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IN THE FEDERAL COURT OF AUSTRALIA |
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BETWEEN: |
KAYTONRUBY PTY LTD First Applicant
CHRISTOPHER WAI HEANG LEONG Second Applicant
LILLIAN POH HAR LEONG Third Applicant
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AND: |
GLEV FRANCHISES PTY LTD First Respondent
GLEV PTY LTD Second Respondent
EVANGELOS DEMETRIOU CHRISTOU Third Respondent
TULLOCH AND ASSOCIATES PTY LTD Fourth Respondent
ALAN TULLOCH Fifth Respondent
FRANCHISE DEVELOPMENTS PTY LTD Sixth Respondent
LEO REYES Seventh Respondent
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DATE OF ORDER: |
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WHERE MADE: |
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MINUTES OF ORDER
THE COURT ORDERS:
1. That the application be adjourned for further directions to a date to be fixed.
Note: Settlement and entry of orders are dealt with in Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA |
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BETWEEN: |
First Applicant
CHRISTOPHER WAI HEANG LEONG Second Applicant
LILLIAN POH HAR LEONG Third Applicant
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AND: |
First Respondent
GLEV PTY LTD Second Respondent
EVANGELOS DEMETRIOU CHRISTOU Third Respondent
TULLOCH AND ASSOCIATES PTY LTD Fourth Respondent
ALAN TULLOCH Fifth Respondent
FRANCHISE DEVELOPMENTS PTY LTD Sixth Respondent
LEO REYES Seventh Respondent
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JUDGE: |
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DATE: |
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PLACE: |
REASONS FOR JUDGMENT
This is an action by a corporate applicant and its two directors claiming damages from the respondents arising out of the entry by the applicants into a franchise agreement and the conduct of the business of a “Pizza Haven” outlet pursuant to that agreement.
In June 1990 the second applicant, Mr Leong, saw the following advertisement in the “Age” newspaper:
LOOK!
PIZZA HAVEN WANTS YOU!
. Ambition, $30,000 plus
asset backing will qualify
you
For information
call Leo Reyes
on (03)
867 7666
FRANCHISE
DEVELOPMENTS
Franchise consulting and marketing
Melbourne, Sydney, Brisbane
Adelaide, Perth
As a result, Mr Leong met Mr Reyes an employee of the sixth respondent, Franchise Developments Pty Ltd (“Franchise Developments”). Mr Reyes consulted in Mr Leong's presence a “disclosure document” prepared as at October 1989 and referred to the profit projections which were in these terms:
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N O T E S |
LEVEL 1 $5,000 p.w.
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LEVEL 2 $7,000 p.w.
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LEVEL 3 $9,000 p.w.
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LEVEL 4 $12,000 p.w.
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$
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%
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$
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%
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$
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%
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$
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%
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|
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ANNUAL SALES
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1 |
260,000 |
100.0 |
364,000 |
100.0 |
468,000 |
100.0 |
624,000 |
100.0 |
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LESS COST OFSALES |
2 |
65,000 |
25.0 |
91,000 |
25.0 |
117,000 |
25.0 |
156,000 |
25.0 |
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GROSS PROFIT |
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195,000 |
75.0 |
273,000 |
75.0 |
351,000 |
75.0 |
468,000 |
75.0 |
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LESS OPERATING EXPENSES Accounting Advertising Bank & Credit Card Charges Cleaning & Laundry Electricity Insurance Leasing Motor Vehicle Expenses Rent & Outgoings Repair & Maintenance Royalty Rubbish Removal Salaries & Wages - staff Stationary & Printing Telephone Uniforms Miscellaneous |
3 4
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
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1,000 13,000
520 600 8,400 2,000 15,550 6,000 20,000 720 14,300 600 52,110 780 1,200 160 1,820
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0.4 5.0
0.2 0.2 3.2 0.8 6.0 2.3 7.7 0.3 5.5 0.3 20.0 0.3 0.5 0.1 0.7
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1,000 18,200
730 600 8,400 2,000 15,550 12,000 20,000 840 20,020 600 78,550 1,090 1,200 160 2,550
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0.3 5.0
0.2 0.1 1.8 0.4 3.3 3.8 4.3 1.8 5.5 0.1 20.2 0.2 0.3 - 0.7
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1,000 23,400
940 600 8,400 2,000 15,550 18,000 20,000 840 25,740 600 94,470 1,090 1,200 160 3,280
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0.2 5.0
0.2 0.1 1.8 0.4 3.3 3.8 4.3 1.8 5.5 0.1 20.2 0.2 0.3 - 0.7
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1,000 31,200
1,250 600 8,400 2,000 15,550 18,000 20,000 1,000 34,320 600 120,800 1,300 1,200 160 4,370
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0.2 5.0
0.2 0.1 1.3 0.3 2.5 2.9 3.2 0.2 5.5 0.1 19.4 0.2 0.2 - 0.7
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TOTAL EXPENSES |
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138,760 |
53.4 |
183,490 |
50.4 |
217,270 |
46.4 |
261,750 |
41.9 |
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TOTAL ANNUAL FRANCHISEE INCOME |
20
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56,240
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21.6
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89,510
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24.6
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133,730
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28.6
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206,250
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33.1
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Mr Reyes then told Mr Leong that he (Leong) could easily achieve the $5,000 minimum turnover indicated in those projections and could expect to be in the higher ranges of turnover - between $7,000 and $12,000. Mr Reyes also told Mr Leong that “costs of sales” did not exceed 25%, and that “Pizza Haven” would provide all of the food required for making the pizzas. As the number of outlets increased the cost of that food would be cheaper. It was further said that an advertising levy equal to 5% of gross turnover would be charged.
At that first meeting, Mr Leong was told that there would be a franchise fee of $30,000. He was also given several maps, apparently photocopied from a street directory, on which were delineated “territories” in the eastern suburbs of Melbourne to be allocated to franchisees. According to Mr Leong, in response to a question from himself, Mr Reyes said that a lot of money had been spent in researching the boundaries of the territories so that each could sustain a profitable outlet. It was further indicated by Mr Reyes that no franchise had by then been allocated in Victoria but Mr Leong would have to be quick because territories would be “snapped up”. Mr Leong says that he took away from that first meeting a copy of the disclosure document, the territory maps, a letter of introduction or welcome and an application form.
From the profit projections set out above Mr Leong calculated, on the assumption of sales of at least $7,000 per week, that he would recoup within 12 months an investment of the magnitude suggested by this passage at p. 24 of the disclosure document:
FRANCHISEE CAPITAL REQUIREMENTS
ITEM ESTIMATED COST
$
SUB TOTAL BROUGHT FORWARD $58,000 - $60,000
6. Opening Stock
- Food, drinks, packaging
- Stationery/Bookkeeping systems
- street directories
- Folders & Pens
- Stock book, staff roster book, notice
board
- other stationery & printing
- Uniforms (Franchisee - 2 people)
4,000
7. Opening Promotion 5,000
8. Working Capital & Pre-payments
Rent in Advance (1 month)
Stamp Duty on Lease
Electricity Deposit
Initial lease payment (1 month)(note 3)
Motor vehicle lease payment (1 month)
- 1 cars (note 4)
Motor vehicle registration
Legal & Consulting
Cash Register Float
Petty Cash Float
Living Expenses whilst in training
Miscellaneous 8,000
______________
TOTAL ESTIMATED CAPITAL REQUIREMENTS: $75,000-$76,000
______________
NOTES
1. The actual cost of site establishment will vary depending on the condition and location of each site.
2. The estimated costs assume that tradesmen are contracted to perform the necessary work.
3. It is assumed that the following equipment is leased:-
- dough breaker - dough mixer
- coolroom - slicer
- oven - freezer
- neon sign
The total amount leased $48,000.
4. One Daihatsu handy van is leased over a four year period with a 20% residual value. Amount leased is $9,000.
* The equipment and motor vehicle leasing payments have been reflected in the franchisee's projected profitability.
On 8 June 1990 Mr Reyes wrote this letter to Mr Leong:
Just a short note to record our recent meeting.
Franchise Developments is working with Pizza Haven as agents assisting and advising on the selection of its franchisees.
As you know Pizza haven is a well developed and proven home delivery pizza shop backed by experienced management and marketing personnel.
The concept has a proven track record of profitability in the shops which are currently operating in Adelaide. Pizza Haven plan to expand into many high profit areas throughout Australia.
You have been provided with complete financial information on the business and as I discussed with you the requirements necessary to be selected as a Pizza haven owner-operator.
I'm sure you will appreciate that not all applications are successful but should you be selected as a Pizza Haven Franchisee this decision will be as important to Pizza Haven as it is for you and your family.
I look forward to meeting you again to discuss your application.
On 20 June 1990 more information was provided to Mr Leong in the form of this further letter from Mr Reyes:
I know that you are still undecided about starting your own business.
I understand that your doubts are probably stronger than your wishes. This is mainly due to all the negative influences we receive.
Well let me say that these, so called, times of economic depression are seen by many business advisors as the best times to build assets. Also, this economic climate is one of the best gauges to measure how viable and secure businesses are.
With franchising we have one of the most secure ways to go into business. Franchising reduces the rate of business failure to a very minimum by marrying the franchisor's expertise and resources with the franchisee's energy and dedication.
We can truly say that our stories are only success stories. Pizza Haven is one of them.
One location has already opened in Melbourne - the Dandenong franchise in Menzies Avenue with a first week gross turnover of $7,000. This is 2½ times the turnover that any independent pizza shop takes in that area and half of what Pizza Hut takes which has been established for a very long time.
The Vermont store at 2/479 Burwood Highway will open this week. Another 13 stores are now in the set up stage. Just to mention some - Wantirna, Oakleigh, Nunawading, Box Hill, Croydon, Elsternwick, Frankston and Werribee.
The opportunities are there for all, but we have found that it is mainly people with business experience who take advantage of them. These are achievers, the ones that don't satisfy themselves with admiring a Rolls Royce, but are determined to drive it. Meanwhile the others just sit back listening to negative influences.
I simply ask you to re-assess your situation. We can take you by the hand, help you with finance, train you, set up your shop, carry out your advertising campaign and virtually do anything that success may require. However, ultimately your success will be determined by your commitment and application.
We still have some opportunities available and there will never be a “perfect time”. Don't be one of the many people who visit us every year and comment on how much lower the investment was a year ago while the enterprising people are enjoying cash flow and reaping handsome capital gains.
Chris, please take the time to reconsider your position and feel free to discuss any aspect with me.
Shortly afterwards, Mr Leong attended the opening of a “Pizza Haven” franchise at Vermont. Also present were Mr Reyes and Mr Gabriel Christou, one of the principals of the first respondent (“Glev Franchises”) and of the second respondent (“Glev”). After a further short lapse of time, Mr Reyes sent to Mr Leong by courier a map of proposed territories in Springvale and Noble Park accompanied by a card bearing the notation by Mr Reyes “Dear Chris, I think Noble Park is a better area any way you look at it.”. A typewritten sheet indicated in respect of several suburbs arranged by postcode the number of houses in each suburb. It included under the sub-heading “TO BE DIVIDED” a reference to “3174 Noble Park 12685” to which Mr Reyes had added the interlineation “equals 21865 plus Springvale South about 8,000 dwellings”. Another typewritten sheet purported to set out daily takings from seven suburban “Pizza Hut” outlets followed by cumulative totals labelled in hand “this week” and “last week”. The “this week” figure for Noble Park was $14,000 compared with $13,388 for “last week”.
Mr Reyes then telephoned Mr Leong to confirm that he had received the documents to which I have just referred. He went on to tell Mr Leong that all of the territories were being purchased or taken by other interested parties. In relation to the “Pizza Hut” figures, he said that if Leong could achieve half of the “Pizza Hut” sales he would be “laughing”. He indicated that Noble Park was a good area to enter because “Pizza Hut” was already there with a customer base and that Leong should be able to compete and make at least half of the turnover of “Pizza Hut”.
On 2 July 1990 Mr Leong attended with his wife at the office of Mr Reyes and signed a franchise application and acknowledgment of receipt of franchise agreement. He paid Mr Reyes a cheque for $1,000 and was given a draft franchise agreement. On 6 September 1990, Mr Reyes wrote a further letter to Mr Leong:
Last time I wrote to you about the progress of the Pizza Haven operation I had mentioned that we were already the second largest pizza operation in Australia. Since then we have had a lot of new developments, three more stores have opened, Oakleigh, Werribee and Knox.
Werribee in the Western suburbs made over $6,000 in its first week of operation.
Finally, the areas of Templestowe, Mount Waverley and Seaford have recently been assigned.
I will enforce again that if you would like to see one of the stores in operation and try their pizzas, I will be glad to take you there and share one with you.
On 24 September 1990, Mr Leong and his wife, accompanied by their solicitor, attended again at the office of Mr Reyes where they signed the franchise agreement and paid $29,000 being the balance of the franchise fee. The franchise agreement did not specify a location from which the franchise would be conducted but it did grant to the franchisee :
...a Franchise to establish and operate the Business in the territory set out in Schedule 4 (hereinafter called “the Territory”) at the location set out in Schedule 5 or if no location is there set out at a location within the Territory which is available to the Franchisee from time to time during the term of the Franchise hereby granted and which had previously been approved in writing by the Franchisor (either the location as specified or approved as aforesaid is hereinafter called “the Location”).
Schedule 5 designated Noble Park as the Territory and on an attached map there was marked out an area extending from north of the Princes Highway to Pillars Road, Keysborough in the south and west to the village of Dingley.
By November 1990 when a location had still not been selected, Mr Leong complained to Mr Reyes. Shortly afterwards, Gabriel Christou and his girlfriend drove Mr Leong around Noble Park looking for suitable shop sites. In the course of that excursion, Mr Leong spoke on Mr Christou’s mobile telephone to the fifth respondent, Alan Tulloch, a principal of the fourth respondent, Tulloch & Associates Pty Ltd, which was to become, in February 1991, the Victorian Master Franchisor for “Pizza Haven” and which is now in liquidation.
In the course of their tour of Noble Park, Mr Christou asked Mr Leong whether both he and his wife would be at the shop running the business. Mr Leong replied that he was only an investor but would be doing the books and the banking. Mr Christou expressed satisfaction at that reply indicating that it “should meet the forty hour requirement”. The search for premises on that occasion was unavailing but early in 1991 Mr Christou telephoned Mr Leong and invited him to inspect a prospective shop on the following morning. After an inspection, Mr Leong decided not to negotiate a lease of those premises.
Shortly after the abortive attempts to find a location in Noble Park, Mr Tulloch suggested that Mr Leong should consider taking a franchise in Malvern which to then had not been offered to prospective franchisees but had been reserved as a company shop. Mr Leong agreed with Mr Tulloch’s suggestion and he and his wife, on 24 April 1991, executed a form of surrender and termination of the franchise agreement of 24 September 1990. When he enquired about the $30,000 franchise fee, Mr Leong was told by Mr Tulloch that it would be transferred to the Malvern franchise.
In late April or early May 1991, Mr Tulloch advised Mr Leong that he had found a shop at the corner of Malvern Road and High Street, Glen Iris. After expressing some guarded readiness to take a lease of that site, Mr Leong consulted his solicitor, and, on 17 May 1991, executed an application for a lease in which it was noted:
...
Proposed Use of Premises: PIZZA TAKE-AWAY
Present Occupation: ACCOUNTANT
...
Are/were you presently/previously in business: YES/NO (If so, where:
Anticipated Turnover in proposed premises $234000
Initial Stock Requirements $ 6000
Anticipated Stock Requirements for First Year $ 23400
Anticipated Plant & Equipment Purchases: Fixtures & Fittings $ 45000
Shop Front $
Other Plant $ 45000
Is plant and equipment to be financed by Lease/Loan? LEASE
Name of Finance Company/Bank
Total amount of own funds to be invested in business: $ 80000
At about the same time Mr Tulloch discussed with Mr Leong the employment of a manager of his franchise. After interviewing one applicant, Mr Leong agreed to employ her at a salary of $25,000 per annum but was subsequently told by Mr Tulloch that he had “sacked” the young lady because she was working for “Pizza Hut”. Mr Tulloch then advised that he had found another potential manager, David Munnery, who was the son of a friend of his, Tulloch’s.
At about the same time, Tulloch & Associates Pty Ltd as Master Franchisor commissioned the fitout of the Glen Iris shop. In the course of the work, Mrs Janelle Tulloch, the wife of Alan Tulloch, requested Mr Leong to pay $50,000 as part of the cost of the fitout. On 29 and 30 May 1991 Mr Leong procured the payment of a number of bank cheques in favour of Tulloch & Associates Pty Ltd totalling $40,000. The work proceeded over the next month and on 29 June 1991, Tulloch & Associates Pty Ltd issued a statement of “franchisee financial commitments” which recited:
As per the Franchise Disclosure Document - setup costs of your Pizza Haven are as follows. Annexes show breakdown of your expected opening expenses to the recommended contractors and franchisor.
Annex A: Tulloch & Associates Pty Ltd $ 79,511.85
Annex B: Estimates on contract works - on order $ 24,710.00
Annex C: Initial Advertising Contribution - this amount
must be paid two weeks prior to opening for
trading, to Tulloch & Associates Pty Ltd
Advertising Fund - Victoria
5,000.00
__________
TOTAL COST $109,221.85
__________
Annexure A comprised a detailed list of fittings and equipment including a cool room, freezer, airconditioning, neon sign, cash register and various utensils. It was followed by this statement:
METHOD OF PAYMENT OF ANNEX (A) TO TULLOCH & ASSOC.
Method of payment is to be made in the following manner:-
On order - Tulloch & Associates Pty Ltd $ 50,000.00
On completion (before store commences
trading) - final payment to Tulloch &
Associates Pty Ltd $ 29,511.85
TOTAL $ 79,511.85
Deposit payable on order and amount payable on completion are to be made payable to Tulloch & Associates Pty Ltd.
The franchisor is obligated to complete the set up stage entirely as a sole agent with no obligations from the franchisee.
It is important to note that Tulloch & Associates Pty Ltd will establish and equip the shop fully before it passes the key to the franchisee.
Annexure B was in these terms:
ANNEX B: ESTIMATE FOR CONTRACT WORK
Tulloch & Associates Pty Ltd will supply and install the following items:
1. Tiling as required
2. Customer/Telephone counter
3. Pizza box racking
4. Space bag racking
5. All plumbing (gas) requirements
6. All electrical requirements
7. Plastering of all walls & ceilings (as requested by Health Dept)
8. Re-glazing of shop front access
Costs for the above items are:- $24,710.00
On 29 June 1991, Mr Leong drew a cheque, presumably in favour of Tulloch & Associates Pty Ltd, for $69,221.85 being the balance of the cost of the fitout.
In the meantime, Mr Tulloch had advised Mr Leong that the manager whom he had selected, Mr Munnery, was inexperienced and that it had been arranged for him to spend two weeks training at the Ringwood “Pizza Haven” franchise. Mr Tulloch further indicated that Mr Munnery had almost completed one week’s training and that Mr Leong would have to pay for both weeks. With some misgivings, Mr Leong, in the interests of having a trained manager in charge of the Malvern franchise in time for its imminent opening on 1 July 1991, paid the training salary for Mr Munnery.
Just before the franchise opened for business a new franchise agreement was executed by the first applicant (“Kaytonruby”) with Mr and Mrs Leong as guarantors. That was done in Mr Tulloch’s office in the presence of the applicants’ then solicitor, Mr MacMillan.
Under the heading “FRANCHISEE'S DUTIES”, Kaytonruby covenanted to perform and observe, amongst others, the following covenants and conditions:
...
2(b) Promote Business
To actively and diligently promote the Franchised Operation within the Territory and to exercise his best endeavours in the conduct of the Franchised Operation to promote the mutual business interests of the foregoing and cause to be provided in the Territory all such facilities and services and products as the Franchisor shall require and shall employ sufficient qualified staff to effectively conduct the Franchised Operation. To ensure compliance with this obligation the Franchisee (or where applicable any manager appointed by him subject to Clause 2(o)) shall devote a minimum of forty (40) hours per week of his time and attention towards the Franchised Operation during the normal business hours of the Franchised Operation and shall not during the term of it carry on any business similar to the Franchised Operation whether on his own account or as nominee, agent, servant, representative, employee, shareholder or director in any firm or corporation conducting such a business. The Franchisee also covenants to ensure that the manager does not engage (in any capacity) in any similar business to the Franchised Operation during his term of employment.
...
2(n) Standard of Conduct for Franchised Operation
The Franchisee shall observe and maintain standards in the conduct of the Franchised Operation (including with respect to the location at which the Franchised Operation is conducted) equal to those prescribed from time to time by the Franchisor and in particular the Franchisee shall in all respects comply with the regulations, procedures and standards prescribed by the Franchisor in any Manual and Audio Visual recordings issued by the Franchisor to the Franchisee from time to time during the terms of the Franchise. The Franchisor shall have the right to modify the said Manuals and any Audio Visual recordings from time to time by addition, deletion, variation or other modification to the provisions thereof as the Franchisor deems appropriate bearing in mind the need to protect the Franchisor's trade marks, business names, reputation and other Industrial Property and the need to comply with any Statutes or judicial or administrative decisions and the need to maintain administrative efficiency and profitability and the need to improve the quality of facilities, the Services and the Products offered by the Franchisee to the public. If at any time the Franchisee fails to operate the Franchised Operation in accordance with the standards hereinbefore described including in particular the standards described in the said Manuals and Audio Visual recordings then the Franchisee’s failure to do so shall be deemed to be a breach of this Agreement and shall entitle the Franchisor to terminate this Agreement as hereinafter provided. Such Manual and Audio Visual recordings remain at all times the property of the Franchisor and must be returned to the Franchisor immediately upon request or upon termination of this Agreement for whatever reason or at the end of the term of this Agreement.
2(o) Approval of Manager
All full time managers employed by the Franchisee to manage the Franchised Operation on the Franchise’s behalf shall first be approved in writing by the Franchisor. Upon approval by the Franchisor the full time manager(s) shall attend and complete the Franchisor’s training programmes at a place determined by the Franchisor. The manager(s) shall complete the training programme to the satisfaction of the Franchisor. The cost of the training programmes shall be paid by the Franchisee together with all travelling and living expenses incurred by the full time manager(s) as a result of attending the training programme. In the event that the manager is employed, the Franchisee shall retain as manager of the Franchised Operation the natural person or persons specified in Schedule 10 (or such other person or persons of equivalent training, skill, experience and good reputation as the Franchisor may in writing agree) who shall:
(i) Devote their time and effort exclusively to the active management and operation of the Franchised Operation; and
(ii) Represent and act on behalf of the Franchisee in all dealings with the Franchisor and develop the operations of the Franchised Operation in conjunction with the Franchisor.
Correspondingly, the franchise agreement imposed, amongst others, the following “franchisor’s duties”:
The Franchisor hereby covenants and agrees with the Franchisee:-
3(a) Location Advice
If required by the Franchisee the Franchisor will provide advice as to the suitable location of premises for the conduct of the Franchised Operation and also in negotiation of a lease for the premises provided that nothing in this Agreement shall be construed as or deemed to constitute a warranty by the Franchisor to the Franchisee that the location at which the Franchisee commences to operate the Franchised Operation will be available for use by the Franchisee as part of the Franchised Operation during the whole of the term of the Franchise hereby granted.
3(b) Development of Premises
The Franchisor shall co-ordinate the construction or remodelling of the premises at the location of the Franchised Operation to the Pizza Haven standards.
3(c) Opening Assistance
The Franchisor shall supply at least one member of its supervising personnel without charge to assist the Franchisee for at least ten (10) days during each of the opening two months of operation of the Franchised Operation.
3(d) Assistance to Franchisees
The Franchisor shall furnish to the Franchisee such advice and assistance in connection with the conduct of the Franchised Operation as is, from time to time reasonably required in the Franchisor's opinion. Operating assistance will consist of regular visits, advice and guidance with respect to:
(i) Operational Procedures
Methods and procedures for the sale and provision of the services and products within the Franchised Operation;
(ii) New Developments
New equipment, services and products as the Franchisor may approve from time to time to be used or offered by Franchisees;
(iii) Advertising and Promotion
Formulating and implementing advertising and promotional programmes using such marketing and advertising research data and advice as may from time to time be developed by the Franchisor and deemed by it to be helpful in the conduct of the Franchised Operation;
(iv) Training
The training of his employees and at the option of the Franchisor if equipment or aids are supplied by the Franchisee these shall be at the Franchisee’s expense;
(v) Sales Techniques and Customer Relations
Sales techniques and proper customer relations; and
(vi) Administration and Accounting
Administrative, bookkeeping, accounting and general operating procedures for the proper operation of the Franchised Operation.
3(e) Equipment
To provide the Franchisee with advice in respect of the equipment and fittings necessary for the Franchised Operation.
3(f) Advertising and Promotion
The Franchisor shall conduct advertising campaigns and other promotional activities for the services and products offered to the public by the Franchisee.
3(g) Advertising Fund
The Franchisor shall establish a separate bank account (“the Advertising Fund”) and shall operate such account to pay the costs of developing and publishing advertising and promotional material in such manner as the Franchisor in its sole discretion, deems appropriate for the benefit of all the PIZZA HAVEN Franchisees (each such Franchisee to have a proportionate interest in the Advertising Fund after payment of monies expended pursuant to this Clause and Clause 3(e) equal to the proportion to which its total Advertising Fund contributions for the preceding week is a proportion of the aggregate Advertising Fund contributions of all such Franchisees for the week). The Franchisor agrees to apply all such amounts in the Advertising Fund exclusively for the development and publication of PIZZA HAVEN advertising and promotions, including such advertising agency fees and reasonable overhead and administration costs as the Franchisor may incur in connection with the administration of the Advertising Fund. The Franchisor shall supply to the Franchisee, if requested by the Franchisee, a statement of all costs relating to such advertising and promotion paid by the Franchisee to the Franchisor pursuant to the terms of this agreement.
3(h) Improvements to the Franchised Operation
To provide the Franchisee with any necessary information and advice to enable the Franchisee to properly conduct the Franchised Operation together with information about developments and improvements as may from time to time be developed by the Franchisor and deemed necessary for the conduct of the Franchised Operation.
3(i) Training
To provide an initial training programme for the Franchisee in the management, supervision and know-how necessary for the administration and conduct of the Franchised Operation. All travelling, living and other expenses and costs incurred by the Franchisee shall be fully paid by the Franchisee and shall be at no cost or expense whatsoever to the Franchisor. The Franchisor further agrees to provide its standard training material which shall be loaned to the Franchisee and updated as changes occur during the term hereof. The parties agree that such material and Manuals shall remain the property of the Franchisor and that copyright [sic] in such Manuals and Audio Visual material shall be deemed to be a breach of this Agreement.
3(j) Layout and Colour Scheme
When required by the Franchisee to provide the Franchisee with all necessary information and details as to the layout and colour scheme requirements for the location at which the Franchised Operation is conducted.
3(k) Accounting
To provide standard accounting and record keeping programmes and systems and changes and modifications thereto as developed by the Franchisor during the term of this Agreement.
3(l) Supply of Goods
Subject to Clause 2(k) to supply to the Franchisee such stock for the Franchised Operation as the Franchisor in the course of its business then supplies and to maintain supply at all reasonable times and upon the usual terms and conditions of supply as applied to its Franchisees generally provided the Franchisor will not be under any obligation to supply in case of interruption to supply caused by act of government, failure of power, strikes, lock outs, force majeure and other like disturbances and interruptions to business and any further delays beyond the control of the Franchisor.
...
3(n) Information
The Franchisor shall prepare and make available to the Franchisee such oral or written information as the Franchise reasonably requires with respect to matters relating directly to the conduct of the Franchisee's Franchised Operation.
By Schedule 8 to the franchise agreement, it was provided that the commencement date of the franchise was to be 24 September 1990. Clause 5(a) of the franchise agreement provided for the achievement by the franchisee of certain “minimum business requirements” by stipulating:
5(a) During the term of this Agreement the Franchisee shall operate a minimum of gross sales from the Franchised Operation as set out in Schedule 16.
5(b) If the gross sales collected fall below the minimum requirement specified above, the Franchisor in its sole discretion may require that the following steps either separately or together be taken:
(i) A conference at the Franchisor headquarters or a location nominated by the Franchisor with the Franchisee to analyse the operations of the Franchisee and offering guidance to assist the Franchisee in improving the operations of the Franchised Operation.
(ii) The Franchisee and such employees who are designated by the Franchisor shall attend a refresher course conducted by the Franchisor at a location specified by the Franchisor for the purpose of improving the work techniques and performance of the Franchisee and such employees.
(iii) All travelling costs and living expenses incurred by the Franchisee and the employees of the Franchisee in attending the aforesaid conference or course shall be borne by the Franchisee.
5(c) If the Franchisee shall either (1) fail to attend the conference or entire refresher course or fail to cause the aforesaid employees to attend the entire refresher course or (2) fail to meet the minimum business requirement specified in Schedule 16 of this Agreement for any consecutive two (2) month period after the expiration of the third calendar month following the month during which the Franchisee and such designated employees of the Franchisee shall have completed the refresher course, the Franchisor shall have the right to enforce the Franchisee to place his Franchised Operation on the market and assign the Franchised Operation to a suitable party (suitable to the Franchisor and subject to Clause 6 of this Agreement) within ninety (90) days of written notice from the Franchisor.
5(d) If the Franchisee fails to place his Franchised Operation on the market and to assign the Franchised Operation to a suitable party within ninety (90) days of written notice from the Franchisor as required in Clause 5(c), the Franchisor shall have the right to terminate this Agreement by giving the Franchisee thirty (30) days prior written notice of such termination.
Schedule 16 was in these terms:
MINIMUM GROSS RECEIPTS (clause 5(a))
$4,000 per week
The said sum of minimum gross sales shall increase on each and every anniversary of the Franchise Agreement by the same factor as the Consumer Price Index (All Groups) for Australia applicable at the time increases above the index applicable at the same date in the previous calendar year. If on any such date the Consumer Price Index (All Groups) for Australia is no longer operative then the Franchisor may nominate an alternative index of the Commonwealth Statistician as the appropriate Index for determining relevant increases.
When the Malvern franchise was open for business, Mr Leong was provided with an operating manual which was subsequently replaced in December 1991 by an updated version. Prices for different types of pizzas were fixed by the franchisor and keyed into the cash register at the franchisee’s premises. From time to time, the franchisor advertised “specials” at cheaper or discounted prices. By a circular dated 6 June 1992 Tulloch & Associates Pty Ltd acknowledged that “what has changed dramatically is the mix of specials sold in total turnover from 10 two years ago to 80 today which is a result of increased competition for the consumer in a recessionary climate”.
John Lewis Food Services and Coca Cola Bottlers were the nominated suppliers for all ingredients except the fresh ingredients capsicums, mushrooms and onions and special sauces and the like supplied by the franchisor, and stock sold through “Pizza Haven” outlets.
By a circular issued in November 1990 “Pizza Haven” franchisees were advised that the advertising levy was to be reduced from 5% to 3% of gross sales with the intention that individual franchisees should apply the difference to their own local advertising. On 1 June 1991, Tulloch & Associates Pty Ltd advised all franchise holders by memorandum that a “unanimous majority” have voted in favour of a levy of $1,200 per franchisee to augment the advertising fund with a view to undertaking a television advertising campaign. Mr Leong paid that levy under protest.
By his affidavit sworn 16 June 1996 which comprised his evidence-in-chief, Mr Leong deposed that, as revealed by its profit and loss statements for the period from 1 July 1991 to 30 June 1992 and from 1 July 1992 to 7 April 1993, Kaytonruby’s net losses for those periods were $39,209 and $11,288 respectively. In the course of cross-examination, significant discrepancies were revealed between those profit and loss statements and figures prepared at other times and for other purposes including submission as part of an annual return to the Australian Securities Commission. In this context, Mr Leong complained that the operating costs revealed by his profit and loss statements were considerably in excess of the corresponding figures projected by the “Pizza Haven” disclosure document. He also complained, as I understood him, of being required without any reimbursement to honour vouchers presented by customers which purported to entitle them to free pizzas.
Another complaint made by Mr Leong on behalf of himself and the other applicants is that he was required to pay much more for ingredients to the franchisor’s nominated supplier, John Lewis Food Services, than he would have paid, or did pay, to alternative suppliers of the same goods.
In about July 1992, Kaytonruby’s territory was expanded by the inclusion of part of the suburb of Hawthorn embracing a significant number of additional dwellings. However, that expansion did not render the franchise profitable and on 7 April 1993 it was terminated by the franchisor for failure from 14 July 1992 to pay instalments of the royalty on gross sales and the failure, also from 14 July 1992, to pay the advertising and direct dial contributions. Glev Franchises has cross-claimed an amount of $11,818.79 in respect of the non-payment of those amounts which is not disputed by Mr Leong. Nor does he dispute Kaytonruby’s liability, also the subject of the cross-claim in the sum of $3,683.10 for goods supplied to it but not paid for.
After the termination, Mr Leong removed the “Pizza Haven” signage from his premises and continued, until September 1994, to conduct a business from the same premises under the name “Ultimate Pizza”. The turnover of that business was less than $1,000 a week, a reduction attributed by Mr Leong to the establishment of a new “Pizza Haven” outlet in Glenferrie Road, Malvern which succeeded to the territory which he had formerly enjoyed.
Another complaint articulated by Mr Leong is that the franchisor received a rebate from suppliers of goods to franchisees, including Coca Cola, without disclosing that fact to franchisees or enabling them to benefit in any way from the rebates.
By paragraph 12 of the further amended statement of claim as further amended in the course of the trial, it is alleged that, in order to induce Kaytonruby to enter into the franchise agreement, one or more of the respondents on behalf of Glev or Glev Franchisees or on his or its own behalf represented and warranted:
(a) that the First Applicant would make a net profit of about 25% of turnover from a Pizza Haven Franchise;
(b) that the First Applicant's cost of sales in a Pizza Haven Franchise would not exceed 25% of turnover;
(c) that the First Applicant would be required to pay advertising expenses in the sum of 5% of its gross sales, in return for which the First Respondent would provide reasonable and adequate advertising for the benefit of the First Applicant.
(d) that the Pizza Haven Group's Directors and management team provided a strong and experienced support base for the Pizza Haven Group;
(e) that there were growing financial returns from all the Pizza Haven stores;
(f) that Pizza Haven sponsored the Adelaide Grand Prix;
(g) that the Applicants would recoup their investment in a Pizza Haven Franchise within a period of twelve months;
(h) that the purchasing power of the Pizza Haven Franchise group was such that each Pizza Haven Franchisee, including the First Applicant, would receive substantial benefits from the resultant cheaper prices for food and ingredients;
(i) that the Pizza Haven Franchise chain was expanding in Victoria and this would result in increased benefits for all Pizza Haven Franchisees;
(j) that the major benefit of being a Pizza Haven Franchisee was that the Pizza Haven Franchisee's costs were lower than those of an independent pizza shop;
(k) that as Pizza Haven gets bigger the costs of food for Pizza Haven Franchisees will get lower;
(l) that as Pizza Haven gets bigger the costs of advertising for Pizza Haven Franchisees will get lower;
(m) that Pizza haven had spent a lot of money on researching suitable Territories for Pizza Haven Franchisees;
(n) that Pizza Haven was a success story;
(o) that the Pizza Haven Franchisors would do anything that was required to ensure the success of the Pizza Haven Franchisees;
(p) that with a Pizza Haven Franchise, the Applicants would be making a sound business investment in their future;
(q) that with a Pizza Haven Franchise business the Applicants would not be:
(i) confronted by the normal problems of starting a new business such as research, development of a saleable product, marketing and establishing a good reputation for quality and service;
(ii) starting from scratch;
(iii) risking their whole future on an unproven product;
(r) that the Second Respondent provided as part of each franchise agreement ongoing business management advice, technical expertise, training facilities and advertising and promotional support;
(s) that the Pizza Haven Franchise system was closely supervised by the National Companies and Securities Commission and the Commissioner for Corporate Affairs in each State of Australia;
(t) that the Pizza Haven Franchise system provided both opportunity and support for people who wanted to operate their own successful business;
(u) that the Territory in which the Malvern Pizza Haven Franchise store was to be situated was good for business.
(aa) that the First Applicant would turn over at least $7,000.00 per week of operation of a Pizza Haven Franchise.
On 20 August 1996, I made an order, pursuant to O. 29 r. 2 of the Rules of this Court, for the decision, separately from any other question in these proceedings, of the following question:
Which, if any of the representations pleaded in sub-paragraphs (a) to (aa) of the further amended statement of claim herein were:
(a) made by or on behalf of any and which of the respondents;
(b) relied on by the applicants in entering into the franchise agreement dated 1 July 1991; and
(c) except insofar as they were in relation to future matters, misleading or deceptive?
It is convenient to indicate in order my conclusions on each of those questions in respect of each of the alleged representations.
(a) Net profit of 25%.
Mr Leong has deposed that after Mr Reyes had told him, in June 1990, that the cost of sales would not exceed 25% he recalls “specifically thinking” that was a good figure “and one that would allow me to make a profit”. The profit projection in the disclosure document required a turnover of $7,000 a week to generate a net profit of 24.6% and even that projection depended on a number of assumptions which were not likely to be borne out by experience in all outlets. It is also clear that the ascertainment of a net profit of 25% or any other percentage depends on a number of variables including staff costs. In November 1990, Gabriel Christou obviously did not know what staffing arrangements Mr Leong proposed to make for his franchise and, except for his agreement to use, on Mr Tulloch’s recommendation, Mr Munnery as manager of his franchise, there is no evidence that Mr Leong ever subsequently disclosed to any of the respondents what labour he proposed to employ in the business in addition to that of himself and his wife. Similarly, rent of premises was another variable relevant to the ascertainment of net profit. The rent for the Malvern premises was not known until about June 1991 and I am not able to find that it was disclosed to any of the respondents in a way that would enable a projection of net profit to be made with any prospect of having Mr Leong rely on it.
In these circumstances, although Mr Leong doubtless made calculations, based on his own assumptions, of the expected net profit from his franchise, I am not persuaded that a representation to the effect alleged in sub-para (a) was made.
(b) Costs of sales would not exceed 25% of turnover.
I am not satisfied that Mr Reyes departed from the text of the disclosure documents to the extent of representing that costs of sales, irrespective of trading conditions or the territory in which a franchise might be located, would not exceed 25% of gross sales. It will be recalled that the disclosure document noted that the principal goods to be sold would be pizza, drinks and sundries (cigarettes, garlic bread, sweets etc) and that “cost of sales consists of all food, drinks and packaging and approximate 20% of sales”. It must have been obvious to any reader of that passage that costs of sales would vary according to the proportions borne to total sales by the various commodities to be sold. It would also have been apparent, had the topic been touched upon, that discounted “specials” would increase the ratio between costs of materials and the value of gross sales. There is no evidence to suggest that the respondents did not believe that costs of sales in the conditions which, by June 1990 had been experienced in South Australia where, to that date, Pizza Haven's trading had been confined, “approximated” to 25% of gross turnover.
(c) Advertising contribution.
Mr Leong was told by Mr Reyes that an advertising levy equal to 5% of gross sales would be charged to the franchisor. That was consistent with the following statement in the disclosure document:
(ii) Advertising Contribution
All franchisees are required to pay a weekly Advertising Contribution, calculated at the rate of five percent (5.0%) of each week’s total gross sales. The Franchisee’s Advertising Contribution will be banked into a separate account. (The Advertising Fund).
The Advertising Contribution is payable no later than noon on the Thursday following the end of the preceding week.
I am not persuaded, and Mr Leong's evidence did not suggest, that there would be any particular distribution of that 5% contribution between television, radio and newspaper advertising on the one hand and the printing and distribution of leaflets on the other. Moreover, it will be recalled that in November 1990, before the applicants entered into the franchise agreement in relation to Malvern, that franchisees had been advised that the advertising contribution was to be reduced from 5% to 3% to allow for a degree of local advertising by franchisees themselves. Mr Leong has complained that he did not participate in any decision to alter the advertising arrangements but it is clear that he knew of the altered arrangements well before he entered into the franchise agreement of 1 July 1991.
(d) Experience of Pizza Haven group’s directors.
Mr Leong did not specify in his evidence any oral representation made by Mr Reyes as to the matters alleged in paragraph 12(c) of the further amended statement of claim. I am satisfied that, if any such representation was made, it did not transcend the statements in pp. 1 to 7 of the disclosure document describing the background of the four Christou brothers who were directors and the part which each of them had played in developing the Pizza Haven business in South Australia. It has not been established that any part of that description was incorrect. Moreover, Mr Leong spent some time with Mr Gabriel Christou while looking for a shop in Noble Park and had an opportunity to make his own assessment of the expertise and business acumen of at least that director. In the circumstances, I am not persuaded that the applicants relied in entering into the franchise agreement on any representation to the effect pleaded in sub-para (d).
(e) Growing returns from all Pizza Haven stores.
I accept that Mr Reyes made the self-obvious statement that the number of Pizza Haven stores would grow. The statement is made at p. 4 of the disclosure document that:
Target Market
Pizza Haven’s target market is substantial.
All sectors of the fast food market continue to grow, and the convenience factor of home delivered pizzas has become a favourite with the consumer.
The growing financial returns from all the Pizza Haven stores continues to reinforce the growth and size of the pizza market and the dominant role Pizza Haven will continue to maintain in the future.
That is to be understood as stating that financial returns from all existing Pizza Haven stores were still growing as at October 1989. There is nothing in the evidence to contradict that statement. However, it is not able to be construed as a warranty that financial returns from all Pizza Haven stores would continue to grow indefinitely into the future. The very context in which the statement appears makes it clear that growth was perceived to depend on continued expansion of the fast food market and the maintenance, at least, of Pizza Haven’s market share. Moreover there was evidence which came to Mr Leong’s notice in September 1990 in the form of Exhibit CWHL 8 that four existing Pizza Haven stores at Vermont, Dandenong, Werribee and Knox had not experienced uninterrupted growth of sales in the few weeks during which they had been operating.
(f) That Pizza Haven sponsored the Grand Prix.
The statement was made at the foot of p. 7 of the disclosure document, that Pizza Haven “also sponsors a number of events including the Adelaide Grand Prix”. The only connection with the Grand Prix suggested in the evidence was that Pizza Haven had maintained a stall at that event from which pizzas were sold. It may be open to doubt whether that amounted to “sponsoring” the event but, in any event, I am not persuaded that Mr Leong relied on that representation in deciding to enter into the franchise agreements.
(g) That the applicants would recoup their investment within twelve months.
There is no evidence that any express representation was ever made in these terms. It is highly unlikely that any such representation would have been made before a shop had been acquired for the conduct of the applicants' business because the fit-out cost and rental expenses could not have been known before then. I am satisfied that Mr Leong calculated, on the basis of the estimated franchisee capital requirements of $75,000-$76,000 indicated at pp. 23-26 of the disclosure document and on the assumption that all vehicles and major equipment to a total value of $48,000 would be leased, that he would recoup that capital requirement from the income generated by twelve months trading at gross sales of $7,000 a week. It will be recalled that the table of profit projections in the disclosure document imputed an annual franchisee income of $89,510 to a business generating sales of $7,000 a week. Allowing for the higher outgoings on wages caused by the need for a full-time manager as a result of Mr Leong’s inability or unwillingness to undertake that role himself, it was still reasonable to assume that an initial capital contribution of $76,000 would be recouped after the first year’s trading if the proprietors took no other drawings for themselves. It is also to be remembered that Mr Reyes had assured Mr Leong, in the light of the Pizza Hut figures for Noble Park, that he could expect to achieve sales of at least $7,000 a week. However, a franchise for Mr Leong in that area did not eventuate and the evidence indicates that he never achieved weekly sales of even $5,000 from the Malvern outlet. I cannot conclude that the representations as to franchisee income in the disclosure document were untrue for those franchisees who averaged weekly sales of at least $7,000.
(h) Benefits from purchasing power of Pizza Haven group.
The “Summary of Benefits to Pizza Haven Franchisees” in the disclosure document laconically noted “Purchasing Power” as one of those benefits. There is no evidence that any more specific representation in respect of that matter was ever made. Nor does the evidence satisfy me that the group had no purchasing power although there are suggestions that such power as it was able to exert was not always exercised for the sole benefit of franchisees.
(i) That the Pizza Haven chain was expanding in Victoria with resultant benefits for all franchisees.
It was self-obvious in June 1990 that Pizza Haven was expanding from the previously non-existent presence in Victoria. By September 1990 there were four franchises operating in outer suburbs of Melbourne. Whether that expansion had benefits for all franchisees is not clear, but I am unable to find on the evidence that any representation was made to the effect alleged in this sub-paragraph.
(j) Major benefit was that a franchisee’s costs were lower than those of an independent pizza shop.
I have found that Mr Reyes told Mr Leong that as the number of Pizza Haven outlets increased, the cost of food supplied by “Pizza Haven” would be cheaper. However, that was a reference to increased purchasing power and not founded on any express or implied comparison with independent pizza shops. It must have been obvious to Mr Leong that certain fixed costs, such as the advertising levy, would have been discretionary for an independent pizza shop. It is also notorious that the cost of supplying fresh ingredients such as capsicums, mushrooms and onions can be subject to seasonal variations and differential costs of transport to various locations. For reasons similar to those explained in relation to sub-para (a), in the absence of direct evidence of an express representation in the terms alleged in sub-para (j) I am not able to find that one was made.
(k) That as Pizza Haven gets bigger, franchisees’ food costs with get lower.
At their first meeting, Mr Reyes told Mr Leong that, as the number of outlets increased, the cost of food supplied by Pizza Haven would be cheaper. The summary of benefits to franchisees in the disclosure document included “purchasing power” and Mr Leong realised that Mr Reyes’ statement was based on that concept as he deposed “I understood this to be a reference to what would be the increased buying power of Pizza Haven when the number of franchisees buying food from Pizza Haven increased”. Obviously, any reduction in the price of ingredients would have to be in real terms as it was contemplated, e.g. in Schedule 16 to the franchise agreements that actual costs and the prices to be charged for Pizza Haven pizzas would increase in line with movements in the Consumer Price Index. It should also have been obvious to Mr Leong, given his experience as a restaurateur, that fresh items like capsicums, mushrooms and onions to be supplied by the franchisor as distinct from canned and bottled lines to be obtained from John Lewis Food Services and Coca Cola, would be subject to seasonal variations in price and availability of supplies. It is significant in this context that the franchise agreement did not contain any mechanism for “capping” or reducing the prices to be paid to the franchisor for food to be supplied.
Any representation as to economies in food costs to be achieved through increased buying power clearly sounded in the future. For the reasons which I have endeavoured to explain, I find that Mr Leong hoped or expected to derive some unidentified benefit from the exercise of increased buying power but he did not rely on any representation about that matter in deciding to enter into either of the franchise agreements.
(l) Decreasing costs of advertising as Pizza Haven gets bigger.
Mr Reyes told Mr Leong that advertising costs would be 5% of gross turnover. That was specified in the disclosure document as acknowledged by Mr Leong in para 65 of his affidavit of 16 June 1996. Mr Leong later, in November 1990, received a circular advising that the advertising levy was to be reduced to 3% of gross sales per outlet to allow each store to use the remaining 2% for its own local advertising. It will be remembered that a further levy of $1,200 was imposed from 1 June 1991 to fund the television advertising campaign. However, apart from the fact that the possibility of such a further levy was not mentioned by any of the respondents, there is nothing in the evidence to support a finding of a representation that advertising costs would decrease as Pizza Haven got bigger. In particular, there is nothing in para 5(b)(iii) of the disclosure document dealing with “advertising contributions” to suggest a diminution in those contributions either as a total money amount or a percentage of gross weekly sales, although one might have expected that, if gross weekly sales of all outlets had increased as projected, there would have been a diminution in the percentage per store required to fund institutional advertising. Significantly, in the “Summary of Benefits to Pizza Haven Franchisees” in Section 9 of the disclosure document, the only benefit identified as referable to advertising was “Participation in Group Marketing Programme”. That being the state of the evidence, I find that there was no representation to the effect alleged in sub-para (l).
(m) That Pizza Haven had spent a lot on researching available territories.
A representation to this effect was said by Mr Leong to have been made by Mr Reyes. According to Mr Leong, when showing him the map on which the territories were delineated, Mr Reyes said “a lot of money had been spent on researching the territories’ boundary so that a profitable outlet could be supported within each territory.” Mr Reyes, when cross-examined, denied making any statement to the effect alleged. Some support for Mr Reyes’ denial is provided by the absence from the disclosure document of any reference to such research and by the fact that research of that kind was outside his province. Significantly, potential investors were warned in the preface to the “franchise profit projections” that “it may take up to twenty four months to establish a store that has no trading history”. It is also significant that Mr Leong did not ask for any details of the methodology of the research, the results obtained or any other information on this topic. Nevertheless, I am prepared to accept that Mr Leong believed that each territory to be allocated to a franchisee had been delineated after appropriate demographic research with a view to its containing a sufficient number of residents of a suitable socio-economic mix to render viable, after a reasonable time to establish its identity and customer base, a Pizza Haven outlet established in that territory. However, I am unable, on the evidence, to conclude that any representation which may have induced that belief was misleading or deceptive.
(n) Pizza Haven a “success story”.
It appears that the allegation of this representation is based on the statement in Mr Reyes’ letter of 20 June 1990 that “we can truly say that our stories are only success stories. Pizza Haven is one of them.” In its context that is to be regarded as a general statement about the franchise operations in Franchise Developments’ “stable” and a particular statement that Pizza Haven was one of that uniformly successful group. However, the possibility of failure was acknowledged in the same letter in the sentence immediately preceding the one just quoted when it was observed “Franchising reduces the rate of business failure to a very minimum...”. A reference was also made to “success” by Mr Reyes at his meeting with Mr Leong in June 1990 when he said that “Pizza Haven was very successful” and owned a number of properties in Adelaide.
In my view, the statements to which I have referred were expressions of opinion in the nature of commendatory puffery as to which see Pappas v Soulac Pty Ltd (1983) 50 ALR 231 at 234-5 and General Newspapers Pty Ltd v Telstra Corporation (1993) ATPR 41-274 at 41,690. The statements in the present case were not comparative in form and, in the light of the facts which have been established as existing in or about June 1990, they have not been shown to have been untrue. In any event, I do not consider that Mr Leong placed any significant reliance on them, if they were still present to his mind when he signed either the first franchise agreement on 24 September 1990 or the second agreement in June 1991.
(o) That the Franchisors would do anything to ensure the success of their franchisees.
This particular seems to be another references to Mr Reyes’ letter of 20 June 1990 which recites “We can take you by the hand, help you with finance, train you, set up your shop, carry out your advertising and virtually do anything that success may require.” Yet it is to be remembered that the immediately following sentence cautions, “However, ultimately your success will be determined by your commitment and application.” As well, as already pointed out, an earlier passage in the same letter made clear that success was not guaranteed, by acknowledging “franchising reduces the rate of business failure to a very minimum...”.
Those written statements about future assistance are also to be viewed in the context of similar oral statements by Mr Reyes at Mr Leong’s first or second meeting with him that all the setting up of the shop, including fitout, would be done for him and he should not worry about anything because the franchisors would “do everything” for him in relation to opening the shop, training and helping with the operation after the business had opened. As I consider it to have been understood in its context, the statement to which I have referred was an assurance from both Franchise Developments and Glev Franchises of continuing support and assistance and as such was relied on by Mr Leong in entering into the first and second franchise agreements. Indeed, the undertaking to provide assistance of that kind was converted into a contractual obligation on Glev Franchises and Tulloch & Associates Pty Ltd as respective franchisors under those agreements by cl 3 thereof which I have already quoted. In so far as they promised ongoing assistance in the specified area, these representations had an element of futurity but I am not persuaded that they were understood or relied on as guaranteeing the success of the applicants’ franchise.
(p) Pizza Haven Franchise would be a sound business investment in the applicants’ future.
The only direct evidence that any of the respondents made an express representation to this effect is contained in an undated, unsigned “Letter of introduction/welcome” which Mr Leong asserts he received at the same time as the disclosure document. The authenticity of that letter, which Mr Leong says was overlooked in the course of collating documents when preparing the applicants’ case, is not admitted by the respondents. The copy received into evidence contains a text which is not below any letterhead but nor was the “Letter of Welcome - New Staff” which Mr Leong says he received at the same time. The “Letter of Welcome - New Staff” concluded with the salutation “Yours sincerely,” above the typewritten “signature” “EVAN D CHRISTOU Director” whereas the “Letter of introduction/welcome” concluded “Yours faithfully” above the typewritten “signature” “E D CHRISTOU Company Secretary”. The passage in the “Letter of introduction/welcome” relevant to sub-para (p) is “with a Pizza Haven franchise you are making a sound business investment in your own future”.
In addition, the general thrust of Mr Reyes’ letters and some parts of the disclosure document are sufficient to raise the implication that the respondents regarded a Pizza Haven franchise as a sound investment which would provide the franchisee with a satisfactory return for the capital and labour committed to it. There was an element of futurity in that implied representation as there is in all statements about the “soundness” of an investment. However, I do not consider that Mr Leong relied on any such express or implied representation in deciding to enter into either franchise agreement. Regard has to be paid to the caveat in the disclosure document that:
The notes to the franchisee profit projections are given to enable your independent financial advisors to examine the soundness of the information and to determine on your behalf, the projected results for your particular franchise. It may take up to twenty four months to fully establish a store that has no trading history. Pizza Haven strongly recommends that you rely upon independent financial advice and make up your own mind.
In the light of that warning and Mr Leong’s experience, both as an accountant and in conducting a restaurant, I am satisfied that he made his own assessment of the soundness of the business investment offered and did not rely on any representation which may have been made to the effect alleged in sub-para (p).
(q) That as Pizza Haven franchisees the applicants would not incur the problems of starting a new business from scratch or risk their whole future on an unproven product.
The following passage occurs in the “Letter of introduction/welcome” discussed above in relation to sub-para (p):
You will not be confronted by many of the normal problems of starting a new business; things like research, development of a saleable product, marketing and establishing a good reputation for quality and service.
These aspects of your business have already been completed so there is no need for you to “start from scratch”, risking your whole future on an unproven product.
The summary of benefits in the disclosure documents concluded with the following four benefits:
· Reduced Risk of Business Failure
· Increased Business Goodwill
· Access to exclusive products and recipes
· Operate and own a business that has a proven formula
Some of those statements of suggested benefits imply that a Pizza Haven franchisee would obtain some advantages not available to a person starting a business without an established brand name or a product which had achieved a high degree of market acceptance. By corollary, it is indicated that certain risks of “starting from scratch” would be avoided. Assuming, in favour of the applicants, the authenticity of the “Letter of introduction/welcome”, I consider that the representations alleged in sub-para (q) are self-obviously true and would not have been relied on by Mr Leong in deciding that Kaytonruby should enter into the franchise agreements. There was certainly no basis, in the light of the caution in the disclosure document that “it may take up to twenty four months to fully establish a store that has no trading history”, for Mr Leong’s believing that Pizza Haven’s proven product or established formula was a guarantee of unbroken success or profitability.
(r) That Glev provided as part of each franchise agreement advice, technical expertise, training and advertising support.
This alleged representation has much in common with that pleaded in sub-para (o) except that the assistance on which it is predicated is to come from Glev instead of Franchise Developments. It seems to be derived from the following sentence in the “Letter of introduction/welcome” discussed above in relation to sub-para (p):
In addition, Glev Pty Ltd provides ongoing business management advice, technical expertise, training facilities and advertising and promotional support as part of the franchise agreement.
In fact, the second franchise agreement did oblige Tulloch & Associates Pty Ltd as franchisor to provide the assistance detailed in cl 3 under the heading “Franchisor’s Duties”. (In the first franchise agreement in relation to the Noble Park territory, Glev Franchises had been identified as the franchisor.) Any representation as to assistance of the kind specified in sub-para (r) irrespective of who was to provide it, clearly had a future element. I am satisfied that Mr Leong in deciding to enter into the franchise agreements relied on an assurance reproduced in the agreements themselves that assistance of the kind described would be provided. However, that reliance was not induced by a representation that Glev alone rather than in combination with one or more of the other respondents, would provide the assistance.
(s) Supervision by Corporate Regulators.
The allegation of a representation in these terms also derives from the “Letter of introduction/welcome” discussed above which recites:
It is closely supervised by the National Companies and Securities Commission and the Commissioner for Corporate Affairs in each State of Australia.
Even if it were not open to the applicants to rely on that disputed document, it is a reasonable inference that the franchisors as corporate entities and the publishers of documents in the nature of prospectuses were subject to a degree of supervision and control by the corporate regulators in each State in which they operated. However, again assuming that a representation to the effect alleged has been made, I consider that Mr Leong, given his training and experience as an accountant, would not have relied on it in deciding to enter into the franchise agreements.
(t) Pizza Haven franchise system provided opportunity and support for people wanting to operate their own successful business.
This allegation is based on the penultimate paragraph of the disputed “Letter of introduction/welcome” which recites:
Pizza Haven’s franchise system allows Glev Pty Ltd to expand its already successful business without the burden of many of the problems of big business. At the same time, it provides opportunity and support for people who wish to operate their own successful business without the risk of being “taken over” by a commercial giant.
Like some of the other representations pleaded in the sub-paragraphs appended to paragraph 12 of the amended statement of claim, this alleged representation has the appearance of a truism. The disclosure document contained a statement that “the directors and management team of the Pizza Haven business provide a strong and experienced support base for the Pizza Haven group”. The promise of support was translated into a contractual obligation imposed on the franchisor by cl 3 of the franchise agreements. Otherwise, the evidence does not disclose an express representation to the effect pleaded in sub-para (t). Again assuming the authenticity of the “Letter of introduction/welcome”, for the reasons explained in relation to sub-paras (p) and (q) I am satisfied that, in entering into the franchise agreements, Mr Leong did not rely on any generalised representations of continuing support or assurance of future success which went beyond the contractual promises embodied in those agreements.
(u) That Malvern Territory was good for business.
This representation, if made at all, at least in any way which went beyond the suggestion discussed in relation to sub-para (m) that each territory would support a viable Pizza Haven business, must have been made in or about April 1991 after Mr Leong had abandoned his intention to set up in Noble Park. At that time, Mr Tulloch told Mr Leong that Malvern had never been offered to any franchisee but had been reserved for a company shop. In that context, Mr Leong has deposed: “It occurred to me that if Mr Tulloch was reserving Malvern for a company shop, then he must have considered it to be a good location.” The fact that Mr Leong had to make such a deduction tends strongly against a finding that any representation was made by Mr Tulloch or anybody else in the terms alleged in sub-para (u). If the applicants, in deciding to enter into a franchise agreement in respect of the Malvern territory, relied on any view that it was good for business, that was derived from Mr Leong’s deduction.
(aa) That Kaytonruby would achieve a turnover of at least $7,000 a week in a Pizza Haven franchise.
At their first meeting, Mr Reyes told Mr Leong that he could easily achieve a turnover of $5,000 a week on which profit figures for Level 1 were predicated in the disclosure document. Mr Reyes further told Mr Leong that he could expect to be “in the higher ranges of turnover - between $7,000 and $12,000 per week.” However, that was said before any territory was contemplated for allocation to the applicants. It is clear that Mr Leong assumed that he would achieve sales of $7,000 a week in calculating that he would recoup the cost of his investment within twelve months. However, it was a clear inference from Mr Reyes’ second letter of 20 June 1990, that, of the newly open Pizza Haven franchises in Victoria, only the Dandenong outlet was achieving a turnover of $7,000 a week. Mr Reyes subsequently supplied Mr Leong with figures showing a turnover in the Noble Park area of $14,000 for the rival “Pizza Hut” operation and suggested that the applicants should be able to compete with “Pizza Hut” and achieve a turnover equal to at least half of that of the rival outlet, i.e. $7,000 a week. A later statement by Mr Reyes on 6 September 1990 about newly opened franchises highlighted the turnover of the Werribee outlet which was $6,000 a week.
In my view the statements of Mr Reyes to which I have just referred reflected only expectations or hopes and were made in the context of a franchise based on the territory of Noble Park. That they were so understood by Mr Leong is demonstrated by his statement in his application for the lease of the Glen Iris shop that the “anticipated turnover in proposed premises” was “$234,000” i.e. $4,500 a week. In the light of that evidence and the fact that the profit projections in the disclosure document were hedged about with the warning that “it may take up to 24 months to fully establish a store that has no trading history”, I am satisfied that Mr Leong did not rely on any prediction of a turnover of $7,000 a week when he entered into the second franchise agreement.
Conclusion
I have not considered it appropriate, having regard to the findings summarised above, to ascribe an answer “yes” or “no” to each part of the question formulated for separate decision in relation to each of the sub-paragraphs appended to paragraph 12 of the amended statement of claim. After the parties have had an opportunity to consider these reasons, I shall list the application for further directions with a view to receiving submissions as to the form of orders which should be made in the light of my findings and by way of identifying the issues which remain for determination in the final disposition of these proceedings.
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I certify that this and the preceding thirty-four (34) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan. |
Associate:
Dated: 11 June 1998
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Counsel for the Applicants: |
Miss J E Richards with Ms M Ryan (28 and 29 April 1997 only) |
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Solicitors for the Applicants: |
Slater & Gordon |
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Counsel for the First, Second, Third, Fifth Respondents: |
Mr C Golvan |
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Solicitors for the First, Second, Third, and Fifth Respondents: |
Coltmans Price Brent |
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Counsel for the Fourth Respondent: |
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Solicitors for the Fourth Respondent: |
Coltmans Price Brent |
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Counsel for the Sixth and Seventh Respondents: |
Mr S Anderson |
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Solicitors for the Sixth and Seventh Respondents: |
Minter Ellison |
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Dates of Hearing: |
12-16 and 19-22 August 1996 28 and 29 April 1997 |
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Date of Judgment: |
11 June 1998 |
