FEDERAL COURT OF AUSTRALIA

Pampered Paws Connection Pty Ltd (on its own behalf and in a Representative Capacity) v Pets Paradise Franchising (Qld) Pty Ltd (No 10) [2012] FCA 25

THE COURT ORDERS THAT:

1.    The parties respectively file and serve within 14 days such proposed orders as they consider appropriate to give effect to these reasons for judgment and for the further hearing and disposition of this application and the application in the former Supreme Court of Victoria action number SCI 06019 of 2009.

2.    The application be listed for further directions at 9:30 am (Adelaide); 9:00 am (Brisbane) on 22 February 2012 or such alternative time and date as the Court may determine.

3.    There be liberty to apply.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

INTRODUCTION

1    Pampered Paws Connection Pty Ltd (Pampered Paws) brings this action on its own behalf and on behalf of other present or former Pets Paradise franchises (the Group Members) under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act). Elizabeth Campbell and Lynda Donnelly are the directors of Pampered Paws. Where it is convenient to do so, I shall group the applicants together as “the applicants”.

2    This action arises out of the grant to Pampered Paws of a Pets Paradise franchise. The term “Pets Paradise” is used to describe the retail business of a supplier of pets and pet accessories, in accordance with a “Pets Paradise Business Model”, developed under the control of the respondents. There is presently a chain of some 80 or so Pets Paradise retail businesses around Australia, many of which operate under franchise.

3    The first seven respondents are all part of the Pets Paradise group. Each of them has a refined function as part of the Pets Paradise group in securing and servicing Pets Paradise franchised businesses or Pets Paradise businesses which are owned and operated by one of the respondents. Paradise Retail Holdings Pty Ltd (PR Holdings) is the holding company of the group. Gary Diamond is the managing director, and on the evidence the person in overall control of each of the members of the Pets Paradise group. The first three respondents, Pets Paradise Franchising (Qld) Pty Ltd (PPQ), Pets Paradise Franchising (SA) Pty Ltd (PPSA) and Pets Paradise Franchising (NSW) Pty Ltd (PPNSW) carry on business in Queensland, South Australia and New South Wales respectively, granting rights to retail businesses to provide pets and pet accessories under the Pets Paradise name – that is, granting Pets Paradise franchises – and each also operates retail businesses providing pets and pet accessories under the Pets Paradise name. Global Pet Products Pty Ltd (Global) is the supplier of goods to operators of Pets Paradise businesses. Pets Paradise (Franchising) Pty Ltd (PP Franchising) is the author and proprietor of intellectual property rights in the Disclosure Document provided to prospective franchisees by PPQ, PPSA and PPNSW. It also provides support services by way of legal services, copies of documents and in other ways directly or indirectly to prospective franchisees, and from time to time receives and accounts for the payment of legal fees and franchise fees. Pets Paradise Pty Ltd (PP) is the proprietor of certain trade marks in relation to categories of pets and pet accessories, and licenses the use of those trade marks to PPQ, PPSA and PPNSW so they may use them and may sublicense their use to Pets Paradise franchisees. It also assumes liability pursuant to hire purchase agreements to make payments in respect of fixtures and fittings used in the operation of Pets Paradise retail businesses, which may have been guaranteed by PPQ, PPSA or PPNSW. It also receives, and assesses, franchise proposals from prospective franchises. PR Holdings operates as a head office, providing legal, accounting and management staff for the Pets Paradise group, including for the purpose of making representations to, and dealing with, potential franchisees and with Pets Paradise franchisees both on its own behalf and on behalf of PPQ, PPSA and PPNSW. Again, where it is convenient to do so, I shall group the respondents together as “the respondents”.

4    In addition to the respondents, there are a few other corporate entities to which reference was made in the course of the hearing.

5    IT Visions Finance Pty Ltd (ITV Finance) is wholly owned by IT Visions Business Systems Pty Ltd (ITV Business). Together they are called IT Visions. Neither is a member of the Pets Paradise group, owned by PR Holdings, but each provides services to Pets Paradise franchisees and Pets Paradise businesses directly owned by PPQ, PPSA and PPNSW. Where a particular Pets Paradise franchisee enters into an IT Visions Point of Sale System, part of the set up to operate a franchise, under a rental agreement, ITV Business or ITV Finance would be the renting party, so it receives the rental payments from the franchisee.

6    Budget Shopfitters Pty Ltd (Shopfitters) is also an entity independent of the Pets Paradise group. It provides shop fit-out services to certain franchisees, including Pampered Paws, to meet the standards and presentation required for a Pets Paradise retail business.

7    Before turning to the Group Members’ claims, it is appropriate to address the claims of Pampered Paws. In some respects, its position is not identical with that of other group members. The matter proceeded on the basis that the claims of Pampered Paws should be heard and determined first. It was anticipated that, at least in respect of the asserted documentary representations, findings made will be of benefit because the terms of the relevant documents are in essence the same for all Group Members.

THE EVENTS LEADING UP TO THE OPERATION OF THE PAMPERED PAWS BUSINESS

8    In about September 2005, Ms Donnelly and Ms Campbell became interested in exploring the acquisition of a Pets Paradise franchise. They each had considerable experience in clerical work and in dealing with people, and some marketing experience. Ms Donnelly had been interested in acquiring and operating a pet related business for some time. She had discussed her plans with her mother, Ms Campbell. She had located a potential shop site at the Stockland Shopping Centre in Burleigh Heads, and had identified the Pets Paradise franchised businesses, through inquiries she had made, as a national and long-standing enterprise. She discussed the prospects of taking a Pets Paradise franchise at that shop with Mr Diamond. She had earlier considered a more extensive pet-related business but had decided that, at that time, it demanded access to too much funding which she could not afford. She made that general decision in conjunction with her mother. Ms Donnelly then arranged to incorporate Pampered Paws, and to secure bank finance to support her then proposed investment. Pampered Paws was to borrow the proposed funds, for shop fixtures and fittings, and a separate loan for the stock. Ms Campbell was to make available personal substantial funds to the bank as security to support the proposed borrowing. Shopfitters had provided a quote for the shop fixtures and fittings, and they were to be financed by an equipment finance lease from the bank, secured by a chattel mortgage. The negotiations and discussions took some time.

9    In late September, Ms Donnelly was given the Disclosure Document from PPQ, and she paid a “deposit” of $10,000 and signed a Confidentiality Agreement. It is clear that, at that stage, no binding obligations were entered into between herself or Pampered Paws and PPQ.

10    On 7 October 2005, PPQ wrote to Pampered Paws noting those matters, and purporting to enclose a series of documents for execution. They included the proposed Franchise Agreement. There is a dispute about whether the documents referred to were all enclosed, and indeed about the legal character of that letter. The applicants referred to it as the “letter of offer”. Those matters are discussed later in these reasons.

11    Further processes took place between about 6 October 2005, when a further “deposit” of $8000 was paid, and 24 February 2006. When the terms of the lease. In the meantime, Ms Donnelly and Ms Campbell consulted accountants to obtain cash flow projections for the proposed business during November 2005; Ms Campbell also prepared her own figures to discuss with the accountant. Detailed cash flow projections were prepared by the accountants on 9 November 2005 and were discussed at some length. Ms Campbell was also well aware of the need to read the documents for the proposed franchise carefully, and stressed the need to do so to Ms Donnelly.

12    On 15 November 2005, Ms Donnelly and Ms Campbell apparently signed the Franchise Agreement for Pampered Paws with PPQ. I note there is some dispute about that date.

13    Ms Donnelly on behalf of Pampered Paws also dealt with the National Leasing Manager of the Pets Paradise group Frank Kersten in relation to securing the lease of the shop at the Stockland Shopping Centre at Burleigh Heights, and in relation to the fit-out of the shop. On 9 March 2006 she signed the lease with the shopping centre operator as director of Pampered Paws.

14    The shop fit-out was effected by Shopfitters. That company provided a quote for the fit-out in mid-February 2006, I find, at the instigation of Mr Kersten. It was for $233,000 or thereabouts. It was considerably more than Pampered Paws (through Ms Donnelly) had expected. Shopfitters also provided a further quote a few days later for $250,000, but Ms Donnelly was told that the higher figure was to support a bank loan of $250,000 as the proposed fit-out itself was unchanged. Pampered Paws accepted the first quote and the work was carried out. Ultimately its cost was some $213,000.

15    The shop opened on 10 March 2006.

16     From the beginning the price for the fit-out was contentious. As a term of the lease, Mr Kersten had negotiated a contribution of some $75,000 from the Stockland Shopping Centre towards the fit-out, but Pampered Paws had not received it. Shopfitters was pressing for payment. Pampered Paws (through Ms Campbell) pressed for a detailed tax invoice and supporting invoices, but received only the tax invoice (without much detail) and some accounts of Shopfitters. Under the threat of being sued, Pampered Paws paid the full Shopfitters’ invoice.

17    One of the elements of the “package” for the franchise was the training to be provided in the Pets Paradise business system. That took place for both Ms Donnelly and Ms Campbell in Melbourne between 30 January 2006 and 6 February 2006. During the training issues arose as to Ms Campbell signing personal Guarantees and Indemnities to PPQ and to Global for the obligations of Pampered Paws under the Franchise Agreement and under the Global Terms and Conditions (the Global Supply Agreement). Ms Campbell signed them, as requested, but reluctantly, on 6 February 2006. She then appreciated that that her personal exposure in the event of Pampered Paws falling into difficulty was no longer limited to her surety provided to the bank to support Pampered Paws’ borrowing that surety to the bank was to the extent of $50,000.

18    The nature and extent and availability of the Pets Paradise stock was also addressed during the training period. Generally speaking, it was to be supplied by Global. During the training, Pampered Paws made its first order to Global for stock. It was also required to sign the Global Commercial Credit Application and the Global Supply Agreement.

19    During training, both Ms Donnelly and Ms Campbell also were taken to the premises of IT Visions. Ms Campbell spoke to officers of IT Visions about the support available in Queensland from a Melbourne based company. Pampered Paws also signed the IT Visions rental agreement for the supply of the electronic ordering and stock control system for Pets Paradise franchisees (the IT Visions System) to operate as its Point of Sale electronic system.

20    There was some discussion during training about the circumstances in which Pampered Paws could order and display products other than “Pets Paradise” labelled stock or other stock sourced from Global, and how the IT Visions System could cater for non-Global products.

21    Following the commencement of the Pampered Paws business, it did not operate successfully at an economic level. It suffered significant losses of around $55,000 in the financial year ended 30 June 2007 and around $30,000 in the financial year ended 30 June 2008. In those periods, Ms Donnelly worked long hours in the business without drawing any significant salary, and progressively Ms Campbell also contributed to the operations of Pampered Paws with her time and efforts, again without payment of salary.

22    Pampered Paws from the early stages of its operations stocked other products in addition to the Global-sourced products, and over time increasingly so. The last order placed by Pampered Paws for Global products was made on 30 April 2008. By about the end of September 2008, Pampered Paws had barely any Global products or Pets Paradise labelled products in its shops.

23    Ms Donnelly from the commencement of the business had plans which extended beyond operating purely as a typical Pets Paradise franchised business. Those plans included incorporating a pet grooming service, a puppy training school service, and a “pawtisserie” selling doggie cupcakes and coffee. She in fact introduced those services over time.

The claims

24    In their submissions, the applicants have categorised the claims made by Pampered Paws and by Ms Donnelly and Ms Campbell under the following headings:

1.    Misleading and Deceptive Conduct

(a)    Express Representations

(b)    Implied Representations

2.    Exclusive Dealing

3.    Franchising Code of Conduct

4.    Unpaid labour claim (of Ms Donnelly and Ms Campbell)

25    They then deal separately with:

5.    Accessorial liability

6.    Loss and Damage

7.    Orders

26    There are also significant factual disputes, and issues about the credit of various witnesses. It is convenient, in the first place, to record some findings about some of the factual issues. The submissions will then be addressed in the sequence above.

GENERAL OBSERVATIONS AND FINDINGS

(a)    The Applicants’ Thesis

27    First, it is useful to understand the general thesis of the applicants’ case. It is that the Pets Paradise system was to enable “Global, and those controlling it, to manipulate the franchisees’ businesses to the benefit of Global”, so that the franchisees would be no more than Global retailers. The only relevant legal relationship between Pampered Paws and Global is by the Global Supply Agreement. Thus, it is asserted, Global achieves the product mark-up to franchisees with a “tied product” obligation, and Global controls and regulates the products which franchisees including Pampered Paws are entitled to sell. It is claimed that the “Pets Paradise Business Model” as described in the Disclosure Document and in the Franchise Agreement is different from that reality.

28    The Pets Paradise Business Model is said to have the following features:

1.    the carrying on of a retail business selling pets, pet food, related literature and accessories under the Pets Paradise name and logo; and

2.    the requirement that franchisees carry a common range, level and mix of stock, and effect and maintain a uniform store fit-out.

29    However, it is claimed, the Franchise Agreement is a “paper tiger” because the franchisees’ obligations are in essence those under the Global Supply Agreement and not under the Franchise Agreement, so that the obligations of PPQ (or the relevant franchisor) under the Franchise Agreement are of little moment.

30    The respondents have labelled this overall thesis as “Unpleaded New Case Raised in Opening”. The thesis is not pleaded. The final submissions on behalf of the applicants did not suggest that the thesis was other than an underlying explanation for the particular pleaded causes of action. I accept that. It is to the pleaded conduct that the Court’s attention must be directed.

31    The applicants’ thesis can readily be regarded simply as an overstatement of the nature of franchising. Whether that is so is a matter to be determined, by reference to the particular allegations. Mr Diamond has conducted the Pets Paradise group business for many years. He opened his first Pets Paradise business in Victoria in 1979, and granted the first Pets Paradise franchise in 1986. The franchisor of that first franchise, Darryl Stephenson gave evidence. He now operates, apparently successfully, four franchised Pets Paradise businesses in Victoria, and does so buying most of his stock through Global without the difficulties or issues raised by the applicants.

32    There are now some 53 franchised Pets Paradise businesses throughout each mainland State of Australia, and some 23 Pets Paradise group owned businesses.

33    Over time, to make a point of difference, to secure the necessary range of stock, and to secure the better stock, preferably exclusive, and for the benefits of group purchasing power, Global became the buying arm and stock supply arm of the Pets Paradise group for its own businesses and for its franchisees. The structure and documentation within which that occurred became more sophisticated. Mr Diamond also said that the competitive market has made it harder in more recent years to secure exclusivity of certain products, but efforts to retain and promote Pets Paradise labelled products have continued.

34    There is nothing sinister about the evolution of the Pets Paradise group in that way. As it has grown, it has (as the applicants pointed out) developed a franchise arm and a stock supply arm (its Global arm) each separately administered under the overall oversight of Mr Diamond.

35    From the point of view of the respondents, the Pets Paradise group with its franchise arm and its Global arm, and the processes adopted by each, has been a natural and typical (and successful) evolution to a sophisticated multi-faceted business.

36     Mr Diamond is also associated with two other businesses in the “pets products” area. Pets Goods Direct stores were commenced in 2005, and there are now 22 of them across Australia, some franchised. They operate as bulk stores selling food in bulk and larger items, whereas Pets Paradise businesses are specialised retail stores focusing on livestock and pet accessory products. The second of Mr Diamond’s other businesses is the Pets R’Fun stores, which was a competitive chain to the Pets Paradise group. They were bought out by the Pets Paradise group in 2007. There are only four Pets R’Fun stores, and none in Queensland. The existence of these businesses is of no moment to the resolution of the present proceedings.

37    IT Visions is operated and, in a real sense, run by Livia Mammarella. It is referred to in more detail later in these reasons. It is convenient to note that Mr Diamond has a 50% interest in IT Visions, through a private company. His interest is disclosed in the Disclosure Document.

38    The Pets Paradise business and the Pets Paradise franchise system, not surprisingly given its lengthy history, is a sophisticated one. It is aimed to get Pets Paradise stores in major shopping centres. The Global arm seeks to secure high quality, and preferably exclusive, stock for both franchisees and its group businesses. It is important to have a relatively consistent product range across all Pets Paradise businesses for building and promoting brands and fostering brand loyalty across all Pets Paradise stores. It is self-evident that a Pets Paradise business which stocked inferior products or did not maintain the image of Pets Paradise stores could diminish the Pets Paradise reputation and goodwill.

39    Consequently, in addition to formal documentation to which reference is made in the next parts of these reasons, the Pets Paradise group has developed its Store Standards Manual, its Instructions and its Information Guide for franchisees. It has a national advertising fund to which its franchisees are required to contribute, and a training program for new franchisees, and Area Managers to monitor and assist the franchisees in their businesses and (as the evidence shows) to ensure if possible adherence to the Pets Paradise business systems.

40     From the respondents’ viewpoint, therefore, the applicants’ thesis is simply misconceived. The respondents say that the Pets Paradise franchise system is a typical and well operated system for the benefit of both the Pets Paradise group and its franchisees, and the Global operations are a legally unremarkable and proper element of that system.

(b)    The Credit of the Witnesses

41    There are, as the submissions indicate, some significant factual disputes which require to be resolved.

42    However, the disputes do not indicate in my view that any particular witness was endeavouring to mislead the Court. To the contrary, in my view each of the witnesses endeavoured to give evidence truthfully and in general terms each witness gave evidence which that witness regarded as reliable. With only a few qualifications, the credit of the witnesses called by the respondents was not adversely criticised in submissions. Mr Diamond gave extensive evidence through his written statements, and only in a few respects was its reliability challenged.

43    The differences in the evidence, I consider, reflect the different focuses of the respective witnesses. From the Pets Paradise group witnesses, Pampered Paws was not perceived as other than a typical new franchisee. There had been many before. The antennae for potential issues was not highly sensitive. Matters which Ms Donnelly and Ms Campbell sought to raise were not perceived as indicating an important matter on behalf of Pampered Paws that it was intended to operate somewhat outside or beyond a typical Pampered Paws business. On the other hand, I consider that Ms Donnelly (as she herself said) had a wider business plan for Pampered Paws than that of a routine Pets Paradise business. I have briefly referred above to those plans. Ms Campbell called it a grand vision. She also had in mind that Pampered Paws might hold a range of stock beyond, or different from, that which was typical of a Pets Paradise business. The comments she and Ms Campbell made to various Pets Paradise group employees were not, however, seen by them as signals of that potential source of difficulty and so were not addressed in advance of the commencement of the Pampered Paws business. It is also fair to observe that I formed the impression that both Ms Donnelly and Ms Campbell were both strong-minded but not confrontational people, so that the way they conveyed their issues in the course of their discussions was not particularly forceful; that is said by way of compliment, not criticism. My findings on disputed issues are informed by those considerations.

44    I also consider that, to some degree, both Ms Donnelly and Ms Campbell on the one hand and Mr Diamond on the other in the course of their evidence became a little dogmatic about the correctness of their respective legal positions. I do not think that reflects deliberate dishonesty on the part of any of them. It is understandable that, believing in the overall correctness of their respective positions, they might overstate or deal with certain material in a way which better accommodates those positions. I have also taken that into account in making my findings on disputed issues.

(c)    The Sequence of Signing Documents

45    There is no dispute about the documents which Pampered Paws, Ms Donnelly and Ms Campbell signed. However, there is some issue about when they were signed. The resolution of that dispute may partly inform whether the causes of action relied upon by the applicants are made out.

46    Reference has been made above to the 7 October 2005 letter from PPQ.

47    In its precise terms, the letter was sent by the corporate counsel for the PPQ confirming the receipt of the Acknowledgment of Receipt of Disclosure Document, Confidentiality Agreement and the deposit of $10,000. It noted that Pampered Paws was purchasing the Burleigh Heads Pets Paradise business. It referred to the enclosed documents: Franchise Agreement with Guarantee and Indemnity (the Franchise Agreement Guarantee); copy of Lease; Assignment of Lease, Global Guarantee and Indemnity and Acknowledgment (Global Supply Agreement Guarantee); Global Terms of Trade (Global Supply Agreement) and tax invoices for the legal costs. It required both copies of the Franchise Agreement and the Franchise Agreement Guarantee to be executed and returned. I find that the Lease was not included; it was not then in final form. As to the Global Supply Agreement, the letter said:

You must sign and return the Global Pet Products Pty Ltd Conditions of Sale and the Guarantee and Indemnity. The Conditions of Sale outline the terms and conditions under which Global will supply products for your business.

48    Under “conditions precedent” it also said that Pampered Paws must attend the Pets Paradise training program in Melbourne, and that PPQ would not consent to the franchise until that training had been given. It enclosed tax invoices for legal costs to be paid to PPF. That is a clear enough indication that, in a technical legal sense, the Franchise Agreement whenever executed by Pampered Paws would not give rise to enforceable legal obligations until PPQ itself agreed to the franchise, and that it was contemplated that its agreement would not be given until after the training period. As noted, the training period took place in early February 2006 (there is some dispute about whether the training was completed on 6 February 2006 or later, but I do not need to resolve that).

49    I find that the Global Supply Agreement was not enclosed, but that the Assignment of Lease and the Global Supply Agreement Guarantee were enclosed with the 7 October 2005 letter, as well as the Franchise Agreement. That is because I find for reasons appearing below that each of those documents was signed by Ms Donnelly on 15 November 2005, and no other occasion is suggested on the evidence when they may have been received by her. The Assignment of Lease was to be held in escrow by PPQ against the failure of the Pampered Paws business.

50    The Global Supply Agreement Guarantee is a pro forma document with a short schedule setting out the particulars applicable to Pampered Paws. It is of four pages. Page 1 leaves space for the date to be inserted. The date inserted is 15 November 2005. The Schedule has typed as the customer Pampered Paws and as the guarantor Ms Donnelly. The name of Ms Campbell has subsequently been printed in handwriting as a guarantor whereas Ms Donnelly’s name (under the name Campbell) has been typed in. The execution clause on page 4, as with the Schedule has provision for Ms Donnelly to sign seal and deliver the document in the presence of a witness. She has signed it in the presence of her husband. There is no date indicating the date of signature, other than the primary date on page 1. Underneath the typed place for the execution of the document by Ms Donnelly has been printed in handwriting a signing space for Ms Campbell. Her witness is Nabil El-Hissi. It has been signed by her.

51    Subsequently on 7 December 2005, Ms Paric apparently on behalf of PPQ confirmed receipt of the deposit, the signed Franchise Agreement and the signed Assignment of Lease. No reference is made to the Franchise Agreement Guarantee, the Global Supply Agreement or the Global Supply Agreement Guarantee.

52    Ms Donnelly said she put in the date 15 November 2005 on the Franchise Agreement and the Franchise Agreement Guarantee, although that was not the date that it was in fact signed by her, and on the Global Supply Agreement Guarantee. The Franchise Agreement is also signed by Ms Campbell, so both the Pampered Paws directors signed it. They also each signed the accompanying Certificates (also all dated 15 November 2005), namely:

    Franchisee’s/Guarantor’s Statement (signed twice by Ms Campbell and Ms Donnelly as both franchisee and guarantor) acknowledging having received the 2004 Disclosure Document and the Franchising Code of Conduct and having an opportunity to understand them before entering into the Franchise Agreement and the Franchise Agreement Guarantee;

    Solicitor’s Certificate (again signed twice by Ms Campbell and Ms Donnelly, as both franchisee and guarantor) acknowledging that they had been recommended to seek advice from a solicitor about the Franchise Agreement and the Franchise Agreement Guarantee and that they had elected not to do so;

    Business Adviser’s Certificate, in generally the same terms as the Solicitor’s Certificate but relating to advice from a business adviser and signed in the same way in relation to the Franchise Agreement and the Franchise Agreement Guarantee; and

    Accountant’s Certificate, in generally the same terms again but relating to advice from an accountant/tax adviser and signed in the same way in relation to the Franchise Agreement and the Franchise Agreement Guarantee.

53    Each of these Certificates was typed including the names of Pampered Paws as franchisee and Ms Donnelly (called Campbell) as a guarantor. Ms Campbell’s name was not typed, but obviously printed in handwriting later as a guarantor.

54    As noted, Ms Donnelly said she did not have those documents on 15 November 2005, and received them only on 6 February 2006 during the training in Melbourne. She identified that occasion by reference to when her mother Ms Campbell was also first required to be a guarantor. She accepted that, whenever she signed the documents, including both the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee, she understood their effect. That expressly extended to an understanding that they included “mortgage type” security given over her personal assets including real estate in her name.

55    The respondents submitted that the documents generated in October 2007, when the applicants and Ms Donnelly’s husband together secured financing from the Bendigo Bank (including refinancing of the Pampered Paws borrowing from its then bank), also provide an insight into the awareness of Ms Campbell into the nature of the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee and affect her credit. It is correct to say that, by that time, the applicants understood the effect of the two Guarantees. I do not think that material informs the state of knowledge of Ms Campbell about them in late November 2005 or at any time up to the completion of the training on 6 February 2006 when, on her own evidence, she signed them – albeit reluctantly – appreciating their terms and effect. I note there is some apparent inconsistency in the evidence about the profit and loss outcomes of Pampered Paws up to that time as given in evidence and as recorded in those bank documents. I have considered the submissions about that but I do not conclude that the apparent discrepancy is of any real assistance in assessing the credit of Ms Campbell or Ms Donnelly.

56    Both the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee in essence do the same things but separately in relation to PPQ and Global respectively. The guarantors, Ms Donnelly and Ms Campbell, guaranteed the payment of monies due by Pampered Paws to PPQ and to Global respectively and the performance of its obligations under the Franchise Agreement and the Global Supply Agreement; each indemnifies PPQ and Global respectively against any losses caused by a breach by Pampered Paws of the terms of those agreements.

57    Each Agreement contains the following clause (clause 3.11 in the Franchise Agreement Guarantee and clause 3.10 in the Global Supply Agreement Guarantee):

The Guarantor hereby agrees to charge his/her property, both real and personal, and including any future property as security in favour of the [Franchisor/Supplier] for my debt owing to the [Franchisor/Supplier] by the [Franchisee/Customer] and authorises [the [Franchisor/Supplier] to register a caveat in respect of this charge over any such property.

58    The applicants consulted an accountant before proceeding finally to sign the Franchise Agreement. By report of 9 November 2005, the accountants provided a “Compilation Report” which contained projected Balance Sheet, Cash Flow, Profit & Loss and Funds Flow Forecasts as well as extensive other data apparently for the period between March 2006 and June 2007. The report was based upon information provided by Ms Donnelly and Ms Campbell. Upon the projections provided in the accountant’s report, the proposed franchise business for Pampered Paws appeared to be a potentially profitable one. It did not turn out that way. One major difference between the projections and the actual figures is that the sales levels did not reach anywhere near the projected sales figures. At this point, it is not necessary to look further into those matters.

59    In addition, on 15 November 2005, Ms Donnelly and Ms Campbell as the directors of Pampered Paws signed resolutions by which Pampered Paws became the trustee for the LJ and E Campbell Trust and that Trust was established. There was no evidence to suggest that the dates of those documents is not correct. It is a logical step in the process of Pampered Paws becoming a Pets Paradise franchisee to set up the trust or business structure in which it was to operate. Subject to other events, including formally signing the Lease of the proposed premises, the next step would sensibly be the signing of the Franchise Agreement and associated documents.

60    In that context, it is not clear why Ms Donnelly was so sure that the Franchise Agreement and the Certificates referred to, the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee were not signed by her on or about the same occasion. The hand printed name of Ms Campbell on the two Guarantees is consistent with the oversight of not including her as a guarantor and director and that omission being identified later by one of the representatives of the respondents (as was their evidence). It does not suggest that Ms Donnelly did not sign those documents at an earlier date.

61    The circumstances in which Ms Donnelly and Ms Campbell signed the Global Supply Agreement and the Global Supply Agreement Guarantee (and when her name was added in hand printing on those documents and on the Franchise Agreement Certificates) are, to some degree, contentious.

62    Simon Gell was the in-house lawyer for the Pets Paradise group between October 2004 and February 2006. Mr Gell was replaced by Mr El-Hissi in that month. Mr El-Hissi left that employment in May 2008.

63    In late January 2006, Mr Gell reviewed the Pampered Paws documentation. He saw that the Franchise Agreement had been duly signed. The letter of 7 December 2005 from Ms Paric indicates it had been signed by 7 December 2005. As prepared and typed, it appears to be a pro forma agreement with the particular data in a Schedule, and a page for the “Signing Clauses” which was also typed so that the directors of Pampered Paws (who were not specified by name could sign it. Mr Gell also saw that the typed versions of the Certificates referred to above had been signed only by Ms Donnelly, and the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee had been signed only by Ms Donnelly. He realised that Ms Campbell’s name would have to be added to those documents, and that she would have to sign them. There were other documents which were required to be signed, including the Global Supply Agreement and its Credit Application.

64    At a meeting in Melbourne on 30 January 2006, Mr Gell told Ms Donnelly and Ms Campbell that Ms Campbell would have to sign the documents she had not signed, and that he would prepare the other documents to be signed by them. Other matters relating to the then proposed lease were also discussed. He then prepared the further documents for execution, and left them for Ms Donnelly and Ms Campbell at the location of the training on 1 February 2006. They included the Global Supply Agreement. Mr Gell met Ms Donnelly and Ms Campbell again on 6 February 2006. Mr El-Hissi was also present.

65    Mr Gell by then had printed Ms Campbell’s name on the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee and on the Certificates. There was some discussion about those documents. There is a dispute about whether he said that Ms Campbell had to sign them or there may be litigation (or words to that effect) or that it is the practice of the Pets Paradise group to obtain such guarantees from all directors. I do not need to resolve that dispute. The position was, in my view, that absent any direction to the contrary from Mr Diamond, they had to be signed by Ms Campbell. Ms Campbell then signed those documents, and Mr Gell witnessed her signature on the Franchise Agreement Guarantee. He also saw her add her signature to the Certificates. He acknowledged that an option was to have fresh Guarantees and Certificates prepared which accurately showed their date of signature. He also acknowledged that he could have had a separate Global Supply Agreement Guarantee prepared and signed by Ms Campbell to accurately show its date of execution. By adding her signature, the documents suggested she signed them on 15 November 2005. He then left the meeting. He did not in fact see Ms Campbell sign the Global Supply Agreement Guarantee, but she acknowledges she did so on that date. Mr El-Hissi agreed with that evidence. Mr El-Hissi witnessed her signature on the Global Supply Agreement Guarantee. Both Ms Campbell and Ms Donnelly also then signed the Global Supply Agreement itself; their signatures on that document were not witnesses.

66    Mr El-Hissi had only commenced working for the Pets Paradise group for a few days before that meeting. He did not read any papers in advance of it. He dispute that either he or Mr Gell made any threats to induce Ms Campbell to sign the documents on that occasion, or that he demanded that she sign the Global Supply Agreement Guarantee. He did witness Ms Campbell’s signature added to that guarantee, but he gave evidence that he did not say or do anything to persuade her to do so.

67    Ms Campbell and Ms Donnelly gave a somewhat different version of that meeting. To the extent that their evidence differs from that of Mr Gell and Mr El-Hissi, I prefer their evidence about what happened at the meeting on 6 February 2006, with one qualification. The qualification is about whether the Franchise Agreement itself was signed by Ms Campbell or by both of them on that occasion. I find that it was signed by both of them on 15 November 2005. It was clearly signed by 7 December 2005. At that time, and indeed even to and after 6 February 2006, Pampered Paws had not finalised its lease for the premises with the operator of the Stockland Shopping Centre. That was known to the respondents. Both the applicants and the respondents were working to finalise that lease, and in the meantime Shopfitters was doing the fit-out.

68    I formed the impression in the course of the evidence of Mr El-Hissi that he did not have any detailed recollection of the meeting of 6 February 2006, but that he was largely reconstructing the events. That would be consistent with the fact that he had played no role in the events leading up to that meeting or indeed had prepared for the meeting. He made no note of what transpired at that meeting. From Mr Gell’s point of view, he was regularising the procedure which the respondents routinely would have imposed. I do not know whether it was commonplace for the evolution or the execution of documents to be progressively occurring quite close to the time of the anticipated start of the franchised business. In this particular instance, that was occurring. In my view, Mr Gell’s evidence demonstrated that he was simply anxious to complete so far as necessary his part in the process by ensuring the execution of all documents necessary on the part of the respondents, and to move on. Again, in terms of the more detailed conversations which then took place, in general terms I prefer the evidence of Ms Donnelly and more particularly Ms Campbell.

69    The one qualification concerns the Franchise Agreement itself. There was some evidence given by Ms Donnelly that the Franchise Agreement itself was signed on that occasion. I find that it was in fact signed on 15 November 2005. It was signed, in my view, at about the time that Ms Donnelly and Ms Campbell made the decision to go ahead with the proposed franchise. Previously, deposits of $10,000 and $8,000 had been paid, but they were still investigating the potential profitability of the franchise. They had procured the accountant’s report on 11 November 2005. They then had a consultation with the accountant. Shortly after that, a number of documents are dated 15 November 2006. In my view, those documents were in fact signed on that day by Ms Donnelly, including the Franchise Agreement Guarantee, the Global Supply Agreement Guarantee, and the Certificates, and the Franchise Agreement was then also signed by Ms Donnelly and Ms Campbell. As I have noted, the signing clauses for the Franchise Agreement did not nominate the directors of Pampered Paws by name but simply left places against the word Directors for the signatures of the Directors to be inserted on the signing page. The signatures were not witnessed. Ms Donnelly’s signature on the two Guarantees is witnessed by her husband, who was not present on 6 February 2006. Ms Campbell was a director of Pampered Paws. Ms Paric’s letter of 7 December 2005 indicates that the Franchise Agreement was signed by them. No other occasion for those signatures by Ms Donnelly and in one case by Ms Campbell has been identified.

70    I also find that the matter would not have progressed to the point of a training program unless and until at least some documentation had been received by the respondents, and in particular until the Franchise Agreement had apparently been duly executed.

71    Up to the time of that meeting, the Global Supply Agreement had not itself been executed and Ms Campbell had not signed the Certificates, or either of the Guarantees. In my view, on that occasion broadly in the circumstances she described she signed the Franchise Agreement Guarantee. On that occasion also, in my view, Ms Donnelly signed the Global Supply Agreement. There were other documents signed on that occasion. In essence, the documentation was complete. There remain the final negotiation of the terms of the Lease, the fit-out completion, and then the commencement of the business which was aimed for 8 March 2006.

72    Ms Campbell gave quite convincing evidence as to the circumstances of signing the two Guarantees. She says that she had not realised up to then that she would be required to sign the Guarantees, involving (as they did) the PPQ charge and the Global charge. Ms Donnelly had previously signed those agreements or guarantees after consulting the accountants, apparently without difficulty, and apparently in the day or two following receipt of the accountant’s report and meeting with the accountants.

73    I can understand Ms Campbell’s concern at being required to sign the Global Supply Agreement Guarantee and the Franchise Agreement Guarantee in their terms, particularly having regard to clauses 3.10 and 3.11 of those documents respectively. She says she was very upset to realise that she had to sign those documents and expressed her concern both to Mr Gell and to Mr El-Hissi. I accept that she did so. The precise terms of their conversations do not matter except that she was given to understand that, without those documents being signed the franchise to Pampered Paws could not go ahead. As I have noted, to Mr Gell that was the routine position. I am not satisfied that particular threats were made to her, as she claims, as that perception may have evolved over time, but I am satisfied she was in effect told that her signature was necessary for the franchise to be granted. What is apparent, however, is that Ms Campbell understood the effect of what she was signing, and that she nevertheless signed both of those documents. She had the option of not doing so. The consequence may have been that PPQ would no longer have offered the franchise to Pampered Paws, or alternatively that Mr Diamond may have authorised PPQ to offer the franchise to Pampered Paws based only on the signature of Ms Donnelly to those two documents. I have found that, from the point of view of Ms Campbell, she reasonably understood, as was the case, that the documents were presented to her on the basis that the Pets Paradise Group routinely required those documents to be signed. I find also that this was a routine requirement. That accords with the evidence of Mr Gell. That is precisely why he wanted those documents to have Ms Campbell’s signature on them.

74    I suspect it is not uncommon for potential franchisees of a Pets Paradise franchise (or indeed of other franchises) to reach a common understanding that the franchise would be granted, and then to proceed with matters such as lease negotiations and fit-out of the proposed leased premises before all the formal documentation is signed. That is what appears to have happened in this instance. The consequence is that, if the transaction falls through, the respective conduct of the parties must be considered to determine whether any loss has been suffered by the anticipatory conduct and, if so, where that loss should fall. In this matter, it is desirable to determine whether any of the conduct complained of has been made out against any of the Pets Paradise group before addressing such questions.

Misleading and Deceptive Conduct

75    The claims are based upon breaches of s 52 of the Trade Practices Act 1974 (Cth) (the TPA) as then in force. Reliance is also placed on s 51A of the TPA concerning representations as to future events. There is no dispute as to the applicable legal principles.

76    Some of the representations complained of are express and some are implied.

77    It is obviously necessary to look carefully at the Disclosure Document and the Franchise Agreement where the express and implied representations are said to be made.

Express Representations

78    The express representations are said by the applicants to have been made by PPQ and by PPF in the Disclosure Document provided to Ms Donnelly. The pleading of the applicants identifies three Disclosure Documents applicable at three different points in time (a 2003 Disclosure Document, a 2004 Disclosure Document, and a 2006 Disclosure Document). The Disclosure Document provided to Ms Donnelly and then to Pampered Paws and Ms Campbell is the document described as the 2004 Disclosure Document. For present purposes, there is no material difference in any of them. The express representations are also said to have been made in a pro-forma Franchise Agreement provided to Ms Donnelly by letter dated 22 September 2005, and used as the form of the Franchise Agreement duly executed by Pampered Paws, Ms Donnelly and Ms Campbell.

79    The pleaded express representations and their asserted inaccuracy is as follows:

(i)    IT Visions System Representation

80    It is alleged that the Disclosure Document represented that each Pets Paradise business was supported by a “sophisticated computer reporting and management system”, and that, contrary to that representation, the computer reporting and management system recommended by PPFQ, namely the IT Visions System, was not a sophisticated computer reporting and management system. In particular, the particulars assert that the IT Visions System could not integrate debit and credit card processing; integrate accounting software; integrate general word processing and internet browsing software; generate purchase orders to any supplier other than Global, including any approved suppliers; track and manage inventory with accuracy; accurately record sales of items other than stock acquired from Global; and was therefore unable to generate accurate and meaningful management reports.

(ii)    Exclusivity Representation

81    It is alleged that the Disclosure Document represented that the “Pets Paradise Corporate Image extended to some of the store’s retail products and point of sale items, many of which were exclusively packaged” for the Pets Paradise group. It is then alleged that only a small number of retail products or point of sale items were exclusively packaged for the Pets Paradise group. The particulars indicate that only 89 of the 2142 products available from Global from January 2006 were Pets Paradise labelled products, and of those Pets Paradise labelled products, the majority were in the “bird accessories” department (the pleading identifies the following departments: dog and cat accessories, bird accessories, fish accessories, reptile accessories, Natura pet products and small animal accessories).

(iii)    Global Representation

82    It is alleged that the Disclosure Document represented that franchisees were not required to purchase goods from Global, but that contrary to that representation Pampered Paws was in fact required to purchase goods from Global. The particulars of that allegation are found elsewhere in the applicants’ pleading. Clause 9.11(a) of the Franchise Agreement provided that Pampered Paws would obtain all stock only from PPQ or its approved suppliers. Clause 9.1(b) provided that Pampered Paws would only use or sell stock approved in writing by PPQ. Clause 9.5 provided that Pampered Paws would maintain the minimum quantities and mix of stock prescribed in the Manuals or otherwise specified by PPQ from time to time.

83    One relevant manual was called the Instruction Manual (“Pets Paradise Instruction and Information Guide”) published in about January 2003 which was to offer a knowledge base of the products on offer to customers of Pets Paradise franchisees. It identified various product categories. It is said that its contents prescribed the mix of products to be maintained by Pampered Paws. It is also asserted that in about January 2005, PPQ participated in promulgating to franchisees a manual entitled “Store Standards Manual (January 2005)” (the Store Manual), made available to Pampered Paws through Retail Holdings website. It also referred to product categories, and is said to have prescribed the mix of stock to be maintained by Pampered Paws.

84    It is also alleged that Pampered Paws and other franchisees were given in hard copy and in electronic form a Global pictorial catalogue, and that the “approved stock list” provided first to Ms Donnelly and Ms Campbell in the course of training at Melbourne, but updated from time to time, included the Global catalogue, products referred to in other catalogues and products described and referred to in the instruction manual.

85    The nub of the allegations is that at all material times, Global was the only approved supplier of stock on the “approved stock list” other than livestock, plants, fish tanks, dog tags, collars and leads and produce. Consequently, Pampered Paws says that between 6 February 2006 and 31 December 2006 it submitted purchase orders to Global for various Global products (other than the category which were not available from Global) and paid for them. It has particularised the dates and numbers of the sale orders and packing slips, and of the payments in respect of them.

(iv)    Recurring or Isolated Payments Representation

86    It is alleged that the Disclosure Document represented that “recurring or isolated payments payable by the franchisee to the franchisor or an associate of the franchisor ought to be collected by the franchisor or an associate of the franchisor for another person were the payments set out at paragraphs 12 and 13 of the 2004 Disclosure Document”.

87    It is then alleged that there were additional recurring or isolated payments to be made by Pampered Paws to PPQ or its associates, or to be collected by PPQ or its associates for another person, namely the cost of Allocated Stock supplied by Global, and an alleged licence fee payable by Shopfitters to Mr Diamond or an associate or Mr Diamond on account of copyright and/or design licence fees in relation to animal pens forming part of the fit-out by Shopfitters for the Pampered Paws shop. The first of those elements arises from clause 4 of the Global Supply Agreement requiring Pampered Paws, and other franchisees, from time to time to accept and pay for goods ordered on the franchisees behalf by Global (Allocated Stock), provided that the qualities were in the opinion of Global reasonably based on the particular franchisee’s store capacity. Secondly, it is alleged that the amounts paid for the fit-out of Shopfitters of $213,003 included an amount payable by Shopfitters to Mr Diamond or an associate on account of copyright and/or design fees in relation to animal pens forming part of the fit-out cost.

(v)    Required Agreements Representation

88    It is alleged that the Disclosure Document represented that “the agreements which the Franchisee or its directors, shareholders, beneficiaries, owners or partners will be required to enter into under the Franchise Agreement were the agreements set out in pages 15 and 16 of the 2004 Disclosure Document”.

89    It is then alleged that there were other agreements which were required to be entered into by Pampered Paws, supported by its directors, under the Franchise Agreement, namely the Global Supply Agreement, the Global Supply Agreement Guarantee, including the Global charge, and the Franchise Agreement Guarantee to create a charge in favour of PPQ. The circumstances in which Pampered Paws was required to enter into the Global Supply Agreement are referred to above. It is alleged that the directors of Pampered Paws, Ms Donnelly and Ms Campbell, were required at the same time to guarantee the performance by Pampered Paws of the Global Supply Agreement, and to charge all of their real and personal property as security for any debt owing to Global. It is also alleged that it was a condition of PPQ entering into the Franchise Agreement that the directors of Pampered Paws should execute a guarantee in favour of PPQ to support any liability of Pampered Paws to PPQ by the Franchise Agreement Guarantee. That required the directors to charge all of their real and personal property as security for any debt owing to PPQ.

90    The letter dated 7 October 2005 concerning the Franchise Agreement stated that, where the franchise was to be conducted through a company, PPQ required each director of the company to sign a Guarantee and Indemnity in relation to the obligations of the company.

(vi)    Integrity of the System Representation

91    It is alleged that in the Franchise Agreement it was said that “… it was essential to the quality and integrity of the system [that is the Pets Paradise system] that only approved stock, including pets, from approved quality suppliers was sold by the Franchisee”. It is then alleged that it was not essential to the quality and integrity of the Pets Paradise system that only approved stock from approved quality suppliers be sold by Pampered Paws because PPQ has never supplied pets and, further, has only approved businesses trading as “Aquarium Industries” and “Deep Water” as suppliers of fish, “Barossa Aviaries” as a supplier of birds, “Mervs Crazy Crabs” as a supplier of hermit crabs and “Pisces” as a supplier of crickets.

92    There is no dispute that the particular terms asserted in the Disclosure Document and in the Franchise Agreement giving rise to those representations is accurate. Nor is there any dispute that the words referred to mean what they say.

93    Those allegations will now be considered in turn.

IT Visions System Representation

94    The respondents dispute that the IT Visions System Representation was misleading and deceptive. If that representation relates to future matters, they also say that they had reasonable grounds for making the representation so that it should not be taken to be misleading.

95    At a general level, in my view the evidence shows that the IT Visions System was a computer reporting and management system with a number of functions which would lead to it being described as sophisticated. The managing director of both ITV Business and ITV Finance, Ms Mammarella, gave evidence which I regarded as reliable. Ms Mammarella has a degree in computer science. She worked for the Pets Paradise group from about 1991 to 1998, and then after two years working as the operations manager for Thompson Dale Corporation overseeing and administering various point of sale systems for its clients, she commenced her own consultancy group. In that capacity, she was asked by Mr Diamond to develop an alternative point of sale system for the Pets Paradise group and its franchisees. After some investigation, that involved developing a new system. In doing so, Ms Mammorella liaised both with Mr Diamond and his staff and with existing Pets Paradise franchisees. It was progressively introduced for Pets Paradise franchisees from 2004.

96    I shall not repeat the extensive functions the system has. They are described by Ms Mammorella in her evidence, and examples of the reports capable of being generated by the system are included in the evidence. I accept that those reports provide Pets Paradise franchisees with relevant key indicators relating to the performance of their businesses, as well as trading stock and animals sold by franchisees. They include inventory reports, sales reports, customer sales reports, profitability reports and more sophisticated data.

97    Ms Mammorella accepted that the system provided such information only for coded stock. The coded stock could include stock which had not been acquired from Global, but it required the coding to be given through Global so it required the stock to be “Global-approved stock”.

98    It is convenient to record at this point that I also accept Ms Mammorella’s evidence about the training she gave both Ms Donnelly and Ms Campbell in the use of the IT Visions System during their training in Melbourne in February 2006. It was fairly comprehensive. There was obviously a lot to go through. To the extent that Ms Donnelly and Ms Campbell were critical of this aspect of their training, I think it is more likely that they did not absorb fully all of the instruction they were then given. Certainly, there is no basis for concluding that Ms Mammorella did not provide what she considered as the appropriate and relevant training to use the system.

99    The quality of the IT Visions System was also attested, inter alia, by Shane McCarthy, who worked for the Pets Paradise group as its National Retail Manager until March 2006. He had a few meetings with Ms Donnelly and Ms Campbell about the prospects of Pampered Paws being a Pets Paradise franchisee, including during their training. I was also impressed by his evidence; it was given frankly and effectively.

100    I therefore conclude that, whatever operative difficulties Pampered Paws through Ms Donnelly or Ms Campbell may have had in their use of the IT Visions System, the IT Visions System Representation was not itself misleading or deceptive. If it were necessary to take the further step of regarding that representation as concerning future events, at least in part, on the basis of their evidence, I would also find that there were reasonable grounds for making it in the Disclosure Document. That accords also with the evidence of Mr Diamond, whose evidence on this topic I also accept.

101    I accept that Ms Donnelly and Ms Campbell nevertheless had difficulties with that system. However, I do not accept that that shows the representation to them was misleading or deceptive. Properly used, within the framework of a Pets Paradise franchise, the system could integrate debit and credit card processing; it could be integrated with other accounting software such as MYOB; it is compatible with word processors such as Microsoft Word; it could generate purchase orders for Global products and other approved products (with product codes); and it could manage and track inventories and sales of those products (but not products without a product code).

102    It may be that the difficulties experienced by Pampered Paws were because it relatively quickly began to stock products sourced elsewhere than from Global or products not approved by Global. That required use of the “miscellaneous stock” code. It is not necessary to find precisely why Pampered Paws had the difficulties referred to, but I suspect the extent of “non-approved” products may have played a significant role.

103    The submissions of the applicants assert that the IT Visions System “supported and reinforced a business system” that obliged Pets Paradise franchisees to purchase stock from Global, so that it “subordinated” the interests of franchisees to those of Global. The IT Visions System obviously was intended to operate to serve the interests of both the Pets Paradise group and its franchisees. The evidence of other franchisees indicates that it did so effectively. The general submission about subordination is made from the particular perspective of the applicants, but it does not focus on the terms of the representation as pleaded.

104    There was common ground on the evidence that the IT Visions System did not readily accommodate stocked products that did not have a product code assigned by Global. There was also common ground that the product code was assigned by Global either for Pets Paradise labelled or other products sold by Global or other “approved” products (that is, approved by Global), whether supplied by Global or by other approved suppliers. The use of the miscellaneous code and manual entry was required for other products, so the more non-approved products in stock the greater the use of the miscellaneous code and the less useful the overall data generated under the System itself. Products without a product code also could not be scanned, but required manual entry through the cash register. It follows that the IT Visions System was not intended for, or readily used, by the businesses that were not Pets Paradise franchisees. The less like a Pets Paradise franchise the Pampered Paws business became, the less useful the System. However, in my view, those matters do not make the representation misleading or deceptive for the reasons given. The complaints of the applicants are more relevant to the Global Representation.

105    It is convenient at this point to deal with a related factual dispute. Ms Donnelly gave evidence that, during discussions, Mr Diamond told her that Global had some 6000 items on its stock list so that there should be little need to go elsewhere for stock. She had some concerns about the range of stock it offered. There may well have been some discussion between Ms Donnelly and both Mr Diamond and Mr McCarthy (separately) during the training period about that Pampered Paws may wish to obtain stock beyond that available from Global. That is consistent with what I have found to have been Ms Donnelly’s initial plans to expand the range of services and products beyond those routinely offered by other Pets Paradise franchisees. One of those products was what Ms Donnelly called “premium dog foods”. Having the benefit of seeing the witnesses, I think there was a difference of perception between Ms Donnelly on the one hand and Mr Diamond and Mr McCarthy on the other about the plans Ms Donnelly had for Pampered Paws, so the conversations between them did not directly confront the prospect that a significant part of the plans for Pampered Paws extended beyond those of other Pets Paradise franchisees. I do not accept that Mr Diamond told Ms Donnelly or Ms Campbell that Pampered Paws could acquire its stock for the Pets Paradise franchise from whatever source it chose or in whatever quantities it chose. That would not accord with the Pets Paradise franchise system, and Mr Diamond wished to preserve that system. Nor do I accept that he told Ms Donnelly or Ms Campbell that the IT Visions System would operate effectively in an environment where significant stock quantities were acquired other than from Global or other approved suppliers.

106    In any event, for the purposes of considering whether the IT Visions System representation is shown to have been misleading and deceptive, I do not consider that that evidence of Ms Donnelly takes the matter further. It is not pleaded that any representation was made, except by the 2004 Disclosure Document, and those conversations, whatever their precise content, do not to my mind demonstrate either alone or in conjunction with other evidence that the pleaded representation was misleading or deceptive. It will be necessary to further consider that evidence in relation to the Global Representation.

Exclusivity Representation

107    Page 5 of the Disclosure Document stated that the Pets Paradise corporate image extended to some of the stores’ retail products and point of sale items, many of which were exclusively packaged for the Pets Paradise group.

108    As noted above, there were in January 2006 some 2,142 products available from Global to Pets Paradise franchisees, of which only 89 or thereabouts were Pets Paradise labelled products. It is also asserted, and not in issue, that of the Pets Paradise labelled products, about 51 related to bird accessories, 18 to dog and cat accessories, 12 to fish accessories and 8 to small animal accessories. There were no products within the categories of reptile accessories or Natura pet products which were Pets Paradise labelled.

109    The precise wording is:

The corporate image is also extended to some of the store’s retail products and point of sale items, many of which are exclusively packaged for the Group”.

As the respondents correctly point out, putting aside issues of causation and reliance, that representation could be misleading or deceptive only if:

    either the Pets Paradise corporate image did not extend to any of the retail products that could be stocked by franchisees; or

    amongst the retail products that bore the Pets Paradise corporate image, there were not many that were exclusively packaged for the group.

The uncontested findings about the number of products available from Global, and the number which bore the Pets Paradise corporate image, indicate that it is not the case that the Pets Paradise corporate image did not extend to any of the retail products that could be stocked by franchisees. Indeed, that was not the gravitas of the applicants’ claim.

110    The Global catalogue is an extensive document. It is in evidence. Ms Donnelly gave some evidence about it. It is fair to say that, in the catalogue, there are a number of products clearly packaged under the Pets Paradise name and corporate image. Ms Donnelly identified one or two products which she said were similar to other products on the market. There is no comprehensive and independent evidence which would indicate that only a very small number of products which are packaged under the Pets Paradise name and corporate image are products which are in fact otherwise available, or alternatively that the products otherwise available were of equivalent quality.

111    The cross-examination of Mr McCarthy also indicated that some of the products in the Global catalogue are available from other providers, and are not exclusive to Global. In those cases, Mr McCarthy said from his past experience working for the Pets Paradise group that he endeavoured by volume buying to secure prices better than those available elsewhere, and to pass on those savings to Pets Paradise franchisees. He said he endeavoured to ensure that products which were only available through Pets Paradise were marked as exclusive, and otherwise were simply marked as Pets Paradise products without claiming exclusivity.

112    It is necessary to go back to the terms of the representation in the Disclosure Document. It is correct that the corporate image of Pets Paradise is extended to some of the retail products available through Global and to its points of sale items. It is also said that many of those items are exclusively packaged for the group. It is not said that, inherently, those products in terms of quality or effectiveness are exclusive to Pets Paradise.

113    The applicants contend that that representation, properly understood, meant that most of the products supplied by Global were exclusive to Pets Paradise franchisees. I do not accept that that is the meaning which could reasonably have been given to that sentence in the Disclosure Document. To the extent to which it asserts exclusivity, it asserts exclusivity in the packaging. I do not know if the words were carefully chosen, but they are clear enough. In my view, the applicants have failed to make out that the representation conveyed that, or there was a real chance that it would convey, that the majority or a significant number of the products supplied by Global were themselves exclusive to Pets Paradise franchisees. In responding to the assertion in that way, I have endeavoured to apply the test as discussed in Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177; and Australian Competition and Consumer Commission v Australian Dreamtime Creations Pty Ltd [2009] FCA 1545.

114    What has been shown is that relatively few of the products available from Global were labelled as Pets Paradise products, and of those which were so labelled probably some only were products which were not otherwise available from other suppliers, perhaps with different forms of packaging but in content the same. So much was acknowledged by Mr McCarthy, and to a degree by Mr Diamond. The evidence from Ms Campbell was part of the evidence which established that. Indeed, she had the opportunity to perceive that during the training period in early February 2006 before the commencement of the business. Ms Donnelly said that during a walk around the Global warehouse she appreciated that there were only a few products which were branded with the Pets Paradise logo.

115    For the above reasons, I do not consider that it has been shown that the exclusivity representation was misleading and deceptive.

Global Representation

116    The Disclosure Document states:

Global Pets Products Pty Ltd is one of the Approved Suppliers. The company is owned by Gary Diamond who is also its shareholder. The franchisees are not required to purchase goods from this company.

117    The contention of the applicants is that, in reality, all stock was supplied by or through Global and invoiced by Global. They say that there was no approval process for unapproved stock or if there was that it was controlled by Global. There was no evidence that a decision had been made to approve any unapproved products. Consequently, they contend that the representation was false or misleading or deceptive because Pampered Paws was required to purchase its stock from Global.

118    The applicants point out that the Franchise Agreement expressly obliged Pampered Paws not to change or modify any of the products, not to sell any products other than products approved by PPQ (clause 7.24), to obtain all stock (as defined) only from PPQ or its approved suppliers (clause 9.1(a)), and only to use or sell stock approved in writing by PPQ (clause 9.1(b)).

119    It is apparent, therefore, that whatever the representation, Pampered Paws was in effect obliged to obtain its stock only from PPQ or its approved suppliers.

120    Moreover, the Franchise Agreement required Pampered Paws to observe and comply with specified manuals (clause 7.30). One of the manuals is called the Instruction Manual. Relevantly, it prescribed the mix of stock to be maintained by Pampered Paws at material times. There was an Approved Stock List for the purposes of clause 9.1(b) of the Franchise Agreement. I find it was in essence the Global catalogue, although the evidence shows there were also lists of approved suppliers. It was provided to Pampered Paws through Ms Donnelly in the course of training at Melbourne in early February 2006. No other document was identified which might fit that description. I acknowledge that the respondents disputed that there was such a document as an approved stock list, although there is no dispute that the products in the Global catalogue were approved stock. There is no dispute that the stock referred to in the Global catalogue, and the categories of stock referred to in the instruction manual, was stock approved in writing for the purposes of clause 9.1(b) of the Franchise Agreement. I think the Global catalogue largely served the function of being the Approved Stock List.

121    The respondents’ answer is a straightforward one. Insofar as the Global representation is based upon clauses 7.5, 7.24(b), 9.1(a) and (b) and 9.5 of the Franchise Agreement, the applicants’ assertion is not correct. The Franchise Agreement operates according to its terms.

122    Secondly, the respondents say that there is no pleading that there was any oral direction to the applicants, in particular Ms Donnelly and Ms Campbell, either during the course of training or subsequently that they must use Global products. It is curious that it is not pleaded, given the emphasis that was attributed to evidence to that effect in the course of the applicants’ case. They both assert that, during the course of training, they were told that Pampered Paws must acquire only Global products.

123    Even though that was not pleaded, it is a significant contested section of the evidence. Upon careful analysis, I do not think that the evidence of Ms Donnelly and Ms Campbell goes so far as to support the fact that they were told that Pampered Paws must acquire its products or stock from Global. It is unclear from the evidence of Ms Donnelly whether she claims to have been told that Pampered Paws had to use Global for all its stock or as its main supplier. Ms Campbell says she was told that Pampered Paws should only purchase stock from Global or from approved suppliers. That is consistent with the Franchise Agreement. As clause 9.1(a) of the Franchise Agreement says, Pampered Paws must stock products supplied either by Global or approved suppliers, so there was a range of options available to it. It is also significant to note that, on Ms Donnelly’s evidence, she regarded Global as the buying arm of the Pets Paradise group, and its capacity to provide products was regarded as significant by her. Pampered Paws, Ms Donnelly and Ms Campbell all signed the Global Supply Agreement and Global Credit Application during the course of training. Thirdly, the fact is uncontested that, within a few weeks of commencing operating the Pampered Paws business, that business was stocking unapproved products and continued to do so without the approval of PPQ or Global for many months. By about the end of October 2008, almost all the Pampered Paws stock was unapproved. Despite that, Pampered Paws was permitted to continue to operate the Pets Paradise franchise over that time. There were occasions when representatives of PPQ, in routine consultations, expressed concern to Ms Donnelly or to Ms Campbell about the fact that Pampered Paws had such a range of unapproved stock. That, however, did not result in any action asserting a breach of the Franchise Agreement.

124    Pampered Paws also relies on the Instruction Manual and the Store Manual and the Approved Stock List. I have briefly referred to the contents of the Instruction Manual above. In my view, neither the Instruction Manual nor the Store Manual prescribe either the mix of stock to be maintained by Pampered Paws or other franchisees or more importantly require that stock be acquired only from Global. The Instruction Manual sets out types of products and services recommended to be sold or provided by franchisees. The Store Manual sets out the ideal floor plan and ideal wall layouts for Pets Paradise stores, including details as to how to best locate and position certain products generally stocked by Pets Paradise stores. The “Approved Stock List” is in fact in essence the Global catalogue. There are a range of products approved for sale by Pets Paradise franchisees in relation to or beyond Global products. They extent beyond livestock, plants, fish tanks, dog tags, collars and leads and produce as asserted by the applicants.

125     Evidence on the topic was given by Christine Beed, the Pets Paradise Business Manager. She initially worked as a Pets Paradise franchisee in Melbourne before becoming employed by the group itself in about July 1993. She was involved in its training program. She participated in the training program with Ms Donnelly and Ms Campbell in early February 2006. I accept her evidence as reliable. She struck me as honest and direct. Her evidence was not seriously challenged in cross-examination. She also impressed me as a thorough and careful person. Her check list, prepared and completed during the course of the training, demonstrates the extensive documentation she provided to Ms Donnelly or Ms Campbell in the course of the training, and her “New Store Training Checklist” confirms that she completed that training in accordance with her usual practice. Relevantly to the present issue, one of the documents which Ms Beed provided to Ms Donnelly and Ms Campbell during the training was an approved supplier’s list. The list in evidence is apparently a slightly more contemporaneous list than that provided to the Ms Donnelly and Ms Campbell at 2006 during their training, as it has some pages dated 2007 or 2009. It is an extensive list of approved suppliers for a range of products. It appears that it was updated form time to time. However, the categories of product are still relatively limited. I note that one of the documents provided and discussed was a Global authority form to purchase premium and exclusive products. I accept Ms Beed’s evidence that she discussed with Ms Donnelly and Ms Campbell the appropriate stock for their proposed store. She provided them with stock orders for the stock which had been discussed. They were then able to make a final decision about that later on. They did so and made a final Global order. The first stock order included Global products and products from four other suppliers.

126    During the training, and in the short period thereafter, Ms Beed discussed with Ms Donnelly and Ms Campbell the names of some independent suppliers and they were invited to deal with those suppliers direct.

127    There is a dispute as to whether Ms Campbell was told by Ms Beed that Pampered Paws must purchase stock only from Global or approved suppliers. I do not accept that they were told that in such uncompromising terms. Firstly, I accept Ms Beed’s evidence that she did not say unequivocally that Pampered Paws must purchase only Global stock. I accept her evidence that she discussed with them during training that items such as livestock, fish tanks and produce should be purchased from other sources. I also accept that she discussed with them the process by which other stock, which they planned to acquire for Pampered Paws and which was not approved stock, could be submitted to Global or PPQ for its consideration. There was also some discussion with them about there being limited approved suppliers close to the Pampered Paws shop at Burleigh Heads, and that they might consider acquiring stock from other reputable local suppliers.

128    The Court also received evidence from Colin McDonald, the Sales Manager for Global. I also was impressed with his evidence, which was given in an honest, direct and uncomplicated manner. He too participated in the training session for new franchisees at the commencement of February 2006. There is some difference in his evidence from that of Ms Campbell and Ms Donnelly about the extent of the training in relation to Global processes, including new products and allocations, its credit procedure, the ordering procedures, freight, the Global Stock Updates and Choice Orders, as well as the tour of the Global warehouse. I do not regard much of the dispute as of significance. Obviously, the knowledge of the trainers on the one hand and of the new franchisees on the other is quite different so it is entirely understandable that Ms Campbell and Ms Donnelly apprehension of what was conveyed or the manner in which it was conveyed or the roles of individual people in the process of the training program might be a little blurred.

129    One of the forms introduced by Ms Beed was the “New Product Submission Form” to seek approval to any proposed new product line. It was Mr McDonald’s responsibility, as the Sales Manager for Global to address such documents. He referred to a number of requests from franchisees seeking approval to stock various items in the course of his evidence. So far as the records of Global are concerned, since February 2006, there are only two possible requests on behalf of Pampered Paws to stock a new product in accordance with that process. They are an email dated 2 May 2006 and an email dated 20 April 2010. A proposed new product, once approved, was given a Global product code.

130    The applicant’s case is based upon a particular reading of the relevant terms of the Disclosure Document.

131    It may be accepted that much of the stock listed in the Global catalogue could be obtained from other approved suppliers. It may be accepted that, on the evidence, most approved stock was supplied by Global. It does not routinely follow that the Global representation is misleading and deceptive because Pampered Paws was contractually required to purchase stock from Global. It is really a matter of emphasis.

132    I find that Pampered Paws was not required to purchase all of its stock from Global. It could purchase stock from other suppliers, provided it was approved stock. There was a range of products which was approved stock and which could be acquired from other suppliers. There were a range of approved suppliers for stock, who could be used in a number of instances to acquire stock which was also on the Global catalogue. There was a procedure by which stock acquired, or proposed to be acquired, from other suppliers that could be submitted to Global for its approval and could become approved stock after consideration by Global. That procedure was rarely followed by Pampered Paws. Once the approval was given, if it was, that stock could be given a Global product number for the purposes of other systems and could be acquired from the other supplier. In addition, on the evidence, Pampered Paws in fact acquired stock from a range of other suppliers than Global without any assertion being made that it was in breach of the Franchise Agreement, to the point where much of its stock within two years of its operations was not acquired from Global. Nevertheless, it continued to operate as a Pampered Paws franchise.

133    In those circumstances, in my view the Global representation is not made out.

134    Reliance was placed upon the Global Supply Agreement itself. It sets out the terms and conditions under which Global would supply products to a franchisee. The Global Supply Agreement does not oblige a franchisee to acquire products only from Global.

135    The evidence also indicates that most franchisees, if not all franchisees other than Pampered Paws, acquired most of their stock from Global. That too does not demonstrate that the representation is misleading or deceptive.

136    I adverted above to the evidence of discussions between Ms Campbell on the one hand and representatives of Global or the Pets Paradise group on the other in which, notwithstanding the documentary material, it was asserted that Pampered Paws must acquire all its products from Global. The evidence does not go that high. Ms Campbell’s evidence was that she was told that most of its stock should be or must be acquired from Global. She also gave evidence of some threats of consequences if Pampered Paws did not use Global stock. I am not persuaded that such threats were made. They were not admitted by any of the witnesses called by the respondents, and I have no reason to reject their evidence. As I have remarked, I generally found their evidence impressive.

137    On the other hand, there is evidence from both Ms Donnelly and Ms Campbell, that, during the training, they had each been told by Ms McDonald, by Hayley Young and by Mr Diamond that Pampered Paws had to use Global for all or most stock. It is clear that Ms Beed, Mr McCarthy and Mr Paul Collishaw told Ms Donnelly and Ms Campbell that they should use Global for stock, but I do not accept that they said there would be consequences adverse to Pampered Paws if they did not do so, and I do not accept that they excluded the prospect of buying stock from other approved suppliers or excluded the prospect of Pampered Paws from getting approval to acquire stock from other suppliers, or from getting externally acquired stock approved. The fact is that Pampered Paws was not provided by Global or the Pets Paradise Group with codes for products supplied by non-approved suppliers, but on the other hand they did not follow the procedure for that coding to be given except (during the relevant period) on one or two occasions.

138    Mr Collishaw is a Pets Paradise franchisee in Doncaster, Victoria. He also has another interest in another Victorian franchise of Pets Paradise. He also manages two Pets Paradise stores in Victoria for the Pets Paradise group. He is one of its training consultants. Mr Collishaw gave evidence that Global is the main, but not the sole, supplier from which his stores purchase their stock. As to the assertion in Ms Campbell’s evidence that Mr Collishaw had said that “all” stock would come from the Global warehouse, he disputes that he said that during training. He was not cross-examined on that. I do not think that he said that in the precise terms asserted. It is inconsistent with the practice he had in relation to the Pets Paradise businesses with which he was involved. I accept that he said to Ms Campbell words to the effect that new franchisees should generally acquire stock from Global or approved suppliers, because that provides franchisees with better pricing and profit margins. That was in fact his state of belief at the time. I do not accept that he excluded the purchase of stock from other approved suppliers, because that is what he did at the time. Nor do I accept the fact that he did not leave open the prospect of obtaining non-approved stock and seeking approval for it.

139    I have noted Mr McCarthy’s role above and his contact with both Ms Donnelly and Ms Campbell during their training period. He accepted that, during that time, he told them that they should purchase stock only from Global or from approved suppliers. He confirmed that in his oral evidence. He also confirmed that, from the Pets Paradise Group perspective, it was desirable for only approved stock to be held by franchisees. He acknowledged that area managers routinely visited franchisees, and that from time to time there was discussion between the relevant area manager and either Ms Donnelly or Ms Campbell that Pampered Paws should be focusing on removing unapproved lines from its shelves.

140    His evidence is consistent with the evidence of Kelly-Ann Illingworth, who at the time was working for the Pets Paradise Group as Area Manager for Queensland. She occupied that position between about April 2005 and March 2008. In that role she visited the Pampered Paws shop from time to time. She assisted in the stocking of that shop and its fit-out prior to its opening. She understood, at all material times, that franchisees were required to use either Global or an approved supplier for stock. She explained to Ms Donnelly and Ms Campbell from time to time the need to get approval for non-approved stock through Global, and it would then be up to Global as to whether the proposed stock was approved stock. She reiterated that message to them on at least on one or two occasions. She was emphatic that Pampered Paws should get prior approval before stocking unapproved products. Mr Diamond himself confirmed that clause 9.1 of the Franchise Agreement requires franchisees to sell only approved stock either from Global or from other approved suppliers. He agreed that product codes are not available through the IT Visions System for non-approved stock. Product codes were only provided to approved stock once the approval process had been completed.

141    The point made in these submissions on behalf of the applicants is that, in reality, the respondents required rather than expected franchisees, including Pampered Paws to acquire goods only from Global. I do not accept that. In general terms, I accept that the respondents required rather than expected franchisees to acquire goods from Global or from other approved suppliers, and not to stock products which were acquired other than from Global or an approved supplier and which had not previously been approved by Global. It is consistent with that finding that the respondents would, and in particular Mr Diamond would, be cautious about a prospective franchisee who did not want to sign the Global Supply Agreement. It was certainly in contemplation that the majority of products held by a Pets Paradise franchisee would be acquired through Global, and that the Pets Paradise group should control what products were held by Pets Paradise franchisees by approving products which were not available through Global or existing approved suppliers. The element of requirement is confirmed by Ms Illingworth in her statement that franchisees were required to use Global or an approved supplier of stock.

142    The documentary material, in particular the Disclosure Document and clause 9.1(b) of the Franchise Agreement, make it plain that a franchisee is expected to apply in writing for approval to purchase goods from unapproved suppliers, and that PPQ is not obliged to approve the purchase of goods from unapproved suppliers. That may be seen as a means of quality control, or as a means of ensuring a finite series of options for particular categories of stock, or (as the applicants contend) to bring Global into the acquisition process to acquire profit by its wholesaling margins – and perhaps inappropriately high margins – for the supply of that stock.

143    It does not follow, as the applicants contend that there was no bona fide approval process. The approval process was said to be a sham. That is inconsistent with the evidence of Mr McDonald in particular as well as that of Mr Diamond. It is not a process which was tested by Pampered Paws in any meaningful way. There were procedures in place for that purpose.

144    The concluding submission of the applicants is that clause 9.1(c) of the Franchise Agreement is misleading and deceptive because it disguises the reality that most approved stock was supplied by Global and that Global was not simply one among a number of approved suppliers, but was the principal supplier. That is not the representation complained of. In my view, the Disclosure Document does not say that. The reality is that franchisees were formally required to stock only approved stock, which could be acquired from Global or from other approved suppliers, but which was principally supplied by Global. It is not proven that the approval process is “a sham” or that it disguises the reality that Global was the principal supplier. Global was, and was understood by both Ms Donnelly and Ms Campbell to be, the principal supplier of product at all material times. The evidence said to support the proposition that the approval process for non-approved products was a sham is said to be indicated by the lack of documentary evidence of the approval process, the fact that in the Melbourne training franchisees were not informed about the approval process, and the difficulty in obtaining product codes for unapproved stock. I do not accept that during the Melbourne training period, Ms Donnelly and Ms Campbell were not informed about the need to secure approval for unapproved stock, or that there was a process for doing so. I accept that there was a process for doing so and that they were told about it. There is no evidence which persuades me that applications for approval for unapproved stock were routinely disapproved either to secure benefits to Global or for any other reason. I do not accept that the approval process in place was a sham.

145    It is certainly accurate to say that the evidence of the approval process being adopted was scanty. Mr McDonald’s evidence was that there were some, but few, requests from franchisees for approval to stock various previously unapproved products. He produced documentary evidence to support those occasions. They related to a period of time after this proceeding was commenced. He also gave evidence that approvals were not infrequently sought for new products from suppliers and manufacturers of products to get onto the Pampered Paws list. He would consider those requests, the quality of the product, the cost to Global and any recommended retail price, and provide the information to Mr Diamond for a decision. Mr Diamond would then decide whether to approve the product for inclusion on the Pets Paradise approved products list and determine a price at which Global would then charge franchisees for the product if the product was stocked and on-sold by Global. It does not follow that Mr Diamond would put a price on the product which would, in effect, leave the benefit of the new product in Global’s margin rather than a significant margin for the franchisee. The product, once approved, could be obtained through an approved supplier. I draw from Mr McDonald’s evidence that there was a process available for seeking the approval of the new product was available and when it was adopted it was properly considered by him. The approval process, once granted, would result in a product code. It would also result in the opportunity for the product to be acquired either from Global or from the supplier. That evidence was confirmed in general by Ms Beed, and Ms Illingworth and Mr McCarthy. There was little documentary trail adduced in evidence to establish the implementation of that process, but I do not accept that the process was a sham for that reason.

146    There is no direct evidence from Mr McDonald or Ms Young (who assisted in the training on this topic) or Ms Beed, that the detailed procedure including the new product application form was specifically discussed at the training session, although the opportunity to seek the approval for new products was certainly pointed out. The new store training checklist of Ms Beed does not cover the approval process for unapproved stock as a discrete subject matter. Nevertheless, I accept their evidence, in preference to that of Ms Donnelly and Ms Campbell for the reason already given (namely that new franchisees were expected to acquire and absorb a great deal of information during the training session and it may not have all registered with them) that there was a new product approval process available to them, and I accept that Ms Illingworth in the course of her inspections raised the use of that process with them. I accept Mr McCarthy’s evidence that both Ms Donnelly and Ms Campbell were at least generally informed about the approval process during their training.

147    As to the third matter, the difficulty in obtaining approval for product codes, in my view the documentary evidence discloses that Pampered Paws barely sought to seek approval for product codes for its then unapproved stock, and that there is no reason to infer in the circumstances that it was difficult to obtain approval for product codes for unapproved stock provided that stock was, in the judgment of Mr Diamond, appropriate for use in Pets Paradise stores. There is no reason why he should not approve appropriate new products. There is an economic reason (as senior counsel for the applicants pointed out) why Global might then wish to provide the opportunity to acquire those products through it, rather than through an independent provider. However, that is not a reason why there should be difficulty in obtaining approval for product codes for new products if they were otherwise appropriate. I have not overlooked the evidence of an email chain concerning the “Vet Lines”, but I do not think that evidence takes that point significantly further.

148    I specifically do not make the finding as requested by the applicants that the Global process was to provide a product at a significant mark-up from its cost to Global and at the expense of franchisees. That is not consistent with other evidence from franchisees, such as was given, for instance from Mr Robert Wallace.

149    It is also important to bear in mind that there is a difference between a request for a product code for unapproved stock and a request for approval of particular stock. The email chain relating to the “Vet Lines” was not a request for approval but a request for a product code in relation to existing unapproved products. As I have found, Pampered Paws made only one or two requests for the approval of unapproved products. The applicants say that they did not do so because they had been told by Mr Diamond, during the training, that they could simply go and acquire such products as they wanted from such sources as they wanted independently of the Pampered Paws Group processes or systems. I have previously indicated that I do not accept that Mr Diamond said that, nor that such an agreement was made (bearing in mind that it was not pleaded).

Recurring Payments Representation

150    Pages 12 and 13 of the Disclosure Document said that the franchisee was required to pay the following recurring or isolated payments to the franchisor or an associate of the franchisor:

(a)    initial franchise fee;

(b)    service fee of 10% of gross receipts from sales;

(c)    advertising contribution of 1% of gross receipts;

(d)    transfer fee of 15% of franchise fee and the franchisor’s cost of consent to the transfer;

(e)    management fee of $1000 to $10,000 per week if the franchisee becomes unable to conduct the franchise;

(f)    licence fee of $2000 to $20,000 per month where the franchisee takes a licence to occupy; and

(g)    stationery costs.

151    The issue is whether that representation was misleading or deceptive, relevantly now because of what is called Allocated Stock. The applicants’ claim that there was a recurring charge payable for Allocated Stock. The applicants do not press their concern about the licence fee payable by Shopfitters.

152    The outline of contentions of the applicants referred to paragraphs 275-279 of their Second Further Amended Statement of Claim (SFASC). This matter provides an illustration of the complexity of the Statement of Claim. Paragraph 275 simply refers to and repeats paragraphs 266 and 271. Paragraph 266 in turn refers to the matters alleged in paragraphs 143 and 166 and paragraph 271 refers to the matters alleged in paragraphs 95-106. Paragraph 143 refers to the Franchise Agreement. Paragraph 166 refers to the obligation under the Franchise Agreement by which Pampered Paws between 6 February 2006 and 31 December 2006 submitted purchase orders to Global for certain approved stock and made payments in respect of them. Particulars are given. Paragraphs 95-106 refer to the initial letter of 7 October 2005 from PPQ to Pampered Paws about operating a pets licence franchise on the condition that Pampered Paws would have to sign the Global Supply Agreement. The Global Supply Agreement then, by clause 4, required Pampered Paws from time to time to accept and pay for goods ordered on its behalf by Global (Allocated Stock) provided that the qualities were in the opinion of Global reasonably based on Pampered Paws’ store capacity. Allocated stock was described in the Global Supply Agreement as “new products sourced by Global”. Clause 5.2 of the Global Supply Agreement required Pampered Paws to pay for those goods and goods associated with their carriage and insurance. There were then default provisions in clause 7 of the Global Supply Agreement. Under clause 16.1 of the Global Supply Agreement Global warranted that the goods and services so supplied would be free of defects. Paragraph 104 of the SFASC records that on 6 February 2006, Pampered Paws entered into the Global Supply Agreement. Then paragraph 105 pleads that between 2 March 2006 and 31 December 2006 Global ordered allocated stock on behalf of Pampered Paws (with particulars given) and up to 16 July 2007, Pampered Paws accepted and paid for that allocated stock (particulars given). There are 41 particulars of packing slips which are said to give details of the ordering of allocated stock by Global on behalf of Pampered Paws and 28 payments in respect of them. It is a tortuous and complex route.

153    The applicants allege that Pampered Paws therefore was obliged as a condition of the supply of services, namely the right to establish and operate a Pets Paradise franchise to pay Global for Allocated Stock. That obligation, it is argued, should have been but was not disclosed in the Disclosure Document, contrary to s 51AB of the TPA.

154    The obligation to pay Global for Allocated Stock under clause 4 of the Global Supply Agreement is in the following terms:

13.1    Global may from time to time place orders on behalf of the customer for new products sourced by Global.

13.2    The Customer agrees to accept and pay for such orders provided that the quantities are, in the opinion of Global, reasonably based on the Customer’s store capacity.

155    The letter of 7 October 2005, on page 2, has a heading “Global Terms of Trade” which then reads: “You must sign and return the Global Pet Products Pty Ltd Conditions of Sale and the Guarantee and Indemnity”.

156    The Global Supply Agreement was in fact signed on or about 6 February 2006 during the training program. It was signed partly because Andrew Kilgour, an accountant who was at the time the financial controller of the Pets Paradise group, required that (although Mr Kilgour’s evidence is that he does not recall whether or not that occurred) and because Mr Gell in any event picked up on that as a missing document and required it to be signed. Routinely, the Global Supply Agreement should have been signed earlier. As I have found that was signed by both Ms Donnelly and Ms Campbell on 6 February 2006.

157    The process of receiving Allocated Stock and the obligation to pay for it was not disclosed in the Disclosure Document. I find, however, that as a result of conversations which took place during the training period in early February 2006, and including in discussions between Mr Diamond and Ms Donnelly and Ms Campbell, that they were each (and Pampered Paws by virtue of the execution of the document as well as by knowledge gained through them) aware of the fact that Global would from time to time provide Allocated Stock to Pampered Paws for which it would be charged and for which it would have to pay. In my view, the communications from Mr Diamond on that topic left no room for Ms Donnelly not to understand that that would occur; Ms Campbell acknowledged that she understood that process by the end of the training period.

158    The applicants contend that there is a “pattern of conduct by the respondents to conceal the true position about the obligations of franchisees to Global” in respect of Allocated Stock. They point out that the Disclosure Document did not refer to allocations of stock or to Allocated Stock; nor did it refer to the Global Supply Agreement; and the Global Supply Agreement itself did not use the term Allocated Stock but referred to “Trial Stock Orders”.

159    I have accepted that Ms Donnelly and Ms Campbell were only told about the Allocated Stock process during the training period in early February 2006. The earlier letter of 7 October 2005 did refer to the Global Supply Agreement but I accept that, for whatever reason, it did not happen to be enclosed with that letter. I do not regard that as sinister. It was probably an oversight. I do not regard that material as demonstrating conduct by the respondents to conceal the position about Allocated Stock. However, that does not provide an immediate answer to the claim. The fact is that Allocated Stock and the obligations in relation to it were not disclosed in the Disclosure Document, but were discussed and exposed in the course of discussions during the training period up to 6 February 2006, and by the execution of the Global Supply Agreement.

160    The respondents’ response is uncomplicated. There was no requirement to disclose in the Disclosure Document any payments on account of Allocated Sock because such payments were conditional upon Pampered Paws “electing” to sign the Global Supply Agreement. They contend that there was an expectation only on the part of the respondents that franchisees would purchase goods from Global and would sign the Global Supply Agreement, but that that was not a mandatory requirement. Consequently, they contend, the allegation must fail.

161    Paragraph 32 of the Amended Defence accepts that under the Global Supply Agreement, as signed by Pampered Paws, Global had a discretion to place orders from time to time on behalf of Pampered Paws for new products, called Allocated Stock, and that it did so. The orders were placed subject to Global being satisfied that they were in reasonable quantities, were placed in order to test the market for new or trial product lines, and were in the interests of the development of the range of products supplied by Pets Paradise franchisees. Mr Diamond accepted in his evidence that there was “a general expectation” that franchisees would sign the Global Supply Agreement and purchase goods from Global from time to time. He says that was “an expectation only, as opposed to a requirement that is imposed upon franchisees”. He adheres to the position expressed in the Disclosure Document that there was in practice no obligation imposed upon franchisees to purchase products from Global, or (by inference) Allocated Products, and that the letter of 7 October 2005 must be read subject to that document. There has been no instance in which a franchisee has declined to sign the Global Supply Agreement. His evidence confirms what Allocated Stock was and that it was frequently discussed with existing franchisees.

162    In that regard, in my view Mr Diamond was being inappropriately cautious. I observed his evidence at the time to that effect. In my view, the practical position was that the Pets Paradise group would not grant a franchise to a potential franchisee unless that franchisee had agreed to sign the Global Supply Agreement, so that it would (as was commonly expected) acquire much of its product from Global and as a consequence of signing the Global Supply Agreement be liable to accept Allocated Stock from time to time and to pay for it. I do not accept that Mr Diamond on behalf of any of the Pets Paradise group, would permit a franchisee to enter into a Pets Paradise franchise without also entering into the Global Supply Agreement. That is entirely inconsistent with what has happened in the past, and with the strong thrust of the training and of all the evidence that only approved products could be stocked by Pets Paradise franchisees, that non-approved products were urged to be taken off the shelves in relation to Pampered Paws, that there was a system to extend the approval of products where necessary, and from the evidence of other Pets Paradise franchisees that that is in fact how they operated.

163    That finding has significance also to the claim under s 47 of the TPA.

164    It also means that I reject the only point raised on behalf of the respondents in opposition to the assertion that the Recurring Payments Representation was misleading or deceptive. It has not been argued that the obligation to accept Allocated Stock and to pay for it, once that obligation existed under the Global Supply Agreement, was not a recurring obligation of the nature described under the relevant heading in the Disclosure Document.

165    Consequently, I find that Pampered Paws has made out that the respondents (or one or more of them) have engaged in misleading or deceptive conduct in the particular circumstances by failing to disclose in the Disclosure Document that it would be necessary for Pampered Paws as the then putative franchisee to sign and agree to the Global Supply Agreement, and thereby to accept from time to time Allocated Stock and to pay for it. That is a finding which is peculiar to Pampered Paws. There is no evidence to suggest that the standard letter of offer sent by a potential franchisor to a potential franchisee in terms similar to the letter of 7 October 2005 would not routinely enclose the suite of documents to which it refers. In this case, I have made the particular finding that, probably accidentally, the Global Supply Agreement and its terms was not included with that letter and was not brought to the attention of Pampered Paws or Ms Donnelly or Ms Campbell until February 2006. Consequently, they would not have read the Disclosure Document in conjunction with the suite of documents enclosed with that letter, and in particular in conjunction with the proposed Global Supply Agreement. That is a position peculiar to Pampered Paws.

166    I shall separately address later in these reasons the consequence of that finding.

167    It is consistent with that conclusion that a Global memo of 2 April 2004 states (including in relation to the Global Supply Agreement):

These documents should be used by Global for all new Franchisees effective immediately.

Please note that I will be providing a copy of the attached documents to all new franchisees. We should also be providing a further copy during training and requiring them to sign and return same at training.

Stock should not be provided until we receive that documentation and Franchisees must be made aware of that. (Underlining in the original.)

I read that document as going further than simply indicating that, if a particular franchisee required or decided to take some or all of its supply from Global, that the documents would only operate if the franchisee made that choice.

Required Agreements Representation

168    The Disclosure Document at pages 15-16 indicated that under the Franchise Agreement, the franchisee or its directors or shareholders would be required to enter into certain agreements specified as being:

(a)    a lease, sub-lease or licence of premises together with any bank guarantee that might be required under a lease;

(b)    an agreement for the use/operation of a specific computer system in the operation of the franchise with IT Visions Finance;

(c)    a guarantee and indemnity provided by the franchisee’s directors and/or shareholders in the form attached to the Franchise Agreement;

(d)    if required by the franchisor, a confidentiality agreement entered into by the franchisees, directors and employees; and

(e)    if required by the franchisor, a non-competition and restraint agreement entered into by the franchisees, directors and employees.

169    It is asserted by the applicants that the Disclosure Document is misleading and deceptive because it did not disclose that Pampered Paws and its directors would be required to enter into:

(f)    the Global Supply Agreement;

(g)    the Global Supply Agreement Guarantee;

(h)    a charge in favour of Global under the Global Supply Agreement Guarantee; and

(i)    a charge in favour of PPQ under the Franchise Agreement Guarantee.

170    The respondents’ starting response is that the Disclosure Document was not misleading or deceptive because none of the documents referred to in (f) to (i) above were required to be entered into under the Franchise Agreement. The letter from PPQ of 7 October 2005 addressed the grant to Pampered Paws of the right to establish and operate a Pets Paradise franchise. It said that it was necessary to sign the Franchise Agreement and the Franchise Agreement Guarantee. It said that Pampered Paws must also sign and return to PPQ the Global Supply Agreement, although as noted above, I have found that the Global Supply Agreement was not enclosed with that letter.

171    The contents of the Global Supply Agreement have been discussed above.

172    I have found on the basis of that material that in fact it was a requirement of PPQ before granting a franchise to Pampered Paws that it should also sign the Global Supply Agreement, and in turn that both Ms Donnelly and Ms Campbell should execute as directors the Global Supply Agreement Guarantee, as well as the Franchise Agreement Guarantee.

173    I do not regard it as realistic to say, as the respondents do, that Pampered Paws might not operate on a credit account at all and operate a cash account. In practical terms, that would require payment of cash in advance to Global, otherwise delivery of any stock from Global would be on credit. There was no evidence that that matter was discussed at all with Pampered Paws or was the practice in relation to any other franchisee. As I have indicated, it was part of the Pets Paradise package that a substantial part of the stock of any franchisee should be acquired from Global and would be supplied on credit subject to the franchisee executing and agreeing to the Global sale conditions.

174    Accordingly, the Disclosure Document did not expressly state (as was the case) that it would also be necessary for Pampered Paws to sign the Global Supply Agreement. It is, in my view, a specious matter to say that a franchisee could pre-pay for Global products so that was not necessary. That is unrealistic for the reasons given. Moreover, that is not consistent with the terms of the letter of 7 October 2005 or the memorandum of 23 April 2004. Nor is it consistent with the fact that the Allocated Stock process necessarily contemplated that Global would select and provide to its franchisees certain stock for which they would be liable to pay.

175    The respondents, too, have pointed out the terms of the letter of 7 October 2005, in particular that it recognised a commitment from Pampered Paws by the existing deposit, and by the further deposit paid of $8000 on 6 October 2005. These matters may go to the questions of reliance or causation, but from the point of view of PPQ, I think it is plain enough that without the suite of documents being executed (and the legal costs paid), it would not formally grant the franchise. I think it does the respondents no credit in the circumstances to point to the “entire agreement” term in clause 28.3 of the Franchise Agreement or to the heading “Conditions Precedent” in that letter. That is plainly not the case. I find that the respondents also required, at least, the execution of the Global Supply Agreement and (as the letter of 7 October 2005 also indicates) an Assignment of the Lease when executed, to be held in escrow in the event of the Franchise Agreement coming to an end, and also required the Global Supply Agreement Guarantee to be executed. It suggested that Pampered Paws got independent legal and accounting advice before signing the documents.

176    I also find that it was a condition of Global that, in the circumstances of a limited company such as Pampered Paws being the franchisee, its directors would be required to enter into a directors’ guarantee and indemnity. In the letter of 7 October 2005, the guarantee of the performance of obligations under the Franchise Agreement and of the performance of obligations under the Global Supply Agreement are recognised as different documents. The final submissions of the respondents might suggest that this is not in fact the case; that there were no separate agreements in relation to the charges in favour of PPQ as franchisor and Global as store supplier. I reject that submission. They are different documents. Their pro forma content is the same, but the Guarantee supporting PPQ refers to the “Franchisor” throughout and describes PPQ in the Schedule as the “Franchisor”, and the Guarantee supporting Global refers to the “Supplier” throughout and describes Global as the “Supplier” in the Schedule. Each document appears to have been executed by Ms Donnelly and Ms Campbell in the same way and with the same handwritten notations concerning Ms Campbell, and each is dated 15 November 2005.

177    However, so far as Pampered Paws and Ms Donnelly are concerned, the Required Agreement Representation claim must fail in relation to the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee. That is simply because, even assuming that the requirement to sign those Guarantees was not disclosed on the Disclosure Document, so that it was to that extent misleading and deceptive, both Pampered Paws through Ms Donnelly and Ms Campbell herself were both aware of that requirement and in any event had signed those documents prior to or at the same time as signing the Franchise Agreement on 15 November 2005. And, on the evidence, they were aware of the terms and effect of the Global Supply Agreement Guarantee. The non-disclosure (if it occurred) had no adverse consequence to either of them in relation to those documents.

178    I do not accept that between about 22 September 2005 (when the Disclosure Document was first provided) and the letter of 7 October 2005 any of the applicants acted to their detriment in reliance on the Required Agreements Representation. From that date, I find that the respondents were aware of the need to sign the Franchise Agreement Guarantee and the Global Supply Agreement and the Global Supply Agreement Guarantee, although they may not have had the opportunity to fully understand the terms of the Global Supply Agreement itself. To the extent that it contained any terms which they may not have expected, that is covered by the finding about the Recurring or Isolated Payments Representation.

179    Then, between 7 October 2005 and 15 November 2005, I also find that neither Pampered Paws nor Ms Donnelly acted to their detriment in any way in reliance to the three documents (covered in (f) to (i) above). There was until then no commitment to take a Pets Paradise franchise on the part of Pampered Paws. There had been apparently routine investigation into doing so, including through the accountants. The disclosure of those documents in the Disclosure Document would have made no difference to that course of events. Had Pampered Paws through Ms Donnelly decided then to no longer pursue a Pets Paradise franchise, any “deposit” paid on 6 October 2005 would – subject to reviewing the relevant documentation – have been repayable. There is no other expenditure or commitment identified in the evidence which was or might have been incurred to them in reliance on this representation to that time.

180    At least by 15 November 2005, Pampered Paws through Ms Donnelly and Ms Donnelly herself were aware of the fact that they would have to sign (and they did sign) the Franchise Agreement and Ms Donnelly also signed the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee.

181    However, it remained within the power of Ms Campbell to decline to sign each of those documents in the terms in which they were presented. The two Guarantees were unlimited as to the security they purported to create or the charge they purported to create in relation to her assets, but were limited, of course, by reference to the potential liabilities of Pampered Paws to PPQ or to Global in respect of its trading operations. I do not accept that it came as a surprise to either Ms Donnelly or Ms Campbell that Pampered Paws was itself through its directors required to sign the Global Supply Agreement. The evidence indicates clearly enough, particularly through Ms Donnelly, that she understood that products would be supplied through Global to Pampered Paws, and so it must have been apparent to her that a supply agreement of some form would need to be executed. It was executed on 6 February 2006. Previously, she had signed both Guarantees, apparently without demur. It is not an uncommon experience for a corporate franchisee to be expected to provide the guarantees of its directors to support its borrowings or its debts to the franchisor, or to the supplier, particularly where the structure of the franchisee (as here) might be that of a trustee of a trust.

182    I do not accept that, in reality, either Ms Donnelly or Ms Campbell would have baulked at the prospect of signing the Global Supply Agreement Guarantee as distinct from the Franchise Agreement Guarantee. They were each guaranteeing different aspects of the potential liabilities to, or obligations of, Pampered Paws to PPQ and Global. They each understood that Pampered Paws was to undertake obligations, and potentially incur liabilities, to both PPQ and Global. I accept that it was the charge granted by the two Guarantees which caused Ms Campbell’s concern. Nevertheless, she signed them. She elected to do so. At that point, although plans for the franchise had substantially advanced, I do not accept that she would not have done so had she been confronted with that obligation at an earlier point in time.

183    Ms Campbell (as well as Ms Donnelly) had had access to the Franchise Agreement Guarantee and to the Global Supply Agreement Guarantee since 7 October 2005. She was aware of their terms. She had consulted Ms Donnelly to consider the terms of all documents carefully. She did not give evidence that she was not aware that Global was a stock supplier to Pets Paradise franchisees, or that she did not appreciate that Pampered Paws would acquire some stock from Global on terms which would be recorded into writing. It would be surprising if she had given that evidence. She had contributed substantially to Pampered Paws taking on the franchise through her surety offered to the bank. I have found she, too, signed the Franchise Agreement on 15 November 2005. She gave no evidence that she counselled Ms Donnelly not to sign either of the two Guarantees on that date. As I have noted, although the charge granted by those two Guarantees was extensive, it assured the finite liability of Pampered Paws to PPQ and to Global. She knew she was a director of Pampered Paws. Had she been required to sign the two Guarantees (and the Global Supply Agreement) on 15 November 2005, although it would have been confronting – as she found on 6 February 2006 – to grant such an extensive charge over her assets, in my judgment she would have signed those documents.

184    Consequently, there is no proven consequence to any misleading and deceptive conduct in relation to the failure of the Disclosure Document to expose the need to sign the Global Supply Agreement, the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee. It was a need which was exposed in the letter of 7 October 2005, albeit without detail of the charge itself. It is not necessarily the case that the failure to disclose the precise terms of those documents, including the charge, amounted to actionable misleading and deceptive conduct in the circumstances. However, I do not need to decide that. In my view, the failure of the Disclosure Document to refer to the Global Supply Agreement, the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee did not cause any loss to Pampered Paws or to Ms Donnelly or ultimately to Ms Campbell.

185    In that regard, it is also significant, in my view, that the closing submissions on behalf of the applicants, under the heading “Representation about Related Agreements” address separately the requirements to enter into the Global Supply Agreement and the Global Supply Agreement Guarantee (including the “requirement to agree to charge in favour of Global”, which is clause 3.10 of the Global Supply Agreement Guarantee) but there is no complaint about non-disclosure of the need to sign the Franchise Agreement Guarantee, and no detailed submissions about that. One might infer that Ms Campbell, in the circumstances, was prepared without demur to have granted, and did grant the Franchise Agreement Guarantee including the charge expressed in clause 3.11 of that Guarantee.

Integrity of the System Representation

186    Clause 9.1 of the Franchise Agreement required Pampered Paws to acknowledge that it was essential to the quality and integrity of the Pets Paradise system that only approved stock from approved quality suppliers was sold by Pampered Paws, and that Pampered Paws would obtain all stock only from PPQ or suppliers approved in writing by PPQ from time to time and would only use or sell such stock.

187    It is complained that there was a representation to Ms Donnelly (it is not clear why it is not a representation more generally to Pampered Paws) that it was essential to the quality and integrity of the Pampered Paws system to only show and sell stock, including pets, from approved quality suppliers that was sold by Pampered Paws. The complaint is that it was not essential to the quality and integrity of the Pets Paradise system that only approved stock from approved quality suppliers be sold to the franchisee. Consequently, the conduct was misleading or deceptive or likely to mislead or deceive both Ms Donnelly and Pampered Paws.

188    It is the evidence of Mr Diamond that the Pets Paradise system (as defined in the Franchise Agreement), as a system for selling pets, pet food and related literature and accessories had to maintain its quality and integrity by the use only of approved stock, including pets, from approved quality suppliers. In essence that is what was presented to franchisees, supported by the Global Supply Agreement. The evidence clearly is also that livestock and food for livestock should be purchased other than from Global, and there were certain nominated approved suppliers for such products although, in general, the evidence suggests that in relation to livestock there was a degree of flexibility about that.

189    The respondents’ primary response is that the pleading in paragraphs 43 and 44 of the SFASC is really a complaint that there were no approved suppliers of pets. It is necessary therefore, to look at those allegations. Those paragraphs read as follows:

43.    In the circumstances [that is, by reference to clause 1 Definitions and clause 9.1 of the Franchise Agreement] PPQ and PPF represented to Donnelly that it was essential to the quality and integrity of the System that only approved stock, including pets, from approved quality suppliers were sold by the franchisee (Franchise Agreement Representation).

44.    However, the First Respondent has never supplied pets (referred to as livestock) to franchisees and has only approved businesses trading as “Aquarium Industries” and “Deep Water” as suppliers of live fish, “Barossa Aviaries” a supplier of birds, “Mervs Crazy Crabs” a supplier of hermit crabs, and “Pisces” as a supplier of crickets.

190    In my view, the respondents have taken a proper reading of paragraphs 43 and 44 of the SFASC, and it has not been shown to be incorrect.

191    The applicants then seeks to say that it was an implied representation that PPQ would supply all stock, including pets, to be sold by Pampered Paws or would approve suppliers of pets. That was the representation. Again, that is not inaccurate.

192    In each case, it also argued that the express “Integrity of the System Representation” was misleading or deceptive because it was not essential to the quality and integrity of the system that only approved stock from approved quality suppliers be sold by Pampered Paws.

193    As I have found, the Pets Paradise system was that Pampered Paws should acquire most of its stock either from Global or from approved suppliers or seek approval to acquire other stock. But the evidence does not show that Pampered Paws in fact adhered to the system. It shows that, for whatever reason, Pampered Paws expected to be able to acquire such stock as it chose independently of Global or approved suppliers. It acted on that basis more or less from the commencement of the operations of Pampered Paws.

194    I am also not persuaded, on the evidence, that in any meaningful way the applicants have shown that most stock sold by Global could be sold by and obtained from other suppliers. There is evidence that some stock sold by Global was sold by other suppliers. The evidence is not sufficient to satisfy me that, in the case of that stock, it was sold by Global at a price greater than that at which it could be obtained from other suppliers. There is evidence that stock more or less like that provided through Global could be obtained from other suppliers, but not sufficient evidence to say that it is the same stock of the same quality in relevant respects. There is attached to the Third Supplementary Statement of Ms Donnelly, a document which is Exhibit LJEC-1 and called Annexure A in her earlier statement. It is a spreadsheet she prepared entitled “Global and Supplier Comparisons”. It has obviously been painstakingly prepared. It is to show that a large number of products, but not all products, provided by Global are products for which “comparable products” were able to be obtained from other suppliers. Ms Donnelly asserts that the “comparable products” are the same or substantially the same as the products supplied by Global. She said some Global products were less expensive or the same price as that available from other suppliers (presumably for what she regards as comparable products), and that there were a number of Global products where she has not been able to identify a comparable product supplied by an alternative supplier.

195    It was a massive exercise which she undertook. Her evidence, in my view, did not however go far enough. She did not know if all the items referred to were cheaper if obtained from Global. She said some products differed in packaging, but not in contents, but her analysis of the contents was not sufficient for me to be satisfied that in reality there was not some difference in the quality of the product. She said some looked alike. Some were actually the same. Some appeared to have the same contents; some looked like they did so. The final page of her Exhibit suggests that, where the comparisons have been made (assuming they have been properly made) overall the collection of Global products was slightly cheaper than those provided or available from other sources. It also emerged in her cross-examination that the comparison of prices made by Ms Donnelly may be inaccurate to some degree because in some respects GST has not been consistently determined.

196    There are three further matters to note in relation to this claim. Firstly, Annexure A which is the foundation for the submission of the applicants as specified in the SFASC was replaced and amended by Exhibit LJEC1 to the subsequent statement of Ms Donnelly adopted in evidence. Without doing a detailed analysis, it is not possible in those circumstances to place too much weight on Annexure A. In any event, Exhibit LJEC1 does not, in my view, make out the allegation sufficiently to persuade me that it is correct for the same reasons as those already given.

197    Secondly, the respondents say that the representation is a statement of opinion reasonably based. I have no reason to reject the evidence of Mr Diamond about the Pets Paradise system. He said that it was an important aspect of the system for the product range to be relatively consistent across various Pets Paradise stores. It is necessary to build and promote product brands and foster in-store and brand loyalty across those stores. A promotion would lose its effectiveness, and the stores lose credibility, if a particular Pets Paradise franchise did not stock the advertised product in the event of a promotional and advertising campaign. Part of the benefit of the system is for customers to perceive that each Pets Paradise store should be in essence the same for similar products and product range. Thirdly, and understandably, it is essential to the integrity of the system that goods stocked in the Pets Paradise stores were of a suitable quality, and are reasonably fitted out with types of specialty pet products generally stocked by pet product stores. It is therefore necessary to have some control over, or input into, the products stocked by franchisees to ensure the quality of the products available and to ensure that there is a consistent product range available through Pets Paradise stores. Mr Diamond acknowledged that franchisees are required, therefore, to sell only approved stock either from Global or other approved suppliers as outlined in clause 9.1 of the Franchise Agreement. Mr McCarthy’s evidence was to the same effect. He explained that Global is the recommended and preferred supplier of the majority of stock and food for Pets Paradise. He said that volume buying created a maximum return in terms of profit margin of products, and is a core principle in franchising. It enables additional purchasing power on behalf of the franchisees, and so improves buying terms to deliver improved profit margin, improved packaging, improved merchandising and improved inventory management. All of those matters are, in my view, reasonably self-evident. There was no submission put on behalf of the applicants which would tend to suggest that those general views were not correct, nor was any evidence led to that effect. Mr McCarthy has had an extensive retail experience over in excess of 30 years, including working in the franchising industry since 1991, both overseas and locally and in relation to franchised brands. He worked for the Pets Paradise Group, as noted, as its National Group General Retail Manager between 2002 and March 2006.

198    Mr Diamond in his oral evidence confirmed those matters. As I have noted, his evidence through his first affidavit was that franchisees were required to sell only approved stock, either from Global or other approved suppliers, in accordance with clause 9.1 of the Franchise Agreement. He sought to resile from that to some degree in his oral evidence. He said there was no formal requirement to purchase from Global, to use the IT Visions System, to get Shopfitters to do the fit-out, or to stock Natura products (a matter no longer pursued by the applicants). I find, as I have noted above, that franchisees were required to sell only approved stock, either from Global or from other approved suppliers with limited exceptions. Those exceptions related to some livestock and in-store bulkier material. There was little cross-examination to challenge his assertion that Global, through its substantial buying power on behalf of franchisees, was able to secure many products at a very favourable price, and then to fix a wholesale price at which Pets Paradise franchisees were able to obtain Global products. Necessarily there was a margin to Global in its operations, in effect, as a wholesaler. The Pets Paradise franchisee would not know the cost to Global and therefore would not know the mark-up to fix the wholesale price. His first supplementary statement contained a detailed analysis or table marked GJD1 in response to the evidence of Ms Donnelly. He excluded those products which, on the information available to him, were not the same as the products supplied by Global. It is a much smaller list of products. That work was done under his direction. In searching for like products, reference was made to the manufacturer, the packaging and the brand. It did not include products exclusive to Global. He explained in cross-examination why there were some differences or omissions on that basis. In my view, the cross-examination did not enable me to reject his evidence and so to decide the extent to which Global products offered for sale are in essence the same as products otherwise available from other suppliers or to decide whether they are cheaper or less cheap through Global than otherwise.

199    In my view, the consequence is that that alleged misleading and deceptive conduct is not made out.

Implied Representations

200    The applicants alleged that there were several implied representations made by the 2004 Disclosure Document. In the end result, they occupied but little of the closing submissions. They can be dealt with shortly.

201    That is in part because, in my view, the pleaded representations implied by the Disclosure Document do not take further what I have found to be representations made by the Disclosure Document expressly, in part because I have made a finding adverse to the respondents on one aspect of those express representations, and in part because the implied representations asserted are based upon the assumption that the Disclosure Document purported to set out all costs of operating a Pets Paradise franchise, rather than simply its establishment costs. Moreover, in my view, there is no ambiguity or other circumstance arising from the Disclosure Document which supports any implied representations beyond the express representations which have been pleaded and, to the extent discussed above, have been found to have been made.

202    The particular implied representations are in paragraph 37 of the Second Further Amended Statement of Claim. They are two-fold.

203    It is alleged that because the Disclosure Document made statements about establishment costs, and about recurring or other payments payable to PPQ or others in the Pets Paradise group, that document disclosed “all significant costs” or payments that would be incurred by the franchisee in operation of a Pets Paradise franchise.

204    It is convenient to deal with that assertion first. I do not accept it. The category of specific establishment costs described is self-evident, and the costs to which it refers obviously relate to the establishment of a Pets Paradise franchise and not to ongoing costs. The recurring or isolated payments concern the payments payable to PPQ or to other members of the Pets Paradise Group, again expressly indicating the routine type of payments which might otherwise not be anticipated: the franchise fee, the service fee in certain circumstances, the advertising contribution, the transfer fee if the franchise were to be assigned, the management fee if the franchisee becomes unable to conduct its business, licence fees (applicable only where a franchisee is taking a licence from a Pets Paradise Group member to operate the franchise) and stationery costs which may be incurred. I do not think that that implies or purports to assert that all significant costs or payment that would be incurred by a franchisee in the operation of the franchise had been set out in the Disclosure Document. In my view, there is no ambiguity in the wording or other circumstance which supports the asserted implied representation.

205    In the submissions, the applicants refer to the undisclosed costs, being the amounts payable for Allocated Stock, and amounts payable under the Global Supply Agreement and the Global Supply Agreement Guarantee. I have addressed those representations when considering been covered the express representations. To address them as implied representations would result in the same outcome.

206    The alternative implied representation is based upon the statements in the Disclosure Document about the documents which the franchisee and its directors would be required to enter into. I have found that there was an express representation about that matter and have addressed the consequences of its breach. I do not think it is necessary to address separately whether there was in addition an implied representation by the Disclosure Document that the only agreements Pampered Paws and its directors Ms Donnelly and Ms Campbell would be required to enter into were those expressly mentioned and that no other agreements would be required to be entered into by them. That is covered by the express representations, and the findings I have made about that particular representation.

207    There is a further implied representation pleaded in paragraph 48 of the SFASC to the effect that the respondents impliedly represented to Ms Donnelly that PPQ would supply all stock, including pets, to be sold by Pampered Paws or would approve suppliers of pets. Ultimately, I do not consider that that implied representation is made out.

208    There is some lack of consistency in this allegation. On the one hand, the applicants complain that it was, by the Global Supply Agreement, in effect obliged through Pampered Paws to acquire all stock from Global whereas the implied representation complains that they were told precisely that. I do not see how that allegation can rest comfortably with the primary complaint of the applicants about the obligation to acquire all stock from Global. If, in fact, the complaint is that they were not told of the opportunity to acquire stock from other approved suppliers, as a fact that is not correct. If it is complained that they were told that they could not acquire livestock from other than Global, that also is not a fact. They were told they could purchase livestock from other approved suppliers, and in fact a number of sources of livestock and foods for livestock were conveyed to them.

209    The only way in which that representation is said to be wrong is in paragraph 44 of the SFASC, namely that PPQ had never supplied pets, that is livestock, to franchisees and had approved some businesses to provide some livestock to Pets Paradise franchisees. That is in fact the case, as Pampered Paws was told. I do not see how this allegation is said to advance the applicants’ case.

210    Under a separate heading in the submission, further comments on this topic were made. The applicants contend that the Disclosure Document did not disclose that Global was a member of the Pets Paradise group, of the approval process for non-approved stock, that that process if it existed at all was a sham, and that the IT Visions System did not operate efficiently, other than for stock acquired from Global for which a product code had been delivered.

211    I do not think it was necessary for the Disclosure Document to formally indicate that Global was a Pets Paradise group member. There is no doubt that it is. It is wholly owned by PR Holdings, which is in turn wholly owned by Mr Diamond. It is accurate, as the applicants say, that from the point of view of a franchisee there were two arms of the Pets Paradise group with which they primarily dealt: the franchisor (in this case PPQ) and Global as the supplier of products. From the point of view of the Pets Paradise group, in my view both PPQ and Global were part of an integrated corporate group with different functions within that group.

212    I have accepted Mr Diamond’s evidence, and that of Mr McCarthy, that in effect Global operated as a wholesale purchaser and then supplier of products, seeking to take advantage of volume purchases from suppliers, and then on-sell to Pets Paradise franchisees at a cost which covered the expenses of Global and allowed for a profit. In that way, as the applicants point out, franchisees such as Pampered Paws would (to the extent that purchases of stock were made through Global) provide a profit margin to Global as a wholesaler of that stock, and also pay subsequently as a franchisee of PPQ by its royalties and advertising commissions to PPQ on its retail sales. That does not, in my view, give rise to any cause of action as pleaded.

213    The second non-disclosure related to the claim that Pampered Paws was required to acquire and use the IT Visions System. So much was more or less made plain by the letter of 7 October 2005. It involved the requirement, therefore, that Pampered Paws lease from IT Visions System the IT Visions System. Clause 2.1 of the Franchise Agreement, which permitted Pampered Paws to establish and operate a Pets Paradise franchise, carried with it the express obligation that, if required, Pampered Paws would operate such point of sale and computer system as required. The letter of 7 October 2005 then makes it plain that that was to be the IT Visions System.

214    As I have found, that was a system purpose built for Pets Paradise businesses, whether for franchisees or otherwise (that is self-owned shops). It was specifically designed to use with Global products and approved products acquired from other approved suppliers. That was the means by which product codes were issued and available for use with the IT Visions System. If unapproved stock from alternative suppliers was sourced, there was no Global product code and it would then be necessary to use the miscellaneous code entry in the IT Visions System. So much is also made plain by clause 18(b) of the Disclosure Document.

215    As I have earlier concluded, in my view that did not exclude the use of a parallel MYOB retail manager system or the like. To that extent, I have preferred the evidence of Mr McCarthy to that of the applicants.

216    I have considered the applicants’ complaint, at least made through Ms Campbell, that she did not fully understand until the training program what the reference to the IT Visions System was as a point of sale software. In my view, Pampered Paws through Ms Donnelly well understood that matter. It is not necessary to determine the extent to which Ms Campbell understood it prior to the training period. It is difficult, however, to see what else it might have meant.

217    In my view, those allegations do not further advance the applicants’ position.

Exclusive dealing

218    Pampered Paws invokes s 47(6) of the TPA as providing a separate basis for liability against one or more of the respondents in this matter, in particular PPQ but also Global as accessorially liable.

219    Section 47(1) of the TPA provides that:

Subject to this section, a corporation shall not, in trade or commerce, engage in the practice of exclusive dealing.

Subsections (2)-(9) describe different ways in which a corporation engages in exclusive dealing.

220    Section 47(6) deals with a form of exclusive dealing known as third line forcing. That is the type of conduct which the applicants assert against PPQ primarily in this matter. At material times up to 1 January 2007, s 47(6) was in the following terms:

A corporation also engages in the practice of exclusive dealing if the corporation:

(h)    supplies, or offers to supply, goods or services;

(i)    supplies, or offers to supply goods or services at a particular price; or

(j)    gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services by the corporation on the condition that the person to whom the corporation supplies or offers or proposes to supply the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will acquire goods or services of a particular kind or description directly or indirectly from another person.

221    Section 47(6) was amended by Sch 7 Pt 2 cl 30 of the Trade Practices Legislation Amendment Act (No 1) 2006 (Cth). In effect, it exempted or removed from the operation of s 47(6) conduct which involved pushing the conditional supply of goods or services by a related entity. Consequently, it is accepted by both the applicants and the respondents that s 47(6) relevantly operated only to conduct up to 31 December 2006.

222    In essence, up to that date, s 47(1) was contravened provided that, in terms of s 47(6) PPQ provided, engaged in or entered into the supply of goods or services or the offer to supply goods or services on the condition that Pampered Paws acquired other goods or services from a third party.

223    Section 47(13)(a) of the TPA provides that:

(a)    a reference to a condition shall be read as a reference to any condition, whether direct or indirect and whether having legal or equitable force of not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances;

224    In Re Ku-ring-gai Cooperative Building Society (No 12) Ltd (1978) 22 ALR 621, Deane J said at 649:

… The practice of exclusive dealing does not necessarily involve the imposition of any condition. It involves supply upon a condition. The condition may well have been suggested by the recipient of supply. It may have been imposed by some third party. It may arise, by implication from all the circumstances in which the goods or services were supplied.

Consequently, it must be shown (as the applicants allege) that PPQ supplied or offered to supply goods or services (namely those related to the PPQ franchise to Pampered Paws) on the condition that Pampered Paws would acquire the goods or services of a particular kind or description directly or indirectly from another person.

225    The allegation is two-fold. The first is that PPQ offered to supply or supplied the goods and services constituted by the franchise to Pampered Paws on the condition that Pampered Paws would acquire stock from Global. The second allegation is that it supplied or offered to supply goods or services, namely the PPQ franchise to Pampered Paws on the condition that Pampered Paws would acquire the IT Visions System from IT Visions.

226    The authorities indicate that the condition need not be a legally enforceable one, but may be drawn from the facts: see eg Australian Competition and Consumer Commission v Bill Express Ltd (in liquidation) (2009) 180 FCR 105 at [64]. Both “supply” and “services” are defined in s 4(1) of the TPA. It is not necessary to refer to those definitions. It is not contentious that granting to Pampered Paws the rights which were granted under the Franchise Agreement by PPQ amounted to the supply of goods or services.

227    As noted, it does not matter whether the condition was legally binding or not: see s 47(13)(a) of the Act, provided that the condition has some attribute of compulsion: per Northrop J in SWVB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd (1980) 48 FLR 445. Drummond J in Cam Nominees Pty Ltd v AGC Ltd (1994) 51 FCR 338 at 343 said that contravening conduct involved saying to the relevant consumer, in this case Pampered Paws:

You do not have to acquire any goods or services from me, but if you want them from me, you can only get them if you will acquire other goods or services from a third person.

Ryan J in Stationers Supply Pty Ltd v Victorian Authorised Newsagents Association Ltd (1993) 44 FCR 35 at 62 also emphasised the need for an element of compulsion, although not one which is necessarily legally enforceable. It must go beyond a hope or expectation on the part of a person for whose benefit the condition has been attached.

228    The respondent’s primary contention is that, on all the evidence, there was no offer of supply nor any supply on a relevant condition.

229    The respondents rely first upon the terms of the letter of 7 October 2005. Although it has been described as a letter of offer in much of the evidence, they point out that it was not in fact a letter of offer or an offer for the purposes of s 47(6) of the TPA. They say that Pampered Paws had already decided to take on the franchise.

230    Ms Donnelly, having become interested in procuring a Pets Paradise franchise, completed the preliminary franchise application form in mid-September 2005, and she completed the Acknowledgment of Receipt of Disclosure Document, the Confidentiality Agreement, and she paid $10,000 deposit before receipt of that letter. She sent that material to PPQ on or about 16 September 2005. She nominated Pampered Paws as the vehicle for the proposed franchise. PPQ, as the respondents described it, then accepted that offer some time before the letter of 7 October 2005. They then categorised the letter of 7 October 2005 as formalising the prior acceptance of her application for a franchise by the provision of the Franchise Agreement for execution by Pampered Paws, with other documents contemplated by the Franchise Agreement (see cl 2.5A of the Franchise Agreement).

231    I find that there was no enforceable legal obligations between Pampered Paws and PPQ before the letter of 7 October 2005 nor any such obligations undertaken by PPQ by that letter. I have also found that, notwithstanding the reference to the enclosed documents in that letter, in fact the Lease to which it refers was not enclosed (that is simply because it was not by then in final form, and indeed it was not until some time in February 2006 that the proposed lease terms were finally negotiated between Pampered Paws and the operator of the Stockland Shopping Centre). I have also found that the Global Supply Agreement was also not enclosed with that letter. The Franchise Agreement, the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee were enclosed with that letter. As I have found above, the Franchise Agreement was executed by Ms Donnelly and Ms Campbell on behalf of Pampered Paws, and the Guarantee by Ms Donnelly personally on or about 15 November 2005. The Franchise Agreement Guarantee, the Global Supply Agreement Guarantee, and the Global Supply Agreement were not executed by Ms Campbell until 6 February 2006 and the Global Supply Agreement was also not executed by Ms Donnelly until that date, simply because it had not previously been provided to her or to Pampered Paws until on or about 1 February 2006 by Mr Gell.

232    In my view, the terms of the letter of 7 October 2005 were quite unequivocal. PPQ required both Ms Donnelly and Ms Campbell to sign the Franchise Agreement Guarantee in relation to the obligations of Pampered Paws to PPQ under the Franchise Agreement. That is what it says. Furthermore, PPQ required Pampered Paws, Ms Donnelly and Ms Campbell to sign and return a Global Supply Agreement and the Global Supply Agreement Guarantee. They set out the terms and conditions upon which Global would supply products to Pampered Paws. Furthermore, in anticipation of the next element, PPQ also required the IT Visions System to be installed and used by Pampered Paws. It said that the necessary documents would be received from IT Visions.

233    In my view, because it was contemplated that Pampered Paws would acquire a significant part of its stock from Global, PPQ would not have allowed the franchise to be formally granted and operated by Pampered Paws until those documents were all signed. I have rejected the proposition put by the respondents that Pampered Paws, of all the franchisees from any of the respondents, was contemplated as operating on a cash basis so that it would have had to pay in advance for any Global stock. I have also rejected the proposition that it was not contemplated or expected that a significant part of its stock would be acquired from Global itself. That was in the contemplation of both Pampered Paws through Ms Donnelly and PPQ. It reflected the reality of what occurred in relation to all Pets Paradise franchisees, whether from PPQ, PPSA or PPNSW.

234    I have also rejected the proposition that, because Ms Donnelly on 6 October 2005 made a further deposit of $8,000 indicating her intention to proceed with the acquisition of the franchise, PPQ for its part was itself committed to agreeing to provide a Pets Paradise franchise to Pampered Paws before all of those documents had been duly executed.

235    I have found that they were all duly executed by 6 February 2006, and that subject to Pampered Paws then finally securing the lease (negotiations for which were still being undertaken) the franchise was to be granted. I have also rejected the evidence of Mr Diamond, that if Pampered Paws or Ms Donnelly or Ms Campbell declined to execute all of those agreements as required, the franchise might well have been granted in any event and that Mr Diamond would simply have reassessed the suitability of Pampered Paws as a franchisee and would have explored with them whether they were really interested in being part of the franchise system.

236    The conduct of the various officers of the respondents during the training period, about which I have made findings above, indicates in my view confirmation of the element of compulsion which I think was clear enough from the terms of the letter of 7 October 2005. Although the respondents say that there was no term of the Franchise Agreement which states that Pampered Paws was required to purchase stock from Global as a condition of obtaining the franchise, clause 9.1 of the Franchise Agreement requires Pampered Paws to acknowledge, as it did, that it is essential to the success of the franchise and the quality and integrity of the system that only approved stock from approved suppliers are sold by Pampered Paws so that it was obliged to obtain all its stock only from PPQ (which did not provide stock) or suppliers approved in writing by PPQ from time to time, and that it would only use or sell stock approved in writing by PPQ (that is Global and other approved suppliers).

237    I am mindful that the line to be drawn may be a difficult one. As the respondents say in their submissions, it is one thing to participate in the franchise which has a long history of success driven by a proven formula and which is willingly entered into, and it is another thing altogether to attempt to elevate that arrangement to a level of compulsion so as to constitute exclusive dealing. They contend that there was no element of compulsion to acquire stock from Global and no sanction imposed for acquiring unapproved stock.

238    In my view, there was an element of compulsion to acquire stock from Global. The Global Supply Agreement was required to be signed before PPQ would formally have committed itself to the franchise. It was required to be signed because a significant part of the stock routinely expected of a Pets Paradise franchisee was available only from Global. There was an option for a not inconsiderable part of the stock to be available from other approved suppliers, but that does not diminish the point. It was also required to be signed because Global, for its part, as part of its operating systems had introduced the Allocated Stock program referred to above and which it expected its franchisees to participate in. I also do not think, upon the whole of the evidence, that there is any scope for accepting the contention of the respondents as a fall-back position, that Pampered Paws was required to sign the Global Supply Agreement but was not itself required to acquire goods from Global.

239    Of course, the fact that stock was acquired from Global does not itself indicate that that was done with an element of compulsion. Ms Donnelly accepted that one of the benefits of entering into the franchise was the availability of acquiring stock from Global, with what she understood (and probably correctly so) was its superior buying power together with its branding of Pets Paradise products. It is also correct, as the respondents pointed out, that evidence given from other franchisees indicated that they acquired most but not all of their stock from Global and acquired the balance of their stock in broad terms from other authorised or approved suppliers. That is of course either consistent with their preparedness to do so without compulsion, or consistent with the fact that they were required to do so. In their respective cases, they were simply prepared to do so but had not tested whether they were in fact required to do so. As I have also indicated, and as accepted by Mr Diamond, in reality Global was a wholesale acquirer and supplier of product to Pets Paradise stores. Subsequent conduct on the part of officers of the respondents who visited the Pampered Paws premises from time to time also confirms that there was considerable dissatisfaction with Pampered Paws continuing to stock and offer for sale non-approved product.

240    In my view it is plain that the Global catalogue was regarded as an approved stock list. It was used as the vehicle for the selection, under guidance, of the initial starting stock of Pampered Paws and subsequently for the selection of stock. The obligation under clause 9.1(a) of the Franchise Agreement obliged Pampered Paws to purchase its commencement stock from Global, at least largely, and it did so. In my view, it was an ongoing obligation to purchase a significant proportion of its stock from Global, and the balance from other approved suppliers.

241    The reality is also that, through the IT Visions System, and through the Pets Paradise system, there was little means by which non-approved product could usefully be acquired until it was approved. There was no means by which product codes for unapproved products supplied from unapproved suppliers could be given, and such stock could not function within the IT Visions System except under the miscellaneous code. Product codes for unapproved stock, as Ms Young said, would only be generated once the approval process was complete. In my view, the evidence of Ms Young, Mr McCarthy and Ms Illingworth all support that conclusion. Ms Beed’s evidence also supports the conclusion that the Global catalogue was a list of approved products available through Global, and there was little other documentation which indicated where other approved stock might be acquired from, other than the lists of other approved suppliers.

242    It is necessary to consider what in fact transpired. As I have noted earlier, in my view, Ms Donnelly (and to a lesser degree Ms Campbell, simply because she was less involved in the immediate proposed operations of Pampered Paws) had in mind at material times a range of activities for the Pampered Paws store which extended beyond those of a typical Pets Paradise franchise. She also had in mind that, therefore, Pampered Paws may wish to acquire products beyond those approved by the Pets Paradise group. I accept that there was a conversation between her and Mr Diamond on that topic during the training period. She says that, as a result of that conversation, she understood that Pampered Paws would be entitled to acquire unapproved products from a range of other suppliers, and that Mr Diamond would then somehow arrange for its approval unless there was particular reason not to do so. Mr Diamond disputes that. The difference in the respective versions of that conversation is probably because each of them had a different understanding as to the emphasis which the other was giving to the nature of the communication at the time. I have also considered whether there was merely a hope or expectation on the part of PPQ that Pampered Paws would purchase stock from Global, without any obligation or compulsion of the kind contemplated by s 47(6), the conduct subsequent to the grant of the franchise. That evidence indicates that, soon after the commencement of the Pampered Paws store, Ms Donnelly did commence to acquire product other than Global approved product and increasingly so over the next months. By about 30 April 2008, Pampered Paws no longer required Global approved product, but continued to operate as a Pets Paradise franchise. I do not think that evidence indicates that PPQ did not impose as a matter of compulsion the obligation to acquire a significant amount of stock from Global as a condition of it granting the franchise in the first place. It is obvious that the Pets Paradise group was aware of its obligations under the TPA and endeavoured, and understandably so, to steer a line which did not offend the TPA (see eg clause 26 of the Franchise Agreement). Thus, despite the relatively unequivocal comments made by various officers of PPQ or of the Pets Paradise Group both during the training period and then during visits to the Pampered Paws store, no action was specifically taken to terminate the Franchise Agreement or to give notice of breach of that agreement when (as progressively became apparent) Ms Campbell or Ms Donnelly persistently acquired non-approved product from suppliers. In my view, that was simply a consequence of Mr Diamond not wishing to test the enforceability of the compulsion which had been imposed by the requirement to execute the Global Supply Agreement and to acquire some stock, including Allocated Stock from Global and to acquire stock generally only from Global or other approved suppliers.

243    In my judgment, the conduct of PPQ and of the respondents or some of them, involved the necessary element of compulsion upon Pampered Paws to:

(a)    acquire a significant part of its stock from Global; and

(b)    acquire and use the IT Visions System.

244    I reject the submission that the grant of the franchise by PPQ was independent of those obligations for the reasons given, and I reject the submission that the acquisition of stock by Pampered Paws was an expectation only and that the acquisition and use of the IT Visions System was also only an expectation. The whole of the evidence, or more specifically and accurately, the findings I have made on the whole of the evidence, lead me to that conclusion. In the case of the IT Visions System, the letter of PPQ of 7 October 2005 was expressed in terms of a requirement. So too was the signing of the Global Supply Agreement. But of course the contents of that letter are but part of the relevant material: it includes the structure of the Pets Paradise group including its buying arm, the specific nature and purpose of the IT Visions System and the terms of the Franchise Agreement. The oral evidence of some of the witnesses called by the respondents, as noted, also supports that conclusion in relation to acquiring stock from Global. There was little discussion about the IT Visions System, although it was incorporated into the training program and no other system was suggested on the evidence as being a useful alternative system.

245    I do not accept that s 47(1) was contravened by PPQ in relation to the shop fitting supplied by Shopfitters. It is clear enough that PPQ expected and required the Pampered Paws franchised business to carry the Pets Paradise “brand” or appearance. PPQ approved the proposed fit-out provided by Shopfitters for that purpose. He was aware of its work, and that it had fitted out other Pets Paradise stores. He no doubt gave Shopfitters the opportunity to take on that job.

246    I do not accept that the use by Pampered Paws of Shopfitters for that task was one which PPQ imposed. I accept Mr Kersten’s evidence that he did not require that to occur. To the extent that Ms Donnelly and Ms Campbell gave evidence to the contrary, I think they are mistaken. It maybe that, as the circumstances evolved, Pampered Paws was not offered any other choice of shopfitter, but that is not the same as Shopfitters being imposed upon it as a pre-condition to the grant of the franchise. Pampered Paws might have got other quotes, or engaged another shopfitter, provided the required “brand” or appearance was achieved.

247    In my view, the required element of compulsion is not made out.

248    The parties are agreed that issues of loss and damage from breach of s 47(1) and (6) of the TPA should be considered separately after these reasons for judgment. However, there is one finding which I should make clear.

249    Mrs Donnelly gave evidence that, having received the Disclosure Document on 28 September 2005, she took comfort from it. She said she would not have proceeded with acquiring a Pets Paradise franchise but would have established an independent pet store with a MYOB point of sale system, had she known about the need to acquire and use the IT Visions System which was, in essence, only adapted to a Pets Paradise franchise, and had she known about the need to purchase most stock from Global. I do not accept that evidence. I consider that evidence is given with the benefit of hindsight. Ms Donnelly was made aware of the need to use the IT Visions System by the letter of 7 October 2005 and to acquire and sell only approved stock from an approved supplier by cl 9.1(a) of the Franchise Agreement enclosed with that letter. She made enquiries about Global, apparently prompted by that letter. The terms of the letter of 7 October 2005 are quite explicit: expressed as mandatory requirements. Ms Donnelly did not then embark on another path. She did not fully explore the IT Visions System, or look for alternatives. She did not, prior to commencing the Pampered Paws franchise business, take steps to learn about the capacity of the IT Visions System to operate with a business which was only partly stocked with Pets Paradise approved stock.

250    Subject to rejecting that claim, as I have indicated, I will give effect to the agreement of the parties as recorded in the order of 27 May 2010 about this part of the claim.

BREACH OF FRANCHISING CODE OF CONDUCT

251    Section 51AD of the TPA provides that a corporation, in trade or commerce, must not contravene an applicable industry code. The Schedule to Reg 3 of the Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) constitutes the Franchising Code of Conduct (the FCC). It is accepted that it is an applicable industry code for the purposes of s 51AD: see s 51AE.

252    I accept the applicants’ contention that each of the respondents, including PR Holdings, is an “associate” of PPQ for the purposes of the FCC. PR Holdings’ status in that regard was put in issue in the pleadings. PR Holdings in clearly a related body corporate to PPQ and on the evidence of Mr Kilgour and Mr Diamond it is clearly a trading corporation. I find that it provided oversight of the franchise operations of the Pets Paradise group in the way that Mr Kilgour described. The oversight included some of what are called the “head office” services, including legal services in relation to the overall Pets Paradise franchising business.

253    There is a “technical” breach of the FCC pleaded: that the Disclosure Document did not disclose that PR Holdings was an “associate” of PPQ. It did not do so. I describe the breach as “technical” simply because I do not consider that that failure had any significance at all to any decision taken by Pampered Paws or Ms Donnelly or Ms Campbell in relation to the undertaking of the Pets Paradise franchise or to its operations or to the signing of any of the documents. The Disclosure Document disclosed the relationship between PPQ and Global and Mr Diamond, and there is no persuasive evidence to suggest that the express disclosure of the status of PR Holdings might in any way have been important to any of the applicants.

254    The remaining alleged breaches of the FCC are described in the written submissions of the applicants as the:

(a)    Goods Non-disclosure;

(b)    Goods Payment Non-disclosure;

(c)    Directions Security Non-disclosure; and

(d)    Global Security Non-disclosure.

The Licence Fee Non-disclosure allegation was not pressed.

255    There is a substantial overlap in the evidence applicable to those claims, and that applicable to the express misrepresentations said to constitute misleading and deceptive conduct. The submissions on these matters, too, were relatively brief or were made by reference to, and adoption of, the submissions made in relation to the claims based on misleading and deceptive conduct.

256    For the reasons which in essence are the same as the reasons above concerning the various claims under the Express Representations heading, I conclude that:

(a)    the Goods Non-disclosure breach alleged is made out because Pampered Paws was required to accept Allocated Stock from Global, contrary to the Disclosure Document;

(b)    the Goods Payment Non-disclosure alleged is also made out because Pampered Paws was required to accept and pay for Allocated Stock from Global, a matter not disclosed in the Disclosure Document;

(c) & (d)    the Directors Security Non-disclosure and the Global Security Non-disclosure breaches alleged are made out because Ms Donnelly and Ms Campbell were each required to sign the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee, and the execution of those documents was part of the package of documents required before the franchise would be granted.

257    There may be reason to decline to make orders as requested by the applicants in the light of those findings. Save for the breaches arising from the failure to disclose the Allocated Stock and to pay for it, I have concluded that each of Pampered Paws, Ms Donnelly and Ms Campbell had reason to be aware of the need to sign the Global Supply Agreement, and each of the Franchise Agreement Guarantee and the Global Supply Agreement Guarantee from 7 October 2005 (although the Global Supply Agreement had not been included with the letter of that date from PPQ). I have also found that they would each have signed those documents had their terms been disclosed in the Disclosure Document. Consequently, I do not consider that the breaches of the FCC in that regard are shown to have caused any loss to any of the applicants.

258    I have included in the orders the opportunity for the parties to address whether any declaratory orders should be made by reason of the breaches of the FCC I have found, and to address any issue of damages arising from findings relating to the failure to disclose the obligation to take and pay for Allocated Stock. The orders also give the parties the opportunity to further address any loss arising from the breaches of the FCC concerning “Directors Security Non-disclosure” and the “Global Security Non-disclosure” as they also relate to the Exclusive Dealing claim on which, to some degree, the applicants have succeeded. However, as I have already remarked, I have made some findings on that aspect of the claims which of course must form the platform on which any further submissions are based.

ACCESSORIAL LIABILITY

259    Mr Diamond accepted that he would be liable as an accessory for any loss and damage suffered by Pampered Paws, or by Ms Donnelly or Ms Campbell. At present, no damages are to be awarded by the orders made when these reasons for judgment are delivered, but the opportunity in limited respects is given to the applicants to pursue such a claim.

260    Similarly, I do not think that the submissions about the accessorial liability of the respondents other than Global (the applicants’ claim are primarily against PPQ) are presently confined enough to usefully address this in the light of the limited findings I have made in favour of the applicants.

261    The further submissions which I propose to allow the parties to make may address the accessorial liability of other respondents than Global. On the evidence of how the two arms of the Pets Paradise business intersected, and of the roles of PPQ and Global, I think at present that Global was an accessory of PPQ to the extent that PPQ has had findings recorded against it. The respondents may also wish to make further submissions on those matters.

UNPAID LABOUR CLAIM

262    Both Ms Donnelly and Ms Campbell have made claims for damages for unpaid labour each provided to Pampered Paws, and interest on those damages.

263    It is, in my view, clear enough that Pampered Paws did not operate in as financially successful way as Ms Donnelly and Ms Campbell had anticipated. Consequently, Ms Donnelly worked long hours for Pampered Paws without herself drawing any salary and overtime. Ms Campbell also provided her labour without drawing a salary and for increasingly long periods of time.

264    As I understand their respective claims, they are claims for damages on the basis that each of them relied upon the express representations, which are said to be misleading or deceptive. That was how the basis of their claim was put when they sought leave to amend the SFASC to include it.

265    In view of the findings I have made on those matters, I do not at present allow the unpaid labour claim. I am not satisfied that the conduct of the respondents or any of them caused the loss alleged. Where misleading and deceptive conduct has been made out, in my view there is no evidence which could enable the Court to attribute any particular part of the extensive hours worked by each of them to be a consequence of that conduct. The claim was presented on an “all or nothing” basis in the sense that it would be shown that the conduct giving rise to the causes of action induced Pampered Paws to undertake the Pets Paradise franchise and that, but for that offending conduct, it would not have done so. Whilst such a finding might be made on the basis of the favourable findings made in these reasons for the applicants, and as a consequence the unpaid labour claim might therefore be enlivened, it is not possible to further address it at present.

266    In those circumstances, I do not intend to determine the other issues raised in the submissions about the quality of the evidence and the legal foundation for the claim.

267    In my view, unless the applicants now seek to assert, by the further matters they are entitled to address by the orders made with these reasons, that the Court should conclude that Pampered Paws by wrongful conduct of the respondents was induced to accept the Pets Paradise franchise and that, but for that wrongful conduct, Pampered Paws would not have entered into the franchise, the unpaid labour claim must be refused.

LOSS AND DAMAGE

268    It is apparent from the above reasons that the applicants have succeeded only to a limited extent in their claims.

269    The orders to be made will give them the opportunity to consider how their claims for loss and damage might be refined and confined to the consequences of the wrongful conduct found to have been made out. They will also have to take account of other findings made on contentious issues.

270    At present, no orders for damages are made.

CONCLUSION

271    In relation to the misleading and deceptive conduct claims, I have concluded that only in one respect has the case of the applicants been made out. That is in respect of the Recurring or Isolated Payments Representation about the Allocated Stock provided by Global from time to time under the Global Supply Agreement.

272    It is not clear that Pampered Paws has suffered any loss as a result of that representation or its misleading character. The evidence focused more on the need to sign the Global Supply Agreement itself, rather than on that feature of it. The applicants in their closing submissions, did not focus on whether there was any evidence which specifically was directed to show that Pampered Paws had relied upon that limited aspect of the pleaded representations to its detriment, including whether Pampered Paws would have acted in any way differently if that limited matter had been disclosed to it. If the applicants wish to pursue that matter, I consider it desirable that they be given the opportunity to do so and, of course, for the respondents to reply. I suspect that it will be difficult for the applicants to show that, but for that misrepresentation, Pampered Paws would not have entered into the Franchise Agreement at all, although I have no concluded view on that question. If, as might be the case, Pampered Paws does not press the claim that it suffered particular loss by reason only of that conduct, the respondents may wish to make submissions – and the applicants to respond – on whether any merely declaratory orders should be made.

273    Accordingly, on that aspect of the claim, I propose to give the parties the opportunity to consider these reasons for decision before addressing how they wish the matter to further proceed.

274    I have also concluded that PPQ (and probably PPF) contravened s 47(1) of the TPA and the FCC in the respects referred to above. By orders made on 27 May 2010, the question of any loss and damage suffered by Pampered Paws as a result has been stood over. The parties will now need to consider whether any declaratory orders should be made, and if so, on what terms. They will also need to consider how the foreshadowed claim for damages by Pampered Paws might be pursued, especially having regard to the general finding about the extent to which it felt constrained in fact by that conduct. That may involve consideration of its claimed loss over separate periods of time by reference to any evidence about how Pampered Paws acted by reason of the contravention not simply at March 2006 but up to 31 December 2006.

275    In relation to each of those matters, also, there is or may be, a need to focus on which of the respondents should be held accountable. The respondents accepted that, in general terms, accessorial liability is not in dispute because of the nature of the Pets Paradise group. However, the submissions did not specifically address the accountability of particular respondents, whether as a principal or as an accessory, in relation to the confined contraventions which I have found.

276    In respect also of the Exclusive Dealing and breaches of the FCC, the orders now to be made will enable the applicants to consider these reasons, and then to determine the extent to which they pursue claims for declaratory relief and for damages.

277    The orders made on 27 May 2010 also indicated that the proceeding cross-vested to this Court (Supreme Court of Victoria Matter SCI D6019 of 2009) should be heard together with this action). The parties will now need to consider what, if any, further steps or submissions they wish to make in that action and what orders they seek in relation to it.

278    Probably more importantly overall is what should now be done with this proceeding as a class action on behalf of the Group Members. Although I have not fully considered that question, I suspect that the findings I have made in this matter in favour of the applicants will not be of much assistance to the Group Members. That may be wrong. The parties should, therefore, also be given the opportunity to consider the future path for this proceeding as a class action and to make such submissions as they may be advised on that question.

279    The orders will also give the parties the opportunity to consider how the related proceeding, transferred to this Court from the Supreme Court of Victoria, should now be dealt with.

280    The orders will also enable the parties to make submissions as to costs, although that may be better dealt with after any issues to be pursued in the light of these reasons have been resolved.

Associate:

Dated:    27 January 2012