FEDERAL COURT OF AUSTRALIA

 

The Silver Fox Company Pty Ltd as Trustee for the Baker Family Trust (ACN 083 629 225) v Lenard’s Pty Ltd (ACN 010 711 145)

[2004] FCA 1225

TRADE PRACTICES – franchise agreement – whether franchisees misled and deceived under s 52 of the Trade Practices Act 1974 (Cth) by representations made in information provided by and statements made by head franchisee and/or master franchisee –impact of s 51A of the Trade Practices Act 1974 (Cth) on the burden of proof – whether the method by which and the circumstances in which the franchise agreement was entered into and subsequently terminated amounted to unconscionable conduct contrary to s 51AC of the Trade Practices Act 1974 (Cth)

 

AGENCY – whether master franchisee an agent for head franchisee

Trade Practices Act 1974 (Cth) ss 51AC, 51A, 52, 75B

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

Campoman Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 applied

Ting v Blanche (1993) 118 ALR 543 applied

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

Sykes v Reserve Bank of Australia (1999) 88 FCR 511 applied

Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276 cited

Hurley v McDonalds Australia Ltd [1999] FCA 1728 applied

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153; [2003] HCA 18 cited

Peterson v Moloney (1951) 84 CLR 91 applied

Massey v Crown Life Insurance Co. [1978] 2 All ER 576 applied

Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385 applied

Jones v Bouffier (1911) 12 CLR 579 applied

THE SILVER FOX COMPANY PTY LTD AS TRUSTEE FOR THE BAKER FAMILY TRUST (ACN 083 629 225), BRYAN WILLIAM BAKER & BEVERLY ANN BAKER v LENARD’S PTY LTD (ACN 010 711 145), THE POULTRY SHOP LEASING (SA) PTY LTD (ACN 060 052 020), POULET FRAIS PTY LTD (ACN 059 852 265) & RICHARD HAMOOD

 

SAD 70 of 2001

 

 

MANSFIELD J

17 SEPTEMBER 2004

ADELAIDE

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SAD 70 OF 2001

 

BETWEEN:	THE SILVER FOX COMPANY PTY LTD AS TRUSTEE FOR THE BAKER FAMILY TRUST (ACN 083 629 225) FIRST APPLICANT   BRYAN WILLIAM BAKER SECOND APPLICANT   BEVERLY ANN BAKER THIRD APPLICANT
AND:	LENARD'S PTY LTD (ACN 010 711 145) FIRST RESPONDENT   THE POULTRY SHOP LEASING (SA) PTY LTD (ACN 060 052 020) SECOND RESPONDENT   POULET FRAIS PTY LTD (ACN 059 852 265) THIRD RESPONDENT   RICHARD HAMOOD FOURTH RESPONDENT

 

JUDGE:	MANSFIELD J
DATE:	17 SEPTEMBER 2004
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

introduction

1                     In late 1996 Bryan William Baker (Mr Baker) and Beverly Ann Baker (Mrs Baker) (together the Bakers) began to consider the acquisition of a business to operate together.  At the time Mr Baker was employed full-time in the Australian Taxation Office, and Mrs Baker was employed full-time at Australian Citrus Growers.  She changed her employment to Dentsleeve on 17 June 1998.  One option the Bakers contemplated was the acquisition of a franchised business.  It is not necessary to refer to the consideration which they gave to that process over the succeeding period, except to the extent that it relates to the respondents.  In due course, on 29 July 1998 The Silver Fox Company Pty Ltd (Silver Fox) was incorporated, and established as Trustee for the Baker Family Trust.  Silver Fox was the vehicle by which, ultimately, the Bakers gave effect to their plans.  I shall nevertheless refer from time to time to the Bakers as running the business which is the source of the present claim, even though it was in reality Silver Fox.

2                     In April 1997, the Bakers first expressed an interest in acquiring a Lenard’s franchise.   Lenard’s Pty Ltd (Lenard’s) is the head franchisee throughout Australia for the ‘Lenard’s Poultry Shop’ franchises (Lenard’s shops).  The franchising concept relates to the business of preparing fresh, ready to cook, gourmet poultry and other products for sale in retail outlets.  There are a significant number of Lenard’s shops throughout Australia, including as at April 1997, 12 Lenard’s shops in South Australia.

3                     Lenard’s operates through a series of master franchisees throughout Australia, including one for the territory of South Australia.  Poulet Frais Pty Ltd (Poulet Frais) at all material times has been Lenard’s master franchisee for South Australia.   Mrs Baker first contacted Lenard’s, and was referred to Richard Hamood (Mr Hamood).  Mr Hamood at all material times has been the director of Poulet Frais.

4                     The relationship between Lenard’s and Poulet Frais is governed by a Master Licence agreement.  Poulet Frais was appointed master franchisee for South Australia on 1 June 1993.

5                     The Poultry Shop Leasing (SA) Pty Ltd (Lenard’s Leasing) is a company controlled by Lenard’s.  It is the vehicle which leased premises in South Australia secured for the purpose of making available Lenard’s shops to potential franchisees.  The system involved a potential franchise shop being identified and secured by Poulet Frais through Mr Hamood.  Mr Hamood negotiated the terms of the lease subject to Lenard’s approval.  The lease was then taken by Lenard’s Leasing rather than by Poulet Frais.  The property was then made available to the potential franchisee.

6                     Under the Master Licence agreement, the master franchisee for a particular territory is obliged to seek prospective franchisees, to seek prospective premises for new Lenard’s shops within the territory, and to train, service and support Lenard’s franchisees within the territory.  Generally speaking, the level of training required to be provided involves two weeks ‘in store’ before the franchisee commences operations, and a further two weeks in the particular Lenard’s shop once the franchisee has commenced operations.

7                     Lenard’s provided to its master franchisees, including Poulet Frais, a Master Manual.  It dealt with a number of topics including guidance for finding and assessing potential sites for new franchised Lenard’s shops. 

8                     Following the communications referred to below, the Bakers decided in mid 1998 to proceed to endeavour to secure a Lenard’s franchise.  On 29 June 1998, they were told by Mr Hamood that a Lenard’s shop known as Shop 5, Hilton Plaza Shopping Centre, at Hilton in South Australia (the Hilton shop) was available at a total cost of $192,402.  The Bakers resolved to adopt that option.  They secured the necessary finance through the Commonwealth Bank of Australia (the bank) to enable them to proceed.  Ultimately, on 4 September 1998 they signed a Franchise Agreement with respect to the Hilton shop.  In fact, Silver Fox commenced operating that business on 2 September 1998.

9                     The applicants allege that the corporate respondents, by entering into, and then subsequently terminating, the Franchise Agreement engaged in conduct that was in all the circumstances unconscionable, contrary to s 51AC of the Trade Practices Act 1974 (Cth) (the TP Act).  They further allege that in the period leading up to the Franchise Agreement, the corporate respondents engaged in conduct which was misleading or deceptive or was likely to mislead or deceive contrary to s 52 of the TP Act.  Mr Hamood is said to have been directly involved in that conduct, so as to render him also liable by reason of s 75B of the TP Act.

10                  The principal foundation for the allegations are the documents entitled:

• ‘Profit from Our Experience’, provided to the Bakers in about April 1997.
• Information Pack provided to the Bakers by Mr Hamood on about 26 June 1997
• Disclosure Document dated 4 March 1997, and provided to the Bakers on about 6 August 1997 (Disclosure Document 1), which included a financial information package with weekly operational reports for the year ended 30 June 1997 in respect of three other Lenard’s shops, and explanatory notes.
• Disclosure Document dated 22 May 1998 provided to the Bakers by Mr Hamood on about 16 June 1998 (Disclosure Document 2), which also included a financial information package with weekly operational reports for three other Lenard’s shops for the year ended 30 June 1997 and explanatory notes.
• Letter of Offer dated 29 June 1998 including the proposed Franchise Agreement, with a schedule which (it is alleged) provided for a ‘minimum performance of $7,000 per week’, that is a figure of gross earnings below which there would be demonstrated a breach by the Bakers of the Franchise Agreement sufficient to warrant termination of the Franchise Agreement.

11                  At present, it is not necessary to list all the representations which are alleged to have been made by reason of those documents.  I will return to them.  Apart from representations through those documents, it is also alleged that in about late June or early July 1998, Mr Hamood as agent for the corporate respondents conveyed to a Mr Kennedy of the Commonwealth Bank of Australia that the forecast sales of the Hilton shop were $10,000 per week, and that Mr Kennedy received that representation inter alia as agent for the Bakers.  It is said to have led to confirmation of the minimum weekly turnover set out on p 5 of the financial information package contained in Disclosure Document 1 and Disclosure Document 2.  Ultimately, the evidence did not support that representation having been made and I do not find that it was made, nor conveyed to the Bakers.  A further oral representation is alleged to have been made by a Mr McDonnell on behalf of the respondents in August 1998 that the Hilton shop ‘would probably do’ $11,000 per week.

12                  It is claimed that, in all the circumstances, the corporate respondents and Mr Hamood represented that the Hilton shop was ‘a middle of the range shop with the capacity to produce an operating net profit of $75,000 to $100,000 per annum’.  It is also claimed that the representations in those documents amounted to a representation that ‘the site of the Hilton shop had been carefully chosen by the respondents and each of them drawing on [their] extensive experience’, and that the Hilton shop was a suitable site for a Lenard’s shop.

13                  Unfortunately, weekly sales at the Hilton shop did not reach the levels which the Bakers and Silver Fox anticipated.  During the period from September 1998 to August 1999, they averaged a little under $7,000 per week.

14                  They could not afford, to continue to operate the Hilton shop, despite injections of further capital by them.  They were unable to maintain payments under the Franchise Agreement.

15                  On 12 July 2000 the Bakers were given notice of termination of the Franchise Agreement by Poulet Frais through Mr Hamood.  On 15 July 2000 Poulet Frais took over operation of the Hilton shop.  It then operated the Hilton shop and eventually sold it to a new franchisee in early 2002.

16                  When the Franchise Agreement was terminated on 12 July 2000, it led to significant losses suffered by the applicants, including loss of their investment, loss of their opportunity to earn on the investment, loss of income which they otherwise would have earned had they not given up their employment to undertake the Hilton shop, loss of capital (caused by the realisation of an asset in a forced sale to secure further capital to inject into the business) and other expenses, as well as personal injuries for mental stress.

17                  I observe that Lenard’s and Lenard’s Leasing were separately represented at the hearing distinct from Poulet Frais and Mr Hamood.  Lenard’s and Lenard’s Leasing dispute any responsibility for the losses claimed by the applicants, quite apart from the alleged misleading character of the documents or the alleged unconscionable conduct, on the basis that neither Poulet Frais nor Mr Hamood were their agent in dealings with the Bakers or with Silver Fox.  They claim that Mr Hamood was not authorised to act on their behalf.  It will be necessary, therefore, when addressing the findings of fact to make findings on those issues.

the communications

18                  There is no real issue as to the fact of the documents referred to having been given to the Bakers as they claimed, nor as to their content.  As their claim is based largely on those documents, it is not necessary to refer in detail to the full sequence of conversations between the Bakers and Mr Hamood.  There were no relevant conversations with anyone else.  I have noted above that the communication with the bank alleged in July 1998 was not one which has significance in relation to the applicants’ claims.

19                  The starting point is the document called ‘Profit from Our Experience’.

20                  Lenard’s published, and made available to its master franchisees including Poulet Frais, the document entitled ‘Profit from Our Experience’.  It was an introductory document designed to be provided to potential franchisees of Lenard’s shops.  It was four pages long, and general in its expression.  It included the assertion that a Lenard’s shop would provide ‘excellent cash flow and return on investment’.  It described the Lenard’s concept.  It briefly described the nature of the relationship between Lenard’s and Lenard’s franchisees.  It invited contact to Lenard’s.  It concluded, under the heading ‘Like to Find Out More?’, the following:

‘Lenard’s has existing and proposed locations for sale throughout Australia and overseas, and can provide estimated costs and projections for these shops.  You will need working capital, plus asset backing, and major banks have established finance packages specifically for Lenard’s poultry shops franchisees.  If the Lenard’s concept and the opportunity for an excellent return on your investment appeals, then contact: …’

The contact details were those of Lenard’s

21                  I do not consider the document ‘Profit from Our Experience’ to be of other than introductory significance to the applicants’ claims.  Mrs Baker said she was impressed by its apparent professionalism, as well as the generally positive picture it presented to potential franchisees.  It made no specific projections with respect to the Hilton shop.  Nor did it contain any actual figures concerning the financial performance of any other Lenard’s shop.  I accept that it did encourage the Bakers to further pursue the option of a Lenard’s franchise.  Senior counsel for the applicants did not seek any finding that, given its generality, it conveyed any fact which was misleading or deceptive about Lenard’s franchisees as a general picture.  The Bakers were aware that not all Lenard’s shops were the same, and that the financial profitability of Lenard’s shops differed from one shop to another.

22                  However, that document did serve to preserve the Bakers’ interest in a Lenard’s franchise.  They looked at several of the Lenard’s shops in suburbs of Adelaide.  They considered the prospect of suggesting the establishment of a Lenard’s shop at Stirling in the Adelaide Hills.  Mrs Baker asked Mr Hamood about the potential availability of a Lenard’s franchise.  By arrangement, he showed them around a Lenard’s shop at Norwood.  He raised the possibility that a Lenard’s shop might be established in the Unley Shopping Centre, and that the Bakers might be suitable franchisees of that shop.

23                  On 26 June 1997, Poulet Frais sent to the Bakers a letter enclosing the Information Pack. The letter was signed for Mr Hamood.  It described Poulet Frais as the ‘Master Franchisee – South Australia’.  The letter invited the return of an application form, which was part of the Information Pack.

24                  The Information Pack was prepared by Lenard’s and was made available to its master franchisees for distribution to potential franchisees.  It spoke of ‘the Lenard’s advantage’, including that:

‘ … Lenard’s choose shop locations carefully, selecting quality shopping centres and areas within those centres which are close to supermarkets so that the distinctive Lenard’s Poultry Shop display windows gain maximum exposure.’

That page of the document also referred to the freshness of the product, the innovative nature of the product range, and the ‘Profit from Value Adding’.  The document then included details of the directors of Lenard’s, the nature of its training and support, and a list of its existing franchised shops.  It invited interested persons to submit an application form.

25                  The information pack included a page headed ‘Financial Requirements’.  It indicated that Lenard’s shops were available in the range of $160,000 to $275,000, depending upon the location, cost of fitout, establishment costs and the size of the store.  Those costs included the licence fee, all plant and equipment required for the establishment of the shop, and the fitout in accordance with Lenard’s requirements.  It then provided:

‘Other opening costs will be the responsibility of the franchisee and a schedule of estimated operating costs and working capital requirements will be supplied with other financial information prior to the signing of contracts.’

26                  That page of the Information Pack explained that Lenard’s (as noted above, through Lenard’s Leasing) arranges and holds the lease to each Lenard’s shop.  It explained that the franchisees were required to pay a weekly franchise or management fee of 4% of gross weekly turnover, and an advertising and promotion fee of 3% of gross weekly turnover.  It then described the return on investment in the following terms:

‘Projected operating profit is determined by many factors including location of the store, commitment of the franchisee, gross sales, rent and occupancy costs, wages and other miscellaneous costs.  It would be imprudent for Lenard’s to generalise on this issue, however, a realistic return on investment has been proven to be achievable.’

27                  Mrs Baker’s evidence was that she was reassured by the professionalism of the Information Pack, by the assurances that Lenard’s chose shop locations carefully, and that a realistic return on investment was achievable.

28                  After further consideration over the succeeding weeks, on 27 July 1997 the Bakers completed, and submitted, a Lenard’s franchise application.  It was provided to Poulet Frais.  It included personal particulars and references, a statement of assets and liabilities, and an undertaking to keep confidential the information then provided in response by the respondents.  That undertaking was apparently given to Lenard’s.

29                  The next step was the receipt by the Bakers of a letter dated 4 August 1997 enclosing Disclosure Document 1, including monthly comparison reports, weekly operating reports, weekly historical reports, and a financial package relating to three other Lenard’s shops.  The letter was sent by Poulet Frais and signed for Mr Hamood.

30                  Disclosure Document 1 described Poulet Frais, and Mr Hamood in particular, as having the role of establishing, developing and continuing growth and support of Lenard’s shops throughout South Australia.  It referred to Mr Hamood combining his local knowledge with the experience gained from Lenard’s national team.  It explained the nature of the relationship between Lenard’s and Poulet Frais, and between a franchisee and Poulet Frais, Lenard’s and Lenard’s Leasing.  It included the following:

‘Written financial information with respect to sales targets, gross/net profit targets subject to various assumptions and parameters for a new outlet will be provided in the Six Page Financial Information Package … There is no guarantee that a Franchisee will achieve the same results as contained in any targets given, nor is it intended that a Franchisee should rely on them as a projection.  A FRANCHISEE IS REQUIRED TO MAKE HIS/HER OWN INQUIRIES AND INVESTIGATIONS AND IS TO SATISFY HIMSELF/HERSELF AS TO POTENTIAL SALES, INCOME AND GROSS/NET PROFITS.’

31                  The monthly comparison records related to three (unidentified) shops covering the period from 7 July 1996 to 20 April 1997.  They produced percentage information on a monthly basis (apparently for the 12 month period to 30 June 1997), comparing average sales, and itemised expenditure items against a national average.  There were then three sheets again apparently dealing with each of three unidentified shops.  They are described as weekly operating reports.  They record on a weekly basis the gross sales, the gross profit, items of expenditure, the operating profit and other information for each shop.  In respect of the three shops, the gross sales varied between $794,217, $624,880 and $489,032 for the 12 months to 30 June 1997.  The gross profit respectively was $383,133, $281,509 and $221,794.  The gross profit percentage varied between 48.2 per cent and 45 per cent and 45.3 per cent respectively.  The operating profit for each of the three shops for that year after identifying the expenses deducted (wages, rent, other and franchise and advertising levels) was $196,380, $88,983 and $52,253 respectively, identified also as a percentage operating profit on sales of 24.7 per cent, 14.2 per cent and 10.6 per cent.

32                  Certain of that information was then extracted, and incorporated into the historical reports covering the same period, and the previous 12 months to compare those items with the previous 12 months.  In each case the sales and gross and operating profits had increased.

33                  The final document Disclosure Document 1 to which it is necessary to refer is a financial package.  It contained, in respect of a hypothetical Lenard’s shop, a hypothetical profit and loss outcome based upon certain targets.  The weekly targeted gross sales were offered in five options starting at $8,000 per week with $2,000 per week increments.  The estimated gross operating profit was allowed for at 47 per cent.  Deductions were then made for rent and promotions (a fixed amount), wages at 15 per cent of targeted gross sales, plus superannuation and compensation, insurance, power, telephone and postage, cleaning, and miscellaneous all at fixed amounts, packaging at 0.6 per cent, and the franchise fee and advertising levy (together totalling 7 per cent of gross sales).  It is clear that the figures provided for wages excluded proprietor’s earnings as the document then identified a target operating net profit on the five gross sales hypotheses put forward ranging between $50,690 and $145,377 before drawings, tax and interest. 

34                  The sales target document included the following:

‘Lenard’s can give no guarantee, warranties, or assurances in relation to the potential of the gross sales or the profitability, if any, of this shop.  You must select your own financial targets.  Lenard’s takes no responsibility for any variance from the estimates you may experience as Franchisee after taking up the Franchise.’

The document was accompanied by explanatory notes reiterating that the gross sales or profitability in a Lenard’s shop are not guaranteed, and are subject to a number of factors beyond the control of Lenard’s.  Many of the points are self-evident. 

35                  The second sheet of the financial package contained some detail of estimated establishment costs, broken into:

Plant, equipment and fitout costs	$118,939
Establishment costs	$18,868
Franchise licence fee	$50,000
TOTAL	$187,807

 

The establishment costs are identified as training expenses, leasing and franchise legal costs, stamp duty, uniforms, manuals and the like. 

36                  There was a third sheet of the financial package providing an indicative estimate only of working cash requirements commonly incurred by franchisees of Lenard’s shops.  Again reference was made to the need to secure independent professional advice to determine the actual amount required, as Lenard’s said that it gave no guarantee that the nominated or indicative figures were the only working cash requirements, although every care had been taken in preparation of the estimates.  The figure arrived at did not include opening ingredients or stock, or the franchisee’s legal costs or stamp duty.  That was made plain.

37                  The Bakers do not suggest that they were unaware of the reservations or cautions contained within that material.  They appreciated that each Lenard’s shop was different, and that each operator would be different.  They did, however, regard the materials as providing ‘parameters’ for projections relevant to the Hilton shop.  It was not a guarantee.  Mrs Baker explained that she believed, following consideration of Disclosure Document 1, that if she and her husband worked hard and diligently in accordance with the Lenard’s system, they could expect similar results.  At this point, the Hilton shop had not become a real option.  They were still considering undertaking the possibility of a Lenard’s shop at the Unley Shopping Centre, although Poulet Frais had not selected them as the proposed franchisees in respect of that shop.

38                  In fact, on 21 August 1997 Poulet Frais wrote to the Bakers offering the franchise to the Lenard’s shop in the Unley Shopping Centre for an estimated cost of $187,807.  A deposit of $10,000 was required.  It was duly submitted.  The cheque was subsequently returned.  Apparently another potential franchisee had also submitted a deposit for that shop and was selected as the preferred franchisee.

39                  The Bakers nevertheless maintained an interest in being a Lenard’s franchisee at some time in the future.  In the meantime they maintained their employment and kept looking for other possible businesses.  They had no further contact with Poulet Frais or Mr Hamood for some months.

40                  On 29 May 1998, Mr Hamood contacted the Bakers to ascertain whether they were still interested in a Lenard’s franchise.  He discussed four possible options, including the Hilton shop.  The Bakers then received a proposed Franchise Agreement including a schedule containing details to which the agreement referred.  The Franchise Agreement was ultimately executed only on 4 September 1998.  Its terms did not alter.  It is apparently a standard form document.  The schedule to the proposed Franchise Agreement differed in some respects from that ultimately included in the Franchise Agreement as executed.

41                  That contact in May was followed up by a letter from Poulet Frais to the Bakers dated 16 June 1998 enclosing Disclosure Document 2.  It was expressed to contain information current to 22 May 1998.

42                  As with Disclosure Document 1, Disclosure Document 2 contained the assertion that the Master Franchisee (Poulet Frais) or Lenard’s Leasing is responsible for site selection.  It enclosed a five page pack of financial information headed ‘Lenard’s Poultry Shop – Hilton’, including sales and profitability targets, estimated costs and fees, estimated cash flow requirements, explanatory notes and an acknowledgment.  That material was specific to the Hilton shop in the sense that it identified in its headings that it related to the Hilton shop.  It contained a sheet entitled ‘Sales Target for the Initial 52 Weeks for Lenard’s Poultry Shop – Hilton’, enclosing ‘a series of sale targets and hypothetical operating profit and loss outcomes if the shop realises the various targets’.  It repeated that Lenard’s could give no guarantee in relation to the potential of the gross sales or profitability of the Hilton shop, and that the Bakers should select their own financial targets.  The only change from the figures previously provided was a rental figure of $29,750, some $4,000 less than previously.  That led to adjustments to the target net operating profit ranging from $54,790 upon weekly gross sales of $8,000 to $149,477 upon weekly gross sales of $16,000.  The sheet containing the estimated costs and fees had increased by $5,000 to $192,400 because the plant, equipment and fitout costs had increased by that amount.  They were now described to include consultancy fees, that is a fee to be charged by Poulet Frais for managing the shop fitout.  The sheet containing the estimated working cash requirements had increased by some $800 to allow for an increased advance rental payment.  The explanatory notes were the same.  They are significant enough to quote:

‘Neither Lenard’s nor any other persons guarantees your success, the gross sales or profitability in the franchise business.  These matters are subject to a number of factors which are beyond the control of Lenard’s including (but not limited to) the following:

∙    Your personal commitment to the business

∙    Your compliance with the Lenard’s system, which can and will be measured by the Lenard’s store evaluation process

∙    Your pricing policy

∙    Training and management of staff

∙    The gross profit you expect to receive

∙    Your willingness to utilise marketing devices

∙    The location of the shop in the centre in relation to the supermarket, other food traders, main entrances and exits and car parking;

∙    The location and catchment area of the shopping centre

∙    Other tenants of the centre (both major and specialties shops)

∙    Neighbouring and/or competing shopping centres

∙    The prevailing economic climate and general business conditions

∙    Consumer tastes and demands

∙    Any direct competition within the shopping centre

∙    The management, operations and marketing of the shopping centre by the Shopping Centre owner or management.’

43                  The Bakers noted that the financial information package was specifically headed by reference to the Hilton store.

44                  On 29 June 1998, Poulet Frais wrote to the Bakers formally offering the Hilton shop to them as a Lenard’s shop for the estimated cost of $192,402.  The asking price, as the Bakers then noted, was slightly less than the median selling price in previous figures.  The Bakers assumed for the franchise for the Hilton shop that the projections with Disclosure Document 2 were broadly speaking to be understood as applicable to around the middle of the range for Lenard’s shops.

45                  The Hilton Shopping Centre is at the north eastern corner of the intersection of Burbridge Road (now Sir Donald Bradman Drive) and Bagot Avenue, Hilton.  It opened officially on 22 June 1998.  It had actually been trading a little prior to that time.  The Bakers inspected it on 20 June 1998.  They made a decision to accept a franchise of the Hilton store, to commence in September 1998, subject of course to further events.  At the time, the Hilton Shopping Centre was proposed to (and came to) have a Woolworths supermarket on its eastern side. 

46                  The principal shopping mall in the Hilton Shopping Centre ran north-south, with the main entrance at its southern end.  There was also a western entrance at its northern end running onto the car park adjacent to Bagot Avenue.  There was a short shopping mall running west from the main mall at that end, leading to the western entrance.  There was a car park also at its southern end.  Once fully tenanted (by December 1998), within the main mall, on its western side, there was a chemist shop, a post office, and then on the corner with the short western mall to the entrance to the west the Lenard’s shop, and then a Smokemart shop to the west of it adjacent to the entrance.  On the western mall on its northern side there was (from the west) a Bank SA branch, a Baker’s Delight shop, and then a restaurant which abutted the northern end of the Woolworths store and was reached also at the northern end of the principal mall.  There was a car park served by an escalator in the middle of the mall.  The restaurant was called Café Hilton.  In the middle of the mall, towards its southern end, was a centrally located Cross Lotto/Lotteries stall.

47                  The Bakers discussed with Mr Hamood the options or potential options.  They indicated that they preferred the Hilton shop option for geographical reasons.  Having regard to their residence, the other options involved potentially too much travel time. 

48                  Designs were prepared for the Hilton shop, Shop 5.  The tenancy was 48.6 square metres (some evidence suggests 45.5 square metres), with a frontage partly to the main mall, a diagonal frontage where the main mall and the western mall joined, and then a longer frontage to the western mall.  The design contemplated a public display area and a closed area for a cool room and other servicing functions not visible from the public spaces in the shopping centre.

49                  On 4 July 1998 the Bakers paid $10,000 deposit towards acquiring the franchise of the Hilton shop.

50                  It is convenient to note certain matters at this point.  The Franchise Agreement was between, and was executed by, Lenard’s, Lenard’s Leasing, Poulet Frais, Silver Fox and the Bakers as guarantors of Silver Fox’s liabilities under it.  Its front page bore the address of Lenard’s, indicating its source.  The relationship between Lenard’s and Poulet Frais was explained in cl 10.1 of the Franchise Agreement in the following terms:

‘The National Franchisor, the Master Franchisee and the Franchisee are each independent contractors.  They are not and shall not be considered as joint venturers, partners or agents of each other and no fiduciary relationship shall be deemed to exist between them.’ 

 

51                  Schedule 1 contained particular information relating to the Hilton shop.  It included the following information handwritten by Mr Hamood:

‘Estimated costs:                    $142,402

Initial fee:                               $  17,000

Service fee:                             $  33,000

Minimum performance:          $    7,000 per week.’

In another version of Schedule 1 provided to the Bakers, those entries were left blank.  The minimum performance figure was written in as $7,000 per week.  Figures against the items for estimated costs, initial fee and service fee were put in at the direction of the Bakers and represent their understanding of the appropriate amounts.  They were written in by their solicitor in the course of him perusing the Franchise Agreement and giving them advice about it in August 1998.

52                  When the Franchise Agreement was executed, Schedule 1 was completed in typing.  The estimated cost is recorded as $142,403.  The initial fee was $16,000.  The service fee was $34,000.  Nothing turns upon those minor alterations.  The minimum performance figure was entered as $6,000 per week.

53                  The definition of those terms is contained within the Franchise Agreement.  The relevant definitions are as follows:

‘ “Estimated Costs”:  the estimated fees and outlays of the Master Franchisee or other consultants with respect to providing the Consultancy Services, Establishment Costs and costs of Fitout as set out in Item 12 of Schedule 1;

“Establishment Costs”:  the initial training expenses of the Master Franchisee, franchise agreement and lease legal costs, stamp duty on the Lease, government and local authority fees, design work, tools of trade, ticketing systems, uniforms, manuals and stationery and other intangible expenses;

“Consultancy Services”:  includes all services provided by the Master Franchisee or other consultants engaged by the Master Franchisee with respect to obtaining all approvals and consents of relevant authorities for the use of the System on the Premises, organising the Fitout and managing the Shopfitter on behalf of the Franchisee;

“Fitout”:  used as a noun means all plant and equipment, fixtures and fittings, signage, colour schemes and other goods, matters and things required under this Agreement to prepare and make ready the Premises for operation of the Franchised Business and, used as a verb means the complete installation of the same;

“Initial Fee”:  the payment referred to in Item 13 of Schedule 1, being a fee paid for:-

(i)                 the grant of the licence to occupy the Premises;

(ii)               the right to use the Trade Mark(s);

(iii)             the right to use the System;

(iv)             the right to use the Permitted Name and the trade name under which the National Franchisor sells the Products;

(v)               all other elements of the System not specifically referred to above;

“Service Fee”:  the payment referred to in Item 14 of Schedule 1, being the fee paid for the know-how, trade secrets, product specifications and other confidential information necessary for the operation of the Franchised Business in accordance with the provisions of this Agreement and the Manuals;’

54                  It is appropriate to record the significance of the minimum performance amount.  That term is defined to include the achievement by the franchisee of the amount set out in Item 16 of Schedule 1 (relevantly, initially $7,000 per week and in the Franchise Agreement as executed $6,000 per week).  Clause 20.1(e) indicates the significance of that figure.  It provides:

’20.1    The Master Franchisee may in its absolute discretion terminate this Agreement immediately by giving written notice to the Franchisee on the occurrence of any one or more of the following:

…

(e)               in the event that the Minimum Performance or either of the elements of Minimum Performance is not achieved for three consecutive months or in any financial year during the Term;’

55                  I find that the figure of $7,000 per week as the minimum performance of gross weekly revenue as first presented to the Bakers, and then the figure of $6,000 per week as the minimum performance as included in the Franchise Agreement as executed, was a figure inserted by Mr Hamood without consultation with the Bakers and without drawing to their specific attention the significance of that figure.  Mr Hamood did not recall how the minimum performance figure was fixed by him.  Apart from one shop, the minimum performance level for other Lenard’s shops in South Australia varied between $6,000 and $7,000.  He does not recall why he changed the figure to $6,000 in the executed Franchise Agreement schedule although he said it was not a consequence of any revised view he had about the potential turnover of the Hilton shop.  He suggested he wanted to give Silver Fox ‘some latitude in the performance standards expected by Lenard’s’.  I have found that he made the change without reference to the Bakers, and without discussing it with them or pointing it out to them.  For reasons which appear below, I do not, however, think the change indicates any underhanded conduct by Mr Hamood or any attempt by him to conceal information from the Bakers about his views as to the prospects of the Hilton shop. 

56                  Nevertheless, when the detail of Schedule 1 was first presented to the Bakers, I accept Mrs Baker’s evidence that she noted it and understood what it referred to.  She saw the figure of $7,000 per week and understood its significance.  The fact that she caused her solicitor Mr Hart to insert that figure in a version of Schedule 1 when the Bakers consulted their solicitors in August 1998 tends to confirm that.  In addition, I accept that Mrs Baker inferred from that figure, consistent with the information which she had already received, that Poulet Frais and Mr Hamood expected that the Hilton Shop would in the ordinary course have a gross weekly turnover comfortably in excess of $7,000 per week.  It was in my view reasonable for her to draw that inference as it was obviously unlikely that Poulet Frais would insert a minimum performance figure in the Franchise Agreement which it did not regard as realistic, or which it did not regard as likely to be achieved.  The consequence of doing so otherwise would be that Poulet Frais (and Mr Hamood) had inserted in that document a minimum performance for weekly gross sales which would impose upon Silver Fox a burden which it could not reasonably be expected to attain, and which therefore would lead to Poulet Frais having a prompt foundation for termination of the Franchise Agreement.

57                  I further accept Mrs Baker’s evidence that, when she came to sign the Franchise Agreement, she did not notice the change from the minimum performance figure of $7,000 per week to $6,000 per week. 

58                  Although the Bakers were not, by the end of July 1998, formally committed to undertaking the franchise of the Hilton shop, the Bakers proceeded to implement their plans to do so.  In early August 1998 they resigned their respective permanent jobs.  They each ceased those jobs on 7 August 1998.  They had by that time consulted with the Commonwealth Bank of Australia, through Mr Kennedy, and subsequently received from the bank confirmation of a funding package totalling $211,666.  The funding package was a combination of a business loan of $105,000 to assist in the payment of the franchise fee and establishment costs, hire purchase finance of $90,000 to assist in the purchase of plant and equipment as part of the fitout of the Hilton shop, a credit card facility limited to $10,000 to provide working capital, and a bank guarantee.  Those financial arrangements were duly implemented.  The Bakers provided security by way of a second registered mortgage over their property at Bugle Range to support that borrowing, as well as a mortgage and bill of sale over their interest in the Hilton shop.  They also transferred an existing mortgage over their home at Bugle Range to protect existing borrowing on that property to the bank, secured by a first registered mortgage over that property.

59                  In August 1998, by a reference of Mr Kennedy, the Bakers consulted accountants Hincks & Smith and solicitors Scales and Partners (Mr Hart).  Mr Hart arranged for the incorporation of Silver Fox and for the establishment of the Baker family trust.  The Bakers also proceeded with the routine documentation in anticipation of executing the Franchise Agreement, such as arranging insurance, entering into supply arrangements for the supplies of product, and the securing of staff.  On 10 August 1998 the Bakers commenced their ‘in store’ training at Lenard’s shops at West Lakes and at Arndale.  That training was largely conducted through John McDonnell (Mr McDonnell), the training officer provided by Mr Hamood.  That training continued for about two weeks.  Mr McDonnell assisted them in selecting staff which, on his advice, included two full-time and one part-time food preparation staff and several sales staff as well as the Bakers themselves.

60                  During August 1998, the fitout of the Hilton store was also arranged through Poulet Frais (Mr Hamood).  The fitout was completed by about the end of August 1998.  The Bakers attended the Hilton shop to commence setting up for the business on 31 August 1998, a Monday, so that the Hilton shop could open on the following Wednesday, 2 September 1998.  On their behalf, Mr McDonnell or Mr Hamood arranged for the first supply of product and dry goods to be delivered to the Hilton shop.  On 31 August 1998, their staff also attended to commence preparing products for the opening in accordance with the Lenard’s formulae.  During that week, the Bakers had the assistance of Mr Hamood and Mr McDonnell from time to time with respect to product make up, window filling – the display of product – and sales.  They formally commenced operating the Hilton shop on 2 September 1998.

61                  As noted earlier, they did not sign the Franchise Agreement until 4 September 1998.

62                  As it has been referred to in submissions, I should note cl 26.4 of the Franchise Agreement.  It provides:

‘The Franchise and Guarantor respectively acknowledge that:

(a)               Neither the National Franchisor, Leasing nor the Master Franchisee have made any representation nor given any warranty to the Franchisee or to the Guarantor or to any person on behalf of the Franchisee or Guarantor that the Franchised Business will be successful and produce turnover, gross or net profits at any particular level or rate or at all and that any material made available by the National Franchisor, Leasing and/or the Master Franchisee and any statement made by the National Franchisor and/or the Master Franchisee were the National Franchisor and/or the Master Franchisee’s own personal material and/or estimates and the Franchisee has in entering into this agreement relied on its own personal assessments and enquiries with respect to the Agreement and the business proposed.

(b)               They have understood the need to carefully read and consider the terms of this Agreement and to obtain independent legal and accounting and financial advice on the meaning of the provisions of this Agreement and their legal and practical effect before entering into this Agreement or conducting the Franchised Business.’

The Bakers were aware of that clause at material times, including when they signed the Franchise Agreement.  I accept their evidence that they knew at the time that they signed the Franchise Agreement that they had received some information from one or more of the respondents as to the prospects of the Hilton business in the documents already referred.  I also accept that they realised that in strict terms that clause 26.4 may not have been accurate.  I also accept their evidence that they did not feel empowered to dispute that that clause should appear in the Franchise Agreement.  They were also aware that the respondents or at least Poulet Frais were the source of, and therefore knew of, those earlier communications.  Theirs was, I think, a realistic attitude to take.  Clause 26.4 was part of an apparently standard document, and was seen by them only as part of the communication process between them and one or more of the respondents through the documentary material to which I have referred.  They had confidence in the reliability of that material.  (It is not necessary in this context, for the reason I have already given, to refer to the oral representation alleged as to the probable turnover of the Hilton shop as allegedly conveyed by Mr Hamood to Mr Kennedy, because I have not accepted on the balance of probabilities that such a representation was made by Mr Hamood to Mr Kennedy, or if it was that it was conveyed to the Bakers.)

issues

63                  So far as I can discern, there are eight representations alleged by these applicants to have been made by the respondents or by some of them which, it is claimed, are misleading and deceptive and in fact misled and deceived them so that they came to enter into the Franchise Agreement.  Six of those representations are said to be derived from the written communications referred to above.  The other two are oral representations.

64                  One of the oral representations, as I have found, either did not occur or if it occurred was not conveyed to the Bakers in terms upon which they relied.  That is the representation said to have been made by Mr Hamood to Mr Kennedy of the Commonwealth Bank of Australia in late July 1998 that he expected the Hilton shop to have an average weekly gross revenue or turnover of about $10,000 per week.  As I have said, Mr Kennedy did not recall such a representation having been made, and Mr Hamood denied having made such representation.  I am not satisfied on the evidence that such a representation was made.  Mrs Baker did not recall learning of any such representation by Mr Kennedy, and I think Mr Baker must be somewhat mistaken in his evidence that he did hear from Mr Kennedy words to that effect.  Even if he did, such evidence is not admissible to prove the fact of the communication as alleged by Mr Hamood to Mr Kennedy.  There is no direct evidence of it, and I am not prepared to infer such a representation was made in all the circumstances. 

65                  The second oral representation is one alleged to have been made by Mr McDonnell to the Bakers in the course of their ‘in store’ training during August 1998.  The Bakers claim to have been told by Mr McDonnell that the Hilton shop ‘would probably do’ $11,000 per week.

66                  Mr McDonnell commenced working with Poulet Frais in March 1996 as a field consultant or field officer, having responsibility for liaising with Lenard’s shop franchisees in South Australia and addressing their needs.  His duties from time to time also included managing certain Lenard’s shops in South Australia as well as being involved in the opening and establishment of new Lenard’s shops including the Hilton shop.  His duties have also included managing the Lenard’s shop at Arndale in South Australia, and it is from that shop that he largely conducted training for new franchisees (including the Bakers).  As well as the pre-opening training, he would then attend the premises of the new franchisee upon them commencing business to ensure that they were operating in accordance with the Lenard’s system and that they did not require further assistance, or if they did so to provide that further instruction and assistance.  As field consultant, he would also periodically visit all franchisees to ensure their adherence to and understanding of the Lenard’s system and to provide such advice as was appropriate.  Those visits apparently occurred quite regularly, approximately fortnightly.  He was also available to franchisees to respond to their requests.

67                  Since the Bakers franchise of the Hilton shop was terminated, Mr McDonnell has become the franchisee of the Lenard’s shop at Stirling. 

68                  Mr McDonnell impressed me as an honest and frank witness.  I find, upon his evidence that he did not promise the Bakers during the course of their training at Arndale that they would have a turnover per week in the order of $11,000.  He accepted that there may have been some conversation about the potential turnover at the Hilton shop.  That is a natural topic of conversation during the course of training.  However, I accept that he did not specifically indicate a turnover figure to them as a probability.  Indeed, it is highly unlikely that he would have suggested such a figure, as it was in fact more than the weekly turnover at the Arndale shop and there appears to be no reason why the Hilton shop should have been instantly more successful than the Lenard’s shop at Arndale, which was in a bigger and already established shopping centre.  That is not to say that the figure of $11,000 per week was not raised by the Bakers in discussions with Mr McDonnell.  Mr McDonnell did not deny that it may have been.  The source of that figure, in my view, is an observation made by Mr Farrow from Hincks & Smith in the course of his discussions with the Bakers about their business prospects.  It is common ground, or at least not contested, that Mr Farrow told the Bakers that they would need to have a turnover or revenue of about $11,000 per week for the Hilton shop to work well as a profitable business.  That was within the range of figures which have been provided, by way of sample figures, to the Bakers through the financial information package.  In my judgment, it is likely that, having been given that particular advice by Mr Farrow, the Bakers did raise with Mr McDonnell that figure.  However, I do not find that Mr McDonnell affirmed to them a view that the Hilton shop would, or was likely to, turn over $11,000 per week although he may have indicated to them that it was possible the shop might do so.  I do not accept that he made anything in the nature of a representation or promise to them as to having a probable turnover of that order.

69                  It is then necessary to revert to the particular documentary representations alleged.

70                  They are as follows:

(1)        Disclosure Document 1, and then Disclosure Document 2 provided with the heading specific to the Hilton shop, are alleged to have indicated through the weekly operating reports representations of the figures for three particular but unspecified shops as follows:

‘Year Total	Shop 1	Shop 2	Shop 3
Gross Sales	489,032	624,880	794,217
Gross Profit	221,794	281,509	383,133
GP as % of GS	45.3%	45.0%	48.2%
Operating Profit	52,253	88,983	196,380’

(2)        Disclosure Document 1, and then, again by reference to the Hilton shop, Disclosure Document 2 contained hypothetical sales and profitability targets and hypothetical operating profit incomes for a series of five weekly sales targets of $8,000, $10,000, $12,000, $14,000, and $16,000 per week.  For the outer and middle of those figures the information provided was as follows:

‘Weekly Target Gross Sales	8,000	12,000	16,000
Annual Target Gross Sales	416,000	624,000	832,000
Estimated Gross Profit	195,520	293,280	391,040
Estimated Target Operating Profit	50,690	98,033	143,377’

Each of those documents made it plain that the Bakers should select their own financial targets, and the figures provided constituted hypothetical operating profit outcomes that may be realisable.  They also included the explanatory notes referred to in [42] above.  They also included the observation that the gross profit of 47 per cent is achievable based upon the experience of other Lenard’s shops, but was vulnerable to factors such as competition, pricing strategy, and the extent of the market.  They also indicated that the hypothetical performance was subject to the productivity, management and commitment of the franchisees.  Specifically it was said that the figures provided are ‘a sample only and do not constitute forecasts’.

(3)        The content of Disclosure Document 1, and then in the context of the Hilton shop Disclosure Document 2, through representations (1) and (2) above are said to have indicated to the Bakers:

(a)                that provided a franchisee complied with the Lenard’s system, and in the light of Poulet Frais having been responsible for suitable site selection, a representative net operating profit was indicated by the targets provided and was therefore represented as a representative net operating profit for the Hilton shop, and secondly

(b)               that a minimal performing shop would produce an operating net profit of approximately $50,000 and a high performing shop would produce an operating net profit of approximately $145,000.

(4)        The minimum performance figure of $7,000, in context, and in the light of those other documents was said to involve a representation by inference that in the ordinary course the Hilton shop would produce a weekly turnover comfortably greater than $7,000 per week.  The fact that that minimum performance figure was reduced to $6,000 per week in Schedule 1 of the Franchise Agreement as executed (without the awareness or focus of the Bakers) is said to indicate a lack of confidence on the part of Poulet Frais and Mr Hamood as to the potential of the Hilton shop and, by failing to draw that cautious view to the attention of the Bakers, to constitute a misrepresentation by silence as to the reliability or applicability of the information previously provided.  It is said to be noteworthy that, on an internal document provided by Poulet Frais to Lenard’s, Mr Hamood had about that time assessed the estimated weekly sales for the Hilton shop as low to medium without proffering a dollar figure.  I have rejected the claimed significance of that change above.

(5)        By reason of the Information Pack conveying to the Bakers that the range of prices for a Lenard’s shop varied between $160,000 and $275,000, and by reason of the nominated price for the Hilton shop of approximately $192,400, the respondents are said to have represented that the Hilton shop was a middle of the range shop with the capacity to produce an operating net profit of the order of $75,000 to $100,000 per annum (based upon the hypothetical profit outcome contained in the financial packages that are part of Disclosure Document 1 and Disclosure Document 2.  That potential range of net operating profit is said to have been inferred as a representation by them, as they applied the asking price to the range of prices which they were informed is usual for Lenard’s shops, and it fitted then somewhere between the second and third of the hypothetical operating profit outcomes provided from the sales and profitability targets in the financial package. 

(6)        Finally, having regard to the initial contents of the ‘Profit from Our Experience’ document concerning Lenard’s experience in selecting locations for Lenard’s shops, and the Information Pack also asserting that Lenard’s choose shop locations carefully, and having regard to the fact that in Disclosure Document 1 and in Disclosure Document 2 it is asserted that Poulet Frais or Lenard’s Leasing is responsible for site selection, by the offer of the Hilton shop to the Bakers as a Lenard’s franchise on about 29 June 1998, it is asserted that the respondents represented that the site of the Hilton shop had been carefully chosen by them drawing on their extensive experience, and that it was a suitable site for a Lenard’s shop.

71                  The respondents in their respective defences do not acknowledge that any such representations were made.  Moreover, they deny that if any of the representations alleged are found to have been made the representations were false or misleading.  Insofar as the representations were with respect to any future matter, the respondents assert that there were reasonable grounds for making each of them.  Those reasonable grounds are particularised at some length.  They relate to the location of the Hilton shopping centre and its facilities, the nature and mix of the proposed tenants in the Hilton shopping centre, the location of the Lenard’s shop within the Hilton shopping centre in relation to other shops, the quality of nearby shopping centres that might reasonably be considered as providing competitive services with the Hilton shopping centre, the decision of Bakers Delight to establish one of its franchise stores in the Hilton shopping centre, the performance of other Lenard’s shops in South Australia (it is said that in the 12 months to August 1997 no South Australian Lenard’s shop averaged gross sales of less than $8,000 per week and in the period of 12 months to June 1998 less than $9,000 per week), and the experience and success of Mr Hamood in selecting Lenard’s shop sites in South Australia over a period of some 15 years. 

72                  The allegation that the representations were false and misleading is general.  It is asserted the representations were false and misleading because the Hilton shop:

(1)        was not capable of producing the net operating profit associated with a weekly turnover in the order of $10,000 per week;

(2)        was not chosen carefully by drawing on the extensive experience of the respondents, and

(3)        was not capable of producing a realistic return on investment.

73                  The Lenard’s shop when it commenced and for the succeeding 12 months had an average weekly turnover of only about $6,944 per week.  For the first six months, the average weekly turnover was $6,609 a week and it increased only slowly over the succeeding second six months.  In the first six months, 18 of the 26 weeks resulted in weekly turnover of less than $7,000 per week, and six of those 26 weeks (but in no period of three weeks in succession) resulted in weekly turnover of less than $6,000 per week.  For the period after 39 weeks of operation, the average turnover exceeded $7,000 per week until the franchise was terminated.  In the period from September 1999 – that is in the second year of operations – until the termination of the Franchise Agreement (a period of 46 weeks), the average weekly turnover was about $7,587 per week. 

74                  The alternative claim of the applicants is based upon s 51AC of the TP Act.  It is based upon the termination of the Franchise Agreement on 15 July 2000, following which Poulet Frais took over the operation of the Hilton shop.  That conduct, and its timing and circumstances, is alleged to have constituted unconscionable conduct contrary to s 51AC of the TP Act.  The applicants allege that the respondents were aware of the weekly turnover which Silver Fox had achieved during the period of the Franchise Agreement and of the serious loss and financial hardship which they had experienced as a result, including the application of further personal financial resources to maintain the operation of the Hilton shop.  They allege that the respondents were aware that their difficulties in maintaining the payment of fees and levies as required by the Franchise Agreement was due to the low turnover.  They claim that it was unconscionable to terminate the Franchise Agreement at a time when, for the first time in the period of the operation of the Franchise Agreement, they had had a period of four successive weeks during which their turnover exceeded $8,000 per week.  They complain further that the respondents then have had the benefit of operating the Hilton shop since July 2000, including the plant and equipment in respect of which the applicants had entered into hire purchase commitments or guarantees and have failed to account to the applicants for the benefit of its operations.  Reliance is also placed upon the relative bargaining positions of the respondents and of the applicants, upon the obligation of the applicants to comply with conditions under the Franchise Agreement that ‘were not reasonably necessary for the protection of the legitimate interests of the corporate respondents’ and that the termination effectively caused them to lose the establishment costs of $104,000 and the fitout costs secured by hire purchase agreement of $88,500, in circumstances where Poulet Frais was able to acquire or take over the Hilton shop and to make use of those assets and ultimately to dispose of the Hilton shop for its benefit rather than that of the applicants.  They further claim that Poulet Frais did not actively market the Hilton shop as it was required to do, so as to sell the Hilton shop franchise to some other person or entity and to give them the benefits of any sale proceeds.

75                  Apart from denying any unconscionable conduct on their part, the respondents also plead that the conduct complained of was not unconscionable within the meaning of s 51AC of the TP Act because it occurs ‘in connection with the supply or possible supply of goods or services to the applicants’ and/or ‘the acquisition or possible acquisition of goods or services’ by the applicants at a price in excess of $3 million, or in relation to the conduct pleaded as having occurred prior to 1 July 2000 at a price in excess of $1 million.  That claim is based upon the price paid for the Lenard’s shop of $192,402, plus the franchise fee and advertising levy contemplated by the Franchise Agreement (totalling 7 per cent of turnover) extended for a period of 10 years, plus the rental of $23,400 per year also extended for a period of 10 years (the lease was for five years, with three options for renewal each of five years), plus the supply of product by one of the respondents or a supplier approved by Lenard’s over a 10 year period under the charge back facility (calculated at 50 per cent of an estimated turnover of either $6,000 per week or $9,000 per week – respectively $165,336 or $248,040 multiplied by 10).

76                  In addition to those issues on the pleadings, the respondents dispute that the applicants relied upon the alleged representations, and assert that in entering into the Franchise Agreement the applicants relied upon their own investigations in relation to other Lenard’s shops at Norwood, Unley and Stirling, conversations with franchisees of other Lenard’s shops, their own commercial experience, their own assessment of the financial prospects of the proposed franchise of the Hilton shop, and advice from their accountant and solicitor. 

77                  Certain of the material referred to in [74] is not in issue, although the applicants dispute that they did not rely upon the alleged misrepresentations.  They acknowledge that they had previously owned and operated a fruit and vegetable business, and that Mr Baker had worked as a client manager (large clients) with the Australian Taxation Office.  Prior to entering into the Franchise Agreement, they had obtained certain independent legal advice from Mr Hart and accounting advice from Mr Farrow of Hincks & Smith.  Mr Hart had provided a certificate to the effect (inter alia) that he had explained to the Bakers the contents and effect of the Franchise Agreement, its obligations and the associated risks and that the Bakers appeared to understand its terms and their obligations under it.  Mr Farrow provided prior to the execution of the Franchise Agreement a certificate which indicated, inter alia, that he had explained to the Bakers and to Silver Fox the financial aspects of entering into the Franchise Agreement and the business and associated risks, and that they appeared to understand it.  The applicants accepted that they had had the Franchise Agreement explained to them including the associated legal and business risks, and had had its financial aspects explained to them by Mr Garrow.  That reflects cl 23.4 of the Franchise Agreement which records that:

‘The Franchisee and Guarantors specifically acknowledge that in relation to this agreement and particularly with regard to the consequences of clause 23, it has received legal advice or has had the opportunity of obtaining legal advice.’

The applicants also acknowledge the terms of the financial package in Disclosure Document 1 and in Disclosure Document 2.  Page 5 of the financial package included the following:

‘I acknowledge receipt of this five page package which includes target sales and profit and loss and other information on the basis that I acknowledge that:

1.         I have undertaken, or will undertake, my own investigations about the proposed franchise business and its potential for me;

2.         I have taken or will take independent legal, accounting and/or franchising consultant advice; and

3.         I have not relied and will not rely upon this material.

4.         I understand that the figures contained in this document are given as a sample only and do not constitute forecasts.  After having obtained professional advise and made my own independent inquiries I will choose my own target figures.” 

One might rhetorically ask what was the purpose of providing the financial package information at all.  One would assume that it was what it represented itself to be, namely a series of sales targets and hypothetical operating profit and loss outcomes if the proposed franchised shop realises the various alternative targets.  One would assume, as one might readily have drawn from the samples of the three shops already provided, that the targets had some relationship to the reality experienced by Lenard’s.  There would be little point, for example, in providing a document containing details of sales targets and hypothetical operating profit and loss outcomes for a weekly turnover of (say) $10 per week or $10 million per week.  To expect a person in receipt of that material not to read it or to give it some consideration, and not to have any regard to it (as par 3 of the quoted passage suggests) is unrealistic.  I find nevertheless that the Bakers did sign that acknowledgement and returned it to Poulet Frais on about 6 August 1997.  They also returned a similar document in respect of the financial information in Disclosure Document 2 on about 17 June 1998.

78                  The Bakers formally acknowledge that they made certain inquiries and investigations (as set out in a letter from their solicitors dated 17 May 2002).  However, in forming their decision to enter into the Franchise Agreement they positively deny having placed reliance upon their own commercial experience or upon their own assessment of the financial prospects of the Hilton shop.  They did not seek the advice of their solicitor or of their accountant as to the accuracy or reliability or reasonableness of the information provided by the documents referred to in par [69] above.

79                  There is a further issue relating to the conduct of the applicants.  It is alleged that the applicants were the authors of their own loss and damage.  Particulars are given by each of the respondents.  It is claimed that:

‘(a)      In breach of clause 14 of the Franchise Agreement that is exhibit RKH36, the applicants failed to accept reasonable directions and advice from the third and fourth respondents and persons engaged by the third and fourth respondents and, in particular, Catherine Louise Jenner Barrett, John Patrick David McDonnell, Jarryd Anthony Smith, Benjamin Leslie White and Peter James Rugless;

(b)       the applicants consistently failed to utilise the whole chicken in order to maximise the most efficient and most profitable products available;

(c)        the applicants failed to take all reasonable steps to promote their business and its products including:

(i)                 failing to regularly cook product and make samples available to the public;

(ii)               failing to consistently properly display product in the shop window including failing to ensure that the window was constantly filled with product, with the products being properly described and priced;

(iii)             failing to consistently promote to customers or prospective customers products in addition to those in which the customer or potential customer was initially interested;

(iv)             failing to ensure that customers or potential customers were consistently served within 15-30 seconds of arrival or, if not doing so was unavoidable, were acknowledged;

(v)               failing to consistently ensure that each customer or potential customer received a high level of service;

(vi)             failure to consistently offer multiple buys of high value lines (e.g. shaslicks and marinated meats).’ 

It will be necessary to address those issues in the course of considering the evidence.

80                  Finally, in relation to the issues arising under the pleadings, Lenard’s has pursued a cross-claim against Silver Fox, and the Bakers as guarantors of its liability, under the Franchise Agreement.  The cross-claim is for amounts allegedly owing between September 1999 and July 2000 by way of advertising contribution, defined as 3 per cent of gross turnover.  That is part of the 7 per cent of gross turnover which was payable to Lenard’s pursuant to the Franchise Agreement.  In addition, there is a claim for $14,922 also said to be owing by Silver Fox to Lenard’s for poultry and dry goods which, pursuant to a charge back facility authorised following the Franchise Agreement but in accordance with its terms, Silver Fox was able to order poultry and dry goods from suppliers to be debited to Lenard’s and then the subject of reimbursement by Silver Fox to Lenard’s.  There are amounts outstanding totalling that figure for invoices issued in the period August to December 1999.  That amount is guaranteed by the Bakers.  Notice of default was served upon Silver Fox on 31 March 2000 in respect of that amount and it has not been paid.  That is the full amount of $21,416.

81                  The applicants do not dispute those calculations, but dispute liability to make the payments claimed because the inability to make the payments claimed was, it is alleged, the direct result of the conduct of the respondents as alleged in the statement of claim.

EVENTS FROM SEPTEMBER 1998

82                  There is no doubt that the operations of the Hilton shop proved unsuccessful in the hands of the Bakers.  Initially, its gross sales were much lower than anticipated and its gross profit percentage was also very low.  I will make detailed findings about the course of events, and its causes, below.  A brief picture is as follows.

83                  The consequence of the poor trading outcome for Silver Fox in effect from the time it commenced trading on 2 September 1998 was that the cash flow projected did not eventuate.  Not only was the gross revenue significantly lower than anticipated, but the gross profit percentage was also much lower than anticipated.

84                  Over the succeeding months, because the business of Silver Fox did not generate the cash flow which had been anticipated by the Bakers, they applied further personal resources towards its sustenance.  The pressure to do so was overwhelming.  Silver Fox did not maintain the payments to the bank which it had committed to.  The Bakers spoke quite often to Mr Hamood and to Mr McDonnell, who encouraged them to persevere as they each in my view believed that the Hilton shop should be successful.  In June 1999, the bank reduced the existing overdraft as it was overdrawn and required that account to be cleared.  Mr Baker, upon his retirement from the Taxation Department, was entitled to a lump sum superannuation payment of $77,668, and to a termination payment for accrued entitlements of $9,533.  Those sums were said to have been advanced to Silver Fox to enable it to keep operating.  As Silver Fox has no value, and no assets, the loan of those amounts has no value.  The same applies to the superannuation entitlement and to the termination payments received by Mrs Baker of $14,661 and $11,217 respectively.  She cashed in her superannuation entitlement in October 1999, but it reduced the immediate cash flow pressures only for a period of several weeks.

85                  At the start of 2000, Mr Baker inherited $17,308.  That sum too was said to have been applied to relieve financial pressure in the business, as the Bakers had no other cash resources available.  Their credit limits were already exceeded, and they were under pressure from the bank to reduce their borrowings.  However, the cash flow difficulties persisted.

86                  As noted, on 12 July 2000 the Bakers were presented with a notice of termination.

87                  On 19 July 2000 the bank made demands on the Bakers and Silver Fox for $85,685 outstanding on their bank loan.  The credit card facility was also cancelled.  On 31 July 2000 notice of the default was given to the Bakers to enliven its power of sale of secured property, their home at Bugle Ranges, in respect of the indebtedness.

88                  The bank allowed the period to 31 October 2000 for the plant and equipment to be sold to realise the repayment of the sum outstanding for plant and equipment.  That period was extended from time to time.

89                  The Bakers were then given notice of mortgagee sale in respect of their home at Bugle Ranges on 25 September 2000.  By arrangement with the bank, they agreed to sell the property on their own account.  They ultimately did so in early 2001.  They had a small equity surplus only, after repaying the monies owing to the bank arising from the transferred mortgage and the borrowings made to acquire and conduct the Hilton shop.

90                  Following the termination of the franchise of Silver Fox, the Bakers have had only spasmodic short term employment.  They have worked at a chicken shop at Mount Barker, and as cleaners.  Since the sale of their home at Bugle Ranges, they have moved to inferior accommodation at Goolwa.  They have also had some part time cleaning work, and Mr Baker has done some casual gardening work and Mrs Baker some part time bookkeeping work. 

91                  I accept the Bakers’ evidence that they have, by their unsuccessful venture into the Hilton shop, ‘lost virtually everything’.  They have lost their superannuation and other employment prospects.  They have lost most of the equity in their home, and have had to sell their home.  They sold the Bugle Ranges house on 31 March 2001.  They now live in inferior accommodation at Goolwa and work only part-time in manual employment.  Mr Baker is now 65 years of age and Mrs Baker 60 years of age.  The business venture which was expected to ‘top off’ their working lives and to set them up for retirement with their existing capital resources failed to do so.

92                  I find that, as they claim, they have each had considerable difficulty coming to terms with their experience in the Hilton shop.  I find Mr Baker has been the more affected of the two of them.  There is really not much difference between the two psychiatrists who have examined Mr Baker.  The difference in their views is explained by the different times at which they examined Mr Baker.  One examination was in May 2002 and the other in October 2002.  I find that the experience of Mr Baker, and the consequences, as a result of his involvement in the Hilton shop led him to developing a moderate depressive illness, although not of ongoing duration.  His ability to concentrate was adversely affected for a time.  He largely withdrew from social activities, and had a general loss of interest in any activities.  His symptoms included feeling sad and a significant loss of energy.  By October 2002, he had recovered well enough to no longer be diagnosed with depression, and his outlook was more positive.  That seems to have coincided with a part-time job at the Goolwa Marina cleaning boats.

93                  I do not think Mrs Baker suffered to such an extent.  She was diagnosed with a mood disorder in May 2002 caused by the collapse of the Silver Fox business and its sequelae.  Although that led to irritability and feelings of sadness, she too recognised the need to confront those problems.  Her concerns were also focused by worry about the change of mood and attitude of her husband.  Again, by September 2002 her symptoms had improved to the point where she no longer had any diagnosable psychiatric illness.

94                  The Bakers are now getting on with their lives, although in much more straightened circumstances than they enjoyed before they entered into the Franchise Agreement.  Their financial loss as a result of the unsuccessful business venture is at least:

Loss of business capital                         $123,851

Net salary and superannuation foregone            $143,073

                                                                        $266,924

There is a dispute between the expert accounting witnesses as to whether in addition they have suffered a further capital loss of $100,687.  That sum is calculated from the superannuation and termination payments and the inheritance received all put into the business (totalling $130,337) less $29,650 benefit received from the business which would otherwise be double counted by reason of the allowance for loss of business capital, and as to whether any allowance should be made for ‘loss of opportunity income’.  There is also a dispute as to whether they should recover damages for any psychological injuries.

95                  The issue as to the claimed further capital losses almost dissolved upon further information being received.  The amounts upon which that calculation was based were ultimately identified as largely applied to reducing personal indebtedness to the bank.  The reformulated quantification, subject to two aspects, reflects more accurately the Bakers’ losses.  The reformulation removes those items, but substitutes a much lower item to reflect capital directly paid to or on behalf of Silver Fox to keep the business running.  The adjusted loss is $228,705.

96                  The first qualification is that the sum includes $44,474 owing to CBFC Limited (CBFC), the bank’s finance arm, for plant and equipment.  The ongoing hire purchase payments were made by Poulet Frais after 12 July 2000 until it acquired the plant and equipment from CBFC in the circumstances described below on 10 November 2003.  I conclude that liability no longer lies with Silver Fox or the Bakers.  I take that sum off the adjusted loss.

97                  The second aspect is that, for a short period, there may be in that calculation an allowance for interest payable to the bank which would in any event have been payable by the Bakers to their former bank for interest on the housing loan which pre-existed their interest in the Hilton shop.  I am unable to qualify that amount with any precision, but doing the best I can I think the further reduction should be in the order of $1,000 - $1,200.  I have rounded out the resulting calculation of loss.

98                  Accordingly, subject to the issue of any damages for psychological injury, and to issues of causation and reliance and the like, I would find the Bakers have lost $182,800 as a result of their unsuccessful venture into the Hilton shop.

99                  In my judgment, each of the Bakers also suffered an identifiable psychiatric illness as a result of having done so.  I have set out above my findings as to the nature and extent of those illnesses and their sequelae.

100               I find the illnesses were largely spent by late 2002.  I would assess the damages to which Mr Baker is entitled under that head of loss at $10,000 and the damages to which Mrs Baker is entitled under that head of loss at $6,000.

101               In the submissions, the parties treated any loss as that of the Bakers rather than that of Silver Fox.  I have done the same.  They also treated the Bakers jointly, as I have done, save for the claim for damages for personal injuries.

102               That is the context in which it is now appropriate to address the claims of the applicants against the respondents.

103               At the termination of the Bakers’ franchise, Poulet Frais ran the Hilton shop.  Mr McDonnell and Mr White took over the management of the shop from 17 July 2000.  Apart from a shortage of stock, it was in good condition.  The existing staff were retained, and further staff engaged (because neither of the managers was working full-time).  The Hilton shop was managed then by a series of managers.  In the succeeding period to 1 July 2001, the average weekly turnover was about $9,097 and the gross profit 44.69 per cent of sales.

104               The gross earnings and gross profit for the period to the ultimate resale of the Hilton shop are not in evidence.  The available figures cover the period to the week ending 22 September 2002.  Overall, the average weekly gross earnings since 17 July 2000 have exceeded the average weekly gross earnings during the period Silver Fox ran the Hilton shop.  However, that is not consistently the case.  For the last ten weeks of the period to 22 September 2002, the average weekly gross earnings was $7,689 whereas the last ten weeks of the Silver Fox operation had an average weekly gross earning of $7,864.  The direct comparison of a short period is of no special significance, but the point is that there has been no continuous sustained dramatic improvement in gross sales after the Silver Fox franchise was terminated.

105               By arrangement with the bank, Poulet Frais made the ongoing hire purchase payments in respect of the plant and equipment.  The plant and equipment initially leased by Silver Fox in September 1998 (the hire purchase agreement is in fact dated 6 October 1998) was purchased by Poulet Frais from CBFC for $20,000 by exchange of correspondence on 28 and 30 October 2003.

106               The Hilton shop lease has recently been received, effective from 1 September 2003 for five years at an annual rental of $25,536 plus GST.

107               Attempts were made by Poulet Frais to sell the Hilton shop, but they were unsuccessful until recently.  On 10 November 2003, Poulet Frais:

(1)        sold the plant and equipment to a new franchisee of the Hilton shop for $70,000, plus stock then on hand;

(2)        entered (with Lenard’s) into a franchise agreement with a new franchisee in respect of the Hilton shop for $50,000 plus GST, effectively by Poulet Frais selling to the new franchisee the business which it had been conducting at the Hilton shop since 17 July 2000;

(3)        lent to the new franchise the full purchase price of $120,000 for a period of one year, free of interest but subject to the new franchise repaying $250 per week during the currency of the loan, with that loan being secured by a bill of sale over the plant and equipment.

The value of the payment of $120,000 effectively payable after 12 months, save for the weekly payment of $250, at the time of that transaction is $114,073.

108               Although that evidence indicates that in November 2003 the Hilton shop was in effect franchised to an independent third party for $50,000 plus plant and equipment of $70,000, but upon vendor finance so the real cost was about $114,000, it is necessary to recognise that the respondents were obliged to, and did, disclose to the new franchisee the existence of these proceedings.  The extent to which that fact weighed in the mind of the new franchisee, or the extent to which the fact of the claim having been made against the respondents in June 2001 impeded others between 2001 to 2003 from making an offer to acquire the Lenard’s franchise of the Hilton shop or the amount of any offer that might have been made, is not known.  In addition, the focus of these proceedings is upon the character of what was conveyed to the applicants by the respondents leading up to the Franchise Agreement executed on 4 September 1998 and then upon the character of the respondents’ conduct in terminating the Franchise Agreement on 12 July 2000.  The terms upon which a new franchisee of the Hilton shop was prepared to undertake the franchise in late 2003 are somewhat remote from those inquiries.  I do not, therefore, place any real weight upon the evidence as to the arrangements entered into between Poulet Frais and the new franchisee of the Hilton shop in late 2003.

FINDINGS ON LIABILITY

109               I have no hesitation in generally accepting the evidence of each of the principal witnesses, Mrs Baker, Mr Baker and Mr Hamood.  I think each tried to give evidence honestly.  There is obviously scope for memories of events to differ, and for perceptions of events to differ.  Hence, there are some factual disputes.

110               The Bakers’ expectations of the Hilton shop very quickly were dissipated and they identified the absence of pedestrian traffic in the shopping centre as essentially the cause of their problems.  That no doubt coloured the way they dealt with officers of the respondents from time to time.  On the other hand, I accept that Mr Hamood considered that the Hilton shop was an appropriate shop for a Lenard’s franchise, and so looked for other reasons for the trading outcomes of the Bakers.  That has influenced what he remembers and how he remembers it.  I have made judgments in the areas of disputed fact, often more matters of degree than of direct conflict, having regard to my impressions of those witnesses and the evidence of the witnesses a little more removed from the difficult situation in which the Bakers found themselves, as well as what I regard as the inherent probabilities of each circumstance.

111               In essence, the disputes were as to the reasons of the failure of the business and, once they are identified, as to whether conduct of any of the respondents relevantly (that is, in the sense that the respondents are legally responsible) caused or contributed to that failure.  There is a degree of interaction between the two steps because the respondents allege that the Bakers, in the way they conducted the Hilton shop, were the authors of their own misfortune.

112               The starting point is not really in dispute.

113               The Silver Fox business failed because its cash flow was inadequate.  The Bakers had borrowed extensively to secure the business.  In effect, they had financed entirely their acquisition of the Hilton shop.  They had arranged to borrow their working capital.  They were therefore dependent from the beginning upon the cash flow from the Hilton shop to meet its operating costs, to meet their finance obligations, and to meet their living expenses including their outgoings to meet their existing housing loan.  The business did not do so.  They were obliged to put personal capital into the business to keep it running. They have not been criticised by the respondents for doing so.  By late 1999 or early 2000, they had no further resources to apply to the business.  Their financial commitments had not really reduced.  The Hilton shop was still insufficient to meet their cash flow needs.  Their capital contributions had been expended in meeting ongoing running costs.  They fell further into arrears in respect of the supply of products to continue to conduct the business, and in the payments due to the respondents.  Hence the Franchise Agreement was terminated.

114               The immediate causes of the Hilton shop underperforming, in the sense that the net earnings and the available cash flow were inadequate to meet the Bakers’ needs, were twofold.  The first is that the weekly turnover was much less than they had expected (and, indeed, much less than Mr Hamood had expected).  The second is that the gross profit percentage on sales was also much less than they (and Mr Hamood) had expected.

115               I find that the Bakers had first expected to have gross weekly revenue of about $8,000 per week, and to have the capacity to increase that to about $11,000 per week over time.  They had no particular timeframe for that increase to occur.  Although Mr Hamood did not put a particular weekly turnover in mind in September 1998, I find his general expectations were more or less in accord with those of the Bakers.  The weekly turnover figure of $8,000 per week did not occur on a reliable basis until, possibly, towards the middle of 2000 just before the Franchise Agreement was terminated.

116               The Bakers attribute the considerably lower turnover to the Hilton shop simply being inappropriately chosen as a Lenard’s shop.  It was in a new, and small, shopping centre in an area where the socio-demographic mix did not give rise to that sales potential.  That much is at least partly true.  The Hilton shopping centre was a small one.  The then lowest performing Lenard’s shop was at Unley.  It was in a considerably larger shopping centre.  There is little evidence about the Unley shopping centre, but it is described as having some 33 shops.  Clearly the Hilton shopping centre was much smaller.  Clearly, too, the Hilton shopping centre was newly established.  A Lenard’s shop had not been established in South Australia in a new shopping centre up to that time.  All existing Lenard’s shops had commenced operations in established shopping centres.  I shall refer to the nature of the surrounding residential areas below.

117               As noted above, the respondents attributed the unsatisfactory level of performance of the Hilton shop whilst run by the Bakers to the quality of their management.

118               I do not find that the turnover levels during the first 12 months of the operations or to July 2000 of the Hilton shop by Silver Fox were materially lower than would otherwise have been the case under some more active or different management.

119               To explain that conclusion and so to address the allegations by the respondents to the contrary it is necessary to deal separately with the particular allegations of the respondents.  I would first, however, indicate that I am satisfied that the personal physical commitment of the Bakers to the business was all that could reasonably have been expected.  They worked long hours, and over time as they shed staff (on the advice particularly of Mr McDonnell) in an endeavour to increase profitability sometimes very long hours, to make the Hilton shop operate profitably.

120               Silver Fox did not operate the Hilton shop on Sundays.  That was a business plan known to Poulet Frais.  When the Bakers in about May 1998 discussed with Mr Hamood the then four options for a Lenard’s franchise which he had suggested, those options included a Lenard’s shop at Stirling.  The Bakers told Mr Hamood that they preferred not to take up that option because it was a shop which would be expected to be open seven days a week.  They said they did not want to have to work seven days a week.  Mr Hamood understood that.  He did not then advise them that they should be prepared to be open seven days a week to operate the Hilton shop profitably, or to achieve an acceptable turnover.  He did not indicate to them that the consequence of operating the Hilton shop on six days per week would mean, or might mean, that the turnover at the Hilton shop might reduce to an unprofitable level, or that any of the illustrative figures provided in the documents referred to above were based on shops trading seven days per week or should be looked at as applicable to shops trading seven days per week, or that by reason of a six day per week trading period the Bakers should look only to or below the lower ranges for turnover provided in those illustrative figures.  Moreover, not all Lenard’s shops then opened on Sundays.  The Hilton shop still does not do so.  Indeed, it has not been shown that, by opening the Hilton shop on Sundays, it would have traded profitably on that day even if its sales had increased somewhat.  Mr Hamood did not suggest in his evidence that he revised the minimum performance figure downwards from $7,000 per week to $6,000 per week because Silver Fox intended to trade on six days per week only.

121               As noted above, Mr McDonnell as field consultant for Poulet Frais regularly visited Lenard’s shops in South Australia, including the Hilton shop.  His practice was generally to complete a ‘Comments Sheet’ following such visits.  In evidence, he described the Baker’s operations of the Hilton shop overwhelmingly as praiseworthy.  The particular comments sheets contain a number of suggestions to improve sales or efficiencies or gross profit of the Hilton shop, but I do not find that they are out of the ordinary or that they indicate that the Bakers were incompetent or inefficient operators of the Hilton shop.  In my view the explanations for those comments are partly that they reflect suggestions which might improve turnover or profitability prompted particularly by the low turnover of the Hilton shop rather than by failings on the part of the Bakers.  They are also partly that a field consultant such as Mr McDonnell would be likely to make some comments critical of operators of Lenard’s shops from time to time as ideal performance by all operators would not be expected at all times.  Where particular suggestions were made, I think the Bakers generally gave effect to them.  Those conclusions are, in my judgment, consistent with the term of the ‘Evaluation Forms’ completed quarterly on each Lenard’s shop.  In the case of the Hilton shop, those forms generally reported in very favourable terms about the cleanliness, product presentation, product quality, service and its general operations.  The picture so presented is also consistent with the Mystery Shopper assessments made at the Hilton shop from time to time.  The Mystery Shopper forms were completed, as the name suggests, by persons unknown to the Lenard’s shop operators.  They appear to have been completed about every two or three months.  In the case of the Hilton shop, the reports were all very favourable and the assessment rated the Hilton shop highly in relation to other Lenard’s shops, including as to the speed and friendliness of service, product knowledge and product display.  In November 1998, the Hilton shop was scored at 100 per cent.

122               Both Mr Baker and Mrs Baker recognised their talents suited them respectively for the ‘behind the scenes’ and the public sales roles.  Mr McDonnell agreed that their respective talents lay in those directions, and that they gave effect to them.  I find that both performed those functions satisfactorily.  Mrs Baker, it was suggested, was sometimes not as aggressive or quick at pushing sales as she might have been.  I agree that she was not likely to be a pushy salesperson.  That is apparently her nature.  But she responded to some particular criticisms in cross-examination explaining why the average unit sale may have been lower than in other Lenard’s shops, and how she encouraged sales by cooking at the Hilton shop, and why and how she dealt with her customers.  I do not think a more aggressive personality would have made more than a marginal difference to the turnover of the Hilton shop during the period of its operation by Silver Fox.  The Bakers were assiduous in seeking advice about how to increase sales, and they implemented that advice.  That included changes in product display, changes in product mix, special promotions and advertising, and on one occasion obtaining the in-store assistance and advice of another apparently successful franchisee of a Lenard’s store.  Accordingly, I do not find that the turnover at the Hilton shop during the regime of Silver Fox was adversely affected by the work performance or personal qualities of the Bakers in any way relevant to the fact that Poulet Frais ultimately terminated the Franchise Agreement. 

123               One criticism of the Bakers’ management of the Hilton shop was that they did not conduct cooking demonstrations or provide samples to the public.  I find that they did not do so with the frequency of other Lenard’s shops.  However, I accept Mrs Baker’s evidence that she did so whenever she expected any significant pedestrian activity – that is mainly Thursdays, Fridays and Saturdays.  I also accept that she made a judgment, based in part upon her experience, that there were simply not enough people about on other days for such activities to have much effect on sales.  I do not consider, in the circumstances, that the fact that Silver Fox did not conduct cooking demonstrations or sampling continuously, or as frequently as some other Lenard’s shops, resulted in the sales at the Hilton shop being materially less than would have been the case by such activities being pursued more extensively.

124               Another criticism of the Bakers’ conduct of the Hilton shop concerns their display of product, and failure to undertake ‘up-selling’ or ‘cross-selling’.

125               I do not think the criticisms are made out.  When Peter Rugless  (Mr Rugless) attended the Hilton shop in May 1999, the Bakers learned of the technique of marking up multiple product sales apparently at a discount.  They then adopted this technique.  Before that time, I accept their evidence that as opportunity presented Mrs Baker and the staff did adopt the technique of ensuring customers did not wish to acquire more or an additional different product where appropriate, and that they did attempt up-selling and cross-selling.  Not every customer can be treated the same.  Mrs Baker indicated, and I accept, that she addressed the needs of each individual customer.  She was aware that, perhaps more so than in other Lenard’s shops, the customers were less prone to such sales techniques and tended to make smaller purchases because of the socio-economic groupings in the catchment area.  She said many were elderly, and many were not particularly well off.

126               The criticism of the window display I find to have been misconceived.  Indeed, the window display provides a further explanation for the gross profit percentage being somewhat lower than the average.  I find that the window display area at the Hilton shop was the longest of the Lenard’s shops in metropolitan Adelaide.  Keeping it full, having regard to the sales levels, is more likely to have led to some wastage than keeping a display window full where the turnover is significantly greater.

127               The evidence about the Bakers’ performance as operators of the Hilton shop was not so complimentary from Benjamin White (Mr White).  He was a director of a former franchisee of a Lenard’s shop at Norwood, but from August 1999 was employed by Poulet Frais as a field consultant.  His evidence was somewhat more critical of the Bakers in his dealings with them as a field consultant.  I formed the impression that his criticisms were slightly overzealous, and where the emphasis of his evidence differed from that of Mr McDonnell I prefer the evidence of Mr McDonnell.  Where it was critical of the display of product, the evidence is not entirely consistent with other contemporary documents or with Mr McDonnell’s evidence.  That, of course, may simply reflect different perceptions of the appearance of the Hilton shop from time to time.  In addition, a number of his comments from time to time about how the Bakers operated the Hilton shop related to the usage of all the chicken product, rather than to sales. 

128               Mr Rugless was the Lenard’s shop franchisee at Glenelg who the Bakers informally consulted from time to time, and who worked with them for one week in May 1999 after he sold the Glenelg shop.  He did so with the support of Mr Hamood.  He too considered that there were some flaws in the operation of the Hilton shop by the Bakers.  Although he considered their product presentation and display was of high order generally, he thought the display case was not refilled promptly after any rush in trade.  He also thought the service of customers was a little erratic.  He took steps to remedy those aspects.  He also encouraged the use of marketing cards of apparent discounting for multiple buys of high value lines of product.  Once again, I do not think his evidence is inconsistent with the evidence of Mr McDonnell.  It captures a short period in time when his efforts were directed specifically at improving sales.  Mr McDonnell had the benefit of having seen the operations of the Hilton shop by the Bakers over the full period of their tenure, including the week during which Mr Rugless worked at the Hilton shop.  The week in which Mr Rugless did work there was a small increase in turnover from the previous week, and after that time there was generally speaking a higher level of turnover per week than in the previous period.  I do not have any reason to conclude, and I do not conclude, that the higher level of turnover per week from about May 1999 was attributable to steps which Mr Rugless suggested and which Mr McDonnell had not previously not identified or suggested.

129               Mr Hamood was aware of the difficulties being experienced by the Bakers soon after the Hilton shop started trading.  I accept he tried to improve its sales performance by promotional activities beyond those normally undertaken by Lenard’s, including a direct mail drop in the area and the provision of assistance from Mr McDonnell and from Mr Rugless.  His efforts proved to be in vain.

130               For these reasons, despite the significant increase in sales at the Hilton shop from July 2000, at least for a time (I have noted above that for the latter part of the period to September 2002 for which figures are available the sales levels had again fallen), I do not consider the sales levels were attributable to any defects in the way the Bakers operated the Hilton shop compared to the way in which other Lenard’s franchisees operated.  In my judgment, the simple fact is that the turnover of the Hilton shop during its operation by Silver Fox and the Bakers reflected its location and its market.  It had a turnover significantly lower than the Bakers and the respondents expected from the commencement of its operations.  Mr McDonnell was aware of that virtually from its inception.  He discussed the problem with Mr Hamood, as well as with the Bakers.  In addition to his suggestions to the Bakers from time to time, with their support he put a proposal for particular promotional assistance to the marketing co-ordinator for Lenard’s on 5 May 1999.  In November 1999, Mr McDonnell himself worked in the Hilton shop for a time with a view to increasing weekly turnover to $9,000.  Despite his sales techniques and his longer experience, he candidly acknowledged that he was unable to do so.  He accepted that he may have conveyed to the Bakers, as they claimed, that the Hilton shopping centre did not have enough ‘traffic’ for turnover to be at that level.

131               In my judgment, the Hilton shop achieved the sales levels between 2 September 1998 and 12 July 2000 which a reasonably competent franchisee following the Lenard’s systems would have achieved.  The sales levels, I find, reflect its location.

132               The weekly gross profit percentage of the Hilton shop was also from September 1998 well below the 47 per cent of gross sales which the Bakers had aimed for.  In the first few weeks, that is not too surprising.  Initially, it is clear they were overstaffed for their turnover.  Mr McDonnell advised them to reduce their staff levels.  They took that advice.  After the first three weeks, for the next ten weeks to make up the first quarter year of the operation of the Hilton shop the gross profit percentage varied between 51.24 per cent and 23.63 per cent.  It averaged over that 10 weeks 39.10 per cent.  For the next 13 weeks, the gross profit averaged 37.52 per cent.  For the second six months of the operation of the Hilton shop, the gross profit averaged 41.02 per cent of gross sales.  In the remaining 46 weeks that Silver Fox operated the Hilton shop, the gross profit per week averaged 49.07 per cent of gross sales.  As noted above, the gross weekly sales over that period were on average significantly higher than for the corresponding previous period.  In only one week of that period did the gross profit percentage fall below 43 per cent, and in only seven weeks did it fall below 47 per cent.

133               Mrs Baker explained that in the initial period, the staffing level required was hard to fix and there was significant product wastage due to the low turnover.  I specifically reject the contention that the Bakers’ gross profit percentage was materially adversely affected by their failure to use the whole chicken to maximise its best and fullest use.  The Bakers did not instruct the boners employed by them to adopt any procedures other than the standard.  No specific departures from any Lenard’s procedures are made out, and there is nothing to suggest the Bakers deliberately departed from any such procedures.  If one or other of their boners was less efficient than others employed by Silver Fox or by other Lenard’s shops, the difference in outcome in my view would be marginal.  It would not contribute in any real way to the gross profit percentage on sales achieved by Silver Fox.  In the period March to May 2000, when Mr Baker worked as the boner, he too in my judgment endeavoured to use the whole chicken.

134               Part of the reason for the lower than average gross profit was that the Bakers reduced the selling price of various products in an endeavour to boost sales.  Indeed, the turnover increase during the latter part of 1999 seems to have resulted in part from gradual price increases introduced by the Bakers and in part from increased product sales, which the Bakers ascribe (again in part) to marketing cards on products offering multiple purchases at a discount.

135               The shortage of funds by the middle of 1999 led firstly to a need to rearrange financial accommodation with the bank.  The Bakers were also having difficulty maintaining the advertising levy and franchise fee payments to Lenard’s on a regular basis.  They had other priorities.  They had to pay staff wages and for product supplies.  They had to pay workcover and taxation amounts, and insurance.

136               To keep operating, and to meet their ongoing liabilities, the Bakers arranged to put further funds from their own resources into the running of the Hilton shop by Silver Fox.  The full extent and the source of those funds are discussed when considering the losses claimed by the applicants.

137               The financial pressure also meant that the Bakers worked long hours.  They operated with as few staff as possible.  I accept that they were each working at the Hilton shop from about 7.00 am to 8.00 pm or 9.00 pm on most days, and later on Thursdays with late night shopping.  Sundays were applied to the maintenance of their personal lives:  washing, ironing, cleaning, and to the completion of the weekly management reports required by Lenard’s.

138               On 31 March 2000, Poulet Frais served on Silver Fox and the Bakers a notice of demand for outstanding franchise fees and advertising levies, and for unpaid product charged back through Lenard’s, totalling $21,620.  They were given 30 days to remedy the default.  The Bakers responded by letter of 2 April 2000.  Apart from some minor disputes about certain items, their response complained about the quality of the site selection of the Hilton shopping centre for a Lenard’s shop and the lack of pedestrian traffic in the centre.  As they had previously done, they invited Mr Hamood to secure a buyer for the Hilton store if he could.  Poulet Frais then provided them with a proposed disclosure document for a possible transferee of the Hilton shop.  The trading statement attached (prepared by Poulet Frais from the figures of Silver Fox available to Poulet Frais) showed:

	2.9.98 – 30.6.99	1.7.99 – 31.3.00
Gross Takings	$297,283	$295,006
Gross Profit	93,652	150,036
Percentage Gross Profit	31.50%	51.53%
Expenses	140,276	134,177
Trading Profit	(45,463)	18,126

139               Poulet Frais followed up the notice of demand by letter dated 1 May 2000.  Again the Bakers responded promptly, on 3 May 2000.  Their letter indicated they could not pay the claimed arrears to Lenard’s.  They added:

‘Richard, we have been telling you for sixteen months now that we need to achieve gross sales of $8,000-8,500 per week to cover our costs.  This is the figure you quoted us before we signed up …’

140               They reiterated the need for a much greater pedestrian traffic flow in the shopping centre, and their concern as to why the Hilton shop was chosen as a Lenard’s shop.  The Poulet Frais response of 29 May 2000 simply asserted the ongoing defaults within 28 days.  Although an agent had been attempting to sell the Hilton shop over the preceding few months, nothing had come of those efforts to then.

141               In my judgment, the factors which led to the gross profit percentage achieved by the Bakers for the first many months of their operation of the Hilton shop are not related to the alleged poor quality of their management, or to their lack of industry.  The immediate factors are likely to be several, but underlying them is in my view the reasonable steps which the Bakers took in the need to increase sales.  They attempted to keep the window display impressive, to keep service levels at the highest, and to respond to the suggestions of others including Mr Hamood and Mr McDonnell but the steps taken to boost sales must have involved other inefficiencies.  When some equilibrium was eventually reached in the running of the Hilton shop, the average gross profit percentage reached and was maintained at acceptable levels.

142               On 12 July 2000, by notice of termination Poulet Frais terminated the franchise of Silver Fox for failing to pay to Lenard’s the advertising levy, and to Poulet Frais the service fee.  The amount outstanding was then said to total $24,684.  At the time, Silver Fox had paid rental to the second week of August 2000.

143               In the four weeks immediately preceding 12 July 2000, Silver Fox had had gross sales of $9,044, $8,321, $8,560 and $8,114.  That was the first occasion there had been a period of four successive weeks in which the gross sales had exceeded $8,000.  That information was, I find, known to Lenard’s and Poulet Frais at the time.

144               The respondents contend that the Bakers became franchisees of the Hilton shop based upon their own judgments and independent advice, and not upon anything conveyed to them by the respondents or any of them.

145               The Bakers did not go into a franchise agreement in respect of the Hilton shop ingenuously.  When they first became interested in a Lenard’s franchise, the Bakers took the precaution in about mid 1997 of speaking to some other franchisees of Lenard’s shops in South Australia.  I accept their evidence that they did so for the purpose of ensuring that there were no particular issues about the relationship between Lenard’s or Poulet Frais and the licensees.  They did not get any information which discouraged them from pursuing the prospect of becoming franchisees of a Lenard’s shop.  Indeed, the picture they got was generally favourable. 

146               However, I also accept their evidence that they did not use those meetings for the purpose of testing the quality or accuracy of the financial information which they had received in the past or for the purpose of forming their own judgment about their financial prospects were they to become franchisees of a Lenard’s shop or of the Hilton shop in particular.  Nevertheless, I think they came away from those meetings with the general sense that hard-working franchisees of Lenard’s shops who followed the Lenard’s systems were able to make an acceptable level of earnings.

147               Moreover, when considering whether to apply for the franchise of the Lenard’s shops proposed at the Unley shopping centre in 1997 (the Bakers were unsuccessful candidates), and whether to pursue a franchise of a Lenard’s shop at Stirling (the Stirling shop ultimately opened with another franchise also in September 1998), in particular Mr Baker undertook further inquiries himself.  In each case, he examined the existing shopping facilities, and their proximity to the proposed Lenard’s shop.  He did so for some time.  He made observations about the proposed Stirling shop which tended to put the Bakers off that option.  He thought the pedestrian traffic around the proposed Unley shop (which was already a specialist chicken shop) was good.  He looked up some census information.  He looked at maps to assess the local neighbourhood and tried to check out the extent of the possible local competition.  He also prepared some projected figures himself in relation to the proposed Unley shop.  They were based in part upon the information in Disclosure Document 1.

148               I do not think those inquiries, or other evidence, lead to the view that the Bakers did not rely upon the material supplied to them by Poulet Frais leading up to the Franchise Agreement being executed on 4 September 1998.  In the case of the Hilton shop, there was no existing trading to observe.  There is nothing to indicate that Mr Baker sought to form an independent view about the catchment area of, or the competition to, or the socio-economic mix of the residents around, the Hilton Shopping Centre.

149               Mrs Baker explained that the documentary material received gave them the confidence that a Lenard’s shop would be profitable if it were operated assiduously and in accordance with Lenard’s systems.  She described the significance of their inquiries about other franchisees as follows:

‘… there had been a lot of people gone through before us and signed these documents and they’re working profitably.  They’re still in business and they’re doing all right.  That’s what we thought of.  We thought if they can do so, so can we.’

150               They were also aware that the success of a particular Lenard’s shop was tied to its turnover, and that the extent of pedestrian traffic past a particular Lenard’s shop was a general indicator of the prospect of turnover.  As noted, they had, when applying (unsuccessfully) for appointment as franchisees of the Lenard’s shop at the Unley shopping centre, sat and watched the extent of the pedestrian movement around the proposed shop site.

151               As noted, the Bakers sought legal advice before signing the Franchise Agreement.  Firstly, that concerned the corporate structure by which the Hilton shop might be run.  Secondly, on 14 August 1998, they were taken through the Franchise Agreement to make sure they understood its terms.  That advice did not touch specifically upon the quality of the proposal that they would through Silver Fox became franchisees of the Hilton shop.  Nor did it touch in any specific way upon the quality of the information which, by then, the Bakers had received from Poulet Frais.  (It is not presently necessary to deal with the other respondents’ accountability for those communications).  I do not consider that legal advice was a substitute for, or the basis or one of the material bases for, the Bakers deciding that it was an appropriate financial investment to undertake the franchise of the Hilton shop.

152               The Bakers also counselled the accountants Hincks & Smith (Mr Farrow).  That too took place in July and August 1998.  There is little evidence about what advice was given.  I find that the Bakers were informed about the risks associated with undertaking a business such as a franchise of the Hilton shop.  They were generally aware of those risks, and the advice would have reinforced that.  I do not find that the advice involved any analysis of, or commentary upon, the documentary material provided at least by Poulet Frais.  The evidence indicates the Bakers were told that the Hilton shop would need to have gross takings of about $11,000 per week for them to make a reasonable income.  How that figure was arrived at was not explored.  I assume it allowed for payment of interest on the borrowing from the bank and for a reasonable level of directors salaries or drawings.  How much was allowed for the Bakers’ drawings was not explored.  I am sure that advice also pointed out to the Bakers the risks associated with any such business generally.  However, I infer that the advice was given premised upon figures provided at least by Poulet Frais, rather than by any critical analysis of those figures.  There is nothing to indicate the accounting advice either independently made any assessment of the prospects of the Hilton shop, or that the accounting advice led to the Bakers deciding to proceed with a franchise of the Hilton shop irrespective of the information provided to them at least by Poulet Frais.

153               None of those steps indicate, in my view, more than the exercise of ordinary common sense.  The Bakers did not have the general business experience, nor any particular knowledge, which would have enabled them to convert their observations into any reliable measure of the potential turnover of the Hilton shop, or to form any reliable judgment about the potential performance of the Hilton shop relative to (or in the spectrum of performance of) other Lenard’s shops in metropolitan Adelaide.  They did not in fact undertake any such task.  They relied upon the Poulet Frais judgment that the proposed Hilton shop was an appropriate location for a Lenard’s shop.  Their general information did not give them cause not to rely upon that judgment.  Beyond that I do not accept the contention of the respondents that the Bakers made a judgment based upon their own experience and their own inquiries and independently of the information provided to them to become franchisees of the Hilton shop.  In my view, the contrary is the case.

154               It is now necessary to consider whether the respondents’ conduct, that is the communications to which I have referred, amounts to the making of representations as alleged and, if so, whether any of those representations was misleading and in fact mislead the Bakers so as to induce them to enter into the Franchise Agreement.

155               I have earlier identified six written ‘representations’ or communications from one or more of the respondents to the Bakers which now require further consideration.  I have elsewhere found that no oral representations were made as alleged, and to the extent that the amended statement of claim relies upon other parts of the contents of documents that those parts of the documents did not convey any relevant representation.

156               It is convenient to deal with the first two of those ‘representations’ together.  They are alleged to derive from the weekly operating reports of three unidentified Lenard’s shops, and from the sales and profitability hypothetical target figures and hypothetical operating profit outcomes potentially achievable by the franchise of a Lenard’s shop.  The hypothetical figures were in fact reviewed and adopted by Mr Hamood as applicable to South Australia.

157               In my judgment neither of those communications is a direct and specific representation to the Bakers that the Hilton shop would, or was likely to, achieve a particular outcome.  On their face, they do not assert that.  The Bakers appreciated that the documents in their terms did not specifically assert that a particular level of earnings or profit would be achieved at the Hilton shop.  They each gave evidence that they understood that those documents did not warrant or nominate that the Hilton shop would achieve a particular level of earnings or profit.

158               The fourth and fifth ‘representations’ can also be dealt with together.  The fourth concerns the minimum performance level of $7,000 per week specified in the schedule to the early copy of the Franchise Agreement.  The fifth concerns the observation in the Information Pack about the range of cost of Lenard’s franchises.  In the fourth case, what is conveyed does not directly represent any matter concerning the potential earnings of the Hilton shop.  It is simply what it is said to be, a minimum weekly sales level which might, if not reached on a regular basis, provide the basis for termination of a franchise agreement.  It is a term in the proposed Franchise Agreement apparently to protect the respondents from an underperforming franchisee and to provide a means of ensuring the intellectual property in the Lenard’s name and standing is not degraded by a poorly performing franchise.  The Bakers saw that expression and understood it.  In the fifth case, on its face, the statement about the range of prices payable for Lenard’s franchises is not shown to be inaccurate.  The Bakers do not claim that it is inaccurate.  Indeed their complaint is based upon its assumed accuracy.  The purchase price of $192,402 for the Hilton shop comprised the franchisee fee of $50,000 plus plant equipment and fitout costs (including the Poulet Frais consulting fee) of $123,418 and establishment costs of $18,984.  The final breakdown of the plant equipment and fitout approximated the estimate.  The final establishment costs also approximated the estimate.  The establishment costs include the training cost (payable to Poulet Frais) of $3,500, and legal fees for the Franchise Agreement and the lease of $4,300.  The quoted price, as those figures confirm, is not in fact related to the anticipated gross turnover.  I accept that Mr Hamood did not suggest to the Bakers that it was.  That was something which they inferred for themselves.

159               The gravamen of the Bakers’ complaint is that the documents together, notwithstanding their repeated emphasis on the information being hypothetical and not directly applicable to the Hilton shop, and notwithstanding their repeated insistence that the recipient should not rely upon them but should seek independent counsel, represent that:

(a)        provided a franchisee complied with the Lenard’s system, a representative net operating profit was indicated by the targets set in the sales and profitability target figures, and

(b)        a minimal performing shop would produce an operating net profit of about $50,000 per annum and a high performing shop would produce an operating net profit of about $145,000 per annum.

160               Those representations were, it is said, confirmed or supported by the minimum performance level of $7,000 per week, as that suggested that the respondents expected the Hilton shop would ordinarily turnover significantly greater than that sum.  In written submissions (albeit with respect to the altered minimum performance figure of $6,000 per week) counsel for Poulet Frais and Mr Hamood accepts that the expression of the minimum performance figure may disclose the expectation of the parties to the Franchise Agreement that the Hilton shop would trade at more than the minimum performance figure in the normal course.  As Mr Hamood was the source of those figures, I attribute to him that expectation.

161               Those representations were, it is said, also confirmed or supported by the asking price for the Hilton shop, it being in the middle of the range of prices for a Lenard’s shop specified in the Information Package.  That, the Bakers believed, lead to it being appropriate to apply to the Hilton shop the middle of the range of sales and profitability target figures in the financial package accompanying Disclosure Document 1 and Disclosure Document 2.

162               I do not consider that step is reasonably available.  The Information Package states that Lenard’s franchises are available for approximately $160,000 to $275,000 depending on the location, cost of fitout, establishment costs and size of the particular shop.  Whilst it is understandable that a reader of the whole of the material might take the step taken by the Bakers, I do not consider that the statement in its context conveys, or has the meaning to reasonable members of the class of persons to whom it is directed that the Bakers drew from it:  see e.g. Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; Campoman Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 at 86.  The statement refers to factors which mainly are cost items.  The reference to ‘location’ may reflect some element of the quality of the particular franchise.  But the Baker’s claim is that the representation arises in relation to, and when, a particular purchase price was nominated.  It was not nominated in a vacuum.  The nominated price contained a break-up of the $192,402 into the cost components and the franchise fee or goodwill payment.  The franchise fee or goodwill payment was expressed to be $50,000.  When the Bakers saw their solicitor on 14 August 1998, they gave him the details of the break-up, at least as between the cost components of the fee and the franchise fee or goodwill payment.  In my view, the Information Package and the letter of offer conveyed only that the goodwill payment in the proposed purchase price was $50,000, but they did not and were not reasonably capable of conveying that the Hilton shop should be assessed by them by reference to the mid-range in the range of hypothetical sales targets and operating profit outcomes.

163               I find however that the material to which I have referred did convey to the  Bakers the representations that, provided they complied with the Lenard’s system, a representative and reasonable weekly gross sales target was $8,000 per week, and was achievable, and that a representative and reasonable net operating profit was $50,000 per annum and was achievable.  I also find that the material to which I have referred did convey to the Bakers the representation that a minimal performing Lenard’s shop selected by Poulet Frais would produce a weekly gross sales figure in the order of $8,000 per week and an annual net operating profit in the order of $50,000, and that a higher performing shop would produce considerably higher outcomes.  There was no information represented to the Bakers by reason of which, in my judgment, they could have concluded that the respondents or any of them represented the potential turnover or net profitability of the Hilton shop would be a specific higher figure or in a range of specific higher figures.

164               That is not to say that it was unreasonable for the Bakers to expect over time potential turnover and profit figures higher than the minimum to which I have referred.  There was no particular reason why they should not have had such an expectation.  But their expectation, in that regard, was not one which I find was founded upon any representation of any of the respondents (I shall hereafter call this ‘the sales/profitability representation’).

165               The other representation alleged by the Bakers is that the respondents choose locations carefully, and in this instance, chose the Hilton shop for a Lenard’s franchise carefully.  That is a specific assertion in the Information Pack.  The fact of its making was not really in dispute.  I shall hereafter call it ‘the site quality representation’.

166               I further find that the Bakers relied upon both the sales/profitability representation and the site quality representation in entering into the Franchise Agreement.  I have rejected above the contention that they did not rely on any information provided to them by the respondents or one of them, but relied only upon their own investigations, and have given reasons for that view.  In addition, as I observed earlier in these reasons, the provision of information such as that in Disclosure Document 1 and Disclosure Document 2 is presumably for a purpose.  It is not information divorced from reality.  It would be oxymoronic to suggest that it is.  Notwithstanding the strictures in those documents (and others provided to the Bakers, including the Franchise Agreement), the information conveyed must have a purpose.  It is to inform.  The information is to be taken as relevant and apposite, rather than irrelevant and inapposite.  It may be qualified.  It may be explained.  It may be the subject of express reservations.  But in the end, it is a communication for a purpose.  In my judgment, as I have said, the purpose was at least to set a lower range below which a Lenard’s shop would not, or was unlikely to, perform and to provide the assurance of the application of due expertise to the selection of the site for a Lenard’s shop.

167               In the case of the sales/profitability representation, I consider this to be a representation with respect to a future matter.  The future matter is as to how the Hilton shop would perform, if competently operated in accordance with the Lenard’s systems, if the Bakers became its franchisees.  Consequently, the norm of conduct imposed by s 52 of the TP Act will be contravened unless the respondents who made the sales/profitability representation prove that they had reasonable grounds for doing so:  s 51A of the TP Act.  See e.g. Ting v Blanche (1993) 118 ALR 543 at 552; Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR 46-179 at 54,432; Sykes v Reserve Bank of Australia (1999) 88 FCR 511.  I observe that in Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276 at [46], Emmett J suggested that s 51A requires only that the maker of the representation as to a future matter only need go into evidence for the normal onus of proof (i.e. that the maker of the representation did not have reasonable grounds for making it) to be restored to the applicant.  In this instance, counsel for the respondents proceeded upon the basis that s 51A of the TP Act shifted the onus of proof to their clients (to the extent they respectively made the sales and profitability representation) to show they had reasonable grounds for making it.  I do not, therefore, need to address the issue raised in the UniversalSportsChallengecase.

168               The site location representation is not with respect to a future matter.  Although in the Information Pack provided before the Hilton shop was selected by Poulet Frais, and so at that time with respect to a future course of conduct, it is a continuing representation.  By offering the Hilton shop to the Bakers on 29 June 1998, together with Disclosure Document 2 which indicated Poulet Frais was responsible for site selection, and the Information Pack, the site location representation was as to the quality of the process of selection of the Hilton shop for a Lenard’s franchise.  Indeed, Mr Hamood maintained throughout his evidence that he had carefully chosen the Hilton shop for a Lenard’s franchise.

169               I shall therefore first address whether the site location representation is shown to have been misleading.  That requires consideration in a little more detail of the Hilton shopping centre and its surrounds, the evidence of Mr Hamood, and of the other evidence touching on the process undertaken by Mr Hamood.

170               The Hilton shopping centre has a total floor space on the evidence of 4060 square metres, of which 2512 square metres is given to food retailing and 548 square metres to non-food retailing.  The Woolworths shop occupies 3082 square metres.  The Lenard’s shop of Silver Fox occupies some 45 square metres.

171               There are retail and commercial premises along Sir Donald Bradman Drive, particularly extending to the east, as well as along Henley Beach Road which also runs east-west about 1 km to the north.  Behind the arterial roads, the usage is mainly residential.  To the south east, extending from about 1 km from the shopping centre, there is an extensive area of industrial land use.

172               Within a radius of 2 km from the centre, there are 19 other retail centres, of which seven are within about 1 km.  Within the 2 km radius, the only shopping centre containing a substantial supermarket is that at Henley Beach Road, Torrensville.  That shopping centre has a total area of 4871 square metres, but the supermarket is a little smaller than the Woolworths supermarket in the Hilton shopping centre.

173               The Baker’s Delight franchised shop commenced operating in mid December 1998.  By then all shops in the Hilton shopping centre were occupied.  The franchisee of that shop Jarrod Smith (Mr Smith) described the turnover as low for some six or seven months.  He attributed that to the size of the shopping centre which he called ‘a relatively small regional shopping centre’, the newness of the shopping centre, the competing shopping complex at Torrensville with the supermarket, and the attitude of the local community.  The turnover in that shop then progressively increased over the succeeding two years.  During that period the Baker’s Delight shop traded on Sundays.  Mr Smith confirmed that Silver Fox did open for a period of successive Sundays but without apparent success.

174               The other ‘lay’ evidence about Lenard’s shops in South Australia led on behalf of the applicants was given by Grant Jarrett (Mr Jarrett), who became the franchisee of a Lenard’s shop in Stirling in the Adelaide Hills.  Mr Jarrett commenced that franchise also during September 1998.  That business also failed.  Poulet Frais also took over the operations of that shop in September 2000 in accordance with a deed dated 15 September 2000.  I do not draw any real assistance from Mr Jarrett’s evidence.  It relates to a different premise.  He was not present during any of the Bakers’ dealings with Mr Hamood.  The expectations of Mr Jarrett, and the performance of his business, are not shown to give rise to any inference specifically applicable to the dealings of Mr Hamood with the Bakers or to the performance of the Hilton shop.

THE LOCATION OF THE HILTON SHOP

175               The decision to establish the Hilton shop was made by Mr Hamood.

176               I find, as Mr McDonnell said, the Hilton shopping centre was the smallest shopping centre in which a Lenard’s shop had been established, at least in South Australia.  Mr McDonnell also noted that the Hilton shopping centre was new, and that the Lenard’s franchise was one of the first specialty tenants.  It was also the first occasion that a Lenard’s shop had been set up in a new shopping centre, at least in South Australia.  However, by about December 1998 the specialty tenants were all more or less in place, and the low level of sales compared to what I have found to have been the mutual expectations of the parties persisted for many more months.

177               The only witness called by Lenard’s and Lenard’s Leasing was Paul Bardwell (Mr Bardwell), one of its directors.  He described the history of Lenard’s, and its structure, including its relationship with its master franchisees.  He had few direct dealings with the Bakers.  He visited the Hilton shop twice during 1999.  I accept his evidence generally.  I have not placed much weight on his observations of the Hilton shop on the occasions of his visits, as they were only relatively short visits and the picture of how the Bakers operated the Hilton shop is more likely to be reliably drawn from the evidence of persons such as Mr McDonnell and Mr Hamood who saw its operations on many more occasions, particularly during 1998.  Mr Bartwell also acknowledged that, by the time of his visits, the Bakers were ‘up against it’ as they had been financially struggling for some time.

178               The Master Licence Agreement between Lenard’s and Poulet Frais as master franchisee for South Australia is consistent with the picture that I have from the whole of the evidence, namely that the dealings of individual Lenard’s franchisees on a day to day basis are with the master franchisee for the relevant territory.  Hence, the Bakers dealt almost exclusively with Poulet Frais, through Mr Hamood, Mr McDonnell and other staff.  Lenard’s maintained responsibility for the Lenard’s system and the manuals to give effect to it.  It received the advertising levy and the franchise fee.

179               Lenard’s had no direct role in the selection of the Hilton shop as a site for a Lenard’s franchise.  The identification of potential franchise sites in South Australia was the responsibility of Poulet Frais.  The operations manual which Lenard’s provided to its master franchisees provided guidance on finding and assessing the suitability of potential sites.

180               The operations manual contains a ‘Business Development’ section which addresses site assessment.  It gives direction about Site Assessment.  It includes a site assessment form to be used to determine the potential trading level of a site.  Attention is directed to the date the shopping centre opened, the extent and nature of car parking and its accessibility, its trading hours and the pedestrian traffic flow.  In addition, the site assessment form directs attention to geographical details about the shopping centre and its competitors in the potential catchment area, the location of the prospective site in the shopping centre, the existing fresh food traders in the shopping centre, the opinions of other traders, and pedestrian traffic flow and car parking accessibility.  Mr Bardwell confirmed that a key factor is the tenancy mix.  With the operations manual there is a flow chart which, under the heading ‘Site Selection’, has the following steps:

Finding sites

Site assessment

Sales Forecasting

Estimating Costs

Site Viability

Negotiations

181               The topic ‘Evaluating Opportunities’ follows the step of site assessment.  The ultimate objective is to establish profitable franchised outlets.  For that objective, this part of the document explains that it focuses firstly on operating profit and secondly on return on investment.  It obliges a master franchisee to assess the financial viability of the prospective site.  It adds:

‘You must have a reasonable basis for making any such assessment and a duty of care is necessary to minimise potential litigation issues.’

182               The first subheading is ‘Operating Profit’, which requires the estimate of weekly gross sales.  The document explains that the estimate of weekly gross sales begins with the site assessment form.  It directs attention to the type of shopping centre (major, regional, community or neighbourhood) and to the core business of the shopping centre.  It suggests:

‘… an assessment can be made of the potential average sale for a Lenard’s store in the area by looking at the average sales being achieved in existing Lenard’s stores with comparable demographics and competition.’

The estimated average sale, and the estimated customer count (determined from the traffic flow past the prospective site compared to that of an existing Lenard’s shop) is said to give an indication of gross sales.  Other factors for consideration are mentioned, including the nature of the traffic flow, the nature of neighbouring shops, and the display space (too large a counter is said to be difficult to keep full and fresh looking if turnover is low).

183               From the weekly gross sales, an operating profit is to be forecast.  The gross operating profit is specified as 47 per cent of gross sales.  The expenses to be estimated are then identified, but no figures provided.  The point is made that the exercise is for ‘viability purposes only’ and is not to be used as a projection for a prospective franchise.

184               It is not presently necessary to refer to other parts of that document.

185               Mr Hamood has considerable experience in selecting and arranging for the establishment of Lenard’s shops in South Australia.  Since the appointment in 1993 of Poulet Frais as Master Franchisee for South Australia, he had arranged the establishment of 15 Lenard’s shops by the end of 1997.

186               He explained at some length both his usual process in selecting the site for a Lenard’s shop, and what he did to select the Hilton shop.  There was no real issue about those matters.  The issue was really as to the adequacy of what he did.  Some of the considerations, with hindsight, seem obvious.  He focused on shopping centres.  He looked for an anchor tenant, generally a supermarket.  He looked for complementary traders.  He looked at the location of the potential site in the shopping centre.  He looked at the physical layout of the proposed site.  He looked at the quality of, and general facilities in, the shopping centre.  And he looked at the proximity of and retail mix in other shopping centres in the surrounding areas to assess the potential competition.

187               In those processes he was assisted by the operations manual provided by Lenard’s.  Included there, as discussed above, is the site assessment form.  He completed that form and submitted it to Lenard’s in respect of the Hilton shop.

188               Mr Hamood became interested in the Hilton shop as a possible site for a Lenard’s shop during construction of the Hilton shopping centre.  In April 1998, he inspected the centre when it was nearing construction.  He learned of the prospective tenants including Woolworths, Baker’s Delight, a newsagent, a pharmacy and Smokemart.  He contacted Baker’s Delight to confirm its interest.  He learned no butcher’s shop tenancy was proposed, so the direct competition for a Lenard’s shop would only come from poultry and meat sales in Woolworths.

189               Mr Hamood then entered into negotiations with the managing agent for a lease of the Hilton shop.  During that period, he obtained demographic information focusing on a radius of 2 km from the shopping centre.  It was not comparative information of the type referred to by Mr Tutte (as discussed below).  Mr Hamood recognised that the general profile of the nearby population was older first generation migrants, but he thought that demographic was changing to a younger working group seeking a lifestyle close to the city.  He considered the latter group is well disposed to the sort of products provided by Lenard’s. He looked at the area to confirm there were no natural barriers to access to the shopping centre from neighbouring areas.

190               In the negotiating period, Mr Hamood completed and sent to Lenard’s the site assessment form.  The shopping centre was described as a neighbourhood one (the lowest of the four classifications on the form:  ‘major/regional/community/neighbour’.  The form noted the car parking facilities as very satisfactory.  It noted no customer counts were possible as it was a new shopping centre.  It noted the fine location of the Hilton shop in relation to the Woolworths supermarket, and the estimated annual sales of the Woolworths supermarket as provided by the shopping centre’s agent.  It noted that the area is the ‘up and coming area where older ethnic families are being replaced with young couples’.  The positive was recorded as the absence of other major shopping centres in the area other than the supermarket at Henley Beach Road, Torrensville, but the negative was the high degree of loyalty to that supermarket.  It noted the proposal for a Baker’s Delight shop also to be established in the shopping centre.  The section headed ‘Physical Site’ estimated weekly sales by circling the ‘low’ and ‘medium’ options and not the ‘high’ option.

191               To understand that assessment, Mr Hamood explained that existing Lenard’s shops had a weekly turnover range between $8,000 and $20,000, and he regarded the range from $8,000 to $12,000 as low and then to $16,000 as medium.

192               Ultimately terms of a lease were agreed upon, and a lease duly executed on 20 July 1998, although Mr Hamood had committed Poulet Frais to the lease on 8 May 1998.

193               The monthly comparison reports, the weekly operating reports and the weekly historical reports in Disclosure Document 1 and Disclosure Document 2 were sourced by Mr Hamood.  Further, the ranges in the sales and profitability targets for gross profit percentage and for expenses were selected by Mr Hamood having regard to his experience of Lenard’s shops in South Australia.  So too were the figures for plant and equipment and for fitout costs.  He maintained the range for gross sales between $8,000 and $16,000 per week, having regard to the fact that at the time the Lenard’s shop in South Australia with the lowest average weekly turnover was in excess of $8,500 per week and the highest in excess of $20,000 per week.  The lowest grossing Lenard’s shop was the Arndale shop.  By the time of Disclosure Document 2, the Lenard’s shop with the lowest weekly turnover was still the Arndale shop, then averaging about $9,700 per week.  The recently opened Unley shop was averaging about $9,800 per week.

194               There were two expert witnesses called on behalf of the respondents in relation to Mr Hamood’s selection of the Hilton shop.  Mr David McArdle (Mr McArdle) is a consultant in strategic property advice, and asset planning and management.  I ruled that he had the expertise to give expert opinion on the topic he addressed.

195               Mr McArdle concluded in his report of 23 December 2002 firstly that the Hilton shop selected in the Hilton shopping centre is and was in 1998 suitable for the operation of a Lenard’s shop.  He secondly addressed the site assessment form, and the population statistics, used by Mr Hamood in making the selection of and forming a judgment about the capability of the Hilton shop.  He commented:

‘Whilst this research is limited the information obtained is consistent with my investigations of the Centre and Mr Tutte’s retail gravity model analysis.’

Finally, Mr McArdle expressed the view that the extensive investigation suggested by Richard Krantz (Mr Krantz), whilst ideal, is not necessarily fully adopted in practice.  Mr McArdle says that it is normal to investigate a site until sufficient information is available to reach a conclusion about the suitability of the proposed site, and that reliance on experience and business judgment is an acceptable component of the process.

196               Mr McArdle’s views must be weighed in the light of his failure to have regard to several matters which, in cross-examination, he accepted as also relevant.  Those factors included:

1.         the performance of the operators of the Hilton shop since July 2000;

2.         the profile of the residents in the vicinity of the shopping centre, that is whether those persons were typical of persons who buy products from Lenard’s stores;

3.         the extent of the pedestrian traffic or potential pedestrian traffic in the vicinity of the Hilton shop.

197               Mr McArdle identified the five major factors relevant to his opinion as being the state of the local economy, the quality of the property ‘in locational terms’, the design and condition of the property, the quality of the shopping centre management, and specific terms of the proposed lease.

198               Alistair Tutte (Mr Tutte) is an urban and regional planner.  His expertise was not challenged.  He has developed what he called a ‘retail gravity model’ to distribute the sum of household retail expenditure from each ‘collector district’ to retail centres, depending on distance and centre size.  The model calculates turnover from food and non-food expenditure.  It does not operate from any determination of a particular catchment area for the retail centre under consideration.

199               Mr Tutte’s analysis of persons living within a 2 km radius of the Hilton shopping centre showed that:

·                    personal incomes and household size are lower than the metropolitan median;

·                    there are fewer children and many more persons over 60 years of age than the metropolitan median;

·                    unemployment is higher than the metropolitan median;

·                    the number of households without a motor vehicle is nearly double that of the metropolitan median;

·                    household incomes are concentrated, much more so than the metropolitan median, in the second and third (lower end) quintiles; the lower end quintiles spend significantly less on retail purchases than the upper end.

That analysis, in my view, is consistent with the Bakers’ evidence that many of their customers were elderly, and tended to make smallish purchases.  Mr Tutte says it shows the area is likely to generate less rental expenditure than the average for metropolitan Adelaide.

200               The retail gravity model then produced the turnover figure of $3,685 per square metre for food floor space at the Hilton shopping centre, increasing to $4,054 per square metre by 2011.  It is based upon the assumption that shopping centres modelled are of equal quality and have comparable ancillary facilities each, such as car parking.  On my calculations, applying that turnover to the Hilton shop, it would represent annual turnover of $165,825, or weekly average turnover of $3,189.  Silver Fox averaged considerably more than that.

201               Mr Tutte then expresses the view that the Hilton Shopping Centre is superior to its competitors because of its newness, the extent of its off-street car parking, and the quality of the Woolworths supermarket.  He does not have any opinion as to the extent to which those factors would increase its turnover.  However, even doubling the projected takeover figure for those reasons would produce an average weekly turnover for the Hilton shop only somewhere about that achieved by Silver Fox in its first year of operations.

202               Mr Krantz gave evidence about the Bakers’ losses, to which I have already referred.  He also addressed the factors to which a franchise dealer should consider before selecting a location for a potential franchise.  There are some factors which Mr Hamood did not consider.  They are:

·                    shopping centre traffic count and traffic count past proposed location;

·                    comparison with other franchisees;

·                    effect on proposed franchisee if a new shopping centre and period of time anticipated to achieve ‘normal’ turnover;

·                    level of shopping centre support for advertising.

The other factors he referred to were addressed by Mr Hamood.  Mr Krantz has spent much of his professional career advising small businesses, including as to their purchase and sale.  I accept his evidence.  Apart from being based on his experience, it has a sound ring of commonsense.

203               David Corkindale (Professor Corkindale) also gave evidence at the behest of the applicants about Mr Hamood’s process of site selection.  I was amply satisfied about his expertise to do so.  He is the Professor of Marketing Management at the School of Marketing, University of South Australia.  He expressed surprise at the lack of sophistication used in making projections (as presented in the hypothetical sales and profitability target figures in the financial package with Disclosure Document 1 and Disclosure Document 2).  There was, he said, no apparent systematic process by which Mr Hamood reached those figures for the purpose of publishing them.  In this matter, I think that is a telling observation in particular regarding Disclosure Document 2, as it was provided in the context of (and with the heading naming) the Hilton shop.  He referred to well known and used techniques for collecting and utilising information by a formulaic application to determine the potential suitability of proposed sites.  No such process was used by Mr Hamood, nor urged nor required by Lenard’s.  Mr Tutte’s retail gravity model is an illustration of the sophisticated techniques available.

204               Professor Corkindale identified two chief factors commonly used in site selection as being the size of the catchment area, and the socio-economic nature of the population in the catchment area.  He otherwise identified factors which Mr Hamood had addressed.

205               The information used by, or available to, Mr Hamood about the turnover and operating profit of the Lenard’s shop in South Australia, together with the socio-economic rating of each store’s locality, indicated that the turnover and profit of Lenard’s shops are very influenced by the relative wealth and nature of the locality which they primarily serve.  Given the nature of the Lenard’s product, which includes extensive ‘value-added’ (i.e. dressed) product, Professor Corkindale thought that could explain why sales and profits are lower in lower socio-economic localities.  The evidence, including that of Mr Tutte, shows the Hilton shop is in a lower socio-economic locality (as are the other Lenard’s shops where the sales and profits are lower).

206               As I have already found, based upon Mr McDonnell’s evidence, Professor Corkindale also pointed out that the Hilton shop is in a smaller shopping centre than any of the existing Lenard’s shops.

207               Notwithstanding the evidence of Mr McArdle and the experience of Mr Hamood, I have come to the view that Mr Hamood did not consider carefully the selection of the Hilton site.  In my judgment, he appreciated only in a general way the significance of the lower socio-economic grouping of the catchment area.  He recognised that grouping, but then as he said offset its significance for the prospect of younger people wishing an inner city lifestyle moving into the area.  That may be an appropriate conclusion, but it does not represent any change in the socio-economic grouping in the short term.  The short term (probably a number of years but certainly at least the first year of operation of the Hilton shop) would seek custom from the existing residents of the area.  I also consider that Mr Hamood’s extrapolation from existing Lenard’s shops to the Hilton shop of the prospects of trading levels failed to take account of the newness of the shopping centre.  He had not established a Lenard’s shop in a new shopping centre before.  It should have caused him to consider whether there would be a period, during which growth of business to the shopping centre would develop.  That is what is likely to have happened, on the evidence.  That alone does not mean the Hilton shop was not an appropriate site for a Lenard’s shop, but it means the Hilton shop was not likely to perform to its full sales potential in the first year or two of its operations.  To suggest to the Bakers that the Hilton shop had been carefully chosen without the qualification that it was not likely to reach its sales potential for some time was misleading.  There was nothing conveyed to the Bakers to suggest that.  Indeed, the material presented to them was consistent with the Lenard’s shop having no build up period.  The Bakers themselves expected to build sales and profit over time, but that was not from a base which reflected the consequences of the newness of the shopping centre but premised upon general recognition of their (planned) excellent service and quality of product.  Mr Hamood, in my view, also did not give proper account to the existing patronage of the Torrensville shopping centre on Henley Beach Road, and the loyalty of its clientele.  Finally, I consider the size of the Hilton shopping centre was not really considered.  It is a small shopping centre, considerably smaller than the Unley shopping centre where a Lenard’s store had been recently opened.  It is smaller than the established Arndale shopping centre, where the then lowest performing Lenard’s shop was located.  It is the smallest shopping centre in which a Lenard’s shop had been located.  The absence of any available traffic count meant, I think, those considerations had to have been considered carefully.  I do not consider they were.

208               Mr Hamood had the comfort of Woolworths and Baker’s Delight having committed to the Hilton shopping centre, to the excellent location of the Hilton shop, and to the informal information from the shopping centre manager about what he (the manager) thought Woolworths expected to gross in its operations.  But I consider he too readily drew comparisons from existing Lenard’s stores when there were good reasons to be cautious about doing so:  the newness of the centre, the potential customer source, the competition, and the size of the centre.  He recognised the nature of the potential customer source, but discounted its significance inappropriately.  He did not use the measurement tools commonly used.  In the case of the retail gravity model, he would have had to have factored up to the outcome by more than double to reach the gross weekly turnover for the Hilton shop which intuitively he had determined upon.

209               I have not overlooked Mr McArdle’s views about the quality of and prospects for the Hilton shopping centre in reaching that conclusion.  However, I formed the impression that he was somewhat intuitive in his views.  He did not investigate any of the other Lenard’s shops, and did not pay much heed to the socio-economic characteristics of the surrounding residential areas.  I think they are each important issues.  Indeed, the reasons for his movement of his estimates from the base provided by the retail gravity model to the level of earnings he projected, and for his assessment of the extent of custom that the Hilton shopping centre would take from the Torrensville shopping centre were to my mind unconvincing.  I also thought Mr McArdle assessed the prospects of customers from up to a radius of 5 km coming regularly to the Hilton shopping centre rather too highly.

210               Accordingly, I find that Poulet Frais engaged in misleading and deceptive conduct in making the site location representation.

211               I have no doubt that Mr Hamood and therefore Poulet Frais, believed the sales/profitability representation.  The issue is whether there were reasonable grounds for making it.  In my judgment there were not.  I would reach that view whether the onus of proof lies on the respondents, or whether – evidence having been adduced by the respondents – the onus of proof lies on the applicants to show there were not reasonable grounds for making it.

212               My reasons for that conclusion are related to the matters I have discussed in relation to the site location representation.  The sales/profitability representation depends largely upon whether it was reasonable to extrapolate from the performance of other Lenard’s shops, particularly the Arndale and Unley shops, to the Hilton shop.  I do not think it was.  The size and newness of the Hilton shopping centre, and the socio-economic composition of the surrounding residential areas, required that separate consideration be given to the Hilton shop.  The implications or potential implications of the newness of the shopping centre to the turnover of the Hilton shop alone would, in my view, preclude such ready use of the comparators used, especially in respect of a potential franchisee who Mr Hamood knew to have sought financing for the franchise.

213               Accordingly, I am also satisfied that Poulet Frais engaged in misleading conduct in making the sales/profitability representation.

214               It was accepted that if Poulet Frais were found to have contravened s 52 of the TP Act, Mr Hamood would also be liable for those contraventions by reason of s 75B of the TP Act.  I shall address the position of Lenard’s and Lenard’s Leasing below.

215               I do not consider the applicant’s claim based upon s 51AC of the TP Act is made out.

216               The Franchise Agreement, as noted, contains terms which required the applicants to acknowledge (contrary to what I have found to be the fact) that no representations were made to them and that they entered into the Franchise Agreement based only on their own judgments.  Such clauses are clearly designed to insulate the respondents from legal liability.  As my judgment above indicates, where there is a contravention of s 52 (or other provisions) of the TP Act, such clauses do not fulfil their purpose.  It is a commonplace of many standard form contracts prepared by or on behalf of institutions that the ‘lesser’ parties have no real say in accepting the printed terms, they either accept them or they have no contract.  However, this is not the occasion to dilate on such issues generally.  The evidence addressing unconscionability in the terms of the Franchise Agreement itself was scanty.  I am not prepared to conclude that the Franchise Agreement itself, by reason of those terms, amounted to unconscionable conduct by any of the respondents.

217               The real thrust of the applicants’ case under s 51AC was that the termination of the Franchise Agreement, at the time and in the manner it was done, was unconscionable.  I do not think it was.  The Bakers had been struggling to meet their obligations to suppliers, to the bank, and under the Franchise Agreement, since at the latest, mid 1999.  They were behind in all those obligations.  They had put substantial capital into the Hilton shop, but it had been absorbed.  Although the last four weeks of their trading had generated successive turnover in excess of $8,000 per week, they have not sought to show that giving them further tolerance in their admitted defaults under the Franchise Agreement would have enabled them to convert the business of Silver Fox into a profitable one, or that the ultimate fate which Silver Fox would have suffered would have been any different.  The defaults under the Franchise Agreement had been ongoing for many months.

218               I also find that Poulet Frais did, following its takeover of the Hilton shop, try to refranchise it.  It paid the ongoing hire purchase commitments.  Ultimately, it paid out the hire purchase contract with CBFC.

219               Even though it is clear that the concept of unconscionability in s 51AC of the TP Act is wider than the concept of unconscionable conduct ‘within the meaning of the unwritten law …’ in s 51AA of the TP Act:  see e.g. Hurley v McDonalds Australia Ltd [1999] FCA 1728 at [22] and [31], in my judgment the respondents’ conduct has not been shown to fall within that wider concept.  I note that the search of s 51AA was determined by the High Court in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153; [2003] HCA 18.

220               It is not necessary to address the respondents’ contention that s 51AC does not apply to the present circumstances by reason of s 51AC(9) or (10).

the position of lenard’s and lenard’s leasing

221               The relationship between Lenard’s and Lenard’s Leasing on the one hand and Poulet Frais on the other is set out in the Master Franchise agreement.  It does not render Poulet Frais the agent of Lenard’s or Lenard’s Leasing in dealings with franchisees or potential franchisees, and indeed cl 4.32 prevents Poulet Frais from becoming so.

222               Nevertheless, both Lenard’s and Lenard’s Leasing had some involvement in the selection of the Bakers as franchisees of the Hilton shop – Lenard’s had the ultimate approval or veto – and in the selection of the Hilton shop – Lenard’s had the ultimate approval or veto and Lenard’s Leasing became the lessee of the Hilton shop.  Those were matters remote from the Bakers, and do not of themselves constitute Poulet Frais as agent of Lenard’s or Lenard’s Leasing in making the sales/profitability representation or the site location representation.

223               The Bakers had no direct personal dealings with Lenard’s, save for the initial telephone contact when they were referred to Poulet Frais.  Subsequently, all their relevant dealings were with Mr Hamood personally or by correspondence from Poulet Frais (using the Lenard’s letterhead and logo as authorised by the Master Franchise agreement).  The name Poulet Frais appears as the corporate entity sending the letters, at the bottom and at the signature space.

224               The significant enclosures with the correspondence (the Disclosure Documents and the Information Pack) were prepared by Lenard’s and bore its name on the header or front page.  I have found, however, that the financial information sheets enclosed with the Disclosure Documents had been vetted by Mr Hamood and adapted by him to reflect the South Australian Lenard’s shops.

225               The material referred to nevertheless conveyed to the Bakers that Poulet Frais was not the agent of Lenard’s in providing that material, even though the material was provided with its authority.  Clause 10.1 of the Franchise Agreement makes that clear.  A copy of the Franchise Agreement was provided to the Bakers at least during July 1998.  The Information Pack identified Lenard’s as the ‘head office’ but also identifies the master franchisees for each state, including Poulet Frais.  It was sent to the Bakers by Poulet Frais, describing itself as ‘master franchisee’.  The Disclosure Documents described Poulet Frais as the master franchisee responsible for seeking franchisees in South Australia in accordance with the Lenard’s system, and described Mr Hamood’s role as establishing and developing those franchises.  The letter of offer of the Hilton shop franchise dated 29 June 1998 was also sent by Poulet Frais.

226               In their submissions, senior counsel for the applicants contended that Poulet Frais was the agent of Lenard’s and Lenard’s Leasing in engaging in the conduct complained of.  It was put as a case of actual agency, rather than one of ostensible or apparent agency.  That reflects the approach pleaded in the amended statement of claim, where the making of the representations alleged is said to have been the conduct of each of the corporate respondents, and Mr Hamood is said to have been the agent of each of them.

227               In my judgment, upon the whole of the evidence, neither Poulet Frais nor Mr Hamood were authorised by Lenard’s or Lenard’s Leasing to create legal relations between potential franchisees of Lenard’s shops and Lenard’s or Lenard’s Leasing:  see e.g. Peterson v Moloney (1951) 84 CLR 91 at 93 – 95.  That is clear enough.  Lenard’s and Lenard’s Leasing retained to themselves such decisions and Mr Hamood understood that.  It is expressed in the Master Franchise Agreement.  It is less clear whether, in their dealings with potential franchisees by providing to them documents such as the Information Pack and the Disclosure Documents, Poulet Frais or Mr Hamood were acting as agent of Lenard’s.

228               The relationship between Poulet Frais and Lenard’s contemplated Poulet Frais would seek out potential new Lenard’s franchisees.  Both Poulet Frais and Lenard’s would benefit by the appointment of new franchisees.  Lenard’s provided to Poulet Frais documents which it was authorised to supply to potential new franchisees.  The reality, in my judgment, is that Poulet Frais was the agent of Lenard’s for the purpose of providing those materials to prospective franchisees.  The agency clearly did not extend to formally appointing franchisees, but that is a further step in the process.  It is the making of the representations, through the documents emanating from Lenard’s and provided to the Bakers by Poulet Frais as Lenard’s intended, which is the step which is said to have been done by Poulet Frais on its own behalf and as agent for Lenard’s.  In reaching that factual conclusion, I have of course given great weight to the terms of the documents to which I have referred:  Massey v Crown Life Insurance Co [1978] 2 All ER 576 at 580; Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385 at 389.  Ultimately, it is the substance of the relationship which I must address:  Jones v Bouffier (1911) 12 CLR 579 at 611.

229               Accordingly, I consider that Lenard’s too is liable for the misrepresentations contained in the sales/profitability representation and in the site location representation.

230               I see no basis for ascribing to Poulet Frais or Mr Hamood the status of agent of Lenard’s Leasing in the making of those representations to the Bakers.  Its role in the corporate structure of Lenard’s was a discrete one.  It was not the source of the documents distributed and it did not appear on the face of those documents to be their author.

CROSS-CLAIM

231               The Bakers did not dispute that they had failed to pay Lenard’s for goods supplied to them under the charge back facility, or for certain advertising fees payable under the Franchise Agreement.  There was no dispute as to quantum.

232               There will be judgment on the cross-claim of Lenard’s against Silver Fox and against the Bakers as guarantors of the liabilities of Silver Fox for $21,416.

orders

233               In the result, apart from judgment on the cross-claim, there will be judgment in favour of the Bakers in the sum of $182,800 and the further sum of $10,000 in favour of Mr Baker and the further sum of $6,000 in favour of Mrs Baker against Poulet Frais, Mr Hamood and Lenard’s.

234               On the cross-claim, there will be judgment in favour of Lenard’s against Silver Fox and the Bakers for $21,416.

235               Before making formal orders, I will hear the parties as to what orders should be made as to interest and as to costs.

I certify that the preceding two hundred and thirty-five (235) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

 

 

 

Associate:

 

Dated:              17 September 2004

 

 

 

Counsel for the Applicants:	P Heywood-Smith QC with T Birchall
Solicitor for the Applicants:	Lisacek & Co
Counsel for the First & Second Respondents:	A Lyons
Solicitor for the First & Second Respondents:	Phillips Fox
Counsel for the Third and Fourth Respondents:	S Milazzo
Solicitor for the Third and Fourth Respondents:	DMAW Lawyers
Dates of Hearing:	3, 15, 16, 17, 22, 23, 24 April 2003 5, 6, 7, 8, 21 May 2003 19 February 2004
Date of Judgment:	17 September 2004