The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust (ACN 083 629 225) v Lenard's Pty Ltd (ACN 010 711 145) - [2004] FCA 1225

FEDERAL COURT OF AUSTRALIA
The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust (ACN 083 629 225) v Lenard’s Pty Ltd (ACN 010 711 145)
[2004] FCA 1225
TRADE PRACTICES – franchise agreement – whether franchisees misled and deceived under s 52 of the Trade Practices Act 1974 (Cth) by representations made in information provided by and statements made by head franchisee and/or master franchisee –impact of s 51A of the Trade Practices Act 1974 (Cth) on the burden of proof – whether the method by which and the circumstances in which the franchise agreement was entered into and subsequently terminated amounted to unconscionable conduct contrary to s 51AC of the Trade Practices Act 1974 (Cth)
AGENCY – whether master franchisee an agent for head franchisee
Trade Practices Act 1974 (Cth) ss 51AC, 51A, 52, 75B
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 applied
Campoman Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 applied
Ting v Blanche (1993) 118 ALR 543 applied
Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR 46-179 applied
Sykes v Reserve Bank of Australia (1999) 88 FCR 511 applied
Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276 cited
Hurley v McDonalds Australia Ltd [1999] FCA 1728 applied
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153; [2003] HCA 18 cited
Peterson v Moloney (1951) 84 CLR 91 applied
Massey v Crown Life Insurance Co. [1978] 2 All ER 576 applied
Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385 applied
Jones v Bouffier (1911) 12 CLR 579 applied
THE SILVER FOX COMPANY PTY LTD AS TRUSTEE FOR THE BAKER FAMILY TRUST (ACN 083 629 225), BRYAN WILLIAM BAKER & BEVERLY ANN BAKER v LENARD’S PTY LTD (ACN 010 711 145), THE POULTRY SHOP LEASING (SA) PTY LTD (ACN 060 052 020), POULET FRAIS PTY LTD (ACN 059 852 265) & RICHARD HAMOOD
SAD 70 of 2001
MANSFIELD J
17 SEPTEMBER 2004
ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY

SAD 70 OF 2001

BETWEEN:

THE SILVER FOX COMPANY PTY LTD AS TRUSTEE FOR THE BAKER FAMILY TRUST
(ACN 083 629 225)
FIRST APPLICANT

BRYAN WILLIAM BAKER
SECOND APPLICANT

BEVERLY ANN BAKER
THIRD APPLICANT

AND:

LENARD'S PTY LTD
(ACN 010 711 145)
FIRST RESPONDENT

THE POULTRY SHOP LEASING (SA) PTY LTD
(ACN 060 052 020)
SECOND RESPONDENT

POULET FRAIS PTY LTD
(ACN 059 852 265)
THIRD RESPONDENT

RICHARD HAMOOD
FOURTH RESPONDENT

JUDGE:

MANSFIELD J

DATE:

17 SEPTEMBER 2004

PLACE:

ADELAIDE

REASONS FOR JUDGMENT
INTRODUCTION

In late 1996 Bryan William Baker (Mr Baker) and Beverly Ann Baker (Mrs Baker) (together the Bakers) began to consider the acquisition of a business to operate together. At the time Mr Baker was employed full-time in the Australian Taxation Office, and Mrs Baker was employed full-time at Australian Citrus Growers. She changed her employment to Dentsleeve on 17 June 1998. One option the Bakers contemplated was the acquisition of a franchised business. It is not necessary to refer to the consideration which they gave to that process over the succeeding period, except to the extent that it relates to the respondents. In due course, on 29 July 1998 The Silver Fox Company Pty Ltd (Silver Fox) was incorporated, and established as Trustee for the Baker Family Trust. Silver Fox was the vehicle by which, ultimately, the Bakers gave effect to their plans. I shall nevertheless refer from time to time to the Bakers as running the business which is the source of the present claim, even though it was in reality Silver Fox.
In April 1997, the Bakers first expressed an interest in acquiring a Lenard’s franchise. Lenard’s Pty Ltd (Lenard’s) is the head franchisee throughout Australia for the ‘Lenard’s Poultry Shop’ franchises (Lenard’s shops). The franchising concept relates to the business of preparing fresh, ready to cook, gourmet poultry and other products for sale in retail outlets. There are a significant number of Lenard’s shops throughout Australia, including as at April 1997, 12 Lenard’s shops in South Australia.
Lenard’s operates through a series of master franchisees throughout Australia, including one for the territory of South Australia. Poulet Frais Pty Ltd (Poulet Frais) at all material times has been Lenard’s master franchisee for South Australia. Mrs Baker first contacted Lenard’s, and was referred to Richard Hamood (Mr Hamood). Mr Hamood at all material times has been the director of Poulet Frais.
The relationship between Lenard’s and Poulet Frais is governed by a Master Licence agreement. Poulet Frais was appointed master franchisee for South Australia on 1 June 1993.
The Poultry Shop Leasing (SA) Pty Ltd (Lenard’s Leasing) is a company controlled by Lenard’s. It is the vehicle which leased premises in South Australia secured for the purpose of making available Lenard’s shops to potential franchisees. The system involved a potential franchise shop being identified and secured by Poulet Frais through Mr Hamood. Mr Hamood negotiated the terms of the lease subject to Lenard’s approval. The lease was then taken by Lenard’s Leasing rather than by Poulet Frais. The property was then made available to the potential franchisee.
Under the Master Licence agreement, the master franchisee for a particular territory is obliged to seek prospective franchisees, to seek prospective premises for new Lenard’s shops within the territory, and to train, service and support Lenard’s franchisees within the territory. Generally speaking, the level of training required to be provided involves two weeks ‘in store’ before the franchisee commences operations, and a further two weeks in the particular Lenard’s shop once the franchisee has commenced operations.
Lenard’s provided to its master franchisees, including Poulet Frais, a Master Manual. It dealt with a number of topics including guidance for finding and assessing potential sites for new franchised Lenard’s shops.
Following the communications referred to below, the Bakers decided in mid 1998 to proceed to endeavour to secure a Lenard’s franchise. On 29 June 1998, they were told by Mr Hamood that a Lenard’s shop known as Shop 5, Hilton Plaza Shopping Centre, at Hilton in South Australia (the Hilton shop) was available at a total cost of $192,402. The Bakers resolved to adopt that option. They secured the necessary finance through the Commonwealth Bank of Australia (the bank) to enable them to proceed. Ultimately, on 4 September 1998 they signed a Franchise Agreement with respect to the Hilton shop. In fact, Silver Fox commenced operating that business on 2 September 1998.
The applicants allege that the corporate respondents, by entering into, and then subsequently terminating, the Franchise Agreement engaged in conduct that was in all the circumstances unconscionable, contrary to s 51AC of the Trade Practices Act 1974 (Cth) (the TP Act). They further allege that in the period leading up to the Franchise Agreement, the corporate respondents engaged in conduct which was misleading or deceptive or was likely to mislead or deceive contrary to s 52 of the TP Act. Mr Hamood is said to have been directly involved in that conduct, so as to render him also liable by reason of s 75B of the TP Act.
The principal foundation for the allegations are the documents entitled:
- ‘Profit from Our Experience’, provided to the Bakers in about April 1997.
- Information Pack provided to the Bakers by Mr Hamood on about 26 June 1997
- Disclosure Document dated 4 March 1997, and provided to the Bakers on about 6 August 1997 (Disclosure Document 1), which included a financial information package with weekly operational reports for the year ended 30 June 1997 in respect of three other Lenard’s shops, and explanatory notes.
- Disclosure Document dated 22 May 1998 provided to the Bakers by Mr Hamood on about 16 June 1998 (Disclosure Document 2), which also included a financial information package with weekly operational reports for three other Lenard’s shops for the year ended 30 June 1997 and explanatory notes.
- Letter of Offer dated 29 June 1998 including the proposed Franchise Agreement, with a schedule which (it is alleged) provided for a ‘minimum performance of $7,000 per week’, that is a figure of gross earnings below which there would be demonstrated a breach by the Bakers of the Franchise Agreement sufficient to warrant termination of the Franchise Agreement.
At present, it is not necessary to list all the representations which are alleged to have been made by reason of those documents. I will return to them. Apart from representations through those documents, it is also alleged that in about late June or early July 1998, Mr Hamood as agent for the corporate respondents conveyed to a Mr Kennedy of the Commonwealth Bank of Australia that the forecast sales of the Hilton shop were $10,000 per week, and that Mr Kennedy received that representation inter alia as agent for the Bakers. It is said to have led to confirmation of the minimum weekly turnover set out on p 5 of the financial information package contained in Disclosure Document 1 and Disclosure Document 2. Ultimately, the evidence did not support that representation having been made and I do not find that it was made, nor conveyed to the Bakers. A further oral representation is alleged to have been made by a Mr McDonnell on behalf of the respondents in August 1998 that the Hilton shop ‘would probably do’ $11,000 per week.
It is claimed that, in all the circumstances, the corporate respondents and Mr Hamood represented that the Hilton shop was ‘a middle of the range shop with the capacity to produce an operating net profit of $75,000 to $100,000 per annum’. It is also claimed that the representations in those documents amounted to a representation that ‘the site of the Hilton shop had been carefully chosen by the respondents and each of them drawing on [their] extensive experience’, and that the Hilton shop was a suitable site for a Lenard’s shop.
Unfortunately, weekly sales at the Hilton shop did not reach the levels which the Bakers and Silver Fox anticipated. During the period from September 1998 to August 1999, they averaged a little under $7,000 per week.
They could not afford, to continue to operate the Hilton shop, despite injections of further capital by them. They were unable to maintain payments under the Franchise Agreement.
On 12 July 2000 the Bakers were given notice of termination of the Franchise Agreement by Poulet Frais through Mr Hamood. On 15 July 2000 Poulet Frais took over operation of the Hilton shop. It then operated the Hilton shop and eventually sold it to a new franchisee in early 2002.
When the Franchise Agreement was terminated on 12 July 2000, it led to significant losses suffered by the applicants, including loss of their investment, loss of their opportunity to earn on the investment, loss of income which they otherwise would have earned had they not given up their employment to undertake the Hilton shop, loss of capital (caused by the realisation of an asset in a forced sale to secure further capital to inject into the business) and other expenses, as well as personal injuries for mental stress.
I observe that Lenard’s and Lenard’s Leasing were separately represented at the hearing distinct from Poulet Frais and Mr Hamood. Lenard’s and Lenard’s Leasing dispute any responsibility for the losses claimed by the applicants, quite apart from the alleged misleading character of the documents or the alleged unconscionable conduct, on the basis that neither Poulet Frais nor Mr Hamood were their agent in dealings with the Bakers or with Silver Fox. They claim that Mr Hamood was not authorised to act on their behalf. It will be necessary, therefore, when addressing the findings of fact to make findings on those issues.
THE COMMUNICATIONS
There is no real issue as to the fact of the documents referred to having been given to the Bakers as they claimed, nor as to their content. As their claim is based largely on those documents, it is not necessary to refer in detail to the full sequence of conversations between the Bakers and Mr Hamood. There were no relevant conversations with anyone else. I have noted above that the communication with the bank alleged in July 1998 was not one which has significance in relation to the applicants’ claims.
The starting point is the document called ‘Profit from Our Experience’.
Lenard’s published, and made available to its master franchisees including Poulet Frais, the document entitled ‘Profit from Our Experience’. It was an introductory document designed to be provided to potential franchisees of Lenard’s shops. It was four pages long, and general in its expression. It included the assertion that a Lenard’s shop would provide ‘excellent cash flow and return on investment’. It described the Lenard’s concept. It briefly described the nature of the relationship between Lenard’s and Lenard’s franchisees. It invited contact to Lenard’s. It concluded, under the heading ‘Like to Find Out More?’, the following:
‘Lenard’s has existing and proposed locations for sale throughout Australia and overseas, and can provide estimated costs and projections for these shops. You will need working capital, plus asset backing, and major banks have established finance packages specifically for Lenard’s poultry shops franchisees. If the Lenard’s concept and the opportunity for an excellent return on your investment appeals, then contact: …’
The contact details were those of Lenard’s
I do not consider the document ‘Profit from Our Experience’ to be of other than introductory significance to the applicants’ claims. Mrs Baker said she was impressed by its apparent professionalism, as well as the generally positive picture it presented to potential franchisees. It made no specific projections with respect to the Hilton shop. Nor did it contain any actual figures concerning the financial performance of any other Lenard’s shop. I accept that it did encourage the Bakers to further pursue the option of a Lenard’s franchise. Senior counsel for the applicants did not seek any finding that, given its generality, it conveyed any fact which was misleading or deceptive about Lenard’s franchisees as a general picture. The Bakers were aware that not all Lenard’s shops were the same, and that the financial profitability of Lenard’s shops differed from one shop to another.
However, that document did serve to preserve the Bakers’ interest in a Lenard’s franchise. They looked at several of the Lenard’s shops in suburbs of Adelaide. They considered the prospect of suggesting the establishment of a Lenard’s shop at Stirling in the Adelaide Hills. Mrs Baker asked Mr Hamood about the potential availability of a Lenard’s franchise. By arrangement, he showed them around a Lenard’s shop at Norwood. He raised the possibility that a Lenard’s shop might be established in the Unley Shopping Centre, and that the Bakers might be suitable franchisees of that shop.
On 26 June 1997, Poulet Frais sent to the Bakers a letter enclosing the Information Pack. The letter was signed for Mr Hamood. It described Poulet Frais as the ‘Master Franchisee – South Australia’. The letter invited the return of an application form, which was part of the Information Pack.
The Information Pack was prepared by Lenard’s and was made available to its master franchisees for distribution to potential franchisees. It spoke of ‘the Lenard’s advantage’, including that:
‘ … Lenard’s choose shop locations carefully, selecting quality shopping centres and areas within those centres which are close to supermarkets so that the distinctive Lenard’s Poultry Shop display windows gain maximum exposure.’
That page of the document also referred to the freshness of the product, the innovative nature of the product range, and the ‘Profit from Value Adding’. The document then included details of the directors of Lenard’s, the nature of its training and support, and a list of its existing franchised shops. It invited interested persons to submit an application form.
The information pack included a page headed ‘Financial Requirements’. It indicated that Lenard’s shops were available in the range of $160,000 to $275,000, depending upon the location, cost of fitout, establishment costs and the size of the store. Those costs included the licence fee, all plant and equipment required for the establishment of the shop, and the fitout in accordance with Lenard’s requirements. It then provided:
‘Other opening costs will be the responsibility of the franchisee and a schedule of estimated operating costs and working capital requirements will be supplied with other financial information prior to the signing of contracts.’
That page of the Information Pack explained that Lenard’s (as noted above, through Lenard’s Leasing) arranges and holds the lease to each Lenard’s shop. It explained that the franchisees were required to pay a weekly franchise or management fee of 4% of gross weekly turnover, and an advertising and promotion fee of 3% of gross weekly turnover. It then described the return on investment in the following terms:
‘Projected operating profit is determined by many factors including location of the store, commitment of the franchisee, gross sales, rent and occupancy costs, wages and other miscellaneous costs. It would be imprudent for Lenard’s to generalise on this issue, however, a realistic return on investment has been proven to be achievable.’
Mrs Baker’s evidence was that she was reassured by the professionalism of the Information Pack, by the assurances that Lenard’s chose shop locations carefully, and that a realistic return on investment was achievable.
After further consideration over the succeeding weeks, on 27 July 1997 the Bakers completed, and submitted, a Lenard’s franchise application. It was provided to Poulet Frais. It included personal particulars and references, a statement of assets and liabilities, and an undertaking to keep confidential the information then provided in response by the respondents. That undertaking was apparently given to Lenard’s.
The next step was the receipt by the Bakers of a letter dated 4 August 1997 enclosing Disclosure Document 1, including monthly comparison reports, weekly operating reports, weekly historical reports, and a financial package relating to three other Lenard’s shops. The letter was sent by Poulet Frais and signed for Mr Hamood.
Disclosure Document 1 described Poulet Frais, and Mr Hamood in particular, as having the role of establishing, developing and continuing growth and support of Lenard’s shops throughout South Australia. It referred to Mr Hamood combining his local knowledge with the experience gained from Lenard’s national team. It explained the nature of the relationship between Lenard’s and Poulet Frais, and between a franchisee and Poulet Frais, Lenard’s and Lenard’s Leasing. It included the following:
‘Written financial information with respect to sales targets, gross/net profit targets subject to various assumptions and parameters for a new outlet will be provided in the Six Page Financial Information Package … There is no guarantee that a Franchisee will achieve the same results as contained in any targets given, nor is it intended that a Franchisee should rely on them as a projection. A FRANCHISEE IS REQUIRED TO MAKE HIS/HER OWN INQUIRIES AND INVESTIGATIONS AND IS TO SATISFY HIMSELF/HERSELF AS TO POTENTIAL SALES, INCOME AND GROSS/NET PROFITS.’
The monthly comparison records related to three (unidentified) shops covering the period from 7 July 1996 to 20 April 1997. They produced percentage information on a monthly basis (apparently for the 12 month period to 30 June 1997), comparing average sales, and itemised expenditure items against a national average. There were then three sheets again apparently dealing with each of three unidentified shops. They are described as weekly operating reports. They record on a weekly basis the gross sales, the gross profit, items of expenditure, the operating profit and other information for each shop. In respect of the three shops, the gross sales varied between $794,217, $624,880 and $489,032 for the 12 months to 30 June 1997. The gross profit respectively was $383,133, $281,509 and $221,794. The gross profit percentage varied between 48.2 per cent and 45 per cent and 45.3 per cent respectively. The operating profit for each of the three shops for that year after identifying the expenses deducted (wages, rent, other and franchise and advertising levels) was $196,380, $88,983 and $52,253 respectively, identified also as a percentage operating profit on sales of 24.7 per cent, 14.2 per cent and 10.6 per cent.

Certain of that information was then extracted, and incorporated into the historical reports covering the same period, and the previous 12 months to compare those items with the previous 12 months. In each case the sales and gross and operating profits had increased.
The final document Disclosure Document 1 to which it is necessary to refer is a financial package. It contained, in respect of a hypothetical Lenard’s shop, a hypothetical profit and loss outcome based upon certain targets. The weekly targeted gross sales were offered in five options starting at $8,000 per week with $2,000 per week increments. The estimated gross operating profit was allowed for at 47 per cent. Deductions were then made for rent and promotions (a fixed amount), wages at 15 per cent of targeted gross sales, plus superannuation and compensation, insurance, power, telephone and postage, cleaning, and miscellaneous all at fixed amounts, packaging at 0.6 per cent, and the franchise fee and advertising levy (together totalling 7 per cent of gross sales). It is clear that the figures provided for wages excluded proprietor’s earnings as the document then identified a target operating net profit on the five gross sales hypotheses put forward ranging between $50,690 and $145,377 before drawings, tax and interest.
The sales target document included the following:
‘Lenard’s can give no guarantee, warranties, or assurances in relation to the potential of the gross sales or the profitability, if any, of this shop. You must select your own financial targets. Lenard’s takes no responsibility for any variance from the estimates you may experience as Franchisee after taking up the Franchise.’
The document was accompanied by explanatory notes reiterating that the gross sales or profitability in a Lenard’s shop are not guaranteed, and are subject to a number of factors beyond the control of Lenard’s. Many of the points are self-evident.
The second sheet of the financial package contained some detail of estimated establishment costs, broken into:

Plant, equipment and fitout costs $118,939

Establishment costs $18,868

Franchise licence fee $50,000

TOTAL $187,807

The establishment costs are identified as training expenses, leasing and franchise legal costs, stamp duty, uniforms, manuals and the like.

There was a third sheet of the financial package providing an indicative estimate only of working cash requirements commonly incurred by franchisees of Lenard’s shops. Again reference was made to the need to secure independent professional advice to determine the actual amount required, as Lenard’s said that it gave no guarantee that the nominated or indicative figures were the only working cash requirements, although every care had been taken in preparation of the estimates. The figure arrived at did not include opening ingredients or stock, or the franchisee’s legal costs or stamp duty. That was made plain.
The Bakers do not suggest that they were unaware of the reservations or cautions contained within that material. They appreciated that each Lenard’s shop was different, and that each operator would be different. They did, however, regard the materials as providing ‘parameters’ for projections relevant to the Hilton shop. It was not a guarantee. Mrs Baker explained that she believed, following consideration of Disclosure Document 1, that if she and her husband worked hard and diligently in accordance with the Lenard’s system, they could expect similar results. At this point, the Hilton shop had not become a real option. They were still considering undertaking the possibility of a Lenard’s shop at the Unley Shopping Centre, although Poulet Frais had not selected them as the proposed franchisees in respect of that shop.
In fact, on 21 August 1997 Poulet Frais wrote to the Bakers offering the franchise to the Lenard’s shop in the Unley Shopping Centre for an estimated cost of $187,807. A deposit of $10,000 was required. It was duly submitted. The cheque was subsequently returned. Apparently another potential franchisee had also submitted a deposit for that shop and was selected as the preferred franchisee.
The Bakers nevertheless maintained an interest in being a Lenard’s franchisee at some time in the future. In the meantime they maintained their employment and kept looking for other possible businesses. They had no further contact with Poulet Frais or Mr Hamood for some months.
On 29 May 1998, Mr Hamood contacted the Bakers to ascertain whether they were still interested in a Lenard’s franchise. He discussed four possible options, including the Hilton shop. The Bakers then received a proposed Franchise Agreement including a schedule containing details to which the agreement referred. The Franchise Agreement was ultimately executed only on 4 September 1998. Its terms did not alter. It is apparently a standard form document. The schedule to the proposed Franchise Agreement differed in some respects from that ultimately included in the Franchise Agreement as executed.
That contact in May was followed up by a letter from Poulet Frais to the Bakers dated 16 June 1998 enclosing Disclosure Document 2. It was expressed to contain information current to 22 May 1998.
As with Disclosure Document 1, Disclosure Document 2 contained the assertion that the Master Franchisee (Poulet Frais) or Lenard’s Leasing is responsible for site selection. It enclosed a five page pack of financial information headed ‘Lenard’s Poultry Shop – Hilton’, including sales and profitability targets, estimated costs and fees, estimated cash flow requirements, explanatory notes and an acknowledgment. That material was specific to the Hilton shop in the sense that it identified in its headings that it related to the Hilton shop. It contained a sheet entitled ‘Sales Target for the Initial 52 Weeks for Lenard’s Poultry Shop – Hilton’, enclosing ‘a series of sale targets and hypothetical operating profit and loss outcomes if the shop realises the various targets’. It repeated that Lenard’s could give no guarantee in relation to the potential of the gross sales or profitability of the Hilton shop, and that the Bakers should select their own financial targets. The only change from the figures previously provided was a rental figure of $29,750, some $4,000 less than previously. That led to adjustments to the target net operating profit ranging from $54,790 upon weekly gross sales of $8,000 to $149,477 upon weekly gross sales of $16,000. The sheet containing the estimated costs and fees had increased by $5,000 to $192,400 because the plant, equipment and fitout costs had increased by that amount. They were now described to include consultancy fees, that is a fee to be charged by Poulet Frais for managing the shop fitout. The sheet containing the estimated working cash requirements had increased by some $800 to allow for an increased advance rental payment. The explanatory notes were the same. They are significant enough to quote:
‘Neither Lenard’s nor any other persons guarantees your success, the gross sales or profitability in the franchise business. These matters are subject to a number of factors which are beyond the control of Lenard’s including (but not limited to) the following:
∙    Your personal commitment to the business
∙Your compliance with the Lenard’s system, which can and will be measured by the Lenard’s store evaluation process
∙    Your pricing policy
∙    Training and management of staff
∙    The gross profit you expect to receive
∙    Your willingness to utilise marketing devices
∙The location of the shop in the centre in relation to the supermarket, other food traders, main entrances and exits and car parking;
∙    The location and catchment area of the shopping centre
∙    Other tenants of the centre (both major and specialties shops)
∙    Neighbouring and/or competing shopping centres
∙    The prevailing economic climate and general business conditions
∙Consumer tastes and demands
∙    Any direct competition within the shopping centre
∙The management, operations and marketing of the shopping centre by the Shopping Centre owner or management.’
The Bakers noted that the financial information package was specifically headed by reference to the Hilton store.
On 29 June 1998, Poulet Frais wrote to the Bakers formally offering the Hilton shop to them as a Lenard’s shop for the estimated cost of $192,402. The asking price, as the Bakers then noted, was slightly less than the median selling price in previous figures. The Bakers assumed for the franchise for the Hilton shop that the projections with Disclosure Document 2 were broadly speaking to be understood as applicable to around the middle of the range for Lenard’s shops.
The Hilton Shopping Centre is at the north eastern corner of the intersection of Burbridge Road (now Sir Donald Bradman Drive) and Bagot Avenue, Hilton. It opened officially on 22 June 1998. It had actually been trading a little prior to that time. The Bakers inspected it on 20 June 1998. They made a decision to accept a franchise of the Hilton store, to commence in September 1998, subject of course to further events. At the time, the Hilton Shopping Centre was proposed to (and came to) have a Woolworths supermarket on its eastern side.
The principal shopping mall in the Hilton Shopping Centre ran north-south, with the main entrance at its southern end. There was also a western entrance at its northern end running onto the car park adjacent to Bagot Avenue. There was a short shopping mall running west from the main mall at that end, leading to the western entrance. There was a car park also at its southern end. Once fully tenanted (by December 1998), within the main mall, on its western side, there was a chemist shop, a post office, and then on the corner with the short western mall to the entrance to the west the Lenard’s shop, and then a Smokemart shop to the west of it adjacent to the entrance. On the western mall on its northern side there was (from the west) a Bank SA branch, a Baker’s Delight shop, and then a restaurant which abutted the northern end of the Woolworths store and was reached also at the northern end of the principal mall. There was a car park served by an escalator in the middle of the mall. The restaurant was called Café Hilton. In the middle of the mall, towards its southern end, was a centrally located Cross Lotto/Lotteries stall.
The Bakers discussed with Mr Hamood the options or potential options. They indicated that they preferred the Hilton shop option for geographical reasons. Having regard to their residence, the other options involved potentially too much travel time.
Designs were prepared for the Hilton shop, Shop 5. The tenancy was 48.6 square metres (some evidence suggests 45.5 square metres), with a frontage partly to the main mall, a diagonal frontage where the main mall and the western mall joined, and then a longer frontage to the western mall. The design contemplated a public display area and a closed area for a cool room and other servicing functions not visible from the public spaces in the shopping centre.
On 4 July 1998 the Bakers paid $10,000 deposit towards acquiring the franchise of the Hilton shop.
It is convenient to note certain matters at this point. The Franchise Agreement was between, and was executed by, Lenard’s, Lenard’s Leasing, Poulet Frais, Silver Fox and the Bakers as guarantors of Silver Fox’s liabilities under it. Its front page bore the address of Lenard’s, indicating its source. The relationship between Lenard’s and Poulet Frais was explained in cl 10.1 of the Franchise Agreement in the following terms:
‘The National Franchisor, the Master Franchisee and the Franchisee are each independent contractors. They are not and shall not be considered as joint venturers, partners or agents of each other and no fiduciary relationship shall be deemed to exist between them.’
Schedule 1 contained particular information relating to the Hilton shop. It included the following information handwritten by Mr Hamood:
‘Estimated costs:                   $142,402
Initial fee:  $ 17,000
Service fee:  $ 33,000
Minimum performance:         $    7,000 per week.’
In another version of Schedule 1 provided to the Bakers, those entries were left blank. The minimum performance figure was written in as $7,000 per week. Figures against the items for estimated costs, initial fee and service fee were put in at the direction of the Bakers and represent their understanding of the appropriate amounts. They were written in by their solicitor in the course of him perusing the Franchise Agreement and giving them advice about it in August 1998.
When the Franchise Agreement was executed, Schedule 1 was completed in typing. The estimated cost is recorded as $142,403. The initial fee was $16,000. The service fee was $34,000. Nothing turns upon those minor alterations. The minimum performance figure was entered as $6,000 per week.
The definition of those terms is contained within the Franchise Agreement. The relevant definitions are as follows:
‘ “Estimated Costs”: the estimated fees and outlays of the Master Franchisee or other consultants with respect to providing the Consultancy Services, Establishment Costs and costs of Fitout as set out in Item 12 of Schedule 1;
“Establishment Costs”: the initial training expenses of the Master Franchisee, franchise agreement and lease legal costs, stamp duty on the Lease, government and local authority fees, design work, tools of trade, ticketing systems, uniforms, manuals and stationery and other intangible expenses;
“Consultancy Services”: includes all services provided by the Master Franchisee or other consultants engaged by the Master Franchisee with respect to obtaining all approvals and consents of relevant authorities for the use of the System on the Premises, organising the Fitout and managing the Shopfitter on behalf of the Franchisee;
“Fitout”: used as a noun means all plant and equipment, fixtures and fittings, signage, colour schemes and other goods, matters and things required under this Agreement to prepare and make ready the Premises for operation of the Franchised Business and, used as a verb means the complete installation of the same;
“Initial Fee”: the payment referred to in Item 13 of Schedule 1, being a fee paid for:-
(i)the grant of the licence to occupy the Premises;
(ii)the right to use the Trade Mark(s);
(iii)the right to use the System;
(iv)the right to use the Permitted Name and the trade name under which the National Franchisor sells the Products;
(v)all other elements of the System not specifically referred to above;
“Service Fee”: the payment referred to in Item 14 of Schedule 1, being the fee paid for the know-how, trade secrets, product specifications and other confidential information necessary for the operation of the Franchised Business in accordance with the provisions of this Agreement and the Manuals;’
It is appropriate to record the significance of the minimum performance amount. That term is defined to include the achievement by the franchisee of the amount set out in Item 16 of Schedule 1 (relevantly, initially $7,000 per week and in the Franchise Agreement as executed $6,000 per week). Clause 20.1(e) indicates the significance of that figure. It provides:
’20.1The Master Franchisee may in its absolute discretion terminate this Agreement immediately by giving written notice to the Franchisee on the occurrence of any one or more of the following:
…
(e)in the event that the Minimum Performance or either of the elements of Minimum Performance is not achieved for three consecutive months or in any financial year during the Term;’
I find that the figure of $7,000 per week as the minimum performance of gross weekly revenue as first presented to the Bakers, and then the figure of $6,000 per week as the minimum performance as included in the Franchise Agreement as executed, was a figure inserted by Mr Hamood without consultation with the Bakers and without drawing to their specific attention the significance of that figure. Mr Hamood did not recall how the minimum performance figure was fixed by him. Apart from one shop, the minimum performance level for other Lenard’s shops in South Australia varied between $6,000 and $7,000. He does not recall why he changed the figure to $6,000 in the executed Franchise Agreement schedule although he said it was not a consequence of any revised view he had about the potential turnover of the Hilton shop. He suggested he wanted to give Silver Fox ‘some latitude in the performance standards expected by Lenard’s’. I have found that he made the change without reference to the Bakers, and without discussing it with them or pointing it out to them. For reasons which appear below, I do not, however, think the change indicates any underhanded conduct by Mr Hamood or any attempt by him to conceal information from the Bakers about his views as to the prospects of the Hilton shop.
Nevertheless, when the detail of Schedule 1 was first presented to the Bakers, I accept Mrs Baker’s evidence that she noted it and understood what it referred to. She saw the figure of $7,000 per week and understood its significance. The fact that she caused her solicitor Mr Hart to insert that figure in a version of Schedule 1 when the Bakers consulted their solicitors in August 1998 tends to confirm that. In addition, I accept that Mrs Baker inferred from that figure, consistent with the information which she had already received, that Poulet Frais and Mr Hamood expected that the Hilton Shop would in the ordinary course have a gross weekly turnover comfortably in excess of $7,000 per week. It was in my view reasonable for her to draw that inference as it was obviously unlikely that Poulet Frais would insert a minimum performance figure in the Franchise Agreement which it did not regard as realistic, or which it did not regard as likely to be achieved. The consequence of doing so otherwise would be that Poulet Frais (and Mr Hamood) had inserted in that document a minimum performance for weekly gross sales which would impose upon Silver Fox a burden which it could not reasonably be expected to attain, and which therefore would lead to Poulet Frais having a prompt foundation for termination of the Franchise Agreement.
I further accept Mrs Baker’s evidence that, when she came to sign the Franchise Agreement, she did not notice the change from the minimum performance figure of $7,000 per week to $6,000 per week.
Although the Bakers were not, by the end of July 1998, formally committed to undertaking the franchise of the Hilton shop, the Bakers proceeded to implement their plans to do so. In early August 1998 they resigned their respective permanent jobs. They each ceased those jobs on 7 August 1998. They had by that time consulted with the Commonwealth Bank of Australia, through Mr Kennedy, and subsequently received from the bank confirmation of a funding package totalling $211,666. The funding package was a combination of a business loan of $105,000 to assist in the payment of the franchise fee and establishment costs, hire purchase finance of $90,000 to assist in the purchase of plant and equipment as part of the fitout of the Hilton shop, a credit card facility limited to $10,000 to provide working capital, and a bank guarantee. Those financial arrangements were duly implemented. The Bakers provided security by way of a second registered mortgage over their property at Bugle Range to support that borrowing, as well as a mortgage and bill of sale over their interest in the Hilton shop. They also transferred an existing mortgage over their home at Bugle Range to protect existing borrowing on that property to the bank, secured by a first registered mortgage over that property.
In August 1998, by a reference of Mr Kennedy, the Bakers consulted accountants Hincks & Smith and solicitors Scales and Partners (Mr Hart). Mr Hart arranged for the incorporation of Silver Fox and for the establishment of the Baker family trust. The Bakers also proceeded with the routine documentation in anticipation of executing the Franchise Agreement, such as arranging insurance, entering into supply arrangements for the supplies of product, and the securing of staff. On 10 August 1998 the Bakers commenced their ‘in store’ training at Lenard’s shops at West Lakes and at Arndale. That training was largely conducted through John McDonnell (Mr McDonnell), the training officer provided by Mr Hamood. That training continued for about two weeks. Mr McDonnell assisted them in selecting staff which, on his advice, included two full-time and one part-time food preparation staff and several sales staff as well as the Bakers themselves.

During August 1998, the fitout of the Hilton store was also arranged through Poulet Frais (Mr Hamood). The fitout was completed by about the end of August 1998. The Bakers attended the Hilton shop to commence setting up for the business on 31 August 1998, a Monday, so that the Hilton shop could open on the following Wednesday, 2 September 1998. On their behalf, Mr McDonnell or Mr Hamood arranged for the first supply of product and dry goods to be delivered to the Hilton shop. On 31 August 1998, their staff also attended to commence preparing products for the opening in accordance with the Lenard’s formulae. During that week, the Bakers had the assistance of Mr Hamood and Mr McDonnell from time to time with respect to product make up, window filling – the display of product – and sales. They formally commenced operating the Hilton shop on 2 September 1998.
As noted earlier, they did not sign the Franchise Agreement until 4 September 1998.
As it has been referred to in submissions, I should note cl 26.4 of the Franchise Agreement. It provides:
‘The Franchise and Guarantor respectively acknowledge that:
(a)Neither the National Franchisor, Leasing nor the Master Franchisee have made any representation nor given any warranty to the Franchisee or to the Guarantor or to any person on behalf of the Franchisee or Guarantor that the Franchised Business will be successful and produce turnover, gross or net profits at any particular level or rate or at all and that any material made available by the National Franchisor, Leasing and/or the Master Franchisee and any statement made by the National Franchisor and/or the Master Franchisee were the National Franchisor and/or the Master Franchisee’s own personal material and/or estimates and the Franchisee has in entering into this agreement relied on its own personal assessments and enquiries with respect to the Agreement and the business proposed.
(b)They have understood the need to carefully read and consider the terms of this Agreement and to obtain independent legal and accounting and financial advice on the meaning of the provisions of this Agreement and their legal and practical effect before entering into this Agreement or conducting the Franchised Business.’
The Bakers were aware of that clause at material times, including when they signed the Franchise Agreement. I accept their evidence that they knew at the time that they signed the Franchise Agreement that they had received some information from one or more of the respondents as to the prospects of the Hilton business in the documents already referred. I also accept that they realised that in strict terms that clause 26.4 may not have been accurate. I also accept their evidence that they did not feel empowered to dispute that that clause should appear in the Franchise Agreement. They were also aware that the respondents or at least Poulet Frais were the source of, and therefore knew of, those earlier communications. Theirs was, I think, a realistic attitude to take. Clause 26.4 was part of an apparently standard document, and was seen by them only as part of the communication process between them and one or more of the respondents through the documentary material to which I have referred. They had confidence in the reliability of that material. (It is not necessary in this context, for the reason I have already given, to refer to the oral representation alleged as to the probable turnover of the Hilton shop as allegedly conveyed by Mr Hamood to Mr Kennedy, because I have not accepted on the balance of probabilities that such a representation was made by Mr Hamood to Mr Kennedy, or if it was that it was conveyed to the Bakers.)
ISSUES
So far as I can discern, there are eight representations alleged by these applicants to have been made by the respondents or by some of them which, it is claimed, are misleading and deceptive and in fact misled and deceived them so that they came to enter into the Franchise Agreement. Six of those representations are said to be derived from the written communications referred to above. The other two are oral representations.
One of the oral representations, as I have found, either did not occur or if it occurred was not conveyed to the Bakers in terms upon which they relied. That is the representation said to have been made by Mr Hamood to Mr Kennedy of the Commonwealth Bank of Australia in late July 1998 that he expected the Hilton shop to have an average weekly gross revenue or turnover of about $10,000 per week. As I have said, Mr Kennedy did not recall such a representation having been made, and Mr Hamood denied having made such representation. I am not satisfied on the evidence that such a representation was made. Mrs Baker did not recall learning of any such representation by Mr Kennedy, and I think Mr Baker must be somewhat mistaken in his evidence that he did hear from Mr Kennedy words to that effect. Even if he did, such evidence is not admissible to prove the fact of the communication as alleged by Mr Hamood to Mr Kennedy. There is no direct evidence of it, and I am not prepared to infer such a representation was made in all the circumstances.
The second oral representation is one alleged to have been made by Mr McDonnell to the Bakers in the course of their ‘in store’ training during August 1998. The Bakers claim to have been told by Mr McDonnell that the Hilton shop ‘would probably do’ $11,000 per week.
Mr McDonnell commenced working with Poulet Frais in March 1996 as a field consultant or field officer, having responsibility for liaising with Lenard’s shop franchisees in South Australia and addressing their needs. His duties from time to time also included managing certain Lenard’s shops in South Australia as well as being involved in the opening and establishment of new Lenard’s shops including the Hilton shop. His duties have also included managing the Lenard’s shop at Arndale in South Australia, and it is from that shop that he largely conducted training for new franchisees (including the Bakers). As well as the pre-opening training, he would then attend the premises of the new franchisee upon them commencing business to ensure that they were operating in accordance with the Lenard’s system and that they did not require further assistance, or if they did so to provide that further instruction and assistance. As field consultant, he would also periodically visit all franchisees to ensure their adherence to and understanding of the Lenard’s system and to provide such advice as was appropriate. Those visits apparently occurred quite regularly, approximately fortnightly. He was also available to franchisees to respond to their requests.
Since the Bakers franchise of the Hilton shop was terminated, Mr McDonnell has become the franchisee of the Lenard’s shop at Stirling.
Mr McDonnell impressed me as an honest and frank witness. I find, upon his evidence that he did not promise the Bakers during the course of their training at Arndale that they would have a turnover per week in the order of $11,000. He accepted that there may have been some conversation about the potential turnover at the Hilton shop. That is a natural topic of conversation during the course of training. However, I accept that he did not specifically indicate a turnover figure to them as a probability. Indeed, it is highly unlikely that he would have suggested such a figure, as it was in fact more than the weekly turnover at the Arndale shop and there appears to be no reason why the Hilton shop should have been instantly more successful than the Lenard’s shop at Arndale, which was in a bigger and already established shopping centre. That is not to say that the figure of $11,000 per week was not raised by the Bakers in discussions with Mr McDonnell. Mr McDonnell did not deny that it may have been. The source of that figure, in my view, is an observation made by Mr Farrow from Hincks & Smith in the course of his discussions with the Bakers about their business prospects. It is common ground, or at least not contested, that Mr Farrow told the Bakers that they would need to have a turnover or revenue of about $11,000 per week for the Hilton shop to work well as a profitable business. That was within the range of figures which have been provided, by way of sample figures, to the Bakers through the financial information package. In my judgment, it is likely that, having been given that particular advice by Mr Farrow, the Bakers did raise with Mr McDonnell that figure. However, I do not find that Mr McDonnell affirmed to them a view that the Hilton shop would, or was likely to, turn over $11,000 per week although he may have indicated to them that it was possible the shop might do so. I do not accept that he made anything in the nature of a representation or promise to them as to having a probable turnover of that order.
It is then necessary to revert to the particular documentary representations alleged.
They are as follows:
(1) Disclosure Document 1, and then Disclosure Document 2 provided with the heading specific to the Hilton shop, are alleged to have indicated through the weekly operating reports representations of the figures for three particular but unspecified shops as follows:

‘Year Total Shop 1 Shop 2 Shop 3

Gross Sales

489,032

624,880

794,217

Gross Profit

221,794

281,509

383,133

GP as % of GS

45.3%

45.0%

48.2%

Operating Profit

52,253

88,983

196,380’

(2) Disclosure Document 1, and then, again by reference to the Hilton shop, Disclosure Document 2 contained hypothetical sales and profitability targets and hypothetical operating profit incomes for a series of five weekly sales targets of $8,000, $10,000, $12,000, $14,000, and $16,000 per week. For the outer and middle of those figures the information provided was as follows:

‘Weekly Target
Gross Sales

8,000

12,000

16,000

Annual Target
Gross Sales

416,000

624,000

832,000

Estimated
Gross Profit 195,520 293,280 391,040

Estimated Target
Operating Profit

50,690

98,033

143,377’

Each of those documents made it plain that the Bakers should select their own financial targets, and the figures provided constituted hypothetical operating profit outcomes that may be realisable. They also included the explanatory notes referred to in [42] above. They also included the observation that the gross profit of 47 per cent is achievable based upon the experience of other Lenard’s shops, but was vulnerable to factors such as competition, pricing strategy, and the extent of the market. They also indicated that the hypothetical performance was subject to the productivity, management and commitment of the franchisees. Specifically it was said that the figures provided are ‘a sample only and do not constitute forecasts’.
(3) The content of Disclosure Document 1, and then in the context of the Hilton shop Disclosure Document 2, through representations (1) and (2) above are said to have indicated to the Bakers:
(a)that provided a franchisee complied with the Lenard’s system, and in the light of Poulet Frais having been responsible for suitable site selection, a representative net operating profit was indicated by the targets provided and was therefore represented as a representative net operating profit for the Hilton shop, and secondly
(b)that a minimal performing shop would produce an operating net profit of approximately $50,000 and a high performing shop would produce an operating net profit of approximately $145,000.

(4)       The minimum performance figure of $7,000, in context, and in the light of those other documents was said to involve a representation by inference that in the ordinary course the Hilton shop would produce a weekly turnover comfortably greater than $7,000 per week. The fact that that minimum performance figure was reduced to $6,000 per week in Schedule 1 of the Franchise Agreement as executed (without the awareness or focus of the Bakers) is said to indicate a lack of confidence on the part of Poulet Frais and Mr Hamood as to the potential of the Hilton shop and, by failing to draw that cautious view to the attention of the Bakers, to constitute a misrepresentation by silence as to the reliability or applicability of the information previously provided. It is said to be noteworthy that, on an internal document provided by Poulet Frais to Lenard’s, Mr Hamood had about that time assessed the estimated weekly sales for the Hilton shop as low to medium without proffering a dollar figure. I have rejected the claimed significance of that change above.
(5)       By reason of the Information Pack conveying to the Bakers that the range of prices for a Lenard’s shop varied between $160,000 and $275,000, and by reason of the nominated price for the Hilton shop of approximately $192,400, the respondents are said to have represented that the Hilton shop was a middle of the range shop with the capacity to produce an operating net profit of the order of $75,000 to $100,000 per annum (based upon the hypothetical profit outcome contained in the financial packages that are part of Disclosure Document 1 and Disclosure Document 2. That potential range of net operating profit is said to have been inferred as a representation by them, as they applied the asking price to the range of prices which they were informed is usual for Lenard’s shops, and it fitted then somewhere between the second and third of the hypothetical operating profit outcomes provided from the sales and profitability targets in the financial package.
(6)       Finally, having regard to the initial contents of the ‘Profit from Our Experience’ document concerning Lenard’s experience in selecting locations for Lenard’s shops, and the Information Pack also asserting that Lenard’s choose shop locations carefully, and having regard to the fact that in Disclosure Document 1 and in Disclosure Document 2 it is asserted that Poulet Frais or Lenard’s Leasing is responsible for site selection, by the offer of the Hilton shop to the Bakers as a Lenard’s franchise on about 29 June 1998, it is asserted that the respondents represented that the site of the Hilton shop had been carefully chosen by them drawing on their extensive experience, and that it was a suitable site for a Lenard’s shop.

The respondents in their respective defences do not acknowledge that any such representations were made. Moreover, they deny that if any of the representations alleged are found to have been made the representations were false or misleading. Insofar as the representations were with respect to any future matter, the respondents assert that there were reasonable grounds for making each of them. Those reasonable grounds are particularised at some length. They relate to the location of the Hilton shopping centre and its facilities, the nature and mix of the proposed tenants in the Hilton shopping centre, the location of the Lenard’s shop within the Hilton shopping centre in relation to other shops, the quality of nearby shopping centres that might reasonably be considered as providing competitive services with the Hilton shopping centre, the decision of Bakers Delight to establish one of its franchise stores in the Hilton shopping centre, the performance of other Lenard’s shops in South Australia (it is said that in the 12 months to August 1997 no South Australian Lenard’s shop averaged gross sales of less than $8,000 per week and in the period of 12 months to June 1998 less than $9,000 per week), and the experience and success of Mr Hamood in selecting Lenard’s shop sites in South Australia over a period of some 15 years.
The allegation that the representations were false and misleading is general. It is asserted the representations were false and misleading because the Hilton shop:
(1)was not capable of producing the net operating profit associated with a weekly turnover in the order of $10,000 per week;
(2)was not chosen carefully by drawing on the extensive experience of the respondents, and
(3) was not capable of producing a realistic return on investment.
The Lenard’s shop when it commenced and for the succeeding 12 months had an average weekly turnover of only about $6,944 per week. For the first six months, the average weekly turnover was $6,609 a week and it increased only slowly over the succeeding second six months. In the first six months, 18 of the 26 weeks resulted in weekly turnover of less than $7,000 per week, and six of those 26 weeks (but in no period of three weeks in succession) resulted in weekly turnover of less than $6,000 per week. For the period after 39 weeks of operation, the average turnover exceeded $7,000 per week until the franchise was terminated. In the period from September 1999 – that is in the second year of operations – until the termination of the Franchise Agreement (a period of 46 weeks), the average weekly turnover was about $7,587 per week.
The alternative claim of the applicants is based upon s 51AC of the TP Act. It is based upon the termination of the Franchise Agreement on 15 July 2000, following which Poulet Frais took over the operation of the Hilton shop. That conduct, and its timing and circumstances, is alleged to have constituted unconscionable conduct contrary to s 51AC of the TP Act. The applicants allege that the respondents were aware of the weekly turnover which Silver Fox had achieved during the period of the Franchise Agreement and of the serious loss and financial hardship which they had experienced as a result, including the application of further personal financial resources to maintain the operation of the Hilton shop. They allege that the respondents were aware that their difficulties in maintaining the payment of fees and levies as required by the Franchise Agreement was due to the low turnover. They claim that it was unconscionable to terminate the Franchise Agreement at a time when, for the first time in the period of the operation of the Franchise Agreement, they had had a period of four successive weeks during which their turnover exceeded $8,000 per week. They complain further that the respondents then have had the benefit of operating the Hilton shop since July 2000, including the plant and equipment in respect of which the applicants had entered into hire purchase commitments or guarantees and have failed to account to the applicants for the benefit of its operations. Reliance is also placed upon the relative bargaining positions of the respondents and of the applicants, upon the obligation of the applicants to comply with conditions under the Franchise Agreement that ‘were not reasonably necessary for the protection of the legitimate interests of the corporate respondents’ and that the termination effectively caused them to lose the establishment costs of $104,000 and the fitout costs secured by hire purchase agreement of $88,500, in circumstances where Poulet Frais was able to acquire or take over the Hilton shop and to make use of those assets and ultimately to dispose of the Hilton shop for its benefit rather than that of the applicants. They further claim that Poulet Frais did not actively market the Hilton shop as it was required to do, so as to sell the Hilton shop franchise to some other person or entity and to give them the benefits of any sale proceeds.
Apart from denying any unconscionable conduct on their part, the respondents also plead that the conduct complained of was not unconscionable within the meaning of s 51AC of the TP Act because it occurs ‘in connection with the supply or possible supply of goods or services to the applicants’ and/or ‘the acquisition or possible acquisition of goods or services’ by the applicants at a price in excess of $3 million, or in relation to the conduct pleaded as having occurred prior to 1 July 2000 at a price in excess of $1 million. That claim is based upon the price paid for the Lenard’s shop of $192,402, plus the franchise fee and advertising levy contemplated by the Franchise Agreement (totalling 7 per cent of turnover) extended for a period of 10 years, plus the rental of $23,400 per year also extended for a period of 10 years (the lease was for five years, with three options for renewal each of five years), plus the supply of product by one of the respondents or a supplier approved by Lenard’s over a 10 year period under the charge back facility (calculated at 50 per cent of an estimated turnover of either $6,000 per week or $9,000 per week – respectively $165,336 or $248,040 multiplied by 10).

In addition to those issues on the pleadings, the respondents dispute that the applicants relied upon the alleged representations, and assert that in entering into the Franchise Agreement the applicants relied upon their own investigations in relation to other Lenard’s shops at Norwood, Unley and Stirling, conversations with franchisees of other Lenard’s shops, their own commercial experience, their own assessment of the financial prospects of the proposed franchise of the Hilton shop, and advice from their accountant and solicitor.
Certain of the material referred to in [74] is not in issue, although the applicants dispute that they did not rely upon the alleged misrepresentations. They acknowledge that they had previously owned and operated a fruit and vegetable business, and that Mr Baker had worked as a client manager (large clients) with the Australian Taxation Office. Prior to entering into the Franchise Agreement, they had obtained certain independent legal advice from Mr Hart and accounting advice from Mr Farrow of Hincks & Smith. Mr Hart had provided a certificate to the effect (inter alia) that he had explained to the Bakers the contents and effect of the Franchise Agreement, its obligations and the associated risks and that the Bakers appeared to understand its terms and their obligations under it. Mr Farrow provided prior to the execution of the Franchise Agreement a certificate which indicated, inter alia, that he had explained to the Bakers and to Silver Fox the financial aspects of entering into the Franchise Agreement and the business and associated risks, and that they appeared to understand it. The applicants accepted that they had had the Franchise Agreement explained to them including the associated legal and business risks, and had had its financial aspects explained to them by Mr Garrow. That reflects cl 23.4 of the Franchise Agreement which records that:
‘The Franchisee and Guarantors specifically acknowledge that in relation to this agreement and particularly with regard to the consequences of clause 23, it has received legal advice or has had the opportunity of obtaining legal advice.’
The applicants also acknowledge the terms of the financial package in Disclosure Document 1 and in Disclosure Document 2. Page 5 of the financial package included the following:
‘I acknowledge receipt of this five page package which includes target sales and profit and loss and other information on the basis that I acknowledge that:
1.I have undertaken, or will undertake, my own investigations about the proposed franchise business and its potential for me;
2.I have taken or will take independent legal, accounting and/or franchising consultant advice; and
3. I have not relied and will not rely upon this material.
4. I understand that the figures contained in this document are given as a sample only and do not constitute forecasts. After having obtained professional advise and made my own independent inquiries I will choose my own target figures.”
One might rhetorically ask what was the purpose of providing the financial package information at all. One would assume that it was what it represented itself to be, namely a series of sales targets and hypothetical operating profit and loss outcomes if the proposed franchised shop realises the various alternative targets. One would assume, as one might readily have drawn from the samples of the three shops already provided, that the targets had some relationship to the reality experienced by Lenard’s. There would be little point, for example, in providing a document containing details of sales targets and hypothetical operating profit and loss outcomes for a weekly turnover of (say) $10 per week or $10 million per week. To expect a person in receipt of that material not to read it or to give it some consideration, and not to have any regard to it (as par 3 of the quoted passage suggests) is unrealistic. I find nevertheless that the Bakers did sign that acknowledgement and returned it to Poulet Frais on about 6 August 1997. They also returned a similar document in respect of the financial information in Disclosure Document 2 on about 17 June 1998.
The Bakers formally acknowledge that they made certain inquiries and investigations (as set out in a letter from their solicitors dated 17 May 2002). However, in forming their decision to enter into the Franchise Agreement they positively deny having placed reliance upon their own commercial experience or upon their own assessment of the financial prospects of the Hilton shop. They did not seek the advice of their solicitor or of their accountant as to the accuracy or reliability or reasonableness of the information provided by the documents referred to in par [69] above.
There is a further issue relating to the conduct of the applicants. It is alleged that the applicants were the authors of their own loss and damage. Particulars are given by each of the respondents. It is claimed that:
‘(a)In breach of clause 14 of the Franchise Agreement that is exhibit RKH36, the applicants failed to accept reasonable directions and advice from the third and fourth respondents and persons engaged by the third and fourth respondents and, in particular, Catherine Louise Jenner Barrett, John Patrick David McDonnell, Jarryd Anthony Smith, Benjamin Leslie White and Peter James Rugless;
(b)the applicants consistently failed to utilise the whole chicken in order to maximise the most efficient and most profitable products available;
(c)the applicants failed to take all reasonable steps to promote their business and its products including:
(i)failing to regularly cook product and make samples available to the public;
(ii)failing to consistently properly display product in the shop window including failing to ensure that the window was constantly filled with product, with the products being properly described and priced;
(iii)failing to consistently promote to customers or prospective customers products in addition to those in which the customer or potential customer was initially interested;
(iv)failing to ensure that customers or potential customers were consistently served within 15-30 seconds of arrival or, if not doing so was unavoidable, were acknowledged;
(v)failing to consistently ensure that each customer or potential customer received a high level of service;
(vi)failure to consistently offer multiple buys of high value lines (e.g. shaslicks and marinated meats).’
It will be necessary to address those issues in the course of considering the evidence.
Finally, in relation to the issues arising under the pleadings, Lenard’s has pursued a cross-claim against Silver Fox, and the Bakers as guarantors of its liability, under the Franchise Agreement. The cross-claim is for amounts allegedly owing between September 1999 and July 2000 by way of advertising contribution, defined as 3 per cent of gross turnover. That is part of the 7 per cent of gross turnover which was payable to Lenard’s pursuant to the Franchise Agreement. In addition, there is a claim for $14,922 also said to be owing by Silver Fox to Lenard’s for poultry and dry goods which, pursuant to a charge back facility authorised following the Franchise Agreement but in accordance with its terms, Silver Fox was able to order poultry and dry goods from suppliers to be debited to Lenard’s and then the subject of reimbursement by Silver Fox to Lenard’s. There are amounts outstanding totalling that figure for invoices issued in the period August to December 1999. That amount is guaranteed by the Bakers. Notice of default was served upon Silver Fox on 31 March 2000 in respect of that amount and it has not been paid. That is the full amount of $21,416.
The applicants do not dispute those calculations, but dispute liability to make the payments claimed because the inability to make the payments claimed was, it is alleged, the direct result of the conduct of the respondents as alleged in the statement of claim.
EVENTS FROM SEPTEMBER 1998
There is no doubt that the operations of the Hilton shop proved unsuccessful in the hands of the Bakers. Initially, its gross sales were much lower than anticipated and its gross profit percentage was also very low. I will make detailed findings about the course of events, and its causes, below. A brief picture is as follows.
The consequence of the poor trading outcome for Silver Fox in effect from the time it commenced trading on 2 September 1998 was that the cash flow projected did not eventuate. Not only was the gross revenue significantly lower than anticipated, but the gross profit percentage was also much lower than anticipated.
Over the succeeding months, because the business of Silver Fox did not generate the cash flow which had been anticipated by the Bakers, they applied further personal resources towards its sustenance. The pressure to do so was overwhelming. Silver Fox did not maintain the payments to the bank which it had committed to. The Bakers spoke quite often to Mr Hamood and to Mr McDonnell, who encouraged them to persevere as they each in my view believed that the Hilton shop should be successful. In June 1999, the bank reduced the existing overdraft as it was overdrawn and required that account to be cleared. Mr Baker, upon his retirement from the Taxation Department, was entitled to a lump sum superannuation payment of $77,668, and to a termination payment for accrued entitlements of $9,533. Those sums were said to have been advanced to Silver Fox to enable it to keep operating. As Silver Fox has no value, and no assets, the loan of those amounts has no value. The same applies to the superannuation entitlement and to the termination payments received by Mrs Baker of $14,661 and $11,217 respectively. She cashed in her superannuation entitlement in October 1999, but it reduced the immediate cash flow pressures only for a period of several weeks.
At the start of 2000, Mr Baker inherited $17,308. That sum too was said to have been applied to relieve financial pressure in the business, as the Bakers had no other cash resources available. Their credit limits were already exceeded, and they were under pressure from the bank to reduce their borrowings. However, the cash flow difficulties persisted.
As noted, on 12 July 2000 the Bakers were presented with a notice of termination.
On 19 July 2000 the bank made demands on the Bakers and Silver Fox for $85,685 outstanding on their bank loan. The credit card facility was also cancelled. On 31 July 2000 notice of the default was given to the Bakers to enliven its power of sale of secured property, their home at Bugle Ranges, in respect of the indebtedness.
The bank allowed the period to 31 October 2000 for the plant and equipment to be sold to realise the repayment of the sum outstanding for plant and equipment. That period was extended from time to time.
The Bakers were then given notice of mortgagee sale in respect of their home at Bugle Ranges on 25 September 2000. By arrangement with the bank, they agreed to sell the property on their own account. They ultimately did so in early 2001. They had a small equity surplus only, after repaying the monies owing to the bank arising from the transferred mortgage and the borrowings made to acquire and conduct the Hilton shop.
Following the termination of the franchise of Silver Fox, the Bakers have had only spasmodic short term employment. They have worked at a chicken shop at Mount Barker, and as cleaners. Since the sale of their home at Bugle Ranges, they have moved to inferior accommodation at Goolwa. They have also had some part time cleaning work, and Mr Baker has done some casual gardening work and Mrs Baker some part time bookkeeping work.
I accept the Bakers’ evidence that they have, by their unsuccessful venture into the Hilton shop, ‘lost virtually everything’. They have lost their superannuation and other employment prospects. They have lost most of the equity in their home, and have had to sell their home. They sold the Bugle Ranges house on 31 March 2001. They now live in inferior accommodation at Goolwa and work only part-time in manual employment. Mr Baker is now 65 years of age and Mrs Baker 60 years of age. The business venture which was expected to ‘top off’ their working lives and to set them up for retirement with their existing capital resources failed to do so.
I find that, as they claim, they have each had considerable difficulty coming to terms with their experience in the Hilton shop. I find Mr Baker has been the more affected of the two of them. There is really not much difference between the two psychiatrists who have examined Mr Baker. The difference in their views is explained by the different times at which they examined Mr Baker. One examination was in May 2002 and the other in October 2002. I find that the experience of Mr Baker, and the consequences, as a result of his involvement in the Hilton shop led him to developing a moderate depressive illness, although not of ongoing duration. His ability to concentrate was adversely affected for a time. He largely withdrew from social activities, and had a general loss of interest in any activities. His symptoms included feeling sad and a significant loss of energy. By October 2002, he had recovered well enough to no longer be diagnosed with depression, and his outlook was more positive. That seems to have coincided with a part-time job at the Goolwa Marina cleaning boats.
I do not think Mrs Baker suffered to such an extent. She was diagnosed with a mood disorder in May 2002 caused by the collapse of the Silver Fox business and its sequelae. Although that led to irritability and feelings of sadness, she too recognised the need to confront those problems. Her concerns were also focused by worry about the change of mood and attitude of her husband. Again, by September 2002 her symptoms had improved to the point where she no longer had any diagnosable psychiatric illness.
The Bakers are now getting on with their lives, although in much more straightened circumstances than they enjoyed before they entered into the Franchise Agreement. Their financial loss as a result of the unsuccessful business venture is at least:
Loss of business capital  $123,851
Net salary and superannuation foregone           $143,073
  $266,924
There is a dispute between the expert accounting witnesses as to whether in addition they have suffered a further capital loss of $100,687. That sum is calculated from the superannuation and termination payments and the inheritance received all put into the business (totalling $130,337) less $29,650 benefit received from the business which would otherwise be double counted by reason of the allowance for loss of business capital, and as to whether any allowance should be made for ‘loss of opportunity income’. There is also a dispute as to whether they should recover damages for any psychological injuries.
The issue as to the claimed further capital losses almost dissolved upon further information being received. The amounts upon which that calculation was based were ultimately identified as largely applied to reducing personal indebtedness to the bank. The reformulated quantification, subject to two aspects, reflects more accurately the Bakers’ losses. The reformulation removes those items, but substitutes a much lower item to reflect capital directly paid to or on behalf of Silver Fox to keep the business running. The adjusted loss is $228,705.
The first qualification is that the sum includes $44,474 owing to CBFC Limited (CBFC), the bank’s finance arm, for plant and equipment. The ongoing hire purchase payments were made by Poulet Frais after 12 July 2000 until it acquired the plant and equipment from CBFC in the circumstances described below on 10 November 2003. I conclude that liability no longer lies with Silver Fox or the Bakers. I take that sum off the adjusted loss.
The second aspect is that, for a short period, there may be in that calculation an allowance for interest payable to the bank which would in any event have been payable by the Bakers to their former bank for interest on the housing loan which pre-existed their interest in the Hilton shop. I am unable to qualify that amount with any precision, but doing the best I can I think the further reduction should be in the order of $1,000 - $1,200. I have rounded out the resulting calculation of loss.
Accordingly, subject to the issue of any damages for psychological injury, and to issues of causation and reliance and the like, I would find the Bakers have lost $182,800 as a result of their unsuccessful venture into the Hilton shop.
In my judgment, each of the Bakers also suffered an identifiable psychiatric illness as a result of having done so. I have set out above my findings as to the nature and extent of those illnesses and their sequelae.
I find the illnesses were largely spent by late 2002. I would assess the damages to which Mr Baker is entitled under that head of loss at $10,000 and the damages to which Mrs Baker is entitled under that head of loss at $6,000.
In the submissions, the parties treated any loss as that of the Bakers rather than that of Silver Fox. I have done the same. They also treated the Bakers jointly, as I have done, save for the claim for damages for personal injuries.
That is the context in which it is now appropriate to address the claims of the applicants against the respondents.
At the termination of the Bakers’ franchise, Poulet Frais ran the Hilton shop. Mr McDonnell and Mr White took over the management of the shop from 17 July 2000. Apart from a shortage of stock, it was in good condition. The existing staff were retained, and further staff engaged (because neither of the managers was working full-time). The Hilton shop was managed then by a series of managers. In the succeeding period to 1 July 2001, the average weekly turnover was about $9,097 and the gross profit 44.69 per cent of sales.
The gross earnings and gross profit for the period to the ultimate resale of the Hilton shop are not in evidence. The available figures cover the period to the week ending 22 September 2002. Overall, the average weekly gross earnings since 17 July 2000 have exceeded the average weekly gross earnings during the period Silver Fox ran the Hilton shop. However, that is not consistently the case. For the last ten weeks of the period to 22 September 2002, the average weekly gross earnings was $7,689 whereas the last ten weeks of the Silver Fox operation had an average weekly gross earning of $7,864. The direct comparison of a short period is of no special significance, but the point is that there has been no continuous sustained dramatic improvement in gross sales after the Silver Fox franchise was terminated.
By arrangement with the bank, Poulet Frais made the ongoing hire purchase payments in respect of the plant and equipment. The plant and equipment initially leased by Silver Fox in September 1998 (the hire purchase agreement is in fact dated 6 October 1998) was purchased by Poulet Frais from CBFC for $20,000 by exchange of correspondence on 28 and 30 October 2003.
The Hilton shop lease has recently been received, effective from 1 September 2003 for five years at an annual rental of $25,536 plus GST.
Attempts were made by Poulet Frais to sell the Hilton shop, but they were unsuccessful until recently. On 10 November 2003, Poulet Frais:
(1)sold the plant and equipment to a new franchisee of the Hilton shop for $70,000, plus stock then on hand;
(2)entered (with Lenard’s) into a franchise agreement with a new franchisee in respect of the Hilton shop for $50,000 plus GST, effectively by Poulet Frais selling to the new franchisee the business which it had been conducting at the Hilton shop since 17 July 2000;
(3)lent to the new franchise the full purchase price of $120,000 for a period of one year, free of interest but subject to the new franchise repaying $250 per week during the currency of the loan, with that loan being secured by a bill of sale over the plant and equipment.
The value of the payment of $120,000 effectively payable after 12 months, save for the weekly payment of $250, at the time of that transaction is $114,073.

Mr McArdle’s views must be weighed in the light of his failure to have regard to several matters which, in cross-examination, he accepted as also relevant. Those factors included:
1. the performance of the operators of the Hilton shop since July 2000;
2.the profile of the residents in the vicinity of the shopping centre, that is whether those persons were typical of persons who buy products from Lenard’s stores;
3.the extent of the pedestrian traffic or potential pedestrian traffic in the vicinity of the Hilton shop.
Mr McArdle identified the five major factors relevant to his opinion as being the state of the local economy, the quality of the property ‘in locational terms’, the design and condition of the property, the quality of the shopping centre management, and specific terms of the proposed lease.
Alistair Tutte (Mr Tutte) is an urban and regional planner. His expertise was not challenged. He has developed what he called a ‘retail gravity model’ to distribute the sum of household retail expenditure from each ‘collector district’ to retail centres, depending on distance and centre size. The model calculates turnover from food and non-food expenditure. It does not operate from any determination of a particular catchment area for the retail centre under consideration.
Mr Tutte’s analysis of persons living within a 2 km radius of the Hilton shopping centre showed that:
·personal incomes and household size are lower than the metropolitan median;
·there are fewer children and many more persons over 60 years of age than the metropolitan median;
·unemployment is higher than the metropolitan median;
·the number of households without a motor vehicle is nearly double that of the metropolitan median;
·household incomes are concentrated, much more so than the metropolitan median, in the second and third (lower end) quintiles; the lower end quintiles spend significantly less on retail purchases than the upper end.
That analysis, in my view, is consistent with the Bakers’ evidence that many of their customers were elderly, and tended to make smallish purchases. Mr Tutte says it shows the area is likely to generate less rental expenditure than the average for metropolitan Adelaide.
The retail gravity model then produced the turnover figure of $3,685 per square metre for food floor space at the Hilton shopping centre, increasing to $4,054 per square metre by 2011. It is based upon the assumption that shopping centres modelled are of equal quality and have comparable ancillary facilities each, such as car parking. On my calculations, applying that turnover to the Hilton shop, it would represent annual turnover of $165,825, or weekly average turnover of $3,189. Silver Fox averaged considerably more than that.
Mr Tutte then expresses the view that the Hilton Shopping Centre is superior to its competitors because of its newness, the extent of its off-street car parking, and the quality of the Woolworths supermarket. He does not have any opinion as to the extent to which those factors would increase its turnover. However, even doubling the projected takeover figure for those reasons would produce an average weekly turnover for the Hilton shop only somewhere about that achieved by Silver Fox in its first year of operations.
Mr Krantz gave evidence about the Bakers’ losses, to which I have already referred. He also addressed the factors to which a franchise dealer should consider before selecting a location for a potential franchise. There are some factors which Mr Hamood did not consider. They are:
·shopping centre traffic count and traffic count past proposed location;
·comparison with other franchisees;
·effect on proposed franchisee if a new shopping centre and period of time anticipated to achieve ‘normal’ turnover;
·level of shopping centre support for advertising.
The other factors he referred to were addressed by Mr Hamood. Mr Krantz has spent much of his professional career advising small businesses, including as to their purchase and sale. I accept his evidence. Apart from being based on his experience, it has a sound ring of commonsense.
David Corkindale (Professor Corkindale) also gave evidence at the behest of the applicants about Mr Hamood’s process of site selection. I was amply satisfied about his expertise to do so. He is the Professor of Marketing Management at the School of Marketing, University of South Australia. He expressed surprise at the lack of sophistication used in making projections (as presented in the hypothetical sales and profitability target figures in the financial package with Disclosure Document 1 and Disclosure Document 2). There was, he said, no apparent systematic process by which Mr Hamood reached those figures for the purpose of publishing them. In this matter, I think that is a telling observation in particular regarding Disclosure Document 2, as it was provided in the context of (and with the heading naming) the Hilton shop. He referred to well known and used techniques for collecting and utilising information by a formulaic application to determine the potential suitability of proposed sites. No such process was used by Mr Hamood, nor urged nor required by Lenard’s. Mr Tutte’s retail gravity model is an illustration of the sophisticated techniques available.
Professor Corkindale identified two chief factors commonly used in site selection as being the size of the catchment area, and the socio-economic nature of the population in the catchment area. He otherwise identified factors which Mr Hamood had addressed.
The information used by, or available to, Mr Hamood about the turnover and operating profit of the Lenard’s shop in South Australia, together with the socio-economic rating of each store’s locality, indicated that the turnover and profit of Lenard’s shops are very influenced by the relative wealth and nature of the locality which they primarily serve. Given the nature of the Lenard’s product, which includes extensive ‘value-added’ (i.e. dressed) product, Professor Corkindale thought that could explain why sales and profits are lower in lower socio-economic localities. The evidence, including that of Mr Tutte, shows the Hilton shop is in a lower socio-economic locality (as are the other Lenard’s shops where the sales and profits are lower).
As I have already found, based upon Mr McDonnell’s evidence, Professor Corkindale also pointed out that the Hilton shop is in a smaller shopping centre than any of the existing Lenard’s shops.
Notwithstanding the evidence of Mr McArdle and the experience of Mr Hamood, I have come to the view that Mr Hamood did not consider carefully the selection of the Hilton site. In my judgment, he appreciated only in a general way the significance of the lower socio-economic grouping of the catchment area. He recognised that grouping, but then as he said offset its significance for the prospect of younger people wishing an inner city lifestyle moving into the area. That may be an appropriate conclusion, but it does not represent any change in the socio-economic grouping in the short term. The short term (probably a number of years but certainly at least the first year of operation of the Hilton shop) would seek custom from the existing residents of the area. I also consider that Mr Hamood’s extrapolation from existing Lenard’s shops to the Hilton shop of the prospects of trading levels failed to take account of the newness of the shopping centre. He had not established a Lenard’s shop in a new shopping centre before. It should have caused him to consider whether there would be a period, during which growth of business to the shopping centre would develop. That is what is likely to have happened, on the evidence. That alone does not mean the Hilton shop was not an appropriate site for a Lenard’s shop, but it means the Hilton shop was not likely to perform to its full sales potential in the first year or two of its operations. To suggest to the Bakers that the Hilton shop had been carefully chosen without the qualification that it was not likely to reach its sales potential for some time was misleading. There was nothing conveyed to the Bakers to suggest that. Indeed, the material presented to them was consistent with the Lenard’s shop having no build up period. The Bakers themselves expected to build sales and profit over time, but that was not from a base which reflected the consequences of the newness of the shopping centre but premised upon general recognition of their (planned) excellent service and quality of product. Mr Hamood, in my view, also did not give proper account to the existing patronage of the Torrensville shopping centre on Henley Beach Road, and the loyalty of its clientele. Finally, I consider the size of the Hilton shopping centre was not really considered. It is a small shopping centre, considerably smaller than the Unley shopping centre where a Lenard’s store had been recently opened. It is smaller than the established Arndale shopping centre, where the then lowest performing Lenard’s shop was located. It is the smallest shopping centre in which a Lenard’s shop had been located. The absence of any available traffic count meant, I think, those considerations had to have been considered carefully. I do not consider they were.
Mr Hamood had the comfort of Woolworths and Baker’s Delight having committed to the Hilton shopping centre, to the excellent location of the Hilton shop, and to the informal information from the shopping centre manager about what he (the manager) thought Woolworths expected to gross in its operations. But I consider he too readily drew comparisons from existing Lenard’s stores when there were good reasons to be cautious about doing so: the newness of the centre, the potential customer source, the competition, and the size of the centre. He recognised the nature of the potential customer source, but discounted its significance inappropriately. He did not use the measurement tools commonly used. In the case of the retail gravity model, he would have had to have factored up to the outcome by more than double to reach the gross weekly turnover for the Hilton shop which intuitively he had determined upon.
I have not overlooked Mr McArdle’s views about the quality of and prospects for the Hilton shopping centre in reaching that conclusion. However, I formed the impression that he was somewhat intuitive in his views. He did not investigate any of the other Lenard’s shops, and did not pay much heed to the socio-economic characteristics of the surrounding residential areas. I think they are each important issues. Indeed, the reasons for his movement of his estimates from the base provided by the retail gravity model to the level of earnings he projected, and for his assessment of the extent of custom that the Hilton shopping centre would take from the Torrensville shopping centre were to my mind unconvincing. I also thought Mr McArdle assessed the prospects of customers from up to a radius of 5 km coming regularly to the Hilton shopping centre rather too highly.
Accordingly, I find that Poulet Frais engaged in misleading and deceptive conduct in making the site location representation.
I have no doubt that Mr Hamood and therefore Poulet Frais, believed the sales/profitability representation. The issue is whether there were reasonable grounds for making it. In my judgment there were not. I would reach that view whether the onus of proof lies on the respondents, or whether – evidence having been adduced by the respondents – the onus of proof lies on the applicants to show there were not reasonable grounds for making it.
My reasons for that conclusion are related to the matters I have discussed in relation to the site location representation. The sales/profitability representation depends largely upon whether it was reasonable to extrapolate from the performance of other Lenard’s shops, particularly the Arndale and Unley shops, to the Hilton shop. I do not think it was. The size and newness of the Hilton shopping centre, and the socio-economic composition of the surrounding residential areas, required that separate consideration be given to the Hilton shop. The implications or potential implications of the newness of the shopping centre to the turnover of the Hilton shop alone would, in my view, preclude such ready use of the comparators used, especially in respect of a potential franchisee who Mr Hamood knew to have sought financing for the franchise.
Accordingly, I am also satisfied that Poulet Frais engaged in misleading conduct in making the sales/profitability representation.
It was accepted that if Poulet Frais were found to have contravened s 52 of the TP Act, Mr Hamood would also be liable for those contraventions by reason of s 75B of the TP Act. I shall address the position of Lenard’s and Lenard’s Leasing below.
I do not consider the applicant’s claim based upon s 51AC of the TP Act is made out.
The Franchise Agreement, as noted, contains terms which required the applicants to acknowledge (contrary to what I have found to be the fact) that no representations were made to them and that they entered into the Franchise Agreement based only on their own judgments. Such clauses are clearly designed to insulate the respondents from legal liability. As my judgment above indicates, where there is a contravention of s 52 (or other provisions) of the TP Act, such clauses do not fulfil their purpose. It is a commonplace of many standard form contracts prepared by or on behalf of institutions that the ‘lesser’ parties have no real say in accepting the printed terms, they either accept them or they have no contract. However, this is not the occasion to dilate on such issues generally. The evidence addressing unconscionability in the terms of the Franchise Agreement itself was scanty. I am not prepared to conclude that the Franchise Agreement itself, by reason of those terms, amounted to unconscionable conduct by any of the respondents.
The real thrust of the applicants’ case under s 51AC was that the termination of the Franchise Agreement, at the time and in the manner it was done, was unconscionable. I do not think it was. The Bakers had been struggling to meet their obligations to suppliers, to the bank, and under the Franchise Agreement, since at the latest, mid 1999. They were behind in all those obligations. They had put substantial capital into the Hilton shop, but it had been absorbed. Although the last four weeks of their trading had generated successive turnover in excess of $8,000 per week, they have not sought to show that giving them further tolerance in their admitted defaults under the Franchise Agreement would have enabled them to convert the business of Silver Fox into a profitable one, or that the ultimate fate which Silver Fox would have suffered would have been any different. The defaults under the Franchise Agreement had been ongoing for many months.
I also find that Poulet Frais did, following its takeover of the Hilton shop, try to refranchise it. It paid the ongoing hire purchase commitments. Ultimately, it paid out the hire purchase contract with CBFC.
Even though it is clear that the concept of unconscionability in s 51AC of the TP Act is wider than the concept of unconscionable conduct ‘within the meaning of the unwritten law …’ in s 51AA of the TP Act: see e.g. Hurley v McDonalds Australia Ltd [1999] FCA 1728 at [22] and [31], in my judgment the respondents’ conduct has not been shown to fall within that wider concept. I note that the search of s 51AA was determined by the High Court in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153; [2003] HCA 18.
It is not necessary to address the respondents’ contention that s 51AC does not apply to the present circumstances by reason of s 51AC(9) or (10).
THE POSITION OF LENARD’S AND LENARD’S LEASING
The relationship between Lenard’s and Lenard’s Leasing on the one hand and Poulet Frais on the other is set out in the Master Franchise agreement. It does not render Poulet Frais the agent of Lenard’s or Lenard’s Leasing in dealings with franchisees or potential franchisees, and indeed cl 4.32 prevents Poulet Frais from becoming so.
Nevertheless, both Lenard’s and Lenard’s Leasing had some involvement in the selection of the Bakers as franchisees of the Hilton shop – Lenard’s had the ultimate approval or veto – and in the selection of the Hilton shop – Lenard’s had the ultimate approval or veto and Lenard’s Leasing became the lessee of the Hilton shop. Those were matters remote from the Bakers, and do not of themselves constitute Poulet Frais as agent of Lenard’s or Lenard’s Leasing in making the sales/profitability representation or the site location representation.
The Bakers had no direct personal dealings with Lenard’s, save for the initial telephone contact when they were referred to Poulet Frais. Subsequently, all their relevant dealings were with Mr Hamood personally or by correspondence from Poulet Frais (using the Lenard’s letterhead and logo as authorised by the Master Franchise agreement). The name Poulet Frais appears as the corporate entity sending the letters, at the bottom and at the signature space.
The significant enclosures with the correspondence (the Disclosure Documents and the Information Pack) were prepared by Lenard’s and bore its name on the header or front page. I have found, however, that the financial information sheets enclosed with the Disclosure Documents had been vetted by Mr Hamood and adapted by him to reflect the South Australian Lenard’s shops.
The material referred to nevertheless conveyed to the Bakers that Poulet Frais was not the agent of Lenard’s in providing that material, even though the material was provided with its authority. Clause 10.1 of the Franchise Agreement makes that clear. A copy of the Franchise Agreement was provided to the Bakers at least during July 1998. The Information Pack identified Lenard’s as the ‘head office’ but also identifies the master franchisees for each state, including Poulet Frais. It was sent to the Bakers by Poulet Frais, describing itself as ‘master franchisee’. The Disclosure Documents described Poulet Frais as the master franchisee responsible for seeking franchisees in South Australia in accordance with the Lenard’s system, and described Mr Hamood’s role as establishing and developing those franchises. The letter of offer of the Hilton shop franchise dated 29 June 1998 was also sent by Poulet Frais.
In their submissions, senior counsel for the applicants contended that Poulet Frais was the agent of Lenard’s and Lenard’s Leasing in engaging in the conduct complained of. It was put as a case of actual agency, rather than one of ostensible or apparent agency. That reflects the approach pleaded in the amended statement of claim, where the making of the representations alleged is said to have been the conduct of each of the corporate respondents, and Mr Hamood is said to have been the agent of each of them.
In my judgment, upon the whole of the evidence, neither Poulet Frais nor Mr Hamood were authorised by Lenard’s or Lenard’s Leasing to create legal relations between potential franchisees of Lenard’s shops and Lenard’s or Lenard’s Leasing: see e.g. Peterson v Moloney (1951) 84 CLR 91 at 93 – 95. That is clear enough. Lenard’s and Lenard’s Leasing retained to themselves such decisions and Mr Hamood understood that. It is expressed in the Master Franchise Agreement. It is less clear whether, in their dealings with potential franchisees by providing to them documents such as the Information Pack and the Disclosure Documents, Poulet Frais or Mr Hamood were acting as agent of Lenard’s.
The relationship between Poulet Frais and Lenard’s contemplated Poulet Frais would seek out potential new Lenard’s franchisees. Both Poulet Frais and Lenard’s would benefit by the appointment of new franchisees. Lenard’s provided to Poulet Frais documents which it was authorised to supply to potential new franchisees. The reality, in my judgment, is that Poulet Frais was the agent of Lenard’s for the purpose of providing those materials to prospective franchisees. The agency clearly did not extend to formally appointing franchisees, but that is a further step in the process. It is the making of the representations, through the documents emanating from Lenard’s and provided to the Bakers by Poulet Frais as Lenard’s intended, which is the step which is said to have been done by Poulet Frais on its own behalf and as agent for Lenard’s. In reaching that factual conclusion, I have of course given great weight to the terms of the documents to which I have referred: Massey v Crown Life Insurance Co [1978] 2 All ER 576 at 580; Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385 at 389. Ultimately, it is the substance of the relationship which I must address: Jones v Bouffier (1911) 12 CLR 579 at 611.

Accordingly, I consider that Lenard’s too is liable for the misrepresentations contained in the sales/profitability representation and in the site location representation.
I see no basis for ascribing to Poulet Frais or Mr Hamood the status of agent of Lenard’s Leasing in the making of those representations to the Bakers. Its role in the corporate structure of Lenard’s was a discrete one. It was not the source of the documents distributed and it did not appear on the face of those documents to be their author.
CROSS-CLAIM
The Bakers did not dispute that they had failed to pay Lenard’s for goods supplied to them under the charge back facility, or for certain advertising fees payable under the Franchise Agreement. There was no dispute as to quantum.
There will be judgment on the cross-claim of Lenard’s against Silver Fox and against the Bakers as guarantors of the liabilities of Silver Fox for $21,416.
ORDERS
In the result, apart from judgment on the cross-claim, there will be judgment in favour of the Bakers in the sum of $182,800 and the further sum of $10,000 in favour of Mr Baker and the further sum of $6,000 in favour of Mrs Baker against Poulet Frais, Mr Hamood and Lenard’s.
On the cross-claim, there will be judgment in favour of Lenard’s against Silver Fox and the Bakers for $21,416.
Before making formal orders, I will hear the parties as to what orders should be made as to interest and as to costs.

I certify that the preceding two hundred and thirty-five (235) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Associate:
Dated: 17 September 2004

Counsel for the Applicants:

P Heywood-Smith QC with T Birchall

Solicitor for the Applicants:

Lisacek & Co

Counsel for the First & Second Respondents:

A Lyons

Solicitor for the First & Second Respondents:

Phillips Fox

Counsel for the Third and Fourth Respondents:

S Milazzo

Solicitor for the Third and Fourth Respondents:

DMAW Lawyers

Dates of Hearing:

3, 15, 16, 17, 22, 23, 24 April 2003

5, 6, 7, 8, 21 May 2003

19 February 2004

Date of Judgment:

17 September 2004

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 70 OF 2001

JUDGE:	MANSFIELD J
DATE:	17 SEPTEMBER 2004
PLACE:	ADELAIDE

Plant, equipment and fitout costs	$118,939
Establishment costs	$18,868
Franchise licence fee	$50,000
TOTAL	$187,807

‘Year Total	Shop 1	Shop 2	Shop 3
Gross Sales	489,032	624,880	794,217
Gross Profit	221,794	281,509	383,133
GP as % of GS	45.3%	45.0%	48.2%
Operating Profit	52,253	88,983	196,380’

‘Weekly Target Gross Sales	8,000	12,000	16,000
Annual Target Gross Sales	416,000	624,000	832,000
Estimated Gross Profit	195,520	293,280	391,040
Estimated Target Operating Profit	50,690	98,033	143,377’

Counsel for the Applicants:	P Heywood-Smith QC with T Birchall
Solicitor for the Applicants:	Lisacek & Co
Counsel for the First & Second Respondents:	A Lyons
Solicitor for the First & Second Respondents:	Phillips Fox
Counsel for the Third and Fourth Respondents:	S Milazzo
Solicitor for the Third and Fourth Respondents:	DMAW Lawyers
Dates of Hearing:	3, 15, 16, 17, 22, 23, 24 April 2003 5, 6, 7, 8, 21 May 2003 19 February 2004
Date of Judgment:	17 September 2004