FEDERAL COURT OF AUSTRALIA

 

TRADE PRACTICES – misleading and deceptive conduct – purchase of delicatessen franchise – whether certain representations made prior to purchase – if so, whether representations false – if so, whether representations relied upon – whether alleged misrepresentations caused loss – whether causes of action based on Trade Practices Act 1974 (Cth) and Fair Trading Act 1987 (NSW) brought within time – time for accrual of cause of action where misrepresentation induces purchase of business.

 

DEEDS – deed of release – whether deed intended to preclude suits based on statutory causes of action – meaning of expression “at common law and/or in equity” – privity of contract – whether non-parties may enforce deed which purports to preclude action being brought against them – whether deed may be enforced by a person who was a party to the deed – whether such a person must be joined as a party to enforce deed.

 

Trade Practices Act 1974 (Cth) ss 52, 82 (2)

Fair Trading Act 1987 (NSW) ss 42, 68 (2)

Commissioner for Railways for the State of Queensland v Peters (1991) 24 NSWLR 407 referred to

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 considered

Snelling v John Snelling Ltd [1973] 1 QB 87 applied

Bahr v Nicolay [No 2] (1988) 164 CLR 604 applied

Hawkins v Clayton (1988) 164 CLR 539 referred to

Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 applied

Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35 applied

 

 

 

 

 

 

 

AIRBERG PTY LTD & Ors v CUT PRICE DELI PTY LTD & Ors

 

NG 388 of 1995

 

 

LINDGREN J

SYDNEY

3 AUGUST 1998

 

 

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 388  of   1995

 

BETWEEN:	airberg pty limited (acn 051 085 495) First Applicant   michael douglas faulkner Second Applicant   antonietta faulkner Third Applicant
AND:	cut price deli pty limited (ACN 000 917 475) and cut price deli (AUSTRALIA) pty limited (ACN 010 913 103) First RespondentS     HARRY MALOVANY Second Respondent   ENZO SGAMBELLONE Third Respondent   FRANK RECHICHI Fourth Respondent
JUDGE:		LINDGREN J
DATE OF ORDER:		3 AUGUST 1998
WHERE MADE:		SYDNEY

 

 

THE COURT ORDERS THAT:

 

1.         The proceeding be stood over to 18 August 1998 at 9.30 for the making of orders including orders as to costs.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 388 of 1995

 

BETWEEN:	airberg pty limited (acn 051 085 495) First Applicant   michael douglas faulkner Second Applicant   antonietta faulkner Third Applicant
AND:	cut price deli pty limited (ACN 000 917 475) and cut price deli (AUSTRALIA) pty limited (ACN 010 913 103) First RespondentS   HARRY MALOVANY Second Respondent   ENZO SGAMBELLONE Third Respondent   FRANK RECHICHI Fourth Respondent

 

JUDGE:	LINDGREN J
DATE:	3 AUGUST 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

THE FACTS

The second and third applicants (“Faulkner” and “Mrs Faulkner”) are the directors and members of the first applicant (“Airberg”).  At all material times, the third and fourth respondents (“Sgambellone” and “Rechichi”) were the directors and members of the first respondents, to which I will refer, respectively, as “CPD” and “CPD(A)”.  The second respondent (“Malovany”) was employed by CPD as “General Manager, Franchise Developments”. CPD(A) played no part in the underlying events which have given rise to the present litigation.  Subsequent to those events, it took an assignment from CPD.  For reasons soon to be noted, I will have little need to refer further to CPD(A).

The Cut Price Deli business was founded by Sgambellone and Rechichi in the mid-1970s. Malovany became employed by CPD in November 1983 as an accountant. After about a year, he was appointed General Manager. In the late 1980s his title was changed to “General Manager, Franchise Developments”. Throughout the period with which I am concerned, CPD carried on business from premises at 61-65 Kingsway, Kingsgrove. Its business was, relevantly, that of franchisor in respect of delicatessen retail businesses carried on under the name “Cut Price Deli”. 

The present proceeding relates to one Cut Price Deli outlet, “Cut Price Deli, Hornsby”, conducted at Shop L5A Northgate Shopping Centre, Florence Street, Hornsby (“the Business” and “the Centre” respectively). The owner of the Centre was West Australian Trustees Ltd. The manager of the Centre was Growth Equities Mutual Property Management Pty Ltd, which traded as “GEM Northgate” (“GEM”).

While CPD owned and operated some Cut Price Deli shops itself, it was franchisor in respect of most.  Sgambellone would identify a suitable shop site in an air conditioned shopping centre, negotiate a lease to CPD, and cause the shop to be fitted out and painted in the CPD format. CPD would, through a shop manager and other staff, establish and build up the business, although in some cases it granted a franchise at the outset. While a business remained company-owned, stock was purchased and sold on account of CPD.  CPD received from suppliers a rebate on the purchase price it paid to them for stock.  For various reasons, however, CPD preferred to grant franchises, that is, it preferred to be an absentee franchisor rather than an absentee business proprietor. It would receive a capital payment on the sale of a business to the first franchisee (in the apparently less common case where it granted a franchise at the outset, the franchisee would reimburse CPD for the fit-out of the shop and perhaps pay a relatively small sum as well).  In addition, it would receive from suppliers of stock a rebate on the prices paid to them by the franchisee, and from, the franchisee, “royalties” or “franchise fees” calculated as a percentage of “turnover” or “gross sales” of the franchisee’s business. According to the evidence of Malovany, a business performed much better when operated by a franchisee-owner who worked in it than when operated by employees of an absentee owner. Other aspects of CPD’s preference for franchised outlets have been more contentious and I will discuss them later.

The documentation in relation to the franchised shops conformed to a pattern.  CPD would take a head lease from the owner of the shop premises and grant a sub-lease to the franchisee.  As well there would be a Franchise Agreement between CPD and the franchisee, governing the terms on which the franchisee was to carry on business, and a guarantee or guarantees by individuals associated with the franchisee of the franchisee’s performance. 

The present case conformed to the basic pattern just described.  In early 1991, the Business was carried on by Myfuco Pty Ltd (“Myfuco” - until a change of name, called “Culars (No 67) Pty Ltd”), a company associated with Warren Skerritt (“Skerritt”), when Faulkner and a business acquaintance of his, John Wesley Lockyer (“Lockyer”), became interested in purchasing it.  Over a period they made inquiries of Skerritt, CPD, and other Cut Price Deli franchisees.

The focus of the applicants’ attack in this proceeding is certain statements allegedly made by Malovany and Sgambellone to Faulkner and Lockyer.  The applicants did not plead or adduce evidence of the making of representations by Rechichi. Nor did they cross-examine him. On 22 June 1998, in the course of submissions, the applicants sought, and I granted, leave for them to discontinue against Rechichi.

The discussions between Faulkner and Lockyer of the one part and the representatives of CPD (and Skerritt and others) of the other occurred chiefly in February and March 1991.  Some documents of the first six months of 1991 are also relevant to the negotiations.  After Lockyer read an article about Cut Price Deli in January 1991 and spoke to Faulkner, they approached CPD, and, after looking at several outlets, focussed their attention on the Business.  On 7 February 1991, Malovany sent to Lockyer particulars of the weekly turnover of the Business for calendar 1989 and 1990 and 4 weeks of calendar 1991.  The average for 1989 was $21,955 per week and that for 1990 was $21,500 per week.  The average for those two calendar years was $21,727 per week.  Taking into account the 4 weeks of calendar 1991, the overall weekly average was $21,735.  These figures were significant for the most important representation alleged to have been made by CPD, that is, that the Business could and should turn over $30,000 per week. Skerritt was in arrears in performing his obligation to furnish gross sales figures to CPD.

CPD supplied Faulkner and Lockyer with a glossy brochure about Cut Price Deli franchises said to be correct as at September 1990 and a “Disclosure and Explanatory Memorandum” apparently prepared in January 1991. The latter had been prepared as a defensive measure in the light of CPD’s experience of being sued in the Queensland District Registry of this Court for contravention of s 52 of the Trade Practices Act 1974 (“the TP Act”). That proceeding had gone to hearing in 1990 but had been settled on the second day by a payment of compensation by CPD.  Faulkner and Lockyer returned to CPD a completed and signed “Form B Yes/No Questionnaire” which had been included with the Disclosure and Explanatory Memorandum supplied to them.  Faulkner’s bore the date 16 February, and Lockyer’s 5 March.  The questionnaire was directed to eliciting from purposed franchisees information about themselves, their background and aspirations.

On 6 March, Faulkner and Lockyer wrote to Sgambellone advising that they had reached agreement with Skerritt.  They enclosed a “Proposal” for CPD's consideration and acceptance.  The document showed that the price agreed with Skerritt was $405,000 “plus the assignment of a lease of two scales”.  The price was shown to comprise $110,000 for plant and equipment, $285,000 for goodwill and $10,000 for stock.  The document stated that the price had been arrived at on the basis of a “rule of thumb guideline” of $20,000 per $1,000 of weekly turnover which had been referred to in the Disclosure and Explanatory Memorandum.  Accordingly, they had calculated the price on a weekly turnover of approximately $20,000.  Again, this is significant for Airberg’s case that it relied on the representation to which I have referred.

Lockyer and Faulkner supplied applications for CPD’s approval of them as franchisees.  Lockyer’s bears the date 14 February and Faulkner’s 6 March.

On 6 March, Lockyer prepared a two foolscap sheet profit and loss analysis for 12 months.  It had vertical columns headed “WORSE [sic] CASE SCENARIO”, “MOST LIKELY SCENARIO” and “FURTHER SAVINGS THAT CAN BE ACHIEVED ON WORST CASE SCENARIO”.  The worst case scenario was based on a turnover of $1,170,000, that is $22,500 per week, and the most likely scenario, $1,300,000 or $25,000 per week.  The gross profit was shown as $421,200 (36.0%) and $512,200 (39.4%) respectively.  The estimated overhead was shown as totalling $335,195 (28.6%) and $361,248 (27.8%) respectively, leaving a “profit margin” (before partners’ wages and interest) of $86,005 (7.4%) and $150,952 (11.6%) respectively.  Drawings of $40,000 each for Faulkner and Lockyer and interest of $56,532 on borrowings, totalling $136,532, gave a shortfall of $50,527 on the worst case scenario and a profit of $14,420 on the most likely scenario.  The further savings that could be achieved on the worst case scenario were shown as totalling $33,480 which would reduce the loss on that scenario from $50,527 to $17,047.  The range of weekly turnover figures of $22,500 to $25,000 is again relevant to the alleged representation to which I have referred.

On 13 March, Faulkner, on behalf of himself and Lockyer, wrote to Malovany acknowledging that the royalty payable to CPD would be 5% of monthly turnover for the first six months and then rise to 6%.  The letter enclosed two “cashflow worksheets”.  According to the letter, the first was based on “1989 Sales/worse [sic] case scenario” and the second was based on “Average Sales of $25,000 per week/likely scenario”.  Each projection extended for twelve months.  The former was based on an average weekly turnover of $22,393.  The ratio of profit (sales less cost of sales) to turnover was 40.5% under the former, and 40.3% under the latter.  The relevance of the weekly sales figures to the alleged representation is again clear.

In March 1991, Faulkner and Lockyer acquired Airberg as a “shelf company” for the purpose of purchasing the Business.  Airberg’s shareholders and directors were Faulkner, Lockyer and their wives (the four held one share each).  On 2 April 1991, CPD wrote to Lockyer and Faulkner advising that CPD had approved their application to purchase.   On 3 April, CPD instructed its solicitors, Snelgrove & Partners (“Snelgroves”), to prepare a new franchise agreement and to act on the assignment by Myfuco of the existing sub-lease.

On 24 April, Airberg contracted to purchase the Business from Myfuco for $395,000 plus stock-in-trade at valuation, estimated by Myfuco to be $12,000.  Completion was fixed for 1 July.  The Agreement was expressed to be contingent upon CPD’s granting to Airberg a franchise to continue to conduct the Business. Apparently there was attached to the Agreement, inter alia, the proposed form of Franchise Agreement between CPD and Airberg. The Agreement for Sale was also expressed to be subject to an assignment by Myfuco to Airberg of Myfuco’s sub-lease from CPD. The head lease (from West Australian Trustees Ltd) to CPD was due to expire on 30 September 1994. The sub-lease from CPD to Myfuco was due to expire on 29 September 1994 (if a typographical error is disregarded). Neither contained an option of renewal. The lease and sub-lease both incorporated the terms of registered memorandum W883926 which, it is common ground, included a provision for a holding over on the basis of a month to month tenancy. The sub-lease provided that it was collateral to the Franchise Agreement, that default under the sub-lease should be deemed to be default under the Franchise Agreement, and that in the event of inconsistency between the two, the terms of the Franchise Agreement should prevail. On the transaction and in subsequent dealings, Snelgroves acted for CPD, while Bryan McCarthy, solicitor (“McCarthy”), acted for Airberg.

In May or June, CPD provided further turnover figures for the Business.  The figures were for the months from January 1989 to June 1992.  The figures for the months from January 1989 to April 1991 were apparently “actual” figures whereas the figures for the months from May 1991 to June 1992 were “predicted”.  For calendar 1989, the figures provided gave an average turnover of $21,955 per week and for calendar 1990, $21,499 per week.  Importantly, there appear on the sheet figures in Lockyer’s handwriting representing the predicted annual turnover and the predicted average monthly and weekly turnover for the calendar year 1991 and the financial year 1991 – 1992 based on the predicted monthly turnover figures supplied by CPD.  For calendar 1991, those figures are $1,182,930, $98,578 and $22,748 respectively.  For the financial year 1991 – 1992 they are $1,218,500, $101,542 and $23,433 respectively.

The course by which Airberg applied for and obtained CPD’s approval of it as a franchisee will require close attention later in these Reasons.  It was not an entirely smooth one. Malovany told Faulkner and Lockyer that by borrowing the entire purchase price, they were at risk, that they had misled him by saying that they had one third of the purchase price in cash, and that they had misled him by embarking upon CPD’s four week training course for franchisees before they had entered into an unconditional commitment to purchase. However, the view of Sgambellone and Rechichi was that approval should be granted.

In fact, CPD had an interest in seeing Skerritt replaced: his father, who had apparently been influential in the running of the shop, had died; Skerritt had become “tired” and the shop was under the control of a manageress rather than of Skerritt himself;  the shop and stock were not well presented; turnover was down; and Myfuco was in default of its obligation to pay royalties to CPD for the recovery of which Snelgroves caused a statement of liquidated claim to be filed in the District Court of New South Wales in January.  As at 10 January, Myfuco had owed CPD $29,652.05.  On 2 April, the day on which it instructed Snelgroves to act on the transaction, CPD also instructed them to stay any further recovery action against Myfuco and Skerritt because the Business was being sold.

Settlement took place on 1 July 1991.  On that date, Myfuco assigned its sub-lease to Airberg with the consent of CPD, and Airberg entered into a Franchise Agreement with CPD.  Faulkner and Lockyer guaranteed performance by Airberg of all the provisions of the Franchise Agreement. To enable it to purchase the Business, Airberg borrowed the entire purchase price from National Mutual Royal Bank Ltd (“NMRB”). In fact, it borrowed $415,000 from NMRB for four years under a fixed rate acceptance bill facility.  The facility carried a fixed rate of interest of 12.2% pa ($50,630 pa or $4,219.17 per month or $973.65 per week) and an “acceptance fee” of 1.5% pa.  Principal reductions of $30,000 were required in June of 1992, 1993 and 1994 and repayment in full on 3 July 1995.  Security took the form of a mortgage by Airberg over its assets, guarantees and indemnities from the Faulkners and the Lockyers, and second registered mortgages over their homes. The Faulkners’ home was at 173 Alt Street, Haberfield. During the term of the facility, Australia and New Zealand Banking Group Ltd (“ANZ”) succeeded to the assets of NMRB (sometimes I will refer to NMRB and sometimes to ANZ). Airberg also had a facility with Westpac Banking Corporation (“Westpac”) which was  jointly and severally guaranteed by the Lockyers and the Faulkners.  Upon settlement on 1 July 1991, $31,915.00 was paid to discharge Myfuco’s indebtedness to CPD which had been the subject of the District Court proceeding.

As noted earlier, the applicants allege that they were induced to enter into the transaction by misrepresentations made by Malovany and Sgambellone. They allege that through them, CPD, in trade or commerce, engaged in misleading and deceptive conduct which caused them to suffer loss or damage, and that Malovany and Sgambellone have an accessory liability in respect of the principal liability of CPD. I will have occasion later to outline the causes of action pleaded, but it is useful at this point to note that the principal alleged misrepresentations relied on are as follows:

(1)        That Skerritt was a bad operator and that the Business was not operating to its potential as one of the best shops in the franchise chain.

(2)        That, with Faulkner and Lockyer operating it, the Business could, and would, operate at a turnover of $30,000 per week.

(3)        That, following the purchase, the Business could, and would, trade at a gross profit of 38 per cent of turnover and that that rate could be increased.

(4)        That the buying power of CPD was so strong that it was capable of achieving and did in fact achieve, the best possible wholesale prices for the stock to be sold by the Business.

(5)        That the Business would benefit substantially from the purchase of stock from suppliers recommended by CPD.

(6)        That a rebate of 4 per cent payable by wholesalers to CPD in respect of stock sold by them to the Business was not part of the cost price charged to the Business for that stock.

(7)        That the funds generated by the 4 per cent rebate were, and would be, applied to promoting (by way of advertising) the business of Cut Price Deli franchisees.

(8)        That the Business’s wage costs as a percentage of sales could, and would, be reduced from 10 per cent to 7 per cent if Faulkner and Lockyer worked full time in the Business.

(9)               That the Business would be sufficiently profitable to support two families.

(10)     That as a “rule of thumb,” the Business would have a value for selling purposes of $20,000 per $1,000 of weekly turnover.

(11)     That by becoming a Cut Price Deli franchisee, Airberg would be in business for itself but not by itself and the Cut Price Deli organisation was more than a business arrangement and was a “family”.

Within a fortnight after settlement on 1 July 1991, Airberg received a setback. This related to “demonstrations”. These were an activity which GEM had permitted shops to conduct in the pedestrian thoroughfares within the Centre. The operator of a shop would engage in promotional and selling activity from a table in the walkway near the shop. It seems to be undisputed that Skerritt had engaged in promotions three times a week and made sales of some $600 each time - a total of some $1,800 per week. Apparently there was no associated direct cost and so the $1800 was “pure profit”.  According to Faulkner, what happened within about a fortnight after completion of Airberg’s purchase was that a butcher in the Centre conducted a “demonstration” in the form of a barbecue and the resultant smoke and odour led to GEM’s prohibiting demonstrations. This meant that Airberg was deprived of revenue of some $1,800 per week. At first, Faulkner and Lockyer suspected that Skerritt may have been aware of the Centre Manager’s intention and concealed the information from them, but apparently they satisfied themselves that this was not so. They tried to make up for the lost revenue by other promotional activity but were unable to do so completely.  Of course, the cessation of demonstrations was something for which CPD had no responsibility and would have been to its detriment in terms of franchise fees received by it.

By late 1991, and certainly by early 1992, Faulkner and Lockyer well knew that the Business had not enjoyed a turnover of $30,000 per week, yet the first occasion when any complaint was made was more than three years later, on 31 May 1995, when the present proceeding was launched.  I shall say more of this later.

In the first half of 1992, tensions developed between CPD of the one part and Faulkner and Lockyer of the other, and between Faulkner and Lockyer themselves. Faulkner recorded in his diary complaints which he had in relation to Lockyer’s conduct, including his late arrival at the shop, lengthy absences from it, and his poor relations with staff.  Airberg would have it that the tension between Faulkner and Lockyer was caused, in whole or in part, by that between them and CPD, and was sourced, to a substantial extent, in the conduct of CPD.  But it is difficult to see a connection between the kind of behaviour of Lockyer to which I have referred and CPD’s conduct at that time.

Airberg’s complaints against CPD are the chief concern of this proceeding but CPD also had complaints against Airberg. One important issue was Airberg’s failure to conform to CPD’s requirements in relation to the operation of franchised Cut Price Deli outlets.  CPD would negotiate with particular suppliers for the purchase of particular product lines at what CPD said were advantageously low prices.  CPD required all its franchisees to purchase those products at those prices from particular “recommended suppliers” and to sell them as “specials” at low prices determined and notified by CPD. To this end, CPD would send to franchisees (and managers of “company shops”) particulars of “weekly specials”, which identified products, suppliers, cost prices and selling prices. In course of time, Faulkner and Lockyer were to allege that the cost prices “negotiated” by CPD were inflated by the addition of the four per cent rebate payable by the suppliers to CPD, and that franchisees such as Airberg could, in fact, buy at lower prices directly from suppliers. Related to this complaint were complaints by Airberg that the selling prices being directed by CPD were too low and that the four per cent rebate paid by suppliers to CPD was not being used by CPD for  the advertising and promotion of franchisees businesses, but was, in substance, treated by CPD simply as additional franchise fees at its free disposal.  For its part, CPD contended before me that it had been entitled to treat the rebate paid to it by suppliers as part of its general revenue and to use it for such purposes as it should see fit.

Airberg’s failure to implement the weekly “specials” was an ongoing source of disputation, and prompted a notable heated discussion between Sgambellone, Malovany, Faulkner and Lockyer in a coffee shop in the Centre on 3 June 1992. Airberg faxed CPD the same day after the meeting to the effect that Airberg was now selling the specials for that current week at the prices notified by CPD.  The memo sought a further meeting, however, “to discuss the level of profitability of future specials”. Ominously, a copy was sent to McCarthy. On the same day, but apparently not in reply to the memorandum from Airberg, CPD faxed Lockyer and Faulkner a lengthy letter.  It dealt with many matters in addition to directing the immediate selling of the week’s “specials” at the stipulated prices.  The letter said:

“1)      You have purchased a franchise system and to deviate from the policies set by the Franchisor is a breach of your agreement.

….

4)                 You are part of a Franchise network and are not permitted to do anything that will in any way effect [sic] the goodwill of the Cut Price Deli group.

5)         You are relatively new Franchise Owners in our organisation and your attitude must not reflect your own personal views but instead must reflect that of the group. We have a considerable amount of retail experience and whilst your views will be noted, they cannot become policy unless Cut Price Deli sanctions same.”

The letter concluded by requesting Lockyer and Faulkner to attend at CPD’s office to discuss “all parties’ concerns” and advised that if a solution could not to be found, CPD would request Lockyer and Faulkner to “cease [their] association as part of the group”.  It was an ongoing source of friction that, according to one’s perspective, Faulkner and Lockyer desired to steer their own course, or CPD desired to compel them to conform to the Cut Price Deli System.

The relationship between Airberg and CPD deteriorated further.  A significant development occurred on 10 November 1992. There was a meeting of disaffected franchisees at the Hornsby RSL Club which Lockyer attended. They or some of them wrote a letter of that date to The Hon David Beddall, Minister for Industry, Technology and Commerce. The letter referred to proceedings which were on foot in Queensland by certain Cut Price Deli franchisees in that State against CPD. The letter continued:

“Allegations before the Courts include some of the following:

 

            misrepresentation

            secret commissions/kick backs,

            fraud,

churning (ie the rapid repossession and resale of shops to refinance the franchisors profits)

            improper use of royalty funds to finance court actions;

            and,

            unconscionable behaviour.

 

Our concern is that if in the fullness of time such allegations are proven then this will bring the industry and organisation into disrepute.

 

As you will understand the above allegations create grave misgivings as we, as individuals, have in good faith invested large amounts in capital and time into our businesses. Our nervousness is compounded by the interest being shown in the group by officers of the Australian Securities Commission and Australian Taxation Office.

 

We seek your support, and the support of your colleagues in the investigation of the above allegations, and implementing if appropriate, remedial action to ensure the ongoing viability of the franchising sector and the effectiveness of the franchising code you recently announced. For your information, several Affidavits in support of our claims from current and former franchisees are attached.”

The letter bore the signatures of franchisees in respect of a dozen or so sites.  The first signature on the letter was that of Lockyer.  Faulkner did not attend the meeting or sign the letter.

CPD wrote to Lockyer and Faulkner on 12 November a letter marked “private and confidential” and headed “CLANDESTINE MEETING”, advising that CPD was aware that they and other franchisees had held the meeting of 10 November (as noted above, in fact Faulkner had not attended).  The letter expressed disappointment that the franchisees had not communicated directly to CPD.  It made a “demand” for written answers to thirteen questions and advised that if a written response was not received, Lockyer and Faulkner would be “deemed a hostile franchise owner”. On 13 November, CPD sent a lengthy memo to all franchise owners headed “RECENT EVENTS”.  It referred to the meeting of 10 November and put CPD’s point of view. It enclosed a questionnaire containing seven questions, marked “TO BE COMPLETED AND RETURNED BY 15TH DECEMBER 1992”. Lockyer and Faulkner answered the questionnaire on 14 December and returned it to CPD.  The third to seventh questions and corresponding answers were as follows:

“3.     Are there any matters of the Cut Price Deli operation that you are unhappy

          with?(Please list them eg: gross profit, advertising etc)

 

                      Yes.  Please refer to letter directed by John L.

                      Cunningham (solicitor for Franchisee Association.)

 

“4.     Are there any matters that deal with Cut Price Deli Executives or Staff that

          you are unhappy with? (Please list)

 

                      Yes.  Refer above answer

 

 “5.    Do the various meetings throughout the year and our “open door” policy provide you with the opportunity to express any ideas or concerns you have?

 

                      No.

 

“6.     Are you contemplating taking any legal action against Cut Price Deli?

 

                      No.

 

“7.       Are you contemplating now or in the future to involve yourself with any action or matter that could lead to the disruption of the Cut Price Deli System and the value and reputation of the Cut Price Deli Name and Goodwill?

                        No, our intentions is [sic] to promote Cut Price Deli & maximize our profits.”

The “letter directed by John L. Cunningham (solicitor for Franchisee Association)” is referred to below.

On 16 November, CPD wrote to Lockyer a letter beginning,

“Our investigations have uncovered that you were the person who instigated the clandestine meeting of franchise owners that was held on Tuesday 10th November 1992.”

The letter asserted that Lockyer had breached certain terms of the Franchise Agreement. It concluded by requesting him to attend CPD’s office on Wednesday 18 November at 10.30 am to discuss his actions with the “Management Board”.  The Management Board of CPD comprised Sgambellone, Rechichi, Malovany (General Manager, Franchise Developments) and Ash Baillie (General Manager, Operations).  It was therefore internal to CPD, to be distinguished from the New South Wales Advisory Council for the Franchisees of Cut Price Deli (“the NSW Advisory Council”), a representative body of franchisees of which the chairperson was Mark Emery, the franchisee of Cut Price Deli, Mosman.

There was an exchange of correspondence between McCarthy, on behalf of Lockyer, and CPD. On 17 November, Lockyer and three other franchisees signed a standard form of memorandum to franchisees reporting on the meeting of 10 November and advising that the signatories had caused an association of franchisees to be incorporated, called “The Franchisees Group Inc”. The memorandum enclosed a form of application for membership and invited recipients to sign and return it.

On 17 November, John L Cunningham & Associates, solicitors, wrote to CPD advising that they acted for several Cut Price Deli franchisees and expressing their clients’ concerns.  The concerns  expressed may be summarised as follows:

(1)          CPD’s apparent involvement in extensive litigation and associated expenditure of management energy and money, in preference to “a more conciliatory approach to disputes” which would benefit CPD “and the franchise as a whole”;

(2)          the reduction of support staff in CPD’s head office and the use of field staff to manage company shops;

(3)          the low morale of franchisees due to CPD’s apparent lack of concern to protect the franchisees’ investments in the franchised shops;

(4)          the possibility that buyers might be dissuaded from buying franchised businesses by reason of the existence of the other problems mentioned.

As can be seen, the letter did not complain about misrepresentations of the kind of which Airberg now complains in the present proceeding.

CPD replied on 24 November.  The letter might be described as “confrontational” and “argumentative”.  Finally, on 27 November, CPD wrote to the NSW Advisory Council a twelve page letter in response to a request which that Council had apparently made at its meeting on Tuesday 24 November for information about the recent events and complaints. On 21 December, The Franchisees Group Inc sent out a letter addressed “Dear Fellow Franchisee”, explaining the role of the association and inviting recipients to join.  The letter identified the association’s officers. They included Lockyer as Secretary. He was one of the two signatories to the letter.

Correspondence continued to follow at a rapid pace in December 1992 and into 1993.  Much of it was expressed in extreme terms.  There were references to death threats, the Universal Declaration of Human Rights, conspiracy, defamation and the engagement of a private investigation agency.  The correspondence on both sides was of an “adversarial” nature, in the sense that it asserted, with supporting argument, the rightness or wrongness of “positions” which were being firmly taken by CPD and the dissident franchisees respectively.

It is not necessary for me at this stage to identify the issues discussed in all this correspondence.  It should be noted, however, that there was a tension, not only between CPD and the franchisees whom it characterised as “hostile”, but also between the latter and those franchisees who supported CPD.  This latter group saw strict and universal adherence by franchisees to the system as directed by CPD as being essential in the interests of all franchisees.

Faulkner’s attitude to The Franchisees Group Inc is not clearly revealed by the evidence.  Certainly Lockyer was a leader of the “rebels” while Faulkner was not.

In the first half of 1993, a proposal for Lockyer to sell out to Faulkner was made.  On 23 April 1993, Faulkner wrote to CPD advising that as from that date, all correspondence could be addressed to him or the shop, and advised:

“for the present Mr J Lockyer will no longer take an active roll [sic] in the day to day running of the shop itself.”

Accordingly, from about this time Faulkner was the only “proprietor” in the shop on a day to day basis. 

On 23 June, Faulkner wrote to Sgambellone and Rechichi referring to a discussion with them on 16 March and advising that he and Lockyer had “agreed to settlement terms”, with Faulkner and Mrs Faulkner “taking over the shop”.  But there were difficulties.  ANZ was requesting payment of a special additional amount in respect of the early discharge of its second mortgage over the Lockyers’ house.  In his letter, Faulkner advised that the amount was “to the tune of $47,000”, that he would have to pay this amount (apparently as part of the agreement reached with Lockyer) as well as “associated costs, eg Legal, Stamp Duty and refinancing”, and that he was not in a position to do so.  He asked that CPD reduce the rate of the franchise fees to 5 per cent for the four year term of a new franchise agreement which would omit reference to the Lockyers.  He also reported that he had spoken to the Centre Manager who had said that GEM would provide a letter indicating the Centre owner’s intention in relation to renewal of the lease of the shop, if this was required by CPD.  The last two paragraphs of the letter were as follows:

“Concern was expressed at the meeting of Mr Lockyer’s involvement with the Franchisee Association Inc. after settlement.  Suffice to say that this issue forms a major part of our sale agreement, where Mr Lockyer will immediately resign and take no further part/role in the Franchisee Association in any way, shape or form, either directly or indirectly.

 

It is hoped that you give favourable consideration to the royalty reduction request, and I advise that upon response to this letter I will then be in a position to either proceed to settlement or withdraw from discussions.”

On 2 July, Faulkner wrote a reminder letter to CPD seeking its response “so as we can put the whole matter behind us”.  CPD replied on 2 July requesting particulars of the “bank penalties” of some $47,000 and of the settlement with Lockyer.  The letter advised that CPD was prepared to offer Faulkner a new franchise agreement but could not see why it should agree to a reduction in the rate of franchise fees.

On 11 August, CPD sent to Faulkner a draft of the latest (the 26th) edition of the Cut Price Deli form of franchise agreement.  On 13 September, Faulkner wrote to Malovany a letter beginning “Dear Harry,” which urged CPD to resist an increase in rent which was being threatened by GEM with effect from  20 September, and advanced reasons why an increase was unjustifiable.  On 8 October, CPD wrote to Faulkner advising that it approved of the sale of the Lockyers’ shares to the Faulkners, subject to conditions including a condition that “the usual Deed of Release as prepared by Cut Price Deli and signed by the existing franchise owners and guarantors is executed by John and Cheryl Lockyer”.

On 6 December, the Faulkners obtained from Citibank Limited approval of finance in a sum of $385,000 over 180 months, repayable (including interest) by monthly payments of $3,668.16, on the security of a registered first mortgage over their home at Haberfield.

On 13 December, in the Supreme Court of New South Wales, Brownie J dismissed a proceeding brought by Airberg against NRMB seeking to have it established that Airberg was not obliged to pay the early termination amount (an appeal to the New South Wales Court of Appeal also later failed).

Eventually, by deed dated 2 February 1994 between the Faulkners, the Lockyers and Airberg, the Lockyers agreed to sell their shares in Airberg to the Faulkners for $2.00. The date fixed for completion was the date of discharge of Airberg’s facility with ANZ, the discharge of the second mortgage by the Lockyers to ANZ  over their house, the release of the Lockyers’ guarantee in favour of ANZ and the discharge of Airberg’s debt to Westpac.  There were numerous other provisions in the Agreement. One was that the Faulkners undertook to use their best endeavours to obtain CPD’s agreement to enter into a new franchise agreement and to release the Lockyers. The agreement of CPD to the transaction was expressed to be a “pre-condition” to settlement.

On 7 February, the Lockyers wrote to CPD advising it of the transaction. Ominously, CPD instructed Snelgroves:

“We would be grateful if you would draft a strong release clause especially knowing the past problems experienced with this rebel.”

There were negotiations between Snelgroves representing CPD of the one part, and Andrew Thorpe (“Thorpe”), the solicitor for Airberg and the Faulkners, of the other.  Eventually, settlement of the sale was fixed for 9 March 1994. By that date, the amount payable to ANZ was $431,133.35, including $355,000 to discharge Airberg’s commercial bill, $48,802.35 to discharge its overdraft, and a “prepayment amount” of $27,331.00.  By that date, however, the terms of  the new franchise agreement were not resolved, and, in fact, no fresh franchise agreement was ever entered into.

Upon settlement on 9 March, a “Deed of Release” was entered into by CPD, Airberg, Lockyer and Faulkner and Mrs Faulkner. The respondents rely on this Deed of Release as a special defence although they were not parties to it, and it will be necessary for me to discuss the effect of the Deed later.  For the present, it suffices to say that the Deed contained (1) a release and indemnity by Airberg, Faulkner and Lockyer in favour of CPD; (2) a further indemnity by Airberg, Faulkner and Lockyer in favour of CPD; and (3) an undertaking by Airberg, Faulkner and Lockyer not to sue CPD or its “representatives” “in relation to anything done or not done by or on behalf of [CPD] and/or the [CPD] representatives at any time up to the date of [the Deed]”. By the Deed, CPD also accepted Mrs Faulkner as a guarantor in place of Lockyer.

In response to an inquiry by Snelgroves, Malovany advised that they should do nothing further in relation to the new franchise agreement until Faulkner raised the matter again. Malovany observed that if he were Faulkner, he would not do so until a new three-year lease for the shop issued in September 1994.

On 14 March, GEM advised CPD that GEM was working on plans to develop the Centre and that if CPD’s lease should expire prior to finalisation of the plans, CPD would be offered a “monthly holdover with a letter of comfort assuring [CPD] that upon completion of the redevelopment [CPD] would be offered a new five (5) year lease”.

In early 1994, Airberg began advertising the Business for sale. According to Faulkner, he agreed with a prospective purchaser named “Pinkus” on a price of $350,000. Then, on Wednesday evening, 13 July 1994, the television programme “A Current Affair” reported on complaints made by two former Queensland franchisees of CPD, Mr and Mrs Lee and Mr and Mrs Jacques. A significant number of current Cut Price Deli franchisees and other persons wrote to CPD expressing “disgust” at what they perceived to be the biased reporting on the program, and  their support for Sgambellone, Rechichi and Malovany. 

Pinkus told Faulkner that he had heard about the program but had not seen it. He said that a friend of his had recorded the program and that he (Pinkus) would view it. Not long afterwards, he told Faulkner that he was no longer interested in buying the Business.

On 20 July, Malovany wrote to franchisees, explaining the background to the “A Current Affair” program from CPD’s point of view.

By letter dated 2 August  (addressed “Dear Harry”), Faulkner complained about a decline in the patronage of the Centre as a whole, the uncertainty surrounding the renovation of the Centre and the question whether a fresh lease would be available to Airberg. He asked Malovany to endeavour to obtain a new five year lease. CPD sent a copy of the letter to GEM and sought a meeting to discuss the matter.

It is common ground that after expiry of the terms of the sub-lease and head-lease on 29 September and 30 September 1994, respectively, Airberg and CPD held over as sub-lessee and lessee respectively, and that Airberg held over as franchisee also from month to month.

On 31 October, GEM served on CPD a notice to quit the shop.  In the event, however, there was a strong protest by CPD and no attempt was made to recover possession. On 5 November, Snelgroves asked Thorpe to obtain Faulkner’s instructions as to his knowledge of GEM’s intention to give the notice to quit. On 8 November, Malovany met with Peter Morgan of GEM and was apparently told that the background to the giving of the notice to quit was that Faulkner had made allegations in writing to GEM  about CPD. On 10 November, Malovany wrote to Mr Morgan addressing the matters which, apparently, Mr Morgan had told him were the subject of Faulkner’s allegations.

In the meanwhile, Faulkner was seeking employment elsewhere. By a letter dated 31 October, the Commonwealth Bank of Australia offered him the position of “Relationship Manager CBFC Limited NSW” at a taxable income of $47,000 gross per annum. He accepted the position and appointed a person to manage the Business – a step which, it seems to be commonly accepted, does not usually augur well for profitability.

By letter dated 30 November, GEM advised Malovany that the notice to quit was withdrawn. The letter continued:

“Would you proceed to finalise negotiations with the current franchisee and once completed formally advise the lessor.

We require Cut Price Deli to confirm in writing that should the current franchisee decide not to continue trading in Northgate Shopping Centre and remove his fixtures and fittings then Cut Price Deli will replace the fixtures and fittings in Shop L5A and continue to trade under the same terms and conditions as currently apply.”

On 7 December, CPD replied to Mr Morgan confirming that it agreed to the terms set out in his letter.

At the end of 1994, Airberg was in arrears in payment of franchise fees and rental. CPD wrote letters from time to time requesting payment.  Faulkner’s response was to make some payment and request the indulgence of an extension of time as to the balance. In one of his letters, that dated 22 December, he stated:

“In relation to the late royalties I wish to advise that due to a downturn in the sales of the shop and other Economic circumstances I have found my finances have been strained.”

On 26 December, Faulkner wrote to CPD advising that the “door counts” for the Centre showed a “negative trend over the period May 94 to October 94”. The letter gave particulars and requested CPD to seek a substantial reduction in the monthly rent for the shop.

On Sunday 18 December, it was apparently reported in the Queensland “Sunday Mail” that CPD had been found to have engaged in misleading or deceptive conduct in proceeding QG 66 of 1990 in this Court. Faulkner wrote to the Franchisors Association of Australia and New Zealand Ltd inquiring what that Association proposed to do about the matter.  He also complained to the Franchising Code Administration Council Limited about what he alleged to be breaches by CPD of the “Franchising Code of Practice” relating to “Standards of Conduct, Dispute Resolution and Disclosure Document Requirements”. The complaints were taken up by the Council with CPD, which responded to them.

Meanwhile, Airberg was failing to pay accounts due to suppliers as well as its franchise fees to CPD.  In a letter dated 3 March 1995, CPD advised Faulkner that according to CPD’s records, for the approximately fifty-week period that Faulkner had operated the Business since the departure of Lockyer, it had achieved an average weekly gross sales figure of $17,189 compared to $19,796 averaged over a similar period when Faulkner had been “in partnership” with Lockyer.

Faulkner advertised the Business for sale in the “Sydney Morning Herald” on Saturday 18 February 1995. CPD engaged Lyonswood Investigations to play the role of a prospective purchaser. Faulkner gave the representative of that firm figures for the years ended 30 June 1992, 1993 and 1994 which showed annual sales figures which, on an average weekly basis, were $20,728, $20,977 and $18,918.

On 23 March, the Faulkners granted to a real estate agent exclusive selling rights in respect of their home at Haberfield for the period 23 March 1995 to 23 July 1995. The agent was of the opinion that the then “current reasonable selling price” was $500,000 and that the property should be offered at $600,000.

On 28 March, CPD wrote to Faulkner about his complaints to the Franchisors Association of Australia and New Zealand and the Franchising Code Administration Council Limited. In the letter, Malovany complained about Faulkner’s having approached those two organisations directly without having first discussed his concerns with CPD. The letter concluded:

 

“The damage that you seek to do to us impacts on your fellow franchisees and our goodwill will affect your attempts to sell your location. Your shortsightedness is pathetic.”

In May, several Cut Price Deli franchisees wrote letters of support to CPD and at least one wrote directly to Faulkner pointing out that, whatever his personal experience of CPD may have been, by airing his grievances in the media he was destroying the goodwill of contented franchisees who had invested large sums of money in their businesses.

On 31 May, the application by which the present proceeding was commenced was filed. Thorpe still represented the applicants.

 

On the same day, the Trade Practices Commission wrote to CPD advising it that the Commission had finalised an investigation into complaints concerning “anti-competitive supply arrangements” between CPD and “recommended manufacturers and distributors who supply products to Cut Price Deli franchisees”.  The letter advised that the Commission’s inquiries had not revealed any evidence to demonstrate that the alleged conduct was likely to have the effect of substantially lessening competition in the relevant market.  Accordingly, so the letter advised, the Commission had formed the view that no contravention of the TP Act was “apparent” and that the Commission did not propose to pursue the matter further.

On Friday 23 June, Kiefel J in this Court in Brisbane granted Mareva relief against CPD.  Apparently a Brisbane solicitor, Paul Lynch, acted for certain Queensland franchisees.  One factor which influenced her Honour was the assignment of assets to CPD(A). 

In “The Sydney Morning Herald” of Saturday 24 June, there appeared a lengthy article by Anne Lampe headed “A franchising ‘success’ story that includes a lot of failure”. The article cast CPD, its methods and its treatment of its franchisees in a poor light. 

 

The following Tuesday, 27 June, Faulkner wrote a letter to franchisees headed “Article in Sydney Morning Herald on 24/6/95”, beginning:

“Further to that article, I have had numerous enquiries from concerned franchisees, and rightly so.

As a result of these enquiries, to which I do not have all the answers, I have been able to secure the services of a highly qualified professional legal advisor who will be attending my home on Tuesday 12/7/95 at 7.30 pm.”

The letter invited interested franchisees to attend for the purpose of having their questions answered.  The next day, Wednesday 28 June, Mark Emery, the chairman of the NSW Advisory Council, wrote a letter to Mr Colin Burge, the Business Editor of “The Sydney Morning Herald”, complaining about Anne Lampe’s article.  It pointed to what it asserted to be factual errors and bias in the article.  Mr Emery and the Chairman of the Queensland Advisory Council distributed the letter to franchisees in New South Wales and Queensland respectively, inviting them to sign it.  Eighty-eight signatures resulted.  On 7 July, Mr Emery sent to Mr Burge a copy of the letter with signatures.

On 1 August, Faulkner sent another letter to franchisees and, on 4 August, Mr Emery sent a letter to franchisees strongly condemning Faulkner’s conduct in “badmouthing” CPD.

On 7 October, Airberg “abandoned” the shop in the sense that Faulkner returned the key to it direct to the Centre Manager.

Faulkner and Mrs Faulkner moved to Western Australia to live where Faulkner obtained employment as a branch manager with the Commonwealth Bank of Australia. They sold their house at Haberfield for $440,000 and the sale was settled on 17 May 1996. Out of the proceeds, $382,989.67 was paid to Citibank.

From his new home in Western Australia, Faulkner began, in May 1997, to distribute a newsletter to franchisees generally (not only Cut Price Deli Franchisees).

The applicants have sought in this proceeding to establish that they suffered loss and damage as a result of representations allegedly made by Sgambellone and Malovany which induced them to purchase the Business. They seek to recoverstatutory and common law damages in respect of allegedly misleading and deceptive conduct engaged in by CPD in contravention of s 52 of the TP Act and s 68 (2) of the Fair Trading Act 1987 (NSW) (“the FT Act”), and negligently given information and advice.

CPD and CPD(A) are now in voluntary administration pursuant to deeds of company arrangement.  The administrator is John Edward Star of Star Dean-Willcocks.  The applicants sought, and I granted them, leave to discontinue against CPD and CPD(A). Pursuant to that leave, they filed a notice of discontinuance against CPD and CPD (A) on 18 June 1998.

 

I have sometimes referred to “the applicants”. After the conclusion of the evidence and in the course of submissions I raised with senior counsel for the applicants the basis of the claim by Faulkner and Mrs Faulkner. He sought and was granted leave to discontinue the proceeding in so far as those two individuals sought any relief in it. They filed a notice of discontinuance on 23 June 1998. Accordingly, henceforth I will refer to “Airberg” alone as the applicant.

In the result, the only claims remaining to be addressed are those of Airberg against Sgambellone and Malovany.

THE PLEADINGS

Airberg’s case is pleaded in a further amended statement of claim filed on 29 May 1998.  The following is a summary of that case and includes no findings. (References to paragraphs are references to paragraphs of the further amended statement of claim.)

Airberg alleges in pars 4-10 that over the period from 1 February to 30 June 1991, CPD, Sgambellone and Malovany made numerous representations to Airberg, Faulkner and Lockyer. Many of the representations as pleaded are of a very general nature, and little has been made of them on the hearing.  The major representations on which emphasis has been placed are the following:

Par 6    that, with Skerritt operating the Business, its weekly turnover was $22,000 but that he was a “bad operator”, and that with Faulkner and Lockyer as operators, it could and would do $30,000 per week turnover;

Par 7    that, with Faulkner and Lockyer as operators, the Business would trade at a gross profit of 38.0 per cent of turnover and would trade at a gross profit higher than 38.0 per cent if Faulkner and Lockyer were prepared to work hard, and

“(f)      That the Hornsby site would continue to be available to the Applicants after the expiry of the current lease term;

(g)       That the lease of the Hornsby site and sub-lease could and would be renewed and continued by [CPD];

(h)       That [CPD] would negotiate the renewal of the lease and sub-lease for the said site;

(i)        …

(j)        That the Applicants would be able to sell the business in the future for at least the purchase price;

(k)       That the business at Hornsby was worth more than $385,000.00;

(l)        The 4% Rebate/commission from suppliers was not part of the amount upon which the franchise fee would be charged;

(m)      That the site would be one at which demonstrations would continue to be carried out;

(n)       That the Applicants would receive a reasonable remuneration and/or profit in respect of their labours, time and effort put into the said business;

(o)       That the suppliers commission was up to but would not exceed 4%.”

Par 8    that if Faulkner and Lockyer worked in the delicatessen, the wage component would be reduced from an existing 10 per cent of sales to 7 per cent of sales;

Par 9    that:

“(a)     [CPD] had over 140 shops and great buying power;

(b)       The buying power of [CPD] was so good that it was capable of achieving the best prices in town for stock to be supplied to Airberg;

(c)        [CPD’s] direct negotiations with recommended suppliers of stock was for the benefit of the Applicants and Lockyer and by such negotiations [CPD] could achieve the lowest prices available for stock required by [Airberg] to supply the Cut Price Deli, Hornsby;

(d)       In light of the buying and negotiating power of [CPD], [Airberg] would substantially benefit by purchasing its stock from the recommended suppliers at [CPD’s] recommended price list (hereinafter referred to as ‘the recommended price list’);

(e)        [CPD’s] recommended suppliers paid to [CPD] a 4% rebate (‘the Rebate’) which was used by [CPD] for promoting the delicatessen by way of posters, and advertising on TV and radio;

(f)        The Rebate provided to [CPD] by the recommended suppliers was paid in order that such suppliers could secure a relationship with [CPD] as a recommended supplier to franchisees of [CPD], and was not incorporated in the recommended buying price, which was provided by [CPD] to the Applicants for their benefit;

(g)       That as a result of the ‘special buy price’ of the stock obtained by [CPD] for [Airberg] by virtue of [CPD’s] buying power, [Airberg] could offer its goods at a retail price to beat any other competitor;

(h)       That [CPD] was capable by negotiation with recommended suppliers of obtaining the ‘cheapest prices in town’, and did in fact obtain ‘the cheapest price in town’.”

Par 10  that the rebate provided to CPD by recommended suppliers would be used by CPD to promote Airberg’s business by advertising by posters and on television and radio, and that the rebate was paid by the recommended supplier to CPD without being included in the recommended buying price identified by CPD as the price payable by Airberg to the supplier.

It is pleaded that in reliance on the representations, Faulkner and Lockyer prepared possible “profit and loss” assessments for the proposed operation of the Business, and that on or about 1 July 1991, also in reliance on the representations, Airberg purchased the Business for $395,000;  Airberg, Faulkner and Lockyer executed a deed of assignment of lease; and Airberg as principal, and Faulkner and Lockyer as guarantors, entered into a deed of franchise with CPD.

Par 15 pleads the following terms and conditions of the deed of franchise:

“(a)     In order to safeguard the reputation for quality  and composition of goods sold, any purchase by [Airberg] of products from a supplier other than a recommended Supplier of [CPD], [CPD] shall have the right to test for quality and composition the products in order to determine whether the same meet the specifications and standards as required by [CPD];

(b)       [CPD] had expertise in the assessment of the quality and saleability of product and was able to negotiate from time to time terms more advantageous for [Airberg];

(c)        [CPD] shall have the right to specify the maximum retail price of any and all of the products and unless so specified, [Airberg] may sell the product at any such prices as it determines in its absolute discretion;

(d)       [Airberg] may, with the consent of [CPD], such consent not to be unreasonably withheld, advertise products as specials, additional to the recommended specials, for sale to the public;

(e)        [Airberg] would pay [CPD] a royalty calculated as a percentage of the weekly gross sales of stock at Cut Price Deli Hornsby (‘the royalty’).”

Pars 16 to 24 plead facts said to falsify the representations.  Thus, it is alleged that, at all material times, the Business traded at a turnover of only $17,000-20,000 per week; that a gross profit of 38% of sales yielded a net loss; that the wage component necessary for the operation of the Business did not fall below an average of 10% per annum of gross sales;  and that Airberg was capable of negotiating prices for products cheaper than those on CPD’s recommended price list.  It is also alleged that at no time during the operation of the Business by Airberg, were the payments of rebate materially used by CPD for the promotion, advertising and furtherance of Airberg and its shop;  did CPD seek to obtain, or in fact obtain, the best prices from the recommended suppliers in order to benefit Airberg substantially; or did the “special buy price” of the stock obtained from recommended suppliers at the direction of CPD enable Airberg to offer its goods at a retail price to beat any other competitor.  Finally, it is alleged that at all material times, the rebate payable by recommended suppliers to CPD was calculated on the total expenditure by Airberg with the recommended supplier and was incorporated in the price of the stock recommended by CPD to be the “special buy price” on the recommended price list to be paid by Airberg.

Paragraph 25 pleads that, at the time of making the representations, Sgambellone and Malovany and each of them knew or ought to have known of the matters referred to in pars 16-24 and of other matters (identified in par 25) which falsified the representations.

Paragraph 25A is as follows:

“(a)     The Hornsby site did not continue to be available to the Applicants;

(b)       The lease of the Hornsby site and sub-lease have not been renewed and continued by [CPD and CPD(A)] or one of them;

(c)        [CPD and CPD(A)] or one of them did not negotiate the renewal of the lease and sub-lease for the said site;

(d)       [CPD or CPD(A)], or either one of them did not support the Applicants by obtaining renewal and continuation of the lease of the said site and sublease thereof;

(e)        The Applicants were not able to sell the business for the said purchase price or otherwise;

(f)        The business was not worth $395,000.00;

(g)       The 4% commission/Rebates from suppliers formed part of the amount upon which the franchise fee was charged;

(h)       The suppliers commission/Rebate exceeded 4%.”

All of the representations to which I have referred to date preceded Airberg’s purchase. But par 26 alleges that in or about June 1992, contrary to the pre-transaction representations and contrary to the terms of the Deed of Franchise, Malovany and Sgambellone made certain further representations to Airberg, Faulkner and Lockyer. In the course of submissions, senior counsel for Airberg disclaimed reliance on these alleged representations of June 1992 as giving rise to a cause of action.

Paragraphs 27 and 28 plead that at the time of the making of the representations referred to in pars 4-10 and 26, the respondents and each of them knew or ought to have known certain matters specified in the two paragraphs, that is, pars 27 and 28. But pars 27 and 28 in fact play no further part in the pleading and I will ignore them.

Paragraph 29 pleads that the respondents knew that Airberg was relying on the representations.

Paragraph 30 pleads that, to the extent that the representations set out in pars 4-10 and 26 were as to future matters, the person making the representation did not have reasonable grounds for making it.

Paragraphs 31 and 32 plead respectively that the representations were made in trade or commerce and that Airberg was intended to rely on them and did in fact rely on them.

Paragraph 33 pleads that in making the representations in pars 4-10 and 26, the respondents engaged in misleading and deceptive conduct in contravention of s 52 of the TP Act and s 42 of the FT Act and that Airberg thereby suffered loss.

Paragraph 33A pleads that Malovany and Sgambellone

“aided, abetted, counselled or procured … induced by threat, promise or otherwise … were directly or indirectly knowingly concerned in, or parties to … [and] conspired with others to effect the contravention”

 

by CPD and CPD(A), of s 52 of the TP Act for the purposes of s 75B of that Act. In so far as par 33A refers to CPD(A) it is clearly erroneous and I will ignore it.

Paragraph 34 is as follows:

“During the period 1 February 1991, through to 30 June 1991 and during the course of discussions between [Malovany, Sgambellone and Rechichi], and on behalf of [CPD], the Respondents and each one of them failed to inform the Applicants that:

(a)       By exerting control and restrictions on the pricing of the Stock sold by Cut Price Deli Hornsby in the manner set out above, [CPD];

              (i)       maintained gross profit of Cut Price Deli Hornsby of between 30; and

             (ii)       promoted a high turnover of stock purchased from recommended suppliers; and

            (iii)       maximised the Rebate and Royalty that was paid by the recommended supplier and Cut Price Deli Hornsby respectively to [CPD]; and

            (iv)       caused Cut Price Deli to trade at just above, or just below, ‘break even’ point where there was no operating profit.

(b)       By compelling [Airberg] to purchase stock from recommended suppliers, [CPD];

              (i)       received the Rebate; and

             (ii)       maximised the Rebate; and

            (iii)       increased the cost of Stock to Cut Price Deli Hornsby; and

            (iv)       thereby increased the Royalty; and

             (v)       thereby caused Cut Price Deli to trade at just above, or just below, ‘break even’ point where there was no operating profit.

(c)        By reason of the above-mentioned matters, the Respondents were promoting a rapid turnover of the ownership of Franchised outlets of [CPD] for which the Respondents received a benefit.”

Finally, a case in negligence is pleaded.  It is alleged in pars 35 and 36 that CPD, CPD(A), Malovany and Sgambellone undertook to inform and advise the applicants and Lockyer in relation to Airberg’s purchase and acted as “business advisers” to them regarding Airberg’s purchase and operation of the Business (again the reference to CPD(A) is clearly erroneous).  According to pars 37-39, the respondents and each of them gave information and advice and made the representations to the applicants in terms of pars 4-10 and 26 and they knew or ought to have known that the information, advice and representations would influence Airberg and be relied upon by it, and this in fact occurred.

Paragraph 40 pleads that the respondents owed a duty of care to Airberg, and par 41, that the information, advice and representations were “knowingly false” or “made or given with reckless indifference as to whether the same [were] true or accurate” or “negligent”.  It is pleaded that Airberg relied on the information, advice and representations, and, as a result, suffered loss.  Particulars of the loss and damage are given in par 43A. However, Airberg came to put its case differently on the hearing. The particulars of loss and damage on which it ultimately relied were as follows:

“1.  Debt of Airberg to M and A Faulkner arising from the Citibank facility used to pay out the ANZ facility (The Citibank facility was satisfied with funds from the sale of the Faulkners’ house at 173 Alt Street Haberfield).	$	401,507.73
2.      Debt of Airberg to M Faulkner arising from M Faulkner’s payment of St George Business Overdraft used for expenses of Airberg between August 1994 and October 1995	$	15,000.00
3.      Start up costs not associated with the original ANZ facility (a)          Legal fees of the Respondents paid by the Applicants (b)          Applicant’s legal fees (d)     Purchase of shelf company for Airberg (e)          Stamp duty on purchase of the business (f)           Stamp duty on mortgage (g)          Loan establishment and registration fee (h)          Training fees	$ $ $ $ $ $ $	1,556.40 5,600.00 1,500.00 13,275.00 1,621.00 4,159.00 4,000.00
4.      Debt of Airberg to M and A Faulkner arising from costs associated with the Citibank facility (item (c)) and payments by Airberg associated with the Citibank facility items (a) and (b)) (a)          Stamp duty (b)          Outgoing mortgagee’s costs (c)          “Personal” contribution	$ $ $	1,480.00 927.00 9,780.40
5.    Debt of Airberg to M Faulkner arising from M Faulkner’s payment of Airberg’s overdraft with Westpac	$	15,103.90
SUB-TOTAL	$	475,510.43
LESS RECOVERY FROM LEND LEASE	$	19,200.00
TOTAL PLUS INTEREST	$	456,310.43

APPLICANT’S INTEREST CALCULATION

Calculated in accordance with Schedule J of the NSW Supreme Court Rules

7 October 1995–28 February 1997	510 days at 12%	$76,495.88
1 March 1997–31 August 1997	184 days at 10.5%	$24,147.95
1 September 1997-30 June 1998	303 days at 10%	$37,873.77
	TOTAL	$138,517.60

Plus interest to the date of judgement”

In pars 44-49 and 50A-50L, the further amended statement of claim pleads a case in support of an application for an order setting aside the Deed of Release.  In his opening submissions senior counsel for Airberg conceded that so long as the Deed of Release stood, the applicants  could not succeed in this proceeding.  Not long afterwards, and certainly before the respondents could have been prejudiced, he withdrew that concession and said that Airberg no longer sought to have the Deed of Release set aside.  Accordingly, I shall say nothing of  pars 44-49 and 50A-50L.

In par 50 Airberg alleges that during July 1994, CPD assigned to CPD(A) all CPD’s rights and obligations under the Deed of Franchise, by reason of which CPD(A) is liable to Airberg in respect of the matters alleged in the further amended statement of claim in like manner to CPD itself.  As noted earlier, however, the discontinuance against CPD and CPD(A) renders the assignment irrelevant to any issue I have to decide.

Airberg claims in par 50M that it is entitled to set off its damages against any liability which it may have to CPD for royalties or otherwise.  But CPD has not cross-claimed in respect of any outstanding royalties, and in any event, has ceased to be a respondent since the discontinuance against it.

In their respective defences, Malovany and Sgambellone deny and do not admit numerous allegations in the further amended statement of claim. They raise two special defences. The first arises from the Deed of Release. The second is that the causes of action under the TP Act and the FT Act are statute-barred.  In this respect, they rely on the three year limitation period fixed in subs 82 (2) of the TP Act and in subs 68 (2) of the FT Act.

ISSUES

The following are the issues which arise on the pleadings.

 

1.         JANUARY-JUNE 1991 REPRESENTATIONS

1.1       Did Malovany or Sgambellone or both make to Airberg, Faulkner and Lockyer during the period 1 February 1991 to 30 June 1991 any of the representations referred to in pars 6-10 of the further amended statement of claim?

1.2       If yes to 1.1,

            1.2.1    which representations were made, and by whom to whom?

            1.2.2    in respect of each such representation made,

                        1.2.2.1             was it misleading or deceptive?

                        1.2.2.2             did it induce Airberg to enter into the Agreement on 24 April 1991 and to complete that Agreement and to execute the other documents on 1 July 1991?

                        1.2.2.3             if “yes” to 1.2.2.2,

                                    1.2.2.3.1          did that inducement cause Airberg to suffer loss and damage?

                                    1.2.2.3.2          what is the amount of that loss and damage?

2.         REPRESENTATIONS AS TO FUTURE MATTERS

2.1       Were any of the representations made that caused loss or damage, representations as to future matters?

2.2       If “yes”, as to any that were as to future matters, did the person making the representations have reasonable grounds for making it?

3.         ACCESSORY LIABILITY

In relation to any of the representations made by CPD that were misleading or deceptive and caused loss or damage, did Malovany or Sgambellone,

            3.1       aid, abet, counsel or procure the making of the representation?

            3.2       induce by threat or promise or otherwise the making of the representation?

            3.3       conspire with others to make the representation?

            or was Malovany or Sgambellone

            3.4       directly or indirectly knowingly concerned in or a party to the making of the representation?

In submissions, senior counsel for Airberg disclaimed reliance on 3.2 and 3.3 above.

 

4.         NEGLIGENCE

In respect of any representations that conveyed information or advice and caused Airberg to suffer loss,

            4.1       did the giver of the information or advice owe a duty to take care to ensure that it was true and safe to be relied upon?

            4.2       was the maker of the representation in breach of that duty of care?

            4.3       if “yes” to 4.2, did that breach cause the loss or damage?

            4.4       what is the amount of that loss or damage?

            4.5       which respondents are liable to Airberg for that loss or damage?

5.         DEED OF RELEASE

Does the deed of release afford Malovany and Sgambellone a defence to the claims made against them in the proceeding?

6.         LIMITATION DEFENCE

Do subs 82 (2) of the TP Act and subs 68 (2) of the FT Act operate to defeat Airberg’s claims based upon those Acts?

REASONING

As will appear below, I have come to the view that on its proper construction, the Deed of Release would provide Malovany and Sgambellone with a defence to Airberg’s claims if CPD were again a party to this proceeding and were to enforce it.  Further, for reasons which will appear, I am not satisfied that the representations as pleaded were made; or if made, are shown to have been misleading or deceptive; or if made and shown to have been misleading or deceptive, in fact induced Airberg to purchase the Business.  Yet further, the losses claimed to have been suffered by Airberg are not shown to have been caused by representations made by Sgambellone and Malovany in the first half of 1991.  Finally, at least as to the most significant of the alleged representations, that concerning a weekly turnover of $30,000, the limitation defence succeeds.  Accordingly, this Reasoning section is not organised in accordance with the statement of issues above.

 

THE EVIDENCE AND THE WITNESSES

The evidence relating to the making of the representations is contained in affidavits in chief of Faulkner sworn 31 July 1995 and Lockyer sworn 5 June 1998 and an affidavit  of Faulkner in reply sworn 27 May 1998.  On the respondents’ side, the affidavits read were affidavits of Malovany sworn 24 April 1996 and 21 April 1998; affidavits of Sgambellone sworn 16 February 1997, 3 March 1997, 27 November 1997 and 15 April 1998; and affidavits of Rechichi sworn 18 February 1997, 4 March 1997, 27 November 1997, 15 April 1998 and 24 May 1998.  There were four lever arch files of documentary evidence.

Sgambellone and Rechichi did not cross examine Faulkner or Lockyer: they left to Malovany the task of doing so and also of making submissions.  Malovany cross examined Faulkner and Lockyer. Senior counsel for Airberg cross examined Malovany and Sgambellone, but not Rechichi.  The hearing occupied ten days.

 

None of Faulkner, Lockyer, Malovany or Sgambellone impressed me as a witness who was unwilling to tell the truth. No doubt, to some extent their recollections were affected by the passing of time and their interests in the outcome of the present proceeding. The interests of Faulkner, Malovany and Sgambellone are obvious. While Lockyer does not have a direct or financial interest in the outcome, and, indeed, became aware of the pendency of this proceeding not long before the hearing, he does have an interest of sorts in blaming CPD and those associated with it. By the end of 1992, he was a leader of the “rebel” franchisees. His sense of grievance at that time over the conduct of CPD seems to have exceeded that of Faulkner. The evidence of animosity between Lockyer and the officers of CPD from the second half of 1982 down to the sale by the Lockyers to the Faulkners in early 1994 is clear. While I found Lockyer, like the other witnesses, a person prepared to tell the truth to the best of his recollection, I do not think that he is to be regarded as a totally independent bystander whose evidence provides the key to resolving conflicts between the evidence of the chief protagonists.

 

In summary, to the extent that it may be necessary to resolve conflicts, I would do so where possible by reference to “objective” evidence, in particular documentary evidence, and the inherent probabilities to be found in circumstances otherwise proved.

 

It is appropriate that I say something of the background of the principal witnesses.

 

Sgambellone was born on 26 July 1942 in Italy.  He came to Australia in 1951 with his parents.  He left school at the age of fifteen years and worked with his father in “cafés, general business, mixed business, always something to do with food”.  When his father retired in 1974, Sgambellone had been working with him in a mixed business at Kogarah.  He bought an “Igloo Deli” business in King Street Newtown and established it as the first “Cut Price Deli” shop, registering the business name “Cut Price Deli”.  Rechichi, his brother-in-law, joined him some twelve months later, in November 1975, opening the second Cut Price Deli shop at Kogarah.  Sgambellone operated the one at Newtown and Rechichi the one at Kogarah.  From 1975 to 1982, the number of shops grew from two to sixteen.  In 1982, the first franchised shop was opened.  It was at Warriewood.  It had earlier been a “company shop” and was converted to a franchised outlet.  By January 1991, CPD had about twenty to thirty company owned shops and about 100-120 franchised shops.

 

Sgambellone’s role in CPD’s business was that of identifying desirable sites for Cut Price Deli shops and “talking to” leasing agents, shop fitters, suppliers of product, prospective franchisees, and company managers. Without much in the way of formal education, he was a “hands-on” man with many years of experience in the kind of business in question.

 

A particular difficulty in assessing Sgambellone’s evidence is that in his affidavits he frequently simply adopted the accounts of conversations given by Malovany in his affidavits.  Lawyers know that this course is as unsatisfactory as it would be if, in the witness box, Sgambellone had adopted oral evidence given earlier in the witness box by Malovany.  But Sgambellone and Malovany were not legally represented and they prepared their own affidavits.  The problem remains what weight is to be given to Sgambellone’s adoption of Malovany’s evidence.  I have the advantage of the cross examination of Sgambellone.  Unsatisfactory as his affidavit evidence is, I think that in relation to the conversations in question, his oral evidence generally conformed to that in Malovany’s affidavit which he adopted.  In the result, I consider that his adoption of Malovany’s evidence of particular conversations did generally express the evidence that he would have given unaided by that unacceptable procedure.

 

Malovany was born on 24 September 1951 in Adelaide.  His secondary schooling went to “about the Leaving [Certificate] level” but he did not get the Leaving Certificate.  After high school he completed a TAFE accounting course as a part-time (evening) student while employed by a firm of accountants.   He obtained an accounting qualification, apparently in 1974 or 1975, and worked overseas in various “accounting roles” from about 1976 to 1979.  After returning to Australia at about the end of 1979, he worked in Sydney in various accounting jobs until he commenced work with CPD in its office at Kogarah in November 1983.  He had been interviewed for the job by Rechichi and Sgambellone.

 

Malovany says that he recalls the opening of CPD’s fiftieth franchise location at Top Ryde in April 1984, not long after he commenced his employment with CPD (one can only wonder whether it is correct, both that the first franchise outlet opened in 1982 and that the fiftieth opened in 1984).  He was employed first as an accountant, and, within twelve months, was appointed as “general manager”.  Sgambellone and Rechichi had limited education, and Malovany assumed the role of correspondent for CPD (“’cause Mr Sgambellone and Mr Rechichi didn’t write letters”).  He liaised with solicitors, financiers and CPD’s external accountant, and was closely involved in the drafting of the successive editions of CPD’s standard form of franchise agreement.

 

In 1989 or 1990, Malovany’s title changed to “General Manager, Franchise Developments” to distinguish his position from another one which had been created called “General Manager, Operations”.

 

I turn next to Faulkner. He gave the following information about his background in his application dated 6 March 1991 to CPD for its approval of him as a franchisee.  He was born on 11 August 1960.  Like Lockyer, as at early 1991 he had not previously owned or managed a delicatessen business or any other form of small business.  At the time he was married and had three children, aged 8, 6 and 1.  From 20 November 1988 to 21 October 1990 he had been employed by “St George Commercial Credit” with duties of  “product development”.  His annual salary had been $60,000.  He told CPD that his reason for leaving St George in November 1988 was “disenchantment with finance industry”.  He gave the following reasons for his interest in becoming a Cut Price Deli franchisee:

 

“Due to the successfulness of the operation over the years, the food industry is an attractive industry and to utilise my own marketing skills on the whole.”

In his affidavit sworn 31 July 1995, Faulkner stated that from 1977 to 1991 he worked in the finance industry in Australia; that his last position was as “fleet manager for GIO Fleetpack” where his role was “to approach large corporate entities and offer them bulk leasing facilites for fleets of motor vehicles”; that prior to that he undertook various sales and management roles in the finance industry and, at different times, was involved in mortgage and leasing finance; and, finally, that he had no retail experience, nor did his wife who also worked in the finance industry with Westpac.

Lockyer gave the following information relating to his background in his application dated 14 February 1991 to CPD for its approval of him as a Cut Price Deli franchisee.  He was born on 10 October 1951 and was married with two children aged 9 and 6 years.  He was employed at the time and had been since January 1985 by Jambro Pty Ltd as “financial controller & company secretary”.  (Apparently Jambro Pty Ltd was engaged in the business of manufacturing industrial fasteners.)He said that his duties were those of  “financial head of a $20 million co’y”.  He said that his annual income was $60,000 including “bonus/super’n” “plus motor vehicle package.”  He gave as his reasons for leaving that position his desire to “be independent”.  Finally, he gave as the reason for his interest in becoming a Cut Price Deli franchisee, the following:

“We are very impressed with  professional approach of  company.  The food catering industry has appealed to me for many years.” 

He added that he believed that his current position was very similar to the running of his own business. 

It is clear that Faulkner and Lockyer lacked any experience in retailing.  On the other hand they were not financial naïve, by any means.  They were experienced in the finance industry.  They had ideas related to marketing.  In my opinion, the evidence as a whole shows that they, particularly Lockyer to whom Faulkner left the task, made a study of the historical figures relating to the Business.  They were both ambitious for the Business, perhaps excessively so.  In my opinion, they were not the kind of people who would for long remain content simply to implement the directions of CPD.

 

THE DEED OF RELEASE

The Deed of Release dated 9 March 1994 is made between CPD (in the Deed called “Cut Price Deli”), Airberg (in the Deed called “the Franchisee”), Lockyer and Faulkner (in the Deed called “the Guarantors”) and Mrs Faulkner (in the Deed called “the New Guarantor”). After recitals, the Deed, in clause 1, sets out definitions including the following:

 

“1.1     ‘the Releasors’ shall mean the Franchisee and the Guarantors and any person claiming through or by them.

1.2       ‘the Releasees’ shall mean Cut Price Deli.

 

1.3       ‘the Cut Price Deli Documentation’ shall mean collectively and severally the Franchise Deed, the Sub-Lease (if any) and any other documentation entered into between Cut Price Deli, the Franchisee and the Guarantors prior to the date hereof relating to the Franchise Business including the agreements and Deeds referred to in PART 6 of the SCHEDULE hereto.

1.4       ‘the Representations’ shall mean all representations statements and/or warranties whether made orally or in writing or by silence at any time by or on behalf of Cut Price Deli by Cut Price Deli representatives concerning and/or in any way relating to the negotiations leading up to the sale and franchise of the Franchise Business by Cut Price Deli to the Franchisee and/or the entering into of the Cut Price Deli documentation and the carrying on thereafter of the franchise business and including and without limiting the generality of the same the profitability, the turnover and financial performance of the Franchise Business.

1.5       ‘the Cut Price Deli Representatives’ shall mean all persons be they directors servants and/or agents of Cut Price Deli that have at any time before the date hereof been engaged and/or retained and/or employed by Cut Price Deli and/or otherwise represented Cut Price Deli in relation to the making of the representations and/or concerned themselves in or with the making of the representations.

            …

1.7       ‘All Liabilities’ shall mean all liabilities arising in respect of any cause of action suit arbitration verdict judgment debt dues costs and/or demands whether arising in contract and/or in tort or otherwise arising under the provisions of any statutory enactment rule or regulation (and without limiting the generality thereof under the Trade Practices Act (Commonwealth) and the Fair Trading Act (New South Wales) with respect to the Franchise and/or the Guarantors.”

 

I do not think it necessary to set out the definitions of “Franchise Deed”, “Sub-Lease” or “Franchise Business”, or to identify the agreements and deeds identified in Part 6 of the Schedule to the Deed, since their meanings give rise to no issue. The “Franchise Business” is, of course, the Business. Clauses 15.1, 15.2 and 15.3, which appear under the heading “THE RELEASES”, are as follows:

“15.1   The Releasers hereby release the Releasees from all liabilities and the Releasors hereby indemnify the Releasees with respect to and in any way concerning or relating to the Cut Price Deli documentation and/or the Representations.

15.2          Notwithstanding any covenant in this Deed the Releasors hereby indemnify the Releasee in relation to all and every liability expense and outgoing of the Franchise Business.

15.3     The Releasors shall not commence any suit action and/or proceedings at common law and/or in equity in any Court having jurisdiction in relation to any of the matters referred to herein and in relation to the Cut Price Deli documentation and the representations [sic – the Representations] against Cut Price Deli and/or the Cut Price Deli representatives in relation to anything done or not done by or on behalf of Cut Price Deli and/or the Cut Price Deli representatives at any time up to the date hereof.”

 

Malovany and Sgambellone rely on clause 15.3. It is not in dispute that in that clause, the expression “The Releasors” is apt to refer to Airberg, or that the expression “the Cut Price Deli representatives” is apt to refer to Malovany and Sgambellone. Nonetheless, Airberg submits that there are two reasons why clause 15.3 does not afford a defence to its claims. The first is that the presence of the words “at common law and/or in equity” limit the promise in a way which leaves untouched the present proceeding in so far as it includes the claims under the TP Act and the FT Act. The second reason is that Airberg’s promise is not enforceable by Malovany or Sgambellone because they were not parties to the Deed, and is enforceable only by CPD which is no longer a party to this proceeding.

 

Mr N F Francey of counsel appeared for Malovany on the afternoon of the last day of the hearing for the purpose of making submissions in relation to the issues raised by the deed of release and the limitation defence. He submitted that the words “at common law and/or in equity” were included in order to express an intention that the promise should embrace every kind of proceeding, and certainly every kind that was “comparable” to a proceeding which was technically one at common law or in equity. In the alternative, he submitted that the expression “at common law and/or in equity” should be construed as qualifying only the term “proceedings” and not “suit” or “action”.

 

In my opinion the words “at common law and/or in equity” were intended to be words of expansion, not of contraction; of amplitude, not of constriction. They were chosen by reference to the historical development of courts administering the general law as either the Common Law Courts or the Court of Chancery. By reference to that distinction, an application under ss 52 and 82 of the TP Act or under ss 42 and 68 of the FT Act is a “proceeding … at common law.” This Court is within the expression “any Court having jurisdiction in relation to any of the matters referred to herein and in relation to the Cut Price Deli documentation and the [R]epresentations”.  The words “at common law and/or in equity” signify “[whether or including] at common law and/or in equity”. By subcl 15.3, Airberg promised, relevantly, not to commence any proceeding in, relevantly, this Court in relation to the matters described, including a proceeding which would have been brought in the common law jurisdiction of a “pre-fusion” system of judicature.  I note that the approach to construction which I have taken is consistent with that of the New South Wales Court of Appeal in its construction of the expression “whether in contract or in tort” in s 58 of the Judiciary Act 1903 (Cth) in Commissioner for Railways for the State of Queensland v Peters (1991) 24 NSWLR 407. 

 

In arriving at the construction just described, I have not found it necessary to invoke any accepted approach to construction relevant to the resolution of ambiguities.  If I had thought that the expression “at common law” might have been intended to bear a reasoning exclusive of the present statute-created causes of action, an accepted approach to the resolution of problems of ambiguity in deeds of release would have been applicable.  That accepted approach is that in a case of true ambiguity, the words in a deed of release are to be construed most strongly against the user of them, that is, the releasor, if so doing works no injustice: Norton on Deeds (2^nd ed, 1928) at 127 – 128 and cases there cited.  In accordance with this approach, the present issue of construction would again be resolved against Airberg.

 

I turn now to the issue of privity of contract.  Notwithstanding Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, the doctrine of privity of contract remains part of the general principles of the Australian law of contract. Clause 15.3 contains a promise by, relevantly, Airberg to CPD.  It was CPD whose participation was necessary to the sale by the Lockyers of their shares in Airberg to the Faulkners and the release of Lockyer from his guarantees in favour of CPD.  The price which CPD exacted for its consent included a forbearance to sue its directors, servants and agents.   In my opinion, cl 15.3 is not enforceable by Sgambellone and Malovany in the absence of CPD as a party.  But all is not necessarily lost from their viewpoint.  In Foskett’s The Law and Practice of Compromise (4^th ed, London, Sweet & Maxwell, 1996) the position is expressed thus:

 

“It seems that if two parties compromise their differences, one of the terms being that a third party should not be sued in respect of some matter by one of the parties, the third party can effectively claim the benefit of that term provided the correct procedural steps are taken and all parties are before the court: [the learned author refers to Snelling v John Snelling Ltd [1973] 1 QB 87]”. (at par 6-18, pp 110-111)

 

Subject to my being persuaded otherwise by Airberg’s submissions, I think that Sgambellone and Malovany are entitled to have CPD re-joined as a respondent with a view to having it cross-claim to enforce the forbearance to sue contained in clause 15.3 of the Deed for the benefit of Sgambellone and Malovany, by seeking a permanent stay or dismissal of the proceeding: see Snelling v John G Snelling Ltd [1973] 1 QB 87 at 98-100 and Bahr v Nicolay [No 2] (1988) 164 CLR 604 at 656 (Brennan J).  If CPD should be unwilling to be joined as a party for the purpose of enforcing the forbearance to sue, it may be that Sgambellone and Malovany would be entitled to compel it to do so as trustee of Airberg’s promise: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, particularly at 121, 146ff.

 

Counsel who appeared for Malovany has submitted that if I should take this view, an opportunity should be afforded to Sgambellone and Malovany to move to rejoin CPD.  I agree.  I therefore propose to give the parties the opportunity of considering these Reasons so that Malovany or Sgambellone or both may have the opportunity, if so advised, to move for the re-joinder of CPD as a party.

 

WHETHER THE REPRESENTATIONS WERE MADE; IF SO, WHETHER THEY WERE MISLEADING OR DECEPTIVE; AND IF SO, WHETHER THEY INDUCED AIRBERG TO PURCHASE THE BUSINESS

 

(1)      That Skerritt was a bad operator and that the Business was not operating to its potential as one of the best shops in the franchise chain

Faulkner states that at a meeting with Malovany and Sgambellone, Sgambellone said “the shop is in a great location, it is one of the best”; that the existing franchisee, Skerritt, was “tired” and “a bad operator”; and that with “enthusiasm and hard work” the shop should achieve a specified level of turnover (referred to below).  Lockyer states that in Malovany’s presence, Sgambellone said to him and Faulkner:

 

“The Cut Price Deli Hornsby is one of the leading shops in New South Wales....Mr Skerritt is a bad operator. … Mr Skerritt’s father recently passed away and since that time he has lost interest in the shop.  He has a full time manager in there and is rarely in the shop.”

 

Lockyer also says that Sgambellone said: 

 

“The shop is not been [sic – being] operated at its potential.  With you two [referring to Faulkner and Lockyer] operating the shop the figures will do a lot better.  You should be prepared to put in the time and work hard … .”

Malovany states that the relevant part of the conversation was as follows: 

 

Faulkner or Lockyer: “How is the shop performing?” 

 

            Sgambellone:                “It’s okay but I think it can do better. It’s had a chequered history.  At one stage a franchisee who was doing very well decided he wanted to break away and not pay franchise fees.  He had the head lease so we couldn’t do anything when the sign came down.  We later found out he ran it down after that because he was after tax losses against his pubs.

Eventually it came on the market again and Graham [Skerritt] bought it when it was doing about $14,000 per week and he’s  built it up to $22,000 on average.  He’s taken  higher figures at Christmas time, the busiest week at this centre.  It went over $30,000.  You can see how busy the centre is.  The shop is in a good location with excellent traffic flow past it.  The  centre is first class with Coles, K-Mart and Grace Bros in it.  The car park is usually very full.  You can see this yourself.  You can look at other Cut Price Deli’s and see they aren’t anywhere [near] as busy.

Graham has told me his heart isn’t in running the deli any more now that his father has passed away.  He’s not spending the time in the shop that he knows he should.  He just wants to get out.  He told us he often leaves the shop to his manageress to run as he’s tired of working the long hours and lost interest in the shop.  Talk to him and check out the true situation and you’ll see it’s one of the better shops in the chain.”

 

Malovany says that Sgambellone did not use the expression “bad operator”.  Sgambellone adopts Malovany’s version of the conversation.

 

There is no substance in Airberg’s complaint in relation to representation (1).  CPD did make a representation generally to the effect that the Business was not being conducted to its maximum potential because Skerritt was tired and depressed and was, in any event, an absentee proprietor, and that with Faulkner and Lockyer working hard in it full-time, it could be expected to do better.

 

Airberg did not attempt to show that any aspect of this representation was false.  There was no evidence inconsistent with Skerritt’s being depressed following the death of his father or being “tired” or having lost interest in the Business. Airberg did not submit that the evidence showed that the Business was not one of the best shops in the franchise chain.  Nor is it shown that the Business was in fact operating “to its potential”.  Indeed, even Skerritt told Faulkner and Lockyer the shop could do better.  Faulkner’s evidence is that Skerritt told him that his late father had been “the brains of the two”; that he (Skerritt) had “lost enthusiasm”, and that Skerritt said “[t]he shop has the potential to do $26,000 to $27,000 per week and since my dad has passed away I just want to get out” .  If representation (1) was made, it has not been shown to be false.

 

(2)      That, with Faulkner and Lockyer operating it, the Business could, and would, operate at a turnover of $30,000 per week

The parties correctly treated representation (2) as the most significant of those pleaded.

 

As pleaded, the representation means not that the Business would attain a turnover of $30,000 for one week but that it would do so each week.  There is a question as to the period for which it would, according to the representation, do so.  I do not think that representation (2) is that a weekly turnover of $30,000 would be maintained indefinitely.  Rather, the allegation is that so long as Faulkner and Lockyer were both working full-time in the Business, it would maintain $30,000 as its normal weekly turnover.  The parties treated the pleading as being, not that the turnover could and would rise to $30,000 immediately, but that it could and would do so over time.

 

According to Faulkner, Sgambellone said to him and Lockyer in the presence of Malovany, “… with the right operators, like you guys, the shop should do $30,000.00 per week.” Faulkner says that Sgambellone said “the shop should do $30,000 per week” quite often in meetings and that he “accentuated it”.  According to Faulkner, Sgambellone said this in the context of such other expressions as “the shop is in a great location, it is one of the best” and in the context of referring to Skerritt’s failure to operate the Business to its full potential.

 

Lockyer performed cash flow calculations.  These are in evidence and are headed  “scenario 1.4”, “scenario 2.4” and “scenario 3.4”. He states that on at least one occasion, he and Lockyer went to Lockyer’s home after meeting with Malovany and Sgambellone, and updated the cash flows based on information provided during the meeting. He states that scenario 1.4 was calculated on a turnover of $30,000 per week, that scenario 2.4 was calculated on a turnover of $25,000 per week, and that scenario 3.4 was calculated on a turnover of $22,000 per week. He says that all three scenarios assumed a gross profit of 39.4 per cent of sales. He says that he and Lockyer had to make estimates of the outgoings of the Business as best they could from the information which they had.  As at the end of one year’s operation, scenario 1.4 indicated a net profit of approximately $90,000, scenario 2.4 indicated a net profit of $22,000, and scenario 3.4 indicated a net profit of $7,328. All that is important for present purposes is Faulkner’s evidence that scenario 1.4 was based on $30,000 because that is the figure which he claims Sgambellone said was achievable.

 

Faulkner did not believe that sales of $30,000 per week would be achieved immediately. He states he believed that $25,000 per week was achievable from the first day and that $30,000 per week would be achieved before the end of the first year. He understood that the shop had a turnover of about $22,000 per week at the time of the purchase and that if the Business were to be slowly built up, so that $30,000 per week was achieved before the end of the year, the “average” over that year would probably work out to have been $25,000 per week.  He says, however, that he believed that $30,000 per week was a “theoretical possibility” throughout the year, except over the first few months.

 

Lockyer’s affidavit evidence is that Sgambellone, in the presence of Malovany, said to himself and Faulkner:

 

“The Hornsby outlet should do $30,000 a week.”

 

Lockyer says that Skerritt told him that the shop was selling around $24,000 per week and had the potential to do $26,000 to $27,000 per week. He says that he made a note of what Skerritt told him and that a copy of that note is annexed to his affidavit. The note includes:

 

“(30K Cut Price Deli)”

 

Lockyer states that when he made that note, he intended to be recording the estimate which had been provided to Faulkner and himself by Sgambellone for the purpose of comparison with the figure of $26,000 to $27,000 indicated by Skerritt.  The material “(30K Cut Price Deli)” does indeed appear on the note adjoining the annotation “(potential 26-27K p.w.)”.

 

Lockyer refers to a later meeting with Sgambellone and Malovany in which one of them said to him:

 

“The Deli products gross around 38% to 44% GP. The cheese products gross around 50% GP and the chicken products gross around 32% GP. On those figures if you grossed $1,225,000 per annum in ratios of around $1,000,300.00 on deli products and $111,000.00 each on cheese and chicken products, you would be looking at an overall GP of 38.5% or $472,000.00 gross profit per annum.”

 

Clearly, it was not in the contemplation of the speaker (Sgambellone or Malovany) that the Business would gross $30,000 per week. An annual figure of $1,225,000 is only $23,558 per week.  A turnover of $30,000 per week, on the other hand, would give a turnover of $1,560,000 per annum, and at a gross profit rate of 38.5 per cent, it would yield a gross profit of $600,600.

 

It will be recalled that in March 1991, Lockyer prepared a profit and loss analysis with three columns: “worse [sic] case scenario”, “most likely scenario” and “further savings that can be achieved on worst case scenario”. The worst case scenario was based on a turnover of $22,500 per week ($1,170,000 per annum) and the most likely scenario was based on a turnover of $25,000 per week ($1,300,000 per annum).  He says that he considered the weekly turnover of $22,500 to be the worst case scenario in the light of the matters which, inter alia, Sgambellone had told him about Skerritt, Skerritt’s current “bad” operation of the Business, and the current weekly figures of the Business.

 

As noted earlier, at a meeting in May or June 1991, CPD gave Faulkner and Lockyer predicted turnover figures for the year 1 July 1991 to 30 June 1992.  They showed an average weekly turnover of $23,433.  Lockyer was cross examined on these figures.  Asked whether this did not show that $23,433 per week was the average turnover that was to be expected over that 12 month period, he replied:

“Yes, there’s certainly a recognition that there was a figure which one would be looking at like that, yes.”.

In my opinion, this is significant evidence against the making of representation (2) and, if it was made, against Airberg’s having relied on it.

Lockyer states that at the heated meeting in the coffee shop in the Centre on 3 June 1992, Sgambellone again said “you should be making $30,000 this week.” While Airberg no longer relies upon this conversation as giving rise to an independent cause of action, it submits that I should accept this evidence as supportive of the evidence of Faulkner and Lockyer that Sgambellone had made a virtually identical statement more than a year earlier, prior to Airberg’s purchase in April 1991.

 

For his part, Malovany gives the following account of the relevant part of the conversation deposed to by Faulkner, in his affidavit sworn 31 July 1995:

 

Faulkner or Lockyer:    “What do you believe the shop can do?”

Malovany:                    “We have to be very careful with what we say about turnover. We are not selling you the shop. You are looking at buying it from Graham. The world is changing so much that we can be held accountable for any representations we make.”

Sgambellone:                “Harry’s right, but I feel comfortable saying I believe that the shop can get up to $25,000 per week if the right operators were in it working it properly and hard and following the system. Graham’s lost his enthusiasm. If he’s doing $22,000 now and he’s not there full time then I believe it can be improved. If I were to put any of the top franchisees, with their experience, into the shop, with the traffic flow past the shop, I’d be very surprised if it didn’t improve after a few months.”

Malovany:                    “That’s Enzo’s opinion. You have to make up your opinion on what improvement could occur. There are many factors you must consider.”

 

Malovany elsewhere “denies” that Sgambellone said “the shop should do $30,000 per week”. Elsewhere he gives an account of a conversation as follows:

 

Faulkner or Lockyer:    “Harry, we’ve done a cash flow projection on $30,000 and would like your comments.”

Malovany:                    “Are you satisfied with what Graham has told you and can you tell me the offer you are making and how everything else is going?”

Faulkner or Lockyer:    “We still have a few things to check.”

Malovany:                    “OK. Looking at this $30,000 per week projection I’d say immediately that I couldn’t let you buy the shop thinking that you are going to turn the shop overnight into that turnover. If you are depending on this situation to occur then forget the purchase.”

Faulkner or Lockyer:    “No. We don’t expect it to go to $30,000 straight away. It’s just that it could be a possibility sometime later.”

Malovany:                    “It’s good to have a high goal but you have to be realistic and I’d be irresponsible if I let you buy the shop on this belief. It’s wise to do a cash flow on what is occurring now and another on what you think you can do to improve the shop but please be realistic and understand there are factors that effect future expectations and everything takes time to achieve.”

Faulkner or Lockyer:    “OK. We’ll do one at the current level of turnover and one at say $25,000.”

Malovany:                    “OK. I’ll look at that and advise you …”

 

Malovany deposes to a later conversation over the telephone with the use of Sgambellone’s loud speaker in his office.

 

Sgambellone:                “ … you must understand we want people to be open and honest with us from day one. We also set rules on what can be borrowed based on our past experiences. We are going to let the purchase proceed but we have a few conditions.”

Lockyer:                      “Have you changed the franchise fee charge back to 6%?”

Malovany:                    “No. What I told you the other day will stay.”

Sgambellone:                “We are going to insist on a bank guarantee of $25,000 to cover our franchise fees if you don’t turn out to be as good operators as we believe you will be. It will be held for twelve months and drawn on if you don’t pay franchise fees.”

Lockyer:                      “Enzo I’m positive we will improve the shop and get well over $25,000 per week. If we do this it might be reasonable to release the bond as we’ll have no problem with franchise fees at that level. Do you agree?”

Sgambellone:                “Yes. That’s a reasonable request.”

 

Sgambellone adopts Malovany’s version of the conversations and says that at no time did he say that the shop would achieve $30,000 per week or had a potential to do $30,000 per week.

 

In cross examination, Faulkner and Lockyer were at various times both firm in claiming that Sgambellone told them on a number of occasions that the shop should reach a turnover of $30,000 per week if it was being properly run, although the terms of the conversation as recalled by Lockyer were not as unequivocal as those recounted by Faulkner.  I have referred to one passage from Lockyer’s cross examination earlier.  His cross examination also includes the follow passage:

 

“Did Mr Sgambellone talk to you about what he believed the potential of the Cut Price Deli at Hornsby was?---Certainly.”

“Did he stipulate a turnover figure that he thought it might get to? ---There was often discussion as to how well that shop could go because it was considered to be one of the leading lights in the organisation if it was only run properly.  30,000 was often brought up for discussion and I have no doubts that that was considered to be a figure which we could achieve.”

“Do you recall at any stage myself saying to you 30,000 may be a goal down the road but be very careful and be realistic in your expectations? ---Oh, certainly.”  (emphasis supplied).

 

Lockyer is careful to stop short in this passage of saying unequivocally that Sgambellone initiated a prediction of the figure of $30,000 or volunteered an assurance that it would be attained.  Moreover, his concession that Malovany sounded the note of caution referred to in the last question and answer is relevant to the issue of reliance.

In his cross examination, Sgambellone was firm in his denial.  Malovany was not cross-examined on his version of the conversations in so far as the present issue is concerned.

 

The two 12-month projected cash flows supplied by Faulkner and Lockyer to Malovany on 13 March 1991 did not contain a projection based on $30,000 turnover per week.  In cross examination, Faulkner could not explain the omission.  But Malovany states in his affidavit that he told Faulkner and Lockyer $30,000 per week was unrealistic, so he must have known they were considering this level of turnover at some stage.  Again, his warning against reliance on achieving a turnover of $30,000 per week (noted above) suggests that he knew that Faulkner and Lockyer were contemplating such a weekly turnover as a possibility.  It is not, however, probative either way on the question whether that contemplation was induced by something Sgambellone said.

Sgambellone conceded that he did not believe the shop was capable of producing a turnover of $30,000 per week.  He said that he did not say or believe that with operators like Faulkner and Lockyer, the Business should do $30,000 a week.  Accordingly, a finding that he did make the representation is a finding of fraud.  Although Airberg does not plead fraud, I bear in mind the seriousness of a finding that Sgambellone was prepared to make a representation which he did not believe to be true.  Another consideration which tells against a finding that representation (2) was made is that CPD was being sued in proceedings in which it was alleged to have made misleading and deceptive representations.  The Disclosure and Explanatory Memorandum was a product of CPD’s resultant concern.  It is perhaps unlikely that Sgambellone would immediately proceed to make representations which he knew to be untrue, in promoting the sale of a franchised business.

It is also significant that prior to the commencement of this proceeding, neither Faulkner nor Lockyer ever once complained to CPD that Airberg was not reaching the specified level of weekly turnover.  Nor did they ever complain to their solicitor at the time, McCarthy, that the turnover had not reached a promised level.

Taking into account all the evidence, I am not satisfied that Sgambellone (or Malovany) made representation (2).  I am satisfied that a weekly turnover figure of $30,000 was a possibility for the future that Faulkner and Lockyer contemplated.  I think moreover, that the figure was mentioned in the course of discussions between Faulkner, Lockyer, Sgambellone and Malovany, but I think that in those discussions it was raised by Faulkner and Lockyer as a long term goal for which they wished to aim.  It is difficult to be certain who first suggested the precise amount.  It may have been simply a round figure thought up by Faulkner and Lockyer.  It may well have been first mentioned by Rechichi’s son, Joe Rechichi.  On 13 February, he certainly told Lockyer over the telephone that “the shop should be selling $30,000 per week” and Lockyer made a note of this at the time.  There was no reason why CPD should not be pleased to learn that Faulkner and Lockyer were aiming high: the harder they worked, the more franchise fees for CPD.  What was important was that CPD should not represent that $30,000 per week was realistic achievable goal.  I am not satisfied that it did so.  Rather, in my view, what has happened is that with the passage of time, Faulkner and Lockyer have mistakenly convinced themselves that they were caused to adopt an unrealistically high goal by CPD, whereas in truth the responsibility for adopting it was their own.

If, contrary to my conclusion expressed above, representation (2) was made, there arises the question whether Airberg relied on it.  Faulkner says he relied on the representation. However, there are reasons to doubt this evidence. Skerritt apparently told Faulkner and Lockyer that he thought the Business was capable of reaching a turnover of $26,000 to $27,000 per week, but Faulkner says he did not rely on this because he thought “it could have been a salesman talking”.  Faulkner explains the lack of reliance on Skerritt and the reliance on Sgambellone by saying:

“We placed a lot more importance on what Mr Sgambellone told us basically because he wasn't actually selling the asset but he was promoting the group as a whole.”

 

“So you believed what [Sgambellone] said was true and would not otherwise had [sic – have] proceeded with the purchase?---At the end of the day, yes, we took great, I suppose, belief in what [Sgambellone] had told us over the meetings and yourself and [Rechichi] from our discussions.  We certainly did think that we were going to become part of a profitable organisation, an operation.”  

 

“Why would you [not] rely on one person’s statement that says 27 [thousand dollars turnover per week was possible and yet rely on]another one who puts in his alleged statement another 3000 on top.  Why would you rely on that one more than the 27,000 one?---It goes back to Cut Price Deli having the system of being involved in the industry a long time and knew all their franchise outlets very well as you professed you did and that you know all the locations, you arrange for them individually and sought specific locations, it goes hand in hand with that sort of arrangement.  Yes, we relied more on - - -

 

But you do not seem to rely on the operator of the store?---Well, as I said to you earlier, we sort of put it down to a little bit of salesman's puff to a certain extent because - - -

 

It was puffery was it?---Well, we discounted it.  He was in fact trying to sell the business and we obviously knew he was trying to sell it for the best possible [price] and present it in the best light possible.

 

But you didn't know what he paid for it previously or anything like that, did you?---I can't recall, no.

 

Did you discount Mr Sgambellone as having some puffery in his conversation with you when he talks about potential of 30,000?---No, he seemed very convincing.  No, [I] didn't discount it.”

 

There are suggestions in the evidence that Faulkner did not have a firm belief that the shop would produce a weekly turnover of $30,000. The following exchanges took place during Faulkner’s cross-examination:

“But still you were going go increase [turnover] from 22 to 30,000 [dollars per week] or you aimed to increase it?---We were hoping to, yes.”

 

“When were you going to get that 30,000; when did you have that expectation of getting that 30,000?---We were hoping to do it definitely by the end of the year if possible.”

 

“Right, well, you are telling the court in your actions that there was representation made by Mr Sgambellone that the shop could do or should do or would do $30,000 at some particular time?---That’s correct.

You say you put a serious or you seriously relied on that statement Mr Sgambellone had made to you?---That and a number of others, yes.”

One must be careful not to draw out of an answer more than it can properly bear, but it seems to me from this last answer that Faulkner, as an honest witness, was unwilling to commit himself without qualification to the proposition that he really purchased in reliance on an assurance given by Sgambellone as to turnover.

 

Lockyer appeared to be even more sceptical about the shop’s potential to earn $30,000 per week. The following exchanges occurred in his cross-examination:

“If Mr Sgambellone says the shop has a potential of achieving a figure of $30,000, do you take that as a guaranteed figure?---No.

 

There are many factors in any business in any shopping centre that can affect a shop's turnover somewhere down the track?---Yes, sure.”

 

“Maybe the terminology that you have got in relation to 25,000 where it says, Most Likely Scenario.  Could you explain what you actually meant by Most Likely Scenario, please?---I think in most cases there is, in any business proposition, you always have a number of scenarios and worst case stands out and speaks for itself.  Most Likely Scenario is what I believe would be a likely position based on the information disclosed to us at that time.  I tend to feel that 25,000 per week was a figure which we could achieve.

 

A realistic sort of figure that could be achieved?---Well, keep in mind that we had not taken over the shop at that stage so 25,000 to us seemed to be quite possible and when I consider the circumstances surrounding the shop in the fact that demonstrations were denied basically in our first week and also Graeme's grey area of, you know, milking then that figure to me seemed to be quite realistic.”

 

“Would [Sgambellone] have mentioned a figure in the vicinity of 30,000?---I recall that figure being discussed, but as far as putting it as a most-likely scenario, that would be silly to put it down as a most-likely scenario.

 

Yes, and that's why you didn't do it in this particular projection on 6 March?---Well, looking at it as an investment you couldn't go in, you know, with false dreams.”

 

“No matter what you were told by Cut Price Deli, you had to make a realistic assessment of all facts before you decided to proceed with the purchase for [sic – from] Mr Skerritt, am I correct?---Yes.

 

You made realistic assessments on turnover?---Well, certainly, yes.  The turnover, one had to - based on historical information and what information was made available to us.  Like, where else would I get it?

 

You realistically believed the most likely scenario was possible to be achieved of $25,000?---I believe so, yes.  I was very confident about that.”

 

I have referred earlier to Lockyer’s evidence in relation to the predicted figures for 1991-1992 as giving on average a weekly turnover of $23,433.  Faulkner says he relied on Lockyer:

“You're placing a lot of reliance on what John's doing in this particular exercise?---John was a financial controller, he was an accountant, qualified accountant, he took more charge of the accounting side of things than I did, I certainly looked at other areas and I relied on John in the partnership.

 

So, you relied on a lot of things that Mr Lockyer told you?---I felt I could rely on the information he gave me.

 

Did you rely on more of the information that he told you than what you relied on Mr Sgambellone's advice?---Certainly John was part of the partnership, yes.”

 

On the basis of Faulkner’s evidence that Lockyer was the person who was making the decision as to whether the Business had sufficient potential, I find on Lockyer’s evidence above, alone,  that if representation (2) was made, it was not influential in the decision to purchase.

Faulkner says he and Lockyer had hoped to reach the $30,000 turnover per week level by the end of the first twelve months of trading, that is, by 30 June 1992.  Asked when he first became aware of the terminology “deceptive conduct”, Faulkner said:

“No, I can’t recall when.  Once again it all started in – our concerns were highlighted back in June 1992 and we became increasingly aware that perhaps things that were said previously were in fact not honoured or in actual fact and over a period of time we became more and more aware of other matters.”

The following further exchange occurred in cross-examination:

“So what were your concerns prior to 30 June, I'm sorry?---We were concerned that the business wasn't going to make the 30,000 a week.  The GP levels wasn't [sic] there.

 

Let us take each one:  you were concerned that you had not achieved $30,000 at that particular stage?---No, we were concerned that we wouldn't get to that eventually.

 

You formulated that opinion right then, had you?---In June 1992, just before June 1992?

 

Yes?---We were beginning to be doubtful about it, yes.

 

You had set yourself a particular time period to get to that 30,000?---Well, yes, obviously as quick as possible.

 

No, maybe even as long as 12 months?---Yes.

 

Maybe more?---No, 12 months I think.”

 

Later in cross-examination, Mr Faulkner said that as early as October 1991 he formed the opinion that a turnover of $30,000 per week might not be achievable:

 

“Okay, but at that stage, [October 1991], had you formulated [sic] an opinion that the turnover of $30,000 may not be achievable?---I can’t remember exactly when we formulated [sic] the opinion, but I would imagine October 1991, yes, perhaps.

You had been in the shop what, 4 months?---July, October, yes.

But you didn’t say anything to Cut Price Deli at that particular time that you hadn’t achieved or it wasn’t looking as if you were likely to achieve the $30,000?---I can’t recall a discussion like that.”

 

I find that Airberg understood some months before 31 May 1992 (the date three years before the commencement of this proceeding) that the Business was not a business with a potential turnover of $30,000 per week.  Faulkner and Lockyer were, according to the evidence, both working long hours in the shop, yet the weekly turnover figures, which they saw and which were in evidence, averaged only $21,088 for the period July 1991 to March 1992, with figures ranging between $17,835 and $25,158 (excluding figures of $27,138 and $14,701 for the Christmas and New Year period).  This level of turnover was maintained for the first two years of Faulkner and Lockyer’s management of the Business, with the average weekly turnovers for the 1991-92 and 1992-93 financial years being $20,629 and $21,039 respectively.  From the middle of 1993, however, the level of turnover decreased steadily.  This may have been due to Lockyer’s having ceased to work in the shop.  The average weekly turnover for the 1993-94 financial year was $18,871 and for the first 22 weeks of the 1994-95 financial year was $17,028.

 

Faulkner’s understanding by March 1992, if not earlier, that supposed representation (2) was falsified, tells against the submissions that the representation was made, or if made, relied upon.  As well, it is relevant to the special limitation period defence (see later).

 

(3)      That, following the purchase, the Business could, and would,  trade at a gross profit of 38 per cent of turnover and that rate could be increased

According to Faulkner, Sgambellone said to him:

 

“The [gross profit] often obtained is 38% but you can get more if you are prepared to work hard.”

 

In the Disclosure and Explanatory Memorandum given to Faulkner and Lockyer, the following statements appear:

 

“NOTES; Provided Cut Price Deli standards, operations, systems and manuals are adhered to and there are no unforeseen events that adversely affect the figures above that are beyond the control of cut price deli then the following general principles may apply:- 

1.         We have estimated that the Gross Profit achieved by franchisees can range between 30-40% and percentages outside these extremes are not common.

           

            ….

 

9.      GROSS PROFIT

We have estimated from information collected over the years from the franchise owners that the gross profit commonly achieved by them ranges between 30-40%.

            ….

For simplification purposes the definition of Gross Profit under this section is the difference between turnover and the cost of goods sold.

It is VERY IMPORTANT that you understand that the GROSS PROFIT can be affected by a number of factors.”

 

Faulkner states elsewhere that he and Lockyer were “told on countless occasions that the [gross profit] obtained is often 38 per cent but you can get higher if you work hard”.

 

According to Lockyer, at a meeting with Malovany and Sgambellone, one of them said to him:

 

“The Deli products gross around 38% to 44% [gross profit].  The cheese products gross around 50% [gross profit] and the chicken products gross around 32% [gross profit].  On those figures if you grossed $1,225,000 per annum, in ratios of around $1,003,000.00 on deli products, and $111,000.00 each on  cheese and chicken products, you would be looking at an overall [gross profit] of 38.5%  or $472,000.00 gross profit per annum.’

 

Lockyer states that he wrote those figures down as they were mentioned and he annexed to his affidavit a copy of his notes. Elsewhere, he states:

 

“My projections were all based on the fact and in conjunction with the representations made to us by Malovany and Sgambellone, that we could achieve 38% or higher and that 38% [gross profit] with a $30,000.00 per week turnover would yield a substantial profit.”

 

According to Malovany, the discussion of the rate of gross profit was between Sgambellone, Faulkner and Lockyer.  I accept that it was Sgambellone who spoke about that subject as it was within his knowledge rather than that of Malovany.  According to Malovany’s affidavit, the following conversation took place:

 

Sgambellone:    “How good a Gross Profit you will get will depend on how good an operator you are.  Our franchisees can get a Gross Profit between 30 to 40%.  It also depends on what competition you encounter and how you combat that.  Some franchisees choose to reduce the same price of products to attract extra customers and thus they run the shop at a lower Gross Profit but in the long run they get a better bottom line.  Some franchisees are exceptional operators who will experiment with everything – others make their own salads, marinades, value added chicken items and make their own marinade olives.  They get a higher Gross Profit than others.  Some franchisees tell me they can get over 40% but that’s plenty.  If you sell everything as per the Recommended Price List you should get approximately 38% and that’s what you would be happy with.  I believe Graham [Skerritt] gets 38% or better but you need to check with him.”

 

Malovany:        “In the Disclosure Document there is a specific section on all the factors that can affect the Gross profit.  You must understand this section fully.  Obviously many things in there will be covered with you in training.  We keep a register of shops’ Gross Profits which is simply calculated by sales less purchases over a given period of say three months from the information the franchisees give us usually on the weekly trading sheet or over the phone.  Unfortunately not everyone sends in the weekly trading sheets but I believe the latest average Gross Profit for NSW shops was approximately 37%.”

 

Sgambellone adopts this version of the conversation given by Malovany.  He goes on to deny that representations were made that Airberg should achieve a gross profit higher than 38 per cent.

 

According to Lockyer’s affidavit, one of the representations which Joe Rechichi made to him over the telephone on 13 February 1991 was recorded in Lockyer’s notes of that conversation, as follows:

 

“we can safely assume 39.5% [gross profit] in 1^st year (Price List will confirm this).  Many stores do better.”

 

In my opinion, this evidence is irrelevant to the issue of the representations that were made by Malovany or Sgambellone.  There is no evidence, and it is not suggested, that they authorised or approved of the making of that or any representation by Joe Rechichi.

 

In cross examination, Faulkner agreed that Skerritt had represented to him and Lockyer that they could obtain a gross profit of 38 per cent or more.  Faulkner relied on Lockyer to check that the percentage was supported by the evidence.  But Faulkner observed that Skerritt’s records showed gross profit “rarely less than 46 per cent on average over a 5½ month period”.  Lockyer’s “most likely” scenario, referred to earlier, was based on a gross profit of 39.4 per cent. In fact, in 1993-1994, when Faulkner was in the shop, he attained a gross profit of 40 per cent, and for the last full financial year of operation of the shop by Airberg (1994-1995), when a manageress was in charge, the gross profit was 42.5%.  For the 1991-1992 financial year, the first year in which the Business was operated by Airberg, the gross profit was 38.34 per cent. On these figures, if representation (3) was made, it was true.

I accept that Sgambellone spoke to Faulkner and Lockyer about the rate of gross profit but I do not accept that the conversation was in the terms deposed to by them.  I think that it is more likely that Sgambellone’s words were closer to those in the version set out by Malovany in his affidavit.

Sgambellone said in cross-examination that he believed the gross profit often obtained in franchise shops was 38 per cent. As for increasing the gross profit, the following exchange occurred in cross-examination:

 

“Did you believe in the first half of 1991 that that GP can be improved if the franchisee is prepared to work hard?---No, not by saying work hard, no.”

 

Whatever this means, given that the shop did achieve a gross profit of 38 per cent or more while being operated by Airberg, representation (3) is not shown to have been misleading or deceptive.

 

(4)      That the buying power of CPD was so strong that it was capable of achieving, and did in fact achieve, the best possible wholesale prices for the stock to be sold by the Business

(5)      That the Business would benefit substantially from the purchase of stock from suppliers recommended by CPD

These two representations and the evidence in relation to them are in substance identical. A claim by CPD that it achieved the best possible wholesale prices would only be relevant in the sense that CPD would implicitly be saying that, through its recommended suppliers, it would obtain the best possible prices, and, obviously, franchisees would benefit by purchasing from those suppliers.

 

According to Faulkner, Sgambellone said: 

 

“The buying power of Cut Price Deli is so good that we get the best prices in town.  The prices that you will be able to get from our recommended suppliers are the lowest available.  We talk to the suppliers every week and we get the best prices for you.  Our recommended price list is the deal we do for you with suppliers.  We have over 140 shops and that gives us great buying power.”

 

Further, according to his affidavit, Faulkner enquired about the competition from the “Coles Deli”, and Sgambellone responded:

 

“We can get a special buy price for you from the suppliers to beat them.  We can beat any competitor that way.”

 

According to Lockyer’s affidavit, either Sgambellone or Malovany said during one of the meetings:

 

“Cut Price Deli is substantial.  It has strong buying power and is capable of negotiating the best prices in town from  suppliers for its franchisees……The suppliers pay a rebate to be secured on the recommended list.  The recommended buying price is negotiated with the suppliers by Cut Price Deli and provided to the Franchisees  for their benefit.”

 

Malovany gives in his affidavit a lengthy account of the relevant conversation as follows:

 

 

Faulkner or Lockyer:    “How does the supplier’s rebate work?”

 

Sgambellone:                “We negotiate with approximately thirty different suppliers to get the best consistent quality product at the best prices we can negotiate and with the best trading terms with quick delivery and credits.  You can get just about everything you want from about ten of these suppliers.  Our biggest supplier is Primo.  We receive from these suppliers a rebate or commission of up to 4% for any product they sell throughout the group because we promote their product and give them business on a silver plate.”

 

Malovany:                    “The rebate is placed into general revenue and used for whatever we deem fit.  It can go to advertising, the field manager’s costs, motor vehicles, rental of premises or any overhead etc that we deem appropriate.”

 

Sgambellone adopts Malovany’s account.  Sgambellone denied saying CPD could obtain “the best prices in town”.  He agrees that he said:

“Cut Price Deli ha[s] a very good buying power”

 

and that he said:

“We talk to the suppliers every week and we got [sic – get] the best prices for you”.

 

There was no evidence that independent delicatessens could get better prices than could operators of Cut Price Deli shops.  In fact, Faulkner in cross-examination was not prepared to say that CPD or its franchisees did not “buy better than independent operators”.

 

It appears that individual Cut Price Deli franchisees could get better prices on particular occasions by dealing directly with both recommended and other suppliers, but this does not, in my view, falsify representation (4) or (5), properly understood, and, in any event, Faulkner and Lockyer knew this before they went into the business because Skerritt told them he had done the same thing.  Faulkner asserted that Airberg “attained, quite often, all the time, cheaper prices” by dealing directly with suppliers.  But Airberg did not attempt to prove this by evidence.  In any event, it is not inconsistent with representations (4) and (5) that Airberg, already having the advantage of the low prices available to Cut Price Deli franchisees, was able to negotiate individually for even lower prices for itself.  In order to falsify the representations, Airberg would have had to lead evidence of the prices at which delicatessens which were not part of the Cut Price Deli chain were buying their stock, and thereby enable the Court to compare those prices with the prices which CPD negotiated for its franchisees.  Airberg did not essay this task.

 

I think that the probability is that Sgambellone did say words to the effect that CPD’s buying power was such that its franchisees were able to purchase stock at relatively low prices and to be in a competitive position in this respect with other delicatessens such as Coles Deli. But Airberg does not submit, and the evidence does not establish, that this was untrue.

 

(6)      That a rebate of 4 per cent payable by wholesalers to CPD in respect of stock sold by them to the Business was not part of the cost price charged to the Business for that stock 

This alleged representation was a source of controversy.  Airberg’s complaint can be understood as a complaint that CPD persuaded the suppliers to add on the amount of the rebate to the prices being charged to franchisees, so that, in effect, franchisees were funding the amounts of “rebate” paid by the suppliers to CPD.

 

Faulkner gives the following account of a conversation:

 

 

Sgambellone:                “Suppliers pay 4% which we use to promote your shop in the form of posters and advertising on TV and radio and for the benefit of the whole group.  It goes back into the business to promote your business.  The 4% rebate is not added on to your buy price. The suppliers cover that.”

 

Faulkner or Lockyer     “So the rebate is not included in the recommended buying price that Cut Price Deli get?”

 

Sgambellone:                “No the suppliers pay us direct.”

 

Lockyer states in his affidavit that at meetings in mid January 1991 and May 1991 Sgambellone or Malovany said to Faulkner and himself:

 

“The suppliers pay a rebate to be secured on the recommended list.  The recommended buying price is negotiated with the suppliers by Cut Price Deli and provided to the franchisees for their benefit.”

 

Malovany’s version of the relevant part of the conversation was set out earlier (see p 62).

 

Malovany says that at no time was he, or Sgambellone in his presence, asked by Faulkner or Lockyer if the rebate was added to the recommended “buy” price.  Malovany denies that the commission increased the cost of the products.  He agrees that Sgambellone told Faulkner that CPD would use its buying power to attempt to obtain the best competitive quality products.  He refers also to the statement in the Disclosure and Explanatory Memorandum provided to Airberg which states in section 12 (B) “PURCHASING POWER”:

 

“The Franchisor provides a bulk buying plan that generally enables the purchase of delicatessen type products upon competitive terms compared with similar products purchased by other delicatessens from the same suppliers to the Cut Price Deli Group.

We have experienced that Cut Price Deli franchise owners, as a result of them being part of the Group, have negotiated occasionally in exceptional circumstances, prices that are cheaper than obtained by the Group.

A list of recommended suppliers together with the maximum retail sale prices chargeable for particular items are regularly provided to franchise owners. 

Cut Price Deli has a list of recommended suppliers with whom it endeavours for the benefit of franchise owners to obtain products at competitive prices and who can satisfy the strict supply criteria as to presentation, quality and delivery.  In order to ensure that Cut Price Deli standards are kept, Cut Price Deli reserves the right to test, at the franchise owner’s own expense, any stock bought from other than the recommended suppliers and to forbid the sale of any sub-standard product.

Cut Price Deli promotes by various means the product of recommended suppliers and as such receives a commission of up to 4%  on all purchases made by the Cut Price Deli Group.  This commission is credited to general revenue and is applied as Cut Price Deli thinks appropriate.”

 

For his part, Sgambellone adopts Malovany’s account of the conversation set out earlier.  Specifically, he adds that he was never asked by Faulkner or Lockyer if the rebate was added to the recommended buy price.  He also states:

 

“ … I disagree that a product’s price was increased by a commission.  Cut Price Deli tried to obtain product at the best competitive price for the group.  It is well known in the retail industry that a supplier of a commodity will pay a commission, rebate, fee or subsidy to a major client to promote that product.”

 

Sgambellone conceded in cross-examination that he told Faulkner and Lockyer that the 4 per cent rebate was not added on to the cost price of stock sold to them by suppliers.  However, he did not concede that the representation was untrue.

 

In assessing the evidence in relation to alleged representation (6), certain things are clear.  Everyone knew that the supplier was paying a rebate of 4 per cent to CPD.  It must have been understood that in arriving at the price at which it was prepared to sell to Cut Price Deli franchisees, a supplier would, at least theoretically and in a general sense, take into account all of its overheads and other costs including the 4 per cent rebate which it was to pay to CPD.  In the light of this, it is not clear precisely what representation (6) is intended to convey.  Apparently it is intended to amount to a representation that a supplier would exclude from consideration the 4 per cent rebate when arriving at the price which the supplier was deciding to offer to CPD.  I do not accept that Sgambellone made any representation to that effect. The representation was simply that CPD could and would use its buying power to negotiate competitive prices for its franchisees. Moreover, all that mattered to Cut Price Deli franchisees was whether they were able to buy at prices which were competitive with the prices at which competing delicatessens were able to buy competing stock.

 

It is not established that Sgambellone or Malovany made representation (6) in the only sense in which it can be significant.  In any event, the only evidence that was led on the matter shows that even in that sense the representation was true.  David Beverley, since 1985 the sales director of P & M Quality Smallgoods Pty Ltd trading as “Primo Small Goods” (“Primo”), made an affidavit on which he was not cross examined.  He said that in approximately 1985 Primo became a recommended supplier to the Cut Price Deli stores.  He states that the rebate which it paid to CPD “was a promotional cost and was an overhead expense” and “not part of the cost that made up the price of a product”.  He states that if Primo did not pay that promotional cost “the price of the product would not change” and that “[t]he only thing that would occur is [that Primo’s] net profit would increase or [its] loss would decrease”.  He also states that Primo had agents that delivered to various independent delicatessen proprietors and that they were paying prices at least 5% - 7.5% above the prices which the Cut Price Deli chain was paying.  His affidavit included the following paragraph:

“I believe that an independent deli operator may obtain a cheap price on an individual product line from time to time.  These one-off deals may come from an agent and not be from the principal supplier.  This could happen if an agent is overstocked with a particular line.  However, when an independent deli operator averages the price of that product over a year they will be 10% worse off than a Cut Price Deli franchisee.”

 

There is no evidence that the supplier’s rebate was directly added to the prices charged by suppliers to franchisees.  The most that can be said is that it would have been taken into account as a general overhead that had to be recovered. In other words, there is no evidence that the cost prices were calculated and then increased by four per cent to cover the supplier’s rebate.  Faulkner simply asserted in cross-examination that he discovered that the supplir’s rebate inflated the prices paid by franchisees through “some conversations with a number of suppliers”.

 

According to Lockyer,

 

“it became quite apparent over a period of time when one was in the franchise that [the rebate] was a hidden cost which was built into the product…. it was just a common thing which many a franchisee would have conceded that it was a cost which was sitting there and someone had to bear it and it was coming through on our buying prices.”

 

But neither Faulkner nor Lockyer inquired of suppliers as to how they arrived at their prices to Cut Price Deli franchisees, and Airberg led no evidence from them.  There is no probative evidence to challenge the claim, referred to above, by David Beverley, the Managing Director of Primo Smallgoods, one of the main suppliers to the CPD chain, that the four per cent rebate did not increase the price of stock sold to franchisees.

 

 

(7)      That the funds generated by the 4 per cent rebate were, and would be, applied to promoting (by way of advertising) the business of Cut Price Deli franchisees

The pleading in subpar 10 (a) of the third amended statement of claim is:

 

“(a)     The Rebate that was paid to [CPD] by the recommended suppliers would be used by [CPD] to promote the business of [Airberg] by advertising by posters on television and radio.”

 

Again, there is a question as to precisely what representation (7) as pleaded means. Is it that the 4 per cent rebate which CPD obtained on purchases made by Airberg alone would be applied in promoting the Business by advertising? If so, the scheme as said to have been represented was one under which CPD was accountable to each franchisee for the use of the 4 per cent rebate obtained by CPD in respect of that particular franchisee’s purchases. To express the matter differently, the scheme would be one under which CPD would not be at liberty to use for the benefit of Airberg, the 4 per cent rebate obtained in respect of purchases made by any other Cut Price Deli franchisee, and vice versa. Perhaps what is meant is that the 4 per cent rebate paid to CPD in respect of the purchases made by all franchisees was to be used by CPD exclusively for the benefit of the businesses of all franchisees. This is a more realistic construction of the pleading in the light of the background facts and I adopt it.

 

According to Faulkner’s affidavit, Sgambellone said:

 

“Suppliers pay 4% which we use to promote your shop in the form of posters and advertising on TV and radio for the benefit of the whole group. It goes back into the business to promote your business.”

 

Faulkner says that he read in the Disclosure and Explanatory Memorandum:

 

“Cut Price Deli promotes by various means the product of recommended suppliers and as such receives a commission of up to 4% on all purchases made by the Cut Price Deli group. The commission is credited to general revenue and applied as Cut Price Deli thinks appropriate.”

 

This made it clear that CPD did not maintain a separate “rebates account” devoted to promotion of the businesses of franchisees. However, Faulkner states that he assumed the passage meant that CPD had an absolute discretion as to “which mode of advertising the 4% commission was spent on”, and believed that he was still being assured that the commission would be “wholly spent on advertising and promotion”.

 

According to par 27 of Faulkner’s affidavit, Sgambellone said:

 

“We have constant advertising and promotion programmes, including radio and TV, weekly specials, signs and the advertising rebate goes straight to promoting the goodwill of the shop, and the group as a whole.”

 

According to Malovany’s affidavit, he (Malovany) said:

 

“The rebate is placed into general revenue and used for whatever we deem fit. It can go to advertising, the field manager’s costs, motor vehicles, rental of premises, or any overhead etc that we deem appropriate.”

 

Elsewhere in his affidavit, Malovany states that Faulkner was told that the commission “went to general revenue and as such the commission/rebate was applied to all sorts of expenditures”.

 

Malovany agrees that Sgambellone said:

 

“We do a lot of advertising for the group. We use TV, radio, newspapers, pop (a reference to posters at the shop hanging from the bulkhead) magazines and anything else we feel gives us good coverage subject to its cost effectiveness. I like TV but is very expensive [sic – it is]. How much we will spend will depend on our budget. But it’s usually over $1,000,000 a year. We send you the pop signs which covers weekly specials. Many people say that a person doesn’t hop in a car and go to a centre because they see a TV commercial. It’s just they do their normal shopping at a centre and subconsciously recall our corporate image. That’s why the pop signs are so bright and attractive and entice the customer to stop and look at what’s on special.

Franchisees don’t spend much on advertising. If they do a few letter box drops a year it’s cheap.”

 

Malovany:        “We have a media person who can help you with a story on you as the new owners for your local paper once you’ve gone into the shop.”

 

            Sgambellone:    “In your centre you’ll pay a promotions amount as part of your rent. The Centre Manager and Marketing Manager will come up with good ideas to generate customers to the centre. You’ve already got the customers in the centre. You have to stop them at the counter.”

 

Sgambellone adopts Malovany’s account of the conversations.

 

In my view, the most that can be said is that Faulkner and Lockyer were being assured that the 4 per cent rebate would be of benefit to them in common with other franchisees. The 4 per cent rebate was being paid by suppliers to CPD on all purchases, not only by franchisees, but also by CPD itself for its company-owned stores. I do not accept that Faulkner and Lockyer were told or led to believe that the 4 per cent rebate in its entirety, or even in its entirety in respect of purchases by franchisees alone, was somehow “quarantined” and used exclusively for the promotion of the franchisees’ shops or for the promotion of those shops and company-owned shops. They were not told, or otherwise caused by any conduct of Sgambellone or Malovany, to believe that the whole or any particular proportion of the rebate was to be applied in the promotion by advertising of the franchised shops generally or of the Business in particular. They were certainly told that CPD spent money on advertising and promotion for the benefit of franchised businesses including the Business. They were given the impression that as a result, they would need to spend less on advertising than they would otherwise have to do.

 

There were two forms of promotion: the promotion of the Cut Price Deli chain generally and the promotion of individual shops.  Faulkner and Lockyer were told that CPD looked after the former to the advantage of all shops. One way of regarding matters was to say that this was a benefit which franchisees derived by combining their buying power through CPD: they were able to buy at competitive prices and CPD promoted their businesses. But it is altogether another matter to say that CPD was assuring Faulkner and Lockyer that the 4 per cent rebates were or would be dedicated to promotion, by advertising, of the Cut Price Deli shops generally or, more particularly, of the franchised operations, or, even more particularly, of the Business.

 

Sgambellone simply denied even saying that some of the money earned through the four percent rebate would be spent on advertising for the benefit of the group.

 

In my view, the evidence does not establish the making of this representation.

 

(8)      That the Business’s wage costs as a percentage of sales could, and would, be reduced from 10 per cent to 7 per cent if Faulkner and Lockyer worked full time in the Business

According to Faulkner’s affidavit, Sgambellone said to Lockyer and himself in the presence of Malovany:

 

“If you work hard, you can get the wages down, and then there is more money for you. It depends on how hard you want to work. With the two of you working in there, you can get it down to 7% of sales. … ”

 

Faulkner read in the Disclosure and Explanatory Memorandum:

 

“Wages for staff vary between 7-10% of takings …. If a husband and wife team correctly operate a location the wages payable for staff would be at 8.5% of turnover.”

 

Faulkner continued by stating that he believed that the statement meant that a proper wage could be still earned for the labour put in by a team of two and that the wages would be 8 per cent, or less, of turnover.

 

Malovany states that Faulkner’s evidence does not accurately reflect what was said and that the relevant part of the conversation was as follows:

 

Sgambellone:                “Wages is an area that the owner operator has direct control. In company shops one of the reasons for losses is because our managers spend far too much money on staff. I’ve owned other businesses in my time and I know how important good staff are but they will cost you. You as owner operators have to put in the long hours and effort yourself [sic]. It’s no good you working out the back of the shop on paperwork or the cool room and you are paying extra staff to serve. You can do the paperwork later. The customer needs to be served. They come first and the owner usually gets more dollars out of customers than a staff member. Will your wives be working with you?”

 

Faulkner or Lockyer:    “Yes we want to involve them if we can for some of the time.”

 

Sgambellone:                “That’s great. With all of you working you’ll get the wages down to a low level. I’ve been told by some franchisees who really work hard starting early and involving their family that they can get the wages cost down to 7% of turnover. Sometimes a shop can increase its turnover and  no extra wages are incurred if the staff work that little bit harder. In company shops if someone’s ill for the day they ring up a replacement and you are paying for two people. An owner operator works harder than a staff member and he or she should be the equivalent of two staff members.”

 

Malovany:                    “Unfortunately we also have some franchisees who decide they must take extra time off to socialise or play golf. It’s rampant in Queensland with everyone playing golf on Tuesdays. A wages bill can be as high as 14% but usually we say wages can range between 7-10% with 8.5% to be expected, if two operators work very hard. Working in the shop is not where an owner operator can say they get an award wage. You get what is left after all expenses are paid and the bottom line figure depends on a whole number of factors but most importantly how you work the shop. Many franchisees get caught with public holidays paying 2½ to 3 times the award rate. These days are when all the family and friends should be working.”

 

Sgambellone adopts Malovany’s version of the conversation.

 

The “wages” for staff being spoken of is a reference to wages of persons other than the proprietors who were to be employed in the Business. Clearly, the more proprietors working in the Business, the less the wages bill. In the Disclosure and Explanatory Memorandum, the item “Wages” was shown as 10 per cent, and a note to this item read as follows:

 

“Wages for staff vary between 7-10% of takings – it is noted that no wages are allowed in this figure for the owners and also that the correct mix of juniors and seniors must be maintained together with proper rosters. It is believed that if a husband and wife team correctly operate a location that the wages payable for staff would be approximately 8.5% of turnover. This may vary slightly from State to State owing to different regulations.”

 

I do not accept that Sgambellone represented simply that if Faulkner and Lockyer worked full time the wages would be reduced to 7 per cent of sales. The evidence as a whole shows that CPD made it clear that whether this was achieved depended upon “how hard” the proprietors worked and on other factors. I think that a fair construction of the whole of the evidence is that 7 per cent was held out as a possibility which was achieved by some franchisees and which might be aimed for by Airberg but that the achievement of it was not assured.

 

In cross-examination, Faulkner repeated his claim that Sgambellone told him that wages could be reduced to seven per cent of turnover. He did not accept that the statement was qualified by Sgambellone’s saying something along the lines of, “if you [Faulkner], Mr Lockyer and both your wives are working in the shop”.

Sgambellone denied saying wages could be reduced to seven per cent of turnover if both Faulkner and Lockyer were working in the shop, although it is not clear whether he said wages could be reduced to that level if Faulkner, Lockyer and both their wives were working in the shop.  Faulkner says he and Lockyer told Sgambellone that their wives might work in the shop but indicated that “future circumstances would dictate” whether they would in fact do so.

Sgambellone admits that, at the time, he did not believe that wages could be reduced to seven per cent of turnover if Faulkner and Lockyer were working in the shop without their wives.

I find that a representation as formulated by me earlier was made, but that the evidence does not falsify it.

 

(9)      That the Business would be sufficiently profitable to support two families

According to par 11 of Lockyer’s affidavit, during one of the meetings, Sgambellone or Malovany (Lockyer cannot recall which) said to him and Faulkner:

 

“By achieving a gross profit of 38% or more, Hornsby will yield a substantial income capable of supporting two families.”

 

Faulkner does not give evidence that this was said. Sgambellone was cross-examined in relation to the matter. The cross-examination was as follows:

 

“Did you say to Mr Faulkner and Mr Lockyer that the Cut Price Deli shop at Hornsby under their ownership would support two families? – When you say under the ownership, what does the description of ownership mean?

OK, did you say to Mr Faulkner and Mr Lockyer, the two family men, that with the two of you working in the shop Hornsby is a shop that will support two families? – No I didn’t tell them in those words.

What did you say? – They didn’t tell me like that, sorry, that’s what –

No, I’m asking you whether that’s what you told them? – I didn’t. They told me there was going to be two families working in the shop and I asked them if their wives were going to be included and they said, yes, from time to time they’re  going to be working in the shop.

And did you say to them, well, Hornsby is a shop that if you work hard it’ll support two families? – with the wives in there, yes.” 

 

I think that the proper construction of the evidence is that Sgambellone represented that with the four individuals, the two Lockyers and the two Faulkners, working hard and full-time in the Business, the Business would support two families. I think that a proper construction of the evidence is, further, that he represented that if the two wives worked to a certain undefined extent from time to time and the two husbands worked hard full time, the Business would support two families. The two families which it would support are not defined, nor is the level of support. At its strongest level in favour of Airberg, the representation was that if Faulkner and Lockyer worked hard full time in the Business and their two wives worked to a certain undefined extent from time to time in it, the Business would support two families of undefined size at an undefined standard of living. On the evidence, I am not satisfied that the representation as formulated by me is shown to have been false.

 

(10)  That as a rule of thumb, the sale price of the Business would be $20,000 per $1,000 of turnover

Faulkner relies on a passage in the Disclosure and Explanatory Memorandum which was as follows:

 

“PURCHASE PRICE, RE-SALE PRICE AND MONETARY REQUIREMENTS

PURCHASE PRICE

The purchase price of a new Cut Price Deli franchise is generally in the order of $240,000.00 to $300,000.00 of which approximately $140,000.00 to $160,000.00 would be expended on equipment.

RE-SALE PRICE

Outlets have been sold at prices up to $400,000.00. The highest sale price of a Company location was $600,000.00 (the highest weekly turnover that had been achieved was $30,000.00). The long-standing “rule of thumb” for calculating a resale price appears to be $20,000.00 sale price for every $1,000 of weekly turnover.

Urgent franchise owner’s sales and sales of Company owned shops may not coincide with the rule of thumb principle.

We have over the last few years maintained a register of all shop sales. This register reveals three categories of sales, that is, equal to, greater than, and less than the “rule of thumb” principle and can be examined at the Group Office.”

 

Unlike the other representations, this one was made exclusively in writing. In my opinion, the writing meant no more than that there was evidence of past sales suggesting that a buyer of the Business might expect to re-sell it at a price equal to $20,000 per $1,000 of weekly turnover. However, even this representation was heavily qualified by the matters mentioned in the passage set out above.  Moreover, while the passage made it clear that there was a body of evidence supporting the “rule of thumb” mentioned, it invited readers to inspect the “shop sales register” themselves and to draw their own conclusions. The passage did not suggest that the only conclusion available was the rule of thumb mentioned. In any event, the evidence does not establish that the shop sales register did not support that rule of thumb.

 

(11)  That by becoming a Cut Price Deli franchisee, Airberg would be in business for itself but not by itself and that the Cut Price Deli organisation was more than a business arrangement and was a “family”

I find that statements of this vague kind were made. They were obviously in the nature of self-promotional puff.  They were incapable of having the legal significance sought to be given to them.  In any event, insofar as they were capable of being “true” or “false”, they were true. Airberg was indeed to be in business “for itself but not by itself” in the sense that the Business was its own but it was to be part of an organisation of franchisees. Ironically, the very disputation which later broke out between franchisees might be said to demonstrate that the arrangement was akin to a “family”. I need say nothing further of representation (11).

 

It is convenient to summarise my findings in relation to the 11 representations discussed.

(1)               If made, not shown to have been false.

(2)               Not satisfied made or that Airberg relied on it.

(3)               If made, not shown to have been false.

(4)(5)   Probably made, but not shown to have been false.

(6)               Not made in the only sense in which is significant; in any event, not shown to have been false.

(7)               Not satisfied made.

(8)               Not satisfied made.

(9)               Not made in the terms pleaded; the representation that was made, not shown to have been false.

(10)           Not made in the terms pleaded; the representation that was made, not shown to have been false.

(11)           Probably made but too vague to have legal significance; in so far as capable of being true or false, not shown to have been false.

 

These conclusions also dispose of the cause of action in negligence.  It is not necessary, therefore, for me to decide whether CPD owed the pleaded duty of care necessary to ground that cause of action.

 

I conclude this section with the following general observations.  Although they had not operated a retail business previously, Faulkner and Lockyer had both been employed in the finance industry.  They made their own investigations.  They had numerous discussions with Skerritt in particular.  In my opinion, probably what occurred is that only after the lapse of a very long period did Faulkner become disillusioned with the Cut Price Deli franchise and with Sgambellone, Rechichi and Malovany and see that his high goals were unattainable. He came, apparently belatedly, to share the disillusionment which Lockyer had felt in November 1992 and throughout 1993.  Lockyer had deserted him.  This meant that one of the principal bases on which he had bought was gone.  Then he too abandoned the Business to a manager.

 

The probability is that when he sought legal advice as to any remedy which might be available for the predicament in which he found himself, he was asked to give a detailed account of the events of the first half of 1991. I think that probably his legal advisers analysed this account with him and seized upon anything that CPD had told him that could be said to have been misleading or deceptive. The great lapse of time from 1991 to 31 May 1995 without complaint is a strong factor which leads me to conclude that Faulkner was not induced to contract by any misrepresentations which may be found to have been made.

 

CAUSATION OF LOSS AND DAMAGE

Airberg’s primary submission is that it suffered loss “when the business ultimately failed in 1995”.  More elaborately, Airberg submits that it was upon the ultimate failure of the Business in October 1995, and no earlier, that its cause of action under s 52 of the TP Act and s 42 of the FT Act accrued. This submission was made in response to the submission that the commencement of the present proceeding on 31 May 1995 was outside the three year limitation period fixed s 82 (2) of the TP Act and s 68 (2) of the FT Act.  If this primary submission of Airberg’s is to be accepted, there are, as noted below, many potential causes of that loss.

 

Airberg’s alternative submission is that “the earliest possible date from which time could run is June 1992”. It submits:

 

“that it was not until the aftermath of the June 3 1992 meeting between Faulkner, Lockyer, Malovany and Sgambellone and the decision by the applicant to comply with the Cut Price Deli “system” that the ultimate failure of the Hornsby franchise could have been ascertainable.”

Is not clear to me why “the aftermath of the 3 June 1992 [acrimonious coffee shop] meeting” should mark the suffering of loss and the commencement of the running of the limitation period.  What is the “aftermath” to which the submission refers? On the day of the meeting, 3 June, Airberg faxed Sgambellone and Malovany:

 

“Please note that as a result of our discussion this morning, we are compelled to urgently request to you a meeting to discuss the level of profitability of future specials.  We believe that the hasty nature of our discussions this morning did not assist in the general improvement in our store’s profitability and a more appropriate time and venue is arranged.

Thanking you.”

 

Also on the same day, CPD wrote to Faulkner and Lockyer, calling upon them to adhere to CPD’s system, including its recommended purchase and pricing system.  By November 1992, Lockyer was participating in the activities of the complainant franchisees.

 

It is clear, on the evidence, that Faulkner and Lockyer knew by the end of 1991 that the Business was not achieving a turnover of $30,000 per week.  The present alternative submission by Airberg seems to be that, nonetheless, they could not reasonably have known at that time that this necessarily entailed loss and that it was only in the second half of 1992 that they knew, and could reasonably be expected to have known, that Airberg had suffered loss.

 

I was not taken to any particular evidence from which I should draw this inference and I do not draw it.  But even if I were to draw it, the fact of present relevance remains that Airberg continued to carry on the business until 7 October 1995, by which time the following had occurred:

 

·        Further “demonstrations” in the Centre had been disallowed by the Centre Manager at a cost to the Business of sales of $1,800 per week.

 

·        Litigation had been brought against CPD by franchisees in Queensland and Victoria and had received publicity.

 

·        There had been a falling out between Faulkner and Lockyer, Lockyer had ceased working in the Business as from about April 1993 and the Lockyers had finally sold out to the Faulkners in March 1994.

 

·        The Franchisees Group Inc had been formed in November 1992 and had been disparaging CPD.

 

·        There had been the adverse “A Current Affair” programme on 13 July 1994 and the adverse article in “The Sydney Morning Herald” on 24 June 1995.

 

·        The lease and sub-lease had long since expired and Airberg was without tenure, holding over as a month to month tenant and franchisee.

 

·        About October 1994, Faulkner had installed a manageress and from that time down to Airberg’s abandonment of the Business on 7 October 1995 he had not worked in the Business, with consequent increase in overheads and lack of “proprietor involvement”.

 

·        There had been a decline in the patronage of the Centre as a whole, as shown by “door counts”.

 

·        There was uncertainty over the proposed renovation of the Centre and the effect a renovation would have on existing businesses.

 

In the light of these intervening events, I am not persuaded that any losses which Airberg ultimately suffered were caused to any extent by the supposed misleading and deceptive conduct of Sgambellone and Malovany in early 1991, some four to five years earlier.

 

LIMITATION DEFENCE

In view of the conclusions already reached, it is not necessary for me to consider the limitation defence.  But in view of the fact that the parties addressed it in detailed submissions I will deal with it, but only insofar as it touches representation (2), the most significant of the alleged representations.

The present proceeding was commenced on 31 May 1995.  Pursuant to subs 82 (2) of the TP Act and subs 68 (2) of the FT Act, therefore, it was brought out of time if the causes of action for contravention of s 52 and s 42 of those respective Acts accrued prior to 31 May 1992.  Of course, each representation would give rise to a separate cause of action and it would be necessary to consider the supposed representations individually to determine when the respective causes of action accrued.  However, if the representations were made, they were made, relevantly, in early 1991 and if they were acted upon, they were acted upon on 24 April 1991 when Airberg contracted to purchase and again on 1 July 1991 when Airberg completed the purchase.  In respect of each representation, therefore, the crucial question would be when loss or damage was suffered as a result of reliance upon it.

There are four possible points in time at which it might be said Airberg’s cause of action for misleading and deceptive conduct in relation to the supposed representation that the Business could and should produce a turnover of $30,000 per week accrued:

1.                  24 April 1991 or 1 July 1991 when Airberg respectively contracted to purchase, and completed the purchase of the Business;

2.                  late 1991 or early 1992 when Faulkner and Lockyer became aware that the Business was incapable of producing turnover of $30,000 per week;

3.                  shortly after July 1992 when the accounts for the first year’s trading by Airberg were produced;

4.                  October 1995 when Faulkner finally abandoned the Business.

An important question to consider in selecting the appropriate date is what loss or damage is claimed to have been suffered.  If the loss or damage claimed is that the Business was not worth what Airberg paid for it, then the loss was suffered on 24 April or 1 July 1991.  It would not be to the point that Airberg was not aware then, or at any time during the running of the limitation period, of the existence or extent of its loss: Hawkins v Clayton (1988) 164 CLR 539.

However, in cases where what is bought does have some value, it has been said that it is not necessarily correct that time begins to run at the time of purchase.  For example, in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, Brennan J said:

“A plaintiff may suffer economic loss or damage in a number of ways: by payment of money, by transfer of property, by diminution in the value of an asset or by the incurring of a liability.  Whether loss or damage is actually suffered when any of those events occurs depends on the value of the benefit, if any, acquired by the plaintiff by paying the money, transferring the property, having the value of the asset diminished or incurring the liability.  If the plaintiff acquires no benefit, the loss or damage is suffered when the event occurs.  At that time, the plaintiff’s net worth is reduced.  And that is so even if the quantification of loss or damage is not then ascertainable.  But if a benefit is acquired by the plaintiff, it may not be possible to ascertain whether loss or damage has been suffered at the time when the burden is borne – that is, at the time of the payment, the transfer, the diminution in value of the asset or the incurring of the liability.  A transaction in which there are benefits and burdens results in loss or damage only if an adverse balance is struck.  If the balance cannot be struck until certain events occur, no loss is suffered until those events occur: See Swingcastle Ltd v Gibson [1990] 1 WLR 1223, at p 1236; [1990] 3 All ER 463, per Sir John Megaw.  The quantification of the diminution in value of an asset or of a liability incurred or the value of any benefit acquired may not be ascertainable at the time when the burden of the transaction is borne.  In that event, the suffering of any loss cannot be said to occur before it is reasonably ascertainable (not before it is ascertained) that the burdens which the plaintiff has borne are greater than the value of the benefits that the plaintiff has acquired or will acquire.  In other words, no loss is suffered until it is reasonably ascertainable that, by bearing the burdens, the plaintiff is ‘worse off than if he had not entered into the transaction’.

…

There is a sense in which it is right to say that, when a misrepresentation induces a plaintiff to enter into a transaction in which the plaintiff suffers a loss, the loss is suffered once the plaintiff becomes bound to the transaction.  The die is then cast and what follows can be viewed as evidence proving the extent of the loss suffered when the first binding step was taken.  That may be the correct analysis when the first binding step is such that, whatever extrinsic circumstances may transpire, a loss must be suffered.  For example, when an asset is purchased for a price and, by reason of an inherent defect, it is worth less than the price paid (See Potts v Miller (1940) 64 CLR, at p 298), a loss may be said to be suffered when the plaintiff pays the price or becomes bound to pay the price.  Similarly, when an agreement imposes on a plaintiff an obligation to pay an amount of money without acquiring a benefit and the amount to be paid is quantified by no factors extrinsic to the agreement save the passing of time, it is right to say that the loss is suffered when the agreement to pay becomes binding on the plaintiff.  But when the actual loss that a plaintiff suffers depends not only on the making of an agreement but also on circumstances extrinsic thereto, the loss is not suffered until those circumstances have transpired and, in benefit and burden cases, not until the loss is ascertainable.” (at 537-538 – emphasis supplied)

 

See also Mason CJ, Dawson, Gaudron and McHugh JJ at 527-533.

This reasoning was applied by a Full Court of this Court in Karedis Enterprises Pty Ltd v Antoniou (1995) 59 FCR 35 (“Karedis”), a case with some factual similarity to the present one.  In that case, the applicants had leased premises from the respondents for the purpose of establishing a café on the basis of representations made to them by the respondents as to the likely turnover of the café.  Burchett and Hill JJ said (at 42):

“The present is a case where the mere entry into the lease produced only a situation where the Antonious had the potential to suffer loss.  That loss could only be calculated by reference to receipts and outgoings of the business over time.  Certainly it could not be said at the time the lease was entered into that they had actually incurred loss or damage as distinct from potential or likely damage.  In the language of the majority in Wardley [at 527]:

‘…the disadvantageous character or effect of the agreement [could not] be ascertained until some future date when its impact upon events as they unfold[ed] [became] known or apparent … It was only when their loss was ascertained or ascertainable that it could be said that they had suffered loss.’”

 

Similarly in this case, it could be said that the loss was not suffered upon the making or completion of the contract of purchase, because it could not then have been known whether or not the Business was capable of producing turnover of $30,000 per week.  Viewed in this light, Airberg’s claim is not that the Business was not at the outset worth what it paid for it.  Rather, its claim is that the Business was not as successful as had been represented, and therefore produced losses instead of making profits.  The cause of action therefore accrued at the later time when it became apparent that the Business was incapable of producing the represented results.

 

One alternative submission of senior counsel for Airberg was that the third possibility referred to above gives the correct date, that is, when the results of the first year’s trading became available.  However, in Karedis it was held that such an inflexible approach should not be adopted: at 43.  Rather, the question should be,

 

“at what time could it be said that it was reasonably ascertainable that [Airberg] would suffer loss”? (ibid)

 

See also Sackville J at 48.

 

I have found that Airberg, through its officers, realised that $30,000 turnover per week could not be achieved some months before 31 May 1992, certainly by early April 1992, by which time they had the turnover figures for nine months.  In my view, the cause of action for contraventions of the TP Act and the FT Act based on alleged misrepresentation (2) is statute barred.

 

What I have said above is sufficient to dispose of the fourth possible date of accrual of the cause of action referred to above.  There is no special significance in the date when Faulkner finally abandoned the Business.  Moreover, if that were the correct date, Airberg did not have cause of action on 31 May 1995 when the proceeding was commenced and the problems associated with causation of loss or damage to which I referred earlier are all the more obvious.

 

CONCLUSION

I will publish these Reasons and give the parties an opportunity to make submissions as to the rejoining of CPD.

 

I certify that this and the preceding eighty one (81) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren

Associate:

Dated:              3 August 1998

Counsel for the Applicants:	Mr J J Graves SC with Mr M Pesman
Solicitor for the Applicants:	Julie A Orsini
The Second Respondent appeared in person except on the afternoon of 23 June 1998 when Mr N F Francey of counsel appeared for him
The Third Respondent appeared in person
The Fourth Respondent appeared in person
Date of Hearing:	9,10, 11, 15, 16, 17, 18, 19, 22, 23 June 1998
Last submission received:	26 June 1998
Date of Judgment:	3 August 1998