected as a Pizza Haven Franchisee this decision will be as important to Pizza Haven as it is for you and your family.
I look forward to meeting you again to discuss your application. [Emphasis added: see the first pleaded representation discussed below.]
(v)What was said at the meeting on 12 September 1990
a) Evidence of Reyes
According to Reyes, at a second meeting, on 12 September 1990, he talked with both the applicants and Taylor about their franchise applications. The applicants and Taylor mentioned that they planned to recruit a Pizza Hut store manager for their business. In his first witness statement, Reyes said:
We discussed the selection of territories indicated in Mr. Taylor’s application. These territories were presented to me by Mr. Taylor as his preferred territories, and were not suggested by me. Mr. Taylor’s application referred specifically to Ormond and Springvale. The territories sought therefore included Bentleigh, which I knew to be a company site. I said that Bentleigh might present a problem, as that area had been allocated as a company site, with a store already available, being a store which had already been fitted out as a fast food outlet. I said that Pizza Haven planned to use Bentleigh as a training site, and that I had been interested in the territory myself, as it was close to my house, and had a store already located and already fitted out as a fast food outlet, but I was told it was not available. I said that Louis and Gabriel Christou were in at the FD offices, which happened to be the case, and that I would try to speak to them about the availability of Bentleigh. I also said that it would be helpful to meet them anyway if this was convenient.
Reyes was cross-examined about the selection of Ormond (referred to as “Bentleigh” by Reyes and the Christous). His evidence was that the applicants and Taylor first mentioned Ormond when they lodged their applications. According to him, “Ormond” was written on Taylor’s front sheet at the time he received it. Reyes did not dispute the evidence of Zienkiewicz that the word “Ormond” was written beside the words “position applied for” in Reyes’ presence on 12 September 1990. Reyes agreed that Gabriel Christou had told the applicants and Taylor that Ormond was intended to be a company store and the Melbourne head office, and that it was close to being operational. He did not, however, recall Gabriel Christou saying that Ormond would be one of the better performing territories; or that if the applicants and Taylor chose only one territory, they would not be permitted to purchase Ormond; or that Ormond would turn over between $10, 000 to 12,000 per week. In relation to the latter topic, he said:
[T]he brothers would not discuss – ever discuss turnovers or anything like that in meetings.
He denied that there had been any discussion about what column in the profit projections table was most likely to describe the performance of the Ormond store.
Reyes also said that he “went through the whole of the franchise agreement”, and that this took about 30 to 45 minutes. If this was so, then he must have gone through the document summarily, bearing in mind that the agreement consisted of about 44 pages and, on Reyes’ own estimate, the entire meeting went for no more than 90 minutes. Reyes did say, however, that he “concentrated on” certain clauses, and if so, he must have said little about the others. I accept that he may well have paid more attention to some clauses (as e.g., cls 2, 3, 8 and 17) in the interview than to other provisions.
According to Reyes, after discussing the franchise agreement, he invited Gabriel and Louis Christou (who happened to be visiting Franchise Developments) to meet the applicants and Taylor (which they did). During the following discussion, Reyes said that the Christou brothers described the history of the business and its present status, including the fact that there were already 17 stores operating in South Australia. According to Reyes:
They said that they had developed a special family recipe for making pizzas, and that they emphasised freshness in the preparation of their pizzas. … They said that they marketed the business aggressively in Adelaide and planned to do the same in Victoria, using leaflet drops and some media advertising.
Gabriel Christou said that the franchisor would help new franchisees and give them as much assistance as they could because they wanted each franchisee to be successful.
I can remember there being some discussion about what we called the Bentleigh territory and its availability. I can remember that it was discussed that the Bentleigh territory had been allocated for a company training store for Pizza Haven as a suitable store had been found in the territory, being an ex-chicken shop, and the lease had been secured by Pizza Haven. Louis and Gabriel Christou said that they planned to keep the territory as they had secured a store suitable for training. Mr. Taylor said that his group would like two territories, their first preference being Springvale, and that they also wanted the Bentleigh or Ormond territory (as he referred to it). The Christous said they would need to think about it. I recall other matters of a positive nature being discussed about Pizza Haven and its plans for Victoria. The Christous said they hoped to expand Pizza Haven substantially in Victoria and to open 50 stores in Australia within about another two years and that it operated successfully in South Australia.
There was also discussion about the success of Pizza Hut in Victoria. Gabriel Christou said that Pizza Hut had converted the Dial-A-Dinos home delivery stores to Pizza Hut delivery stores in Victoria so that the well known Dial-a-Dinos name had been removed from the market in Victoria, with there then being one major brand in competition in Victoria rather than two, as had previously been the case. Gabriel said that this was good for Pizza Haven’s plans to expand in Victoria.
Again, it became clear in cross-examination that Reyes had no very precise memory of exactly what had been said at this meeting, when and by whom. When the applicants’ counsel sought to clarify matters, there was the following exchange:
Counsel:         What I’m asking you to tell her Honour is whether or not you can recall the various topics I’m raising having been raised in meetings with my clients that you attended?
Reyes:            By Gabriel Christou?
Counsel:         Yes, by Gabriel Christou so far?
Reyes:            Right. Well, I can set the topics in general, right, like saying talk about the product, the campaign, right – the advertising campaign. Now, if you tell me Gabriel said exactly that the dough had 200 grams of flour and – no, I don’t remember that exactly, right.
Counsel:         Let me take you back one step then. Did Gabriel at any meeting with my clients which you attended refer to Pizza Haven’s marketing and promotional campaign in South Australia?
Reyes:            Yes, that – I say yes because it’s a most probable topic. [Emphasis added.]
Counsel for the applicants subsequently asked Reyes whether either of the Christou brothers said that the Melbourne territories would produce a business that would be successful. Reyes answered:
Look, what I recall is they were with the Christou brothers 10 minutes and they talk about South Australia, right, how was South Australia, the product, the family, coming into Melbourne, and that was all – and a few mentions about the Ormond or Bentleigh territory when the brothers – that I mentioned to the brothers when I saw it in their application. That was the whole of the meeting with them.
In answer to further questions, Reyes said that he could not recall:
·any discussion between the applicants and Gabriel Christou about the cost of ingredients;
·Gabriel Christou saying that Pizza Haven’s purchasing power meant that the food costs would be as low as they could be; or
·Gabriel Christou saying that if any franchisee could source a product at a cheaper price Pizza Haven wanted to know about it.
When counsel for the applicants asked “Do you recall Gabriel Christou saying that if my clients were to purchase two territories he would make Ormond available to them?”, Reyes responded firmly that “No, that wasn’t the case”.
b) Evidence of Louis Christou
Louis Christou was not responsible for the selection of franchisees, and it would seem that his involvement with the applicants at the time of their entering into the franchise agreements was accidental. According to all witnesses except Zienkiewicz and Sanders, Louis Christou said little at the ten-minute meeting with the applicants and Taylor on 12 September 1990. In his first witness statement, Louis Christou said that:
The people concerned display[ed] an awareness of the territories available and that they said to us something to the effect they were interested in more than one territory. There was discussion about their interest in a territory in which we planned to open a company training store as we had found a suitable site, in Bentleigh.
I can remember Gabriel or myself asking them about their background and who it was that was going to run the franchised outlets. I can remember being told that it was planned that Mr. Taylor would run the franchised outlets and it was said to us that he knew all about the food industry, and that the other gentlemen involved would be partners. He mentioned using a Pizza Hut store manager as a store manager.
I believe Gabriel may have referred to the fact that we had 17 shops in Adelaide and it was hoped by us to recreate the successful South Australian franchising experience in Victoria and to develop the franchise accordingly in Victoria.
I did not regard the meeting as being of great significance but rather one in the nature of an incidental meeting. Afterwards, Gabriel and I discussed letting the applicants and Mr. Taylor take the Bentleigh territory and our proposed company store site, and we discussed getting another site suitable for a training store.
I accept that Louis Christou was a witness of truth, although in cross-examination he readily conceded that he had only limited recollection of the meeting with the applicants and Taylor, and of what was said in the course of the meeting. His evidence was nonetheless important, because it supported the respondents’ case that the applicants and Taylor were the first to propose that they acquire two territories and had themselves mentioned Ormond (or Bentleigh, as Louis Christou called it). His evidence also supported the proposition that the applicants themselves were cognisant of the advantages that Taylor’s experience and the recruitment of a Pizza Hut manager conferred on their business plans.
c) Evidence of Gabriel Christou

Further, it does not follow from the fact that there were stores below the range (e.g., at Port Pirie and Blackwood) that the table was misleading. The notes accompanying the table themselves indicated that the trading results at any particular store would be affected by a number of considerations, including the period of its establishment, its mode of operation and location. The last-mentioned factor was relevant for the Port Pirie and Blackwood stores.
The applicants relied particularly on the evidence concerning cost of sales which showed that there was a difference between the 25% set out in the table and the historical actual cost of sales figures for individual company stores. The evidence showed, however, that the figure of 25% was based on store performance in South Australia, adjusted on account of a number of factors, particularly the use of the commissary. It was true that no store recorded the 25% figure. The profit projections table, however, was concerned to provide projected estimates, and not actual figures. In order to derive one figure from a variety of store experiences, there had necessarily to be some assumptions made upon which the calculation of a projected figure might be made. The applicants have not shown that these assumptions were misconceived. A relevant consideration was, plainly enough, the effect on food costs of the use of a commissary. It did not follow from the fact that this was borne in mind in calculating a percentage figure for cost of food compared with sales that the resulting figure was not relevantly based on actual store experience as well.
Further, I was not satisfied that the accounts for Glev Franchises and the Glev Unit Trust supported a finding that that the company stores did not make a profit in the period prior to 1991. I accept that, while the Trust operated the company stores and commissary, the Trust accounts included expenses that were not directly relevant to the stores at all. It was plain from the evidence that there were many disparate items included in these accounts, and that this fact made it unsafe to make any finding to the effect the applicants sought.
I accept that the applicants were not told of the 20% uplift factor that was introduced into the calculations for the profit projection table, but I reject the proposition that this necessarily made the figures in the table misleading. The Disclosure Document, the table and the notes accompanying it made it plain enough that the table assumed that the franchisee was an owner/operator. It was clear enough that the projected figures were calculated on this assumption. Whilst noting Young’s evidence as to the introduction of the uplift factor into the owner/operator model, I accept that the significance of the uplift factor diminished as Pizza Haven and Franchise Developments acquired greater information and experience on the performance of franchise stores; and that, when they received the Enfield trading figures in August 1990, they satisfied themselves that these figures confirmed the projections in the profit projections table that was given to the applicants and Taylor in September 1990.
In any event, I doubt that the applicants can claim to have relied upon any misrepresentation that might have been conveyed by the profit projections table. If there were any capacity to mislead as to Ormond’s turnover during the first two years, that capacity ought to have been dispelled by the provision of figures for the Brighton store and the Victorian store trading figures. The Brighton figures showed that in its first year the store averaged a turnover of $4,300 per week. That is, viewed historically, stores in South Australia did not trade only in a range above a $5,000 weekly turnover. Further, Victorian store figures showed trading levels between $4,000 and $7,000 in their first months of opening.
I note too that this representation was not pleaded until trial and that the applicants gave some evidence at trial that they did not rely on the Disclosure Document or on Hughes (see below).
m: the issue of reliance
Referring to the observations of Wilson J in Gould v Vaggelas (1985) 157 CLR 215, at 236, as applied in, for example, Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471, at 482-3, the applicants contended that they had been induced to enter into the Ormond franchise agreement by representations that proved to be false. In view of the findings that I have made in this case, it is not strictly necessary to discuss this contention further (although I have already touched on some issues of reliance earlier in these reasons.) Issues of reliance loomed large at trial, however, and, for this reason, I say something about them in the following paragraphs.
As already stated, I accept the evidence of Taylor (and the evidence of Reyes and Louis and Gabriel Christou to the extent that it was consistent with Taylor’s evidence) that it was the applicants and Taylor who first proposed to acquire two territories rather than one. Further, as already stated, I accept that the applicants and Taylor met with Reyes and the Christous on 12 September 1990 (and not 5 September 1990 as the applicants maintained). It followed that the applicants and Taylor had determined to apply for the two territories before they met the Christous.
I reject the applicants’ contention that the Christous and Reyes talked the applicants and Taylor into acquiring the Ormond territory in preference to other territories. The evidence (which I accept) was that the Christous were intending to run a company store at the Ormond location. There was no evidence that they had any reason to persuade the applicants that they should take up a franchise at Ormond; and the evidence does not support a finding that they did so. I reject Zienkiewicz’s evidence in cross-examination that Gabriel Christou induced the applicants and Taylor to take Ormond instead of Springvale by making representations that Ormond “would do between 10 and 12 thousand and quickly rise to 15 and the expected turnover should be easily $7000”.
There were a number of considerations that led me to conclude that the applicants and Taylor made up their own minds about the Ormond territory. These factors included:
·The applicants and Taylor came to the meeting on 12 September 1990 with a bank cheque for the deposit on two territories; and Taylor had written the word “Ormond” on the front sheet of his application before he spoke with Reyes on that day.
·The applicants’ and Taylor’s workplace was situated near the border of the Ormond/Bentleigh territory.
·Zienkiewicz was familiar with the locality that the Ormond store was to serve, since he had grown up in the area and in September 1990 his mother was living in the area.
·Taylor had managed the McDonald’s store at Elsternwick (a nearby suburb) for a number of years. He had, therefore, relevant business experience and knowledge of the locality.
·Taylor was the leader of the applicants. Reyes, together with Louis and Gabriel Christou, gave evidence (which I accept) that Taylor was the leader in the negotiations with them. It was he who signed the formal documents on behalf of them all, attended at other franchise stores, and fully completed the franchise application.
·The applicants’ own evidence was that Taylor provided them with advice on the suitability, for their purposes, of a Pizza Haven franchise. Zienkiewicz’s evidence was that Taylor was initially asked to investigate whether a Pizza Haven franchise would be a suitable investment for them, and that he made a positive recommendation. Sanders described Taylor as “the cook at the time”.
·By 12 September 1990 (if not earlier) the applicants and Taylor were proposing to employ Troy Skilling as their manager at the Ormond store. In September 1990 Skilling was a Pizza Hut manager for the Bentleigh Pizza Hut store and had, therefore, relevant knowledge of the Ormond/Bentleigh territory.
·The applicants and Taylor had some knowledge of how the Bentleigh Pizza Hut was performing at the relevant date. Zienkiewicz gave evidence at the trial that Skilling told him that the Bentleigh Pizza Hut had a weekly turnover of $8,000. Skilling also discussed this and other matters with Taylor. I reject the applicants’ evidence that the proposed employment of Skilling and the information he gave them concerning the Bentleigh Pizza Hut were not considerations affecting their choice of the Ormond territory. As I have said, there were doubts about the reliability of their evidence on a number of issues, and this evidence was, so it seems to me, contrary to the inherent probabilities of the case.
I am not satisfied that, on the balance of probabilities, the applicants were induced to take up a franchise at Ormond by reason of statements made by Reyes or by Gabriel and Louis Christou about the Ormond store in September 1990. (Another factor that may be borne in mind is that, at Reyes’ invitation, one or other of the applicants and Taylor visited the franchise stores at Knox and Elsternwick prior to entering the Ormond franchise agreement. In cross-examination, Sanders conceded that Taylor and Zienkiewicz had told him about the Elsternwick’s store performance after they had visited the store.)
I accept, of course, that a representation need not be the sole inducement, and that it would be sufficient if it played some part, even if comparatively minor, in contributing to the decision to enter into the Ormond franchise agreement. Even so, I am not satisfied, on the balance of probabilities, that the applicants were induced to enter the franchise agreement by statements made by Reyes or Gabriel and Louis Christou in discussions with the applicants concerning the investment potential of the Ormond store or its potential turnover. The applicants and Taylor did not appear to me to be the kind of people who would have been likely to risk their families’ financial security upon the recommendations of Gabriel Christou (whom they had met only once and briefly) or of Reyes (who was plainly trying to sell a franchise to them). It was in keeping with their personalities and experience that the applicants consulted an accountant and a lawyer before entering the franchise agreement, and took their advice. (I note that Zienkiewicz consulted his accountant, Hughes, immediately after his meeting with Gabriel and Louis Christou.)
Hughes’ advice concerned the suitability of a franchise as an investment for the applicants. I do not accept Sanders’ evidence that Hughes was engaged simply “to look into the documents that had been given to us and to see, with his knowledge, if those numbers were going to stack up”. This description of Hughes’ task does not reflect the work that Hughes actually did (as recorded in his work files and indicated in his request for actual trading figures) and was, so it seemed to me, an attempt on Sanders’ part to lessen the significance of Hughes’ involvement in his, Sanders’, decision-making.
Further, there were, as already noted, inherent improbabilities in the applicants’ evidence that they took up a franchise at Ormond on the basis of a representation that they would recoup their investment within twelve months. As we have seen, amongst other things, Zienkiewicz did not inform either Reyes or the Christous of the amount of the applicants’ intended borrowing.
Upon the basis of, amongst other things, the financial information in the Disclosure Document (including the profit projections table), the figures for the Brighton store and the trading figures for stores in Victoria, Hughes advised Zienkiewicz and Sanders that they should have regard only to “the lowest turnover and profit level”, which was based on a projection of weekly sales of $5,000. I do not accept Zienkiewicz’s evidence that he effectively ignored his accountant’s advice. Zienkiewicz sought to diminish the significance of Hughes’ advice in his decision-making by describing Hughes as “conservative” and “very cautious in providing information”. This did not fit with Sanders’ evidence, however, that Zienkiewicz had specifically referred him, Sanders, to Hughes’ advice concerning the appropriate basis for assessing their proposed investment and that he, Sanders, had in fact relied upon a $5,000 weekly turnover in making his decision. It seemed to me inherently unlikely that Zienkiewicz would have referred Sanders to Hughes’ advice and yet have ignored it himself. This was another instance in which I considered that Zienkiewicz was not a credible witness. (I observe that the store at Ormond in fact achieved a weekly turnover of $5,000 within two years’ of trading.)
Although I accept Sanders’ evidence that he had regard to a $5,000 weekly turnover (this being consistent with Hughes’ advice and with the profit projections table), I would not accept Sanders’ evidence that, while relying upon this turnover figure, he was also relying upon assurances (if made) by the Christou brothers that the Ormond store would start up with a $7,000 weekly turnover. The inherent inconsistencies in this evidence were not explained away by Sanders’ further evidence “that the $5000 level was a safe and conservative view” favoured by Hughes as their accountant. As already noted, Sanders had not referred to a $7,000 weekly turnover anywhere in his first witness statement and, as already noted, he failed at trial to explain the omission. Considering Sanders’ evidence as a whole, his evidence on this point was, so it seems to me, an example of his manufacturing evidence to suit the interests of his case.
As should be apparent, I accept that Hughes relied on the profit projections table, as well as the figures for the Brighton store in giving his advice (and to the extent appropriate, the Victorian trading figures). In connection with the profit projections table, Hughes’ evidence was that:
[W]e didn’t take the profit projections as a recommendation. As I recall, they were an indication.
I accept Hughes’ evidence in this regard. As stated earlier, I am not satisfied, on the balance of probabilities, that the provision of the table and the Brighton figures (or the Victorian trading figures) involved any misleading or deceptive conduct on the respondents’ part.
In any event, as already noted, the Disclosure Document contained explicit warnings about the information it contained (including the profit projections table). In relation to these warnings, Sanders said:
In the context of this document being handed to us at the conclusion of the meeting of 5 September, in the context of all that had been spoken to in that meeting, I took it that this document and that the subsequent full disclosure document were a conservative tome compiled for legal reasons, generic in form, that might be spoken to for any and all stores that were being sold but the conversation that had taken place in that full two-hour meeting at Franchise Developments painted an entirely different picture in respect of the Ormond store.
Zienkiewicz gave evidence to the same effect. For the reasons referred to below (at [341]), I reject the applicants’ evidence that, although they read these warnings, they did not understand that the warnings applied to them.
The franchise agreement itself contained an acknowledgment (in cl 17) that the franchisee “understood that the Franchisor does not guarantee to provide a rate of return on investment or profit to the Franchisee and understands that profit or return depends upon his own effort and investment”. In connection with this, Sanders also said:
I would have treated that within the context that I treat the whole document, as being a very generic document and that I felt that we had been put in a privileged position where we had two of the directors of Glev come and speak to us directly and make other claims regarding in particular the Ormond store.
I do not accept this evidence.
Whilst the contents of the first acknowledgement and the second acknowledgement may not have been noted by the applicants (since they did not retain copies of them), in view of the applicants’ careful approach to entering the venture and their own and Taylor’s experience, I reject as improbable their evidence that they paid no regard at all to the warnings in the Disclosure Document (or to the relevant provisions in the franchise agreement) and relied (according to Zienkiewicz, virtually entirely) on the statements made orally by Gabriel and Louis Christou. In the particular circumstances of this case (see e.g. at [331]), I do not consider it probable that the applicants, advised by Taylor, would have relied as alleged on what was said in the relatively short meeting with the Christous on 12 September 1990, more particularly as the applicants subsequently took professional advice from an accountant and a lawyer. Amongst other things, as already noted, Zienkiewicz and Taylor had specific knowledge of the area in which they were proposing to operate their business, as well as the knowledge and know-how that Skilling made available to them.
It is also to be borne in mind, in considering the reliability of the applicants’ evidence (that they had regard to what Gabriel Christou in particular said, rather than the “generic” documentation) that, in October 1990, Zienkiewicz made an application for a mortgage loan in which he referred to the profit projections table in the Disclosure Document as providing the details of his Pizza Haven franchise business.
It should be apparent from this that, if it were necessary to do so, I would find that the applicants had failed to make out their case on reliance, save in so far as it involved the reliance by Hughes (and, therefore, the applicants) on the profit projections table, the Brighton figures and, to some limited extent, the Victorian trading figures. As I have said, the provision of this information did not give rise to misleading and deceptive conduct on the respondents’ part.
n: other matters
For the reasons stated in the foregoing pages, the applicants’ case against the first respondent alleging breaches of s 52 of the TPA fails. It is unnecessary to discuss any other issues of causation.
The applicants made a case against the second respondent (Gabriel Christou) and the third respondent (Reyes) based on s 75B of the TPA. This too fails, since no contravention of s 52 has been established.
The applicants also alleged that the representations as pleaded constituted collateral warranties that were breached by the first respondent. Of the pleaded representations made out by the applicants, one (in statement of claim, par 7(2)(b)) stated an obligation arising from the franchise agreement: see cl 2(ah) of the Ormond franchise agreement (set out at [204] above). As already noted, there was no evidence that cl 2(ah) had been breached. For the reasons already stated, none of the representations pleaded in pars 7(1)(a), 7(1)(i) and 7(2)(a) of the statement of claim constituted collateral warranties. Even if the representations pleaded in pars 7(2)(e) and 7(3)(j) of the statement of claim could be so regarded (and leaving aside the effect of cl 21 of the franchise agreement), the applicants have not established, on the balance of probabilities, that there was any breach of the kind alleged.
Further, in view of the findings made, the applicants’ claim for damages for negligent misstatement also fails. The applicants have made out 6 of the 28 pleaded representations. In the circumstances of the case, the statements to the effect that the Pizza Haven chain was extremely successful (statement of claim, par 7(1)(a)), that a franchise was an attractive investment (statement of claim, par 7(1)(i)), and that there would be an aggressive program of advertising (statement of claim, par 7(2)(a)) did not attract a duty of care. As already noted, these commendatory statements were of the kind commonly made by salespersons in the course of negotiating a sale, and to say they were intended to convey “information” to a purchaser upon the basis that the purchaser would trust that the information was true is to misdescribe the nature of the communication. Neither the character of these communications nor the circumstances in which they were made support a finding that Gabriel Christou or Reyes ought to have realised that, in making them, the applicants were trusting in his special competence and that it was reasonable, in all the circumstances, for these applicants to accept and rely on statements of this nature in determining to purchase the Ormond franchise: see, e.g., Tepko Pty Ltd v Water Board (2001) 206 CLR 1, at 16-18 per Gleeson CJ, Gummow and Hayne JJ, and at 22-24 per Gaudron J; SanSebastian Properties Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340, at 354-357 per Gibbs CJ, Mason, Wilson and Dawson JJ and 372 per Brennan J.

As already stated, the applicants have not shown that the representation pleaded in par 7(2)(e) was made without reasonable grounds. It was not, for that reason, made negligently. Further, as set out above, the applicants have not succeeded in establishing that any of the representations pleaded in pars 7(2)(b), 7(2)(e) and 7(3)(j) of the statement of claim were incorrect.
o. conclusion
For the foregoing reasons, the applicants have not made out their case that the respondents are liable to them in damages for misrepresentations made by them during the negotiations preceding their entry into the Ormond franchise agreement. I would, therefore, dismiss the application in this proceeding.
In the ordinary course, the applicants would be required to pay the respondents’ costs. There may, however, be considerations that, in the circumstances of the case, support a costs order of a different kind. There also remains the respondents’ cross-claim. I would, therefore, afford the parties an opportunity to make written submissions on the question of costs and on

the disposition of the cross-claim, if they so wish, before any further step is taken in the proceeding.

I certify that the preceding three hundred and fifty (350) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.
Associate:
Dated: 29 October 2002

Counsel for the Applicants: Mr P Bick QC with Mr D Farrands

Solicitor for the Applicants: Slater & Gordon

Counsel for the Respondents: Mr C Golvan

Solicitor for the Respondents: Middletons

Dates of Hearing: 8/6/00, 13/6/00-14/6/00, 20/6/00, 19/1/01, 22/1/01-25/1/01, 29/1/01-30/1/01, 2/2/01, 5/2/01-9/2/01, 12/2/01-14/2/01, 16/2/01, 27/2/01-2/3/01, 26/4/01-27/4/01, 30/4/01-1/5/01, 5/6/01 & 13/6/01

Date of Judgment: 29 October 2002

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 418 OF 1992

BETWEEN:	JOHN EDWARD SANDERS First Applicant CHRISTOPHER ZIENKIEWICZ Second Applicant
AND:	GLEV FRANCHISES PTY LTD First Respondent GABRIEL CHRISTOU Second Respondent LEO REYES Third Respondent
JUDGE:	KENNY J
DATE OF ORDER:	29 OCTOBER 2002
WHERE MADE:	MELBOURNE

JUDGE:	KENNY J
DATE:	29 OCTOBER 2002
PLACE:	MELBOURNE

$		$
Estimated total (after leasing)	54,030	-		56,360
Less Leasing		1,600	-		1,600
52,430	-		54,760
Add Equipment Motor vehicles		41,500	-		41,500
		17,000	-		17,000
total investment (before leasing)	$110,930	-		$113,260

Counsel for the Applicants:	Mr P Bick QC with Mr D Farrands
Solicitor for the Applicants:	Slater & Gordon
Counsel for the Respondents:	Mr C Golvan
Solicitor for the Respondents:	Middletons
Dates of Hearing:	8/6/00, 13/6/00-14/6/00, 20/6/00, 19/1/01, 22/1/01-25/1/01, 29/1/01-30/1/01, 2/2/01, 5/2/01-9/2/01, 12/2/01-14/2/01, 16/2/01, 27/2/01-2/3/01, 26/4/01-27/4/01, 30/4/01-1/5/01, 5/6/01 & 13/6/01
Date of Judgment:	29 October 2002