CATCHWORDS

TRADE PRACTICES - misleading statements inducing entry into franchise agreement - misleading information supplied to bank leading to approval of loan to applicants - whether reliance of applicants is necessary element of causation - whether reliance of bank in approving loan necessary for entry into lease and franchise agreement is cause of losses thereby incurred

DAMAGES - calculation of damages under section 82 Trade Practices Act - extent to which applicants' own conduct can be taken into account in calculation of damages - effect of contributory negligence on damages in trade practices cases

Trade Practices Act 1974 (Cth) ss 51A, 52, 82

McRae v Commonwealth Disposals Commission [1951] 84 CLR 377

Gould v Vaggelas [1984] 157 CLR 215

Gates v City Mutual Life Assurance Society Ltd [1986] 160 CLR 1

March v E & M H Stramare Pty Ltd [1991] 171 CLR 506

Poseidon Limited v Adelaide Petroleum N.L. & Ors [1994] 179 CLR 332

Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) [1987] 16 FCR 410

Argy v Blunts & Lane Cove Reals Estate [1990] 26 FCR 112

Janssen-Cilag Pty Limited v Pfizer Pty Limited  [1992] 37 FCR 526

Munchies Management Pty Limited v Belperio (1988) 84 ALR 700

Henjo Investments Pty Ltd & Ors v Collins Marrickville Pty Ltd [1990] 89 ALR 544-5

Lockyer Investment Co Pty Ltd v Smallacombe & Ors [1994] 122 ALR 659

Collins Marrickville Pty Limited v Henjo Investments Pty Limited & Ors [1987] ATPR 40-822

G Lowe & Sze Tu Holdings Pty Ltd v Cudal Nominees Pty Ltd & Anor [1991] ATPR 46-074

Pacific Coal v Idemitsu [1992] ATPR 46-094

Pavich v Bobra Nominees Pty Limited French J, unreported, 4 August 1988

Howe v Teefy [1927] 27 SR (NSW) 301

Lombardo v Henne NSW Court of Appeal, unreported 2 December 1973 per Glass JA at page 11

FRANCIS VERNER HAYNES & ANOR v TOP SLICE DELI PTY LTD & ORS

No. G 61 of 1994

EINFELD J

SYDNEY

2 JUNE 1995

IN THE FEDERAL COURT OF AUSTRALIA     )

NEW SOUTH WALES DISTRICT REGISTRY     )    No.   G 61 of 1994

GENERAL DIVISION                 )

                   Between:      FRANCIS VERNER HAYNES & JACQULYN DION HAYNES

                                 Applicants

                       And:      TOP SLICE DELI PTY LIMITED

                                 ACN 008 627 781

                                 First Respondent

                                 TOP SLICE DELI SYSTEMS PTY LIMITED ACN 008 636 119

                                 Second Respondent

                                 ROSS TRIMBOLI

                                 Third Respondent

                                 JOHN J DELLAVEDOVA

                                 Fourth Respondent

                                 GREGORY C A HOLLANDS

                                 Fifth Respondent

                                 JOHN W BEARD

                                 Sixth Respondent

                                 FRANCIS VERNER HAYNES & JACQULYN DION HAYNES

                                 First Cross Respondents

                                 TOP SLICE DELI SYSTEMS PTY LIMITED     ACN 008 636 119

                                 First Cross Claimant

                                 JOHN J DELLAVEDOVA

                                 GREGORY C A HOLLANDS

                                 JOHN W BEARD

                                 Second Cross Claimants/

                                 Third Cross Respondents

                                 TOP SLICE DELI SYSTEMS PTY LIMITED ACN 008 636 119

                                 TOP SLICE DELI PTY LIMITED

                                 ACN 008 627 781

                                 ROSS TRIMBOLI

                                 Second Cross Respondents/

                                 Third Cross Claimants

                      MINUTE OF ORDERS

THE COURT ORDERS THAT:

1.   the application be allowed against the first, second and third respondents in the sum of $193,710

2.   the application be dismissed against the fourth, fifth and sixth respondents

3.   the first cross claim be allowed in the sum of $66,950

4.   the second and third cross claims be dismissed

5.   the first second and third respondents pay to the applicants the sum of $126,760

6.   costs reserved pending written submissions of parties

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

EINFELD J

SYDNEY

2 JUNE 1995

IN THE FEDERAL COURT OF AUSTRALIA     )

NEW SOUTH WALES DISTRICT REGISTRY     )    No.   G 61 of 1994

GENERAL DIVISION                 )

                   Between:      FRANCIS VERNER HAYNES & JACQULYN DION HAYNES

                                 Applicants

                       And:      TOP SLICE DELI PTY LIMITED

                                 ACN 008 627 781

                                 First Respondent

                                 TOP SLICE DELI SYSTEMS PTY LIMITED ACN 008 636 119

                                 Second Respondent

                                 ROSS TRIMBOLI

                                 Third Respondent

                                 JOHN J DELLAVEDOVA

                                 Fourth Respondent

                                 GREGORY C A HOLLANDS

                                 Fifth Respondent

                                 JOHN W BEARD

                                 Sixth Respondent

                                 FRANCIS VERNER HAYNES & JACQULYN DION HAYNES

                                 First Cross Respondents

                                 TOP SLICE DELI SYSTEMS PTY LIMITED ACN 008 636 119

                                 First Cross Claimant

                                 JOHN J DELLAVEDOVA

                                 GREGORY C A HOLLANDS

                                 JOHN W BEARD

                                 Second Cross Claimants/

                                 Third Cross Respondents

                                 TOP SLICE DELI SYSTEMS PTY LIMITED ACN 008 636 119

                                 TOP SLICE DELI PTY LIMITED

                                 ACN 008 627 781

                                 ROSS TRIMBOLI

                                 Second Cross Respondents/

                                 Third Cross Claimants

                    REASONS FOR JUDGMENT

EINFELD J                  SYDNEY                2 JUNE 1995

On 14 October 1992 the applicants entered an agreement with the second respondent to conduct a delicatessen (the delicatessen) under the name "Top Slice Deli" as franchisee (the franchise agreement).  The applicants had actually commenced to trade two days earlier, on 12 October 1992.  Financial and trading difficulties appeared almost immediately, so that by the end of 1992 the business had begun to fail, notwithstanding the approach of the Christmas season and its customary boon to retail trading.  During 1993 it became clear that the applicants would not be able to run the business at a profit, and they finally ceased trading in mid 1994 with the loss of substantial sums of their money.

By their application and statement of claim filed on 7 February 1994 and amended on 8 February 1995, the applicants alleged that their losses resulted from misrepresentations by the respondents about the likely profitability of the business which induced them to enter the agreements.  They claimed as relief for breach of section 52 of the Trade Practices Act 1974 (the Act) certain declarations, damages suffered in the failure of the delicatessen, and an order voiding the franchise agreement.  There are three cross claims to which I shall return.

The respondents fall into two categories and each was separately represented at the hearing: the first and second respondents are the companies which contracted with the applicants and the third
respondent is one of their directors (Ross Trimboli) who runs the companies with two of his sons, Dominic and Joseph (Joe).  I shall generally refer to this group of respondents as Top Slice Deli.  The fourth to sixth respondents are principals in an accountancy practice employed at relevant times by Top Slice Deli (the accountants).

The facts

The applicants are a married couple who have lived all their lives in the town of Crookwell, near Goulburn, New South Wales.  Mrs Haynes completed primary school and two years of secondary school by correspondence before passing nursing exams.  She did not practise as a nurse, but from 1964 to 1969 owned and ran a clothing shop in Crookwell which she then sold to look after her first child.  From 1973 she became involved in shearing contracting, and ran a business as a contractor for twenty years until commencing to operate the delicatessen.

Mr Haynes had no secondary education at all.  He worked as a shearer with his wife's contracting business, and when she became involved in the delicatessen he provided intermittent assistance there, but took no real part in its daily affairs or management.  In fact, during the time the delicatessen operated he was running his own business breeding ostriches.  It was clear from the evidence that Mrs Haynes provided all the effective decisions in the matter both to enter the franchise agreement, and in the running and management of the delicatessen itself.

In June 1992 the centre management of Argyle Mall in Goulburn offered a site for lease to Top Slice Deli which thereafter placed advertisements in the local newspapers for a franchisee.  One of them was seen by the applicants who subsequently contacted Ross Trimboli.  In late July or early August 1992 there was a meeting between the applicants and Ross Trimboli in Canberra, where the representations involved in this application are alleged to have been made.  After this meeting the applicants decided to enter the franchise agreement.

On 6 August 1992 the ANZ Bank at Crookwell, where Mrs Haynes had banked all her life, refused to lend the applicants $150,000 (the amount estimated by Ross Trimboli) to finance the fit-out of the delicatessen.  Ross Trimboli then put Mrs Haynes in contact with Mr Griffiths of Detemo Pty Ltd, a finance brokerage, who approached the State Bank of New South Wales (the bank) on the applicants' behalf.  Prospective cash flow figures for the proposed delicatessen, prepared on the instructions of Top Slice Deli and based on actual figures from other similar establishments, were sent to the bank by the accountants.  On the basis of these cash flow figures, which form the basis of the claim of misleading and deceptive conduct against the accountants, the bank approved the loan on 14 September 1992.  All or most of the loan was in the form of a lease over the equipment in the delicatessen.

The applicants then agreed to take the lease in Argyle Mall and during September and early October 1992 the parties prepared the Goulburn shop for opening.  The fit-out of the shop was organised at a meeting  between the applicants, two employees of Olympia (the fit-out company nominated by Top Slice Deli), and Ross Trimboli.  According to the applicants all relevant decisions were made by Ross Trimboli and the Olympia people, their own opinion being sought on only one minor matter.  Furthermore, Ross Trimboli undertook other aspects of the business, such as advertising for staff, without consulting the applicants.  After discussion with the applicants he arranged for the employment at the shop of Pasquale Macarlino who had managed delicatessen outlets for Top Slice Deli before.  Together, Mr Macarlino and Ross Trimboli set the initial selling prices on all the goods in the delicatessen.  Dominic Trimboli showed the applicants how to manage other aspects of the business, such as the cash book and wages.

The franchise agreement provided for a weekly fee of $900 or 6% of weekly gross revenues, whichever was the greater, payable by the applicants to Top Slice Deli.  On 19 October 1992 the tenancy with the shopping centre commenced, as did the equipment lease with the bank.  Both leases were for 5 years, the shop lease carrying an initial monthly rent of $2,926.13, the equipment lease providing for monthly instalments of $3,462.08.  I shall hereafter refer to these three contracts, by which the applicants commenced to trade, as 'the agreements'.

For the first few weeks of trading Mrs Haynes was assisted by Ross Trimboli, who spent time at the shop, and Mr Macarlino, who was initially a full time employee.  Then Ross Trimboli reduced his own participation and Mr Macarlino was gradually reduced to four, then three, days a week, before leaving the delicatessen altogether in late November when, after he had taken a week off to recuperate from an injury, Mrs Haynes felt that she no longer required his services.  Although initially the delicatessen traded seven days a week, from February 1993 Mrs Haynes ceased Sunday trading, on the basis that there was not enough custom on Sundays to justify opening.

By the beginning of 1993 it was apparent to Mrs Haynes that the business was in difficulty.  Hence during February and March she tried to sell the business and a rent reduction was unsuccessfully sought in March.  By the end of April 1993 the ANZ Bank, which still held Mrs Haynes' personal accounts and where she apparently operated the business account despite the lease finance from the State Bank, stopped paying on her cheque account.  As a result Mrs Haynes no longer banked her takings, but paid her expenses in cash, and allowed other debts to accumulate.  At some time she opened a new account with Advance Bank where she operated a cheque account.

The applicants left the shop in January 1994 after which time it was managed for them by one of their employees, Lana Gardiner.  The lease was finally terminated, with rent well in arrears, in June 1994.  The original application in the current matter was filed on 7 February 1994, but proceedings for preliminary discovery had been commenced in this Court on 19 August 1993 under Order 15A of the Court's rules.

The issues

The central issue between the applicants and Top Slice Deli was whether certain representations were made in the initial meeting between the applicants and Ross Trimboli in 1992, and if so, whether they were misleading or deceptive or likely to mislead or deceive, and induced the applicants to enter the business.

Between the applicants and the accountants the issue is somewhat novel.  The applicants contended that by providing the bank with a cash flow which it is alleged was misleading in material respects, and by thereby procuring for the applicants a successful result to their loan application, the accountants breached section 52 of the Act.  It was argued that without the loan the applicants would not have been able to enter the business, and the breach therefore relevantly caused the losses suffered in running the delicatessen.  The applicants said that these losses are recoverable in damages from the accountants under section 82 of the Act.  It was not suggested that the applicants themselves saw or relied on the cash flow at all, or that they were induced into entering the agreements by any other misleading or deceptive conduct of the accountants.  As might be expected, real issues of fact arose concerning whether the cash flow was misleading, but this claim has actually come to be determined as a question of law.  Causation and quantum of damage was disputed by both groups of respondents.

Top Slice Deli has cross claimed against the applicants for outstanding payments under the franchise agreement.  In the second cross claim the accountants claim an entitlement to contribution or indemnity from Top Slice Deli in respect of any liability to the applicants.  By the third cross claim Top Slice Deli makes a similar claim against the accountants.  I understand that bankruptcy proceedings are outstanding against the applicants arising from one of their debts.  There are several creditors including, no doubt, the ANZ Bank and the Argyle Mall to whom there is owing a considerable sum for the unpaid rent for the shop.

The evidence

The principal witness for the applicants was Mrs Haynes.  Mr Haynes also gave evidence, but it was clear that Mrs Haynes had by far the better recollection of all the important events including the crucial meeting with Ross Trimboli.  The applicants also called Brian Cassidy, the officer of the bank who was responsible for approving the loan made to the applicants.  He gave evidence of the bank's reliance on the accountants' cash flow.

Despite indicating before the trial dates were fixed and up to the date it commenced that they would be calling only one witness -- this was probably the estimate for all respondents who were jointly represented prior to the commencement of the hearing -- Top Slice Deli alone called a total of 8 witnesses during the hearing.  Ross Trimboli himself was obviously the only witness
on the representations alleged to have been made at the initial meeting between the parties but he also dealt with other questions as well.  Dominic Trimboli gave evidence primarily about the manner in which the applicants ran the delicatessen.  Joseph Trimboli had some accounting expertise and handled Top Slice Deli's financial affairs.  His evidence principally concerned the cross claims between the respondents.  The rest of the witnesses gave evidence critical of the manner in which the applicants ran the delicatessen:

     (a)  Deborah Woolley was the centre manager of Argyle Mall during the tenancy of the applicants.  She was able to observe the appearance and operation of the delicatessen.

     (b)  Bruno Ursino ran a fruit and vegetable shop opposite the delicatessen, and gave evidence about the nature of the site, the appearance of the delicatessen and a number of other matters concerning the running of a delicatessen on which he was, as far as I could see, completely unqualified.  I found him to be an honest and reliable witness, but his evidence in most regards was of little use in the resolution of the issues in the case.

     (c)  Andrew Meagher, a retail management consultant commissioned by the respondents, visited the delicatessen while the applicants were operating it and made a report on the way it was managed.  His report (ex M) and testimony were of considerable assistance.

     (d)  Christopher Anderson was an advertising consultant commissioned first by Argyle Mall centre management then by Top Slice Deli to report on the performance and problems with the delicatessen (ex R).  I found much of his evidence useful although I was left with some doubt as to the care and attention with which Mr Anderson observed the delicatessen in preparing his report and testimony (T332-3).

     (e)  Pasquale Macarlino worked with the applicants at the delicatessen until November 1992, and was able to give useful evidence of the manner in which it was run.

The accountants called two witnesses:

     (a)  Raymond Dawson, a partner in the Canberra Office of accountants Ernst & Young, gave his expert opinion on the accountants' projections.

     (b)  John Dellavedova, the fourth respondent, was the person responsible for supplying the cash flow to the bank.

An interlocutory order was made on 8 July 1994 by Justice Sheppard that the evidence in chief of the witnesses in the case be taken orally rather than by written statement.  However, through delay caused by the late separation of the legal representation of the accountants, lengthy argument on an unpredicted "no case" submission, and an unexpected change in the legal representation for Top Slice Deli, the trial lost most of the week for which it was originally set down.  It was also significantly lengthened by the additional evidence called by the respondents.  As the trial had been expedited and had significant urgency due to the threatened bankruptcy of the applicants, I was therefore obliged to shorten the hearing time by permitting the respondents' witnesses to give their evidence in chief by written statement.  In the process of weighing up the conflicting evidence, I have taken into account that this ruling gave the respondents' witnesses an opportunity, denied to the applicants, to perfect their recollections of important conversations.  This is an important difference in an oral representations case, and I have therefore made allowance for the added difficulty of precise recollection in the witness box of words spoken thee years before.  There were a large number of documentary exhibits in evidence.

The case against Top Slice Deli

REPRESENTATIONS

The applicants alleged that Ross Trimboli made the relevant representations during their initial meeting outside the Civic, Canberra, outlet of Top Slice Deli in mid 1992.  The applicants
were uncertain as to the date of this meeting, which they said lasted about 45 minutes, except that it occurred on a Wednesday.  Top Slice Deli alleged, contrary to the recollection of the applicants, that Joe Trimboli was also present at the meeting, although not for the whole time: he was "in and out" (ex GG1, T260).  There was no suggestion, however, that he heard any of the significant parts of the conversation.  According to the applicants, Ross Trimboli first asked them about their background and financial position and they asked him for details of the business.  The first representation concerned the projected turnover of the new business, and was remembered by Mrs Haynes in the following terms (T38):

     I said what would ... the turnover of the delicatessen be approximately.  He said $15,000 a week or a minimum of $55,000 a month.

Mr Haynes had a recollection to similar effect (T118).  Further representations were also alleged as to the expected profit margin (T38):

     Mrs Haynes:   ... I asked him what the profit line would be on that business.

     Counsel:      What did he say in response to that?

     Mrs Haynes:   He said "for you it would be slightly less than 50 per cent, 48.  We're only doing 42 over here in Canberra, but", he said, "the competition is a lot keener over here than in Goulburn, you've only got a Coles and we have got to contend with Woolworths and they're much more competitive".  I said "There's also a deli in the main street".  He said "That's no worry".

It was alleged by the applicants that there followed a short exchange on the amount of profit the applicants should expect to take home each week after all expenses (T39):

     Mrs Haynes:   I asked Mr Trimboli what would be the end line of profit and he said you would take home $2000 a week in the hand.

     Counsel:      Did he say what that was after paying out?

     Mrs Haynes:   After paying all your commitments.

Once again Mr Haynes confirmed this account (T118), although he was unsure as to the accuracy of his recollection (T121), and I have placed little weight on his corroboration.

Ross Trimboli had quite a different recollection of the meeting.  He remembered making the following statement (in his written statement ex N p.11):

     At the moment I am told by the Shopping Management that the Cut Price Deli there has been doing about $10,000 per week but it is run in a very poor condition.  The Centre Management tell me that Franklins are going in as well and provided that they do and provided that you run the shop like we are doing in Civic Centre here, then you should do about $50,000 to $55,000 per month.

He denied having said anything about $2,000 a week net profit, or $15,000 a week gross, or giving any percentage as a profit margin (T218, 262).  Mrs Haynes rejected the suggestion that Ross Trimboli mentioned the Cut Price Deli, or any basis for his predictions at the meeting, although she agreed that Franklins was mentioned (T73).

The parties also disagreed on what was said on the subject of finance.  It was the applicants' case that Ross Trimboli told them they would need about $150,000, and that he was aware that the entire amount would have to be borrowed.  Ross Trimboli's recollection was that he gave $150,000 as a rough estimate when asked by Mrs Haynes, and that she assured him at the time that she would be able to arrange the finance (T261).  In the result nothing seems to turn on this question.

TRAINING

Top Slice Deli's case was that any prediction regarding the success of the delicatessen was qualified by a precondition that the applicants, or Mrs Haynes at least, attend three months training at the Top Slice Deli in Civic, Canberra.  An important corollary of this contention was that the prediction as to gross takings presupposed the shop being run in the same manner as the Civic shop (ex N11, T234).  Mrs Haynes denied that any such suggestion was made and said that the only concession made in this regard was that Ross Trimboli agreed to put someone in the delicatessen with them in Goulburn "until Christmas" (T39, 105, 116).  Mr Haynes, under cross-examination, appeared to agree with Top Slice Deli on this point (T122), but he was clearly confused at the time, and as on other aspects of his testimony, I am unwilling to place any great reliance on his individual answers in this instance.  The applicants conceded that the Civic shop was in fact taking at least $55,000 a month at the time.

PRIOR INCONSISTENT STATEMENTS

Top Slice Deli pointed to the fact that in the original statement of claim, drafted on Mrs Haynes' instructions, there was not pleaded any representations concerning a weekly takings figure, a percentage mark up, or a net take home amount.  The only figure mentioned was the $55,000 per month, conceded by Top Slice Deli to have been mentioned.  The original statement of claim particularised the conversation in the following manner:

     The representation was oral and occurred in Canberra, at a coffee shop outside the City Markets outlet, when Mr Trimboli said to the Applicants words to the effect "You can't go wrong.  You will have no trouble taking $55,000.00 per month.  The other Top Slice Delis are doing this and Goulburn is a golden opportunity".

Similarly when Mrs Haynes confronted Ross Trimboli in July 1993, claiming the delicatessen had not performed to the level he had led them to anticipate, even on her own account she did not mention the take home amount of $2,000 or the 48% mark up (T80).  She recorded that conversation in notes taken at the time in the following terms (ex F):

     I said we had Pas[quale Macarlino] here and I paid him myself for 3 months and we still didn't take anything like the $60,000 + per month you gave us.

     He said those figures were not a ... [guarantee?].  Only for your loan.  I said you also gave $60,000 to us verbally at Canberra when we went over to see you which we relied totally on to go into the business.

Top Slice Deli sought to draw additional comfort from an affidavit filed in the earlier Order 15A proceedings which contained no mention of the controversial matters raised before me.  However, the purpose for which the affidavit was prepared meant that any particularisation of the representations was unnecessary and I draw no conclusion from this document.

I have also considered Mrs Haynes' testimony (T43) that when the applicants were trying to get a loan from the ANZ Bank, she gave the bank manager the turnover figures she had been given by Ross Trimboli, but made no mention of a net profit figure.  As it happens, Mrs Haynes first saw the projected cash flow analysis in June 1993, and it was suggested against her that she has used the figures in that cash flow to arrive at the figures of net weekly profit and percentage mark up that she subsequently attributed to Ross Trimboli in the initial meeting.

GENERAL CREDIT ISSUES

Both sides attempted to bolster the credit of their respective witnesses by reference to a range of minor issues upon which the testimony of Mrs Haynes and Ross Trimboli conflicted.  Disputes over such matters as whether Ross Trimboli spoke to Mr Macarlino in Italian in the delicatessen, whether the applicants met Joe Trimboli at the initial meeting with Ross Trimboli, and other trivialities need not be resolved.  In all likelihood they represent nothing more than the differences in recollection between different people, and do not reflect on the credit of either.

CONCLUSIONS ON REPRESENTATIONS

In my view the important representation is that concerning the $2,000 a week net profit after all commitments.  If that representation was made, then the others are of minimal significance.  Turnover, or weekly takings, or mark up on goods, are of little relevance unless net weekly profit is known.  The applicants were at best unsophisticated operators.  In fact, as discussed in greater detail later, I derived the distinct impression from their testimony that they did not really understand the significance of what Mrs Haynes referred to as "the profit line" or mark up on goods.  But it is clear from the evidence (T41, extracted later) that the "bottom line" figure of $2,000 is now said to have had great impact on the applicants.

In the light of these conclusions, it is of some significance that the $2,000 was not mentioned before the amended statement of claim.  If made, this representation might be expected to have far outweighed the turnover figure of $55,000 in the mind of Mrs Haynes.  Had she reported it to her potential lenders at the outset, and to her lawyers as soon as the action was commenced, it ought to have immediately commended itself as an important part of the picture being presented.  Moreover, the question of what the $2,000 actually represented in terms of its relationship to outgoings was left very vague at best.

I have balanced these concerns with what I considered to be the inherent likelihood of some questions and answers having passed concerning net profit.  The applicants knew nothing about delicatessens or Top Slice Deli's business and were presumably anxious for some indication of the likely return to them.  Furthermore I considered Mrs Haynes' evidence on this point to be credible.  The cross examination of her on this major evidence was at best perfunctory, suggesting that Ross Trimboli is more likely to have forgotten or suppressed this part of the conversation.  His own answers on the matter in the witness box were unconvincing and the treatment of the matter in his written statement must be read in light of the fact that he does not read or write English, and that even his spoken English is sometimes poor.

I am also reluctant to draw conclusions from pleadings that have now been amended.  Such matters are often the exclusive domain of the lawyers and can result from inadequate instructions or communication at an early stage of proceedings.  Experience suggests many reasons why pleadings might be amended, even on such a significant matter, and the late invention of a significant aspect of a case cannot be regarded as the most likely.  It is not less likely that the lawyers overlooked asking the pertinent questions or including the answers in the statement of claim.  Otherwise there would be some evidence of such an unlikely occurrence as that nothing was said about profit.

As for the ANZ Bank, my impression was that Mrs Haynes probably thought that her bank manager would be more impressed with gross takings of $55,000 which could be corroborated from the existing turnovers of other outlets than of her expected profit which would be unprovable and individualistic.

Allegations concerning oral misrepresentations often have to be decided on the basis of conflicting testimony, in what is always a somewhat unsatisfactory process.  I have thought long and hard about this case and read and re-read the evidence several times.  In the end, I have decided that the matter should be chiefly resolved by what I considered to have been the more credible evidence of Mrs Haynes given without the assistance of a statement and tested over several sessions of cross examination.  I think that at the initial meeting between the parties, Ross Trimboli did tell the applicants that they could expect to take home $2,000 clear a week.  Although the "commitments" taken into account in arriving at this bottom line figure were not spelt out anywhere, Ross Trimboli knew that the applicants would have to fully finance their fit-out, in addition to meeting their rent and franchise fees.  $2,000 would have been very little indeed if these payments were included.  I conclude that what was communicated was that the $2,000 would be clear of those liabilities.

Deciding this evidentiary conflict against Ross Trimboli leads me also to conclude that he said that their turnover would be $15,000 a week or around $55,000 a month, and that he also said that the average profit on the retail price of goods would be about 48%.

RELIANCE

As mentioned earlier, I was left in some doubt as to whether Mrs Haynes really understood the significance of the percentage mark up.   She certainly seemed at one stage to struggle with explaining what she had meant when she asked Ross Trimboli about "the profit line" (T106).  She also seemed uncertain what profit margin she had operated with during her time at the delicatessen (T107).  She gave evidence that she never changed the prices given to her by the Trimbolis when she opened, except to reflect price rises from her suppliers, or to give effect to "specials", also passed on by suppliers (T407).  She never tried to work out what the percentage mark up on her goods was (T112), and although she disputed the respondents' figure of an 80% average mark up, she was unable to give her own figure or provide a basis for her belief (T437).

Nor was there any evidence that the turnover figures played any real part in the decision of the applicants to enter the agreements, although the fact that it was mentioned to the ANZ Bank in 1992 and Ross Trimboli in 1993 might suggest that it was considered important at least in retrospect.  Certainly they could not have relied on the statement that they would take $15,000 a week when that estimate was clearly qualified by the $55,000 monthly figure.  Even though it could be argued that together with the gross profit percentage of 48%, the turnover might give some basis for calculation of money available to offset overheads, there is no evidence that such a reasoning process was ever undertaken by the applicants.  Indeed, on the evidence presented, it is unlikely that they performed any financial forecast at all, however rudimentary.

The applicants' strongest case was that they relied on the forecast of a probable net profit of $2,000 a week.  Mrs Haynes' evidence in this respect included the following (T41):

     Counsel:      ...after your meeting with Mr Trimboli that we have dealt with, presumably you and your husband discussed that meeting?

     Mrs Haynes:   Yes we did.

     Counsel:      In deciding to go ahead, what aspects of that meeting did you talk about?

     Mrs Haynes:   Well, we discussed the bottom line of $2,000 a week.

                   ...

                   My husband said that seems rather a lot but if we could take a thousand or 1200 it would still be good.

     Counsel:      So I take it you in your mind somewhat discounted what had been said?

     Mrs Haynes:   Well not really but we just thought it could be a little less.

     Counsel:      Yes.  How would you have reacted if you had been told at the meeting  that it would take a thousand dollars per week?

     Mrs Haynes:   Well, we wouldn't have gone into it.

     Counsel:      And why would not you have gone into it?

     Mrs Haynes:   Well then we would have thought discount of that and then it wouldn't have been as good as the business I had.

It is clear from this evidence as well as her evidence at T53 and
the evidence of Mr Haynes at T119 that the applicants relied in particular on the figure of $2,000 as a true bottom line notwithstanding the notional discounting they made of it.  The other representations may have contributed to a general feeling of confidence, but the applicants did not know enough about the business to appreciate the significance of the turnover figure or mark up percentage.  In any event those figures are really only important insofar as they support the final profit figure.  In my opinion they did not specifically induce the applicants into entering the agreements.

REASONABLENESS

Section 51A(1) of the Act provides that a prediction or other representation as to a future matter for which no reasonable grounds exist is misleading.  By definition all three representations relied on in this case fall to be considered under this section.  Although my conclusions on the question of reliance make it strictly unnecessary, I set out briefly here my reasons for concluding that, if the $55,000 figure had been relied on, it would not have been misleading under section 51A.  I do not similarly address the mark up prediction because in my opinion its causal nexus is too remote altogether.

Ross Trimboli considered the turnover figure of $50-55,000 a month reasonable at the time it was made (T217).  In his evidence he pointed to the fact that the Cut Price Deli that hadexisted in the Mall had taken about $40-45,000, and gave several reasons
why the new Top Slice Deli would be expected to perform better (T216-7).  These included:

(a)  It had a better location, being in the food hall rather than in general retail.

(b)  Franklins was opening very close to the delicatessen, so that people had to walk past to get to Franklins.

(c)  The shopping centre had been extended since the failure of Cut Price Deli, thus increasing the flow of people.

These factors were also considered relevant by Mr Anderson, the advertising expert, who testified that the Top Slice location was far superior to the old Cut Price location (T293).

I have mentioned earlier that another basis for comparison also used was the turnover of the shop at Civic in Canberra, which at the time was $60-70,000 a month (T217).  In fact the accountants' cash flow presented by Mr Griffiths to the bank predicted an average monthly turnover for Goulburn of $67,520.  Ross Trimboli had formed the view that the shop in Goulburn would take similar levels to the Civic shop, although his answers under friendly cross examination by counsel for the accountants failed to suggest any particularly enlightened basis for this presumption (T229).  Nevertheless, in the circumstances of the case, the complete failure of the delicatessen to achieve the projected figure does not evidence the lack of a reasonable basis for the prediction and I am satisfied that such a basis existed for it.

On the other hand, the reliability or accuracy of the prediction of a weekly net profit figure of $2,000 was not addressed by Top Slice Deli.  One reason for adopting that approach might have been because, having denied that it was made, these respondents saw no reason to address its reasonableness.  However, another reason was in my opinion more likely.  If Top Slice Deli could have shown that the Civic or other outlets had never made anything like $2,000 per week clear, it would tend to establish that this figure was most unlikely to have been mentioned, amongst other reasons because its accuracy could have been checked and found to be wrong or greatly exaggerated.  In fact the accountants' cash flow threw up a net profit figure of almost $1,900 per week.  Section 51A(2) placing the onus in this regard on Top Slice Deli, I am bound to conclude that there was no reasonable basis for making this representation.

The case against the accountants

At the close of the applicants' case the accountants moved on the pleadings that no case requiring an answer could be or had been made out against his clients and that judgment be entered for them at the threshold.  In reasons delivered ex tempore at the conclusion of argument on that motion I commented on the unlikely nature of the claim against the accountants, but did not consider it a sufficiently clear case to permit summary disposal.  Consequently the motion was refused.

The action against the accountants arises from the loan to the applicants by the bank.  When the applicants initially approached the Crookwell branch of the ANZ Bank to provide this finance, Mrs Haynes informed the manager of the turnover estimates provided by Ross Trimboli but finance was refused,  evidently on the basis that "delicatessens just do not take that sort of money" (T43).  When the applicants informed Ross Trimboli that their bankers were not prepared to give them a loan, he is said to have replied (T43): "Well, ours are" and offered to help them get a loan.

Ross Trimboli denied every aspect of this account insofar as it involved him (T268).  He agreed that on his advice the applicants contacted the broker Mr Griffiths.  He also agreed that he arranged for a cash flow to be prepared by the accountants whose firm had had Top Slice Deli as a client for several years.  The accountants admitted in evidence that they produced the cash flow on instruction from the Trimbolis to assist the applicants to get a loan from a bank (T131).

THE CASH FLOW

The cash flow is first alleged to have been misleading in that the stated average anticipated monthly turnover of $67,250 conflicted with the estimate given to the applicants of $55,000, and was even more out of tune with the actual takings.  However, it was eventually agreed that if the prediction in the cash flow was a misrepresentation, it was misleading conduct by Top Slice Deli, which provided the source figures, not the accountants who
merely analysed and passed them on.  The misleading statement relied on against the accountants was the projected 42% gross profit margin included in the cash flow (not the 48% mentioned by Ross Trimboli), which gave rise to a higher predicted net surplus than was reasonable.  Some other elements were also pointed to but my findings in due course make it unnecessary to determine whether any aspect of the cash flow breached section 52.

CAUSATION

The applicants argued on two bases that the cash flow relevantly caused them to enter the agreements:

1.   They were told by Mr Griffiths, who had seen the cash flow, that (T53):

     "On the cash flow you should do well"

However, apart from other difficulties it posed, this statement occurred after the opening of the delicatessen, and cannot therefore be a cause for entering the agreements.

2.   The principal argument was that without the cash flow the loan would not have been approved so that the applicants could not have entered the agreements and would not have suffered losses incurred in running the delicatessen.  This somewhat unusual argument has both factual and legal aspects.

(a)  Factually

Brian Cassidy, the bank officer responsible for approving the loan, gave evidence that he relied on the figures supplied by the accountants in approving the loan, although he conceded that it was only one of several relevant factors (T93).  He testified (T89) that he considered the cash flow especially reliable because it was provided by agents for the franchisor.  He stated that he generally places much greater reliance on the figures of a franchisor or vendor than those supplied by a franchisee or purchaser, on the interesting if doubtful basis that the former is more likely to base figures on actual experience of the particular business or some similar enterprise (T90).

I accept therefore that the cash flow played a significant role in the decision of the bank to approve the loan.  However, this fact is not decisive.  It may well be that without the cash flow the applicants would have been rejected by the State Bank of New South Wales, but would have applied for, and perhaps received, a loan from another financial institution.  Mr Griffiths would seemingly have been an ideal witness on this question but he was not called.  No doubt many other bankers or finance brokers would have been similarly qualified.  There was simply no substantial evidence that had the cash flow not been provided or, assuming that it was false or misleading, had been given correctly, the applicants would not have been able to get a similar loan elsewhere.  Of course without the accountants' cash flow but on the basis of the $50-$55,000 turnover figure, the ANZ Bank had already refused a loan.  Intuitively it seems to me likely that someone would have lent the money but no finding of any kind can be made on such an insubstantial basis.

(b)      Legally

The other side to this argument is whether this aspect of the applicants' claim is within the scope of section 82(1), which provides:

     A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

The question is whether the applicants suffered loss or damage "by conduct of" of the accountants.  This claim is unusual because, unlike most cases in which misleading conduct is said to have induced entry by a person into a contract, it does not claim reliance by the applicants on the misleading conduct.  There are few useful guidelines to assist the resolution of such a claim.

The leading case supporting the view that reliance on the part of the applicant is not always necessary to support an action for breach of section 52 is Janssen-Cilag Pty Limited v PfizerPty Limited  [1992] 37 FCR 526.  That case concerned theapplication of the section in the context of misleading advertising causing loss to a competitor.  Justice Lockhart decided that the fact
that the applicant had not itself relied on the misrepresentation was no bar to recovery by the competitor for the loss of custom.  First defining causation under section 82 in broad terms (at 530):

     The use of the preposition "by" in s 82(1) is important; it indicates the requirement that there be a sufficient cause or link between the respondent's conduct and the recoverable loss or damage...  Loss or damage must directly result from or be caused by the respondent's conduct.  The respondent's conduct must be the real or direct or effective cause of the applicant's loss; it must have been "brought about by virtue of" the conduct which is in contravention of section 52...

his Honour went on to conclude that there is no requirement in the Act to suggest that an applicant's right to damages under section 82 depends on personal reliance on the offending conduct.  At least in the area of misleading advertising, that conclusion must with respect be correct.  It might also be the case that the reliance of a third person will be sufficient for causation in circumstances similar to the current case.  The decision of Justice Ryan in Pacific Coal v Idemitsu [1992] ATPR 46-094 lends some support to that theory, although it too was a case in which the third party reliance directly caused a loss of a commercial opportunity.  However, this is not some technical or mathematical exercise.  In Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) [1987] 16 FCR 410 Justice Gummow made the comment at 418 that:

     In logic, the cause of any state of being may be not less than "the sum of the entire conditions", but the courts both in expounding the common law and in construing statutes which present issues of causation, have selected some one or more out of what is an infinite number of conditions to be treated as the cause...  And, as those learned judges also explained, the cause or causes so selected vary with the purpose at hand.  In making that selection the law is moved by considerations of policy, not simply of logic.

This concept is consistent with the High Court's subsequent pronouncement in March v E & M H Stramare Pty Ltd [1991] 171 CLR 506 that "considerations of policy and value judgment" were elements of the Court's "common sense" approach to causation.  See also Henjo Investments Pty Ltd & Ors v Collins Marrickville Pty Ltd [1990] 89 ALR 539 at 544-5.

Even if a third person's reliance is theoretically sufficient at law, in a particular case it must relevantly cause the damage.  In Janssen-Cilag Justice Lockhart made it clear at 531 that in allowing recovery for loss occasioned by the reliance of a third person, he was not giving section 82 an "unduly wide" interpretation.  His Honour referred at 532 to the fact that, in a case of misleading advertising, reliance by third parties, namely consumers, was precisely what might be expected to cause damage:

     Nor is there any element of indirectness or remoteness associated with the damage alleged by the applicant.  Where a corporation engages in conduct which misleads consumers, the natural and direct result of which is to cause the public to buy more of that trader's product and less of a rival trader's product, the loss to the rival is direct and immediate; it is not remote or indirect.  The purpose of the conduct is to reduce the market share of the rival to the benefit of the trader engaged in the misleading conduct.  That benefit is achieved by misleading consumers.  This is a class of conduct to which s 82 is directed.

These observations reveal an important constraint on the possibility of expansion in the scope of section 82.  Justice Lockhart's recognition that there is no absolute requirement of reliance on the part of the applicant was in no sense an abandonment of the considerations of proximity or directness that lie behind reliance and have made it a decisive factor in the majority of cases.  His Honour clearly recognised that, although reliance by the applicant is not a necessary element of section 82, all applicants retain the onus of proving the requisite element of directness or proximity necessary to constitute causation at law.

In this case the third party reliance was that of a bank, resulting in its approval of a loan application.  Armed with that approval, the applicants entered a set of agreements upon which they had already determined.  Even if the bank's approval of the loan was an antecedent condition of entry into the agreements, and I have expressed my reservations on the evidence on this point, there was not an effective or true nexus between the approval and the entry.  To adopt the language of Justice Lockhart, any resulting loss from the failure of the business is both a remote and indirect, not the "natural and direct", result of the relevant conduct.  It therefore falls outside section 82 and the applicants' case against the accountants fails.  There will be judgment accordingly.

Damages

The applicants seek their losses incurred in running the
business, and the forgone profits of the shearing business given up by Mrs Haynes to run the delicatessen.

TRADING LOSSES

The first claim is for the trading losses of the business over the period October 1992 to June 1994, as disclosed by the financial statements prepared for the business (ex Y), of $114,675.87.

1.   Accuracy of financial statements

The cash books (ex B, ex AA) provided the primary material upon which the financial statements were based.  Top Slice Deli attacked the reliability of these source documents, alleging that they do not reveal the true level of the applicants' takings.  It was argued first that the cost of goods sold when compared with the figure for gross sales was inconsistent with what the respondents claimed was the average mark-up of 70-80%.  For example, in 1993 cost of goods sold was $200,000 and gross sales $275,000.  If the $200,000 worth of goods had on average been marked up by 75% (corresponding to a 42% profit margin), gross sales should have totalled $350,000, meaning that gross sales had been under-recorded by $75,000 in that year.

I was not attracted to this argument.  Clearly Mrs Haynes did not understand the figures well enough to defend them under cross examination, but they do not seem to me to be prima facie inconsistent.  First, the argument depends entirely on a 75% average mark up.  The evidence on this point was not entirely clear but, for example, Dominic Trimboli initially guessed that the average mark up was 50% (T483), and I was not impressed by his later changing his evidence to match the respondents' case under very friendly cross examination by counsel for the accountants (T494).

Even if I accepted the bulk of Top Slice Deli's evidence that the average mark up was about 75%, this reasoning also assumes that there was no wasted, unsold or damaged goods.  In a delicatessen, where many lines would presumably have had a short shelf life, this seems to be a dangerous assumption, as the evidence of Dominic Trimboli suggested (T503).  If even as few as 20% of goods purchased had been wasted, the gross sales figure would be roughly consistent with a 75% average mark up (($200,000 x 0.8)x 1.75 = $280,000).  In 1994 the corresponding figures were $114,000 and $170,000.  Once again a low wastage (15%) makes them consistent with the mark up percentage of 75% (($114,000 x 0.85) x 1.75 = $170,000).

These calculations may or may not be an accurate reflection of the facts -- I have little evidence either way -- but when combined with the possibility of specials and of goods sometimes being sold at or below cost to get rid of them, and of the mark up being sometimes less than 70-80%, they are sufficient to rebut the implication of fraud drawn from the figures alone.

Top Slice Deli's witnesses also gave some evidence suggesting that all takings were not fully recorded and that some were deliberately understated.  Ross Trimboli spoke of an incident in which takings for one day were recorded as $700 when the till showed receipts of $1,300 (T220).  This incident was denied by Mrs Haynes (T399) and in my view is unlikely to have occurred in the way Mr Trimboli described it.  Mr Macarlino gave evidence that takings were higher in the time he was there than are indicated by the cash book (T343):

     Well, the first week it was about seventeen and a half thousand dollars and it was slightly less the week after - about sixteen, fifteen and a half... I don't recall exactly ... while I was there it was never under fifteen thousand dollars.

According to the cash book the receipts from the opening on 12 October 1992 until the end of 1992 were as follows:

     Week commencing         No. customers      "Net Sales"

     12 October 1992             3,572              $16,860.66

     19 October 1992             3,277              $15,814.58

     26 October 1992             2,636              $12,711.09

     02 November 1992        2,937              $12,612.78

     09 November 1992        2,433              $10,832.60

     16 November 1992        2,356              $11,060.64

     23 November 1992        2,332              $10,531.85

     30 November 1992        2,220              $09,584.75

     7 December 1992             2,118              $09,288.90

     15 December 1992        1,832              $08,981.65

     21 December 1992        1,346              $07,872.73

         (3 day week) 

     28 December 1992        1,201              $05,804.16

         (5 day week)

Mr Macarlino left the delicatessen in the middle of November.  The column headed "Net sales" evidently refers to the week's gross takings.  The  number of customers I have compiled by adding the daily figures recorded.  These figures are generally consistent with the recollection of Dominic Trimboli who helped Mrs Haynes keep her accounts for the first few months (ex DD).  On this matter I prefer the contemporaneous record of the cash book and Dominic Trimboli's memory over Mr Macarlino's uncorroborated testimony and Ross Trimboli's single example.

The respondents also pointed to the fact that on many days the record for gross takings less recorded cash payments was less than the cash banked.  Once again I found that the examples given failed to substantiate allegations of systematic understatement of takings.  Moreover, although she admitted paying wages to her employees out of the till, and taking drawings herself, Mrs Haynes was adamant that she never did so without declaring it in her books (T394-8).

None of this evidence persuaded me that I should not rely on the financial statements comprising exhibit Y, and I therefore find that the applicants lost about $114,675 whilst in the business.

2.   Reason for low level of takings

Top Slice Deli further argued that the low level of takings, and any loss suffered by the applicants, was the result of the poor manner in which the delicatessen was managed. 

There is some difficulty for a respondent seeking to argue the negligence of an applicant contributing to the losses sustained.  At common law, contributory negligence was an absolute bar to a claim in damages.  On the other hand, the various statutory schemes permitting an apportionment of damages to take account of the contributory negligence of the applicant in actions in tort do not apply to actions under the Act.  Adopting the approach taken by Justice French in Pavich v Bobra Nominees Pty Limited (unreported, 4 August 1988), a Full Court of this Court (Fisher, Gummow, Lee JJ) in Munchies Management Pty Limited v Belperio [1988] 84 ALR 700 said at 712:

     The primacy of the causation principle in s 82 would seem to exclude reliance upon such concepts as mitigation or contributory negligence, unless it can be shown that the applicant's own carelessness or disregard for his or her interest is the cause of all or some part of the claimed loss.  It may still be in such a case that the misleading or deceptive conduct complained of may be identified as a sine qua non of the loss claimed.  There may come a point, however, where the applicant's own conduct is so dominant in the causal chain as to constitute a novus actus interveniens.  It is perhaps simply putting it another way to say that in such a case a selection principle of the kind adverted to [in the Elna Australia case] comes into operation to exclude liability.  The criteria for such selection may import concepts analogous to remoteness, mitigation or contributory negligence.

There are two points at which it might be argued that the negligence of an applicant ought to be taken into account in attributing responsibility for the loss.  The first is the lack of care in entering the agreement.  Certainly these applicants could hardly have done less to protect their own interests in their preparation to commence the delicatessen business.  They were clearly aware that Cut Price Deli had existed in the Mall and had only recently failed (T36).  They also knew before entering the agreements that Cut Price Deli went broke "because they were only taking $9-10,000 a week" (T48), and that they would be competing against Coles and a deli in or near the main street of Goulburn known as the Auburn Street Deli.  Both of them had spent their adult lives in the shearing industry and, in the case of Mrs Haynes, in training as a nurse and running a dress shop.  They had no particular knowledge or experience of delicatessens.  Nevertheless they carried out not even the most basic market research or independent inquiry.

The second stage of possible negligence by an applicant causing loss is in the conduct of the business or undertaking in question.  Justice Hill observed in Argy v Blunts & Lane Cove Real Estate [1990] 26 FCR 112 at 138:

     A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering into a contract.  In such a case the element of causation between misrepresentation and damage will have been severed by the intervention of the negligence of the applicant.

In G Lowe & Sze Tu Holdings Pty Ltd v Cudal Nominees Pty Ltd & Anor [1991] ATPR 46-074 at page 53,284, I commented that there will be some circumstances in which

     a failure to take reasonable steps for self-protection may make a finding of relevant misleading and deceptive conduct or of reliance on such conduct quite unreal and even a little absurd...

In such a case the carelessness of the applicant in entering the contract or in conducting the operation concerned will exclude as a cause of the loss the misleading conduct of the respondent.  But this case primarily raises the question of contribution to rather than causation of the losses.  I have always been troubled by the failure of the legislature to provide for apportionment of damages in section 52 cases where the negligence of the applicant has contributed to the losses claimed.  If section 82 damages are to be generally assessed as in tort: see Gates v City Mutual Life Assurance Society Ltd [1986] 160 CLR 1; Lockyer Investment Co Pty Ltd v Smallacombe & Ors [1994] 122 ALR 659, it seems inconsistent to exclude what has become a fundamental principle applicable to the assessment of damages in tort.

On the other hand, the doctrine of contributory negligence does not operate in respect of the torts most analogous to misleading conduct under section 52, viz. deceit and negligent misstatement.  However, in deceit, the need to show an intent to induce reliance makes unnecessary the consideration of other factors, including the plantiff's carelessness, that might also have contributed to the entry into the agreement.  In the case of negligent misstatement, the reliance on the misrepresentation must be reasonable so that claimants who show disregard for their own interests will presumably not recover.  Section 52 requires neither an intent to deceive, nor that reliance be reasonable.  In the circumstances it is appropriate to consider, in the absence of these factors, how apportionment of responsibility might fit into the causative scheme under Part V of the Trade Practices Act.

Where the losses are caused both by misleading conduct and the applicant's own negligence, and damages are to be assessed as in tort, it seems to me that justice requires a balancing of the parties' respective responsibilities for the losses sustained.  Indeed, the reference in Munchies Management at 712, extracted earlier, to the applicants' negligence as causing all or "some part" of the losses suffered suggests that a principle akin to apportionment by which certain items of loss might be attributed to the applicant may be developing.  Although clearly raised on the facts here, this possibility was not sought to be argued, despite my express invitation to the parties to address further submissions on the matter after judgment was reserved.  I return to this concept shortly.

It seems to me quite clear that the applicants must have known that Ross Trimboli was basing his expectations of the Goulburn delicatessen on what he knew of the way the other Top Slice Deli outlets operated.  The applicants would undoubtedly have appreciated that if they were to achieve the results predicted, they had to trade as efficiently as possible, and to take advantage of the accumulated experience of the Trimbolis and the other Top Slice Delis.  In this context I think that the carelessness and disregard of the applicants in this case for their own interests were such that were an apportionment of damages permissible under section 82, they would have to bear a considerable part of the responsibility for their losses.  However, on the current state of the law, it is not possible to apportion responsibility for the applicants' own contribution to their losses.  Top Slice Deli was therefore required to argue that the mismanagement of the delicatessen was so extreme that it constituted the real cause of the loss, a novus actus interveniens which broke the chain of causation from the misrepresentations.  I have particularised this contention under several headings:

(a)  Failure to undergo training

Top Slice Deli alleged that by failing to train at the Civic outlet in Canberra for three months or so, Mrs Haynes reduced her chances of successfully trading in Goulburn.  I have already referred to the evidentiary conflict over whether this suggestion was made at all during the first meeting.  In any event, there were not three months between the time the agreements were finalised and the opening of the delicatessen.  The more relevant time was the one and a half months between the approval of the applicants' finance and the opening.  Ross Trimboli nonetheless insisted that she should have trained at Civic, even if it meant
being in Canberra while the Goulburn shop was manned by someone else.

Mrs Haynes visited the Civic outlet once, just before her own delicatessen opened in October 1992, and on that occasion spent her time ordering uniforms and finalising arrangements with Ross Trimboli, although she was apparently also taught such tasks as slicing meats and using the scales.  At the conclusion of that meeting it was suggested that she return for half a day or a day, but she was too busy completing a shearing contract and never did.  Some members of her staff also attended various Top Slice outlets in Canberra and received some limited training, and of course Pasquale Macarlino and Ross Trimboli himself, both of whom worked at Goulburn at the beginning, were very experienced.  Although Top Slice Deli alleged that Mrs Haynes also visited the Civic store on the day of the initial meeting, there is no dispute that she never had or took the opportunity of closely examining the way in which that or any of the other outlets operated.

Having a definite interest in the applicants' success, Ross Trimboli certainly appreciated that the applicants needed hands-on experience before they could hope to conduct the Goulburn outlet profitably and well.  I have little doubt therefore that he did mention the possibility of their learning from the Civic delicatessen, and that he suggested Mrs Haynes attend for training there.  To the extent that Mrs Haynes does not remember the comment, it is most likely because she discounted it at the time in favour of Ross Trimboli's additional proposal to put an experienced person in the delicatessen with her.

(b)  Management

A great deal of the evidence in the case went to establish Mrs Haynes' poor management of the delicatessen.  This evidence left me with the unmistakable impression that for whatever reason, she did not properly manage the business and that that fact, at least partly, explains its failure.

Deborah Woolley, the centre manager, testified that the delicatessen gave the appearance of trading well initially, but that a decline became evident in the lead up to Christmas, and continued in January and February (T97).  She said that following Pasquale Macarlino's departure, matters such as the presentation of the food degenerated sharply (ex D, T98-9):

     The display, product range, lines and general merchandising decreased after the initial opening at a very fast rate.  The deli was looking like a "claytons" deli.  As a manager I don't believe customers were being served and looked after in a professional manner.  I approached Jackie [Mrs Haynes] on many occasions to rectify the problems because it had been brought to my attention.  I held quite a few meetings with her to discuss her displays, customer service and lack of product lines and knowledge and found generally that Jackie was resistant to any advise [sic] given to her.

Similar observations were made by the greengrocer opposite the delicatessen, Bruno Ursino, who also noticed a general decline, particularly in customer service (T175):

     It didn't seem to be as stocked as well as previous[ly].  Sometimes you wouldn't have anybody outside the deli to serve, they'd be round the back slicing or cutting, where customers walk up then you see them walking away.  A few actually came over to the shop [the greengrocers] and said is there anybody serving over at the deli?

Mr Macarlino's evidence was also directed at the poor management of Mrs Haynes.  He spoke of her reluctance to attend to customers, wear a uniform, or give the delicatessen her full attention or efforts.  He testified that she tried to cut costs by reducing stock levels and quality (ex S), and that with proper management the delicatessen could have achieved a turnover exceeding $15,000 a week.  As stated earlier, for the first few weeks of its operation while he was there, takings were at a relatively high level.

Ross Trimboli (ex N p.25, T236ff) made similar observations.  Dominic Trimboli also noticed the poor service (ex DD) but said it later improved slightly (T493).  However, of most concern was the evidence of the expert management consultant Andrew Meagher, who prepared a report at the request of Mr Dellavedova, the fourth respondent, in late 1993.  The report commented that the delicatessen was "very poorly presented" and that "[t]he service was appalling" (ex M), and made various criticisms of certain specific aspects of the presentation.  In evidence Mr Meagher indicated in some detail the fairly basic steps that could have been taken to improve the performance of the delicatessen (T193).

Mr Meagher's evidence must be qualified by the fact that he did not see the delicatessen until October 1993, by which stage it was common ground that the applicants were trying to get out of the business and had presumably lost some of their enthusiasm.  When shown photographs of the delicatessen taken as late as June 1993, he said that "you wouldn't know it was the same shop" (T197) as the more dilapidated business he visited a few months later.

The first report of Mr Anderson's advertising agency in March 1993 (ex R1) said of the delicatessen:

     There seemed to be a reluctance to approach customers and there certainly were no smiles anywhere.  It was not uncommon to see people waiting to be served even though they were the only customer at the counter at the time.

This criticism was repeated in the agency's second report in October 1993 (ex R2) which, while it identified many problems with the business, stressed one matter in particular:

     The biggest concern observed was that not once during the whole day was there a smile, a warm greeting or some show of recognition.

I have no hesitation in concluding, both from all this evidence and from observations of Mrs Haynes' demeanour in the witness box, that she is not a natural salesperson, possessed few skills as a food shop manager, and had clear difficulty providing attractive and attracting service to her customers.

(c)  Pasquale Macarlino

The applicants argued that Mr Macarlino had a negative influence on the reputation and profitability of the delicatessen.  They alleged that he took frequent breaks to smoke, would serve customers after a cigarette without washing his hands, enjoyed extended lunch breaks, and took food from the delicatessen (T55).  It was further alleged that he overcharged customers and served substandard food (T56).  All these allegations were specifically denied (T352), and I was quite unpersuaded that they occurred as alleged.  If they did, the higher takings in the period of Mr Macarlino's employment would not support a causal nexus between such happenings and the failure of the business, not least because after they were removed upon his departure in late November and there was an opportunity to effect change, the fortunes of the business declined further.

The applicants asserted that, together with Ross Trimboli, Mr Macarlino made all the important management decisions concerning the delicatessen.  He and Ross Trimboli set the prices when trading commenced, and they were only changed to reflect variations in supply prices.  Mr Macarlino also did all the ordering.  This evidence sought to establish that Mrs Haynes did not receive the assistance and on-the-job training she needed, as was obviously intended by the secondment of Mr Macarlino.  In fact it served to emphasise the reason for the decline in the fortunes of the business following his departure.

(d)  Financial and administrative control

It was quite clear from the evidence that Mrs Haynes was quite ill equipped to conduct a delicatessen in Goulburn in 1992 and 1993.  She did not understand the delicatessen business before entering it, and made no effort to come to terms with it once she became involved.  She did not truly carry out its management beyond the most basic aspects of organising staff and coordinating the finances.  When things were not going well in the business, she made no significant attempt to improve its performance.  The evidence established that she did not understand what profit margin she was working with, or from what goods in particular her profit were or should be coming (T407-9).  She only rarely experimented with new lines, and generally maintained the proportions of each type of product she commenced with (T410).  Her only significant decision in these respects was to reduce the stock level of the business, but whatever reasons drove that step, in the event it does not seem to have been helpful to the business.

(e)  Sunday trading

Top Slice Deli criticised the applicants for not trading on Sundays after January 1993.  Mr Meagher in particular thought that a retailer in the applicants' position "can't afford not to" trade seven days a week (T195), especially when the major competitor, Coles, was trading 24 hours every day at the time.  Mr Macarlino remembered trading on the two Sundays when he was present as being quite profitable.  On balance there was insufficient evidence comparing the cost with the benefits of Sunday trading to permit a conclusion that the cessation of Sunday trading was a poor decision.

(f)  Absence from the delicatessen

There was a deal of evidence suggesting that Mrs Haynes was often absent from the delicatessen.  Certainly she had to travel about 100kms to get there from her home every day, and when early morning deliveries were made she paid someone else to take them.  The major allegation was, and there was some evidence, that she had a strong interest in horse racing, and that she regularly attended local race meetings.  According to Mrs Haynes, she was absent from the shop to go to the races on about eight occasions in the entire time she conducted the business (T35).  Otherwise she was away for a period of five days in April 1993 looking after her grandchildren.  Mr Ursino and Ross Trimboli remember her being absent more frequently, but I accept the testimony of Mrs Haynes on the subject.  On a review of the evidence, I have found little to support allegations that she was absent for whole days on a regular basis for horse racing or any other reason or that her absence contributed in any significant way to the failure of the business.

(g)  The ramp

The delicatessen was on one side of a sloping walkway at one end
of which was Franklins.  This was the only external factor to which the applicants could point to explain the failure of the business.  They stated that the ramp had an adverse effect on the business, because it made one end of the counter very high, and because people found it difficult to stop with their trolleys on the slope.  Mr Ursino did not report similar problems at his shop (T179), but that may have been because he had a flat surface inside the shop where people could park their trolleys.  Anyone who has ever used a supermarket trolley knows the problem.

The ramp was the first matter identified in the report of the advertising agency commissioned by the centre management as a problem.  The report stated that it created "an environmental problem" (ex R1), presumably meaning a problem for the successful conduct of a shop which had no walk-in facility.  The report recommended that trolley parking be organised.  Clearly Ross Trimboli was aware of the ramp when he met with the applicants.  The applicants themselves must or ought also to have been aware of it as they had a good opportunity to observe the site for themselves prior to entering the agreements.  They obviously did not appreciate the difficulty it might cause, and I believe that Ross Trimboli was also unaware that it would present such a serious "environmental" problem.  The shop at Civic, which had been successful, was also on a slight ramp (T266).  I find that the ramp presented a problem for the business, but that it falls far short of explaining the applicants' failure.  If the delicatessen had had popular commercial appeal, the difficulty of stabilising trolleys on the ramp would not have destroyed its attractiveness.

3.   Cause of the decline

The evidence leaves me in little doubt that in their preparation for the decision to enter the delicatessen and in the manner in which they ran it, the applicants bear some of the responsibility for its performance.   In other words, the evidence leads me to the conclusion that a significant proportion of the applicants' losses were caused by their own actions in the business, rather than the offending conduct.  However, I am unable to conclude that Mrs Haynes' failure as a manager constitutes a sufficient intervening act to break the chain of causation.  Firstly, it is clear that she faced stiff competition from Coles and the Auburn Street Deli.  Secondly, I have paid particular regard to the circumstances under which the franchise was sold.  The respondents had made it quite clear in their advertising that they were not especially looking for franchisees with any managerial or business experience.  According to the advertisement produced in evidence (ex A2):

     At Top Slice Deli our business techniques are proven profit makers.  We will assist you every step of the way.

         *    Day to day assistance to make you profitable.

         *    Training both initial and ongoing.

         *    Leasing, including the design and fit out of your store, in a top location in a major shopping centre.

         *    Promote extensively on TV, radio and newspapers.

         *    Handle group purchasing power.

     If you have adequate security, some management
experience (but not essential), and welcome an opportunity to apply your energy and enthusiasm for achieving success in your own business, then you are invited to contact Ross on ....

Clearly Top Slice Deli was aware of the applicants' complete lack of experience in the delicatessen business (T116), and the resolution of the issue of causation must also take that crucial fact into account.

On the other hand, an applicant claiming damages under section 82 for breach of section 52 has a duty to act reasonably to mitigate the damage flowing from the breach.  I have referred already to the principles governing causation under section 82.  In Gould v Vaggelas [1984] 157 CLR 215, in the context of fraudulent misrepresentation, Justice Dawson said at 267 that:

     ..... for a loss to be recoverable it must be clear that it is suffered as a direct consequence of the deceit and is not referable to something else such as the purchaser's ineptitude in the conduct of the business.

In the same case Chief Justice Gibbs indicated at 222 that:

     ..... the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself ...

Together with the comments of Wilson J at 242 and Brennan J at 254-5, this approach was applied to section 82 by Justice Wilcox in Collins Marrickville Pty Limited v Henjo Investments Pty Limited & Ors [1987] ATPR 40-822.  At 48,905 his Honour distinguished between losses arising directly from the misrepresentation and other losses:

     The trading losses occasioned by the loss of the stools were losses which not only stemmed from a defect inherent in the business at the time of purchase; they were losses on a matter which was the subject of a misrepresentation.  Upon any view they are recoverable.  Conversely, the losses occasioned by reason of the loss of key staff, the changes in the method of operation of the business and the change in taxation law were not only unrelated to any misrepresentations; they were not losses which could be described as defects inherent in the business at the date of purchase.  They were losses caused by the supervening factors.

Furthermore, in Pavich Justice French adverted to the possibility of separately dealing with that part of the loss caused by an applicant's own carelessness or disregard for his own interests.

It is clearly relevant to causation that the business declined rapidly after opening when the shopping centre and surrounding businesses were performing well.  The decline is obvious even from the few months' figures earlier reproduced from the cash book, and is referred to in the evidence of Mrs Haynes and most of Top Slice Deli's witnesses.  Dominic Trimboli recorded it in the following terms (ex DD):

     I recall that the turnover for the Goulburn store had remained fairly high around the $15,000 per week mark for most of October 1992 and then in November 1992 the turnover had began [sic] to drop to $11,000 and $12,000 per week and then towards Christmas the turnover had dropped below $10,000 per week which was strange as the summer months and particularly Christmas season are favourable to our type of business and at least Christmas is favourable for many retail outlets.

Mrs Haynes had no explanation for the decrease in her business in the period approaching Christmas 1992, although she recognised that December was a busy month generally for the food hall (T417).  These low levels of takings persisted throughout the applicants' tenancy (T414).

The figures for takings between October 1993 and Christmas 1993 compare miserably to figures for the same period in the previous year, notwithstanding the fact that trade in the centre as a whole had evidently improved (ex AA):

     Week commencing      No. customers   "Net Sales"

     11 October 1993         1,126 (31%)   $05,258.44

     18 October 1993             1,082 (33%)   $05,210.83

     25 October 1993             1,081 (41%)   $04,853.21

     01 November 1993        1,214 (41%)   $06,158.26

     08 November 1993        1,120 (46%)   $05,322.05

     15 November 1993        1,168 (49%)   $05,602.33

     22 November 1993        1.002 (43%)   $04,965.54

     29 November 1993        1,230 (55%)   $05,883.43

     06 December 1993        1,061 (50%)   $04,970.80

     13 December 1993        1,132 (61%)   $06,150.89

         (7day week - 1 day longer than 1992)

     20 December 1993        1,046 (77%)   $07,106.34

         (5 day week - 2 days longer than 1992)    

     27 December 1993          649 (54%)   $03,168.98

         (4 day week - 1 day shorter than 1992)

The percentages indicate the 1993 number of customers as a percentage of the corresponding 1992 figure.  Generally the figures are indicative of a substantial decrease in the level of trade.  The delicatessen never regained the strength it had initially while trading seven days a week under the guidance of Pasquale Macarlino.

In my opinion the evidence establishes that major factors in the decline in the fortunes of the business after November 1992 were the applicants' inadequate prior planning and preparation for the business, and management, administrative and commercial decisions taken by Mrs Haynes that ought reasonably not to have been taken, or not taken by Mrs Haynes that ought reasonably to have been taken.  She clearly had an obligation, often mentioned to her, to stem and reverse her losses.  My view is that had she acted reasonably she could have ensured that the delicatessen was better managed and thereby more profitable.  I ascribe to her failure to do so considerable responsibility for the decline in the fortunes of the delicatessen.  She should either have undertaken training at the Civic shop or used Mr Macarlino's and the Trimbolis' services to much greater advantage than she did.  Certainly she ought not to have allowed Mr Macarlino to leave the delicatessen without her having received proper training herself, or without employing someone else with appropriate managerial experience.

Her duty to act reasonably to mitigate losses also demanded that she work to improve the quality of the service provided by her staff, upgrade the quality of her goods, and take a more active and constructive interest in the detail involved in proper management and financial control of the delicatessen.  She ought to have worked on her presentation of both goods and customer service, been willing to vary her produce, and been alive to the need for appealing "specials" to attract custom.  She had to be informed about and responsive to the competition provided by Coles and the Auburn Street Deli, continually checking their sales, marketing methods, product lines and service provision, and then seeking to match or improve on what they provided.  The evidence established that she did none of those things.

4.   Quantification of trading losses

There is no evidence what the losses of $114,675.87 might have been had Mrs Haynes acted reasonably to minimise her losses by improving the way in which the delicatessen was conducted.  It is not possible to find that it would have been profitable -- Ross Trimboli refused to take it over, Mrs Haynes could not find a buyer, and Lana Gardiner, who took over after January 1994, does not seem to have been able to make it profitable, leaving after six months.  Nevertheless a comparison of the cash book figures while Mr Macarlino was managing the shop with those of a year later and the oral evidence provide support for a conclusion that proper management would have enabled the store to have traded at a much higher and more profitable level.

On the other hand, as I have said earlier, Top Slice Deli was aware that the applicants did not have the capacity to supply this level of competence.  It is therefore necessary to balance the finding against the applicants with an allowance for the cost of extra managerial assistance or of another staff person to work in the shop while Mrs Haynes was fully trained at one of the other Top Slice Delis.  Although the evidence does not permit a precise calculation of this difficult balancing exercise, difficulty in determining damages does not justify non-assessment: Howe v Teefy [1927] 27 SR (NSW) 301 at 306; McRae v Commonwealth Disposals Commission [1951] 84 CLR 377 at 411; Lombardo v Henne NSW Court of Appeal, unreported 2 December 1973 per Glass JA at page 11.  I am therefore bound to make the best available estimate or assessment.  I disallow one half of the applicants' trading losses, or $57,338, on this basis.

CAPITAL LOSSES

The applicants also point to accumulated deficiencies of $151,956.16, and a number of substantial outstanding debts to the ANZ Bank, trade creditors and utilities.  However, all these matters are either covered in the trading accounts as expenses or financial costs in the calculation of net losses, or are no more than the inevitable result of almost two years of the accumulated losses which have already been awarded.  They are what the money lost and now to be reimbursed would have been spent on.  It would therefore be double dipping to award these amounts in addition to net trading losses.  The exception to this category, because it is not covered elsewhere, is the money still owing on the fit-out lease when trading ceased.  This amounts to $118,871.84 which will be made part of the judgment sum.

FORGONE PROFITS

The applicants also claimed the lost profits from the shearing business that Mrs Haynes sold to her sons before going into the delicatessen.  If there were or would have been any such profits, it would in my opinion be inappropriate to award the amounts involved.  There is no doubt that damages for loss of commercial opportunity are recoverable under section 82: Poseidon Limited v Adelaide Petroleum N.L. & Ors [1994] 179 CLR 332.  However, such damages are frequently impossible to calculate in a manner that tends to a realistic practical result, as I pointed out in Lockyer at 671-2.

The claim must presumably be that if the applicants had not entered the franchise agreement in the first place, they would have stayed in the shearing business and made the same profits that their sons made in their absence.  There was insufficient evidence of any actual or likely profit to support even the basics of that proposition.  Furthermore, it could not be said that the applicants left the shearing business because of any conduct of the respondents.  The applicants voluntarily answered the advertisement for Top Slice Deli and engaged in the Canberra meeting with Ross Trimboli.  They had clearly determined on a change in lifestyle and in all likelihood would have left the shearing business to enter some other enterprise.  In these circumstances it is inappropriate to speak of any loss of possible profits in the shearing business.

In any event the applicants took drawings from the delicatessen business as well as goods for their own use: the financial statements suggest a total figure of almost $57,000 during the whole period of operation (ex Y p.7).  In the absence of any reliable information of the net profit that would have been made by the shearing business, or from any other enterprise in which they may have been engaged, no actual loss of net or take home amounts was proved.

MENTAL STRESS

The applicants sought damages for mental stress.  The evidence to support this claim was brief, perhaps partly as a result of a misunderstanding between counsel as to whether or in what particular the claim was disputed.  It comprised several answers by Mrs Haynes to the effect that the failure of the business had caused her stress, lack of sleep, and shame at the fact that she is now in debt.  She testified (T67) to being

     devastated because we've worked for 40 years to get our property, we paid it off, our house and our ground in town and we will lose the lot.

Similar evidence was given by Mr Haynes (T120) although his testimony on the point appears to have been truncated due to his counsel's view that such damage was conceded by the respondents. I can fully understand the sentiments embodied in these expressions.

Clearly it is often the case that a direct and natural result of business failure is great stress resulting in pressure on the victim's health and family life.  It cannot be considered an unusual or remote result of inducing someone to enter a business unlikely to succeed.  However, the courts have always been reluctant to extend the range of recoverable damage in what are essentially economic wrongs arising from breach of contract and proprietary or economic torts.  There was nothing in the evidence in this case to suggest that the applicants suffered any more than might generally be expected of people involved in the stress of business and litigation.  I am therefore unwilling to award general damages in this case; any such award would in any event have been nominal.

Applicants' damages

I therefore assess damages at:

     Accumulated losses          $114,676

     Less: avoidable loss             $ 57,338

                                           $ 57,338

     Fit-out debt                          $118,872

     Sub-total                             $176,210

     Interest from June 1994                    $ 17,500

     making a total amount of                   $193,710

The first cross claim

By the first cross claim Top Slice Deli claims from the applicants unpaid franchise fees from March 1993 until March 1994, when the cross claim was prepared, in the sum of $48,750 plus interest.  These fees have been taken into account in calculating the losses of the business for which the applicants have been compensated.  Thus the fees must be paid until 30 June 1994 when trading ceased.  This sum has been submitted without dissent from the applicants to be $61,350.

Top Slice Deli also seeks interest and indemnity costs in accordance with the terms of the franchise agreement between the parties.  My findings in these reasons for judgment, and in particular the refusal of Top Slice Deli to take over the delicatessen when it initially got into trouble, or to really assist Mrs Haynes to get out of the business, make it inappropriate that these terms of the contract now be enforced.  However, interest is appropriate under section 51A of the Federal Court Act and I allow the sum of $5,600 in this regard making a total on the cross claim of $66,950.

Other cross claims

My conclusion that the accountants are not liable to the applicants means that the second cross claim does not arise.  The third cross claim related only to any liability in Top Slice Deli for the cash flow submitted to Detemo Pty Ltd and the bank. Since I have found that no such liability exists, it is not necessary to deal with this cross claim either.  I therefore propose to dismiss both the second and third cross claims.

The result

The net amount to be paid to the applicants is thus calculated as follows:

                   Applicants' claim       $193,710

                   Less cross claim        $ 66,950

                                           $126,760

Top Slice Deli will be ordered to pay this sum to the applicants.

Costs

The issue of costs raises some unusual concerns connected with the manner in which this case was presented and conducted and I propose to give the parties time to make written submissions on costs.  The applicants shall file and serve their written submissions on this issue by 9 June 1995.  The respondents' submissions will be filed and served by 16 June 1995, with any submissions in reply by 21 June 1995.

Counsel and solicitors for theI. Davidson instructed by

applicant                      P. Meckiff of R.J. McCarthy & Co

Counsel and solicitors for theI. Lawry then G. Rich

first, second and third              instructed by J. Memmolo

respondents                          of Romano & Co

Counsel and solicitors for theG. O'L. Reynolds instructed

fourth, fifth and sixth              by K. Emmanuel agent for

respondents                          Snedden Hall & Gallop

Date of hearing                      6, 8, 10, 27 February, 2, 7, 9, 10 March 1995

Written submissions                  7 April 1995

completed

Date of Judgment                     2 June 1995