FEDERAL COURT OF AUSTRALIA

 

Rafferty v Time 2000 West Pty Limited (No 4) [2010] FCA 725

Citation:		Rafferty v Time 2000 West Pty Limited (No 4) [2010] FCA 725
Parties:		PATRICK CAMPBELL RAFFERTY, SANTORA HOLDINGS PTY LIMITED ACN 128 467 550 and KARAVILLE HOLDINGS PTY LIMITED ACN 009 439 178 v TIME 2000 WEST PTY LIMITED ACN 127 893 270, TIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED ACN 127 853 614, TIME 2000 OPERATIONS (AUSTRALIA) PTY LIMITED ACN 128 700 541, EMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG), STEPHEN GERARD DONOVAN and MADGWICKS
File number:		SAD 122 of 2008
Judge:		BESANKO J
Date of judgment:		13 July 2010
Catchwords:		TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for misleading and deceptive conduct – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where fifth respondent was a natural person and second, third and fourth respondents were corporations associated with him – where fifth respondent made representations to first applicant that prototype portable accommodation unit was under construction in China Held: application allowed – representations as to prototype materially contributed to applicants entering into agreements – the applicants’ entry into the agreements was sufficient to establish that they suffered loss or damage – the fifth respondent was liable as being “knowingly concerned” in the contravention under s 75B(1) of the Trade Practices Act 1974 (Cth). TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for breach of s 51AD – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where no disclosure documents provided as required if the agreements were a franchise agreement under the Franchising Code of Conduct – whether the agreements or one or more of them was a franchise agreement or agreement to enter into franchise agreement under Franchising Code of Conduct – whether agreement granted the right to carry on the business of offering, supplying or distributing goods or services under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor within clause 4(1)(b) of the definition of franchise agreement Held: application allowed – agreements provided for matters such as a centralised bookkeeping and recordkeeping computer operation, the reservation to the franchisor of the right to screen and approve promotions, the prohibition of repackaging of products, suggested retail prices by the franchisor, a comprehensive advertising and promotional program by the franchisor, the division of a state into marketing areas, the establishment of sales quotas and the restriction on the sale of products without the franchisor’s consent – the fifth respondent was not liable as being “knowingly concerned” in the contravention under s 75B(1) of the Trade Practices Act 1974 (Cth). TRADE PRACTICES – application for relief under s 159 of the Fair Trading Act 1999 (Vic) for misleading and deceptive conduct – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where sixth respondent was a firm of solicitors and had prepared the relevant agreements – where the agreements or one or more of them had been held to be a franchise agreement and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the sixth respondent had engaged in misleading or deceptive conduct by failing to advise the applicants that the Franchising Code applied. Held: application dismissed – the applicants did not have a reasonable expectation that the sixth respondent would advise them on whether the Franchising Code applied – the sixth respondent owed a duty of confidence to the second to fifth respondents and the failure to disclose was not deliberate. TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for breach of s 51AD – where applicants entered into agreements with second to fifth respondents for the sale of portable accommodation units – where the agreements or one or more of them had been held to be a franchise agreement and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the sixth respondent was “knowingly concerned” in the contravention of s 51AD under s 75B(1) because they drafted the agreements. Held: application dismissed – the sixth respondent did not know all essential matters that made up the contravention because they did not know that the Franchising Code of Conduct applied to the agreements. CONTRACT – claim for breach of retainer – where the second to fifth respondents had retained the sixth respondent to draft agreements relating to the sale of portable accommodation units – where the agreements or one or more of them had been held to be franchise agreements and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the sixth respondent had adequately  advised the second to fifth respondents as to Franchising Code of Conduct Held: application dismissed – uncontradicted evidence that the sixth respondent had adequately advised the second to fifth respondents. TRADE PRACTICES – application for relief under s 87 of the Trade Practices Act 1974 (Cth) for breach of s 51AD – where the agreements or one or more of them had been held to be franchise agreements and the disclosure obligations under the Franchising Code of Conduct had not been complied with – whether the second to fifth respondents could claim a contribution or indemnity from the sixth respondent by reason of s 75B(1) of the Trade Practices Act 1974 (Cth) Held: application dismissed – s 75B(1) of the Trade Practices Act 1974 (Cth) does not enable the court to make orders for contribution or indemnity – the sixth respondent was not knowingly involved in the contravention of s 51AD for the purpose of s 75B(1) of the Trade Practices Act 1974 (Cth).
Legislation:		Corporations Act 2001 (Cth) s 131 Customs Act 1901 (Cth) s 233B Evidence Act 1995 (Cth) ss 97, 99, 100 Fair Trading Act 1999 (Vic) ss 9, 159 Federal Court Rules O 5 r 12(2), O 29 r 2, O 33 r 18 Trade Practices Act 1974 (Cth) ss 51AD, 52, 75B, 87 Trade Practices (Industry Codes  — Franchising) Regulations 1998 (Cth)
Cases cited:		ACCC v IMB Group Ltd [2003] FCAFC 17 cited ACCC v Kyloe Pty Ltd [2007] ATPR 42-194 discussed Adler v Australian Securities and Investments Commission (2003) 179 FLR 1 cited Ashbury v Reid [1961] WAR 49 referred to Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd [1985] ATPR 40-538 referred to Bowler v Hilda Pty Ltd [2000] FCA 899 cited Butt v Tingey (1993) ATPR (Digest) 46-110 discussed Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 referred to Capital Networks Pty Ltd v .au Domain Administration Limited [2004] FCA 808 discussed Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 referred to Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 cited Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1999) 155 ALR 714 referred to Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 discussed Fencott v Muller (1983) 152 CLR 570 referred to Gakora Pty Ltd v Montgomery Jordan & Stevensen Pty Ltd [1986] ATPR 40-722 referred to Giorgianni v R (1985) 156 CLR 473 cited Gould v Vaggelas (1985) 157 CLR 215 referred to Henville v Walker (2001) 206 CLR 459 discussed Heydon v NRMA Ltd (2000) 51 NSWLR 1 discussed I and L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 discussed John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1993] ATPR 41-249 discussed Jones v Dunkel (1959) 101 CLR 298 cited Kabwand Pty Ltd & Ors v National Australia Bank Ltd [1989] ATPR 40-950 discussed Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054 discussed Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 discussed Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1 discussed Nescor Industries Group Pty Ltd v Miba Pty Ltd (1997) 150 ALR 633 discussed Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd[1994] ATPR 41-135 cited Pico Holdings Inc v Voss [2004] VSC 263 discussed Quinlivan v ACCC (2004) 160 FCR 1 cited R v Kelly (1975) 12 SASR 389 discussed R v Lam (1990) 46 A Crim R 402 discussed Re La Rosa; Ex parte Norgard v Rodpat Nominees (1991) 31 FCR 83 discussed Rhone-Poulenc Agrochimie SA and Anor v UIM Chemical Services Pty Ltd and Anor (1986) 12 FCR 477 referred to Ridgway v Consolidated Energy Corporation Pty Ltd [1987] ATPR 40-754 referred to Rosenberg v Percival (2001) 205 CLR 434 cited Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 discussed Smith v Chadwick [1884] 9 App. Cas 187 discussed Smith v Maloney (2005) 92 SASR 498 cited Software Integrators Pty Ltd v RoadRunner Couriers Pty Ltd (1997) 69 SASR 288 discussed Sutton v A J Thompson Pty Ltd (in liquidation) (1987) 73 ALR 233 discussed Warner v Elders Rural Finance Ltd (1993) 41 FCR 399 cited Wheeler Grace & Pierucci Pty Ltd v Wright [1989] ATPR 40-940 cited Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 discussed With v O’Flanagan [1936] 1 Ch 575 referred to Yorke v Lucas (1985) 158 CLR 661 followed
Dates of hearing:	11, 12, 13, 14, 15, 18, 19 January 2010
Place:	Adelaide
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	358
Counsel for the Applicants:	Mr R J Whitington QC with Mr J M Cudmore
Solicitor for the Applicants:	Cosoff Cudmore Knox
Counsel for the First Respondent:	The First Respondent did not appear
Counsel for the Second to Fifth Respondents:	Mr M E Hoile
Solicitor for the Second to Fifth Respondents:	Cowell Clarke
Counsel for the Sixth Respondent:	Mr M Keith
Solicitors for the Sixth Respondent	Mouldens

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	SAD 122 of 2008

 

BETWEEN:

PATRICK CAMPBELL RAFFERTY First Applicant   SANTORA HOLDINGS PTY LIMITED ACN 128 467 550 Second Applicant   KARAVILLE HOLDINGS PTY LIMITED ACN 009 439 178 Third Applicant

AND:

TIME 2000 WEST PTY LIMITED ACN 127 893 270 First Respondent   TIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED ACN 127 853 614 Second Respondent/Second Cross-claimant   TIME 2000 OPERATIONS (AUSTRALIA) PTY LIMITED ACN 128 700 541 Third Respondent/Third Cross-claimant   EMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG) Fourth Respondent/Fourth Cross-claimant   STEPHEN GERARD DONOVAN Fifth Respondent/First Cross-claimant   MADGWICKS Sixth Respondent/Cross-respondent

 

JUDGE:	BESANKO J
DATE OF ORDER:	13 JULY 2010
WHERE MADE:	ADELAIDE

 

THE COURT ORDERS THAT:

1.                  Each party is at liberty to make submissions on the final orders to be made in light of these reasons.  

 

 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website. 

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION	SAD 122 of 2008

 

BETWEEN:

PATRICK CAMPBELL RAFFERTY First Applicant   SANTORA HOLDINGS PTY LIMITED ACN 128 467 550 Second Applicant   KARAVILLE HOLDINGS PTY LIMITED ACN 009 439 178 Third Applicant

AND:

TIME 2000 WEST PTY LIMITED ACN 127 893 270 First Respondent   TIME 2000 SYSTEMS (AUSTRALIA) PTY LIMITED ACN 127 853 614 Second Respondent/Second Cross-claimant   TIME 2000 OPERATIONS (AUSTRALIA) PTY LIMITED ACN 128 700 541 Third Respondent/Third Cross-claimant   EMBLETON LIMITED (A COMPANY INCORPORATED IN HONG KONG) Fourth Respondent/Fourth Cross-claimant   STEPHEN GERARD DONOVAN Fifth Respondent/First Cross-claimant   MADGWICKS Sixth Respondent/Cross-respondent

 

JUDGE:	BESANKO J
DATE:	13 JULY 2010
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

Introduction

The parties

1                     The applicants in this proceeding are Mr Patrick Rafferty, Santora Holdings Pty Limited (“Santora”) and Karaville Holdings Pty Limited (“Karaville”).

2                     Sometime before the events giving rise to this proceeding Mr Rafferty was a part owner and operator of a business that manufactured and supplied equipment for mineral sampling and testing. He established that business in 1983 and it was known as ESSA. The business expanded over the years and went through several name changes and a merger with another company. The business is now known as Essa Australia Limited. Mr Rafferty is no longer involved with Essa Australia Limited.

3                     Santora was incorporated in the State of Western Australia on 14 November 2007. The directors of the company are Mr Rafferty and persons and entities associated with him. The shares in Santora are held by Karaville.

4                     Karaville was incorporated in the State of Western Australia on 13 February 1990. The directors of the company are Mr Rafferty and his wife. They also hold the shares in the company.

5                     Except where it is necessary to identify a particular person or entity, I will refer to Mr Rafferty, Santora and Karaville as the applicants.

6                     The respondents in the proceeding are Time 2000 West Pty Limited (“T2W”), Time 2000 Systems (Australia) Pty Limited (“T2SA”), Time Operations (Australia) Pty Limited (“T2OA”), Embleton Limited (“Embleton”), Mr Stephen Donovan and Madgwicks.

7                     T2W was incorporated in the State of Victoria on 8 October 2007. The directors of T2W are Mr Rafferty and Mr Donovan. The shareholders of T2W are Santora (1,700,000 shares) and T2OA (1,769,487 shares).

8                     T2SA was incorporated in the State of Victoria on 4 October 2007. The director and secretary of the company is Mr Donovan. The shares in T2SA are held by Almere Pty Ltd, which is a company based in Hong Kong.

9                     T2OA was incorporated in the State of Victoria on 29 November 2007. The director and secretary of the company is Mr Donovan. The shares in T2OA are held by Welltron Limited, which is a company based in Hong Kong.

10                  Embleton was incorporated in Hong Kong on 1 June 2007. The corporate director of the company is Almere Limited.

11                  Mr Donovan has experience in real estate and property development. He owned and controlled a group of companies which I will refer to as the Time 2000 group.

12                  Madgwicks is a firm of solicitors which carries on practice in Australia including in the State of Victoria.

13                  Almere Limited was incorporated in Hong Kong on 14 March 2007 and Mr Donovan is the director of the company.

14                  It is alleged by the applicants that Time 2000 Services Limited (formerly Welltron Limited) is a company incorporated in Hong Kong and which has Almere Limited as its sole corporate director. Time 2000 Pty Ltd was incorporated in the State of Victoria on 11 July 1997. The directors of Time 2000 Pty Ltd are Mr Donovan and Ms Kamila Runkowska. Ms Runkowska married Mr Donovan and is now Ms Kamilla Donovan. Gemhall Holdings Pty Ltd is the sole shareholder of the company.

15                  Time Developments Pty Ltd was incorporated in the State of Victoria on 22 May 1987. The director of the company is Mr Donovan and he holds the shares in the company.

16                  Gemhall Holdings Pty Ltd was incorporated in the State of Victoria on 10 June 1994. The director of the company is Mr Donovan and he holds the shares in the company.

17                  The events which give rise to the applicants’ claims and to the cross-claims took place between May 2007 and May 2008. They involved a business venture between Mr Rafferty, Santora and Karaville on the one hand, and T2SA, T2OA, Embleton and Mr Donovan on the other. It was agreed between the parties that the business venture would be carried out by a company which would be incorporated for that purpose. T2W was incorporated for the purpose of carrying out the business venture. It is the first respondent, but it took no active part in the proceeding.

18                  I will refer to T2SA, T2OA, Embleton and Mr Donovan as the Donovan respondents except where it is necessary to distinguish between them.

19                  The business venture involved the sale of Modular Accommodation Units, or MAUs as they were referred to in the evidence. MAUs are buildings, and the proposal was that the business would arrange for them to be manufactured in China and then sold in Australia. Embleton allegedly held a number of patent applications, innovation patents and provisional patent applications in Australia and elsewhere in relation to MAUs.

20                  Mr Rafferty described the advantages associated with MAUs in his evidence. He said that they were affordable, easy to install and did not require extensive on-site labour to make them operational. The latter matter was a distinct advantage where accommodation was required in remote areas. Although Mr Donovan did not give evidence in the trial, an email from him was tendered in evidence and in the email he describes the advantages of the MAUs as follows:

“The unique patented intellectual property enables the cost effective manufacture of sophisticated building units in China. We attach two of our presentations for your information and hope they are of interest.

Our patent allows us to exclusively utilise container shipping and distribution infrastructure to deliver high performance buildings which fold open on-site thereby minimising the inefficient and expensive Australian labour component. The buildings have all plumbing, electrical and mechanical systems including kitchens, Bathrooms and other joinery (housed within the container dimensions and) factory finished and tested in China. The buildings will be delivered with a national accreditation by the BCA, as such the buildings will be considered as an appliance with national certification.

Our Patents are unique in enabling the assembly of buildings from China which provide habital [sic] internal volumes with the width ranging from 6m up to 8.4m. This ability to deliver luxury factory finished products via existing Containerised Shipping and Trucking networks will ensure that we enjoy competitive advantage.”

21                   The evidence before me was to the effect that the parties envisaged that MAUs would be constructed in different sizes and with different finishes and would be sold into different markets. Two markets in particular were the subject of evidence in this case, namely, the market for mining accommodation and the market for tourist or rural accommodation. In the typical case, an MAU for mining accommodation would consist of three bedrooms within a 40-foot module, while an MAU for tourist accommodation would consist of one bedroom within a 20-foot module. The MAU for tourist accommodation would have a better finish than the MAU for mining accommodation and may include features such as a verandah. As I understand it, this is what the parties expected in the typical case, but there was nothing to prevent an MAU for mining accommodation being a different size and having as good as, or better, finish than an MAU for tourist accommodation. It seems that it would depend on what the customer wanted. What is important, however, for the purposes of the applicants’ claim against the Donovan respondents for contraventions of s 52 of the Trade Practices Act 1974 (Cth) (“TPA”) is that the basic features, and therefore perceived advantages, of an MAU were the same whatever use they were to be put to.

22                  The business venture between the applicants and the Donovan respondents was established by three agreements. First, there was a Heads of Agreement which was executed on or about 5 October 2007 (“HOA”). The parties to this agreement were T2SA, Embleton, Mr Donovan and Mr Rafferty. Secondly, there was a Joint Venture and Shareholders’ Agreement which was executed on or about 23 November 2007 (“JVSA”). The parties to this agreement were T2OA, Santora, Mr Rafferty and T2W. Thirdly, there was a Rights Agreement executed on or about 19 December 2007 (“RA”). The parties to this agreement were T2SA, T2W, Embleton, Mr Rafferty, Santora and Karaville. All three agreements were prepared by the firm Madgwicks which was acting as the solicitors for the Donovan respondents.

23                  The business venture was not a success. It had come to an end by as early as May 2008. T2W never arranged for the manufacture of an MAU and never sold an MAU.

A summary of the claims made by the parties

24                  The applicants’ claims are set out in a Further Amended Application (“Application”) and a Further Amended Statement of Claim (“Statement of Claim”). During the course of the trial I allowed some relatively minor amendments to the Statement of Claim. I refused an application which was made at the conclusion of the applicants’ opening, to amend the Statement of Claim in a more substantial way. I delivered reasons for that ruling during the course of the trial.

25                  The relief sought in the Application is as follows:

“On the grounds stated in the accompanying Statement of Claim, the applicant claims:

As against the first to fifth respondents, relief pursuant to sections 82 and/or 87(1) and 87(2) of the Trade Practices Act 1974 (Cth) as follows:

1.         That the Heads of Agreement, the Joint Venture and Shareholders’ Agreement and the Rights Agreement be set aside.

2.         The applicants be repaid the following sums subject to and upon the terms of the orders set out hereinafter:

2.1       as to $200,000 to the first applicant (‘Rafferty’);

2.2       as to $500,000 to Karaville Holdings Pty Limited (‘Karaville’); and

2.3       as to $1,000,000 to Santora Holdings Pty Limited (‘Santora’) and/or Karaville.

3.         The second to fifth respondents shall do all things reasonably necessary to ensure payment out to the applicants or their nominees of the moneys held to the credit of first respondent (‘T2 West’) in the following bank accounts:

3.1       in the name of T2 West with Commonwealth Bank of Australia Account No 066107-104054419;

3.2       in the name of Time 2000 Tourism (North West) Pty Ltd with National Australia Bank Limited Account No. 853427-858528252.

4.         Upon payment of such moneys the applicants shall forthwith pay and discharge all bona fide creditors of the T2 West from the proceeds of the bank accounts referred to in paragraph 3 (‘the Proceeds’) and in the event of doubt or dispute between the applicants and the second to fifth respondents as to the amount of the debt of any such creditor there shall be liberty to apply to the Court for further orders and directions, including an order for an inquiry.

5.         Upon payment of such creditors the applicants shall forthwith notify the second to sixth respondents of the balance remaining from the Proceeds of the said bank accounts.

6.         The second, fourth and fifth respondents shall jointly and/or severally pay to the applicants the following monies:

6.1       as to Rafferty, the difference between $200,000 and Rafferty’s proportionate share of the Proceeds after payment out as provided for in paragraph 3.1 above and payment of creditors as provided in paragraph 4 above;

6.2       as to Karaville, the difference between $500,000 and Karaville’s proportionate share of the Proceeds after payment out as provided in paragraph 3.2 above; and

6.3       as to Santora and/or Karaville the sum of $1,000,000.

7.         Upon payment by the first, second, fourth and fifth respondents as provided in paragraph 2 above:

7.1       the shares of Santora in T2 West be cancelled; and

7.2       Rafferty provide to T2 West by its director the fifth respondent (‘Donovan’) a notice of resignation as a director of T2 West.

As against the sixth respondents, relief as follows:

8.         That the sixth respondents (‘Madgwicks’) do pay pursuant to section 82 and/or 87 of the Trade Practices Act 1974 (Cth) the respective sums specified in paragraph 6 hereof to the applicants stipulated in paragraph 6.

9.         In the alternative to paragraph 8, that Madgwicks pay by way of damages pursuant to section 159 of the Fair Trading Act (Victoria) the respective sums specified in paragraph 6 hereof to the applicants stipulated in paragraph 6.

10.       Such other or further relief as the Court deems fit.

11.       Interest.

12.       Costs.

13.       That the parties have liberty to apply generally.”

26                  The applicants plead two causes of action against the Donovan respondents.

27                  First, they allege that the Donovan respondents contravened an applicable industry code within s 51AD of the TPA. The applicable industry code was the Franchising Code of Conduct (“Franchising Code”) which is the Schedule to the Trade Practices (Industry Codes  — Franchising) Regulations 1998 (Cth). The applicants’ case is that the contravention arose because the agreements (either taken separately or any one of them in conjunction with other or others of them) constituted a “franchise agreement” and a “franchise system” within the TPA and the Franchising Code, and the Donovan respondents did not comply with the Franchising Code.

28                  Secondly, they allege that the Donovan respondents made a number of false representations to them which induced them to enter into the agreements and that the Donovan respondents thereby engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive, within s 52 of the TPA. The pleaded representations were as follows: 

(1)        that the Donovan respondents, or one or more of them, had entered into a contract with an entity known as “BMA” said to be associated with BHP Billiton Limited, for the purchase by that entity of approximately 100 modular building units;

(2)        that the Donovan respondents, or one or more of them, had entered into a contract with a company in China known possibly as Duowie or CIMC for it to manufacture modular building units in China;

(3)        that a prototype modular building unit was being manufactured in China and would be available to T2W in China before Christmas 2007;

(4)        that a prototype modular building unit was being manufactured in China and would be available to T2W in China by the end of January 2008.

29                  The fourth representation was allegedly made some time after the third representation.

30                  The applicants also plead two causes of action against Madgwicks. Both relate to the alleged contravention of s 51AD of the TPA by the Donovan respondents. First, they allege that by failing to advise them that the agreements would, if executed, constitute a “franchise agreement” and a “franchise system”, Madgwicks engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive, within s 9 of the Fair Trading Act 1999 (Vic) (“FTA”). They claim relief against Madgwicks under s 159 of the FTA. Secondly, the applicants allege that Madgwicks was involved in the contravention of s 51AD of the TPA by the Donovan respondents within s 75B(1) of the TPA.

31                  T2OA has brought a cross-claim against Mr Rafferty. The company pleads one cause of action against Mr Rafferty, namely, that he breached and repudiated the JVSA.

32                  The Donovan respondents have brought a cross-claim against Madgwicks. They plead two causes of action against Madgwicks. First, they allege that Madgwicks acted in breach of their contract of retainer in that the firm failed to provide proper and complete advice with respect to the Franchising Code. Secondly, they allege that if they contravened s 51AD of the TPA, Madgwicks was knowingly concerned in the contravention under s 75B(1) of the TPA and that they are entitled to relief against Madgwicks.

33                  Madgwicks have brought a cross-claim and raised a setoff against the Donovan respondents. That cross-claim or setoff relates to legal fees of $315,369.05 allegedly owed by the Donovan respondents to Madgwicks. On 30 November 2009, I ordered that, pursuant to O 5 r 12(2) and O 29 r 2 of the Federal Court Rules, there be a separate hearing and determination of that issue and that it be subsequent to the hearing and determination of the remaining issues.

The facts

34                  A convenient starting point is a summary of the three agreements.

35                  Under the HOA, the parties agreed that a new company would be incorporated to market, sell and install MAUs in the State of Western Australia and in the Northern Territory for short term accommodation in the tourism and rural accommodation sectors and for remote area laboratories for use on mining sites (recitals C and D, clauses 4 and 7). The “Territory” is defined as:

 “the state of Western Australia and the Northern Territory, Australia but excluding an area comprising a radius of 15 kilometres from the central business district of Perth”.

In the HOA the proposed company is referred to as “Time 2000 (WA/NT) Pty Ltd or similar”. The company which was in fact incorporated was T2W. It is convenient to summarise the HOA as if it referred to T2W.

36                  Under the HOA, Mr Rafferty agreed to pay into the trust account of Madgwicks, who were the lawyers for T2SA, what was called a seed fee of $200,000 immediately, and that seed fee would be paid to T2W on its incorporation (clause 2). T2W was to use that money to defray the costs and expenses of forming the company, the costs and expenses of engaging consultants to prepare documentation and commence working drawings for the prototype (as defined) and the costs and expenses of preparing the HOA and initial drafts of other agreements contemplated by the HOA. If the HOA was terminated the seed fee was to be paid to T2SA; it was not repaid to Mr Rafferty.

37                  The HOA provided that T2SA was to hold 51 per cent of the shares in T2W and a company to be incorporated by Mr Rafferty was to hold the other 49 per cent. The decisions of shareholders were to be made by simple majority (clause 4). The board of directors of T2W was to comprise one director appointed by T2SA and one director appointed by the company to be incorporated by Mr Rafferty. The first directors were to be Mr Donovan and Mr Rafferty.

38                  The parties agreed that the company to be incorporated by Mr Rafferty would pay $1,000,000 to the trust account of Madgwicks as a licence fee pending execution of a Rights Agreement and upon execution of the Rights Agreement the money would be paid to Embleton (clause 6.1). The company which was in fact incorporated by Rafferty was Santora and again it is convenient to summarise the HOA as if it referred to Santora. Under the HOA, the parties agreed that Santora would also pay $500,000 as working capital into an account to be established by T2W (clause 6.1). The parties agreed that Santora could be required to pay up to a further $3.3 million on the occurrence of certain events specified in the HOA and according to the times prescribed by the HOA for the production of modular building units (clause 6.3).

39                  The HOA contemplated the execution of a Shareholders and Venture Agreement (clause 5.1) (in fact, as I have said, a Joint Venture and Shareholders Agreement was executed) and a Rights Agreement (clause 5.2). On the face of it, T2W was not bound to enter into a Rights Agreement with Embleton; it could request Embleton to do so (clauses 5.2 and 8.1). By contrast, Embleton undertook to enter into a Rights Agreement if requested by T2W (clause 8.1). It also undertook that, if requested by T2W to enter into a rights agreement, it would “comply with any applicable pre-contract requirements of the Franchising Code of Conduct”. Clauses 5.2 and 8.1 are in the following terms:

 “5.2     If T2WANT requests Embleton to enter into a Rights Agreement as contemplated by clause 8, the parties shall use reasonable endeavours to ensure that the Rights Agreement is concluded on or before 1 December 2007.”

 “8.1     Undertaking by Embleton

(a)        Embleton is a party to this agreement solely for the purpose of giving this undertaking and having the right to enforce any rights or claim in relation to the Time 2000 IP.

(b)        Upon request by T2WANT, Embleton undertakes that it will:

(i)         comply with any applicable pre-contract requirements of the Franchising Code of Conduct; and

(ii)        subject to having complied with such requirements, offer to enter into a Rights Agreement with T2WANT on the terms set out in clause 8.2.”

The “Rights” which were to be the subject of the Rights Agreement were defined as:

“… the rights that Embleton undertakes to grant to T2WANT (pursuant to a Rights Agreement if T2WANT requests Embleton to enter into the Rights Agreement) for exclusive use of the Time 2000 IP in the industry markets within the territory.”

40                  The HOA contained detailed provisions specifying the terms and conditions which were to be included in the Rights Agreement. The Rights Agreement was to include a provision that Embleton grant T2W limited rights to use its intellectual property (clause 8.2(a)) and a provision that T2W use reasonable endeavours to design and build the prototype in China within three months of the date of the HOA (clause 8.2(b)). The prototype was defined in the HOA as a prototype of, or similar to, the Modular Accommodation Unit shown in the plan which was a schedule to the HOA (clause 1.1). The plan showed an MAU which, in the typical case, would be suitable for tourist or rural accommodation and not one which, in the typical case, would be suitable for mining accommodation. The Rights Agreement was to include a provision that Mr Donovan have an absolute discretion to scrutinise proposed sales by T2W at his option on a project by project basis and to approve or deny any product (clause 8.2(c)).

41                  Clause 8.2(d) of the HOA provided that the Rights Agreement must include provisions that T2W shall (among other things):

“(ii)           use and promote the trademark and the design concepts contained in the Time 2000 IP;

(iii)           promote and protect the Time 2000 brand;

(iv)           establish a business development capacity to identify and solicit customers for the purchase of modular accommodation units; and

(v)            develop and design suitable products for the Industry Markets within the Territory.

…

(vii)          seek design compliance approval from Embleton;

(viii)          seek quotations from and contract with Embleton approved panel of manufacturers that are satisfactory to T2 WA/NT;

…

(x)            coordinate a project specific production licence from Embleton in respect of each project order placed with a manufacturer;

…

(xiii)          establish display unit(s) and employ required sales persons;

…

(xv)          comply with the policies and procedures as defined by Embleton;

…

(xix)         [achieve agreed sales targets specified in the agreement]

(xx)          prepare and maintain proper financial records with assistance from Deloitte in an Embleton approved format and hold these available to Embleton at all times.”

Clause 8.2(f) also provided that:

                    “T2 WANT acknowledges that a fee equal to 10% of the price charged to T2 WANT by the manufacturer will be payable by the manufacturer to Embleton.”

The HOA indicated that the Rights Agreement:

                    “shall otherwise be on the terms on which Embleton enters or intends to enter into other Rights and/or Franchise Agreements in relation to the Time 2000 IP.”

42                  Mr Rafferty paid a sum of $200,000 into Madgwicks’ trust account on 8 October 2007. Even though the RA was not executed until 19 December 2007, Karaville, at Mr Donovan’s request, paid the sum of $1,000,000 into Madgwicks’ trust account on 14 November 2007.

43                  I turn now to the JVSA.

44                  Recital E in the JVSA records that Mr Rafferty, on behalf of Santora, paid the sum of $200,000 in accordance with the HOA. Clause 5.2 placed an obligation on Santora to pay the sum of $1.5 million to T2W, being $1 million for the rights under the Rights Agreement (in fact that sum had already been paid before the JVSA was executed) and $500,000 to be used by T2W as working capital. There was also provision for further payments of up to $3.3 million by Santora to T2W (clause 5.3). The JVSA provided that T2OA was to hold 51 per cent of the shares in T2W and Santora was to hold 49 per cent of the shares (clauses 4.1 and 5.6). The directors of T2W were to be Mr Donovan as chairman and Mr Rafferty as managing director and chief executive officer. The JVSA provided that Mr Rafferty was to continue as the managing director for three years (clause 8.1). In the event of the board of directors being deadlocked, the chairman (Mr Donovan) had a second or casting vote (clause 8.8). The JVSA provided that Mr Rafferty, as managing director, would be personally liable for the obligations of T2W. As far as I can see, the JVSA contains provisions with respect to a prototype which are similar to those contained in the HOA. In clause 37 of the JVSA each party acknowledged that he or it had had the opportunity to seek legal advice in respect of the terms and conditions of the agreement. One effect of the HOA and the JVSA was that the Donovan respondents controlled T2W both at board and shareholder meetings.

45                  I turn now to the RA.

46                  Under the RA, T2W was to pay what is called a “once-off” licence fee of $1,000,000 to T2SA in consideration of the Licence granted to it by T2SA. It appears that what had happened prior to the execution of the RA is that Embleton agreed to grant to T2SA an exclusive licence to use and exploit its intellectual property in Australia. The sum of $1 million paid by Santora into Madgwicks’ trust account was to be paid to T2SA on behalf of T2W (clause 4). T2SA granted the Licence to T2W and, for the purpose of giving effect to the Licence, T2W was entitled to use the Core IP and any relevant Developed IP (clause 2(a)). T2W agreed that T2SA “may at any time grant other licences provided that such licences do not apply to the Industry Markets within the Territory” (clause 2(b)).

47                  The Licence was defined in the RA as the exclusive right granted to T2W by T2SA to:

“(a)      design MAUs (for the purpose given in (c));

(b)     arrange manufacture and importation of MAUs (for the purpose given in (c)); and

(c)     promote, market, sell and install MAUs within the Industry Markets in the Territory during the Term”

(Clause 1.1)

48                  The “Core IP” and the “Developed IP” were defined in the RA as follows:

“Core IP means the following intellectual property:

(a)        Embleton Limited Patents and/or Patent Applications:

(b)        Embleton Limited Trademarks:

            Time2000

            T2

            Australia Trade Mark 1173883 (T2 Logo)”

“Developed IP means all Intellectual Property which constitutes a modification, enhancement, improvement, alteration, amendment, development, extension or supplement to, or is otherwise ancillary or relates directly or indirectly to, the Core IP;”

49                  Clause 3 dealt with the permitted use of the Core IP. It was in the following terms:

“3          (a)      T2W is only permitted to use the Core IP for the purpose of the licence. T2W must not without the prior written consent of T2SA use the Core IP for any other purpose, or within any other market outside the Industry market or within any area outside the Territory.”

50                  The term, “Industry Markets” was defined in the RA as the markets for the supply of modular accommodation units for short term stay accommodation for the purposes of national park accommodation, caravan parks and rural accommodation (excluding the supply of such units for use as motels, hotels, truck stop accommodation, aged care and/or retirement village accommodation except where agreed by T2SA) and remote-area laboratories for use on mining sites.

51                  “Term” was defined to mean the life of the Patents, and “Territory” was defined to mean the Northern Territory and the State of Western Australia excluding an area comprising a radius of 15 kilometres from the central business district of Perth.

52                  In view of the issues in this case, the provisions in the RA which deal with the control T2SA may exercise over T2W and which deal with the prototype are important.

53                  As to the issue of control or potential control, the RA placed certain obligations on T2W in connection with its proposed business of promoting, marketing, selling and installing units within the Industry Markets in the Territory during the Term. Those obligations related to the design and manufacture of the MAUs (clause 8), the marketing and sales of the MAUs by T2W (clause 9), the achievement of specified sales targets (clause 10) and the conduct by T2W of its business operations (clause 13.1).

54                  The effect of clause 8 of the RA was that T2W was to design the units and they were to be manufactured in China. T2W was required to comply with reasonable design requirements of T2SA and with all reasonable directions of T2SA as to quality control in the design and manufacture of MAUs (clause 8(b)(i) and (g)). The manufacturers of units were to be approved and licensed by T2SA (clauses 8(b)(ii) and (iii)). T2W acknowledged and agreed that a manufacturer would pay a fee to T2SA, or a related party, equal to 10 per cent of the price charged by the manufacturer to T2W (clause 8(h)).

55                  Clause 9 of the RA provided that T2W must, if and when required by T2SA, give prominence to the trade marks and trade and brand names associated with the Core IP and the Time 2000 Image in all promotional material referring to the MAUs (clause 9.1(a)). The Time 2000 Image was defined in clause 1.1 of the RA as follows:

“Time 2000 Image means the distinctive image, reputation and presentation of the Core IP, T2SA and any Related Party of T2SA and/or Licensee from T2SA. The words ‘Time 2000’ and any related images and trade marks, brand names incorporating ‘Time 2000’ and ‘T2’, logs, slogans and colours associated with the Core IP are features of the Time 2000 Image.”

56                  The RA provided that T2W must at all times use its best endeavours to promote, sell and protect the MAUs and that it must establish display unit(s) and employ sales persons as reasonably required by T2SA from time to time for T2W to fulfil its obligations under the RA (clause 9.1(b) and (c)). The MAUs developed and designed by T2W must be acceptable to T2SA (clause 9.2(a)). T2SA was given a discretion to scrutinise proposed sales by T2W to customers on a project by project basis and to approve or refuse any project (clause 9.3(b)). Clause 9.3 was in the following terms:

 “9.3     Sales orders

(a)        notwithstanding anything in this agreement, T2W must notify T2SA at least fourteen (14) days before entering into any agreement or accepting any order to sell MAUs in respect of a Project;

(b)        T2SA or its nominee, shall have an absolute discretion to scrutinise proposed sales by T2W to customers on a Project by Project basis and to approve or refuse any Project.”

57                  Clause 10 dealt with sales targets. The target for gross sales revenue for year one was $15,000,000 and for year two was $18,000,000. A failure by T2W to achieve sales targets could lead to termination of the RA by T2SA.

58                  Clause 13 dealt with the conduct of T2W’s business operations and provided, among other things, that T2W was required to comply with the policies and procedures as required by T2SA from time to time, was to prepare and maintain proper financial records with assistance from Deloitte in a format and on a financial management system approved by T2SA and hold those available to T2SA at all times and was to comply with all reasonable directions of T2SA as to quality control in the manufacture and marketing of the units (clause 13.1(a), (e) and (f)).

59                  As to the prototype, it was defined in the RA in a similar way to how it had been defined in the HOA and JVSA. T2W was under an obligation to use reasonable endeavours to build the prototype in China within three months of the date of the RA (clause 7(a)). T2W was obliged to meet the costs of manufacture and of complying with other obligations under clause 7 (clause 7(i)) and T2W was required to comply with all reasonable directions of T2SA as to quality control in the design and manufacture of the prototype (clause 7(g)).

60                  Finally, the provisions of clause 12 of the RA should be noted. It is in the following terms:

“12.     Parties will enter into Franchise Agreement if required by T2SA

The parties agree and acknowledge that, if at any time T2SA forms the view that the Franchising Code of Conduct applies or might apply to the arrangement between the parties, the parties will sign such documents and do such acts as may be necessary to enter into a Franchise Agreement under which T2SA or its nominee is the Franchisor and T2W is the Franchisee and, save as may be necessary to comply with the provisions of the Franchising Code of Conduct, the terms and conditions of the Franchise Agreement will otherwise be similar to the terms and conditions of this Agreement.”

61                  On or about 19 January 2008, Santora, having received the moneys from Karaville, paid $500,000 to T2W.

62                  The principal witness called by the applicants was Mr Rafferty. He appeared to me to be an honest witness with a fairly good recollection of events, although his recollection was not perfect. I have considered his evidence in light of all the evidence in the case. I have concluded that for the most part I should accept his evidence. I have carefully considered his evidence in light of the evidence of Ms Donovan (Mr Donovan, although available, did not give evidence) and his evidence of regliance and those two particular topics are dealt with below (at [119]-[125] and [129]-[133]). There were some relatively minor inconsistencies between Mr Rafferty’s evidence and Mr Levy’s evidence. They are also addressed below (at [193]). Although I have made findings on those matters in accordance with Mr Levy’s evidence, that fact does not cause me to doubt that, generally speaking, Mr Rafferty was an honest and reliable witness. In those circumstances, unless otherwise qualified, I make findings in accordance with his evidence.

63                  Mr Patrick Rafferty acted on his own behalf and on behalf of Santora and Karaville. His evidence deals with the events leading up to the execution of the agreements and of his attendance at various meetings during which he alleges Mr Donovan made the representations set out above (at [28]). Mr Rafferty also gave evidence of the actions he and others took under the agreements.

64                  Prior to May 2007, Mr Rafferty was not aware of the Franchising Code and he knew nothing of its requirements.

65                  In May 2007, Mr Rafferty and Mr Geoff Luff were friends and business partners. It was through Mr Luff that Mr Rafferty first heard of Time 2000 and Mr Donovan. In May 2007, Mr Luff invited Mr Rafferty to a lunch where he said an “exciting business opportunity” would be discussed. Mr Rafferty did not attend lunch at Maurizio’s Restaurant in Northbridge, Perth, but he did go there in the middle of the afternoon. There were two stages to the discussions which took place. On that afternoon, at the first stage, Mr Rafferty met with Mr Luff and Mr Jon Brunner and he was introduced to the concept of MAUs. He was given or shown some drawings, floor plans, elevations and photographs of the units, and, either at that point, or at the second stage of the meeting, he was shown a video demonstrating the assembly arrangement of the units and how it was proposed they would be delivered and assembled on site. Mr Rafferty was told by Mr Luff in the presence of Mr Brunner that the cost to build the units in China and to ship them to Australia was less than $20,000 per room and that the expected sale prices of the units varied from between $70,000 and $90,000 per unit depending upon size and configuration.

66                  The second stage of the meeting commenced with the arrival of Mr Donovan and Mr Detsis. Mr Rafferty was told that Mr Donovan was the principal of Time 2000 Developments (“T2D”), Mr Detsis was the marketing manager and Mr Brunner was the chief executive officer. The parties discussed MAUs and, in particular, cost per square metre, selling prices and market opportunities. At some stage during the meeting, Mr Donovan told Mr Rafferty that a prototype three room accommodation unit was being manufactured in China at that time as a prototype for BMA for use in their Dysart Project in Queensland. From the discussions, Mr Rafferty understood “BMA” to be a reference to an alliance between BHP and Mitsubishi. (Other evidence in the case establishes that BMA operated or was proposing to operate a coalmine in Dysart in Queensland.) A little later, Mr Donovan told Mr Rafferty the name of the Chinese manufacturer of the prototype (he cannot now recall the name which was mentioned) and that it was a business based near Beijing in China. Mr Donovan also told Mr Rafferty that he had met with BHP, Rio Tinto and FMG and that his negotiations with each of them were at an advanced stage.

67                  A second meeting involving, among others, Mr Rafferty and Mr Donovan, was held in Melbourne in June 2007. Mr Brunner and another employee of Mr Donovan or one of his companies, Mr Angus Koch, collected Mr Rafferty and Mr Luff from the airport and drove them to a hotel in Chapel Street where they were staying. Some time after they had arrived at their hotel they went to a restaurant in Chapel Street where they met Messrs Donovan, Detsis, Koch, Brunner and a Mr John Beyer. Mr Rafferty was told that Mr Koch was the operations manager of Time 2000. At this dinner, Mr Donovan said to Mr Rafferty that the MAUs were “being made in China”. Mr Donovan said that he was getting a prototype made that they would be able to show to prospective buyers. Mr Donovan said to Mr Rafferty that BMA wanted a number of units and Mr Rafferty’s best recollection is that he said 96 units. Mr Donovan also said words to the following effect:

“The mining module prototype is now being manufactured in China for BMA. We will be able to show prospective buyers this unit while we are progressing other designs, but at least they will be able to see the quality we will be offering. Once they see this we will be flooded with orders.”

68                  On the next day, there were further discussions between Mr Donovan and Mr Rafferty and during those discussions Mr Donovan told Mr Rafferty (probably at a lunch at a restaurant in the Docklands) the following:

1.                  Prototypes of the MAUs would be ready to view by Christmas 2007.

2.                  He expected construction of the MAUs in China to be completed within six weeks of final selection of fittings by an individual client.

3.                  Two prototypes would be built; one would be delivered to Perth and the other to Melbourne.

4.                  A company, Mr Rafferty thinks it might have been “CIMC”, had been engaged to manufacture the prototypes. I think it is fair to say, having regard to all the evidence, that Mr Rafferty has no clear recollection of the name of the manufacturer mentioned at various times; it could have been Duowie or it could have been CIMC. On this occasion, Mr Donovan used words to the effect that he had engaged a company called CIMC or Duowie (and in Mr Rafferty’s oral evidence he was reasonably sure it was not Duowie) to manufacture the prototypes.

5.                  On several occasions, Mr Donovan spoke about an order for 96 units for BMA. He said words to the effect that they had a trial order for MAUs to be delivered to BMA’s Dysart operations in Queensland.

69                  On the following day, Mr Rafferty, Mr Luff, Mr Donovan and others went to lunch at a winery on the Mornington Peninsula. The lunch was a social occasion but during the lunch a number of business matters were discussed by Mr Rafferty, Mr Donovan, Mr Luff and Mr Brunner. The first matter discussed was the territory or area which would be the subject of the proposed venture. The second matter discussed was the market which would be the subject of the proposed venture and, in particular, whether it would include the mining sector. Eventually, it was agreed the proposed venture would include the caravan, tourism and rural sectors, but that it would not include the mining sector. In the course of the discussions on that matter, Mr Donovan said that he was in the advanced stages of negotiations with other parties and he named BMA in particular. Mr Donovan told Mr Rafferty that although BMA was based in Queensland and therefore outside the territory which had been agreed, BHP was particularly interested in a global approach to a contract with T2D. He told Mr Rafferty that BHP was interested in obtaining 5,000 three-bedroom workers’ units per annum. He told Mr Rafferty that a contract had been entered into with BMA for approximately 96 three-bedroom units at $180,000 each.

70                  At this point Mr Luff and Mr Brunner left the discussion group and Mr Rafferty and Mr Donovan were left, as Mr Rafferty put it, “to iron out the details”. They discussed the income to be paid to Mr Rafferty to conduct the business and the amount to be invested by Mr Rafferty. Mr Donovan told Mr Rafferty that he would have to prepare a “marketing strategy” and that every sale, marketing concept and price had to be consistent with Time 2000’s plans, approved by him and be based on the licensed intellectual property. Mr Donovan told Mr Rafferty that they would have to act quickly “as he was very close to production”. The parties discussed the payment of profits and the formation of a company and the payment of profits through the payment of dividends.

71                  At this time, Mr Rafferty noted that the only contribution Mr Donovan appeared to be making was to pay for the cost of the prototype and that appeared to him to be odd. However, Mr Rafferty could see the prospect of a quick and good return on his investment.

72                  Mr Rafferty did not know of the structure of Mr Donovan’s companies. As far as the intellectual property rights were concerned, Mr Rafferty was given a list of the patents and patent applications. He asked for the patents and patent applications themselves, but those documents were never given to him.

73                  The next day, Mr Rafferty and Mr Luff left Melbourne.

74                  Mr Rafferty and Mr Luff returned to Melbourne on or about 21 June 2007. Mr Rafferty had discussions with Mr Brunner at the offices of Time 2000. It appears that nothing of real significance was discussed during this trip.

75                  On 21 July 2007, Mr Rafferty received an email from Mr Koch. The message which is part of the email is in Mr Donovan’s name. It contains a description of the respondents’ business and plans. In the course of the message Mr Donovan states:

“We confirm that our company is well advanced in the commercialisation of a manufactured building system with global reach.

The unique patented intellectual property enables the cost effective manufacture of sophisticated building units in China. We attach documents for your information and hope it is of interest. More will follow in subsequent emails. Please print them to view with ease.”

76                  There were a number of drawings of MAUs attached to the email. In addition, there was a document apparently prepared by Deakin University setting out details of a proposed feasibility study involving what is described as “BHP/Time 2000 Intelligent Sustainable Mining Village”.

77                  On 27 September 2007, Mr Rafferty attended a meeting at the offices of Deloitte Touche Tohmatsu (“Deloitte”) in Melbourne. Deloitte was acting for Mr Donovan and his companies. Mr Donovan was present, as were Mr John Downes of Deloitte and Mr Graeme Levy and Ms Sue Harris of Madgwicks. The discussion included a discussion about territory and the markets which were to be the subject of the proposed venture. Mr Rafferty said that the fact that there were to be other territories with other people involved was discussed and some names were mentioned. Mr Rafferty was told that some people were possibilities while others were ready to sign. On this topic, Mr Rafferty said that Mr Donovan said words to the following effect:

“If you come upon a potential sale you can discuss the situation with me on a project-by-project basis and I will decide on the outcome. I see no reason why sales outside your territory would be an issue anyway until there are other franchises in other states and you wanted to sell in their territory.’

…

The other territories being envisaged at this point are Queensland, New South Wales, South Australia and Victoria/Tasmania. I am close to signing deals in Queensland and Victoria/Tasmania and have prospects lined up for the other territories.

…

I want to float the Time 2000 business at some stage after all the other territories are signed up.”

Mr Levy said words to the following effect:

“Payments from other people in relation to other territories will mirror your agreement.

…

Stephen, through his companies, will have overall control of where the product is sold, how it is marketed and to whom it can be sold.”

78                   There was discussion about financial matters and ownership of the company to be incorporated to carry on the business. Mr Rafferty believed that Mr Donovan would effectively receive $5,000,000 in licence fees for five territories plus 51 per cent of the territory companies without making any financial contribution to those companies. Mr Rafferty said that there was a discussion about a potential float of the Time 2000 business.

79                  Mr Rafferty said that there was some discussion about what would have to happen if the proposed venture involved a franchise. He cannot remember precisely what was said or by whom. He said that he was told that the proposed arrangement did not involve a franchise.

80                  Mr Rafferty said that at the meeting at Deloitte the use of his proposed initial contribution of $200,000 for engineering drawings was first raised. He said that he thought the initial prototype was “already in the works” and the initial prototypes were already done. He thought that must be a reference to the new design.

81                  Mr Rafferty lent Mr Donovan the sum of $50,000 on or about 16 August 2007. This payment was viewed by the parties as a down payment on the $200,000 to be paid by Mr Rafferty under the HOA.

82                  Mr Rafferty had time to consider a draft Heads of Agreement and indeed he made some written comments about the document to Mr Donovan and Mr Levy. However, he did not obtain legal or financial advice in relation to the proposed Heads of Agreement.

83                  Mr Rafferty executed the HOA on or about 5 October 2007. At that time, he believed that there was a prototype for the MAUs under construction in China and that it would be complete and available to be inspected before Christmas 2007. He also believed that Mr Donovan was in the advanced stages of discussions with investors interested in other territories.

84                  On 8 October 2007, Mr Rafferty paid the sum of $200,000 referred to in clause 2 of the HOA. In a separate transaction Mr Donovan repaid the $50,000 he had borrowed from Mr Rafferty.

85                  I turn now to the events which occurred after the execution of the HOA and before the execution of the JVSA on 23 November 2007.

86                  On 15 October 2007 Mr Rafferty opened an office for the business operations of T2W. He paid expenses, including travel expenses, and the rent from his own funds and he purchased office furniture. He arranged for his son, Tom, to work in the business.

87                  Mr Rafferty also arranged for his niece, Ms Shelley Davis, and a Mr Bernard Worthington, to work as commission only operatives. Their job was to identify and contact prospective customers. Ms Davis was based in Katherine in the Northern Territory, and Mr Worthington was based in Perth, Western Australia. Mr Rafferty said that loosely they were each allocated responsibility for the territory they were based in, but were free to work jointly if they wished.

88                  Nitmiluk Tours was a tourism business based near Katherine in the Northern Territory. In the middle of October 2007, Ms Davis identified the possibility of a contract with that business for the purchase by the business of tourism units for an ecotourism venture at or near Katherine Gorge. Mr Rafferty was told that the general manager of Nitmiluk Tours was seeking a meeting between representatives of Time 2000 and the board of Nitmiluk Tours at Katherine on 31 October 2007. It was agreed by Mr Rafferty and Mr Donovan that Mr Donovan would attend the meeting and that he would give a Powerpoint presentation at the meeting. It was agreed that Ms Davis and Mr Worthington would attend the meeting for training purposes. Mr Rafferty paid Mr Worthington’s travel expenses. Mr Rafferty decided not to attend the meeting because of the costs involved were he to do so.

89                  Ms Davis and Mr Worthington spoke to Mr Rafferty the day after the meeting and gave him a report of what had occurred. I refer to their evidence below (at [106]- [118]).

90                  Mr Donovan had a conversation with Mr Rafferty after he had returned from the Northern Territory. Mr Donovan said that the presentation had gone over very well and that he believed Nitmiluk Tours would be placing an order for 10 spa units by 15 November 2007 at $70,000 per unit. When asked whether Nitmiluk Tours would want to see a prototype before placing the orders, Mr Donovan said words to the following effect:

“They are willing to place the order so manufacture of the structures can commence and by the time they see the prototype before Christmas in China, we will be ready to offer the fit out they require. We will also have to fly at least two of the Jawoyn representatives to China to view the prototypes. Will the new company be prepared to pay for this?”

Mr Rafferty said that he did not think that would be a problem.

91                  On 29 October 2007, Mr Rafferty received from Mr Donovan a report of that date by an organisation called Mobile Architecture and Built Environment Laboratory dealing with an energy consumption analysis and acoustic evaluation of the BMA Time 2000 Module.

92                  In the middle of November 2007, Mr Rafferty travelled to Melbourne with Ms Davis and Mr Worthington. During his visit he met with Mr Donovan. He asked him when the prototypes would be completed. Mr Donovan told him that they would not be ready before Christmas, but that they would be ready by the end of January 2008. They would be shipped to Australia by the end of February 2008. The conversation was along the following lines:

“Mr Rafferty: When will the prototypes be completed?

Mr Donovan: They will not be ready before Christmas, but they will now be ready by the end of January.

Mr Rafferty: Shipping to here by the end of February.

Mr Donovan:  Yes.”

93                  Mr Rafferty said that he was concerned to ensure that the prototypes would be completed by the end of January 2008. He feared that if they were not they would be caught up in the Chinese New Year and not completed until after February 2008.

94                  Between the date of the execution of the JVSA (that is, 23 November 2007) and the date of execution of the RA (that is, 19 December 2007), Mr Donovan continued to tell Mr Rafferty that the prototypes would be ready by the end of January 2008. Mr Rafferty believed that Mr Donovan had an agreement with an organisation called CIMC or Duowie (as I have said, he was quite unclear as to which) to manufacture the prototypes. He said that he did not know that Mr Donovan did not have an agreement with any manufacturer to manufacture the prototypes.

95                  On 15 December 2007, Mr Rafferty received a copy of an email sent by Mr Donovan to a third party. The email refers to a recent trip to China by Mr Donovan. It suggests that on that trip Mr Donovan “set in place” a manufacturing relationship with Duowie Corporation and had the agreement of a business called B & Q Retail and Wholesale Distributors to sponsor Mr Donovan’s project and prepare all schedules of fixtures and fittings for the prototypes and manage the supply chain on behalf of the project.

96                  Mr Rafferty said that the statement in this email about a manufacturing relationship with the Duowie Corporation was consistent with his understanding at the time. It was only later that Mr Rafferty learnt that there was no agreement with the Duowie Corporation. He referred to an email sent to him on 14 March 2008 with an attachment containing a copy of an email from Mr Brunner to a Mr Leong Kok Yin dated 3 December 2007. That shows quite clearly that, as at 3 December 2007, no plans or drawings had been sent to the Duowie Corporation because that company had not yet signed a confidentiality deed.

97                  By Christmas 2007, Mr Rafferty was unhappy with Mr Donovan because every time he asked Mr Donovan for a commitment about when the prototype would be available he was told it would be ready in about six weeks. In early January 2008, Mr Rafferty began to suspect that a prototype was not being constructed. It became clear to him from his discussions with the architects and engineers that the prototype was some way from being ready to be manufactured.

98                  By about the third week in January 2008, it was clear to Mr Rafferty that the prototype would not be ready by the end of January. He spoke to Mr Donovan and asked him to send him a program setting out the work required to complete the prototype. A program was prepared by Hassells, a firm of architects, and sent to Mr Rafferty. It showed a scheduled completion date in June 2008 and it did not identify a manufacturer. It is clear from the evidence that that prototype relates to the prototype for tourist accommodation not the prototype for mining accommodation. Mr Rafferty said by that time the two types of prototype were becoming blurred.

99                  By late February or early March 2008, Mr Rafferty was convinced that Mr Donovan was not telling him the truth about the status of the prototype. In early March 2008, Mr Brunner told Mr Rafferty that Mr Donovan had decided not to go ahead with the Duowie Corporation and that he was now in discussion with Sunscape and Bluescope.

100               At about this time, Mr Rafferty, Mr Worthington and Mr Donovan travelled to China to meet with manufacturers. Mr Rafferty attended a meeting with Madame Wong Kong of Sunscape and a meeting with Bluescope. Mr Rafferty said that it was apparent to him that Mr Donovan was still trying to convince each of them to manufacturer the units.

101               On his return from China, Mr Rafferty had another conversation with Mr Donovan about when the prototypes would be available. Mr Donovan told him that they would be ready in August 2008. There was a discussion about money and, in the course of that discussion, Mr Donovan accused Mr Rafferty of embezzlement. Thereafter, the relationship between Mr Rafferty and Mr Donovan broke down and they ceased to have any direct dealings with each other.

102               Mr Rafferty, on his own behalf and on behalf of Santora and Karaville, sought legal advice from the firm, Cosoff Cudmore Knox, in or about May 2008. On behalf of the applicants, Cosoff Cudmore Knox wrote to Madgwicks, who, at that time, were acting on behalf of the Donovan interests, by letter dated 23 May 2008. One of the assertions in the letter was that the Franchising Code of Conduct applied to the HOA and the RA, that the Franchising Code of Conduct was a mandatory industry code under the TPA, and that the HOA and the RA were illegal and void ab initio. Cosoff Cudmore are acting for the applicants in this proceeding.

103               The applicants paid a total of $1,700,000 under the agreements. The sum of $200,000 was paid into the trust account of Madgwicks and certain expenses were paid. The balance, which Mr Rafferty believes is about $100,000, was paid into a National Australia Bank account in the name of T2W. The sum of $500,000 designated in the agreements as being for working capital was paid by Mr Rafferty into a Commonwealth Bank account in the name of T2W. A sum of approximately $314,000 remains in that account and a sum of $25,000 is in a term deposit account. The sum of $1,000,000 was paid into the trust account of Madgwicks and thereafter it was distributed as follows:

1.                  Time Developments Pty Limited: $200,000.

2.                  T2SA: $300,000.

3.                  Time 2000 Pty Limited: $250,000.

4.                  Gemhall Holdings Pty Limited: $250,000.

104               Mr Rafferty said that he did not obtain legal or financial advice in relation to the agreements. Prior to May 2008 he was not aware of the Franchising Code or any requirement for a disclosure document. He was never given a disclosure document by Mr Donovan or any other person or entity.

105               Mr Rafferty said that before the detailed terms of the HOA were discussed, someone, he could not remember who, asked him if he wanted to obtain legal advice. He said that he did not think things had “got that far yet”. Neither Mr Donovan nor anyone else from the respondents suggested to Mr Rafferty that he obtain legal advice.

106               Mr Worthington gave evidence for the applicants. He was an honest witness and I accept his evidence. Mr Worthington is a valuer and property consultant. He has had substantial experience in dealing with property in Western Australia and, in particular, in the mining regions and the north west of Western Australia. He is a personal friend of Mr Rafferty, and he has known him for eight to ten years. One of Mr Rafferty’s sons is married to his daughter.

107               In September 2007, Mr Rafferty spoke to Mr Worthington and told him that he had entered into an agreement to obtain the rights to sell MAUs in the State of Western Australia and in the Northern Territory. He asked Mr Worthington for his assistance. Mr Worthington agreed and he became a Regional Sales Manager. He was to be remunerated by commissions on sales.

108               Ms Davis is Mr Rafferty’s niece. For some time prior to her involvement in the venture which is the subject of the agreements, she had worked in Katherine in the Northern Territory. Mr Worthington understood that she had been engaged by T2W on a similar basis to his engagement.

109               Mr Worthington went to the Northern Territory on 30 October 2007. He understood that he was to meet Ms Davis and Mr Donovan in Katherine. There were to be a series of meetings with potential customers of MAUs. Mr Worthington, Ms Davis and Mr Donovan were to meet with representatives of an organisation called Nitmiluk Tours.

110               Mr Worthington met Mr Donovan at the airport in Darwin and they drove to Katherine. During the trip to Katherine, Mr Donovan told Mr Worthington that he had a company in China near Beijing arranged to build the MAUs and Mr Donovan called the company “Do Wei” or similar. Mr Worthington does not recall Mr Donovan specifically saying that he had a contract with Do Wei, but he did tell Mr Worthington about the business and manufacturing process of Do Wei in substantial detail.

111               At about 8.00 am on 31 October 2007, Mr Worthington, Ms Davis and Mr Donovan met with two representatives of a local women’s group which was looking at the possibility of accommodation for a women’s short term shelter at Timber Creek. After that meeting, Mr Worthington, Ms Davis and Mr Donovan met with representatives of Nitmiluk Tours. Those representatives included Mr Clive Pollack, who Mr Worthington understood to be the chief executive officer of the business Nitmiluk Tours, Mr Brian Kittel, the chief financial officer, and Mr John Ah Kit, the chairman. Ms Davis had identified Nitmiluk Tours as a potential customer and Mr Worthington understood that they were interested in purchasing as many as 80 MAUs as tourist cabins over two potential sites. Mr Donovan made a presentation to the representatives of Nitmiluk Tours. He offered to provide each unit at a price of $70,000 fully furnished. In the course of the presentation, Mr Donovan said that a prototype was being built in China and that he could guarantee to have a display prototype “here” by the end of February 2008. Mr Donovan said that he could arrange for the whole village to be installed by May or June 2008 at the latest. Mr Pollack said words to the effect that subject to the representatives of his organisation carrying out an inspection of the prototype which was satisfactory and subject to agreement with plans, specifications, final costing and a fit-out schedule, Nitmiluk Tours were, in principle, happy to proceed with an initial order of accommodation units. Mr Pollack said that Nitmiluk Tours wished to receive the plans and specifications and fit-out schedule within two weeks. Mr Pollack said that Nitmiluk Tours would be interested in 40 units by way of the first stage. There was also discussion about finishes and the dimensions of the units. It was clear that Nitmiluk Tours were looking at MAUs of a high standard.

112               After the meeting with Nitmiluk Tours, Mr Worthington, Ms Davis and Mr Donovan drove to Darwin. That evening they had dinner with a person who was a representative of the Federal Government and a person from Connell Wagner who were consulting to the government. The meeting concerned the possible purchase of MAUs for housing, as part of the Federal Government’s intervention in indigenous communities in the Northern Territory. During the course of that meeting, Mr Donovan told those present that he had sold 40 units to Nitmiluk Tours that morning. That concerned Mr Worthington because he considered it to be untrue.

113               In late November 2007, Mr Worthington went to Melbourne with Mr Rafferty. They met Mr Donovan. During the course of the meeting, Mr Donovan told them that a prototype of the MAU was “being built” by “Do Wei”.

114               In late January or early February 2008, Mr Worthington became concerned about the lack of progress with the MAU prototype. By then, it was clear that no prototype would be available in February 2008, as Mr Donovan had promised Nitmiluk Tours. They had a meeting with Mr Downes of Deloitte and expressed their concerns about the lack of progress. They then had a meeting with Mr Downes and Mr Donovan.

115               In late March or early April 2008, Mr Worthington learned for the first time that “Do Wei” were not contracted to manufacture the MAU prototypes and that, to that date, no company had been contracted to manufacture the prototypes.

116               In mid April 2008, Mr Worthington, Mr Rafferty and Mr Donovan went to China. They met Madam Wong Kong who represented Sunscape. After the meeting, Mr Donovan had a further meeting with Madam Wong Kong. That night, Mr Donovan told Mr Worthington and Mr Rafferty that he had “signed up” Sunscape. The next day, Mr Worthington, Mr Rafferty and Mr Donovan met with representatives of Bluescope. It was clear from the meeting that Bluescope had not yet signed a confidentiality agreement.

117               Ms Davis also gave evidence for the applicants. She too was an honest witness and I accept her evidence. Ms Davis said that she commenced working as a consultant for T2W in about October 2007. She expected to be compensated solely by commission on sales. Ms Davis said that during the meeting with the representatives of Nitmiluk Tours, one of the representatives said words to the effect that Nitmiluk Tours wanted to have units on site for the beginning of the tourist season which was in April 2008. Mr Donovan said that a prototype was being built and he said that a display prototype would be available in China by December 2007. There was some discussion about flying the representatives of Nitmiluk Tours to China around the first week of February 2008 so that they could inspect the prototype. There was discussion about that being done at Time 2000’s expense. Mr Donovan said that the units would be available for inspection by then. There was discussion about whether the units would be available by 1 April 2008. The representatives of Nitmiluk Tours said that it would be acceptable if units could be available on site by 1 May 2008. Mr Donovan assured the representatives that this could be done. Ms Davis said that during the meeting with the representatives of the Federal Government that evening Mr Donovan took out the business card of Mr Ah Kit and put it on the table and said words to the effect that “an order has been received today from this person for 40 units”. Ms Davis said she knew this statement to be untrue.

118               In her oral evidence, Ms Davis said that she recalled a breakfast meeting with representatives of the Timber Creek Community Council at the All Seasons Hotel. That took place before the meeting with the representatives of Nitmiluk Tours. The representatives of the Timber Creek Community Council were interested in accommodation for an aged care facility. During the course of the meeting, Mr Donovan said that a prototype for the BMA units was currently being built in China. There was discussion as to whether a unit of that nature would be sufficiently robust for aged care accommodation. Ms Davis also said in her oral evidence that at the meeting with the representatives of the Federal Government, Mr Donovan said that a prototype was being built in China and that the prototype would be available for viewing in December. Mr Donovan referred to the prototype as the BMA prototype. He spoke to some drawings when giving his explanation of the BMA prototype.

119               The only direct evidence against Mr Rafferty’s version of events was given by Ms Donovan. I put to one side for the moment some minor inconsistencies between Mr Rafferty’s evidence and that given by Mr Levy. Those inconsistencies are dealt with below (at [193]).

120               Ms Donovan was the only witness called by the Donovan respondents. Mr Donovan did not give evidence at the trial. He was available and, in fact, he sat in Court for most of the trial.

121               Ms Donovan said that she attended a dinner in mid-June 2007 at the CNF Café in Chapel Street, South Yarra, Melbourne. The persons present at the dinner were Mr Rafferty, Mr Luff, Mr Donovan, Mr Brunner, Mr Detsis, Mr Koch and herself. Ms Donovan said that there was a discussion about the accommodation units and the modules that Mr Donovan was developing. Mr Donovan told those present that he had attended a meeting with Mr Frances Price from BHP. Mr Donovan said that the meeting had gone well. He said that Mr Price would contribute $200,000 for a prototype to be used for a mining village. He said that this was subject to approval of the plans. The prototype would be used as a display unit at BHP’s coal mining site to allow BMA to test it. Mr Donovan said that the idea of the unit was that it would comprise three rooms to be occupied by single men. Mr Donovan said that Mr Price had said that he would like to be involved in Mr Donovan’s mobile accommodation unit concept. Ms Donovan does not remember Mr Donovan saying that any such units were being built at that time. Mr Donovan did say that he had instructed Idle Architects and Cardno Engineers to commence preparing the required plans. Mr Donovan said that he had hoped the module could be built by Christmas and he said words to the effect of “we will see how things will go”.

122               Ms Donovan attended the lunch at the winery on the Mornington Peninsula. There were about 20 people present. Ms Donovan said that a number of bottles of wine were brought out during the course of the lunch. She recalls Mr Rafferty drinking a fair amount and that by the end of the lunch he was slurring his words. At about 4.00 pm, Mr Rafferty, Mr Luff, Mr Donovan and Mr Brunner went to another area. Mr Luff and Mr Brunner came back to the table. Mr Rafferty and Mr Donovan spoke by themselves for about three minutes. After the lunch, members of the group went to the Imperial Hotel. The group at the Imperial Hotel were Mr Rafferty, Mr Luff, Mr Donovan, Ms Donovan, Mr Koch and Ms Donovan’s sister, Anya. Ms Donovan said that Mr Rafferty and Mr Luff were drinking heavily. At some point, the group moved to a Greek restaurant to have dinner. They were joined by a man in a cowboy hat. The drinking continued. Ms Donovan does not recall anyone talking much about business. She said that Mr Rafferty became very drunk and fell off his chair. I should add that Mr Rafferty said that he did not have any more to drink than anyone else on that day.

123               Ms Donovan attended a lunch in March 2008 in Melbourne. Mr Rafferty, Mr Donovan and a Chinese delegation were present. In addition, Mr Downes, Mr Levy and Mr Worthington were present.

124               The principal significance of Ms Donovan’s evidence appears to be her recollection of what her husband said at the dinner at the CNF Café.

125               I have carefully considered Ms Donovan’s evidence. It does not cause me to doubt Mr Rafferty’s honesty or reliability. His evidence is consistent with what Mr Donovan said to him both before and after the dinner at the CNF Café. It is possible that Mr Donovan made the comments attributed to him by Ms Donovan but Mr Rafferty did not hear them. That seems unlikely having regard to Mr Rafferty’s recollection of what was said. In my opinion, Ms Donovan must be mistaken in her recollection.

126               There are two additional reasons for accepting Mr Rafferty’s evidence about what he was told by Mr Donovan. First, Mr Donovan did not give evidence and, in those circumstances, I can infer that his evidence would not have assisted the Donovan respondents and I can more readily accept Mr Rafferty’s evidence: Jones v Dunkel (1959) 101 CLR 298. Secondly, the evidence of Mr Worthington and Ms Davis about Mr Donovan’s statements concerning the construction of a prototype in China may be used as tendency evidence. The evidence was admitted without objection. In any event, I would have allowed the evidence under s 97 of the Evidence Act 1995 (Cth). It met the conditions for admissibility. Had I been asked, I would have dispensed with the requirement of notice (see s 99 and s 100 of the Evidence Act 1995 (Cth); O 33 r 18 Federal Court Rules) and the evidence has substantial probative value.

127               Furthermore, there is Mr Donovan’s statement in an email to a third party dated 11 September 2007 (Exhibit A28):

“This prototype [for mining accommodation] is currently under construction in China.”

128               The statements in an email from Mr Donovan apparently to Mr Luff dated 14 August 2007 do not lead to a contrary conclusion.

129               Mr Rafferty gave evidence in support of his case that he would not have entered into the agreements had he been told there was no prototype in China and no manufacturer under contract to make a prototype or production models. He also gave evidence of what he would have done had the Franchising Code been complied with. He called two solicitors to give evidence of the legal advice they would have given him had he consulted them in October 2007. Although the Donovan respondents and Madgwicks disputed the applicants’ case on a number of grounds, it is fair to say that an alleged lack of reliance or failure to prove causation was a major ground.

130               Mr Rafferty explained his reasons for not seeking legal or financial advice in relation to the venture. He said that he did not think he needed legal advice because a lawyer from a reputable legal firm (that is, Madgwicks) was drawing up the agreements. Neither Mr Donovan nor anyone from Madgwicks ever said that Madgwicks were not advising him. As far as financial advice is concerned, none of Mr Donovan, Deloitte or Madgwicks ever said to Mr Rafferty that he should obtain financial advice.

131               Mr Rafferty said that if he had been told that he should obtain legal advice he would have spoken to Mr Cosoff. He said that if he had been told that he should obtain independent accounting advice he would have spoken to his regular accountants in Perth, Moore Stephens.

132               Mr Rafferty had limited knowledge of Mr Donovan’s companies and he did not know anything of the business experience of the managers or staff of those companies or their trading or business history. Mr Donovan spoke very confidently about agreements with BHP on mining site accommodation units, and about the manufacture of the prototype in China. Mr Rafferty said he had little information about likely sales levels. Mr Rafferty said that he would not have signed the agreements if he had known that there was no current agreement with a manufacturer able to provide the products in a timely fashion. That was critical to his understanding of the business and his expectations of financial viability. He believes he was not provided with the information he needed to make an informed decision about whether to enter into the agreements and, in fact, the information he was given in relation to the manufacturing arrangements and the availability of prototypes was false or incomplete.

133               Mr Rafferty said that if he had received advice from his lawyers, Mr Cosoff or Mr Marryat, in the terms set out in their affidavits before he signed the HOA, then he would not have entered into the HOA. Based on his previous dealings with Mr Cosoff, he would have accepted and followed the advice provided to him by Mr Cosoff and Mr Marryat. Mr Rafferty trusted Mr Cosoff and followed his advice. Mr Rafferty said that he would have informed Mr Cosoff and Mr Marryat of the representations and he would have told Mr Cosoff that the timing of the availability of the product, which was the subject of the proposed HOA, was important to him. He would have instructed Mr Marryat to negotiate on his behalf with the lawyers acting for Mr Donovan, namely, Madgwicks, for an agreement on different terms and on terms which accorded with the advice which Mr Cosoff and Mr Marryat say they would have provided to him. In particular, Mr Rafferty states that if he had received the advice outlined by Mr Cosoff and Mr Marryat, he would have provided instructions that he would not commit to, or execute, any agreement until he had seen a prototype modular building unit or been able to satisfy himself that such a prototype would be ready by Christmas 2007. He would have instructed Mr Marryat to ensure that his interests were fully protected in the event that the manufacture of a prototype modular building unit was not completed in China before Christmas 2007, in the event that Mr Donovan or his associated companies had not entered into a contract with a company in China known as “Duowei” to manufacture modular building units in China or in the event Mr Donovan or his associated companies had not entered into a contract with an entity known as BMA for the purchase by that entity of approximately 100 modular building units. Mr Rafferty said that he would have instructed Mr Marryat to negotiate an agreement that recorded either no payments were to be made by him, or on his behalf, or by any entities associated with him, in the terms contemplated by the HOA unless and until the representations were satisfied, or if any of those payments were made, they were to be held by a stakeholder for return to him if conditions relating to the representations made to him had not been satisfied. Mr Rafferty states that he would have instructed Mr Marryat to ensure that his interests were properly protected under the provisions of the Franchising Code and he would have instructed Mr Marryat to negotiate on his behalf an agreement, in accordance with the advice of Mr Marryat and Mr Cosoff, which properly protected his commercial interests.

134               I will return to the important question of whether I should accept Mr Rafferty’s evidence of what he would have done had there been no contraventions of the TPA.

135               Mr James Cosoff is a partner in Cosoff Cudmore Knox. He gave evidence before me. He was an honest witness and I accept his evidence. In reaching that conclusion, I have had regard to the fact that Cosoff Cudmore Knox are the solicitors acting for the applicants, and that they wrote to the solicitors then acting for the Donovan interests in May 2008 in this proceeding in the terms I have described above (at [102]. Nevertheless, Mr Cosoff was a straightforward witness and nothing was put to him in cross-examination which leads me to conclude that I should not accept his evidence.

136               Mr Cosoff was admitted as a practitioner of the Supreme Court of South Australia in or about December 1978. He has practised as a solicitor since that date. His main area of practice is in the area of commercial disputes. He also has experience in the management of legal firms. Cosoff Cudmore Knox was established in October 1998, and Mr Cosoff has been the managing partner of that firm since late 2004.

137               Cosoff Cudmore Knox has a commercial transactions practice, and Mr William Marryat has been head of that section of the practice since late 2004. Cosoff Cudmore Knox also has a commercial disputes section, and, prior to his appointment as managing partner, Mr Cosoff was the head of this section.

138               Mr Cosoff met Mr Rafferty in about 1997. Mr Rafferty was a director of a private company called Labtech Essa Pty Ltd (Labtech Essa). Labtech Essa became a client of Cosoff Cudmore Knox following the establishment of the firm in October 1998. Mr Cosoff had frequent dealings with Mr Rafferty following the establishment of Cosoff Cudmore Knox and many of those dealings related to intellectual property matters in which Cosoff Cudmore Knox acted for Labtech Essa. Some of those matters led to litigation in this Court.

139               Mr Cosoff did not know that Mr Rafferty had entered into the transaction embodied in the agreements until April 2008. Mr Cosoff was asked to assume that Mr Rafferty contacted him on or about 1 October 2007 and provided him with a copy of the HOA. On that assumption, Mr Cosoff was asked to answer four questions.

140               First, Mr Cosoff was asked what he would have done in response to Mr Rafferty’s inquiry and who he would have involved in the matter. Mr Cosoff said that he would have asked Mr Rafferty for as much information as possible and that he would have arranged to meet Mr Rafferty in Adelaide. He would have involved Mr Marryat in providing advice to Mr Rafferty. He would have read the documents prior to meeting with Mr Rafferty and he would have had a discussion with Mr Marryat about the matters to be raised with Mr Rafferty.

141               Secondly, Mr Cosoff was asked what questions or issues he would have raised with Mr Rafferty. He said that he would have asked Mr Rafferty about his experience in the industry referred to in the HOA and his knowledge of Mr Donovan and his associated entities. He would have discussed with Mr Rafferty the risks associated with the transaction. He would have raised with Mr Rafferty the amount of money he was putting into the venture in circumstances where, while he was contributing a significant amount of money and time, Mr Donovan did not appear to be contributing any money. He would have raised with Mr Rafferty the level of borrowings associated with the money to be contributed by him. He would have raised with Mr Rafferty whether he had seen the prototype referred to in the HOA. He would have raised with Mr Rafferty the question of whether he had taken any accounting advice or any other advice. He would have raised with Mr Rafferty a number of general matters about the structure of the arrangements, the control of the arrangements, how the venture would be funded and what the consequences would be for Mr Rafferty if the venture failed or indeed if the venture succeeded.

142               Thirdly, Mr Cosoff was asked whether he would have discussed the Franchising Code with Mr Rafferty. Mr Cosoff said that he would have discussed the Franchising Code with Mr Rafferty. Mr Cosoff said he would have agreed with Mr Marryat that he (Mr Marryat) would raise the matter during the meeting with Mr Rafferty as he had far greater experience with the Franchising Code.

143               Fourthly, Mr Cosoff was asked what advice he would have given to Mr Rafferty. Mr Cosoff, on the assumption that nothing was said during the hypothetical interview with Mr Rafferty which would have led him to form a different view, would have advised Mr Rafferty not to proceed with the transaction, at least on the terms contemplated. He would have given this advice for a number of reasons. First, Mr Rafferty was paying a significant amount of money to people who, so far as Mr Cosoff knew, were not well known to him, to do something in an industry where, so far as Mr Cosoff knew, he had no experience. Secondly, that was being done in circumstances where Mr Rafferty appeared to be funding the venture in full and, in addition, putting in his time. Thirdly, the control of the venture would not be in the hands of Mr Rafferty. Mr Cosoff considered that the transaction appeared very risky for Mr Rafferty and very uncommercial. The terms of the HOA struck him as being very complex.

144               Mr Cosoff was asked to assume that the Donovan respondents had made the following representations to Mr Rafferty:

1.                  That manufacture of a prototype Modular Building Unit was to be completed in China before Christmas 2007.

2.                  That Mr Donovan or his associated companies had entered into a contract with a company in China known as “Duowei” for Duowei to manufacture modular building units in China.

3.                  That Mr Rafferty would be able and permitted to finance an anticipated investment of an additional $3.3 million from his profit from sales of modular building units.

4.                  That Mr Donovan or his associated companies had entered into a contract with an entity known as “BMA” for the purchase by that entity of approximately 100 modular building units.

145               In light of these matters, Mr Cosoff said that he would have advised Mr Rafferty that it would be imprudent to commit to payment of any substantial amount of money without having personally confirmed, by a visit to China if necessary, that a prototype was complete or substantially so. Mr Cosoff would have advised Mr Rafferty that he should verify personally all of the matters which were essential to the success of the venture before executing the HOA and before making any significant financial outlay. He would have advised Mr Rafferty that, given the size of the proposed investment, he should meet the manufacturer and satisfy himself in person of the manufacturer’s expertise and capability.

146               Mr William Marryat is also a partner in Cosoff Cudmore Knox. Mr Marryat was an honest witness and I accept his evidence. I make the same observations as I have in connection with Mr Cosoff (at [135]).

147               Mr Marryat was admitted to practice in 1980. His areas of practice are advice with respect to commercial transactions, taxation matters, franchise agreements, intellectual property, licensing agreements and similar arrangements. He has experience in relation to corporate matters including providing advice on shareholders’ agreements.

148               Mr Marryat met Mr Rafferty at least once before October 2007.

149               Mr Marryat was provided with a copy of the HOA and he was asked to assume that he was asked by Mr Cosoff to attend a meeting with Mr Rafferty in October 2007. Mr Marryat said that he would have discussed the matter with Mr Cosoff before the meeting and he would have made notes of the structure and the commercial transactions contemplated by the HOA. Mr Marryat said that he would have pointed out to Mr Rafferty certain key features of the HOA. He would have expressed concern to Mr Rafferty about the fact that, despite the payment of the seed fee and the other party making no contribution, the Rafferty interests would be in the minority in T2W and that all decisions of shareholders were to be by simple majority. Mr Marryat would have told Mr Rafferty that the payment of any moneys in circumstances where the actual shareholders agreement had not been seen, let alone agreed, was unwise. He would have advised Mr Rafferty that the payment of any money into a company which he did not control and where any decision could be made by simple majority, particularly as he had contributed all the money, would not be prudent. He would have advised Mr Rafferty that if the HOA had been terminated he, Mr Rafferty, would forfeit the seed fee. He would have pointed out the fact that the HOA required the Rafferty interests to make substantial financial contributions in circumstances where the other party contributed nothing and yet controlled T2W.

150               Mr Marryat would have considered whether the HOA was a franchise. He would have raised the matter with Mr Rafferty and he would have discussed the ramifications of a franchise and, in particular, the disclosure documents that must be provided under the Franchising Code. He would have given Mr Rafferty advice about the Franchising Code and he would have told him that, given the fact that Embleton and T2SA, were associates the HOA “may very well be a franchise agreement”. In any event, he would have told Mr Rafferty that far more work needed to be done before any agreement of this nature was executed. Mr Marryat would have been alarmed about the terms of the proposed Rights Agreement and in particular the payment of the initial fee for the grant of the right in the sum of $1 million which was in effect coming from the Rafferty interests. He would have advised Mr Rafferty of those concerns. He would have encouraged Mr Rafferty to see his accountant. If Mr Rafferty had seen his accountant, and his accountant had considered that the transaction was viable, Mr Marryat would have advised Mr Rafferty to seek a second view. Mr Marryat considered that unless the $1 million fee payable to Embleton could be confirmed by a qualified accountant or business adviser as being a discount on the true value of the licence or commercially sensible on some viable ground, then the arrangement did not appear to make any commercial sense. It appeared to be a mechanism whereby the T2SA group required the Rafferty interests to fully fund a business that might potentially benefit the Rafferty group if successful. On the other hand, the arrangement would definitely benefit the T2SA group. Mr Marryat would have advised Mr Rafferty not to sign the HOA in its then form.

151               I turn now to the evidence called by Madgwicks. Madgwicks called two witnesses, Mr Graham Levy, who at the relevant time was a partner, and Ms Susan Harris, who at the relevant time was a solicitor employed by the firm. I have considered their evidence carefully. Their knowledge or lack of knowledge about whether the Franchising Code applied to the agreements is an important issue in the cases for reasons which will become clear. I consider that they were honest witnesses.

152               Mr Levy was admitted to legal practice on 1 April 1971. Since 1975, he has been a partner in Madgwicks, a firm of solicitors based in Melbourne, Victoria. He has practised primarily in the areas of commercial and corporate law, insolvency and reconstruction, and commercial litigation.

153               In July 2007, Mr Levy was introduced to Mr Donovan of Time Developments by Mr Graeme Adams, a partner of Deloitte. Mr Levy was told of Mr Donovan’s development of a new concept in modular housing and of the legal issues upon which Mr Donovan may need advice. Mr Levy first met with Mr Donovan on 5 July 2007. Mr Adams and another member of Deloitte were also present. Mr Donovan explained to Mr Levy his plans for the development of his concept of modular housing. It is fair to say, that Mr Donovan had extensive plans, including the development of his modular building concept in Europe. Mr Donovan advised Mr Levy that Time Developments had persons working for it that were not being paid anything but had an expectation of receiving an interest in the company. A number of names were mentioned, including Mr Brunner, Mr Detsis and Mr Koch. On 9 July 2007, Mr Levy was instructed by Mr Donovan to carry out various items of legal work. I do not need to set out the details as to the various letters of retainer. It may be noted that the retainer letter of 23 November 2007 referred to the drafting of the Heads of Agreement between T2SA and BM Alliance Coal Operations Pty Ltd (called BMA Coal) for the purpose of BMA Coal entering into a supply contract with the company created by Mr Donovan, called Time 2000 Dysart Pty Ltd, subject to the production of a prototype satisfactory to BMA Coal.

154               Mr Levy’s understanding was that during the time he was advising Mr Donovan, Deloitte was also advising Mr Donovan.

155               On 19 September 2007, Mr Levy met Mr Donovan in Madgwicks’ offices. Mr Donovan told Mr Levy that he had an investor, Mr Patrick Rafferty, who wanted to invest in the Time 2000 project. He gave Mr Levy details of what was proposed.

156               On 21 September 2007, Mr Levy went to the offices of Deloitte. He first met with Mr Donovan. Later in the meeting he was joined by Mr Adams and another partner of Deloitte, Mr John Downes. The group in Melbourne had a telephone conversation with Mr Rafferty. Among other things there was a discussion about prototypes and Mr Donovan said that Mr Rafferty’s involvement would fast-track a prototype for ecotourism. Mr Rafferty said that he would need a small, single bedroom unit and he said he would be happy to fund such a unit.

157               At some stage, either at this meeting or at another meeting, Mr Donovan advised Mr Levy that he would like confidential documents and other mail to be sent to him care of his mother’s address. That was because he was concerned with preserving the confidentiality of documents from his employees.

158               On 25 September 2007, Mr Levy again went to the offices of Deloitte. Various members of Deloitte were present, including Mr Adams and Mr Downes. Mr Donovan attended the meeting. They discussed the proposed deal with Mr Rafferty. Later, there was a telephone call with Mr Rafferty. It was agreed that they would meet at 11.00 am on Thursday of that week. Mr Levy’s evidence that Mr Rafferty said he would bring a solicitor with him to act in the matter.

159               Mr Downes subsequently prepared a document headed “Time 2000 and Patrick Rafferty – Thoughts for Discussion”.

160               On 27 September 2007, Mr Levy and Ms Harris of Madgwicks went to the offices of Deloitte, where a meeting was held. Initially, Mr Donovan, Mr Adams and Mr Downes, were present. At an early stage of the discussions, Mr Levy or Ms Harris raised the question of the Franchising Code and whether it would apply to the proposed transaction. One or other of them said that there was a risk that the proposed transaction would be a franchise and that that would necessitate compliance with the Franchising Code. Mr Levy or Ms Harris said that there were strict compliance requirements including disclosure obligations and that Madgwicks would give further consideration to the matter. Those discussions took place before Mr Rafferty joined the meeting. Mr Rafferty joined the meeting and at some stage, he said that $200,000 could be provided to engage consultants to prepare the prototype and the balance could be provided as required for working capital. During the meeting, there was reference to a manufacturing contract and it was suggested that three prototypes be obtained from the same factory.

161               On 28 September 2007, Mr Levy and Ms Harris received instructions to commence drafting a Heads of Agreement. At that time, Ms Harris started to investigate the issues which might arise under the Franchising Code.

162               On 1 October 2007, Ms Harris sent an email to Mr Downes. Attached to the email was a letter from Madgwicks dated 1 October 2007 and a draft Heads of Agreement. The letter from Madgwicks was signed by Mr Levy and Ms Harris. It is in the following terms:

“Attached is a draft of a heads of agreement for consideration by you, Graeme Adams and Stephen Donovan. We have provided a draft directly to Stephen Donovan.

You will see that the heads of agreement does not contain any actual agreement between Embleton and the other parties to enter into the proposed rights agreement. This is because our preliminary research has confirmed that the rights agreement is likely to constitute a franchise agreement under Australian law and, if the Heads of Agreement contains provisions binding the proposed franchisee or its representatives to enter into the rights agreement, it will also be caught under the Franchising Code of Conduct as an agreement to enter into a franchise agreement. The Code requires a franchisor (Embleton) to give a copy of the Franchising Code of Conduct and a Disclosure Document to the prospective franchisee at least fourteen days before entering into a franchise agreement and also gives the prospective franchisee a 7-day cooling period after doing so.

The time frames in this instance are two tight to allow for what is effectively a 21‑day lead time. Accordingly, we have drawn the agreement so that Embleton undertakes to enter into the rights agreement if requested by the new company (T2WANT) to do so however, we cannot confirm categorically that this will prevent any subsequent attach [sic] on the Heads of Agreement on the grounds that it is effectively a non-compliant franchise agreement.

As Stephen will effectively control 51% of T2WANT and as the whole purpose of establishing T2WANT is to enter into the rights agreement we do not believe that there is a risk that T2WANT will not request the rights agreement once it is established.

We have otherwise tried to keep the agreement as succinct as possible. Please let us have your comments so that we can forward the Heads of Agreement to Patrick Rafferty.”

163               Mr Levy met with Mr Donovan on 1 October and again on 2 October 2007. There then followed communications between Mr Downes, Mr Levy and Ms Harris, and Mr Donovan and Mr Rafferty about the terms of the Heads of Agreement. On 5 October 2007, Ms Harris sent an amended Heads of Agreement to Mr Rafferty with a request that it be signed and returned that day and that a bank transfer be made that day to Madgwicks trust account of the amount required to be paid under the Heads of Agreement. There was then some communication about the execution of the Heads of Agreement.

164               On 8 October 2007, Mr Levy’s secretary received a telephone call from Mr Donovan who said that the money had been received and that he would like Ms Harris to start drafting the necessary documents and, in particular, the Joint Venture and Shareholders Agreement.

165               On 8 October 2007, Ms Harris received some information from a firm of legal practitioners in Perth who belonged to the Meritas Network (as did Madgwicks) about the meaning of “franchise agreement” under the Franchising Code.

166               On 11 October 2007, Mr Levy and Ms Harris sent a letter to Mr Downes and Mr Adams of Deloitte Growth Solutions Consulting. In that letter, they advised Mr Downes and Mr Adams as follows:

1.                  The Rights Agreement (to be entered into) may constitute a franchise and fall within the Franchising Code.

2.                  If the Rights Agreement did amount to a franchise agreement, then there were various requirements under the Franchising Code. The broad nature of those requirements were set out.

3.                  The four “requirements” in clause 4 of the Franchising Code were set out. Mr Levy and Ms Harris make the observation that requirements 1, 3 and 4 would be satisfied in the case of a licence agreement. Mr Levy and Ms Harris said:

“It seems that some information or advice regarding marketing may be provided to a licensee without the agreement becoming a franchise but the more structured and prescriptive that information or advice becomes the more likely it is that the agreement will be found to be a franchise agreement. A further difficulty arises with the use of the word ‘suggested’ in requirement 2. It is possible that any commentary or information provided to a licensee relating to methods of best practice, even if application of those methods is expressed to be optional, could bring the agreement within the definition of a franchise.

Accordingly, it is essential that, before we prepare the Rights Agreement, we have full details of the proposed marketing of the Time 2000 product and the extent to which Embleton Pty Ltd proposes to require licensees to adopt a common marketing program. As this is a very specialised area of the law, we suggest that you provide us with a memorandum outlining the manner in which Embleton Pty Ltd proposes that the marketing of the product should be handled and we shall then instruct a practitioner, experienced in the area of franchising law, to advise whether the Rights Agreement is likely to fall within or outside the operation of the Code.”

167               Mr Levy and Ms Harris sent the letter to Mr Downes and Mr Adams because of the confidentiality issues associated with sending it to Mr Donovan. The letter was discussed with Mr Donovan on 16 October 2007.

168               On 16 October 2007, Mr Levy and Ms Harris went to the offices of Deloitte. They met with Mr Downes and Mr Donovan.

169               The issue of whether the Franchising Code applied to the agreements involving the applicants was discussed at the meeting. One or other of Mr Levy or Ms Harris referred to the letter dated 11 October 2007. Mr Downes said that the issue was a simple one to deal with in that “we just ensure that we don’t impose a system or marketing plan and therefore avoid satisfying that element of the definition of a franchise”. Mr Donovan or Mr Downes, or both, advised Mr Levy and Ms Harris that Mr Donovan wanted to avoid creating a franchise because he was in a hurry to consummate the deal with the applicants and there was insufficient time to comply with the formalities required under the Code. Accordingly, the arrangement would be structured to avoid the need to comply with the Code by not creating a franchise.

170               At that stage, Mr Levy and Ms Harris did not know the final nature of the business set up to be formed by Mr Donovan. In particular, they were still having discussions regarding the structure to be put in place with respect to the licensing of the technology. The terms of the Rights Agreement were to be determined. It had been agreed that both parties would have equal control.

171               At the meeting on 16 October 2007, it was agreed by those present that the matter could be reviewed in January 2008 and that Madgwicks could then brief the firm in Western Australia which was part of the Meritas Group and which had specialist expertise in the area of franchising law.

172               On 26 October 2007, Ms Harris sent an email to Mr Rafferty attaching a scanned copy of the HOA and a draft Joint Venture and Shareholders Agreement for his consideration.

173               In the weeks that followed there were communications between Madgwicks and Mr Rafferty and between Mr Donovan and Mr Rafferty.

174               On 14 November 2007, Madgwicks received into its trust account from Karaville the sum of $1,000,000. I have already set out how that sum was distributed (see [103]).

175               On 4 December 2007, Ms Harris sent an email to Mr Donovan. Attached to the email was the then current draft of the Rights Agreement. The draft contained the following:

“13.      Parties will enter into franchise agreement if required by T2SA.

The parties agree and acknowledge that, if at any time during the term of this agreement, T2SA forms the view that the Franchising Code of Conduct applies or might apply to the arrangement between the parties, the parties will sign such documents and do such acts as may be necessary to enter into a franchise agreement under which T2SA or its nominee is the franchisor and T2W is the franchisee and, save as may be necessary to comply with the provisions of the Franchising Code of Conduct, the terms and conditions of the Franchise Agreement will otherwise be similar to the terms and conditions of this agreement.”

In the email, Ms Harris said:

“There is a new clause 13 which requires the parties to enter into a Franchise Agreement if that becomes necessary. You may remember that early on we raised the issue of whether the Franchising Code of Conduct applied to the grant of licences. The preliminary view was that it probably didn’t but this would ultimately turn on the extent to which the Rights Agreement imposed a system of marketing on T2W as licensee. We agreed in early October that we would seek further advice on this point in January 2008.”

176               Mr Levy said that Madgwicks advised Mr Donovan of the import of the Franchising Code and of the elements which constituted a franchise. He states that it was agreed that a system or marketing plan would not be imposed by the licensor, “but the parties would revisit this issue if Donovan entered into similar arrangements with other parties and wanted to set up a franchise model”.

177               On 13 December 2007, Ms Harris sent a draft of the Rights Agreement to Mr Rafferty. On 18 December 2007, Mr Levy wrote to Mr Rafferty regarding the Rights Agreement and enclosed a copy of the revised Rights Agreement and requested that he sign it if it was acceptable to him.

178               Mr Levy said that at the meetings at Deloitte, either he or Ms Harris said that if the Franchising Code applied and it was not complied with, the Agreement would be unenforceable. Mr Levy said that in December 2007 he and Ms Harris discussed clause 12 (previously draft clause 13) in the RA. One or other of them said to Mr Donovan that this clause was included to provide for the possibility that he (Mr Donovan) might later want to develop a common marketing system for his licensees. Mr Levy or Ms Harris told Mr Donovan that the clause may not be enforceable in view of the fact that a concluded agreement had been entered into with Mr Rafferty, but that it was an expression of intention between the parties.

179               Ms Harris was asked by Mr Levy to attend a meeting with Mr Donovan at Deloitte on 27 September 2007. Ms Harris said that before Mr Rafferty arrived at the meeting she understood the agreements to involve, among other things, Mr Donovan first producing a couple of prototypes which he expected to do before Christmas 2007. Ms Harris recalls being told that in the long run, Time 2000 intended to establish an international franchise for the marketing of MAUs. Ms Harris believes that Mr Levy said that Madgwicks would need to examine the Franchising Code to see whether the agreements with Mr Rafferty, which were to be the first for the sale of the MAUs, would constitute a franchise under the Franchising Code. Mr Levy gave a broad description of the requirements of the Code if the proposed agreements were a franchise, and Mr Downes said something to the effect that it would be better if it were not a franchise because of time constraints. Ms Harris was asked to look at the issue of whether the Franchising Code would apply. Ms Harris’s notes refer to “franchisees” but she does not recall whether that word was used by anyone as such or whether she just used it as a shorthand description in her notes for persons who would enter into agreements similar to the one contemplated by Mr Rafferty. Ms Harris recalls discussions about when prototypes would be available in Australia to show potential customers. Mr Rafferty said that he had not yet appointed a lawyer.

180               Ms Harris was asked to draft the Heads of Agreement. Ms Harris did so and she and she also prepared the letter dated 1 October 2007 (see [162] above). Ms Harris’s view was that the risk of the Heads of Agreement and other agreements being non-compliant franchise agreements was “very much dependent on whether the agreements imposed a system or marketing plan and the extent of the control over any system or marketing plan reserved to the licensor”.

181               Ms Harris said that she contacted lawyers in Perth who were a member of the Meritas Network. The lawyer she spoke to said that, based on what Ms Harris told her, the Rights Agreement would not constitute a franchise agreement. That was also the view of Ms Harris. Ms Harris states that it did not appear that what was proposed would satisfy the requirement that the business be conducted under a system or marketing plan substantially determined, controlled or suggested by Mr Donovan or his entities.

182               Ms Harris drafted the letter from Madgwicks to Mr Downes and Mr Adams dated 11 October 2007 (see [166] above). Ms Harris said that at the meeting on 16 October 2007 the Franchising Code was discussed. The letter from Madgwicks dated 11 October 2007 was referred to. Ms Harris states that Mr Downes said they had received the letter and that Time 2000 would not be providing or imposing a marketing system, policies or procedures and that all such matters would be decided internally by the joint venture company. He said that the memorandum requested in the letter dated 11 October 2007 would not be provided. Ms Harris’s best recollection is that during the course of the two meetings at Deloitte on 27 September 2007 and 16 October 2007 respectively, they said to Mr Donovan that if the agreement required compliance with the Franchising Code and the Code was not complied with then the agreement would not be enforceable and could be set aside. Ms Harris’s recollection is that this was said on 27 September 2007 and she cannot be sure if it was said on 16 October 2007 as well. Ms Harris explained what she was trying to achieve by clause 12 of the RA. She said that the clause was designed to try and reserve to Mr Donovan the ability to renegotiate the agreement with Mr Rafferty. She told Mr Donovan that Mr Rafferty could not be forced to do that. She considered that clause 12 should be included because it was possible, even probable, that Mr Donovan would want to revisit the issue of franchises with Mr Rafferty and might then want T2W to enter into a franchise agreement so that the Time 2000 Group could then impose a system or marketing plan. Ms Harris said that clause 12 was not intended to be “a de facto concession” that the agreement may be a franchise. She states that she knew that if the Rights Agreement was a franchise the issues arising from non-compliance with the Code could not be solved after the event.

183               Ms Harris said that at a meeting with Mr Donovan on 11 December 2007 and shortly before the discussion of what was then draft clause 13, she and Mr Levy discussed with Mr Donovan the issue of the agreement becoming a franchise. She said that the following occurred:

“Mr Donovan wanted to tighten up the sub-clause dealing with marketing and suggested we insert a provision requiring Time 200 [sic] West Pty Ltd to ‘comply with marketing directions’ or something of that nature. Graeme and I reminded Donovan that he should be careful not to impose a marketing system or retain any power to direct Time 2000 West Pty Ltd to carry out its marketing in a particular manner because that might result in the agreement becoming a franchise.”

184               Ms Harris said that in early 2008 she again mentioned to Mr Downes the possibility of obtaining specialist advice on the franchising issue. She was told that Time 2000 did not want to pursue it at that stage and therefore Madgwicks was not to seek such advice.

185               Some time in the second half of 2008, Ms Harris was asked to provide her recollection of events in late 2007. She prepared a memorandum dated 23 September 2008 and in the course of that memorandum she said that:

“This was in the context of the inclusion of a new clause in the Rights Agreement, which required the parties to enter into a franchise agreement if that became necessary. As we saw it, at some time in the future the licensor might wish to develop a common marketing system for all of its licensees but it would then need to enter into a franchise agreement with each such licensee. The clause was intended to express the willingness of all parties to the agreement to enter into a franchise agreement in that event. We explained this to Stephen at the time and told him that the clause may not be effective to compel Mr Rafferty or any company or interest controlled by him to enter into a franchise agreement if the licensor wished to develop a marketing system.

As we did not receive instructions in relation to the proposed marketing of the product we were never in a position to obtain or provide definitive advice on whether or not any marketing system proposed in respect of the Time 2000 products would cause the Rights Agreement to constitute a franchise agreement under the franchise code and we were confident that Stephen understood this and accepted the risk. We understood that Stephen’s reasons for instructing us not to obtain or provide further advice in relation to the franchising code were that the Rights Agreement did not seek to impose a marketing system (and he understood that the licensor should not impose a marketing system) and, further, that the time constraints within which he required the documents, including the Rights Agreement to be signed and money paid under them, were too tight to comply with the time frames laid down by the franchising code.

I recall that in early 2008 (although not, I believe, in January 2008) I again raised the issue of obtaining expert advice on the franchising issue with John Downes. I reminded him that it had been agreed at the meeting on 16 October 2007 to re-consider the issue of obtaining expert advice on the franchising issue in early 2008. John’s response was that we were not to obtain the expert advice. I received the impression that the only legal work to be carried out at that stage was such work as was required to further current and specific negotiations.

At the present time we still do not know whether any, and if so what, marketing system has been imposed on or suggested to Time 2000 (West) Pty Ltd by the licensor.”

186               For the reasons set out below, I have concluded that the HOA was an agreement to enter into a franchise agreement, and the RA was a franchise agreement within the provisions of the Franchising Code. The applicants claim that Madgwicks were involved in the contravention of s 51AD within s 75B(1). I must address Madgwicks’ knowledge as to whether the Franchising Code applied to the HOA and the RA. On the evidence, there is no reason to distinguish between Mr Levy’s state of mind and Ms Harris’s state of mind, although it seems likely that Ms Harris had a more detailed understanding of the Franchising Code.

187               On 1 October 2007, Mr Levy and Ms Harris considered that the proposed Heads of Agreement was very unlikely to be a franchise agreement (because it was proposed that it would not legally require T2W to enter into the proposed Rights Agreement) but, based on preliminary research, the proposed Rights Agreement would constitute a franchise agreement.

188               On 11 October 2007, Mr Levy and Ms Harris considered that the proposed Rights Agreement might constitute a franchise agreement. Their view was that it would depend on the proposed marketing of the Time 2000 product and the extent to which Embleton proposed to require licensees to adopt a common marketing program. They considered that the case was one where the obtaining of expert advice was probably appropriate.

189               At the meeting on 16 October 2007, Mr Levy and Ms Harris were advised that the licensor would not be providing or imposing any marketing system, policies or procedures and that these matters would be left to T2W to develop. If the matter had been left there, the position might have been clear enough. However, it seems it was made clear by Mr Donovan, or Mr Downes in Mr Donovan’s presence, that there was insufficient time (having regard to Mr Donovan’s desired timetable) for the licensor to comply with the Franchising Code and that that was a factor in Mr Donovan’s approach. It seems that the door was left open for the question to be reconsidered “depending upon any decisions being reached regarding the future imposition of a marketing program”. That is a quote from Ms Harris’s memorandum dated 23 September 2008. It seems most likely that clause 12 of the RA was drafted by Ms Harris to meet the eventuality of the licensor (Embleton or T2SA) wishing to develop a common marketing system for all of its licences.

190               Ms Harris set about drafting the RA in a way which would avoid it being a franchise agreement within the Franchising Code (see [183] above).

191               It seems to me that, considering the evidence as a whole, but with particular reference to Ms Harris’s memorandum dated 23 September 2008, neither Ms Harris nor Mr Levy considered that the RA was a franchise agreement. However, they were not given instructions about the proposed marketing of the MAUs. To overcome any concern they had about that fact, they relied on their view that the RA did not constitute a franchise agreement and the fact that they had advised Mr Donovan that Embleton or T2SA should not impose a marketing system and that Mr Donovan had said that that would not be done. Clause 12 was an attempt to deal with the possibility that after the agreements had been executed the licensor imposed a marketing plan or sought to impose a marketing plan.

192               Although I have reached the view that Mr Levy and Ms Harris were incorrect in their view about the status of the HOA and the RA, they did not know, nor were they wilfully blind to the fact, that the agreements fell within the provisions of the Franchising Code.

193               Finally, before leaving the facts I must address some relatively minor differences between the evidence of Mr Rafferty on the one hand, and Mr Levy and Ms Harris on the other. First, I think Mr Rafferty did say during the telephone conversation on 25 September 2007 that he would bring a solicitor to assist him to the meeting planned for 27 September 2007. There is a note from Mr Levy to that effect. In the end it does not matter a great deal because he did not engage a solicitor. Secondly, Mr Levy denied saying at the meeting on 27 September 2007 that payments from other people in relation to other territories would mirror Mr Rafferty’s agreements. I accept Mr Levy’s evidence on that point. At the same time, I think somebody said something to that effect in Mr Rafferty’s presence either at that meeting or some other meeting. Again, this is a matter which would not seem to be of great significance because I would think it is quite clear that Mr Donovan contemplated similar arrangements in other territories (see, for example, clause 2(b) of the RA referred to in [46] above). Finally, Mr Rafferty said that somebody at the meeting on 27 September 2007 said that the proposed venture did not involve a franchise. The evidence of Mr Levy and Ms Harris was that questions of franchise and the Franchising Code were discussed before Mr Rafferty joined the meeting. I accept the evidence of Mr Levy and Ms Harris. Mr Rafferty’s statements are very vague and, in my opinion, they are too vague to form the basis of a finding against Madgwicks on the applicants’ claim against it under s 9 of the FTA. Furthermore, such statements are not pleaded against Madgwicks.

The applicants’ claims against the Donovan respondents

Section 52 of the TPA

194               The applicants seek relief under s 87 of the TPA on the ground of a contravention or contraventions by the Donovan respondents (other than T2SO) of s 52 of the TPA. They claim that Mr Donovan on behalf of the other Donovan respondents made representations to Mr Rafferty which were untrue and which materially contributed to the applicants’ decision to enter into the HOA, JVSA and RA.

195               The pleaded representations are set out in ([28] above). I will refer to the first representation as the BMA contract representation and the second representation as the manufacturer representation. The third and fourth representations will be referred to as the first mining prototype representation and the second mining prototype representation respectively. Mr Rafferty referred to them on occasions as the “BMA prototype” statements because of their association with the BMA mining project in Queensland. It is important to recognise that the mining prototype representations referred to a prototype for mining accommodation not a prototype for tourist accommodation. The prototype referred to in the agreements was a prototype for tourist accommodation.

196               I find that each of the representations was made by Mr Donovan. The following table sets out the particular representations and the passages in the above reasons which deals with each of them.

Representation	Paragraph
BMA contract representation	[68]
Manufacturer representation	[66] [67] [68]
First mining prototype representation	[66] [67] [68]
Second mining prototype representation	[92]

197               Even if I exclude any statements made in Perth in May 2007 on the basis that such statements are not part of the particulars pleaded by the applicants, each of the representations is made out.

198               The following matters are not in dispute:

1.                  None of the Donovan respondents had entered into a contract with BMA at any relevant time;

2.                  None of the Donovan respondents had entered into a contract with Duowie or CIMC to build MAUs at any relevant time;

3.                  None of the Donovan respondents had a reasonable basis upon which to believe that a mining or BMA prototype MAU was being manufactured in China and would be available to T2W in China by Christmas 2007.

4.                  None of the Donovan respondents had a reasonable basis upon which to believe that a mining or BMA prototype was being manufactured in China and would be available to T2W in China by the end of January 2008.

199               The major issue between the applicants and the Donovan respondents with respect to the representations was the issue of causation or reliance. I think it is fair to say that by the end of the case, the applicants’ case rested on Mr Rafferty’s reliance on the manufacturer representation, and the first mining prototype representation and the second mining prototype representation. Those representations are of course closely related. Mr Rafferty gave evidence that he would not have invested the money had he been told that there was no prototype being manufactured in China and there was no manufacturer under contract to make a prototype or production models. A prototype, even of an MAU suitable for mining accommodation, would be a useful demonstration and marketing tool. He said that the manufacturer representation was critical to his understanding of the business and his expectations for financial viability.

200               I think it is fair to say that by the end of the case the BMA contract representation had receded into the background, although it remained an important part of the context in which the critical representations were made.

201               The legal test for determining whether an applicant is a person who has suffered loss or damage by conduct of a respondent in contravention of s 52 of the TPA is clearly stated in Henville v Walker (2001) 206 CLR 459 (“Henville”) and I and L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 (“I and L Securities”). It is sufficient if the conduct was a cause of the loss or damage or likely loss or damage (Henville at 469 [14] per Gleeson CJ; at 494 [109] per McHugh J; at 509 [163] per Hayne J; Gummow J agreeing with McHugh J and Hayne J at 507 [152]; I & L Securities at 121-122 [33] per Gleeson CJ) or it materially contributed to the loss (I & L Securities, Gaudron, Gummow and Hayne JJ at 130 [62]).

202               In Smith v Chadwick [1884] 9 App. Cas 187, Lord Blackburn said (at 196):

“I think that if it is proved that the defendants with a view to induce the plaintiff to enter into a contract made a statement to the plaintiff of such a nature as would be likely to induce a person to enter into a contract, and it is proved that the plaintiff did enter into the contract, it is a fair inference of fact that he was induced to do so by the statement.”

(see also Gould v Vaggelas (1985) 157 CLR 215 at 236 per Wilson J.)

203               Viewed objectively, the statements about the mining prototypes mean that the project involving the manufacture and construction of MAUs had moved from the concept stage or plans and drawings stage to the development stage. That would be important to an investor. The overall project for the development of MAUs was after all a new venture. Furthermore, the statements mean there would soon be a model of the MAUs which could be displayed and shown to potential customers, even though those persons were in the market for MAUs suitable for tourist accommodation. Indeed, Mr Donovan told Mr Rafferty that a mining prototype would be made and sent to Perth. I am satisfied that Mr Donovan made the representations with a view to inducing Mr Rafferty to enter into the agreements.

204               On the evidence I am satisfied that the representations about the mining prototypes and the manufacturer materially contributed to Mr Rafferty’s decision to enter into the agreements. The provision of a display model was important to Mr Rafferty. It was an important matter to Mr Rafferty, as evidenced by the fact that he kept raising with Mr Donovan the question of when the prototypes would be available, and Mr Rafferty’s belief about the reliability of Mr Donovan’s statements about the availability of the prototypes was ultimately an important reason for the breakdown of the commercial relationship between the applicants and the Donovan respondents.

205               In reaching this conclusion, I have taken into account the following matters. First, Mr Rafferty’s evidence is evidence given after the event, and by an interested party. Such evidence should be examined very carefully: Rosenberg v Percival (2001) 205 CLR 434 at 441-442 [15]-[16] per Gleeson CJ.  Furthermore, it is fair to say that there was confusion in Mr Rafferty’s affidavits about the prototypes which were the subject of the representations by Mr Donovan. The matter was clarified by Mr Rafferty in his oral evidence and it became clear that Mr Rafferty understood Mr Donovan to be referring to the mining or BMA prototype. I have considered the evidence carefully, and despite the initial confusion, I accept Mr Rafferty’s evidence.

206               Secondly, the representations were not about the tourism prototype which is the prototype referred to in the agreements. It was not the prototype referred to during the discussions about a prototype which was the subject of evidence from Mr Levy and Ms Harris.  I have taken those matters into account but, for the reasons given earlier, I think that the statements about the mining or BMA prototype materially contributed to Mr Rafferty’s decision to enter into the agreements.

207               Thirdly, there is no doubt that Mr Rafferty was very enthusiastic about the project and the prospects of the manufacture and sale of MAUs. He received reports from Ms Davis which suggested that his enthusiasm was justified. He was prepared to commit himself to an investment of $5,000,000 without taking any legal or financial advice. That is surprising. It appears that he had decided, or almost decided, to proceed with the venture at a fairly early stage, as evidenced by the fact that he was prepared to lend $50,000 to Mr Donovan on 16 August 2007. I have no doubt that Mr Rafferty was very enthusiastic about the potential of the venture. Nonetheless, the misleading or deceptive conduct does not need to be the sole reason for Mr Rafferty’s decision to enter into the agreements.

208               Fourthly, the Donovan respondents submitted that Mr Donovan’s statements were no more than sales talk. That submission must be rejected because Mr Donovan’s statements were not mere puffery, but were statements on important matters of fact. Nor do I think it can be said that once it became clear to Mr Rafferty in June 2007 that he was not to be involved in the mining sector then the representations about the mining or BMA prototype became irrelevant. That was not his evidence and it ignores the significance of the representations to a potential supplier of MAUs even to the tourist or rural accommodation market.

209               Fifthly, the Donovan respondents referred to the email dated 15 December 2007 (see [95] above) and submitted that this was before the RA was signed on 19 December 2007 and that Mr Rafferty should have inferred from the email that a manufacturing relationship was only recently set in place with the Duowei Corporation. It followed that the prototypes were either not then under construction or their construction had only recently commenced. I am not sure that these matters clearly emerge from the email but, in any event, I accept Mr Rafferty’s evidence that by then it was too late for him to withdraw. By 15 December 2007, the applicants had entered into the HOA and JVSA, the sum of $200,000 by way of a seed fee (which was not refundable) had been paid and the sum of $1,000,000 had also been paid. That latter sum was paid on 14 November 2007. Mr Rafferty had set up the T2W offices on or about 15 October 2007.

210               Finally, the Donovan respondents submitted that the applicants’ claim under s 52 should fail because they had not proved all of the representations which they had pleaded and that was fatal to their case because they had pleaded that all of them had contributed to their decision to enter into the agreements. They referred to the decision of the High Court in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at 353 [146]-[147] per Gummow, Hayne, Heydon and Kiefel JJ. That submission must be rejected because what is important in this case is the evidence given by Mr Rafferty and not the pleadings. Mr Rafferty gave clear evidence of the effect of the manufacturer representation, the first mining prototype representation and the second mining prototype representation on his decision to enter into the agreements.

211               Mr Donovan’s conduct is taken to be conduct by Embleton and T2SA (TPA s 84(2)). Although T2SA was not incorporated until 4 October 2007, upon its incorporation it came under an obligation to correct the representations. The misleading or deceptive conduct is a continuing course of conduct and there is a duty to correct it: With v O’Flanagan [1936] 1 Ch 575; Rhone-Poulenc Agrochimie SA and Anor v UIM Chemical Services Pty Ltd and Anor (1986) 12 FCR 477. Mr Donovan is a person involved in the contravention under s 75B(1).

212               The applicants seek the relief set out earlier in these reasons. The relief is sought under s 87 of the TPA. The appropriate subsection is s 87(1), but for present purposes it does not matter whether it is s 87(1) or s 87(1A). To obtain relief under s 87(1) it is sufficient for the applicants to show that they would not have entered into the agreements but for the conduct in contravention of s 52 of the TPA. They do not need to show loss or damage in the sense in which those words are used in s 82(1): Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 (“Demagogue”).

213               I am satisfied that the applicants have established this and that they are entitled to relief under s 87(1) against T2SA, Embleton and Mr Donovan. T2OA is a proper party for the purposes of the proper orders. I reject the submission that the relief sought by the applicants is disproportionate in terms of the misleading or deceptive conduct of the Donovan respondents (Demagogue at 33 per Black CJ).

214               I might add that the applicants might well have been able to show a disadvantage flowing from the agreements having regard to the Valutech’s valuation of the intellectual property rights dated 29 June 2009.

The Franchising Code

215               The relevant version of the Franchising Code is the Code before the amendments effected by the Trade Practices (Industry Codes — Franchising) Amendment Regulations 2007 (No 1). Those amendments did not come into effect until 1 March 2008.

216               I make some preliminary observations. The legislative purpose in enacting Part IVB of the TPA and the Franchising Regulations was discussed by the High Court in Master Education Services Pty Ltd v Ketchell (2008) 236 CLR 101 (“Ketchell”) at 108 [12] and following. In addition, I was given a copy of the Explanatory Statement for the Regulations when they were introduced in 1998. An attachment to that document is a Regulation Impact Statement (Attachment B). The following appears in that Statement:

“Notwithstanding the general success of franchising activities in Australia, this is an area where disputation between the parties has been a distinct feature since the mid 1970s. The high levels of disputation and litigation in the sector arise from the fundamental nature of franchising arrangements, which differ significantly from other business ventures. Essentially, franchising arrangements result in a separation between the ownership and the control of the capital assets of a business. A franchisee invests in the business and bears the majority of the risk associated with the operation of a particular outlet, while the franchisor maintains control over the design of the overall system and the quality of the output. Difficulties arise when a franchisor uses that control in an opportunistic manner for its own benefit rather than the benefit of the group as a whole.”

217               Clause 6A of the Franchising Code sets out the purposes of a disclosure document under the Code. It provides:

“The purposes of a disclosure document are:

(a)        To give to a prospective franchisee, or a franchisee proposing to enter into, renew or extend a franchise agreement, information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise ; and

(b)        To give a franchisee current information from the franchisor that is material to the running of the franchise business.”

218               One of the obligations imposed on a franchisor by the Franchising Code is to give a disclosure document to a prospective franchisee.

219               The question of whether a particular agreement is a franchise agreement within the Franchising Code is to be determined by reference to the definitions in the Code and not by reference to any preconceived notions of other agreements which are not ordinarily understood to be franchise agreements. Nevertheless, it is perhaps of assistance to bear in mind that there are other agreements which may have some of the features of a franchise agreement, for example, agreements providing for the licensing of intellectual property rights, distributorship agreements, agency agreements and cooperatives (see Gyles S, Redfern M J and Terry A, Franchising: Law and Practice (Butterworths, subscription service) at [1.0410] and following). In this case, Madgwicks submitted that the nature of the agreement between the applicants and the Donovan respondents was not a franchise agreement but a joint venture involving or including a licence of intellectual property rights.

220               Before setting out provisions of the Franchising Code, two features of this case should be noted. First, the business to be conducted by T2W was a new business and the company was not acquiring an existing business. Where there is an existing business, it may be fairly clear that there is or is not a “system or marketing plan” within clause 4(1)(b) of the Franchising Code. The other consequence of the fact that T2W’s business was a new business is that there may be a number of matters in the disclosure document which cannot be addressed, or can only be addressed in a fairly general way. Secondly, the applicants’ case is that no aspect of the Franchising Code was complied with. This is not a case of partial compliance whether by way of the provision of inaccurate information or otherwise.

221               For the purposes of this case, the principal obligations and rights under the Franchising Code were those contained in clauses 6, 6B, 10, 11 and 13. Those clauses relevantly provided as follows:

“6        Franchisor must maintain a disclosure document

(1)        A franchisor must, before entering into a franchise agreement, and within 3 months after the end of each financial year after entering into a franchise agreement, create a document (a disclosure document) for the franchise in accordance with this Division.

(2)        A disclosure document:

(a)        must be:

(i)         if the franchised business has an expected annual turnover of $50 000 or more — in accordance with Annexure 1; or

(ii)        if the franchised business has an expected annual turnover of less than $50 000 — in accordance with Annexure 1 or 2; and

(b)        may include additional information under the heading ‘Other relevant disclosure information’; and

(c)        must be signed by a director or an executive officer of the franchisor.

…

6B       Requirement to give disclosure document

(1)        A franchisor must give a current disclosure document to:

(a)        a prospective franchisee; or

            (b)        a franchisee proposing to renew or extend a franchise agreement.

(2)        If a subfranchisor proposes to grant a subfranchise to a prospective subfranchisee:

            (a)        the franchisor and the subfranchisor must:

(i)         give separate disclosure documents, in relation to the master franchise and the subfranchise respectively, to the prospective subfranchisee; or

(ii)        give to the prospective subfranchisee a joint disclosure document that addresses the respective obligations of the franchisor and the subfranchisor; and

(b)        the subfranchisor must comply with the requirements imposed on a franchisor by this Part.

Note   A subfranchisor is also sometimes referred to as a master franchisee: see subclause 3 (1).

…

10        Franchisor obligations

            A franchisor must give a copy of this code and a disclosure document:

(a)        to a prospective franchisee at least 14 days before the prospective franchisee:

(i)         enters into a franchise agreement or an agreement to enter into a franchise agreement; or

(ii)        makes a non-refundable payment (whether of money or of other valuable consideration) to a franchisor or an associate of the franchisor in connection with the proposed franchise agreement; or

(b)        to the franchisee at least 14 days before renewal or extension of the franchise agreement.

Note   Subsection 9 (1) of the Electronic Transactions Act 1999 provides that a requirement under a law of the Commonwealth to give information in writing is satisfied by giving the information electronically if it is reasonable to expect that the information will be readily accessible so as to be useable for subsequent reference, and the person to whom the information is given consents to it being provided electronically.

11        Advice before entering into franchise agreement

(1)        The franchisor must not:

(a)        enter into, renew or extend a franchise agreement; or

(b)        enter into an agreement to enter into, renew or extend a franchise agreement; or

(c)        receive a non-refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement;

unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code.

(2)        Before a franchise agreement is entered into, the franchisor must have received from the prospective franchisee:

(a)        signed statements, that the prospective franchisee has been given advice about the proposed franchise agreement or franchised business, by any of:

(i)         an independent legal adviser;

(ii)        an independent business adviser:

(iii)        an independent accountant; or

(b)        for each kind of statement not received under paragraph (a), a signed statement by the prospective franchisee that the prospective franchisee:

(i)         has been given that kind of advice about the proposed franchise agreement or franchised business; or

(ii)        has been told that that kind of advice should be sought but has decided not to seek it.

(3)        Subclause (2):

(a)        does not apply to the renewal or extension of a franchise agreement with a franchisor; and

(b)        does not prevent the franchisor from requiring any or all of the statements mentioned in paragraph (2) (a).

…

13        Cooling off period

(1)        A franchisee may terminate an agreement (being either a franchise agreement or an agreement to enter into a franchise agreement) within 7 days after the earlier of:

(a)        entering into the agreement; or

(b)        making any payment (whether of money or of other valuable consideration) under the agreement.

(2)        Subclause (1) does not apply to the renewal, extension or transfer of an existing franchise agreement.

(3)        If the franchisee terminates an agreement under subclause (1), the franchisor must, within 14 days, return all payments (whether of money or of other valuable consideration) made by the franchisee to the franchisor under the agreement.

(4)        However, the franchisor may deduct from the amount paid under subclause (3) the franchisor’s reasonable expenses if the expenses or their method of calculation have been set out in the agreement.”

222               In this case, the expected annual turnover was in excess of $50,000 and the relevant disclosure document was that set out in Annexure 1. One of the recommendations made in the disclosure document by the franchisor to the franchisee or prospective franchisee is that the latter should get independent legal, accounting and business advice before signing a franchise agreement.

223               The definition clause in the Franchising Code is clause 3. It defines “prospective franchisee” as a person who deals with a franchisor for the right to be granted a franchise.

224               The parties to the HOA were T2SA, Embleton, Mr Donovan and Mr Rafferty. The applicants contend that the HOA was an agreement to enter into a franchise agreement. Embleton was the franchisor and T2W or Mr Rafferty or both were prospective franchisees. The applicants contend that Mr Rafferty should have been given the documents required to be given under the Franchising Code.

225               The parties to the RA were T2SA, T2W, Embleton, Rafferty, Santora and Karaville. The applicants contend that the RA was a franchise agreement. T2SA was the franchisor and T2W was the franchisee. Santora was also a franchisee because of its shareholding in T2W and Mr Rafferty was also a franchisee because he otherwise participated in a franchise as a franchisee.

226               The Donovan respondents and Madgwicks each made submissions in support of a conclusion that the Franchising Code did not apply to the agreements. The principal submission was that none of the agreements was a “franchise agreement” within clause 4 of the Franchising Code. I will address that submission in due course. It is convenient at this point to deal with the other arguments put as to why the Franchising Code did not apply to the agreements or any one or more of them.

227               The first submission made by the  Donovan respondents was that T2W could not be a franchisee or prospective franchisee under the HOA because it was not incorporated until 8 October 2007. There is some uncertainty as to whether the HOA (which was executed by Mr Rafferty on 5 October 2007) became binding on 5 October 2007 or 8 October 2007. That question was not addressed by the parties in any detail. Even assuming the HOA was entered into before the incorporation of T2W I do not think that that fact causes any difficulty. The HOA placed obligations on T2W, including obligations concerning the use of the payment of the sum of $200,000 paid by Mr Rafferty (clause 2) and, upon its formation, the establishment of the venture business referred to in the agreement (clause 7). T2W became bound by the provisions of the HOA upon its incorporation (see s 131 of the Corporations Act 2001 (Cth)). Furthermore, I think Mr Rafferty, because of the obligations he assumed under the HOA, participated in a franchise (assuming for present purposes it is a franchise) as a franchisee or prospective franchisee.

228               The Donovan respondents and Madgwicks submitted that the HOA was not an agreement to enter into a franchise agreement under the Franchising Code because even if the RA was a franchise agreement T2W was not bound under the HOA to enter into it. They referred to clauses 5.2 and 8.1 of the HOA which are set out above (at [39]). In other words, T2W had an option to enter into the proposed Rights Agreement.

229               There is no doubt that the HOA itself was an enforceable agreement. It gave rise to immediate obligations; for example, Mr Rafferty had to pay the sum of $200,000 and incorporate the company which became Santora. Embleton, if requested, was bound to enter into the RA. The question is whether T2W’s apparent option to enter into the RA meant that the HOA was not an agreement to enter into a franchise agreement.

230               The Franchising Code does not contain a definition of an agreement to enter into a franchise agreement. Clause 4(1) provides that an agreement within the clause can be a written agreement, or oral agreement or an implied agreement.

231               Ordinarily, an agreement to enter a franchise agreement would involve an agreement which was legally enforceable by both parties. However, for the two reasons which follow, I have reached the conclusion that the HOA is an agreement to enter into a franchise agreement (assuming for present purposes it is a franchise).

232               First, I think the expression, “agreement to enter into a franchise agreement” should be construed broadly and should include an option arrangement where it is practically certain that the option will be exercised. In this case it was practically certain that the option would be exercised because Mr Donovan controlled T2W, the prospective franchisee. Mr Levy and Ms Harris themselves gave the reason in their letter dated 1 October 2007 when they said:

“As Stephen will effectively control 51% of the T2WANT and as the whole purpose of establishing T2WANT is to enter into the Rights Agreement we do not believe that there is a risk that T2WANT will not request the Rights Agreement once it is established.”

233               Secondly, although T2W had an option to enter into the Rights Agreement, Embleton did not. It was bound to enter into the Rights Agreement if requested to do so by T2W. That is an agreement by it to enter into a franchise agreement and that is sufficient to engage the provisions of, for example, clause 11(1) of the Franchising Code, where the obligation arises where the franchisor has entered into an agreement to enter into a franchise agreement.

234               The Donovan respondents submitted that Embleton was not bound by the obligations in the Franchising Code by reason of clause 5(3)(a). At the relevant time, that clause was in the following terms:

“(3)      However, this code does not apply to a franchise agreement:

(a)        if the franchisor:

(i)         is resident, domiciled or incorporated outside Australia; and

(ii)        grants only one franchise or master franchise to be operated in Australia;”

235               As I have said, Embleton is incorporated in Hong Kong. The meaning of clause 5(3)(a)(ii) is somewhat obscure. The clause itself directs attention to the status of the franchisor rather than the franchise agreement. That seems to follow from the fact that if attention was directed towards the franchise agreement then clause 5(3)(a)(ii) would have virtually no work to do because most franchise agreements will grant only one franchise. A way of avoiding that difficulty would be to construe clause 5(3)(a)(ii) as only operating in circumstances where the one franchise covered the whole of Australia so that no further franchises could be granted. However, that seems to me to be an artificial construction of the clause. The better construction is that the clause only operates if it is clear from the agreement(s), or the facts, or both, that the franchisor will be granting only one franchise to be operated in Australia. That is not the case here, and, in fact, the very opposite is suggested. I refer to the last two lines of clause 8.2 of the HOA and clause 2(b) of the RA (at [41] and [46]).

236               For these reasons, I do not think that clause 5(3)(a) of the Franchising Code operated to exclude Embleton from the terms of the Franchising Code. I record, without deciding, a submission by the applicants that clause 5(3) was irrelevant because it only applied to a franchise agreement and not an agreement to enter into a franchise agreement.

237               In any event, clause 5(3)(a) has no relevance to the RA because by the time of the RA, Embleton had decided to grant to T2SA (a company incorporated in Victoria) “an exclusive licence to use and exploit the core IP in Australia” (Recital B). If the RA was a franchise agreement, then T2SA was the franchisor and T2W was the franchisee. In addition, by reason of the definitions in clause 3 of the Franchising Code, Santora was a franchisee because it was a person to whom a franchise was granted being “an interest in a franchise”. That expression is defined in clause 3 to include a legal or beneficial interest in “shares or voting rights in a corporation, not being a listed corporation that owns a franchised business”. Furthermore, Mr Rafferty was also a franchisee because he otherwise participated in a franchise as a franchisee.

238               I turn now to the principal dispute between the parties concerning the Franchising Code. The Donovan respondents and Madgwicks submitted that none of the agreements were franchise agreements within clause 4 of the Franchising Code. At the relevant time, clause 4 was in the following terms, relevantly:

“(1)      A franchise agreement is anagreement:

(a)        that takes the form, in whole or part, of any of the following:

(i)         a written agreement;

(ii)        an oral agreement;

(iii)       an implied agreement; and

(b)        in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and

(c)        under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:

(i)         owned, used or licensed by the franchisor or an associate of the franchisor; or

(ii)        specified by the franchisor or an associate of the franchisor; and

(d)        under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:

(i)         an initial capital investment fee; or

(ii)        a payment for goods or services; or

(iii)       a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or

(iv)       a training fee or a training school fee;

but excluding:

(v)        payment for goods and services at or below their usual wholesale price; or

(vi)       repayment by the franchisee of a loan from the franchisor; or

(vii)      payment of the usual wholesale price for goods taken on consignment; or

(viii)     payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or continue business under the franchise agreement.”

239               Neither the Donovan respondents nor Madgwicks submitted that the agreements did not meet the requirements in clause 4(1)(a), (c) and (d). The application of the Franchising Code turned on the construction and application to the facts of clause 4(1)(b).

240               The submissions raised an issue as to the point in time at which the Court makes the assessment whether there is “a system or marketing plan” within clause 4(1)(b). Madgwicks submitted that the Court confines itself to the position at the time of the agreement and does not examine events after the agreement has been entered into. Under clause 8.2 of the HOA, the Rights Agreement is to contain a term or condition that T2W comply with the policies and procedures as defined by Embleton (clause 8.2(d)(xv)). Under the RA, clause 13(1)(a) provides that T2W must comply with the policies and procedures as required by T2SA from time to time. As I understood Madgwicks’ submission, I would not, for example, interpret these clauses by having regard to what was done under them after the agreements had been entered into. Madgwicks referred to certain observations made by Tracey J in ACCC v Kyloe Pty Ltd [2007] ATPR 42-194 (“Kyloe”) at 48,224 [56]. In Kyloe, Tracey J said that it was not relevant to the question of whether there was a franchise agreement to consider whether in fact certain contractual provisions had been enforced. Tracey J said (at 48,224 [56]) that that was not relevant because:

“The judgment as to whether a particular proposed agreement is a franchise agreement falls to be made before it becomes operative. That judgment must be made by reference to the terms of the proposed agreement”.

With respect, I agree with those observations. They are correct in a context where the agreement is embodied in a written document. I leave to one side the position where there is an implied agreement arising out of conduct over a period of time. However, the observations do not take the matter very far in this case because it is not suggested by the applicants that I should consider any conduct after the agreements. They base their case on the provisions of the agreements.

241               A related point is important in this case. It seems to me clear that the actual details of the alleged system or marketing plan need not be set out in the agreement or incorporated into the agreement or even be in existence at the time the agreement is reached. It will be sufficient for the purposes of clause 4(1)(b) that there be a power in the agreement which is said to be a franchise agreement to impose, “a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor”. It seems to me that that must be so for at least two reasons. First, systems and marketing plans will change from time to time and it is most unlikely that Parliament intended the Franchising Code to apply only to those cases where the system or marketing plan was fixed for the duration of the contract. Secondly, and more significantly, to conclude that a contractual power to impose a system or marketing plan is insufficient for the purposes of clause 4(1)(b) would mean that the scheme established by the Franchising Code would be very easy to evade.

242               The relevant definitions of “system” and “marketing” in the Macquarie Dictionary, (5^th ed, The Macquarie Dictionary Publishers, 2009) are as follows:

“system … noun … for a coordinated body of methods, or a complex scheme or plan of procedure: a system of marking; a system of numbering; a measuring system”

“marketing … noun … 1. the total process whereby goods are put onto the market.”

243               The use of the word “substantially” in clause 4(1)(b) means that the system or marketing plan does not need to be a system or marketing plan which covers the whole of the business, and the use of the word “suggested” means that the system or marketing plan need not be one which is imposed on the franchisee by the franchisor.

244               The applicants pointed to the fact that unlike the word “plan”, “system” was not qualified by the word “marketing”. They pointed out that the United States authorities summarised by Bennett J in Capital Networks Pty Ltd v .au Domain Administration Limited [2004] FCA 808 (“Capital Networks”) at [101]-[110] dealt with the phrase “a marketing plan or system”. The applicants submitted that if there was a “system” in relation to the acts of manufacture and the sale by manufacturers to T2W then that was sufficient to satisfy the definition in clause 4(1)(b) of the Franchising Code. The applicants submitted that there was such a system and they referred to clause 8.2(d)(vii), (viii), (x) and (f) of the HOA and clause 8 of the RA (see [41] and [54]).

245               I reject the premise of the applicants’ argument, although I acknowledge that it may not be possible in all cases to draw a clear line between systems relating to the manufacture of goods and systems relating to the sale or supply of goods. I reject the applicants’ submission because, although part of T2W’s business will be instructions to manufacturers and contracts with manufacturers, the acts of the business which are to be “under” a system or marketing plan are the acts of “offering, supplying or distributing goods”. Those are acts by T2W after it has received the MAUs (see the definition of “supply” in clause 3 of the Franchising Code and s 4 of the TPA).

246               Under the HOA, the right to carry on the business of offering, supplying or distributing MAUs in Australia results from the undertaking by Embleton to enter into a RA which contains a grant to T2W of what are called the “Rights”. The definition of the “Rights” is set out above (at [39]). Under the RA, T2W’s right to carry on the business of offering, supplying or distributing MAUs arises from the grant of the Licence and an entitlement to use the Core IP and any relevant developed IP. The definition of “Licence” is set out above (at [47]). What the definition in the RA does is to distinguish between acts of design and manufacture of MAUs on the one hand, and the acts of marketing and sale of MAUs on the other. A distinction of that broad kind is recognised in clause 4(1)(b) of the Franchising Code.

247               I turn now to consider the provisions of the HOA and RA, and whether they include a system or marketing plan of the nature referred to in clause 4(1)(b). For the reasons I have given, I will focus primarily on those aspects of T2W’s activities which involve the offering, supplying or distributing of MAUs. It is convenient to consider the HOA and RA together, because by and large their provisions are the same.

248               Some of the factors relevant to whether there is a system or marketing plan within clause 4(1)(b) are identified in Capital Networks and Kyloe. The list of factors set out in those cases is not intended to be an exhaustive one. Furthermore, not all of the factors need be present and not all need to be present in the particular form in which they are identified in those two cases before a Court will say there is a system or marketing plan. Some factors may be entitled to more weight than others, depending on the circumstances of the case. After considering the factors, it remains necessary for the Court to stand back and consider whether the terms of the definition are satisfied.

249               In Kyloe at [40], Tracey J identified sixteen relevant factors. Some of the factors are particular to transactions where the alleged franchisee is distributing the alleged franchisor’s goods. The three factors which deal specifically with that situation are the provision by the franchisor of a detailed compensation and bonus structure for distributors selling its products; a scheme prescribed by the franchisor under which a person could become a distributor, direct distributor, district director, regional director, or zone director; and the provision of assistance by the alleged franchisor to its distributors in conducting “opportunity meetings”. Those factors are not relevant here.

250               The first factor which the applicants allege is present, or present in a varied or modified form, in this case is a centralised bookkeeping and recordkeeping computer operation provided by the franchisor for distributors. Of course in this case, I am not dealing with a distributor as such. In this case, T2W is to prepare proper financial records with assistance from Deloitte and in a form approved by Embleton (HOA) or T2SA (RA) and on a financial management system approved by T2SA. These were to be held available to Embleton (HOA) or T2SA (RA) at all times (see HOA clause 8.2(d)(xx); RA clause 13.1(e)).

251               The second factor which the applicants allege is present, or present in a varied or modified form, in this case is the reservation by the alleged franchisor of a right to screen and approve all promotional materials used by distributors.  Under the HOA, the RA is to include a term or condition that Mr Donovan has an absolute discretion to scrutinise proposed sales and to approve or deny any proposed sales (see HOA clause 8.2(c)). In addition, the applicants point to the provision in the HOA which provides that the Rights Agreement shall include a provision that T2W must comply with the policies and procedures as defined by Embleton (HOA clause 8.2(d)(xv)). I will refer to this as the policies and procedures provision. There is a similar clause in the RA (clause 13.1(a)). Furthermore, there is the clause giving T2SA power to approve or refuse any project (clause 9.3) and a clause requiring T2W to comply with all reasonable directions of T2SA as to quality control in the manufacture and marketing of MAUs (clause 13.1(f)).

252               It is appropriate at this point that I set out my construction of the policies and procedures provision in both the HOA and the RA. In my opinion, it is a very broad provision which would enable a number of features of a system or marketing plan to be imposed by Embleton or T2SA, as the case may be. In my opinion, there is no reason to read the clause down to exclude systems or marketing plans which fall within clause 4(1)(b) of the Franchising Code. The question is one of the construction of a contract and I can find nothing in the agreements themselves which suggests that the policies and procedures provision should be read down. It would have been open to the Donovan respondents or Madgwicks to call evidence of surrounding circumstances in aid of a more limited construction of the policies and procedures provision (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352 per Mason J (as his Honour then was)). However, no such evidence was called in this case. There was evidence that Mr Donovan intended that the agreements not fall within the Franchising Code, but his uncommunicated intention is not an admissible surrounding circumstance.

253               The third factor which the applicants allege is present, or present in a varied or modified form in this case, is a prohibition on the repackaging of products by distributors. They rely on the policies and procedures provision in both the HOA and the RA, and clauses 3(a) and 9.1(a) of the RA which are set out above (at [49] and [55]).

254               The fourth factor which the applicants allege is present, or present in a varied or modified form, in this case is a suggestion by the franchisor of the retail prices to be charged for products. The applicants refer to the policies and procedures provision in both the HOA and RA, and clauses 9.3 and 13.1(f) of the RA which are set out above (at [56] and [58]).

255               The fifth factor which the applicants allege is present, or present in a varied or modified form, in this case is a comprehensive advertising and promotional program by the alleged franchisor. The applicants refer to the policies and procedures provision in the HOA and RA. In addition, they point to 8.2(d)(iv) and (xiii) of the HOA and clause 9.1 of the RA, all of which are set out above (at [41] and [55]-[56]).

256               The sixth factor which the applicants allege is present is the division of a state into marketing areas. Under the HOA, Territory is defined in the manner I have already indicated, and I refer also to clause 8.2(d)(v) (at [41]).

257               The RA defines “Territory” in the same way as the HOA (clause 1.1 and Recital C). Under clause 2(b) of the RA, T2W agrees that T2SA may at any time grant other licences provided that such licences do not apply to the industry markets within the territory. In addition to these matters, there is evidence from Mr Rafferty (which I accept) that Mr Donovan told him of other territories and that he was close to signing up deals in certain other territories.

258               The seventh factor the applicants allege is present in this case is the establishment of sales quotas. The HOA provides that the RA shall include a term or condition providing that T2W shall “achieve agreed sales targets and other agreed KPIs”. Further details of the precise requirements are then set out. The RA contains a similar provision in clause 10.

259               The eighth factor the applicants allege is present or present in a varied or modified form in this case is that the franchisor has approval rights of any sales personal whom the franchisee might seek to employ. The applicants refer to clause 8.2(d)(xiii) of the HOA and clause 9.1(c) of the RA (see [41] and [56]).

260               The applicants then identify four factors which they allege are present by virtue of the policies and procedures provision in the HOA and the RA. Those four factors are a mandatory sales training regime; the provision of quotation sheets to the franchisees’ employees; the provision by the franchisor of prescribed invoices and other sales forms; and a requirement that franchisees elicit certain information from their customers and provide that information to the franchisor.

261               The thirteenth factor which the applicants submit is present is a restriction on the franchisee selling any of the franchisor’s products without first consulting the franchisor. With the variation that the products are T2W’s products manufactured in accordance with the alleged franchisor’s intellectual property, this factor is present in the HOA in clause 8.2(c) and in the RA in clause 9.3 (see [40] and [56]).

262               In my opinion, the policies and procedures provision would authorise Embleton (HOA) and T2SA (RA) to carry out most of the acts I have identified above. In the RA it appears under the heading “Conduct of business by T2W” and the proposed business of T2W included the offering, supplying or distribution of MAUs. Furthermore, in the same clause T2SA is given the power to impose reasonable directions as to quality control in the “marketing” of MAUs.

263               I come back to the terms of clause 4(1)(b) of the Franchising Code. I think that, when regard is had to the factors I have identified and the provisions of the agreements, the HOA and the RA involve a grant of the right to carry on the business of offering, supplying or distributing goods in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor.

264               Madgwicks’ submission that it is significant that there was no marketing plan in existence must be rejected. This was a new business and, in any event, it is the contractual power to impose a system or marketing plan which is significant in this case.

265               The right to carry on the business must be “under” the relevant type of system or marketing plan. That requirement is satisfied in this case bearing in mind the terms of the HOA and RA.

266               In Ketchell, the High Court considered whether a contravention of s 51AD of the TPA resulted in the franchise agreement being illegal and unenforceable at common law. The Court decided that that was not the result of a contravention. The Court said (at 117 [38]):

“The detailed provision by the Act for the consequences of non-compliance with an industry code, such as the Franchising Code of Conduct, does not support a conclusion that it was intended that the harsh consequences provided by the common law were to follow upon contravention of s 51AD. The Act provides a more flexible approach. It allows a Court to prevent entry into a franchise agreement, to vary the terms of an agreement entered into in breach of the Code, or to terminate such an agreement or provide compensation for loss and damage, if it is shown to have been caused by the contravention. In that regard, the extended meaning which may be given to loss and damage by s 82, which is suffered by reason of entry into contractual obligations, may assume significance.”

267               In my opinion, the HOA was an agreement to enter into a franchise agreement and the RA was a franchise agreement under the Franchising Code. Under the HOA, Embleton was the franchisor and Mr Donovan was likely a participant in the franchise as a franchisor. Under the RA, T2SA was the franchisor. In my opinion, Embleton and T2SA have contravened s 51AD of the TPA. However, Mr Donovan is only liable if he was involved in the contravention within s 75B(1) of the TPA. I do not think he is liable because I do not think he had the required knowledge and I refer to my discussion in the context of the applicants’ claim against Madgwicks under s 75B(1) of the TPA.

268               Both the Donovan respondents and Madgwicks submitted that even if there had been compliance with the Franchising Code Mr Rafferty would have not sought legal advice or even if he did, he would have proceeded with the agreements irrespective of the legal advice. They identified some of the factors identified in relation to the applicants’ claim against the Donovan respondents under s 52 of the TPA (see, for example, [205] and [207]).

269               Mr Rafferty was aware of the terms of the agreements; in fact he made suggestions for various changes. Mr Rafferty was aware of what Mr Cosoff and Mr Marryat considered to be the uncommercial or disadvantageous aspects of the HOA. Mr Rafferty was aware that he could seek legal advice. These matters are no doubt true and have considerable force when coupled with Mr Rafferty’s obvious enthusiasm for the venture and the caution required in relation to the evidence of a person as to what they would otherwise have done. However, I am satisfied on the evidence that had the Franchising Code been complied with, Mr Rafferty would have sought legal advice. I am satisfied that the legal advice he would have obtained would have been not to enter into the HOA and that he would have accepted the advice. I agree with counsel for the applicants that it is one thing to know an agreement contains a particular provision; it is another to have that matter emphasised and expanded upon by advisers you trust.

270               Madgwicks submitted that an adverse inference should be drawn against the applicants by reason of the fact they did not call Mr Luff or Mr Brunner. I reject that submission. The issue was what Mr Rafferty would have done had the circumstances been different. Mr Rafferty was called and he gave his evidence on that topic.

271               The applicants are entitled to relief under s 87 of the TPA on the separate and independent ground that there was a contravention of s 51AD.

T2SO’s cross-claim against Mr Rafferty

272               It was accepted that this cross-claim must be dismissed if the applicants succeed against the Donovan respondents. The applicants have succeeded against the Donovan respondents and the cross-claim must be dismissed.

The Applicants’ claimS against Madgwicks

Section 9 of the Fair Trading Act 1999 (Vic)

273               Section 9 of the Fair Trading Act 1999 (Vic) (“FTA”) provides as follows:

“(1)      A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

(2)        Nothing in the succeeding provisions of this Part is to be taken as limiting by implication the generality of subsection (1).”

274               The expression “trade or commerce” is defined in s 3 to include:

“any business or professional activity whether or not carried on for profit.”

275               Madgwicks do not suggest that their conduct was not conduct in trade or commerce for the purpose of s 9 of the FTA.

276               The expression “engaging in conduct” is defined in s 3 of the FTA in the following way:

“… in relation to a person, includes all or any of the following –

(a)        the doing of any act by the person;

(b)        the refusal by the person to do any act;

(c)        the person refraining (otherwise than inadvertently) from doing an act;

(d)        the person making it known that an act would not be done;

(e)        the person offering to do an act or to do an act on a particular condition;

(f)        the person making it known that he or she will accept applications, offers or proposals to do the act or do the act on a particular condition;”

277               Section 159(1) of the FTA provides as follows:

“A person who suffers loss, injury or damage because of a contravention of a provision of this Act may recover the amount of the loss or damage or damages in respect of the injury by proceeding against any person who contravened the provision or was involved in the contravention.”

278               The factual matters which are relevant to this claim are as follows. At all times, Madgwicks acted for the Donovan respondents in relation to their dealings with the applicants and, in the course of acting for the Donovan respondents, Madgwicks provided to Mr Rafferty, on behalf of the applicants, each of the HOA, the JVSA and the RA. In the course of acting for the Donovan respondents, Madgwicks received into their trust account two amounts paid under the agreements, namely, the sum of $200,000 paid under the HOA, and the sum of $1,000,000 paid under the RA. Those moneys were disbursed by Madgwicks in the manner indicated above (at [103]).

279               In the course of acting for the Donovan respondents, Mr Levy attended one meeting at which Mr Rafferty was present, namely, the meeting at the offices of Deloitte on 27 September 2007, and Ms Harris attended two meetings at which Mr Rafferty was present, namely, the meeting at the offices of Deloitte on 27 September 2007 and a meeting, again at the offices of Deloitte, on 18 October 2007.

280               I accept Mr Rafferty’s evidence that at a very early stage and before any discussion of the detailed terms of the HOA, somebody asked him whether he wanted to seek legal advice and that he said “we haven’t got that far yet”. That would not have been someone from Madgwicks, as Madgwicks were not involved at that very early stage.

281               I also accept Mr Levy’s evidence that on 25 September 2007 Mr Rafferty said he would bring a solicitor to the meeting to be held on 27 September 2007. As it happened he did not do that. Mr Rafferty reviewed the various agreements and made suggestions as to alterations. He asked that a copy of the HOA be sent to his accountants. He at no time sought advice on any matter from Madgwicks.

282               Madgwicks dealt with Mr Rafferty directly. They did not deal with any solicitors or other advisers acting on his behalf. Of course, they did not know whether or not Mr Rafferty was taking legal or other advice “behind the scenes”. There was some suggestion that Mr Rafferty may have been taking advice from his accountants in Perth, Moore Stephens. Mr Rafferty and Santora acknowledged in clause 37 of the JVSA executed on or about 23 November 2007 that they had had the opportunity to seek legal advice in respect of the terms and conditions of the agreement and, further, they acknowledged and confirmed that they had read and understood the terms and conditions of the agreement. Mr Rafferty’s belief was that Madgwicks were competent solicitors acting on behalf of the Donovan respondents.

283               Madgwicks had legal and professional obligations by reason of their retainer with the Donovan respondents.

284               The applicants claim that, in these circumstances and by reason of the fact that Madgwicks did not advise them that the agreements constituted a “franchise agreement” and “franchise system”, Madgwicks represented to them that the transactions contemplated by and given effect to under the agreements did not constitute a “franchise agreement” and a “franchise system”. It followed (said the applicants) that they were not aware of the provisions of the Franchising Code and they were not aware of the protection afforded by the Code and the information which should have been provided to them.

285               The applicants allege that by reason of Madgwicks’ conduct, they acted to their detriment. They allege that Madgwicks’ conduct was misleading or deceptive or was likely to mislead or deceive in contravention of s 9 of the FTA.

286               I note that it is not alleged by the applicants that they were misled about whether the Franchising Code applied by any of the provisions in the agreements, for example, clause 8.1(b) of the HOA or clause 12 of the RA.

287               Madgwicks did not say anything about the Franchising Code to the applicants and that raises the issue of when what appears on the face of it to be silence may constitute misleading or deceptive conduct or conduct likely to mislead or deceive.

288               Demagogue is a leading case on the circumstances in which a person may be guilty of misleading or deceptive conduct in the absence of a positive representation. Black CJ said (at 32):

“Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of ‘mere silence’ or of a duty of disclosure can divert attention from that primary question. Although ‘mere silence’ is a convenient way of describing some fact situations, there is in truth no such thing as ‘mere silence’ because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.”

Gummow J (with whom Cooper J agreed) said, at 41:

“But, consistently with regard to the natural meaning of the terms of s 52, the question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive. Conduct answering that description may not always involve misrepresentation: …”

289               In Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054 French J (as his Honour then was) said (at 53,195):

“The cases in which silence may be so characterised [ie as misleading or deceptive] are no doubt many and various and it would be dangerous to essay any principle by which they may be exhaustively defined. However, unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that that fact does not exist.”

290               In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97 (“Winterton Constructions”), Hill J said (at 114):

“Obviously, it is difficult to see how mere silence could, of itself, constitute conduct which is misleading or deceptive… However, if the circumstances are such that a person is entitled to believe that a relevant matter affecting him or her adversely would, if it existed, be communicated, then the failure to so communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his or her detriment is entitled to infer from the silence that no danger or detriment existed.”

291               Silence can be misleading or deceptive even though there is no legal or equitable duty which requires disclosure: Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 at 88 per Samuels JA; Demagogue at 40 per Gummow J; Warner v Elders Rural Finance Ltd (1993) 41 FCR 399 (“Warner”) at 405 per Hill J (also see R S French, “A Lawyer's Guide to Misleading or Deceptive Conduct” (1989) 63 Australian Law Journal 250 – an article written by French J).

292               In Software Integrators Pty Ltd v RoadRunner Couriers Pty Ltd (1997) 69 SASR 288, Doyle CJ noted that silence or non-disclosure, by themselves, were not misleading and deceptive conduct for at least two reasons. First, mere silence or non-disclosure cannot cause a person to be misled or deceived. An applicant must establish that his or her belief was caused by the respondent’s conduct and that is necessarily absent in cases of mere silence or non-disclosure. Secondly, in cases of silence the respondent’s conduct must fall within the expression “engaging in conduct” and, in the context of s 4(c) of the TPA, refusing to do an act “otherwise than inadvertently” has been interpreted as including an omission to disclose information only where that omission is deliberate. The Chief Justice expressed what he considered to be the test in the following passage (at 297-298):

“Analysis of the authorities leads me to the conclusion that the appropriate inquiry in this case is whether the conduct of Software, considered as a whole, was misleading and deceptive. In answering this question Software's silence will be misleading and deceptive if, objectively assessed, a person in Ryan’s position, would be entitled to expect or infer (has a reasonable expectation) that Brain would disclose the fact that transfer of the data entered on the transit grid involved a substantial amount of manual work and substantial cost.”

(Citation omitted.)

(See Warner at 405 per Hill J.)

293               One factor which is relevant in considering whether there was a reasonable expectation of disclosure is whether the non disclosing party owed a duty of confidence to his client or another party.

294               In Kabwand Pty Ltd & Ors v National Australia Bank Ltd [1989] ATPR 40-950 (“Kabwand”), the applicants had purchased two farming properties and a business. The applicants had successfully sued the vendor, a Mr Cardell, and his family for deceit in relation to representations made as to the profitability of the business. Mr Cardell and his family were, however, bankrupt, so the applicants pursued a claim of misleading and deceptive conduct against the bank that had facilitated the purchase of one of the properties. 

295               The evidence was that the respondent bank had only been involved in the purchase of the property known as “Glenhaven”. Mr Cannon, the manager of a branch owned by the respondent, had arranged finance for the purchase of that property by auction. The purchase of the other property, “Gunna Doo”, and a strawberry farming business in relation to that property had occurred prior to the purchase of “Glenhaven”. There was a dispute in the evidence as to when Mr Cannon had spoken to the applicants regarding the purchase of “Glenhaven”. The trial judge had accepted his evidence that they had not spoken until after the purchase of “Gunna Doo” and the business. However, the Full Court considered the position on the assumption that Mr Cannon had spoken to the applicants before those purchases had taken place.

296               The applicants claimed that Mr Cannon and through him, the respondent, had misled and deceived them by refraining from informing them as to whether the business was a sound and prosperous business. The claim failed. Lockhart J delivered the judgment of the Court (Lockhart, Hartigan and Hill JJ) and his Honour said (at 50,377):

“In the present circumstances, however, it could not be said that there was any duty on the part of Mr Cannon to impart to the Somersets any information at all concerning the business or financial affairs of Mr Cardell. Mr Cannon as a bank manager had an implied contractual duty to keep confidential the business and financial affairs of Mr Cardell.”

 

His Honour then went on to consider the qualifications to the duty of confidence imposed upon the bank. He concluded (at 50,377)

“In our view the present circumstances did not fall within any of the four qualifications to the duty stated by Bankes L.J., and, for Mr Cannon to have said anything at all about the business or affairs of his customer Mr Cardell, would have been in clear breach of Mr Cannon’s obligations.”

 

297               Winterton Constructions is a similar case. In that case, the respondent merchant bank had arranged finance for a property developer in relation to a construction project. The property developer was initially a party to the proceeding but summary judgment was entered against it when it did not enter a defence. The applicant was the construction company that undertook the construction work.

298               The applicant claimed that the respondent had engaged in misleading and deceptive conduct by failing to inform the applicant of a change in the financial circumstances of the property developer. The change in circumstances meant that the respondent was entitled to withhold the advance of funds to the property developer, the result being that the applicant would no longer receive payment for the construction work.

299               Hill J referred to the decision in Kabwand. He said (at 114-115):

“As the decision of the Full Court of this Court in Kabwand Pty Ltd v National Australia Bank Ltd [1989] ATPR 50,367 shows, there is no duty on a bank to disclose to a purchaser from a customer of the bank that the business purchased was unprofitable and that the customer owed the bank a substantial sum of money pertaining to that business. The bank’s duty of confidence at common law prevented such a duty to the public arising in that case.

Kabwand’s case (supra) is not directly in point for Hambros is not a banker in the ordinary sense of the word. Hambros is what is commonly referred to as a merchant bank. However, there is much to be said for the view that a merchant bank has likewise a contractual duty of confidence to its clients, that duty being an implied term in the relationship between them.”

His Honour concluded that disclosure was not required. He said (at 115-116):

“With respect to the submission, I do not think that the law imposes in such circumstances any such obligation. Even in the case of a financier not being a bank, a borrower is entitled to expect (even if it is not an implied term of the contractual arrangement) that his financier will keep confidential matters concerning the borrower's financial affairs. To impose upon a lender such an obligation to communicate to a person whom it knows to be under contractual obligations with the borrower, would impose an intolerable burden upon the financier and could be most damaging to its borrowers. This is so whether or not the financier itself might tend to benefit from the failure to disclose. It is hard to see, for example, how the financier would be protected from an action of defamation should it turn out that the information conveyed by it to a contracting party turned out to be in some way incorrect. The communication of that information could further work, in many cases, quite contrary to the interests of the financier.

It follows, in my view, that the applicant has not established misleading or deceptive conduct on the part of Hambros and accordingly that its claim under the Trade Practices Act must fail.”

300               Another important consideration referred to in the authorities is whether the failure to disclose was deliberate. In Costa Vraca Pty Ltd v Berrigan Weed & Pest Control Pty Ltd (1999) 155 ALR 714, Finkelstein J held that a pest control company did not engage in misleading and deceptive conduct because they did not deliberately withhold from the customer in question the fact that they had previously used their equipment with a pesticide that was dangerous to the tomatoes grown by the customer. His Honour said (at 722):

“When the complaint is that s 52(1) has been infringed by conduct that involves either refusing or refraining from doing an act before that conduct is actionable it must have been deliberately engaged in. Bowen CJ in Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 77 said this followed from the use of the words ‘refuse’ and ‘refrain’ in s 4(2). This conclusion is reinforced by the fact that by s 4(2)(c) conduct includes the refraining from doing an act provided it is ‘otherwise than inadvertently’: see also Edgar v Farrow Mortgage Services Pty Ltd (in liq) (1992) ATPR 46–096 at 53,375; Zaknic Pty Ltd v Svelte Corp Pty Ltd (1996) ATPR 46–159 at 53,362; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 42; Diversified Mineral Resources NL v CRA Exploration Pty Ltd (1995) ATPR 41–381 at 40,284.”

301               I have considered the facts carefully, and I do not think there is any evidence to support the suggestion that Mr Rafferty had a reasonable expectation that Madgwicks would advise him that (as I have held) the agreements constituted a “franchise agreement” and a “franchise system” within the Franchising Code of Conduct. The fact that Madgwicks owed a duty of confidence to the Donovan respondents and that any non-disclosure by them was not deliberate supports that conclusion.

302               I add that, if it is correct to approach the issue by considering whether a representation was made then, rather than the representation pleaded by the applicants, it would probably be appropriate to express the representation in terms of a representation that Madgwicks believed on reasonable grounds that the agreements did not constitute a “franchise agreement” and a “franchise system” within the Franchising Code. Such a representation has not been shown to be misleading or deceptive.

303               The applicants’ counsel sought to gain support for a duty of disclosure by referring to clause 2 of the HOA. That clause deals with the seed fee to be paid by Mr Rafferty to Madgwicks’ trust account. The fee was not refundable. Madgwicks were to pay that fee to T2W and the fee was to be used to reimburse certain costs and expenses incurred by the parties, including the costs incurred by T2W in preparing the HOA and the initial drafts of other agreements contemplated by the HOA. The applicants referred to the fact that they were to become the holder of a 49 per cent interest in T2W. The applicants’ submission was that they, through T2W, were paying part of Madgwicks’ fees and that this was relevant to whether or not they had a reasonable expectation of disclosure by Madgwicks. The applicants also referred to clause 29.16 of the RA which provides that T2W must pay all of the legal costs (on a full indemnity basis) and the accounting and other costs and expenses incurred with respect to the establishment of T2W and the preparation of the agreements and the transactions and documents contemplated by the agreements. Again, the applicants submit that the fact that the company of which they were a 49 per cent shareholder was paying Madgwicks’ fees was relevant to the question of reasonable expectation. I reject these submissions. None of these matters are pleaded and, as Madgwicks’ counsel submitted, it is not unusual for a purchaser to pay costs of the vendor.

304               The applicants’ claim based on s 9 of the FTA must fail.

305               I mention further arguments advanced by Madgwicks in case they were wrong on their primary submission.

306               I have already dealt with and rejected their submission that even if the Franchising Code applied the applicants have not shown causation or reliance. I dealt with that in the context of the applicants’ claim against the Donovan respondents based on a contravention of s 51AD of the TPA (at [268]-[270] above).

307               Madgwicks submitted that even if it was established that they had engaged in conduct which was misleading or deceptive, or likely to mislead or deceive, the applicants must fail because they did not terminate their relationship with the Donovan respondents because of any failure relating to the Franchising Code. They submitted that the relationship came to an end because the Donovan respondents failed to fulfil their promises in relation to the BMA prototype and because Mr Donovan accused Mr Rafferty of embezzlement. That submission must be rejected because I have accepted that had the Franchising Code been complied with, the applicants would not have entered into the agreements and paid the moneys under the agreements. That is loss and damage for the purposes of s 158 of the FTA, which is the FTA equivalent of s 87 of the TPA.

308               Madgwicks submitted that if they were liable, they would be liable only for the judgment amount against the Donovan respondents minus the amount realised by the sale of the assets which are presently the subject of the freezing order. That argument must be rejected for the reason advanced by the applicants, namely, the freezing order does not create a proprietary interest in favour of the party who has obtained it.

Section 75B of the TPA

309               Section 75B of the TPA is in the following terms:

“(1)      A reference in this Part to a person involved in a contravention of a provision of Part IV, IVA, IVB, V or VC, or of section 95AZN, shall be read as a reference to a person who:

(a)        has aided, abetted, counselled or procured the contravention;

(b)        has induced, whether by threats or promises or otherwise, the contravention;

(c)        has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)        has conspired with others to effect the contravention.”

310               I have held that Embleton and T2SA contravened s 51AD of the TPA. They have done that because they did not give the documents referred to in clause 10 of the Franchising Code, or receive the documents referred to in clause 11 of the Franchising Code.

311               The applicants claim that Madgwicks aided, abetted, counselled or have been involved in, knowingly concerned in or have been a party to the contravention of s 51AD of the TPA and that they are entitled to relief against them under s 82 or s 87 of the TPA or both.

312               In Fencott v Muller (1983) 152 CLR 570, the High Court held that s 75B of the TPA is a valid law of the Commonwealth. In the course of his reasons, Gibbs CJ said (at 584):

“By the combined provisions of ss. 75B and 82, the Parliament has made natural persons liable in damages for a contravention by the corporation only if they have been involved in the manner described by s. 75B, which, in my opinion, refers to a close rather than a remote involvement in the contravention. In the most general words of s. 75B, those of par. (c), the word ‘knowingly’ significantly confines the operation of the provision.”

313               In a case where a party seeks to establish that another party has been involved in a contravention within s 75B(1) of the TPA, there are two questions. The first question is whether the person’s acts are sufficient to bring the person within the terms of the subsection. The second question is whether the person has sufficient knowledge for the purposes of the subsection.

314               In terms of the authorities, a common case to come before the Courts is a case where a corporation has been guilty of misleading or deceptive conduct and an applicant seeks to make liable a director of the corporation who made representations or otherwise participated in the misleading or deceptive conduct. In those cases, the second question is likely to be the one which determines the outcome of the case. However, s 75B(1) has resulted in many other groups being held liable in respect of a contravention by another. In Sutton v A J Thompson Pty Ltd (in liquidation) (1987) 73 ALR 233, the company’s accountant was held liable under s 75B(1) of the TPA. The representations which formed the basis of the misleading and deceptive conduct were made during discussions at which the accountant was present and in which he took part. In Heydon v NRMA Ltd (2000) 51 NSWLR 1, McPherson A-JA (with whom Ormiston A-JA agreed) said, obiter, that solicitors engaged to advise on a prospectus would fall within s 75B(1)(a) or s 75B(1)(c) provided they had the knowledge required by that section (at 150 [436]).

315               There is not a great deal of authority on the level of involvement required in order to establish that a party was “knowingly concerned in” or “party to” a contravention within s 75B(1)(c).

316               In Butt v Tingey (1993) ATPR (Digest) 46-110 a claim was made that a solicitor had been knowingly concerned in a contravention of s 52 of the TPA. The solicitor had been retained by Blu-Binda Marina Pty Ltd. Blu-Binda had entered into a contract to sell a motor vessel to the respondent. Blu-Binda had accepted part-payment from the respondent in the form of money and an old vessel which Blu-Binda had promptly sold. Blu-Binda failed to deliver the new vessel to the respondent. The respondent sought return of the funds provided and an assurance that they would not be distributed. The solicitor for Blu-Binda wrote to the respondent by facsimile indicating that the funds would not be disbursed. In fact, the funds had already been applied to Blu-Binda’s overdraft facility. 

317               At first instance, the solicitor was held liable. This decision was overturned on appeal by Neaves and Beazley JJ (Davies J dissenting). The majority held that the solicitor in question did not have actual knowledge that the funds had been applied to the overdraft. Their Honours also held that the evidence did not establish that the solicitor was doing anything more than conveying to the respondent’s solicitors the essence of the instructions he had received. Davies J, in dissent, held that, by giving his authority as a solicitor to the facsimile and letter, the solicitor had knowingly assisted Blu-Binda to mislead and deceive the respondent.

318               In Nescor Industries Group Pty Ltd v Miba Pty Ltd (1997) 150 ALR 633, Davies J said (at 641):

“Agents may be held to be in breach of the statutory provision either because they are directly responsible for the misleading information or because the fact that the information has come from them has added something to its weight and authority”

319               In John G Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1993] ATPR 41-249, Davies, Heerey and Whitlam JJ upheld a decision at first instance that a real estate agent was liable under s 75B(1)(c). The agent had provided to the purchasers a brochure produced by the vendors which contained misrepresentations as to the net lettable area of the property. The agent claimed that it was not “knowingly concerned” because it had merely passed on the information. The Court said (at 41,359):

“In our opinion an estate agent which holds itself out as, amongst other things, ‘consultants to institutional investors and to developers of major properties’ would not be regarded by potential purchasers of properties as merely passing on information about the property ‘for what it is worth and without any belief in its truth or falsity’.”

Their Honours placed particular reliance on the fact that the misrepresentations related to the net lettable area which “stands on a different footing from the puffery which often accompanies the sale of real property” because it is a figure of “hard physical fact” (see 41,359).

320               The meaning of the phrase “knowingly concerned” has been considered in the context of criminal offences. The old s 233B(1)(d) of the Customs Act 1901 (Cth) prohibited a person being knowingly concerned in the importation of a prohibited import. In R v Tannous (1987) 10 NSWLR 303, the New South Wales Court of Criminal Appeal considered the meaning to be given to the phrase “knowingly concerned” as it appeared in s 233B(1)(d). Lee J (with whom Street CJ and Finlay J agreed) indicated that what was required was more than just knowledge, but also some act or omission which implicated or involved the accused by establishing a physical connexion between him and the offence (see 308). His Honour said (at 308-309):

“I agree with counsel for the appellant when he submits that a mere state of mind which merely amounted to the appellant being interested in or concerned ‘about’ the venture, for whatever reason, would not be sufficient to constitute the concern of which the section speaks. The ‘concern’ to which the section speaks is not a concern personal to the appellant in the sense of being in his mind, but it is a concern which can be demonstrated objectively by reference to his association, whatever it may be, with the importation. It must be shown that he is ‘concerned in’ not just ‘concerned about the importation’… Before he could be convicted under the section he would have to do something to connect himself with or involve himself in the importation.”

 

Lee J, in reaching his conclusion, cited with approval comments made by the Full Court of the Western Australian Supreme Court in Ashbury v Reid [1961] WAR 49. That case involved the application of s 54(1) of the Forestry Act 1918-1954 (WA) which prohibited aiding, abetting, counselling or procuring or being directly or indirectly concerned in the commission of a forestry offence.

321               In R v Kelly (1975) 12 SASR 389, the Full Court of the Supreme Court of South Australia considered the meaning of the word “concerned”. Hogarth ACJ, Mitchell and Zelling JJ said (at 400):

“The word is no doubt deliberately chosen to cover a wide range of activities since it would be well-nigh impossible to define more closely the various acts which could go towards the fulfilment of a plan for the importation of prohibited articles.”

322               In R v Lam (1990) 46 A Crim R 402 (NSW CCA), Gleeson CJ cited this passage with approval. The Chief Justice said (at 405):

“The expression ‘concerned in’ is of general import and it is impossible to state with precision what it comprehends. It is necessary to consider the facts and circumstances of the particular case.”

323               In this case, Madgwicks did not argue that their level of participation in the contravention did not meet the requirements of s 75B(1) and therefore it is not necessary for me to consider this question any further. I have mentioned the authorities to illustrate that the determination of the issue very much turns on the facts of the particular case.

324               Madgwicks submitted that they were not liable to the applicants under s 75B(1) because they did not have the required level of knowledge. The contravention in this case is a contravention of s 51AD of the TPA, and that came about because of a failure to comply with the requirements of clauses 10 and 11 of the Franchising Code.

325               Madgwicks no doubt knew that some of the Donovan respondents were corporations and that they were acting in trade or commerce. They knew of the terms of the agreements. They knew that there was a Franchising Code, and they knew that the Donovan respondents took no action to comply with it. The applicants submitted that this knowledge was sufficient to render Madgwicks liable under s 75B(1).

326               Madgwicks submitted that, in order for them to be liable under s 75B(1), the applicants had to show that they knew the Franchising Code applied to the agreements and that that is an essential element of the knowledge requirements under the subsection. Madgwicks accept that it is not necessary for the applicants to show that they knew that there was a contravention of the Act.

327               In Yorke v Lucas (1985) 158 CLR 661 (at 667 and 671 per Mason ACJ, Wilson, Deane and Dawson JJ; at 677 per Brennan J) the High Court said that knowledge of the essential elements making up the relevant contravention must be proved in order to establish liability under s 75B(1)(a) or (c).

Brennan J (as his Honour then was) said (at 677):

“But section 75B(a) does require knowledge of the acts constituting the contravention and of the circumstances which give those acts the character which s 52 defines, namely, ‘misleading or deceptive or ... likely to mislead or deceive’.”

328               In a misleading and deceptive conduct case it has been held that knowledge that the conduct amounts to a contravention is not required, but knowledge of the circumstances that make the conduct misleading or deceptive is required: Wheeler Grace & Pierucci Pty Ltd v Wright [1989] ATPR 40-940 at 50,257 per Lee J (Neaves and Burchett JJ agreeing); Paper Products Pty Ltd v Tomlinsons (Rochdale) Ltd[1994] ATPR 41-135 at 42,204 per French J; Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1 at 11 per Moore J (Mansfield J agreeing); Adler v Australian Securities and Investments Commission (2003) 179 FLR 1 at 68-69 per Giles JA (Mason P and Beazley JA agreeing).

329               In Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1, Moore J said (at 11):

“Liability as an accessory (in circumstances where the contravening conduct of the principal was making false or misleading representations) does not depend on an affirmative answer to the question whether the alleged accessory knew the representations were false or misleading. All that would be necessary would be for the accessory to know of the matters that enabled the representations to be characterised in that way.”

330               In Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 Gummow, Hayne and Heydon JJ said (at 74 [48]):

“The trial judge rightly held that it was necessary to find that McAuliffe and Law participated in, or assented to, the companies’ contraventions with actual knowledge of the essential elements constituting the contraventions. The Rural Press parties complained that he failed to make particular findings, but they are in fact inherent in his reasoning. In the end the argument was only that McAuliffe and Law ‘did not know that the principal’s conduct was engaged in for the purpose or had the likely effect of substantially lessening competition ... in the market as defined’. It is wholly unrealistic to seek to characterise knowledge of circumstances in that way. Only a handful of lawyers think or speak in that fashion, and then only at a late stage of analysis of any particular problem. In order to know the essential facts, and thus satisfy s 75B(1) of the Act and like provisions, it is not necessary to know that those facts are capable of characterisation in the language of the statute.”

331               In Pico Holdings Inc v Voss [2004] VSC 263, Mandie J of the Victorian Supreme Court had to consider whether the sole director and majority shareholder of a company could be held liable under s 75(1)(c) of the TPA. Pico Holdings Inc had made two loans to the company in question and the company had defaulted on those loans. Pico Holdings Ltd claimed that the company had engaged in misleading and deceptive conduct because it had made representations that shares provided as security for the loans were unencumbered when in fact they were subject to a charge held by the National Australia Bank.

332               Mandie J held that Mr Voss was not liable under s 75(1)(c) of the TPA because, although he was aware of the charge, he was not aware that the relevant shares were encumbered by that charge. His Honour said (at [150]):

“I am satisfied that Mr Voss knew of the making of the representation, in that he had signed and sent the Promissory Note.  Nor was it in issue that he knew of the existence of the NAB charge.  I do not think that Mr Voss’s knowledge of the existence of the NAB charge is sufficient of itself. In my opinion, it was an essential element of the contravention that the Dominion Wines shares were encumbered by the NAB charge and it is that matter which Pico had to prove was known by Mr Voss.  I do not think that Pico has established that Mr Voss knew that the Dominion Wines shares were encumbered by the NAB charge.”

333               The knowledge required is actual knowledge: Yorke v Lucas (1985) 158 CLR 661 at 667 per Mason ACJ, Wilson, Deane and Dawson JJ; Butt v Tingey (1993) ATPR (Digest) 46-110 per Davies, Neaves and Beazley JJ; Quinlivan v ACCC (2004) 160 FCR 1 at 4 per Heerey, Sundberg and Dowsett JJ. Constructive knowledge appears to be insufficient, despite the support it has received in some of the authorities: Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd [1985] ATPR 40-538 at 46,397 per Toohey J; Gakora Pty Ltd v Montgomery Jordan & Stevensen Pty Ltd [1986] ATPR 40-722 at 47,917 per Wilcox J; Ridgway v Consolidated Energy Corporation Pty Ltd [1987] ATPR 40-754 at 48,189 per Fox J. Although actual knowledge is required, it can be inferred from dishonest or deliberate ignorance (Giorgianni v R (1985) 156 CLR 473 at 482-483 per Gibbs CJ; at 495 per Mason J; at 507-508 per Wilson, Deane & Dawson J; Bowler v Hilda Pty Ltd [2000] FCA 899 at [78] per Finn J) or from wilful blindness (ACCC v IMB Group Ltd [2003] FCAFC 17 at [135] per Cooper, Kiefel and Emmett JJ). 

334                In my opinion, in this case the essential matters which constitute or make up the contravention of s 51AD of the TPA are as follows:

1.                  a corporation;

2.                  the corporation acting in trade or commerce;

3.                  the three agreements and the terms and conditions of those agreements;

4.                  the Franchising Code applies to or in relation to the agreements; and

5.                  the provisions of the Franchising Code were not complied with.

335               Madgwicks had knowledge of the matters referred to in paragraphs 1, 2, 3 and 5, but, for the reasons earlier given (at [186]-[192]) not of the matter in paragraph 4. In those circumstances, they do not have the required knowledge for the purposes of s 75B(1). I have considered whether to include the matter identified in paragraph 4 is, in effect, to require the applicants to prove that Madgwicks knew that there was a contravention. That would be contrary to the authorities. The argument that that is the effect of including paragraph 4 is perhaps supported by the fact that on the face of it the matter is a matter of law. In the end, I have decided that, even if it is but a short step from the matters listed above to a requirement of knowledge of a contravention, the matter in paragraph 4 is an essential matter within the authorities and that it must be concluded that Madgwicks had knowledge of it before they are held liable under s 75B(1).

336               The applicants’ claim against Madgwicks based on s 75B(1) of the TPA must be dismissed.

The Donovan respondents’ claim against Madgwicks

Breach of retainer

337               There were various letters of retainer between the Donovan respondents and Madgwicks. There is no dispute about the fact that the Donovan respondents retained Madgwicks and that Madgwicks provided advice and assistance in relation to the transactions involving the applicants.

338               In their pleadings, the Donovan respondents plead the terms of the retainers and the duties that arose under the retainers. They plead the work carried out by Madgwicks and the two letters of advice provided by Madgwicks to them dated 1 October 2007 and 11 October 2007 respectively.

339               The breaches of retainer pleaded by the Donovan respondents are critical. They are as follows:

“8.        Had Madgwicks properly discharged the General Retainer and the Rafferty Retainer, Madgwicks would have advised the cross-claimant as to the consequences to the cross-claimants should it subsequently be found that Agreements constituted a franchise agreement.

…

10.       Madgwicks failed to advise and warn, or adequately advise and warn or alternatively to adequately advise or warn the cross-claimants of the risks attached to the agreements or any of them being found to be a franchise agreement.

Particulars

At no time prior to the entry into of any of the agreements did Madgwicks advise or warn, or alternatively adequately advise or warn, the cross-claimants that one or more of the agreements could, if found to be a franchise agreement for the purposes of the Code, be made void by the order of the Court pursuant to section 87 of the Trade Practices Act or that part or all of the funds paid under or in relation to one or more of the agreements could be ordered to be refunded.” 

340               The breaches of retainer pleaded against Madgwicks relate not to a failure to draw the agreements in a particular way, or to provide advice as to whether the agreements as drawn involved a franchise agreement, but rather, a failure to advise as to the consequences of it being held that the agreements involved a franchise agreement. In other words, the complaint about the work carried out and advice provided by Madgwicks is quite specific. The alleged breach is a failure to provide advice as to the consequences of a matter raised with the Donovan respondents.

341               The Donovan respondents plead that had they been advised “as to the consequences to [them] should it subsequently be found that Agreements constituted a Franchise Agreement” then they would have complied with the Franchising Code or they would have structured the transaction and the agreements such that they did not contravene the Franchising Code.

342               Mr Donovan did not give evidence. Mr Levy and Ms Harris gave evidence. The claim by the Donovan respondents based on the breach of retainer faces two difficulties.

343               First, Mr Levy and Ms Harris gave evidence that they did advise Mr Donovan about the consequences of the agreements being held to be or to involve a franchise agreement. That advice is not contained in any of the written advice given by Madgwicks. Nevertheless, the evidence of both Mr Levy and Ms Harris was that they did advise Mr Donovan of the consequences of the Franchising Code applying to the agreements and, in particular, that the “deal” would be set aside. That evidence was not contradicted by Mr Donovan. I see no reason not to accept it and the breaches of retainer alleged by the Donovan respondents are not made out.

344               Secondly, there is no evidence from Mr Donovan to the effect that he would have acted differently had he been advised of the consequences of the Franchising Code applying to the agreements (Smith v Maloney (2005) 92 SASR 498 at 514-515 [51]-[52]). I do not need to make a final decision as to whether this difficulty is fatal because of my conclusion as to the first matter.

345               In his closing address, counsel for the Donovan respondents submitted that Madgwicks were obliged to advise the Donovan respondents on the RA and that the firm should have advised the Donovan respondents that the RA was a franchise agreement and of the requirements in the Franchising Code. That is not the case which is pleaded against Madgwicks and it is not a case that I think should be entertained at this stage having regard to the way in which the trial was conducted.

Section 75B(1) of the TPA

346               The Donovan respondents submitted that if they were liable to the applicants in relation to the alleged contravention of s 51AD of the TPA then Madgwicks were involved in the contravention within s 75B(1) of the TPA. The Donovan respondents sought relief against Madgwicks under s 87 of the TPA.

347               This claim must be rejected for two reasons.

348               First, the claim cannot be maintained, having regard to the fact that it is based on the Donovan respondents being the primary contraveners. I would follow the same approach as that taken by French J (as his Honour then was) in Re La Rosa; Ex parte Norgard v Rodpat Nominees (1991) 31 FCR 83. In that case, his Honour said (at 88):

“It was stated from the Bar table that there is no authority on the question whether s 87(1A) can be invoked to provide for indemnity or contribution under the Trade Practices Act. In my opinion, the reason for that scarcity is that the proposition is untenable. Section 87(1A) contemplates an application by ‘a person who has suffered or is likely to suffer loss or damage by conduct of another person ... in contravention of a provision of Part V’. Now it was contended that this would extend to a person who has suffered a judgment for contravention of the Act in which contravention another person was involved. But the Act contemplates that the applicant for relief under s 87(1A) is not the person who contravenes the relevant provisions of Pt V. That becomes clearer when it is seen that, before the court can make an order under this subsection, it must consider that the order or orders will compensate the person who made the application. And to the extent that s 87(2)(d) is relevant, it does not define the categories of person who may seek damages. In my opinion, there is no mechanism in s 87, nor in the Act generally, which would enable the court to make orders for contribution or indemnity against other contravenors of the Act or persons involved in the primary contravention.”

349               Secondly, the claim must fail for the reasons I have given in relation to the applicants’ claim against Madgwicks based on s 75B(1) of the TPA.

Conclusions

350               My conclusions are as follows.

351               First, I state my conclusions on the applicants’ claims against the second to fifth respondents.

352               Time 2000 Systems (Australia) Pty Limited, Embleton and Mr Donovan are liable to the applicants for contraventions of s 52 of the Trade Practices Act 1974 (Cth). Time 2000 Systems (Australia) Pty Limited and Embleton are primary contravenors and Mr Donovan is liable as a person involved in the contraventions (s 75B(1)). Time 2000 Operations (Australia) Pty Limited is a proper party for the purposes of the relief claimed by the applicants. The orders sought in paragraphs 1 to 7 inclusive of the Further Amended Application seem to be both within the scope of s 87 and appropriate, but I will hear the parties generally as to final orders.

353               Embleton and Time 2000 Systems (Australia) Pty Limited are also liable to the applicants for a contravention of s 51AD of the Trade Practices Act 1974 (Cth). They are liable as primary contravenors. Mr Donovan is not a person who was involved in the contravention of s 51AD. The cross-claim by Time 2000 Operations (Australia) Pty Limited against Mr Rafferty must be dismissed.

354               Secondly, I state my conclusion on the applicants’ claims against the sixth respondent.

355               The applicants’ claims against the sixth respondent under s 9 and s 159 of the Fair Trading Act 1999 (Vic) and under s 75B(1) of the Trade Practices Act 1974 (Cth) must be dismissed. In the circumstances, it is not necessary for me to consider the sixth respondent’s submissions concerning proportionate liability under the Wrongs Act 1958 (Victoria).

356               Finally, I state my conclusions on the claims of the second to fifth respondents against the sixth respondent.

357               Those claims, being claims based on breach of retainer and involvement in the contravention of s 51AD of the Trade Practices Act 1974 (Cth), must be dismissed.

358               I will hear the parties as to final orders, costs and any other matters.

 

I certify that the preceding three hundred and fifty-eight (358) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.

Associate:

Dated:         13 July 2010