Trans-It Freighters Pty Ltd v Billy Baxters (Franchising) Pty Ltd

[2012] VSCA 71

SUPREME COURT OF VICTORIA
COURT OF APPEAL

TRANS-IT FREIGHTERS PTY LTD (ACN 076 074 210) (as Trustee for the Pollard Family Trust) AND OTHERS	S APCI 2009 3779
v
BILLY BAXTERS (FRANCHISING) PTY LTD (ACN 089 180 156)

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JUDGES:	BONGIORNO and HANSEN JJA and KYROU AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	16 February 2011
DATE OF JUDGMENT:	20 April 2012
MEDIUM NEUTRAL CITATION:	[2012] VSCA 71
JUDGMENT APPEALED FROM:	[2009] VSC 207 (Harper J)

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TRADE PRACTICES – Franchise of chain restaurant – Statements of projected turnover and reasonableness of rent – Whether misleading or deceptive – Reliance – Whether reasonable grounds – Trade Practices Act 1974 (Cth) ss 51A(1) and 52.

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APPEARANCES:	Counsel	Solicitors
For the Appellants	Mr S G O’Bryan SC with Mr G L Rice	DMAW Lawyers
For the Respondent	Mr P Crennan	Macpherson + Kelley

BONGIORNO JA:

1. I agree with Hansen JA.

HANSEN JA:

Introduction

1. This is an appeal from the judgment[1] and orders of a judge in the Commercial and Equity Division made on the trial of a proceeding arising out of a franchise agreement dated 17 June 2004.  The parties to the franchise agreement were Billy Baxters (Franchising) Pty Ltd[2] (‘Billy Baxters’) as franchisor, Trans-It Freighters Pty Ltd (‘Trans-It’) as franchisee and Ross Allan Pollard and Sue Dianne Pollard (being the directors and shareholders of Trans-It) as guarantors of the due performance of Trans-It’s obligations under the franchise agreement.  By the agreement Billy Baxters granted to Trans-It the right to operate a Billy Baxters franchise at 20 Jetty Road, Glenelg, South Australia, for a period of five years for a fee of $45,000 and otherwise on the terms of the agreement.  The guarantee, also dated 17 June 2004, was annexed to the franchise agreement.  The Billy Baxters franchise business was ‘a chain of licensed coffee houses, cafés and restaurants with modern and distinctive décor based on a cartoon character’.[3]

   [1]Billy Baxters (Franchising) Pty Ltd v Trans-It Freighters Pty Ltd [2009] VSC 207.

   [2]In the agreement the name is spelt without an apostrophe but with an apostrophe in the trademark.  I follow the same course as the judge of omitting the apostrophe except where appropriate for the possessive.

   [3]See Franchise Information brochure, Appeal Book C359.

1. Trans-It duly commenced to conduct the franchise business but it did not achieve the anticipated turnover and sustained losses.  In these circumstances Trans-It fell into arrears of payment of amounts due under the franchise agreement, namely service fees and advertising expenses.  In 2006 Billy Baxters commenced the proceeding against Trans-It and the Pollards as guarantors to recover the amounts thus owing;  they denied the claim and counterclaimed for relief on a range of

grounds.  The judge upheld Billy Baxters’ claim and dismissed the counterclaim.

1. The appeal raises two questions, namely:

(a)     whether, as the appellants (Trans-It and the Pollards) contend, the judge erred in holding that Billy Baxters had reasonable grounds for making a misleading or deceptive representation which induced them to enter into the franchise agreement and guarantee respectively, and

(b)     whether, as the respondent (Billy Baxters) contends (by notice of contention), the judge erred in holding that Billy Baxters (by its agent) made a misleading or deceptive representation.

1. The effect of the holding of reasonable grounds (along with other holdings to which I refer below) was that Billy Baxters succeeded on its claim and Trans-It and the Pollards failed on their defence and counterclaim.  I refer to the orders below.  If the appeal succeeds these orders will be set aside, the proceeding will be dismissed and there will be orders on the counterclaim.  If, on the other hand, the notice of contention succeeds the appeal will be dismissed and the orders will stand.

The proceeding - issues

1. By the time the proceeding went to trial (in February 2009) there was a counterclaim and the pleadings raised a variety of issues.  The issues may be summarised as follows.

1. Billy Baxters claimed:

   (a)       Unpaid service fees and advertising expenses being $253,259.80.

   (b)        In respect of non-payment of service fees in the period after 7 June 2007 to 7 June 2009, damages and/or the amount found due on the taking of accounts.

   (c) On an allegation that it was induced to enter into the franchise agreement by representations by Trans-It that constituted conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (‘TPA’) alternatively s 9 of the Fair Trading Act 1999 (Vic) (‘FTA’), damages including against the Pollards as parties involved in the contravention.

2. Trans-It and the Pollards:

   (a)        Alleged that on or about 23 March 2004 Billy Baxters and Trans-It entered into ‘an agreement relating to the operation of the franchise’.

   (b)        Sought damages, declarations and orders on the basis that in several respects the franchise agreement (or an agreement to enter into a franchise agreement) was entered into without complying with requirements of the Trade Practices (Industry Code Franchising) Regulations 1998 (‘the Code’), which in the circumstances constituted a contravention by Billy Baxters of s 51AD of the TPA, and the engaging by Billy Baxters in unconscionable conduct (including in relation to signing the lease of the premises) in contravention of s 51AA and s 51AC of the TPA.

   (c) Sought the like damages, declarations and orders on the basis that conduct of Billy Baxters in contravention of s 52 of the TPA induced Trans-It and the Pollards to:

   (i)       enter into the ‘agreement relating to the operation of the franchise’;

   (ii)      enter into an agreement to lease on 23 March 2004;

   (iii)     execute a memorandum of lease dated 24 March 2004;

   (iv)     execute the franchise agreement dated 17 June 2004;

   (v)      execute the guarantee dated 17 June 2004;

   (vi)     establish the franchise business and commence trading as Billy Baxters.

   The alleged contravening conduct was constituted by five representations made to Trans-It and the Pollards, namely:

   ·           First, at a meeting with Mr and Mrs Pollard on 18 March 2004, one Phillip Korry Mauviel on behalf of Billy Baxters said that the proposed rental of the premises of $160,000 per annum[4] plus GST was reasonable having regard to the projected turnover of the franchise.

   [4]The amount of $160,000 is throughout referred to as rental.  In fact it included an amount for the annual outgoings.  The figures were:  rent $149,146 and outgoings $10,854 which produced the figure of $160,000 per annum;  see Appeal Book C218 and C433.

   ·           Secondly, and at the same meeting on 18 March 2004, Mr Mauviel said that the projected turnover of the franchise in the first year of operation was $1,300,000.

   ·           Thirdly, in a spreadsheet described as ‘Income statement – 12 months year 1’ which Mr Mauviel provided to Mr and Mrs Pollard on 19 March 2004, that sales for the first year of the franchise would total $1,365,000 excluding GST.

   ·           Fourthly, also on 19 March 2004 by the same spreadsheet, that net profit for the first year of the franchise would be $175,732.

   ·           Fifthly, at a meeting with the Pollards on 19 March 2004, Mr Mauviel said that, having regard to the projected turnover of the franchise, the level of rent for the premises was reasonable.

   The representations were particularised as being false and misleading or deceptive or likely to mislead or deceive in the following respects:

   ·           Sales for the 2003/2004 year, with trading commencing on or about 7 June 2004, totalled $30,471 excluding GST.

   ·           Sales for the 2004/2005 year totalled $728,294 excluding GST.

   ·           A net loss was sustained in the 2003/2004 year, totalling $53,384.

   ·           A net loss was sustained in the 2004/2005 year, totalling $139,369.

   ·           At no stage had the business achieved annual sales of $1,300,000 or $1,365,000, either inclusive or exclusive of GST.

   ·           At no stage had the business achieved annual profits of $175,000.

   ·           Having regard to annual sales actually achieved the rent was excessive, and imposed a significant cost burden on the business.

   It was further alleged that to the extent the representations were as to a future matter, there were no reasonable grounds for their making and they were thus misleading within the meaning of s 51A of the TPA.

   (d) On the above bases Trans-It and the Pollards sought damages pursuant to s 82, and orders pursuant to s 87(1) and s 87(1A) of the TPA to restrain enforcement of the franchise agreement and guarantee and to declare those instruments void. Orders were also sought under s 80 but it is not necessary to refer to them.

   (e)Claimed that in the circumstances Billy Baxters was estopped from relying on the franchise agreement and recovering any amounts thereunder. 

   The judge’s decision

1. In a reserved judgment the judge dealt with and concluded on these various claims as follows. 

1. Billy Baxters’ claim of being induced to enter into the franchise agreement by misleading or deceptive conduct of Trans-It was rejected. 

1. The judge rejected the claims of Trans-It and the Pollards of having entered into a franchise agreement or an agreement to enter into such an agreement on or about 23 March 2004 prior to entry into the franchise agreement dated 17 June 2004. The Code was neither engaged nor infringed, and the claims based upon the allegations concerning it failed, as did the claims based upon s 51AA, s 51AC and s 51AD. The claim of estoppel (being founded on the alleged, but non-existent 23 March 2004 agreement) was rejected.

1. These conclusions left for determination Billy Baxters’ claim for amounts payable under the franchise agreement, both fallen due at the time of termination and thereafter as damages, or as may be found due on an account.

1. On the other side, there remained for determination Trans-It and the Pollards’ case based on the five alleged representations. Being representations as to a future matter it was necessary that Mr Mauviel had reasonable grounds for making them; otherwise the representations were to be taken as misleading (s 51A(1)). As to that it is to be noted that s 51A(2) provides that:

For the purposes of the application of subsection (1) in relation to a proceeding concerning a representation made by a corporation with respect to any future matter, the corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making the representation.

1. In the course of argument, and merely for completeness, counsel for the appellants referred to a difference in the authorities as to the proper interpretation of s 51A(2). He referred to Auswest Timbers Pty Ltd v The Secretary to the Department of Sustainability and Environment[5] for the proposition that the effect of s 51A(2) is to impose an evidentiary onus on the representor. He also referred to Readymix Holdings International Pty Ltd v Wieland Process Equipment Pty Ltd (No 2)[6] where Flick J reviewed some of the authorities and stated that the preferable view was that expressed in McGrath v Australian Naturalcare Products Pty Ltd,[7] to the effect that the sub-section does not shift the legal or persuasive onus onto the representor. Neither counsel suggested that the appeal turned on the application of either view, and they did not debate the issue. Their approach to the issue was whether, having regard to the evidence as a whole, there were reasonable grounds for making the representation. Accordingly, it is unnecessary to consider the issue as to the interpretation and operation of s 51A(2).

   [5][2010] VSC 389, [44] (Croft J).

   [6][2008] FCA 1480, [95]-[99].

   [7](2008) 165 FCR 230, (Emmett and Allsop JJ, Stone J not expressing an opinion on the basis that to do was undesirable given the point was obiter). 

1. The issues for determination having been thus narrowed, the resolution of the case turned on the establishment or otherwise of the alleged Mauviel representations and the matter of reasonable grounds for their making.  In short, the judge found there was a misrepresentation but that it was made on reasonable grounds.  Accordingly the counterclaim failed.  The judge concluded as follows:

158.There remains the question of the five representations which the defendants insist were misleading.  The five, when analysed against the evidence called in support of the defendants’ allegations, amount to a contention that Mr Mauviel told them that he anticipated a turnover for the business of $1,300,000 (which the defendants accepted as meaning more or less) and that that turnover would enable the business to meet its rental commitments and return a profit.

159.I am satisfied that Mr Mauviel did make statements to that effect.  He believed that, as predictions about a greenfields site in an area he assessed to be well suited to the proposed Billy Baxters restaurant, they would turn out to be accurate.  He was asked by the defendants to tell them what he believed.  He responded.  He was honest in his response.  But his prediction was wrong.

160.In these circumstances, the issue is whether the plaintiff can meet the requirement, imposed by s.51A(2) of the Trade Practices Act, that - unless it adduces evidence to the contrary - any representation about the future shall be deemed to have been made without there being reasonable grounds for making it.

161.The representations made by Mr Mauviel were intended to, and did, influence the defendants in deciding to become Billy Baxters franchisees.  But they were not intended to stand alone.  Mr Mauviel made it clear that Mr and Mrs Pollard were to make their own enquiries.  It follows that they were to weigh whatever Mr Mauviel might have said about the viability of the business against the other evidence on that point.  It is in this context that one must evaluate the reasonableness of the grounds upon which Mr Mauviel based his predictions, and the reasonableness of the period allowed for the defendants to make their assessments.

162.Not that these considerations are of great materiality here.  There were reasonable grounds upon which Mr Mauviel could conclude that a Billy Baxters outlet in Jetty Road Glenelg was likely to be profitable.  In the first place, he established (and his evidence on this point was not challenged) that the asking rent was at market rates; and this in a location that embraced many restaurants – 50 to 60, according to the defendants.  He was entitled to think that most of them were profitable, and that a Billy Baxters restaurant would comfortably fill a niche in that market.

163.Secondly, as the defendants’ business plan itself attests, Glenelg is the largest tourist precinct in South Australia, but without a Billy Baxters restaurant in an area in which, according to the Pollards’ statement to the bank, an outlet of that character “is sadly missing”.  On this basis, as the defendants informed the bank, the anticipated turnover in the first 12 months of operation was $1,230,000 and the anticipated profit was $143,984.

164.This evidence was, in effect, common ground. It follows that I had before me evidence to support the proposition that there were reasonable grounds for making the representations which were made by Mr Mauviel. Section 51A(2) is satisfied.

1. Thus, Trans-It and the Pollards failed in their defences and counterclaim.  The judge held that Billy Baxters had rescinded the franchise agreement by acceptance of a purported termination of the defendants’ on 7 May 2007, and was entitled to judgment.  The judge ordered that the counterclaim be dismissed, the appellants pay the sum of $253,259.80 plus interest, accounts be taken for the period 7 May 2007 to 7 June 2009 and Trans-It pay Billy Baxters such amount as may be found to be due on the taking of the account plus interest, and the appellants were ordered to pay costs. 

The appeal

1. Trans-It and the Pollards appealed from the judgment and orders on eight grounds, only the first of which was relied on at the hearing of the appeal.  This ground contends that the judge erred in finding that the representation he found at [158] was made on reasonable grounds (judgment [90], [162]-[164]). 

1. The notice of appeal seeks orders setting aside all of the above orders, that the proceeding be dismissed, and that there be judgment on the counterclaim for $1,224,743 in accordance with the third report of Mr P V Jorgenson dated 29 January 2009 or such other sum as the Court deems appropriate, and costs. 

1. It is convenient to say something about the counterclaim for damages.  While the judge said that ‘the business made ongoing losses[8]’ he did not otherwise deal with the claim.  That is, he made no findings as to the quantum and calculation of the damages.  Further, counsel before us did not advert to the matter.  However, the third report of Mr Jorgenson, an accountant who gave evidence for the appellants, is included in the appeal book.  The report discloses the above figure as representing a calculation of Trans-It’s total loss.  It may well be that Billy Baxters does not dispute the Jorgenson calculation but, if so, the Court was not so advised.  Hence, for there to be judgment on the counterclaim, the amount of the damages would have to be assessed, if not already agreed.

   [8]Reasons, [152].

Notice of contention

1. The respondent filed a notice of contention that specified six respects in which the judge either did not decide the matter raised or decided erroneously, and on the basis of  which the judgment should be affirmed.  The six respects are:

1         The judge:

(a)       erred in:

(i)       characterising the representations as amounting ‘to a contention that Mr Mauviel told them he anticipated the turnover for the business of $1,300,000 (which the defendants accepted as meaning more or less) and that that turnover would enable the business to meet its rental commitments and turn a profit’ [158] and;

(ii)      determining whether Mr Mauviel had made statements to the effect characterised by his Honour (emphasis added).

(b)      Ought to have considered each alleged representation and determined whether that representation was made as alleged.

2         Having found that the appellants had proven on the balance of probabilities that Mr Mauviel said words to the effect that he anticipated the turnover of a Billy Baxters in Jetty Road, Glenelg would be $1,300,000, [159], the judge ought to have found the appellants had not proved the pleaded representation that the projected turnover of the franchise in the first year of operation was $1,300,000 (emphasis added).

3         Further, rather than the above finding at [159]:

(a)       The judge should have held, in light of the evidence of the appellants and Mr Mauviel as to their recollections of the relevant conversations and surrounding events and conversations, that it could not be established on the balance of probabilities what Mr Mauviel said in relation to turnover, or the effect of those words.

(b)      The judge ought to have found that neither Mr nor Mrs Pollard relied on that statement.   He ought to have found that they relied on figures provided by Mr Mauviel in the spreadsheet sent to them on 19 March 2004.

(c)       The judge ought to have found that the Pollards were not entitled to rely on those words, or their effect, as the projection of the income the business would generate, having regard to Mrs Pollard’s evidence (accepted by the judge at [60] and [81]) that in the conversation on 18 March 2004 Mr Mauviel said to the Pollards that he would provide them a template into which they could put their own projections and Mr Pollard’s evidence (accepted by the judge) that he did not take Mr Mauviel’s words in reference to turnover as a guarantee [62].

1. The notice contained one further ground, ground 6.  As this related to a ground of appeal that was abandoned it is not necessary to refer to it.

The judge’s reasons

1. I now refer to the judgment both as a convenient reference to the evidence and to see how the judge dealt with the case.

1. In early March 2004 Mr Mauviel, realising the premises at 20 Jetty Road, Glenelg were vacant, and considering them to be a potential Billy Baxters’ site, communicated with the landlord and, following discussions with Frank Kersten, Billy Baxters National Leasing Manager, offered a lease rental of $160,000 per annum.  He considered that to represent market value.  He discussed with the landlord a term of ten years with appropriate reviews.

1. On 10 March 2004 Mr Mauviel placed an advertisement in The Advertiser newspaper stating ‘BILLY BAXTER’S CAFÉ FRANCHISES AVAILABLE.  We have [exciting] opportunities for new Franchises at Ingle Farm, Jetty Road, City Cross.’ Mrs Pollard responded by email in which she stated that she and Mr Pollard:

… have often thought that a Billy’s at the Bay would be wonderful for us.  There are a lot of families who go to the bay and would enjoy dining at Billy Baxters.

We live at West Beach so that site would be wonderful for us.  Could you please email me all the details. 

West Beach is three to four kilometres north of Glenelg.

1. On 17 March Mr Mauviel emailed to Mrs Pollard a letter with an attached information pack[9] and application form which needed to be forwarded to head office with a refundable cheque for $1,000 to secure her interest.  The letter stated:

The new franchise on Jetty Road has generated a lot of interest, and the landlord needs us to move quickly to secure the site.  Please contact me with any queries you have, and I am happy to meet with you to show you our concept.

The anticipated capital required to fund this new venture on Jetty Road is approximately $350,000, which includes the franchise fee.  If this opportunity excites you please act quick, there is a lot of information for you to assess and time is fast disappearing. 

[9]Also referred to as a Franchise Information brochure.

1. Among other things the information pack (brochure) stated that before deciding to enter the food industry ‘you should ask yourself [a number of questions including] –

·       Do you realise that all business ventures pose some risk?

·       Have you researched franchising?

·       How much will it cost you to establish a business?

·       Can you minimise and control expenditure?

·       Which location, how much area and how much rent should you pay?’

It was stated that Billy Baxters can answer questions, and, further on, that:

No previous food industry experience is required as we provide a comprehensive training programme, assistance with start up and ongoing management support.

1. The information pack specified as being payable:  a franchise fee of $45,000 which covered the cost of site selection, design of the new store and certain other costs associated with starting a new store, a royalty of 8% of gross sales, and an advertising and promotion fund contribution of 1% of gross sales.

1. The information pack concluded with an invitation to contact Phillip Mauviel for ‘further discussions’.  Mauviel was described as ‘Franchise Manager SA/WA’.  I interpolate that Mr Mauviel occupied that position pursuant to an agreement with Billy Baxters dated 1 July 2003.  The agreement recited that Mr Mauviel was a current Billy Baxters franchisee who owned and operated several franchises in South Australia, and provided that Billy Baxters engaged his services to actively participate in the sale of his own franchise businesses and new franchise businesses in South Australia and Western Australia (cl 1).  The engagement was for a term of five years (cl 3.1), and provided that on the sale of a franchise Billy Baxters would pay Mr Mauviel a portion of the franchise fee and royalties (cl 5). 

1. On 18 March Mr and Mrs Pollard met Mr Mauviel outside the shop at 20 Jetty Road. It was during this meeting that the Pollards allege that Mr Mauviel made the first and second representations referred to at [8](c) above. Mr Mauviel and Mr and Mrs Pollard gave evidence of the discussion.

1. In dealing with the evidence as to this meeting the judge commenced with the evidence of Mrs Pollard:

55.      According to Mrs Pollard, Mr Mauviel began the meeting with a presentation about Billy Baxters, using his laptop for that purpose.  They told him that, having seen the advertisement in the newspaper and having discussed the prospect with their daughters, they were interested.  They said they held a Boost Juice franchise at West Lakes shopping centre.  This was managed by one of their daughters.  For his part, Mr Pollard ran a transport company.  Mrs Pollard was its bookkeeper.  Mrs Pollard says that Mr Mauviel was pleased to learn that the Pollards had experience with a franchise because the pressure was on to get the site signed up and he did not have the time to explain “the ins and outs to you”.

The judge continued:

56.Mrs Pollard says that she and her husband were concerned when told that the rent would be $160,000.  Given that they were paying $58,000 per annum for their Boost Juice franchise, they thought that $160,000 was “just exorbitant to us, for a site on Jetty Road or not, it was a lot of money”.  Mr Mauviel indicated that this was the market rent for that area.  When the Pollards said that the business would have to be turning over a lot to carry that liability, Mr Mauviel assured them that it could be done.  Mrs Pollard then gave the following evidence:

Ross said “well, how much do you think this site will be turning over? “ And he said “oh, I really can’t say that”. And Ross said “well, you must have some idea”, and he said “well, yes, yes, I do actually”. And I can remember him standing up, gesticulating like this across the square and saying “oh, look at this”, he said, “yep, yep for sure, you will be doing 1.3 million in the first year”, he said as a matter of fact he said in excess, well in excess of 1.3 million in the first year. And then Ross said “oh, right. Well how do you come to that figure? “ And he said “well, the store at Norwood is doing 1.1, Cavill Avenue [sic][10] is doing 2.3, 5”, I can’t remember exactly what it was. He said this store is going to be more like Cavill [Mall]. He said that, you know, if we go somewhere in the middle, he said you will be doing that easy. We still even after he said that … came back to the rent figure. You know, this rent is really high.

57.Mrs Pollard and her husband were, she said, upbeat about the venture.  They told Mr Mauviel that it sounded good, and that they would have no trouble obtaining finance.  Later that day, Mrs Pollard returned the preliminary franchise application form, together with a deposit. Although they discussed with Mr Mauviel the cost of the fitout and the need for them to pay for staff training before the restaurant opened, they did not at this stage have any information about expenses such as the cost of goods, electricity or finance.  Mrs Pollard conceded in cross-examination that they therefore were not in a position to form a view about the profit the restaurant might make although, she said, her husband “is pretty good with things like that”.  She also conceded that, despite what she had written in her email to Mr Mauviel of 10 March, she and Mr Pollard had never, before that date, discussed operating any kind of restaurant, let alone a Billy Baxters’ franchise.

58.At some point in the conversation, Mr Mauviel said, “Well, I think I have found my new franchisees, but I have just got to make a phone call to get the nod”.  After making the call, which he later told them was to Mr Menzies, he said to the Pollards: “Yes, you are the new franchisees of Jetty Road: congratulations”;  and then he shook their hands.  

Mr Menzies was Billy Baxters Operations Manager located at the head office at Hallam.

[10]Cavill Mall is a Billy Baxters outlet on the Gold Coast.

1. As the judge noted, Mr Mauviel’s congratulations did not mean that then and there Mr and Mrs Pollard were duly appointed franchisees.  Not only did they not have the lease of the premises but Billy Baxters was yet to consider their application form.

1. Mrs Pollard added that Mr Mauviel said he would do everything he could to help them, including supplying them with a spreadsheet in the form of a template such as he provided to potential franchisees, and into which they could put their ‘own projections’, that is to say their own income and expenditure projections. 

1. The judge then referred to Mr Pollard’s evidence.  Mr Pollard said that Mr Mauviel told them that, as a prime site, he was going to secure the premises for Billy Baxters but there was someone else interested and they would have to move fairly quickly.  Given its location he was confident it would be a success.  Indeed, he was prepared to take it on himself.  The judge continued:

62. Mr Pollard described the rent as “a rather frightening figure”. Mr Mauviel nevertheless reassured them on more than one occasion that it would not be a problem because they would turn over in excess of $1,300,000.  While Mr Mauviel said this figure was arrived at having regard both to the turnover of $1,100,000 generated by the franchise owned by him at Norwood Parade and that of the Gold Coast store at Cavill Mall (being $2,300,000 to $2,500,000), the figures meant nothing to Mr Pollard.  He did not take the reference to a turnover of “in excess of $1,300,000” as a guarantee – he would have accepted actual turnovers that were 10 or 20 per cent out – but he maintained that the steps taken by the defendants from that day forward were “all based on the fact that the store would do in excess of $1,300,000”.

1. The judge then turned to Mr Mauviel’s account of the 18 March meeting.  According to him, after Mr and Mrs Pollard referred to their trucking and fruit juice business they added:

65.… that their involvement with these two businesses meant “they were very confident in their understanding of franchising and commercial documents such as franchise agreements and leases and were very confident with their interpretation and understanding of these documents and the procedures and systems that go with that”. They were, he said, very excited and positive about the venture and indicated they had been thinking about a Billy Baxters at Glenelg for five years.

The judge, referring to Mrs Pollard’s email of 10 March and to Mr and Mrs Pollard’s familiarity with the area, considered that at least on the basis of the email Mr Mauviel was ‘entitled … to assume that the Pollards had given the proposed venture some thought on the basis of their background knowledge’.  Mr Mauviel also described the Pollards as having ‘a wealth of business experience’.  The judge then referred to Mr Mauviel’s evidence as follows:

68.Mr Mauviel cannot remember what he said about the rent or the likely turnover of the Jetty Road business.  However, he did remark that:

Obviously it’s a greenfield site, what the turnover of the store is going to be is an unknown commodity but what we can do is have a look at how other stores are performing, in particular other stores in similar sort of precincts to use as an information tool to assist in the assessment of how the business could potentially perform.

He told the Pollards that his store at Norwood Parade was doing about $1,100,000 a year in sales while, on the Gold Coast, Cavill Mall was doing about $2,300,000 a year.  He could not recall the Pollards expressing concern about the level of rental and whether the store would be able to support it.  Had they done so, however, he:

… would have said to them, an ideal benchmark for rental to be affordable is 15 per cent of turnover, rental is about 15 per cent of turnover, that’s your maximum benchmark.  So then they have to determine whether they believed the business can turn over enough turnover for rental to be 15 per cent of turnover.

He certainly concluded that rent of $160,000 plus GST could be supported by the turnover that he expected the business would generate.  In conveying this to Mr and Mrs Pollard, he would at the same time (he maintained) have told them to make their own independent assessments.  He could not recall saying that the turnover would exceed $1,300,000 a year, but he thought he would have told the Pollards that in order to afford a rental of $160,000 a year plus GST, the business would need to turn over such an amount.  He was nevertheless, and somewhat inconsistently with the above, adamant that he would not make any representations about what the sales would be; his role was to provide as much information as possible for them to make their own independent assessment of whether the business could turn over the sales needed for it to be viable.

69.Mr Mauviel denied that he told the Pollards at the conclusion of the meeting that he would email to them details of the projected turnover for the Jetty Road store.  Rather, he said he would email them the profit and loss statements from a selection of stores for them to look at and, as a kind of template, “a projection sheet for them to be able to assess the viability of the business which … was for them to play around with different turnovers.  It was never a projection for that store”.

1. Later on 18 March Mrs Pollard sent to Mr Menzies their franchise application form and a deposit of $3,000.

1. On 19 March 2004 Mr Mauviel sent the Pollards emails at 9.38 am and 9.50 am.  The first email included a spreadsheet and stated:

Hello Suzie & Ross,

Attached is a spreadsheet to help you in your calculations.  There are 3 pages to the programme.  Enter your info on to the income statement page and the breakeven and cashflow will calculate themselves automatically.

I have confirmed that the rental is $160,000 Gross (including outgoings etc).

Play around with the turnovers.  The employment expense is inclusive of workcover and GST and is indicative of a store run under management.  Therefore in your calculations if there are to be family members and or owner operators in the business this would usually be accounted for already in this calculation.

Please contact me with any queries.  Sorry about the disclaimer at the bottom, but legally I have to do it!

Regards,

Phillip Mauviel

Disclaimer:

The information provided is for information purposes only.  Although upmost [sic] care has been taken in the preparation of these figures, the provider of this information cannot be held liable for any error or omission.  The provider of this information recommends you seek independent advice.[11]

The spreadsheet is the document referred to at [8](c) above as containing the third and fourth representations.

[11]Appeal Book C401.

1. The spreadsheet shows sales for June 2004 to May 2005 inclusive, totalling $1,365,000 excluding GST and less cost of goods of $382,200 producing a gross profit of $982,800.  The spreadsheet sets out 15 items of operating expenses totalling $807,088 producing income before tax of $175,732.  These figures did not include the franchise fee.  Further, an arithmetical error of $20 has occurred in calculating the figure of $807,088;  hence that figure and that for income before tax should have appeared as $807,068 and $175,712 respectively.

1. The next page of the attachment is headed ‘Break-Even analysis 12 months year 1’.  As the judge noted:

77.… It postulates “projected sales” of $1,365,000;  puts forward figures for indirect and direct costs of operating the business;  includes the amount of $1,120,927.78 as representing break-even sales; and concludes with an indicative profit during the period of $175,732.00. 

1. The final page of the attachment was a cashflow forecast for the same 12 month period.  In a column headed ‘Pre-Start’ it includes a figure of $40,000 for net sales as well as figures for subsequent monthly net sales and GST collected.  The total receipts are shown as $1,541,500.  It is to be noted that the effect of including the $40,000 was to increase net sales from $1,365,000 to $1,405,000.  Hence there is a consistency in the attachments.  It would seem that the $40,000 represents working capital.

1. Before referring to the contents of the spreadsheet, the judge addressed the purpose of the email and what it conveyed.  First noting that the email was inconsistent with the appellants’ proposition that the parties had already made an agreement, the judge stated that:

72.… The clear object of the exercise, in my opinion, was to help Mr and Mrs Pollard assess the attractiveness of the franchise proposal.

73.The email is likewise inconsistent with the proposition that by attaching the spreadsheet Mr Mauviel was making anything more than indicative representations about the turnover or profitability of the business – representations which reflected his expectation about the turnover, to be sure, but nothing more than that.  The profitability of the business, as is true of any retail business, depends upon much more than turnover.  And here, as the email acknowledges, factors personal to the operators of the business are relevant – factors such as whether (to adopt Mr Mauviel’s expression) they are to operate the business under management; and the cost of any finance they require.  Consistently with this, Mr Mauviel, in effect, instructs Mr and Mrs Pollard to “play around with the turnovers” and make their own calculations by entering their own information, after which the spreadsheet will effect the appropriate adjustments to the bottom line.

1. The judge then dealt with submissions, and made findings, as to the spreadsheet.  He stated, at [74], that the spreadsheet was no more than what it states, namely an aid for the Pollards to use in making their calculations. 

As such it reflects Mr Mauviel’s belief about the likely level of turnover;  but none of the other figures (except rent) purport to have any greater connection with reality than as being indicative.  And even the figures going to turnover were subject to being “played around with” by [the Pollards].  They are not put forward as being definitive. 

Hence, the judge observed (at [75]):

Any sensible response to the spreadsheet would … have the persons responding insert their own figures (other than rent) in each box, and thus come to their own conclusion about the likely profitability of the business.

At the same time, the judge said it was highly pertinent that the disclaimer stated that the utmost care had been taken in preparing the figures.

1. The judge then, at [79], referred to the appellants’ argument that by providing the spreadsheet Mr Mauviel made the third and fourth representations.  They maintained that the document confirmed Mr Mauviel’s statement the previous day that the projected turnover of the business would be in excess of $1,300,000.    On the other hand, the respondent’s contention was that the document was merely what Mr Mauviel said he would provide for use as a template:  ‘a very simple pre-done tool’ for them to use to assess the viability of the business.  The judge noted that in his evidence Mr Mauviel said he had devised the spreadsheet and used it in his business as a budgeting tool to assist in forecasting profitability and to help managers in managing his restaurants.  They were, he said, a useful tool to work out the potential viability and profitability of an operation of this type.  The purpose of giving the Pollards the spreadsheet was to allow them to get an indication of how the store would perform with different turnovers, ‘so they could assess whether they wanted to do or not to do the business’.  He said that:

the way that the spreadsheet has been programmed is you enter your sales along the top line, and it does all the rest of the sheets simultaneously for you, so the only line you have to touch is the sales column, and all the rest of the percentages, calculations and formulas across all three pages all calculate automatically.[12]

[12][80].

1. The judge noted (at [82]) that of all the figures, covering receipts and payments, only that for rent was confirmed.  He continued:

82.… Each figure impacts upon the most important of all – the profit or loss at the end of the period.  It is impossible to accept that Mr and Mrs Pollard took each of them as fixed (and they do not suggest that they did).  The spreadsheet, after all, is all about what might, as opposed to what would, be.  There is also the disclaimer, which is followed by a statement that the Pollards should “seek independent advice”. 

1. The judge concluded (at [83]) that:

83.In my opinion, Mr Mauviel sent this document not as a representation of the turnover (and profit) the business would realise, but merely as a tool to assist the Pollards.  The reference to a turnover in excess of $1,300,000 over 12 months is explicable on two bases.  First, that, as the Pollards must have understood, only a turnover of that order could maintain the viability of the restaurant.  Secondly, that Mr Mauviel was confident that a turnover in that amount was attainable.  The Pollards, however, contend that they were entitled to read more into the document than that.

1. The judge found, at [84], that the appellants did not have regard to what Mr Mauviel said in the covering email, as it was (they said) overtaken by a telephone call Mr Mauviel made to Mrs Pollard shortly after it was sent.  Mrs Pollard said that Mr Mauviel told her that the spreadsheet was on its way and that ‘you don’t have to worry about putting your own figures in, I have done it all for you’.  Mr Mauviel apologised for the disclaimer and hoped it did not offend them.  The judge noted that Mrs Pollard said that Mr Mauviel did not say to ‘disregard’ the covering email. 

1. At all events, the judge found (at [85]) that the Pollards ignored the recommendation to seek independent advice.  They also ignored the recommendation to enter their own information and ‘play around with the turnovers’. As to Mrs Pollard’s evidence of Mr Mauviel’s suggested telephone advice, the judge noted that this did not sit with the covering email and that the figures other than rent were not fixed.  For instance, how would Mr Mauviel have known the Pollards’ labour costs?  The judge noted (at [86]) that in his evidence Mr Pollard said that he too allowed ‘the inconsistency’ to pass unnoticed.  He saw the figure of $1,365,000 as confirmation of Mr Mauviel’s statement that the business would turn over in excess of $1,300,000.  He was not aware of Mrs Pollard’s telephone conversation with Mr Mauviel.  The judge then noted (at [87]) that Mr Mauviel denied the alleged telephone advice to Mrs Pollard, and the judge accepted his denial.  Mr Mauviel said that the purpose of the conversation would have been to tell Mrs Pollard ‘how the spreadsheets work, what she needed to do with them.’  The judge accepted Mr Mauviel’s evidence as being much closer to the truth than Mrs Pollard’s evidence on the point. 

1. Then, at [88] the judge adversely dealt with another piece of Mrs Pollard’s evidence in which she sought to deal with what Mr Mauviel said about the purpose of the spreadsheet.  The judge recorded that in her evidence Mrs Pollard:

… drew a distinction between a “template” and a “spreadsheet”.  As she understood the distinction, a template is blank and “is set up for putting in information”;  but the document sent to her contained figures in every box, and was therefore a spreadsheet.  Yet she had to concede that had Mr Mauviel sent them a blank document it would have been of little use.

1. In other words, again the judge rejected Mrs Pollard’s evidence which clearly was designed to cover the fact that, as the judge found at [85], the Pollards had not used the spreadsheet for the purpose for which it was provided as well as having ignored the recommendation to seek independent advice.

1. Then, (at [89]) the judge noted and rejected evidence of Mrs Pollard that she read the phrase ‘play around with the turnovers’ as an invitation to insert her own figures for whatever months she chose, leaving the total 12 month turnover as fixed.  The judge stated:

89.… I do not accept that the Pollards regarded this document as a static statement of the income which, in the absence of exceptional circumstances, the business would generate; rather, I find that they knew that it was being sent to them as a tool to be used by them to make their own assessment of the viability of the business. 

90.At the same time, I have no doubt that Phillip Mauviel told them that in his opinion the café was capable of achieving a turnover of $1,300,000.  This was his opinion, genuinely held.  It was shared by others within Billy Baxters.  Were it otherwise, Mr Mauviel would not - following discussions with Mr Kersten, the plaintiff’s National Leasing Manager – have offered the landlord of 20 Jetty Road a base rental of $160,000 per annum.

1. It is convenient to mention that the second email attached a profit and loss statement for Mr Mauviel’s Norwood franchise, (being for the first four months of conduct of that franchise, October 2003 to January 2004, noting that the first month’s trading was not a full month), and profit and loss statements for the first year of his Golden Grove franchise and the Myer Centre franchise (for the four years he owned it).  Mr Mauviel concluded the covering email with the statement ‘I hope this information helps you’. 

1. The judge then (at [91]-[95]) referred to reasons why he concluded that the Pollards knew of the limitations surrounding Mr Mauviel’s reference to the expected turnover.  These were the limitations in the spreadsheet:  there was no provision for the rent-free period, and there was no allowance for the cost of borrowings or interest.  Further, it would have been pointless to provide the profit and loss statements for the Norwood, Golden Grove and Myer Centre franchises if all the figures for Glenelg were already ascertained;  and the business plan subsequently provided to their bank by the Pollards included a spreadsheet based on, but differing significantly from, Mr Mauviel’s template, and in which they catered for a loss.

1. Returning to the sequence of events, later in the afternoon on 19 March Mr Mauviel met the Pollards at their home. It is at this meeting that Mr Mauviel is alleged to have made the fifth representation referred to at [8](c) above. It seems that the landlord of 20 Jetty Road was applying pressure on Mr Mauviel for the lease to be signed, and that Mr Mauviel saw the Pollards to discuss the lease. He showed them a ‘disclosure document’ dated 19 March 2004 provided by the landlord which named the lessee as Mauviel Holdings Pty Ltd. It seems also that Mr Mauviel had an Instructions for Lease document for the Pollards to sign. The Pollards refused to sign the documentation. Mr Mauviel accepted the Pollards not signing the lease that day, he himself being uncomfortable with the pressure being exerted by the landlord.

1. The judge noted (at [100]) that Mr Pollard confirmed in cross-examination as to this meeting that he told Mr Mauviel he was uncomfortable about the level of rental, and that in response Mr Mauviel ‘reassured us of the potential of the business and the fact that 1.3 plus would easily cover any expenses, as far as the lease goes’. 

1. Finally, at the meeting Mr Mauviel gave the Pollards a copy of the franchise agreement for his Myer Centre store.  They did not yet have a draft franchise agreement for the Jetty Road store. 

1. Subsequently, on 24 March 2004 the Pollards signed a lease of the premises for a term of five years commencing on 19 April 2004 and with options for two further five year terms.  Two days prior they had seen their accountant, Graeme Tull, but did not ask him for, and were not given, any advice about the viability of their new venture.  They said this was because they were ‘happy with what Phillip Mauviel had told us, had assured us’.

1. An issue at the trial was whether, as the Pollards contended, Mr Kersten told them that they could go ahead with executing the lease.  Mr Kersten denied having done so, which was consistent with his email of 22 March that the lease was subject to the approval within ten days of the lessee’s and franchisor’s solicitors.  The judge found (at [121]) that Mr Kersten was a reliable witness and that he ‘did not tell Mr and Mrs Pollard that it was in order for them to execute the lease’.  The judge further found (at [122]) that if there was any pressure to execute the lease, that pressure had its source with the landlord.  In the end, although Mr Pollard ‘demonstrated himself to be someone who would not be pushed into doing something he did not want to do’,  and without taking advantage of the possibility of a delay of up to ten days, the Pollards executed the lease.  No representative of Billy Baxters was present when they did.  In these circumstances the judge found that Billy Baxters did not unconscientiously pressure the Pollards to sign the lease (at [124]).

1. It is seen that in these circumstances the Pollards committed themselves to a lease before they had a franchise.  Nevertheless they commenced to undertake the steps necessary to establish a Billy Baxters business.

1. On 23 March 2004 Billy Baxters sent the Pollards a disclosure statement, the Code and a pro forma franchise agreement.  As the judge observed, the letter is in the form of a letter to a prospective franchisee.  It stated, for instance, that if they decided not to proceed they should return all documents.  The judge noted, correctly, that at that time ‘the Pollards had no contractual obligation to the plaintiff’ (at [128]).  Hence they could have opened a different food outlet at the premises, the judge finding that the landlord would have so agreed. 

1. The disclosure document gave extensive information concerning the Billy Baxters franchise business and the obligations under a franchise agreement.  The following warnings were set out on the front page:

This disclosure document contains some of the information you need in order to make an informed decision about whether to enter into a franchise agreement.

Entering into a franchise agreement is a serious undertaking.

A franchise agreement is legally binding on you if you sign it.

Take your time, read all the documents carefully, talk to other franchisees and assess your own financial resources and capabilities to deal with the requirements of the franchised business.

You should make your own enquiries about the franchise and about the business of the franchise.

You should get independent legal, accounting and business advice before signing the franchise agreement.

It is often prudent to prepare a business plan and projections for profit and cash flow.

You should also consider educational courses, particularly if you have not operated a business before.

1. In late March the Pollards sought finance from the Bank of South Australia, supported by a business plan they prepared.  They sought $340,000 for fit-out, $40,000 for working capital and $20,000 for contingencies.  In introductory remarks it was stated that ‘the success of Billy Baxters in the style of precinct that represents Jetty Road is demonstrated by the results achieved at the franchised outlets at Norwood Parade, SA and Cavill Mall, Qld where the respective weekly takings were $26,000 and averaging $75,000’ and continued:

Using these two stores as a model, with Cavill Mall representing the style of business that matches the Jetty Road precinct, combined with the sales of Norwood Parade to fathom a South Australian influence, we expect the Jetty Road outlet when up and running to comfortably turnover $25,000-$30,000 per week.

1. The business plan spoke glowingly of the location at 20 Jetty Road, and stated (among other things) that they would offer a type of restaurant service missing in the area, and that their research showed that a large percentage of residents eat out in the Glenelg area.

1. The business plan included an income statement for the first 12 months.  Mrs Pollard said it was created after she copied the spreadsheet Mr Mauviel sent on 19 March.  The judge noted, however, that it differed significantly from the original spreadsheet in the following respects:

(a)       each monthly amount of sales had been reduced (in particular, June by $40,000 and July by $30,000) to produce a total sales figure of $1,230,000 in lieu of $1,365,000.  There were corresponding adjustments to the cost of goods, and the gross profit was reduced to $885,600;

(b)      the employment expenses were reduced from $477,750 to $430,500;

(c)       rent was reduced from $160,008 to $120,006 by allowing for rent-free periods;

(d)      the amount for electricity was changed from a static $1,500 per month to allow for seasonal variation;

(e)       there were adjustments to the figures for franchise fees, advertising levy and uniform;

(f)       an additional item of accountancy/legal fees was added and $3,600 allowed;

(g)      June now showed an operating loss of $4,914 in lieu of a profit of $10,386;  and

(h)      bank interest was included at $19,200 and $30,000 for a chattel mortgage.

Nevertheless, there was little change in estimated total operating income, from $175,732 to $173,984;  this was due to the reduction in both turnover and expenses.  The cumulative net income was shown as $143,984 down from $175,732.

1. The Pollards gave evidence that they made these changes, in part responding to the bank having queried the projected turnover figure of $1,365,000;  the bank requested they be ‘more conservative’.  As a consequence, the Pollards said, they for the first time critically examined Mr Mauviel’s figures, and in that process made the amendments (at [134]).  Having noted this evidence, the judge said that:

135.In my opinion, all this is consistent only with the conclusion that, of all the figures appearing in the spreadsheet originally sent by Mr Mauviel on 19 March, the defendants relied only on the final turnover.  But this exception, important though it is, carries with it equally important qualifications.  Ross and Sue Pollard relied on Mr Mauviel’s estimate of the turnover, but as one element only in a much wider set of considerations which weighed upon them when deciding to accept the plaintiff’s offer to become Billy Baxters franchisees.  That estimate was what they thought it was:  his honest expression, based upon reasonable grounds, of that which the café was capable. 

136.Limited in that way, their reliance was justified.  I find that Mr Mauviel did believe that a well-run Billy Baxters business, at that location, would in its first year turn over something in the vicinity of $1,300,000.  Of course he could not guarantee this.  And equally, as Mr Pollard accepted, Mr Pollard knew that such a guarantee could not be given.  The latter anticipated a degree of divergence, which – as he said in his evidence - might be as much as 20% less than $1,300,000.

137.But Mr and Mrs Pollard had formed their own assessment of the business that their Billy Baxters café would attract.  They went to some lengths to impress upon the bank that they had made such an assessment.  Hence the reference in their submission to the bank to “our research”.  It is true, as I find, that Mr Mauviel’s opinion influenced them.  But it will be remembered from Mrs Pollard’s evidence (as recounted in paragraph [55] above) that they asked for his opinion, he hesitated, they pressed him, and then he gave it.  Importantly, however, it was his opinion, honestly held.  Having given it in response to the request from the Pollards to do so, he shortly afterwards (in his email of 19 March 2004) told them to make up their own minds – or, to put it in his words, “play around with the turnovers”.

138.It follows that Mr Mauviel’s estimate of the turnover of the business in its first year of operation was intended to be but one factor to be taken into account by Ross and Sue Pollard.  Nevertheless, it was made for the purpose of influencing their decision;  and I find that it did.  It was therefore misleading, even as a mere projection about the future, unless it were based upon reasonable grounds.

139.I find that they did use the spreadsheet as a tool, as suggested by Mr Mauviel, and did “play around with the turnovers”.  They did so for each month.  There was a consequential adjustment to the twelve-month total.  I further conclude that they could not reasonably rely, and did not in fact rely, on the net income figure of $175,732 in the original spreadsheet.  They are quite intelligent enough to appreciate that, given the uncertainty of the operating expenses which would need to be tailored to provide for their own circumstances (for example borrowing costs, staffing structures and the rent free period) they could not accept the figures included by Mr Mauviel as anything more than a base from which to make their own calculations about the likely profitability of the business.  This is perhaps exemplified by the fact that, in adjusting the spreadsheet for the purposes of their application to the bank, they took into account seasonal effects – something Mr Mauviel did not do.  That omission alone must have demonstrated to Mr and Mrs Pollard that his figures did not purport to be anything more than indicative of the categories (and to an extent the scale) of items that should be taken into account in working out whether or not the business was an attractive proposition.

140.I find for these reasons that what is pleaded by the defendants as the fourth misrepresentation - that the business would make a net profit of $175,732 in its first year of operation - was not made in those terms; and even if it had been made, the defendants did not rely upon it. 

141.Mr Mauviel nevertheless represented not only that in his opinion the business would return a profit in that initial period, but also that the rent sought by the landlord was reasonable, and that the turnover which the business would generate, some $1,300,000, would support the rent and therefore keep the business profitable.

1. Then, observing that the context in which those representations were made was important, the judge said that:

142.… If the evidence of Mr and Mrs Pollard is accepted, Mr Mauviel did not initially refer to their responsibility to undertake their own (appropriate) enquiries before making up their minds.  Nevertheless, that was the thrust of subsequent statements which were either made by or on behalf of the plaintiff or (not quite the same thing) contained in documents prepared by the plaintiff and given to the defendants.  The message was that they should base any decisions upon their own research, albeit while taking Mr Mauviel’s opinion – which, as I find, he expressed to them - into account.  The Myer Centre document, which the defendants propound as incorporating the terms of their initial franchise agreement, said this, or to this effect, in paragraph 6.13.1.  The email sent to Mr and Mrs Pollard at 9.38 am on 19 March likewise said so, and in any event is explicable only on that basis.  And the disclosure document repeated the message.  It is one which also accords so directly and fundamentally with common sense that at one level it should not have required any repetition.

143.This conclusion has significance when one seeks to assess whether or not there were reasonable grounds for the representations made by Mr Mauviel.  Mr and Mrs Pollard were told that those representations were not to be accepted without question, but rather that they were responsible for making up their own minds.  The question of importance in this context - whether the representations were reasonably based - must be assessed in that light.  It is one thing to tell a prospective franchisee, or leave a prospective franchisee under the misapprehension, that representations about the future are inherently reliable, and may be accepted at face value and without further enquiry.  If that be the situation in which the prospective franchisee is left, the reasonableness of the grounds for the representation(s) will be assessed very strictly.  The test will not be so strict when, as here, two other facts must be taken into account.  First, that the defendants were on several occasions told, in effect, that they were not to rely only upon one source of information or advice.  Secondly, that they were by Mr Kersten’s email of 22 March given an opening by means of which they could have acquired the time and opportunity to obtain that additional assistance.

1. Returning to the chronology, on 13 April the bank offered finance.  On 15 April the Pollards accepted the offer and advised Billy Baxters.  On 2 May Mrs Pollard emailed Mr Mauviel confirming that finance was arranged.

1. In the meantime, a fit-out commenced on 19 April, carried out by a contractor under the direction of Mr Mauviel.

1. On 3 May 2004 Billy Baxters wrote to the Pollards confirming their intention to franchise the store at 20 Jetty Road and enclosing a franchise agreement and invoices for the franchise fee of $45,000 plus GST and fees incurred in drafting the documentation.  The letter stated:

We suggest that you seek your own independent legal, business and accounting advice before signing the documentation.

The judge found that Mrs Pollard took no notice of that sentence or the sentence confirming their intention to franchise the store, as, by the time of this letter, ‘everything was done and dusted’.

1. The Pollards signed the franchise agreement and guarantee on 10 May 2004.  The Pollards also signed certain statements attached to the franchise agreement.  These were a franchisee/guarantor’s statement in which they acknowledged having received the disclosure document and the Code and had had a reasonable opportunity to understand them.  The documents also included a form of Solicitor’s Certificate, Business Adviser’s Certificate and an Accountant’s Certificate;  as to each, the Pollards signed Part B in which they acknowledged they had been recommended to seek advice from a solicitor, business adviser or accountant/tax adviser (as the case may be) and had elected not to seek advice from such persons about the franchise agreement.

1. The documents were returned to the respondent on 13 May 2004.

1. In fact, however, the agreement came to be dated, and came into effect on, 17 June 2004.  That was a few days after the store opened for business on 9 June.

1. Unhappily the business was not successful and suffered ongoing losses.  Among the difficulties were these:  being at the beach, there were strong winds and people stayed indoors;  there was limited parking;  and the configuration of the restaurant (being narrow at the front) was an impediment:  it meant the venue had little relationship to the street and passers-by.  In short, there were not enough customers.

1. It was in the light of these facts and findings that the judge concluded as he did in paragraphs [158]-[164] referred to above.[13]            

   [13]At [14].

Reasonable grounds

1. As the appeal is brought on the issue whether Mr Mauviel had reasonable grounds for making the representations he was found to have made, it is appropriate to deal with it first.  Before setting out the parties’ submissions on this aspect of the appeal, however, it is necessary to explain how the issue of reasonable grounds was put at trial.    

The issue at trial

1. As mentioned earlier, the appellants’ counterclaim contended that, to the extent that the pleaded representations related to future matters, there were no reasonable grounds for their making.  The appellants provided particulars which,   in essence, referred to the fact that a Billy Baxters had never operated at the site or in Glenelg, a lack of trading data in respect of any previous tenancy of the particular site or other cafes and restaurants in Glenelg, that Billy Baxters were generally based in shopping centres and not strip shops and insufficient consideration had been given to the difference, and the trading performance of comparable Billy Baxters stores did not justify the figures contained in the pleaded representations.  The respondent’s defence to counterclaim merely alleged that there were reasonable grounds for the representations alleged.

1. In his closing address, the appellants’ counsel sought to demonstrate a lack of reasonable grounds by noting, among other things, the following evidence:

(a)Mr Mauviel told the Pollards that the Norwood store was doing about $1.1M a year in sales.

(b)Mr Mauviel believed the Glenelg store was comparable to the Norwood store, and agreed that he told the Pollards the two stores were directly comparable.

(c)Mr Mauviel conceded that in its first year Norwood took less than $1M.

(d)As to the spreadsheet figure of $1,365,000, when he [counsel] put to Mr Mauviel that the figure was hopelessly optimistic as a projection for Norwood, Mr Mauviel replied that ‘quite often they are used as budgeting tools in order to keep the managers performing’.  Later, Mr Mauviel agreed that he had projected turnover of $1,365,000 for Norwood, and made a similar projection for Glenelg in his own mind. 

(e)Mr Jorgensen’s evidence that no reasonable person could have made those projections [as to $1.1M and $1,365,000] based on the material Mr Mauviel had available to him.  Yet the respondent called no expert evidence to refute Mr Jorgensen.

(f)The actual sales figures for the first four months at Norwood overstated profit because the rent figure was understated by virtue of the rent-free period being taken into account. 

1. Counsel submitted that there was no basis for projecting a turnover of $1,365,000 for Glenelg or Norwood, and Mr Mauviel had not explained the jump from $1.1M to $1,365,000.  Indeed, both figures were grossly optimistic having regard to the actual sales data for Norwood which Mr Mauviel had at the time he made the representation.  And given that Mr Mauviel conceded that he had done no due diligence regarding the Glenelg site, it was unreasonable to compare that unopened site with Norwood.  In short, he made a wildly optimistic guess about Glenelg, a guess that could not have been based on actual Norwood figures because those figures did not justify the projection.

1. The respondent’s written submissions at trial did not deal with the question of reasonable grounds.  In his closing address, counsel for the respondent said:

Our case, Your Honour, is that the representations weren’t made in the form alleged.  If Your Honour finds that the representations as pleaded were made, the only matter to which I could point to in relation to the reasonable grounds basis would be the observations made in relation to Jetty Road by Mr Mauviel, and the takings of the Norwood store as at that time, and if those don’t form reasonable grounds, Your Honour, I can’t say anything more about that.

1. I interpolate that counsel did not explain what ‘observations’ of Mr Mauviel he was referring to.  However, it is reasonable to infer from what counsel said that they were Mr Mauviel’s observations to the effect that the Jetty Road store was in a busy tourist area and he believed that the store would be viable, being comparable to Norwood.  Such an inference is consistent with counsel’s reference to the Norwood takings, as those takings could only have been relevant to the issue of reasonable grounds if, as Mr Mauviel asserted in evidence, the two stores were comparable.   

Submissions on appeal

Appellants

1. The appellants commenced by submitting that the respondent had not adduced ‘evidence to the contrary’ within the meaning of s 51A(2) and, in consequence, the respondent was deemed not to have had reasonable grounds for the representation. In the end, however, the appellants were content to argue on the basis that the issue was not whether the respondent had adduced evidence to the contrary (which would be assumed) but whether, on the balance of probabilities and having regard to all the evidence on the point, the respondent had established that there were reasonable grounds for the representation. As to that, counsel submitted that the evidence did not establish that the respondent had reasonable grounds for the representation.

1. In developing this submission, counsel referred to [162]-[163] of the judgment where the judge identified what he considered constituted reasonable grounds for the representation.  Those grounds were Mr Mauviel’s unchallenged evidence that the asking rent was at market rates (in a location where, according to the appellants, there were 50 or 60 restaurants), and the inference (drawn by the judge) that Mr Mauviel was entitled to think that most of the restaurants were profitable and that a Billy Baxters restaurant would comfortably fill a niche in the market.  The judge also referred to the appellants’ business plan as presented to their bank, which stated that Glenelg was the largest tourist precinct in South Australia but without a Billy Baxters in an area where an outlet of that character was ‘sadly missing’, and anticipated a turnover in the first 12 months of $1,230,000 and a profit of $143,984.

1. Counsel submitted that these matters did not constitute reasonable grounds.  First, the judge erred in inferring that Mr Mauviel was entitled to believe that other restaurants in the area were profitable;  there was no evidence to justify such a belief.  Indeed, the evidence, including that of Mr Mauviel, was to the contrary effect; namely that restaurants came and went in the area, and that there were just as many successful as unsuccessful restaurants.  Secondly, neither side led expert evidence as to the profitability of the restaurant market in the area.  And even if it could be said that restaurants in the area were profitable, that was a generalised proposition which could not constitute reasonable grounds for a representation as to a specific projected turnover for a Billy Baxters restaurant in that location.  Thirdly,  as to the figures in the Pollards’ business plan, they were themselves a toned-down version of Mr Mauviel’s representations, and as such could not logically be said to constitute reasonable grounds for Mr Mauviel’s representations.  More fundamentally, the Pollards’ beliefs about turnover were irrelevant to the question whether Mr Mauviel had reasonable grounds for making the representations.  It followed, submitted counsel, that none of the matters relied on by the judge constituted reasonable grounds for the representation.       

1. That left the other evidence relied on by the appellants at trial as going to the lack of reasonable grounds.  As to that, counsel referred to Mr Mauviel’s evidence that he regarded Jetty Road and Norwood as comparable stores, and that he had used his Norwood projections in the spreadsheet that he sent to the Pollards.  He initially submitted (as did counsel at trial) that the two stores were not comparable, thus to the extent that Mr Mauviel used Norwood projections as a basis for predictions about Jetty Road turnover, he had no reasonable grounds to do so.  However, counsel later said that it was not necessary to resolve the question whether the two stores were in fact comparable.  That was because even assuming they were comparable, Norwood never achieved the projected turnover of $1,365,000, and its sales were well below the figure of $1.1M Mr Mauviel told the Pollards.  At the time he made the representation about Jetty Road, Mr Mauviel knew that his Norwood projections were wrong, however he conceded in evidence that he had made the same projection for Jetty Road in his own mind.  The Jetty Road projection was thus unsustainable.  And as the parties conceded on the appeal, the Cavill Mall store was not a valid comparator hence turnover figures for that store could not constitute reasonable grounds for the representation.  It followed that no person in Mr Mauviel’s position, having the information he had on 18 March 2004 about the actual Norwood takings, could have made the Norwood projections or applied them to an unopened Glenelg store about which there had been no due diligence or market research.

Respondent

1. Counsel submitted that the question of reasonable grounds depended on the nature of the representation.  If the representation was a concrete statement about projected income (for example ‘you will make $1.3M’), one would expect solid grounds for it.  If, on the other hand, the representation was Mr Mauviel’s opinion as to what takings might be, given in response to being asked about that by the Pollards over coffee at their first meeting, different considerations would apply.  Counsel submitted that the judge was correct to deal with reasonable grounds by reference to the representation found, rather that the representations pleaded.  In effect, the representation found was an opinion rather than a concrete projection.

1. Counsel referred to the following evidence:

(a)in the absence of a trading history for Billy Baxters for that site, the practice of the organisation was to rely upon comparable stores;

(b)there were significant points of comparison between Norwood and Glenelg;

(c)Mr Mauviel had done an analysis and believed the store at Glenelg was viable;

(d)Mr Mauviel would have been prepared to take it on himself;

(e)Jetty Road was a significant tourist precinct;

(f)the rental for the Glenelg site was at market for the area, and comparable to Norwood;

(g)the site was fully equipped to meet the requirements of Billy Baxters; and

(h)a turnover of about $1.3M was within the usual correlation between rent and turnover.            

1. That evidence having been adduced, the question for the judge was whether on the totality of the evidence there were reasonable grounds for making the representation found.  Counsel emphasised the fact that Mr Mauviel had looked at the Jetty Road site and would himself have been prepared to take a risk on it.  He submitted that there was evidence which allowed a finding that there were reasonable grounds for making the representation, given the nature and content of the representation.

Conclusion on reasonable grounds

1. At the outset something should be said about the judge’s holding at [143] – and repeated at [161] - that the issue whether reasonable grounds existed for the representations was to be tested on a standard less strict than in a case where the representee is told or given to understand that the representation about the future is ‘inherently reliable, and may be accepted at face value and without further enquiry’.  The judge considered however that that was not the present case, as the Pollards ‘were told that those representations were not to be accepted without question, but rather that they were responsible for making up their own minds’.  Further, Mr Kersten’s email of 22 March had given them more time and opportunity in which to obtain additional assistance.  With respect, the matters identified by the judge seem more related to issues of reliance and causation.  Having found that Mr Mauviel made a representation as to a future matter – being that stated at [141] – he either had reasonable grounds for making the representation or he did not.  Whether he did will depend on the nature and terms of the representation considered in light of the relevant facts and circumstances.  

1. In my view, the evidence taken as a whole did not establish that the respondent had reasonable grounds for the representation found by the judge at [158]-[159].

1. It is convenient to begin with the matters relied on by the judge.  As to the first matter - being the fact that the rent was at market rates - the only connection between the rent and turnover figures was that if one applied the Billy Baxters ‘policy’ (to the effect that rent should be no more than 15% of turnover) the turnover would need to have been at least $1.3M to make the rent affordable.  So much was conceded by Mr Mauviel.  But the fact that turnover of a particular amount was required to make the rent affordable bore no logical connection to a representation as to what turnover would actually be.  As to the second matter, while Jetty Road is a tourist precinct with many restaurants, there were no reasonable grounds for Mr Mauviel to think that most of the restaurants in the area were profitable and, more particularly, that a Billy Baxters restaurant would comfortably fill a niche in the market.  Indeed, as the appellants point out, even if Mr Mauviel did have reasonable grounds to expect that the Jetty Road store would be profitable, that would not translate into a specific turnover figure, at least in the absence of evidence that Mr Mauviel had undertaken some quantitative analysis that justified his putting forward the figure of $1.3M found by the judge.  As to the third matter - being the statements of anticipated turnover and profit in the appellants’ business plan - irrespective of the source of such statements, the Pollards’ beliefs as to those matters could not constitute reasonable grounds for Mr Mauviel having made the representation that he did.  In my view, none of these matters constituted reasonable grounds for the respondent making the representation found by the judge.

1. Unfortunately, and presumably because he had already concluded that there were reasonable grounds, the judge did not go on to deal with the other matters raised by the appellants in closing address as evidencing an absence of reasonable grounds, and the respondent’s response thereto.  Thus it is necessary to consider those matters in order to determine whether, on the whole of the evidence, there were reasonable grounds for the representation. 

1. In essence, the matters raised by the appellants in closing address bore on the question of whether the Norwood store was a valid comparator and whether the Norwood projections and/or actual sales figures constituted reasonable grounds for Mr Mauviel making the representation he did about Jetty Road.  However, as the argument developed on appeal, it may be assumed for present purposes that the two stores were comparable.

1. As I have indicated earlier, the respondent’s reference in closing address to the Norwood takings bearing on the question of reasonable grounds was explicable only on the basis that Mr Mauviel regarded the stores as comparable and hence the Norwood takings were relevant to the representations about Jetty Road.  Similarly, the underlying premise of the respondent’s submission on appeal was that, in the absence of a trading history at Jetty Road, the respondent’s practice was to rely upon comparable stores - Jetty Road and Norwood being sufficiently comparable - and that Mr Mauviel’s analysis of Jetty Road on that basis led him to believe that Jetty Road was viable.

1. The difficulty with the respondent’s submission is that it merely asserted that Mr Mauviel had done an analysis of Jetty Road.  While in cross-examination Mr Mauviel agreed with counsel’s suggestion that he had ‘done a fairly detailed analysis for [his] own purposes and decided that it was a viable proposition’, there was actually no evidence as to any specific analysis that would enable one to conclude that Mr Mauviel had a cogent basis, or reasonable grounds, for his opinion that Jetty Road would produce the turnover of $1.3M he considered to be necessary for the business to be profitable.  In effect, behind the spectre of Mr Mauviel’s ‘analysis’, the only matters the respondent could point to in support of his opinion as to Jetty Road were the similarities with Norwood. 

1. Thus understood, the critical issue is whether the information Mr Mauviel had about Norwood’s trading performance, as at 18 March 2004, constituted reasonable grounds for the representation he made about turnover at Jetty Road.

1. Mr Mauviel’s evidence in chief was that he told the Pollards that Norwood ‘is doing about $1.1M a year in sales’, and that he could say that with ‘about a 100 percent degree of confidence’ because it was his business and ‘he handled the financials on that on a daily basis’.  Unfortunately, that confidence appears to have been misplaced.  The Norwood store had commenced trading in October 2003, and the first four months’ trading figures (up to 31 January 2004) showed ‘cafe sales’ of $308,076.61.  Mr Mauviel said in cross-examination that these were net sales, not including GST.  Mr Mauviel sent these figures to the Pollards as a Profit and Loss statement for the first four months at Norwood, his email advising them to bear in mind that ‘the first month’s trading was not a full month’.  I interpolate that the figure of $308,076.61 was not broken down into individual monthly figures.  But in terms of the sales as at the time of the representation, the net sales figures (a different document from that provided to the Pollards) show that monthly sales were $41,563.13 (October 2003 – last week only), $75,985.54 (November 2003), $77,244.84 (December 2003), $93,803.75 (January 2004), $64,576.70 (February 2004) and $29,352.23 (first two weeks of March 2004).  The total of these sales is $382,526.72.  It is sufficient to note that, leaving to one side October 2003, the actual sales averaged less than $76,000 per month over the period up to the time of the representation.  Extrapolating such a figure over a one year period (12 x $76,000) produces an annual turnover of $912,000.  And even if one takes the actual sales figures after the date of the representation (up to and including October 2004, which latter month is substituted for the less profitable starting month of October 2003), the net turnover is about $975,000.  Thus, on any view, the actual turnover was well below the figure of $1.1M given to the Pollards.  But more importantly, the figure was even further below the representation of $1.3M relating to Jetty Road.  In short, there was no logical connection between the actual turnover at Norwood and the representation about turnover at Jetty Road.   

1. In so concluding, I do not overlook that counsel reiterated on several occasions that the appellants did not plead any misrepresentation as to turnover at Norwood.  That is so, but it misses the point.  In the absence of any stand alone analysis of Jetty Road turnover, the respondent’s case on reasonable grounds ultimately rested on the proposition that Norwood and Jetty Road were sufficiently comparable for Mr Mauviel to rely on the Norwood trading performance as reasonable ground for the representation as to Jetty Road.  In that context, the focus on Norwood turnover figures is necessary to demonstrate that assuming comparability between stores the discrepancy between the actual Norwood figures and the representation about Jetty Road was so great that the Norwood figures could not have constituted reasonable grounds for the representation.

1. I also note that counsel submitted that to the extent that projections (whether they be $1.1M or $1,365,000) as to the turnover of Norwood were raised, the Pollards received by email the actual Norwood turnover figures, so it could not reasonably be said that they relied on any comment by Mr Mauviel as to the Norwood takings.  Further, the analysis of the Norwood figures (showing that turnover would be well under $1M) was available to the Pollards ‘before they made any decisions’ so the higher figure of $1,365,000 in the spreadsheet would not have misled them.  That is really an argument about reliance.  The issue here is not whether the Pollards would have been misled about the Norwood turnover, but rather whether the Norwood figures themselves constituted reasonable grounds for the representation about Jetty Road.

1. In my view, for the reasons given above, the respondent did not have reasonable grounds for the representation about Jetty Road. 

Notice of contention

Submissions - respondent

1. In essence, counsel made two broad submissions.

1. First, that on the evidence it was not open to make positive findings as to what Mr Mauviel said about turnover. More particularly, it was not open to find that the pleaded representations were made. In essence, this submission encapsulates the matters in 1(a) and (b), 2, and 3(a) set out at [20] above.

1. Secondly, that even if a representation about projected turnover was made, in all the circumstances of the parties’ dealings it was not open to find that the appellants relied on any such representation. In essence, this submission encapsulates the matters in 3(b) and (c) set out at [20] above.

1. As to the first submission, in developing his argument, counsel submitted that in the circumstances of this case, the actual words spoken about turnover were important.  That was because there was a material difference between:

(a)on the one hand, the pleaded representation (that Mr Mauviel told the Pollards that the projected turnover of the Jetty Road store was $1.3M) and the representations alleged in Mr Pollard’s evidence (that Mr Mauviel said ‘you’ll turn over in excess of $1.3M’) and Mrs Pollard’s evidence (that Mr Mauviel said ‘you will be doing $1.3M in the first year’); and

(b)on the other hand, the representation found by the judge (that Mr Mauviel made statements to the effect that he anticipated a turnover of $1.3M).

In making the finding that he did, in effect the judge did not accept the Pollards’ evidence as to what was said, nor did he accept Mr Mauviel’s evidence that he may have said that in order to pay rent of $160,000 it would be necessary to turn over $1.3M.  Thus, the judge did not accept the evidence of any participant in the conversation.  That meant there was uncertainty as to what was said.  Indeed, the representation found by the judge was materially different from the pleaded representation and the type of representations referred to in the Pollards’ evidence.  The pleaded representation referred to projected income, which suggested a statement based on a process of projection or evaluation.  Similarly, the Pollards’ evidence referred to statements of the amount the business would turn over as a fact.  But no such representation was proved.  Rather, the representation found was an opinion, in the sense of an honest prediction as to the potential of a greenfields site, given in the context of an exploratory discussion where, as the judge found, Mr Mauviel initially said nothing as to income until he was pressed by Mr Pollard, at which point he gave his opinion.

1. Counsel referred to the observation of McClelland J in Watson v Foxman[14] that, in cases about misleading or deceptive conduct, the words spoken must ‘be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances’.  In this regard, McClelland J also referred to the fallibility of human memory increasing with the passage of time.  Counsel submitted that in the present case the conversations happened five or six years before the trial, meaning that, having rejected the Pollards’ evidence, it was not open to the judge to find against the respondent on the basis of a representation that was not pleaded, and at best was merely the judge’s interpretation of the gist of what was said. 

   [14](1995) 49 NSWLR 315, 318-9.

1. In developing the second submission, counsel submitted that in determining whether any representation made by Mr Mauviel was misleading or deceptive, it was necessary to have regard to the overall course of dealing between the parties and the objective commercial realities of the transaction; see Effem Foods Pty Ltd v Lake Cumbeline Pty Ltd.[15]  He submitted that, assuming it was made, Mr Mauviel’s statement about a turnover of $1.3M could not have been taken by the Pollards as an unqualified statement of fact that the business would turn over that amount.  Rather, it was an opinion, expressed during an exploratory discussion, which was not the end of the matter and was not to be taken in isolation, but rather in the context of all the surrounding circumstances.  Those circumstances included the fact that the following day, Mr Mauviel emailed the Pollards the spreadsheet, advising them that it was to help them in their calculations and that they were to ‘play around with the turnovers’.  Importantly, the email did not tell the Pollards to do their calculations on the basis of the figure stated the previous day.  Further, Mr Mauviel sent actual profit and loss figures for other franchises including Cavill Mall and Myer Centre.  Given that he had made no comparison between Jetty Road and those stores, what was the purpose of providing those figures other than as an aid to the Pollards doing their own calculations regarding Jetty Road?  Further relevant matters were the disclaimers accompanying the spreadsheet, and the fact that the Pollards had told Mr Mauviel that they were experienced in business and had previously run a franchise.  Thus, when Mr Mauviel sent the spreadsheet figures to the Pollards, it was in the reasonable expectation that they would use the figures to do their own calculations as to the viability of the business.

   [15](1999) 161 ALR 599, 603 [15]-[16] (Gleeson CJ, Gaudron, Kirby & Hayne JJ).

1. Further, in determining whether the appellants relied on the oral representations of 18 March, counsel submitted that given (a) Mr Pollard’s evidence that everything they did was based on the spreadsheet, (b) the qualifications in the covering email to the spreadsheet, and (c) the Pollards’ subsequent use of the spreadsheet, the evidence that the Pollards relied on the previous day’s oral representation was uncompelling. 

1. As to whether the Pollards relied on the spreadsheet, counsel noted that the judge did not accept Mrs Pollard’s evidence that Mr Mauviel phoned her after sending the email and told her that there was no need to fill in the figures as he had ‘done it all for [them]’.  That finding was not challenged on appeal.  Further, Mrs Pollard said that she did the bookkeeping and it was Mr Pollard who did profit calculations, whereas Mr Pollard said that having heard $1.3M he stopped.  Thus, counsel submitted, on the Pollards’ own evidence, they ignored the spreadsheet figures, hence the information in the spreadsheet ‘fell through the cracks’ and neither Mr nor Mrs Pollard relied on it.  In any event, even if they did rely on the spreadsheet, in all the circumstances they could only have regarded the turnover figures therein stated as an opinion qualified by all the other material before them.  As such, it could not be said that they relied on the spreadsheet figures when entering into the franchise agreement.

Appellants

1. Counsel submitted that:

(a)it was open to the judge to find that Mr Mauviel represented to the Pollards that the turnover of the business would be $1.3M;

(b)having made that finding, the judge erred in finding that the Pollards understood the representation to mean that turnover would be $1.3M (more or less), and that Mr Pollard ‘anticipated a degree of divergence  … as much as 20% less than $1,300,000.’  Rather, the judge should have found that the representation was that turnover would be $1.3M or in excess; and

(c)it was open to the judge to find that the appellants relied on the representation when entering into the franchise agreement.

1. In developing the first submission, counsel referred in some detail to the evidence and passages in the judgment said to support such a finding.  He referred to Mrs Pollard’s evidence (described at [56] of the judgment) and Mr Pollard’s evidence (at [62]), which was to the effect that Mr Mauviel told them that the business would turn over more than $1.3M in the first year.  Counsel also referred to the judge’s observation (at [74]) that the turnover figure in the spreadsheet reflected Mr Mauviel’s belief as to likely turnover, and the judge’s observation (at [83]) that Mr Mauviel was confident that a turnover in excess of $1.3M was attainable.  These beliefs of Mr Mauviel supported the inference that he had made the statement about $1.3M turnover the previous day.  Counsel also referred to further statements in the judgment (at [90], [100] and [141]) as supporting the finding of a representation that the business would turn over $1.3M.  Counsel referred to Mr Mauviel’s evidence in cross-examination that rental should be no more than 15% of turnover, and his statement that ‘I would have told them in order for that rent [$160,000] to be affordable, you would need to turn over $1.3M a year’.  Counsel noted the judge’s finding (at [68]) that Mr Mauviel did not remember what he said about the likely turnover, and submitted that when compared with the Pollards’ direct evidence of what was said, as to which they were not shaken in cross-examination, the finding of the representation as to $1.3M turnover was justified.

1. Indeed, counsel went further and submitted that the judge should have found that the turnover figure of $1.365M in the spreadsheet was a continuation of the previous day’s representation.  He referred to the judge’s statement at [73] that the spreadsheet contained ‘indicative representations about the turnover or profitability of the business – representations which reflected his expectation about turnover, to be sure, but nothing more than that’.  Similarly, at [74] the judge said the spreadsheet ‘reflects Mr Mauviel’s belief about the likely level of turnover’.  As counsel seemed to concede, however, that was tempered by the judge’s observation at [83] that Mr Mauviel sent the spreadsheet not as a representation of the turnover (and profit) the business would realise, but merely as a tool to assist the Pollards. 

1. Turning to the second matter, namely whether Mr Pollard ‘anticipated a degree of divergence’ counsel submitted that the judge misunderstood Mr Pollard’s evidence.  The evidence was given during the following exchange in cross-examination:

Q:All right.  Did you believe that there was a guaranteed return on this business?

A:There is never a guarantee.  As I said, I mentioned to them, let them be 10 or 20 percent out, don’t be 100 percent out, and that’s the crux of it. 728,000 against 1.3 million.

Q:So it is not the fact that it was any other amount than 1.3 million, or 1.365 million that you are concerned with, it is the fact that there was a significant discrepancy?

A:Yes.

Q:And that’s what you say was misleading by Mr Mauviel, is it?

A:No, the misleading aspect of it was the fact that he said it would do in excess of 1.3.

Q:And that was misleading, and that you would not have been concerned if it had been 1.1, or 1.2?

A:He would have had to have convinced me more in relation to - - -

Q:No, in relation to the actual turnover, 1.1, or 1.2?

A:He would have had to convince me more in relation to the rent.

Q:I’m sorry, not …

Mr Rice:I don’t think he understands the question. 

Q:I haven’t made the question sufficiently clear.  You said that your concern is that there was a statement in relation to 1.3 million, and that you accepted there was some significant lee-way, up to 20 percent?

A:No, I didn’t say that.  I said if they were out 10 to 20 per cent either way, I could accept it.  I didn’t say there was lee-way or there could be lee-way.  I said if they were out – then we are talking about, this is in March 2005, we are not talking about it on 18 March 2004.

Q:What I am asking you about now, I am really asking about your state of mind now.  Do you consider that if the turnover of your franchise in the first year had been 10 or 20 per cent down on the figures that you have referred to, that that would have been acceptable to you?

A:Probably would have been.  But for[16] the benefit of hindsight.

Q;So you would accept that it was your view at the time you executed this document that you didn’t expect that there was any guarantee on a particular return?

A:No, but moving forward from 18 March was all based on the fact that the store would do in excess of $1.3 million.

[16]The correct word appears to be ‘with’.

1. Counsel submitted that Mr Pollard did not say that he understood the representation to mean $1.3M or thereabouts, or up to 20 percent less.  Rather, all he was saying was that in hindsight, he would not have complained, and may not have counterclaimed, if the turnover had been 20 percent less than Mr Mauviel’s estimate.

1. Turning to the third submission, counsel referred to the judge’s finding of reliance at [161] that ‘the representations made by Mr Mauviel were intended to, and did, influence the [appellants] in deciding to become Billy Baxters franchisees’.  He submitted that this finding, which mirrored the findings at [135], [136] and [138], was open in the light of the following matters.  Mr Mauviel was experienced with Billy Baxters franchises - to the extent that at one stage he owned and operated 20 percent of all Billy Baxters franchises in Australia – and it was his business to recruit new franchisees.  He agreed in cross-examination that he was experienced in analysing the stores and knew how they were performing.  The representation as to turnover of $1.3M was not made in isolation, but rather was based on his view that the Jetty Road site was similar to his site at Norwood, where turnover was estimated at $1.1M and where he had actual sales figures, albeit for a few months only.  The fact that Jetty Road was a greenfields site made the representation more significant because, in the absence of actual trading figures for the site, the Pollards were relying on Mr Mauviel who had expertise in the turnovers of Billy Baxters franchises.  Further, counsel referred to Mr Pollard’s statement that they used the spreadsheet ‘as a basis of everything we did’ as evidence supporting a finding of reliance.

1. As to whether other factors caused the appellants to enter into the franchise agreement, counsel submitted that it was sufficient if Mr Mauviel’s representation was one of several causes; see I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd[17] and Henjo Investments Pty Ltd v Collins-Marrickville Pty Ltd (No 1).[18]

   [17](2002) 210 CLR 109, 121-2 [33] (Gleeson CJ), 128 [57] (Gaudron, Gummow & Hayne JJ) and 175 [210]-[211] (Callinan J).

   [18](1988) 39 FCR 546, 558-9.

Conclusion on Representation case

1. In considering these submissions it is important to keep in mind that the appellants’ case is that they were led, by contravening conduct based on three oral representations and two written representations made on 18 and 19 March 2004, to enter into the franchise agreement (and guarantees) dated 17 June 2004.  That is the pleaded case.  It can be said at once that it was common ground that at the 18 March meeting Mr Mauviel informed the Pollards that the proposed rental was $160,000 per annum plus GST, which was at  market rates.  But this did not establish the first  or second representations.  Further, we were informed by counsel[19] that the focus in their final addresses at trial regarding the alleged representation about rent affordability centred around what was said at the meeting on 18 March, both counsel ignoring that issue and the evidence about it in relation to the 19 March meeting.

   [19]In response to a query by the Court following the hearing of the appeal.

1. It was necessary for the judge to consider whether what Mr Mauviel said or represented accorded with the appellant’s pleaded case of representations that constituted conduct in contravention of s 52. In that exercise it was necessary to consider what was said or represented in the overall context. The point was made by McHugh J in Butcher v Lachlan Elder Realty Pty Ltd;[20] where he said:

The question whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact. In determining whether a contravention of s 52 has occurred, the task of the court is to examine the relevant course of conduct as a whole. It is determined by reference to the alleged conduct in the light of the relevant surrounding facts and circumstances. It is an objective question that the court must determine for itself. It invites error to look at isolated parts of the corporation’s conduct. The effect of any relevant statements or actions or any silence or inaction occurring in the context of a single course of conduct must be deducted from the whole course of conduct. Thus, where the alleged contravention of s 52 relates primarily to a document, the effect of the document must be examined in the context of the evidence as a whole. The court is not confined to examining the document in isolation. It must have regard to all the conduct of the corporation in relation to the document including the preparation and distribution of the document and any statement, action, silence or inaction in connection with the document.

[20](2004) 218 CLR 596, 625, [109] referred to with approval in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304, 341, [102].

1. Those observations are apt in the present case where the alleged representations occurred on two consecutive days on 18 and 19 March, at the outset of the parties’ dealings, several months prior to entry into the franchise agreement.  Not only must that which was stated or represented by Mr Mauviel be considered in the overall context of the discussions and the materials provided on 18 and 19 March, but also in the light of that which occurred subsequently down to entry into the franchise agreement.

1. The case was a witness action in which the representor and representees gave evidence as to relevant meetings and events.  There were issues as to what was said in relevant conversations, particularly on 18 and 19 March, as to the correctness of the rival accounts, the terms of any representation, how any representation found was or ought have been understood, and as to reliance or causation.  The resolution of these issues turned on findings of fact. 

1. The judge did not separately deal with, and make findings upon, the credit and reliability of the critical witnesses.  The respondent’s counsel suggested that the judge decided the representation case on an objective consideration of the evidence[21] and with regard to the probabilities.  So approaching the matter, the judge in part accepted and in part did not accept evidence of Mr Mauviel and the Pollards.  In doing so, one is disposed to consider that the judge took into account his impression of the witnesses, but he did not make that point or state his impressions or how he took them into account.  Nevertheless, it seems that the judge regarded Mr Mauviel as an honest witness, as indicated by the absence of an adverse finding on his credit and reliability, and the finding that his representation as to turnover was made honestly and on reasonable grounds.  Then, as to the Pollards it is seen that on some issues the judge rejected their evidence.  Overall, I consider, the judge approached the case as counsel suggested.

   [21]As to that approach counsel referred to Thompson v Ice Creameries of Australia Pty Ltd (1998) ATPR 41-611.

1. Then, there is an absence of findings on some critical issues as the judge dealt with those issues in the course of his reasons.  In dealing with the meeting on 18 March, the judge referred to the evidence but moved on to events on 19 March without finding what evidence he accepted, and whether the first and second representations were made.

1. One is left to discern the judge’s conclusions on these and the other three representations, as expressed at [141]-[142] and [158], by working back from them to discern the evidence he acted upon and the relationship of that evidence to the pleaded case.  It will be noted that at [141] and [158] the judge referred to the five representations in a rolled up way, which approach is first seen at [38] when he was considering the counterclaim.  Moreover, at [38] and prior to making factual findings, the judge assimilated the sums of $1.3M and $1.365M.  The danger in so approaching the case is the risk of blurring the lines between separate representations, let alone of conflating them, and in consequence of diverting the mind from the pleaded case.

1. The point can be developed further.  The third and fourth representations were alleged to be contained in or made by the spreadsheet which the judge dealt with at [71]-[95].  It can immediately be noted that the judge rejected the fourth representation at [140] in a subsequent section of the judgment.  As to the third representation, that sales for the first year would total $1,365,000, the position was not entirely clear.

1. At [73] the judge described the spreadsheet as no more than an indicative representation about the turnover.  It reflected Mr Mauviel’s expectation ‘but nothing more than that’.  At [82] he said the spreadsheet was about what might be as opposed to what would be.  At [83] the judge stated that Mr Mauviel sent the spreadsheet not as a representation of the turnover (and profit) the business would realise, but merely as a tool to assist the Pollards.  Then, at [89] the judge found that the Pollards did not regard the spreadsheet as a static statement of the income which, in the absence of exceptional circumstances, the business would generate;  rather it was for them to use as a tool to make their own assessment of the viability of the business.  Finally, at [90] the judge stated that Mr Mauviel told the Pollards that in his opinion the café was capable of achieving a turnover of $1,300,000, being his genuinely held opinion;  otherwise, the judge stated, Mr Mauviel would not have offered the landlord a rental of $160,000 per annum.

1. Stopping at this point, which was the discussion dealing with the spreadsheet, the above findings amount to this, in my opinion.  The judge has not found that the third representation was made.  Indeed, the findings as to the purpose for which the spreadsheet was provided and the Pollards’ understanding thereof would tell against the reference to a turnover figure being capable of constituting a representation to the effect pleaded or that could have reasonably been relied upon as constituting such a representation.  Further, the finding at [90] refers not to the spreadsheet but to a statement of Mr Mauviel made at the meeting on 18 March.  In light of the use of the phrase ‘told them’, the earlier discussion concerning how the spreadsheet was to be understood, and that the judge had not yet dealt with the 19 March meeting, the reference at [90] must refer to an oral statement the previous day.  Thus understood, the finding is out of sequence in that it is not stated in the section of the judgment dealing with that meeting.

1. On this understanding of the judgment to this point, the judge has not found the third representation. Indeed, in my view, it has been rejected. However, further on, in dealing with establishment of the business (at [125]-[149]) the judge referred, at [134], to evidence of the Pollards (concerning when they adjusted the figures for the bank and that they then for the first time critically examined Mr Mauviel’s figures) and then stated, at [135], that this evidence was consistent only with the conclusion that of all the figures in the spreadsheet, the defendants relied only on the final turnover. Several things need to be said about this. First, the judge did not explain why the evidence at [134] was consistent only with the Pollards having relied on the figure for turnover in the spreadsheet. In my view, with respect, this did not follow. All that the evidence showed was that the Pollards used the figure in their application for finance. That is, they used it for that purpose, but adjusted it. But the judge’s prior findings surely established that they did not rely upon it in the s 52 sense. And if this truly was a finding of reliance on the spreadsheet figure for turnover in the s 52 sense, the judge did not explain how this fitted with his earlier findings. Further, the figure in the spreadsheet was $1,365,000 and not $1,300,000, which was the figure the judge referred to in the following paragraph [136] (and in the concluding paragraphs [141] and [158]), although the judge’s assimilation of the two figures (at [38]) might explain the reference.

1. It is to be further noted that at [90] the judge stated that he had ‘no doubt’ that Mr Mauviel told the Pollards that in his opinion the cafe ‘was capable of achieving a turnover of $1,300,000’, at [136] the judge described Mr Mauviel’s belief as to turnover as ‘something in the vicinity of $1,300,000’, at [141] as ‘some $1,300,000’ and at [158] as an ‘anticipated’ turnover of $1,300,000 ‘which the [appellants] accepted as meaning more or less’.  There is a difference in terms between these statements and the pleaded second and third representations.

1. The fifth representation is alleged to have been made at the meeting on 19 March.  This is the same, in effect, as the first representation but the question is whether the judge made a finding as to its making.  The judge noted the alleged representation at [96] and evidence of Mr Pollard at [100] but did not refer to any evidence of Mr Mauviel on the point and did not find whether the pleaded representation was made or state whether he accepted that evidence of Mr Pollard.  The explanation for this may lie in the way the case was conducted, which I referred to earlier.  That is, that counsel focused on what was said at the meeting on 18 March, and ignored the issue as to likely rent affordability and the evidence about it in relation to the 19 March meeting.  That is, in effect in final address counsel did not separately press the fifth representation, concentrating not unnaturally on the critical 18 March meeting and bearing in mind that the fifth representation was the same as the first.  It is understandable that in these circumstances the judge did not deal with the 19 March meeting insofar as it concerned the establishment of the alleged fifth representation or at that point in the judgment make a finding on it.  He did deal with other matters concerning that meeting, which emphasises the omission of findings on the two matters.  It is also important to note the further common position of counsel, which relates to the absence of any reference to the evidence of Mr Mauviel on the matter of Mr Pollard’s evidence noted by the judge at [100];  counsel agree that based on the burden of his evidence, written and oral, Mr Mauviel should be taken as having denied that evidence of Mr Pollard.  Finally, counsel are also agreed that having regard to the way the case was conducted, the Court should not have regard to any lack of puttage should such be thought to have occurred, as for instance of Mr Pollard’s evidence at [100] to Mr Mauviel. 

1. Notwithstanding the clarification of how the case was conducted in relation to the fifth representation, the finding at [141] and conclusion at [158] suggest an implicit finding of the fifth representation, but that is not necessarily so for at least three reasons.  First, because the fifth representation is covered by the first representation and in the circumstances the judge may have relied upon, or accepted, the first (but in the terms he found) and not the fifth.  Secondly, as the judge rejected the fourth representation, the reference in [158] to the five representations is seen as an inaccurate recording of that which has been found.  This error may have been a consequence of regarding the representations in a rolled up way.  Thirdly, the expression of the five representations is not a finding as to the making of any of the specified pleaded representations but rather the judge’s description of ‘statements to that effect’ and without an identification of the terms of those statements and when they were made.

1. Finally, at [141] the judge set out the representation which he found that Mr Mauviel had made.  He did not say which of the pleaded representations was established.  In my view, as I refer below, it was the first and second representations, although not in the terms pleaded.  However, the judge’s finding includes that Mr Mauviel represented that ‘the business would return a profit’ in the first year and that the turnover would ‘keep the business profitable’.  Neither was an expressed part of the pleaded representations other than the fourth which referred to a figure for profit and was rejected.

1. I take the same view of paragraph [158], which one would suppose was intended to be consistent with the finding at [141]. Yet it is not. In the first place, there is a looseness in the reference to the five representations when plainly the fourth at least had been rejected. There is also the difference in the terms compared to the pleading. Secondly, there is the introduction of the finding that the appellants accepted the representation ‘as meaning more or less’, which indicates that the representation was understood in a qualified sense and not in the absolute terms of the pleading. It is evident that this finding of ‘more or less’ was based on Mr Pollard’s evidence which the judge referred to at [62], that he would have accepted turnovers that were 10 or 20 per cent out.

1. It is apparent from this discussion that the appellants’ path to success lay in the first and second representations alleged to have been made at the meeting on 18 March 2004.  That was the combined consequence of the way in which the judge dealt with, and his findings as to, the third, fourth and fifth alleged representations and the way in which the parties conducted the case.

1. The respondent submitted, correctly, that the judge should have dealt specifically with the question whether the first and second representations were made as pleaded, rather than find a rolled up representation to the effect he found at [158]-[159], which was not the pleaded case.

1. In these circumstances, as mentioned earlier, the respondent submitted that the judge should have held that none of the representations was established and rejected that basis of the counterclaim.  It is to be noticed however that the Notice of Contention attacked rather the area of the second representation as to the projected turnover of $1.3M than that of the first representation concerning the amount of the rental.  That was doubtless because of the common ground between the parties as to Mr Mauviel having advised that the amount of the rental was $160,000 per annum plus GST and that it was a market rent, in which sense it was reasonable.  But whether it was reasonable in terms of what might be achieved as turnover in a Billy Baxters business conducted at the shop was another matter and was in the area of the second representation.  It was thus that the point agitated by paragraphs 1, 2 and 3(a) of the Notice of Contention concerned the second representation.  The submission was that (a) the pleaded second representation was not established, and (b) the representation found at [158] was not that pleaded, in consequence of either of which the judge should have found the second representation was not established.  Alternatively, it could not be found what Mr Mauviel had said in relation to the turnover, with the same consequence.

1. The respondent’s pleading point is correct but the question is whether it was open to the judge to find a representation that differed in strict terms from that pleaded.

1. In my view it was, having regard to the nature and breadth of the evidence, in particular cross-examination, and the conduct of the trial.  Further, it went little beyond that pleaded, when properly understood in context, and it accorded with common sense, to refer to the turnover of $1.3M as ‘anticipated’ in the sense that it may not turn out to be the very dollar amount.  To so describe the representation was not in my opinion to find a representation significantly different from that pleaded, in the sense in which it was to be reasonably understood.  I consider that the earlier references in his Honour’s reasons to ‘capable of achieving a turnover of $1,300,000’ ([90]), ‘something in the vicinity of $1,300,000’ (‘135]), and ‘some $1,300,000’ ([141]) to be consistent with his ultimate finding. 

1. In this respect the fact that the Pollards, or Mr Pollard to be precise, might have ‘accepted’ a lesser turnover is not to the point.  Nor was any such preparedness part of the representation.  Having referred to this issue it is convenient to say that I accept the appellants’ submission that Mr Pollard’s evidence does not bear the meaning that the appellants accepted that the representation meant ‘more or less’ (or 10-20% per annum less) than the anticipated $1.3M.

1. As to the finding that what Mr Mauviel said on 18 March amounted to a contention that the stated turnover ‘would enable the business to meet its rental commitments and turn a profit’, this is to be understood in the light of what was said both as to the annual rental and turnover.  The starting point is what was said as to the rental, as to which there is common ground.  The Pollards, who expressed immediate concern as to the amount, were advised by Mr Mauviel that he had agreed the rental amount, and he had of course done so with a Billy Baxters shop in mind which in itself might be taken as an indication that a Billy Baxters business at the shop would be anticipated to make sufficient to cover such rental and other expenses and allow a margin of profit.  If not a profit, why would one undertake the business at a greenfields site?

1. It was well open to accept, and I would do so, the Pollard’s evidence as to their requesting advice as to turnover.  It was a natural enquiry, and particularly in view of the high asking rent, and an enquiry reasonably made, particularly of Mr Mauviel in his position.  His Honour found that Mr Mauviel answered in terms of a turnover of $1.3M (anticipated) rather than an amount in excess of $1.3M as the Pollards referred in their evidence.  Considering also Mr Mauviel’s evidence, it was open to his Honour to find as he did.

1. Moreover, in the situation where the Pollards expressed concern as to the level of the rental, Mr Mauviel said in evidence that he would have told them that the ideal or maximum benchmark for rental was 15% of turnover.  That meant the business would need to turn over $1.3M.  The judge was entitled to, and clearly did, act on this evidence.

1. In the circumstances, it was open to the judge to hold, and I would hold, that the first and second representations were established.  The finding that a turnover of an anticipated $1.3M ‘would enable the business to meet its rental commitments and turn a profit’ was not part of the pleaded first and second representations but was open on the evidence.  The central point of the case was the first and second representations which, if true, postulated a situation in which it was surely being said that the revenue from sales would cover rental and leave a profit. 

1. Finally, the respondent challenges the judge’s finding that the appellants relied on the representations in entering into the franchise agreement and

guarantees.  In my view it was open to the judge to conclude on reliance as he did, and I would reject the respondent’s submissions on this aspect.  His Honour clearly took account of relevant matters and his findings should not be disturbed.  The fact that further time passed, and events occurred, prior to entering into the franchise agreement and guarantees did not necessarily preclude finding that reliance continued to that ultimate point.  What Mr Mauviel said on 18 March was highly significant, and was readily to be understood as operating as a material inducement to the Pollards in determining to enter upon the process which led to entry into the franchise agreement and the guarantees.  It was also readily to be considered as having an ongoing inducing operation.  I would so find and consider that the judge was correct to do so.

1. For these reasons the grounds in the Notice of Contention are not established.

Conclusion

1. It follows from these reasons that the appeal should be allowed and the Notice of Contention dismissed.  It follows that the appellants are entitled to judgment on the claim and on their counterclaim.

KYROU AJA:

1. I also agree with Hansen JA.

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