SEAL-A-FRIDGE (South) Pty Ltd v Seal Home Services Pty Ltd - [2009] WADC 19

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: SEAL-A-FRIDGE (SOUTH) PTY LTD -v- SEAL HOME SERVICES PTY LTD & ANOR [2009] WADC 19

CORAM: STAVRIANOU DCJ

HEARD: 25 & 26 MARCH 2008, 8 & 9 SEPTEMBER 2008

DELIVERED : 17 FEBRUARY 2009

FILE NO/S: CIV 2322 of 2004

BETWEEN: SEAL-A-FRIDGE (SOUTH) PTY LTD
Plaintiff
AND
SEAL HOME SERVICES PTY LTD
First Defendant
NIGEL JOHN ROONEY
Second Defendant

Catchwords:

Trade Practices Act 1974 (Cth) - Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) - Franchising Code of Conduct - Franchise agreement - Whether agreement between parties constituted a franchising agreement - Failure to comply with Code - Whether director knowingly involved in contravention by failure to comply with Code - Causation - Whether damages caused by breach of Code

Legislation:

Trade Practices Act 1974 (Cth) s 51AD, s 75B, s 82, s 87
Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth)

Result:

Plaintiff's claim against first and second defendants dismissed

Representation:

Counsel:

Plaintiff:     Mr A P Hershowitz
First Defendant              :     Mr S R Sirett
Second Defendant         :     Mr S R Sirett

Solicitors:

Plaintiff:     Butcher Paull & Calder
First Defendant              :     Downings Legal
Second Defendant         :     Downings Legal

Case(s) referred to in judgment(s):

Gould v Vaggelas (1985) 157 CLR 215
Smith v Chadwick, Chadwick, Adamson and Collier (1884) 9 App Cas 187
Sutton v A J Thompson Pty Ltd (In liq) (1987) 73 ALR 233
Townsend v Roussety & Co (WA) Pty Ltd (2007) 33 WAR 321
Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514

STAVRIANOU DCJ:

Introduction

In July 2003 the plaintiff and the first defendant entered into an agreement pursuant to which the plaintiff paid the first defendant $71,500.00. What the plaintiff was to receive as consideration for the payment is one of the principal controversies between the parties.
The claim against each defendant is for damages being the price paid.
The plaintiff's case is that the agreement was a franchise for the cleaning of blinds and the first defendant was required to comply with the Franchising Code of Conduct (the Code). The first defendant failed to comply with the Code and on the plaintiff's case it became entitled to damages pursuant to the Trade Practices Act 1974 (Cth) (the Act). The non‑compliance alleged includes a failure to create and provide a disclosure statement and to provide a copy of the Code to the plaintiff.
The defendants' case is that the agreement was for the sale of two blind cleaning machines and there was no franchise. Accordingly, the Code and the Act have no application.
The defendants further contend that there is no causal connection between any contravention of the Code and any loss suffered by the plaintiff.
The claim against the first defendant is as a corporation which contravened s 51AD of the Act.
The claim against the second defendant (Mr Rooney) is for damages as a person involved in the contravention and is made pursuant to s 75B of the Act.

The parties

The plaintiff is a corporation associated with Mathew Alexander Kelly (Mr Kelly) who was at all material times a director. Joyce Kelly is his wife and when I need to refer to them together I will use the phrase "the Kellys".
The first defendant (formerly Seal Blind Cleaning Pty Ltd) offers three different types of franchises for sale throughout Australia, one of which was a system for the cleaning of blinds. The franchises are marketed with a "seal" logo. Mr Rooney is a director of the first defendant. His wife Linda Rooney (Mrs Rooney) was involved in the business of the first defendant and on occasions she would make telephone calls to prospective franchisees. When I need to refer to them together I will use the phrase "the Rooneys".
A reference to the Kellys and the Rooneys in these reasons may be taken as a reference to the plaintiff and first defendant respectively.
Seal‑A‑Fridge Pty Ltd is another corporation associated with the Rooneys.

Overview

By an agreement in writing made in or about 1997 the Rooneys granted a franchise to the Kellys in relation to the supply of refrigerator seals (the 1997 Franchise). In 2001 the Kellys were authorized by the Rooneys to sell oven and dishwasher seals pursuant to the 1997 Franchise.
There were issues between the Kellys and the Rooneys in relation to the operation of the 1997 Franchise and it was the evidence of Mr Kelly that there had been little contact between Mr Rooney and himself over the years. On the odd occasion that there was contact it was usually of an aggressive nature.
On or about 27 June 2003 the first defendant was engaged by the Defence Housing Authority (DHA) to clean blinds in houses owned by it in Perth, Cairns, Brisbane, Gold Coast, Newcastle, Sydney, Canberra and Melbourne. The engagement was for a period of two years.
The first defendant had no employees in Western Australia to perform DHA work and there were therefore discussions with Mr Kelly concerning the grant of a franchise for the plaintiff to do the blind cleaning. On the defendants' case the negotiations began in May 2003.
The manner in which the blind cleaning franchise was to operate was that the first defendant would, as part of the franchise fee, supply a cleaning machine to franchisees. The machine comprised a tank into which blinds were placed. The tank had an ultrasonic cleaning machine attached to it. The machine and tank would be installed into the rear of a vehicle and the operator (franchisee) would then attend upon customers. The cleaning work would be done on site.
On 9 July 2003 Mrs Rooney wrote to the Kellys enclosing an information package. The letter was in the following terms:
"Dear Joy & Kelly,
Please fine enclosed information package and TV Commercial on Seal Blind Cleaning.
In the Perth area we have the contract for the DHA (Defence Housing Association) and this is over 800 homes. It is a good foundation for the business.
As discussed how this works is that the DHA will fax you a job to do within a specified time, you go and do the job, there is usually no one home, you invoice them and they deposit cleared funds into your account. There is no chasing the payments here as they want to pay you as quickly as possible so they can close the case so to speak.
We are selling these off at a much reduced rate, because we don't want to move around Australia again – we have moved 22 times in the last 4 years. Therefore the breakdown for Perth comprises the whole state of Western Australia.
As you will see the marketing and trademark are all the same as Seal‑A‑Fridge to capitalise on its recognition in the marketplace. When you do a fridge seal job you give out a brochure on blinds and vice versa.
Perth is the only area I don't have a buyer for yet, so before we start to advertise it we thought of you because you have a bit of a labour force at your disposal.
If you have any more questions please ring me on 0400 795 313.
Kind regards,
Linda Rooney."
The information package which was included with the letter was detailed and made reference to methods of operation of the proposed franchise and outlined what was said to be the benefits of being a franchisee. One of the documents set out how the purchase price of $71,500.00 for a franchise was calculated. It includes references to a blind cleaning machine ($25,400.00), van fit out and signage ($2,000.00), spare parts ($800.00) and a franchise fee of $34,800.00. The document states that the price includes "five days intensive training in your area".
The first issue which requires determination is whether the negotiations resulted in a franchise or an agreement for sale of two blind cleaning machines.
Towards the end of July 2003 Mr Kelly on behalf of the plaintiff made an oral agreement with the first defendant and agreed to pay $71,500.00.
It was necessary for the Kellys to purchase a vehicle to transport the machine for utilisation on site. Finance was required to purchase the vehicle and to complete the acquisition of the franchise.
On 30 July 2003 the plaintiff paid the first defendant $5,000.00.
On 1 August 2003 the plaintiff paid the first defendant a further sum of $5,000.00.
On 8 August 2003 the plaintiff paid the first defendant $61,500.00.
On 8 August 2003 Mr Rooney arrived in Perth and visited the Kellys. He arranged to collect and deliver to the Kellys one blind cleaning machine.
During his stay in Perth Mr Rooney assisted Mr Kelly in the fit out of the vehicle and the installation of the blind cleaning machine.
On 15 August 2003 Mr Rooney wrote to the Kellys in the following terms:
"15^th August, 2003
TO WHOM IT MAY CONCERN
Mr Matthew Kelly and Mrs Joyce Kelly are Franchisee's of 'Seal Blind Cleaning Pty Ltd'.
He has our companies authorisation to register the trading name of Seal Blind and Carpet Cleaning (Perth) or another similar name approved by you in the state of Western Australia.
If you have any questions please call me direct on 0418 250 240.
Yours sincerely
Nigel Rooney
Director
Seal Blind Cleaning Pty Ltd."
It was Mr Kelly's evidence that after delivery of the machine by Mr Rooney the plaintiff commenced the blind cleaning business. This was in about the middle of August 2003.
It was Mr Kelly's evidence that the business was not a good one from the outset. The earnings of $400.00 per day six days per week referred to in the information package were not being achieved. DHA was basically the only customer for the business and its work involved a lot of jobs but with a small return on each. The business did not on his evidence make a profit from the outset.
By letter dated 21 July 2004 the plaintiff through its solicitors requested the return of $71,500.00 from the first defendant and rescission of what was described as the franchise agreement. Non‑compliance with the Code was relied upon. Mr Rooney responded to Mr Kelly by letter of 25 October 2004 in which he denied the existence of a written franchise agreement. A similar denial was made by Mr Rooney in an email of 7 November 2004 to Mr Kelly.
On 31 March 2005 Mr Kelly wrote to Mr Rooney advising that the plaintiff would no longer be accepting any DHA work.
The blind cleaning machine remains in the Kellys' shed.

The agreement

Mr Kelly's evidence was that negotiations in relation to the grant of a franchise began in July 2003 when he was telephoned by Mrs Rooney. In the conversation Mrs Rooney told Mr Kelly about the new blind cleaning franchise and that there was a master franchise available for the whole of Western Australia. It was his evidence that in the course of a conversation with Mrs Rooney it was made clear that what was being sold was a franchise. He was not interested in more than one machine and acquiring more than one machine was never discussed with Mr or Mrs Rooney. In discussions there was only reference to the purchase of a franchise operation, or a master franchise for Western Australia.
Mr Kelly's evidence was that after his discussion with Mrs Rooney he needed to think about the matter before making a decision as to whether to proceed. During the conversation there was a discussion about the provision of further information. Mr Kelly's evidence was that within a day or two of the conversation he received the letter dated 9 July 2003 from the Rooneys.
Mr Kelly's evidence was that he considered the information provided and decided to proceed with the franchise and he told Mrs Rooney in a telephone conversation of his decision to do so. Mr Kelly had difficulty arranging finance for the purchase and Mrs Rooney suggested an application to a financier in Queensland and she provided the name of a contact to Mr Kelly. She also told Mr Kelly that the finance application should be made for two Ultra‑Sonic Blind‑Cleaning machines and not for the goodwill of the franchise. This was because it was considered to be easier to obtain finance for plant and equipment than goodwill. I accept Mr Kelly's evidence as to what had been said to him concerning the application for finance by Mrs Rooney.
Mr Rooney gave evidence that in April 2003 he tendered for a national contract for the DHA. It was his evidence that in May 2003 he spoke to Mr Kelly and to another person in Perth who also was a franchisee for refrigerator seals about a blind cleaning franchise.
The evidence of Mr Rooney was that in a conversation with Mr Kelly Mr Kelly had said that he did not want to proceed with the franchise and instead wanted to purchase two blind cleaning machines. It was Mr Rooney's evidence that Mr Kelly decided to buy the equipment and operate the blind cleaning business under the 1997 Franchise. An agreed price of $71,500.00 was to be paid and it was Mr Rooney's evidence he told Mr Kelly that he would send paperwork authorising Mr Kelly to be able to clean blinds and do blind cleaning work under the 1997 Franchise. Mr Kelly produced a copy of a letter to the Rooneys dated 27 July 2003 providing such authorisation. The Kellys denied receipt of the letter. Mr Rooney's evidence was that there was an agreement to pay a monthly fee for use of a telephone service.
I was not impressed with Mr Rooney's evidence and the record keeping of the first defendants.
Mr Rooney's recollection of events was poor. He gave evidence that he had not met payments for items installed in the Kellys' van when he was in Perth. Mr Kelly was extensively cross‑examined on that basis. Mr Rooney accepted when cross-examined that he had made payments. He then sought to explain the payments on the basis that money was outstanding to the Kellys for work done. This was not the case and there was documentary evidence produced which established that no money was outstanding.
At trial there were a number of invoices produced which refer to a figure of $71,500.00. There was an invoice dated 14 July 2003 addressed to Seal‑A‑Fridge (South) from the first defendant and received by facsimile. This related to the supply of two Ultra‑Sonic Power Corporation Blind‑Cleaning machines at $32,500.00 each. This invoice was attached to the application for finance by the Kellys.
There was a further invoice dated 28 July 2003 which referred to the sum of $71,500.00 and made no reference to a deposit. There was also produced a third invoice which was dated 28 July 2003 which was also for $71,500.00 and referred to a deposit of $10,000.00. Mr Kelly had not seen this invoice. The Rooneys could not explain why there were three invoices. Mr Rooney said he had never seen the invoice dated 14 July 2003.
The defendants' case is that a disclosure document and a copy of the franchise agreement were given to the plaintiff. At trial leave was obtained to amend to plead that the first defendant had also given a copy of the Code. The defence first pleaded that no document in compliance with reg 11 of the Code had been received. At trial the defendants produced a document dated 20 July 2003 which was asserted to be in compliance with reg 11. It had never been discovered by the defendants.
The defendants did not give proper discovery of documents. Shortly before trial a number of documents critical to the defendants' allegations were produced. These had not been discovered and included the letter of 1 July 2003, the document dated 20 July 2003, the letter of authorisation dated 27 July 2003 and the disclosure document.
Mr Rooney had sworn affidavits dealing with the delivery of the second machine. His explanations in relation to the contents of the affidavits were unsatisfactory. In his own evidence he described the records kept at the time by the first defendant as not being up to "Australian Standard".
Mrs Rooney in her evidence denied that she had been involved in negotiations with Mr Kelly. It was her evidence she had spoken only on one occasion initially to the Kellys. The next time she had discussions was when Mr Rooney asked her to ring the Kellys towards the end of July 2003 to provide the name of the contact within the financier. She could not remember anything about the invoices of 28 July 2003. I do not accept her evidence as to the extent of her involvement. It was Mrs Rooney's evidence she had been asked to contact people around Australia after the DHA tender had been received. Her evidence was vague and unconvincing. She did not appear to have a good recollection and I formed an unfavourable impression as to her evidence.
Mr Rooney's evidence was that it was only after receiving the DHA tender on 1 July 2003 that efforts were being made to secure franchisees in Western Australia. Prior to that date the position was that the Rooneys were trying to see who was interested. In the circumstances I am satisfied that negotiations began in July 2003 as Mr Kelly said and not in May 2003 as was contended by the Rooneys.
It was Mr Rooney's evidence that after securing the DHA tender he advised his wife to make contact with different people around Australia. In her evidence Mrs Rooney sought to downplay her role and denied she had spoken to Mr Kelly as he alleged. I do not accept her evidence. The Rooneys' business was a busy one and in all the circumstances I am satisfied Mrs Rooney was involved in the conversations with Mr Kelly as Mr Kelly said in evidence.
The negotiations which had been conducted between the parties had been directed to the sale of a franchise. The information package which had been enclosed with the letter made reference to the grant of a franchise and included information in relation to the franchise operation.
I have carefully considered Mrs Rooney's evidence that she had a limited involvement. Her recollection, as I have said, was not good. Mr Kelly's evidence was straightforward and honest. I prefer the evidence of Mr Kelly to that of Mr and Mrs Rooney as to the agreement and his version of events. There are a number of reasons for this. The business of the Rooneys and the first defendant was the sale of franchises and acting as master franchisor which entitled it to an ongoing monthly fee. The seal brand was clearly important to the first defendant.
The first defendant had secured the arrangement with DHA and this was expected to be a good source of income.
On 8 August 2003 Mr Rooney arrived in Perth. Mr Rooney's conduct whilst in Perth was consistent with the version of events given by the Kellys and the existence of a franchise.
Mr Rooney's evidence as to his conversation with the Kellys when he was in Perth was as follows:
"Yeah, I believe it was either on that night; the Friday, I went to see the Kellys and talked to them more. This is the first time face to face that I'd seen them in a period of time, I can't remember how long. So it was a good ice breaker to break the ice there and talk to them about the franchise set up and basically on what we ‑ what the different plans were et cetera, there."
It was his evidence in cross-examination that the reference to a franchise was incorrect. The explanation he gave in evidence was that he meant to talk about the blind cleaning business. His explanation was unconvincing.
Mr Rooney gave evidence he went and picked the tank up in the blind cleaning van that the Kellys had for the business.
It was the evidence of Mrs Kelly that when Mr Rooney came to Perth he had talked to the Kellys about buying the franchise. She gave evidence that the Kellys had not spoken to other franchisees before starting the business. Mr Rooney handed to them a written franchise agreement. This provided for a price of $71,500.00 and the grant of a franchise for 15 years. The agreement which was never signed provided for a franchise service fee of $50.00 per week.
During his time in Perth Mr Rooney assisted Mr Kelly in the fit out of the van which Mr Kelly had purchased for the purpose of conducting the business. He also made purchases in connection with the fit out of the van and purchased spare parts for the blind cleaning machine. He also assisted with the signage and provided instruction in relation to the machine. He introduced Mr Kelly as the new franchisee for Perth to representatives of the DHA. This conduct was all consistent with the existence of a franchise.

Mr Rooney's evidence in relation to the fit out of the van and purchase of the parts was unsatisfactory. His evidence initially was that he had made no purchases. He subsequently gave evidence that the purchases were made because he owed Mr Kelly for work that had been done by him. I am satisfied that there was no money owing. The bank statements and invoices produced are clear.
Mr Rooney gave evidence that he put the second machine together when he returned to Brisbane, and that it was collected from Brisbane on 20 August 2003. He gave evidence he had a telephone conversation the day before with Mr Kelly to say that he had arranged for the second blind cleaning machine to be collected the next morning. He gave evidence he worked all the previous day to have the tank organised, boxed up and ready. He did not recall the name of the transport company. There was on his evidence no conversation with Mr Kelly about delivery of the second machine after it had been collected.
By about February 2004 Mr Kelly was interested in selling the business. On 16 February 2004 he advertised the blind cleaning master franchise for sale. He was getting calls for the business and there were enquiries from persons who wanted to know more about the business. He therefore rang Mr Rooney and asked him about the procedure. Mr Rooney responded that he would forward a confidentiality agreement. The document was received by Mr Kelly but not used and no sale occurred.
The evidence of Mr Rooney was that the first defendant's business was that of a franchisor. Its income was principally derived from the operation of franchises. The unsigned written franchise agreement contained a reference to a franchise fee of $34,800.00 resulting in a total payable of $71,500.00. That same figure was referred to in the document included in the information package provided with the letter of 9 July 2003.
It was Mr Rooney's evidence that there was a prior agreement between himself and Mr Kelly that he would assist him in the fit out of the van. This was on Mr Rooney's evidence the reason why he came to Western Australia and made payment of a number of items relating to the van. I am not satisfied that there was such an agreement. In my view when Mr Rooney travelled to Perth it was to assist in establishing the franchise pursuant to the agreement which had been entered into. When he was in Perth he expended money in setting up the van. This is consistent with the existence of the agreement as alleged by the plaintiff.
Mr Rooney's description of the consignment of the second machine to the Kellys was unconvincing. The first defendant and Mr Rooney did not produce any documentary evidence concerning the second machine. There was extensive cross‑examination in relation to the existence or otherwise of documentary evidence concerning the second machine. At the end of the cross‑examination I was not satisfied that the evidence of Mr Rooney was credible and reliable.
Mr Kelly denied that he had ever received a second machine. The way in which the business was to operate envisaged a mobile system in which the blind cleaning machine was transported by van. The Kellys had no use for a second machine. The vehicle in which the first machine was transported was financed and there was no reason for them to acquire a second machine.
On 15 August 2003 Mr Rooney wrote authorising the conduct of business by the Kellys under the name Seal Blind and Carpet Cleaning (Perth) and described the Kellys as franchisees of Seal Blind Cleaning Pty Ltd. Mr Rooney's explanation for this letter was that it was to assist in the opening of a bank account. Whilst that may have been the immediate purpose, it is consistent with the existence of the franchise at that date as maintained in the evidence of the Kellys.
I have carefully considered the evidence of Mr Kelly particularly in the light of his representation to the financier that he was acquiring two machines. I have also considered his evidence in the light of the content of his financial documents and statements which make reference to the existence of two machines. He was quite frank in his evidence that he gave the relevant documents to his accountant who prepared the returns and statements and he signed them. It was his evidence he had had the same accountant for a number of years and would just sign things. Notwithstanding the evidence as to the representations to the financier and the content of the financial documents and statements, I am satisfied that there was an agreement as Mr Kelly stated in his evidence.
I am satisfied that there was an agreement as contended by the plaintiff in this case. It was a franchise agreement and was not an agreement for the sale of two machines. Only one machine was to be supplied pursuant to the franchise. Only one machine was supplied.
It was agreed between counsel that in the event that it was determined that the agreement was a franchise agreement then the further issues to be considered were whether there had been a contravention of the Code and whether that contravention entitled the plaintiff to damages.

The legislation

Sections 51ACA to 51AE comprise Part IVB of the Act and deal with Industry Codes.
Section 51ACA of the Act contains the following relevant definitions:
"'applicable industry code', in relation to a corporation that is a participant in an industry, means:
(a)the prescribed provisions of any mandatory industry code relating to the industry; and
(b)the prescribed provisions of any voluntary industry code that binds the corporation.
'industry code' means a code regulating the conduct of participants in an industry towards other participants in the industry or towards consumers in the industry.
'mandatory industry code' means an industry code that is declared by regulations under section 51AE to be mandatory."
Section 51AD of the Act provides:
"A corporation must not, in trade or commerce, contravene an applicable industry code."
Section 51AE of the Act provides the regulations may prescribe an industry code, or specified provisions of an industry code, for the purposes of this Part.
The Trade Practices (Industry Codes - Franchising) Regulations 1998 prescribe as a mandatory industry code the Franchising Code of Conduct (the Code).

The Code

Regulation 6 of the Code provides:
(1)A franchisor must, before entering into a franchise agreement, and within 4 months after the end of each financial year after entering into a franchise agreement, create a document (a disclosure document) for the franchise in accordance with this Division.
(2)A disclosure document:
(a)must be:
(i)if the franchised business has an expected annual turnover at any time during the term of the franchise agreement of $50,000 or more -- in accordance with Annexure 1; or
(ii)if the franchised business has an expected annual turnover of less than $50,000 -- in accordance with Annexure 1 or 2; and
(b)may include additional information under the heading "Other relevant disclosure information'; and
(c)must be signed by a director or executive officer of the franchisor.
Regulation 6A provides:
The purposes of a disclosure document are:
(a)to give to a prospective franchisee, or a franchisee proposing to enter into, renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise; and
(b)to give a franchisee current information from the franchisor that is material to the running of the franchised business.
Regulation 10 provides a franchisor must give a copy of the Code and a disclosure document to a prospective franchisee at least 14 days before the prospective franchisee:
(i)enters into a franchise agreement or an agreement to enter into a franchise agreement; or
(ii)makes a non‑refundable payment (whether of money or of other valuable consideration) to the franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or
Regulation 11 provides:
(1)The franchisor must not:
(a)enter into, renew or extend a franchise agreement; or
(b)enter into an agreement to enter into, renew or extend a franchise agreement; or
(c)receive a non‑refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement;
unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this Code.
(2)Before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee:
(a)signed statements, that the prospective franchisee has been given advice about the proposed franchise agreement or franchised business, by any of:
(i)an independent legal adviser;
(ii)an independent business adviser:
(iii)an independent accountant; or
(b)for each kind of statement not received under paragraph (a), a signed statement by the prospective franchisee that the prospective franchisee:
(i)has been given that kind of advice about the proposed franchise agreement or franchised business; or
(ii)has been told that that kind of advice should be sought but has decided not to seek it.
(3)Subclause (2):
(a)does not apply to the renewal or extension of a franchise agreement with a franchisor; and
(b)does not prevent the franchisor from requiring any or all of the statements mentioned in paragraph (2)(a).
Regulation 13 relevantly provides:
(1)A franchisee may terminate an agreement (being either a franchise agreement or an agreement to enter into a franchise agreement) within 7 days after the earlier of:
(a)entering into the agreement; or
(b)making any payment (whether of money or of other valuable consideration) under the agreement.
(2)Subclause (1) does not apply to the renewal, extension or transfer of an existing franchise agreement.
(3)If the franchisee terminates an agreement under subclause (1) the franchisor must, within 14 days, return all payments (whether of money or of other valuable consideration) made by the franchisee to the franchisor under the agreement.
(4)However, the franchisor may deduct from the amount paid under subclause (3) the franchisor's reasonable expenses if the expenses or their method of calculation have been set out in the agreement.
Annexure 1 of the Code specifies the details which must appear in the disclosure document. There is a requirement that the first page of the disclosure document refer to a cooling off period. The disclosure document must also include details of:
(a)business experience of the franchisor;
(b)litigation involving the franchisor;
(c)existing franchises;
(d)intellectual property;
(e)the franchise site or territory;
(f)the obligations of the franchisor and the franchisee.

The contraventions

The contraventions alleged in this case are that the first defendant:
(1)failed to create a disclosure document or have it signed by its director or executive officer;
(2)failed to give a current disclosure document to the plaintiff;
(3)failed to give a copy of the disclosure document and the Code to the plaintiff at least 14 days before the plaintiff entered into the agreement and/or before the plaintiff paid the franchising fee;
(4)did not receive from the plaintiff the written and/or signed statement required by reg 11 of the Regulations.
Mr Kelly gave evidence that he received a disclosure document dated 15 March 2005 from Mr Rooney on or about 13 April 2005. It related to the 1997 Franchise business and named the first defendant as the franchisor. It was Mr Kelly's evidence that this was the first time he had received a disclosure document from Mr Rooney.
Mr Kelly gave evidence that he had never seen a letter dated 1 July 2003 which the Rooneys maintained had been sent to the Kellys and which enclosed a draft franchise agreement, a disclosure document dated 1 July 2003 and the Code. It was Mr Rooney's evidence he had handwritten the letter of 1 July 2003 and his wife had typed it.
The evidence of Mr Kelly was very clear in relation to the documents which he said had been received. A disclosure statement and copy of the Code had not been received before he entered into the blind cleaning franchise. Mrs Kelly's evidence was that she had not seen the letter of 1 July 2003 or its enclosures at any time and it was not given to her prior to entry into the franchise agreement.
The records maintained by the first defendant were inadequate. Documents were being discovered shortly before trial. This included the letter of 1 July 2003 which the Rooneys maintained had included a disclosure statement and a copy of the Code. Mr Rooney's evidence as to the delivery of the letter of 1 July 2003 was inconsistent. In cross‑examination it became clear he was unsure how the letter was sent. His evidence was unreliable in this respect.
At trial the first defendant maintained through the evidence of Mr Rooney that it did receive a signed statement in the form required by reg 11 of the Code. The original defence asserted that the signed document required by reg 11 had not been received. The Kellys denied in evidence that they had signed the document produced by the first defendant.
Paragraph 12(d) of the defence as amended at trial was as follows:
"The First and Second Defendants did receive a written and signed statement in the form required by Regulation 11, but did not rely on that document for any purpose because the Plaintiff decided not to purchase the franchise and declined to sign any of the documents."
The statement relied upon by the first defendant is a document dated 20 July 2003 and is as follows:
"We confirm that we have received a copy of the Seal Blind Cleaning Franchise Agreement, Disclosure document and a copy of the Franchising Code of Conduct at least 14 days prior to this statement.
We confirm that we have received, read and had a reasonable opportunity to understand the Disclosure Document, The Franchising Code of Conduct and The Franchise Agreement.
We confirm that we have been given advice about the proposed Franchise Agreement from independent legal, business and financial advisors and that we have been given that kind of advice about the proposed Franchise Agreement."
Mrs Kelly's evidence was that she had never seen the document dated 20 July 2003 before her lawyers showed it to her shortly before trial and she did sign not an original of this document at any time. She did not ever sign a statement to the effect that she had received a copy of a disclosure document or the Code. She said she had never received a disclosure document or a copy of the Code. Her evidence was convincing. Mr Kelly denied he had signed the document dated 20 July 2003.
The document dated 20 July 2003 was not an original and appeared at some stage to have been transmitted by facsimile. I am not satisfied that the document dated 20 July 2003 was signed by either Mr or Mrs Kelly. Each gave evidence denying that they had signed the document and I accept that evidence.
I am satisfied based on the evidence of the Kellys that the first defendant did not comply with the Code as alleged. The Kellys were not given a copy of the Code or a disclosure statement as required by reg 10 and they had not signed the document required by reg 11.

The claim against Mr Rooney

Section 75B of the Act imposes personal liability on a person who has been in any way, directly or indirectly, knowingly concerned in, or party to a contravention by a corporation of s 51AD of the Act. I am satisfied on the evidence that Mr Rooney was knowingly concerned. It was not suggested at trial that if there was a contravention he had not been involved in it. That approach is supported by the evidence. Mr Rooney was directing the day to day operations of the first defendant. In the circumstances I consider he was a person knowingly concerned in the contravention of s 51AD.

Damages

A breach of s 51AD of the Act enables a franchisee who suffers or is likely to suffer loss and damage as a result of the franchisor's non‑compliance with the Code to recover damages.
The claim by the plaintiff is based upon the assertion that if it had been provided with a copy of the Code and the disclosure statement as required by reg 6 and reg 10 the plaintiff would have been aware of and would have exercised the rights available to it to terminate the agreement pursuant to reg 13.
The plaintiff's case is that the information package contained crucial financial information concerning the proposed franchise. On the basis of that information the types of enquiries that the Kellys could have made can be identified. The plaintiff's case is that they had spoken to franchisees then information may have become available or they could have sought financial statements. This would have assisted the plaintiff in making the decision as to whether to proceed with the agreement. The assertion is that the Code encourages due diligence by prospective franchisees and because of the contraventions in this case a proper due diligence could not be carried out. There was no evidence as to what a proper due diligence, if carried out, would have disclosed.
The claims are made under s 82 and s 87 of the Act and may be considered together.
Section 82 of the Act provides:
"Subject to subs (1AAA), a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Pt IV, IVA, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention."
The plaintiff must prove that it suffered loss or damage by the contravening conduct of the first defendant. The test under s 82(1) in relation to causation is a practical or commonsense one.
Mason CJ, Dawson, Gaudron and McHugh JJ said in Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 (at 525):
"The statutory cause of action arises when the plaintiff suffers loss or damage 'by' contravening conduct of another person. 'By' is a curious word to use. One might have expected 'by means of', 'by reason of', 'in consequence of' or 'as a result of'. But the word clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or commonsense concept of causation recently discussed by this Court in March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506, except insofar as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Had Parliament intended to say something else, it would have been natural and easy to have said so."
I take the relevant legal principles in relation to causation to be as set out in Townsend v Roussety & Co (WA) Pty Ltd (2007) 33 WAR 321 at [96] ‑ [103].
Specific evidence of reliance is not essential for proof of causation. It is not essential that causation be established by direct evidence of the effect of the conduct. The Court may determine by inference what effect the relevant conduct must have had (Townsend (above) at [102]).
In Smith v Chadwick, Chadwick, Adamson and Collier (1884) 9 App Cas 187, Lord Blackburne said at 196‑7:
"I do not think it is necessary, in order to prove this, that the plaintiff always should be called as a witness to swear that he acted upon the inducement. At the time when Pasley v Freeman was decided, and for many years afterwards, he could not be so called. I think that if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract, and it is proved that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement. In Redgrave v Hurd the late Master of the Rolls is reported to have said it was an inference of law. If he really meant this he retracts it in his observations in the present case. I think it not possible to maintain that it is an inference of law. Its weight as evidence must greatly depend upon the degree to which the action of the plaintiff was likely, and on the absence of all other grounds on which the plaintiff might act."

In Gould v Vaggelas (1985) 157 CLR 215 Wilson J said at 238:
"Where a plaintiff shows that a defendant has made false statements to him intending thereby to induce him to enter into a contract and those statements are of such a nature as would be likely to provide such inducement and the plaintiff did in fact enter into that contract and thereby suffered damage and nothing more appears, common sense would demand the conclusion that the false representations played at least some part in inducing the plaintiff to enter into the contract. However, it is open to the defendant to obstruct the drawing of that natural inference of fact by showing that there were other relevant circumstances. Examples commonly given of such circumstances are that the plaintiff not only actually knew the true facts but knew them to be the truth or that the plaintiff either by his words or conduct disavowed any reliance on the fraudulent representations. It is entirely accurate to speak of an onus resting on a defendant to draw attention to the presence of circumstances such as those I have described in order to show that the inference of the fact of inducement which would ordinarily be drawn from the fraudulent making of a false statement calculated to induce a person to enter into a contract followed by entry into that contract should not in all the circumstances be drawn. But it is no more than an evidentiary onus – an obligation to point to the existence of circumstances which tend to rebut the inference which would ordinarily be drawn from the primary facts. When all the facts are in, the fact‑finding tribunal must determine whether or not it is satisfied on the balance of probabilities that the misrepresentations in question contributed to the plaintiff's entry into the contract."
Regulation 6(1) of the Code requires a franchisor to create a disclosure document for the franchise in accordance with Div 2.1. The franchisor is required to give a current disclosure document to a prospective franchisee. Regulation 6A of the Code outlines the purposes of a disclosure document.
The disclosure document was required to include the following:
"You should get independent legal, accounting and business advice before signing this franchise agreement."
It also required advice as to a cooling off period as follows:
"If this is a new franchise agreement (not a renewal, extension or transfer) of an agreement, you will be entitled to a 7 day 'cooling off' period after signing the agreement without cost."
In his evidence Mr Kelly said that if he had been provided with a disclosure statement he would have been spoken to franchisees and tried to establish how much money was being received. His evidence was:
"I know it's difficult to say what you might have done had you received the disclosure documents and what you may have done at that time but, doing the best you can, had you received the disclosure document in July 2003 telling you about cooling off periods, giving you other franchisee contact details, telling you more about the company and profitability and things like that what do you think you may have done or would have done had you been given that information? – That's a very hard question to answer because obviously I haven't had the opportunity, but what I would have done is at least contact all the franchisees in the list and obtained advice from my accountant.
Would you have obtained independent advice? – Yes.
When you say you would have definitely contact franchisees, what sort of things would you be trying to establish? – I think the most important thing I would have been trying to establish is how much money you get. It would have been the number 1 priority."
As to the cooling off period Mr Kelly's evidence was:
"If you had been advised of the sort of profits or amounts that could be made, that you found were ultimately made out of this business or amounts that you could charge; if that had been told to you would you have done anything during the cooling period? – I don't understand what you are saying.
If you had been told you had a cooling period of seven days and you had phoned up franchisees, made your inquiries and you had concerns about the profitability or how much could be made out of this business, are you able to say what you may have done during that period? – Once again, it's a very hard thing to answer but I would've made a much more informed decision whatever it was."
The evidence is that the Kellys did not seek advice before entering into the franchise agreement. It was Mr Kelly’s evidence that he relied upon the information package provided in deciding to proceed with the franchise.
The Kellys did have an accountant of long standing.
In 1997 when they entered into the refrigerator franchise they did not seek accounting advice. However they did cause a company to be incorporated. The Kellys engaged an accountant to assist in the preparation of income tax returns. Advice was sought from the accountant when it was necessary to prepare income tax returns and when tax documents were delivered by them to the accountant.
When the 1997 Franchise was entered into the Code was not in force and a disclosure statement was not required. It was only in 2004 that the Kellys became first aware of the requirements of the Code concerning disclosure statements.
In 2001 the Kellys as part of a group sought legal advice as to the interpretation of franchise agreements in general. This related to the fees charged by the plaintiff.
I am satisfied the Kellys were able to obtain and were familiar with obtaining legal and accounting advice before entering into the agreement with the first defendant.
Mr Kelly was fully aware that the principal source of income for the franchise was to be obtained from the DHA houses. Prior to payment of the $71,500.00 Mr Kelly had received a list of DHA houses in Western Australia. He was aware that the first defendant had not done any work on behalf of the DHA in Western Australia.
The view which Mr Kelly formed was that the franchise would be profitable. This was based upon the background as he described it of the 1997 Franchise being a very profitable business. His view was that the seal blind cleaning business could on that basis also be profitable. He was aware that it was to be a start-up business in Western Australia with one principal source of income. Whilst he was aware of the existence of other franchisees for the blind cleaning business and the refrigerator seal business around Australia he made no effort or attempt to speak or obtain information from them. I do not accept his evidence that there was no way to contact the franchisees. Mr Pope had provided a reference which was in the information package. Mr Pope's telephone number was on the reference.
The relationship between the Kellys and the Rooneys at the time of entering into the franchise agreement was characterised by mistrust. They had been involved with each other for six years. It was Mr Kelly's view that Mr Rooney was a devious person. Notwithstanding that he would have approached dealings with Mr Rooney with a degree of care, he chose to enter into an oral agreement with the first defendant and make payment of $71,500.00 on the promise of delivery of a machine and the grant of a franchise.
Mr Kelly was happy to proceed without advice. Mr Kelly made a decision to proceed with the franchise based upon the information provided to him. The plaintiff's case is not that there was any misrepresentation in the negotiations leading up to the conclusion of the agreement or in the material supplied.
Mr and Mrs Kelly at all times had an accountant and had previously contacted lawyers in relation to franchising issues. Mr Kelly's evidence was that he would have sought independent advice if he had received the disclosure statement. That answer must of course be considered in context. It was an answer given in relation to a business he had operated for just over 18 months and which had been financially unsuccessful.
In the circumstances I am satisfied that even if provided a warning about obtaining legal, accounting and business advice the plaintiff would not have sought such advice. Mr Kelly had decided the franchise was a good opportunity and proceeded on that basis.
No witness was called to give evidence as to the legal, accounting or business advice which would have been provided to the Kellys if it had been sought prior to entry into the franchise. I accept the advice would have included a recommendation that the information provided in the information package should be verified. There is no evidence which I accept that the information was incorrect. It referred to average figures throughout. The cleaning charges for example were based upon an average home. The figure of $400.00 per day was expressed as an average. The plaintiff’s case was that there was no opportunity to verify the information. There was no evidence that any of the information was inaccurate, incorrect or created a misleading impression. I accept an advisor may have suggested enquiries. However there is no evidence as to the enquiries which would have been recommended and the result of the recommended enquiries being made.
The plaintiff's income tax return for the year ended 30 June 2004 disclosed a gross income of $180,670.00. Mr Kelly's evidence was that the income was derived from the refrigerator seal business and the blind cleaning business. He could not say what the respective proportions were. In relation to blind cleaning he said the work could vary. On occasions there were five very small little jobs. There could be five one day and one the next week.
It can be assumed an accountant would have advised against the purchase of the franchise if it was to be unprofitable. There is no evidence from an accountant as to whether the business would have been unprofitable. Mr Kelly's evidence was that the figure of $400.00 per day was unobtainable. The average figures referred to may have been reasonable and based upon accurate information.
The franchise was a new business in Western Australia. In that situation predictions as to likely income would have been required. Income necessarily would have been dependant upon orders obtained. I am not in a position without evidence to assess what advice would have been provided by an accountant, lawyer or business advisor if it had been sought by the plaintiff.
The blind cleaning franchise was operated by the Kellys at the same time as the refrigerator seal business. Mr Kelly would attend jobs with his son as well as doing existing fridge seal work. The refrigerator seal business was lucrative. At the commencement of the blind cleaning business the plaintiff was busy. Mr Kelly's evidence was that the work did drop off by 50 per cent. The work involved Mr Kelly travelling around the metropolitan area. There is evidence that the plaintiff did not advertise the blind cleaning business. These are all matters an advisor would need to have taken into account.
The average income of $400.00 per day six days per week which Mr Kelly said could not be achieved needs to be considered in the light of the above circumstances. An accountant or other advisor would have needed information as to how the plaintiff intended to operate the business before advising as to whether to proceed or not.
What is clear is that the business as I have said had no financial history in Western Australia and its only existing source of work was the DHA. The plaintiff knew this. Mr Kelly made a decision to proceed on the information he had in the circumstances then known to him.
I am satisfied there was nothing in the disclosure statement which would have made a difference to the plaintiff's decision to proceed with the business. Mr Kelly did not give evidence as to any particular piece of information which if provided to him would have made a difference to the decision to proceed and not to terminate. His evidence was that if he had concerns about profitability after making enquiry he would have made a more informed decision. He did not say he would terminate. Mr Kelly had made up his mind to proceed and in my view compliance with the Code would not have affected the plaintiff's decision to proceed and not to terminate.
Mr Kelly was aware that the franchise agreement related to the State of Western Australia. He was interested in the opportunity because the 1997 Franchise had been lucrative and he hoped that the new franchise would also be. Mr Kelly did not ask to speak to other franchisees when he was having discussions with Mrs Rooney prior to making payment. This was the case even though he knew that Mr Pope was a franchisee. Mr Kelly and the plaintiff were determined to proceed with the franchise. Compliance with the Code would not have been an influence in any way (cf Sutton v A J Thompson Pty Ltd (In liq) (1987) 73 ALR 233 at 240).
There was no evidence as to any information concerning the franchise and which would have been contained within a disclosure statement or disclosed by a due diligence enquiry which would have resulted in the Kellys deciding not to proceed. There was no evidence that the other franchisees of franchises in Australia granted by the first defendant had failed or were dissatisfied. The evidence of Mr Rooney on this issue was unchallenged that franchisees were either still operating or had been able to sell their businesses. There was nothing identified in the material to suggest the plaintiff would have made a different decision in relation to proceeding to enter into the agreement or exercising the right granted by reg 11 to terminate the agreement.
The business started trading soon after Mr Rooney had left Western Australia. It was not on Mr Kelly's evidence a profitable business, but continued to trade with a view to trying to meet the expenses including meeting obligations to financiers in relation to the sum of $71,500.00 and the amount required to purchase the van. The financing cost for the van was $632.00 per month. The financing cost for the business was approximately $1,200.00 per month. Mr Kelly considered the franchise would be lucrative. The plaintiff carried on the business from August 2003. In July 2004 the plaintiff through its solicitors sought a return of the price paid of $71,500.00. It was not until March 2005 that the plaintiff advised the first defendant it would no longer accept DHA work. This was 19 months after the business had commenced.
I am satisfied that the Kellys would not have terminated the agreement if they had known of the cooling off period. The Kellys had purchased a van which was financed. They had financed the franchise fee by loan. The plaintiff's position would not have been different if there had been compliance with the Code. In the circumstances I am satisfied that if the plaintiff had known of the cooling off period it would not have terminated the agreement.
I am satisfied that even if the plaintiff had sought advice and it was to terminate that it would not have accepted the advice. The plaintiff knew the business was a start‑up business in Western Australia, it knew there was one principal client and it knew the refrigerator seal business had been lucrative. The period between the initial contact from the first defendant and the payment by the plaintiff of $71,500.00 was less than a month on the evidence of Mr Kelly. The plaintiff did not contact the DHA or any franchisee. The plaintiff was determined to proceed.
I find that the first defendant's contravention of the Code would have made no difference to the plaintiff's decision to proceed with the franchise and not exercise the right to terminate within the cooling off period. The contravention was not a cause of the loss sustained.
The evidence adduced is insufficient to establish causation.

Conclusion

For the above reasons the action must be dismissed.

Damages

If the plaintiff had succeeded in the action I would have assessed damages in this case at $71,500.00 being the price paid. Damages would be assessed on that basis because if the plaintiff had terminated the first defendant would have had an obligation to repay the price.