Tone 'n' Tan Pty Ltd v Bailey
[2007] WADC 97
•14 JUNE 2007
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: TONE 'n' TAN PTY LTD -v- BAILEY & ORS [2007] WADC 97
CORAM: YEATS DCJ
HEARD: 13-16 MARCH 2007
DELIVERED : 14 JUNE 2007
FILE NO/S: CIV 501 of 2004
BETWEEN: TONE 'n' TAN PTY LTD (ACN 099 996 880)
Plaintiff
AND
GAIL MARIE-THERESE BAILEY
First DefendantNEIL JAMES WILLIAM BAILEY
Second DefendantGAIL MARIE-THERESE BAILEY
First Plaintiff by CounterclaimNEIL JAMES WILLIAM BAILEY
Second Plaintiff by CounterclaimTONE 'n' TAN PTY LTD (ACN 099 996 880)
First Defendant by CounterclaimBRADLEY RODMAN HANKINSON
CARMEL MAREE JAMES
Second Defendants by Counterclaim
Catchwords:
Civil law - Contract - Breach of Franchise Agreement - No misrepresentation - Wrongful repudiation - Injunction and restraint of trade
Legislation:
Fair Trading Act (WA) 1987 s 10, s 77
Trade Practises Act (Cth) 1974 s 51A, s 52, s 82, s 87
Result:
Damages awarded to Plaintiff in the sum of $36,000 plus interest
No Injunction granted
Representation:
Counsel:
Plaintiff: Mr J G Hanly
First Defendant : Mr A P Hershowitz
Second Defendant : Mr A P Hershowitz
First Plaintiff by Counterclaim : Mr A P Hershowitz
Second Plaintiff by Counterclaim : Mr A P Hershowitz
First Defendant by Counterclaim : Mr J G Hanly
Second Defendants by Counterclaim : Mr J G Hanly
Solicitors:
Plaintiff: Hotchkin Hanly
First Defendant : Holborn Lenhoff Massey
Second Defendant : Holborn Lenhoff Massey
First Plaintiff by Counterclaim : Holborn Lenhoff Massey
Second Plaintiff by Counterclaim : Holborn Lenhoff Massey
First Defendant by Counterclaim : Hotchkin Hanly
Second Defendants by Counterclaim : Hotchkin Hanly
Case(s) referred to in judgment(s):
Carr v J A Berryman Pty Ltd [1953] 89 CLR 327
Foran v Wight (1989) 168 CLR 385
Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181
Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494
Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535
Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444
Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126
Shevill v Builders Licensing Board (1981-1982) 149 CLR 620
Wenham v Ella (1972) 127 CLR 454
White & Carter (Councils) Ltd v McGregor [1962] AC 413
YEATS DCJ: The plaintiff sues the defendants on a written Franchise Agreement entered into on 3 May 2002 when the defendants purchased the franchise for a business "Tone 'n' Tan Morley" from the plaintiff. On the same day, the plaintiff and the defendants also entered into a Business Sale agreement. The defendants terminated the Franchise Agreement on 22 December 2003 by letter addressed to the plaintiff, and in mid January 2004 the defendants commenced a new business at the Morley premises, trading as "The Sculptured Body", the same type of business they had operated when trading under the Franchise Agreement as "Tone 'n' Tan Morley". The plaintiff claims losses of $36,000 for breach of the Franchise Agreement being the annual franchise fee of $12,000 payable for three years.
The defendants allege misrepresentations by the plaintiff orally and in writing in profit and loss statements for the Morley business, and the defendants claim they were induced by the misrepresentations to enter into the Business Sale Agreement and the Franchise Agreement on 3 May 2002. The defendants also contend that the plaintiff's misrepresentations amounted to misleading or deceptive conduct contrary to s 10 of Western Australia's Fair Trading Act 1987 ("FTA") and contrary to s 52 of the Commonwealth Trade Practices Act 1974 ("TPA").
The defendants further contend that the making of the representations by the plaintiff amounted to unconscionable conduct and was contrary to s 51A of the TPA.
The defendants also contend that the plaintiff breached express and implied terms of the Franchise Agreement by failing to provide training and training programmes for the defendants, and by failing to undertake any special advertising campaigns.
The defendants contend that the plaintiff's breaches of the franchise agreement amounted to a total failure of consideration or, alternatively, repudiation of the contract by the plaintiff, which repudiation the defendants accepted.
The defendants further contend that the clause of the franchise agreement prohibiting the franchisee from operating the same type of business after termination of the Franchise Agreement is an unlawful restraint of trade and has no force or effect where the contract is terminated by the defendants' acceptance of the repudiation of the contract by the plaintiff.
The defendants counterclaim against the plaintiff based on these contentions and seek damages and interest under s 82 TPA, alternatively, an order setting aside the Franchise Agreement, together with compensation and appropriate orders under s 87 TPA.
The defendants also counterclaim against Mr Bradley Hankinson and Ms Carmel James, directors of the plaintiff. The defendants seek damages and interest or, alternatively, an order setting aside the Business Sale agreement together with an order for compensation and other appropriate orders under s 77 of the FTA.
In reply to the defendants' counterclaim, the plaintiff's directors contend that the defendants did not use their best endeavours in operating Tone 'n' Tan Morley under the Franchise Agreement. And they deny the defendants were induced by or relied upon the alleged misrepresentations in entering the two agreements. The directors further contend that the first defendant failed to attend the training sessions required to be attended by her under the Franchise Agreement, and that the plaintiff undertook special advertising campaigns under the Franchise Agreement.
It is convenient in these reasons in order to avoid confusion to refer to Tone 'n' Tan Pty Ltd as the plaintiff, to refer to Mr Hankinson and Ms James, the directors of the plaintiff Tone 'n' Tan Pty Ltd as the plaintiffs, and to refer to Ms Gail Bailey and Mr Neil Bailey as the defendants, even though the Baileys are the plaintiffs on the counterclaim and Mr Hankinson and Ms James are defendants along with Tone 'n' Tan Pty Ltd on the counterclaim.
The main issues are:
(1)Whether the defendants wrongfully repudiated the Franchise Agreement on 22 December 2003.
(2)Whether the defendants are liable to pay damages of $36,000.
(3)Whether the plaintiffs misrepresented the earnings of Tone 'n' Tan Morley to the defendants.
(4)Whether the defendants relied on the alleged misrepresentations and were thereby induced to enter the agreements.
(5)Whether the plaintiffs breached the franchise agreement by failing to provide training to the defendants.
(6)Whether the plaintiffs thereby repudiated the contract and the defendants accepted the alleged repudiation.
Background
The plaintiffs commenced business in partnership with each other as Tone 'n' Tan Riverton in around 1998. The "toning" provided by the salon involved the administration of electronic muscle stimulation techniques which cause the muscles to contract and relax in a natural muscle action resulting in a shortening and tightening of the muscles. This caused a slimming effect by way of the loss of centimetres to various areas of the body such as thighs and stomach. Electronic muscle stimulation (EMS) was coupled with solarium tanning and the two services formed the foundation of the salon. The salon guaranteed that those undergoing EMS treatment for a full course of treatment would drop at least one dress size. That guarantee required very careful record keeping, careful measurement and recording of measurements of clients as well as photographs. From what I have been able to understand from the evidence, the Tone 'n' Tan salon was successful. In February 2000 the plaintiffs opened a second Tone 'n' Tan salon in Morley. It was in that salon that the defendant Gail Bailey received treatment in December 2001 and January 2002. Mrs Bailey was so impressed with her results that she told her husband Neil that it looked like it would be a good business because it was a busy place and she was impressed with her results.
At the time Mrs Bailey taught fine arts at Murdoch College and was looking for employment closer to home and was considering the purchase of a business. Her husband, the other defendant, Neil Bailey, was a licensed electrician who ran his business at that time in partnership with another man. That business operated from the Baileys' home.
Because of his wife's interest in the Tone 'n' Tan salon, Neil Bailey contacted the Morley salon and left a message for the plaintiffs to contact him. That message was not immediately answered so he contacted the Riverton salon and left a message there. Eventually he had a conversation with Bradley Hankinson who, with his partner Carmel James, owned and operated the two salons under a partnership agreement. According to Mr Hankinson, he initially rejected any consideration of selling the Morley salon but he told Mr Bailey that he would think about it and get back to him. In discussion with Ms James, Mr Hankinson decided that, although he would not sell the Morley salon, he would consider a franchise arrangement. He then telephoned Mr Bailey and in conversation was told that the Baileys would be interested in purchasing a franchise, although they preferred an outright purchase of the business. Mr Bailey has a different recollection of these telephone calls with Mr Hankinson. Mr Bailey said that in the initial telephone call Mr Hankinson mentioned a franchise and indicated a willingness to sell a franchise.
Eventually the four parties met – Mr Hankinson and Ms James met with Mr and Mrs Bailey and began discussing the purchase by the Baileys of the franchise for the Morley salon. Mr Hankinson indicated that the cost of the franchise would be $60,000 and he and Ms James gave evidence that the Baileys, particularly Mr Bailey, seemed to accept that that was a reasonable figure and that they should have no trouble raising that amount of money. Mr and Mrs Bailey gave quite a different account of this negotiation. Both claimed that at an early stage Mrs Bailey indicated that she was earning $52,000 gross per annum and would need to replace that salary in the takings from the salon. Both of the Baileys indicated that Mr Hankinson and Ms James responded very positively to that with Ms James saying words to the effect that she would have no trouble making that or more, that she need not work harder but work smarter. Ms James and Mr Hankinson denied that Gail Bailey ever mentioned how much she earned and how much she would need the business to earn each year.
The plaintiffs then proceeded to prepare a draft Business Sale Agreement and a Franchise Agreement which appear in Exhibit 1 at p 5 and at p 26. Toward the end of the trial Exhibits 20 and 21 were tendered, being two bound copies of the agreements with original signatures by all parties.
The defendants rely on two documents, each being a profit and loss statement which they claim was provided to them by the plaintiffs in the course of negotiations, documents they claim they relied on in deciding to purchase the franchise. The first document is headed Tone 'n' Tan Riverton Profit and Loss January through June 2000 and appears in Exhibit 1 at p 1. That document is dated 25 March 2002 and there is general agreement that it was provided to the defendants some time close to that date. But the parties disagree as to the circumstances in which that profit and loss statement was handed to the defendants. Mr Hankinson's evidence was that he organised the books of Tone 'n' Tan and in late March was speaking to Mr Bailey about how the books were set up, including the various headings that he used. In order to assist Mr Bailey in setting up the books once the sale of the franchise had taken place Mr Hankinson said that he gave them this document (which I will refer to as Document 1) so that Mr Bailey would have the headings that Mr Hankinson used in bookkeeping. According to Mr Hankinson, this was not a real profit and loss statement but a practice statement that was available because Ms James had been practising entering various amounts into the computer and generating a profit and loss statement. Mr Hankinson said he wrote on the side of the document "Headings Only" and signed and dated the document and handed it to Mr Bailey.
Ms James supports Mr Hankinson's evidence about that and gave evidence explaining that so far as the sales at Morley were concerned she had practiced entering all of those figures from the actual sales at the salon but that many of the other figures were not accurate. It is clear from looking at the photocopy of Document 1 in Exhibit 1 that no signature of Mr Hankinson's appears on it and no words "Headings Only" appear. There is, on the right hand side of the document, a vertical "squiggle" which Mr Hankinson claimed was the tail of his signature which he thought must have been whited out before the photocopy document was discovered and included in Exhibit 1.
According to the Baileys, Mr Hankinson gave them Document 1 as the profit and loss statement for Morley for the period January through June 2000. The Baileys deny that there was ever a signature of Mr Hankinson or the words "Headings Only" written on the document. Their evidence was that when they questioned Mr Hankinson as to why it was headed "Tone 'n' Tan Riverton" that he crossed out "Riverton" and wrote "Morley". That cross out and handwriting does appear on Document 1. The plaintiffs deny that Mr Hankinson did that and deny that it is Mr Hankinson's writing. The defendants tendered as Exhibit 5 a document they say is the original of Document 1, the document handed to them by Mr Hankinson. That document bears no evidence of any whiting out.
Document 1 next appears in the hands of Damien Pougnault, a business banking manager with Westpac Banking Corporation. Mr Pougnault claimed he had done dealings with Neil Bailey with his existing business and that Neil Bailey had rung him and told him he was looking at acquiring a business for his wife. He said that Mr Bailey provided him with Document 1. He said Mr Bailey also put in an application for finance and as a result of that Mr Pougnault made a submission to the bank for finance on 23 April 2001. According to Mr Pougnault, the finance sought was an overdraft to fund the running of the business. He understood that the purchase was to be made by selling shares and a boat but there could be a timing issue which would require some of the overdraft for use in the purchase (T183). Mr Pougnault said, under cross-examination, that when he received a photocopy of Document 1 there was no other writing on the document. In the computer documents recording information he had at the time (Exhibit 10) Mr Pougnault recorded:
"Customer has just purchased a new business, being Tone and Tan Riverton. …They officially take over the business in May and would like to have Overdraft as backup…"
Mr Pougnault was unable to explain why the application for finance was not part of the documents provided to the Court under subpoena duces tecum. In his evidence, Mr Pougnault said that the writing on Document 1 on the upper left hand corner was notes made by the bank's credit manager, Vicki Radic, and that Document 1 was a clean document when he received it. He also believed the writing on the lower right hand corner were further calculations by that credit officer. However, in re‑examination Mr Pougnault qualified his evidence and said what he had said about the handwriting was just an assumption.
As to the other writing on Document 1, Mr Neil Bailey gave evidence that Mr Hankinson wrote not only "Morley" but also "Wages" on the lower right hand corner of the page. Mrs Bailey, in her evidence, said that she wrote on the upper left hand corner of the document the words: "Not included, GST, Insurances, Wages", directly contradicting Mr Pougnault's evidence. Mr Pougnault was specific that when Document 1 was delivered to him "Riverton" was not crossed out and again he thought the credit manager may have done that (T180).
Mr Pougnault's initial application for the overdraft facility for the defendants was rejected by Westpac and further financial documents were sought. According to Mr Bailey, he then gave Mr Pougnault Mr Hankinson's name and telephone number and asked the bank officer to directly contact Mr Hankinson to obtain further financials. Mr Pougnault gave evidence that he contacted someone whose name he no longer remembers and as a result of that contact he received Document 2 (Exhibit 1, p 2) purporting to be a Tone 'n' Tan Morley profit and loss statement for July 2000 through June 2001. That document had Damien Pougnault's name handwritten with his telephone and fax number on the top, and at the bottom of the document a ribbon of information which indicates that the document was sent by fax on 1 May 2002 at 17:03 from the fax number of Tone 'n' Tan salon in Riverton. This was a two page document including on the second page (Exhibit 1, p 3) the total GST payable, wages, and total superannuation liabilities.
Damien Pougnault gave evidence that he sent this profit and loss statement document forward, and as a result the overdraft facility was approved. Exhibit 10 shows Mr Pougnault's notes at the time were recorded as:
"Accountant has provided profit and loss for Morley for 30/6/01 to verify new business income. Accountant has also provided working to show calculations of GST and wages income…They are funding the purchase of the business from the sale of their boat and shares. They are only requiring OD for ongoing cash flow requirements."
Mr Pougnault's evidence was that he put the document through seeking approval of the overdraft on the day he received it, 1 May 2002, and that the bank approved the overdraft the following day, information which he provided to Mr Bailey.
Mr Bailey gave evidence that on 2 May 2002 Document 2 was faxed to him by Mr Pougnault. Mr Pougnault gave no evidence to that effect and Document 2 does not contain any ribbon of fax information indicating that it was ever faxed to the defendants. The defendants claim they did receive Document 2 on 2 May 2002 and on the basis of the further figures on that profit and loss statement showing a net ordinary income of $60,899.50, that they then decided to proceed with the purchase of the franchise for Tone 'n' Tan Morley and that they were induced by this document.
Mr Hankinson raised some troubling matters about Document 2. He denied preparing or sending this document. He denied having any contact with Mr Pougnault at Westpac. He accepted that his fax number appears on the ribbon on the bottom but he questioned the words "Tone "N" Tan Salons" which appear on the banner. According to Mr Hankinson the words "Tone 'n' Tan" have never involved a capital N and have only included one inverted comma on each side of a small n - never the quote marks included in this banner (T83). There is no evidence before me, however, to support that contention. It was open to the plaintiff to tender a faxed document with the proper printing of Tone 'n' Tan Salons on it; that invitation was given by the defendants but that was not done during the trial. That failure to prove what Mr Hankinson said about the ribbon of information detracts from the weight that I am able to give to his oral evidence on this important point.
Mr Hankinson also gave evidence that the layout of Document 2 was completely different from any programme on his computer that he used for bookkeeping or creating profit and loss statements. He gave evidence that his computer programme creates a document in the form of Document 1. Mr Hankinson denied that he or Ms James prepared Document 2 and denied that they ever sent it to Mr Pougnault.
The parties negotiated the terms of their agreements over a period of some weeks. Exhibit 3 was tendered, being a working copy of the agreements containing a number of yellow stickers. Mr Hankinson's evidence was that all of the yellow stickers had been put on the agreement by Mrs Bailey and that the document with the stickers on was discussed on the same night that he provided Document 1 to the Baileys as a "Headings Only" profit and loss statement, thus placing the date of Exhibit 3 toward the end of March.
Clive Robert Leeman, the defendants' accountant, gave evidence that he was provided with Document 1 at some time early in 2002 by Mr Bailey. Mr Leeman had the copy of Document 1 that was handed to him by Mr Bailey and the word "Riverton" had been crossed out and the word "Morley" was written there, as well as the notes in handwriting on the document.
Operation of Tone 'n' Tan Morley by defendants
All parties agree that on the evening of Friday, 3 May 2002, they entered into the Business Sale Agreement and the Franchise Agreement (Exhibit 1, p 5 - 85, Exhibit 20 and Exhibit 21). Earlier that day Mr Bailey had transferred the business name for Tone 'n' Tan Morley and on Monday, 6 May, the defendants commenced operating that business under the franchise agreement. There were immediate problems about the training of Mrs Bailey. During negotiations it had been understood by the plaintiffs that Mrs Bailey would take over the running of the Morley salon and that she would require training. Ms James understood that she needed to give four weeks notice to Murdoch College and the timing of the sale was to coincide with that arrangement so that Mrs Bailey would be free to work full-time in the salon. Unfortunately that did not happen. Mrs Bailey claimed in her evidence that she had to give 10 weeks notice at Murdoch College and would not have been available full-time at the salon until 17 June 2002. However, in her written statement of evidence she had indicated that she had to give seven weeks notice but claimed in evidence that was a typographical mistake. Ms James gave evidence that she had prepared a roster on Saturday, 4 May 2002, in discussion with Mrs Bailey which provided for her to have training during the first fortnight of her takeover of the Morley salon. That training was to be provided by Ms James and also by the manager of the two salons, Ms Tania Roscoe. Ms Roscoe said she had been working for Tone 'n' Tan since 1999 after initially being a client, and she worked at the Riverton salon but was the manager for both salons. Ms Roscoe gave evidence that she had trained some 10 staff in the EMS technique and the methods used at the salon. Ms Roscoe's evidence was that she expected to have Gail Bailey full-time for full days because she understood Mrs Bailey wanted to be trained quickly and training would take anywhere up to 10 days. Training involved everything from opening the salon in the morning, turning the machines on, turning the lights on, greeting clients, taking them through to the cubicles, putting them on the machines, answering the phone and creating client cards and taking measurements and photographs. Ms Roscoe said that Mrs Bailey was expected at quarter to 9 Monday morning on 6 May 2002 but did not arrive until late and did not stay for the whole day. According to Ms Roscoe, she completed around two days of training for Mrs Bailey before Mrs Bailey approached her and told her that she did not want Ms Roscoe to train her because Ms Roscoe was younger and she did not want to be trained by a younger employee. This conversation upset Ms Roscoe and she rang Ms James and Ms James said she would take over the training and sort it out.
It emerged in the evidence of Ms James that Mrs Bailey did not present herself for training. Ms James' evidence was that this was a matter of some concern because of the franchise agreement and that the Morley salon was now operating under an untrained person which could damage the reputation of the system of business that the plaintiffs had set up. Ms James' evidence was that on 6 May 2002 she had arranged to go to the Morley salon in the afternoon to train Mrs Bailey but Mrs Bailey was not there. According to Ms James, Mrs Bailey did not attend any scheduled training sessions for that whole week. Her evidence was that she was there every day but Mrs Bailey did not show up despite reassurance from Mr Bailey that his wife would be in on the following day as arranged. According to Ms James, around 15 May she spoke to Mr Bailey about the problems she was having with rosters and Mrs Bailey's unreliability and was told that Mrs Bailey was not herself at the moment, that she had been ill, may be a bit depressed, low on iron and that in the past Mrs Bailey had been extremely ill with problems related to low iron. Not long after that, according to Ms James, she was informed by Mr Bailey that Mrs Bailey wanted to stay on teaching and could not bring herself to be trained by juniors. Mr Bailey asked if Mrs Bailey could be trained after hours at Riverton but Ms James said that was not possible. Later, according to Ms James, she reached an agreement with Mrs Bailey to teach her by correspondence and despite being told by Mrs Bailey that she knew nothing and should be taught all the basics, Ms James' first effort at correspondence teaching resulted in Mrs Bailey expressing concern that the correspondence work was insulting for beginners and just a joke.
As these events developed Ms James became particularly concerned and on 28 May 2002 she and Mr Hankinson wrote to the defendants about their areas of concern (Exhibit 4). Ms James set out the problems with scheduling and for arranging training and then said this in par 6:
"As we had anticipated, these arrangements left us in an unsuitable position to satisfactorily effect training. We found ourselves carrying out the shift duties with very little time for training. This went on for two weeks, until you informed us that Gail would no longer be working at the salon and would forego her training until such time as she had served out her notice period in her current position and that Candice would be promoted to full-time. We welcome this change, however, over the last two weeks there still has been no full-time employee.
After reviewing the situation, Gail again changed her plan and requested some form of training by correspondence. Again we attempted to accommodate the variation and issued the first basic stage of 'myology', which would usually be accompanied by a practical demonstration. Unfortunately, Gail complained that this level of education was not advanced enough for her, notwithstanding all previous conversations either of us had with Gail regarding anatomy resulted in her declaration that she knew absolutely nothing about the subject. In fact, Gail asked to be treated as a beginner and naturally, the correspondence training regimen was implemented on this basis.
The focus therefore, falls upon where, when and how to train Gail to the satisfaction of both parties, as there are certain areas of which we must be absolutely sure Gail is conversant in and not just based on her say so. Our recommendation remains the same as at the time Gail first informed us that she wished to postpone her training period until she is available for more intensive training, which is in accordance with her suggestion. To clarify that point, we believe it is not in the interests of all concerned to continue Gail's training until she is in a better position to avail herself more readily. Please notify us of the date that Gail will be available to commence intensive training and in the meantime, as suggested, perhaps Gail could attend your salon in her spare time to observe and familiarise herself with the procedures. In the event Gail wishes to apply herself practically, our recommendation is for her to continue cleaning, perhaps make appointments and coupled with the information given to Neil, attend paperwork. It is not advisable for Gail to involve herself in procedures outside the realm of training already undergone."
That letter also set out a number of problems with the running of the Morley salon that were of considerable concern to the plaintiff.
The defendants replied to that letter of 28 May 2002 by letter dated 30 May 2002 (Exhibit 1, p 106). In that letter they confirmed that Mrs Bailey will be available to commence full-time training on Monday, 24 June 2002, that the training will be provided by Ms James for a two week period and that at the conclusion of the two weeks of full-time training provided by Ms James "you will provide a full diploma to Gail Bailey certifying her legally competent to operate the machines with both existing and future clients of the Tone 'n' Tan Morley salon". This letter anticipated that Mrs Bailey would assume responsibility for daily operations from Monday, 8 July 2002.
Mrs Bailey gave very different evidence. She said that she was always going to be starting at the point at which her notice was effective with Murdoch College (T268). She gave evidence that Ms Tania Roscoe was not qualified to give training (T273) and she denied that any training by correspondence was offered. Mrs Bailey gave evidence that she was trained on EMS, along with her staff, about a year later in around May of 2003. Mrs Bailey gave evidence she worked full-time in the Morley salon from 17 June 2002 until 26 July 2002, a period of six weeks. After that she returned to full-time teaching at Murdoch College. In her cross‑examination Mrs Bailey initially denied ever having an iron deficiency but then later admitted she had had such a deficiency. Similarly, she denied ever suffering depression but then conceded that she had (T348). Her evidence was that neither depression nor iron deficiency affected her at the time of these events. She denied ever telling Ms Roscoe that Ms Roscoe was too young to give her training and denied ever even discussing with Ms Roscoe that she was stopping training with her (T350). Mrs Bailey denied in her evidence that she ever asked Ms James to train her by correspondence but admitted that she did tell Ms James to treat her like a beginner.
End of the franchise agreement
On 22 December 2003 Mr Bailey delivered an undated letter to Mr Hankinson purportedly severing the franchise agreement effective as of 22 December 2003 (Exhibit 1, p 110 - 111). In that letter the defendants claim that they purchased the Morley salon in its entirety, including assets and purchased the business free of all encumbrances and not as a franchise business and that in the "total absence of any training or other supports" suggested that a franchise agreement did not exist either in intent or practice. That letter also indicated that the defendants were in the process of registering a new business name and that they would proceed to sever all connection with Tone 'n' Tan.
It is accepted by all that some time in January 2004 the defendants commenced trading at the Morley site as "The Sculptured Body" providing the same services that had been provided under the Tone 'n' Tan banner.
In a letter dated 16 January 2004 (Exhibit 1, p 113) solicitors for the plaintiff wrote to the defendants and stated that their actions in trading as "The Sculptured Body" amounted to a clear repudiation of the franchise agreement and urged them to reconsider their position in the next seven days, referring to cl 15.5 of the agreement. If no reply, then the plaintiff indicated they would accept the repudiation.
The defendants replied to this letter in a three page letter, marked "without prejudice" (Exhibit 1, pp 115, 116, 117). It is clear from the evidence and from this letter that the defendants were acting without legal advice. That letter emphasised the failure to train Mrs Bailey. There was evidence that by this time the plaintiff had sold other franchises and in this letter the defendants criticised the plaintiff for failure to maintain standards in Tone 'n' Tan salons. The defendants again maintained that "no franchise has ever operated in respect of the business they purchased free of encumbrances in May 2002". As a consequence, the plaintiff commenced proceedings in about April 2004. There was no mention in any document from the defendants of any concern about the income being generated in the Tone 'n' Tan Morley salon under the franchise agreement. That complaint only emerged after the defendants sought legal advice once they had been served with the writ and statement of claim in this action.
Credibility
The defendants contend that the position maintained by Mr Hankinson and Ms James that the defendants never sought any documents verifying the earnings of the Morley salon is simply unmaintainable and unbelievable. The defendants contend that no-one would purchase a business without any information provided on the earnings of the business.
The plaintiffs maintain their position that earnings information was never sought or provided, and refer to the fact that the defendants approached the plaintiff and sought to purchase the business so that the question of the earnings of the business never arose in their negotiations. The plaintiffs rely on cl 19 and cl 20.2 of the business sale agreement. The plaintiffs maintain that Mrs Bailey would have been fully aware of the successful Morley salon, having been a client there, realising how many appointments and how busy the salon was and knowing from her own experience how much she had paid for the treatment.
The defendants' case depends on Document 1 and Document 2 as being earnings information provided to them by the plaintiff. The defendants rely on Exhibit 3, the draft agreements with yellow notes from Mrs Bailey on various matters requiring discussion, and in particular, the last yellow note where Mrs Bailey wrote: "Clause 20 require profit and loss statement and balance sheet for last two years for Morley" as evidence that they were continually asking for earnings information about the Morley salon. Clause 20 of course does not refer to Tone 'n' Tan Morley. It refers to Tone 'n' Tan Salons Pty Ltd, a proprietary company being the plaintiff in these proceedings which was only incorporated in 2002. Prior to that, the plaintiffs operated as a partnership. It was only when they began selling franchises, the first being this franchise, that they incorporated. Therefore, Mrs Bailey's note on Exhibit 3 is an example of her failure to understand legal matters and does not assist the defendants' case.
The important evidence about the agreement of the parties concerning earnings information appears in the Business Sale Agreement (Exhibit 1, p 54, cl 19) which is in these terms:
"19.1Earnings information for the franchise, if it is given, must be based on reasonable grounds.
The Franchisor can provide earnings information in respect of the Riverton branch, however, each of the earnings is a matter for the Franchisee to ascertain as the earnings from each area and locality will be different.
19.2Earnings information may be given in a separate document attached to the disclosure document.
19.3Earnings information includes information from which historical or future financial details of a franchise can be assessed.
19.4If earnings information is not given - the following statement:
The Franchisor does not give earnings information about a Tone 'n' Tan Franchise.
Earnings may vary between franchises.
The Franchisor cannot estimate earnings for a particular franchise."
And further in cl 20.2 of the business sale agreement this clause is included:
"Tone 'n' Tan Pty Ltd was not in operation at the end of the last financial year. As such it has not needed to prepare profit and loss statements and balance sheets for the last two years."
When faced with these provisions of the business sale agreement in cross‑examination Mrs Bailey denied signing the business sale agreement (T371) and then gave evidence that her signature at Exhibit 1 p 56, was on a different document from the document where cl 19 and cl 20 appear (T372). She said that p 54 of Exhibit 1 is from a different document to p 56 (T373). As a result of that evidence Exhibits 20 and 21, being a blue bound copy and a white bound copy of the agreements containing original signatures were produced. Mrs Bailey accepted that her original signature did appear on Exhibit 21, the white bound copy, and denied her earlier evidence (T381).
A further example of Mrs Bailey's attempts to avoid documents occurred when she wilfully, under cross-examination, misread a letter, Exhibit 13, signed by herself and her husband, dated 27 January 2004, in which the defendants asserted "It's our position that no such document (franchise agreement) exists…" Her cross-examination at T365 shows that she was not an honest and truthful witness. She was unable to offer any explanation why she never complained to the plaintiff about lower earnings when they operated under the franchise. And her explanation of why she and her husband kept the Morley salon operating in January 2004 if it was losing money lacks credibility (T368).
One problem with the defendants' evidence was that it was not consistent with contemporary documents including correspondence between the parties at the time. There is no explanation offered by the defendants for their reliance in the letter of 22 December 2003 (Exhibit 1, pp 110 – 111) and the letter of 19 January 2004 (Exhibit 1, pp 115-117) on the failure to train Mrs Bailey, the failure to advertise and their assertion in these documents that no franchise existed when they now come to court and claim the Morley salon did not achieve the profits the plaintiffs assured them would be achieved from the Morley salon. That does not make sense, particularly when the defendants commenced trading as "The Sculptured Body" within less than one month after purporting to end the franchise agreement. I find no support for the plaintiffs' evidence about this in any contemporary documents.
I formed a very poor impression of the credibility of Mrs Bailey. I did not find her to be a truthful witness. Her evidence, when it conflicts with the evidence of any other witness, will not be accepted.
I formed an unfavourable impression of the credibility of the male defendant Mr Neil Bailey. His efforts to try to avoid the questions asked by counsel continued throughout his cross‑examination but in particular at T215, T230 and T250.
On the other hand, both Mr Hankinson and Ms James gave their evidence in a direct and forthright manner and without trying to avoid difficult questions. I found each of them to be honest witnesses who were doing their best to give truthful evidence of what occurred. From the evidence before me, they each appear to be well organised business people who had put a lot of thought and a great deal of care into running their Tone 'n' Tan salons. I found them to be careful cautious business people. Ms James began keeping a contemporaneous record of occurrences in the plaintiff's relationship with the defendants. I accept that she did that. It is exactly the kind of precaution I would expect her to take. I accept that her "chronology of events" (Exhibit 8) contains her contemporary notes of what took place and is a truthful and accurate record. That record, her evidence and the evidence of Mr Hankinson are consistent in their account of what happened, and are consistent with the correspondence between the parties at the time (letter of 7 June 2002 from plaintiff to defendants (Exhibit 14): Reply from defendants to plaintiff 30 May 2002 (Exhibit 1 p 106 – 109)).
I did not find Damien Pougnault to be a reliable witness. Under cross-examination he said that when he spoke to Mr Bailey on 23 April 2002, Mr Bailey told him he had just purchased a new business, Tone 'n' Tan (T179). But in his re-examination, Mr Pougnault was asked "did Neil Bailey tell you that he had already purchased the business?" and Mr Pougnault replied "no" (T195).
Mr Pougnault also qualified his evidence under cross-examination that the Westpac Credit Manager's hand written notes appear on Document 1, when on re-examination he said that was only an assumption, that he did not see anyone write on the document (T195). Mr Pougnault was unable to explain why the application for finance was not before the Court. Mr Pougnault's re‑examination left me with the impression that he was trying to give answers the defendants wanted him to give rather than trying to tell the truth, the whole truth and nothing but the truth.
I did form a very positive view of the evidence of Ms Tania Roscoe. She gave her evidence in a very careful manner. She was remembering events five years ago and was cautious as to exactly what she could remember. I have full confidence in her evidence and, where it conflicts with that of Mrs Bailey, I do not accept Mrs Bailey's evidence. I also note that Ms Roscoe's evidence is consistent with the evidence of Mr Hankinson and Ms James.
Based on these findings on credibility I am satisfied on the balance of probabilities that Mr and Mrs Bailey never sought any documents verifying the earnings of the Morley salon other than Mrs Bailey's misguided request for documents under cl 20, a request that had nothing to do with the Morley Salon. I accept the evidence of Mr Hankinson and Ms James about that.
Findings on Misrepresentation
The defendants rely on what they allege the plaintiffs said to them early in negotiations to the effect that Mrs Bailey would have no difficulty replacing her salary of $52,000 with profits from the Morley salon. Both plaintiffs deny that was ever discussed and I accept their evidence about that.
The defendants also rely on Document 1 dated 25 March 2002 as a profit and loss statement for the Morley salon for the period January through June 2000. I do not accept the defendants evidence about that. The document is clearly not a profit and loss statement. It does not include any entries for wages, GST, or insurance. It does include exactly the kind of information Ms James would have known in the course of operating her salons and is consistent with the plaintiffs evidence that Ms James created the document as a "practice" document when she practised entering financial information from the day to day operations of the Morley salon.
There are problems involved in making specific findings about the handwritten details on Document 1. There is a conflict between Mr Pougnault's evidence that there was no handwriting on the document when he received it from Mr Bailey; his evidence was that the bank's credit manager wrote on it. But he was such an unreliable witness that I accept Mrs Bailey's evidence that her own writing appears on the upper left hand corner of Document 1.
Exhibit 5 appears to be the original of Document 1 and no whiting out appears on its face. It therefore does not support the evidence of Mr Hankinson that he wrote "headings only" on the document and signed it before giving it to Mr Bailey. I do not accept Mr Hankinson's evidence about that.
I am unable to make any finding as to the crossing out of "Riverton" and the handwritten "Morley" as appears on the top of Document 1. Nor am I able to make any finding on the handwriting on the lower right hand area of the document.
But I do accept Mr Hankinson's evidence that he gave Document 1 to Mr Bailey for the purpose of showing the bookkeeping headings that Mr Hankinson used. And I accept Ms James' evidence that Document 1 was prepared by her as a practice document.
For these reasons I do not accept the defendants evidence that Document 1 was given to them by the plaintiffs as a representation of the Morley salon's earnings.
The defendants' case depends to a large extent on Document 2. The defendants' case is that they needed further financial information about the Morley salon in order to obtain finance from Westpac. Their case is that Mr Bailey gave Mr Pougnault telephone contact details for Mr Hankinson, and that Mr Pougnault telephoned Mr Hankinson seeking that information, and that Mr Hankinson faxed Document 2 to Mr Pougnault on 1 May 2002 at 17.05. Document 2 bears a fax ribbon imprint which appears to show that the document was faxed from Mr Hankinson's fax machine at that time. Mr Hankinson confirmed that is his fax number. But his business name is not properly depicted in the ribbon. A capital N appears rather than a lower case n. Double quote marks appear instead of single inverted commas. I find that very surprising given that Tone 'n' Tan was a trade mark registered in the name of the plaintiffs. On the other hand, the plaintiffs never produced a document faxed from its machine to prove this point, and in those circumstances I should not rely on Mr Hankinson's oral evidence about that.
Mr Hankinson denied any knowledge of Document 2. He denied being contacted by Mr Pougnault and he denied sending the document. There is some support for that in Mr Pougnault's notes (Exhibit 10), where he indicated he received Document 2 from an accountant. Mr Hankinson is not an accountant, and Mr Pougnault could not remember the name of the person he did receive Document 2 from.
I accept Mr Hankinson's evidence that he never prepared profit and loss statements in the format of Document 2. He said the computer program and format he used is as in Document 1, and it is evident on its face that Document 2 was prepared using a different computer programme from that used to prepare Document 1. I accept Mr Hankinson's evidence about that. Therefore, I am satisfied on the balance of probabilities that Mr Hankinson did not prepare Document 2. I am unable to determine who prepared the document. I am satisfied it was not Mr Hankinson's document.
In order to prove a misrepresentation, the defendants must show that Document 2 was presented to them by the plaintiffs. The faxed details appear to show that the document was faxed to Mr Pougnault, and I accept that he did receive that document on 1 May 2002, and that he relied on it to obtain approval for finance for the defendants. That is confirmed in Exhibit 10, the bundle of bank documents recording what Mr Pougnault did. But there is no evidence before me as to how Mr Bailey ever obtained any copy of Document 2 other than Mr Bailey's evidence that Mr Pougnault faxed the document to him on 2 May 2002. If Mr Pougnault did that, I would have expected a copy of the document with the bank's ribbon of fax information displayed on it to be before the Court. There is no such document. There is no support for Mr Bailey's evidence about this. There is certainly no evidence before me that Mr Hankinson ever provided Document 2 to the Baileys.
If Document 2 had been provided to him as Mr Bailey claims, I find it very surprising that there is no evidence of the defendants ever complaining to the plaintiffs about the low income generated by the Morley salon during the period the defendants operated the salon as a Tone 'n' Tan franchise from May 2002 until December 2003. If, as the defendants maintain, they were provided with Document 2 and relied on it in deciding to enter into the franchise agreement and expected to make an annual profit of $60,000 from the Morley salon, then it is very surprising that they did not complain to the plaintiffs when instead, they suffered losses of $16,643 according to the calculations of Mr Thompson, the business valuer (Exhibit 11 and Exhibit 17). Yet there is no record of any such complaint in the correspondence from the defendants in May 2002 or in the undated letter given to Mr Hankinson by Mr Bailey in December 2003, purporting to end the franchise agreement (Exhibit 1, pp 106 – 109 and pp 110 – 111). Nor is there any mention of any such complaint in the defendants letter to the plaintiffs solicitors dated 19 January 2004. Nor is there any mention of any complaints by the defendants of a failure to make expected profits from the Morley salon in Ms James' chronology of events (Exhibit 8). The defendants documented complaints to the plaintiffs centred on the failure to train Mrs Bailey and the failure of the franchisor to advertise.
Under cross-examination, Mr Bailey admitted no complaint was made of misrepresentation until after the writ was issued in this matter (T235). He admitted he never wrote to the plaintiffs complaining the income was lower than expected, but he claimed he told the plaintiffs all along that "it was very quiet" (T235). Mr Bailey claimed he had telephone conversations to that effect with Ms James on several occasions (T235). Mr Bailey's failure to answer questions put to him under cross‑examination caused me to intervene (T235) and he agreed he never said to the plaintiffs that profits coming from the salon were different from what had been represented to him.
I do not accept Mr Bailey's evidence that he complained to Ms James on several occasions that it was very quiet. If he had done so I would have expected Ms James to have noted it in her chronology (Exhibit 8). It is not mentioned.
This lack of complaints about profit levels supports the plaintiffs' case that they never made any representations to the defendants about the profits of the Morley salon. The defendants have failed to satisfy me that Document 2 was provided to them shortly before they entered into the agreements. The defendants have failed to satisfy me that the plaintiff ever represented to them that the Morley salon would generate profits of $60,000 per year.
For these reasons the defendants contentions that they were induced by misrepresentations to enter into the business sale agreement and Franchise Agreement are dismissed, their contentions of misleading or deceptive conduct contrary to s 10 of the FTA and s 52 of the TPA are dismissed, and their contentions of unconscionable conduct in breach of s 51A TPA are dismissed.
Termination of the Franchise Agreement
There is no dispute that the plaintiff and defendants entered into the Marketing and Licensing Agreement ("the Franchise Agreement") on 3 May 2002 for a five year term ending on 29 April 2007. There is no dispute that from the commencement of the Franchise Agreement the Baileys operated the Morley Salon pursuant to the Franchise Agreement. The Franchise Agreement provided that the annual fee payable by the Baileys inclusive of GST was to be $12,000 per annum but, by agreement, the annual fee was waived for the first two years of the Franchise Agreement (Exhibit 1, p 81 – Appendix 1) so that the fee was due to be paid from 30 April 2004 to 29 April 2007.
There is no dispute that the Baileys terminated the contract by an undated letter (Exhibit 1, pp 110 – 111) delivered to Mr Hankinson on 22 December 2003 by Mr Bailey. The terms of that letter make it clear that the defendants did not intend to be bound any longer by the Franchise Agreement. After receiving the letter the plaintiff instructed solicitors who quite properly wrote to the defendants on 16 January 2004 warning them of the consequences of their termination of the Franchise Agreement and urged them to reconsider their position (Exhibit 1, pp 113 – 114). The defendants replied in a letter dated 19 January 2004 (Exhibit 1, pp 115 – 117) confirming that they no longer operated the Morley Salon under the Franchise Agreement. This letter provides clear evidence they no longer intended to be bound by the Franchise Agreement.
Clause 15 of the Franchise Agreement makes provision for termination of the contract by the Franchisee. The termination of the agreement by the defendants by their letter on 22 December 2003 was not a termination in accordance with cl 15 (Exhibit 1, p 74). Clause 15 of the Franchise Agreement is in the following terms:
"15. Termination by the Franchisee
15.1The Franchisee may terminate this Agreement at any time by giving Tone 'n' Tan Salons not less than six (6) months written notice.
15.2The Franchisee shall, upon the giving of notice in accordance with Clause 15.1, perform its obligations in good faith for the duration of the notice period.
15.3In the event the Franchisee exercises its right to terminate pursuant to Clause 15.2 Annual Fees shall be paid by the Franchisee to Tone 'n' Tan Salons on a pro rata basis up to the date of termination.
15.4Should the Franchisee cease to carry on the Business at the Premises for any reason other than a relocation of the Business (with the consent of Tone 'n' Tan Salons in accordance with Clause 7.8), this Agreement shall automatically terminate.
15.5Termination pursuant to this Clause does not entitle the Franchisee to a refund of the Joining Fee or any part thereof.
15.6Upon Termination the Franchisee will not operate a business in the type of business that it carried on under the Franchise.
15.7After Termination the Franchisee must give the Tone 'n' Tan System manuals back to the Franchisor and continue to keep the Tone 'n' Tan System absolutely confidential."
The defendants justify their termination of the contract for either a total failure of consideration or alternatively that the plaintiff repudiated the Franchise Agreement which repudiation was accepted by the defendants on 22 December 2003.
In their letter of 22 December 2003 the defendants asserted that there was no Franchise Agreement, that the Franchise Agreement was "null and void" and that there had been a "total absence of any training or other support". Further, in par 8 of their defence the defendants allege breach of express and implied terms of the Franchise Agreement by the plaintiff. I will deal with each of those allegations in turn.
8.1 The plaintiff, despite repeated requests from the defendants to do so, failed to provide the defendants with any or adequate training so as to enable them to operate the Business and the machines used in the Business.
The express terms of the Franchise Agreement so far as training is concerned are found at cl 3.3 of the Business Sale Agreement (Exhibit 1- p 9).
"3.3 Vendor assistance
For 14 days (10 business days) after completion, the Vendor must supply to the Purchaser, and any person who has the Purchaser's written authority, any information or documents in its possession or control reasonably requested concerning the business or its conduct and reasonably assist the Purchaser at the Purchaser's request to gain knowledge concerning the business and its conduct."
Clause 4.4 of the Business Sale Agreement (Exhibit 1, p 11) places obligations on the Vendor concerning assistance following completion.
"4.4Vendor assistance following completion
For 20 business days after completion, if the Purchaser gives the Vendor notice (the 'Assistance Notice') so requesting, the Vendor must at it own expense:
(a)furnish the Purchaser with any information that has been, in the opinion of the Vendor, reasonably requested, that is in the Vendor's possession or control concerning the matters (if any) relating to the business or its conduct specified in the assistance notice; and
(b)if so requested in the Assistance Notice, attend at the premises to assist the Purchaser to gain knowledge concerning the business and its conduct at the times specified in the assistance notice (being times not earlier than two business days after receipt of the assistance notice)."
Clause 5.1 of the Business Sale Agreement (Exhibit 1, p 11) allows the Vendors to use its employees in the assistance period following completion.
"5.1 Employees
The Vendor is responsible for the employees including the termination of employment, or the transfer of any employee up to the Completion date. At the absolute discretion of the Vendor, the Vendor may use its employees in the assistance period following completion."
For reasons I have already stated I accept the evidence of Ms James and Ms Roscoe. I accept their evidence that it was expected that Mrs Bailey would take over the running of the Morley Salon from 3 May 2002 when the Franchise Agreement and the Business Sale Agreement were executed. I am satisfied that a roster was prepared by Ms James in consultation with Mrs Bailey and that Ms Roscoe was available to train Mrs Bailey commencing on Monday 6 May 2002. It was anticipated that training could take up to 10 working days and I am satisfied on the evidence of Ms James that she arranged for that to be provided. I accept the evidence of both Ms James and Ms Roscoe that the difficulty with training Mrs Bailey arose because she failed to attend in a timely way or at all for her training. I accept Ms Roscoe's evidence that after about two days of training Mrs Bailey told Ms Roscoe that she did not want to be trained by a younger employee.
One aspect of this case has made little sense to me. There is no explanation from Mrs Bailey or Mr Bailey as to why they entered into the Franchise Agreement and took over the running of the Morley Salon at a time when Mrs Bailey remained committed to her teaching duties at Murdoch College. That does not make sense to me. The defendants in negotiation with the plaintiffs determined when they wanted to takeover the Morley Salon. If Mrs Bailey was not available to be trained at the time of the takeover it is difficult to understand how the Baileys intended to operate the Morley Salon.
I accept Ms James' evidence about her attempts to provide training to Mrs Bailey after Mrs Bailey had refused to be trained by Ms Roscoe. Those attempts went well beyond the obligations of the plaintiff under the Business Sale Agreement. Ms James was unsuccessful because Mrs Bailey rejected the written training notes provided by Ms James. I do accept the evidence of Ms James and Ms Roscoe that staff at the Morley Salon other than Mrs Bailey were trained. The Morley Salon was able to operate and did operate between 6 May 2002 and 23 December 2003 under the Franchise Agreement.
In all the circumstances based on this evidence I am satisfied the plaintiff did not breach any of its training obligations under the Franchise Agreement or under the Business Sale Agreement.
8.2 The plaintiff failed to undertake special advertising campaigns designed to promote the Business and its products;
Clause 8 of the Franchise Agreement (Exhibit 1, p 68) is in these terms.
"8. Promotion
8.1From time to time the Franchisor agrees that it will during the Term undertake special advertising campaigns specifically designed to promote the Tone 'n' Tan Salons brand and/or the range of Tone 'n' Tan's Salons Products and services, the Franchisee agrees that it will pay to the Franchisor at the beginning of each financial year an amount of $3,000 plus GST for use in undertaking any special advertising campaigns.
8.2The Franchisee is responsible for advertising and marketing within the Franchisee's Territory at its own costs.
8.3The Franchisee shall not advertise its business in any media in a format that is not pre‑approved by Tone 'n' Tan Salons or its representatives."
Ms James in her evidence acknowledged cl 8 but said that all parties had agreed that while there was only one franchisee there would be no real benefit in jointly contributing to expensive advertising such as TV magazines costing thousands of dollars (T121). Ms James recalls a further discussion with the Baileys about an advertising promotion that she suggested but she recalled that the Baileys asked her not to advertise the Riverton Salon together with the Morley Salon (T121-123). In his evidence Mr Bailey agreed with Ms James' evidence that the Baileys were never required to pay the $3,000 levy (T362). Mrs Bailey also agreed that the defendants were never asked to pay the special advertising levy (T383). But Mr Bailey's evidence was that he expected there would be specialist advertising and that the defendants would have to pay that $3,000 levy at sometime (T383).
In its Further Amended Reply and Defence to Counterclaim dated 21 December 2006 at par 6(b) the plaintiff pleaded that it undertook special advertising campaigns on 43 occasions between 26 November 2002 and 22 December 2003. That pleading is particularised in 42 entries. In his cross‑examination at (T92-94) Mr Hankinson was shown this pleading and admitted it was a mistake – that the 42 entries were for unauthorised advertising by the defendants and not for any special advertising campaign by the plaintiff.
I am satisfied on the evidence that the parties agreed there need be no specialist advertising and no levy need be paid. The plaintiff's obligation under cl 8 was "from time to time" to undertake special advertising campaigns. I am satisfied there was no breach of this obligation in its terms because no such advertising was done between April 2002 and December 2003. The oral agreement between the parties to excuse the defendants from payment of the annual $3,000 fee is consistent with my finding.
8.3 The Plaintiff failed to train the defendants to operate the Business and the Machines in a manner which was safe to clients of the Business for them to do so;
This pleading is very poorly drafted and there is no evidence I accept to support it. I accept Ms James and Ms Roscoe's evidence about the training of staff. While Mrs Bailey did not make herself available to be trained her staff were trained. The only complaints about safety were from Mrs Bailey whose evidence I do not accept. From the evidence of Mr Hankinson and Ms James and the contemporary documents I am satisfied the plaintiffs cooperated and did all they could to assist the defendants to operate the business and the machines properly. I am satisfied that in this regard there was no breach of any express or implied term of the contracts by the plaintiff. There was certainly no evidence of any unsafe practices at the Morley Salon or the Riverton Salon.
8.4 The defendants by counterclaim were not accredited to train the defendants to operate the Business and the Machines in a manner which was safe to the clients of the Business for them to do so.
The plaintiff was under no contractual obligation to be formally accredited in order to train the defendants. I accept Ms James' evidence that she herself was trained and she trained Ms Roscoe and Ms Roscoe in turn had trained some 10 staff members in the operation of the Machines and the Business. All of that training was available to the defendants and their staff under the terms of the agreements. I am satisfied the plaintiff did not breach those agreements as alleged.
For these reasons I am satisfied there was no total failure of consideration. Nor was there any repudiation of the Franchise Agreement by the plaintiff entitling the defendants to accept that repudiation.
Defendants breach of the Franchise Agreement
On the evidence I accept and the facts that I have found I am satisfied that the defendants by the letter of 22 December 2003 and by their conduct in January 2004 operating "The Sculptured Body" at the Morley Salon breached the Franchise Agreement in the ways particularised by the plaintiff in cl 9 of the amended statement of claim.
Particulars of breach
(a)In breach of cl 15.1 of the Franchise Agreement, failed to give to the plaintiff not less than six months written notice of termination of the Franchise Agreement;
(b)In breach of cl 15.2 of the Franchise Agreement, failed to perform their obligations under the Franchise Agreement in good faith for the duration of the notice period;
(c)In breach of cl 15.7 of the Franchise Agreement, failed to return to the plaintiff the Tone 'n' Tan System manuals and keep the Tone 'n' Tan System absolutely confidential;
(d)In breach of cl 17.1(c) of the Franchise Agreement, failed to return to the plaintiff all advertising and promotional materials provided to them pursuant to the Franchise Agreement;
(e)In breach of cl 9.8 and/or cl 15.6 of the Franchise Agreement, commenced and operated the new business, being a business in the type of business that it carried on under the Franchise Agreement;
(f)In breach of cl 7.4 of the Franchise Agreement, used and continued to use the premises for a purpose other than the operation of the Business under the Franchise Agreement, without the plaintiff's written consent.
The plaintiff has made other allegations of breach but there is no evidence before me to support them. I am satisfied on the balance of probabilities that each of the above particulars shows a breach of the Franchise Agreement by the defendants.
The measure of damages
Repudiation occurs when a party manifests unwillingness or an inability to perform a contract or at all or in some essential respect (Foran v Wight (1989) 168 CLR 385 at 441: (Shevill v Builders Licensing Board (1981-1982) 149 CLR 620 per Gibbs CJ at 625: Carr v J A Berryman Pty Ltd [1953] 89 CLR 327 per Fullargar J at 351-2), I am satisfied that the defendants repudiated the Franchise Agreement by their letter of 22 December 2003 and by re‑opening the Morley Salon as "The Sculptured Body" in January 2004. There is no dispute that they did these things. Their letter and their actions clearly indicate an unwillingness on their part to perform the Franchise Agreement. I have already found that there was no repudiation of the contract by the plaintiff as the defendants alleged. In all the circumstances I am satisfied that the repudiation of the contract by the defendants was a wrongful repudiation.
Wrongful repudiation of a contract entitles the other party to accept the termination of the contract and/or to sue for damages (Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 per Barwick CJ at 453: Cheshire v Fifoot's Law of Contract, 8th Australian Edition at 21.11).
In its submissions the plaintiff relies on White & Carter (Councils) Ltd v McGregor [1962] AC 413 in support of the proposition that since the defendants "termination" is wrongful, it is not accepted as such, and the plaintiff is not obliged to accept it by terminating the performance of the contract. The principle in the White & Carter case – that the party may insist on the unwanted performance of a wrongfully repudiated contract – has been criticised by the learned authors of Cheshire and Fifoot's Law of Contract at 21.9. The principle in the White & Carter case has no application on the facts in this case because in its terms the Franchise Agreement was automatically terminated by the actions of the defendants in ceasing to carry on the Business at the premises (cl 15.4 of the Franchise Agreement). "Business" is defined in cl 1.1 of the Franchise Agreement:
"'Business' means the business operated by the Franchisee pursuant to this Agreement involving the marketing and provision of Electronic Muscle Stimulation and Solarium Services using the Tone 'n' Tan Salons System and the Tone 'n' Tan Salons Marks;
…"
From January 2004 the business operated at the premises was not operated pursuant to the Franchise Agreement and the Franchise Agreement automatically terminated.
There is some authority for the proposition that damages for breach of contract by manifesting unwillingness to perform the contract may not be available unless the contract is terminated (Ogle v Comboyuro per Barwick CJ at 450). If that principle does apply it is of no concern to this plaintiff because the Franchise Agreement has been terminated (cl 15.4).
The issue in this case is the measure of the plaintiff's damages. The defendants seek to rely on provisions of the Franchise Agreement including cl 15.3:
"In the event the Franchisee exercises its right to terminate pursuant to Clause 15.2 Annual Fees shall be paid by the Franchisee to Tone 'n' Tan Salons on a pro rata basis up to the date of termination."
The defendants also rely on cl 17.8 of the Franchise Agreement:
"Without prejudice to the rights of any Party which have accrued up to and including the date of termination, including the right to claim damages in respect of any breach of this Agreement, then unless Clause 15.2 applies, Annual Fees shall be paid by the Franchisee to Tone 'n' Tan Salons for the period up to the first day of the month immediately following the effective date of termination."
Based on these two clauses the defendants submit that the plaintiff is unable to succeed in its claim for annual fees or, at best, the plaintiff would only have a claim for annual fees from 30 April 2004 to 22 June 2004 being six months after the effective date of termination of the contract. These submissions of the defendants are misconceived. The plaintiff is not claiming annual fees under the contract. The plaintiff is claiming damages. The provisions the defendants rely on limit the defendants' obligation to pay the annual fee if the Franchise Agreement had been terminated pursuant to the provisions in cl 15 or cl 16. But those provisions have no operation where the defendants have wrongfully repudiated the contract as the defendants have done in this case. By doing so the defendants have become liable to pay common law damages in contract to the plaintiff.
The defendants' counsel may have been misled as to the nature of the plaintiff's claim by a short discussion at the commencement of the trial (T 11). The plaintiff abandoned its claims under par 10(b), par 10(c), par 10(d) and par 10(e) of the amended statement of claim and then agreed that the plaintiff's claim was "for damages for loss of the annual fee" and confirmed that the plaintiff claimed "breach of contract, its loss". The measure of common law damages reflects the "loss" but the plaintiff's action has always been and continues to be an action for damages.
Damages for breach of contract are awarded based on the principle that the injured party is to be placed in the same position as if the contract had been performed (Wenham v Ella (1972) 127 CLR 454 per Barwick CJ at 460 and per Gibbs J at 471: Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 per Gaudron J at 503.) Because of the defendants wrongful repudiation of the contract the plaintiff has lost the expectation that the Franchise Agreement would be performed. The plaintiff's expectation of receiving the Annual Fee payable for the final three years of that agreement is protected by the common law. In these circumstances the measure of damages is the $36,000 the defendants would have been liable to pay the plaintiff as Annual Fees for the final three years of the Franchise Agreement.
In this case that measure of damages can be seen to be fair and equitable. The defendants did not give the plaintiff notice of repudiation nor did the defendants return the manuals to the plaintiff (cl 15.7). The defendants did not abide by their obligation not to operate a business in the type of business that they had carried on under the Franchise Agreement. What the defendants have done is to retain all the business methods, manuals and procedures they obtained under the Franchise Agreement and have used those things in their own business "The Sculptured Body" entirely for their own benefit. The measure of damages is the benefit which would have flowed to the plaintiff from the performance of the contract. The plaintiff is entitled to the full value of the hypothetical performance as compensation for its loss (Cheshire v Fifoot 8th Australian Edition at 23.6). For these reasons damages of $36,000 are awarded to the plaintiff.
Injunction & restraint of trade
The plaintiff seeks an injunction restraining the first and second defendants from continuing to operate a muscle and figure toning business under the name "The Sculptured Body" and from operating any muscle and figure toning business until 29 April 2012.
In his evidence Mr Bailey said the defendants sold "The Sculptured Body" on 8 July 2006 (T198). Under cross‑examination Mrs Bailey said that "The Sculptured Body" had been sold in June 2006 (T368). There was no documentary proof of the sale of the business but even if the business has been sold the other aspect of the injunction remains to be considered.
An injunction is a discretionary remedy and will only issue when an award of damages does not adequately compensate the plaintiff for its loss. I am satisfied that damages alone may not entirely compensate the plaintiff for its loss. The defendants have wrongfully used and profited from the business method and procedures provided to them under the Franchise Agreement. Whether or not they have sold "The Sculptured Body" they are in a position to use the franchised business methods and procedures in another business unless restrained from doing so. There is however an absence of evidence from the plaintiff on this point. It was not suggested to the defendants in cross‑examination that they had not sold the business. Nor was it ever suggested that the defendants may at sometime in the future operate a similar business. I accept the defendants' submission that if the defendants threatened to operate a similar business in the future the plaintiff could seek an interlocutory injunction. But at this time there is no evidence of that before me.
The defendants contend that cl 15.6 is void and of no effect because it is contrary to public policy and is in restrain of trade (Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 at 565). But the law in this area has advanced since the 19th century case relied on by the defendants (Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126: Maggbury Pty Ltd v Hafele Aust Pty Ltd (2001) 210 CLR 181). The plaintiff has made no attempt at trial to justify the restraint in cl 15.6 as reasonable in the circumstances (Maggbury at 2003). Nor, on the other hand, have the defendants shown that the compliance with cl 15.6 would offend against public policy. As a matter of commonsense it seems unlikely any "discernible economic detriment of an anti‑competitive nature" (Maggbury's case per Callan J at [93]) could be found in such a clause in this Franchise Agreement. But that question will have to be left for another day. On the evidence and submissions before me I am not able to make any finding on this issue.
For these reasons I decline to make the injunction sought by the plaintiff.
7
2