FEDERAL COURT OF AUSTRALIA

 

Sanders v Glev Franchises Pty Ltd [2002] FCA 1332

trade practices – franchise agreement – whether pre-contractual representations constituting misleading and deceptive conduct – whether representations made – whether commendatory puffery – whether reasonable grounds for representation as to future matter – whether representations as to past and present matters untrue – reliance – collateral warranties – negligent misstatement

Trade Practices Act 1974 (Cth), s 51A, s 52, s 82(1)

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

Ting v Blanche (1993) 118 ALR 543 discussed

Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR (Digest) 46-179 referred

Banque Commerciale SA, en liquidation v Akhil Holdings Limited (1990) 169 CLR 279 applied

Cummings v Lewis (1993) 41 FCR 559 applied

Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525 distinguished

General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164 applied

Pappas v Soulac (1983) 50 ALR 231 followed

Hanave Pty Ltd v LFOT Pty Ltd [1998] FCA 1051 referred

Kaytonruby Pty Ltd v Glev Franchises Pty Ltd [1998] FCA 650 referred

Sykes v Reserve Bank of Australia (1998) 88 FCR 511 applied

Gardner Corporation Pty Ltd v Zed Bears Pty Ltd [1999] WASC 1043 referred

Lobendhan v West Perth Investments Pty Ltd [1998] FCA 1257 referred

Holz v Lane [2002] WASCA 164 referred

Tomlinson v Cut Price Deli Pty Ltd (1995) ATPR (Digest) 46-151 referred

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 applied

Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 applied

Fried v Dixie Holdings Pty Ltd [2000] FCA 1048 referred

Gould v Vaggelas (1985) 157 CLR 215 applied

Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 applied

Tepko Pty Ltd v Water Board (2001) 206 CLR 1 referred

San Sebastian Properties Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 referred

JOHN EDWARD SANDERS & ANOR v GLEV FRANCHISES PTY LTD & ORS

VG 418 of 1992

 

KENNY J

29 OCTOBER 2002

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 418 OF 1992

 

BETWEEN:	JOHN EDWARD SANDERS First Applicant   CHRISTOPHER ZIENKIEWICZ Second Applicant
AND:	GLEV FRANCHISES PTY LTD First Respondent   GABRIEL CHRISTOU Second Respondent   LEO REYES Third Respondent
JUDGE:	KENNY J
DATE OF ORDER:	29 OCTOBER 2002
WHERE MADE:	MELBOURNE

 

THE COURT ORDERS THAT:

 

1.         The application be adjourned to a date to be fixed.

2.                  On or before 12 November 2002, the parties file and serve proposed minutes of orders and any submissions they wish to make in support of the minutes. 

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

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 418 OF 1992

 

BETWEEN:	JOHN EDWARD SANDERS First Applicant   CHRISTOPHER ZIENKIEWICZ Second Applicant
AND:	GLEV FRANCHISES PTY LTD First Respondent   GABRIEL CHRISTOU Second Respondent   LEO REYES Third Respondent

 

JUDGE:	KENNY J
DATE:	29 OCTOBER 2002
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

a:  introduction

1                     This proceeding arises out of the purchase, in 1990, of franchises by the applicants, John Sanders and Christopher Zienkiewicz, and Russell Taylor (who is not a party to the proceeding).  The first respondent, Glev Franchises Pty Ltd (“Glev Franchises”) is the franchisor for a chain of pizza outlets known as “Pizza Haven”.  The applicants have claimed that the respondents made numerous misrepresentations during the pre-contractual negotiations and that these misrepresentations induced them to enter into franchise agreements, as a result of which they have suffered loss and damage. 

2                     By one of these franchise agreements, Glev Franchises conferred a franchise to operate a Pizza Haven business at Bentleigh (a suburb of Melbourne).  This is referred to below as the Ormond franchise.  The alleged misrepresentations concern only the applicants’ purchase of the Ormond franchise. 

3                     Pursuant to the Ormond franchise agreement, the applicants set up and began operating a Pizza Haven store at Bentleigh in late October 1990.  The business was unprofitable, and two years later the applicants sold the franchise back to Glev Franchises, having allegedly incurred losses attributable to the respondents’ misdescription of the potential of the Ormond store and the Pizza Haven chain.

b:  the case as pleaded

4                     An initiating application commencing this proceeding was filed on 6 November 1992.  It is unnecessary to set out the protracted procedural history of the litigation.  It suffices to note that there have been about 10 versions of the statement of claim, and consequential and non-consequential amendments to other pleadings. 

5                     The applicants have put their claim for loss and damage in a number of ways.  They have alleged (a) misrepresentations that were misleading and deceptive in contravention of s 52 (read with s 51A) of the Trade Practices Act 1974 (Cth) (“TPA”); (b) breaches of warranties and collateral warranties; and (c) negligent misstatements.  The latest statement of claim also included a claim for damages for breach of the Ormond franchise agreement but this claim was not ultimately pursued.

6                     The substance of the alleged representations allegedly made by the respondents was that the Ormond franchise would be profitable and a good investment.  These representations are the basis for all the causes of action pleaded by the applicants against the respondents.  The details of these representations are set out below.

7                     The applicants relied primarily, however, on s 82(1) of the TPA, read in conjunction with s 52.  Section 52 of the TPA prohibits a corporation from engaging in conduct in trade and commerce that is misleading or deceptive, or that is likely to mislead or deceive.  The words “engage in conduct” include the making of representations about a past, present or future matter.  It was conceded, or not in issue, that the first respondent was a corporation engaged in trade and commerce, and that Gabriel Christou was a director of the first respondent.  The applicants claimed that the first respondent, principally by Gabriel Christou, contravened s 52 by making certain representations with respect to past, present and future matters. 

8                     In order to make out their case under s 52 in respect of each pleaded representation, the applicants needed to establish (1) that the representation was made; (2) that, viewed objectively and subject to s 51A (see below), the representation was misleading or deceptive or likely to mislead or deceive; and (3) that they relied on the representation in the sense that it operated as an inducement for them to enter the Ormond franchise agreement.  In order to be compensated for any loss and damage under s 82(1) of the TPA, the applicants needed to establish a causal connection between the respondents’ conduct and the loss for which they sought compensation:  see, e.g., Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, at 525-6 per Mason CJ, Dawson, Gaudron and McHugh JJ.

9                     In relation to the representations allegedly made with respect to future matters, the applicants relied on s 51A of the TPA.  Where a corporation makes a representation with respect to a future matter without reasonable grounds for making the representation, s 51A deems the representation to be misleading for the purposes of s 52.  As Hill J said in Ting v Blanche (1993) 118 ALR 543 (“Ting v Blanche”), at 552:

What s 51A does, in a practical sense, in cases where it applies, is to cast the burden of proof upon the respondent corporation who has made a representation about a future matter to show that in making that representation it had reasonable grounds for so doing.

10                  An applicant does not have to establish as a part of his cause of action that the respondent corporation did not have reasonable grounds for making the representation.  Subsection 51A(2)

throws the evidentiary burden on a respondent to establish that grounds for making the representation existed and in the absence of such evidence the deeming provision has the consequence that the representation is taken to be misleading.  Section 51A does not create an independent cause of action separate from s 52 and other sections in Pt V of the Act but rather casts the burden of proof on the respondent and if that burden is not discharged then a breach of s 52 is established by the applicant proving the representation as to the future matter and the fact that it did not come to pass.

See Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR (Digest) 46-179 per Goldberg J, citing Ting v Blanche at 552. 

11                  In the most recent version of their defence, the respondents

            (a)        denied the representations;

            (b)        relied on disclaimers contained in acknowledgements dated 5, 12 and 21 September 1990 and in the Disclosure Document (see below); and

            (c)        admitted that they made oral representations; but

            (d)        asserted that they had reasonable grounds for making any representations they made as to future matters; and

            (e)        asserted that any representations they made as to past or present matters were in substance true; and

            (f)         denied that the applicants relied on the representations made by them.

The respondents also maintained that, if the applicants had suffered loss and damage, then it was caused by their own conduct; and that the applicants had failed to mitigate their loss and damage.  It is unnecessary at this stage to refer in any detail to the applicants’ reply to the respondents’ defence.

12                  The respondents also cross-claimed for $5,000 in respect of legal costs and stock.  They submitted, however, that this claim should not be considered at this stage of the proceeding (which was concerned only with their primary liability).  The claim should, they said, be considered at the assessment stage of the proceedings.  As the applicants did not oppose this course, I have proceeded on this basis.

c:  the facts

(i)            The Christous’ Pizza Haven business

13                  In October 1984, the second respondent, Gabriel Christou, and his three brothers (Evan, Bill and Louis) opened an eat-in and take-away restaurant at Glenelg in South Australia, under the name “Pizza Haven”.  From the beginning, Gabriel worked full-time in the business.  Evan began working full-time in the business in August 1985.  Bill joined in January 1986, and Louis, in January 1987.  The restaurant seated about 120 people.  Take-away sales comprised about 20% of sales. 

14                  In July 1985, the Christou brothers expanded the business to include home deliveries of pizzas.  They subsequently opened five more Pizza Haven outlets.  These outlets were located in or near Adelaide, at Christies Beach (October 1985); Colonel Light Gardens (December 1985); Findon (March 1986); Glenunga (July 1986); and Modbury (October 1986).  Employee managers managed these five new stores.  Unlike the Glenelg restaurant, the new outlets focussed on home delivery and take-away sales of pizza. 

(ii)         Development of the Pizza Haven Franchise

15                  Franchise Developments Pty Ltd (“Franchise Developments”), which was liquidated in 1997, provided franchise consultancy services.  The Christous approached Franchise Developments in 1986, to discuss the development of a Pizza Haven franchise.

16                  Evan Christou met Bruce Robinson, an employee of Franchise Developments, in Melbourne on 17 September 1986.  Five days later, Robinson met Evan and Bill Christou, in order to obtain information about the Pizza Haven business.  Towards the end of September (around 24 September 1986) Franchise Developments submitted a “Franchising Feasibility Programme”, which included a proposal for a “Feasibility Study” and the creation of a “Franchising Programme”.

17                  Another employee of Franchise Developments, Tino Bettiol, met Evan, Bill and Gabriel Christou in Adelaide on 3 October 1986, in order to obtain further information about their business operations.  About a fortnight later, Franchise Developments submitted an initial draft of a “Pizza Haven Franchise Feasibility Study” (“the feasibility study”).  Franchise Developments subsequently revised the draft following a meeting with the Christous in Adelaide on 23 October 1986. 

18                  The revised version of the feasibility study was dated November 1986 and consisted of about 51 pages.  The study described its first two objectives in the following terms:

1.      The primary objective of this study is to examine the feasibility and scope of applying franchising to the Pizza Haven retail home delivery and take-away business as an effective strategy to increase and secure Pizza Haven’s presence in the South Australian market and expand nationally by initially penetrating the Victorian market.

2.      If effective, franchising should enable the Pizza Haven organisation to expand its retail base and generate additional income in the form of Franchise Fees and Service Fees (Royalties) … . 

19                  In discussing the ‘franchisability’ [sic] of the Pizza Haven stores, the feasibility study said:

The most important single test of the franchisability of any business is its financial viability.  The projected franchisee financial performances shown in … this Study indicate that a franchised Pizza Haven store can be a very profitable venture for the franchisee.  The estimates … show that a franchisee could realistically expect to earn annual profits ranging from $16,000 to over $70,000 plus their drawings.

In assessing the financial attractiveness of a franchise opportunity it is necessary to consider the investment requirements.  …  [T]his Study … indicates that a franchisee would need to invest between $54,000 to $56,300 to establish a new store under the Pizza Haven banner.

…

…  The franchisee financial model in … the Study shows that the franchisee’s business could comfortably support a service fee of 5.5% of gross sales and an advertising contribution, equal to 5.0% of gross sales respectively.  … .

20                  The feasibility study contained what was called a “Franchise Profit Projections” table, which set out five levels of weekly sales:  $4,000, $4,500, $5,000, $6,000 and $7,000.  In relation to each level, the table set out the cost of sales (24.5% of sales); operating expenses (including “leasing” and “salaries and wages”); and annual net profit (before interest and taxes) ranging from $3,310 (in relation to level 1 - $4000) to $71,900 (in relation to level 5 - $7,000). 

21                  In connection with the Victorian market, the feasibility study noted:

Victoria as a more heavily populated state has potential for in excess of twenty regional Pizza Haven stores, if the same population criteria is applied [as in South Australia].  It is difficult to determine the exact number of Melbourne metropolitan Pizza Haven stores.  Given Pizza Haven’s location criteria and target markets, Franchise Developments envisages scope for at least twenty to twenty-five Pizza Haven stores in the Melbourne metropolitan area. 

The Victorian market is currently proliferated by a large number of independent pizza stores, with Pizza Hut being the only pizza chain with any significant market share.  … .

22                  The study made a number of recommendations, which included a recommendation for the development of “a formal franchise programme”.

23                  In November 1986, Franchise Developments submitted a proposal to prepare a franchise programme.  The proposal was duly approved.  By April 1987, Franchise Developments had completed a document called “Pizza Haven Franchise Programme” (“the franchise programme”). 

24                  The franchise programme consisted of well over 100 pages.  The programme declared that its aim was

to facilitate expansion of the Pizza Haven base of home delivery and take-away stores by recruiting suitable franchisees who will commit their funds to establish their business within the Pizza Haven group.

25                  The franchise programme proposed a corporate structure, which the Christou brothers were to adopt.  Glev Pty Ltd (“Glev”), which was incorporated in 1986, was to own all non-franchised Pizza Haven stores; to supply goods and management services to Glev Franchises; to service the franchisees on behalf of Glev Franchises; and to operate the central commissary at Glenelg.  Glev Franchises was to grant Pizza Haven franchises; collect service fees and franchise fees; pay management fees to Glev for the provision of services; and pay royalties to the Christous for trade mark use.  The result was that, since 1987, Glev Franchises has carried on the business of promoting, marketing, advertising, granting, selling and administering a chain of franchises under the name and style “Pizza Haven”.  Glev has continued to operate the company-owned stores and the central food commissary for the Adelaide stores, and to provide head office support.

26                  In connection with “Franchisee Capital Requirements”, the franchise programme reiterated that the “expected capital requirements for a new Pizza Haven store franchise” was a total estimated franchise investment of $54,030 - $56,360.  An accompanying note advised that:

The total estimated investment before any leasing is:-

		$				$
Estimated total (after leasing)		54,030	-		56,360
Less         Leasing		1,600	-		1,600
		52,430	-		54,760
Add          Equipment                  Motor vehicles		41,500	-		41,500
		17,000	-		17,000
total investment (before leasing)		$110,930	-		$113,260

27                  Under a heading “Franchisee Profit Projections”, the following appeared:

A.     The franchisee profit projections shown on the following page are based on Pizza Haven’s existing company-owned stores and Franchise Development’s experience in retail franchises.

B.      The franchisee profit projections have been adjusted for a franchise situation.  Explanatory notes accompany the profit projections.

28                  There was a “Franchisee Profit Projections” table in the same form as in the feasibility study, save that the cost of “salaries and wages”, which had previously ranged from 37.7% to 29.3% of sales, was reduced to 35.1% to 27% of sales.  The cost of insurance and motor vehicles was also less in the new table, although the cost of leasing had increased.  The annual net profit before interest and taxes ranged from $10,660 (in relation to level 1 - $4000) to $83,030 (in relation to level 5 - $7000).  An accompanying note advised:

The net profit is an operating profit.  It does not take into account any taxes.  The net profit is after the franchisee’s drawings of $25,000 per annum and after leasing has been accounted for.

No depreciation has been allowed for in the figures.

29                  The franchise programme recommended that Pizza Haven grant “exclusive territorial rights to its franchisees”, and that a thorough investigation of proposed territories be undertaken.  The programme remarked:

Determining the ideal size of the franchise territories can be a difficult task because different areas and locations have varying potential.

…

When examining potential franchise territories, a number of factors must be analysed, such as:-

-         population of the drawing area and the socio-economic structure of the area,

-         the growth rate of the area,

-         the level of competition,

-         geographical barriers such as hills, rivers and highways,

-         the proximity and likely interference with other Pizza Haven stores,

-         distance from Pizza Haven’s Head Office and commissary … and

-         the likely success of the franchise.

30                  Around this time, Franchise Developments also prepared a Disclosure Document, which was to be given to potential franchisees.

(iii)       Franchising in South Australia

31                  The first ‘pilot’ franchise Pizza Haven store was opened at Enfield in December 1986.  During the period 1987 to 1989, other franchise stores were opened in South Australia.  They were: 

1987

April                Elizabeth

July                 Murray Bridge

October           Payneham

                        O’Halloran Hill

December        Fulham

1988

March                         Blackwood

32                  During the same period, the following company stores were opened:

1987

February         Salisbury

April                Brighton

1988

September       Semaphore

1989

                        Port Pirie

33                  As at September 1990 (when the applicants entered franchise agreements with Glev Franchises) there were 7 franchised stores and 10 company stores in operation in South Australia.  In September 1990, these 17 stores had weekly turnovers ranging between from about $3,500 to nearly $14,000 (at Glenelg, but see below).  The average South Australian store sales turnover as at September 1990 was $6,085 per week.  Generally speaking, in South Australia, Pizza Haven had successfully competed against other pizza chains, such as “Pizza Hut”, “Dial-a-Dino’s” (subsequently taken over by Pizza Hut) and “Pizza Express”.  (Issues were raised in this case about the profitability of the Pizza Haven chain.  These issues are discussed below.)

(iv)    Franchising in Victoria

34                  In 1989, after five years trading in South Australia, the Christou brothers decided to open franchise outlets in Victoria.  They believed that Pizza Haven would have to compete in Victoria against only one other pizza chain operator, namely, Pizza Hut.  In March 1990, Gabriel Christou moved from Adelaide to Melbourne to set up the Victorian operations, although all the brothers apparently participated in developing a plan for dividing Victoria into franchise territories.  They subsequently provided Franchise Developments with a map of Melbourne, showing the territories that they proposed should be franchised.  Franchise Developments was engaged to act in the recruitment of franchisees for Victoria, although the choice of a franchisee was subject to the approval of Gabriel Christou.  The third respondent, Leo Reyes, an employee of Franchise Developments, was involved in selecting potential franchisees and marketing the Pizza Haven franchises.

35                  The first advertising for Pizza Haven franchisees for Victoria occurred in the second half of 1989.  A franchise Pizza Haven store opened at Dandenong on 10 June 1990.  From 1990 to 1991, a further 19 franchise stores were opened in Victoria.  They were:

1990

June                Vermont

July                 Elsternwick

                        Blackburn

August             Oakleigh

                        Werribee

                        Knox

October           Ormond

November       Chadstone

December        Ringwood

                        Croydon

1991

January           Carrum

                        Syndal

March             Bendigo

                        Balwyn

                        Templestowe

April                Collingwood

                        Prahran

July                 Black Rock

                        Malvern

36                  As at September 1990, there were apparently 7 Pizza Haven franchise stores operating in the Melbourne metropolitan area.  As at 11 September 1990, the Vermont, Dandenong, Werribee and Knox stores had opening sales of between $4,197 and $6,510 (although no store had been operating for more than three months, and Werribee and Knox for between two and three weeks only).

37                  About January 1991, Glev Franchises appointed Tulloch and Associates Pty Ltd (“Tulloch”) as its Victorian Master Franchisor.  (Glev Franchises and Tulloch concluded a written agreement on 23 October 1991.)  Tulloch acted on behalf of Glev Franchises in granting franchises and was responsible for the management of the Victorian operations. 

(v)      October 1989 Disclosure Document

38                  In 1989, Franchise Developments reviewed the Disclosure Document that it had prepared for the Christous two years before.  The revised Disclosure Document, which was used for Victoria, was dated October 1989 (referred to below as “the Disclosure Document”). 

39                  The Disclosure Document consisted of some 32 pages, and fell into two parts.  In the first part, a covering page bore the Pizza Haven logo and the description “Pizza Haven Franchises, Franchise Disclosure Document”.  Under this heading, there appeared the following:

The attached information has been prepared to help you make a decision.  Study it carefully.  While it includes some information about your contract, don’t rely on it alone to understand your contract.  Read all of your contract carefully.  Buying a franchise is a serious undertaking.  Take your time to decide.  It is strongly recommended that you show your contract and this information to your advisors, such as a solicitor and an accountant before signing the franchise agreement.

 

40                  The second part of the Disclosure Document also bore the Pizza Haven logo but was entitled “Pizza Haven Franchise Prospectus Franchising Investment Requirements and Profit Projections”.  Beneath this heading, there appeared the same warnings as set out above, save that the word “strongly” did not appear in the last sentence.

41                  The Disclosure Document affirmed:

To maintain a high profile, Pizza Haven has developed a strong market image and name with its ongoing advertising and marketing programme.

…

Pizza Haven’s target market is substantial.

…

The growing financial returns from all the Pizza Haven stores continues to reinforce the growth and size of the pizza market and the dominant role Pizza Haven will continue to maintain in the future.

…

The directors and management team of the Pizza Haven business provide a strong and experienced support base for the Pizza Haven group.

…

Pizza Haven’s main business is the home delivery of pizzas that are freshly cooked in just seven minutes, and delivered within 30 minutes of ordering.

…

Total freshness is what makes Pizza Haven pizzas different – and better.

…

Pizza Haven utilises a variety of marketing mediums with major emphasis on leaflet distribution, radio, television and the print media. 

42                  The Disclosure Document informed a prospective franchisee that:

The franchisee is required to pay an initial Franchise Fee upon execution of the Franchise Agreement.  At the time of writing, the initial Franchise Fee was $30,000 for a new franchised Pizza Haven store.

…

Each Franchisee is required to pay a weekly Royalty Levy equal to five and a half per cent (5.5%) of each week’s total gross sales.

…

All franchisees are required to pay a weekly Advertising Contribution, calculated at the rate of five per cent (5.0%) of each week’s total gross sales.

…

[T]he Franchisee will pay for any advertising and marketing costs incurred by the Franchisor in connection with the Franchisee’s opening promotion.

…

The Pizza Haven franchisees are granted the exclusive rights to operate a Pizza Haven store in an area … which the Franchisor considers a Pizza Haven business can be operated.

…

[F]ranchisees are required to purchase all stock items necessary for the Pizza Haven business from the Franchisor if available from the Franchisor.

The Disclosure Document also informed a prospective franchisee that he or she was required to devote a minimum of 40 hours per week to the business. 

43                  The Disclosure Document described the obligations of Glev Franchises as being:

i)                    Location advice.

ii)                  Provide one supervisory person to work with the Franchisee for at least ten days during the franchisee’s first two months of business.

iii)                Management, Sales, Administration, Operational and Technical advice.

iv)                Conduct advertising campaign and other promotional activities.

v)                  Establish an advertising fund for all franchisee advertising contributions to be paid into.

vi)                Equipment advice.

vii)              Provide information regarding the successful operation of the Franchised Operation, together with any new developments and improvements to the Franchised Operation.

viii)            Provide the Franchisee with initial training and standard training material.

ix)                Layout, design and colour scheme for the store and delivery vans.

x)                  Advice on preparation of the Franchisee’s accounting system.

xi)                Supply stock to the Franchisees.

xii)              Convene meetings.

xiii)            Not to grant a similar franchise in the franchisee’s territory.

xiv)            Arrange installation of the telephone lines.

44                  The second part of the Disclosure Document gave information on “Franchisee Capital Requirements” and “Franchisee Profit Projections”.  An itemised account of Capital Requirements indicated that “Total Estimated Capital Requirements” were $75,000 - $77,000.  An accompanying note acknowledged, however, that:

The actual cost of site establishment will vary depending on the condition and location of each site.

45                  Under the heading “Franchisee Profit Projections”, the Disclosure Document advised:

The figures on the following page are estimates.  The figures are based on the experience of Pizza Haven in its company owned and franchised stores.

Pizza Haven does not represent or warrant that all franchisees will achieve the results shown on the following pages, since results in any particular case will depend on the ability and work performed by the individual franchisee, strict operational control and location and amongst other factors.

The notes to the franchisee profit projections are given to enable your independent financial advisors to examine the soundness of the information and to determine on your behalf, the projected results of your particular franchise.  It may take up to twenty four months to fully establish a store that has no trading history.

Pizza Haven strongly recommends that you rely upon independent financial advice and make up your own mind.

The Profit Projections are current as at October, 1989.

46                  A “Franchise Profit Projections” table (“the profit projections table”) followed.  This was similar in form to those contained in earlier Franchise Developments documents (namely, the feasibility study and the franchise programme).  The newest table differed from the earlier tables in some respects, however.  It set out four levels of weekly sales:  $5,000, $7,000, $9,000 and $12,000.  In relation to each level, it set out the costs of sales (25% of sales); operating expenses (including “Advertising”, “Leasing”, “Rent & Outgoings”, “Royalty”, “Salaries & Wages - Staff”.  “Total Annual Franchisee Income” (replacing annual net profit) ranged from $56,240 (in relation to level 1 - $5,000) to $206,250 (in relation to level 4 - $12,000).  In contrast to the earlier tables, the operating expense, “Salaries & Wages”, no longer provided for a payment to the franchisee.  Accompanying notes informed the prospective franchisee, amongst other things, that the “Total Annual Franchisee Income”

is as operating result.  It does not take into account any taxes or depreciation.  The income is after the leasing of equipment ($48,000) and one to three motor vehicles.

In relation to “Salaries & Wages - staff”, another note informed the prospective franchisee, in tabular form, that the projection was based upon operating expenses for (1) permanent staff from $13,000 (annual sales - $260,000) to $31,200 (annual sales - $624,000); (2) casual staff from $2,910 (annual sales - $260,000) to $8,740 (annual sales - $624,000); and (3) drivers from $33,700 (annual sales - $260,000) to $74,960 (annual sales - $624,000).

d:  the applicants

47                  Before turning to the differing accounts of events and what was said in negotiations, it is helpful to describe the characteristics of the three individuals who were buying the franchises.  This is relevant to an appreciation of their evidence generally and, more specifically, to the issue of reliance, which is discussed hereafter. 

48                  In 1990, the applicants and Taylor were employed as production supervisors at Philip Morris Ltd (“Philip Morris”).  The applicants and Taylor had, therefore, some managerial skills.  Taylor also had direct experience in fast food management.  Between 1979 and 1986, he had worked with the McDonald’s franchise as an assistant store manager at various stores and then, between 1984 and 1986, as a store manager for McDonald’s at its Elsternwick outlet.  He left McDonald’s in 1986 to work at BWN Industries as a manufacturing manager.  (During his three years there, he met Troy Skilling, then a purchasing clerk but later a manager for Pizza Hut at Elsternwick.  Skilling was attracted from his Pizza Hut position to manage the applicants’ Ormond store.) 

49                  Taylor met the applicants when he started work at Philip Morris in April 1990.  He and they worked closely together on afternoon shift and started discussing the possibility of investing in a business venture.  As it turned out, the applicants determined to borrow 100% of the funds for their commercial venture.  They and Taylor saw an opening with the new Pizza Haven franchise chain and, by September 1990, they had plans to open a number of outlets and run them under management.  According to Sanders, Taylor was “going to have a closer regard to the running of the business, particularly the start-up stage, as he had had some convenience food experience”.  In his witness statement, Taylor said:

In July 1990, we decided to start looking at businesses to buy or invest in and run under management, with us having daily input, using our management/supervisory skills we had built up at Phillip Morris and in our previous employment. 

The applicants gave evidence to similar effect.

e:  witnesses

50                  The evidence relating to the negotiations for the Ormond franchise is contained in the witness statements (verified on oath at trial) of the applicants, Taylor, Gabriel and Louis Christou, and Leo Reyes.  Each witness was cross-examined.  Save for Louis Christou, all these witnesses’ accounts of the pre-contractual events and discussions were selective in varying degrees, and coloured by a desire to support their own interests.  The interests of the parties was plain enough (notwithstanding that Gabriel Christou and Leo Reyes were no longer resident in Australia).  Although Taylor had no direct or financial interest in the outcome of the case, his propensity to colour his evidence in the applicants’ favour was also clear enough, springing perhaps from a desire to vindicate his role in the venture.  He was not a totally independent bystander to these events.

51                  The general unreliability of the evidence of these witnesses was exacerbated by the fact that they were purporting to recall details of conversations of more than a decade ago and, generally, without any reliable documentary assistance.  Louis Christou, an honest witness, clearly stated that he could recall little of the detail of the relevant meetings. 

52                  Further, there were, as appears below, other significant doubts about the credibility of Zienkiewicz; and Gabriel Christou’s volubility in evidence tended to indicate that he was reconstructing his evidence as he went along and endeavouring to avoid giving exact answers to precise questions. 

53                  In summary, wherever possible, I have sought to resolve conflicts in these witnesses’ accounts by reference to documentary material or the inherent probabilities of the case.  Where this has been impossible, it has been necessary to resort to concepts of onus of proof:  it was for the applicants to satisfy the court on the balance of probabilities that their version of the events and discussions should be accepted.  In the absence of documentary support, as appears below, I have been unable to accept that they satisfied this onus.

54                  As appears below, there is less need to comment upon the evidence of other witnesses in the proceeding.  They included Graeme Hughes, Roderick Young, Evan Christou, Troy Skilling, Geoffrey Sincock, Anthony Watson, Alan Tulloch and Aubrey Whitear.  Some, like Hughes, were honest in expressing the limitations of their evidence.  Where appropriate, I have indicated below the extent to which I have accepted or rejected their evidence.

f:  the representations

(i)       When was the initial meeting with Reyes?

55                  About August 1990, Taylor noticed two advertisements in “The Age” newspaper.  One concerned a franchising exhibition to be held in Melbourne and the other was for the Pizza Haven franchise chain.  In its advertisement, Pizza Haven called for persons with “$30,000 plus asset backing”, interested in acquiring a Pizza Haven business.  This advertisement nominated Leo Reyes at Franchise Developments as the contact person. 

56                  There was disagreement between the parties about the chronology of meetings thereafter which led to the conclusion of the Ormond franchise agreement.  The relevant written evidence consisted of (a) Reyes’ diary; (b) Franchise Developments’ documentation check list; (c) signed acknowledgments and correspondence passing between Franchise Developments and Taylor; and (d) Zienkiewicz’s diary.

57                  The following discussion concerns the sequence of events that resulted in Reyes’ first meeting with Sanders and Taylor, and his subsequent meeting with both the applicants and Taylor.

58                  Taylor and Sanders went to the franchising exhibition in Melbourne in 1990, where, according to them, they spoke to a representative of Franchise Developments about Pizza Haven.  In their witness statements, they maintained that they had attended the exhibition in August (or even July) 1990, and that they had spoken to Reyes when they were there. 

59                  Sanders’ evidence was that they first met Reyes before the franchising exhibition, and that they and Zienkiewicz had attended a second meeting with Reyes on 5 September 1990.  Sanders maintained in cross-examination that he and Taylor had met Reyes prior to the exhibition, and that they “had bumped into him again at the Old Exhibition Buildings”. 

60                  Taylor’s evidence was to the effect that he telephoned Reyes after the exhibition to arrange a meeting with him, and that he and Sanders had their first meeting with Reyes at Franchise Developments as arranged in this telephone call.  In cross-examination, Taylor conceded that he could not in fact recall either the date of the exhibition or the date of his first meeting with Reyes.  Nor could he recall whether it was Reyes whom he and Sanders met at the exhibition.  Taylor conceded in cross-examination that his first meeting with Reyes might have occurred in September 1990 since he could not recall the precise date. 

61                  Leo Reyes, who had started working for Franchise Developments in January 1990, gave a different account of his first meeting with Sanders and Taylor.  In so doing, he relied upon a work diary, which he maintained in 1990 and 1991.  In this diary, he recorded details of meetings and the like with, amongst others, potential franchisees and their advisers. 

62                  Reyes had no recollection of meeting the applicants or Taylor in July or August 1990.  In his first witness statement, he stated:

I have got a good record of dates of meetings by reference to a detailed diary which I kept of all meetings conducted with franchisees.  I recorded some details of meetings in my diary.  In particular, I often recorded the time of meetings, the names of people who attended the meetings and certain details about the stage reached in the documentation process.  I would sometimes note the receipt of a franchise application in my diary and often I recorded when franchise agreements were signed and when the sale was completed.  I was not precise in always recording each of the matters to which I have referred above. For example, when a group of people attended a meeting with me, I sometimes recorded the name of only one person in the group, as was the case in the present matter.

63                  A copy of Reyes’ diary was in evidence.  A diary note for 5 September 1990 indicates that at 11.00 am on that day, Reyes met with “Russell Taylor” and “John S”.  In connection with this entry, Reyes said (again in his first witness statement):

My diary note indicates that I first met with Mr. Taylor and Mr. Sanders at 11 a.m on 5 September 1990 (the reference in my diary is to ‘John S’).  I cannot recall our prior contact on the telephone, although we must have had a conversation to fix a meeting.  I cannot, for example, recall whether I spoke to them originally in response to their seeing an advertisement.  There had been a promotional event at the then newly opened Pizza Haven store in Elsternwick, which I attended on 13 July 1990 (as indicated by my diary to meeting [sic] potential franchisees in Elsternwick …).  Arising from that event, there were a number of enquiries which I processed from people who attended.  It is possible that Mr. Taylor and Mr. Sanders contacted me following this event.  Mr. Zienkiewicz was not in attendance at this meeting on 5 September 1990.  I have recorded in my diary the name of Mr. Taylor (and his telephone number), by way [of] making a note of a planned meeting.  I added ‘John S’ later using two different pens for ‘John’ and then ‘S’.  I cannot explain why two different pens were used for the ‘John S’ entry, but the entry itself shows me that someone else attended the meeting, being ‘John S’ (ie. Mr. Sanders).  It was my practice at the time to record the name of every person who attended a meeting with me.  I can remember this meeting occurred in a small (and cramped) conference room at FD’s offices, and that there were three people (including myself) in attendance.  We sat around a small round conference table.

Reference to Reyes’ diary confirms that he had an evening appointment at Elsternwick on 13 July 1990.

64                  Reyes maintained that the franchising exhibition was not held in July or August 1990 but, rather, between 6 - 9 September 1990.  This too is consistent with the entries in his diary for these days.  His diary does not record any trade exhibitions in July or August 1990.  In his first witness statement, Reyes said:

I remember a franchising trade exhibition in 1990, which I attended on a daily basis on behalf of FD, which had an FD branded stand.  I probably spoke to hundreds of people during the exhibition, and I may have spoken to the Applicants or Mr. Taylor, but the exhibition did not commence until after our first meeting on 5 September 1990 … .

65                  Counsel for the applicants pressed Reyes, in cross-examination, as to whether he could, in truth, recall who attended the meeting on 5 September 1990 (i.e., almost ten and a half years before Reyes gave his evidence.) 

Counsel:           How do you know that?

Reyes:              Because, I mean, as soon as I know the case of the person we talking about, I remember coming out, I remember seeing them sitting there, I remember getting into the first room, the only one available.  I remember the three of us being there perfectly well.

66                  Sometime later in Reyes’ cross-examination, Reyes and the applicants’ counsel had the following exchange:

Counsel:           You recall meeting Mr Taylor and Mr Sanders on 5 September?

Reyes:              Yes.

Counsel:           But you say Mr Zienkiewicz was not there, don’t you?

Reyes:              Yes.

Counsel:           What is the basis of your saying that?  Do you have an independent recollection?

Reyes:              Again, I’m saying, you know, when I’m confronted by my diary, the documents they had signed and all that, particularly because they came through, they were one of the sales we made, yes, I do remember that he wasn’t there.

Counsel:           So you say you’ve looked at your diary and you’ve refreshed your memory from your diary and ‑ ‑ ‑?

Reyes: And also flashes come in that he wasn’t there on the first meeting.

Counsel:           Well, I put it to you that he was there.  I take it that you continue to dispute that?

Reyes:              Yes.

67                  In this instance, I prefer Reyes’ evidence, supported as it is by the diary he kept at the time of the events with which this case is concerned, to the evidence of Sanders and Taylor.  Reyes’ diary contained no record of any earlier meetings with the applicants and Taylor.  There was nothing in the evidence on this issue to indicate that Reyes’ evidence was unreliable.  There was, moreover, a documentary checklist dated 24 September 1990 that had been completed by Reyes, which tended to confirm his account of the dates and sequence of events. 

68                  I find, as Taylor for his part conceded, that neither Taylor nor Sanders had any independent recollection of the relevant dates, nor, indeed, of the order of some of the events to which they referred in their evidence.  Their lack of recollection is, in large part, attributable to the passage of time. 

69                  Substantially for the reasons advanced by the respondents’ counsel in closing submissions, I reject the proposition that the applicants established that the Elsternwick store opened on 5 September 1990 and, having regard to Gabriel Christou’s evidence, this fixed the meeting with Gabriel and Louis Christou (discussed below) as occurring at this date.  By the close of the hearing, it had become clear that the Elsternwick store in fact opened in July 1990, a date that favoured neither the applicants nor the respondents.

70                  I find, on the balance of probabilities, that the franchising exhibition was held between 6 - 9 September 1990 and that Taylor and Sanders (and not Zienkiewicz) had an initial meeting with Reyes at the offices of Franchise Developments on 5 September 1990.  At this meeting Reyes gave Taylor and Sanders a copy of the Disclosure Document and Taylor signed an Acknowledgment of Receipt of Financial Information (“the first acknowledgement”). 

71                  Between the meeting on 5 September 1990 and the next meeting (which, as set out below, I accept was on 12 September 1990), Taylor (and possibly one of the applicants) visited the Elsternwick and the Knox stores.  At or after 5 September 1990, Reyes invited Taylor to an official opening of a Pizza Haven outlet, either at Knox or Elsternwick.  (The evidence is unclear.)  According to Taylor, he and Zienkiewicz went to the opening and met Gabriel Christou there, as well as the store franchisee, and “had a store tour”.  According to Reyes, he also invited Taylor to see a store in operation (semble, either at Knox or Elsternwick). 

(ii)    When was the second meeting with Reyes?

72                  According to Reyes (whose evidence is supported by an entry in his diary), Sanders and Taylor met him again at Franchise Developments on 12 September 1990.  On this occasion, Zienkiewicz accompanied them.  At this meeting, the applicants and Taylor lodged applications for two franchises.  They also gave Reyes a bank cheque dated 11 September 1990 for $2,000 (being the refundable deposit on two franchise territories).  As the Disclosure Document instructed, the cheque was made out to Franchise Developments Trust Account.  At this meeting, they were also given a copy of a franchise agreement, and Taylor signed an “Acknowledgment of Receipt of Franchise Agreement” (“the second acknowledgement”). 

73                  Sanders’ evidence was that he completed and signed his franchise application on 10 September 1990.  Zienkiewicz said that he completed his application on 11 September 1990.  Neither of them nominated a preferred territory in their applications. 

74                  Taylor’s application was completed and signed on 11 and 12 September 1990.  In his application, beside the words “preferred area”, he wrote:

Springvale (1)

Fountain Gate/Narre Warren (2)

Ormond (3)

Within the application, beside the words “Position applied for”, there also appeared the words “Pizza Haven – Ormond and Springvale”.

75                  In his application, Sanders indicated that his spouse would be actively involved in the business for four days per week, two hours per day.  He also indicated that he, Zienkiewicz and Taylor were each to have a one-third interest in the business.  Zienkiewicz stated in his application that his spouse would be involved two hours per day.  He did not indicate the number of days in the week when she would work.  Taylor indicated that his wife would be involved three days a week, four hours per day.  All three applicants stated that they had an accountant and a solicitor.  The applicants stated that at that time they each had two young children, and Taylor stated that he had one very young child. 

76                  Zienkiewicz also kept a diary in 1990.  His diary contains no entries for the relevant period that might concern any meeting with Reyes.  Zienkiewicz deposed, however, that he made some notes at the back of his 1990 diary about “a week or two” after the discussion with Reyes (and Louis and Gabriel Christou) at a meeting on 5 September 1990.  The notes commenced:

Meeting Franchise Developments

G Christou, L Christou, L Reyes, S Sanders, R Taylor, C Zienkiewicz

1)        Buying power – can’t beat commissary

2)        L Christou – asked questions mainly – job, family, expectations

3)        G Christou will be in store to help if we don’t achieve sales.

4)        Leo Reyes backed up all claims by Gabriel – profit, sales, buying power.

5)        What about competition – not a problem can’t compete against buying power.

6)        Paid deposit and signed papers

                                                            refundable $2000 next week

7)        Had to buy two territories seeing we were investors

8)        Look promising – sounds very good

9)        Deposit to be returned if we change our minds

77                  At the foot of this page, Zienkiewicz had also written:

Would do any thing to make sure stores achieved $4,000 – which was break even for store under management – would be in store after month and make sure

Lou – did all marketing research – told us about computer system which would revolutionise business and make it idiot proof

Asked questions about Dominos because we [wanted to know] also how they would compete.

78                  On the opposite page Zienkiewicz had written:

1)      Why Pizza haven

2)      Any mark [up] on purchases if so what is it

3)      What if we don’t achieve sales

4)      What if we change our mind

5)      Will our shift working affect business

6)      What training is provided

There is nothing in these notes to corroborate Zienkiewicz’s claim that they concerned a meeting on 5 September 1990. 

79                  Zienkiewicz gave evidence that he looked at these diary notes in the course of preparing his first witness statement in June 2000.  He also gave evidence that, some four years prior to trial, he had altered his diary by adding entries to it.  This was done at the offices of his solicitors and, so he said, in an effort to consolidate information in relation to this case.  He explained that he had found some handwritten notes at the bottom of the boxes in which his diary was kept, and that he had written the contents of the notes into the diary and destroyed the notes.  He had informed his solicitor of what he had done only 6 months before trial.  His evidence was that only the first and third of the three passages set out above had been written at a time shortly after a meeting with Reyes (and the Christous).  This was confirmed by comparing the diaries in the form in which they were discovered to the respondents (prior to the changes made by Zienkiewicz) with the diaries as now exhibited in evidence.

80                  As the respondents’ counsel observed, an analysis of these diary entries supported the conclusion that the notes made in 1990 (the unamended version) concerned a meeting on 12 September 1990.  Originally the notes included, at par 6, “Paid deposit & signed papers”.  The applicants and Taylor paid the deposit of $2,000 (and lodged their franchise applications) on 12 September 1990.  Zienkiewicz subsequently crossed out these words and wrote in “$2,000 refundable next week”.  I find that Zienkiewicz deleted this entry from his diary because it was inconsistent with the version of events that he wanted to maintain.  This finding bears upon his credit generally (see below). 

81                  As the applicants’ counsel noted, the credibility of Gabriel Christou’s statements about dates was diminished by the respondents’ failure to discover or produce a diary, which, according to him he kept in 1990 and remained in existence (in Thailand where he was living).  As already stated, however, on this topic of dates, I accept the respondents’ account, since it is supported by some contemporaneous documentary evidence.

82                  I have dealt with this question of dates in some detail for two reasons.  First, the witnesses’ evidence on the point illustrates the effect that the passage of time has had upon their ability to recall matters of detail and, secondly, because the parties relied on the timing issue in connection with the further issue of reliance.

83                  The difference between the applicants’ and the respondents’ chronology was important in this sense.  On the applicants’ account, they had a second meeting with Reyes, which also involved Gabriel and Louis Christou, on 5 September 1990.  If this were so, then they completed their franchise applications after speaking with the Christous, and it is possible that whatever the Christous said to them affected their decision to apply for the two franchises.  If the respondents’ account is accepted, however, the second meeting took place on 12 September 1990, by which time the applicants had completed their applications and, save perhaps for the nomination of Ormond, Taylor had completed his application.  I interpolate that I accept that part of Taylor’s application (which involved the addition of Ormond) was completed or amended during the meeting with Reyes on 12 September 1990.  This sequence of events indicates that, at a time after 5 September and before 12 September 1990, the applicants and Taylor had decided to apply for two franchise territories, and had made some decisions about their preferred territories.  The Christou brothers did not, therefore, instigate their applications for two territories.  This is relevant to my rejection of the applicants’ case in relation to some of the representations (see below). 

(iii)What was said at the meeting on 5 September 1990?

a)         Sanders’ evidence

84                  In his first witness statement, Sanders described the initial meeting with Reyes (in the company of Taylor) in the following terms:

Leo gave us a history of the Pizza Haven operations in Adelaide and of the four Directors, the Christou brothers.  He gave details of the rapid growth of Pizza Haven to the current strength of 17 operating stores.  He also described expansion into Victoria and said that the franchise territories were selling fast.  He said that we could get in on the ground floor of the franchise business that was ideal for investors.  Leo said that market research had been done in Melbourne that confirmed that the market was ready for a second major pizza franchise.  He said this research was also used to determine the size of franchise territories.  He said this was done to ensure that all franchisees would get an area that would sustain profitable levels of turnover.  As this meeting was concluding, Leo screened a video of a commercial he said was currently running on Adelaide television.  He said that this commercial would be screened in Melbourne when 8 stores were operational.  He then said that a new commercial may be produced for the Victorian launch if that was needed.

85                  In cross-examination, Sanders said that at this interview, which lasted about 30 minutes:

Leo Reyes showed us into a room.  He started the conversation talking initially about franchising.  We’d identified ourselves as investors, not as owner operators.  Leo Reyes then started to talk about franchising as an ideal opportunity for investors to get into.  After a moment or two we then began speaking about Pizza Haven, that he was handling Pizza Haven; that Pizza Haven was an ideal investment for people like ourselves to get into.  He talked about the buying power that Pizza Haven was able to bring to bear.  He talked about the group advertising in that, the strength of a dollar in a franchise, advertising campaign was better than an owner operator could bring to bear to support his business.  He then spoke in brief terms about substantial market research that had been undertaken for Pizza Haven and that the territories had been, as a result of this market research territories had been mapped out in the Melbourne area and this was an ideal investment for investors like ourselves to become involved in for all those number of reasons. 

 

I interpolate that Sanders had not referred to the “buying power” issue in his witness statement and, as he conceded in answer to a question from counsel for the respondents, “buying power” really became a significant issue after the applicants had opened the Ormond store.  As will be seen, Taylor did not mention this particular issue in his account of this meeting with Reyes.

b)         Taylor’s evidence

86                  Taylor’s account of this first meeting with Reyes only partially supported the account given by Sanders.  In his witness statement, Taylor described the meeting in these terms:

[H]e [Leo Reyes] gave us an information pack, which included a glossy brochure and some promotional leaflets.  We watched a video of a Pizza Haven advertisement which had been run on television in Adelaide.  We said to [Leo Reyes] that we wanted to be investors and that we did not want hands on operational roles, although we said we would have some day to day dealings in the business, but would be looking for a store manager to run the business. 

 

In cross-examination, it became clear that Taylor was unable to recall much about his discussion with Reyes on 5 September 1990 (or, indeed, at any other time around this date). 

87                  Taylor did not dispute that, on 5 September 1990, he signed a document, on behalf of himself and the applicants, headed an “Acknowledgment of Receipt of Financial Information”.  This was the first acknowledgement referred to above.  The first acknowledgement read:

Franchise Developments Pty Ltd acts as agents for our franchisor clients in the selection of their franchisee. 

The information provided to you has been approved by the franchisor and we believe it to be correct.  However, you must understand that being selected as a franchisee is not a guarantee of success.  Your results will depend upon the amount of effort you apply to the business and strict adherence to the system of operation of the franchisor.  You or the franchisor may fail.  When you go into business you must accept the risk of failure. 

We strongly recommend that you seek independent legal, commercial and financial advice.  Take your time.  Read all the information carefully and make sure any questions you have about the franchise are answered to your satisfaction.

Signing this form does not obligate you or the franchisor in any way.  It is an acknowledgment that you have received financial information and disclosure documentation regarding the franchise and a copy of this form. 

 

88                  Taylor could not recall, however, exactly what he was given at the time he signed this document.  He said, in cross-examination,

I was given a pack of documents but I can’t remember exactly what was in them at that stage when I signed for them. 

He could not recall Reyes reading out either the first acknowledgement or the Disclosure Document (or any part of these documents) at this meeting.  Nor could he recall whether he was encouraged to get independent advice in relation to the information that he was given.  When counsel for the respondents asked him whether the profit projections table in the Disclosure Document were shown to him at this time, Taylor answered:

I can’t remember whether they went through the whole document when I signed for it or whether it was given to us as a pack. 

89                  What Taylor did recall in cross-examination was that he and Sanders had told Reyes that they were going to run their business under management.

It was an investment opportunity that we would have some overseeing in. 

When asked how was he able to recall telling this to Reyes, Taylor answered:

The issue of us buying the business was to be investors and not be hands-on in the business full-time. 

 

He added:

Every discussion that we had with Leo and further down the track was that we were investors, right, we were not hands-on managers.  From my point of view it was very clear that we were not going to be working full-time in the business, it was to be investors in the business with an overseeing role. 

90                  Taylor also recalled informing Reyes that his aim was to own two or three Pizza Haven stores, and that he planned to approach a Pizza Hut store manager to act as a day-to-day operations manager for a multiple store operation, although he could not recall whether he had said anything about the manager he had in mind (who at that time was running a Pizza Hut store in the Bentleigh area). 

c)         Evidence of Reyes

91                  In his first witness statement, Reyes gave a detailed account of the 5 September 1990 meeting, which took, he said, about 90 minutes.  He said:

By way of introduction, I asked questions of Mr. Sanders and Mr. Taylor, such as what work they did, whether they were married with children, why they were looking at franchising and what their plans were for a franchise.  I can recall Mr. Taylor saying that he was experienced in franchising, and that he had managed a McDonald’s outlet for some years.  I can remember that this information impressed me as to his suitability.  We also talked about Phillip Morris, where they told me they worked in managerial roles.  In fact, I had worked there and we chatted about my time there.  I can recall there was some discussion about their wives wishing to work in a franchised business.  I can recall thinking that Mr. Sanders and Mr. Taylor seemed to have a good management background … .

In talking with Mr. Taylor and Mr. Sanders, I recall going through the usual procedure which I followed with every potential franchisee.  I talked about franchising in general.  I then talked about FD, and our role in assigning franchises, and I gave information about FD’s clients.  I then talked about Pizza Haven in general terms, ie. the franchise opportunity was in connection with a pizza home delivery chain which had been operating successfully in Adelaide and was expanding into Melbourne.

I can recall I had a map at the meeting which showed a division of territories for Melbourne.  The map has been provided to FD by Pizza Haven with the territories allocated.  I estimate that the map was about 1.5 metres by a metre in size.  This map was used to copy territory maps for franchise agreements.  The map was marked with territories which had been already been allocated with a red sticker on the territory.  I cannot remember any details concerning the discussions about territories, beyond showing the map with what was available.

… I mentioned to Mr. Sanders and Mr. Taylor that I was acquiring a Pizza Haven store myself, and that I was keen on the Pizza Haven franchise concept.

Also at the time of this meeting, I had access to Pizza Hut sales information and household details … .  I cannot recall precisely how I got this information, but we had been dealing with people who were franchisees for Pizza Hut and who provided this information at the time.  … .

I recall discussing the Pizza Haven map and the Pizza Hut turnover information with Mr. Sanders and Mr. Taylor.  I said that the areas not marked on the map with a red sticker were available.  … .  I said that the Pizza Hut turnover, which I believe I showed to them …, showed that an established Pizza chain was operating what appeared to me to be a successful business in Melbourne, and that I believed there was room for a new chain in the Melbourne market. 

I also mentioned that the franchisor organised a live to air (on FM radio) store promotion for new franchisees, which it was about to do for a new store in Knox.

I also showed Mr. Taylor and Mr. Sanders a video of an advertisement for Pizza Haven which had been screened in South Australia, which I said showed the campaigns undertaken by Pizza Haven.  I said that Pizza Haven was a good marketer of its product, and had utilised radio and television and leaflet campaigns in South Australia, and that it had plans to do the same in Victoria.

92                  Reyes said that he gave Sanders and Taylor the Pizza Hut information simply to enable them to see how a competitor was trading,

[b]ecause that’s what we had and that’s to sort of compare how other business were operating in the area.  It didn’t mean that you were going to actually achieve those figures.

93                  Reyes’ evidence was that he in fact read out parts of the Disclosure Document at the meeting. 

I started by going to the Table of Contents.  I read out the whole of the Table of Contents.  I then went through each section in the document.  I did not read every word of the document but rather I took the gentlemen to specific sections.  In particular, I identified who the directors of Pizza Haven were, the related companies to the franchisor, the background of the company and the Pizza Haven concept.  I then went to the summary of the franchise agreement and specifically spoke about the franchise fee, the royalty, advertising contributions; basically I spoke to each of the items referred to in the summary section.  It took me about an hour to go through the whole of the disclosure document, in this point by point way.  I had my own copy of the document from which I read, and I very likely gave to Mr. Taylor and Mr. Sanders a copy of the document to follow.

94                  In his witness statement, Reyes said that he could specifically recall reading the warning that preceded the profit projections table before taking Sanders and Taylor to the table itself.  He said that he “specifically spoke to Level 1”.

I said that the projection information was based on the performance of Pizza Haven stores, but that the figures given were projections and not actual figures.  I said that the disclosure document, including the projection information, had been prepared by FD from information supplied by Pizza Haven, in particular information arising from Pizza Haven’s experience in South Australia, the chain having been in operation there for a few years.

95                  When he had finished his reading, Reyes stated that he not only read out the warning preceding the table but also the other warning statements in the Disclosure Document.

I usually read out these cautionary references at the end of going through the disclosure document because at the end of the process I had potential franchisees sign an acknowledgment … .

96                  Reyes said that he read out the first acknowledgment before it was signed by Taylor in his presence.  He noted that:

I wrote on the acknowledgement ‘after interview please’ … which was a note to the secretary to send a standard follow up letter.

97                  Reyes also stated that he provided Sanders and Taylor with a copy of the franchise application. 

I said that if an application was to be lodged, a refundable payment of $1,000 would be required, such money to be repaid if the application did not proceed.

He added:

I have looked at the documents from FD’s file which confirm the provision of the disclosure document on 5 September 1990 … .  [T]his document bears my writing. 

98                  In cross-examination, Reyes acknowledged that he knew that Sanders and Taylor wanted a franchise as an investment, and that they intended to employ a manager to carry on the day-to-day running of the business.  Reyes also said that they told him that their spouses would be involved. 

99                  Reyes did not shrink from the proposition that at the time he believed a Pizza Haven franchise to be a very good product.  Of the product he said:

I love it.

I bought one myself.

(Reyes and his wife acquired a Pizza Haven franchise (the Syndal territory) on 12 September 1990.) 

100               Reyes maintained that, at the first meeting with Sanders and Taylor, he had given them the whole of the Disclosure Document and not, as Zienkiewicz said, simply the second part on “Franchisee Capital Requirements” and “Franchisee Profit Projections”.  In cross-examination, he said that he spoke about the Disclosure Document during the last 10 - 15 minutes of the interview,

going through what was the directors, the companies related, the small definitions about the actual agreement, you know, like 5 per cent royalty, if that was the one – I can’t remember – or the initial franchise fee, all those sort of things, and then showing the cost of calling it Pizza Haven, right, okay.  That happened there, showing what it was, and those are your projections.  Next to your projections you have your explanation of what each of those were:  ‘This is for you to take to your financial advisers, read the front part,’ … .  Read the front part aloud, I had them sign the receipt of financial information. 

101               This account differed from his witness statement.  When asked to explain himself, he stated that the whole interview was “an hour and a quarter, an hour and a half” and that it took him 10 minutes to take prospective franchisees through the Disclosure Document,

but if somebody would make an inquiry about a point itself, well, that would probably have been another 20 minutes.  The meeting itself took an hour and a quarter to an hour and a half – the meeting itself.  We show the video.  That took something like 10 minutes itself.

102               In the course of cross-examination, it became clear that, notwithstanding his detailed witness statement, Reyes did not have an independent recollection of a number of the matters to which he referred, including the provision of the Disclosure Document and the first acknowledgement.  Rather, Reyes reconstructed a large part of his account of this meeting from the documents that he had seen (such as his diary, the first acknowledgment, the Disclosure Document) and from what he recollected was his usual practice at the time in recruiting franchisees for Pizza Haven. 

103               For example, the applicants’ counsel asked Reyes whether he actually remembered when he gave the applicants the Disclosure Document.  He responded:

Well, there was a process of giving a disclosure document in the first meeting.  So I must have given them a disclosure document.

If I wouldn’t have given them the disclosure document I wouldn’t have the acknowledgment signed.

104               The applicants’ counsel also asked whether he actually recalled showing the video of the Adelaide television advertisement, and Reyes said:

Yes.  I used to show it to people, that video.

In answer to the applicants’ counsel’s question,

You told them what the current state of Pizza Haven franchising was in Victoria.  Is that correct?

Mr Reyes responded,

Probably, yes.  Sorry, I can’t remember exactly.

105               Bearing in mind the natural effect of the passage of time on memory, it is unsurprising that none of the participants in the meeting of 5 September 1990 could recall precisely what was said on that occasion.  Presumably, after introductions had been made, Reyes told Sanders and Taylor something about Franchise Developments and Pizza Haven, and the prospective franchisees explained something of themselves.  I accept too, as Taylor and Reyes said, that the prospective franchisees told Reyes that they were proposing to invest in a franchise or franchises and to employ a manager to run the business on a day-to-day basis.  Presumably, Reyes also told them about the Pizza Haven product, Pizza Haven’s past history and existing position in and proposed plans for Victoria.  As Reyes conceded in cross-examination, he probably told them that Pizza Haven had been operating successfully in Adelaide.  It seems likely too that Reyes showed Sanders and Taylor a map of the available territories (since they were considering becoming franchisees of a territory or territories).  All agreed that Reyes showed a video of an advertisement appearing on Adelaide television.  Probably too Reyes showed them the Pizza Hut information to which he referred (since that information showed that Pizza Hut was trading well and he had it in his possession at the time). 

106               I accept too that, at some time during the meeting on 5 September 1990, Reyes gave the prospective franchisees an information pack containing part or the entire Disclosure Document, and that Taylor signed the first acknowledgment.  Reyes apparently spent between 10 and 15 minutes discussing the Disclosure Document in an interview that presumably occupied at least an hour (given the number and nature of the matters discussed).  At some time too, he discussed the requirement to pay the $1000 deposit in respect of each franchise.

(iv)    After the 5 September meeting

107               After the meeting on 5 September 1990, Sanders, Zienkiewicz and Taylor discussed their plans further.  In his witness statement, Taylor said:

[W]e felt that the food business was a good business to get into because, as [Reyes] had explained to us, and as [Sanders] and I explained to [Zienkiewicz], there was at that time only one pizza chain in Melbourne, after Pizza Hut had bought out Dinos.  In other words, the market was there for a second pizza delivery chain to come to Melbourne.

108               Reyes subsequently sent a letter dated 5 September 1990 to Taylor.  The letter was in the following terms:

Dear Russell,

Just a short note to record our recent meeting.

Franchise Developments is working with Pizza Haven as agents assisting and advising on the selection of its franchisees.

As you know Pizza Haven is a well developed and proven home delivery pizza shop backed by experienced management and marketing personnel.

The concept has a proven track record of profitability in the shops which are currently operating in Adelaide.  Pizza Haven plan to expand into many high profit areas throughout Australia. 

You have been provided with complete financial information on the business and as I discussed with you the requirements necessary to be selected as a Pizza Haven owner-operator.

I’m sure you will appreciate that not all applications are successful but should you be selected as a Pizza Haven Franchisee this decision will be as important to Pizza Haven as it is for you and your family.

I look forward to meeting you again to discuss your application.  [Emphasis added:  see the first pleaded representation discussed below.]

(v)   What was said at the meeting on 12 September 1990

a)         Evidence of Reyes

109               According to Reyes, at a second meeting, on 12 September 1990, he talked with both the applicants and Taylor about their franchise applications.  The applicants and Taylor mentioned that they planned to recruit a Pizza Hut store manager for their business.  In his first witness statement, Reyes said:

We discussed the selection of territories indicated in Mr. Taylor’s application.  These territories were presented to me by Mr. Taylor as his preferred territories, and were not suggested by me.  Mr. Taylor’s application referred specifically to Ormond and Springvale.  The territories sought therefore included Bentleigh, which I knew to be a company site.  I said that Bentleigh might present a problem, as that area had been allocated as a company site, with a store already available, being a store which had already been fitted out as a fast food outlet.  I said that Pizza Haven planned to use Bentleigh as a training site, and that I had been interested in the territory myself, as it was close to my house, and had a store already located and already fitted out as a fast food outlet, but I was told it was not available.  I said that Louis and Gabriel Christou were in at the FD offices, which happened to be the case, and that I would try to speak to them about the availability of Bentleigh.  I also said that it would be helpful to meet them anyway if this was convenient.

110               Reyes was cross-examined about the selection of Ormond (referred to as “Bentleigh” by Reyes and the Christous).  His evidence was that the applicants and Taylor first mentioned Ormond when they lodged their applications.  According to him, “Ormond” was written on Taylor’s front sheet at the time he received it.  Reyes did not dispute the evidence of Zienkiewicz that the word “Ormond” was written beside the words “position applied for” in Reyes’ presence on 12 September 1990.  Reyes agreed that Gabriel Christou had told the applicants and Taylor that Ormond was intended to be a company store and the Melbourne head office, and that it was close to being operational.  He did not, however, recall Gabriel Christou saying that Ormond would be one of the better performing territories; or that if the applicants and Taylor chose only one territory, they would not be permitted to purchase Ormond; or that Ormond would turn over between $10, 000 to 12,000 per week.  In relation to the latter topic, he said:

[T]he brothers would not discuss – ever discuss turnovers or anything like that in meetings.

He denied that there had been any discussion about what column in the profit projections table was most likely to describe the performance of the Ormond store.

111               Reyes also said that he “went through the whole of the franchise agreement”, and that this took about 30 to 45 minutes.  If this was so, then he must have gone through the document summarily, bearing in mind that the agreement consisted of about 44 pages and, on Reyes’ own estimate, the entire meeting went for no more than 90 minutes.  Reyes did say, however, that he “concentrated on” certain clauses, and if so, he must have said little about the others.  I accept that he may well have paid more attention to some clauses (as e.g., cls 2, 3, 8 and 17) in the interview than to other provisions. 

112               According to Reyes, after discussing the franchise agreement, he invited Gabriel and Louis Christou (who happened to be visiting Franchise Developments) to meet the applicants and Taylor (which they did).  During the following discussion, Reyes said that the Christou brothers described the history of the business and its present status, including the fact that there were already 17 stores operating in South Australia.  According to Reyes:

They said that they had developed a special family recipe for making pizzas, and that they emphasised freshness in the preparation of their pizzas.  …  They said that they marketed the business aggressively in Adelaide and planned to do the same in Victoria, using leaflet drops and some media advertising.

Gabriel Christou said that the franchisor would help new franchisees and give them as much assistance as they could because they wanted each franchisee to be successful.

I can remember there being some discussion about what we called the Bentleigh territory and its availability.  I can remember that it was discussed that the Bentleigh territory had been allocated for a company training store for Pizza Haven as a suitable store had been found in the territory, being an ex-chicken shop, and the lease had been secured by Pizza Haven.  Louis and Gabriel Christou said that they planned to keep the territory as they had secured a store suitable for training.  Mr. Taylor said that his group would like two territories, their first preference being Springvale, and that they also wanted the Bentleigh or Ormond territory (as he referred to it).  The Christous said they would need to think about it.  I recall other matters of a positive nature being discussed about Pizza Haven and its plans for Victoria.  The Christous said they hoped to expand Pizza Haven substantially in Victoria and to open 50 stores in Australia within about another two years and that it operated successfully in South Australia. 

There was also discussion about the success of Pizza Hut in Victoria.  Gabriel Christou said that Pizza Hut had converted the Dial-A-Dinos home delivery stores to Pizza Hut delivery stores in Victoria so that the well known Dial-a-Dinos name had been removed from the market in Victoria, with there then being one major brand in competition in Victoria rather than two, as had previously been the case. Gabriel said that this was good for Pizza Haven’s plans to expand in Victoria.

113               Again, it became clear in cross-examination that Reyes had no very precise memory of exactly what had been said at this meeting, when and by whom.  When the applicants’ counsel sought to clarify matters, there was the following exchange:

Counsel:          What I’m asking you to tell her Honour is whether or not you can recall the various topics I’m raising having been raised in meetings with my clients that you attended?

Reyes:             By Gabriel Christou?

Counsel:          Yes, by Gabriel Christou so far?

Reyes:             Right.  Well, I can set the topics in general, right, like saying talk about the product, the campaign, right – the advertising campaign.  Now, if you tell me Gabriel said exactly that the dough had 200 grams of flour and – no, I don’t remember that exactly, right.

 

Counsel:           Let me take you back one step then.  Did Gabriel at any meeting with my clients which you attended refer to Pizza Haven’s marketing and promotional campaign in South Australia?

Reyes:              Yes, that – I say yes because it’s a most probable topic.  [Emphasis added.]

114               Counsel for the applicants subsequently asked Reyes whether either of the Christou brothers said that the Melbourne territories would produce a business that would be successful.  Reyes answered:

Look, what I recall is they were with the Christou brothers 10 minutes and they talk about South Australia, right, how was South Australia, the product, the family, coming into Melbourne, and that was all – and a few mentions about the Ormond or Bentleigh territory when the brothers – that I mentioned to the brothers when I saw it in their application.  That was the whole of the meeting with them. 

115               In answer to further questions, Reyes said that he could not recall:

·        any discussion between the applicants and Gabriel Christou about the cost of ingredients;

·        Gabriel Christou saying that Pizza Haven’s purchasing power meant that the food costs would be as low as they could be; or

·        Gabriel Christou saying that if any franchisee could source a product at a cheaper price Pizza Haven wanted to know about it.

When counsel for the applicants asked “Do you recall Gabriel Christou saying that if my clients were to purchase two territories he would make Ormond available to them?”, Reyes responded firmly that “No, that wasn’t the case”.

 

b)         Evidence of Louis Christou

116               Louis Christou was not responsible for the selection of franchisees, and it would seem that his involvement with the applicants at the time of their entering into the franchise agreements was accidental.  According to all witnesses except Zienkiewicz and Sanders, Louis Christou said little at the ten-minute meeting with the applicants and Taylor on 12 September 1990.  In his first witness statement, Louis Christou said that:

The people concerned display[ed] an awareness of the territories available and that they said to us something to the effect they were interested in more than one territory.  There was discussion about their interest in a territory in which we planned to open a company training store as we had found a suitable site, in Bentleigh.

I can remember Gabriel or myself asking them about their background and who it was that was going to run the franchised outlets.  I can remember being told that it was planned that Mr. Taylor would run the franchised outlets and it was said to us that he knew all about the food industry, and that the other gentlemen involved would be partners.  He mentioned using a Pizza Hut store manager as a store manager.

I believe Gabriel may have referred to the fact that we had 17 shops in Adelaide and it was hoped by us to recreate the successful South Australian franchising experience in Victoria and to develop the franchise accordingly in Victoria. 

I did not regard the meeting as being of great significance but rather one in the nature of an incidental meeting.  Afterwards, Gabriel and I discussed letting the applicants and Mr. Taylor take the Bentleigh territory and our proposed company store site, and we discussed getting another site suitable for a training store.

117               I accept that Louis Christou was a witness of truth, although in cross-examination he readily conceded that he had only limited recollection of the meeting with the applicants and Taylor, and of what was said in the course of the meeting.  His evidence was nonetheless important, because it supported the respondents’ case that the applicants and Taylor were the first to propose that they acquire two territories and had themselves mentioned Ormond (or Bentleigh, as Louis Christou called it).  His evidence also supported the proposition that the applicants themselves were cognisant of the advantages that Taylor’s experience and the recruitment of a Pizza Hut manager conferred on their business plans.

c)         Evidence of Gabriel Christou

118               In his first witness statement Gabriel Christou described the meeting on 12 September 1990 in the following terms:

We had a discussion, wherein they introduced themselves to us by saying that they worked in managerial roles at Phillip Morris.  I recall Mr Taylor stated that he had experience as a manager of a McDonald’s outlet.  They said that they were keen to be involved in the operation of Pizza Haven franchised businesses and that they had approached a Pizza Hut store manager to act as a manager for their proposed Pizza Haven stores.

I spoke about the experience of Pizza Haven in South Australia.  I said that we had successfully set up 17 stores in South Australia and that we hoped to expand the business quickly in Victoria.  I can recall saying that we were looking forward to having 50 stores set up in Australia within about two to three years.

I believe I said that we had been successful in South Australia because we had developed a unique pizza recipe and that we had in particular promoted the freshness of our product.  For example I said that we used fresh dough whereas Pizza Hut by comparison used pre-prepared dough.

I believe [we] discussed our purchasing process in South Australia which I said operated by the use of a central commissary system where all stores bought processed product from a central supply point.  I said that by contrast it was a plan of Victoria to operate through a distributor, and that we had appointed Ballantyne Five Star to act as distributor for all Pizza Haven products to Victorian stores.  I said that Victorian stores would have to buy their fresh product locally from a local vegetable supplier to supply fresh product on a regular basis.

Mr Taylor said that his group had planned to take on two territories, and in particular he identified Springvale and Ormond.  I explained that the Ormond area, which came within the Bentleigh territory, was reserved for a company training store and that an ex-chicken outlet known as Smokin’ Joes had been secured on North Road, which had already have been fitted out as a fast food outlet.  I said that the store was of a suitable size for use as a training store.  I said that if they were going to take the Bentleigh territory then they would need to take the store that had been located. 

I said that we had marketed the business aggressively in South Australia using leaflets and other media advertising and we planned to do so similarly in Victoria.  I said that the experience of Pizza Haven in South Australia had been successful and that we had obtained sales figures for Pizza Hut which showed that the franchised stores were achieving healthy sales in Victoria.  I said that we were particularly encouraged by the take over of the Dial-A-Dinos chain by Pizza Hut a year or two before which resulted in a well known name in the home delivery pizza business being removed by the adoption of the Pizza Hut name for the Dial-A-Dinos home delivery stores and that therefore there was an opportunity for Pizza Haven to come in as the second major brand in the home delivery pizza business in Victoria.  I said this gave us a lot of encouragement in our plans to expand in Victoria.

119               In cross-examination, Gabriel Christou described the discussion on 12 September 1990 as follows:

And they asked me, ‘How did you start Pizza Haven?’  I mean, they were – I guess they wanted to know how the whole thing started.  So I said to them that at the corner of Glenelg in Adelaide there is a corner where used to be a white elephant, used to be called.  Nobody really succeeded except, I guess, I did.  And of course I just went on and I told the story, began – of course, by the – I guess the way it was told was that I copied Pizza Hut.  They had the red and white chequered tablecloths and I had the blue and white, I guess being Greek, and there was a restaurant.  There was no deliveries.  So I’ve told them the story.  Of course, you know, they were – yes, they wanted to know exactly how was Pizza Haven derived, and from then on I followed – Pizza Hut was doing very good sales further from where I was, not too far, probably about 500 kilometres away, … and so what I did I explained to them how the whole thing was developed and developed my own recipes and it happened that one night I discovered this flour that was just a miracle, that had different types of flours that I was mixing up, happened to be 11 point something per cent protein that I discovered later on that was the ideal, my recipe, the way it was said.  So from then on we talked about – well, they mentioned about they want two – couple of territories, they’re looking at a few territories in Melbourne and I also talked about distribution of our products and I explained to them how it was done and how we do it here in Adelaide.  That was explained to them and I also talked about – and of course Taylor said to me that he had a manager from Pizza Hut and they talked about themselves, Philip Morris – I think Zienkiewicz worked for Philip Morris and Taylor had a McDonald’s which, for me, it was all right, it was good, good for me.  … .

At that time the position was that – there was a little big of haggling about the price, buying two areas, asked about, ‘Come on, Gab, give us a better price,’ on these two areas or whatever.  So I said, ‘Look, let’s just hang in there, let’s just wait.  You know, let's not rush into it.  Let’s talk about some of the fundamentals first.’  ‘First of all,’ I said, ‘investors I don’t accept.  So I’m going to come back to you guys later on, I’ll do that, with the answer, would have, but at the present moment I want to think about Mr Taylor, who is an ex-McDonald’s guy, and the Pizza Hut guy.  The rest of them’ – and, of course, one of them asked me, ‘Do you think one store is enough?’ and I said, ‘Look, you can’t – what do you think, you’re not buying a hotel, you’re buying one store and then you’re buying two stores according to what you’re telling me.’  So we worked on sort of two stores and after that we discussed the purchasing, I think – Taylor mentioned something about, ‘Yes, I know somebody with – I know quite a few suppliers,’ he says.  I said, ‘Well, that’s good.  Let’s talk about it and see if you can help us get a better deal with some of the type of goods that we sold.’  Then he says about – I do remember, I do remember saying about, ‘Yes, but you probably make some margins on these,’ and I said to him, ‘Look, nothing is free in life.  When you book something, when you’re buying something you’ve got to procure’ – I mean, there’s a procure – there is a cost in everything but if you can help save the situation, why not.  That’s the whole idea and so there was a bit of discussion, it was quite good.  But I relied a lot on Taylor and, of course, the Pizza Hut guy and they were fairly confident … .

[W]e talked a little bit about the advertising and I said to them that we’d been doing leaflets in Northern Adelaide and it seemed to be working and we’ve done some in Melbourne and, you know, we’ve got the 17 stores and looking forward to opening the 50 stores in Melbourne and the same time I talked a little bit about the radio, that we were having with the Triple T, Molly on the radio … . 

120               When the applicants’ counsel inquired whether anything else was said at the meeting with the applicants and Taylor, Gabriel Christou responded:

Maybe I think a bit later on.  In the present I cannot think of anything else. 

121               Gabriel Christou’s evidence in cross-examination was that:

·        there was no discussion about whether Pizza Haven had investigated the market in Melbourne;

·        there was no discussion about whether Pizza Haven had investigated the proposed territories in Melbourne;

·        the applicants and Taylor did not ask him how he thought the Ormond store would go; and

·        he did not say that the Ormond store was going to be one of the better performing stores.

122               As already noted, it became plain in cross-examination that, despite his assertions to the contrary, Gabriel Christou had no recollection of the actual date of this meeting; and although he claimed to have “all my diaries back in Thailand from back in 1984”, none were produced in Court.  It became clear in the course of cross-examination (and despite his protestations to the contrary) that he was largely reconstructing an account to counter the applicants’ claims, and to favour his own interest.  I accept, however, that his evinced enthusiasm about the Pizza Haven business at the time was real, and that he believed in the worth of what he was selling.  As noted, however, his volubility in giving evidence showed a strong disinclination to give exact answers to precise questions.  I remain sceptical about the reliability of much of his evidence.

d)         Taylor’s evidence

123               The applicants and Taylor gave differing accounts of the meeting with Reyes and, subsequently, the two Christous.  In his witness statement, Taylor said:

At that meeting, I said that we would not be giving up our jobs to work in the store, and we would be investor/managers, with the long term aim of owning two or three of these, where we would have an area manager, managing the stores, our involvement being limited to regular meetings where we would review how the stores were doing.  I also said that we were in the process of approaching a Pizza Hut store manager who would be running the day-to-day operations of the store under our guidance. 

LR said that he would be buying a store as an owner/investor.  GC mentioned that Pizza Haven had a store in Ormond which they already had a lease over, and that if we liked, Pizza Haven would be happy to relinquish it to us, so that we could get up and running quicker, as the other territories we were considering did not have any premises readily available.  GC told us the Ormond territory would be a very busy store, with main road location, with high visibility, and that they could have it up and running in four to five weeks.  GC said Pizza Haven had undertaken market research on all franchise areas, including Ormond.  We spent a lot of time talking about the product and the concept of the stores, how Pizza Haven had done in Adelaide, and explained how they had selected the flour so as to give them a better quality base for the pizzas.  We discussed the level of sales they said the store would achieve.  They said it was going to be a company store and that it would be successful.

 

[W]e were told that if we took the Ormond territory, Pizza Haven would let us put a holding deposit on the Springvale territory which we were interested in, and we couldopen up a store there after we had established the Ormond outlet.

124               In cross-examination Taylor resiled from some of these statements, saying he was unable to recall what Reyes (or either of the Christous) said about the profit projections table; whether he had asked to see actual trading figures for Victoria; whether he had in fact seen any such figures; whether he had seen any figures relating to the South Australian Brighton store; or whether he had told Gabriel Christou about his plan to employ a Pizza Hut manager.  Taylor maintained that:

What I can recollect is that Ormond was presented that there was already a leasing place to Pizza Haven and it was going to be used as a training store, high visibility.  They had already done market research to say that it had, you know, a ripper potential basically based on what they had told us.  You know, figures were quoted or insinuated of between 7 and 8 thousand [turnover] starting a week.  You know, a big store and it was going to be their flagship which, if I think back, I mean, that was probably one of the reasons why we took that.  It was going to be up and running quicker.  You know, quicker sales, quicker cash flow, and the added bonus was we had a store manager that worked three or four kilometres away.

125               Taylor did not mention turnover figures in his witness statement, and could not satisfactorily explain why he could recall the matter at trial and not earlier.  In determining whether or not to accept this evidence, it must also be borne in mind that he could not recall a number of other significant matters, as for example, whether he had planned to invest any of his own money in the business, or whether he had in fact invested in it.  When it was put to him that he was bringing the “know-how to the venture” and the applicants, the capital, he merely said “I can’t recall”.  He could not recall anything of his subsequent discussions with the applicants about the acquisition of a franchise, observing

I can’t recall exactly what we would have spoken about.  It’s nearly 11 years ago.

126               I formed the view that Taylor’s recall was selectively designed to favour the applicants’ case (and to vindicate his participation in the venture).  There was also the following exchange between counsel for the respondents and Taylor:

Counsel:           You see, what you say is that the franchisor told you that it had secured a lease on a store in Ormond and they would be happy to relinquish it to you so that you could get up and running quicker.  So that, I suggest to you, you understood as being an attempt by the franchisor to cooperate with helping you to get a store going quickly?

Taylor:             I can’t recall but that could have been the case.

Counsel:           And that of all things, the store was in the same area which had been managed by the Pizza Hut store manager?

Taylor:              Yes.

Counsel:           It must have seemed like a pretty good proposition to you.  You had a store located in the territory and you had a person with the experience of running a store in the business of the direct competitor?

Taylor:              Yes.

e)         Sanders’ evidence

127               Sanders agreed that Gabriel Christou had given an account of Pizza Haven’s history, referring to the 17 stores in South Australia and the stores in Victoria, and that he had described the high quality of the Pizza Haven product.  According to him, Gabriel Christou had said that the applicants should “take up more than one territory”, and that the purchasing power of the franchise would result in cheaper food costs. 

128               In his first witness statement, Sanders specifically said:

During the meeting Chris told them our background and that we were investors who would employ a manager.  We were presented with a brief outline of the Pizza Haven disclosure document which included some projected turnover figures with relevant costs and expected profits.  We were told we could not have the full disclosure document unless we paid a non-refundable deposit of $1000 per territory. 

Leo Reyes showed us a document which he said showed the takings for the 5 operating stores in Melbourne for the previous weeks.  I have not seen the document again but I have seen a similar document … .  They said the stores were trading at a level which would have meant that they were returning a profit.  Gabriel said this level of turnover was achieved in the first few months of operation, even before television advertising, which was going to start as soon as 8 to 10 stores were operational.  We were told if we went ahead with a franchise purchase the $1,000 would be taken as a deposit and part payment on the franchise territory.

…

[Gabriel Christou] said that the Pizza Haven chain was growing and would continue to grow.  He said there would be 50 stores trading by July 1992.  We discussed the proposed television advertising campaign in Victoria, which he said would commence when there were 8 or 10 stores operating.  We said at this stage we were looking to take up the Springvale territory.  He said if we agreed to purchase two territories at this stage, he would make the Ormond territory available to us.  He said that Pizza Haven had intended to set up the Ormond store themselves and run it as a company run training store.  He said the market research had shown that the store that was being set up at Ormond was going to be one of the most profitable in Melbourne.  He said the offer of the Ormond store was only open if we agreed to purchase two territories now, and because of the generous nature of the offer, it would expire in two weeks.  Gabriel said that as he expected the store turnover to be high, we may wish to set up a second store in the Ormond area within two years.  Gabriel said that their market research showed that the Ormond territory would turnover $7,000 per week after trading commenced and that their market research showed the Ormond territory turnover would rise to $10,000-$12,000 per week and once it was fully established, it would turnover $15,000 per week.

Leo [Reyes] said … we would recover our investment in a year.  We asked to have a copy of, or at least to see the market research done for the Victorian market.  They said that this was strictly confidential as they did not want the contents of this report to become public.

…

Leo Reyes said that if we were to have an oven failure, the franchisor would have a back up oven into our store and operating in one hour.  This was standard practice he said, and the level of support that could be expected from the franchisor by franchisees.  We said we had convenience food expertise in that Russell Taylor had considerable experience in the position of a McDonald’s store manager.  We said we had also secured the services of a person as our store manager, who had been managing a Pizza Hut store for two years.  We discussed the type of training that Pizza Haven would require.  We asked how the size and location of the franchise territories was determined.  Louis Christou said it was done after extensive market research.  We asked to see the market research.  Louis Christou said it was confidential.  He said the market research meant that every territory would be viable.  He said that eventually some franchisees might want to open a second store in their territory.

We said we wanted to know what support we could expect from the franchisor if we failed to trade profitably.  Gabriel said that all of their expertise would be made available.  He said that in the past, on the odd occasion, a store had gotten into difficulty he and his brothers had rushed right in, rolled up their sleeves, helped with product preparation, and manned the phones.  He said all possible assistance would be given, because they did not want to see any franchisee struggle.  He said he also believed that no properly managed store would get into such a position.  He said on the other hand, a store that was performing poorly was holding back the franchise as a whole, so it was in the best interests of the franchisor to see that all the franchisees were operating successfully.

We went through the operating costs and projected profits during the meeting.  We asked what margin Pizza Haven was taking on products being supplied through their commissary.  Gabriel said no percentage was being taken on supplied goods as the franchisor was making a very reasonable income from their 5.5% royalties.  He said their main aim was to help each franchisee to increase their turnover, thus increase the size of their royalty cheque.

129               There were some linguistic similarities between the first witness statements of Sanders and Zienkiewicz.  Sanders conceded that he and Zienkiewicz had been discussing this litigation for years.  Sanders also said:

I have no problem with either the similarities or the differences between the two statements made by two people 10 years after the event.

130               Sanders’ evidence in cross-examination was that Gabriel Christou had first suggested that they take a franchise over the Ormond store, and that Reyes and the two Christou brothers led him to have an expectation that, from the start of its operations, the Ormond store would have a weekly turnover of $7,000.  He also said that “Ormond” was included in Taylor’s application following a comment by Reyes.  Later, he said:

The reason that we were being offered the Ormond store was that Leo Reyes, Gabriel Christou and Louis Christou said that the market research that had been undertaken for the company said that this store was going to turn over at $7000 a week and that it was – they had guaranteed that this was so.

…

The purchase of the Ormond store was on the undertaking from the Christou brothers that this was one of the gems in all of Melbourne and that this Ormond store was available to us but because it was such a choice offering we had two weeks to accept or reject the Ormond store, and that the Ormond store was going to turnover $7000 a week.  That is the reason that the Ormond store was purchased.

131               Sanders added that:

It had been said that 10 to 12 thousand would be achieved, not immediately but probably towards the end of the first year’s trade.  My concern was that we were going to trade profitably from the outset and I was more than confident, given the confidence that Gabriel and Louis Christou had divulged to us – their confidence as a result of the market research they had undertaken. 

…

The guarantee was such that if it failed to perform the franchisor would be in to see that it got back up to that volume of turnover.

…

It was going to do 7000, whether we did it by ourselves or whether the franchisor came in to assist us to do 7000.  It was going to do 7000, and the franchisor spoke at length – at length – on the issue of 7000 a week turnover.

132               Sanders accepted that the information about the turnover of stores in Melbourne in September 1990, which he said was provided to him (and Zienkiewicz and Taylor) by Reyes at this meeting (but see below), indicated that, at that date, no store had attained a $7,000 weekly turnover.  Sanders maintained, however, that:

The guarantee of performance was in regard to not each and every store, not even some stores, but to the Ormond store.  The Ormond store had been singled out, they said, because of its outstanding properties.  It was going to be a company store, they said.  There was going to be training conducted because it had such a large floor plan and this was the store that was going to do $7000 a week.  And in addition, as television advertising kicked in, which was going to happen – in the first instance when we first met Leo Reyes when eight stores were trading, in the second instance on the meeting of September 5 when eight to 10 stores were trading, television advertising was going to kick in and this was going to be a shot in the arm for the stores that were already trading.

133               Sanders maintained too that he, Taylor and Zienkiewicz repeatedly told the Christous and Reyes that:

(1) that we were always investors and never owner operators; and (2) we would be borrowing 100 per cent of the capital required to go into the business.

He denied that Reyes or the Christous had said anything to him about having a preference for owner/operator franchisees. 

134               Like Zienkiewicz, Sanders also said that their $2,000 payment was for the Disclosure Document (and not to be considered as franchisees); that Reyes and the Christous had made strong statements about their market research, and had declined to disclose its contents; and that he had never seen the figures concerning the Brighton store in South Australia. 

135               In cross-examination, it became clear that Sanders claimed to have a detailed recollection of some matters and no recollection of others.  Counsel for the respondents asked Sanders about the discussions that took place between himself, Zienkiewicz and Taylor around and between the meetings with Reyes.  He said that he had no recollection of any of them.  Sanders failed satisfactorily to explain his selective memory.  It seemed to me at trial and in re-reading the transcript of evidence that what Sanders claimed to remember was a reconstruction of the discussions that he had had with Reyes and the Christous in September 1990.  This reconstruction, which was designed to favour his own interest, probably developed in the conversations between the applicants in the years between the purchase and sale of the franchise and the trial.

f)         Evidence of Zienkiewicz

136               In his first witness statement, Zienkiewicz said:

·                  “Reyes produced copies of a brief outline of the disclosure documents for us to peruse.  He said we would not be able to have the complete disclosure documents until we paid a $1,000 per franchise which was not refundable if we chose not to proceed”.

·                  Gabriel Christou referred to the history of the Pizza Haven business (mentioning a “closely-guarded family secret recipe” and the high quality of the product); aggressive marketing and promotional campaigns (and “that we could [also] expect the same in Melbourne”); the current number of stores; and the “very strong” level of interest in Victoria.

·                  Gabriel Christou said that the growth of the chain was guaranteed by the growing financial returns that its stores were experiencing.  He said that there would be 50 stores trading by July 1992 and that this growth would result in increased benefits to all franchisees. 

·                  Gabriel Christou said that there would have to be television advertising when there were between 8 and 10 stores.

·                  Louis Christou asked the applicants and Taylor to give a brief outline of themselves and their expectations of the business. 

·                  Zienkiewicz told Louis Christou that they would have to operate the store under management, and Christou said that he did not see this as a problem and that he could see more franchises being taken up by investors, as in Adelaide.

·                  Taylor asked Louis Christou if he had any objections to them appointing as one of their managers a person who had two years’ experience with Pizza Hut, and Christou said that he had no problems with this.

·                  Gabriel Christou said that Pizza Haven would provide training in Adelaide at its expense. 

·                  Taylor asked what the criteria were for determining the size and location of franchise territories in Melbourne.  Louis Christou said that this was done “quite scientifically, after extensive market research commissioned by Pizza Haven in the Melbourne market”.

·                  Zienkiewicz asked to see this research and was told by Louis Christou that it was confidential. 

·                  Louis Christou said that, as a result of the research, territories had been established that would guarantee the viability of every franchise.

·                  Louis Christou said that he could see a time where some franchisees would want to open a second store in their territories.

·                  Gabriel Christou said that, if for any unforseen reason, the applicants and Taylor failed to trade at a point above break-even, he would personally come to their store, roll up his sleeves, and make pizzas.  

·                  Gabriel Christou said that, in order to maintain quality and uniformity through out the chain, all the items apart from fresh vegetables would need to be purchased through Pizza Haven.  He said that “there was no mark up on these items, as they received their income through franchisee royalties”.

·                  Gabriel Christou said that if any franchisee managed to find any product at a cheaper price, he wanted to know in order that he could source the supplier and all franchisees would benefit. 

·                  Gabriel Christou said that, if the applicants and Taylor were to purchase two territories, and since they were investors, he would make the Ormond territory available to them. 

·                  Gabriel Christou said that at this stage the Ormond territory was not on the market, as it was intended to be set up as a company store, and used as the head office and a training store for new franchisees in Victoria.  He said that Ormond (Bentleigh) had been chosen for a company store after market research had shown that a store in this area was going to be one of the better performing stores, with a weekly turnover between $10,000 to $12,000 and that once fully established this could rise to $15,000 per week.  He said that realistically the applicants and Taylor should expect to achieve a turnover of $7,000 per week at the Ormond store when it opened.  The higher figures would be attained after the first year of trading. 

·                  Gabriel Christou said that Ormond was only being made available to them because they were the type of investors that Pizza Haven wanted to encourage; and that, if they chose to purchase only one territory at this time, the offer of the Ormond store would be withdrawn.  He also said that the Ormond offer would only be available for two weeks.

·                  Reyes said that, seeing Ormond was close to being operational, he would strongly recommend the Ormond option from an investment point of view, since taking the option would ensure that they recouped their investment within twelve months, and generated the income to open Springvale (for which a site had not yet been chosen).

·                  The applicants and Taylor told the Christous and Reyes that they would consider their offer and get back to them.

·                  Reyes showed them a document showing the turnover for the stores currently operating in Victoria.  He said that these stores had only been operating for a few months and, as they could see from the profit projections, were trading profitably.  He said that Pizza Haven was underestimating the potential profitability of the franchises as there had as yet been no television or advertising.

137               Zienkiewicz also maintained that Reyes had said:

[T]he two store deal was an outstanding offer and that if he could afford two territories he would have tried to purchase the Ormond store.  Leo Reyes said that we were virtually guaranteed a successful territory because Pizza Haven had picked this for their company store.

138               Zienkiewicz said in cross-examination that he had told Louis Christou that the applicants and Taylor were intending to borrow 100% of the money required to set up the franchise (although this did not appear in his witness statement).  He maintained that:

In the conversation Louis Christou asked each of us to give a brief explanation of our backgrounds to provide him with some expectations of what we had.  During that course of conversation I said to Louis that we would be borrowing 100 per cent of our investment.  I said would it be okay – we’d need to run it by management and he said he could see no reason why [not].  His other franchisees in Adelaide did.

139               He conceded that he did not tell the Christous or Reyes the amount of his intended borrowing.  This concession led to the following exchange between Zienkiewicz and the respondents’ counsel:

Counsel:           How did you expect that you could recoup your investment within 12 months without disclosing to the franchisor how much your investment would be?

Zienkiewicz:     That was based on the profit projections in the disclosure document.

Counsel:           So you weren’t actually told that you would recoup your investments in 12 months?

Zienkiewicz:     I was told by Leo Reyes.

Counsel:           But you have agreed with me, haven’t you, Mr Zienkiewicz, that you did not say how much your investment would be?

Zienkiewicz:     We said we’d be buying 100 per cent of capital required for opening up one store from the profit projections and from the mini disclosure document that was handed to myself, it said that a store set-up was approximately $78,000.  So based on that, plus the 30,000, our capital would be required between 130 and 135 thousand dollars to open up one store.  Based on that and the profit projections and at the level that was told to us which was 7000 minimum, we could have recouped our investment.

Counsel:          How much were you going to borrow?

Zienkiewicz:     I personally was borrowing 85,000.

Counsel:           And how much was Mr Sanders going to borrow?

Zienkiewicz:     75,000.

Counsel:           That’s $160,000?

Zienkiewicz:     That’s correct.

Counsel:           You say there was something in the profit projections that conveyed to you that you would recoup $160,000 within 12 months?

Zienkiewicz:     Based on the higher figure of $12,000 it was $206,000 profit from memory.

Counsel:           You say you recalled you were told that you would recoup your capital investment because you would make $7000 per week?

Zienkiewicz:     We were initially told, based on the market research that was conducted, that the Ormond territory was going to do between 10 and 12 thousand dollars and would easily rise to $15,000 and realistically to expect 7000, and that was on opening only.

Counsel:           With the benefit of looking at the profit projections I want you to try and explain how it was you formed the impression that on the $7000 per week level you would recoup your investment within 12 months?

Zienkiewicz:     I was basing my decision on the information that was provided to me by Gabriel Christou.  The 7000 was a conservative estimate by Gabriel and that was on the store opening.  I was assuming, as per the market research that was carried out, that we would be doing between 10 and 12 thousand and jumping to 15.

Counsel:           So in other words you understood you weren’t going to recoup your investment on a $7000 per week turnover in the 12-month period?

Zienkiewicz:     I understood it was a transitional phase from opening the store but we would jump to 10 to 12 thousand.

 

140               Zienkiewicz stated in cross-examination that he received only half the Disclosure Document at the time of his meeting with the Christous, although he also said that Reyes had shown them the sales figures for the Victorian stores (but see below).  (These were the figures referred to at [36] above.)  In earlier litigation involving Glev Franchises and another franchisee (“the Kaytonruby litigation”), Zienkiewicz had given evidence that he had come across these sales figures inadvertently.  I accept, as the respondents’ counsel submitted, that the contradiction between his evidence in this case and in earlier litigation was not satisfactorily explained.  Having regard to this and other matters referred to in these reasons, I formed the view that Zienkiewicz did not generally give reliable evidence. 

141               In cross-examination, Zienkiewicz said that, at the conclusion of the meeting with the Christous, the applicants and Taylor said they were interested in the Springvale territory. 

That is when Gabriel Christou said from an investment point of view he’d make the Ormond territory, or as it was known then, Bentleigh territory, available to us, because market research had shown that it was going to be one of the better performing territories.  The indications are that it would do between 10 and 12 thousand and quickly rise to 15 and the expected turnover should be easily $7000.

142               Notwithstanding Gabriel Christou’s statements, according to Zienkiewicz, Taylor still prepared his application on the footing that their preference was for Springvale.  Zienkiewicz was cross-examined on this evidence. 

Counsel:           Why did you maintain that preference despite all the good things you had been told about Ormond?

Zienkiewicz:     We changed our preference after the conclusion of the meeting on the 5th of the 9th.

Counsel:           That’s not right, is it, Mr Zienkiewicz?  Your preference as drafted by Mr Taylor, notwithstanding what was said on 5 September, was for Springvale?

Zienkiewicz:     Our initial preference was for Springvale.

Counsel:           When do you say you changed that preference?

Zienkiewicz:     After the discussion on 5/9/1990.

Counsel:          Well then, why did Mr Taylor indicate a first preference for Springvale on 12 September 1990?

Zienkiewicz:     He had filled in the documents earlier on.  We had further discussions between the 5th and the 12th at work between myself, John Sanders and Russell Taylor.

…

Counsel:           Well, as at 12 September Ormond is stated to be a third preference, not a first or second.  You can’t explain why it was expressed that way?

Zienkiewicz:     I can’t explain why Mr Taylor put that there.  Our initial preference was Springvale.  It was whether we’d take the recommendations of Gabriel or not.

If, however, Zienkiewicz genuinely believed in what Gabriel Christou told him, it would appear more likely than not that the applicants would have made Ormond their first preference. 

143               Zienkiewicz’s evidence in cross-examination was that, at the meeting on 12 September 1990, the applicants and Taylor paid the sum of $2,000 for “two disclosure documents and two agreements”.  This statement was plainly inconsistent with the Disclosure Document itself, and which on his own account he had been given to read and had read.  He gave no acceptable explanation of how it was that the bank cheque was made out precisely in the manner directed by the Disclosure Document.  He also maintained that the applicants and Taylor had no intention of purchasing more than one territory until after their discussions with the Christous, a statement that is contradicted by Taylor’s evidence (as well as by Reyes and the Christous).

144               Zienkiewicz averred in cross-examination that the Christous and Reyes told him that his investment was “guaranteed”.  When the respondents’ counsel asked him “What do you understand was being guaranteed exactly?”, he responded “That the profit projections, based on the market survey, that the turnover would be guaranteed.”  As already noted, the Disclosure Document cautioned against this very thing.  Zienkiewicz accepted this, but said:

I had a verbal guarantee from the Christous on the one hand and I was here getting a document that had writing on the other hand.  I took the word of the two Christous.

He denied that he perceived that there was any risk attached to the venture.  This denial was, so it seemed to me, inherently improbable, especially if account were taken of the advice that he received from his accountant.

145               Subsequently, the respondents’ counsel asked him what he understood by the word “projections”, in the profit projections table, to which Zienkiewicz said, “This is what you would expect – these are the expected returns on investment”.  Zienkiewicz understood, correctly as it turned out, that these projections were “based on the experience of the South Australian franchised and company stores”.  Nonetheless the return to him was, according to him, guaranteed because –

[b]ased on the market research that had been conducted for the Melbourne area, that the stores were guaranteed, the Ormond store was guaranteed.

146               The respondents’ counsel questioned him further on this assertion.

Counsel:           Were you told that the Ormond franchise was expected to produce sales and profits in the range of the figures in the franchise profit projections or better?

Zienkiewicz:     At that meeting, the first meeting when we were being told about the turnover, the expected turnover of the store, Leo Reyes pointed to the profit projections and said these are the type of profits to be expected at those turnovers.

Counsel:           Expected but he didn’t say they were going to be guaranteed by any research they had done, did he?

Zienkiewicz:     Specifically those words I cannot recall.

Counsel:           You see, either you went into this venture on the basis of being told what was expected or on the basis of some guarantee or assurance of performance.  Can you now clarify whether you went into it on the basis of being told about an expectation of what would be achieved or on the basis of a guarantee?

Zienkiewicz:     Based on what the directors told me, which is Gabriel especially.  On the performance of the store I relied on Gabriel.

 

Counsel:           Did you take it that you were being told about an expectation or a guarantee?

Zienkiewicz:     I believed it was a guarantee.

…

Zienkiewicz:     I was told that I was going to achieve 10 to 12 based on market research.

147               I find, as the respondents maintained, that the applicants and Taylor met with Gabriel and Louis Christou for a relatively short time, and that the Christous made statements favourable to their business interests, including expressions of optimism about the future of Pizza Haven in Victoria.  I also find that the applicants and Taylor first proposed to take up a franchise at Ormond, and discussed the availability of the territory with Reyes and the Christous.  The availability of the territory was an issue because Pizza Haven had taken a lease on a site at 636 North Road, Ormond with a view to using the site as a company store.  Bearing in mind that the applicants and Taylor were yet to be approved as franchisees, I accept, as the respondents maintained, that no firm decision was made during the 12 September 1990 meeting as to whether the applicants could have the Ormond territory.  I discuss the evidence about this meeting further below in considering whether the applicants have made out their case with respect to the misrepresentations alleged by them.

g:  an accountant and solicitors are consulted

148               The same day, 12 September 1990, and after the meeting with the Christous, Zienkiewicz telephoned his accountant, Graeme Hughes, and arranged to meet with him at 4.10 pm that day.  When asked about his discussions with Zienkiewicz, Hughes stated that:

I don’t recall independent recollection now.  But certainly the file notes are indicative of what took place.

Hughes made file notes contemporaneously with the meetings and conversations that they purported to record. 

149               I accept that, as Hughes said in evidence, his file note for the meeting on 12 September 1990 indicated that he had had “a discussion ... with Mr Zienkiewicz regarding a Pizza Haven franchise proposal” and that this discussion had touched on “the probable structure … if it was to proceed with the three parties involved”, “an indication of a turnover of $7000 per week predicted”, a $30,000 deposit, and “set-up costs … in the order of $130,000” (emphasis added).  This reference to a $7,000 weekly turnover was important because the applicants relied on it as written corroboration of a key alleged misrepresentation (see below).  Also at this meeting on 12 September 1990 or thereabouts, Zienkiewicz gave Hughes a copy of the profit projections table in the Disclosure Document. 

150               On 14 September 1990, Hughes apparently telephoned Reyes (and at some time too Tino Bettiol) and sought some actual financial results of Pizza Haven stores.  Although neither Hughes nor Reyes could recall precisely what Hughes asked for, in response to Hughes’ request, Franchise Developments provided Hughes with the profit and loss figures for the Brighton company store in Adelaide over the preceding three years and the sales figures to date for most of the Victorian Pizza Haven stores trading at this time (see below). 

151               As already stated, these Victorian stores sales figures showed that, as at 11 September 1990, the Vermont, Dandenong, Werribee and Knox stores were trading at between $4,197 and $6,510 (although no store had been operating for more than three months and Werribee and Knox for between two and three weeks only).  The 1987 - 1990 profit and loss figures for the Brighton store (in South Australia) showed that, in its first year (July 1987 - June 1988), it had averaged sales of approximately $4,300 per week; in its second year, approximately $5,000 per week; and in its third year, approximately $6,500 per week.  According to Hughes (whose evidence I accept) he advised Zienkiewicz and Sanders “they should have regard only to the lowest turnover and profit level”.  This was level 1 of the profit projections table – being the projection of weekly sales of $5,000 per week. 

152               Between 17 and 21 September 1990 (when the franchise agreements were signed), Hughes had a number of telephone discussions with Zienkiewicz and others (including a representative of Interlease and a solicitor).  Hughes advised the applicants about various matters relating to their business venture, including their proposed levels of borrowings and their plan to employ a full-time manager.  In cross-examination, Hughes was asked whether he formed an impression about the profitability of the venture.  He responded, “I recall there wasn’t a lot of room”.  Hughes also arranged for the franchise agreement to be reviewed by a firm of solicitors.  Another firm of solicitors reviewed the agreement at Taylor’s request. 

h:  the franchise agreements are signed

153               Sometime after the meeting on 12 September 1990, Gabriel Christou instructed Rod Young, who was the chief executive officer for Franchise Developments, that he approved the applicants’ and Taylor’s applications.  Gabriel Christou’s evidence was that he approved the applicants and Taylor as franchisees because (1) Taylor had significant experience as a former McDonald’s manager; (2) they had secured the services of a Pizza Hut store manager who, in September 1990, was managing a Pizza Hut store near what would be the Ormond store; and (3) their wives were to have an active involvement in the business.  Notwithstanding the doubts I have expressed about the evidence of Gabriel Christou, I accept that these factors affected his decision to approve the applicants and Taylor as franchisees. 

154               In his first witness statement, Gabriel Christou said:

Rod and I had a conversation about whether these Applicants should be required to operate both the stores they were taking from the outset or whether we should agree to staggering the opening of the stores.  I said that we would prefer them to be obliged to open both stores within a limited period of time, and I agreed that they could have three months to open one of the stores and then a further three months for the second, and that this should be a condition of the Franchise Agreement.

This was reflected in the Special Conditions in the franchise agreements made by the applicants and Taylor.

155               On 21 September 1990, the applicants and Taylor signed franchise agreements for Ormond and Springvale and gave them to Reyes.  At the same time, Taylor signed an Acknowledgement of Contract on behalf of the applicants and himself.  (The applicants conceded that for this purpose Taylor was acting on their behalf as their agent.)  The Ormond store commenced trading around 27 October 1990. 

i:  some subsequent events

156               Before turning to the representations as pleaded by the applicants, it is convenient first to note a numbers of subsequent events. 

157               First, in November 1990, the applicants and Taylor put a $10,000 deposit on the Albury-Wodonga Pizza Haven franchise; and, in the same month, they (and the Vermont franchisee and possibly other franchisees) submitted an unsuccessful proposal requiring a financial commitment from the group of in excess of $250,000 to acquire the Pizza Haven Victorian Master Franchise.

158               The applicants borrowed 100% of the funds required to acquire each of the Ormond (Bentleigh), Springvale and Albury-Wodonga territories, and to fit out the Ormond store.  They secured their borrowings by mortgages over their homes, with Taylor as their joint guarantor.  The applicants negatively geared their investments and obtained tax deductions for the borrowings.  Why Taylor’s investment remained comparatively small was never satisfactorily explained.  The applicants did not allege that the respondents made any misrepresentations concerning the Springvale or the Albury-Wodonga territories. 

159               On or about 17 June 1991, Taylor left the venture with the applicants, who remained to carry on business by themselves.  In July 1991, the applicants negotiated with Alan Tulloch, whose company was the Master Franchisor for Victoria, to swap the Albury-Wodonga territory for the Noble Park Pizza Haven territory.  The applicants surrendered the Noble Park territory in November 1991.  The Springvale store did not open, and the applicants eventually surrendered the franchise for it as well. 

160               Although the sales turnover of the Ormond store generally increased over time, the store failed to operate profitably.  Between 1990 and 1992, the store was at the bottom end of the scale in the sales for Pizza Haven stores in Victoria.  In June 1992, the applicants had a meeting with Alan Tulloch, in consequence of which Tulloch agreed to try to find a buyer for the franchise.  In July 1992, the applicants ceased paying royalties to the first respondent.  In November 1992, the first respondent terminated the franchise at Ormond, and took over the operation of the outlet.

j:  were the alleged representations made?

161               In substance, the applicants claimed that they were ‘talked into’ taking the Ormond store.  Their claim was that Gabriel and Louis Christou, backed up by Reyes, made a series of representations to them about the anticipated turnover of the Ormond territory (based on alleged market research).  The applicants alleged that they accepted the Ormond franchise on account of these representations, which turned out to be wrong. 

162               The first issue arising for determination is whether, during the period 5 September to 21 September 1990, any of the representations alleged by the applicants were made.  If so, by whom and to whom were they made?  I discuss in turn each of the representations pleaded (and in one case sought to be pleaded) immediately below.

The Pizza Haven chain was extremely successful with a proven track record of profitability (Statement of Claim, par 7(1)(a))

163               The letter dated 5 September 1990 from Reyes to Taylor, which was sent after the meeting of 5 September 1990, included the statement that “[t]he concept has a proven track record of profitability in the shops which are currently operating in Adelaide”.  There was, however, no evidence that the applicants read the letter or were otherwise made aware of its contents.  The Disclosure Document referred to a “proven formula”. 

164               Having regard to Gabriel Christou’s own evidence (confirmed by his brother and Reyes), at the 12 September 1990 meeting, he said that Pizza Haven had “successfully set up 17 stores in South Australia”.  I have little doubt that Gabriel Christou (and Reyes) told the applicants that Pizza Haven had been successful in Adelaide.  Bearing in mind Gabriel Christou’s evident enthusiasm for “Pizza Haven”, which was also shared at the time by Reyes, I am satisfied that the first respondent, by Gabriel Christou, represented to the applicants that the chain had been successful, and probably extremely successful, in South Australia. 

165               The applicants have established that the first respondent, through Gabriel Christou, made a representation generally to the effect alleged. 

The size and location of franchise territories were determined scientifically on the market research commissioned by the first respondent in relation to the Melbourne market (Statement of Claim, par 7(1)(e))

166               On the one hand, the applicants gave evidence that Louis Christou said words to this effect at the meeting on 12 September 1990.  Taylor said merely that Gabriel Christou had mentioned market research had been done on all territories.  On the other hand, Louis Christou plainly had no recollection of the statement attributed to him.  All witnesses except Zienkiewicz and Sanders agreed that Louis Christou said comparatively little at this meeting.  Reyes could not recall anything of this kind being said by either Louis or Gabriel Christou.  Gabriel Christou denied that he or his brother had made a statement to this effect.  For the reasons I am about to give, the applicants have not discharged their onus of proof in relation to this representation.

167               As already noted, the evidence of Zienkiewicz and Sanders was unsatisfactory in a number of respects.  First, it was apparent that neither of them had any independent recollection of the details of the discussions that had occurred over ten and a half years before. 

168               Secondly, Zienkiewicz and Sanders purported to recollect some discussions and to forget others of apparently equal moment from the same period.  This selectivity was, so I have found, designed to favour their own interests.

169               For example, Zienkiewicz could not recall discussions with his partners or with Troy Skilling (the Pizza Hut manager who was appointed to manage the Ormond store) concerning the profit projections table or estimated turnover.  Nor could he recall whether he discussed other related matters with Skilling.  He could not recall discussions with Taylor and Sanders following their visit to the franchise exhibition.  He could not recall specific discussions with his accountant or whether he discussed his accountant’s advice with Taylor.  As to this limited recall, Zienkiewicz at one point conceded, “Specifically what was said to me I do not recall.  I recall what the decisions [were that] I made …”.  He said he could remember only “the broad gist of the conversation”.  In connection with the meeting with Reyes and the Christous, he acknowledged, “During that meeting a lot of things happened.  I don’t recall specifically everything that was said to me”.

170               I reject Zienkiewicz’s claims about his ability to recall the key events and conversations with which much of this proceeding is concerned.  As already stated, bearing in mind his conduct with respect to his diary (discussed again below) and various inconsistencies in his evidence (many of which I have already mentioned), I do not regard him as a credible witness. 

171               Sanders too could not recall the substance of any discussion with Skilling prior to signing the franchise agreement on 21 September 1990, including what Skilling said, if anything, about the turnover at the Pizza Hut store where he was manager.  Nor could he recall the substance of any discussions between the applicants and Taylor about territories either before or after the meeting with the Christous.  He apparently had no recollection of the applicants’ discussions about their original business plans.  He also had no recollection of discussions with Taylor in the days prior to signing the franchise agreement, or even of specific events following the meeting with the Christous.

172               I doubt that Sanders’ recollection was better than that of Zienkiewicz.  Sanders’ evidence was that, over the past decade, he and Zienkiewicz had discussed the matters with which this litigation is concerned.  As already noted, this continual rehearsing of events has resulted in a reconstruction designed to favour the applicants’ own interests. 

173               Taylor had less hesitation than the applicants in admitting that he was unable to recall the events of “nearly 11 years ago”, and he conceded that he had forgotten “a lot of what maybe I should have remembered”. 

174               It is to be borne in mind that neither the applicants nor Taylor gave consistent evidence.  There was, for example, contradictory evidence given by them concerning the payment of the deposit.  I accept, as the respondents submitted, that this illustrated in yet another way the unreliability of evidence concerning events and conversations that occurred over a decade before the trial.

175               Zienkiewicz’s claimed memory on certain issues was dependent on his diary.  As set out above, however, Zienkiewicz’sdiary (in its current form) cannot be regarded as reliable as to events in 1990 (although, by a process of comparison, one can ascertain what was originally in the diary).  The diary, in the form in which the respondents inspected it in 1993, contained no record that supported the applicants’ allegation that the first respondent (by a director or otherwise) made any representation about market research.  Zienkiewicz amended it some years later, to include the words “Lou – did all marketing research”.  The pleaded representation goes well beyond this note, which, in any event, deserved to be given little weight on account of the circumstances and late date in which it came to be written into the diary.

176               Zienkiewicz also gave evidence that, in late 1992 or early 1993, he and Sanders had prepared a written note for their lawyers of their then recollection of events.  A call was made for the production of the note.  The note was the subject of legal professional privilege and the call was not met.  There was no other written record created prior to the issue of this proceeding capable of corroborating the representation as pleaded.  The representation was not, moreover, included in the statement of claim filed on 6 November 1992 (“the original statement of claim”), or referred to in earlier correspondence from the applicants or their then solicitors.

177               I have also expressed doubts about the reliability of the evidence of Gabriel Christou; and noted that, in relation to many matters, Reyes’ memory was dependent on his diary and other written records, as well as on his recollection of what was the usual procedure with respect to potential Pizza Haven franchisees at the relevant time. 

178               In the absence of any reliable documentary evidence, I am unable to resolve the conflict in the parties’ accounts otherwise than by reference to the concept of the onus of proof.  The inherent probabilities of the case provided little guide in connection with this representation.  The applicants bore the burden of proof of establishing that the first respondentmade the alleged representation regarding market research.  Bearing in mind the matters mentioned, they have failed to discharge this burden. 

The first respondent had established franchise territories which would guarantee the viability of every franchise business  (Statement of Claim, par 7(1)(f))

179               The applicants gave evidence that Louis Christou said words to this effect at the meeting on 12 September 1990.  Taylor did not give any evidence to this effect.  Neither Louis Christou (who said little at this meeting) nor Reyes could recall any such statement being made.  Gabriel Christou denied that he (or his brother) had made a statement to this effect.

180               The original statement of claim (par 4(b)) and a letter written by the applicants’ then solicitors in June 1994 also made this (or a similar) allegation.  Save for this, however, the matters referred to at [167] - [177] above are relevant to this alleged representation.  Bearing in mind these matters, the applicants have failed to discharge their onus of proof and to establish that this representation was made.

Extensive market research commissioned by the first respondent had established that the market was ripe for a second major pizza franchise in Victoria (Statement of Claim, par 7(1)(d))

181               The applicants’ evidence was that Gabriel Christou and Reyes had made this representation.

182               As already noted, Reyes gave evidence that, at the meeting on 5 September 1990, he had said that, given the turnover figures for Pizza Hut, he believed that there was room for Pizza Haven in the Melbourne market; and that, at the meeting on 12 September 1990, Gabriel Christou had referred to Pizza Hut as being the only major brand in competition with Pizza Haven in Victoria.  In cross-examination, Gabriel Christou substantially agreed that, at the 12 September 1990 meeting, he had referred to Pizza Hut as the major competitor in Victoria (although he denied that either he or his brother had referred to market research). 

183               On the evidence, it is more probable than not that at some stage both Gabriel Christou and Reyes referred to Pizza Hut as the other major competitor to Pizza Haven in Melbourne.  Reyes most likely did so on 5 September 1990 when he was showing the Pizza Hut turnover figures to Sanders and Taylor.  Gabriel Christou repeated the reference in discussions on 12 September 1990.  At most, however, their evidence established that they represented that there was only one major competitor in the relevant market and that, in this situation, Pizza Haven could be expected to compete successfully.  None of this evidence supported the making of a representation in the terms pleaded by the applicants, which involved a reference to market research commissioned by the first respondent. 

184               Bearing this in mind (as well as the matters referred to in connection with the representations pleaded in pars 7(e) and (f) of the statement of claim), the applicants have not discharged their burden of proof in relation to this alleged representation. 

All five operating stores in Melbourne were trading at a level which meant they were returning a profit (Statement of Claim, par 7(1)(g))

185               The evidence of Zienkiewicz and Sanders was to the effect that, in their meeting with Reyes on 12 September 1990, Reyes showed them and Taylor a table of then current sales figures for the Vermont, Dandenong, Werribee and Knox stores; and that Reyes said that, whilst the stores had only been operating for “a few months”, they could see from the profit projections table that they were trading profitably.  The only document in evidence recording these figures is a copy of a fax dated 14 September 1990 from Evan Christou to Reyes, which was later provided to Hughes (see below).  This document did not include the figures for Elsternwick, which opened in July 1990. 

186               Taylor did not recall whether this information had been shown to him at any meeting with Reyes and the applicants.  Reyes denied that he gave this information to the applicants and Taylor at any meeting with him.  He maintained that this information had been given to Hughes at Hughes’ request.  In cross-examination, Hughes agreed that Reyes had sent the Victorian store figures to him. 

187               I accept the evidence of Reyes, ultimately supported by Hughes, on this point.  Given that in the Kaytonruby litigation, Zienkiewicz gave a different account to the present one of how he came by this information; that Hughes agreed that Reyes sent this information to him; and that Taylor (who by reason of his knowledge and experience would have been the most likely person to recall the information) had no recollection of Reyes showing it to him, I find that Reyes did not show the Victorian sales figures to the applicants and Taylor at the meeting on 12 September 1990, and that this information was sent by Reyes to Hughes, apparently without comment, after Hughes had requested further information. 

188               Hughes was an accountant, and I have little doubt that he fully appreciated that these very limited figures said nothing about the profitability of the four Victorian stores referred to in the table.  The information plainly showed that, whilst the stores had had opening sales of between $4,197 and $6,510, no store had been operating for more than three months, and that two stores (Werribee and Knox) had only been operating for between two and three weeks.  In this context, I reject the proposition that the first respondent made the representation as alleged. 

Pizza Haven was expanding and would have about 50 stores in Victoria by July 1992 (Statement of Claim, par 7(1)(h))

189               Zienkiewicz and Sanders gave evidence that Gabriel Christou stated that there would be 50 stores trading by July 1992 at the meeting with them at Franchise Developments in September 1990.  Taylor and Louis Christou gave no evidence about a representation of this kind.  Gabriel Christou’s evidence was that he said that they “were looking forward to having 50 stores set up in Australia within about two to three years”.  Reyes gave evidence to the like effect as Gabriel Christou.

190               I accept that Gabriel Christou made some statement about the number of stores that he hoped would open in the ensuing two or three years.  It is impossible to determine on the evidence whether his statement related to the stores to be opened nationally or merely in Victoria.  Indeed, the relevant pleading in the original statement of claim was merely that the first respondent had represented that Pizza Haven would “have about 50 stores by July, 1992 … ”.  As counsel for the respondents noted, the first respondent did in fact have 50 stores open in Australia by July 1992.  Given the matters set out at [167] - [177] above, there is no reason to prefer the applicants’ evidence to that of Gabriel Christou.  The applicants have not discharged their burden of proof in relation to this alleged representation. 

A Pizza Haven franchise was an attractive investment (Statement of Claim, par 7(1)(i))

191               Zienkiewicz and Sanders gave evidence that Reyes told them that the acquisition of the franchise store at Ormond was a good investment since it would enable them to recoup their investment within a year.  Taylor did not give evidence to this effect.  Reyes conceded that he knew that the applicants and Taylor were intending to be investors; that he “believed in” Pizza Haven; and that he probably told the applicants and Taylor that he believed that a Pizza Haven franchise was a “good investment”.  Reyes denied, however, that he made this representation specifically in connection with Ormond (see below). 

192               On Reyes’ own evidence, it is more probable than not that he told the applicants and Taylor that, in his view a Pizza Haven franchise was a good (or attractive) investment, although, as appears below, I am not satisfied that he made any such statement specifically about the Ormond franchise.  I accept that the representation as pleaded was made, assuming that Reyes (who was an employee of Franchise Development) is also to be regarded as an agent for the first respondent. 

A Pizza Haven franchise was an ideal investment opportunity for investors rather than owner/operators (Statement of Claim, par 7(1)(j))

193               Sanders and Zienkiewicz gave some evidence that might support this alleged representation in their first witness statements and, in Zienkiewicz’s case, in a subsequent statement. 

194               The respondents denied the alleged representation.  Gabriel Christou’s evidence was that, despite the fact that he was not looking for investors but for owner/operators, he approved the applicants’ and Taylor’s applications because he was impressed with Taylor’s experience, their proposal to hire a Pizza Hut manager, and with the fact that their wives were to be involved in the business.  For the following reasons, and notwithstanding my doubts about the reliability of Gabriel Christou’s evidence generally, I accept that these factors affected his decision to approve the applicants and Taylor as franchisees.  First, his evidence was consistent with that of Reyes and Young, who also said these matters impressed them.  Secondly, the applicants and Taylor too regarded these factors as important.  Thirdly, each of the Christous (including Evan), Reyes and Young gave consistent evidence that, in undertaking franchising, the first respondent was looking to recruit owner/operators, rather than investors.  Fourthly, their evidence was in keeping with the feasibility study and the franchise programme prepared by Franchise Developments, and the owner/operator model was the evident basis on which the profits projections table (in the Disclosure Document) was prepared.  Fifthly, the letter of 5 September 1990 addressed to Taylor in terms reflected an assumption that franchise applicants would be owner/operators. 

195               Taking account of this context, and bearing in mind the matters set out at [167] - [177] above, I am not satisfied that this alleged representation was made.  The applicants have not discharged their burden of proof with respect to the representation in par 7(1)(j) of the statement of claim. 

It would be of advantage to the applicants to take up more than one territory (Statement of Claim, par 7(1)(k))

196               Sanders’ and Zienkiewicz’s evidence was generally to this effect.  They said that they had not intended to take more than one territory but that Gabriel Christou told them that they could only have the Ormond territory (which was a particularly desirable one) if they took a franchise over two territories.  According to them, Gabriel Christou said that the offer was open for two weeks only.  The version of Zienkiewicz’s diary discovered in 1993 contained the notation “Had to buy two territories seeing we were investors”.  This was of equivocal significance, however:  it may have recorded what Taylor said to Reyes and the Christous and not what they said to Taylor and the applicants (see below). 

197               As already stated, the evidence showed that, by the time the applicants and Taylor met Gabriel Christou, they had decided to apply for two territories.  Taylor, whose evidence was inconsistent with the applicants’ evidence, was clear that, from the beginning, he told Reyes that his (and therefore the applicants’) aim was to own two or three Pizza Haven stores.  His evidence was that he had reiterated this to Gabriel and Louis Christou (in the applicants’ presence).  Zienkiewicz’s diary note is entirely consistent with this (and other possibilities).  According to Taylor, he and the applicants were told that, if they took the Ormond territory, then they could put a holding deposit on the Springvale territory.  He said nothing of the offer being open for a limited period.  Taylor’s evidence was that Gabriel Christou had said Pizza Haven would relinquish Ormond as a company store if they liked, in order to get them up and running (emphasis added). 

198               Gabriel Christou’s evidence agreed, in substance, with Taylor’s on this matter.  He said that the applicants led by Taylor proposed to take two territories and that he granted their applications as owner/investors because of the particular features of their applications (see above).  As I have stated, I accept his evidence in this regard.  After discussing the applications with Young, Gabriel Christou said that he sought the inclusion of the Special Conditions that were to form part of the Ormond franchise agreement.  His evidence on this point was consistent with that given by Young.  The Special Conditions required the applicants and Taylor to open their first store within three months of the date of the agreement, and their second store within six months of “the commencement of the first operation”. 

199               I reject the applicants’ evidence that they were required to take two territories to secure the Ormond territory or that Gabriel Christou (or anyone else on behalf of the first respondent) told them that it would be of advantage to them to take up more than one territory.  It is true that, in cross-examination, Reyes conceded that he could have said that the acquisition of one or more Pizza Haven franchises was an outstanding opportunity, although he denied making any such statement with reference to Ormond.  This concession, however, fell short of the alleged representation. 

200               Subject to these matters, the matters set out at [167] - [177] above are also relevant in connection with this alleged representation.  In this instance, I prefer the evidence of Taylor (and Gabriel Christou in so far as it is consistent with Taylor’s evidence) to that of the applicants.  I reject the proposition that the first respondent (through its director or otherwise) made the alleged representation. 

The first respondent would organise an aggressive program of advertising and promotion of the Pizza Haven chain in Victoria (Statement of Claim, par 7(2)(a))

201               According to Zienkiewicz, Gabriel Christou said that Pizza Haven’s success in Adelaide was attributable to “aggressive marketing and promotional campaigns” and that the applicants and Taylor “could expect the same in Melbourne”.  Reyes and Gabriel Christou gave evidence that Gabriel Christou had told the applicants that Pizza Haven had marketed the business aggressively in South Australia and planned to do the same in Victoria.  (Neither Sanders nor Taylor gave evidence on the subject.  Louis Christou was also silent on the matter.) 

202               In substance, the respondents conceded that the first respondent, through its director, represented that it planned to organise an aggressive program of advertising and promotion of Pizza Haven in Victoria.  The applicants have made out this representation as pleaded.

Each franchisee was required to pay to the first respondent each week an advertising contribution not exceeding 5% of its gross sales (Statement of Claim, par 7(2)(b))

203               This representation was plainly made.  As noted in [42] above, the Disclosure Document informed prospective franchisees that franchisees were required to pay a weekly advertising contribution equal to 5.0% of their gross weekly sales. 

204               The requirement was in fact contained in cl 2(ah) of the franchise agreement, which provided:

The Franchisee shall pay to the Franchisor a contribution in respect of all advertising and marketing conducted by the Franchisor or its agents during the term of the Franchise … in accordance with the calculations … set out in Schedule 12 … together with such additional amounts as the Franchisor may require … provided that such additional amounts are not opposed by a majority of the Franchisees.

Schedule 12, headed “Advertising Contribution”, stipulated an amount of 5% of gross sales calculated and payable weekly.

3% of a franchisee’s gross weekly sales being part of the advertising contribution would be spent by the first respondent on television, radio and newspaper advertising (Statement of Claim, par 7(2)(c))

205               The evidence does not establish that this representation was made prior to signing the Ormond franchise agreement.  The franchise agreement provided in cl 3(g) for an advertising fund to pay the costs of publishing advertising and promotional material “in such manner as the Franchisor in its sole discretion” deemed appropriate. 

2% of a franchisee’s gross weekly sales being part of the advertising contribution would be spent by the first respondent on the distribution of promotional leaflets (Statement of Claim, par 7(2)(d))

206               The evidence does not establish that this representation was made prior to signing the Ormond franchise agreement.  The terms of cl 3(g) of the franchise agreement are noted above. 

The marketing and promotion of the Melbourne Pizza Haven stores would be similar to that for the Adelaide Pizza Haven stores (Statement of Claim, par 7(2)(e))

207               I refer to what I have said with respect to the representation alleged in par 7(2)(a) of the statement of claim.  At the 5 September 1990 meeting, Reyes showed Sanders and Taylor a video of an advertisement that had been shown on Adelaide television, and told them that Pizza Haven planned to do similar advertising for Victoria.  The evidence (see above) established that Gabriel Christou represented to the applicants and Taylor prior to signing the franchise agreement that the first respondent planned to carry out marketing and advertising in Melbourne that was similar to that carried out in Adelaide.  The applicants have made out this representation as pleaded.

An advertisement which was televised in Adelaide would also be televised in Melbourne; alternatively, a new commercial of the same quality would be made for the promotion of the Pizza Haven chain in Melbourne as soon as 8 or 10 Pizza Haven stores were opened in Melbourne (Statement of Claim, par 7(2)(f))

208               I refer to what is set out above in connection with pars 7(2)(a) and 7(2)(e) of the statement of claim.  The evidence did not show, however, that the first respondent represented that the advertisement that had been televised in Adelaide would also be televised in Melbourne.  Nor did the evidence establish that the first respondent made a representation in the terms pleaded.

209               Sanders and Zienkiewicz gave evidence that Gabriel Christou told them that a television advertising campaign would begin when 8 to 10 stores had opened.  They said nothing about any particular new commercial.  No other witness gave evidence to the same effect as the applicants, and there is no written corroboration of this allegation.  Bearing in mind the matters referred to [167] - [177] above, the applicants have failed to establish that this representation as pleaded was made.

The Ormond franchise was an outstanding investment opportunity (Statement of Claim, par 7(3)(a))

 

The Ormond franchise was going to be one of the better performing franchises (Statement of Claim, par 7(3)(b))

 

The Ormond franchise business would be established quickly and provide funds to enable the applicants to commence the Springvale franchise business (Statement of Claim, par 7(3)(g))

The applicants and Taylor would recoup their investment in the Pizza Haven chain within 12 months of operating the Ormond franchise (Statement of Claim, par 7(3)(i))

210               I deal with these four alleged representations in the following paragraphs.

211               The gist of Zienkiewicz’s evidence was that Reyes had told the applicants and Taylor that the Ormond franchise was an outstanding investment opportunity, since investment in Ormond would enable them to recoup their investment within 12 months and generate the income to open Springvale.  Sanders agreed that Reyes told them that Ormond was an outstanding opportunity, and that they would recover their investment in a year.  Sanders and Zienkiewicz also said in evidence that Gabriel Christou had told them that a site had been chosen for Ormond, which the Christous planned to make a company store.  According to Sanders, Gabriel Christou also said that it had been chosen as a company store “because of its outstanding properties”. 

212               Reyes gave evidence that he told the applicants and Taylor that he himself was buying the franchise for Syndal.  He also said that he told them and that he would have taken the Ormond outlet for himself because it was closer to where he lived but he had been told that it was reserved for a company store.  In cross-examination, Reyes, as we have seen, admitted that he believed that a Pizza Haven franchise was a good investment and that he could have said as much to the applicants and Taylor.  He also said that he told them that Ormond had been picked out as a company store and that it was close to being operational.  He consistently denied, however, that he told them that the Ormond franchise, in particular, was a good investment; that they would recoup their investment within 12 months; or that, because the Ormond store was close to being up and running, they would generate income from it for the opening of the Springvale store.  Statements of this kind would, he said, have been contrary to Franchise Developments training and procedures.

213               Evan Christou (who despite being indisposed when he gave his evidence) impressed me as a truthful witness.  He gave evidence in cross-examination that the Christous had “picked up the Ormond store because the store there had offices at the back which could be used for training in the first instance and the second thing is [we] thought Ormond would do okay”.  I accept this evidence.  (Gabriel Christou said that he had chosen the store as a company store because it had a food permit, although he later noted that many places had food permits.) 

214               Gabriel Christou denied that he told the applicants and Taylor that the store would be one of the better performing stores.  When pressed in cross-examination about his expectations for the Ormond store in September 1990, he said:

I would have been happy to do 25, 30 per cent of Pizza Hut because that’s, I guess – I start off very low and build it up.

This was about $2,500 to $3,000 per week.  Ultimately, he said:

Well, it’s hard to say.  How do I remember my view?  If you ask me my view, what’s going to be the store that I’m opening in Chang Rai in Thailand I can tell you.  But if you ask me what my view was 10 years ago in that particular store it would have been positive and it would have been something which – that it was part of my job to make it work.

I accept this latter evidence and that, as Gabriel Christou said, he would have been positive about the Ormond franchise in his discussions with the applicants and Taylor.  Such optimism was consistent with Gabriel Christou’s personality, his belief in his product, and the evidence of Evan Christou.  It does not follow, however, that Gabriel Christou made the specific representations alleged against him.

215               Gabriel Christou denied that the applicants and Taylor had asked him about the expected turnover for the Ormond store.  He said, “[T]hey already had an idea.  They were not interested in the sales”.  When asked whether they asked him how the Ormond store was going to go, he answered:

No, look, from what I understood, they already had a plan with a Pizza Hut guy to go in there and do whatever they can to build it up.  They’ve been to other stores.  They spoke to franchisees.  They’ve done their homework.

216               I reject as improbable Gabriel Christou’s evidence that the applicants were “not interested in the sales”, although, again, it does not follow that the representations alleged to have been made by him were in fact made.  Taylor’s evidence is corroborative of Gabriel Christou’s evidence that they had “done their homework”; and that the applicants and Taylor told the Christous and Reyes about the plans they already had. 

217               I reject the proposition that Reyes told the applicants and Taylor that, if they took the Ormond franchise, then they would recoup their investment in a year.  I also reject the proposition that the applicants were told that they would be able to finance the opening of Springvale from the business of the store at Ormond.  As already noted, in answer to a series of questions from the respondents’ counsel, Zienkiewicz conceded that he had not told the Christous or Reyes the precise quantum or structure of the applicants’ borrowings.  Sanders’ evidence was to similar effect.  It became clear in cross-examination that the applicants’ allegation that they would recoup their investment in 12 months was based upon their own reading of the profit projections table, and what they might have mistakenly hoped to achieve at Ormond. 

218               Further, I accept that, as Reyes stated, statements of this kind (including a statement about the Ormond franchise in particular) would have been contrary to his training and that, generally speaking, he did as he had been trained to do and complied with Franchise Developments procedures.  This was confirmed by his supervisor, Rod Young, whose evidence was that, amongst prospective franchisees, the most commonly asked question was, “Where in these levels should I expect to trade,” and that he instructed his staff to say, “You should speak to an existing franchisee and make your own assessment.”  Taylor’s evidence also supported Reyes’ evidence that it was the applicants and Taylor who proposed to acquire more than one franchise, and he, Reyes, said nothing about the financing of Springvale from the Ormond business.

219               The applicants have been unable to point to any written corroboration of their evidence in this regard, save for an entry in Zienkiewicz’s diary, which is of equivocal significance.  As already noted, the version that was discovered in 1993 (before Zienkiewicz made his alterations) contained a note “Leo Reyes backed up all claims by Gabriel, profit, sales, buying power”.  Presumably, whatever Gabriel Christou said about these matters was “positive” but the note gives no indication as to the precise content of these positive statements. 

220               Further, the Special Conditions in the Ormond franchise agreement are inconsistent with a representation about opening Springvale with profits from the Ormond business.  The Special Conditions required the applicants and Taylor to open their first store within three months of the date of the agreement, and their second store within six months of “the commencement of the first operation”.  (The evidence shows that the applicants and Taylor investigated the opening of the store at Springvale within a time-period consistent with the obligations imposed by the Special Conditions.) 

221               The matters set out at [167] - [177] above are relevant in this connection too.  There is no reason to prefer the applicants’ evidence to that of Reyes or Gabriel Christou.  The applicants have not discharged their burden of proof in relation to these alleged representations. 

Research commissioned by the first respondent had shown that the Ormond franchise would initially turn over $10,000 to $12,000 a week and that turnover would rise to $15,000 per week (Statement of Claim, par 7(3)(c))

A turnover of $4,500 per week would be easily achieved by the Ormond franchise and the applicants should expect to achieve a turnover of at least $7,000 per week at the Ormond store (Statement of Claim, par 7(3)(f))

 

The applicants should expect to achieve a turnover of at least $7,000 per week at the Ormond store (Application to amend Statement of Claim, par 7(3)(f))

222               The last representation (referred to above) was the subject of an application for leave to amend the statement of claim by deleting the reference in par 7(3)(f) to a weekly turnover of $4,500.  As appears below, I would not accede to this application. 

223               In support of their application, the applicants submitted, first, that the representation about the $7,000 weekly turnover had been part of their case from the beginning.  Secondly, they submitted that the respondents would not be disadvantaged by the amendment, if allowed, because they had confronted a similar allegation in the Kaytonruby litigation and, thirdly, that the respondents had, in any event, cross-examined the applicants and Taylor on what was said in the conversations on 5 and 12 September 1990. 

224               I accept that the respondents would suffer significant prejudice if the amendment were allowed and that this prejudice could not readily be overcome.  Bearing in mind the history of the litigation, the respondents were entitled to formulate their defence on the basis that they were to meet the representation as pleaded in par 7(3)(f) of the statement of claim:  cf Banque Commerciale SA, en liquidation v Akhil Holdings Limited (1990) 169 CLR 279, at 286-7 per Mason CJ and Gaudron J.  The respondents chose to meet the representation as pleaded in par 7(3)(f) by denying that they made the representation and putting the applicants to their proofs.  If a representation in the terms of the proposed amendment had been pleaded, the respondents may very well have chosen to advance a “reasonable grounds” defence in the terms of s 51A of the TPA.  In the circumstances of this case, where it had been made clear at an early stage of the trial that the proceeding would be conducted on the pleadings, and given the reverse onus effect of s 51A, it would be unjust to the respondents to permit the applicants to substitute a new unpleaded representation for the representation as pleaded:  cf Cummings v Lewis (1993) 41 FCR 559, at 567 per Sheppard and Neaves JJ.  This is not a case where it was clear from the conduct of the trial that the applicants were relying on an unpleaded representation:  cf Cummings v Lewis, at 581 per Cooper J and Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525 (Miba), a 542-3 per Merkel J.  Further, I accept that the respondents’ cross-examination may well have been conducted differently had they been on notice of a requirement to meet a representation solely concerned with a $7,000 a week turnover and not the representation pleaded in par 7(3)(f) of the statement of claim.

225               It must be borne in mind that (1) the litigation, which commenced in 1992, has provided numerous opportunities for the amendment of pleadings, including in 1996, when the decision was made to include par 7(3)(f) in its current form; (2) the evidence in the case concerned events that happened more than a decade ago; and (3) the evidence-in-chief was presented in writing.  Moreover, given the protracted history of the litigation, the length of the trial to date, and the patent difficulties associated with recalling principal witnesses to give further evidence, the prejudice to the respondents could not reasonably be met by permitting the case to be re-opened:  cf Ting v Blanch at 551 per Hill J.

226               The evidence concerning the pleaded representations on turnover would also have been relevant to the representation that was the subject of the leave application.  Notwithstanding that, for the reasons given, I would not accede to this application, I have discussed below the $7,000 weekly turnover representation as though it fell to be considered on the current state of the evidence (and leave had been granted) because the applicants’ case ultimately rested so heavily upon it.

227               In the original statement of claim, the applicants pleaded only a representation that they would “achieve a turnover of at least $7,000 per week”.  The pleading remained in this form in two further versions of the statement of claim, and was not altered until 1996, when par 7(3)(f) took its present form.  In making the application to amend, the applicants’ counsel conceded that there was “no evidence as to the $4,500 per week” and that the applicants did not seek to rely on “any representation or part of a representation as to $4,500 per week”.  This concession effectively disposed of the second of the representations set out above.  Further, although the applicants did not abandon the first of these representations, the gist of the applicants’ final submissions was inconsistent with it.  Practically speaking, the applicants’ case relied on the $7,000 per week representation.

228               The applicants’ case in final submissions was that Gabriel Christou, supported by Reyes, had told them that, after the initial start-up phase, they should expect to achieve a turnover of at least $7,000 per week at the Ormond store, and that at some time in the future they could expect even higher levels of trading (emphasis added).  This was notwithstanding that the evidence given by the applicants and Taylor in cross-examination was, for the most part, that Gabriel Christou told them that they could expect the Ormond store to start at a weekly turnover of about $7,000 (emphasis added).  The applicants also claimed in evidence that they were led to believe that the Ormond store would have a turnover of $10,000 to $12,000 in the first trading year.  This again was not entirely consistent with the way in which they ultimately sought to put their case.

229               In his first witness statement, Zienkiewicz maintained that Gabriel Christou told the applicants and Taylor that market research showed that they could expect a weekly turnover of $7,000 on the opening of the Ormond store, rising to between $10,000 and $12,000, and this could rise to $15,000 after the first trading year.  Sanders’ first witness statement was to similar effect.  (Emphasis added.)

230               In cross-examination, Zienkiewicz reiterated that Gabriel Christou said that the store would begin at $7,000 (said by Christou to be easily achievable) rising to between $10,000 and $12,000.  Also in cross-examination, Zienkiewicz said that, based on what Gabriel Christou had told him, he “had an anticipation that [he] would be doing 12,000 within 12 months”.  (Emphasis added.)

231               Sanders’ evidence in cross-examination was that, based on what Reyes and the Christous told him, he expected that the Ormond store would have a weekly turnover “in the order of $7,000 ... from starting” (emphasis added).  When counsel for the respondents asked him, “were you working on a guarantee of 10 to 12 thousand dollars quickly achievable?”, he answered:

It had been said that 10 to 12 thousand would be achieved, not immediately but probably towards the end of the first year’s trade.  My concern was that we were going to trade profitably from the outset and I was more than confident, given the confidence that Gabriel and Louis Christou had divulged to us – their confidence as a result of the market research they had undertaken. 

232               Sanders also referred to a “guarantee of 10 to 12 thousand dollars being quickly achievable”.  He said, in cross-examination, that “the guarantee was such that if it failed to perform the franchisor would be in to see that it got back up to that volume of turnover”.

233               Taylor did not mention any figures in his witness statement, although he said that Gabriel Christou had told him and the applicants that Ormond would be “a very busy store” and that he, the applicants and the Christous had discussed “the level of sales they said the store would achieve”.  In cross-examination, he said:

What I can recollect is that Ormond was presented that there was already a leasing place to Pizza Haven and it was going to be used as a training store, high visibility.  They had already done market research to say that it had, you know, a ripper potential basically based on what they had told us.  You know, figures were quoted or insinuated of between 7 and 8 thousand starting a week.  You know, a big store and it was going to be their flagship which, if I think back, I mean, that was probably one of the reasons why we took that.  It was going to be up and running quicker.  You know, quicker sales, quicker cash flow, and the added bonus was we had a store manager that worked three or four kilometres away.

 

234               In re-examination, Taylor said that Gabriel and Louis Christou told them that “based on the market research and where they thought it would sit, it would start at 7 to 8000 and it would be a very good store and it was set up and running, or it would be set up and running”.  There was, as will be seen, no reference to these figures in his earlier witness statement.

235               There was some documentary corroboration for the evidence given by the applicants and Taylor.  At some time when the applicants were trading, probably about August 1992, Zienkiewicz had noted on a copy of the Disclosure Document (on p 17) “told us Ormond was to be a company store and expected to start at $6,000 and quickly jump to $10,000” and (on p 18) “would easily do $7,000 under management”. 

236               As already noted, in a file note for 12 September 1990, Zienkiewicz’s accountant, Hughes, recorded that he had had a discussion with Zienkiewicz, noting “an indication of a turnover of $7000 per week predicted” (emphasis added).  The note was silent as to the source of the prediction, whether the prediction related to turnover on opening or some later time, and whether the prediction related to a store at Ormond or generally.  In cross-examination, Zienkiewicz was asked whether he told “Mr Hughes at the meeting of 12 September that the sum of $7000 per week was predicted” and he answered “I would have told him what was said to me at that meeting [with Gabriel and Louis Christou]”.

237               Weighing against the applicants’ case was the fact that Zienkiewicz himself did not refer to weekly turnovers of $7,000 or $10,000 to $12,000 in an affidavit sworn by him on 1 August 1996, and filed in the Kaytonruby litigation (see above).  Further, in the form discovered in 1993, Zienkiewicz’s diary contained no mention of any particular turnover figures.  When, however, Zienkiewicz amended the diary some years later, he added the note, “Would do any thing to make sure stores achieved $4,000 – which was break even for store under management – would be in store after month and make sure”.  In the circumstances (including for the reasons outlined earlier) I would attach little, if any, weight to Zienkiewicz’s evidence on the matter of turnover. 

238               I remain doubtful about the reliability of Taylor’s evidence on the topic, since, as noted above, at the time of trial, his recollection of the events and conversations in September 1990 was sketchy.  He was unable to explain satisfactorily his inability to recall other matters of apparently equal moment to the matters he could recall or his failure to include a reference to turnover figures in his first witness statement.  Further, for the reasons already given, there were also doubts about the reliability of Sanders’ evidence.  In any event, the applicants’ evidence that Gabriel Christou or Reyes represented that the store at Ormond would have a weekly turnover of $7,000 from start-up was contrary to the inherent probabilities of the case.  Any such representation was plainly contrary to the warnings in the Disclosure Document and was inconsistent with the range shown in the profit projections table, as well as with the actual figures on the Brighton store’s performance that were provided to the applicants’ accountant. 

239               Reyes’ evidence was that, even if asked, neither he nor the Christous would discuss particular turnover figures with prospective franchisees, and that Gabriel Christou did not do so with the applicants and Taylor in this case.

240               Gabriel Christou also denied telling the applicants and Taylor that they could expect a weekly turnover of $7,000 and that, once established, the Ormond store would turn over between $10,000 and $12,000 weekly.  He did, however, recall them mentioning Pizza Hut and that “the sales that they were doing, Bentleigh was doing 10,000 or something”.  When asked whether he himself had expressed a view, he answered:

No.  Look, they knew more than I did.  I didn’t want to show that I knew more than – I mean, they appeared – especially Taylor, he appeared to be more knowledgeable in his areas than what I did.  I didn’t want to interfere.

He later said:

Look, these guys knew beforehand – Taylor was overpowering the whole issue. 

 

241               The evidence about the representations concerning turnover at the Ormond store was confused, as reflected in the applicants’ late application to amend.  The documentary evidence from the applicants’ side was inconclusive.  The documentary information provided by the first respondent to the applicants and Hughes did not support the representations, and was mostly contrary to them.  There was no evidence that the applicants complained to the respondents at any time in their first year of trading that what they described as a “key” representation was not being fulfilled.  Even if Gabriel Christou said something about the weekly turnover at Ormond, the applicants failed to establish precisely what he said.

242               Subject to the matters noted above, the matters referred to at [167] - [177] are also relevant in considering the turnover representations.  The applicants have not discharged the burden of proof with respect to the representations as pleaded.  Were leave to amend to be granted, I would not be satisfied on the evidence before me and on the case as it now stands that the representation the subject of the leave application had been made out.

That the Ormond franchise was expected to produce sales and profit in the range of the figures in the franchise profit projections or better (Statement of Claim, par 7(3)(l))

243               Generally, what is set out above in relation to pars 7(3)(c) and (f) is relevant to this alleged representation. 

244               The pleaded representation was not made by the provision of the profit projections table to the applicants.  The table fell to be read in the context of the Disclosure Document of which it formed part.  As already noted, the warnings preceding the table specifically included statements that:

The figures on the following page are estimates.  The figures are based on the experience of Pizza Haven in its company owned and franchised stores.

Pizza Haven does not represent or warrant that all franchisees will achieve the results shown on the following pages, since results in any particular case will depend on the ability and work performed by the individual franchisee, strict operational control and location and amongst other factors.

 

The notes to the franchisee profit projections are given to enable your independent financial advisors to examine the soundness of the information and to determine on your behalf, the projected results of your particular franchise.  It may take up to twenty four months to fully establish a store that has no trading history.  [Emphasis added.]

245               Nor did the applicants’ evidence about their understanding of the table support the alleged representation.  Both Sanders and Zienkiewicz understood that the figures in the table were estimates giving a simplified account of the experience of Pizza Haven as at the relevant date. 

246               Neither of the applicants gave evidence that Reyes or the Christous told them that they should expect the Ormond store to produce profits in the range in the profit projections table or better.  The thrust of the applicants’ evidence was inconsistent with such a case. 

247               Further, the proposition that the first respondent (through its directors or otherwise) represented to them that the Ormond store would produce sales in the range of the table ($5,000 to $12,000) is inconsistent with their evidence on turnover, which is set out above.  The alleged representation is inconsistent with Sanders’ evidence that based on what Reyes and the Christous told him he expected that the Ormond store would have a weekly turnover “in the order of $7,000 ... from starting”, and that a “guarantee of 10 to 12 thousand dollars [would be] quickly achievable”.  This representation is also inconsistent with Zienkiewicz’s evidence that Gabriel Christou said that they could expect a weekly turnover of $7,000 on the opening of the Ormond store, rising to between $10,000 and $12,000, which could rise to $15,000 after the first trading year.

248               As I have already said, even if Gabriel Christou said something about the weekly turnover at Ormond, the applicants failed to establish precisely what he said.  I am not, moreover, satisfied on the balance of probabilities that Gabriel Christou said anything about profits.  It would have been plain enough to him that he did not know a number of relevant matters (including the amount that the applicants were to pay their manager or the amount of their borrowing expenses).  In giving evidence, Gabriel Christou appeared to be a canny and experienced businessman.  He would have appreciated the risks inherent in making any statement about profits in these circumstances.  This, together with the warnings in Disclosure Document, made it improbable that he would have made any representation about the profits that the applicants and Taylor could expect from the Ormond franchise.  The applicants have failed to discharge their burden of proof with respect to the pleaded representation.

Labour costs would not exceed 21.6% of sales (Statement of Claim, par 7(3)(e))

 

The Ormond franchise would make a profit of at least 21.6% of sales (Statement of Claim, par 7(3)(h))

 

A franchisee’s weekly food costs would not be greater than 25% or alternatively 30% or thereabouts of weekly total gross sales (Statement of Claim, par 7(5)(a))

249               Save for the 30% figure, the basis for these allegations was the profit projections table in the Disclosure Document.  The 30% figure was derived from the information about the Brighton store that was given to Hughes (see above).

250               The applicants’ evidence did not support the first two allegations.  Sanders agreed in cross-examination that, in discussions with Reyes and the Christous, no representation was made to him concerning labour costs.  Zienkiewicz conceded that no representation was made about the cost of a manager, and he could not recall a representation to the effect that “the Ormond franchise would make a profit of at least 21.6% of sales”.  Moreover, for the reasons already stated, I accept that it is improbable that Gabriel Christou made any representation concerning the profits that the applicants could expect from the Ormond store.

251               Further, there was no evidence given by the applicants (or anyone else) that, at meetings on either 5 or 12 September 1990, either of the Christous or Reyes represented that weekly food costs would be no more than 30% of total gross weekly sales.  Indeed, Zienkiewicz gave evidence to the contrary.  His evidence in cross-examination was that he was told that food costs would represent 25% of total gross weekly sales, although he did not refer to any source for the figure other than the profit projections table in the Disclosure Document, which referred to a figure of 25%. 

252               In providing the table with this 25% figure, however, the first respondent did not represent that the applicants’ and Taylor’s food costs at the Ormond store would not be greater than 25% of gross weekly sales.  As already noted, the table fell to be read as part of the Disclosure Document.  The warnings that accompanied the table (set out above) plainly stated that the figures in it were no more than estimates based on Pizza Haven’s experience, and that Pizza Haven did not represent or warrant that all franchisees would achieve the results set out in the table. 

253               None of these pleaded representations were made out on the evidence.

That the franchise profit projections provided by the respondents to the applicants on 5 September 1990 and again on 12 September 1990 as part of the disclosure document contain figures based on the actual experience of Pizza Haven in its company owned and franchise stores and in particular contained:

(i)                projected sales figures based on the actual experience of Pizza Haven at company owned and franchise stores;

(ii)              projected total annual franchise/store income (profit) based on the actual experience of Pizza Haven at its company owned and franchise stores (Statement of Claim, par 7(3)(j))

254               As already noted, the profit projections table in the Disclosure Document was preceded by certain observations, including that:

The figures on the following page are estimates.  The figures are based on the experience of Pizza Haven in its company owned and franchised stores.

…

The notes to the franchisee profit projections are given to enable your independent financial advisors to examine the soundness of the information and to determine on your behalf, the projected results of your particular franchise.  It may take up to twenty four months to fully establish a store that has no trading history.  [Emphasis added.]

 

The table included figures for projected annual sales and income. 

255               Although the table did not purport to set out the actual trading experience of the Pizza Haven stores as at October 1989, the note said that it was “based on” that experience.  That is, the note represented that the figures in the table were projections over up to a twenty-four month period of the possible performance of a new store based on the trading history of Pizza Haven stores in South Australia.  The applicants’ evidence did not show that they read the table in any other way.  Sanders said that he understood that the figures were “a result of the knowledge that the franchisor had regarding the trading in South Australia over previous years”.  Zienkiewicz also acknowledged that the figures were “based on actual performances from the Adelaide stores”.  With these observations in mind, it is apparent that the pleaded representation was in fact contained in the Disclosure Document.

That the figures for the Pizza Haven company owned store at Brighton, South Australia, provided to the applicants’ accountant, Hughes, on or about 14 September 1990 showed the typical actual profit and loss experience for the Pizza Haven company owned and franchised stores (Statement of Claim, par 7(3)(k))

256               The applicants submitted that this representation arose from the provision of the Brighton store figures to Hughes on 14 September 1990, following a request for actual profit and loss figures for a Pizza Haven store or stores.  (The applicants themselves did not see the figures although Hughes relied on them in giving his advice.)  Neither Hughes nor Reyes recalled the provision of the figures or any discussion about them.  They recalled only that Hughes had asked for some actual figures and that, in consequence, those for the Brighton store had been sent to him.  Reyes gave evidence that he told Hughes that “if he had any further queries about the performance of franchised stores in South Australia, he should speak with Tino Bettiol”.  Hughes did not give evidence about any such discussion that he may have had with Bettiol and Bettiol did not give evidence.  There is, therefore, no direct evidence that Hughes was told or led to believe that the figures were “typical” in the sense alleged. 

257               At one stage, the applicants invited the court to draw an inference adverse to the respondents from their failure to call Tino Bettiol, who was apparently living in Sydney.  I have not accepted this invitation.  Young, who was his superior (if not employer) gave evidence that he had first-hand knowledge of most of the work done by Franchise Developments for Glev and Glev Franchises, including the preparation and review of the profit projections table (see below).  I am not satisfied that there was any real basis in the evidence as it ultimately stood to warrant the course that the applicants urged.

258               In the circumstances existing at the time, in providing the figures to Hughes concerning its Brighton store, the first respondent necessarily represented to Hughes that the figures were relevant to the applicants’ consideration of the acquisition of the franchises for which they had applied.  In the absence of evidence as to the terms of Hughes’ request and what, if anything, was said to him about the figures, I am not satisfied, however, that it was more probable than not that the Brighton store figures were held out as “typical” of the actual profit and loss experience for all Pizza Haven stores.  Hughes gave evidence, based on file notes contemporaneous with the discussions he recorded, that Reyes told him on 14 September 1990 (about the time he received the Brighton figures) that there were two areas available to the applicants, Springvale and East Bentleigh (Ormond).  It is entirely possible that he was told that the Brighton figures were indicative figures for stores in areas such as these.

259               It is possible that Hughes was told that the Brighton figures were indicative figures for a company-owned store, rather than a franchise store.  This is notwithstanding that Hughes said in evidence that he did not know that Glev owned the Brighton store, i.e, as a company-owned store.  I would place little weight on his evidence in this regard, since he had virtually no independent recollection of the discussions in September and October 1990. 

260               Hughes’ evidence was that he gave particular consideration to a number of issues (manager’s salary, cost and structure of borrowings) by reference to the applicants’ own circumstances.  If Hughes conveyed any of his concerns to Reyes or Bettiol, Hughes may have been told that there was no typical “actual profit and loss experience” relevant to the applicants.  There was simply no evidence as to whether Hughes’ request was general or specific and as to whether the Brighton figures were the subject of discussion between Hughes and Reyes (or Bettiol).  In this circumstance, the applicants have not discharged their burden of proof as to the alleged representation.

261               In any event, the applicants have not satisfied me that, on the balance of probabilities, the provision of these figures would have been misleading had the representation in fact been made.  I accept that, as Evan Christou purported to demonstrate in his third witness statement, in September 1990 (in its third year) the Brighton store was performing either at an average level of turnover or about 6% above the average for Adelaide metropolitan stores (depending on whether or not the figures for Glenelg were excluded).  The Brighton store’s performance in its first year (at a $4,300 weekly turnover) and in its second year (at a $5,000 weekly turnover) was not shown to be atypical of the trading history of the generality of Pizza Haven stores. 

If a franchise business did not reach projected sales then the respondents would become actively involved with the franchisee’s business to find out why that business was not achieving projected sales and help it to do so (Statement of Claim, par 7(4)(c))

262               The applicants’ evidence fell well short of this pleaded representation.  In his first witness statements, Zienkiewicz maintained that Gabriel Christou had said that, if the applicants and Taylor failed to trade “at a point above break even”, then he would personally come to the store, roll up his sleeves, and make pizzas.  In cross-examination, he modified this, saying:

He did say that he’d roll up his sleeves and come into a store to support a poorly performing franchise.  Specifically about the break-even, I’m not sure.

263               In his diary as discovered in 1993, Zienkiewicz recorded that “G Christou will be in store to help if we don’t achieve sales”.  Opposite, he had written “What if we don’t achieve sales”.  He had subsequently amended his diary to include a note that “Would do any thing to make sure stores achieved $4,000 – which was break even for store under management – would be in store after month and make sure”.

264               The diary as discovered in 1993 confirmed that the applicants and Taylor probably asked Gabriel Christou whether they could expect help if they failed “to achieve sales” and that, as Reyes thought probable (see below), Christou had reassured them on this score.  Precisely what was asked, however, and, what Gabriel Christou said in reply did not appear.  The diary as amended referred to $4,000 but this reference cannot, in the circumstances already referred to, be regarded as reliable evidence of what was said.  In cross-examination, as noted above, Zienkiewicz resiled from his earlier statement as to the “break even point”. 

265               Sanders’ evidence was also general.  He said in his first witness statement that the applicants and Taylor had asked “what support we could expect from the franchisor if we failed to trade profitably” and that Gabriel Christou had said that “in the past, on the odd occasion, a store had gotten into difficulty [and] he and his brothers had rushed right in, rolled up their sleeves, helped with product preparation, and manned the phones”.  Neither applicant gave evidence that the Christous had said that, if their business did not reach “projected sales”, then the respondents would attempt to “find out why”. 

266               Reyes’ evidence was inconclusive too.  In cross-examination, Reyes was asked:

Do you recall Gabriel Christou saying to my clients that any franchise which was not performing was a problem for Pizza Haven and that they would work with the franchisee to make sure that the franchise was a success?

He replied:

They probably said it.  I don’t recall the particular thing, because it was, you know, trying to make it operate well.  That was the sort of help the franchisor provided.

267               Gabriel Christou denied that he made any such representation.

268               Bearing in mind these considerations and the matters already referred to above, the applicants have failed to make out this alleged representation. 

Summary

269               In summary, the applicants have made out the following representations:

1.      The Pizza Haven chain was extremely successful with a proven track record of profitability (statement of claim, par 7(1)(a));

2.      A Pizza Haven franchise was an attractive investment (statement of claim, par 7(1)(i));

3.      The first respondent would organise an aggressive program of advertising and promotion of the Pizza Haven chain in Victoria (statement of claim, par 7(2)(a));

4.      Each franchisee was required to pay to the first respondent each week an advertisingcontribution not exceeding 5% of its gross sales (statement of claim, par 7(2)(b));

5.      The marketing and promotion of the Melbourne Pizza Haven stores would be similar to that for the Adelaide Pizza Haven stores (statement of claim, par 7(2)(e));

6.      That the franchise profit projections provided by the respondents to the applicants … as part of the disclosure document contained figures based on the actual experience of Pizza Haven in its company-owned and franchise stores and in particular contained:

·        projected sales figures based on the actual experience of Pizza Haven at company-owned and franchise stores;

·        projected total annual franchise/store income (profit) based on the actual experience of Pizza Haven at its company-owned and franchise stores (statement of claim, par 7(3)(j)).

k:  the nature of the representations

(i)        Puffery – statement of claim, pars 7(1)(a), 7(1)(i) and 7(2)(a)

270               A further question arises in this case as to whether any of the representations made out by the applicants (“the representations”) were statements in the nature of commendatory puffery and not of an actionable kind.  In relation to this question, each of the representations falls to be considered in the light of the particular facts and “in the light of the ordinary incidents and character of commercial behaviour”:  see General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164, at 178 per Davies and Einfeld JJ. 

271               In Pappas v Soulac (1983) 50 ALR 231, Fisher J held that a number of the statements made by the vendor’s agent (a Mr Spencer) to the purchasers of a shopping centre were of this kind.  His Honour said, at 234-235:

It is important to appreciate that many of the statements alleged or admittedly made by Mr Spencer were wholly or in part statements of opinion, not capable of being objectively proved to be true or false.  They were also essentially the type of introductory comments, in the nature of puffery, made at the start of negotiations for the purpose of attracting the interest of a possible purchaser.  As such they became irrelevant or of little, if any significance when detailed information is subsequently given a fortiori, to a potential purchaser with commercial experience  To the extent that they are essentially puffery, it is proper to be reluctant to elevate them to the status of potentially misleading conduct.

His Honour held, at 238, that a statement by Mr Spencer that the shopping centre was a good investment was “the type of puffing which would normally fall from a selling agent and which was incapable of being proved to be correct or incorrect”.  See also Hanave Pty Ltd v LFOT Pty Ltd [1998] FCA 1051 (31 August 1998) per Moore J and Kaytonruby Pty Ltd v Glev Franchises Pty Ltd [1998] FCA 650, at p 29.  In Kaytonruby, Ryan J held that a representation to the effect that Pizza Haven was a success story was in the nature of puffery.

272               In the present case, the representations pleaded in pars 7(1)(a), 7(1)(i) and 7(2)(a) of the statement of claim (that Pizza Haven was extremely successful; that a Pizza Haven franchise was an attractive investment; and that the first respondent would organize an aggressive marketing campaign) were in the nature of puffery.  They were the kind of puffing that one might ordinarily expect to be made at the commencement of negotiations on behalf of a franchisor seeking to sell franchises. 

273               In the case of the representations pleaded in pars 7(1)(a) and 7(1)(i), their significance for the applicants’ decision faded away when the applicants received more detailed financial information of the kind contained in the Disclosure Document.  In any event, I doubt that the applicants would have placed any reliance upon these representations, if they were present to their minds when they signed the Ormond franchise agreement.  It may be recalled that there was no evidence that the applicants were ever made aware of the contents of the letter of 5 September 1990 sent by Reyes to Taylor, referring to “a proven track record of profitability”; and any representation as to Pizza Haven’s success was, practically speaking, overtaken by the details in the Disclosure Document.  Furthermore, the applicants had by then taken Hughes’ advice on the suitability of a franchise as an investment for them.  They made up their minds on this matter based on Hughes’ advice (which took into account information in the Disclosure Document, the Brighton figures and the trading figures for the Victorian stores), Taylor’s experience, and the availability and experience of Skilling (see below).

274               The representation pleaded in par 7(2)(a) was in substance a statement of opinion about the character of the advertising and marketing that the first respondent would organise and, in Fisher J’s words, “was not capable of being objectively proved to be true or false”:  see Pappas v Soulac cited above.  Again, its importance was overtaken by the information about marketing and promotion contained in the Disclosure Document and the actual provisions concerning advertising in the franchise agreement itself (which had been reviewed by the lawyers retained by the applicants and Taylor):  see, e.g., franchise agreement, cls 3(d)(iii) and 3(f) and 3(g).  Furthermore, in view of the Disclosure Document information and these contractual provisions, I doubt that the applicants would have placed any reliance on this representation had it been present to their minds on 21 September 1990.

(ii)       Representations as to future matters – statement of claim, par 7(2)(e)

275               Did any of the representations constitute a representation as to a future matter?  If so, then s 51A of the TPA has an operation.  The meaning of “future matter” for these purposes has been discussed in this Court in a number of cases:  see, e.g., Ting v Blanche at 552-553 per Hill J; Miba, at 536 per Merkel J; and Sykes v Reserve Bank of Australia (1998) 88 FCR 511 (“Sykes”), at 514-5 per Heerey J and 518-520 per Sundberg J.

276               In Ting v Blanche Hill J found that the respondent had represented that, if the applicants purchased a warehouse, then they could rent it out for between $70,000 and $80,000 a year, and that this was misleading and deceptive.  In considering s 51A, his Honour said, at 552-553:

It will be readily apparent that a representation as to future conduct or a future event will generally imply (and sometimes explicitly state) that the maker of the representation was of a particular state of mind as to the future conduct or event as at the time the representation was made.  A representation that a particular occupancy rate for a hotel might in the future be achieved, or, as alleged here, that a particular rent for nominated premises could be achieved in a future letting, impliedly involves a representation that the maker of the representation believed that the occupancy rate or rental could be achieved.  It would be no less a representation as to the future by virtue of this implication.  If the actual term of the representation is that the maker of the representation is of the view at the time that the occupancy rate or rental nominated could be achieved in the future, does that express statement turn a representation as to the future into a representation as to existing fact? 

…

Whatever may be the case where there is an express representation as to the maker’s state of mind concerning a future matter, it is not, in my opinion, correct to treat a representation as to an event or conduct in the future, be that in a form of prediction or otherwise, as not being a representation with respect to a future matter merely because it implies a representation as to the maker’s present state of mind. 

… 

A representation as to future rental, for example, will be a representation with respect to a future matter, even if also, impliedly, a representation as to the existing state of mind of the maker.

(As noted above, his Honour ultimately dismissed the application, on the ground that the representation had not been pleaded.)  

277               In Miba, on the other hand, Merkel J held that a representation about potential turnover was not, in the particular circumstances of the case, a representation as to a future matter.  The applicants in Miba alleged that, in order to induce them to enter into a franchise agreement, the respondents made representations about the takings that the business would make.  They relied on a letter from one of the respondents in which it was said that the weekly sales achieved at another franchise store ranged from between $14,780 to $18,396 over a six-week period, and that the sales were expected to settle down to between $14,000 and $16,000 per week and then gradually increase.  The letter stated the writer’s “understanding” that the average operator at the shopping centre in which the prospective franchisee proposed to open his store achieved sales in the order of $10,000 per week.  This was compared with operators at another shopping centre, and the letter concluded by saying that “this would lead us to believe that a well managed operation … could achieve sales of between $8,000 and $12,000 per week after adjusting for competition and demographics”.  Merkel J held that this last mentioned representation was not within s 51A of the TPA, observing, at 536:

[I]t is my view that [the representation] is properly characterised as a statement as to a present belief based on the grounds set out.  In that context it relates to the capacity of the proposed outlet to achieve the sales projection.  Although the sales projection necessarily has a future element in it that element does not transform the characterisation of the representation into one which is with respect to a future matter.  In my view the applicability of s 51A is to be ascertained by a proper characterisation of the representation made in each case.  It is difficult to see how s 51A can operate in a case such as the present where the grounds for the sales projection are expressly stipulated and an assessment of their reasonableness is left for evaluation by the representee.  In these circumstances a representation that the grounds are reasonable, rather than that the representor believes that they are reasonable, is consistent with the representation made.

278               Miba was distinguished in Sykes, at 515 per Heerey J and 521 per Sundberg J, upon the ground that Sykes was not a case where the grounds for a projection were expressly stipulated and an assessment of their reasonableness left for evaluation by the representee.  As Sundberg J observed in Sykes at 521:

The significance of Miba for present purposes is its insistence that whether a statement is with respect to a future matter depends on its proper characterisation in the context in which it is made.

See also Gardner Corporation Pty Ltd v Zed Bears Pty Ltd [1999] WASC 1043 at p 38 per Steytler J; Lobendhan v West Perth Investments Pty Ltd [1998] FCA 1257 (2 October 1998) per Heerey J at p 16; Holz v Lane [2002] WASCA 164 at [4]-[9] per Wheeler J; and Tomlinson v Cut Price Deli Pty Ltd (1995) ATPR (Digest) 46-151per Drummond J. 

279               In the present case, the representations included representations as to the future advertising that the applicants should expect to occur (in statement of claim, pars 7(2)(a) and 7(2)(e)).  I have found, however, that the representation pleaded in par 7(2)(a) was no more than commendatory puffery and, for present purposes, might be put aside.   This left the representation pleaded in par 7(2)(e), which was as to a future matter.  Although it contained a representation about the maker’s state of mind, it essentially related to future events. 

l:  were the representations misleading or deceptive?

Representation as to future advertising - statement of claim, par 7(2)(e)

280               As noted at the beginning of these reasons (at [9] and following), where a corporation makes a representation with respect to a future matter without reasonable grounds for making the representation, s 51A deems the representation to be misleading for the purposes of s 52.  Since the applicants have made out one such representation in this case, it is convenient at this point to determine whether or not the respondents have shown that, in September 1990, they had reasonable grounds for the representation.  This was that the marketing and promotion of the Melbourne Pizza Haven stores would be similar to that for the Adelaide Pizza Haven stores. 

281               I am in little doubt that the respondents established that they had reasonable grounds for this representation.  In his first witness statement, Evan Christou stated that amongst the very first matters discussed with Franchise Developments when it was consulted about the possibility of franchising was Pizza Haven’s experience of advertising, including what form of advertising had been found most effective and the cost of advertising, expressed as a percentage of (gross) sales.  Pizza Haven identified the cost of advertising, based on its experience, as about 5% of gross sales.  The subsequent feasibility study found that a franchisee’s business could support an advertising levy (5%) equal to the percentage figure that Pizza Haven had identified.  Prior to the introduction of franchising in Victoria, Evan Christou’s evidence was that the advertising expense for stores in Adelaide remained 5% of sales, and the same percentage was projected to be spent in Victoria. 

282               As Young noted, the franchise programme also “identified that advertising and promotion would play a critical role in development success of the Pizza Haven group”.  As he said in his witness statement, the franchise programme also recommended

that in view of the projected franchisee profitability and Pizza Haven’s then current advertising budget per store and precedents set in the fast food industry generally an advertising levy equal to 5% of each franchisee’s gross receipts would be feasible.  It was specifically provided in the Franchise Agreement however that the franchisee advertising contribution could be increased above 5% of gross sales provided the majority of franchisees agreed.  This was considered useful for special corporate programs such as television campaigns and billboard programs. 

283               As at September 1990, the advertising contribution in South Australia and in Victoria was fixed at 5% of sales.  As we have seen, this was reflected in the franchise agreement, which provided for an advertising contribution of 5% of sales (subject to variation).  A franchisee’s contribution was paid into an advertising fund and, under the franchise agreement, was to be spent on advertising for the group.

284               As at September 1990, Pizza Haven spent advertising monies in Adelaide on radio advertising, Yellow Pages, TV advertising and local leaflet advertising.  The Disclosure Document referred to advertising of this kind too.  Subject to the proviso that television advertising would not begin until about 10 stores had opened in Melbourne, the evidence was that Pizza Haven planned to advertise in Melbourne as it had done in Adelaide.  Given this and the recommendations of Franchise Developments in the feasibility study and in the franchise programme, including as to the quantum of the advertising contribution, the respondents have established, on the balance of probabilities, that, in September 1990, they had reasonable grounds for representing that the marketing and promotion of the Melbourne stores would be similar to that for the Adelaide stores.  The fact that, as Evan Christou said, a decision was subsequently made to alter the franchisees’ contribution did not change the fact that the respondents had reasonable grounds to make the representation at the time it was made.

285               The first respondent in fact arranged advertising and marketing through the mediums referred to in the Disclosure Document, including television advertising in July 1991. 

Representations as to present and past matters

286               The application of s 52 of the TPA is not restricted to conduct that is intended to mislead or deceive:  see Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 (“Puxu”), at 197 per Gibbs CJ; Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216, at 225 per Stephen J; and Fried v Dixie Holdings Pty Ltd [2000] FCA 1048, at [55] per Weinberg J.  As Gibbs CJ observed in Puxu, at 197:

A corporation which has acted honestly and reasonably may therefore nevertheless be rendered liable to be restrained by injunction, or to pay damages, if its conduct has in fact misled or deceived or is likely to mislead or deceive.

287               The conduct complained of must, however, be viewed as a whole.  Again, as Gibbs CJ observed in Puxu, at 199:

It would be wrong to select some words or act, which, alone, would be likely to mislead if those words or acts, when viewed in their context, were not capable of misleading.  It is obvious that where conduct complained of consists of words it would not be right to select some words only and to ignore others which provided the context which gave meaning to the particular words.

Statement of Claim, par 7(2)(b)

288               The representation, pleaded in par 7(2)(b) of the statement of claim, that a franchisee was required to pay a weekly contribution not exceeding five per cent of its gross weekly sales was contained in the Disclosure Document.  It was a statement of legal obligation arising from a franchise agreement made at the relevant time (September 1990):  see cl 2(ah) of the Ormond franchise agreement (set out at [204] above).  Schedule 12 to the Agreement provided for an amount of five per cent of gross sales calculated and payable weekly.  The pleaded representation was true at the time it was made and was not misleading and deceptive. 

289               It may be noted that the obligation in cl 2(ah) was subject to the proviso that this amount might be varied and a franchisee be required to pay to the franchisor “such additional amounts as the Franchisor may require … provided that such additional amounts are not opposed by a majority of the Franchisees”.  As it happened, the advertising arrangements for Victoria were varied to reduce the contribution required under cl 2(ah) upon the basis that local advertising would be in the discretion of each franchisee.  (There is no evidence that the applicants and Taylor did not consent to this change and to any consequential variation of the franchise agreement.)  These arrangements were subsequently varied again, with the result that the contribution required by cl 2(ah) returned to its former level (5% of gross sales), although each franchisee retained the discretion with regard to local advertising.  (There is evidence that this variation was made with the approval of a majority of the franchisees.)

Statement of Claim, par 7(3)(j)

290               As it turned out, the representation that has called for most attention in these reasons is the representation pleaded in par 7(3)(j) of the statement of claim.  This was to the effect the first respondent had misled the applicants in representing that the profit projections table in the Disclosure Document was based on the actual experience of Pizza Haven in its company-owned and franchise stores and, in particular, contained (a) projected sales figures based on the actual experience of Pizza Haven at company-owned and franchise stores; and (b) projected total annual franchise/store income (profit) based on the actual experience of Pizza Haven at its company-owned and franchise stores. 

(a)        Young’s evidence

291               As already noted, Franchise Developments initially prepared the profits projection table for the Disclosure Document.  Young’s evidence was that “[t]he disclosure document was to provide a guide to the franchisee as to their expectations in terms of performance, to give them and their advisers some basis to consider taking up a franchise”.  The applicants’ evidence was to the effect that they too appreciated that the profit projections table was intended to be no more than indicative of the range of potential performance for a store and, as the notes accompanying the table indicated, a store might take two years to establish. 

292               As noted at the beginning of these reasons, the profit projections table in the Disclosure Document given to the applicants derived in part from a similar table that had been prepared by Franchise Developments in late 1986 - early 1987.  Young gave evidence that he participated in the preparation of this first Disclosure Document, which was based upon Franchise Developments’ research into the performance of Pizza Haven stores in Adelaide, the data for which was provided by Pizza Haven.  In his witness statement, Young said that the information in the Disclosure Document

was based upon the experience of Pizza Haven in its company owned stores as translated to the experience of a franchisee in which situation it was expected there would be savings in respect of wages, WorkCover and some reduction in the cost of goods sold figure.  The other operating expenses largely mirrored the company owned situation.  FD then took the actual sales figures for the company owned locations and attempted to estimate the likely level of sales which may be experienced by franchisees and the impact on the various operating expenses at the different sales levels.  These levels would assist a franchisee in assessing where the likely break-even figure would be in operating the franchise based on the assumptions in the Disclosure Document.  In establishing a set of financial projections it is obviously very difficult to predict the future in that many variables may impact upon a business’ [sic] turnover, its operating expenses and therefore its profitability.  FD in these circumstances can really only take the actual figures being experienced by the company in its own locations then attempt to assess all possible factors and variables which may impact on those figures (ie. what threats there are to the business, what weaknesses and strengths in the business and its procedures and its staff and then make an estimate of the expected performance to the client’s business in the future).  We provide a range of variables to take into account the highest expected performance as opposed to the lowest expected performance. 

 

293               The data provided by Pizza Haven not only included information as to turnover levels but also included the estimated cost of producing pizzas expressed as a percentage of sales, rebates and other subsidies from suppliers, staff requirements and labour costs, other expenses (including cleaning, electricity, rent, repairs and maintenance, rubbish removal, stationery and printing, telephone, insurance and motor vehicle expenditure), as well as capital set-up costs and the like. 

294               In cross-examination, Young reaffirmed that the figures in the profits projection table given to the applicants were based on Pizza Haven’s actual experience in South Australia.  Asked to explain what this meant, he said:

We’ve got to start somewhere in terms of putting together a financial structure that we expect a franchisee may be able to achieve and a very sound benchmark for that would be to actually have where the existing company-owned stores fall in that benchmark.  But we then start to look at factors such as an uplift factor for a typical franchisee and what he may do in terms of performance.  …  So we need to think of what this business might be doing one to two years out and then you take into account what the other players in the marketplace are doing, what the competitors are doing.  In the case of Pizza Haven, we would look at the existing pizza businesses that were in the market in Melbourne and Adelaide.  …  So we would get a relative benchmark of independent businesses … .  [W]e tended to gather a fair amount of data on actually what the turnovers were.  … .  [I]t hasn’t got much science to it but the weight of that starts to give us a ballpark figure in terms of what we would think other businesses were doing and we’d gather data on how the better performing Pizza Hut stores, for instance, were travelling.  This would give us a guide as to what range of performance, independent and franchised businesses, in the pizza market were actually doing.  From that basis we would then take a fairly educated decision on where the performance of these business might lie across a range that would be reasonable for a franchisee to expect his store might fall within.

295               Young was cross-examined on the charts that the first respondent had prepared for this litigation on the performance of Pizza Haven stores in South Australia.  Asked to explain “how it was that you came to present in the profit projection table the range of sales as being between $5,000 per week and $12,000 per week”, Young said:

Firstly, this disclosure document was to be used in the Victorian market so what we did was product a bottom figure that was generally representative of the average in Adelaide at that time.  Because we had been actively involved in recruiting franchises in this market and preparing for this time for a period of time, we also had the benefit of not only seeing what independent pizza operators were doing in the Melbourne market at that time … but also the experience of Dial-A-Dino’s which had been recently in the last year or couple of years purchased by Pizza Hut.  We knew what the performance of the Dial-A-Dino’s had been in Adelaide.  Pizza Haven had started in Adelaide with three people in the market … .  By 1989 Pizza Haven had competed quite successfully with Dial-A-Dino’s, grown their store numbers.  … .  We had assessed that in terms of their ability to compete with a Dial-A-Dino’s who was clearly the market leader up until the time Pizza Haven took them over in home delivery, that Pizza Haven could compete quite effectively and have a product offering in the marketing program that would work.  We watched Dial-A-Dino’s come into the market in Victoria and we had noted that their performance relative to our knowledge of what they had been doing in Adelaide was relatively greater.  When they converted to Pizza Hut of course the benefit of that brand in the marketing drove sales forward again and so we constructed a disclosure document that was based on the performance of Pizza Haven stores in Adelaide, our experiences from independent stores in the Melbourne market that were trading between I think at that time about 2500 and 7 or 8 thousand dollars.  We did some homework across the board and there were some independents trading as high as $11,000 a week.  There were some chain operators as high as $11,000 a week at that time.  Then we attempted to reflect a picture of what those stores might perform in terms of a range between now and say 1991, given that there would be a period of establishment and on that basis we formulated a disclosure document that we believed at that time accurately reflected what a capable franchisee may be able to, in that period going forward for the next two years.  (Emphasis added.)

296               Young observed that “during the preparation of the entry into the market in Victoria we sat down with the directors of Pizza Haven and talked about the current performance of their existing franchisees”.  He stated that it was not unusual at that time for a franchisor to have no profit and loss statements for franchised stores, adding:

Franchisors tended to track sales and had a very good understanding of what the cost of sales and the operating costs were.  So unless the franchisees were not paying their royalties which indicated a profit problem, there’d be a reasonable assumption that the franchisees were tracking reasonably well.  The first person that they don’t pay is the franchisor.

297               As Young noted, by September 1990, when the applicants and Taylor entered into the Ormond franchise agreement, no store in Victoria had been trading for more than four months, although, as he said, the trading figures for the Victorian stores appeared to be “following the South Australian experience (i.e., stores were beginning with sales figures of approximately $4,000 per week and were slowly building)”. 

298               According to Young, in 1989, Franchise Developments reviewed the Disclosure Document prepared in 1987 “in the context of Pizza Haven’s experience in Adelaide both in its company owned and its franchised locations”.  He said that Franchise Developments confirmed, in the course of the review, that:

[T]he sales expectations, cost of goods and operating expenses figures would be in line with what may be expected in the Victorian market especially in the light of food being purchased directly from suppliers and prepared at the premises rather than purchased from a central commissary as in Adelaide.

299               Indeed, his evidence was that from 1989, when Pizza Haven began recruiting franchisees for Victoria, the Disclosure Document and the profit projections table were regularly reviewed by Franchise Developments in conjunction with Pizza Haven.  He said:

The review considered the operation of the company owned stores and results being reported from the franchise stores to Pizza Haven. 

 

300               Young gave evidence in cross-examination that he met regularly with his business partner, Sergio Alderuccio, and another employee, Tino Bettiol, to discuss the financial performance of Pizza Haven.  He said that Franchise Developments spent “considerable time with the franchisor in the business having a look at his operation and spending time out in the stores talking to their managers and other staff”.  When asked to explain why little or none of the results of this research remained on Franchise Developments files, he said that this material was archived for about three years, and then destroyed since it was of no further use.

[H]istory tends to overtake it.  Within a couple of years your pro forma projections have been established and they’re either correct or in some cases they may not be correct and they’re modified depending on the economic conditions on the market at the time.

301               Young denied that Franchise Developments uncritically adopted Pizza Haven’s data.  In cross-examination, Young stated that, whilst Franchise Developments did not “audit” the information provided by its clients,

[w]e certainly did challenge it if we saw inconsistencies in the numbers.  For instance, in the Pizza Haven chain, as in probably every chain that we’ve looked at, there are aberrations.  There will be better performing stores and there will be worse performing stores.  In trying to pitch some sort of average, we sit down with the client and we go through why their stores are performing.  We don’t take the information as read from the client and simply accept it.  … .  So our experience was that we would certainly challenge unusual numbers within the set of numbers of a franchise organisation’s performance.

302               The applicants contended that, at and prior to September 1990, the respondents had little or no information on the financial position of the franchise stores in South Australia.  Young gave evidence, however, that he was actively involved in selection of a first franchisee for Adelaide, who opened the pilot franchise at Enfield.  Young’s evidence in his witness statement was that:

I assisted Pizza Haven in the recruiting of its first franchisees, being the first three or four franchises granted in Adelaide.  These early franchises performed in accordance with the estimations in the Disclosure Document.  They commenced with weekly takings of approximately $4,000 per week which steadily increased.  Pizza Haven knew how much product was being used in the stores as they were supplying from a central commissary and this consumption was in line with the cost of goods sold estimates in the Disclosure Document. 

303               Young also gave evidence in cross-examination that Franchise Developments was informed of the results from Enfield, and that the pilot was properly conducted “almost from the period of the first three months after the store started”.  Whilst he conceded that Franchise Developments did not receive documented figures for Enfield (or any other franchised store) until Enfield was due to be sold in August 1990, his evidence was that:

[D]uring our relationship with Pizza Haven I would have regular meetings with the directors of Pizza Haven or one of the directors, depending on who was responsible, to talk about performance of the operation and one of my key lines of questioning are, ‘How are the existing franchisees going?  How are their sales going?  How is their performance?  Are they happy?’  It was my perception at least that Pizza Haven, by the way in which they answered these questions, were in close contact and had a very good feel for the performance of the business.

304               The applicants also challenged the representation that the figures were “based on” Pizza Haven’s experience on the ground that these figures included an “uplift figure”.  Young gave evidence that Franchise Developments developed principles based on its experience “across a wide range of businesses”, including that “if the existing company owned stores are profitable under management a franchised owner operator should perform at least as well, and in our experience 10 better than a company owned location in terms of both sales and profitability”.  This principle was applied when first calculating the figures for the profit projections table.  In connection with the “uplift factor”, Young said in cross-examination that:

[T]he uplift factor was one of several factors that arrived at these numbers, including the performance of both independent and other chain operators.  Generally speaking, that uplift factor would have been in the realm of 10 to 15 to 20 per cent.

305               It is important to note, however, that Young said that the uplift factor was not necessarily applied on a continuous basis, “because as we get experience of franchise locations we’re then able to take in the actual performance of franchisees”. 

306               Young was a credible witness.  I accept his evidence as providing an accurate account of Franchise Developments’ work in preparing and reviewing the profit projection table.

(b)        Evan Christou’s evidence

307               In his first witness statement, Evan Christou said that, prior to September 1990, Pizza Haven (through its directors and staff) also reviewed the Disclosure Document in the context of Victoria, particularly in light of the fact that “a commissary was not going to be operated in the early stages at least in Victoria”.  He said that Pizza Haven regularly provided sales data to Franchise Developments in order that it might review the Disclosure Document, including the Disclosure Document used in Victoria in October 1989.  In connection with franchise stores, he said that, for the period before September 1990, Pizza Haven based “the estimates for most of the operating expenses (with the exception of cost of goods from our own company stores experiences) from information generally obtained or gleaned from information conveyed to us by franchisees”. 

308               Evan Christou’s evidence was that he liaised closely with the proprietors of the Enfield store, and that he had a good knowledge of Enfield’s trading experience.  This was, he said, later confirmed by the store’s trading accounts, which were received in August 1990.  In his third witness statement, he augmented his evidence as follows:

In the course of the Enfield franchise operating as a pilot franchise, I was in regular communication with Mr. Botsaris Sr., the franchisee’s father, who was managing the books of account for the franchise, concerning the performance of the franchise.  They showed me details of all expenses by reference to cheque butts and cash book entries which Mr. Botsaris Sr. made.  I knew details of sales, all purchases in relation to food, cleaning and uniforms, advertising, insurance, rent (the property belonged to, and still does, to one of our companies) expenses and royalties.  I sought and regularly obtained details of all other expenses from the time of opening in December 1986.  I had a keen interest in following this store’s performance for approximately 12 to 18 months.  The Botsaris family were family friends of ours, and we had a very cooperative relationship.

309               I accept Evan Christou’s evidence.  I accept that, besides having first-hand knowledge of its company-owned stores, the first respondent had, as Young and Evan Christou said, a good working knowledge of Enfield and subsequently other franchised stores. 

310               Evan Christou gave considerable evidence to the effect that Pizza Haven’s experience was reflected in the profit projections table.  Exhibited to his first witness statement was a graph showing the sales levels of the stores in Adelaide (including company-owned and franchise stores) for the period June 1990 to December 1990.  The graph showed that, as at 30 September 1990, the per store average of the South Australian stores was $6,085 per week.

311               Having noted this fact, Evan Christou went on to say that:

Weekly sales figures in excess of $12,000 were first achieved in May 1991 at the Modbury (SA) store ($13,125).  The 1989 Disclosure Document advised potential franchisees that optimum sales levels may take up to 24 months to achieve.  This had been our experience in Adelaide and in Victoria.  In my experience stores start selling at different levels and take different times to achieve sales potential. 

312               Evan Christou’s evidence was that Enfield trading accounts, received in August 1990, “largely confirmed our view that the franchise models produced by FD and the estimates provided by Pizza Haven in the Disclosure Document of October 1989 were accurate”.  I accept this evidence. 

313               There was other evidence, in the form of chart prepared by Evan Christou from information available to Glev at the time, that showed that in 1989-1990 the company-owned stores and Enfield had sales and profit generally in the range in the profit projections table given to the applicants and Taylor.  I accept, as Evan Christou, stated, in his third witness statement:

[A]t the time the Applicants were enquiring as to the acquisition of a franchised territory in Victoria, the South Australian stores in metropolitan Adelaide were generally averaging about $6,500 per week … .

Glenelg was trading at approximately $14,000 per week (or approximately $11,000 per week if, as was unclear, the sum of $14,000 included restaurant sales).  I reject the applicants’ submission that Glenelg was properly to be excluded.  There was, moreover, evidence that by May 1991 (7 months after the Ormond store had opened) the store at Christies Beach was achieving $15,119 per week. 

(c)        Louis Christou’s evidence

314               The applicants sought to prove that the first respondent had little knowledge of the profitability of its company-owned and franchise stores as at September 1990.  Whilst there was only a limited amount of contemporaneous documentary evidence about the financial position of Glev’s company-owned stores (and even less for franchise stores), I was ultimately not satisfied that they had succeeded in making out this aspect of their case. 

315               Louis Christou was cross-examined extensively on this matter.  In order to understand the character of his response, I have set out the following exchange between him and the applicants’ counsel at some length. 

Counsel:           You needed to know how the stores were going to know how they were going relative to one another, didn’t you?

L Christou:       Key information like the food costs was key information that we kept records on a weekly basis.

Counsel:           You had that for all stores, didn’t you?

L Christou:       We had that for all stores because we had the commissary and we knew what the sales – we used to ring up the stores on a daily basis to get the sales and on a weekly basis we delivered to the stores, mainly once a week and I was able to develop those profits and losses for myself to see how things were going.  We kept good tallies on the cost of food and labour for our company stores.

Counsel:           Did you do profit and losses for all stores?

L Christou:       Not all the time.

Counsel:           Did you do them for each store at least once a year, each company store?

L Christou:       I can’t say.  I think it was simply, yes, I want to do something now.  As I said, we were very busy and we did things based on need or if the time allowed.  So those things that you’re talking about, it’s purely my work that I did for myself.

…

Counsel:           [C]an her Honour take it from the answers you’ve just given that there was no regular or formal process of preparing profit and loss statements for company stores?  It wasn’t done every three months or every six months?

L Christou:       No, it wasn’t.

Counsel:           Was it done every year for each company store?

L Christou:       I’ve taken windows – I’m not quite sure but I’ve taken windows.  I mean, I’ve done them and I’ve done some things for a year but there was no guarantee that I will have basically say to you, ‘Yes, I’ve done them for a whole year,’ or ‘I’ve done them for a month.’  I don’t know what you’ve got over here.  I believe I’ve done them on a reasonably regular basis between 88 and 90.

…

Counsel:           If you haven’t done them for set periods such as one for each store for each year or one for each store for each six months or three months, then you may never have known whether any company store was profitable or not, Mr Christou?

L Christou:       Let me explain to you.  Up to 1986 there was one company store and brother Gabriel worked from there and made his living.  Brother Bill, brother Evan worked from there, only on company stores and they’ve made their living.  I came in 1987 and we’ve made our living and also on top of the micro evidence, looking at the overall position we knew we were making money.

…

Counsel:           Is it possible that you may not have known from one year to the next whether any particular company store was profitable or not?

L Christou:       We knew because of the sales and I said to you earlier that I kept on a weekly basis the cost of food and also the labour – those two main variables.  Most of the other items are fixed costs.

…

Counsel:           As I understand your evidence a little while ago, you would keep or make records for company stores on a need to know or time allowed basis?

L Christou:       The food as you see it, but every week we knew what the cost of food was for each of our stores.  We knew what the labour cost was for each of our stores.  We controlled the advertising.  So looking at those three things we knew how to drive the business because the rest of it was fixed cost.

316               As already noted, I have accepted that Louis Christou was an honest witness, whose evidence on these matters was supported by Evan Christou.  I accept that, although Glev did not prepare formal profit and loss statements for each of its company-owned stores at fixed intervals, Glev, through its directors or staff, prepared some such statements from time to time and, at any one time during the relevant period, Glev knew its sales figures and the expenses of substance for each of its stores with a fair degree of accuracy.  In addition to profit and loss statements, Glev also maintained a computerised record, showing sales, food costs, franchise fees, wages and advertising. 

317               With the passage of time, it is unclear when and how Glev lost documents and computer records recording financial information pertinent to this case.  I accept that it did.  The applicants have not shown that these documents and records were lost for any reason connected with this litigation, or that the respondents’ legal advisers should have done more than they did to ensure their safekeeping.

318               The applicants submitted that, although the profit projections table showed the estimated cost of food at 25%, the actual average cost of food for the South Australian stores was at least 30%.  A chart, also prepared by Evan Christou from computer generated print-outs for 14 of the 17 company-owned and franchise stores operating as at 30 June 1990, showed these stores’ weekly sales and the costs of food, packaging and drinks used in the stores.  This information provided a means to analyse the evidence for annual sales and the cost of food percentages, as well as the printing and stationery, cleaning and uniform expenses (also recorded) of the 14 company-owned and franchise stores.  Whilst the chart showed that a number of stores fell outside (and below) the total weekly sales range in the table, most lay within it.  The chart also indicated that, as might be expected, the costs of goods sold varied (23% to 33.7%).  I accept, however, that Pizza Haven believed, for the reasons given by Evan Christou in his first witness statement, that the cost of goods sold was more expensive in the case of stores using the commissary than for stand-alone stores.  Stores that fell into this latter category were Port Pirie (23.74%), Murray Bridge (27.06%), and Glenelg (26.88%).  I accept that this and a number of other factors referred to in Evan Christou’s first witness statement were taken into account in settling on the figure of 25% in the profit projections table.  Evan Christou’s evidence was that, because commissary store food costs were higher than non-commissary stores, commissary stores in South Australia were converted from the commissary concept to the self-contained concept (for food preparation) from the beginning of March 1990.

(d)        Evidence on the profit projections table representation summarised

319               The applicants have not established that the statement that the figures in the profit projection table were based on the experience of Pizza Haven in its company-owned and franchise stores was misleading or deceptive.  The evidence given by Young and Louis and Evan Christou established that the figures were calculated from figures reflecting Pizza Haven’s own experience, and that they were regularly reviewed by reference to that experience.  I accept the evidence given by Louis Christou that he and others monitored the performance of company-owned stores.  I accept that Young and Louis and Evan Christou had a working knowledge of the performance of franchise stores, commencing with Enfield, and that they took this knowledge into account in their reviews of the profit projections table in the Disclosure Document. 

320               The fact that Louis Christou acquired information about Enfield in discussion with the father’s proprietor, rather than through the regular provision of profit and loss statements, did not diminish the quantity and quality of his knowledge about the outlet’s performance.  The evidence, which I accept, is that he and Young scrutinised its operation from early in its trading and that, when the documented figures for Enfield were received, these figures confirmed the figures in the profit projection table.  The Enfield figures showed that sales at this outlet rose from an average of $5,234 per week in 1987-88 to $5,674 per week in 1989-90, although the net profit (excluding wages and drawings by the proprietors) to the owner/operators fell.  (I accept, however, that, for the reasons given by Evan Christou, nothing in this case was shown to turn upon this drop in net profits.)

321               As indicated already, the applicants sought, unsuccessfully, to show that the profit projections table was not based on the actual experience of Pizza Haven in South Australia since the company-owned and franchise stores were not profitable; alternatively, Glev did not know whether or not they were profitable.  The evidence as to the actual performance of the company-owned and franchise stores prior to September 1990 (as set out in the analyses prepared by Evan Christou and accepted by me) confirmed that, for the most part, these stores were performing within the range in the table (although at the lower end).  As at 30 September 1990, the store at Glenelg was, however, performing at the upper end of the range (in the store’s home delivery business).  Given that the table was expressed as setting out profit projections and that the notes accompanying the table advised that it might take up to two years to establish a store that had no trading history, it was also relevant that, within a two year period, there were other stores also performing at the upper end of the range. 

322               Further, it does not follow from the fact that there were stores below the range (e.g., at Port Pirie and Blackwood) that the table was misleading.  The notes accompanying the table themselves indicated that the trading results at any particular store would be affected by a number of considerations, including the period of its establishment, its mode of operation and location.  The last-mentioned factor was relevant for the Port Pirie and Blackwood stores. 

323               The applicants relied particularly on the evidence concerning cost of sales which showed that there was a difference between the 25% set out in the table and the historical actual cost of sales figures for individual company stores.  The evidence showed, however, that the figure of 25% was based on store performance in South Australia, adjusted on account of a number of factors, particularly the use of the commissary.  It was true that no store recorded the 25% figure.  The profit projections table, however, was concerned to provide projected estimates, and not actual figures.  In order to derive one figure from a variety of store experiences, there had necessarily to be some assumptions made upon which the calculation of a projected figure might be made.  The applicants have not shown that these assumptions were misconceived.  A relevant consideration was, plainly enough, the effect on food costs of the use of a commissary.  It did not follow from the fact that this was borne in mind in calculating a percentage figure for cost of food compared with sales that the resulting figure was not relevantly based on actual store experience as well.

324               Further, I was not satisfied that the accounts for Glev Franchises and the Glev Unit Trust supported a finding that that the company stores did not make a profit in the period prior to 1991.  I accept that, while the Trust operated the company stores and commissary, the Trust accounts included expenses that were not directly relevant to the stores at all.  It was plain from the evidence that there were many disparate items included in these accounts, and that this fact made it unsafe to make any finding to the effect the applicants sought. 

325               I accept that the applicants were not told of the 20% uplift factor that was introduced into the calculations for the profit projection table, but I reject the proposition that this necessarily made the figures in the table misleading.  The Disclosure Document, the table and the notes accompanying it made it plain enough that the table assumed that the franchisee was an owner/operator.  It was clear enough that the projected figures were calculated on this assumption.  Whilst noting Young’s evidence as to the introduction of the uplift factor into the owner/operator model, I accept that the significance of the uplift factor diminished as Pizza Haven and Franchise Developments acquired greater information and experience on the performance of franchise stores; and that, when they received the Enfield trading figures in August 1990, they satisfied themselves that these figures confirmed the projections in the profit projections table that was given to the applicants and Taylor in September 1990. 

326               In any event, I doubt that the applicants can claim to have relied upon any misrepresentation that might have been conveyed by the profit projections table.  If there were any capacity to mislead as to Ormond’s turnover during the first two years, that capacity ought to have been dispelled by the provision of figures for the Brighton store and the Victorian store trading figures.  The Brighton figures showed that in its first year the store averaged a turnover of $4,300 per week.  That is, viewed historically, stores in South Australia did not trade only in a range above a $5,000 weekly turnover.  Further, Victorian store figures showed trading levels between $4,000 and $7,000 in their first months of opening. 

327               I note too that this representation was not pleaded until trial and that the applicants gave some evidence at trial that they did not rely on the Disclosure Document or on Hughes (see below). 

m:  the issue of reliance

328               Referring to the observations of Wilson J in Gould v Vaggelas (1985) 157 CLR 215, at 236, as applied in, for example, Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471, at 482-3, the applicants contended that they had been induced to enter into the Ormond franchise agreement by representations that proved to be false.  In view of the findings that I have made in this case, it is not strictly necessary to discuss this contention further (although I have already touched on some issues of reliance earlier in these reasons.)  Issues of reliance loomed large at trial, however, and, for this reason, I say something about them in the following paragraphs.

329               As already stated, I accept the evidence of Taylor (and the evidence of Reyes and Louis and Gabriel Christou to the extent that it was consistent with Taylor’s evidence) that it was the applicants and Taylor who first proposed to acquire two territories rather than one.  Further, as already stated, I accept that the applicants and Taylor met with Reyes and the Christous on 12 September 1990 (and not 5 September 1990 as the applicants maintained).  It followed that the applicants and Taylor had determined to apply for the two territories before they met the Christous. 

330               I reject the applicants’ contention that the Christous and Reyes talked the applicants and Taylor into acquiring the Ormond territory in preference to other territories.  The evidence (which I accept) was that the Christous were intending to run a company store at the Ormond location.  There was no evidence that they had any reason to persuade the applicants that they should take up a franchise at Ormond; and the evidence does not support a finding that they did so.  I reject Zienkiewicz’s evidence in cross-examination that Gabriel Christou induced the applicants and Taylor to take Ormond instead of Springvale by making representations that Ormond “would do between 10 and 12 thousand and quickly rise to 15 and the expected turnover should be easily $7000”. 

331               There were a number of considerations that led me to conclude that the applicants and Taylor made up their own minds about the Ormond territory.  These factors included:

·        The applicants and Taylor came to the meeting on 12 September 1990 with a bank cheque for the deposit on two territories; and Taylor had written the word “Ormond” on the front sheet of his application before he spoke with Reyes on that day.

·        The applicants’ and Taylor’s workplace was situated near the border of the Ormond/Bentleigh territory. 

·        Zienkiewicz was familiar with the locality that the Ormond store was to serve, since he had grown up in the area and in September 1990 his mother was living in the area. 

·        Taylor had managed the McDonald’s store at Elsternwick (a nearby suburb) for a number of years.  He had, therefore, relevant business experience and knowledge of the locality. 

·        Taylor was the leader of the applicants.  Reyes, together with Louis and Gabriel Christou, gave evidence (which I accept) that Taylor was the leader in the negotiations with them.  It was he who signed the formal documents on behalf of them all, attended at other franchise stores, and fully completed the franchise application. 

·        The applicants’ own evidence was that Taylor provided them with advice on the suitability, for their purposes, of a Pizza Haven franchise.  Zienkiewicz’s evidence was that Taylor was initially asked to investigate whether a Pizza Haven franchise would be a suitable investment for them, and that he made a positive recommendation.  Sanders described Taylor as “the cook at the time”. 

·        By 12 September 1990 (if not earlier) the applicants and Taylor were proposing to employ Troy Skilling as their manager at the Ormond store.  In September 1990 Skilling was a Pizza Hut manager for the Bentleigh Pizza Hut store and had, therefore, relevant knowledge of the Ormond/Bentleigh territory. 

·        The applicants and Taylor had some knowledge of how the Bentleigh Pizza Hut was performing at the relevant date.  Zienkiewicz gave evidence at the trial that Skilling told him that the Bentleigh Pizza Hut had a weekly turnover of $8,000.  Skilling also discussed this and other matters with Taylor.  I reject the applicants’ evidence that the proposed employment of Skilling and the information he gave them concerning the Bentleigh Pizza Hut were not considerations affecting their choice of the Ormond territory.  As I have said, there were doubts about the reliability of their evidence on a number of issues, and this evidence was, so it seems to me, contrary to the inherent probabilities of the case.

332               I am not satisfied that, on the balance of probabilities, the applicants were induced to take up a franchise at Ormond by reason of statements made by Reyes or by Gabriel and Louis Christou about the Ormond store in September 1990.  (Another factor that may be borne in mind is that, at Reyes’ invitation, one or other of the applicants and Taylor visited the franchise stores at Knox and Elsternwick prior to entering the Ormond franchise agreement.  In cross-examination, Sanders conceded that Taylor and Zienkiewicz had told him about the Elsternwick’s store performance after they had visited the store.)

333               I accept, of course, that a representation need not be the sole inducement, and that it would be sufficient if it played some part, even if comparatively minor, in contributing to the decision to enter into the Ormond franchise agreement.  Even so, I am not satisfied, on the balance of probabilities, that the applicants were induced to enter the franchise agreement by statements made by Reyes or Gabriel and Louis Christou in discussions with the applicants concerning the investment potential of the Ormond store or its potential turnover.  The applicants and Taylor did not appear to me to be the kind of people who would have been likely to risk their families’ financial security upon the recommendations of Gabriel Christou (whom they had met only once and briefly) or of Reyes (who was plainly trying to sell a franchise to them).  It was in keeping with their personalities and experience that the applicants consulted an accountant and a lawyer before entering the franchise agreement, and took their advice.  (I note that Zienkiewicz consulted his accountant, Hughes, immediately after his meeting with Gabriel and Louis Christou.) 

334               Hughes’ advice concerned the suitability of a franchise as an investment for the applicants.  I do not accept Sanders’ evidence that Hughes was engaged simply “to look into the documents that had been given to us and to see, with his knowledge, if those numbers were going to stack up”.  This description of Hughes’ task does not reflect the work that Hughes actually did (as recorded in his work files and indicated in his request for actual trading figures) and was, so it seemed to me, an attempt on Sanders’ part to lessen the significance of Hughes’ involvement in his, Sanders’, decision-making. 

335               Further, there were, as already noted, inherent improbabilities in the applicants’ evidence that they took up a franchise at Ormond on the basis of a representation that they would recoup their investment within twelve months.  As we have seen, amongst other things, Zienkiewicz did not inform either Reyes or the Christous of the amount of the applicants’ intended borrowing.

336               Upon the basis of, amongst other things, the financial information in the Disclosure Document (including the profit projections table), the figures for the Brighton store and the trading figures for stores in Victoria, Hughes advised Zienkiewicz and Sanders that they should have regard only to “the lowest turnover and profit level”, which was based on a projection of weekly sales of $5,000.  I do not accept Zienkiewicz’s evidence that he effectively ignored his accountant’s advice.  Zienkiewicz sought to diminish the significance of Hughes’ advice in his decision-making by describing Hughes as “conservative” and “very cautious in providing information”.  This did not fit with Sanders’ evidence, however, that Zienkiewicz had specifically referred him, Sanders, to Hughes’ advice concerning the appropriate basis for assessing their proposed investment and that he, Sanders, had in fact relied upon a $5,000 weekly turnover in making his decision.  It seemed to me inherently unlikely that Zienkiewicz would have referred Sanders to Hughes’ advice and yet have ignored it himself.  This was another instance in which I considered that Zienkiewicz was not a credible witness.  (I observe that the store at Ormond in fact achieved a weekly turnover of $5,000 within two years’ of trading.)

337               Although I accept Sanders’ evidence that he had regard to a $5,000 weekly turnover (this being consistent with Hughes’ advice and with the profit projections table), I would not accept Sanders’ evidence that, while relying upon this turnover figure, he was also relying upon assurances (if made) by the Christou brothers that the Ormond store would start up with a $7,000 weekly turnover.  The inherent inconsistencies in this evidence were not explained away by Sanders’ further evidence “that the $5000 level was a safe and conservative view” favoured by Hughes as their accountant.  As already noted, Sanders had not referred to a $7,000 weekly turnover anywhere in his first witness statement and, as already noted, he failed at trial to explain the omission.  Considering Sanders’ evidence as a whole, his evidence on this point was, so it seems to me, an example of his manufacturing evidence to suit the interests of his case. 

338               As should be apparent, I accept that Hughes relied on the profit projections table, as well as the figures for the Brighton store in giving his advice (and to the extent appropriate, the Victorian trading figures).  In connection with the profit projections table, Hughes’ evidence was that:

[W]e didn’t take the profit projections as a recommendation.  As I recall, they were an indication. 

I accept Hughes’ evidence in this regard.  As stated earlier, I am not satisfied, on the balance of probabilities, that the provision of the table and the Brighton figures (or the Victorian trading figures) involved any misleading or deceptive conduct on the respondents’ part. 

339               In any event, as already noted, the Disclosure Document contained explicit warnings about the information it contained (including the profit projections table).  In relation to these warnings, Sanders said:

In the context of this document being handed to us at the conclusion of the meeting of 5 September, in the context of all that had been spoken to in that meeting, I took it that this document and that the subsequent full disclosure document were a conservative tome compiled for legal reasons, generic in form, that might be spoken to for any and all stores that were being sold but the conversation that had taken place in that full two-hour meeting at Franchise Developments painted an entirely different picture in respect of the Ormond store.

Zienkiewicz gave evidence to the same effect.  For the reasons referred to below (at [341]), I reject the applicants’ evidence that, although they read these warnings, they did not understand that the warnings applied to them. 

340               The franchise agreement itself contained an acknowledgment (in cl 17) that the franchisee “understood that the Franchisor does not guarantee to provide a rate of return on investment or profit to the Franchisee and understands that profit or return depends upon his own effort and investment”.  In connection with this, Sanders also said:

I would have treated that within the context that I treat the whole document, as being a very generic document and that I felt that we had been put in a privileged position where we had two of the directors of Glev come and speak to us directly and make other claims regarding in particular the Ormond store.

I do not accept this evidence.

341               Whilst the contents of the first acknowledgement and the second acknowledgement may not have been noted by the applicants (since they did not retain copies of them), in view of the applicants’ careful approach to entering the venture and their own and Taylor’s experience, I reject as improbable their evidence that they paid no regard at all to the warnings in the Disclosure Document (or to the relevant provisions in the franchise agreement) and relied (according to Zienkiewicz, virtually entirely) on the statements made orally by Gabriel and Louis Christou.  In the particular circumstances of this case (see e.g. at [331]), I do not consider it probable that the applicants, advised by Taylor, would have relied as alleged on what was said in the relatively short meeting with the Christous on 12 September 1990, more particularly as the applicants subsequently took professional advice from an accountant and a lawyer.  Amongst other things, as already noted, Zienkiewicz and Taylor had specific knowledge of the area in which they were proposing to operate their business, as well as the knowledge and know-how that Skilling made available to them. 

342               It is also to be borne in mind, in considering the reliability of the applicants’ evidence (that they had regard to what Gabriel Christou in particular said, rather than the “generic” documentation) that, in October 1990, Zienkiewicz made an application for a mortgage loan in which he referred to the profit projections table in the Disclosure Document as providing the details of his Pizza Haven franchise business. 

343               It should be apparent from this that, if it were necessary to do so, I would find that the applicants had failed to make out their case on reliance, save in so far as it involved the reliance by Hughes (and, therefore, the applicants) on the profit projections table, the Brighton figures and, to some limited extent, the Victorian trading figures.  As I have said, the provision of this information did not give rise to misleading and deceptive conduct on the respondents’ part.

n:  other matters

344               For the reasons stated in the foregoing pages, the applicants’ case against the first respondent alleging breaches of s 52 of the TPA fails.  It is unnecessary to discuss any other issues of causation.

345               The applicants made a case against the second respondent (Gabriel Christou) and the third respondent (Reyes) based on s 75B of the TPA.  This too fails, since no contravention of s 52 has been established. 

346               The applicants also alleged that the representations as pleaded constituted collateral warranties that were breached by the first respondent.  Of the pleaded representations made out by the applicants, one (in statement of claim, par 7(2)(b)) stated an obligation arising from the franchise agreement:  see cl 2(ah) of the Ormond franchise agreement (set out at [204] above).  As already noted, there was no evidence that cl 2(ah) had been breached.  For the reasons already stated, none of the representations pleaded inpars 7(1)(a), 7(1)(i) and 7(2)(a) of the statement of claim constituted collateral warranties.  Even if the representations pleaded in pars 7(2)(e) and7(3)(j) of the statement of claim could be so regarded (and leaving aside the effect of cl 21 of the franchise agreement), the applicants have not established, on the balance of probabilities, that there was any breach of the kind alleged.

347               Further, in view of the findings made, the applicants’ claim for damages for negligent misstatement also fails.  The applicants have made out 6 of the 28 pleaded representations.  In the circumstances of the case, the statements to the effect that the Pizza Haven chain was extremely successful (statement of claim, par 7(1)(a)), that a franchise was an attractive investment (statement of claim, par 7(1)(i)), and that there would be an aggressive program of advertising (statement of claim, par 7(2)(a)) did not attract a duty of care.  As already noted, these commendatory statements were of the kind commonly made by salespersons in the course of negotiating a sale, and to say they were intended to convey “information” to a purchaser upon the basis that the purchaser would trust that the information was true is to misdescribe the nature of the communication.  Neither the character of these communications nor the circumstances in which they were made support a finding that Gabriel Christou or Reyes ought to have realised that, in making them, the applicants were trusting in his special competence and that it was reasonable, in all the circumstances, for these applicants to accept and rely on statements of this nature in determining to purchase the Ormond franchise:  see, e.g., Tepko Pty Ltd v Water Board (2001) 206 CLR 1, at 16-18 per Gleeson CJ, Gummow and Hayne JJ, and at 22-24 per Gaudron J; San Sebastian Properties Pty Ltd v Minister Administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340, at 354-357 per Gibbs CJ, Mason, Wilson and Dawson JJ and 372 per Brennan J. 

348               As already stated, the applicants have not shown that the representation pleaded in par 7(2)(e) was made without reasonable grounds.  It was not, for that reason, made negligently.  Further, as set out above, the applicants have not succeeded in establishing that any of the representations pleaded in pars 7(2)(b), 7(2)(e) and7(3)(j) of the statement of claim were incorrect. 

o.  conclusion

349               For the foregoing reasons, the applicants have not made out their case that the respondents are liable to them in damages for misrepresentations made by them during the negotiations preceding their entry into the Ormond franchise agreement.  I would, therefore, dismiss the application in this proceeding. 

350               In the ordinary course, the applicants would be required to pay the respondents’ costs.  There may, however, be considerations that, in the circumstances of the case, support a costs order of a different kind.  There also remains the respondents’ cross-claim.  I would, therefore, afford the parties an opportunity to make written submissions on the question of costs and on
the disposition of the cross-claim, if they so wish, before any further step is taken in the proceeding. 

I certify that the preceding three hundred and fifty (350) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.

Associate:

Dated:              29 October 2002

Counsel for the Applicants:	Mr P Bick QC with Mr D Farrands
Solicitor for the Applicants:	Slater & Gordon
Counsel for the Respondents:	Mr C Golvan
Solicitor for the Respondents:	Middletons
Dates of Hearing:	8/6/00, 13/6/00-14/6/00, 20/6/00, 19/1/01, 22/1/01-25/1/01, 29/1/01-30/1/01, 2/2/01, 5/2/01-9/2/01, 12/2/01-14/2/01, 16/2/01, 27/2/01-2/3/01, 26/4/01-27/4/01, 30/4/01-1/5/01, 5/6/01 & 13/6/01
Date of Judgment:	29 October 2002