FEDERAL COURT OF AUSTRALIA
Julstar Pty Ltd v Hart Trading Pty Ltd [2013] FCA 1359
Citation: | Julstar Pty Ltd v Hart Trading Pty Ltd [2013] FCA 1359 | |
Parties: | JULSTAR PTY LTD (ACN 122 620 400), SEMOLINA PTY LTD (ACN 117 933 570), JULIANNE STARIHA, HART TRADING PTY LTD (ACN 114 806 996), COLLEEN TRACEY HART, FRONTLINE RECRUITMENT GROUP PTY LTD (ACN 078 126 851) and PETER JOHN DAVIS | |
File number(s): | QUD 16 of 2011 | |
Judge(s): | GREENWOOD J | |
Date of judgment: | 12 December 2013 | |
Catchwords: | COMPETITION – consideration of a series of claims of misrepresentations inducing a franchisee to enter into two franchise agreements | |
12, 13, 14, 15, 16, 19 March 2012; 8 May 2012 | ||
Date of last submissions: | 8 May 2012 | |
Place: | Brisbane | |
Division: | GENERAL DIVISION | |
Category: | Catchwords | |
Number of paragraphs: | 784 | |
Counsel for the Applicants: | Mr R A Perry QC | |
Solicitor for the Applicants: | Shand Taylor Lawyers | |
Counsel for the First and Second Respondents: | Mr C Jennings | |
Solicitor for the First and Second Respondents: | Thomsons Lawyers | |
Counsel for the Third and Fourth Respondents: | Mr A B Crowe QC and Mr M Jones | |
Solicitor for the Third and Fourth Respondents: | HWL Ebsworth Lawyers | |
IN THE FEDERAL COURT OF AUSTRALIA | |
DATE OF ORDER: | 12 DECEMBER 2013 |
WHERE MADE: |
THE COURT ORDERS THAT:
1. The claims of the applicants as against all respondents are dismissed.
2. The applicants shall pay the costs of and incidental to the proceedings.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
QUEENSLAND DISTRICT REGISTRY | |
GENERAL DIVISION | QUD 16 of 2011 |
BETWEEN: | JULSTAR PTY LTD (ACN 122 620 400) Applicant SEMOLINA PTY LTD (ACN 117 933 570) Second Applicant JULIANNE STARIHA Third Applicant |
AND: | HART TRADING PTY LTD (ACN 114 806 996) First Respondent COLLEEN TRACEY HART Second Respondent FRONTLINE RECRUITMENT GROUP PTY LTD (ACN 078 126 851) Third Respondent PETER JOHN DAVIS Fourth Respondent |
JUDGE: | GREENWOOD J |
DATE OF ORDER: | 12 DECEMBER 2013 |
WHERE MADE: | BRISBANE |
REASONS FOR JUDGMENT
1 In this proceeding the applicants contend, put simply, that the respondents have engaged in misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth), as it was known at the time of the events in question, (the “Act”) in respect of two broad classes of conduct.
2 The applicants contend that in reliance upon the pleaded representations, said to be misleading and deceptive, two companies (the first and second applicants) controlled by the third applicant, Mrs Julianne Stariha, entered into franchise agreements with the third respondent. The applicants contend that, had they known the truth of the matters in question, neither the first nor the second applicant would have entered into the relevant franchise agreements.
3 Other causes of action are pleaded by the applicants arising out of the conduct all of which is in controversy in these proceedings.
4 The first applicant is a company called Julstar Pty Ltd (“Julstar”). The third applicant, Mrs Stariha, is the sole director of that company.
5 The second applicant is a company called Semolina Pty Ltd (“Semolina”) and Mrs Stariha is the sole director of that company.
6 Mrs Stariha is the third applicant.
7 The first respondent is a company called Hart Trading Pty Ltd (“Hart Trading”). The sole director of that company is the second respondent, Mrs Colleen Hart (“Mrs Hart”).
8 Mrs Hart caused Hart Trading to employ Mrs Stariha in a particular capacity from 29 August 2005 in Brisbane in undertaking activities as part of the conduct by Hart Trading of a retail recruitment business, put simply for present purposes, as the Brisbane Frontline Retail Agency. From November 2005, Mrs Hart and Mrs Stariha made arrangements for Mrs Stariha to operate the Frontline recruitment activities from premises at the Gold Coast as part of seeking to develop, put simply for present purposes, the Gold Coast Frontline retail undertaking for Hart Trading. The Frontline activity undertaken by Hart Trading both in Brisbane and the Gold Coast from August 2005 until December 2006 was conducted as a franchisee of the third respondent, Frontline Recruitment Group Pty Ltd (“FRGPL”).
9 The fourth respondent, Mr Peter Davis, is the Managing Director of FRGPL.
10 On 8 December 2006, Julstar entered into a business contract with Hart Trading to acquire the business known as “Frontline Retail Gold Coast” and as a part of that acquisition Julstar entered into a franchise agreement for the Gold Coast geographical region with FRGPL (then known as Frontline Retail Pty Ltd) for a period of five years.
11 Mrs Stariha and Julstar contend, put simply, that representations were made to Mrs Stariha by Mrs Hart which induced her to enter into the business contract with Hart Trading and, in turn, the franchise agreement with FRGPL. Mrs Stariha also contends that representations were made to her (and also, in part, to her husband, Mr Lee Stariha) by Mr Peter Davis which were relied upon by Mr and Mrs Stariha in causing Julstar to enter into the transaction with Hart Trading, acquire the Frontline Retail Gold Coast business from Hart Trading and enter into a new governing franchise agreement with FRGPL.
12 Mrs Stariha and Semolina contend that Semolina on 1 October 2007 entered into a franchise agreement with FRGPL to acquire the right to operate a Frontline recruitment hospitality agency in a particular geographical territory described as the Gold Coast territory. Under these arrangements, Semolina would provide staff and employee recruitment services to participants in the hospitality industry. Mrs Stariha contends that particular representations were made to her by representatives of FRGPL on 6 November 2006, between June 2007 and 30 September 2007 and July 2007 which induced Semolina to undertake a sequence of commercial steps made necessary as part of entering into the Frontline Hospitality Franchise Agreement for the Gold Coast area.
13 It will, of course, be necessary to examine in considerable detail the content of the conduct in question.
14 The events at the centre of the dealings between Mrs Stariha and Mrs Hart are in controversy. Mrs Stariha has given extensive statements and extensive oral evidence in cross-examination about conversations, the chronology of the events and her understanding of the things put to her by Mrs Hart and the statements made to her by Mrs Hart. On the other hand, Mrs Hart has a quite different understanding and recollection of the events and the content of conversations. Similarly, Mrs Stariha has given evidence both in her statements and in oral evidence about her recollection and understanding of her dealings and discussions with, in particular, Mr Davis. Mr Davis has a different recollection about some material matters in issue. It has been necessary to examine closely all of the documents to identify objective anchor points against which the recollections of the witnesses might be tested in seeking to determine which versions of the events are more likely to be either a correct recollection of likely events, or alternatively, simply true. Each side, to a greater or lesser degree, encourages me to reject the evidence of particular witnesses as unreliable, for a number of reasons.
15 I recall the demeanour of the witnesses as they gave their evidence tested strongly in cross-examination in the case of the primary witnesses. However, the resolution of the issues in this case does not turn upon impressions made upon the primary judge of demeanour. Having said that, I formed the following views about the three principal witnesses.
16 As to Mrs Stariha, two things might usefully be noted. First, there is, no doubt, that Mrs Stariha, in giving her evidence exhibited a sense of confidence and affirmative belief in her understanding of the events in question, as she recalled them. It will be necessary to examine aspects of her approach to identifying and recalling the features of the conduct she relies upon, later in these reasons. However, in evidence, Mrs Stariha explained her method of placing relevant papers in a box, examining those papers and generally testing her recollection of events against the papers she had kept. She said, however, that independently of the documents she had a strong recollection of the relevant events. It will be necessary to examine Mrs Stariha’s evidence about the conduct in question in a chronological way having regard to the documents in evidence to determine, as a question of fact, what occurred. Second, when confronted with documents which seemed to overstate the facts (relating to the relevant subject matter), Mrs Stariha accepted from time to time that particular documents such as aspects of earlier work experience documents were not correct. The respondents contend that Mrs Stariha’s version of the events is not true and, further, that Mrs Stariha when giving evidence about matters affecting her interests ought not to be accepted or believed as she is propounding a version of the events which she knows to be untrue.
17 As to Mrs Hart, she too gave evidence in a way which was affirmatively confident. Her evidence contradicted much of Mrs Stariha’s evidence. Mrs Hart was perhaps a little more assertive than Mrs Stariha. Mrs Hart gave evidence that she had a good recollection of the precise content of the dealings between her and Mrs Stariha and she offered some explanations of how it might be that Mrs Stariha is simply confused about some aspects of the critical events. For Mrs Stariha, I am encouraged to prefer her version of the events to that of Mrs Hart. Mrs Hart, it is said, was keen to sell the Gold Coast aspect of the Hart Trading franchise to Mrs Stariha (Mrs Stariha having relatively recently acquired both the Brisbane and Gold Coast aspects of the Frontline franchise from Ellis Trading Pty Ltd) and Mrs Hart, it is said, had a commercial interest in securing Julstar’s purchase of the Gold Coast aspect of that business from Hart Trading. Mrs Stariha says that Mr Davis had an interest in seeing the Gold Coast aspect of the franchise taken up by a new incoming franchisee.
18 As to Mr Davis, he was a relatively quietly spoken and forthright witness who made concessions against his interest when propositions were put to him. He sought to answer questions directly and forthrightly.
19 I will deal with aspects of the evidence of all of the witnesses when reviewing the events in question.
20 The method I propose to adopt in seeking to resolve these controversies of fact is this. First, I propose to identify the way in which the applicants have framed and formulated the conduct in the Statement of Claim. I propose to then examine the primary evidence of Mrs Stariha by reference to her recollection of events and the documents. I will then examine the evidence of Mrs Hart, Mr Davis and others on the events the subject of Mrs Stariha’s evidence. I will then examine the separate question of the Semolina hospitality franchise.
PART 2 - THE STATEMENT OF CLAIM OF 3 fEBRUARY 2011
Conduct up to and including 6 November 2006
21 By para 8, on 4 October 2006, Mrs Hart made oral representations to Mrs Stariha at Hart Trading’s office at Level 3, Kaybank Plaza, Southport, Queensland and, to the extent that representations were partly written, the representations were contained in a spreadsheet entitled “GC Agency” given by Mrs Hart, on behalf of Hart Trading, to Mrs Stariha at the meeting.
22 The representations were these. First, the retail recruitment franchised business situated in Southport, Queensland, trading under the name “Frontline Retail”, known as the Gold Coast Frontline Retail Agency (the “Frontline Gold Coast”; “Gold Coast Agency”; “Gold Coast Retail Frontline Agency”), “would be profitable in the future”.
23 Second, Frontline Gold Coast “had earned Earnings Before Interest and Tax (“EBIT”) of $80,000.00 in the previous year”.
24 Third, Mrs Stariha “would achieve EBIT of $80,000 in her first year as franchisee of the [Frontline Gold Coast] in addition to paying herself a wage of $50,000.00 per annum if she purchased the [Frontline Gold Coast]”.
25 Fourth, the “value of the [Frontline Gold Coast] was $240,000.00 based on EBIT of $80,000.00 per annum”.
26 Fifth, Mrs Stariha, “would receive the benefit of $10,000.00 worth of initial training from [FRGPL]”.
27 Sixth, “every franchisee of [FRGPL] is successful”.
28 Seventh, “no franchisee of [FRGPL] has ever failed”.
29 By para 9, in early October 2006, Mrs Hart on behalf of Hart Trading made oral representations to Mrs Stariha at a coffee shop at the Kaybank Plaza Shopping Centre, Southport to this effect. First, the “gross income figure of the [Frontline Gold Coast] on the spreadsheet document entitled ‘GC Agency’ was understated”.
30 Second, Mrs Stariha should “revise the spreadsheet document entitled ‘GC Agency’ to include replacement credits”.
31 Third, “[Frontline Gold Coast] had always achieved average gross income of $11,000.00 per month while operated as part of the Brisbane Frontline Retail Agency”.
32 By para 10, on 18 October 2006 Mrs Stariha revised the GC Agency spreadsheet by adding into the spreadsheet as income, the amount of “replacement credits” for the months of January, February, July and October 2006. Replacement credits are described, in the pleading, as recruitment placements made by the Gold Coast Agency with clients in those four months that needed to be “replaced” at a later date in accordance with the terms of the franchise agreement between Hart Trading and FRGPL, because the original placement had left the place of employment within three months of placement. Mrs Stariha pleads that she obtained the information about the amount of the replacement credits from “national sales reports” which were contained in the “national database” of the franchisor [FRGPL] access to which was provided to Mrs Stariha by FRGPL.
33 By para 11, Mrs Stariha on 19 October 2006 sent an email to Mrs Hart attaching a copy of a revised spreadsheet, also entitled “GC Agency” which disclosed that the financial performance of the Gold Coast Agency for the 12 month period to October 2006 revealed total income of $173,246.94 and EBIT of $75,787.14.
34 By para 12, between 19 October 2006 and 23 October 2006, Mrs Hart orally represented to Mrs Stariha at the office of Hart Trading at Level 12, Emirates House, 167 Eagle Street, Brisbane that the revised GC Agency spreadsheet “was accurate” and, the revised GC Agency spreadsheet “showed the true income figures for the [Frontline Gold Coast].
35 By para 13, on a date between 21 October 2006 and 3 November 2006, Mrs Hart delivered to Mrs Stariha at Hart Trading’s business office at Level 3, Kaybank Plaza, Southport an untitled five column document that purported to list a number of national retail clients of the franchisor [FRGPL] in the context of a representation by Mrs Hart to Mrs Stariha that “if she purchased the [Frontline Gold Coast] she would have access to 401 contracted clients for whom job placements could be made”.
36 By para 14, in or about the first half of October 2006, FRGPL provided a copy of its “Standard Franchise Agreement” to Mrs Stariha and the agreement contained a “Minimum Gross Revenue” term (cl 5.1) which contemplated that during the term of the franchise agreement Julstar would be required to co-operate with FRGPL in the preparation of a business plan setting out minimum performance criteria based upon “Territory Development” requirements and “Gross Revenue” of the undertaking of the franchisee in the relevant territory. The initial minimum performance criteria would be set out in Schedule 15 to the agreement and those criteria would be required to be reviewed as between FRGPL and Julstar after six months and then 12 months from the date of commencement of the franchised undertaking, and thereafter annually, unless FRGPL instigated an earlier review. Schedule 15 was in these terms:
TERRITORY DEVELOPMENT REQUIREMENTS
Developed Territory
A developed territory will generate one dollar of revenue for each person in the territory population unless otherwise established in consultation with the franchisor in the review of the business plan detailing minimum performance criteria based on Territory Development requirements.
Partially Developed Territory
If the existence territory is not deemed a Developed Territory upon purchase of that territory and the territory has been in operation for over three years, minimum growth of 15% per year is expected until the territory is deemed fully developed.
New Territory
To develop a territory, unless the territory has been deemed to be a “Developed Territory” within the first three years of operation, the following minimum revenue growth per year is required:
Yr 1: Minimum of $150,000.
Yr 2: Minimum of 60% revenue growth from previous year.
Yr 3: Minimum of 50% growth.
Minimum expected growth for all subsequent years will be 15% unless the territory is considered a Developed Territory.
37 By para 15, on 6 November 2006, Mr Davis made oral representations to Mrs Stariha to this effect. First, the “Gold Coast Retail Frontline Agency would easily achieve the Minimum Territory Development Requirements [of cl 5.1 and Schedule 15] in the operation of the [franchised undertaking] if [Mrs Stariha] purchased [the business]”.
38 Second, the “Gold Coast Frontline Retail Agency was capable of achieving sales of $500,000.00 per annum”.
39 Third, “if [Mrs Stariha] purchased the said business [from Hart Trading and entered into a franchise agreement with FRGPL] she would achieve a Minimum Territory Development Performance of $240,000.00 in her first year of operating the Gold Coast Frontline Retail Agency”. These representations are said to have been made in a partly oral and partly implied way. As to the implied representation, it is said that the representation is to be implied from cl 5.1 and Schedule 15 to the Standard Franchise Agreement given by FRGPL to Mrs Stariha.
40 By para 16, Mr Davis made representations to Mrs Stariha at a conference called the “Discovery Day” held at FRGPL’s Head Office at Level 20, Suite 2002, Tower 2, 500 Oxford Street, Bondi Junction in New South Wales on 6 November 2006 to this effect. First, “all of [FRGPL’s] franchisees had operated and were operating financially successful franchise businesses”.
41 Second, “no franchise business of any franchisee had financially failed and no franchise business was financially failing.
42 Third, “if [Mrs Stariha] purchased … Gold Coast Frontline Retail Agency, Mrs Stariha would be financially successful in its operation.
43 By para 17, on 6 November 2006, Mr Davis made oral representations to Mrs Stariha at the Discovery Day conference at the same premises, to this effect. First, “the value of the Gold Coast Frontline Retail Agency was $240,000.00”.
44 Second, “other Frontline Recruitment retail franchise businesses had been sold for amounts between $200,000.00 and $300,000.00”.
45 By para 18, on a date not later than 6 November 2006, Mr Davis made a representation in writing contained in a document described as “Australia Disclosure Document November 2006” to Mrs Stariha to the effect that if Julstar purchased the Gold Coast Frontline Retail Agency “it would have access to over 485 contracted clients who pay a fee for the permanent placement of staff”.
Aspects of reliance
46 By para 19, Mrs Stariha relied upon the truth of the representations set out at paras 8 to 13 and took a sequence of steps which involved retaining lawyers to advise her about the standard franchise agreement; attending the Discovery Day conference; incurred and paid expenses to so attend, and by para 20 acting upon the truth of the representations in paras 8 to 13 and 15 to 17, Mrs Stariha caused Julstar to be incorporated on 11 November 2006.
47 By para 21, Julstar, acting in reliance upon the truth of the representations set out at paras 8 to 13 and paras 15 to 18, undertook a sequence of steps including accepting the terms of an ANZ Bank facility for the purchase of Frontline Gold Coast from Hart Trading; making arrangements to secure the lease of premises for the business at Office 7, Kaybank Plaza, Scarborough Street in Southport; making arrangements with Telstra for communications arrangements; paying monies for the incorporation of the company; stamp duty and other expenses; paying $240,000 to Hart Trading by electronic transfer and on 8 December 2006, entering into a franchise agreement with FRGPL for the acquisition of the right to operate a Frontline Recruitment Retail agency franchise in the territory identified by a map at Schedule 4 to the franchise agreement; and paying a range of other expenses (see para 21(a) to (s)).
48 By para 22, Mrs Stariha acting in reliance upon the representations at paras 8 to 13 and paras 15 to 18, entered into a Deed of Guarantee and Indemnity in favour of FRGPL of the performance of Julstar and commenced employment with Julstar as from 14 January 2007.
Further conduct of FRGPL after 6 November 2006
49 By para 23, on dates between June 2007 and 30 September 2007, FRGPL published a representation on its website in the following terms: “100% franchise success rate”. Further, between these dates FRGPL made representations by Mr Davis to Semolina, by making the representations to Mrs Stariha at each of three franchisee conferences conducted by FRGPL as follows: January 2007 at Melbourne; April 2007 at Auckland and July 2007 at Sydney. The representations were these. First, “all of [FRGPL’s] franchisees had operated a financially successful franchise business”.
50 Second, “no franchise business of any of its franchisees had financially failed”.
51 Third, [Semolina] would be financially successful in the operation of the franchised undertaking.
52 By para 24, in about July 2007, Mr Doug Downer on behalf of FRGPL, made a representation to Semolina that FRGPL “would provide initial training to [Semolina] in respect of a Frontline Hospitality franchise business”.
Further aspects of reliance
53 By para 25, acting upon the truth of the representations referred to in para 16(a) and 16(b) (made by Mr Davis at the Discovery Day conference on 6 November 2006: see [40] and [41] of these reasons); para 23 (see [49] to [51] of these reasons); and para 24 (see [52] of these reasons), Semolina took a sequence of steps including entering into a franchise agreement with FRGPL on 1 October 2007 by which Semolina acquired the right to operate a Frontline Recruitment Hospitality franchise in the territory described in Schedule 4 to the Agreement broadly described as the Gold Coast area; paid FRGPL $45,645.48 on 3 October 2007; set up the Semolina undertaking at premises at Shop 1, 130-136 Scarborough Street, Southport and shared those premises with Julstar; took up a loan ($9,090.91) from Mr Lee Stariha on 19 October 2007 to pay a contribution towards the fit-out costs of the Scarborough Street premises; and, Mrs Stariha (and Mr Stariha) commenced paying interest to the ANZ Bank on a finance facility related to the acquisition, on a monthly basis.
54 By para 26, Mrs Stariha acting upon the truth of the representations described at paras 16(a) and 16(b), paras 23 and 24 (as earlier described) took a sequence of steps including making arrangements with her husband on 26 September 2007 to establish a further line of credit ($60,000) as part of Mr Stariha’s home loan facility, so as to pay the franchise territory fee and the training and development fee payable in respect of the Semolina franchise agreement, and to fund contributed set-up costs associated with the Semolina franchise agreement; entered into a guarantee and indemnity on 1 October 2007 of the obligations of Semolina; paid the franchise territory fee and the training and development fee.
The misleading and deceptive quality of the conduct or the likelihood that the conduct was misleading and deceptive on the part of Hart Trading
55 By para 27, the representations at paras 8(a) to (c) and 8(f) and 8(g) (see [21] to [24] of these reasons and [27] and [28] of these reasons) were misleading for these reasons. First, Frontline Gold Coast did not earn EBIT of $80,000 in the 12 months prior to its acquisition by Julstar.
56 Second, a Gold Coast Frontline Retail Agency had previously been operated at the Gold Coast by an entity the principal of which was Ms Karen Ellis. That Frontline undertaking had not operated, under Ms Ellis, at a profit. The previous Frontline Gold Coast agency under Ms Ellis had been operated between 11 February 2003 and 7 December 2004 and achieved sales of $151,560. Ms Ellis had been issued with a notice by the franchisor that she had failed to achieve her “Territory Development” requirements set out in the entity’s franchise agreement with FRGPL. The previous franchise entity had been issued with a notice directed to Ms Ellis requiring the sale of the franchise undertaking because the entity had failed to achieve its Territory Development requirements.
57 There was no reasonable basis, it is said, for the representations described at paras 8(a) to (c) and 8(f) and 8(g) (see para 27(a) to (c)).
58 As to these contentions see para 27(a) to (c).
59 By para 28, the representation at para 8(d) (see [25] of these reasons) was misleading for these reasons. First, Frontline Gold Coast did not achieve EBIT of $80,000 in the 12 months prior to Julstar’s purchase of the agency.
60 Second, the value of the Frontline Gold Coast business conducted by Hart Trading, when calculated by reference to the annual income earned by that business in the 12 months prior to 30 October 2006 was less than $240,000, “when compared to the price paid by franchisees for other Frontline Retail Agency franchise businesses” (para 28(b)), on the footing that Frontline Retail Recruitment franchise businesses that had sold for amounts between $200,000 and $350,000 had achieved, in the year before their sale to an incoming franchisee, a particular scale of turnover. For example, a Sydney franchise sold for $350,000 with turnover in the preceding 12 months of $1 million; a Brisbane franchise sold for $260,000 having achieved turnover in the preceding 12 months of $879,472.60; and an Adelaide franchise had sold for $240,000 where turnover had been $300,000. Hart Trading had paid $260,000 for the Brisbane Frontline Agency in circumstances where that agency had achieved a turnover of $879,472.60 in the year ending 30 June 2005 (para 28(c)).
61 By para 29, the representation contained in para 8(e) as to training (see [26] of these reasons) was misleading for these reasons. First, Julstar was not provided with any initial formal training.
62 Second, despite Mrs Stariha making oral requests on numerous occasions between April 2007 and July 2007 to staff of FRGPL at its Head Office, FRGPL refused to provide Julstar with any initial formal training.
63 By para 30, the representations in paras 9(a) (that the gross income of the Frontline Gold Coast Agency was understated in the spreadsheet; see [29] of these reasons) and para 12 (that the spreadsheet was accurate and showed the true income figures for Frontline Gold Coast, see [34] of these reasons), were misleading for these reasons. First, the gross income figure on the spreadsheet was not understated.
64 Second, Mrs Hart knew that the revised spreadsheet document entitled “GC Agency” was not accurate because Mrs Hart had operated the Brisbane Frontline Recruitment Agency since 2005 and had operated Frontline Gold Coast from November 2005 until 8 December 2006; and, Mrs Hart knew “how the replacement credit process worked and its effect on income earned by an agency”.
65 Third, Mrs Hart knew that Mrs Stariha’s revised spreadsheet document entitled “GC Agency” did not provide the correct income figure for the Gold Coast Frontline Retail Agency for the 12 month period ending 31 October 2006 and the state of Mrs Hart’s knowledge were the factors mentioned at [64] of these reasons.
66 Fourth, Mrs Hart knew that Mrs Stariha’s revision of the spreadsheet document entitled “GC Agency” to add an amount as income for replacement credits in respect of initial placements for the months of January, February, July and October 2006 without making the corresponding adjustment to income in the months in which the replacements were recruited (and in which the income for the replacements was recorded), was overstating the total income earned by Hart Trading in the 12 month period ending 31 October 2006.
67 By para 31, the representation at para 13 (concerning access to 401 contracted clients) was misleading for these reasons. First, there were not 401 contracted retail clients in the territory which was being acquired by Julstar.
68 Second, there were only 167 contracted retail clients in the territory acquired by Julstar.
69 Third, Hart Trading (and Mrs Hart) knew that there were only 167 contracted clients by reason of Mrs Hart’s conduct of the Frontline Gold Coast Agency from 1 November 2005 until 8 December 2006.
Future matters
70 By paras 32 and 33, the representations alleged by paras 8(a) and 8(c) and 13 (see [22], [24] and [35] of these reasons) were representations with respect to a future matter and for there were no reasonable grounds for making the representations (having regard, as to para 13, the matters set out at para 31; see above).
71 The applicants rely upon s 51A of the Act.
The misleading and deceptive conduct of FRGPL
72 By para 35, the contended representations set out in para 15 (concerning the ease with which Julstar would achieve the Territory Development requirements of cl 5.1 and Schedule 15 of the Standard Franchise Agreement) were misleading at 6 November 2006 for these reasons. First, the Gold Coast Frontline Retail Agency had previously been operated by Ms Ellis and that business had failed.
73 Second, in the period of Ms Ellis’s conduct of a Frontline agency from 11 February 2003 to 7 December 2004, the agency achieved total sales of $151,560 which were “well below its minimum Territory Development requirements”.
74 Third, in that period, the agency operated at a financial loss.
75 Fourth, a number of franchisees of FRGPL had failed to meet the Minimum Territory Development requirements set out in each of their respective franchise agreements for varying periods of years (of which 14 examples are identified in the pleading).
76 Fifth, FRGPL issued notices signed by Mr Davis to a number of its franchisees to inform them that they had not met the Minimum Territory Development requirements.
77 Sixth, FRGPL failed to disclose each of the matters described at [72] to [76] of these reasons to Julstar in circumstances where Julstar had “a reasonable expectation that such disclosure would be made”, on the footing that the matters not disclosed were relevant and material to Julstar (and Mrs Stariha’s) decision to acquire the Gold Coast Frontline Retail Agency from Hart Trading and enter into a governing franchise agreement with FRGPL; and FRGPL’s Disclosure Document at para 3.2, p 5 recited that the franchisor had over 485 clients but failed to disclose which of those clients had businesses in the territory the subject of the proposed Julstar Franchise Agreement.
78 By para 36, the representations described in para 16 (concerning all franchisees operating in a financially successful way and no franchise business having failed; see [40] of these reasons) and para 23 (concerning the representations between June 2007 and 30 September 2007; see [49] of these reasons) were misleading at 6 November 2006 and September 2007 for these reasons. First, Ms Ellis had operated a Frontline Gold Coast Agency at a financial loss in the period 11 February 2003 to 7 December 2004.
79 Second, other identified franchisees of FRGPL had not been financially successful.
80 Third, FRGPL failed to disclose that at the time Julstar signed its franchise agreement with FRGPL, the franchisor had been involved in Court proceedings in New South Wales with Aura Enterprises Pty Ltd (“Aura”), the Sydney metropolitan franchisee of FRGPL, in which Aura sought a declaration that FRGPL had engaged in unconscionable conduct in contravention of s 51AC of the Act; a judgment had been published on 6 September 2006 in an interlocutory application for injunctions; and FRGPL had served notices of default on Aura asserting that Aura had breached the franchise agreement.
81 By para 37, the representations at para 17 (concerning the value of the Frontline Gold Coast Agency of $240,000 and the relevance of other sales between $200,000 and $300,000; see [43] and [44] of these reasons) were misleading for the reason that FRGPL failed to disclose to Julstar and Mrs Stariha that other Frontline retail recruitment businesses (identified in the pleading) that had sold for amounts between $200,000 and $350,000, had achieved annual turnover of between $300,000 and $1 million in the 12 months prior to the relevant sale.
82 By para 38, the representations at para 18 (concerning the representation contained in the November 2006 Disclosure Document as to access to over 485 contracted clients) were misleading for the reason that Julstar did not have access to 485 contracted retail clients for whom it could place candidates for employment, and Julstar had access to only 167 active retail clients.
83 By para 39, the representation at para 24 (concerning Mr Downer’s representation of the provision of initial training; see [52] of these reasons) was misleading because FRGPL did not provide Semolina with any initial formal training and despite Mrs Stariha’s oral requests between April 2007 and July 2007 to FRGPL’s staff, FRGPL refused to provide Semolina “with any initial formal training because [Mrs Stariha] had previously been employed in a franchise business”.
Further future matters
84 By para 40, the representations in para 15 (see [37] to [39] of these reasons) were representations with respect to future matters and there were no reasonable grounds for making the representations having regard to the matters described in para 35 (see [72] to [77] of these reasons). The applicants rely upon s 51A of the Act. By para 41, the representations in para 16(c) (that should Mrs Stariha acquire Frontline Gold Coast she would be financially successful in its operation; see [42] of these reasons) and para 23(c) (see [51] of these reasons) were representations with respect to future matters and there were no reasonable grounds for making them having regard to paras 36(a) and (b) (concerning Ms Ellis’s unsuccessful earlier operation of a Frontline agency at the Gold Coast; see [78] and [79] of these reasons). The applicants rely upon s 51A of the Act.
85 By para 42, the representation in para 18 (concerning Julstar’s access to over 485 contracted clients; see [45] of these reasons) was a representation with respect to a future matter and there were no reasonable grounds for making the representation having regard to para 39 (see [83] of these reasons). The applicants rely upon s 51A of the Act.
FRGPL’s conduct
86 By para 43, having regard to the matters at paras 35 to 42 (see [72] to [85] of these reasons), the conduct of FRGPL described in paras 15 to 18 (see [37] to [45] of these reasons) and paras 23 and 24 (see [49] to [52] of these reasons) was misleading or deceptive conduct, or conduct likely to mislead and deceive; and thus conduct in contravention of s 52 of the Act.
87 By paras 44 to 48, the contended loss and damage suffered by Julstar is set out ($495,932.09).
88 By para 49, the contended loss and damage suffered by Semolina is set out ($79,649.31).
89 By paras 50 to 54, the contended loss and damage suffered by Mrs Stariha is set out having regard to a range of particular considerations.
90 The content of the claims based upon the contended loss and damage of the applicants will be addressed later in these reasons.
Accessorial liability
91 By para 55 to 57, facts are pleaded which are said to support a claim of accessorial liability in Mrs Hart in respect of the contraventions alleged against Hart Trading. By paras 58 to 61, facts are pleaded which are said to support a claim of accessorial liability in Mr Davis in respect of the contraventions alleged against FRGPL.
The contract claim
92 By para 62, cl 2.39 of the Julstar Franchise Agreement is set out. That clause deals with the topic of a guarantee given to a client in respect of the placement of a candidate recruited for the client. Clause 2.39 is in these terms:
Guarantee for Placements
The Franchisee shall provide to clients a three-month guarantee period for placed candidates. In the event that a candidate has to be replaced as a result of the guarantee, the Franchisee shall be responsible to supply a replacement candidate to the client free of charge. If the replacement is supplied by another Franchisee, 50% of the original fee, after the deduction of the royalty, will be paid to the Franchisee responsible for supplying that replacement.
93 By para 63, it was an implied term of the Julstar Franchise Agreement that Julstar would supply a replacement candidate to any clients of FRGPL if FRGPL had a legal obligation to supply a replacement candidate to a client. The implied term is said to be necessary to give business efficacy to cl 2.39 of the Agreement. The factors which are said to condition business efficacy and thus the implication of the term are these. First, cl 2.39 contemplates a replacement guarantee in the event that a candidate “has to be replaced as a result of the Guarantee”.
94 Second, client agreements between FRGPL and its clients were entered into by “Franchisees or [FRGPL] on behalf of [FRGPL]”.
95 Third, candidates and replacement candidates were placed with clients of FRGPL by its franchisees.
96 Fourth, because there is no definition of the terms “Client”, “Replacement” or “Replacement Guarantee”, in the Julstar Franchise Agreement and the meaning of these terms is to be ascertained from the terms of “Client Agreements” entered into between FRGPL and its clients, it is necessary to imply the contended term.
97 By paras 64 and 65, FRGPL entered into agreements with its clients set out in Schedule D (33 examples pleaded) each of which contained a term that FRGPL would supply a “replacement credit” to the client if, first, an employee placed with the client by FRGPL did not remain in employment with the client to the end of a 90 day period from commencement, described as the “Replacement Guarantee Period”, and, second, the client had paid the invoice rendered by FRGPL for the initial placement within seven days after the commencement of the employee’s employment.
Contended Breach
98 By para 66, in breach of the Julstar Franchise Agreement, FRGPL required Julstar to provide replacements to any client with FRGPL where the initial employee placed with the client had ceased employment within the Replacement Guarantee Period notwithstanding that the client had not paid FRGPL’s invoice for the initial placement within seven days of the employee’s commencement with the client; and, FRGPL was not legally obliged to supply a candidate to the client pursuant to the terms of the Client Agreements; and, Julstar was not legally obliged to supply a replacement candidate to the client pursuant to cl 2.39 of the agreement.
99 By para 67, Julstar supplied Replacement Credits to the clients of FRGPL as required by the franchisor which Julstar was not legally obliged to supply pursuant to cl 2.39 of the agreement. The total value of the credits is set out in Schedule D to the pleading and by para 68, Julstar suffered loss and damage by reason of FRGPL’s contended breach, to the value of $109,814.56.
100 By paras 69 to 72, the applicants set up an alternative collateral contract giving rise to contended loss of the same value.
101 By paras 73 to 76, the applicants assert a failure on the part of FRGPL to comply with the requirements of the Franchising Code of Australia and by para 77 assert loss and damage arising from that contravention in Julstar of $495,932.13 and loss and damage in Mrs Stariha of $69,667.92.
PART 3 – BACKGROUND MATTERS LEADING UP TO MRS HART’S ENGAGEMENT WITH MRS STARIHA AND THE SALE TO JULSTAR
102 Mrs Hart gave the following evidence in her amended witness statement of 31 January 2012 concerning background matters leading up to her first engagement with Mrs Stariha, Hart Trading’s employment of Mrs Stariha, and the discussions leading up to Mrs Stariha relocating to Hart Trading’s Gold Coast office on or about 7 November 2005. It will, of course, be necessary to examine this evidence in the context of the later cross-examination but the following relevant matters are drawn from the version of events contained in Mrs Hart’s amended statement. Mrs Stariha’s statement essentially begins with the events in October 2006. I will examine the following matters drawn from Mrs Hart’s amended statement and then take up the matters identified by Mrs Stariha. Later in these reasons I will then examine this material in the context of the cross-examination of each witness.
103 In June 2003, Mrs Hart applied for a position with a client for which Frontline Retail Brisbane was conducting recruitment activity. At this time, Frontline Retail Pty Ltd (as FRGPL was formerly known) had established, as franchisor, a franchise agreement for the State of Queensland with a franchisee called Ellis Trading Pty Ltd (“Ellis Trading”), the principal of which was Ms Karen Ellis. The franchisor conducts, through its franchise network, the business of recruiting permanent and casual staff for clients. The franchisor began the business in 1995 and has a range of franchisees throughout Australia.
104 In the case of Ellis Trading, Ms Ellis operated a franchise for the entire State of Queensland.
105 Mrs Hart was interviewed by Ms Ellis for the position advertised by the client. However, during the second interview with Ms Ellis, Mrs Hart was asked to join Ellis Trading as a “recruitment consultant”. Mrs Hart commenced in that role on 14 July 2003.
106 About six weeks later, Mrs Hart was called to a meeting with Mr Peter Davis and Ms Ellis. At this meeting, Mr Davis asked Mrs Hart to manage the Frontline Brisbane Agency “on behalf of Frontline and Ellis Trading”. Mrs Hart understood from Mr Davis (and Ms Ellis confirmed it to be so) that she was being offered this role because Ms Ellis had become pregnant and wanted to remove herself from the management of Frontline Brisbane (recognising that the Ellis Trading franchise was for the whole of the State and not just Brisbane).
107 Mrs Hart’s new role was largely a managerial one and involved managing all of the franchisee’s staff. Those staff would report to her. Mrs Hart would also be responsible for the franchisee’s budget for its activities throughout the State of Queensland. Mrs Hart also had to ensure that all staff of the franchisee were achieving their individual “Key Personal Indicators” (“KPIs”). Mrs Hart met with staff on a weekly basis to ensure that these KPIs were being met. Mrs Hart was also a recruitment consultant acting for particular clients. Mrs Hart also had to achieve her own KPIs.
108 The franchisor requires employees of its franchisees to undertake training as to the KPIs they are required to meet. Mrs Hart puts in evidence a document called “Weekly Consultant KPI Minimum Standards” as at April 2006 which sets out the field of KPIs stipulated by the franchisor at that time. The document addresses 28 essential Key Performance Indicators (for a given period) which, for example, include the number of managed accounts to be handled, key contacts to be made, new key contacts, the number of client interviews to be held, the number of client interviews to be booked, the number of client contacts to be made by phone or email, the number of candidates to be contacted by phone or email and other matters. Mrs Hart says that the idea behind the training and the stipulation of the KPIs is that “… the activity you do [in terms of meeting the KPIs] decides your outcomes and if you follow the recipe, you will be successful” (para 13, Amended Statement, 31 January 2012). Mrs Hart says that her experience tells her that franchisees that demonstrate strong compliance with the KPIs do better than those which exhibit weak compliance with the KPIs.
109 In late July 2003, Ms Ellis told Mrs Hart that Ellis Trading proposed to open a Frontline Retail agency on the Gold Coast in August 2003. Ms Ellis told Mrs Hart that she had arranged for one of the Brisbane-based employees, Ms Niki Garnett-Palmer, to transfer to the new Gold Coast office. She would report directly to Ms Ellis. This happened at about the same time that Mrs Hart became the Manager under the arrangements earlier described.
110 Mrs Hart says that she was not privy to financial information for the Gold Coast agency. She cannot comment on the success or otherwise of the Gold Coast agency. Mrs Hart could see the sales performance in the database maintained by the franchisor for the entire franchise system which Mrs Hart calls the “Frontline Database”.
111 Mrs Hart says that Ms Ellis told her that she was going to close the Gold Coast agency in or around December 2004. In February 2005, Ms Ellis told Mrs Hart that she had closed the Gold Coast agency because she had two small children and opening and building new agencies in Queensland would be difficult for her to manage. Mrs Hart says that on this footing, Ms Ellis asked Mrs Hart to consider going into equal partnership with her in opening new agencies including a proposal to re-open the Gold Coast agency and open a new office in Cairns.
112 In April 2005, Mrs Hart rejected Ms Ellis’s proposal. The day after doing so, Ms Ellis offered to sell the Frontline Brisbane agency to Mrs Hart. Ms Ellis said she would sell the Brisbane agency to Mrs Hart as a “developed agency” and would then sell other territories (Gold Coast, the Sunshine Coast and North Queensland) as undeveloped territories. The negotiations between Ms Ellis and Mrs Hart for the purchase of the “Brisbane Agency” commenced in or around May 2005. There were extensive negotiations with several meetings including a meeting with Ms Ellis’s Accountant. During the negotiations, Ms Ellis provided Mrs Hart with profit and loss statements which recorded, as Mrs Hart understood the position, the entire income of the franchisee for the State of Queensland. The documents handed to Mrs Hart by Ms Ellis during the negotiations for the purchase of the Brisbane element of the franchise included Profit and Loss Statements for the period July 2002 to June 2005 for Ellis Trading; a forecast for the Brisbane agency for the financial year 2005/2006; and a Sales Report for the period 1 July 2004 to 30 June 2005.
113 In the course of the discussions, Ms Ellis told Mrs Hart that the expenses recorded in the statements included some personal expenses such as school fees and thus Mrs Hart was told she needed to understand that the business was “more profitable than it appeared on paper”. In other words, the financial statistics understated the true position because some of the expenses were not expenses incurred in deriving the earnings of the business.
114 Mrs Hart said that she understood that her own “due diligence enquiries” needed to consider the expenses that she would incur “in running the franchise” particularly as compared with the expenses attributed to the undertaking by Ms Ellis.
115 Mrs Hart was “keen to purchase the entire Queensland territory”, set up agencies in various territories within Queensland and then sell each as a “developed franchise”. Mrs Hart thought that the Gold Coast territory (or Agency) had great potential and thus she “pushed” Ms Ellis to include the Gold Coast territory in the sale so that she could re-open the franchise at the Gold Coast. Finally, Ms Ellis and Mrs Hart agreed that Mrs Hart would purchase, subject to the relevant arrangements with the franchisor, a territory comprising the Brisbane metropolitan territory and a defined Gold Coast territory which, combined, represented the franchise Mrs Hart would take up.
116 These arrangements were agreed to by Mr Davis during the course of the negotiations with Ms Ellis. Mr Davis agreed to extend the Brisbane territory to include the Gold Coast territory as part of the Hart Trading franchise, for the purposes of the sale to Mrs Hart. Mrs Hart made it plain that unless she secured a right to the Gold Coast territory she would “walk away” from the transaction entirely. Nevertheless, Mrs Hart says that Mr Davis made it clear to her that the Gold Coast territory, taken up by Mrs Hart as part of the franchise, “would have to be sold by me as a separate Franchise as soon as it was ready for sale” [emphasis added] (para 29). Mrs Hart says that she was in contact with Mr Davis throughout the negotiations with Ms Ellis in relation to the sale and, “the purchase price in particular”.
117 The negotiations were protracted and a purchase price was eventually agreed at $320,000 in about June 2005. That sum would be payable less the value of replacement credits which the buyer would have to provide to meet the former obligations of Ellis Trading. Although replacement credits are calculated by the Head Office of Frontline, Mrs Hart had access to the Frontline database which provided her with details of the value of the replacement credits.
118 Mrs Hart describes the notion of replacement credits in this way.
119 A client pays Frontline a fee for the placement of a successful candidate. Should the candidate leave the client business for any reason (other than redundancy) within a three month period, the Frontline franchisee that recruited the candidate must recruit a new candidate for the client without any additional fee being charged to the client. This “obligation” to provide a replacement candidate is known as a “replacement credit” and the practice is common in the recruitment industry. In effect, the client has an entitlement to a free placement (or replacement) which involves the franchisee doing further work for which no extra fee is payable. It represents an obligation to be performed and is treated within the Frontline database as a “negative value” within the franchisee’s business, to be discharged. It is important for a franchisee to keep track of these replacement obligations as the franchisee would normally wish to honour them as quickly as possible so as to discharge the obligation. This is particularly so if a franchisee wishes to sell a business as the carrying “value” of the replacement obligation is always deducted from any purchase price a franchisee might achieve in selling the business. The replacement credit is not a credit in the sense that a refund of the placement fee issues to the client. It is a credit in the sense that the client has an entitlement to the placement of another candidate for no fee. Once a replacement candidate is found, the “replacement credit” then becomes recognised in the Frontline database as simply a “replacement” which is not accounted for in any financial sense as either a revenue or expense item in a profit and loss analysis of the franchisee.
120 On 17 June 2005, Mrs Hart caused Hart Trading to be incorporated. She is a Director of that company. Hart Trading entered into a contract with Ellis Trading to purchase the relevant franchise interest on 8 July 2005. The contract settled on that date. On 5 July 2005, Hart Trading (in a trustee capacity) entered into a franchise agreement directly with FRGPL for two territories comprising the Brisbane metropolitan area and a defined Gold Coast area.
121 As part of the sale, Mrs Hart negotiated a vendor finance arrangement with Ms Ellis reflected in the Special Conditions of the Business Contract. Hart Trading agreed to pay Ellis Trading $140,000 on settlement less any deposit, and wages owing to employees. Ellis Trading would finance the balance owing until settlement of the sale of an investment property owned by Mrs Hart. Hart Trading would pay monthly vendor finance interest payments to Ellis Trading until the balance was paid. The value of replacement credits set off against the purchase price was $56,237.08. The deposit was $4,700 and the wages owing were $3,226.17.
122 After completion of the transaction on 8 July 2005, Hart Trading made monthly payments of interest to Ellis Trading and finally paid the balance of the purchase price of $120,536.75 on 20 December 2005.
123 From the commencement of the franchise undertaking, Hart Trading has utilised MYOB financial accounting software. Prior to the sale of the Gold Coast Agency to Julstar, the MYOB financial accounting software was uploaded to computers at Hart Trading’s Brisbane offices to record all financial transactions so as to have data readily available for review in the management of the financial performance of the franchisee, and to provide information to Hart Trading’s Accountants. Ms Carolyn Hutt regularly attended Hart Trading’s Brisbane offices to enter data into the MYOB accounting modules from source documents, such as receipts, provided to her.
Some aspects of the documents
124 Some aspects of the documents to this point are these.
125 On 31 March 2005, Mr Davis sent an email to Ms Ellis dealing with a number of matters relating to a meeting to be held with Ms Ellis on 1 April 2005. Mr Davis said that he would need to discuss circumstances which had led, in his view, to a breach of the franchise agreement; the timeline of what happened; the procedural breakdown which occurred regarding a candidate being presented to a client for a Sydney position without the Sydney franchisee being informed (which suggested to Mr Davis a broader problem); actions taken since the breach; and measures to ensure that such circumstances did not re-occur. Mr Davis said that other key objectives to be discussed concerned, first, recent discussions “around Partnership, Selling and Regionalisation and how this has been handled”, and, second, expressions of concern from other franchisees “about the poor performance of Queensland (this includes both the Brisbane agency and the closing down of the Gold Coast) and how this is potentially threatening the value of the network as a whole”.
126 Mr Davis also said “with this in mind we need to address the real and perceived damage your actions are now causing the network”. Mr Davis concluded that it was not his “intention to ‘slap you across the wrist’ – that has been done, it is to objectively take stock of the situation and help you deal with it in a manner that is in keeping with the best interests of both yourself and the Frontline Retail business”.
127 Plainly enough, Mr Davis was concerned about, at least, perceptions within the ranks of other franchisees, about the poor performance of the Queensland franchise by Ellis Trading both in relation to the Brisbane metropolitan area and the closing down of the Gold Coast presence.
128 On 22 April 2005, FRGPL and Ellis Trading entered into a Deed of Variation of the Ellis Trading Franchise Agreement of 1 July 2001. By the variation, as from 1 April 2005, the Schedule 4 territory for the purposes of the agreement would be reduced from the “State of Queensland” to an area indicated on a map attached to the Deed of Variation. The State of Queensland would also be divided into a number of different territories described as Levels 1, 2, 3 and 4 with a formula for determining the initial franchise fee for each particular level.
129 On 26 May 2005, Mr Davis and Ms Ellis entered into a document called “Franchisee Intention to Sell Agreement”. Under that document, Ellis Trading agreed to sell the Queensland franchise if and when the agreed sale price was offered ($350,000). The franchise agreement provided that before Ellis Trading could offer the franchise for sale, it was required to first offer the franchise to the franchisor. Ellis Trading was required to provide current financial information to FRGPL.
130 On 8 July 2005, Ellis Trading and Hart Trading entered into a Business Sale Contract at a price of $320,000 with a deposit of $4,700 having been paid. By the Special Conditions, Hart Trading agreed to the cancellation of the existing franchise and the grant of a new franchise confined to the Brisbane and Gold Coast territories. On settlement, Hart Trading would pay Ellis Trading $140,000 less the deposit, and the balance of the purchase price would be a debt owing by Hart Trading to Ellis Trading. That debt would be paid within 12 months of 8 July 2005 (by 8 July 2006) or upon settlement of the sale by Mr and Mrs Hart of a property at Wavell Heights, whichever event would first occur. Interest would be paid at 6.55% monthly in arrears with the first payment falling due on 8 August 2005. By cl 8, should Hart Trading default in making any monthly payment, then Hart Trading, if requested by Ellis Trading, would be required to re-transfer the assigned business (then the subject of a fresh franchise agreement with FRGPL) to Ellis Trading and forthwith vacate the premises occupied by the business.
131 Mr and Mrs Hart entered into a guarantee of the performance of the obligations of Hart Trading.
132 On 8 July 2005, Hart Trading (as trustee for the Hart Family Trust) entered into a Franchise Agreement with FRGPL for a territory defined by reference to a map which marks the boundaries of two areas relevantly described as the Brisbane and Gold Coast territories. The term was five years commencing on 8 July 2005 involving a royalty payable to the franchisor of 20% plus GST. The Schedule 15 “Territory Development” requirements for “developing” a territory, contemplated minimum revenue in Year 1 of $170,000 per consultant; Year 2 minimum revenue reflecting 60% growth over the previous year; and Year 3 minimum revenue reflecting 50% growth over Year 2 revenue until the territory became “fully developed”. Minimum expected growth for all subsequent years was 30% until the territory became regarded as a “Developed Territory”.
133 Mrs Hart has isolated, from sales data contained within the Frontline database, the sales (placement fees) of the Gold Coast Agency during the period from July 2003 to 30 June 2011 (para 67, CTH 15). In the period in which Ellis Trading conducted recruitment activities from the Gold Coast (August 2003 until 31 December 2004), the sales attributable to those activities recorded in the Frontline database are these.
Financial Year | 2003/2004 | 2004/2005 |
July | - | $6,999.00 |
August | $3,289.00 | -$5,495.00 |
September | - | - |
Qrt 1 | $3,289.00 | $1,504.00 |
October | - | -$3,357.00 |
November | $33,798.00 | $9,315.00 |
December | $34,245.00 | $6,113.00 |
Qrt 2 | $68,043.00 | $12,071.00 |
January | $6,210.00 | - |
February | $11,347.00 | - |
March | $1,987.00 | - |
Qrt 3 | $19,544.00 | - |
April | $11,452.00 | - |
May | $12,007.00 | - |
June | $23,462.00 | - |
Qrt 4 | $49,921.00 | - |
Year End | $137,797.00 | $13,575.00 |
134 It follows, according to this data, that for the period 1 August 2003 to 31 December 2004, Ellis Trading generated revenue from the Gold Coast Agency of $151,372.00.
135 In the negotiations with Ms Ellis, Mrs Hart was provided with the documents earlier described and identified as CTH 2 to her affidavit. In the period 1 July 2002 to 30 June 2003, Ellis Trading, in respect of all of its activities as a franchisee throughout Queensland (not just the Gold Coast) generated an operating profit of $54,845.56 based on total income of $266,428.16 having regard to total operating expenses of $211,582.60. Having regard to some other minor income and expenses the ultimate net profit was $53,274.32. The net profit was struck after paying wages to K. Ellis of $31,692.40 and wages to D. Ellis of $500.00. The ultimate value of the business to Mr and Mrs Ellis (apart from any private expenses attributed to the business), it seems, was $85,466.72.
136 The Profit and Loss Statement for the financial year 1 July 2003 to 30 June 2004 shows an operating profit of $53,198.82 based on total income of $672,466.63 and total expenses of $433,423.49. In the space of one financial year, the placement revenue apparently grew by $406,038.47. In that financial year, the wages paid to K. Ellis were $54,346.28 and the wages paid to D. Ellis were $52,346.20. These statistics are reflected in profit and loss papers prepared on 15 July 2004. The Profit and Loss Statement for the financial year ending 30 June 2004 finalised as at 30 May 2005 suggests an operating profit of $12,510.35 based on total income of $647,802.45 and total operating expenses of $635,292.10. Apart from other minor income and expenses, the net profit was $12,196.46. Wages paid to K. Ellis were $58,346.28 and to D. Ellis $56,346.20.
137 The operating profit before income tax for the financial years ending 30 June 2003 and 30 June 2004 recited in the financial statements for Ellis Trading Pty Ltd was $48,485.00 and $19,594.00 respectively.
138 Hart Trading commenced operating the franchise in July 2005. Initially, in July 2005, Mr Davis permitted Hart Trading to make placements to clients outside Hart Trading’s franchised territory by making placements in North Queensland and the Sunshine Coast. These arrangements were agreed between Mrs Hart and Mr Davis. They also agreed that Mrs Hart could continue to do so until these territories had been sold to a new franchisee, so as to ensure that clients received placement services. Placement fees attributable to these services are therefore reflected in a profit and loss account for Hart Trading for the financial year ending 30 June 2006 (para 42).
Further evidence drawn from Mrs Hart’s amended statement
139 On 29 July 2002, Mrs Stariha then known as Julianne Jones (prior to her marriage to Lee Stariha) registered with the Frontline Brisbane Agency for placement in positions handled by the agency. Mrs Hart says that Mrs Stariha was placed in three positions for clients by the agency, commencing on 19 August 2002, 24 December 2002 and 27 April 2003 being positions with Uncle Bob’s Bakery, City Beach and Just Jeans, respectively (CTH 12A). Mrs Stariha filled out an employment application on 29 July 2002 and set out background material in relation to her last three employment positions. One of Mrs Stariha’s references was given by Mr Harris the Retail Director for an English entity called “Eat Ltd”. In the reference, Mr Harris said this:
As a Senior Store Manager, her duties have included the operational support to seven of our cafes. Julianne was initially recruited as a “trouble shooter” to ensure the success of the South Bank Center. Julianne initiated teamwork and built a sense of “customer service” within the business and ultimately ensured Eat’s success. It was her sales driven and commercially aware approach which led her to becoming a Senior Store Manager. Her role in the past six months has been the operational support to seven cafes including concessional stores within Selfridges and the South Bank Center.
I would describe Julianne’s best attributes to be her dedication and eye for detail. She is proactive in her approach believing in “systems” and making things “water tight”. Consistency is her belief, to provide consistently good service and standards every minute of the day. …
[emphasis added]
140 Mrs Hart says that on 11 August 2005, Mrs Stariha applied for a position as a Recruitment Consultant with Hart Trading within the Brisbane agency directly, rather than a placement with a client. Mrs Hart puts in evidence (CTH 13) a copy of Mrs Stariha’s Curriculum Vitae (“CV”) submitted in support of her application for that position. It will be necessary to return to aspects of that CV which were put to Mrs Stariha in cross-examination concerning her description of the performance of the business called Café Addict Pty Ltd and her role in relation to International Working Holidays. Nevertheless, Mrs Hart says that she was impressed with Mrs Stariha having regard to her CV and the later interview she had with Mrs Stariha. Mrs Hart noted Mrs Stariha’s experience with retail businesses based on reading her CV documents to that point. Mrs Hart says that Mrs Stariha appeared, on the face of her stated experience, to be convincing and she seemed to have a detailed understanding of financial matters as well as experience in business development. Mrs Stariha “interviewed strongly” confirming Mrs Hart’s impression of her. It was “difficult not to be impressed with Julianne” says Mrs Hart.
141 On 29 August 2005, Mrs Hart employed Mrs Stariha as a Recruitment Consultant employed by Hart Trading in Brisbane.
142 Mrs Stariha’s first few days of employment were taken up with “Orientation training” conducted by Mrs Hart. Mrs Hart does not recall the content of the training given to Mrs Stariha but based on her usual practice, Mrs Hart says she has no reason to believe that she did not undertake the following steps.
143 Normally, Mrs Hart explains the history of the Frontline franchise. She identifies the year each Frontline agency opened starting with Sydney in 1995, Melbourne, Brisbane and other sites. Mrs Hart explains that Frontline has been established for 15 years; has a national presence; and that Recruitment Consultants of the franchisees are “territory experts”. In the context of this general description, Mrs Hart makes reference (para 53), inclusively, to Frontline’s Gold Coast presence in 2003. Mrs Hart says that as part of the orientation she tells attendees about the contract the client will enter into with Frontline and she gives each new employee a copy of the standard contract used as between Frontline and clients, and asks the new employee to read the document carefully so that each employee “fully understands the contract” in dealings with clients and also to enable the employee to calculate the recruitment fee payable by the client. At CTH 14, Mrs Hart puts in evidence a true copy of the pro forma contract that she used in the business and had available to her when Mrs Stariha undertook the Orientation training.
144 Two things ought to be noted about that document.
145 First, the placement fee is calculated on the following basis:
SALARY PACKAGE | PLACEMENT FEE |
Less than $50K | 11% of Annual Salary Package Minimum fee of $3500 plus GST |
$50 – 70K | 14% of Annual Salary Package plus GST |
$70 – 120K | 17% of Annual Salary Package plus GST |
$120K plus | 20% of Annual Salary Package plus GST OR 17% of Annual Salary Package plus GST with 8 week Exclusivity Clause** |
146 Second, the guarantee term is framed this way:
Guarantees: A ninety (90) day replacement guarantee applies from the successful candidates [sic] start date on the provision that:
Payment for placement is to be received no more than seven (7) days after the commencement date of employment.
The terms and conditions of original employment, stated in the letter of offer or by verbal agreement, remain unchanged.
Replacements are available only in the State of original placement.
There is a limit of one replacement on any one previously invoiced placement.
The replacement owing date is the final date of employment.
147 Mrs Hart says that as part of the orientation training she “would have told Julianne that in my business, we are always flexible … about replacements and payments” [emphasis added]. Mrs Hart, in her principal amended statement, says that she has no active present recollection of the content of these orientation matters but relies upon her usual practice. Mrs Hart says that the reason she emphasises flexibility about replacements is that clients, in her experience, frequently pay the placement fee late (beyond the seven day period) and Frontline “could lose large national clients if we did not allow some leeway”. Mrs Hart says that she jokingly suggests in the orientation training that “if we enforced a strict 7 day payment policy, we would not have a single client left”. Mrs Hart says this approach reflects the standard practice adopted nationally by Frontline. At para 60, Mrs Hart says she believes that she did not depart from her usual practice when engaging in the orientation training with Mrs Stariha and by way of emphasis she repeats that she believes she told Mrs Stariha that Frontline had opened an agency on the Gold Coast in 2003, and that, in practice, it was normal for Frontline franchisees to afford a client some flexibility in the payment period while still honouring the replacement promise (see para 60(a) and (b)).
148 During Mrs Stariha’s period of employment as a Recruitment Consultant in the Brisbane agency, Mrs Hart recalls that Mrs Stariha performed her role “exceptionally well” and that she “exceeded her KPIs and budgets, as well as adapting to the role effortlessly”. For this reason, Mrs Hart decided that Mrs Stariha “was the perfect candidate to manage the Gold Coast Agency” which Mrs Hart had “always intended to re-open after Hart Trading purchased the franchise from Ellis Trading”.
149 Mrs Hart says she met with Mrs Stariha in October 2005 to ask her if she would consider transferring to the Gold Coast so as to re-open the Gold Coast Agency. At para 63, Mrs Hart says this:
I explained the history of the Gold Coast Agency including the fact that it had been owned previously by Karen Ellis. I told Julianne that Karen had run the Gold Coast Agency out of the Kaybank Plaza in Southport for 17 months between August 2003 and December 2004, before deciding that it was easier for her at the time to sell it as an undeveloped territory, as opposed to a developed territory.
150 Mrs Hart says that she told Mrs Stariha that she had purchased a territory from Ellis Trading which included the Gold Coast territory as she had intended to re-open the Gold Coast Agency “as soon as possible after my purchase”. Mrs Hart says that she told Mrs Stariha she was going to re-open the Gold Coast Agency in the same location where Ms Ellis had operated it because “in using the same address we would not be confusing our clients or candidates”.
151 At para 65, Mrs Hart says this:
At that meeting [October 2005], I explained the performance of the agency under Karen and I showed Julianne a spreadsheet of the sales under Ellis Trading for the 2003/2004 and 2004/2005 financial years (Spreadsheet). I recall clearly that I showed Julianne this Spreadsheet to show her the figures the Gold Coast Agency had achieved with the recruitment consultants employed by Karen. I recall saying this because I told her that I thought she could do better because I felt she was a stronger recruiter that the past employees. …
152 Mrs Hart says that the spreadsheet she showed Mrs Stariha in October 2005 was produced from the Frontline database. Mrs Hart no longer has a copy of the spreadsheet and she can no longer generate the “particular document” as it is a “living document”, up to the current period. However, Mrs Hart has prepared another spreadsheet, as earlier described, containing sales data from the Frontline database for the Gold Coast Agency for the period 2003 until May 2011. I have already set out that data for the period of trading by Ellis Trading. The sales for the 2005/2006 and 2006/2007 financial years by the Gold Coast Frontline Retail Agency were these according to Mrs Hart’s data (CTH 15):
Financial Year | 2005/2006 | 2006/2007 |
July | - | $15,320.00 |
August | - | $4,886.00 |
September | - | $4,620.00 |
Qrt 1 | $0 | $24,826.00 |
October | - | $31,404.00 |
November | $10,791.00 | $36,390.00 |
December | $20,661.00 | $9,182.00 |
Qrt 2 | $31,452.00 | $76,976.00 |
January | $14,334.00 | -$17,879.00 |
February | $34,306.00 | $12,043.00 |
March | $11,471.00 | $28,670.00 |
Qrt 3 | $60,110.00 | $22,833.00 |
April | $23,522.00 | $24,547.00 |
May | $30,658.00 | $4,360.00 |
June | $38,015.00 | $29,975.00 |
Qrt 4 | $92,194.00 | $58,882.00 |
Year End | $183,757.00 | $183,517.00 |
153 It follows, according to this data, that in the period 7 November 2005 to 31 October 2006, sales by the Gold Coast Agency were $239,987.00. The minimum Year 1 revenue requirement under the Hart Trading Franchise Agreement for the undeveloped territory of the Gold Coast was $170,000.
154 Mrs Hart says that in the October 2005 meeting she told Mrs Stariha that it was her intention to sell the Gold Coast Agency and that she was only opening it so as to sell it. Mrs Hart says she told Mrs Stariha she wanted to keep the Gold Coast Agency for a minimum of one year to optimise tax savings. She says she suggested to Mrs Stariha that “maybe [Mrs Stariha] could be the new business owner”. Mrs Hart says she made this suggestion “in an effort to plant a seed of an idea in her mind”. Mrs Hart also said this at para 69:
Julianne told me she had always believed and saw herself as a business owner and although she sold her café [Café Addict Pty Ltd] for a profit, she had not enjoyed it as much as she thought she would. I told that maybe the café just was not the right business.
155 At para 70, Mrs Hart says this:
I had earmarked Julianne as a potential buyer for the Gold Coast Agency before I ever approached her to simply be its employee [at the Gold Coast for Hart Trading].
156 Mrs Hart says that in the meeting in October 2005 with Mrs Stariha, Mrs Hart told her, in the course of outlining the history of Ellis Trading’s activities at the Gold Coast for Frontline, that Ms Diane Knight and Ms Niki Garnett-Palmer were former employees of Ellis Trading under Karen Ellis. Mrs Hart says that she explained the former engagement of those two individuals with Ellis Trading and the Gold Coast because each of them had become a client of the Frontline business. Ms Garnett-Palmer joined “Pretty Girl Fashion Group” and became a client and Ms Knight joined “Billabong” and became a client.
157 Mrs Hart says that Mrs Stariha needed to be aware of these relationships because “she would be expected to make regular contact with each of them”. Another “important” factor informing Mrs Hart’s mind on this topic was that she had confidence in Mrs Stariha to out-perform either of those former employees. Mrs Hart, at para 72, says this:
I had been a peer of both Niki and Diane, I knew them and their ability, and I believed that Julianne was a better performer in recruitment. During the meeting in October 2005, I told Julianne that I believed she was a stronger performer than Niki and Diane and that I believed she could obtain better results than they had obtained.
158 The underlined section in the above quote drawn from Mrs Hart’s amended statement reflects an addition to para 72. Mrs Stariha says in her further statement of 6 March 2012 at para 17 that Mrs Hart did not say to her the words Mrs Hart asserts in the amendment to her statement set out above.
159 Mrs Hart has reviewed the Frontline database to identify the recording by Mrs Stariha as a recruitment consultant for Hart Trading of any conversations between Mrs Stariha and either Ms Knight or Ms Garnett-Palmer (as the KPIs require). At CTH 16, Mrs Hart puts in evidence a true copy of screen shots she has copied from the Frontline database that show particular conversations recorded by Mrs Stariha.
The screen shots
160 On 20 January 2006, Mrs Stariha records a weekly outgoing client conversation with Ms Knight of Billabong in which Mrs Stariha notes: “heard there is an asm role at burleigh … anything for us? She is fine – no help”.
161 On 23 January 2006, Mrs Stariha records a weekly outgoing client conversation with Ms Knight in which Mrs Stariha notes:
making sure no roles – helping her with her change of job.
Fabulous company. Wouldn’t mind – movieworld – area manager of sorts. Interested in multisite. $55k.
Asm – burleigh – give it to us ….. same industry ……. put forward kim lawrence.
162 On 27 January 2006, Mrs Stariha records a weekly outgoing client conversation with Ms Knight in which Mrs Stariha notes: “diane came to visit the office – update on billabong and doing the rounds of the agencies”.
163 On 20 February 2006, Ms Stariha appears to have had a weekly outgoing conversation under the description “Catch Up” with Ms Knight in which Ms Stariha notes this:
she is no longer with
contract was up in end of january – in fairness to you – I will move on … Felt like doing justice to the role. They appreciated it.
164 On 22 March 2006, Mrs Stariha records a weekly outgoing client conversation with Ms Garnett-Palmer of Pretty Girl Fashion Group in which Mrs Stariha notes:
how about that store management role at robina … she will be right.
Great to meet her in person.
165 On 2 August 2006, Mrs Stariha records that she left an outgoing message with Ms Knight asking: “what is she up to?”
166 Mrs Hart rejects Mrs Stariha’s contention that she was never told that a Frontline Recruitment Agency had been opened at the Gold Coast and then closed. Mrs Hart says that in the October 2005 conversation she told Mrs Stariha that Hart Trading would be “re-opening” the Gold Coast Agency and that in doing so Hart Trading would be operating “at the same location” from which Ellis Trading had conducted the undertaking, namely, Kaybank Plaza in Southport. Mrs Hart also says this at para 78(d):
In her performance at the Gold Coast, I was continually, in my conversations with Julianne, comparing her sales with the sales achieved by Niki when Niki had worked at the Gold Coast Agency. During Julianne’s time at the Gold Coast Agency, we very often measured and discussed her sales performance verses the prior opening and we were both thrilled and impressed at the improved result she achieved. For example, under Julianne, the Gold Coast Agency achieved a monthly average of $22,969 from 1 November 2005, when I re-opened the Gold Coast Agency until 30 June 2006. When compared with the previous monthly average of $11,483 under Ellis Trading, $22,969 was a terrific improvement.
167 Mrs Hart says at para 78(c) that in October 2005 she told Mrs Stariha that in “re-opening the Gold Coast Agency we were at the same location as when it was open under Ellis Trading – namely Kaybank Plaza in Southport”. Mrs Stariha denies this statement was made to her in October 2005 or at all (para 19, Mrs Stariha’s further statement of 6 March 2012).
168 Mrs Stariha accepted Mrs Hart’s offer of a position in the Gold Coast office with Hart Trading. Mrs Stariha commenced work in the Gold Coast office on 7 November 2005.
169 On 1 November 2005, Mrs Hart and Mrs Stariha signed a “Letter of Employment”. By that letter, Mrs Hart said that she took pleasure in “confirming the following change in salary as at 07 November 2005”. The letter continues to recite Mrs Stariha’s position as “Recruitment Consultant”, at a change in salary to $50,000 per annum excluding superannuation. The letter recites a start date of 29 August 2005 with a probationary period of three months, although, of course, Mrs Hart gives evidence that she had only raised the question of Mrs Stariha transferring to the Gold Coast in the October 2005 conversation. The letter continues to reflect Mrs Stariha’s initial commencement date of 29 August 2005 and the reference to the position of “Recruitment Consultant” presumably because that is when Mrs Stariha actually commenced employment, as a Recruitment Consultant, and the letter is reflecting what Mrs Hart, in an introductory way, simply described as a “change in salary” not a change in position. In any event, the letter reflects a position description of “Recruitment Consultant” in the context of the new Gold Coast arrangements. At para 80, however, Mrs Hart says that Mrs Stariha was initially employed on 29 August 2005 at an annual salary of $35,000 plus superannuation, and when she agreed to undertake the role at the Gold Coast, Hart Trading increased her salary to $50,000 per annum, plus superannuation, plus a commission on sales (placements) which was designed to reflect the “additional responsibilities assumed by her upon undertaking this role”. Mrs Hart says (para 80) that in addition to her duties and responsibilities forming part of her role as a Recruitment Consultant, Mrs Stariha was responsible:
… for the general management of the Gold Coast Agency. She was responsible for the placement of retail candidates with clients, business development, which included prospecting new business, achieving sales targets, achieving minimum KPIs, client and candidate care, and database record keeping. I audited the performance of the Gold Coast Agency, and Julianne in turn rectified any discrepancies, and/or issues that arose.
170 The underlined section in the above quote is an addition reflected in Mrs Hart’s amended statement.
171 The Letter of Employment describes the hours to be worked and sets out some information about other entitlements. As to those matters, the letter says this:
Hours: Minimum 8.30a.m. to 5.30p.m. Monday to Friday with increased hours as the business requires. This is a salary paid position – no over time pay will apply for extra hours.
Other: You may be eligible for bonus or incentive payments during your employment. Please note that you will not be eligible for accrued bonus or incentive payments due after your resignation or termination date.
172 As to commission payments, Mrs Stariha received commission payments and an example of the commission arrangement is set out in a letter from Mrs Hart to Mrs Stariha dated 24 May 2006 in which Mrs Stariha received a 10% commission based upon a performance for the Gold Coast Agency which was $5,033.50 above the budgeted performance for that month resulting in a commission payment of $503.35. The letter also reflects an indication of the relationship between Mrs Hart and Mrs Stariha at this time. In making the commission payment, Mrs Hart said this in the letter:
Julianne another solid month and I’m very pleased to be awarding you commission for April. You’ve a strong result also MTD May and it’s a fabulous result for the last quarter so far. Your focus and commitment is unwavering, thank you so very much for your efforts.
173 Mrs Hart says that in or around 7 November 2005, Mrs Stariha was transferred to the Gold Coast Agency “as the sole recruitment consultant” (para 79). Exhibit 19 is a copy of a release promoting the proposed opening of the Frontline Gold Coast office. Exhibit 19 is an email sent by Mrs Stariha to her home email address on 5 September 2006 which contains the release. Among other things, it says this:
FRONTLINE RETAIL IS OPENING ON THE GOLD COAST!
I wanted to take this opportunity to introduce myself. My name is Julianne Jones and I am the Agency Manager for Frontline Retail on the Gold Coast. Our expansion is a fantastic opportunity for us retailers on the Gold Coast as it is often difficult to find quick service and finer quality candidates based in Brisbane. Our doors open on Monday 7 November 2005. We already have in place a large data base full of retailers for the sunny coast.
Just a quick reminder about Frontline Retail:
…
Frontline Retail is not an overnight agency; we have been in business since 1995.
There is no obligation to hire our candidates, nor is there a fee for viewing their resumes. We also offer a three month guarantee, so if the candidate is not successful through probation we replace once free of charge.
…
Frontline Retail Gold Coast
Level 3
33 Scarborough Street
Southport Qld 4215
…
Julianne Jones
Agency Manager
Mrs Hart’s further evidence drawn from her amended statement
174 Mrs Hart says that as “manager” of the Gold Coast Agency, Mrs Stariha had access to the Frontline Database which “contained and continues to contain historical sales figures for the Gold Coast Agency”. Mrs Hart says that she regularly provided “Historical Sales Reports” to Mrs Stariha which “compared current sales with historical figures and budgets” (para 66). Mrs Stariha contends that she was not the “manager” of the Gold Coast Agency and that she was “employed as a consultant only”. As to the “Historical Sales Reports”, Mrs Stariha says they were not part of the Frontline Database in 2006. They were made up and distributed by Mrs Hart (para 16 of Mrs Stariha’s further statement, 6 March 2012).
175 Mrs Hart says that Mrs Stariha was extremely successful as a Recruitment Consultant. On 22 May 2006, Ms Melissa Moseley of Frontline’s Head Office sent an email to franchise owners advising of the Frontline Awards as at 22 May 2006. The winner of the “Most Productive Agency” Award was the Gold Coast Agency. The “Rookie Consultant of the Year” was won by Mrs Stariha on the footing that she had achieved average monthly sales as a Recruitment Consultant of $19,957.00. Mrs Hart recognises that Mrs Stariha’s performance contributed significantly to the success of the Gold Coast Agency as Mrs Stariha was the only salesperson employed in the agency. The “Most Productive Agency” Award is awarded to the agency which has the highest per head sales in the financial year. Since Mrs Stariha was the only Recruitment Consultant in the Gold Coast Agency, she was able to achieve more revenue “per head” than any other Frontline agency in Australia.
176 Mrs Hart says that Mrs Stariha was interested in increasing the performance of the Gold Coast Agency and “also very interested in cost saving measures” [emphasis added] (para 85) examples of which were introducing “Voice over the Internet” protocols to save normal telephony costs and moving the office to the use of less stationery and preferably a paperless office.
177 Mrs Hart says that on a number of occasions between June 2006 and September 2006 she discussed with Mrs Stariha the “possibility of splitting the Gold Coast Agency from the Franchise” (para 88) and making the Gold Coast territory an entirely separate franchised territory. This “possibility” was something “in addition to me ‘planting the seed’ of the idea for Julianne to purchase the Gold Coast Agency from me in our first discussion about re-opening the Gold Coast Agency in 2005” (para 88) [original emphasis]. Mrs Hart says she spoke “casually” to Mrs Stariha about this on a number of occasions that became more frequent and more serious between June and September 2006. Mrs Hart says she cannot recall “each and every occasion because there were numerous times when we discussed this” (added to para 89 by the amended statement). Mrs Hart says she explained to Mrs Stariha that she had always intended to sell the Gold Coast Agency after one year of operation. Mrs Hart says that Mrs Stariha “always made it clear” (para 89) that she was very keen to purchase the Gold Coast Agency.
178 The places where these numerous meetings/discussions occurred were in the Brisbane and Gold Coast offices. Mrs Hart says that in about September 2006, Mrs Stariha said to her that if she did not “end up buying the Gold Coast Agency” she would leave the Gold Coast office. Mrs Hart regarded this possibility as a serious one. Mrs Hart’s recollection of these discussions about Mrs Stariha possibly leaving her role in the Gold Coast office should a sale to her not occur (and the anterior sale discussions themselves) is aided by an email Mrs Hart sent to Ms Tina Price on 4 October 2006 which includes this observation:
…
I have a lot going on also, we are giving Julianne a price to purchase the Gold Coast in the next couple of days. She has advised that should she not buy for whatever reason she is leaving, so its a little scary at the moment. I’m praying for a sale and if not a new gun consultant … Hopefully Julianne will buy, she’s absolutely golden.
179 Mrs Hart says that she and Mrs Stariha agreed in September 2006 that in their next meeting in October 2006, Mrs Hart “would supply Julianne with profit and loss figures for the Gold Coast Agency” (para 94). Mrs Hart says that “during our conversation in September 2006”, Mrs Stariha was “putting pressure on me, asking me to set a sale price and to give her profit and loss figures to sell the Gold Coast Agency, rather than the other way around” (para 94) [the underlining represents additions to Mrs Hart’s amended statement].
180 Mrs Hart says she would have preferred to wait until 12 months trading at the Gold Coast had occurred (7 November 2005 to November 2006) so as to have a full year of sales information including sales for the usually buoyant October month, to review. Mrs Hart says she was responsive to Mrs Stariha’s pressure to identify a price and concerned that Mrs Stariha might leave the Gold Coast office absent a sale to her.
181 Mrs Hart says that well before the proposed October 2006 meeting, Mrs Stariha updated her CV/Resume (CTH 23) to include a description of her then role at the Gold Coast Agency. Mrs Stariha described the features of her role and her success in this way:
EMPLOYMENT HISTORY
AUGUST 2005 - CURRENT
Frontline Retail Pty Ltd
AGENCY MANAGER
Frontline Retail is a specialist retail recruitment agency based in Brisbane. After 3 months in the business I was promoted to Manage the new Agency opening on the Gold Coast. November 2005, saw the opening of the new agency, where we then went to break all records in Frontline Retail billing $275k against a budget of $180k for the first year. Annual awards which were won for the performance on the Gold Coast were –
Rookie Recruiter of the Year 2005/06 (First Nationally across 40 consultants)
• Rookie Agency of the Year 2005/06
• Most Productive Agency in Australia & New Zealand 2005/06
• Offered to purchase the business in September 2006
[emphasis added]
182 To the extent that I have described events in Part 3 by reference to Mrs Hart’s recollections, I am simply noting for present purposes the elements of her evidence on these topics particularly as Mrs Stariha’s principal statement begins with events on either 3 October or 4 October 2006, as she then recalled them and, as to some matters, Mrs Stariha cannot speak directly.
183 It is now convenient before returning to Mrs Hart’s evidence on the central matters of the sale to Julstar (and the oral evidence in cross-examination of both Mrs Stariha and Mrs Hart) to examine the recollections of relevant events given in evidence by Mrs Stariha in her first and principal statement before going to her other evidence and the evidence of other witnesses.
184 I now turn to that exercise.
PART 4 – THE EVIDENCE OF MRS STARIHA ON THE CENTRAL EVENTS DRAWN FROM HER PRINCIPAL STATEMENT
185 Mrs Stariha gives this evidence-in-chief of her recollections of the events and conversations.
186 On 3 October 2006 or 4 October 2006, Mrs Stariha met with Mrs Hart in the Gold Coast Frontline office at Level 3, Kaybank Plaza, 33 Scarborough Street, Southport (the first meeting identified by Mrs Stariha relevant to these matters).
187 Mrs Stariha says that at that time she was employed in the role of a “Recruitment Consultant” by Hart Trading.
188 The meeting commenced at 8.00am. Mrs Stariha expected the meeting to deal with general administrative matters. Mrs Stariha has no notes of the meeting but says she has a “good recollection of the topics discussed at the meeting” and the “general effect” of the words said at the meeting. At the start of the meeting, Mrs Hart told Mrs Stariha that she was thinking of selling the Frontline Gold Coast Agency and suggested that Mrs Stariha might be interested in buying the business from her. Mrs Hart emphasised that Mrs Stariha had previously run businesses and she was “running the Gold Coast agency”. Mrs Stariha told Mrs Hart that she had not thought about buying the business and said that she wanted to talk to her husband about the matter.
189 During the meeting, Mrs Hart produced “a blue and grey spreadsheet document entitled ‘GC Agency 2005/2006’ consisting of a blue spreadsheet and a separate grey spreadsheet”. Mrs Stariha says that Mrs Hart only had one copy of each spreadsheet and handed them to her at the meeting. Mrs Hart then began to explain the meaning of the various line items on the two spreadsheet documents. Mrs Stariha says that although she had worked in the Gold Coast Agency since November 2005, she had never been provided with any financial statements or spreadsheet data concerning the financial performance of the Gold Coast Agency (para 5). Mrs Stariha was the only consultant employed by Hart Trading in the Gold Coast office. Mrs Stariha knew the approximate number of placements made by the Gold Coast Agency each month and the monthly placement fees charged. Mrs Stariha had “an approximate idea” (para 6) of the sales she had made up to 30 June 2006.
190 Mrs Stariha says that Mrs Hart told her the Frontline franchises were “‘cash cows’ and highly profitable” (para 7).
191 The two spreadsheets put in evidence by Mrs Stariha given to her at this meeting, on her evidence, are documents described at (Vol A1, Tab 1A). The blue spreadsheet bears the heading “GC Agency 2005/2006”. The grey spreadsheet, however, bears the heading GC Agency 2006/2007. The blue spreadsheet sets out the income for each month from July 2005 to June 2006 and, for each month, the expenses of the agency by reference to 15 categories. The income and expenses for the months of July, August, September and October 2005 are zero in each case because Hart Trading did not commence its operations at the Gold Coast until the month of November (7 November 2005).
192 The blue spreadsheet therefore shows the income and expenses for the actual trading period from November 2005 to 30 June 2006. Set out below is the data taken from that spreadsheet for the relevant actual trading months of the financial year set out in the same format as the spreadsheet:
November | December | January | February | March | April | May | June | Total | |
Income | |||||||||
$3,520.73 | $12,410.47 | $8,824.40 | $9,442.40 | $8,342.40 | $17,106.80 | $25,941.39 | 33,353.72 | $118,942.31 | |
Expenses | |||||||||
A | $885.27 | $1,127.43 | $927.54 | $927.53 | $682.73 | $998.17 | $857.07 | $927.52 | $7,333.26 |
C | $18.18 | $0.00 | $0.00 | $0.00 | $0.00 | $34.32 | $0.00 | $0.00 | $52.50 |
CE | $38.84 | $109.00 | $120.37 | $65.06 | $201.00 | $290.17 | $114.30 | $147.35 | $1,081.09 |
IS | $0.00 | $0.00 | $90.91 | $340.91 | $197.21 | $0.00 | $0.00 | $46.82 | $675.85 |
IN | $0.00 | $0.00 | $1.55 | $40.80 | $40.47 | $36.68 | $88.18 | $76.64 | $284.32 |
I/R | $0.00 | $0.00 | $19.94 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $19.94 |
M | $0.00 | $0.00 | $0.00 | $0.00 | $63.27 | $0.00 | $30.00 | $11.27 | $104.54 |
OS | $181.16 | $559.43 | $0.00 | $5.77 | $0.00 | $22.73 | $0.00 | $4.00 | $773.09 |
P | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $11.58 | $0.00 | $11.58 |
R | $606.66 | $497.95 | $606.65 | $679.91 | $888.33 | $888.33 | $888.33 | $888.33 | $5,944.49 |
R/M | $28.42 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $28.42 |
T | $100.00 | $29.04 | $311.33 | $468.39 | $619.79 | $711.81 | $483.88 | $773.24 | $3,497.48 |
TT/C | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $0.00 | $134.55 | $0.00 | $134.55 |
S | $325.39 | $432.78 | $262.13 | $346.15 | $586.51 | $346.15 | $508.64 | $436.87 | $3,244.62 |
W/S | $3,615.38 | $4,808.70 | $2,912.59 | $3,846.16 | $6,516.44 | $4,669.36 | $5,248.31 | $5,923.13 | $37,540.07 |
Total Expenses | |||||||||
$5,794.30 | $7,564.33 | $5,253.01 | $6,720.68 | $9,795.75 | $7,997.72 | $8,364.84 | $9,235.17 | $60,725.80 | |
Net Profit (Loss) | |||||||||
-$2,273.57 | $4,846.14 | $3,571.39 | $2,721.72 | -$1,453.35 | $9,109.08 | $17,576.55 | $24,118.55 | $58,216.51 | |
Legend:
Expenses Categories | |
A | Advertising & Promotions |
C | Client Gifts & Meetings |
CE | Computer Expenses |
IS | Incentives for Staff |
IN | Internet |
I/R | Interviewing & Reg Expenses |
M | Meetings |
OS | Office Supplies |
P | Postage |
R | Rent |
R/M | Repairs & Maintenance |
T | Telephone |
TT/C | Travel, Training & Conference |
S | Superannuation |
W/S | Wages & Salaries |
193 The grey spreadsheet is not a spreadsheet for the 2005/2006 year. The grey spreadsheet bears the heading “GC Agency 2006/2007”. The grey spreadsheet contains the information set out below for that part of the 2006/2007 financial year it addresses:
July | August | September | October | Total | |
Income | |||||
$14,180.56 | $2,933.09 | $1,262.55 | $14,194.40 | $32,570.60 | |
Expenses | |||||
Advertising & Promotions | $927.52 | $769.89 | $769.89 | $2,467.30 | |
Client Gifts & Meetings | 0.00 | 0.00 | 0.00 | 0.00 | |
Computer Expenses | $529.00 | $144.80 | $78.19 | $751.99 | |
Incentives for Staff | 0.00 | $568.19 | 0.00 | $568.19 | |
Internet | $99.15 | $100.14 | $113.39 | $71.90 | $384.58 |
Interviewing & Reg Expenses | 0.00 | 0.00 | 0.00 | 0.00 | |
Meetings | 0.00 | $192.81 | $13.27 | $206.08 | |
Office Supplies | $13.80 | $.60 | $97.85 | $112.25 | |
Postage | 0.00 | 0.00 | 0.00 | 0.00 | |
Rent | $888.33 | $888.33 | $888.33 | $888.33 | $3,553.32 |
Repairs & Maintenance | 0.00 | 0.00 | 0.00 | 0.00 | |
Telephone | $928.88 | $984.41 | $868.10 | $546.72 | $3,328.11 |
Travel, Training & Conference | 0.00 | 0.00 | $54.27 | $54.27 | |
Superannuation | $430.82 | $664.38 | $346.15 | $173.08 | $1,614.43 |
Wages & Salaries | $10,001.02 | $7,382.04 | $4,634.85 | $1,923.08 | $23,940.99 |
Total Expenses | $13,818.52 | $11,695.59 | $7,864.29 | $3,603.11 | $36,981.51 |
Net Profit (Loss) | $362.04 | -$8,762.50 | -$6,601.74 | $10,591.29 | -$4,410.91 |
194 It follows, according to the blue spreadsheet, that in the period from 7 November 2005 to 30 June 2006, the Gold Coast Agency generated a net profit of $58,216.51. In the period 1 July 2006 to the moment in time in October 2006 when the grey spreadsheet was formulated, the Gold Coast Agency had suffered a loss of $4,410.91. Aggregating the two for the period up to the date of formulation of the information contained in the grey spreadsheet, the Gold Coast Agency generated a net profit of $53,805.06.
195 Mrs Stariha says that when she first looked at the spreadsheet (by which she must mean the blue spreadsheet), she noticed that sales to 30 June 2006 were listed as $118,942.31 (the blue spreadsheet total). Mrs Stariha says that when she saw the total sales figure she questioned Mrs Hart as to the accuracy of that figure. Mrs Hart said that the sales figure in the spreadsheet was different to the figures Mrs Stariha was used to seeing. Mrs Hart said that the total sales figure was calculated after the deduction of franchise fees payable by Hart Trading to the franchisor from the placement fees payable by the client. Mrs Stariha says that Mrs Hart did not tell her either the amount of the franchise fees or their method of calculation, at this point. Mrs Stariha says Mrs Hart told her that the monthly income figures in the spreadsheet were different to those shown in the Frontline database because the spreadsheets “only took account of the money Hart Trading received in the bank account every month, not what placement fees were written for any month” [emphasis added] (para 9). Also, Mrs Hart told Mrs Stariha that the income figures in the spreadsheet “did not deduct any monies for replacement credits because the business had received the cash” (para 9), from the original placement.
196 So, as to the monthly income recited in the blue spreadsheet, Mrs Stariha says Mrs Hart told her the monthly numbers reflected the deposits (by the franchisor, in effect) to the franchisee’s account after deducting the franchise fee payable to FRGPL but without any deduction of the value of any “replacement credits” that may have accrued (paras 9 and 10).
197 Mrs Stariha says that Mrs Hart then proceeded to “go through the expense line items on the spreadsheets and she pointed out what the monthly spend was on most of the expenses” [emphasis added]. Mrs Hart asked Mrs Stariha whether she was interested in buying the business and Mrs Stariha told her that she “wanted to learn more”. Mrs Stariha says she asked Mrs Hart if she could “take the spreadsheet documents with [her] to which [Mrs Hart] agreed” (para 10).
198 Mrs Stariha says that Mrs Hart pointed to the net profit figure on the blue spreadsheet of $58,216.51 and said that “this figure was not correct” and that she suspected that “her bookkeeper had made errors”. Mrs Stariha says that Mrs Hart told her that “she had checked with her accountant and he had told her that the Gold Coast agency made $80,000.00 EBIT for the period of the spreadsheet” (which must be a reference to the blue spreadsheet since Mrs Stariha and Mrs Hart were talking about the EBIT of $58,216.51): para 11. Mrs Stariha says she asked Mrs Hart whether the $80,000 EBIT included the salary of $50,000 per annum paid to Mrs Stariha. Mrs Stariha says that Mrs Hart told her that the $80,000 EBIT was calculated “after allowing for [Mrs Stariha’s] salary of $50,000.00” (para 12). Mrs Hart said that Mrs Stariha “could employ a consultant at a salary of $50.000.00 instead of working [herself] and the business would still generate $80.000.00 EBIT” (para 12).
199 The blue spreadsheet self-evidently sets out a calculation of the net profit to 30 June 2006 of $58,216.51 after the payment of wages and salaries and the making of superannuation contributions. If the EBIT of the business was $58,216.51 after deducting from the earnings all relevant expenses including the wages paid to Mrs Stariha, the earnings value of the business to Mrs Stariha (assuming hypothetically that she had owned the business throughout the relevant period) would have been $108,216.51 as her salary would, in effect, have been simply a pre-payment of a part of the profit, in real terms. Nevertheless, the EBIT recited in the blue spreadsheet was $58,216.51. If the EBIT had actually been $80,000.00, the earnings value of the business to Mrs Stariha would have been, in principle, $138,216.51. Mrs Stariha told Mrs Hart that she would like to have “a closer look at the spreadsheet documents” and the (3 or 4 October 2006) meeting then ended (para 12).
200 Mrs Stariha says that she had another meeting with Mrs Hart in the Gold Coast Kaybank Plaza office (the second meeting). The date of the second meeting is not identified in Mrs Stariha’s statement. Mrs Stariha says that at this second meeting, she and Mrs Hart discussed a purchase price for the Gold Coast business and Mrs Hart told Mrs Stariha that she had calculated the purchase price for the business at $240,000 “which she told me was three times EBIT of $80,000.00” (para 13). Mrs Stariha questioned Mrs Hart about the calculation and asked her whether the $80,000 EBIT figure was “a true figure” (para 13). Mrs Stariha asked Mrs Hart this question because Mrs Hart “had earlier told [Mrs Stariha] that some of the calculations on the blue spreadsheet were in error” [emphasis added] (para 13). Mrs Stariha says that she was told by Mrs Hart that the $80,000 EBIT figure was the “true EBIT figure for the business” and Mrs Hart said that the $80,000 EBIT figure reflected the figure contained in the “tax return for the business” (that is, Hart Trading’s tax return) (para 13).
201 Mrs Stariha says that Mrs Hart discussed “the money that Agency Owners made”; the franchisee conferences that occur; the training Mrs Stariha would receive if she purchased the business; the notion that Frontline franchises were “highly profitable businesses”, and said “you should see the money that they make”. Mrs Hart told Mrs Stariha about the success of Ms Sarah Vockler, the Melbourne franchisee, and told Mrs Stariha about Ms Vockler’s personal chef and personal trainer who were said to visit the office each day (para 14).
202 Mrs Hart told Mrs Stariha that the training she would receive would cost $10,000 but that this would be included in the $240,000 purchase price (para 14).
203 Mrs Hart told Mrs Stariha that “she knew for a fact that everyone was successful and that no one had ever gone bad or struggled as a Frontline franchisee” (para 15). Mrs Hart said that Mrs Stariha deserved to own the business as she had built it from the ground up but that if she did not wish to buy it, Ms Vockler was looking at the Gold Coast business, as was Ms Sheila Rowley from Canberra, who was keen to purchase it. Mrs Stariha says that Mrs Hart told her she would have the first right to purchase the Gold Coast business. Mrs Stariha says that she needed to decide whether she wanted to buy the business.
204 Mrs Stariha says that after the second meeting, she recalls that she telephoned Mrs Hart (the third engagement) and asked her whether she could provide her with “an electronic copy of the spreadsheet documents that she had given [her] at the meeting”. Mrs Hart said that she would forward those documents to her.
205 On 13 October 2006, Mrs Stariha received an email from Mrs Hart which attached “the first blue spreadsheet” and another document described as an “Agency Forecast” (para 18).
206 Between 13 October 2006 and 18 October 2006, Mrs Stariha says she had a meeting with Mrs Hart (the third meeting). This meeting took place at a coffee shop at the Kaybank Plaza Shopping Centre. Mrs Hart and Mrs Stariha were the only persons present. Mrs Stariha says she clearly recalls the “important matters” that were discussed, although she did not keep any notes of the meeting. At this meeting, Mrs Stariha told Mrs Hart that she was “having trouble getting the figures in the spreadsheet to match the monthly placements that were in the Frontline database” (para 20). Mrs Stariha says Mrs Hart said that the “gross income figure on the spreadsheet” was “understated” because “it did not include replacement credits” (para 20) [emphasis added]. Mrs Hart said that Mrs Stariha needed to understand that as owner of the business “it’s about the money in your bank not what’s on your database”. Mrs Hart said that Mrs Stariha “had to look at the months where there were replacement credits and that’s where the money will be”. Mrs Hart said that Mrs Stariha had to “add back the replacement credits as if they were cash in [her] bank account” (para 20) [emphasis added]. Mrs Stariha says that Mrs Hart suggested that the electronic spreadsheet ought to be revised by Mrs Stariha “to make the adjustments for replacement credits” (para 20). Mrs Stariha said that she would do that and asked Mrs Hart whether she [Mrs Stariha] could send the revised spreadsheet to her for Mrs Hart “to tell me whether I was on the right track” (para 20). Mrs Hart agreed. Mrs Stariha says that Mrs Hart told her she should not worry about the figures because “[Mrs Hart] had checked and the Gold Coast agency had always done a minimum of $11,000.00 per month”.
207 This recollection of the exchanges suggests that Mrs Hart was encouraging Mrs Stariha to be astute to the fact that the monthly income figures recited in the spreadsheet (for example the blue spreadsheet to 30 June 2006) understated the true income position as the value of replacement credits in the relevant months was, in effect, offset from the franchisee’s actual income notwithstanding that the franchisee had actually earned the placement fee (less royalty) and thus Mrs Stariha would need to identify the months where replacement credits arose and then add back the value of the credit as if it was cash in the franchisee’s account, in order to determine the true income position of the Gold Coast business.
The revised combined spreadsheet produced by Mrs Stariha
208 Mrs Stariha says that after she received the “electronic version of the spreadsheets” [emphasis added], she made changes to those spreadsheets by doing the following 11 things (para 21).
209 First, Mrs Stariha accessed the Frontline database and noted the monthly sales for the Gold Coast Agency and transferred the data recited on the blue and grey spreadsheets to a combined spreadsheet.
210 Second, although Mrs Stariha did not have access to an “Agency Owner version of the database” Mrs Stariha could identify the start date of a candidate with a client and whether the candidate had left the position within the three month guarantee period. If the candidate had not left the position within the period, Mrs Stariha simply entered into the combined revised spreadsheet the monthly sales made by the Gold Coast Agency. Mrs Stariha entered this information in the revised spreadsheet in a line under the reference “JJ checking”. The revised spreadsheet therefore contained an income line (as before) and a new “JJ checking” line in relation to the monthly income.
211 Third, if a candidate had left the position with the client within the period, Mrs Stariha would add back the value of the replacement credits as Mrs Hart had told her to do, because the information in the Frontline database for earnings was said to deduct the value of replacements owing by the franchisee, from its gross sales figure. Mrs Stariha put the gross sales figure into the revised spreadsheet in the “JJ checking” line without any deductions for the value of replacement credits.
212 Fourth, to arrive at the figure reflected in the JJ checking line after the “add-back of any replacement credits”, Mrs Stariha would then deduct 20% from this add-back total so as to take account of the amount of royalty fees payable to the franchisor, and “to arrive at the figure in the revised spreadsheet in the JJ checking row”.
213 Fifth, where the income figures in the revised spreadsheet were different to those in the spreadsheets provided to Mrs Stariha by Mrs Hart, Mrs Stariha shaded those entries in the revised spreadsheet.
214 Sixth, Mrs Stariha then had a number of telephone conversations with Ms Moseley at Frontline’s Head Office accounts section about the expenses that were contained in the spreadsheets given to her by Mrs Hart. Mrs Stariha asked Ms Moseley about the “prices of the various expenses items” and told Ms Moseley that she was thinking about buying the Gold Coast Agency. Ms Moseley told Mrs Stariha of the “prices for advertising and promotion, computer and data costs etc” (para 21(f)). Mrs Stariha recorded the information given to her by Ms Moseley about these expenses in a new section of the spreadsheet called “FORECASTS – FROM RESEARCH”.
215 Seventh, Ms Moseley told Mrs Stariha that there were a number of expenses that Mrs Stariha had not mentioned but that she would incur as an agency owner. Mrs Stariha listed these expenses and the amount of each expense as discussed with Ms Moseley, in a section of the revised spreadsheet under the title “NOT LISTED”.
216 Eighth, Mrs Stariha then deducted the new expense figure from the new income figure and derived a monthly EBIT figure which she shaded in the revised spreadsheet and called “EBIT JJ SALES”.
217 Ninth, Mrs Stariha set out the monthly EBIT, shown in the earlier spreadsheets in the next row of the revised spreadsheet under the heading “EBIT Col [Colleen Hart] Sales”.
218 Tenth, Mrs Stariha then totalled the new EBIT figure for a 12 month period which amounted to $97,707.31.
219 Eleventh, on the revised spreadsheet, Mrs Stariha set out a number of other tables made up of calculations by her of income tax, GST, interest on bank loans and other expenses she would incur in borrowing monies to purchase the business. Mrs Stariha says that she made these calculations because she wanted to be sure that the business could support repayments to the bank on borrowed funds.
Some of the documents
220 Before turning to aspects of the revised spreadsheet, it is convenient to note some of the documents to this point.
221 On 5 October 2006, Ms Shannon Price of Hart Trading, sent Mrs Hart profit and loss spreadsheets by email for the Gold Coast Agency for the period November 2005 to 30 June 2006 and for the months of July, August and September 2006 (there being no entries for October).
222 On 6 October 2006, Mrs Stariha sent an email to her husband from the Frontline office saying: “we have a price and I have seen the profit margin. I am going to make you guess all night” [emphasis added].
223 On 9 October 2006, Mrs Hart sent an email to Mrs Stariha on the subject of the “Sales Reports [week ending] 7/10” in which she said: “Thought you’d like an updated copy – might help with all your thinking about. Thanks for the two placements today”. On 9 October 2006, Mrs Stariha sent an email to her husband attaching material described as “National Historical Sales With LY and Budget Comparisons; Sales Report” and said “… numbers to crunch”.
224 On 10 October 2006, Mrs Hart sent an email to her book-keeper, Ms Hutt, forwarding the Profit and Loss Statements sent to her by Ms Price describing the attachments as “Gold Coast 05-06 and Gold Coast 06-07”. The spreadsheet entitled “GC Agency 2005/2006” shows the same income statistics for each month from November 2005 to 30 June 2006 as set out at [189] except for the month of May which is shown as $23,578.37 rather than $25,941.39. The profit to 30 June 2006 is shown as $61,248.63 rather than $58,216.51. The spreadsheet described as “GC Agency 2006/2007” shows the same income for July 2006 but different amounts for August and September 2006 and no amount of sales for October 2006, as compared with the information set out in the spreadsheet described at [191]. The documents attached to the email include a wages template for 2005/2006 and a cash flow template for 2005/2006.
225 In the email to Ms Hutt, Mrs Hart said this:
we have now started negotiations with Julianne and I need to forward P&L’s asap.
Attached is the P&L’s for the Gold Coast taken from the monthly printouts. Can we go through them when you’re here Thursday as I’d like to make sure any of her queries [Mrs Stariha’s queries] are answered.
fyi – so far I’ve noted:
Rent was different each month from Nov - Feb
No wages in May
Advertising which is set for the GC changes monthly
Thanks – I’m getting excited – cash may be coming????
Hope you’re well?
[emphasis added]
226 On 13 October 2006, Mrs Hart sent an email to Mrs Stariha copied to Mr Davis in which she said this:
Attached is the GC P&L for 05/06 & 06/07
Also I’ve attached an Agency Forecast for your perusal – interesting to play with.
Happy reading.
227 The spreadsheet described as “GC Agency 2005/2006” attached to Mrs Hart’s email is in precisely the same terms as the spreadsheet Mrs Stariha refers to in her evidence and the content of which is set out at [189], as having been handed to Mrs Stariha in the early October 2006 meeting, according to her principal statement. It shows total earnings of $118,942.31 and a net profit to 30 June 2006 of $58,216.51. The spreadsheet entitled GC Agency 2006/2007 is in the same terms as the spreadsheet Mrs Stariha refers to in her evidence and the content of which is set out at [191], as having been handed to her as earlier described. However, there is a further version of the spreadsheet entitled “GC Agency 2006/2007” which recites the same income for July, August, September and October but the expenses vary. For example, “Advertising and Promotion” expenses in July were $927.52 according to version 1 and the version Mrs Stariha said she was given (see [191]) but the advertising and promotion expenses shown on version 2 are $1,085.49. The net profit (loss) for July and September in the version at [191] is $362.04 and -$6,601.74 respectively, but in version 2, it is $204.07 and -$3,971.79 respectively. The net loss in the version at [191] is -$4,410.91 but in version 2 it is a lesser loss of -$1,938.93.
228 The first thing to note about the revised spreadsheet is that although it is described as a spreadsheet for the 2005/2006 financial year, the first four months (July, August, September and October) are the first four months of the following financial year (06/07) drawn from the grey spreadsheet. The data for the 2005/2006 financial year begins in November 2005 on the revised spreadsheet.
229 Second, in the period November 2005 to June 2006, the income for two months (January and February 2006) has been adjusted by Mrs Stariha according to the method she adopted as earlier described. The blue spreadsheet (and the 2005/2006 spreadsheet attached to Mrs Hart’s email of 13 October 2006 to Mrs Stariha) shows income of $8,824.40 and $9,442.40 for January and February 2006, respectively, whereas Mrs Stariha’s “JJ checking” income line shows adjusted income of $10,424.40 and $24,949.65 respectively for those months. The income for July and October 2006 set out on the grey spreadsheet (and the two 2006/2007 spreadsheets attached to Mrs Hart’s email of 13 October 2006 to Mrs Stariha), is shown as $14,180.56 and $14,194.40, respectively. Mrs Stariha has adjusted the income for these months to $18,147.35 and $14,854.40 respectively, according to her adjustment method as earlier described.
230 The revised spreadsheet puts the two earlier spreadsheets together (by which I mean the blue and the grey spreadsheets Mrs Stariha says she was given by Mrs Hart), as adjusted, to reflect, it seems, a 12 month period from 7 November 2005 to the date of the earnings cut-off selected for October 2006 by Hart Trading in compiling the 2006/2007 spreadsheet, although the months of July, August, September and October are inserted before the November 2005 month (which is part of the earlier financial year).
231 Third, the revised aggregated spreadsheet retains each of the 15 expense items on each of the earlier spreadsheets (being the blue and grey spreadsheets and the version of the 2005/2006 spreadsheet attached to Mrs Hart’s email to Mrs Stariha of 13 October 2006 and a version of the grey spreadsheet attached to that email). The revised spreadsheet retains the net profit (loss) items according to those earlier spreadsheets.
232 Fourth, Mrs Stariha’s revised spreadsheet then sets out a “forecast” or assessment of likely expenses of the business based on her discussions with Ms Moseley as earlier described. Those expenses fall into 11 categories and contain 17 line items.
233 The revised spreadsheet then sets out seven additional line items of expenses also based on Mrs Stariha’s discussion with Ms Moseley, under the heading “Not Listed”.
234 The result of the method of revision of the expenses for the revised spreadsheet adopted by Mrs Stariha can be summarised (as illustrated by the month of July 2006 as an example), this way. The “Forecast from Research” expenses identified by Mrs Stariha (based on the discussions with Ms Moseley) amount to $7,831.65. The expense items under the category “Not Listed” which needed to be taken into account according to Ms Moseley, amounted to $616.00. The total expenses for July 2006 would then be $8,447.65. On that footing, the EBIT earnings for July 2006 would be $9,699.70 (called “EBIT – JJ Sales” in the revised spreadsheet) based on the revised income of $18,147.35 (rather than income of $14,180.56). The EBIT earnings of $9,699.70 for the month are then compared with the EBIT earnings of $362.04 retained, in a line in the revised spreadsheet called, “EBIT – Col Sales”.
235 Fifth, apart from attempting to capture the full field of likely expenses in the way earlier described, Mrs Stariha has eliminated the variable rental figure shown in parts of the 05/06 spreadsheet and applied rent of $888.33 across each month consistent with some months in the 05/06 spreadsheet and the four months in the 06/07 spreadsheet. As to the wages, Mrs Stariha has divided the $50,000 in wages paid to her by 12 to identify the monthly wages payment of $4,166.67.
236 Having regard to expenses derived from “Research” and the expenses otherwise “Not Listed”, Mrs Stariha adjusted the monthly EBIT calculation set out on Mrs Hart’s spreadsheets to show a new EBIT calculation for each month from November 2005 (from 7 November 2005) to October 2006 (at least, to the cut-off date adopted by Hart Trading for calculating the October income). For four of those months, Mrs Stariha also adjusted the income (January, February, July and October 2006). Mrs Stariha then struck the total EBIT earnings over the period of the revised spreadsheet and compared that figure with Mrs Hart’s figure. Mrs Stariha’s adjusted net profit for the period is $97,707.31 as compared with Mrs Hart’s EBIT earnings for the period of the 2005/2006 and 2006/2007 spreadsheets of $53,805.60. Mrs Stariha’s total adjusted revenue for the period is $173,246.94 as compared with the earlier spreadsheet revenue of $151,512.91 (a difference according to Mrs Stariha’s method of revision as earlier described, of $21,734.03).
237 For the purpose of illustrating Mrs Stariha’s approach, I will set out the statistics drawn from her revised spreadsheet for the months of January, February, July and October 2006 and also show the total for the entire 12 month period the subject of the revision.
January | February | July | October | 12 Month Total November 2005 to October 2006 | |
Income | $8,824.40 | $9,442.40 | $14,180.56 | $14,194.40 | $151,512.91 |
JJ Checking | $10,424.40 | $24,949.65 | $18,147.35 | $14,854.40 | $173,246.94 |
Expenses | |||||
Advertising & Promotions | $927.54 | $927.53 | $927.52 | $9,800.56 | |
Client Gifts & Meetings | $0.00 | $0.00 | $0.00 | $52.50 | |
Computer Expenses | $120.37 | $65.06 | $529.00 | $1,833.08 | |
Incentives for Staff | $90.91 | $340.91 | $0.00 | $1,244.04 | |
Internet | $1.55 | $40.80 | $99.15 | $71.90 | $668.90 |
Interviewing & Reg Expenses | $19.94 | $0.00 | $0.00 | $19.94 | |
Meetings | $0.00 | $0.00 | $0.00 | $310.62 | |
Office Supplies | $0.00 | $5.77 | $13.80 | $885.34 | |
Postage | $0.00 | $0.00 | $0.00 | $11.58 | |
Rent | $606.65 | $679.91 | $888.33 | $888.33 | $9,497.81 |
Repairs & Maintenance | $0.00 | $0.00 | $0.00 | $28.42 | |
Telephone | $311.33 | $468.39 | $928.88 | $546.72 | $6,825.59 |
Travel, Training & Conference | $0.00 | $0.00 | $0.00 | $188.82 | |
Superannuation | $262.13 | $346.15 | $430.82 | $173.08 | $4,859.05 |
Wages & Salaries | $2,912.59 | $3,846.16 | $10,001.02 | $1,923.08 | $61,481.06 |
Total Expenses | $5,253.01 | $6,720.68 | $13,818.52 | $3,603.11 | $97,707.31 |
Net Profit (Loss) | $3,571.39 | $2,721.72 | $362.04 | $10,591.29 | $53,805.60 |
FORECASTS FROM RESEARCH | |||||
Advertising and Promotions | |||||
Seek – Advertising | $700.00 | $700.00 | $700.00 | $700.00 | |
Career One – Advertising | $500.00 | $500.00 | $500.00 | $500.00 | |
My Career – Advertising | - | - | - | - | |
Computer Expenses | |||||
Mailguard (Back ups & service) | $8.17 | $8.17 | $8.17 | $8.17 | |
Avante – Computer Support | $90.00 | - | $90.00 | - | |
Terminal Server – Hire | $16.00 | $16.00 | $16.00 | $16.00 | |
Dataline (17.82) Avente Pre (14.66) | $32.48 | $32.48 | $32.48 | $32.48 | |
Clients Gifts & Meetings/ Incentives for Staff | |||||
Gift Account – per AO | $20.00 | $20.00 | $20.00 | $20.00 | |
Internet | |||||
Internet – Service Office | $70.00 | $70.00 | $70.00 | $70.00 | |
Meetings/Travel Training & Conference | |||||
Meetings (including conferences) | $1,000.00 | - | $500.00 | $1,000.00 | |
Breakfast Series – Promotion | $170.00 | $170.00 | $170.00 | $170.00 | |
Office Supplies | |||||
Printing & Stationery | $50.00 | $50.00 | $50.00 | $50.00 | |
Postage | $5.00 | $5.00 | $5.00 | $5.00 | |
Rent | $888.33 | $888.33 | $888.33 | $888.33 | |
Telephone | |||||
Phone Rental | $40.00 | $40.00 | $40.00 | $40.00 | |
Telephone ($1,000/month usage) | $200.00 | $200.00 | $200.00 | ||
Superannuation | $375.00 | $375.00 | $375.00 | $375.00 | |
Wages/Consultants | $4,166.67 | $4,166.67 | $4,166.67 | $4,166.67 | |
NOT LISTED | |||||
P I Insurance | $200.00 | $200.00 | $200.00 | $200.00 | |
Legal Fees | - | - | - | - | |
Parking | $110.00 | $110.00 | $110.00 | $110.00 | |
Travel | $150.00 | $150.00 | $150.00 | $150.00 | |
Accounting Fees | $125.00 | $125.00 | $125.00 | $125.00 | |
Bank Charges | $10.00 | $10.00 | $10.00 | $10.00 | |
ASIC | $21.00 | $21.00 | $21.00 | $21.00 | |
Total Expenses [comprising “Forecasts from Research” and the items described “Not Listed” | $8,947.65 | $7,857.65 | $8,447.65 | $8,857.65 | |
EBIT – JJ Sales | $1,476.75 | $17,092.00 | $9,699.70 | $5,996.75 | |
EBIT – Col Sales | $3,571.39 | $2,721.72 | $362.04 | $10,591.29 | |
238 In Mrs Stariha’s revised spreadsheet, she also adopts three further columns under the headings “Forecast”, “Provided” and “Variance”. These columns set out the total of the expenses as given or provided to her on both the grey and the blue spreadsheets, on her evidence. That total amounts to $97,707.31. In the “Forecast” column, Mrs Stariha sets out the total forecast expenses arising out of her discussions with Ms Moseley and the total of those expenses amounts to $97,459.80 with the result that there is a variance between the two categories of expenses of only $247.51. The EBIT earnings according to Mrs Hart’s spreadsheets of income and expenses amount to $53,805.60. The EBIT earnings according to Mrs Stariha’s revised spreadsheet having regard to the “Forecast” expenses, the “Not Listed” expenses and the revisions to the income for the months of January, February, July and October 2006 amount to $75,787.14 (JJ checking income of $173,246.94 less expenses based on the Moseley discussions, of $97,459.80). I have illustrated Mrs Stariha’s revised spreadsheet by reference to the above four months but the same approach is reflected for each of the 12 months from November 2005 up to and including the cut-off point in the month of October 2006 (across two financial years).
The steps Mrs Stariha says she took in relation to the revised spreadsheet
239 Mrs Stariha says that on 19 October 2006 she sent an email to Mrs Hart attaching the revised spreadsheet. In the email, Mrs Stariha says that she set out the information she was seeking from Mrs Hart concerning the changes she had made. On a date between 19 October 2006 and 23 October 2006 (the fourth meeting), Mrs Stariha says she had a meeting with Mrs Hart at the Hart Trading Office at Level 12, Emirates House, Brisbane. Mrs Hart and Mrs Stariha were the only persons present.
240 Mrs Stariha says she asked Mrs Hart what she thought of the revised spreadsheet and Mrs Hart told her that “the figures were very detailed and that they look right” (para 24). Mrs Stariha says that Mrs Hart asked her whether she wanted Mrs Hart “to get her bookkeeper to do up the figures for [her]” (para 24) and Mrs Stariha told Mrs Hart that “if [Mrs Hart] says that [the] revised figures are correct then what was the point of having her bookkeeper do them up for me” (para 24). Mrs Hart asked Mrs Stariha how she was feeling about the potential sale. Mrs Stariha says she told Mrs Hart that she had asked her accountant about buying the business and had been told that it was “overpriced”. Mrs Stariha says she told Mrs Hart that her accountant (that is, Mrs Stariha’s accountant) had said that in his opinion the business was worth between $180,000 and $190,000 “at a push”. Mrs Stariha says she told Mrs Hart that her accountant had said the price had “blue sky” within it and Mrs Hart disagreed and seemed a little annoyed. Mrs Hart told her that if Mrs Stariha was not interested in the business, she would discuss a sale of it with Ms Sarah Vockler and Ms Sheila Rowley. Mrs Hart told Mrs Stariha that the price of the business is “what it is”. Mrs Stariha says that Mrs Hart told her that it was “a good business that does $80,000 EBIT after payment of [Mrs Stariha’s salary] and [Mrs Stariha] was working it anyway” (para 24). Mrs Stariha says she told Mrs Hart that she wanted to continue “looking at the business” (para 24).
241 Mrs Stariha says that after this discussion with Mrs Hart, she started to feel that she was “not looking at the business in the right way” and reasoned that as Mrs Hart had confirmed that “my revised figures were correct” and as those figures showed an EBIT of over “$80,000.00 per year”, the Gold Coast Agency was a “good business”.
242 On 24 October 2006, Mrs Stariha sent Mrs Hart an email, addressing aspects of these exchanges.
Some further documents
243 At this point, it is convenient to return to some of the documents.
244 At 10.34am on 17 October 2006, Mr Lee Stariha sent an email to Mrs Stariha on the subject “JJ’s WORKINGS 2.x1s” which attached spreadsheets for the period November 2005 to October 2006 in relation to earnings and expenses attributable to the Gold Coast business. At 11.34am on the same day, Mr Stariha sent another email with attached workings in spreadsheet form to Mrs Stariha. On the same day at 1.28pm, Mrs Stariha sent an email of the document to her husband’s email address. Mrs Stariha has given oral evidence that she sent some documents to her home because they could not be printed in the office.
245 On 18 October 2006 at 8.22am, Ms Piggott sent an email to Ms Moseley and Agency Owners attaching a document called “Xmas Gifts – Penetration Report” which sets out a list of 401 clients ranked according to earnings with the highest ranked client reflecting the highest earnings down to client number 401. This document was sent by Mrs Stariha to her home email address on the same day.
246 On Wednesday, 18 October 2006 at 12.24pm, Ms Briede (described in her email block as National Projects Manager [FRGPL]) sent an email to Mrs Stariha copied to Mr Davis and Mrs Hart under the subject reference “Franchise Opportunity” making reference to an attachment described as “FR Franchise Applicant – Non Disclosure Agreement 291104.pdf” in which she says this:
Peter has asked me to forward to you our Non Disclosure Agreement in order to release a perusal Franchise Agreement to you. Could you please sign and return to [me] either by fax or scanned email. I will forward a copy of the Franchise Agreement to you upon receipt.
If you have any questions in the meantime, please don’t hesitate to contact me.
[emphasis added]
247 Ms Briede’s email attached a pro forma two page document under the heading “Franchise Applicant – Non-Disclosure Agreement”.
248 On 19 October 2006 at 1.33pm, Mrs Stariha sent an email to Mrs Hart under the subject reference “gc numbers” in which she said this:
I understand that you must be busy with the conference. If you have a chance, can you look at my workings on the figures. Broken it down as best I can. Should I forward a copy to shan [Ms Shannon Price], is this her sort of thing?
If there is anything that you believe that I have forecast incorrectly, please let me know. Can you also confirm that the sales that I mention[ed] yesterday, that I have highlighted in red, if these need correcting. The numbers based on $150k nett look weak.
One question – Pete mentioned on the phone that there is a $70 per head charge for the Commander lines. Melissa didn’t mention that in her email on computer charges. Is that charged? (if so, it is not included in the forecasts)
I just asked the service office to outline the fees so I can audit that, and they will not provide the information. Will chase later.
From these figures I have my business plan ready for the bank. Appreciate your feedback.
Please do not look at my workings thinking that this is a huge concern or I am stressed or worried – I find this enjoyable! I will really appreciate your feedback this is the basis of my business plan, if this under/over prefer to adjust now.
On the GC news side –
Good news is we have priceline in the bank, Mathers replaced …, hopefully another Mathers (tweed) tomorrow for October, two rubellis for October, Versace for October. Best n Less looks like November.
[emphasis added]
249 The reference to “numbers based on $150k nett look weak” is a reference to the total income shown on the two spreadsheets Mrs Stariha says were handed to her, which amounts to $151,492.91.
250 On 20 October 2006 at 9.36am, Ms Briede sent Mrs Stariha an email copied to Mrs Hart and Mr Davis under the subject reference “Perusal Franchise Agreement” in which Ms Briede said this:
Thanks for sending through the signed Non Disclosure Agreement. Please find attached a perusal Franchise Agreement plus a map of the Gold Coast territory (alongside the Brisbane territory).
If you have any questions please don’t hesitate to contact me – it is a big document so you will probably have lots of questions!
[emphasis added]
251 The email attached a document described in the footing as “MASTER Franchise Agreement V14 020806.doc”. The document bears the title “PERUSAL COPY ONLY”. It is a template version of the Master Franchise Agreement showing the map relevant to the Hart Trading Franchise consisting of the Brisbane and Gold Coast territories. On 20 October 2006 at 11.05am, Mrs Stariha sent the document to Mr Stariha’s email address. The schedules set out the term, minimum trading hours, maximum required advertising, royalties payable, insurance requirements, the territory development requirements (Sch 15, in terms of developed, partially developed and new territories), the transfer fee and other information.
252 On 20 October 2006 at 8.39pm, Mrs Hart sent an email to Ms Carolyn Hutt under the subject reference “FW:gc numbers” attaching material described as “GC provided PL v forecasts.xls” in which Mrs Hart said: “Just wondered if we could have an hour again on Thursday to discuss?” The email to Ms Hutt forwarded the email from Mrs Stariha of 19 October 2006 attaching the revised spreadsheet prepared by Mrs Stariha under the reference “gc numbers”.
253 On 24 October 2006 at 7.51pm, Mrs Stariha sent the email to Mrs Hart referred to in Mrs Stariha’s statement. That email is in these terms:
I must apologise on the phone I was exhausted.
I wanted to let you know that I am really happy with the opportunity. I think you have been more than fair & very willing with the information. I guess I wanted to have everything down to a “t”, to get my head around it. I have thought about it in the car on the way home and understand that I cannot understand everything now, it will happen. Studying the franchise agreement to all hours of the morning, is taking its toll.
SO LETS DO IT! $240k less credits as agreed. I am freaking out personally. I am taking Lee and I into debt and that freaks me the most. I believe in the business and myself. I know that the bits I don’t understand will be explained. The bank is fine, the ins and outs of Lee’s needs doesn’t take away from the fact that we have the green light. We will sought that all out on Thursday. Sometimes you can get really bogged down in information and that is us right now. I try to do everything myself, need to rely on the system.
Thanks Col for your support. So let me know what happens next – sign a contract? settlement date you would like? let me know what day are you happy for me to leave the business and go down to Sydney for the day. Thinking next Friday as an idea. So much going on right now on the coast – feel a bit out of order. Trying to put the business first and not my own needs.
I will phone you in the morning.
[emphasis added]
254 Mrs Stariha says that some time between 21 October 2006 and 3 November 2006, Mrs Hart called in to see her at the Frontline office at Kaybank Plaza (the fifth meeting). Mrs Stariha says that at that meeting Mrs Hart handed her a five column document entitled “National Clients” and told her that the document “listed the national clients for whom [she] could make placements if [she] purchased the Gold Coast Frontline Retail Agency” (para 28). Mrs Hart told her that there were 401 clients that Mrs Stariha would have access to if she purchased the business (para 28).
255 Mrs Stariha then addresses in her statement the conduct of FRGPL.
256 It is convenient to deal with those matters before returning to the documents.
257 Mrs Stariha says that in about the first or second week of October 2006 she received a “Draft Franchise Agreement and Disclosure Document” from [FRGPL] by post” [emphasis added] (para 29 of Mrs Stariha’s principal statement). As to this dating, Mrs Stariha gave oral evidence that the dating was incorrect and that she received the documents on or about “the last two weeks of October” (T, p 10, lns 11-13). At para 26 of Mrs Stariha’s responsive statement to a range of other witness statements (dated 6 March 2012), Mrs Stariha says in response to para 19 of Ms Briede’s amended witness statement that Mrs Stariha “did not receive a further Disclosure Document by post from Ms Briede in November 2006”. When giving her short oral evidence-in-chief, Mrs Stariha accepted that she had received what she described as “the second disclosure document” from Ms Briede in the month of November 2006. Mrs Stariha was shown a document which she said she thought was the first Disclosure Document and that she had received two Disclosure Documents. The first document she says she received in the second half of October 2006 and the other in November 2006. The document marked as Exhibit 3 is the document Mrs Stariha believes is “the October one” (T, p 11, lns 9-10).
258 On 6 November 2006, Mr and Mrs Stariha attended a “Discovery Day” at FRGPL’s Head Office at Bondi Junction in Sydney. Mrs Stariha says these things occurred. On arrival they were introduced to Mr Davis, Ms Moseley and Ms Briede. Mrs Stariha thinks that Mr Peter Gleeson was in attendance. The day consisted of a number of sessions. The first session was with Mr Davis. Mr Davis congratulated Mrs Stariha on winning a number of awards at the franchise conference. Mr Davis introduced Mrs Stariha to Mr Gleeson. Mr Davis remarked that Mrs Stariha was thinking of purchasing the Gold Coast Frontline business. Mrs Stariha says that Mr Davis told her that “the best news was that Frontline had a 100% success rate” and although he conceded that this was “a pretty big claim”, he said that Frontline had “never had a franchisee go bad in our network” (para 30). Mr Davis told Mrs Stariha that “his franchisees had highly profitable businesses” and that “Frontline liked to sell the businesses from within as Frontline liked to have a family culture” (para 30). Mr Davis said that he knew Mrs Stariha was thinking about leaving Frontline some time ago and he had spoken to Mrs Hart and told her that she should have spoken to Mrs Stariha about buying the business earlier. Mr Davis told Mrs Stariha that the day was “informal” and she would be spending time with him and someone from each department within the national office for a short time.
259 Mr Davis told Mrs Stariha that Mr Stariha could not be involved in the company taking up the franchise as he would have to submit a CV for approval to be a recruiter.
260 Mrs Stariha says that Mr Davis invited her to ask him any question she wished and in response Mrs Stariha said that she had “only one question which was whether I am paying the right price for the business” (para 33) and at this, Mr Davis laughed and said that the question would be addressed in the afternoon session. Mr Davis said that it appeared to him that Mrs Stariha had “over-prepared”.
261 Mrs Stariha thinks that the next session was with Ms Briede who said that she looked after “everything legal”. Ms Briede said that given the litigious environment it was important to “cover some key points today” including insurances, standards surrounding the privacy of candidates, and Frontline’s policies and procedures. Ms Briede told Mrs Stariha that the franchisee entity must be a new company. A discussion about the trustee status of that entity occurred. Ms Briede invited questions and Mrs Stariha asked her “whether any Agency Owner had any problem with a candidate suing them and she told me that it had never happened” (para 36).
262 Mrs Stariha says that she and Mr Stariha went to lunch with Mr Davis. Mr Davis said that he enjoyed going to the conferences and listening to the stories Agency Owners told about “how much money they are making and the diamonds that the women buy”. Mr Davis told Mrs Stariha that he was proud of the fact that the Frontline business had created “all of that”. Mrs Stariha says that Mr Davis told them that “a number of the husbands of the female Agency Owners didn’t have to work” (para 37).
263 Mrs Stariha says that the session after lunch was with Ms Moseley who said that this would be a good opportunity for Mr Stariha to understand “how the system worked such as replacements and credits” although the session would be “easy” for Mrs Stariha as she already worked in the business. Mrs Stariha says this at paras 39 and 40 of her principal statement:
39. I asked Melissa Moseley how long it takes for a franchisee to receive money from a placement as although I had worked in the Gold Coast Agency, I had never been exposed to the financial side of the business. Melissa Moseley told me that when the client pays Frontline this can be seen on the Frontline database. Melissa Moseley told me that before I received payment for a placement Frontline would deduct the royalty payable to it. Melissa Moseley also explained that the contract expenses such as advertising contracts, Mailguard etc would be deducted by Frontline prior to me receiving the balance of the placement fee. Melissa Moseley explained how replacement warranties and replacement credits would be treated on my purchase of the business from Colleen Hart.
40. Melissa Moseley showed me the different functions with an Agency Owner database as previously as an employee I only had Consultant access to the database. [FRGPL and Mr Davis] have discovered a document entitled “Discovery Day Recollections – M. Moseley” in which Melissa Moseley asserts that she discussed client contracts with me at the Discovery Day. Nothing was said by Melissa Moseley concerning the enforcement of the 7 day payment period contained in client contracts at the Discovery Day.
[emphasis added]
264 Mrs Stariha says that the final session of the day was conducted by Mr Davis with Mr and Mrs Stariha. Mrs Stariha says that in this session “we went through the material that I had brought with me to Sydney including details of my bank loan and agency forecast that I had previously undertaken and general sales report that I had earlier printed from the Frontline database”. As to these discussions, Mrs Stariha says this:
43. Prior to attending the Discovery Day I had prepared a three year projection of the financial performance of the franchised business based on my revised spreadsheet which Colleen Hart had told me was accurate. Peter Davis went through these projections with me and commented to me that I’d gone to a lot of trouble and that I was highly detailed. Peter Davis told me that the figures looked great. Peter Davis pointed to the EBIT figures on my projections and told me that Frontline franchises were highly profitable and that he knew I could produce these figures because I had already done it for Colleen Hart.
44. Peter Davis told me that whatever sales that you make in your first year you add 60% for the second year because this is proven with the Frontline system. Peter Davis said that in the third year of operation you add 50% on top of the second year placements. At this point Lee Stariha disagreed with these high numbers at which point Peter Davis said that if you stick to the system and do what we tell you to do you will achieve those numbers and Julianne’s already doing those numbers and you’ve got nothing to worry about – just stick to the system and you’ll do the numbers.
[emphasis added]
265 A discussion then took place about the value of the Gold Coast Agency. Mrs Stariha says she asked Mr Davis whether he thought the Agency was worth $240,000, and also said that “this was the reason that we wanted to come down to Sydney today” (para 45). Mrs Stariha says that Mr Davis pointed to the general sales report that she had brought to Sydney, printed from the Frontline database and, in particular, the Adelaide sales. Mr Davis told Mrs Stariha that the Adelaide franchise had recently sold for $300,000 although “as it is a capital city the purchase price would be higher than that for the Gold Coast”. Mr Davis told Mrs Stariha that the Darwin franchise was purchased for $240,000 and it had the same sales as the Gold Coast. Mrs Stariha says that Mr Davis pointed to Brisbane and said that the Brisbane franchise was worth $750,000. Mr Davis then “flipped the page and pointed to Sydney” saying that “Sydney has just sold recently for $1.2 Million dollars”. Mr Davis then referred to south-west Western Australia and told Mr Stariha that the franchisee had paid $300,000 for the franchise although the buyer “had paid too much”. Mr Davis told Mrs Stariha that everyone had told the buyer that she was paying too much “but now she’s doing really well”. These contentions are set out at paras 45, 46 and 47 of Mrs Stariha’s principal statement. At para 48, Mrs Stariha says that Mr Davis said this:
… he agreed with the purchase price of $240,000.00 for the Gold Coast agency which he told me was calculated on the basis of three times EBIT. Peter Davis said that small agencies with one person in a serviced office with an EBIT of $80,000.00 would be worth $240,000.00. Lee Stariha asked Peter Davis what we would be able to get for the Gold Coast agency if we wanted to sell it down the track and Peter Davis said it would be worth between $200,000.00 - $300,000.00 because that’s what they sell for.
266 At para 48, Mrs Stariha says that Mr Davis said that Frontline’s experience was that a territory would be developed until the placement fees each year equated to $1.00 per head of population in the territory in question, and as the Gold Coast had a population of 500,000 he expected the Gold Coast Agency “to top out at $500,000 fees per annum”.
Some further documents
267 It is now appropriate to return to the documents.
268 Exhibit 16 is Julstar’s application to the bank for a loan to purchase the Frontline Retail Gold Coast Agency for $240,000 with a settlement date of 30 November 2006. The loan application sets out a description of the business. It describes the arrangement in relation to client guarantees. It sets out the five conditions that attach to the replacement of a candidate. It sets out 13 specific propositions in relation to the Gold Coast business and attaches seven appendices to the loan application. As to the specific matters, Mrs Stariha tells the bank that the Gold Coast business was opened on 1 November 2005 with Mrs Stariha managing the branch and building it up from inception. Gross sales for the first 12 months are said to be $265,957.38 according to a Profit and Loss Statement attached at Appendix 1. Mrs Stariha says, as to that document: “Figures supplied by the vendor”. Mrs Stariha also says: “As the purchaser (Julianne Jones has managed the business, verified that the figures are correct)”. Mrs Stariha also says: “As further proof, Appendix 2 is a printout from the Company data base to confirm the Annual Sales”. Mrs Stariha says that no other support staff are required for the running of the Agency: “just the one recruiter”. She further says that “Appendix 3 outlines the top 400 clients for the last quarter 2006 – 2007”. A “conservative” forecast of sales for three years is attached as Appendix 4 showing projected EBIT earnings over the three years of $504,770.
269 Appendix 1 to the application contains a spreadsheet for the Gold Coast Agency for the period from 7 November 2005 to the end of October 2006. The income (sales) figures set out in that spreadsheet for November 2005 and December 2005 and March, April, May, June, August and September 2006 are the same income figures set out in the two spreadsheets Mrs Stariha says she was given by Mrs Hart at the early October meeting. The income figures in the spreadsheet put to the bank for the months of January and February 2006 are the adjusted figures reflected in the “JJ checking” income line in Mrs Stariha’s revised spreadsheet put to Mrs Hart. The income figures for the months of July and October 2006 are also the adjusted figures reflected in the “JJ checking” income line in Mrs Stariha’s revised spreadsheet, each month adjusted according to the method earlier described.
270 Appendix 2 to the bank application is a Sales Report which is said to have been printed from the Frontline database as confirmatory of sales. The period is described as 1 November 2005 to 30 November 2006. However, the report is dated 8 November 2006 at 8.05am and, in effect, reflects the period from 7 November 2005 to the end of October 2006 which, in turn, is the period covered by the spreadsheet at Appendix 1. Total revenue for the Gold Coast area is said, in the printout, to be $265,957.38 which is the same total set out in the spreadsheet at Appendix 1 under the heading “Gross Sales”.
271 The gross sales figure is calculated in this way. The total value of placements made by the Gold Coast Agency in the above period is $302,830.15. However, credits (being the entitlement of a client to a replacement candidate) amount to $78,077.17 in the period. The value of replacements actually provided (and therefore in partial discharge of the credits) amounted to $41,204.40. On that footing, the total value to the franchisee of the placements in the period is calculated by setting off the total value of the credits ($78,077.17) against the total value of placements ($302,830.15) and then adding the value of the replacements made in partial discharge of the credit obligation ($41,204.40) resulting in the value of placements to the franchisee in the period of $265,957.38. The GST included within sales of $265,957.38 amounts to $24,177.94 (at 1/11th). The royalty payable to the franchisor at 20% of sales of $265,957.38 amounts to $53,191.48. Schedule 13 of the Perusal Copy of the Franchise Agreement describes the royalty as 20% of the amount invoiced to clients (plus GST on the royalty). Total sales at $265,957.38 less GST, less the 20% royalty, amounts to net sales for the period of $188,587.96.
272 Unlike the earlier spreadsheets which simply show the income to the franchisee, Mrs Stariha’s spreadsheet for the period 7 November 2005 to 31 October 2006 shows the gross sales consistent with the Frontline Sales Report printout, the GST, the royalty and the resulting net sales or “income” figure for the period subject to the income adjustment according to the revised spreadsheet for the months of January, February, July and October 2006.
273 Appendix 3 is the list of 401 clients Mrs Stariha says she was given.
274 Appendix 4 consists of the three year forecast.
275 On 1 November 2006, Ms Briede sent an email to Mr and Mrs Hart, copied to Mr Davis concerning the Gold Coast sale. The email attached a Deed of Variation which effected a change to Hart Trading’s existing territory confining the territory to the Brisbane area. Nevertheless, the franchisee would be entitled to the proceeds of sale of the former Gold Coast territory subject to the payment of particular fees on the transaction, to the franchisor. Those fees were set out in the Agreement and Ms Briede’s email.
276 On Thursday, 2 November 2006, Mrs Stariha sent an email to Mr Davis copied to Mrs Hart in relation to the upcoming Discovery Day arrangements on Monday, 6 November 2006. Mrs Stariha told Mr Davis that she had organised to bring to the meetings a range of documents consisting of these things:
- proposed cash flow for first year.
- 3 year business plan (very conservative)
- company documents (the established company which we want to use to purchase)
- proof of funds – 3 months expenses
- proof of loan approval
- solicitor advice. (understand no changes made to the agreement)
- accountant has signed off – P & L from Col.
- information on proposed new office for the Gold Coast and costings. (very glam! and mind you cheaper – will represent the brand beautifully)
If I need anything else that I haven’t thought of, can you let me know? Really looking forward to it!
277 On 3 November 2006, Mrs Stariha had a conversation with her solicitor, Mr Jim Burke, about the Franchise Agreement. Mr Burke made a file memorandum about the conversation in which he says that he had a telephone call with Mrs Stariha in relation to the Franchise Agreement. He says that he “went through the agreement with Julianne” and gave her advice about the agreement and the types of clauses that one would expect to find in such an agreement. Notwithstanding the typicality of those clauses, Mr Burke raised “several issues” with Mrs Stariha including observations in relation to the territory; prohibitions upon changes to a corporate franchisee entity; similar prohibitions in relation to the trustee capacity and the trust of the franchisee entity; the clause 7 arrangements in relation to an assignment of the franchise as stipulated by the franchisor; and the costs and fees associated with the Franchise Agreement.
278 Apart from the Franchise Agreement, Mr Burke gave advice to Mr Stariha in that telephone conversation about the “restrictive covenants contained in the Deed of Confidentiality and Non-competition”. That document is Annexure 6 to the Franchise Agreement. Mrs Stariha told Mr Burke that she was going to Sydney on Monday to discuss the Franchise Agreement with the franchisor and she would contact Mr Burke when back in Brisbane. Hart Trading’s solicitor was to provide a copy of the Business Sale Contract.
279 The agenda document for the Discovery Day on 6 November 2006 sets out a welcome by Mr Davis and sessions by Leanne Johnston (or possibly Peter Gleeson), Ms Briede, Ms Moseley and Ms Browning between 11.00am and 2.30pm.
280 Ms Moseley made a note of her session at the Discovery Day with Mr and Mrs Stariha. Ms Moseley says that she made a presentation on the accounts. Ms Moseley notes that Mrs Stariha felt that some parts of the presentation were for her husband’s benefit as she understood the process by reason of her experience as an existing consultant in the business and this was especially the case in relation to the treatment of fees from placements and the way credits and replacements were processed. Ms Moseley notes that her presentation covers the “guarantee periods and the fact that we rarely enforce the contract clause about replacement guarantee validity if not paid within terms because it gives us leverage to collect the payment especially when the candidate has already left”.
281 On 7 November 2006, Ms Moseley sent an email to Mrs Hart setting out the assessment of the value of warranties in relation to Gold Coast Agency placements. In other words, the value of placements which were subject to the 90 day replacement warranty amounted to $9,006.40 and the value of replacements owing was $8,507.04 with the result that $17,513.44 would need to be paid into the trust account of Frontline as security for those obligations.
282 On 7 November 2006, Mrs Stariha sent an email to Mr Davis, Ms Moseley and Ms Briede in these terms:
This is just a quick email to say thanks for having both Lee and I visit you on Monday. We really appreciate the time you spent with us and your open, honest approach. The information was invaluable and we understand so much more now.
It is easy to take these things for granted, we feel very comfortable and reassured in this process. For you to take the time to answer questions and explain, in person, is a fantastic support.
…
283 On 16 November 2006, Mr Stariha sent an email to Mrs Stariha attaching a document called “gc client list – business development.xls”.
284 On 21 November 2006, the ANZ Bank sent a Letter of Offer to Julstar of a $260,000 facility to Julstar in its own capacity and as trustee for the Julstar Investment Trust for a 25 year term to enable the purchase of the Gold Coast franchise reflecting a repayment commitment of $2,032.26 per month of principal and interest (among other charges and fees).
285 On 23 November 2006 at 4.06pm, Ms Briede sent an email to Mrs Stariha under the subject “Disclosure Document”, marked “Importance: High” in which she said this:
I have just realised that I have not sent you a Disclosure Document! I apologise – too many balls in the air at the moment not unlike yourself!
We are required to issue you with a Disclosure Document as per the Franchising Code 14 days before you sign the Franchise Agreement. It is really just a summary of the Franchise system including our financials for the last 2 years.
I have put a hard copy in the mail for you along with the Franchise Agreement. Please call me if you have any questions.
Everything else seems to be moving along really well. I will get Leanne Johnston to call you in the next few days to arrange a convenient time for you to do AO training.
[emphasis added]
286 On the same day, Ms Briede sent a letter to Mrs Stariha under the reference “FRANCHISE AGREEMENT” in which she said this:
Please find enclosed two (2) copies of the Franchise Agreement and the Deed of Confidentiality and Non Competition for signing.
To execute the agreements please sign where indicated on both copies and initial every page of both agreements. Upon return of both agreements to the franchisor for signing, I will duly return your copy.
I have included a hard copy of the Disclosure Document issued to you on 23 November 2006 and would appreciate it if you could return the signed “receipt” page marked.
As per clause 18.1(f) of the Disclosure Document you are required to enter into the following “other agreements”:
[Five other agreements are identified.]
I have attached a copy of each of these agreements for signing upon execution of the Franchise Agreement. I am waiting on confirmation from Colleen in regard to [the SEEK Contract and the Career One Contract] as to the quota you have agreed on. I will issue these contracts to you electronically in the next few days.
…
[emphasis added]
287 On 24 November 2006, Mrs Stariha signed a receipt document for Julstar in which she acknowledged receipt of an “enclosed disclosure document of 52 pages” on 24 November 2006.
288 At this point it is also convenient to mention some further aspects of Mrs Stariha’s evidence in relation to the Disclosure Document. Mrs Stariha says that the prospect of her purchasing the Gold Coast Agency was first raised with her in September 2006. She says that in the second or third week of October 2006 she received a perusal copy of the Franchise Agreement and a Disclosure Document from FRGPL. Mrs Stariha says that both documents were received by her by post in or about the second or third week of October 2006 (para 165). Mrs Stariha says that when she first consulted Mr Burke from Cleary & Hoare in October 2006 she took the perusal copy of the Franchise Agreement and the Disclosure Document with her to the meeting. Mrs Stariha recalls that she had a “short meeting” with Mr Burke in late October 2006 at which time she provided him with both documents. Mr Burke did not give Mrs Stariha any advice concerning those documents at that time (para 166). At para 75 of her first statement, Mrs Stariha says that she met with Mr Burke on 18 October 2006 and gave him instructions to act in relation to the purchase of the Gold Coast Agency business. Mrs Stariha said she had the Franchise Agreement and the Disclosure Document at this time. She says she gave them to Mr Burke and he said he would look at them and give advice to her about them.
289 Mrs Stariha says that in early November 2006 before she went to Sydney for the Discovery Day she had a telephone conference with Mr Burke in which he provided her with certain advice concerning the documents. Mrs Stariha says that she has read Mr Burke’s diary note of a conversation that he records having had with her on Friday, 3 November 2006 (see [277] and [278]) and she says the contents of the diary note “seems accurate to me” (para 167). Mrs Stariha cannot recall the date of the conversation. She recalls a discussion with Mr Burke about the Territory Development requirements. Mrs Stariha says that after she had received Mr Burke’s advice that day, she collected the Franchise Agreement and Disclosure Document from his office and although she says she is sure that she collected these documents from Mr Burke, Mrs Stariha does not have a “specific memory” of the date when she did so other than that “I know it was prior to the Discovery Day (Monday, 6 November 2006) because I can recall myself reading the Franchise Agreement and the Disclosure Document when I travelled to Sydney with Lee Stariha on the morning of 6 November 2006”.
290 Mrs Stariha says that in late October or early November 2006, she received an email attaching the Franchise Agreement and the Disclosure Document “together with other associated documents” (para 173). Mrs Stariha says she has not kept the email attaching those documents and she cannot be certain who sent her the email. Mrs Stariha says that she did, however, download the documents attached to the email on 16 November 2006. No acknowledgement document was attached to the email.
291 Mrs Stariha says that she received Ms Briede’s email of 23 November 2006 (quoted earlier). Mrs Stariha says that having seen Ms Briede’s observation that Ms Briede had forgotten to send Mrs Stariha a Disclosure Document, Mrs Stariha telephoned Ms Briede and told her that she already had a copy of the Disclosure Document. Ms Briede made no comment in response to that remark. Mrs Stariha says she told Ms Briede that there was no need to send her a new Disclosure Document as she already had the document. Mrs Stariha says that Ms Briede said she would send her the documents by post anyway and that she needed Mrs Stariha to complete an acknowledgement form saying she had received the documents. Mrs Stariha says Ms Briede told her to complete the form “by putting in the date 23 November as the date that I received the documents”. Mrs Stariha says she told Ms Briede that as soon as she received the documents she would complete the acknowledgement form and send it back to her. The acknowledgement form is the document referred to at [287].
292 Mrs Stariha says she received both documents from FRGPL “a couple of days later”. Mrs Stariha thought it a little odd that she would be sent duplicate documents. She telephoned Mr Burke and told him that the franchisor had sent her the Franchise Agreement and the Disclosure Document again. Mr Burke said that he wanted Mrs Stariha to check whether there were any differences between the two sets of documents. Mrs Stariha says Mr Burke told her to check “the two sets of documents side by side and to make sure that they were identical” (para 175). Mrs Stariha says she did that carefully page by page and found they were “identical to each other” (para 176).
293 Mrs Stariha cannot say with any confidence that she checked the title page of each Disclosure Document or the “version code” of each Disclosure Document that appeared on each document. Mrs Stariha says she then telephoned Mr Burke and told him that she could not find any differences in the two sets of documents. She says that Mr Burke told her that she was welcome to bring in both sets of documents for him to check. Mrs Stariha told Mr Burke that as she had already decided to buy the franchised business, she did not think there was any point in doing so (para 176).
294 Mrs Stariha says that she has not retained a copy of the Disclosure Document provided to her in early October by FRGPL. Mrs Stariha says she recalls “having a cleanup of files in my Pivotal Point serviced office prior to moving to my new office at Scarborough Street, Southport”. Mrs Stariha says that her “best recollection” is that she discarded the Disclosure Document at that time (para 178).
295 On 28 November 2006 at 10.08am, Mrs Stariha sent an email to her husband’s email address under the subject “your work for today!” attaching another version of the master copy Gold Coast client list described as “business development.xls”. In that email, Mrs Stariha said that the attachment was an up to date file for Mr Stariha to work with. He could start with each shopping centre in the list. Mrs Stariha also observed that she and her husband would need to look at the websites for the top 50 clients to see how many outlets they had in the territory. This master client list is a spreadsheet which sets out the clients in one column and across the spreadsheet the various shopping centres such as Sanctuary Cove, Robina etc and against each client the column is marked to identify whether the client has a site in the relevant shopping centre. This document is a more complete version of the earlier document mentioned at [283].
296 On the same day at 10.57am, Mrs Stariha sent an email to Mr Stariha confirming the arrangements in relation to the serviced office resulting in similar financial arrangements to Kaybank Plaza. Mrs Stariha was required to pay an initial amount that day. Mr Stariha was asked to transfer $5,000 to Mrs Stariha’s credit card to enable the payment to be made.
297 On the same day at 11.42am, Mr Stariha sent an email to Mrs Stariha in relation to the shopping centres in which he said that he had found the best shopping centre sites although he just needed to assemble the information in the spreadsheet. At 12.10pm, Mr Stariha sent an email to Mrs Stariha suggesting that paying the amount in relation to the service office by cheque the following day would “keep things clean”. Mr Stariha asked a number of questions about particular clients in the various shopping centres. On the same day at 1.02pm, Mrs Stariha sent an email to Mr Stariha suggesting that the completion of the spreadsheet in relation to the shopping centres might be done by them together notwithstanding that the task apparently seemed a very substantial one to Mr Stariha.
298 On 7 December 2006, Mrs Stariha sent to her husband’s email address a document describing the Frontline business, its presence in various cities, the service levels and the elements of the 90 day replacement guarantee. On the same day, Mrs Stariha sent to her husband’s email address an email attaching her CV which represented the last version of her CV incorporating her role with Frontline from August 2005.
299 On 8 December 2006, Hart Trading and Julstar entered into a business contract for the purchase of the Frontline Retail Gold Coast business. The contract would be completed that day. On 8 December 2006, Ms Moseley sent an email to Mrs Hart copied to Ms Briede congratulating Mrs Hart on the sale. The email confirms that $199,754.16 would be transferred to Mrs Hart’s account with Frontline on 11 December 2006 reflecting the net amount after setting aside $23,651.82 for outstanding warranties which might fall in and $8,894.02 for replacements owing. Particular fees were also payable by Hart Trading. Also on 8 December 2006, Julstar entered into a Franchise Agreement with FRGPL for the Gold Coast territory. The franchise would commence on 11 December 2006 at the Kaybank Plaza office. The loan funds from the ANZ Bank were paid into Julstar’s account on 4 December 2006 with settlement effected on 8 December 2006 by a drawdown of $240,028.00.
300 It is now necessary to return to Mrs Hart’s evidence.
PART 5 – THE FURTHER EVIDENCE OF MRS HART
301 At [177], I note Mrs Hart’s evidence that she and Mrs Stariha agreed in September 2006 that in their next meeting in October 2006, Mrs Hart would supply Mrs Stariha with profit and loss figures for the Gold Coast Agency. At para 96, Mrs Hart says that in preparation for the October 2006 meeting, Mrs Hart calculated the purchase price for the business and she did so on this basis.
302 First, having regard to her experience in the purchase of the Brisbane Agency from Ellis Trading, the value of the business could be calculated “from a combination of the (EBIT), and the salaries paid to the Franchise”. Mrs Hart said that over the 11 months the Gold Coast Agency had operated, the EBIT was approximately $50,265.44 and Mrs Stariha’s salary had been $50,000 plus superannuation per annum. Mrs Hart rounded those figures down to $100,000.
303 Second, Mrs Hart considered that a “number of multipliers” could be used to calculate the “actual value” of the business and when she had purchased the franchise from Ellis Trading, Karen Ellis had told her that a multiplier of three was applied to a figure based on EBIT earnings plus salaries. Mrs Hart says that she understood from advice given to her by Frontline’s Head Office that applying a multiplier of three to EBIT earnings plus salaries was “the national standard” and was the “normal multiplier” used in calculating the purchase price for a sale of a business. Mrs Hart said this at para 96(b)(i):
At the time of negotiating with Karen Ellis to purchase the Brisbane Agency, Peter Davis had told me multiplying the EBIT by 3 was appropriate. Karen’s accountant, Bruce Dart, and my accountant Gavin Johns from Hirn Newey had also told me to use a multiplier of the EBIT at the time of Hart Trading’s purchase from Ellis Trading where the EBIT included the salaries. I have now sold two businesses where the EBIT included the salaries.
[The underlining as quoted is always Mrs Hart’s addition to her statement reflected in her amended statement]
304 Mrs Hart considered that because the Gold Coast Agency had only been operating for 12 months and did not have the potential to generate the same turnover as the Brisbane franchise, she thought that a multiplier of three was too high as $300,000 was “too much” in her opinion and she did not think that Mrs Stariha would pay that amount. Mrs Hart said that she would not have paid that amount to purchase the business. Mrs Hart gave evidence that “From our discussions during September 2006 and then on 5 or 6 October 2006, I knew that Julianne had told me that she would have to borrow money not only for the purchase of the business but also for cash flow purposes”. As to the calculation of the purchase price, Mrs Hart also said this at para 96(b)(v) and (vi):
(v) In addition, I liaised with Peter from Frontline. Peter’s advice was that the best way to calculate the price was to apply a multiplier to the EBIT. He suggested that I decide the money I ultimately want to generate from the sale and then see if this was achievable. I cannot recall the precise date of this conversation, but it was shortly before I set the price and was before I met with Julianne on 5 or 6 October 2006.
(vi) After much consideration I decided to apply a multiplier of 2.5 to the $100,000 EBIT I had calculated. I then discounted this by $10,000 to acknowledge Julianne’s contribution to the establishment of the Franchise on the Gold Coast. This gave a purchase price of $240,000.
305 In addition, Mrs Hart took into account the value of replacement credits which would be deducted from the sale price in any event and the value of placements under warranty (see Ms Moseley’s email of 7 November 2006, [281]). Further, Mrs Hart took into account the legal fees and training fees Hart Trading would have to pay. Having regard to all of these factors, Mrs Hart decided that she wanted to receive $200,000 from the sale of the business which she thought a “fair price” based on her “general knowledge of talking to other Frontline franchisees and Pete [Davis]”. Mrs Hart says she selected a price of $240,000 as that price would result in her receiving $200,000 after all the adjustments and the costs of completion.
306 Ms Moseley’s email of 8 December 2006 identifies a net settlement sum paid to Hart Trading’s account of $199,754.16.
The meeting of 5 October 2006 or 6 October 2006
307 As to the October meeting, Mrs Hart says this.
308 Mrs Hart says that on 5 October 2006 or 6 October 2006, she and Mrs Stariha met at the Gold Coast Agency office to discuss the purchase price. Mrs Hart thinks it was one of those dates by reference to Ms Price’s email of 5 October 2006 at 3.59pm attaching two files in the form of spreadsheets under the titles “Gold Coast 05-06 without graph.xls” and “Gold Coast 06-07.xls”.
309 On 10 October 2006, Mrs Hart forwarded that email to her bookkeeper, Ms Hutt, together with the attachments (see [224], [227] and [228]). Mrs Hart says that she took Ms Price’s two attachments to her meeting with Mrs Stariha for the purposes of the discussion. Mrs Hart describes the figures set out in the spreadsheets for the 2005/2006 financial year and the 2006/2007 financial year as the “Raw Profit and Loss” figures. Mrs Hart suggests that Ms Price would have prepared those spreadsheets based on the MYOB profit and loss statistics printed out by Ms Hutt each fortnight. Ms Price prepared the spreadsheet attachments as she was familiar with using spreadsheets. However, Mrs Hart says that Ms Hutt was the individual who actually entered data into the MYOB program for Hart Trading. As noted earlier at [221], the spreadsheets presented to Mrs Hart by Ms Price on 5 October 2006 and sent by Mrs Hart to Ms Hutt on 10 October 2006 contain essentially the same data as the spreadsheet at [189] except for the month of May, as to the 2006 financial year. The 2006/2007 financial year shows different income statistics for August and September 2006 as compared with [191], and for the month of October 2006, however, the spreadsheet shows no income at all. The document Mrs Stariha believes was given to her by Mrs Hart shows the statistics set out at [191].
310 Mrs Hart says that she did not give Mrs Stariha a copy of the “Raw Profit and Loss” statistics (being copies of the two spreadsheets attached to the above emails) at the meeting as Mrs Hart says she only had one copy with her at the meeting and she made notes for herself on that copy (para 100).
311 As noted earlier at [224], Ms Price’s attachments are described as “GC Agency 2005/2006” and “GC Agency 2006/2007” and in Mrs Hart’s email to Ms Hutt she describes them as the “P&Ls for the Gold Coast” taken from the monthly printouts produced because Mrs Hart had “now started negotiations with Mrs Stariha” and needed to forward the Profit and Loss Statements for the two periods to Mrs Stariha as soon as possible. At para 100, Mrs Hart says that the “final Profit and Loss Statement for the 2006/2007 financial year” was not prepared by Hart Trading’s accountant until 30 June 2007 and Mrs Hart says that she “never gave Julianne the actual final Profit and Loss Statements for the Gold Coast Agency, because they included the figures for Brisbane and would have been meaningless for the purposes of assessing the Gold Coast Agency’s performance” [emphasis added] (para 101).
312 Mrs Hart says that although Mrs Stariha gives evidence that Mrs Hart gave her a copy of the blue spreadsheet document and the grey spreadsheet document, as Mrs Stariha describes those two documents, Mrs Hart says she did not give Mrs Stariha those documents and says “in fact I did not give her any document to keep at our meeting” [bold emphasis added] (para 103).
313 Mrs Hart believes this to be so for four reasons.
314 First, Mrs Hart says she took the “Raw Profit and Loss [spreadsheets] home because I had written Julianne’s queries about expenses onto it”. Mrs Hart says that she no longer has a copy of “that document” because at that time she “did not think that it was important to keep [it]”. Although Mrs Hart talks about a document in the singular, the attachments Mrs Hart took to the meeting, on her evidence, comprise two documents being Ms Price’s spreadsheet for the 2006 financial year and a spreadsheet for the months of July, August and September of the 2007 financial year.
315 Second, Mrs Hart says the “Raw Profit and Loss statement as attached in softcopy form” to Ms Price’s email of 5 October 2006 is pink and blue/purple, not blue and grey. The versions in evidence attached to the email appear to be blue background spreadsheets with large parts of the columns in white and the figures in the “Total Expenses” and “Net Profit (Loss)” rows shaded purple, although the shade of purple might realistically be described as light grey as well. However, whatever description that shade might carry, the grey spreadsheet in evidence referred to by Mrs Stariha is plainly a grey background colour (and significantly different to the purple shade) with the Total Expenses and Net Profit (Loss) rows in a clearly grey colour.
316 Third, Mrs Hart says she did not have a colour printer in the Brisbane office at that time and “could not have provided Julianne with a colour version of that document”.
317 Fourth, the Raw Profit and Loss statement for the 2006/2007 financial year does not contain any income for October 2006 with the income finishing at the end of September 2006. Mrs Hart says that that makes sense to her as the spreadsheet was prepared by Ms Price on 5 October 2006 and thus it contains no placement fees for October 2006.
318 Mrs Hart believes that Mrs Stariha is confused about the spreadsheets and that the likely position is this.
319 Mrs Stariha has printed copies of the spreadsheets attached to Mrs Hart’s email of 13 October 2006 (see [224] and [225]) and believes that those documents were the documents Mrs Hart took to the early October 2006 meeting. Of course, Mrs Stariha and Mrs Hart disagree, in any event, about whether spreadsheets were handed to Mrs Stariha at the early October meeting. Mrs Hart says that the spreadsheet attached to her email of 13 October 2006 for the 2006/2007 financial year shows income for October 2006 of $14,194.40 which is the same amount shown on Mrs Stariha’s “grey spreadsheet”. However, Mrs Hart says that based on her review of the placement fees recorded in the Frontline database, she has identified that Hart Trading generated income for the month of October prior to 6 October 2006 of $8,870.31. Mrs Hart says that according to the Frontline database, Mrs Stariha placed three candidates with clients prior to 6 October 2006. By 6 October 2006, however, the franchisee had not generated income from the Gold Coast Agency of $14,194.40. Mrs Hart puts in evidence three screen shots from the Frontline database which are said to show the placement details for the three candidates Mrs Stariha placed in October 2006. The details are said to be these. Candidate 1 was placed on 29 September 2006 and commenced in the position on 9 October 2006. Candidate 2 was placed on 21 September 2006 and commenced in the position on 9 October 2006. Candidate 3 was placed on 15 September 2006 and commenced in the position on 16 October 2006. It is not necessary to mention the names of the individuals. Mrs Hart says that the placement fee is payable by the client “with reference to the date that the candidate starts their job, which is the date that the income from a client accrues on the profit and loss statement” [emphasis added] (para 108). Mrs Hart says it follows that the placement fees referable to the three individuals had not accrued by 6 October 2006 and that prior to 6 October 2006 only $8,870.31 in income had accrued. The 2006/2007 spreadsheet, however, that Mrs Stariha says she was handed in early October by Mrs Hart shows, on Mrs Hart’s view of it, income which had not accrued by 6 October 2006. Mrs Hart’s statement, however, does not show the precise composition of the amount of $14,194.40 (the candidates, dates of commencement etc) as accrued as at 13 October 2006.
320 Frontline’s contract with the client conditions the client’s entitlement to the replacement guarantee upon (among other things) payment of the fee within seven days of the candidate’s commencement with the client which suggests, in principle, that Frontline was looking to receive payment from the client within seven days. Mrs Hart’s general statement that the placement fee was payable “with reference to the date that the candidate starts their job” [emphasis added] might be intended to convey that the placement fee became payable on the date of the candidate’s commencement in the position. In any event, in the three examples for Candidates 1, 2 and 3 in evidence at CTH29, the candidates commenced in their placement positions on 9 October 2006 in two cases and on 16 October 2006 in another. The placement fee at the earliest became payable on those dates.
Further aspects of the early October 2006 meeting according to Mrs Hart
321 Mrs Hart says that at the early October 2006 meeting she discussed with Mrs Stariha the overheads and expenses in relation to what she calls the raw profit and loss figures reflected in the spreadsheets. Mrs Hart says that Mrs Stariha was “very interested in how much it cost to run the business” [emphasis added]. Mrs Hart believed that Mrs Stariha was used to interpreting profit and loss statistics and gave evidence that Mrs Stariha had said she continued to prepare the profit and loss statements for Mr Stariha’s business.
322 As to the sales, Mrs Hart says that she said the following things to Mrs Stariha when each of them were looking at the so-called raw spreadsheets.
323 First, the sales represented what was “billed in placements (that is, cash due in) not replacements, less 10% GST and then less 20% in fees paid to Frontline as franchisor” (para 111(a)). Second, the profit and loss statements were prepared on “an accrual profit and loss, not a cash accrual profit and loss”. Mrs Hart says that she explained that the income of the franchisee was “accounted for when it was due (that is, when a client was supposed to pay the placement fee), not when cash was actually received” [emphasis added] (para 111(b)). Third, if the profit and loss was being calculated at the end of October 2006 rather than the beginning of that month, the EBIT would improve as Hart Trading was expecting a busy month “based on the placements that were coming through from clients” (para 111(c)).
324 As to the expenses, Mrs Hart says that she and Mrs Stariha discussed the expenses “line for line” and Mrs Stariha had some questions including “why the wages for September were lower than prior months”. Mrs Hart says she made a note of these questions on her hard copy of the raw profit and loss statements and told Mrs Stariha that she would discuss Mrs Stariha’s questions with her bookkeeper and get back to her. Mrs Hart also says she told Mrs Stariha that she would need working capital requirements “equivalent to three months of expenses”.
325 As to the purchase price, Mrs Hart says she discussed an amount of $240,000. She says she told Mrs Stariha that she had used a multiplier of 2.5 and should Mrs Stariha elect not to purchase, Mrs Hart would list the Gold Coast franchise for sale at $300,000. Mrs Hart says she explained that the replacement credits and warranties would be deducted by Frontline from the purchase price. Mrs Hart says she explained that certain placements were on probation for the purposes of the three month warranty protection and those monies would be held on trust by Frontline from the date of settlement. The monies would be distributed to Mrs Stariha if the placements fell out, but if not, the monies would be transferred to Mrs Hart.
326 Mrs Hart says that she and Mrs Stariha “agreed that the figures for October 2006 would increase given that we were only at the beginning of October 2006”. This seems an odd way to describe the discussion in early October about the October 2006 figures. In this early October meeting, Mrs Hart says that she had with her spreadsheets which did not show any figures for October 2006 at all (being Ms Price’s spreadsheets). Perhaps Mrs Hart is intending to convey that whatever the October figures might have been as at 5 October or 6 October 2006, they would inevitably increase by the end of the month. The October sales result was $26,695.87 reflecting a margin of $20,602.73.
327 Mrs Hart also says that during this early October meeting she reminded Mrs Stariha that she needed to take account of additional fees and expenses that might be charged by Frontline such as insurance expenses. Mrs Hart says she told Mrs Stariha to “factor repayments and interest into her calculations” since she was proposing to borrow money to purchase the business.
Events subsequent to the early October 2006 meeting
328 Mrs Hart says that she did not meet again with Mrs Stariha in person to negotiate or discuss the sale of the business. She says they met for a casual lunch at the Gold Coast prior to the settlement in December 2006. All the details of the transaction “had been worked out by that time”.
329 However, Mrs Hart says that between 6 October 2006 and 13 October 2006, Mrs Stariha made telephone calls to Mrs Hart to chase up obtaining electronic copies of the two spreadsheets.
330 On 10 October 2006, Mrs Hart sent her email to Ms Hutt requesting her to respond to the questions Mrs Stariha had asked “and to prepare the profit and loss statement” (para 123). Ms Hutt was to come into the Brisbane Agency office on 12 October 2006 in accordance with her normal routine. Mrs Hart says that on 12 October 2006 she and Ms Hutt met and addressed Mrs Stariha’s questions “about expenses on the Raw Profit and Loss” statements. Mrs Hart says that after this meeting on 12 October 2006, she requested Ms Price to amend the raw profit and loss statements to “include the ‘amended’ tabs into the spreadsheet”. Mrs Hart describes this amended spreadsheet as the “Profit and Loss Spreadsheet” (that is, no longer raw data) so produced by Ms Price. Mrs Hart says that this step was taken so she could show Mrs Stariha the way in which Mrs Stariha’s questions from the early October meeting had been answered.
331 The Profit and Loss Spreadsheet so produced showed the combined EBIT for the 30 June 2006 financial year and part of the 2006/2007 financial year at $53,805.60. Mrs Hart also says that she directed Ms Price to prepare the amended profit and loss spreadsheet and provide Mrs Stariha with the “Agency Forecast” template so that Mrs Stariha could enter any additional overheads she thought she might incur, into the forecast profit and loss statement. Mrs Hart says that on 13 October 2006 she sent a copy of the two spreadsheets, as amended by Ms Price (up to the point of trading for the month of October 2006), to Mrs Stariha as well as the “Agency Forecast” template. Moreover, Mrs Hart says that the amended profit and loss spreadsheet prepared by Ms Price by this process, contained “pop up dialogue boxes” that would be revealed when the cursor hovers over each of the figures in the spreadsheet. These boxes contain additional information “that answered Julianne’s queries” (para 129), an example of which is said to be the July advertising and promotions expenses for the 2007 financial year which reveals expenses of $1,085.49 and the box comments that the advertising cost should be approximately $927.69. The pop-up boxes are not displayed when the profit and loss spreadsheet is printed. They only appear electronically when the cursor hovers over the relevant item.
Mrs Hart’s responses to Mrs Stariha’s contentions
332 Mrs Hart in her amended statement seeks to address a number of the contentions made by Mrs Stariha in her detailed principal statement. It is convenient to now contextually mention Mrs Hart’s position on these various contentions.
333 First, Mrs Hart says that Mrs Stariha was the “sole Recruitment Consultant” in the Gold Coast Agency and thus she was required to fill out each placement form for each candidate and fax it to Frontline’s Head Office in Sydney for entry of the data into the system. Mrs Stariha therefore had to review each placement contract with the client and calculate the fee the Gold Coast Agency would receive from that placement. It follows for Mrs Hart that Mrs Stariha must have been familiar with the placement revenue being earned by the Gold Coast Agency from 7 November 2005 up until the early meeting on 5 October or 6 October 2006.
334 Second, Mrs Hart denies describing the Frontline Agency as a “cash cow”.
335 Third, Mrs Hart denies saying that the Gold Coast Agency would be “highly profitable in the future”.
336 Fourth, Mrs Hart denies saying that the Gold Coast Agency earned an EBIT of $80,000 in the previous year (November 2005 to October 2006) or that Mrs Stariha would achieve EBIT earnings of $80,000 plus a wage of $50,000. Mrs Hart contends that the profit and loss spreadsheet sent to Mrs Stariha by email on 13 October 2006 sets out Mrs Hart’s understanding of the EBIT earnings for the 2006 financial year and those EBIT earnings for the 2007 financial year up to the point in time of the preparation of the spreadsheet, which Mrs Hart understood to be approximately $54,000.
337 Fifth, Mrs Hart denies saying to Mrs Stariha that she would receive the benefit of $10,000 worth of initial training from Frontline. Mrs Hart says she understood, based on her discussions with Frontline Head Office representatives, that she would pay $5,000 for Mrs Stariha’s training to change from being “an agency manager to [being] an agency owner”.
338 Sixth, Mrs Hart denies saying to Mrs Stariha that “every Frontline franchisee is successful” or that “no Frontline franchisee had ever failed”. Mrs Hart says that she did not have access to relevant data which would enable her to make such a statement.
339 Seventh, Mrs Hart denies saying to Mrs Stariha that she would “only need to work 40 hours per week” in the Gold Coast Agency. Mrs Hart said that she knew running a Frontline business to be hard work and in Mrs Stariha’s case she worked in excess of 40 hours per week as Agency Manager at the Gold Coast.
340 Eighth, as to the income position for the Gold Coast Agency, Mrs Hart says that she told Mrs Stariha that the income was calculated on the basis of the sales being the placement fee less 10% GST and less 20% as a franchise fee payable to the franchisor.
341 Ninth, Mrs Hart says that she told Mrs Stariha that the accounting method adopted by Frontline was “an accrual based accounting method” and that “the cash component of sales was put into the spreadsheet”. Mrs Hart contends that she told Mrs Stariha that “the replacements” would not be included in the income for the Agency as “the agency would not receive any extra money” by supplying a replacement.
342 Tenth, Mrs Hart denies saying to Mrs Stariha that her bookkeeper had made “errors”. Mrs Hart says that when she received Mrs Stariha’s email of 19 October 2006 [248], she was “shocked”. Mrs Hart says Mrs Stariha was the one who brought discrepancies in the sales figures to her attention and that Mrs Stariha “only had queries about the expenses, not about the sales figures” [emphasis added]. This caused Mrs Hart to take up the issue with Ms Hutt, not Hart Trading’s “accountant”.
343 Eleventh, Mrs Hart says that she did not discuss the profitability of other Frontline franchisees with Mrs Stariha, and that Mrs Stariha “could see the sales figures of any other agency on the Frontline Database” just as Mrs Hart could see that data but Mrs Hart did not know “how profitable those other franchises were”. Mrs Hart denies discussing agency owner conferences with Mrs Stariha. Mrs Hart denies telling Mrs Stariha that “everyone was successful and no one ever struggled”.
344 Twelfth, Mrs Hart says that the meeting Mrs Stariha refers to at the Kaybank Plaza Shopping Centre Coffee Shop between 13 October 2006 and 18 October 2006 “did not happen”.
345 Mrs Hart says that during this period she was very busy preparing for a conference in Perth on 19 October 2006 and she left for Perth on either 18 or 19 October 2006. In dealing with Mrs Stariha’s contentions about the contended conversation at the Coffee Shop, Mrs Hart says this. Mrs Stariha never discussed with Mrs Hart a concern she is said to have had about “the top line sales” or “how to calculate the top line”. Mrs Hart did not say to Mrs Stariha that “it [is] about the money in your bank, not what’s on your database” and Mrs Hart denies telling Mrs Stariha to “add back the replacement credits”. Mrs Hart says that apart from not making that remark, she would have had no reason to make such a remark because the provision of a replacement candidate to a client in the event of a candidate leaving the client within the replacement guarantee period “is not cash actually coming into the business” and discharging a replacement obligation does not “represent an actual increase in revenue”. Mrs Hart denies telling Mrs Stariha that she would “check the figures” for her and says that she knew Mrs Stariha was undertaking her own “due diligence” but did not know that Mrs Stariha was undertaking her own “line by line comparison”. Mrs Hart says that she wanted Mrs Stariha to gather together the relevant information and Mrs Stariha “could come back to me with queries”. However, Mrs Hart says she thought that Mrs Stariha “had to be comfortable with her own calculations” and that if Mrs Stariha had asked Mrs Hart to check the figures, Mrs Hart would have done so, “especially as it [doing so] may have meant the difference between selling the business to her and not selling it”. Mrs Hart denies telling Mrs Stariha that “the Gold Coast Agency had always done a minimum of $11,000 per month”. As to these matters, see para 134 of Mrs Hart’s amended statement.
346 Thirteenth, as to the contended meeting between Mrs Stariha and Mrs Hart between 19 October 2006 and 23 October 2006 at Hart Trading’s office in Emirates House in Brisbane, Mrs Hart says that she has no recollection of a meeting with Mrs Stariha in Hart Trading’s office in this period. Mrs Hart says that she was in Perth for the National Frontline Conference on 19 and 20 October 2006 and she stayed there for a further few days to celebrate her daughter’s birthday. Mrs Hart returned to Brisbane on 23 October 2006 and doubts whether she would have gone into Hart Trading’s office to meet with Mrs Stariha on that date. Mrs Hart denies that Mrs Stariha told her that her accountant was of the opinion that the Gold Coast Agency was “only worth $180,000 or $190,000”. Mrs Hart says that “we never talked about the value of the business as she saw it, either by phone or in [person]” [emphasis added]. Mrs Hart says that at no time did she know that Mrs Stariha “had the business valued”. As to these matters, see para 135 of Mrs Hart’s amended statement.
347 In her amended statement, Mrs Hart comments upon Mrs Stariha’s loan application documentation submitted to the ANZ Bank. Mrs Hart says that although the application document suggests that Mrs Hart supplied the profit and loss statement attached at Appendix 1, the only profit and loss spreadsheet(s) provided by Mrs Hart to Mrs Stariha were the spreadsheets attached to her email dated 13 October 2006 [226] and [227]. Mrs Hart says that she does “not know where Mrs Stariha obtained the statement from” and in her view the EBIT recorded in the profit and loss statement provided to the ANZ Bank appears to Mrs Hart to be “over inflated at $97,864.66”. Mrs Hart says that the profit and loss statement records EBIT earnings plus salaries of $157,636.66 as compared with EBIT earnings plus salaries of approximately $100,000 as recorded in Mrs Hart’s spreadsheets. Mrs Hart says that in formulating a profit and loss statement, the income should not be calculated on the basis of gross sales which include GST or the amounts payable to the franchisor as a royalty, and Mrs Stariha’s Annexure 1 document does just that.
Mrs Hart’s understanding of the exchanges with Mrs Stariha in relation to Mrs Stariha’s revision to the spreadsheets [208] to [219] and [237] and [238]
348 As to these matters, Mrs Hart says this.
349 On about 18 October 2006, Mrs Stariha contacted Mrs Hart by telephone and said that she had reviewed the profit and loss spreadsheets and the Frontline Sales Report. Mrs Stariha told Mrs Hart that four of the months had been “understated” as to the income when compared with the Sales Report. Mrs Stariha told Mrs Hart that the profit and loss spreadsheet Mrs Hart had provided to Mrs Stariha understated the income by about $21,734.03 and that although the income figures for the months of May and June were, in fact, different to the figures Mrs Hart had identified, the discrepancies in each month “balanced each other out”, overall.
350 On 19 October 2006, Mrs Hart received Mrs Stariha’s email attaching the revised workings, as earlier discussed [248].
351 Mrs Hart says that on 20 October 2006, Mrs Stariha contacted her by telephone and repeated what she had said to her on 18 October 2006. Mrs Hart says that she had not had a chance to “properly look at the JJ Spreadsheet” until then. Mrs Hart says that in this discussion, Mrs Stariha said that she had highlighted on the revised spreadsheet the figures for the four months where the sales appeared to be different to the figures recited on Mrs Hart’s earlier spreadsheets. Mrs Hart says that she and Mrs Stariha “went through the figures line by line”. Mrs Hart says that she saw from the Frontline Sales Report and another document called the “Historical Commission Report” that in February 2006, the sales were $34,545.57. Mrs Hart noted that Mrs Stariha’s revised figure for the month of February 2006 was $24,949.65 represented by sales, less 10% for GST, and less 20% being the franchisor’s franchise fee. The variance between Mrs Stariha’s figure of $24,949.65 and the figure recited in Mrs Hart’s earlier spreadsheet of $9,442.20 was $15,507.45 and represented 71% of the understated amount for the four months in issue.
352 In this discussion, Mrs Hart says that she told Mrs Stariha that this discrepancy “was weird” and asked Mrs Stariha for other examples. Mrs Hart says that it was clear to her that the amount recited in “my Profit and Loss Spreadsheet was understated”. Mrs Hart and Mrs Stariha, in the course of this conversation, “worked through each of the other three months” that Mrs Stariha had queried as Mrs Stariha “could directly recall the sales that she had made in those months”. Mrs Hart says that as trading for the month of October had not concluded and the variance was only $660.00, “we did not bother working through those figures”. Mrs Hart says she told Mrs Stariha that the variance in sales might have been attributable to Ms Hutt incorrectly coding some of the Gold Coast Agency sales by Hart Trading as Brisbane Agency sales and thus some of the Gold Coast Agency sales were missing from the spreadsheet.
353 Mrs Hart says that in this conversation she asked Mrs Stariha whether she wanted Mrs Hart “to get Carolyn [Hutt] to revise the Profit and Loss Spreadsheet”. Mrs Hart says that she assured Mrs Stariha that the asking price for the business would “remain the same, even if any potential discrepancies increased the EBIT, and thereby increased the business worth of the Gold Coast Agency”. Mrs Hart says that Mrs Stariha said that she “understood where the discrepancies had come from, so she did not need the revised spreadsheet from Carolyn”. Mrs Hart says she took that response to mean that Mrs Stariha “was not too concerned about those calculations”. Mrs Hart says she told Mrs Stariha that the asking price of $240,000 was not going to change and Mrs Stariha said that she “was happy with the price”.
354 Mrs Hart says that at no point did she say or otherwise represent to Mrs Stariha that Mrs Stariha’s revised profit and loss spreadsheet “was accurate” or that it “documented the true income figures for the Gold Coast Agency”. Mrs Hart says that Mrs Stariha knew that “some of the figures contained in the Profit and Loss Spreadsheet were not completely accurate”. Mrs Hart says that she did not discuss with Mrs Stariha “the profit itself”. Mrs Hart denies saying to Mrs Stariha that “she should revise the profit and loss statement to include replacements” and doing so “was never discussed by us at any time”. Mrs Hart says that the revised spreadsheet produced by Mrs Stariha reflects a correction of the errors in the income for the four months in question as earlier described but does not include “any increase [in income] equal to replacement credits, being $8,800”. Mrs Hart says that neither in the course of the telephone conversations on 18 October 2006 or 20 October 2006, nor otherwise, did she say to Mrs Stariha that the income figure for the Gold Coast Agency reflected in Mrs Hart’s profit and loss statement “was understated”. Mrs Hart says that she was impressed with the “JJ Spreadsheet” and Mrs Stariha’s examination of the top line sales (as compared with the database figures) and the expenses. Mrs Hart said that Mrs Stariha’s revised spreadsheet demonstrated to her that Mrs Stariha had “put extensive work into her due diligence, which went to show how smart and professional she was in nature”.
355 Mrs Hart says that she forwarded Mrs Stariha’s spreadsheet to Ms Hutt on 20 October 2006 after the discussion with Mrs Stariha on that date requesting a meeting with Ms Hutt to discuss Mrs Stariha’s questions. As to these matters at [330] to [347] see paras 141 to 151 of Mrs Hart’s amended statement. As to the four months showing discrepancies in the income the subject of this discussion on 20 October 2006, the variances are these:
Month | P & L Spreadsheet of 13 October 2006 | JJ Spreadsheet of 19 October 2006 | Variance (+/-) |
Feb – 06 | $9,442.20 | $24,949.65 | -$15,507.45 |
Jan – 06 | $8,824.40 | $10,424.40 | -$1,600.00 |
Jul – 06 | $14,180.56 | $18,147.35 | -$3,966.79 |
Oct – 06 | $14,194.40 | $14,854.40 | -$660.00 |
356 Mrs Hart says that she has no recollection of meeting with Mrs Stariha between 21 October 2006 and 3 November 2006 at the Gold Coast Agency (see [254]) and says she did not hand deliver the document described as “National Clients” to Mrs Stariha at such a meeting. Mrs Hart says she sent an email to Mrs Stariha in the following context. On 18 October 2006, Ms Piggott from the Frontline Head Office sent Mrs Hart a “national penetration report” which Mrs Hart then forwarded to Mrs Stariha (and others) by email the same day. The report enabled franchisees to determine which clients should receive Christmas cards or gifts. Mrs Hart says she sent the report to Mrs Stariha because she was going to be a franchisee and Mrs Hart thought the list would assist her in deciding who should receive a Christmas card. Mrs Hart denies saying to Mrs Stariha that she would have “access to 401 clients for whom job placements could be made”. Mrs Hart says that Mrs Stariha would have been much more familiar with the number of clients, and potential clients, available to the Gold Coast Agency, than Mrs Hart.
357 On 24 October 2006, Mrs Hart received from Mrs Stariha the email set out at [253]. Mrs Hart telephoned Mrs Stariha immediately upon receiving the email. Mrs Hart says Mrs Stariha confirmed that she was “happy with the price”. Mrs Hart then forwarded the email to Mr Davis.
358 Settlement of Julstar’s purchase of the Gold Coast Agency occurred on 8 December 2006. Mrs Stariha says that Julstar commenced trading the Gold Coast Frontline Retail Agency on 9 December 2006 (para 92 of Mrs Stariha’s statement). In the latter part of December 2006, Mr and Mrs Stariha were overseas after their marriage in December. They returned to Brisbane in early January 2007. Mrs Stariha says that whilst she was away, Mrs Hart managed the Gold Coast Agency for Julstar. Mrs Stariha says she personally commenced attendance at the franchised business on 14 January 2007.
359 It is now necessary to consider further aspects of the evidence of Mrs Stariha given in her further statement of November 2011 in which she addresses many of the contentions made by Mrs Hart about the relevant events.
PART 6 – ASPECTS OF THE FURTHER EVIDENCE OF MRS STARIHA DRAWN FROM HER FURTHER STATEMENT DATED NOVEMBER 2011
Employment applications
360 As to the employment applications, Mrs Stariha says that she had also made an application for a role in February 2004. Mrs Stariha says that in August 2005 when interviewed by Mrs Hart, she was applying for positions in retail industries not recruitment.
Completion of the application form
361 Mrs Stariha says that she partially completed the employment application form before the start of her interview with Mrs Hart. Mrs Stariha did not complete the details on that form relating to annual turnover, wages/sales, and staff details for the business “Café Addict” or “Portmans” nor any details at all in relation to “International Working Holidays”. Mrs Stariha says that she was required to provide financial details for Café Addict and Portmans. Mrs Stariha says she told Mrs Hart that she had been an independent contractor in her employment with “Anchor Health Care” and she had worked from home checking employment references for nurse employment.
362 Mrs Stariha says she told Mrs Hart that “International Working Holidays” was the name of a project not a business but Mrs Hart told her that she should list International Working Holidays as the name of her employer. Mrs Stariha says that Mrs Hart suggested to her that she record her involvement with International Working Holidays as “Owner” and she did so. Mrs Stariha told Mrs Hart that her reason for leaving the project was that she did not enjoy working from home. Mrs Stariha says Mrs Hart asked her whether she had received any payment when ceasing employment with the project. Mrs Stariha told her that no monies were received and she merely passed over her contracted work to other subcontractors. Mrs Stariha says that Mrs Hart said “we would say that I decided to sell the sub-contracting business”. Mrs Stariha completed the employment application form with the words “decided to sell” and stated as the reason for ceasing involvement with the project, “did not enjoy working from home alone”.
Mrs Hart’s approach to Mrs Stariha
363 Mrs Stariha says that she was unsuccessful in August 2005 in an interview arranged by Brisbane Frontline with a retail business, UTT Group. Mrs Stariha says that Mrs Hart then telephoned her and asked her to attend an interview with her and apply for a Recruitment Consultant role with Brisbane Frontline.
Flexibility about replacements
364 As to Mrs Hart’s contention that she said words to Mrs Stariha to the effect that Frontline was always flexible about replacements and payments by the client, Mrs Stariha denies that Mrs Hart said those words to her during orientation training. More specifically, Mrs Stariha denies that Mrs Hart told her that if Frontline enforced a strict seven day payment policy with clients, Frontline would not have a single client left. Mrs Stariha says that although Mrs Hart contends that Mrs Stariha would have had many examples of Frontline honouring a replacement guarantee regardless of the payment terms, Mrs Stariha says that she simply processed the “replacement owing” form once a candidate had “fallen out” with an employer within the three month period, because she did not have “Agency Owner” access to the database and could not determine whether a particular client had paid a replacement fee within seven days or not.
365 Mrs Stariha denies that Mrs Hart told her, during orientation in August 2005, that while the standard contract with a client contains a seven day term for paying placement fees, it was normal in reality to allow some flexibility in the period of time a client was allowed to pay the fee while still honouring the replacement.
Prior Gold Coast Agency
366 Mrs Stariha denies that Mrs Hart told her, during orientation in August 2005, that a Frontline Retail Agency had opened on the Gold Coast in 2003.
367 Mrs Stariha says that in October 2005, Mrs Hart told her she had an opportunity that she wished to offer Mrs Stariha and that she was looking at opening a Gold Coast office. It was described as a “fantastic opportunity” for Mrs Stariha. Mrs Stariha says that Mrs Hart told her she would have access to “all managed accounts” not just her “list of managed accounts in Brisbane”. Mrs Hart said it would be challenging for Mrs Stariha to open the agency “from scratch” but that “she trusted [Mrs Stariha] to run the Gold Coast office”.
368 As to this issue, Mrs Stariha also says this:
79. At no point in this conversation was there any mention of Karen Ellis. At no point in this conversation was there any information provided to me that Karen Ellis had previously conducted a Frontline agency from the Gold Coast. There was no mention of Kaybank Plaza in this conversation. I deny that words or words to the effect [of those asserted by Mrs Hart] were said to me by Mrs Hart in August 2005 on the occasion of the interview.
80. Specifically the words “reopen” was never said to me by Mrs Hart.
81. In paragraph 64 of the witness statement Mr[s] Hart asserts that she told me about her intention to “reopen” the Gold Coast agency in the same location from which Karen Ellis had operated. Such a conversation never took place between myself and Ms Hart.
82. In paragraph 65 of the witness statement Ms Hart asserts that during the meeting that took place in October 2005 she showed me a spreadsheet containing the sales for Ellis Trading for 2003/2004 and 2004/2005. This statement is untrue. Ms Hart did not show me any documents during this meeting and in fact has never provided me with sales details for Ellis Trading at any time.
[emphasis added]
Access to documents
369 Mrs Stariha says that during the period when she managed the Gold Coast Agency she did not have “Agency Owner access to the Frontline database” and she knows of no document entitled “Historical Sales Report” that can be generated from the Frontline database and this is so both for a Recruitment Consultant and an Agency Owner. Mrs Stariha says she has never viewed or printed a document entitled “Historical Sales Report”. Mrs Stariha says that in late 2007 or 2008 at Frontline Agency Owners’ conferences Mrs Hart provided her with an “electronic document” that Mrs Hart had compiled entitled “Historical Sales Report”. This document included budgets provided by franchisees to the franchisor and actual sales achieved by franchisees. The document showed whether each franchisee had achieved their budget for the period concerned.
370 Mrs Stariha says that she did not keep electronic copies of each of the documents that Mrs Hart provided to her in this way but she has kept two of such documents which bear the title “Historical Sales Report” that were provided to her by Mrs Hart in 2008 and 2009. As to these documents, Mrs Stariha says this:
86. I understand this document to be a document authored by Ms Hart and not a document that is able to be downloaded from the Frontline database. I was not ever given such a document or shown such a document until after I had purchased the Gold Coast Retail Agency. I was never provided with such a document by Ms Hart that had any details for the performance of the Gold Coast Retail Agency for a period prior to November 2005 when I commenced work at the Gold Coast.
[emphasis added]
Planting the seed of the idea of being a new business owner of the Gold Coast Agency
371 Mrs Stariha says that she denies “absolutely” that in October 2005 Mrs Hart told her that it was her intention to sell the Gold Coast Agency after having kept it for a minimum of one year and that Mrs Stariha could “maybe … be the new business owner”. Mrs Stariha says that the two further observations in para 69 of Mrs Hart’s statement to the effect that Mrs Stariha had said, first, that she always believed and saw herself as a business owner, and, second, that although she had sold her Café for a profit she had not enjoyed it as much as she thought she would, took place in August 2005 on the occasion of the interview with Mrs Hart, and not in October 2005.
Ellis Trading, Diane Knight and Niki Garnet-Palmer
372 Mrs Stariha says this:
88. In paragraph 71 of the witness statement Ms Hart asserts that in October 2005 she had a conversation with me in which she outlined the history of the Gold Coast Agency under Ellis Trading. She also asserts that she informed me that Diane Knight and Niki (I take it that Ms Hart means to refer to Niki Garnet-Palmer) were former employees of Karen (I take it that Ms Hart means to refer to Karen Ellis).
89. I deny that any such conversation took place between myself and Ms Hart in October 2005. I deny that Ms Hart said words or words to that effect to me as alleged in paragraph 71. …
90. In November 2005 after I had opened the Gold Coast Frontline retail agency I had a weekly meeting at the Gold Coast with Ms Hart. During one of these meetings that took place in November 2005 Ms Hart went through a client list that she had given me and on that occasion told me that both Diane Knight and Niki Garnet-Palmer had both previously worked for Karen Ellis. Ms Hart said nothing about them working at the Gold Coast for Karen Ellis.
[emphasis added]
373 Mrs Stariha accepts that in her role as a consultant at the Gold Coast Agency she would have had to edit the previous “account manager’s details” and insert her own details and that when updating client accounts it was usual for the current consultant to “uncheck” the names of “former consultants” and insert the name of the “current consultant”. Mrs Stariha says that this activity, however, does not “reveal the location or name of the franchise in which the consultant worked but only the consultant’s name” and in the case of Ms Knight and Ms Garnet-Palmer “I was told that they both worked for Karen Ellis”. Ms Stariha also says this:
92. … When I interviewed at the Brisbane Frontline office in 2004 I was interviewed by Karen Ellis. I believed that Karen Ellis owned the Brisbane retail agency. In August 2005, Ms Hart told me that she had purchased the Brisbane retail agency from Karen Ellis. I note that [FRGPL and Mr Davis] have discovered a document entitled “Brisbane Sales-Consultant Summary Report” … in which Ms Garnet-Palmer is listed as a consultant for Brisbane Retail.
[emphasis added]
374 Mrs Stariha also says this:
93. I deny that Ms Hart told me that the Gold Coast retail agency was at the same location at Kaybank Plaza as when the agency was open under Ellis Trading. Such a conversation never happened.
94. … Ms Hart asserts that she and I had discussions in which she made comparisons of the sales achieved by Ms Garnet-Palmer and myself. Such conversations never occurred.
[emphasis added]
Consultant and Senior Consultant KPI Report
375 Mrs Stariha says that as a Consultant both in Brisbane and the Gold Coast she was not able to access such a report. Mrs Stariha says that the annexure to Mrs Hart’s statement, CTH-17, was not part of the Frontline database until sometime in 2008 and prior to that time, Consultants would manually complete a KPI form and provide it to the Agency Owner in their weekly meeting.
General management of the Gold Coast Agency
376 Mrs Stariha denies Mrs Hart’s contention that Mrs Stariha was responsible for the “general management of the Gold Coast Agency” and says that the terms of her letter of engagement accurately sets out the conditions of employment.
The position in relation to the initial provision of spreadsheets by Mrs Hart and the initial meeting
377 Mrs Stariha denies Mrs Hart’s assertion that she and Mrs Stariha reached an agreement in September 2006 that Mrs Hart would supply Mrs Stariha with a copy of the profit and loss figures for the Gold Coast Agency when they next met. Mrs Stariha denies that words to that effect were said by Mrs Hart or that any such agreement was reached because Mrs Stariha says that Mrs Hart gave her “the GC Agency document at our initial meeting” [emphasis added]. Mrs Stariha says that she asked Mrs Hart to tell her the purchase price for the business. Mrs Stariha denies the last sentence of para 94 of Mrs Hart’s statement to the effect that Mrs Stariha in September 2006 was “putting pressure” on Mrs Hart to provide Mrs Stariha with a purchase price.
378 Mrs Stariha observes that Mrs Hart in her statement characterises the meeting on 5 October or 6 October 2006 as a “further meeting” to the meeting Mrs Hart describes as having taken place in September 2006. Mrs Stariha says that it is true to say that she had weekly meetings with Mrs Hart prior to October 2006. She says these meetings were “about my performance in achieving business KPI’s” and were not concerned with “any suggestion that I purchase the Gold Coast Retail Agency” (para 100). Mrs Stariha says that although she referred to the October meeting as having taken place on 3 October or 4 October 2006 she now believes that the meeting took place on 5 October 2006 and to that extent, she agrees with Mrs Hart that a meeting took place on that date. The point of departure between Mrs Stariha and Mrs Hart however, is that Mrs Stariha says that the 5 October 2006 meeting was the first meeting in which they discussed the purchase of the Gold Coast business by Mrs Stariha.
The “raw profit and loss” documents
379 Mrs Stariha says that if Mrs Hart intends by the term “Raw Profit and Loss” to refer to documents described as “Gold Coast 05/06 without graph.xls” and “Gold Coast 06/07.xls”, then Mrs Stariha agrees with Mrs Hart that Mrs Hart “provided me with a hard copy of these documents at the meeting that took place on 5 October 2006”. Mrs Stariha says that at the meeting on 5 October 2006, she saw Mrs Hart “make notes in her diary” [emphasis added]. Mrs Stariha says Mrs Hart always brought her diary to the weekly KPI meetings that she had with her. Mrs Stariha says that during the meeting Mrs Hart told her that the “GC Agency documents that she had with her were her only copy of the document[s]”. Mrs Stariha says she asked Mrs Hart to “give [her] the GC Agency document to take away” from the meeting and “she gave it to me to take away”. Mrs Stariha observes that Mrs Hart asserts that she did not give Mrs Stariha the “GC Agency documents” at the 5 October 2006 meeting. Mrs Stariha says she affirms her earlier evidence that Mrs Hart provided her with those documents on 5 October 2006 (see paras 102 to 105).
Preparation of profit and loss statements for Lee Stariha’s business
380 Mrs Stariha denies Mrs Hart’s contention that at the meeting on 5 October 2006 Mrs Stariha told her that she prepares profit and loss statements for Mr Stariha’s business. Mrs Stariha says that she has “never prepared a Profit & Loss account for Lee Stariha or his business” (see para 106).
The discussion on 5 October 2006 in relation to sales, profit and loss and EBIT earnings
381 These topics are the subject of Mrs Hart’s evidence at para 111 of her amended statement in which she says she told Mrs Stariha when they were discussing sales in the course of looking at the “Raw Profit and Loss” spreadsheet three things. Those things were directed to the composition of the sales; profit and loss being an accrual profit and loss and not a cash accrual; and the notion that the EBIT earnings would be “better” if the calculation was being done at the end of October rather than in early October. Mrs Stariha denies that this conversation took place “in the manner suggested by Ms Hart” and she denies that “words to that effect were said” by Mrs Hart at the 5 October 2006 meeting. Mrs Stariha reasserts her earlier version of the content of this meeting.
Discussion of expenses “line by line”
382 Mrs Stariha agrees with Mrs Hart that at the meeting they discussed the expense items “line by line” and that Mrs Stariha had questions for Mrs Hart arising out of that exercise. Mrs Stariha does not recall asking about the level of September wages but she does agree that Mrs Hart made notes of her questions about the expense items. The point of departure between them is that Mrs Stariha says Mrs Hart did not make notes of the questions on the “GC Agency document” but rather made them “in her diary”. Moreover, Mrs Stariha says: “I had the GC Agency document in my hand as we were going through the expenses” [emphasis added] (para 108).
Working capital demands
383 Mrs Stariha denies Mrs Hart’s assertion that Mrs Hart told her “about cash flow ‘working capital’” and that this amounted to “three months expenses”. Mrs Stariha denies that these words or any words to that effect were said to her by Mrs Hart (para 109).
The purchase price
384 Mrs Stariha notes that Mrs Hart says a conversation took place between the two of them on 5 October or 6 October 2006 about the purchase price for the business. Mrs Stariha denies that Mrs Hart discussed the purchase price with her on 5 October 2006 (or 6 October). Mrs Stariha accepts that Mrs Hart did tell her that she wanted $240,000 for the Gold Coast Agency but this statement was made to Mrs Stariha “at the meeting that I held with her on 12 October 2006” [emphasis added]. Mrs Stariha agrees that Mrs Hart explained to her how Mrs Hart had calculated the purchase price of $240,000. However, Mrs Stariha maintains her evidence that the explanation of the calculation was that “it was three times EBIT of $80,000.00”. Mrs Stariha denies that Mrs Hart told her that she was “in no hurry to sell”. Mrs Stariha accepts that Mrs Hart told her that she had “gone as low as she could go with the purchase price and that the business would be sold”. Mrs Stariha denies that Mrs Hart told her that she “did not want to enter into a price war”. Mrs Stariha says that apart from Mrs Hart saying that she had calculated the purchase price by multiplying EBIT of $80,000 by three to arrive at the purchase price, Mrs Stariha denies that words to the effect of Mrs Hart’s version in para 116 of her statement were said. Paragraph 116 talks about a multiplier of 2.5, possible sale of the business through a broker at $300,000 and the need to take account of additional costs Mrs Hart would incur in selling the business through a broker (paras 110 and 111).
Replacement credits and warranties
385 Mrs Stariha denies that Mrs Hart at the meeting on 5 October 2006 explained to her matters in relation to replacement credits and warranties being deducted by Frontline from a purchase price of $240,000 and the way in which those items would be treated by Frontline.
The October 2006 figures
386 Mrs Stariha denies that Mrs Hart said anything to her about the October 2006 figures increasing since “we were only at the beginning of October 2006”.
Mrs Hart’s observation about Mrs Stariha’s need to factor in additional fees that might be charged by Frontline
387 Mrs Stariha denies that Mrs Hart told or reminded her that she needed to factor into her assessment any additional fees that might be charged by Frontline or that Mrs Stariha would need to seek financial and legal advice, check the overheads to make sure she took into account “things” like insurance or repayments and interest charges on any loan she might take out (para 114) and that she ought to take her time and not “hurry through” performing her enquiries.
The 12 October 2006 meeting
388 Mrs Stariha notes that Mrs Hart contends that they did not meet again after the 5 October or 6 October 2006 meeting (which Mrs Stariha accepts as a 5 October 2006 meeting) in person to negotiate or discuss the sale of the business. Mrs Stariha says this is not true and that she met Mrs Hart at the Kaybank Plaza office on 12 October 2006 as explained in her earlier witness statement. Mrs Stariha agrees that they met at some time before settlement in late November or early December 2006 for a casual friendly lunch and that by that time all the details for the sale had been “worked out”. Mrs Stariha notes Mrs Hart’s evidence that Mrs Stariha telephoned her on “several occasions” requesting electronic copies of what Mrs Hart refers to as “the spreadsheet”. Mrs Stariha says that if Mrs Hart is referring to the “GC Agency hard copy documents [Nos. 87 and 89 of the applicants’ List of Document]” then Mrs Stariha agrees that she telephoned Mrs Hart on either 12 October 2006 after a meeting on 12 October 2006, or telephoned her on 13 October 2006 and requested an electronic version of the documents.
Mrs Hart’s willingness to address Mrs Stariha’s issues in relation to the profit and loss account
389 Mrs Stariha denies that she and Mrs Hart agreed at the 5 October 2006 meeting that Mrs Hart would look at the “profit and loss account” and address any issues raised by Mrs Stariha. Mrs Stariha denies any such agreement because she says she did not see any profit and loss account on 5 October 2006. Mrs Stariha says at para 117: “All that I was shown were the GC Agency documents that I have earlier identified. I had a series of questions about those documents, not any Profit & Loss documents”.
Mrs Hart email of 13 October 2006
390 Mrs Stariha accepts that she received the “GC Agency documents” as discovered by her and the “Agency Forecast document” by the email dated 13 October 2006. Mrs Stariha says she has maintained an electronic version of the documents attached to the email and that version does not contain any “pop-ups” as alleged by Mrs Hart.
Mrs Hart’s denial of Mrs Stariha’s contentions at paras 132, 133, 134 and 135
391 As earlier described, Mrs Hart sets out in her statement a response to 11 particular matters at para 132, five matters at para 133, six matters at para 134 and three matters at 135. Each of those topics describes particular events. Mrs Stariha denies the version of events given by Mrs Hart and reasserts her earlier contentions about all of those matters.
The telephone call of 18 October 2006
392 Mrs Hart contends that on 18 October 2006, Mrs Stariha contacted her by telephone and had a discussion about her review of the profit and loss spreadsheet and the Frontline Sales Report. Mrs Stariha says she cannot recall having any telephone conversation with Mrs Hart as contended by her on or about 18 October 2006 as set out at para 139 of Mrs Hart’s statement.
The telephone call of 20 October 2006
393 Mrs Stariha notes that in Mrs Hart’s statement she refers to a telephone conversation which Mrs Hart contends took place on 20 October 2006 with Mrs Stariha upon Mrs Stariha calling her. Mrs Stariha says that she did not telephone Mrs Hart again about the purchase of the business before meeting with her on 23 October 2006 at her Brisbane office after Mrs Hart had returned from the Perth “Agency Owners Conference”. Mrs Stariha says: “I deny that any of the matters referred to in paragraphs 141-148 were said by me, or to me, in a telephone conversation that took place on 20 October 2006”. Mrs Stariha accepts that some of the matters referred to in paras 141 to 148 occurred or were said when Mrs Stariha met with Mrs Hart on 23 October 2006 at Mrs Hart’s office. Mrs Stariha says she told Mrs Hart that her accountant had said that the business was not worth $240,000. Mrs Stariha says that after telling Mrs Hart her accountant’s view, Mrs Hart said that the asking price for the business would not change. Mrs Stariha says: “Apart from these two matters I deny the version of events set out in paragraphs 141-148 of Mrs Hart’s witness statement” [emphasis added].
Mrs Hart’s telephone call concerning the hospitality business
394 Mrs Stariha agrees that Mrs Hart telephoned her and congratulated her on the purchase of the new hospitality business. Mrs Stariha denies saying to Mrs Hart that she planned to replace herself as the main Recruiter in the retail business so she could concentrate on the new hospitality business which had to be built from scratch. Mrs Stariha denies telling Mrs Hart that she had entered into a three year lease for new premises to house both agencies.
Mrs Stariha generally unwell
395 Mrs Stariha denies that she told Mrs Hart that she needed “bed rest” or that “she was trying to work from home as much as possible”.
Mrs Stariha’s loss of staff
396 Mrs Stariha denies Mrs Hart’s contention that whenever Mrs Stariha lost an employee through either Julstar or the hospitality franchisee, Semolina, she would call Mrs Hart “all the time”.
The hospitality agency turnover of staff
397 Mrs Stariha denies Mrs Hart’s contention that she confessed to her on many occasions between July 2008 and late 2008, mostly by telephone but also in person, that the hospitality agency was “not working” because of the turnover of staff, the training costs for staff and her husband’s refusal to lend any further additional funds to her. Mrs Stariha denies that these conversations took place. Mrs Stariha also denies Mrs Hart’s contention that she said to Mrs Hart that “the high rate of staff turnover was getting her down”. Mrs Stariha also denies Mrs Hart’s contention that she told her by telephone that she had “no confidence in her ability to recruit employees or that she had delegated that duty to Mr Downer who then recruited Rebecca McFarlane. Mrs Stariha denies that those words or words to that effect were said to Mrs Hart. She also denies that Mrs Hart telephoned her and advised her not to employ Ms McFarlane. Mrs Stariha says this assertion is untrue.
Ms Ruby Tynan
398 Mrs Stariha denies that she had a telephone conversation with Mrs Hart about Ms Tynan concerning an assertion about Ms Tynan using Mrs Stariha’s credit card. Mrs Stariha accepts that she had a conversation with Mrs Hart at a franchise conference concerning Ms Tynan but the conversation was not in the terms asserted by Mrs Hart.
Mrs Stariha’s non-attendance at the Gold Coast Agency in 2008 and 2009
399 Mrs Stariha denies telling Mrs Hart in 2008 and 2009, frequently or otherwise, that she was not attending the Gold Coast Agency on a full time basis and that she was working from home or only attending the offices of the Agency on “one or two days per week”. Mrs Stariha denies making these statements and affirms her earlier evidence about the hours she worked in the Gold Coast Agency.
Pressure from Mr Stariha for Mrs Stariha to remove herself from the Gold Coast Agency
400 Mrs Stariha denies Mrs Hart’s contention that Mrs Stariha said to Mrs Hart that her husband was placing pressure on her to remove herself from the business in order to focus upon attempting to have a baby.
The September 2008 telephone conversation
401 Mrs Stariha denies that she had a telephone conversation with Mrs Hart in September 2008 in which she said that she “did not feel that she was managing in terms of the business and that she had been unable to retain staff in the business”. Mrs Stariha also denies that she explained to Mrs Hart during this conversation that Mr Stariha had refused to lend Mrs Stariha any more money and that he wanted her to concentrate on her health and her fertility. Mrs Stariha also denies admitting in the conversation or otherwise to the notion that not being able to have a baby was putting stress on her relationship with Mr Stariha and that Mr Stariha had told her that if she did not sell the business, their marriage would be affected. Mrs Stariha denies saying that she no longer had her husband’s support or that her husband would like her to leave the business and he would be able to make any losses up by inflating his client’s invoices in his business. Mrs Stariha denies saying that she was lucky that he could do that.
The Global Financial Crisis
402 Mrs Stariha denies that she had any conversation with Mrs Hart in which she attributed the under-performance of each of the franchised businesses to the Global Financial Crisis. Mrs Stariha denies that she was talking to Mrs Hart “almost daily during 2008 and 2009” as Mrs Hart contends.
Pia Manwaring
403 Mrs Stariha says that Mrs Hart’s contention that shortly after 24 November 2008 Mrs Stariha suggested that Mrs Hart approach her daughter, Pia Manwaring, about purchasing one or both of Mrs Stariha’s franchises, is untrue.
Fit out costs
404 At para 214 of Mrs Hart’s statement she gives evidence that she, Mr Peter Price and Pia Manwaring attended Mrs Stariha’s office on the Gold Coast in late 2008 and again in early 2009 to discuss the potential sale to Ms Manwaring of one of the franchised businesses. Mrs Hart says that Mrs Stariha’s offices were “large with a new fit out and new furniture”. Mrs Hart says she said to Mrs Stariha that her relocation to the office must have been expensive. Mrs Hart then says this: “Julianne responded that her husband, a builder, did the job and he on-charged his clients. Accordingly, there was no charge to her. She also mentioned this is why the fit out and furniture costs were not included in the profit and loss statements she provided to Pia by email”. Mrs Stariha denies that she said these words or words to that effect to Mrs Hart.
Amy Doberer
405 Mrs Hart says that Mrs Stariha contacted her on a number of occasions during three months in 2009 stating that she was not happy with Ms Doberer’s management of the applicants’ franchises and that Ms Doberer had failed to attend the Gold Coast offices once a week as agreed. Mrs Stariha denies that any such conversation ever took place between her and Mrs Hart.
PART 7 – THE HOSPITALITY FRANCHISE
406 It is now convenient to mention some aspects of the issues in relation to the hospitality franchise before examining other matters.
407 Mrs Stariha gave evidence that she commenced attendance at the retail franchise at the Gold Coast on 14 January 2007. She continued to conduct the retail franchised undertaking throughout February, March, April, May, June, July, August and September. On 1 October 2007, Mrs Stariha, through a company controlled by her, Semolina Pty Ltd, took up the Gold Coast Frontline Hospitality Agency by entering into a further agreement with FRGPL. By this time, Mrs Stariha had had the benefit of experiencing eight and a half months of trading activity in relation to the retail franchise by force of the relationship that she had struck with FRGPL arising out of her engagement with Mr Davis, about which she complains, and her engagement with Mrs Hart.
408 Mrs Stariha says that FRGPL engaged in further conduct which induced her and Semolina to enter into the hospitality franchise on 1 October 2007. Mrs Stariha says that the conduct concerns statements made by Mr Davis at conferences of franchisees in Melbourne in January 2007, in Auckland in April 2007 and in Sydney in 2007. Mrs Stariha says that Mr Davis spoke at each of these conferences at which Mrs Stariha was present, when he spoke. Mrs Stariha says that in each of these conferences she heard Mr Davis say that “Frontline had a 100% success rate with its franchisees”. Mrs Stariha says that she recalls “seeing a statement that Frontline had a 100% success rate” on FRGPL’s website (para 50 of Mrs Stariha’s principal statement) although Mrs Stariha does not say when she thinks she saw the statement on the website. As already mentioned, Mrs Stariha also relies upon an observation she contends Mr Davis made to her at the Discovery Day discussions at Bondi Junction on 6 November 2006. At para 30 of her principal statement, Mrs Stariha says this:
Peter Davis told me that the best news was that Frontline had a 100% success rate. He told me that this was a pretty big claim but that he had never had a franchisee go bad in our network. Peter Davis told me that his franchisees had highly profitable businesses and he said that Frontline liked to sell the businesses from within as Frontline liked to have a family culture.
409 Mrs Stariha says that in July 2007, she had a telephone conversation with Mr Doug Downer who was the General Manager of Frontline. Mrs Stariha says she was considering the purchase of the Gold Coast Hospitality franchise and asked Mr Downer whether training would be provided by Frontline to her if she purchased the franchise. Mrs Stariha says that Mr Downer told her that there would be a $5,000 training fund for that purpose.
410 Mrs Stariha says that on 26 September 2007, she and Mr Stariha agreed to establish a loan facility with the ANZ Bank for $60,000 under the terms of Mr Stariha’s home loan account facility with that Bank and that these funds would be used to pay the franchise territory fee and the training and development fee payable under the Semolina Franchise Agreement. On 1 October 2007, Semolina entered into the agreement and on that date Mrs Stariha signed a guarantee and indemnity instrument in favour of FRGPL guaranteeing the performance of Semolina’s obligations under the agreement. On 3 October 2007, Semolina made arrangements for the payment of an amount of $45,645.48 from Mr Stariha’s ANZ facility to FRGPL as the “purchase price of the hospitality agency”.
411 In August 2007, Mrs Stariha says she had a telephone conversation with Mr Downer who said that when Semolina commenced operating the hospitality agency, there would need to be sufficient room in the commercial premises utilised for conducting the business for four consultants engaged as between the retail agency and the hospitality agency. Mrs Stariha says that as she maintained a “home office” she could employ a hospitality consultant at the existing Julstar office for a few days a week and maintain the existing serviced office for both the retail and hospitality agencies. Mrs Stariha says that Mr Downer told her that FRGPL required “separate signage, consultants, officers, internet and telephone lines between the two agencies”. Mr Downer said that this was important from a marketing point of view, according to Mrs Stariha. Mrs Stariha says that Mr Downer told her that FRGPL would not agree to both franchised agencies operating from the existing Julstar serviced office at Pivotal Point, Marine Parade, Southport. Mrs Stariha says that she then located premises at Scarborough Street in Southport. Mrs Stariha says that she received an email from Ms Briede in which FRGPL approved the Scarborough Street premises for the conduct of the retail and hospitality agencies.
412 On 10 October 2007, Julstar entered into a lease of premises at Shop 1, 130-136 Scarborough Street, Southport and these premises were shared between Julstar and Semolina. Semolina conducted the hospitality agency from these premises. On 19 October 2007, Semolina obtained a loan of $10,000 from Mr Stariha for part of the fit-out costs of the Scarborough Street premises. From 26 October 2007, interest has continued to be payable on the loan facility established by Mr Stariha with the ANZ Bank.
413 In his principal amended statement, Mr Downer says these things.
414 He first met Mrs Stariha in May 2007 when he visited the Gold Coast Agency with Mr Davis to undertake an annual review of Julstar’s franchise and to meet with Mrs Stariha about her business plan. This was Mr Downer’s first week in the business. He had joined FRGPL in 2007 as its General Manager. He says that he spoke with Mr Stariha by telephone at least once a week and for a time he was negotiating with Mrs Stariha in connection with Mrs Stariha’s desire to acquire the Frontline Far North Queensland retail franchise. Mr Downer first became aware of Mrs Stariha’s interest in acquiring the Far North Queensland franchise during one of the regular quarterly reviews which he conducted. Ultimately, that franchise was awarded to Mrs Hart. Mr Downer says that he suggested to Mrs Stariha that if she wanted a second franchise she should open a Gold Coast hospitality franchise which would operate within the same geographic territory but would service the hospitality market, in addition to the retail market serviced by Julstar. Mr Downer says he told Mrs Stariha that opening a hospitality franchise in the Gold Coast area would avoid any problems associated with one franchisee trying to operate two agencies in different locations. Mr Downer says that Mrs Stariha told him she wanted to discuss it with Mrs Stariha and that she was interested to understand how the hospitality franchise would work. Mr Downer says he told Mrs Stariha that the first thing she needed to do was to complete a business plan. She did so. Mr Downer says he and Mrs Stariha spoke on the telephone almost every day. Mrs Stariha asked Mr Downer questions about taking on a second franchise and he says they discussed her ideas about it.
415 Mr Downer says that during the period of his discussions with Mrs Stariha he had seen from Frontline database that the Gold Coast retail agency was generating a lot of revenue and the business was “quite profitable”.
416 Mr Downer says that he did not say to Mrs Stariha “anything about whether other franchisees operated financially successful businesses”. Mr Downer says he did not say anything to Mrs Stariha “about whether any of Frontline’s franchises had ever failed”. Mr Downer says that he did not “say anything to her about whether her new company would be successful if it purchased the Gold Coast hospitality franchise”.
417 Mr Downer says that part of his role involved examining each franchisee’s monthly profit and loss statements submitted in standardised reporting templates and assessing information arising out of quarterly reviews with franchisees. Mr Downer says that Julstar scored “quite well” in these assessments. Mr Downer says that in his opinion the business plan that Mrs Stariha submitted for the Gold Coast Hospitality Agency “was realistic and not overly ambitious” and he says he thought the proposal “was achievable”.
418 Mr Downer also says that he said to Mrs Stariha during the period that she was negotiating to purchase the hospitality franchise that she should ensure that there is a dedicated consultant/manager for each of the two agencies; she should be the consultant/manager for one of them; and she should supervise the consultant/manager of the other agency.
419 Mr Downer says that Mrs Stariha told him she had hired a chef and a used car salesperson as consultants in the hospitality business. Mr Downer says Mrs Stariha said that employing these two individuals in the hospitality business would provide her with “good depth” as she believed the chef would have good industry knowledge and contacts. The car salesperson would have good sales skills. Mr Downer says that during the course of weekly telephone discussions with Mrs Stariha she told him that neither of these consultants had “worked out”. The chef had not been good at “business development” and the car salesperson “never came to terms with the Frontline [hospitality] product”.
420 As to the discussions with Mrs Stariha about her business plans for the hospitality agency, Mr Downer says he told Mrs Stariha to “be careful in calculating her rental costs” as he understood her serviced office costs would be calculated on the number of staff she employed and he says he told her she should think about whether it might be cheaper to move into a larger office accommodating both franchises.
421 Mr Downer says he did not tell Mrs Stariha that she “had to move”. Mr Downer says that he told Mrs Stariha that separate signage was required for each franchise. There was, in his view, no requirement for separate offices or even separate entrances and he “did not tell her that there was”.
422 As to training, Mr Downer says he cannot recall Mrs Stariha receiving additional training when Semolina began the hospitality franchise and he doubts he would have arranged “basic franchise training for her since she was already a retail agency franchisee”. Mr Downer says he recalls Mrs Stariha specifically asking him “not to give her training”. In Mr Downer’s amended statement he says this at para 29A:
I recall that Julianne specifically asked me not to give her training. She said to me that she did not think that, as an existing agency owner, she would need it so she didn’t want to pay the training fee.
[the underlining reflects an amendment to Mr Downer’s statement]
423 Mr Downer disagrees with Mrs Stariha’s contention that she requested training but did not receive it. At 29B of his statement, Mr Downer says this:
… Julianne did not ask me for any training, and no one ever told me about Julianne asking them to arrange or provide training for her. If Julianne asked for training, I would have arranged it to be provided. I expressly deny the allegation … that Julianne asked me by telephone for training. She never made any such request.
424 Mr Downer says that Frontline offered Mrs Stariha further training which she did accept. That training was provided by Mr Earland and Ms Foster. Mr Downer says that that training was provided after Mrs Stariha was sent a letter from Frontline dated 10 June 2008 documenting Frontline’s concerns about the performance of the hospitality franchisee as “after 11 months of trade you have only made three placements and achieved sales of $22,617.63”.
425 As to the 100% success claim, Mr Downer recalls that “at one stage while I was working there” Frontline started using a phrase to the effect that Frontline had a “100% success rate” when advertising its franchises. Mr Downer says the statement was copied from the “Baker’s Delight franchise website”. On 29 August 2007, Mr Downer sent an email to Ms Drewer (who was assisting Mr Davis with marketing) attaching a Word document which contained a draft copy of an advertisement prepared by Mr Drewer and then amended by Mr Downer. Mr Downer says that the phrase adopted in the draft advertisement was “over 100% success rate” which was the wording based on the Baker’s Delight wording of “over 90% success rate”. The published version of the statement was “100% success rate” with the word “over” dropped from the advertisement as the success rate claimed was 100%.
426 At para 34 of Mr Downer’s amended statement, he says this:
I did not see any reference to that sort of language in any Frontline material prior to Ms Drewer’s engagement and Peter Davis never used that phrase in my presence until the communications with Ms Drewer referred to above [around August 2007].
427 Mrs Stariha denies having a conversation with Mr Downer during the negotiation phase of the hospitality franchise about the need to ensure that each of the retail and hospitality franchises had a dedicated consultant/manager (with her in one and supervising a consultant/manager in the other). As to the training fee and the matter at para 29A of Mr Downer’s statement, Mrs Stariha says this at para 34 of her reply statement of 6 March 2012:
… I did have a conversation with Mr Downer about training charges and this occurred when I received the Semolina purchase price which included $5,000 for training. I telephoned Mr Downer and said that I had been charged $10,000 for training when I purchased the Gold Coast Retail [business] but that I had not in fact been given any training. I told him that if Frontline were not going to perform any training then I did not want to pay for it. Mr Downer told me that the $5,000 was for staff training not for training me and that I had no option but to pay the training fee. After this conversation I paid the training fee.
[emphasis added]
428 As to the training given by Mr Earland and Ms Foster after the contended letter of 10 June 2008, Mrs Stariha says she had six telephone discussions with the two trainers. As to the letter itself, Mrs Stariha says that she did not receive the letter dated 10 June 2008 until 4 September 2008 when it was sent to her by Mr Downer by email (see JS1 to Mrs Stariha’s reply statement of 6 March 2012). Mr Downer’s email says:
Further to our recent discussions regarding the performance of the Gold Coast Hospitality business, I have attached the letter of concern I discussed with you, this letter outlines our specific concerns and what action items are required by you.
Julianne, Peter, Christina and I are committed to providing you whatever assistance you require to remedy this situation and we have every confidence in your ability to do so.
429 Mrs Stariha says that Mr Downer told her, when she called him about the email and the letter, that the date of 10 June 2008 was a “typing error”. Mrs Stariha says the training conversations occurred in June, July and August 2008 and not after 5 September 2008.
430 On 14 October 2008, Mrs Stariha sent an email to Mr Downer, copied to Mr Davis (Mrs Stariha having had a conversation with Mr Davis about the franchised businesses). In that email, Mrs Stariha said this:
I have taken the opportunity today to have a personal upfront conversation with Pete.
I want to say that after reviewing my options on the Gold Coast that I have decided to put my hospitality business on the market. I will take the necessary action to ensure the ongoing success for the brand. It saddens me greatly that I see so much potential, hospitality is a personal true love, yet I believe that I have made some poor judgements in the past 12 months. I accept responsibility.
Please note that I will also consider options in bundling the two franchises together should the opportunity arise. This will depend on the interest from potential buyers. If this is what it takes to alleviate the issue, it will be considered.
Since your letter received early September, I have taken steps to have the correct structure in my two agencies.
…
431 In that email, Mrs Stariha goes on to talk about the “correct structure” she had put in place in her two agencies. She then sets out the elements of her “interim plan” to actively market the hospitality business for sale and achieve various KPIs she identifies.
432 Mr Downer says that because Mrs Stariha did not achieve the goals she set out in that email, Mr Davis and Mr Downer suggested that Mrs Stariha “shelf” the hospitality business and focus on getting the retail business “back on track”. Mr Downer says that Mrs Stariha could not do so. She decided to sell both businesses. On 24 November 2008, Mrs Stariha sent an email to Mr Downer confirming a sale price for the hospitality franchise at $75,000 (and setting out other data). The email also says that the Retail business was “on the market at a minimum of $305k + replacements (this needs to be discussed with $40k owing)”.
433 Mrs Stariha said this in that email:
The business was bought two years ago with a $80k ebit consistent profit. The costs are lean and consistent. Over the past 12 months I have cut the costs to the minimum investing the time. The new owner/s will benefit from this exercise.
Lee and I will be focusing to sell these businesses quickly. We will be contacting business brokers this week. I will appreciate any assistance from national in the interim. These are good business[es], I just haven’t been able to handle the two. Where there is no consistent ebit for the new hospitality owner, they are picking up the value of the lease and $75k fit out and equipment (all new) and 12 months (spade work) on 350 targeted clients.
These prices are purely the lowest for a current frontliner who knows the value in the brand or a referral. As expenses get added to the process, ie commissions, this will be added to this price. These are not negotiable and this is paying the bank and walking away quietly. This is not a fire sale, $380k I pay the bank, national fees and legals.
434 On 24 March 2009, Mrs Stariha entered into an agreement with Ms Amy Doberer for Ms Doberer to manage the retail business for Julstar on the terms of a document dated 19 March 2009. The agreement contemplated a three month trial, a further 12 months of management by Ms Doberer (by Mettai Pty Ltd) and a first right of refusal in Mettai to purchase the retail franchise.
PART 8 – RELIANCE AND THE “NO TRANSACTION” CASE
435 Mrs Stariha says that had she known that Ellis Trading had closed its Frontline Gold Coast Retail Agency prior to Julstar’s purchase of a Frontline Gold Coast Retail Agency, she “would not have continued with the purchase” because she says she would “not have been prepared to put my husband and I into a situation in which we were at risk of losing everything” (para 52 of Mrs Stariha’s principal statement).
436 Mrs Stariha also says that “a major factor” in her decision to purchase the Gold Coast Retail Agency was the “reassurance” she says she obtained from Mrs Hart when Mrs Hart “confirmed the accuracy of the per annum EBIT that I calculated on my revised spreadsheet”. Mrs Stariha says that without the “security” of Mrs Hart’s assurance “I would not have purchased the business from her” (para 52 of Mrs Stariha’s principal statement).
437 Mrs Stariha says that had she known that existing Frontline franchisees were not meeting “Territory Development Requirements” (“TDRs”) under their franchise agreements, she would not have “proceeded with the purchase of the [Retail Agency]” because first, “of what my solicitor, Jim Burke, had told me about the [TDRs]”, and, second, Mrs Stariha says she believed “based on what Colleen Hart and Peter Davis had told me, that all franchisees were meeting their [TDRs]” (para 69).
438 Mrs Stariha says that had she known that Frontline franchisees were “suffering financial losses” in “running” their franchises, she would not have “gone ahead with the purchase” because she was “buying the business to make a profit” (para 70). Mrs Stariha says she would not have exposed Mr Lee Stariha and herself to “the financial liability of undertaking borrowings” if she had known that “she would suffer a loss when [Julstar] conducted the Gold Coast Frontline Retail Agency” (para 70).
439 Mrs Stariha also says that had she known that a number of Frontline franchisees were “only trading for a relatively short time before exiting the system”, she would not have proceeded with the purchase “because the short trading time and exit of these franchisees was directly contrary to what I had been told about the success of Frontline franchisees by Pete Davis and Colleen Hart” (para 71).
440 Mrs Stariha says that not only was the failure to disclose the prior closure of the Ellis Trading Gold Coast franchise, material to her (see para 52) but had she known of the closure, and that Ellis Trading “had been a poor performer” (para 72), she “would not have proceeded to purchase” the Gold Coast Agency. Mrs Stariha says that “this fact” would have been inconsistent with the “stories of financial success that I had been told was experienced by Frontline franchises by Peter Davis and Colleen Hart” (para 72).
441 Mrs Stariha says that had she known that there were only 167 contracted clients for the Gold Coast Retail Agency, she says she “would have known that I could not meet the [TDRs] and would not have proceeded with the purchase” (para 73).
442 Mrs Stariha also says that had she known that the Gold Coast Agency did not generate $80,000 EBIT in the 12 month period immediately before her purchase through Julstar, she would not have gone ahead and she would not have paid $240,000 “because the purchase price could not have been justified on the basis of three times EBIT” (para 74).
443 Mrs Stariha has given evidence (supported by a range of documents) of the financial facilities arranged by her and Mr Stariha and the expenditures Julstar and Mr and Mrs Stariha incurred on behalf of Julstar (about which they were to be reimbursed by Julstar) in acting in reliance on the conduct asserted against Mrs Hart and Mr Davis. Evidence of the Semolina reliance expenditures has also been given. I will return to the evidence of these reliance expenditures in relation to both businesses later in these reasons.
444 Mrs Stariha says that Julstar’s operation of the retail agency was “unprofitable” (para 110). It is not clear on Mrs Stariha’s primary evidence when it became clear to her that the retail business bought in reliance on the representations she identifies “became unprofitable”. Mrs Stariha says the retail agency operated by Julstar never derived a profit and made a loss in every financial year of its operations. Mrs Stariha began operating the retail business on behalf of Julstar in early January 2007. At para 112 of her statement, Mrs Stariha says that because the retail agency was unprofitable, “the only way” Julstar could continue to “keep the business going” was to “inject” money into the business. Thus, “capital contributions” of $213,200 were made by Mr Stariha and L.A. Stariha Homes Pty Ltd to that end. A further payment was later made on 30 July 2009 of $3,400.
445 Although it will be necessary to examine the following transactions more fully a little later in these reasons, Mrs Stariha says that prior to her purchase of the Gold Coast Retail business in December 2006, the Perth franchise conducted by Ruane Enterprises Pty Ltd (“Ruane”), operated by Ms Bronwyn Butcher, suffered trading losses in the financial years ending 30 June 2003 and 30 June 2005 and made a modest profit ($6,489.00) at 30 June 2006. The Darwin franchise conducted by Coonawarra Gold Operations Pty Ltd (“Coonawarra”) suffered a loss in the financial year ending 30 June 2006, and the Sydney franchise conducted by Manawa Group Pty Ltd (“Manawa”) suffered a loss in the financial years ending 30 June 2005 and 30 June 2006. Mrs Stariha says the Adelaide, Darwin and Wollongong franchises had failed to meet TDRs at March 2003, August 2004 and May 2006 respectively.
446 As to short trading periods and early exit by franchisees from the franchise system, Mrs Stariha says that the Auckland (8 March 2004 to 1 August 2005), Christchurch (5 September 2005 to 9 October 2006), Queensland (14 January 2000 to 1 July 2001) and Western Australian (16 February 2001 to 1 October 2002) franchises are examples, all inconsistent with the contended representations by Mrs Hart and Mr Davis. Mrs Stariha also says that Mr Davis’s email of 31 March 2005 to Karen Ellis at [125] to [127] of these reasons demonstrates that Mr Davis held concerns about the “poor performance” of the Queensland franchise under Karen Ellis’s control.
447 More particularly, Mrs Stariha contests the version of events given by Mr Davis concerning the proceedings between FRGPL (in its former name) and one of its franchisees, Aura Enterprises Pty Ltd (“Aura”). The questions in issue between Aura and FRGPL were the subject of a mediation based on a Notice of Dispute and ultimately a judgment of the Supreme Court of New South Wales of 6 September 2006: [2006] NSWSC 902.
448 Mrs Stariha says that she first saw the Notice of Dispute in the course of discovery in these proceedings; first saw the judgment in December 2009; and was not told of the proceedings between Aura and FRGPL at the 6 November 2006 Discovery Day as Mr Davis asserts.
449 What follows from all of this is Mrs Stariha’s contention at paras 183 of her principal statement and following, that:
Had I been made aware of the level of conflict between Frontline and Aura as portrayed in the Notice of Dispute and the judgment I would not have proceeded to purchase the Gold Coast Frontline Retail Agency because Peter Davis had told me that he had 100% success with franchisees. The Notice of Dispute alleged withholding of commissions, failure to provide on-going training, the issue of repeated breach notices and the making of defamatory remarks by Peter Davis against Aura.
450 Mrs Stariha also says this at para 184:
The allegations made in the Notice of Dispute were contrary to what I had been told about Frontline in that an important matter for me in deciding to go ahead and purchase the Gold Coast Frontline Retail Agency was that all previous Frontline franchisees had been successful according to what Peter Davis told me. Mr Davis did not tell me anything about legal proceedings between Frontline and its franchisees or the numerous breach notices Frontline was said to have issued against Aura.
451 At paras 186 and 187, Mrs Stariha says this:
186. Had I known of the threats made to terminate the Aura franchise as referred to in the judgment and of the necessity to commence court proceedings to prevent Frontline from terminating the Aura franchise, there is no possibility that I would have continued to purchase the Gold Coast Frontline Retail Agency.
187. Lee Stariha and I were going into debt to the extent of $240,000.00 to buy the franchise business and I would not have been prepared to risk this much money because it would have been apparent to me that what I had been told by Mr Davis about the success of Frontline franchisees was not true.
452 Before examining the contest between the parties on these versions of events reflected in the cross-examination of the principal witnesses, I propose to mention some aspects of the other evidence on these controversial topics.
PART 9 – THE EVIDENCE OF MR LEE STARIHA CONCERNING THE FRONTLINE RETAIL BUSINESS
453 Mr Stariha is a building contractor. He incorporated his building company, L.A. Stariha Homes Pty Ltd (“Stariha Homes”) in 2001. He first met Julianne Jones in 2003 and they were married in December 2006.
454 Mr Stariha recalls being told by Mrs Stariha (and understood) that in 2005, Hart Trading offered Mrs Stariha a position as a Recruiter. Mr Stariha also recalls being told by Mrs Stariha about three months later that Mrs Stariha had been “offered a role as manager of the Gold Coast agency” which Mrs Stariha had accepted. Mr Stariha also recalls that “in about September 2006” Mrs Stariha told him that Hart Trading wanted to sell the Gold Coast Agency and Mrs Stariha had been given the first choice of buying the business. Mrs Stariha discussed this matter with Mr Stariha. Mrs Stariha wanted to consider buying the business. Mr Stariha says that at this time, he understood the position to be that Mrs Stariha did not know the purchase price. Although Mr Stariha first turned his mind in detail to these events again, in September 2011 (T, p 198, lns 11-13), and accepted that the September 2006 conversation could have possibly have been earlier, he believes it was in “about September” (T, p 198, lns 29-33). Mr Stariha also says that based upon his recollection of his discussions with Mrs Stariha in September and October 2006, Mrs Stariha had made no decision to buy the business but she was giving the matter serious consideration. Mr Stariha accepted the propositions put to him by Counsel for Mrs Hart that Mrs Stariha is a cautious and meticulous person when it comes to business affairs; a person who keeps good records of accounts; a person who is generally very cautious with incurring business expenses (T, p 198, lns 41-47), and a very prudent business operator (T, p 199, lns 1-3). Mr Stariha accepted that the purchase of the Gold Coast Agency was an important and significant decision for both Mrs Stariha, and Mr Stariha as the grantor of security for the ANZ debt to Julstar (T, p 198, ln 38; T, p 199, lns 16-24).
455 Mr Stariha says he was told by Mrs Stariha in early October 2006 that the purchase price for the business was $240,000. Mr Stariha understood that Mrs Stariha would need to borrow the full purchase price and Mr Stariha would need to provide security over his house property at Cleveland for the debt. Mr and Mrs Stariha attended two meetings at the ANZ Bank to discuss a business loan. Mr Stariha says one meeting was in “late October” and the other meeting was about “one or two weeks” earlier. A business loan application was completed in the second meeting. Mr Stariha recalls that before the first meeting at the Bank, Mrs Stariha showed him “a copy of a document that appeared to be a spreadsheet” which Mrs Stariha said Mrs Hart had provided to her. Mr Stariha says he looked at it with Mrs Stariha.
456 Mr Stariha recalls Mrs Stariha “putting together” the application to the ANZ Bank for the purpose of funding the purchase of the business. Mr Stariha thought the application document at Exhibit 16 appeared to be that document but he did not have a strong recollection of it although he did recall particularly the Appendix 1 spreadsheet appearing in the application immediately before the Frontline “Sales Report” document (T, p 203, lns 1-11). Mr Stariha said he had no hand in the preparation of the spreadsheet. The spreadsheet was supplied to the Bank by Mrs Stariha (T, p 203, lns 14-17). Mr Stariha said that at the first meeting with the Bank, Mr and Mrs Stariha took with them the spreadsheet “supplied to my wife … by Mrs Hart” and any other documents that Mrs Stariha thought “was necessary for the purchase” (T, p 203, lns 21-26). As to the application and the spreadsheet within it, Mr Stariha said that he remembered from the first meeting with the lender that there was some confusion with the spreadsheet and it was to be simplified. Mr Stariha said that if the spreadsheet in the application document was not given to the lender in the first meeting, it was certainly the one given in the second meeting (which may have been a simplified version of an earlier version of the spreadsheet). However, Mr Stariha pointed out that he did not produce the spreadsheet (T, p 203, lns 28-33).
457 Mr Stariha does not recall reading any document received from FRGPL. Mr Stariha, however, recalls that Mrs Stariha received “some documents” from FRGPL because he recalls seeing documents marked with the Frontline logo on one particular night when Mrs Stariha opened the mail at home in his presence. Mr Stariha recalls attending a meeting with Mrs Stariha with Mr Burke of Cleary & Hoare, Solicitors, and he recalls Mrs Stariha taking documents received from FRGPL to the meeting.
458 Mr Stariha recalls attending the Discovery Day at Bondi Junction on 6 November 2006. Mr Stariha says the first session that day involved a meeting between Mr Davis and Mr and Mrs Stariha (apart from a brief introduction to Mr Peter Gleeson). Mr Davis gave an outline of the Frontline business and the roles of particular FRGPL employees. Mr Stariha recalls Mrs Stariha asking Mr Davis what he thought about the Gold Coast Agency purchase price of $240,000. Mr Stariha says Mr Davis said this:
the price is fair because the franchise businesses have a 100% success rate and no business has sold for less than $200,000. The resale value of franchise businesses is high and you will get back at least what you pay for it.
459 Mr Stariha recalls that Mr Davis outlined FRGPL’s expectations of franchisees and their need to attend quarterly meetings and an annual dinner. Mr Davis mentioned expansion plans for Frontline into the United Kingdom, America and Canada.
460 The second session concerned budget issues and Mr Stariha recalls Mr Davis saying that sales revenue targets for franchisees were $150,000 in Year 1 with an increase of 60% for Year 2 and then a further increase of 50% over Year 2 for Year 3. Mr Stariha said that these sales targets seemed to be “high”. Mr Stariha says Mr Davis responded to this concern by saying:
if you hit the KPIs you will meet these targets. All the other franchisees hit their KPIs and meet their targets.
461 Mr Stariha says this response from Mr Davis allayed his concerns. Mr Stariha recalls aspects of the other presentations that day.
462 Mr Stariha refers to the statement made by Mr Davis concerning the 100% success rate of the Frontline franchise businesses, noted at [358]. Mr Stariha accepted that since the Discovery Day events, he has seen a Frontline website or printouts from a website showing a claim of 100% success. He saw those references in the early part of 2011 (T, p 203, lns 41-44). Mr Stariha did not accept that he had confused his recollection of what Mr Davis had said with something that he later saw from these website references. Mr Stariha rejected the proposition put to him that it was simply not true to say that Mr Davis had said that the purchase price of $240,000 was fair because the franchise businesses have a 100% success rate (T, p 204, lns 4-10).
463 As to the question of replacement credits, Mr Stariha accepted that he could not rule out the possibility of a discussion about replacement credits but he did not recall hearing about replacement credits in his discussion with Mr Davis.
464 As to the other presentations at the Discovery Day, Mr Stariha gave evidence that he met Ms Moseley who discussed her role in the Frontline Accounts Department. He met Ms Briede who discussed her role. He met another woman whose name he could not recall. He gave evidence that each of these persons introduced themselves to Mr and Mrs Stariha, discussed their roles and then left. They were not present when Mr Davis was talking to Mr and Mrs Stariha about Frontline. Mr Stariha said that the afternoon session lasted for about two hours. Mr Davis was there for the first part and the other three ladies were present for the other part. Mr Stariha said that he could not recall any mention of the term “litigious environment” in any discussion with Ms Moseley or Ms Briede and nor could he recall Mrs Stariha mentioning the possibility of candidates placed into retail positions suing a franchisor or a franchisee (T, p 204, lns 36-43). Mr Stariha could not recall Mrs Stariha raising the possibility of candidates suing (T, p 205, lns 4-5).
465 In the context of the issues in relation to the Semolina Hospitality franchise, Mr Stariha says at para 39 that in about June 2007 Mrs Stariha told him that the Far North Queensland Retail franchise business was for sale although Mrs Stariha "did not seem interested in this business”. Mr Doug Downer joined FRGPL in 2007 as its General Manager. He first met Mrs Stariha in May 2007. During one of the Julstar quarterly reviews which Mr Downer conducted, he became aware that Mrs Stariha was interested in purchasing the Far North Queensland business. So too was Mrs Hart. Mrs Stariha and Mrs Hart each submitted a detailed proposal and business plan for the acquisition. Mrs Stariha’s proposal of 19 pages (including a spreadsheet) is set out at Annexure DD1 to Mr Downer’s statement. Mr Stariha gave evidence that he had never seen the document but he knew that Mrs Stariha was working on it. Mr Stariha could not say how long Mrs Stariha may have worked on preparing the proposal. Mr Stariha maintained his evidence that he believed that Mrs Stariha was not interested in the Far North Queensland business (T, p 205, lns 10-11; ln 45; T, p 206, lns 1-3).
466 Mr Stariha says that after the Discovery Day presentations, Mrs Stariha accepted the offer of an ANZ business loan of $260,000 secured by a mortgage given by Mr Stariha over his Cleveland property. The loan was effected by ANZ facilitating a further drawdown under Mr Stariha’s facilities deposited into Julstar’s account. On 7 December 2006, Mr Stariha caused Julstar to transfer $240,000 to FRGPL’s bank account. Mr and Mrs Stariha also agreed that particular expenses of Julstar would be paid from time to time through the use of Mr Stariha’s ANZ credit card which Julstar would reimburse. These reimbursements occurred each month.
467 It will be necessary to consider later in these reasons other aspects of Mr Stariha’s evidence.
PART 10 – THE EVIDENCE OF MS CAROLYN HUTT
468 Ms Hutt formerly worked for Ernst & Whinney, Chartered Accountants. Since 1989, Ms Hutt has worked as a Consultant Bookkeeper. She is familiar with all of the applicable standards relevant to the proper keeping of accounts. Ms Hutt is also familiar with various accounting software packages used in keeping books including the MYOB accounting software.
469 In January 2002, Ms Hutt was engaged by Ms Karen Ellis of Ellis Trading Pty Ltd to undertake general bookkeeping duties for her Frontline retail business including the preparation of profit and loss statements and balance sheets, and the submission of data to the client’s accountant to enable preparation of tax returns. Ms Hutt also prepared and lodged Business Activity Statements for Ellis Trading.
470 Ms Hutt has undertaken bookkeeping work for Mrs Hart and Hart Trading since the acquisition of the Brisbane franchise from Ellis Trading. Mrs Hart recalls that Hart Trading operated the Gold Coast Agency at the outset from the Brisbane office. However, Ms Hutt recalls Hart Trading opening an office on the Gold Coast in or around November 2005 and recalls that from that date Mrs Stariha began working from that office as a Recruitment Consultant.
471 Mrs Hutt’s practice in providing bookkeeping services to Hart Trading was to attend the Brisbane office every fortnight and enter the previous fortnight’s data into the accounting software program. At para 17, Ms Hutt says that she understood the Gold Coast Agency to be part of the Brisbane franchise. It followed for her that she did not regard the Gold Coast Agency, for “financial accounting purposes”, to be a separate Frontline agency and therefore in the preparation of accounts and profit and loss statements, the financial information for the Gold Coast Agency appeared on the statements and accounts of the Brisbane franchise. Ms Hutt annexes to her principal statement at CMH-1, a true copy of the profit and loss statement that she prepared for the Brisbane franchise for the financial year ending 30 June 2007 and also the profit and loss statement she prepared for the period November 2005 to 30 June 2006. At CMH-2, Ms Hutt annexes a profit and loss statement finalised for the period July 2006 to November 2006 which incorporates the “sales, overheads and profit for the Gold Coast Agency”. Ms Hutt also says that she prepared monthly standard profit and loss statements for Hart Trading based on the figures she had entered into the MYOB software for Hart Trading. Ms Hutt’s practice was to attend the Brisbane office every second Thursday and discuss the monthly profit and loss statements with Mrs Hart and deal with any questions as necessary.
472 Annexure CMH-1 is a document described as “Job Profit & Loss Statement” for the period November 2005 to June 2006 bearing the sub-heading “Gold Coast”. Ms Hutt does not say when this document was prepared. It shows consulting fee income for each month and total income all in the same numbers as set out in the “blue spreadsheet”. As to the financial year ending 30 June 2007, the document described as “Job Profit & Loss Statement” at CMH-1 does not bear a sub-heading “Gold Coast”. However, the income for the months of July, August and September 2006 shows consulting fee income in the same numbers as the “grey spreadsheet”. The October 2006 income at CMH-1 is shown as $26,695.87 whereas the grey spreadsheet shows income of $14,194.40. CMH-2 is a document described as “Job Profit & Loss Statement” bearing the sub-heading “Gold Coast” and it also shows consulting fee income for the months of July, August and September 2006 in the same numbers as the grey spreadsheet although CMH-2 also shows the October income at $26,695.87 rather than $14,194.40. The difference in the October figures is no doubt due to the fact that the October data has been compiled with the benefit of the full trading for the month and the entire relevant period. The confusing matter on the face of Ms Hutt’s evidence about assimilation of all the financial data for the Gold Coast within the figures for the Brisbane franchise is that the document for November 2005 to 2006 expressly segregates income and expenses referable to the Gold Coast whereas the second document at CMH-1 does not bear that description (yet the figures are consistent with only Gold Coast figures) and the document at CMH-2 is a document referable to the description “Gold Coast”.
473 At para 21, Ms Hutt describes the process she was asked to undertake by Mrs Hart on or around 10 October 2006. Ms Hutt notes that on 10 October 2006, she received an email from Mrs Hart together with the attachments (see [224] and [225]). Ms Hutt says she was asked by Mrs Hart to prepare profit and loss figures for the Gold Coast Agency and by this she understood that she was to extract only the Gold Coast Agency figures. This presumably is the exercise which resulted in the Gold Coast figures at CMH-1. By this request, Ms Hutt understood that she was to extract only the Gold Coast Agency figures from the general data and to do that she says she would have printed a “job number extract” showing only the Gold Coast figures. That process is explained in this way. Because all of the sales, costs and profit for the Gold Coast Agency had been included in the profit and loss statements for the Brisbane franchise, it was necessary for Ms Hutt to allocate a “job number” to all Gold Coast figures “within the Brisbane Franchise data file” so as to isolate the “sales figures” (placement fee income) and “overheads” relevant to the Gold Coast Agency and then prepare a profit and loss statement. Ms Hutt says that she “normally” records any sales attributable to the Gold Coast Agency by inserting the word “Gold” in the job number and thus she says the “process of preparing a profit and loss statement for only the Gold Coast Agency was fairly straightforward”. Ms Hutt no longer has a copy of the printout of the “job number extracts”.
474 As to this process of preparing profit and loss figures for the Gold Coast, Ms Hutt accepted that she was preparing the figures “cold” in the sense that prior to 10 October 2006 she had not been asked to do so either by Mrs Hart or by anyone else (T, p 381, lns 1-14; lns 25-27) and in order to build up a complete profit and loss statement, the figures had to be extracted from MYOB (T, p 381, lns 17-18) to which only Ms Hutt had access (T, p 381, ln 29). Ms Hutt accepted or believed that until the start of her process of allocating a job code to expenses that she believed belonged to the Gold Coast activities, there was no way of ascertaining Gold Coast expenses as compared with Brisbane expenses (T, p 381, lns 34-44). All of the items in MYOB had to be manually coded (T, p 382, lns 18-19; lns 25-29). The coding exercise began on 10 October 2006.
475 Ms Hutt has been provided with a copy of Mrs Hart’s email of 13 October 2006 to Mrs Stariha [226] attaching a “Profit and Loss Spreadsheet”. Ms Hutt says that she did not prepare the spreadsheet. It was the “type of document” that Mrs Hart and Ms Price would prepare in the normal course of the business. Ms Hutt says that she received an email from Mrs Hart on or around 20 October 2006 which forwarded to her Mrs Stariha’s email to Mrs Hart of 19 October 2006. Ms Hutt recalls that one of the issues Mrs Hart was concerned about was sales that may have been attributed to the Brisbane franchise but which ought to have been attributed to the Gold Coast Agency for the purposes of the profit and loss spreadsheet. Ms Hutt says Mrs Hart wanted to speak to her about that matter. However, Ms Hutt understands that because Mrs Stariha had amended the profit and loss spreadsheet, Ms Hutt had no further involvement with the matter of examining sales which may have been misallocated.
476 Ms Hutt has some things to say about a profit and loss statement for the Gold Coast Agency submitted by Mrs Stariha to the ANZ Bank as part of her application for a loan.
477 First, Ms Hutt observes that Mrs Stariha’s application describes the profit and loss statement as having been prepared by the vendor. Ms Hutt says that since she was the bookkeeper for the vendor the “ANZ Profit and Loss Statement would have to have been prepared by me if Colleen and Hart Trading had wanted it”. Ms Hutt says she did not prepare the document which she would characterise as a “cashflow statement” rather than a profit and loss statement.
478 Second, Ms Hutt says that the document contains figures and items that would not ordinarily appear on a profit and loss statement and those items include the franchise costs, the gross sales and the GST component. Ms Hutt says the gross fees are irrelevant to a Bank because the income to Hart Trading is ultimately 80% of the placement fee after deduction of the 20% royalty. If the document is treated as a cashflow statement, Ms Hutt says that one would include the 10% GST component, although it would be expensed.
479 Third, Ms Hutt says that she has examined the figures in the profit and loss statement and says that the figures do not “add up” for these reasons. The “franchise costs” appear to include a GST component which would not be included according to normal accounting standards for a profit and loss statement. Ms Hutt says the figures for June 2006 appear to be “completely inaccurate” and on the figures presented the “net sales” have been “overstated”. In June 2006, the gross income is shown in the spreadsheet as $38,014.59 with GST of $3,455.87 and franchisee costs of $7,602.92. The net sales for that month are shown as $36,998.68. If the net sales are derived by taking the gross sales less GST, less the identified franchise costs, the net sales for June 2006 ought to be, on those figures, $26,955.80. If the GST component of the franchise cost is excluded ($691.17), the net sales would be $27,646.97, not $36,998.68 as reflected in Mrs Stariha’s spreadsheet.
480 Fourth, Ms Hutt says that the spreadsheet appears to have been prepared using an Excel spreadsheet but the “mathematical formulas embedded in the spreadsheet have not been correctly implemented so the net sales have not been calculated correctly” [emphasis added].
481 Fifth, Ms Hutt says that the spreadsheet shows the GST that has been collected but does not show the GST in the expenses section where it ought to be shown. Ms Hutt says she would not prepare a cashflow statement without including GST in the expenses section. If the document is intended to be a true profit and loss statement, it ought not include GST as GST ought be included in the balance sheet and cashflow statements.
482 A number of things can be conveniently noted now about Appendix 1 to Mrs Stariha’s application to the Bank. The first thing to note is that Ms Stariha asserts in the application document that gross sales amount to $265,957.38 and proof of the profit and loss can be found in Appendix 1. Mrs Stariha then says in her document “Figures supplied by the vendor”. Mrs Stariha might be intending to convey that the figures comprising Appendix 1 have been provided by the vendor or that the figures as to the gross sales have been provided by the vendor, or both. The probability is that Mrs Stariha was intending to convey that both sets of figures were provided by the vendor.
483 As to the gross sales, the Frontline printout for the period 1 November 2005 to the end of October 2006 recites total sales for the Gold Coast of $265,957.38 taking account of placements of $302,830.15 and the value of the replacements and credits. The Frontline printout recites GST of $24,177.94. Mrs Stariha’s spreadsheet reflects gross sales of $265,957.38 and GST of $24,177.94 which is precisely the amounts contained on the Frontline “Sales Report”. It is difficult to criticise Mrs Stariha’s formulation of the profit and loss statement for the relevant period at Appendix 1 at least as to gross sales and GST if those numbers reconcile precisely with the Frontline printout.
484 The second thing to note is that the document reflects a net sales line, and as to the months of November, December, March and April, the net sales reflect the same net sales values recited in Ms Hutt’s document at CMH-1. As to the months of January and February 2006, Mrs Stariha’s net sales are the same numbers recited in her amended spreadsheet which she sent to Mrs Hart for her consideration. The May and June figures are also the amended figures set out in her revised spreadsheet sent to Mrs Hart. The difference between Mrs Hart’s figures and Mrs Stariha’s figures for those latter two months essentially net out. In any event, the adjustments to net sales shown in the spreadsheet put to the Bank is consistent with some of the figures contained in Mrs Hart’s document and where adjustments were made the adjustments are consistent with the adjusted figures put to Mrs Hart.
485 The third thing to note is that the document attempts to provide a top line or gross sales figure for each month consistent with the total figure of $265,957.38. It may ultimately be irrelevant, especially to a prudential banker who would want to see the actual net sales, but setting out the monthly top line sales is an enquiry someone could well want to understand. The GST in each month is separately identified and the costs Julstar would pay to the franchisor described as “franchise costs” reflect a cost to the franchisee based on the royalty at 20% plus GST. That formulation is entirely appropriate because the royalty payable under the Franchise Agreement is “20% plus GST”. If the document is trying to show the gross sales each month, the GST component on those sales and the franchise cost to the franchisee based on the royalty formulation, the amounts are relevantly identified. To take an example in the month of November, gross sales amounted to $10,791. The GST on those sales at 1/11th amounted to $981.00. The sales less GST amounted to $9,810. The royalty at 20% amounted to $1,962 and applying the formula, the royalty plus GST amounted to $2,158.20 (the amount shown in the spreadsheet). The net sales shown in the spreadsheet is $3,520.73 which is the same figure identified by Mrs Hart and Ms Hutt in CMH-1.
486 The fourth thing to note is that in theory, if a calculation is made by taking the gross sales, less GST, less the franchise costs, one would expect that calculation to result in the net sales line shown in the spreadsheet. However, in no month does such a calculation result in the net sales amount shown in the spreadsheet. That is no doubt because the spreadsheet is trying to identify, first, the net sales identified by Mrs Hart and, second, the net sales as adjusted by Mrs Stariha for the months of January and February and May and June based on the method Mrs Stariha has described and as put to Mrs Hart on 19 October 2006. Mrs Hart recognised that in the respects already mentioned, her spreadsheet seemed to understate the net income position, although she thought the discrepancy to be “weird”.
PART 11 – THE EVIDENCE OF DIANE KNIGHT
487 Ms Knight is a teacher. Ms Knight knows Mrs Hart because Mrs Hart worked for Frontline Brisbane when it was operated by Ms Ellis and at the same time Ms Knight worked for Ms Ellis in the Frontline Gold Coast office at Kaybank Plaza in Southport. Ms Knight worked for Ms Ellis as a Recruitment Consultant out of the Gold Coast office between October 2004 and December 2004.
488 Not long before Christmas in 2004, Ms Ellis told Ms Knight that she had made a business decision to close down the Gold Coast Agency.
489 Ms Knight recalls that sometime after she had finished working for Ms Ellis, Ms Knight received a telephone call from Julianne Stariha, which Ms Knight describes in para 8 of her statement as the first contact with Julianne. Ms Knight originally thought the call was in either February or August 2006. However, in her amended statement, Ms Knight says she believes that this call was in January 2006 having regard to the entries in the Frontline database suggesting conversations between Ms Knight and Mrs Stariha in January, then in February and then in August 2006.
490 Prior to the January 2006 call, Ms Knight had not been contacted by Mrs Stariha (then Ms Jones). Ms Knight cannot recall the precise reason why Mrs Stariha called her as it was such a long time ago but she assumes and believes that Mrs Stariha “called me because she either had a potential job for me or was reviewing the database for potential candidates that were interested in career moves”. Ms Knight believes this was the reason for the call, in part at least because, after the call, Ms Knight attended the Frontline Gold Coast office. At para 10 of her statement, Ms Knight says this:
When Julianne told me that she was from Gold Coast Frontline Retail, I was surprised. I told Julianne that I had worked at Gold Coast Frontline Retail when it had been open previously. In particular, I remember that we discussed the location of the offices; because Julianne told me that it was no longer in the same exact location. Instead, it was a few suites away from the original suite where it had been when I was working there.
491 Mrs Stariha says that her initial conversation with Ms Knight occurred when she telephoned Billabong seeking job placements for Billabong. In this conversation, Mrs Stariha introduced herself to Ms Knight and told her that she could assist Billabong with job placements. Mrs Stariha says that Ms Knight told her that she was based on the Gold Coast and did not believe that Billabong would need the assistance of Frontline as Ms Knight fills positions for Billabong. Mrs Stariha says that in this conversation Ms Knight told her that “she had worked for Frontline in the past but not for very long”. Mrs Stariha says that Ms Knight told her that she had “worked for Colleen Hart”. Mrs Stariha says that she has no “precise recollection” of the conversation quoted at para 10 of Ms Knight’s statement although Mrs Stariha says “it is a fact that when [she] was employed by Colleen Hart in the Gold Coast Agency, the agency office was moved from a smaller windowless office to a more spacious corner office in the same serviced office suite” (para 36 of Mrs Stariha’s statement dated November 2011). At para 37 of that statement, Mrs Stariha says this: “At that time I had no knowledge that the Frontline Gold Coast Agency had been previously closed down by Karen Ellis. I found out that Karen Ellis had previously closed the Gold Coast Agency in about early 2009”.
492 On 23 January 2006 at 11.00am, Ms Knight, who was working for Billabong (and had been working there since 2005 as a Human Resources Officer) sent Mrs Stariha an email attaching an up-to-date CV, a list of referees and a summary of her CV. Ms Knight later attended the Gold Coast office of Frontline and met with Julianne Stariha.
493 Ms Knight’s CV attached to the email describes her work experience prior to Billabong in these terms:
Oct 2004 – Dec 2004
Frontline Retail (Southport – Gold Coast)
Recruitment Consultant
494 At p 3 of the Resume, Ms Knight says this about her Frontline Retail work history:
FRONTLINE RETAIL October 2004 to Dec 2004
Frontline Retail is a national recruitment agency that specialises in sourcing suitable candidates for clients in the retail industry. Established in Sydney in 1995 with offices in Melbourne, Brisbane, Perth, Adelaide, Canberra, Newcastle, NSW Central Coast, Hobart, Darwin, and Gold Coast.
Recruitment Consultant
Responsibilities
My role was directly responsible for the operations and building of the Gold Coast business. I sourced Salespeople, Store Managers, Area Managers, Retail Management and Administration Staff, managing all client accounts and building business. I placed advertisements, conducted phone and face-to-face candidate interviews. I short listed candidates and conducted reference checks to ensure the best criteria fit provided by my clients.
Achievements
In my first six weeks the job list increased from 7 to 20, the managed accounts increased from 53 to 66 and added 25 new key contacts. I also placed 16 people in new positions.
Reason for leaving
A business decision was made to close the office and cover the Gold Coast region from Brisbane.
495 There is a challenge to the admissibility of para 8 of Ms Knight’s statement concerning Ms Knight’s recollection of the reason for Mrs Stariha’s call in January 2006. The challenge is made on the footing that what follows is mere assumption and nothing more than speculation. I have admitted the paragraph into evidence. The evidence is informed by an event and the qualification goes to the “precise” recollection. It is a question of weight. Ms Knight gave oral evidence about the telephone call. Ms Knight recalls that Mrs Stariha called her but the circumstances are “a little bit grey” (T, p 374, lns 27-28). Ms Knight worked at Billabong at that time and was “dealing with a lot of recruitment” and thinks the call could have been for that purpose or because Mrs Stariha was “looking at potential candidates”, that is, Ms Knight being a candidate herself, or Mrs Stariha simply wanting Billabong as a client (T, p 374, lns 41-42; T, p 375, lns 1-6). The conversation was “very brief” (T, p 375, lns 8-9). Although Ms Knight cannot recall any discussion of an opportunity for Frontline Gold Coast to place candidates with Billabong, the position was that Billabong would not need Frontline’s help because that was Ms Knight’s role (T, p 375, lns 19-28). Ms Knight recalls, however, telling Ms Stariha that she had worked for Frontline but not for very long (T, p 375, lns 30-31). The main part of the conversation that Ms Knight recalls was the discussion of the location of the Frontline Gold Coast offices because Ms Knight was surprised that the Gold Coast office had re-opened (T, p 375, lns 40-44) as she understood that it had “closed down”.
PART 12 – THE CROSS-EXAMINATION OF MRS STARIHA ON BEHALF OF MRS HART AND HART TRADING
496 Mrs Stariha was asked questions about her CV at Vol R2, Tab 13 (CTH-12) at p 224. Mrs Stariha had prepared this document (T, p 13, lns 26-27) to be sent to prospective employers (T, p 14, lns 1-2) who she accepted would rely upon the truth and accuracy of its contents (T, p 14, lns 4-6). Mrs Stariha was taken to her description of her first entry in her employment history which she puts in these terms:
EMPLOYMENT HISTORY
DECEMBER 2002 – PRESENT International Working Holidays
152 Middle Street, Cleveland QLD 4163
SELF EMPLOYED
Design and creation of own recruitment/travel business utilising contacts established in London during 2000-2002. Simply a business created allowing travellers to gain employment before leaving Australia, London and Canada before travel. Contacts include a network throughout Europe, USA, Canada, New Zealand, South Pacific and Australia. Visas, Travel itineraries supplied and accommodation booked for candidates before departure. Placements range from then 1 year to 4 years in duration.
Building business from inception to well established, profitable venture.
Developing systems in the short term with the objective to sell and earn passive income within 2 years.
October 2003 saw the opportunity to develop a network throughout the Pacific for charity volunteers. This involved a reconnaissance trip to the Solomon Islands forming business relationships and setting up the frame work for healthcare workers and teachers to help these communities.
January 2004 – I now have the opportunity to sell this business with an annual percentage earned.
497 Mrs Stariha accepted that the description in the document was incorrect or inaccurate “insofar as it says or indicates [Mrs Stariha was] employed by International Working Holidays” (T, p 14, lns 12-14). Mrs Stariha said that she had explained during her interview with Mrs Hart that this was the name of a “project” she was working on (T, p 14, lns 9-10). Mrs Stariha was then taken to an updated CV, created by Mrs Stariha, in about 2005 (T, p 14, lns 22-23) in which she describes her employment history concerning Café Addict Pty Ltd. In that entry, she says this:
EMPLOYMENT HISTORY
FEBRUARY 2004 – JULY 2005 Café Addict Pty Ltd
SELF EMPLOYED
Café Addict saw me start my own company with a view to owning four cafés within four years. It has always been a personal goal to own my own café chain in Brisbane. After purchasing an existing food business in Riverhills, converting it into a café concept over 12 months, realised the location was not suitable in the future. The business has recently been sold.
Building business from inception to well established, profitable venture.
Finalist in the South West News Casual Dining Award – recognised as being in the top five businesses in the south west area.
Operating own company, from stock inventory to taxation to payroll, autonomy and no support in this project. Managing a team of 8 staff.
498 Again, Mrs Stariha accepted that the statement “building business from inception to well-established, profitable venture” was included within the CV on the footing that those who received it would rely upon the “truth and accuracy of that statement” (T, p 14, lns 33-34). Mrs Stariha was taken to an email she sent to her accountant, Mr Reed, dated 19 May 2006 attaching, for tax purposes, income and expenses prepared by either her or her husband for four quarters of the relevant year with totals (T, p 16, lns 6-10). Mr Reed sent Mrs Stariha an email later on 19 May 2006 asking for information in order to finalise the “2005 tax return for your company”. In a further email sent by Mrs Stariha on 19 May 2006 to Mr Reed’s assistant, Mrs Stariha provided particular information and concluded her email by saying:
Thank you so much for your assistance. I will double check everything on the weekend and come back to you with those couple of things. I cringe every time I look at this – so disappointing.
499 Although the reference is to the tax for the financial year ending 30 June 2005 (in the attachment mentioned earlier), Mrs Stariha says that reading the emails of 19 May 2006 she believes that she would have assembled all the financial information by about 19 May 2006, handed it to the accountant and then taken time to go through the expenses with the result that the outcome, a loss, was “disappointing in the end” and caused her to “cringe at it [the 30 June 2005 performance]” (T, p 17, lns 20-27). Mrs Stariha said that she became aware that the business had suffered a loss once she got all her accounting details together. Mrs Stariha said that during 2005 the business operated on a predominantly cash basis and she had managed to pay all the bills from the takings. She said she did not believe that the business was then operating at a loss. Mrs Stariha said that at the time she applied to Frontline Retail for a retail position she thought that the Café Addict business had paid all the bills and had broken even. She says it was not until the following year that she realised the true position (T, p 18, lns 13-14).
500 Mrs Stariha was then taken to another version of her CV which she had created sometime after September 2006 (T, 19 lns 12-15). In that CV, Mrs Stariha continues to maintain the observation that she had built the Café Addict business from inception to a well established profitable venture.
501 Mrs Stariha accepted that at September 2006 she knew that the Café Addict business was not a profitable venture. She accepted that by then the statement was incorrect and that a reference to “profitable venture” in 2006 was “an incorrect statement” (T, p 19, lns 40-46).
502 As to the KPIs, Mrs Stariha accepted that compliance with the KPIs was “a guide” to success and that whilst an employee of Hart Trading she had done her “best” to meet the weekly KPIs (T, p 21, lns 25-28; T, p 22, lns 7-18).
503 As to the hours worked, Mrs Stariha accepted that the letter of 1 November 2005 set out the terms of her employment with Hart Trading and that the house to be worked were a minimum of 8.30am to 5.30pm from Monday to Friday and it was, she said, her practice to work those hours normally commencing at 7.45am and generally ending at 5.30pm although sometimes she worked from home with home access to the Frontline database which had occurred some months before Julstar purchased the Gold Coast franchise (T, 22 , lns 38-39; T, p 23, lns 18-23 and lns 38-39 and 45-46; T, p 24, lns 1-2). Mrs Stariha said that she would work about “a couple of hours” a week from home (T, p 24, lns 25-36), although after some time when working for Mrs Hart, Mrs Hart allowed her to work from home one day a week, working exactly the same hours but dialling in on home access.
504 As to the level of access, Mrs Stariha said that she had “consultant level” dial-in internet access to the Frontline database. The database operated in this way according to Mrs Stariha. Mrs Stariha had responsibility for “managed accounts”. She would know each of the managed accounts because they would be entered into the Frontline database under her name, or as she put it, they would be “clicked in” for her. When she “clicked” the “managed accounts” report feature, that report would show the managed accounts under her name. To access prospective client accounts, those prospective clients would also have to be added into the database under Mrs Stariha’s name. Mrs Stariha could look at the “job list” on the database to see the number of current positions or jobs available to be filled with placements. As to “new positions”, they would fall under Mrs Stariha’s KPI Report but only new positions “for myself under my KPI Report (T, p 25, lns 3-16; lns 21-25; lns 30-37). Mrs Stariha said that she could access the database to see the sales through a national sales report and, for example, could see the sales made by the Adelaide franchisee. However, she could not see the “number” of national placements unless she did a detailed report and then counted out the number of placements for herself. Mrs Stariha did not accept that she had “access to top level financial information for all franchises nationally”. She said she did not have details of other franchisees because she was simply a consultant (T, p 26, lns 7-10).
505 Mrs Stariha accepted that when employed in the Brisbane office of Hart Trading, she had weekly meetings with Mrs Hart and that in October 2005 she was asked to commence work as the “sole retail consultant” for the Gold Coast Retail Agency (T, p 26, ln 30). Mrs Stariha did not accept the suggestion put to her that Mrs Hart showed her a spreadsheet from the “national reports” revealing that in the 2003 and 2004 financial years, the Gold Coast Frontline Retail Agency “was being conducted under Ellis Trading”.
506 Mrs Stariha said she was excited about the opportunity to be the sole retail consultant at the Gold Coast and she ran the agency as sole consultant. For some time there was “an administrator there for a few months, Lisa” (T, p 27, lns 6-10). Mrs Stariha did not accept that she was the manager of the Gold Coast office (T, p 27, ln 12). In this context, Mrs Stariha said this (T, p 27, lns 17-30):
When I first spoke to Colleen, she said, “I would like you to go to the Gold Coast and you can manage it for me”. And she said, “we will put the salary – at the time I was on $35,000 … I will pay you $50,000, and you will be the agency manager”. Then I said, “I will go talk to Lee” … but I was excited. When I came back and I said, “yes, I will do it”, she said, “by the way, I can’t officially give you the title of agency manager because according to … Pete, … technically you are the only person there. … - you don’t meet the criteria. The Gold Coast is new. “Who are you managing?” But in my eyes, you’re the manager. But on your letter of offer, it will say “consultant”. And I was fine with that. So in my eyes, for Colleen, I did my best. I managed it, but I did not have that title. I can’t say that I was the agency manager.
507 Mrs Stariha accepted that although a presence on the Gold Coast only began in November 2005 the “Consultant Summary Report” for the period 28 August 2005 to 7 December 2006 accurately shows Gold Coast Retail placements by her to the value of $301,530.21 with replacements of $39,751.30 resulting in “placements” of $261,778.91 (or “$263,000 using round numbers”) based on 96 placements relating to 38 clients. Mrs Stariha said that she had about “40 accounts on my report” (T, p 28, ln 24, lns 29-38; T, p 29, lns 17-20).
508 Mrs Stariha was the only consultant located on the Gold Coast making placements for clients on the Gold Coast although the Brisbane team from time to time made placements. Mrs Stariha believed that she built the Gold Coast Retail Agency over the 2005/2006 years “from the ground up” (T, p 30, lns 25-36). Mrs Stariha did not accept that by August and September 2006 Mrs Stariha was “looking to purchase” the Gold Coast Agency or that by August or September she was engaged in conversations with Mrs Hart regarding a purchase of the Gold Coast franchise. Mrs Stariha said that “it would be at the very end of September, first week of October – was the first time that we discussed me purchasing the business” (T, p 30, lns 44-46). Mrs Stariha says she recalls the conversation. Mrs Hart did not say that the next time they met she would bring with her a profit and loss statement for the Gold Coast Agency. Mrs Stariha says that at this first meeting with Mrs Hart she presented Mrs Stariha with two spreadsheets. Mrs Stariha did not accept that she had been speaking to Mrs Hart about purchasing a retail franchise “well before that meeting” (T, p 31, lns 1-12).
509 Mrs Stariha was taken to an email she sent to her husband’s email address in order to print out material as she could not print documents in the office. In addition, the printer at home was not connected to the database and so Mrs Stariha would send emails with attachments which could be printed. The email is dated 9 August 2006 and attaches a client list for business development purposes. Mrs Stariha gave evidence that the idea was that she would identify clients or prospective clients that had leases in multiple shopping centres. The attachment had the names of clients or prospective clients down a left hand column with the shopping centres across the top. Mrs Stariha said that she was undertaking an exercise to try and develop a better client base so as to pick up better jobs and start billing as she had had “a lot of credits in a row” with the result that she was trying to “claw my way back with my sales”.
510 Mrs Stariha did not accept that as at 9 August 2006 she “had in mind … acquiring the Gold Coast Retail franchise” (T, p 32, lns 10-11) or that, at this time, she was “laying the foundation for building upon the franchise” when or if she “acquired it” (T, p 32, lns 13-18). Mrs Stariha said that at this time she felt she was “failing”, had become disappointed in herself and by September she was ready to leave.
511 The point of the 9 August 2006 document was that Mrs Stariha was “trying to get my sales back” (T, p 32, ln 33) and she “got nowhere near completing it” (T, p 32, ln 39). Mrs Stariha said that she had her managed account list to work upon. Each week when reviewing the KPIs with Mrs Hart, they would look at the “call cycle”. Mrs Stariha wanted to “get a better focus list” to “pick up better jobs”. The attachment to the 9 August 2006 email was, according to Mrs Stariha, taken from the Brisbane client list because those shopping centre clients were likely to have a site on the Gold Coast. It was an attempt to focus on prospective clients and “click them on” (T, p 33, lns 35-40). Mrs Stariha said that she was content to try and develop a client list from the shopping centre list “as part of [her] employment for Hart Trading” because she was “desperate” and she felt she was “failing the business at that time” (T, p 34, lns 8-10) (the email and attachment is Exhibit 6).
512 As to the meeting on 5 October or 6 October 2006, Mrs Stariha affirmed her evidence that Mrs Hart showed her a Gold Coast Agency spreadsheet for the 2005/2006 financial year and the 2006/2007 financial year (T, p 34, lns 46-47) and that at this meeting Mrs Hart said that the Frontline franchises were “cash cows and highly profitable”. Mrs Stariha, in response to the proposition put to her that Mrs Hart did not say that “the Gold Coast Frontline Retail Agency would be profitable in the future” [emphasis added] said that Mrs Hart had said to her that “it would be profitable” [emphasis added]. When asked what the precise words were, Mrs Stariha said: “She said that they’re highly profitable businesses”. When the proposition was put to Mrs Stariha that Mrs Hart did not say that the Gold Coast Frontline Retail Agency “would be profitable in the future”, Mrs Stariha said: “She used words to the [that] effect. Yes she did”. This exchange then followed:
Q: Well, did she use those words or not?
A: Exactly? She said – well, she was talking about the EBIT precisely. So the fact that she was saying the number – it was profitable so …
Q: Did Mrs Hart say – on your meeting with her on 5 or 6 October 2006, did she say, “the Gold Coast Frontline Retail Agency would be profitable in the future” or “is going to be profitable in the future” or something like that?
A: No, she said, “Don’t worry. It’s – it’s an $80,000 EBIT”.
Q: Sorry, those were her exact words?
A: Words to that effect, yes.
Q: All right. But she didn’t say, “this business is going to be profitable in the future?”
A: I do not have a transcript from the day, so I cannot say, absolutely, on oath, that she did not say those exact words. But the intent was that the business was profitable and will be.
Q: All right. And the intent that you draw is derived from, you mentioned before, the EBIT?
A: Yes.
[emphasis added]
513 Mrs Stariha was then asked if there was anything else said in the meeting that caused her to form the impression that the Gold Coast Retail Agency was going to be profitable in the future. Mrs Stariha said this:
Yes, because she was talking about the fact that she had had a look at it. The … profit was actually lower than what she expected, and she said “Don’t worry. I’ve checked it. It’s actually $80,000”. And I asked her if it included the salary because I thought, “well that’s not great” … I knew … the moment I looked at this spreadsheet, that I would have to borrow funds. And that was one [of] the first things I asked … “does that include the salary that I am already getting?” And she said, “No, it’s … separate. You can employ a consultant if anything changes, and there is an 80k EBIT. I’ve checked”.
514 Mrs Stariha was asked whether it was correct to say that her recollection of the conversation with Mrs Hart was that Mrs Hart had said that her accountant had told her that the business had EBIT earnings of $80,000 in addition to Mrs Stariha’s $50,000 salary. Mrs Stariha said yes and said that Mrs Hart said she had “checked with the accountant”. Mrs Stariha then said that she was trying to remember exactly if Mrs Hart made mention of the accountant at the meeting on 5 October or 6 October or whether it was at the next meeting. Mrs Stariha said this (T, p 36, lns 17-20):
[Mrs Hart] said she had checked with the accountant and it was during those two conversations – the two meetings initially with the spreadsheet, the first one and the second one, as to the 80K and the accountant.
515 Returning to the particular meeting on 5 October or 6 October 2006, this exchange occurred (T, p 36, lns 28-47; T, p 37, lns 1-3):
Q: Now, at that meeting do you agree with me that your best recollection of the conversation you had with Mrs Hart was that she said her accountant had told her the business had an EBIT of $80,000 in addition to $50,000 salary?
A: I definitely remember the 80K with the 50 on top. The accountant – the word “accountant” definitely on the 5th. I would say definitely between the two meetings the word “accountant” was used.
Q: We’re only talking about one meeting?
A: Yes, I know. I’m answering the question. I can’t say. I cannot say categorically.
Q: Can’t be sure. This happened a long time ago. Memories fade?
A: No. Well, I remember precisely – there’s a lot I remember about purchasing the business. I spent a lot of money.
Q: All right. And she did not say, you will agree with me, that you would achieve an EBIT of $80,000 in your first year as franchisee of the Gold Coast Frontline Retail Agency in addition to paying yourself a $50,000 salary. She didn’t, on your case, use those words?
A: No, she pointed to it and she said, “it has an 80K EBIT and it has the 50K on top”. She pointed to it. She didn’t say that I would get it, but it was there.
Q: So, your recollection of that conversation was that she was talking about the current EBIT of the franchise, not future?
A: No. I took it to mean that if she was telling me that that’s what it had got and I am purchasing it, that’s what I would have.
[emphasis added]
516 This question of whether Mrs Hart said the words or said things which were to the effect of the words asserted by Mrs Stariha was examined further in these terms (T, p 37, lns 5-15):
Q: She didn’t say to you that the retail agency would have in the future an EBIT of $80,000?
A: I believe that’s what she meant, yes.
Q: Well, hang on, did she use those words?
A: I think she did, yes.
Q: Sorry, she did say …?
A: I think the words were to that effect.
Q: Well, okay, what words were to that effect?
A: That I would have – that the business generates an 80K EBIT. It is different to the spreadsheet. I’m looking at the spreadsheet, I’m looking at it and she said, “Don’t worry, I’ve checked. It’s actually 80K, it’s not 50”.
517 Mrs Hart has taken to the documents in Vol A1 at Tab 1A which contains two spreadsheets in the terms set out at [192] and [193]. Mrs Hart affirmed that those two documents are copies of the two documents shown and given to her at the meeting on 5 October or 6 October 2006. She believed them to be photocopies of those documents (T, p 37, lns 27-38). The spreadsheet for the 2006/2007 year did not contain any data beyond October 2006. The following exchange then occurred (commencing at T, p 37, ln 46 and concluding at T, p 38, lns 1-30):
Q: Now, you will agree with me then that when, in your case, Mrs Hart said that the retail agency had an EBIT of $80,000 she was talking about the current state of the business?
A: No, she said that if you buy it that, you know, don’t worry, the business does an 80K EBIT.
Q: Okay. Were those her precise words?
A: Yes.
Q: She said to you, just so I’m clear on this, “Don’t worry, the business has an 80K EBIT?
A: Yes.
Q: She used those words.
A: Yes.
Q: But … those words you say Mrs Hart said during that conversation, it has always been your belief that those words were said in fact during that conversation?
A: During conversations in October, yes.
Q: … Mrs Hart, during your conversation on 5 or 6 October 2006 did not say the value of the retail agency is $240,000?
A: Not that day, no, because I had the week of guessing what the price will be.
518 Mrs Stariha accepted that Mrs Hart did not say in the initial meeting that there would be $10,000 of training from Frontline and nor did Mrs Hart say in the 5 October of 6 October 2006 that every Frontline franchise was successful. Mrs Stariha said that she was not thinking about things other than the fact that the total income in the financial year ending 30 June 2006 was $118,942.31 when she rather thought that the business had billed $200,000 and moreover, she says she had not seen any expenses of the business until the meeting and until she saw the spreadsheet reciting some expenses. Mrs Stariha says that the discussion was more about the franchises being “highly profitable”. Mrs Stariha accepted that her recollection of the 5 October or 6 October 2006 meeting was that “Mrs Hart did not say every Frontline franchise was successful or words to that effect” (T, p 39, lns 8-9). Mrs Stariha believed that it was at the second meeting that Mrs Hart said that “no franchise had ever failed” (T, p 39, lns 19-21).
519 As to the second meeting, Mrs Stariha affirmed her evidence of her recollection of a second meeting about a week after the first meeting which, in Mrs Stariha’s view, puts the second meeting at 12 October 2006. Mrs Stariha gave evidence that there was no talk of a purchase price on 5 October or 6 October 2006 because she recalls that she was “guessing with my husband for a week” and she had “no idea how much it would cost” (T, p 39, lns 23-29).
520 Mrs Stariha was then taken to the email of 6 October 2006 at 6.07pm which she sent to her husband’s email address (see [222], Exhibit 7). In that email, Mrs Stariha says that she has a price and she has seen the profit margin.
521 As to the timing of the 5 October or 6 October 2006 meeting, Mrs Stariha accepts that she did not keep notes of the meeting and says (T, p 40, lns 26-31):
… but what I had was a document that I started asking – a spreadsheet where I was looking at the possibility of the numbers. So – and that was the – the reason why I drew the conclusion it was on the 5th – I had two meetings – was because I had a document saved for the 4th and 5th – for 5 October … so I did make notes after.
522 Mrs Stariha says that during the last week of September an administrator called Rebecca was supposed to start employment but did not, and the meeting with Mrs Hart took place after the proposed new administrator “did a no show”. Mrs Stariha says she remembers that event and has taken that into account in her recollection.
523 Mrs Stariha accepts that she did not send an email to Mrs Hart at the time confirming what Mrs Stariha says Mrs Hart had said during the conference.
524 Mrs Stariha also accepts that many years later when the retail franchise business began to fail in 2008 and 2009, she did not send Mrs Hart a letter or note asking her to explain why she had said the things on 5 October or 6 October 2006 she had said to Mrs Stariha.
525 Mrs Stariha also accepts that she did not send Mrs Hart any demand or complaint until Mrs Stariha filed these proceedings (T, p 41, lns 1-9).
526 Mrs Stariha, however, did not accept that she had first turned her attention to the October 2006 conversation with Mrs Hart in about late 2010 or early 2011. Mrs Stariha said that she had always maintained her recollection of the events because, “it was a big event for me buying a business for nearly a quarter of a million dollars” (T, p 41, lns 16-17). Mrs Stariha said that she has always had a recollection of the discussion and her recollection has never changed. Mrs Stariha explained that matter further in this way (T, p 41, lns 21-25):
... I think the first time that I actually started looking at it and piecing things together would have been when I realised the losses that I had, which would have been 2009. And I looked at the losses, and I was just looking at everything in front of me. And then I started looking at what had happened in the beginning.
527 Mrs Stariha said that she had some saved emails but it was more the fact that “I was looking at what went wrong” (T, p 41, lns 30-32).
528 Mrs Stariha said that in the first year she had a loss of $15 and in the next year a loss of $4,000 but could never explain to herself why she did not have the margin or the cash flow.
529 As to this question of piecing the events together in 2009, Mrs Stariha said that she did it from her “memory” but she also went to “my box of the documents that I held from when I bought the business”. Mrs Stariha said that the spreadsheets assisted her recollection because they were the documents that she was given in October 2006. Mrs Stariha said that she knew it was the “end of September, early October” and recalled that the meeting with Mrs Hart took place after “Rebecca” failed to “show up” and then said it was “definitely the week before that” (although consistent with the earlier evidence mentioned, Mrs Stariha probably meant to say the week after Rebecca did not show up) (T, p 42, lns 6-10).
530 Mrs Stariha explained that it was “very easy to look at my box of purchase retail”. Mrs Stariha said that she had a box with everything in it in relation to the purchase of the retail business. Mrs Stariha did not accept that her piecing together of the memory of the conversation she had with Mrs Hart in October 2006 was drawn from the contents of the box of documents. Mrs Stariha said that she drew her recollection of the events from her memory and that she remembers it “very clearly”. Mrs Stariha said she did not have to turn to the box to remember what happened and in fact she did not have to “turn to the box at all”. She said that “it was more a case of, ‘There it is’” (T, p 42, lns 10-19). Mrs Stariha said that she was trying to find an answer to what had gone wrong in the business. She said that she knew, at the start of 2009, that she was “looking at a loss” and she knew it was going to be “a bigger loss”. She then asked herself what had gone wrong and why she did not have the profitability (T, p 42, lns 27-31).
531 Counsel for Mrs Hart put the proposition to Mrs Stariha that Mrs Hart did not give her the two spreadsheets on 5 October or 6 October 2006. Mrs Stariha said this:
Well, she did because they’re coloured. And the – they were the originals. I remember it distinctly. I cannot print colour from the office printer in the Gold Coast and I couldn’t print them at home either. … If I printed them at home it would have come through the gmail – the bigpond we’ve got everywhere here. You would have a proof of it coming through.
532 Mrs Stariha explained that matter a little further in this exchange:
Q: So you’re – the basis upon which you say those documents were handed to you during the meeting is that those documents are in colour, is that right?
A: No. It’s the fact that they were the original, they’re – you know, I look at them and they were the ones that I had. They are the original.
533 Mrs Stariha reasserts her evidence that in the 5 October or 6 October 2006 meeting Mrs Hart referred to the Frontline franchises as cash cows and as being highly profitable. She reasserted her evidence concerning the Gold Coast retail franchise having an EBIT of $80,000 and rejected the proposition that Mrs Hart told her of the calculation of the price in the way Mrs Hart describes. Mrs Stariha reasserted her evidence at the meeting on 5 October or 6 October 2006 was not the last time she spoke with Mrs Hart in person about the purchase.
534 Mrs Stariha accepted that the documents at Vol R2, Tab 32 are true copies of the Excel spreadsheet attached to Mrs Hart’s email to her of 13 October 2006.
535 As to the meeting between Mrs Stariha and Mrs Hart at the coffee shop between 13 October and 18 October 2006, Mrs Stariha affirms her evidence that such a meeting occurred. She accepts that she did not take any notes of the meeting and that once she had spoken to Mrs Hart and obtained Mrs Hart’s instructions, as Mrs Stariha describes, Mrs Stariha emailed her revised spreadsheet to her and asked her to make sure that it was right. Again, Mrs Stariha says that she has a very clear memory as to what happened on those particular days. Mrs Hart said that the first time that she sat down and wrote or typed out the events that happened between 13 October and 18 October 2006 “would have been in 2009” and prior to that she had not written down her recollections of the events (T, p 45, lns 15-21). As to these matters, Mrs Stariha says that she was relying on her memory and the documents in her box (T, p 45, ln 23). Mrs Stariha accepted that she cross-referenced what happened, with the documents in her box but “most importantly, she says she remembers the conversations”. Again, she says that she was spending a lot of money and it was “a big deal to me at the time”.
536 Mrs Stariha accepted that she did not raise with Mrs Hart any complaint about the things said by her in the conversation between 13 October and 18 October 2006 and said this (T, p 45, lns 39-42) about the reason for not doing so:
No, I didn’t because the relationship with Colleen required that we needed to work in partnership. She was my neighbour. So to – in the interest of me to be able to do well in my business, we had to cooperate. So no, I didn’t pick a fight while I was in there.
537 In response to the proposition that the meeting never happened, Mrs Stariha said that it did take place “because I received the spreadsheet, and then I went about correcting the spreadsheet and I knew … that Colleen was going to conference and then I double checked with her because, ultimately, I wanted to make sure that the figures were right” (T, p 45, lns 46-47; T, p 46, lns 1-2). Mrs Stariha said this (T, p 46, lns 4-6):
I couldn’t justify to myself all the – that if the spreadsheet said “less than 80” and she was saying “it definitely does 80”, I had an issue with that so I wanted to make sure.
538 As to Mrs Stariha’s contention that Mrs Hart said the figures in the revised spreadsheet “looked right” but that Mrs Hart’s bookkeeper might look at the figures, Mrs Stariha put her recollection in these terms (T, p 46, lns 11-18):
The recollection is that I said to her, “what do you think of my figures”. She said, “They look right. You’re very highly detailed”. She was very – she was praising me. She thought it looked great. … She said, “Do you want me to get the bookkeeper to do it?” And I said, “Well, what was the point of getting her to do it? If you say they’re right, I’m not going to wait”.
539 Mrs Stariha agreed that her recollection was that Mrs Hart said that the figures in the revised spreadsheet “looked right” (T, p 46, lns 20-23).
540 The document that contained Mrs Stariha’s figures put to Mrs Hart containing the “JJ checking” and “other expenses” the subject of the discussion between 19 October and 23 October 2006 is at Vol A1, Tab 1B. Mrs Stariha says that she conducted her own research into the expenses so as to double check them. She spoke to Ms Moseley about the expenses she might expect to incur. She added in other expenses she might expect to incur and made enquiries to satisfy herself of the “wider table” of expenses. Some of the expenses came from the original spreadsheets. Mrs Stariha’s method was to take the date from the earlier spreadsheets and compare it with what she had been told by the “national office”. Mrs Stariha put her efforts this way (T, p 47, lns 43-45):
What I wanted to do was get an accurate spreadsheet, so yes, I did the research and then I emailed it to Colleen saying, “please check and let me know if it’s correct”.
541 Mrs Stariha said that she was concerned about the original spreadsheet because she had been told by Mrs Hart that it was inaccurate and that the business was better than it appeared and Mrs Stariha was intending to base her decision on the “better result”.
542 Mrs Stariha accepted that the revised spreadsheet contained “a lot of information” (T, p 48, ln 11) and gave this explanation of the exchange with Mrs Hart concerning it:
Q: How long do you say your conversation was with Mrs Hart when you were discussing the accuracy of this document?
A: I would say that I was in her office for a good – well, we spoke about that. We spoke about the price. I would say probably 15 minutes, 20 minutes.
Q: 15 minutes. And in that time did Mrs Hart independently verify each of the expenses?
A: She had already checked it. She told me she had already checked it.
Q: Well, no, in fact what she said was they looked right and then she added, but she wanted to get her bookkeeper to do up the figures?
A: No, she asked me if I wanted the bookkeeper to do it and I said, “Well, if you tell me they’re right, then I’m happy to work with this spreadsheet”, and she said okay.
543 Mrs Stariha says that she provided the revised spreadsheet to Mrs Hart because she wanted Mrs Hart to verify the “homework” Mrs Stariha had undertaken. Mrs Stariha says she asked Mrs Hart to check the revision based on what she had “found out”. Mrs Stariha said she declined the offer of having Mrs Hart’s bookkeeper look through the numbers because (T, p 48, lns 34-39):
… She said it was right, so I thought why wait another two weeks. The bookkeeper came in once a fortnight and I believed it was going to hold it up. I wanted to get the information to go to the lawyer … you know, really research this because remember in September I didn’t know if I was staying or going.
544 Mrs Stariha said that in this period between 19 October and 23 October 2006 she was “still unsure” as to whether or not she would stay or go and told Mrs Hart that if she did not buy the retail franchise she would probably leave. Mrs Stariha says she asked the question, however, that if someone else comes in and buys it, would she have a position. Mrs Stariha says that between 19 October and 23 October 2006 she was still of the view that she could still leave Frontline “because even in November I got my termination pay” and “I thought that if I don’t buy the business then I would be unemployed” (T, p 49, lns 1-3).
545 Notwithstanding that Mrs Stariha accepted that purchasing the business would be an expensive outlay for both Mrs Stariha and Mr Stariha and that it would be a long term commitment, she did not wish to wait another two weeks and have a bookkeeper look at the numbers because as far as she was concerned, Mrs Hart had told her, based on the revised spreadsheet, that “That’s the figures we’re going with”. Mrs Stariha believed that “these were the figures” and she says she said to Mrs Hart: “I’m going to the bank with these figures” and Mrs Hart said “Yes, great” and Mrs Stariha then went to the bank with the figures.
546 Mrs Stariha said that she wasn’t satisfied “for my own sake” with the work done in revising the spreadsheet because her point was that she had asked Mrs Hart if the revision was correct and was told that it was correct. Mrs Stariha did not accept that Mrs Hart’s response was “a qualified yes” because Mrs Stariha had “no idea if it was correct or not” and had asked the question “is it correct?”
547 Mrs Stariha did not accept that there was a big difference between a response of “yes, it’s correct” and a response of “it looks right but do you want me to run it past my bookkeeper?” Mrs Stariha said to Mrs Hart “if it’s correct, I will run with this sheet”. Mrs Stariha gave this further explanation on this topic (T, p 50, lns 1-15) in this exchange:
Q: All right. But in any event, you didn’t want the bookkeeper to look at the numbers?
A: No, that’s not the case at all.
Q: Sorry, I don’t understand that. You were happy for the bookkeeper to do up the figures?
A: If she said to me that, “Do you want the bookkeeper?” – she told me that she had checked with the accountant and her bookkeeper. She told me that the spreadsheet was correct, she said, “Do you want the bookkeeper to give it to you?” I said, “Well, if we’ve got the sheet, you tell me it’s correct” – I was not declining the offer of the bookkeeper. I said, “If you tell me it’s correct and you’ve already checked it, then that’s it”. I did not decline the bookkeeper. When she offered for the bookkeeper to take it and send it back to me, I said, “If you say it’s right, I’m happy with that”.
548 Mrs Stariha was taken to her version of the exchange with Mrs Hart at para 24 and said that that was what Mrs Hart had said to her. Mrs Stariha accepted that she had asked her own accountant to look at the numbers in the original blue spreadsheet and her accountant told her what he thought the business “could possibly be worth” (between $180,000 and $190,000).
549 Mrs Stariha did not accept that the conversation she had spoken about with Mrs Hart occurred over the telephone rather than in Mrs Hart’s office, as Mrs Hart was in Perth attending a conference. Mrs Stariha said that the meeting occurred “directly after the conference”. She said: “I remember it distinctly because she didn’t have time to come down to the Gold Coast, so I went up to Brisbane. And it was important, because we were looking at the business”.
550 Mrs Stariha accepted that she kept no notes of the meeting. Mrs Stariha said she had notes along the way but did not “do it all” (write down her recollection of the events) in 2009. The notes consisted of the documents Mrs Stariha had saved and notes as she worked through the “JJ checking” data. Mrs Stariha said that she had “perfect recollection of the meeting”. She remembers being in Mrs Hart’s office and she remembers talking about the price “because she got a little bit frustrated with me”.
551 As to the document containing a list of 401 contracted clients, Mrs Stariha says that she remembers the document being given to her in person but “I also look back now and say, well, maybe there was an email version of the report, but I had a hard-copy because I remember receiving it because it was actually for the lawyer who wanted to check the – the clients”. Mrs Stariha said that the lawyer wanted to know the clients, at the end of October 2006.
552 Mrs Stariha accepts that she received an email from Mrs Hart dated 18 October 2006 attaching a list of 401 clients as “Christmas card list”. Mrs Stariha also says she made enquiries of Mrs Hart at the end of October 2006 about the clients of the retail business due to the “concerns of her lawyer” so as to make sure that she actually had the clients. Mrs Stariha says the copy of the list she has is not a printout of an email attachment but a hard copy given to Cleary & Hoare. The email was forwarded by Mrs Stariha to her personal email at home.
553 On 9 October 2006, Mrs Stariha sent an email to her husband [223] attaching a document and saying to him “numbers to crunch”. The document consisted of a large spreadsheet of month-on-month sales comparisons with budget comparisons. Mrs Stariha says she sent it to her husband but has no recollection of looking at it herself. It shows the financial performance for the Gold Coast Retail sales activity for the 2003/2004 financial year at $23,462.00 and shows “LY and FY” for that year. It shows further entries for January 2005. Mrs Stariha did not accept that either she or her husband would have seen the 2003/2004 figures for the Gold Coast notwithstanding that it was a document sent home by Mrs Stariha for the purpose of her husband “crunching the numbers”. Mrs Stariha accepted that she sent the email and attachment to her husband (T, p 55, lns 43-45; T, p 56, lns 1-23) and did not doubt the authenticity of the document.
554 As to the versions of the spreadsheets Mrs Stariha was working on, she accepted that during the period when she was deciding to purchase the Gold Coast Agency, she was preparing multiple spreadsheets which assumed $150,000 of earnings in Year 1 and postulated earnings of $240,000 in Year 2. Mrs Stariha said that these projections were based on the terms of the Franchise Agreement assuming an income of $150,000 in Year 1 with the uplift contemplated by the Agreement. Mrs Stariha did not accept that these spreadsheet scenarios were formulated to enable her to satisfy herself as to the likely forecast performance of the retail franchise. Mrs Stariha said this: “What I was doing was actually satisfying myself that what I had been told was true” (T, p 59, lns 46-47). Mrs Stariha accepted that the document attached to her email to her husband on 17 October 2006 under the reference “JJ WORKINGS 2.xls” is a copy of an Excel spreadsheet created by her that she was working on in October 2006 (Vol R13, Tab 35).
555 Mrs Stariha accepted that by 28 November 2006 she was “pretty much certain” she would acquire the Gold Coast Retail business. She said this (at T, p 65, lns 36-38): “I had my loan approved. I was convinced. I was really happy. I was ready to go”.
556 By November 2006, Mrs Stariha understood that as an agency owner she would have to attend to “other aspects of the franchise” not required of her when simply an employee of Hart Trading, such as managing employees, paying expenses, preparing budgets as well as working the franchise. Mrs Stariha accepted that being an agency owner meant working as many hours as it took to attend to these things. Mrs Stariha accepted that she would not derive a “wage” for the extra hours necessarily worked as an Agency owner. She said that she expected a wage for what she was already doing, plus the profit (T, p 68, lns 1-3; lns 18-21).
557 As to Julstar’s trading activities, the first financial period of operation by Mrs Stariha was, in a practical sense, from January 2007 to 30 June 2007. Mrs Stariha was asked a number of questions about items of expenditure in that period and then the comparative expenditures in the financial year ending 30 June 2008. The latter period, of course, represents a full financial year rather than 12 months. Mrs Stariha was asked to explain the nature of the expenses and the amounts involved and I accept her evidence in relation to all of those matters. In the financial year ending 30 June 2008, Mrs Stariha purchased, through Semolina, the Frontline Hospitality Agency which caused her to relocate to the new office at Scarborough Street, Southport largely to accommodate the increased staff. Mrs Stariha initially hired one staff member in the retail business and two staff in the hospitality business. I accept Mrs Stariha’s evidence in relation to the nature of the expenses and the relevant amounts incurred in the conduct of Julstar’s business in the financial year ending 30 June 2008.
558 Mrs Stariha accepted that in the period of the financial year ending 30 June 2009 there was a “quite dramatic drop in consulting fees” (T, p 73, lns 42-43) as a result of a significant drop in demand (T, p 74, ln 4) in part due to the impact of the global financial crisis (T, p 73, ln 45).
559 Mrs Stariha “disagreed strongly” with the proposition put to her that from about May 2008 she began reducing the hours of time she spent “working in the agencies”. At that time, Mrs Stariha had four juniors working in the business and May 2008 was “extremely busy”. Mrs Stariha had some health issues to address but they did not occur until September and October 2009.
560 Mrs Stariha accepted that she was not working 40 hours a week for the full financial year ending 30 June 2009 because in March 2009 she struck an agreement with Ms Amy Doberer for Ms Doberer’s management of the Gold Coast retail franchise for three months. Mrs Stariha said that from about October 2008 the placement activity had fallen away to the point where she had the “lowest job list” she had ever experienced at less than five. The demand was lower and Mrs Stariha said she had to contend with the termination by FRGPL of her hospitality business. Mrs Stariha gave evidence that she took steps to procure consulting support to try and improve the business. She also engaged a marketing coach to try and improve her business performance. She was also trying to see how she could attract clients for the hospitality business. As to Julstar, in the financial year ending 30 June 2009, Julstar had 10 employees (including Mrs Stariha) of which four were not consultants. Some of the employees began with Julstar and then moved across to Semolina’s business activities. I accept Mrs Stariha’s evidence in relation to these activities and the related expenditures for the financial year ending 30 June 2009.
561 Ultimately, the retail agency stopped trading on 19 February 2010 and Julstar’s last financial year of trading activity therefore was the year ending 30 June 2010. Again, I accept Mrs Stariha’s evidence in relation to the explanation of the expenditures in that period.
PART 13 – THE CROSS-EXAMINATION OF MRS STARIHA ON BEHALF OF FRGPL AND MR pETER DAVIS
562 Mrs Stariha gave evidence that she commenced work in the Gold Coast office of Hart Trading in November 2005 and was the only person working in that office apart from Ms Carswell from March 2006 for five months. Mrs Stariha accepted that after 12 months of working in the Gold Coast office she was well acquainted with the Frontline “systems” and she had received “some initial training” until she went to the Gold Coast office, in the form of orientation and induction training and negotiation training. She was also given some training by Ms Scottley. Mrs Hart gave Mrs Stariha the “orientation” training. Mrs Stariha accepted that the induction training occurred in October 2005 and gave evidence that it occurred in Sydney. The induction training occurred well before Mrs Stariha purchased the Gold Coast Retail Agency. The training was over a period of two days.
563 Mrs Stariha accepted that she operated the Gold Coast office as a “paperless” office and learned to use the Frontline database including the recording of activities into the database as required by the KPIs. Mrs Stariha accepted that an “activity report” could be examined to see the communications she had made with particular candidates and she thought that an activity report could be seen for other consultants but generally would not do so.
564 As to the Discovery Day on 6 November 2006, Mrs Stariha accepted that by then she knew the purchase price of $240,000 but did not accept that she and her husband, by then, had decided to “go ahead with this contract”. Mrs Stariha put the state of her decision-making in this way (T, p 89, lns 40-47; T, p 90, lns 1-4):
I would say that we were committed. We wanted to check a few things. We wanted to make sure that the biggest question we had was, are we paying the right price? We wanted to talk to him [Mr Davis] about the franchise agreement. We wanted to just seek that reassurance and get that but as to the actual business at Gold Coast, the spreadsheet, the elements of the Gold Coast I had made up my mind but I just wanted that final – to know that I was doing the right thing and so I hadn’t made up my mind completely. If there was anything on that day that I didn’t like then it would have been hard but I wasn’t completely 100 per cent, “I’m sold regardless”. I was looking forward to it because I wanted to double-check, if anything.
[emphasis added]
565 Mrs Stariha accepted that “on the issue of price and Colleen I was probably 90 per cent” committed but with Frontline, Mrs Stariha said that she was not committed to entering into a Franchise Agreement. She said that she had met Mr Davis on “a couple of occasions” and regarded him well but she had “not decided on the franchise part” and thought that the discussions with Mr Davis were “equally as important” as the discussions with Mrs Hart (T, p 90, lns 6-15). Mrs Stariha said that she felt very confident with the business but did not understand the “franchise part” or that “aspect of the business” and wanted to “see it for myself” (T, p 90, lns 20, 21). Mrs Stariha put it this way (T, p 90, lns 23-25):
So to say, if you are saying like a percentage rate, I think I need to split the two because they’re two separate things in my head [discussions with Mrs Hart on the one hand and Mr Davis and FRGPL on the other].
566 Mrs Stariha accepted that the “primary importance” of going to Sydney was to find out how life would be as a franchisee rather than someone being a consultant on the Gold Coast. Mrs Stariha said that by going to the Discovery Day she hoped to find out whether “everything that I had seen, heard, believed was true” (T, p 90, ln 43). Mrs Stariha said that she wanted to find out what it meant to “own one of these franchises”.
567 Mrs Stariha did not accept that prior to the Discovery Day she had access to the “operations manuals” from the database. Mrs Stariha said she had access to the “general policy” for recruiting but not access to “management or things like that”. As to the royalty payable to the franchisor by a franchisee, Mrs Stariha did not accept that prior to the Discovery Day she knew that the Gold Coast business would receive 80% of the placement fee income with 20% going to the franchisor. Mrs Stariha said that when she “received the financials” it was a “bit of an awakening” because “I didn’t really understand the royalty and how much it was”. Mrs Stariha was then asked (T, p 91, lns 25-27) and responded:
Q: Are you seriously saying you had never spoken to Colleen Hart about how much of her income went to the franchisor?
A: I don’t think so, no. Not until around about that time because I didn’t know how much the advertising was …
568 Mrs Stariha gave evidence that Mrs Hart had told the staff that Mrs Stariha was not to see the bills and she respected Mrs Hart’s apparent position that she did not want Mrs Stariha to know “how much money she was making” from the business. Ultimately, Mrs Stariha thought that towards the end of September or the early part of October when she saw the spreadsheets, she became aware of the 20% royalty payable to FRGPL.
569 As to the seven day payment period, Mrs Stariha did not accept that she knew that usually clients took about three weeks to pay the placement fee. Mrs Stariha would complete the replacement forms necessary but she had no knowledge of whether the client had paid or not. She simply filled out the form, faxed it to FRGPL and the fee came off Mrs Stariha’s sales statistics. Mrs Stariha said that was her “focus”. Mrs Stariha’s explanation of the “guarantee system” was this (T, p 93, lns 7-20):
… if the candidate did not last in the position … for three months, regardless of the reason … you must fill out a replacement form and you fax it. And then … that means that it comes off your sales target. And then there was a replacement owing. So as a consultant, if I was on the Gold Coast and there was a replacement owing, that means that that money could go back on my sales budget … I would desperately wait for a role [in placing a candidate with that client] so that the money can go back onto the report, … the figure for the month. … So regardless, within the 90 days, it got processed, there were no questions …
570 As to the role Mrs Stariha performed on the Gold Coast for Hart Trading from 1 November 2005, Mrs Hart accepted that her application for a loan to the ANZ Bank for the purchase of the Gold Coast retail franchise, described her as “managing the branch” at the Gold Coast from 1 November 2005. However, Mrs Stariha put the discussion with Mrs Hart in this way (T, p 94, lns 15-18):
… when I was offered the position, I was told I would be the agency manager. Technically I wasn’t really one, but in the views – between Colleen and I, I said to her, well, I’m her manager.
571 Mrs Stariha did not accept that that conversation did not occur and nor did she accept that from November she was the “manager” of the Gold Coast Agency. Mrs Stariha said that she recalled the discussion distinctly and that Mrs Hart had said to her that technically she was the only person in the office and was a consultant although, in her eyes, she was an agency manager. Mrs Stariha says she took the initiative to care about budgets and did things to try and save money for Mrs Hart “but it wasn’t about being called a manager”. She said this at T, p 94, lns 25-29:
… with the franchisees and other people, I wasn’t an agency manager on an email out or – I was more – it didn’t matter, because all I cared [about] was the relationship with Colleen – that I called myself – that I looked after it for her. My letter of offer is consultant and she told me that technically she couldn’t give it to me.
572 Mrs Stariha accepted that she referred to herself as manager of the Gold Coast Agency but, in these terms (T, p 94, lns 42-48):
Yes, like, but – I say that I was managing the branch, yes. Because that’s what I mean. I’m saying that that’s what happened. Although I didn’t have the title, and although I didn’t – you know, wasn’t included in … conference calls – I don’t even know if there were conference calls but – for agency managers, but, in my view, I was managing it for Colleen. I didn’t necessarily have the title.
573 That response led to this exchange (T, p 95, lns 1-3):
Q: Mrs Stariha, I wasn’t asking you whether you referred to yourself as managing the branch. I asked you whether you referred to yourself as “manager”, and you did, didn’t you?
A: Yes.
574 Mrs Stariha was a successful recruiter. In 2005 she was the “rookie consultant of the year” with the highest billing in the first year of trade out of 35 recruiters throughout Australia and in her application document to the Bank she recites that she was given the prize in 2006 of “rookie agency manager”. Mrs Stariha did not accept that that description was consistent with her real position of being an “agency manager” which was something entirely different from being a “consultant”. Mrs Stariha said that she typed the phrase “rookie agency manager” into the loan application but the truth of the matter is that the award is for “rookie agency of the year”. Mrs Stariha maintained the position that she was a consultant within the Gold Coast Agency in the entire period up to the purchase effective in December 2006. Mrs Stariha also typed into the document an achievement of “highest billing for new agency in first year of operation. First out of five new agencies”. Mrs Stariha explained that this particular award was an Agency award and not a personal award.
575 On 5 September 2006, Mrs Stariha sent an email to her home email address attaching a release promoting the opening of the Gold Coast Agency (see [173]) on 7 November 2005 in which she describes herself and signs off as “Agency Manager”. Mrs Stariha reaffirmed her evidence that when she was offered the position in the Gold Coast office, the offer was on the footing that her title would be “agency manager” although she understood that technically she could not have that title. The agreement with Mrs Hart was that she would be the Agency Manager. Mrs Stariha then gave this reflective answer (T, p 109, lns 2-5):
I have thought overnight as to what my best evidence would be to say why I am a consultant. When I was in the business and between Colleen and I, I did call myself an agency manager. There were three things that I remember. The first thing is that there was an executive position that was listed under my name and I was told that it couldn’t be under my name because I was a junior consultant. The second thing is that there was an issue with reference checks, and Colleen came and spoke to me about it. The reason why I bring this up is that, a couple of weeks ago, when I was reviewing the material and getting ready for this, I had the opportunity to view the – the subpoenaed documents for Aura, and I didn’t realise that I was a part of the proceedings, and I am listed as a junior consultant in the pleadings, which is consistent. I called myself an agency manager because that was the agreement I had with Colleen. I did not have it technically. I said I was the manager, but I was one person on the Gold Coast that just opened it up.
576 Mrs Stariha was then taken to another email dated 7 December 2006 sent to her home email address also describing her as the “agency manager”. Mrs Stariha denies that she intended to send this email to clients extolling her success and describing herself in the way adopted.
577 Mrs Stariha was then asked a number of questions about access to the database.
578 Mrs Stariha said that she had log-on details which consisted of a username and password which would change from time to time. Mrs Stariha accepted that a “manager” has a higher degree of access to the database, although Mrs Stariha said that she was, relevantly, a “consultant”. Mrs Stariha understood the different level of access for a manager involved being able to see more of the invoicing, contact reports for all franchisees and the “agency owner’s details” (T, p 95, lns 14-21).
579 Mrs Stariha said that as to Appendix 2 to the ANZ Bank application she was able to print out a sales report for the “agency” showing the sales generated from that agency.
580 As to that report, Mrs Stariha accepted that it showed placements for about 30 to 40 clients and she had provided it to the Bank to verify sales. She had provided Appendix 3 consisting of the client list of 401 clients to the Bank to “satisfy the bank of the clients for whom the agency acted”. Mrs Stariha gave evidence that she believed that the Gold Coast Agency would have approximately 400 clients on the Gold Coast available to it notwithstanding that the sales report for the period from 1 November 2005 to the end of October 2006 suggested placements for about 40 active clients. Mrs Stariha said that she honestly believed that she had available to her “a fantastic database full of clients”.
581 Mrs Stariha was taken to Appendix 4 to the loan application which projected EBIT earnings over three years of $504,770 based on “conservative sales for the next three years”. Mrs Stariha said that she had prepared Appendix 4 but it was not all her own work. She gave evidence that the spreadsheet was based on the “JJ checking” spreadsheet. Mrs Stariha said that she had taken that spreadsheet to the Bank but had put it into a format for a three year business plan. Mrs Stariha gave evidence that this was the document she took to Sydney and she did forecasts which projected a result of $420,000 in the third year which caused her to be “scared”.
582 In the loan application document, Mrs Stariha makes the observation that the Gold Coast Retail business can be worked from the Gold Coast office two days per week and for the remaining period, the business can be worked from a home office. Mrs Stariha did not accept that she had in mind recruiting employees into the Gold Coast office so that she could “pull back a bit over time and only attend the office two days a week” and then otherwise conduct the business from home. Mrs Stariha gave evidence that the office was fully staffed as it had been from November 2005 but so far as the Bank was concerned, she was telling the Bank that if her circumstances changed, she could work the business from home and have access to the database. Her intention was to be on the Gold Coast notwithstanding that she had one day a week when working for Hart Trading when she was working from home.
583 As to Mrs Stariha’s earlier work history, Mrs Stariha was asked further questions about Café Addict. Mrs Stariha again accepted that she was never the owner of a business called International Working Holidays although she believed that she had explained the circumstances leading to the way in which she had described that work experience.
584 Mrs Stariha accepted that it was false of her to say on the application form for employment that she was the owner of a business called International Working Holidays and that she had sold it. Mrs Stariha gave evidence that she had completed the document during her interview as earlier described because she wanted to describe that matter in a way consistent with her “return to retail” (T, p 106, lns 30-31). As to the relevance of Anchor Health Care (T, p 106, lns 1-8; lns 33-36).
585 Mrs Stariha was asked when she first became aware of the seven day payment requirement entitling a client to a replacement candidate. Mrs Stariha said that when she bought the retail franchise she became aware that a “replacement credit” had to be processed “regardless” of payment if the candidate fell out within 90 days. Mrs Stariha said, however, that once she realised that sometimes the client had not paid for 30 days or more, she began to question whether she was required to provide a replacement.
586 Mrs Stariha gave evidence that she “questioned it throughout” asking “Do I have to process a replacement credit?” (T, p 112, lns 1-7). Mrs Stariha denied that her evidence on this issue was “a plain falsity” (T, p 112, lns 9-11). Mrs Stariha says there are not emails or documents evidencing her questioning throughout the period of the retail franchise (or otherwise) because she raised her questions orally with Ms Moseley who told Mrs Stariha to “just process a replacement” and “you can write it off in a year”. Mrs Stariha accepted that she knew the seven day requirement was in the contract between FRGPL and the client, from dealing with the contract and giving it to clients although she says she did not speak to clients about the seven day period. Mrs Stariha accepted that she knew from the outset of her operation of the Gold Coast Agency that the requirement was in the contract (T, p 112, lns 37-40). Mrs Stariha accepted that although she knew from the outset that the replacement guarantee could be refused if the placement fee was not paid within seven days, she nevertheless, the great majority of the time she operated the business, provided replacements even though the fee was not paid in time (T, p 113, lns 4-8). Mrs Stariha explained that this issue had been discussed with Mr Davis and Ms Moseley, and Mrs Stariha was told “it’s okay, you will be able to replace it” (T, p 113, lns 10-11). Mrs Stariha accepted that of the numerous replacements she was involved in, she was not contending that all clients had paid the fee within seven days (T, p 114, lns 1-7).
587 Mrs Stariha accepted that the induction training was very detailed and included a presentation on replacement guarantees which she described this way (T, p 123, lns 35-38):
… the training for the replacement guarantee is that if someone does not make the 90 days, you will fill out your replacement forms, you will fax it in. It’s taken off your sales. I cannot remember if they said that, you know, waive the seven days. Because, regardless, you did the replacement if it was 90 days.
588 On 15 May 2008, Mrs Stariha sent an email to Sean of Beaumont Tiles extending the replacement guarantee, as a goodwill gesture notwithstanding that the invoice was required to be settled within seven days.
589 Mrs Stariha was again taken to her CV attached to an email from her to her home email address attaching the CV referring to Café Addict. Mrs Stariha had earlier accepted that by then she knew Café Addict had made a loss. However, by then, Mrs Stariha had no intention of using the CV for employment purposes as she was about to settle the purchase on 8 December 2006. However, in the CV, Mrs Stariha says that after three months in the Frontline agency “I was promoted to manage the new agency opening on the Gold Coast, November 2005”. However, Mrs Stariha gave oral evidence that when she commenced at the Gold Coast office in November 2005 that position was not a promotion, for the reasons she had identified (and noted earlier). Mrs Stariha reaffirmed her evidence that as between her and Mrs Hart, she was the “manager”, but “technically she didn’t have that position”. Mrs Stariha said she used the word “promoted” (T, p 117, lns 15-17):
… because when I was offered the position it’s like, you know, you will be the agency manager, and my salary went from 35,000 to 50,000 and therefore I would use the word “promoted” yes.
590 Mrs Stariha (Julstar) on 1 September 2010 sent an invoice to Mr Fitzpatrick (GoFit) for past recruitment fees for Frontline placements in respect of two candidates for $6,937.36 which was paid by Mr Fitzpatrick. The placement fee was actually due to FRGPL. Mrs Stariha says she was doing “systems work” for Mr Fitzpatrick and he said he would “fix you up” for the two placements. Mrs Stariha gave evidence that she was “uncomfortable” about the arrangement because although placement fees remained due to her from FRGPL, “the replacement credits were greater than the amount coming in” and she thought it would be “questioned” (T, p 118, lns 24-27).
591 Mrs Stariha said that she had been completely “upfront” about the arrangement she had earlier made with Mr Fitzpatrick. On 28 January 2011, Mrs Stariha sent an email to Mr Fitzpatrick asking for payment of Julstar’s invoice of $6,937.36 “today” as Mrs Stariha would be stepping “into the dispute [with Frontline]” from Monday. Mrs Stariha accepted that her arrangement with Mr Fitzpatrick was, first, that he would pay her the amount actually due to FRGPL for the two placements and at the same time (“although separately”) he would be paying her for other “systems work” she would be undertaking, and second, if FRGPL:
… ever came against you for these [placement] monies you received, Mr Fitzpatrick had the view, as expressed to you, that you would have to deal with Frontline.
592 Mrs Stariha accepted that she had never paid the money to FRGPL (T, p 120, lns 40-47; T, p 121, lns 6-16).
593 Mrs Stariha denied that in July 2006 she knew that the Aura litigation was on foot (T, p 125, lns 24-25). Mrs Stariha accepted that she spoke to Mrs Attieh on 22 July 2006 at a Frontline conference and she says she remembers “it precisely”. Mrs Stariha had been told that Mrs Attieh was a “bit aggressive”. Mrs Stariha did not accept that in her presence, in the course of giving a speech, Mr Davis was asked questions about the Aura proceedings and suggested answers to questions that might be asked of franchisees (T, p 127, lns 8-13).
594 Mrs Stariha was asked questions about the Discovery Day events. Mrs Stariha accepted that she was told that day that the Sydney franchise had sold for over $1 million and the buyer was in the next room. Mrs Stariha accepts that she met the people recited in the agenda document and that the first meeting was between Mr Davis and Mr and Mrs Stariha at which Mr Davis congratulated Mrs Stariha on her success. Mrs Stariha denies that Mr Davis mentioned the Aura proceedings in this meeting (T, p 129, ln 46). Mrs Stariha accepts that Mr Davis talked about the minimum territory replacements and that in the first year leading up to Mrs Stariha becoming an owner, she had achieved $250,000. Mrs Stariha denies that Mr Davis said Mrs Stariha could expect sales to drop due to other work she would have to do as a franchisee.
595 The following exchanges occurred with Mrs Stariha which I will quote at some length as they address many of the central contentions of Mr Davis (T, p 130, lns 22-47; T, p 131, lns 1-47; T, p 131, lns 1-16):
Q: [As to the expected drop in earnings as a franchisee]
That makes sense, though, doesn’t it?
A: No, not necessarily, because he just said, “Just keep doing what you’re doing. You’re doing well”. He – didn’t tell me that my sales would drop. I don’t remember my sales dropping.
Q: You showed him some figures from forecasts you have brought with you?
A: Mm.
Q: And you asked him what he thought?
A: Yes.
Q: And he said that he was surprised in respect of your second and third year projections, that is, the figures being 300,000 and 350,000?
A: No.
Q: He told you that he had never seen such high figures?
A: No, I disagree.
Q: You asked him, early in the day, whether he thought you were paying the right price for the business?
A: Yes.
Q: And he gave you the response that he could not tell you what the business was worth because, at the end of the day, a business is worth what people pay for it. And in the circumstance where there are a number of interested buyers, businesses may fetch more than they otherwise would, such as a house auction?
A: No. I disagree. He said he would cover it with me in the afternoon, and we talked about the price.
Q: He told you that he would not tell you how much he thought the business was worth?
A: No. I disagree because that’s what – that was the purpose of me being there, in my mind, was to just double-check with Peter Davis because I trusted the – I had an outside view.
Q: That wasn’t your purpose in being there at all. Your purpose in being there was to learn about your role as a franchisee?
A: One of them, yes, but also to confirm the price.
…
Q: He told you that a number of franchises had been sold?
A: Mm.
Q: Generally, the prices paid were based on EBIT?
A: Yes.
Q: Provided by the seller?
A: Mm.
Q: And reviewed by the purchaser and their advisers, and that the multiple on this figure was in the region of two to three times the EBIT?
A: No, it was three times the EBIT, and it was a little bit – not as flowery as that. It was a little bit more simple. But he would say that, generally, the business is calculated on three times EBIT.
Q: And EBIT for that business in the year before you purchased, the year running up, was about 80,000 wasn’t it?
A: Well that’s what I was repeating. Yes.
Q: So you did the calculation in your own head. If it’s three times that, that’s 240?
A: No.
Q: So you took that as advice?
A: No, not at all. That’s – that’s the price I was given, and then I had a – I signed a contract before I attended the Discovery Day. So I had a purchase price of 240. I didn’t make the price up.
Q: Mr Davis went on to say that, in determining the value of the business, you should consult with your accountant and possibly a business broker to satisfy yourself that the business was worth what you were paying?
A: Well, I had actually let him know, before I attended, that I had already seen the accountant, and I deny any mention of a business broker. I do – do not remember the word “business broker” during that day.
Q: At no time did he say to you the Gold Coast agency was worth $240,000.
A: I disagree.
Q: He did not mention to you that the Adelaide franchise had recently sold for $300,000?
A: No, I disagree.
Q: What he told you was that it had sold but for approximately $220,000?
A: No, I remember 300,000 because it was more than the price I was paying. And I remember him saying, “it’s a capital city”.
Q: He did not say that the Brisbane agency was worth $750,000?
A: Yes, he did, and he said it was a good thing that Colleen worked it before and she’s doing great. He was very – he praised Colleen.
Q: He told you that the Darwin franchise had sold for approximately $240,000?
A: Yes.
Q: But that – or he did not say it had the same sales volume as the Gold Coast agency?
A: No, I remember him saying, “like, you’ve comparable sales. You’re pretty much the same”.
…
Q: He told you that the Sydney agency had recently sold for just under $1 million?
A: No, 1.2. I remember it clearly because I thought, “that’s great”. That gave me confidence.
596 Mrs Stariha accepted that by the time she went to the Discovery Day event she had “gone through” the Franchise Agreement herself and with her solicitor. Mrs Stariha gave evidence that because she was going into her second year, that is, “the agency’s” second year (T, p 133, lns 35-37) the minimum requirement was to be $240,000. Mrs Stariha says she believed that she would not be allowed to go back to a first year level of $150,000. Mrs Stariha accepted, from reading the contract, that cl 5 contemplated that people would not or might not achieve the minimum territory requirements (T, p 134, lns 28-30). Mrs Stariha accepted that she thought the business would generate $240,000 in projected income in her first year as owner which was an assessment Mrs Stariha came to before she went to the Discovery Day (T, p 134, lns 41-42; T, p 135, lns 1-2).
PART 14 – THE CROSS-EXAMINATION OF MRS hART
597 Mrs Hart was asked a number of questions about her acquisition of a franchise for Brisbane and the Gold Coast from Ellis Trading and Ms Karen Ellis. Ms Ellis had closed the franchise in December 2004. Mrs Hart said that in the course of the negotiations she never discussed with Karen Ellis aspects of the Gold Coast Agency on its own because Ms Ellis owned one franchise. Mrs Hart said that she did not have any information about the expenses side of the budget for the Gold Coast Agency when trading under Karen Ellis. Mrs Hart knew the sales but when she sold the Gold Coast Agency to Mrs Stariha, Mrs Hart had never actually found out how the Gold Coast part of the franchise run by Ms Ellis had performed with respect to the expenses side of the budget either on an actual basis or as a comparison against the forecast. Mrs Hart said that she just had information in relation to the sales.
598 Mrs Hart discussed the purchase price of $320,000 with Mr Davis and by that Mrs Hart said that she meant she told him the purchase price but she was not asking him to validate the price. That discussion took place with the accountants (T, p 263, lns 15-18). Mrs Hart said that in terms of working out the calculation of the price as a multiple of EBIT, she did not “do anything with Peter”, she worked with Ms Ellis who was an accountant. Ms Ellis set a multiplier whens she set her purchase price of “three times EBIT including salary” which represented the profit plus the wages earned by a director and then “some add-backs” which would then be subject to the multiple of three (T, p 264, lns 8-10). However, to determine the price for the Brisbane and Gold Coast franchise, Mrs Hart did not apply a multiple to any EBIT figure, or extracted EBIT figure, for the Brisbane and Gold Coast part of the Ellis franchise. Mrs Hart said that Ms Ellis gave her a figure based on three times EBITDA including wages and then a negotiation took place.
599 Mrs Hart accepted that when making an application to the Bank to borrow $140,000 as part of the purchase arrangements, a breakdown of the Brisbane and Gold Coast profit and loss position was prepared although the document was not retained by Mrs Hart. Mrs Hart said that her accountant had prepared a forecast in August 2005 showing the sales, and she thought the forecast also included the expenses. At T, p 318, lns 21-29, Mrs Hart accepted that an analysis of the performance of the Gold Coast region was undertaken to enable Mrs Stariha to ascertain whether that region had potential as a business and that the analysis broadly related to both income, definitely, and expenses, broadly, although the document is no longer available (T, p 319, lns 7-8; lns 40-45).
600 Mrs Hart was asked questions about the staffing of the Gold Coast office from November 2005 when Mrs Stariha commenced in that office and the role she was required to play. Initially, from 7 November 2005, Mrs Stariha was there “on her own” and once the office became busy a “12 hour week administration support person”, called Lisa, was retained for a while, 207 hours in all. That represented the entire complement until the sale to Mrs Stariha in November/December 2006. Mrs Hart said that Mrs Stariha’s duties were “full time recruitment consultant and manager combined”. She was required to consult on a daily basis, achieve the KPIs set for a consultant and required to look after the office. When Lisa was on-site, she oversaw Lisa’s activities (T, p 269, lns 40-44). The office was a serviced office. However, the Gold Coast operation was not a separate business. The income and expenses were accounted for as a combined business. Mrs Hart was responsible for paying the accounts, doing the banking and carrying out all parts of the “agency owner side of the business” (T, p 270, lns 20-29). Mrs Stariha was responsible for the sales budget, as, like the Brisbane agency, the whole budget is broken down to individuals and “each person has a portion of the budget” they are required to meet and she was responsible for that (T, p 270, lns 33-42). Mrs Hart would audit the business and Mrs Stariha would have to rectify any auditing discrepancies. Mrs Stariha was responsible for all the filing and any kind of paperwork. Mrs Hart described her, operationally, as “like a sales and ops manager” with responsibility to make sure that sales were achieved and the documents were correct. She was responsible for undertaking all the process necessary in compliance with the operational side of the business and she “looked after Lisa”.
601 As to wider administration and compliance issues, Mrs Hart was responsible for retaining the accountants and responsible for the income tax returns and Business Activity Statements. She was responsible for controlling and operating the bank account as it was one franchise. Carolyn Hutt in the Brisbane office was the bookkeeper for the franchise conducted as one operation, both offices. However, Mrs Hart said that she tried to keep everything applicable to the Gold Coast “coded” to the Gold Coast so as to keep an accurate record of how the Gold Coast office traded in part so that she could keep that part of the operation “clean” so she could explain it to someone who might want to buy the business. Mrs Hart said that she had some sense of the expenses such as the costs of advertising, and other expenses costed by Head Office. The expenses were coded to the Gold Coast and entered into the MYOB accounting software by Ms Hutt and from those printouts from the MYOB software Ms Shannon Price developed the spreadsheets which Mrs Hart took to the meeting with Mrs Stariha on 5 October or 6 October 2006.
602 As to the issue of the multiplier when Mrs Hart was selling the Gold Coast Agency to Mrs Stariha, she said she “looked at the same multiplier, three times EBIT, plus the wages” and so “I used the same kind of analogy” and thus when selling the Gold Coast Agency Mr Hart attempted to determine an EBIT for the Gold Coast when “putting the price for the Gold Coast together” (T, p 279, lns 36-39). The way Mrs Hart says she did that was to extract out of the full profit and loss statement for Hart Trading and EBIT for the Gold Coast operation based on the records of “what the income was and what the expenses were” (T, p 279, lns 41-42).
603 However, Mrs Hart denied that when discussing the EBIT for the Gold Coast with Mrs Stariha, referable to Hart Trading’s records, she said the EBIT was $80,000. Mrs Hart said that the first time she ever heard of Mrs Stariha’s reference to an $80,000 EBIT was when the claim was made in these proceedings. Mrs Hart explained the method of calculation in this way (T, p 280, lns 36-44):
Initially, when I did the math before our fifth or sixth [October 2006] meeting, the EBIT was around about 50,000 because the sales were only up until the end of September … because that’s when I was calculating the numbers. And then … I added back the wages and combined … I did the wages, and salary and the super to get the full combined wages. And it came in just of 108,000 or something like that. So if I had a three times multiplier, we would have got to just over 300,000.
604 Mrs Stariha accepted that Mrs Stariha’s revisions to the spreadsheets, sent to Mrs Hart on 19 October 2006 took up some shortcomings or discrepancies in the figures that Mrs Hart had sent to her which showed some understatement in the earnings and, in addition, Mrs Stariha had “done her homework on the expense lines”. Mrs Hart said she had told Mrs Stariha to make sure that she went back and thought about “the costs” that Mrs Hart did not have in her profit and loss spreadsheet because her agency was one agency and there might be other costs incurred once the Gold Coast Agency was “stand alone”.
605 However, Mrs Hart did not accept that she told Mrs Stariha that her revised spreadsheet was “accurate” and nor did she accept that she had sent Mrs Stariha’s revised spreadsheet to an old friend, Ms Austin, as an emblematically accurate example of a spreadsheet produced as a result of undertaking thorough due diligence. Ms Austin, at the time, was considering taking up a banking and finance franchise and the month by month breakdown of income and expenses was something Mrs Hart thought Ms Austin would be interested in seeing.
606 The proposition was put to Mrs Hart that it was always her plan in order to reduce her financial liabilities, to sell off the Gold Coast Agency as soon as practicable. Mrs Hart said that she had excellent cash flows and no financial concerns. She said she was happy to sell it although keeping the agency would not have been an issue. Mrs Hart said that Mrs Stariha was putting pressure on her to sell it. Mrs Hart did not accept that her email in October 2006, during the negotiations with Mrs Stariha, to Ms Hutt expressing “excitement” that “cash may be coming”, reflected any anxiousness to secure the sale (T, p 284, lns 21-25).
607 Mrs Hart was asked to explain the relative worth of the Brisbane and Gold Coast operations in the context of putting a price to Mrs Stariha for the Gold Coast Agency alone of $240,000 when 12 months earlier she had purchased the Brisbane and Gold Coast franchise rights for $320,000. Mrs Hart in response said: “I understand what you’re saying but I was under – I had found out there was no legal way to price a business”. Mrs Hart then expanded upon that notion. The proposition was put to Mrs Hart that the Brisbane interest was, by far, the more remunerative of the two agency areas (more sales) and, in any event, Karen Ellis had closed the Gold Coast Agency in December 2004. Mrs Hart denied that the “whole tenor” of her approach to Mrs Stariha was to “get her to be a purchaser at around a figure of $240,000” (T, p 286, lns 32-33). Mrs Hart said that she certainly wanted to make sure that the opportunity for Mrs Stariha to purchase the Gold Coast Agency “would be there” and throughout the process of dealing with Mrs Stariha on this issue, Mrs Stariha said: “To be honest with you, through the process I was thinking entirely about her needs … I just had to give her everything that she needed to make a decision and I thought I was a very considerate person when I was dealing with Julianne” (T, p 287, lns 8-16).
608 Mrs Hart was taken to the sequence of exchanges in relation to the spreadsheets and the provenance of the spreadsheets.
609 Mrs Hart accepted that from her own negotiations in buying the franchise from Ms Ellis she had to consider with some degree of care the potential expense lines that would be involved in running the business (T, p 301, lns 41-44).
610 In formulating the spreadsheet which sets out income and some expenses, Mrs Hart said that the only person who did Excel spreadsheets was Ms Shannon Price and that in preparing the spreadsheets, Ms Price extracted figures from the MYOB profit and loss statements. Ms Price was a supervisor and Mrs Hart accepted the description “Your deputy”. Mrs Hart received an email from Ms Price on 5 October 2006 attaching two fold-out spreadsheets which Mrs Hart forwarded to Ms Hutt on 10 October 2006. The spreadsheets from Ms Price came to Mrs Hart on 5 October 2006 at about the day she was meeting with Mrs Stariha and Mrs Hart sent them to Ms Hutt after the meeting with Mrs Stariha. In the fold-out spreadsheets attached to Ms Price’s email October 2005 shows a loss of $72.57 and November 2005 shows a loss of $2,273.57. The month of May 2006 shows a figure in red of $21,215.35 which appears to be an asserted profit although Mrs Hart accepted that it looked to be an incorrect entry.
611 Mrs Hart said that these documents sent to her by Ms Price were the documents she took to the meeting with Mrs Stariha but she says she did not give these documents to Mrs Stariha. Then, on 10 October 2006, Mrs Hart sent to Ms Hutt the spreadsheets sent to her by Ms Price. Then, on 13 October 2006, Mrs Hart sent an email to Mrs Stariha attaching revised spreadsheets. The individual responsible for putting the data into the spreadsheet was Ms Price. Mrs Hart accepted that the Gold Coast spreadsheets used at the meeting on 5 October or 6 October 2006 did not accurately reflect the expense categories that Mrs Stariha’s purchase “would necessarily involve”. Mrs Hart accepted that there were some discrepancies which she spoke to Mrs Stariha about and those matters were taken back to Ms Hutt to be sorted out. Mrs Hart said that the EBIT calculation of about $50,000 was based on the 2005/2006 EBIT of $61,248.63 with an offset of the EBIT for the first three months of the 2006/2007 financial year of $10,983.19. Those figures were calculated by Ms Hutt providing Mrs Hart with the MYOB printouts and then Mrs Hart instructed Ms Price to prepare the spreadsheets.
612 Mrs Hart denied not checking the MYOB printouts upon which the spreadsheets were based, prior to the meeting with Mrs Stariha on either 5 October or 6 October 2006.
613 However, Mrs Hart said that she had the spreadsheets and she took the total EBIT from the spreadsheets. She says that is how she came to the figure for EBIT for the purpose of fixing the purchase price (T, p 309, lns 24-41). The figure of $50,000 was used for the calculation of the purchase price (T, p 310, lns 36-37). The proposition was put to Mrs Hart that the analysis she had prepared comparing the income side and expenses side for the Gold Coast activities was not only particularly relevant with respect to determining the purchase price Mrs Hart had paid to Ms Ellis but was also particularly important in determining a sale price by Mrs Hart which, from the outset of the acquisition, Mrs Hart seemed determined to implement as soon as practicable. Mrs Hart did not accept that such a document was necessarily “particularly relevant” because the earlier document was taking into account income from the Karen Ellis territory for the whole of Queensland and overheads for the territory. Mrs Hart however agreed that she had gone beyond that step and had attempted to analyse the expenses side of the Gold Coast operation but only on “a broad view” of it. Mrs Hart said that in the discussions with Mrs Stariha, she discussed “the trade under Karen Ellis”, the “income under Karen Ellis” although there was no discussion of the expenses in that period because Mrs Hart said she did not have a profit and loss statement that was “separate from Karen Ellis that I could show Julianne because Karen Ellis only had one P and L for the Brisbane territory”. Mrs Hart accepted that the sales side of the equation was easy to access but the other part of the analysis dealing broadly with expenses was not available and Mrs Hart had not kept the analysis that had been done.
614 Mrs Hart was challenged with the proposition that she did not keep the income and expenses analysis for even a few months but said that she did not know she was going to employ Mrs Stariha and she met Mrs Stariha after she had purchased the business and had no opening date for the Gold Coast office in mind at all (T, p 322, lns 31-40).
615 Mrs Hart was taken to the documents which show the placements and credits for the period of 12 months from 1 July 2004 to 30 June 2005 which show the sales made when “Nikki” was working in the Gold Coast office and then later, sales in the financial year ending 30 June 2005. Mrs Hart thinks that she looked at these documents at the time of talking to Ms Ellis so as to keep a track of the “sales line” for the Gold Coast office. Mrs Hart gave evidence that these documents were not supplied to Mrs Stariha.
616 Mrs Stariha ultimately sent Mrs Hart her revised spreadsheets and asked for a response as to the accuracy of the information contained in the revisions. The revised spreadsheets were concerned with both income and expenses. Mrs Stariha says that she never told Mrs Hart that the information was accurate or for that matter, inaccurate. Mrs Hart said that at no time, other than in relation to the particular queries Mrs Stariha had raised, did she ever tell Mrs Stariha that the information she was including in her various “summaries and conclusions” was accurate or inaccurate (T, p 327, lns 26-29).
617 Mrs Hart was taken to Mrs Stariha’s email of 19 October 2006 which invited Mrs Hart’s feedback on “my workings on the figures” and observed that Mrs Stariha had her business plan ready for the bank. Mrs Hart put her response in this way (T, p 327, lns 42-46):
I said they look good. And I would get them checked, if she wanted them checked. And that she had looked like she had really looked at the expense line. So I .. praised her about looking at the expense lines and taking into account those things that I had told her to look for and the fact that she had to repay the debt.
618 Mrs Hart asked Mrs Stariha whether she would like Mrs Hart’s bookkeeper to check the figures. Mrs Hart said she would be willing to send them to Ms Hutt (T, p 328, lns 11-12). Mrs Hart said that she was in Perth, having the conversation on the phone with Mrs Stariha. Mrs Stariha seemed excited and had identified that she had achieved better sales in one particular month than reflected in Mrs Hart’s spreadsheet. Mrs Hart knew that Mrs Stariha was going to the bank to borrow the purchase money and working capital. Mrs Hart accepts that, in respect of Mrs Stariha’s revised spreadsheet, “it looked good” but if Mrs Stariha wanted the bookkeeper to look at the figures, Mrs Hart would arrange for that to happen. Mrs Hart says that Mrs Stariha responded by saying “don’t worry about going to the bookkeeper”, and: “I’ve looked at. I know what has gone on here. I’ve seen the sales.” (T, p 328, lns 42-45). Mrs Hart does not accept that Mrs Stariha said, as to the figures, “if you said they’re right, there’s no need for the bookkeeper to look at it”. Mrs Hart was also asked whether at any time prior to the email of 19 October 2006, had Mrs Hart ever made a statement to Mrs Stariha about the accuracy of her revised spreadsheet. The spreadsheet however was only provided to Mrs Hart by that email. Mrs Hart says that she never asserted to Mrs Stariha that her analysis was accurate. On 20 October 2006 Mrs Hart sent Mrs Stariha’s email of 19 October to Shannon Price. In the telephone discussion, Mrs Stariha was asking Mrs Hart about the income side of the equation.
619 Mrs Hart reasserted her evidence that she made no statements to Mrs Stariha concerning the profitability in the future of the Gold Coast Agency, in her discussions with Mrs Stariha. Mrs Hart said that she had provided Mrs Stariha with a profit and loss spreadsheet for her consideration. Mrs Hart says that Mrs Stariha was “keen to buy” the Gold Coast Agency. Mrs Hart says that although Mrs Stariha says that Mrs Hart told her the franchise would be “highly profitable”, they “never talked about how it would go in the future”. Notwithstanding that Mrs Hart “believed that the business would grow in the future” and she “had as much faith in the business as Julianne had at that time”. Mrs Hart believed that there was “no reason for us not to have faith in it”. (T, p 334, lns 44-45; T, p 335, lns 1-4).
620 This exchange then occurred with Mrs Hart:
Q Do you say that in these discussions with Mrs Stariha you made it clear to her that you would not engage in any discussion about how the business would go in the future?
A I said I thought the business would do well. We both believed in the business.
Q So you said you thought the business would do well?
A [the transcript has failed to record some introductory words here] … of that business myself. It’s doing well.
Q When did you tell her that the business would do well?
A No. I never said it would do well. I said we believed – we both believed that the business would do well. It was common sense. You wouldn’t buy a business if you didn’t think it was going to do well.
….
Q Did you say to Mrs Stariha that you thought the business would do [well]?
A I said that I believe[d] the business would do well.
621 Mrs Hart thought that she made that remark at one meeting and probably on the 6 October 2006. Mrs Hart believes that she and Mrs Stariha were in agreement that the business would do well. Mrs Hart said that although the claim made against her is that she told Mrs Stariha the business would achieve EBIT earnings of $80,000 each year and also generate $50,000 of salary paid to Mrs Stariha, Mrs Hart said that she and Mrs Stariha “never talked about that kind of detail”. She said (T, p 337, lns 10-14): “it was just, ‘I believe the business will do well’.” Mrs Stariha said that she did not say that the Gold Coast business would be “highly profitable in the future”. Mrs Hart says that she did not talk with Mrs Stariha about how the business “would go” in the future and a belief she held that the business would do well was a different thing, in her mind to predicting the future performance of the business (T, p 337, lns 30-34).
622 At the meeting on 5 or 6 October 2006 Mrs Stariha and Mrs Hart discussed the current EBIT earnings based on the profit and loss spreadsheets Mrs Hart had at the meeting, given to her by Ms Price. Mrs Hart did not accept that she knew that Mrs Stariha would have to take into account significantly more overheads than those shown on Ms Price’s spreadsheets. She put it this way: “not significantly more, a few more” (T p,. 338, lns 35-38). Mrs Hart said that when they got to the meeting some inaccuracies in the expense line became apparent such as the P & L and P & I insurance costs although the major issue to be taken into account was the costs of the loan. Mrs Hart said that some of the expenses had been umbrella expenses for the whole franchise and Mrs Stariha would need to determine the expenses for a “standalone franchise”. Mrs Hart then had this exchange with counsel for Mrs Stariha:
Q … you say you did not at any time look at what Mrs Stariha had done when she sent [the revised spreadsheet] back to you asking for your feedback to ascertain whether, for example, the expense loans that she had included were accurate and comprehensive
A I did look at it with her. I commented that she had done some homework there. I commented that she had taken into account, her loan. I’ve never seen such a comprehensive spreadsheet. It was massive in a soft copy and so we had to run across and down and .. I thought her accountant had done it. I said “who did this?” “Is it your accountant”? She said “No, it was me”. And so we did look at those expense lines.
Q You did not ever consider whether the expense lines covered that which Mrs Stariha would incur when she took the business up, did you?
A I told her to go and do her due diligence. I thought it was important that she got separate advice from me so that she felt comfortable … I didn’t think it was my job to sign off on a spreadsheet from her and say, “That’s exactly right, that’s what you’re going to do”. I wasn’t prepared to do that.
Q The allegation, as you know it, is that you did say to Mrs Stariha that the spreadsheet that she sent back to you was accurate and you say that did not occur.
A It did not occur. It absolutely did not occur.
623 At para 132K of Mrs Hart’s statement she says that Mrs Stariha only had queries about the expenses and not the sales figures. However Mrs Hart gave oral evidence that Mrs Stariha only had queries about the sales line having regard to the four months in issue and no queries in relation to the expenses. Mrs Hart said that her statement in that respect was wrong and that the issue with Mrs Stariha was “around the other way”. Mrs Stariha had “queries on the sales, not about the expenses”. Mrs Hart did not accept that based on what she had paid Ms Ellis for Brisbane and Gold Coast, the price to Mrs Stariha of $240,000 for the Gold Coast alone represented “an enormous overpricing of that franchise area”. Mrs Hart did not accept that she discussed the profit and loss position of the Brisbane franchise with Mrs Stariha on the footing that she was trying to convince Mrs Stariha to buy the Gold Coast Agency.
624 Mrs Hart accepts that at the meeting on 5 or 6 October she talked with Mrs Stariha about replacement credits and replacements owing but in the context of what would happen at settlement and how FRGPL would hold monies pending the relevant events occurring influencing the allocation of those monies. Mrs Hart accepted that Mrs Stariha wanted to settle the purchase transaction as fast as possible. Mrs Hart however took steps to attempt to push the settlement out to early December 2006. Mrs Hart had told her lawyers that she did not wish to settle the transaction until December 2006.
625 Mrs Hart says that Mrs Stariha abandoned the Gold Coast franchise in February 2010. Mrs Hart purchased the franchise in October 2010. At the date of the trial, the position was that there would be no purchase by Mrs Hart until she was in a position to on-sell it to another and FRGPL would receive 20% of the sale price. Mrs Stariha described the franchise as an “abandoned franchise”.
part 14 - the evidence of mr davis
626 Mr Davis is the fourth respondent in the proceeding and the Managing Director of FRGPL. In his evidence, including by reference to the documents in the folder marked “R14” (Exhibit A(6)), Mr Davis explains the Frontline franchise system and all of its procedural systems and support franchisees. The franchise system was first established by Mr Davis and his wife in April 1994. Mr Davis explains elements of the environment within which the Frontline Recruitment franchise was developed. Mr Davis explains some of the methods developed for gathering historical data and showing data to persons who might be potential franchisees. Between 1998 and 2006, Mr Davis and his wife developed a standard expenses sheet. The spreadsheet showed revenue and expenses that Mr and Mrs Davis had identified as being necessary to operate a Frontline agency. Mr Davis says that the purpose of the spreadsheet was to help Frontline better understand exactly what it was costing to run the agencies so that they could benchmark the expenses. He also says that there were some teething problems at first because Frontline did not give enough direction to the franchisees about how to describe their expenses, and the franchisees provided their data in different formats and thus there was no consistency. Mr Davis says that he did not settle on a format until the “Recruitment Industry Benchmark” (“RIB”) was produced by MDF Accountants in 2006. Mr Davis says the RIB is a regular survey publication which sets out the various types of expenses and industry benchmark percentages for those expenses as a percentage of revenue. Mr Davis says that Frontline adopted the RIB’s format and then Frontline used the spreadsheet to provide franchisees with a template they could use to calculate and forecast their businesses’ profitability. An example of the RIB document for the 2007/2008 financial year is set out at Tab 3 of Vol R14. Mr Davis says that he asked franchisees to provide Frontline with their expenses. One element of the environment was that clients seeking candidates for jobs would require a replacement guarantee period. A 90 day replacement guarantee became the industry standard and in practically every Frontline preferred supplier agreement, the client required a 90 day replacement guarantee examples of which are contracts across the period from 2005 to 2009 with Woolworths, Caltex, Colorado and Luxoticca.
627 A feature of the franchise system is the use of key performance indicators (KPIs) and a weekly consultant KPI “minimum standards reporting template” to be used by all Frontline consultants as a management tool. Many features of the standard reporting template are set out in Mr Davis’ evidence. Mr Davis describes 24 KPIs addressed by the standard reporting template. It is not necessary in these reasons to extensively describe all of those features. It is enough to say that they are comprehensive and designed to capture regularly information on a wide range of facets of the business undertaking conducted by franchisees. The reporting template must be filled out by each consultant each week and then reviewed with the franchisee or agency manager.
628 In the case of Mrs Stariha, she was recording her KPIs each week whilst an employee of Mrs Hart.
629 Another feature of the Frontline system is the use of Territory Development Requirements (TDRs) which are growth targets by which Frontline measures a franchisee’s performance. A failure by a franchisee to meet a TDR provides an early warning that the franchisee is not performing as well as it might and it also suggests that KPIs are not being met. Mr Davis says, however, that based on benchmarking data, a franchisee which is meeting its KPIs would usually also meet its TDRs. TDRs are used by Frontline to trigger “remedial action with a franchisee”. Mr Davis says that Frontline has only twice relied upon TDRs to take remedial action against franchisees. The first was the Wollongong Agency. The owner of that agency was also the Canberra Agency owner. The Wollongong Agency had stopped growing and had become unstaffed. After working with the franchisee, a system was put in place to ensure that the Agency was properly serviced which involved setting targets for the franchisee, assistance with employing better staff and a franchisor representative visiting the franchise more regularly. The Canberra Agency continued to trade under the same franchisee until it was sold on 1 October 2009. Mr Davis says that the second example concerned the Gold Coast Hospitality Agency which was conducted by Semolina.
630 As to the basis of the TDRs, Mr Davis says that they were set in 2005 based upon the actual performance of existing franchisees between 1998 and 2005. Mr Davis said this:
We measured the performance of the Brisbane, Perth, Canberra, Newcastle, Adelaide and Darwin agencies and found that in that first year of operation as a franchise, they recorded sales averaging $219,548.23, in their second year of operation they recorded sales averaging $323,544.29 and in their third year of operation they recorded sales averaging $410,882.00. Taking a conservative approach, we rounded those figures down to $150,000.00 in the first year, $240,000.00 in the second year, and $360,000.00 in the third year.
631 As to further benchmarking, Mr Davis says that by the time of Mrs Stariha’s Discovery Day on 6 November 2006, FRGPL had only three franchisees which had traded for in excess of three years being the Sydney, Brisbane and Melbourne franchises. Frontline’s data demonstrated that after the third year of operation, those agencies were averaging 36% year on year growth which can be seen in the sales reports for those three franchises. It followed from this that Mr Davis was comfortable in setting a TDR for franchisees at 15% per annum after their third year of operation. However, TDRs measure growth and Mr Davis says that it is not realistic for an agency to continue to enjoy very high levels of growth within the same territory for an extended period of time. For this reason the version of the Franchise Agreement commencing in May 2005 adopted a “per head of population formula”. Frontline draws a distinction between new and mature territories such that once an agency generates revenue which is equivalent to $1.00 per head of population in the Territory, Frontline regards that territory as “mature”, and at that point TDRs no longer apply. Mr Davis says that when a franchise is sold within the first three years of its operation, Frontline resets the TDR back to the beginning at $150,000 in gross revenue for the first year as the development requirement.
632 Mr Davis says that in his experience poor performance on the part of a franchisee is almost always linked to either illness on the part of the key individual, a disaster occurring of one kind or another or divorce. Mr Davis says that it is unusual for a franchisee’s performance “to just decline for no reason, or for some other reason”. However, during the Global Financial Crisis (GFC) from late 2008 Frontline stopped enforcing TDR’s. At the time of the GFC and thereafter there was a 33% drop in revenue across the franchise network over the 2008/2009 and 2009/2010 financial years and during that period 13 franchisees closed their businesses.
633 As to clients, the consultant or franchisee sends the “Frontline Standard Client Agreement” to the client and asks the client to sign and return the contract. When that occurs, the contract is signed by the consultant franchisee. The signed contract is then sent to Frontline’s head office where it is scanned and entered into the Frontline data base. Frontline regularly negotiates special contracts with clients either because the clients have a particularly good record or other commercial circumstances apply. Some clients have no written agreements. There is no need to mention the names of particular major clients in these reasons. Other clients have extended payment timeframes negotiated to 30 days rather than a seven day payment term. Frontline takes advice from the franchise network about whether there are any objections to a special arrangement being put in place with a particular client and if there are no objections received within four hours the request is generally approved. During the period that Mrs Stariha was “the appointed manager” for the Gold Coast Agency, she received an email dated 15 December 2005 addressed to the “Agency Operations Team” consisting of current franchisees and their appointed Managers, seeking the views of that Group about such matters.
634 As to replacements Mr Davis says that because Frontline deals with national clients, Frontline does not allow a franchisee to refuse to provide a replacement candidate on the basis that the client has strictly breached the terms of a client agreement or because of any other perceived breach by a client. Mr Davis says that during the period that Mrs Stariha was “an employee of Colleen Hart” her sales records show that there 33 occasions when she needed to process “fall outs” which is the start of the replacement process. Mrs Stariha would have required training to process these “fall outs” and the associated replacements. After each falling out of a candidate is processed or a replacement is processed, the Frontline data base automatically updates a report of the franchisee which shows all of the franchisee’s current “replacements owing”. This is how Frontline describes positions for which a candidate has been placed but has fallen out of that placement and for which a replacement is to be provided to the client but has not yet been replaced. Mr Davis says that the entitlement to a replacement appears on the “Replacement Report” even if the invoice for the original (but failed) placement has not yet been paid by the client.
635 Mr Davis says that Frontline’s practice is to continue to press for payment of the invoice while Frontline searches for a replacement for the role, for the client. Mr Davis addresses the seven day issue in this way (at para 96 of his updated statement):
… a number of Frontline’s client agreements contain a provision stating that the replacement guarantee applies if the invoice is paid within seven days. However, Frontline’s practice has always been that, where a candidate leaves the client during the “guarantee period”, and the client has not paid the invoice, the accounts staff and franchisees use the guarantee provision as a commercial way to persuade the client to pay the invoice. For example, the Frontline’s staff member points out that the client has not strictly complied with the payment terms so there is no obligation on Frontline to provide the replacement, and Frontline is technically entitled to payment even if it doesn’t provide a replacement, but if the client agrees to pay the invoice within a week, Frontline will record a credit on the system until the client needs another candidate.
636 Mr Davis says that this practice results in the payment of invoices and keeps clients happy and helps Frontline to gain repeat business. Mr Davis also says this (at para 98): “Frontline has to the best of my knowledge never relied upon the 7 day payment term in its standard client agreements to deny a client a replacement. Instead, that clause has been used to encourage faster payment of invoices”.
637 Mr Davis explains that if a candidate leaves the client’s employment within the guarantee period as stipulated in the contract, the consultant is then required to complete a “Replacement Owing Form”. Mr Davis explains the eight steps involved in dealing with that Form. Mr Davis says that there is a section of the Form that only requires completion if the “Replacement Owing” is to be applied against the original invoice which has the effect of giving the client an actual refund. This is only done in cases where the candidate did not start in the placement or only lasted a very short period of, for example, two or three days. The final step in this sequence is to process a replacement.
638 Mr Davis says that he has conducted an assessment of Frontline’s database records which show that between 8 December 2006 and 15 December 2009 the Gold Coast Retail Agency had 155 placements processed in the data base and of those, 37 were “replacements owing”. Mr Davis says that Mrs Stariha did not complain about having to complete a replacement owing form until January 2010 and by that stage she had processed 34 replacement owing forms without making any complaint to FRGPL. By January 2010, Mrs Stariha had also processed one replacement owing within the hospitality franchise owned by Semolina.
639 Mr Davis says that across the franchise system up until 4 January 2010, franchisees have processed 18,954 placements reflected in its database and have processed “exactly 4,800 replacements owing without any complaint from any franchisee” (para 119). Mr Davis also says that the database reveals that in the 2007 calendar year there were 3,037 placements made over a 255 day working year resulting in approximately 11 per day with 761 credits being processed or almost three credits each day. Mr Davis says that providing replacements is a very common process throughout the franchise system.
640 Mr Davis says that in the recruitment process everything is measurable and by recording the activities of each consultant in the database, as part of the KPIs, and recording the conversion rates, the database allows agency owners and consultants to determine how much “lead-generation and preparatory work a consultant needs to perform in order to reach a given revenue target” (para 128).
641 Mr Davis says that consultants are generally very vigilant about keeping the database up to date. The KPIs require the logging of the various activities extensively described by Mr Davis. Mrs Stariha received formal training on KPIs when she attended her consultant induction training on 18 October 2005. Mr Davis says that if a consultant fails to record their activities in the database, it affects his or her compliance with the KPIs which reflects poorly on the consultant.
642 Mr Davis in his primary statement addresses the contentions of the applicants to the effect that some franchisees had not been financially successful prior to Julstar and Semolina executing their respective franchise agreements. To do so, Mr Davis prepared an analysis of the percentage of estimated expenditure in each of the key expenditure areas based on Frontline’s benchmarking of expenditure by all of its franchisees conducted in the 2006/2007 financial year. The analysis shows the revenue for franchises controlled by the companies listed in Mrs Stariha’s claim as being unprofitable for the period the company was operating a franchise. The revenue is drawn from sales reports within the Frontline database for the relevant financial year. The expenses and profits are calculated by multiplying the revenue by the benchmark percentages. The estimated number of full-time-equivalent staff is an estimate of the number of full-time-equivalent employees who were working in the franchise of the relevant financial years. The analysis sets out the position of the Perth franchisee for the financial years ending 2003, 2005 and 2006. The position for the Darwin franchisee is set out for the 2006 financial year and the Newcastle franchisee’s position is set out for the financial years ending 2005 and 2006. The franchisees made a profit in every year ranging between $69,933.00 to $201,423.00 for the Perth franchisee across those years. The Darwin franchisee’s profit was $46,861.00 and the Newcastle franchisee’s profit was $92,144.00 and $96,321.00 in the two financial years already mentioned.
643 Mr Davis says that the Hobart Retail Agency operated by Ms Vockler is said to have operated at a loss and ceased trading on 29 February 2004.
644 Mr Davis says that Frontline never had a separate Hobart franchise on foot. He says it was a ‘satellite’ of the Melbourne Retail Agency and had a part-time consultant working in it. It operated for six months between October 2003 and February 2004 earning total revenue of $5,172.73. Frontline and the Melbourne franchisee decided in February 2004 that the Hobart Agency was not viable and since that time client needs in Tasmania have been serviced out of Melbourne and regional Victoria.
645 Although the applicants allege that the Christchurch retail franchise was operated at a loss by Ms Greeno and was sold for $1.00 in November 2008, Mr Davis says that the actual position is this. The Christchurch agency was opened as a company owned agency on 5 September 2005. On 9 October 2006, it was sold to Kiwala Ltd and the directors of the franchisee were Mr Walker and Ms Greeno. They ran the agency together until 14 November 2008 when their relationship broke down and they sold the agency to the Frontline Retail Auckland franchisee for the value of its liabilities at the time which were approximately $30,000.00. The new franchisee assigned one of her staff to the agency. During the period 15 November 2008 to 1 July 2009 the revenue of the franchise was $147,106.00 and on 1 July 2009, Ms Mountain purchased the franchise for approximately $70,000.00. The franchise operated by Mettal Pty Ltd commenced on 21 February 2006 and had been operating for a little over four months as at 30 June 2006.
646 In addition, Mrs Stariha says that a number of Frontline franchisees traded for a relatively short time before exiting the franchise system and she cites as examples the operation of the Christchurch and Auckland franchises. Mr Davis says that the Auckland agency was established on 8 March 2004 as a company owned agency (by Frontline). It became an agency on 1 August 2005 when Frontline’s agency manager purchased the business. The Christchurch agency was also a Frontline company owned agency established on 1 August 2005. It was purchased as a franchise by Ms Greeno on 9 October 2006.
647 As to Brunwell Pty Ltd, it was established as an agency before Frontline had established the franchise and was operated by Ms Burdekin. She operated it from her residence in Logan, Brisbane. Brunwell did not pay any fees for the purchase of the Brisbane agency. It operated prior to Frontline establishing its database records. The first database sales record is dated 23 June 1998. Ms Burdekin converted her “agency agreement” to a franchise agreement on 14 January 2000. In early 2001, her family moved back to their home in Nelson, New Zealand, and Ms Burdekin sold the business to her employee, Ms Karen Ellis, for $35,000.00. On 1 July 2005, Karen Ellis sold the franchise to Colleen Hart for $320,000.00 and received a further $106,628.26 for the sale of her other territories totalling in all $426, 628.26.
648 As to Perth, Mr Davis says this. The first Frontline Retail franchisee was Synergy Equity Pty Ltd (“Synergy”) which commenced the franchise on 15 February 2002. Prior to this date, the agency had been operating as a company owned agency under the management of Ms Campion. The agency began operating in January 2001. Synergy purchased the agency for $25,000.00. The franchisee, Joanne French, took over the operations of the agency and operated it until 1 October 2002 at which point her employee, Ms Butcher, purchased the agency from her for $70,000.00.
649 Mr Davis has also sought to identify by a table, as at 6 November 2006, the instances when a franchisee failed to meet territory development requirements. Mr Davis says that in a response made to complaints made to the Australian Competition and Consumer Commission (“ACCC”) by Mrs Stariha, Frontline was required to submit to the ACCC a list of franchises where the franchisee had failed to achieve TDRs and the reasons for their failing to do so. Mr Davis says that in the year ending 31 August 2004, the Darwin franchisee Aspire Equity Pty Ltd (“Aspire Equity”) achieved 87.1% of its TDRs and the report letter to the ACCC noted an 87% achievement of that franchisee’s TDRs in that period.
650 In the year ending 31 July 2006, the Darwin franchisee, Coonawarra Gold Operations Pty Ltd (“Coonawarra Gold”) achieved 95.8% of its TDRs and the report letter to the ACCC did not refer to Coonawarra Gold’s performance as to its TDRs in this period. In the year ending 19 September 2006, the Wollongong franchisee, Phoenix Rowley Pty Ltd (“Phoenix”) achieved 74.8% of its TDRs and the report letter to the ACCC noted a 69% achievement of that franchisee’s TDRs in that period. In the year ending 1 March 2003, the Adelaide franchisee, Valsand Pty Ltd (“Valsand”) achieved 94% of its TDRs as reported to the ACCC.
651 Mr Davis says that in the course of preparing evidence for these proceedings he has discovered that the information provided to the ACCC concerning the Adelaide franchisee was incorrect. Valsand is a company owned by Ms Vockler that operated the Adelaide franchise, established on 1 September 2003. In the first year of operation, Valsand had sales revenue of $264,715.00 and a TDR of $81,000.00 resulting in an achievement rate of 326%. In its second year of operation, the achievement rate was 233% and in its third year of operation the achievement rate was 156%. Mr Davis says that the error contained in the letter to the ACCC was due to time pressures upon staff resourcing at the time of the GFC.
652 Mr Davis says that as to the Darwin franchise, Ms Butcher applied in early 2003 to establish a Darwin franchise. Ms Butcher had been successfully operating the Perth franchise since she purchased it from Ms French in 2002. The franchise began operating on 1 October 2003 and TDRs were set under the agreement. In the first year of operation the franchisee achieved a TDR rate of 87%. Ms Butcher then recruited a consultant, Ms Wilson, who completed induction training on 30 July 2004. In the period 1 September 2004 to 31 August 2005, the Darwin agency achieved a TDR rate of 118%. On 1 August 2005, Ms Wilson purchased the business from Ms Butcher.
653 As to the Wollongong position, Ms Rowley began working with Frontline as its company owned agency manager for Canberra on 19 August 2002 and became the franchisee in Canberra on 1 March 2003. She purchased it for $25,000.00 and operated the Canberra franchise for six years selling the franchise for $350,000.00. Mr Davis recalls that that sum was made up of $220,000.00 plus some other expenses together with the amounts set out under Tab 5 of R14 being amounts of $54,951.01 and $46,007.28. In Year 1, she achieved sales resulting in a TDR achievement rate of 296%. In Year 2, her TDR achievement rate was 244% and in Year 3 it was 168%. In Year 4, she achieved a TDR rate of 208% and in Year 5 a TDR rate of 281%. In Year 6, her TDR achievement rate was 115%. It is not necessary to recite in these reasons all of the dollar values of these revenues.
654 Mr Davis says that in his view, Ms Rowley was an extremely good franchisee. He worked closely with her for a number of years. Mr Davis had established a company owned franchise in Wollongong in June 2004 and Ms Rowley expressed interest in purchasing it. She did so on 20 September 2004 for $33,000.00. In Year 1, she achieved sales revenue resulting in a TDR achievement rate of 121.4%. In Year 2, she generated sales revenue less than the Year 2 TDR requirement and therefore achieved a TDR rate of 74.8% for Year 2. Staffing was the primary problem and Ms Rowley was also having difficulties with remote management of the agency. In Year 3, Ms Rowley achieved sales revenue amounting to a 117% TDR achievement rate. In Year 4, her TDR achievement rate was 105%. In 2009, the Wollongong agency was closed down as a result of the adverse effects of the GFC.
655 Mr Davis says that the only Frontline franchise which has ever been terminated for non-achievement of TDRs was Semolina’s Gold Coast Hospitality Agency. That franchise was terminated after substantial consultation and further training provided to Mrs Stariha.
656 Mr Davis says that the only other agencies to ever receive breach notices were Aura Enterprises Pty Ltd (“Aura”) and Manawa Pty Ltd (“Manawa”) and these breach notices were not related to a failure to achieve TDRs.
657 As to Manawa, Mr Davis says that he discovered that the Newcastle agency operated by Manawa had employed a previous employee of the Sydney franchisee but failed to follow the Frontline procedures and require the employee to complete a non-competition agreement. Mr Davis says that the notice had nothing to do with the financial performance of Manawa. The employee in question left the Newcastle franchise and relocated to Sydney, taking up employment with a competitor of the Sydney franchisee. The Sydney franchisee complained to the franchisor that its business had been adversely affected by the conduct of the Newcastle franchisee in failing to follow Frontline’s employment procedures. This resulted in an immediate audit of all employment documentation of the Newcastle franchisee and re-training in relation to the employment procedures.
658 Mr Davis explains the history of the Gold Coast/Brisbane territory in this way. Ms Burdekin, as already mentioned, became a franchisee. One of her employees was Ms Ellis. She bought the Queensland franchise from Ms Burdekin. Mrs Hart then bought the franchise from Ms Ellis through her company but confined to the Brisbane and Gold Coast parts of the former Queensland territory. The Gold Coast territory did not exist as a separate territory between 11 February 2003 and 7 December 2004. Frontline Retail Brisbane had been making placements for Gold Coast clients from the inception of the franchise in June 1997 although these placements were not recorded in the database as separate Gold Coast based sales until 2003 when Ellis Trading established a Gold Coast office staffed by a consultant living on the Gold Coast, Nikki Garnet-Palmer. She ceased employment on 27 July 2004 at which stage the Gold Coast office was closed and Gold Coast recruitment occurred from the Brisbane office. Mr Davis says that the Frontline database shows that between 18 August 2003 and 6 December 2006, sales of $431,629.91 is recorded in the database under “Gold Coast” and $269,278.61 of those sales were made in a 12 month period to 6 December 2006 when Mrs Stariha was working on the Gold Coast territory or catchment.
659 Mr Davis says that because so much business was being done on the Gold Coast in the period of the financial year ending 30 June 2006 (see the amendments made by Mr Davis to his statement), he was prepared to allow the Gold Coast to operate as a separate territory from Brisbane despite his concerns about having two different franchisees so close to each other. Nevertheless, Frontline agreed to divide the existing Brisbane franchise territory and allow the franchisee of that territory to sell off the Gold Coast portion or catchment.
660 As to Ellis Trading, Mr Davis says the Frontline issued one breach notice to Ellis Trading while it was operating a retail agency on the Gold Coast. That breach notice had nothing to do with the financial performance of the agency. It was concerned with the fact that Karen Ellis, the director of the franchisee company, was not attending the office as often as was required under the franchise agreement and therefore she was not doing enough work to meet the necessary KPIs. Before Frontline issued its breach notice to Ms Ellis, she told Mr Davis that she was divorcing from her husband, had two small children and was not regularly going into the Frontline office. Mr Davis says that he flew to Brisbane and met with Ms Ellis and her husband. The meeting resulted in a commitment by Ms Ellis to continue with the business. Mr Davis says that Ms Ellis did not attend for the requisite hours. He says he could see this from the activity reports and from enquiries he made of Ms Ellis’s staff. Mr Davis said he thought that the position was unfortunate because Ms Ellis had done a good job in the business and her employees had been trained well. Mr Davis says that in the result he sent Ellis Trading a notice to remedy breach requiring Ms Ellis to attend the business for 40 hours per week as required under the agreement and to provide a daily report setting out the activities undertaken that day. Ms Ellis attended the office for 40 hours per week for two months. Mr Davis says that in this period the agency’s trading performance on the Gold Coast was very good as the sales report for the financial year ending 30 June 2005 reveals. Mr Davis says that Ms Ellis stopped working the required hours and the business performance fell away. On 8 July 2005, the Brisbane and Gold Coast territory was sold to Hart Trading Pty Ltd. Mr Davis says that the sales reports for the Brisbane agency from the date Mrs Hart purchased the agency to the date of the trial show that it has been a successful franchise.
661 Mr Davis says that for the reasons he has identified in relation to this history of the Gold Coast Agency, he does not accept that the agency had previously failed.
662 Mr Davis says the following things about Mrs Stariha’s performance in the period August 2005 to November 2006. He regards Mrs Stariha as a “very good consultant”. He says he observed Mrs Stariha’s work in November 2005 and January 2006 when he visited the offices of Hart Trading. Mrs Stariha seemed to be very competent, confident and very active. Her KPIs as recorded in the database were “very high” and her sales figures were “very good”. Mr Davis says that as part of Mrs Stariha’s orientation and induction training she would have been introduced to the Frontline policy and procedures manuals containing details of the processes involved in making placements and replacements. Mr Davis says that Mrs Stariha’s training consisted of PowerPoint presentations relating to parts of the manuals.
663 As to induction training, Mr Davis says that it is not offered to an employee until he or she has been working in an agency for about six weeks as a franchisee would not normally want to spend the money sending an employee to Sydney for training if the franchisee is uncertain about whether the employee will stay and is suitable. During the initial six weeks of employment, employees usually undergo “general orientation training” with the franchisee. While an employee of Mrs Hart, Mrs Stariha completed “replacement owing forms herself” which shows that she had been trained in that process.
664 Mrs Stariha commenced employment with Hart Trading in August 2005. Mr Davis has caused a report to be printed from the Frontline database for the period from January 2005 to 8 December 2006 which, of course, covers Mrs Stariha’s period of employment from August 2005 to 8 December 2006. In that period, Mrs Stariha made placements on the Gold Coast to the value of $301,530.21 and in Brisbane made placements to the value of $104,785.00. Of those sums, $86,761.00 in value of placements made by her at the Gold Coast required replacements to be made and in Brisbane $47,895.00 of placements were the subject of replacements representing 21 candidates on the Gold Coast and 9 candidates in Brisbane.
665 Mr Davis then addresses in his primary evidence the circumstances relating to the establishment of the franchises with Julstar and Semolina.
666 Mr Davis says that the Frontline database has a number of security access categories consisting of candidate, agency owner/manager, consultant, national and client. As well, there are “General Restrictions” according to the office or database that users work from. For example, a Frontline Retail Agency cannot access information on the Frontline Hospitality database. Mr Davis says that Mrs Stariha had “Agency Manager” access to the database, which is the same level of access as “franchisee” access, while she was an employee of Hart Trading. That level of access arose because Mrs Stariha was the “agency manager” for the Gold Coast. Mr Davis says that Mrs Stariha therefore had a higher level of access than ordinary consultant access. Mr Davis says that database access is limited by industry sector so that access is confined to retail information, hospitality information, health, construction, etc. This limitation prevents consultants who operate in different industries having access to candidate and client information in other industries and this is necessary due to privacy laws. The database also limits access depending upon the agency which results in Frontline only giving access to restricted staff records. An agency owner or manager or franchisee has access to all staff records for that person’s agency. A consultant only has access to his or her own staff records. Employees of the national office of FRGPL have access to all staff records.
667 In December 2006 and prior to that, as well as the general restrictions just mentioned, Mr Davis says that agency owners (franchisees) had access to all parts of the Frontline database with the exception of “inputting billing information and inputting new franchise, agency and staff data”.
668 Mr Davis says that consultants had access to all agency owner areas except information relating to financial disbursements made to franchisees.
669 Mr Davis says that it follows from this level of access available to Mrs Stariha that she “had full access to the exact monthly placements and placement fees from the sales reports which were available to her in the database”. Mr Davis says that, “All consultants had full access to sales reports and sales show the placement fees charged to clients”. Mr Davis notes that Mrs Stariha brought with her to Sydney a document described as a sales report printed from the Frontline database. Mr Davis says this is the database report which shows the monthly placements and placement fees charged by an agency. Mr Davis says that Mrs Stariha could not have printed that report in that form if she did not have access to the sales report part of the database.
670 Mr Davis then addresses in his statement aspects of the events relating to the Discovery Day. At these Discovery Days, Mr Davis says that the franchisor’s representatives are him, the operations manager, the special project manager, the individual responsible for accounts receivables, the accounts manager, the IT manager and the training manager.
671 Mr Davis says that almost invariably the first question asked by prospective franchisees is, “How much money am I going to make?” Mr Davis says that his practice based on his experience is not to state any figure or make any predictions. Instead, he says that he uses words to this effect: “rather than guessing, let’s have a look at what these businesses have actually done and you will need to draw your own conclusions from that”. Mr Davis says that he usually shows franchisees the Frontline database on a projector screen if there are a number of people at the Discovery Day and explains the way the system works and shows them actual historical data for franchisees. Mr Davis says this involves explaining the structure of the system, how invoicing is performed and why the processes are done in the particular way adopted. Mr Davis says that on every Discovery Day where there are attendees who have not previously had access to the database, he produces reports dissecting agency sales figures for different periods of time.
672 Mr Davis says that he does not make any representation that the historical data means that a franchisee will make the same revenues. Mr Davis says that his practice is to say that these figures are being achieved by other franchises but he explains that that does not mean other people will necessarily achieve those sales. Mr Davis says that his practice is to explain that the database records sales figures because sales are processed through the database, but the database does not record expenses. Mr Davis says his practice is to say that Frontline does not audit a franchisee’s expenses but that Frontline has a “reasonable idea of the costs” involved in running an agency, due to Frontline’s personal experience in running agencies and regular reports. Mr Davis says that his practice is to say that the expenses are those set out on the standardised expense spreadsheet but Frontline does not know what other expenses franchisees put through their books and therefore Frontline does not know the franchisee’s ultimate “bottom line profit”.
673 Mr Davis says that to deal with the issue of expenses, it was his practice to provide contract details of existing franchisees and invite prospective franchisees to contact current franchisees and verify with them how the franchises were performing.
674 Mr Davis says that he cannot recall ever saying to any franchisee that he expected a franchisee would earn a particular amount of revenue (para 260 of Mr Davis’s updated witness statement). Mr Davis says that he has adopted a practice of not making promises or projections about financial performance in order to protect Frontline from litigation about unmet earnings projections. Mr Davis says that he has “always been extremely concerned to avoid litigation like that because I have invested so much time and money into the business and I have always been concerned about losing the results of all of that hard work because of litigation” (para 261). Mr Davis says that it has always been his practice to instruct Frontline staff participating in the Discovery Day presentations that “they must not make any promises or projections about financial performance”.
675 Mr Davis says that the other main questions asked of him typically by prospective franchisees is: “Will Frontline change the franchise agreement for me?” and “Has anybody ever failed or gone bankrupt here?” The answer to the first question is always “No” because consistency across the system is necessary. Mr Davis says this as to the second question (at para 266):
As to the second question, before the Global Financial Crisis, no franchisee had ever failed, no one had ever abandoned or walked out on a franchise and those franchises which had been sold were always sold for more than the original purchase price. In the case of Ellis Trading and Aura they both left the business in part because they were under notices but in both cases they sold their businesses for substantially more than they were purchased. I reluctantly took action against Aura, an agency with very significant revenues, because the franchisee’s conduct was harming other franchisees, not because Aura was not operating profitably or successfully.
676 Mr Davis says that due to the GFC, Frontline, at the date of trial, had only held one Discovery Day since 2009.
677 Mr Davis says that these discussions he has just described are the discussions he ordinarily has with prospective franchisees and usually with their partners as well.
678 Mr Davis says that the last part of the Discovery Day is “about business forecasting” which Mr Davis takes. The operations manager would also usually be involved in this part of the day. At this stage, Mr Davis would talk through the numbers that the prospective franchisee has put into the standardised expense spreadsheet/business forecast template, and he would compare those figures with the benchmark percentages based on his experience in operating Frontline agencies and in dealing with reports. Mr Davis says that most franchisees begin with a profit figure which is too high because of an overly optimistic revenue forecast. Mr Davis says that he always questions the prospective franchisee about the revenue figures and refers them back to the sales reports. He says that sometimes the prospective franchisees revise the revenue forecasts during the course of the day so that a more modest forecast is adopted by the final presentation. Mr Davis says that the point of this approach is that he tries to ensure that prospective franchisees are “being realistic” and he is conscious of “not trying to talk a prospective franchisee into the business, or out of the business”.
679 Mr Davis says that where a prospective franchisee’s sales forecast is greater than $200,000 per year, his experience tells him that an agency would need to employ at least one consultant in addition to a full time franchisee/agency owner and his practice is to ask how the franchisee proposes to deal with that necessity. Mr Davis says he then checks the expenses template the franchisee has assembled to test whether the employee costs are high enough to accommodate the extra employees to generate the extra revenue. Mr Davis says that he also checks the rental expenses.
680 Mr Davis also says that where a prospective franchisee forecasts $200,000 per year or higher he points out that in order to achieve that figure, the franchisee would need to focus on KPIs. The performance of a number of consultants who have achieved their KPIs is looked at from the database to see their financial performance.
681 Mr Davis says that this is part of the Discovery Day where it is particularly helpful to have the prospective franchisee’s partner in the room critically analysing each of the revenue and expense figures as well.
682 Mr Davis also says that he talks about what he calls the “gap” which involves a basic cash flow calculation. It is calculated by adding cash at Bank to receivables and deducting expenses for a period of three months. Mr Davis says that Frontline encourages its franchisees to maintain cash equivalent to at least three months of expenses. Frontline also requires incoming franchisees to show proof, usually in the form of a Bank balance that they have sufficient cash reserves to meet this gap.
683 Mr Davis also says that partners of a prospective franchisee would often ask him whether the prospective franchisee is paying “too much to enter into the franchise in the first place”. Mr Davis says this (at para 284 of his updated witness statement):
284. By the time a prospective franchisee attends the Discovery Day, I usually have a good idea about what the purchase price will be because the outgoing franchisee usually talks to me about how much they want to sell the business for and completes an “intention to sell” document which has an indicative sales price on it.
684 Mr Davis says that he also has a good idea of the sale price for a new franchise based on the per head of population calculation he describes at para 285 (corrected to the 4 cent per head of population calculation). Mr Davis also says this (at para 286):
286. I had a practice of not commenting on the specific purchase price but I did generally say that the franchises sell for about three times earnings before income interest and tax (“EBIT”) and that they should have their accountant check the figures to satisfy themselves that the price is reasonable.
685 Mr Davis says this in relation to the particular Discovery Day on 6 November 2006 involving Mr and Mrs Stariha. Mr Davis says that he recalls receiving Mrs Stariha’s email shortly before the Discovery Day which suggested to him that Mrs Stariha was already across the detail of what was required to become a franchisee and that she had carefully considered the figures and taken appropriate professional advice. Mr Davis says that he can easily recall the Discovery Day Mrs Stariha attended because it was held in Mr Davis’s office rather than the Boardroom which was being used that day for training the Sydney franchisee (Mr Sher). Mr Davis also says that he can recall Mrs Stariha’s Discovery Day because she was a “star Frontline employee” and he was pleased that such a good consultant was planning on becoming a franchisee. Mr Davis says he thought that Mrs Stariha might be one of the best franchisees Frontline had ever had and he was really excited about her becoming a franchisee. This made the day more prominent for Mr Davis. Mr Davis recalls that Mrs Stariha brought printouts with her of sales reports from the Frontline database. Her husband was with her.
686 Mr Davis says that at the start of the day he spent some time talking about the extra responsibility of being a franchisee. He says (at para 296) that he talked about the Aura proceedings. He says that franchisee responsibility was an issue in those proceedings and so he made a “point to talk about responsibility with Julianne”. He says that Mrs Stariha had three copies of the standardised expense spreadsheet with her each with different figures and revenue projections. He recalls that she had three revenue forecasts at $250,000.00, $300,000.00 and $350,000.00. He said she was “very bullish” and he said to her a few times that she “only needed to achieve $150,000 in revenues in her first year, and that she had already done $250,000 in the previous year as a consultant”. Mr Davis says that he then said that Mrs Stariha “should expect this to drop because she would have other work to do now that she was a franchisee”.
687 Mr Davis says that he recalls Mrs Stariha asking him about the figures by saying “What do you think about this?” Mr Davis says he responded by saying that “no one had ever projected such high figures” (being the $300,000.00 and the $350,000.00 figures). Mr Davis says he recalls that Mrs Stariha had not allowed for extra staff in her projections and said that she was “planning on doing all the recruitment work herself”.
688 Mr Davis says that Mrs Stariha asked him early in the day whether he thought she was paying the right price for the business. Mr Davis says that he did not laugh at the question as Mrs Stariha suggests and nor did he say he would cover that matter in the afternoon session. Mr Davis says that he is almost always asked that question and usually at the beginning of the day and he says he gave Mrs Stariha the response he gives every other prospective franchisee who asks that question. He says he told her that he “could not tell her what the business was worth, at the end of the day a business is worth what people pay for it and in a circumstance where there are a number of interested buyers businesses may fetch more than they otherwise would, same as a house auction” (para 302). Mr Davis also says this:
303. I told Julianne that I would not tell her how much I thought the business was worth. I then said that a number of franchises had sold and, generally, the price was based on the EBIT figure provided by the seller and reviewed by purchaser and their advisers and that the multiple on this figure was in the region of 2 to 3 times the EBIT. I went on to say that in determining the value of the business she should consult with her accountant and possibly a business broker to satisfy herself that the business was worth what she was paying. At no time did I say “the Gold Coast agency was worth $240,000”.
304. I did not say that the Adelaide franchise had recently sold for $300,000. I said it was sold for approximately $220,000. I did not say that the Brisbane agency was worth $750,000. I did say that the Darwin franchise was purchased for approximately $140,000 but I did not say it had the same sales as the Gold Coast agency. There was no reason for us to discuss sales figures for any Frontline franchise business because Julianne had access to sales reports for all Frontline franchises and could find out each franchise’s turnover figures herself by looking up those figures in the database. Since she came to the Discovery Day with sales reports I thought she had already done so.
305. I did not say that the Sydney agency had just sold recently for $1,200,000. I said that it had sold for just under $1,000,000. I did not say that the Western Australian agency had sold for $300,000. I said it had sold for approximately $100,000.
306. I did not say anything about what price Julianne and Lee could sell the business for in the future.
689 Mr Davis says that he did not doubt Mrs Stariha’s ability to do well or that she knew what was required to make the franchise a success. Mr Davis says that Mrs Stariha said to him that she had run two businesses before and that she was very confident in her ability to run the Frontline business. Mr Davis says that he recalls discussing the “gap” issue with Mr and Mrs Stariha.
690 On the issue of the discussion with Mr Stariha, Mr Davis says this at para 311:
311. Lee asked me whether or not the business could do $240,000 in sales in its first year of operation as a stand-alone business now that it is no longer part of the Brisbane agency. I said that I could not say that it would or wouldn’t, but I showed him, using the sales reports, the sales the business had achieved over the previous 12 months with Julianne operating it, but that, again operating as a franchisee brings extra responsibilities and that takes some time away from generating sales. I said to Julianne, though, that in the first year of operation, all that was required was sales revenue of $150,000.
691 Mr Davis says that the only advice which Mrs Stariha sought from him during the Discovery Day was his thoughts on the office she was proposing to move into. Mr Davis says that he said to her that he was familiar with the Gold Coast office she was already working in and he did not think there was anything wrong with it. Mr Davis says that Mrs Stariha responded saying that she was convinced that she should move because the new office was a better deal and would be more upmarket. Mr Davis said he told her that some clients may see an upmarket office as a sign that perhaps Frontline is charging too much for its services. Mr Davis says he told her she should be careful not to spend too much money and that 6% of her total revenue was the benchmark figure for rental expenditure.
692 As to the contention that Mr Davis told Mrs Stariha that all of Frontline’s franchisees had operated and were operating financially successful franchise businesses, Mr Davis says this (para 314):
I did not use those words. I may have said words to the effect of “we have never had a franchisee go bad in our network” and then explained that no franchisees had been terminated or abandoned and that all franchises which had been sold were sold for more than the price at which they were purchased. I did not make any absolute or unqualified statements about the success of the businesses.
693 Mr Davis notes that Mrs Stariha contends he said to her that “my franchisees had highly profitable businesses”. Mr Davis denies saying that. Mr Davis reasserts his position that when asked about profitability, his practice was always to say words to the effect that “when these businesses are well run they can be profitable”. Mr Davis says that he would not have said anything to Mrs Stariha about her being personally financially successful if she acquired a Frontline franchise. Mr Davis says he only ever spoke to franchisees about how franchise businesses perform and business costs. Mr Davis says that because he knew that franchisees book a range of expenditures through their franchise entities he could not comment upon how much money might ultimately be paid to the controlling individuals.
694 As to the TDRs, Mr Davis says that he spoke directly about the schedule in the franchise agreement which sets out the TDRs and said that after the third year of operation, Frontline expected the franchisee to achieve a 15% increase year on year until the agency’s revenue is the equivalent of $1.00 per head of population in their territory. Mr Davis says that he told Mr and Mrs Stariha that non-achievement of TDRs on its own does not mean that a franchise would be terminated and that there had been cases in the past of Frontline agencies failing to meet TDRs.
695 In relation to Ellis Trading, Mr Davis explained to Mr and Mrs Stariha that Frontline had received a number of complaints about the Brisbane Retail Agency from other franchisees on the basis that their clients were complaining that the Brisbane Agency was not providing them with candidates. Mr Davis told Mr and Mrs Stariha that he had taken steps to try and remedy the problems. Mr Davis says he told them that he had required Ms Ellis to complete daily activity reports although this did not address the core problem as Ms Ellis was not able to attend the business with the result that the business was sold to Mrs Hart “at a significant profit for Karen based on her original purchase price”.
696 As to aspects of the conversation with Mr Stariha, Mr Davis says that he recalls Mr Stariha saying that a 60% and then a 50% increase in sales over the first few years of the franchise’s operation was high. Mr Davis says he responded by saying that if a franchisee met KPIs and recruited good staff, Frontline’s experience was that those increases in revenue were achievable for a new franchise. Mr Davis says he then repeated how important the KPIs were and said that although Mrs Stariha as an employee had met her KPIs, it was vital for her to continue to do so. Mr Davis says he explained that Frontline’s TDRs had been based on the actual performance of other agencies (para 322).
697 Mr Davis says that he recalls Ms Moseley delivering her presentation and in the course of it she said these things. First, Frontline used the replacement guarantee provision in the standard client agreement to leverage fast payment from clients and that she had a practice of promising clients replacement candidates if they paid their invoices within the next seven to 14 days. Second, the average number of days it was taking Frontline to collect payment for invoices was 21 days. Third, although the standard client agreement says that if a client does not pay within seven days, the client technically loses the right to a replacement, Frontline does not enforce that term. Mr Davis disputes Mrs Stariha’s contention that nothing was said by Ms Moseley concerning the enforcement of the seven day payment period in client contracts on the Discovery Day.
698 Mr Davis says that Mrs Stariha contends Melissa Moseley showed her the different functions with the Agency Owner database, as previously, as an employee, Mrs Stariha only had consultant access to the database. Mr Davis, for the reasons mentioned earlier, does not accept that Mrs Stariha only had consultant access to the database.
699 Mr Davis says that he was present during a presentation made at the Discovery Day by Leanne Johnson. It was a short session because Ms Johnson was conducting training in the Boardroom that day. Ms Johnson explained, in Mrs Stariha’s case, that because she was already an accomplished and prudent consultant, she would assist Mrs Stariha with business development. Mrs Stariha and Ms Johnson had a discussion about the content of the training that Mrs Stariha required. Mr Davis recalls Ms Johnson saying that because Mrs Stariha was already a prudent consultant, Ms Johnson would adjust the usual training to suit Mrs Stariha’s specific needs.
700 Mr Davis says that he recalls saying to Mr and Mrs Stariha that he enjoyed going to conferences and listening to the success stories of agency owners. He says that he cannot recall whether he raised with them how much money agency owners were making or “the diamonds that the women buy” but Mr Davis says that that “is generally not my language”. Mr Davis says that he recalls that around that time, Frontline’s Melbourne franchisee had “purchased a large diamond ring and there was a large amount of talk about that” (para 337). However, Mr Davis says he cannot recall discussing it with Mrs Stariha or anyone else and he thinks he would be more inclined “to talk about football and cricket than jewellery”. Mr Davis says that he does not specifically recall saying that he was proud of the fact that Frontline had created an opportunity for profit and diamond rings but he says he is proud, and may have said so, of the fact that Frontline’s operations have allowed “franchisees to bring up families”. Mr Davis says he is sure that he did not say “a number of husbands of the female agency owners did not have to work”. Mr Davis says he cannot think of any husbands of franchise owners who have not had to work.
701 Mr Davis also says that Frontline did not have very much to gain financially by Mrs Stariha taking over the Gold Coast franchise. The purchase price was to be paid to the outgoing franchisee. The Gold Coast Agency had been performing well and Mr Davis expected it to generate good franchise fees for Frontline whether it was operated by Mrs Hart or Mrs Stariha. Frontline would receive a $10,000 transfer fee from the outgoing franchisee on the sale but Mr Davis says that this is not a very large return given the amount of work Frontline dedicates to administering and completing the sale.
702 Mr Davis says a number of things specifically in relation to Aura Enterprises Pty Ltd. Some of them have been mentioned but in context, Mr Davis says this.
703 Aura was operated by Ms Attieh. She had previously been the manager of the Sydney agency when Mr and Mrs Davis were still operating it. Mr Davis brought Ms Attieh into the business at a time when they were looking to remove themselves from the day-to-day running of an agency so as to concentrate on developing the franchise system. Ms Attieh bought the franchise in February 2003 and was quickly generating revenues of more than $2 million per year. Mr Davis began receiving complaints from other franchisees after Ms Attieh had been operating the Sydney franchise for about nine months. The complaints were initially about bullying other franchisees. Mr and Mrs Davis then began receiving complaints from clients. One complaint was that the Sydney franchise was refusing to provide discounts which had been agreed by Frontline at a national level. Mr Davis says that he then began receiving complaints from candidates about their interviews and also complaints from staff about Ms Attieh’s conduct. One specific complaint was that Ms Attieh was manipulating information in the database to change the location of sales so as to record a placement in Melbourne as a placement in Sydney. As a result, Mr Davis issued a series of breach notices to Aura. Aura applied for an injunction to restrain Frontline from terminating the franchise. There was then a mediation and Aura sold the franchise to Mr Laurence Sher for $855,000.00 approximately six months later.
704 Mr Davis says that the whole dispute with Aura and not just the Court proceedings was a constant topic of conversation within Frontline. Mr Davis says he talked about it at every Discovery Day which occurred while that dispute was ongoing. Mr Davis says Mrs Stariha was an employee “during that whole saga, and her Discovery Day occurred just as it was coming to an end with Laurence Sher’s purchase of the franchise” (para 347). Mr Davis says that he recalls talking to Mrs Stariha and Mr Stariha “for some time about the issues Frontline had with Aura, including the Court case”. Mr Davis says that this discussion, as he had mentioned earlier in his evidence, was in the context of the different relationship that he and Frontline would now have with Mrs Stariha as she was to become a franchisee. Mr Davis says that this topic also came up for discussion “for the simple reason that the new Sydney franchisee, Laurence Sher, was using the Boardroom that day to train to take over the franchise from Aura”. Mr Sher was on the premises at the same time and was in the room next door. Mr Davis says that he told Mr and Mrs Stariha that the Aura case was particularly important to Frontline because Aura had been responsible for approximately 30% of Frontline’s revenue. Mr Davis says he told Mr and Mrs Stariha that the issues with Aura were important to Frontline and if the same issues arose again in the future, Frontline would take the same approach (para 349). Mr Davis says that although he cannot recall the precise words, he remembers Mr and Mrs Stariha saying words to the effect that they thought it positive to know that Frontline would take legal action against a profitable franchisee to protect other smaller franchisees, since Mrs Stariha was buying a smaller regional franchise.
705 In his statement, Mr Davis attaches a schedule setting out the sales by Aura in its first, second, third and fourth years of activity concluding with the sale price as at 1 November 2006. The periods cover the financial years ending 31 January 2004 to 31 October 2006. The revenues in those four years were $1.4 million, $1.9 million, $2.061 million and $1.527 million. Mr Davis says that the Aura proceedings were also referred to in a letter dated 13 April 2006 to all agency owners and mentioned at the Frontline Retail conference in January 2006. It was also mentioned at the Retail conference in July 2006. Ms Attieh’s attendance at that conference was “a big issue”. Mr Davis says that three franchisees had threatened not to attend the conference because of Ms Attieh’s behaviour and so he tried to prevent Ms Attieh from attending that conference. In the result, Mr Davis says that she did not attend the franchisee day but did attend the second day which was for all staff. These disclosures Mr Davis mentions occurred before either Julstar or Semolina entered into their particular franchise agreements.
706 Having regard to these matters, Mr Davis denies Mrs Stariha’s assertion that she first became aware of the Aura proceedings in September 2009. Mr Davis says that statement is simply not true and apart from anything else, Mrs Stariha was told about the proceedings at a conference in Melbourne on or about 18 January 2007 and in an email dated 27 September 2007.
707 As to the Semolina issues, Mr Davis says this.
708 Within six months of taking on the Gold Coast Retail franchise, Mrs Stariha expressed interest in purchasing the Far North Queensland Retail franchise. Mr Davis says he was aware that Mrs Stariha was negotiating that matter with Frontline’s General Manager, Mr Downer. Mr Davis says that since Mrs Stariha had been operating the Retail franchise for a relatively short period, it was not prudent to take on a second franchise and particularly a remote franchise in another territory that would require extensive travel and time away from the Gold Coast franchise. However, Mrs Stariha developed a very comprehensive PowerPoint business plan called “Forecasting Far North–2007-2008.ppt”. Mr Davis says this plan was a seven page business plan which provided great detail on the Far North territory and very precise EBIT estimates. The plan was accompanied with an Excel spreadsheet document containing 11 different financial scenarios presented for discussion relating to cost effective and profitable practices Mrs Stariha might employ if she owned that territory. The spreadsheet was called “Forecast different options FNQ.xls”.
709 Mr Davis says that after Frontline rejected Mrs Stariha’s request to operate the Far North franchise, Mrs Stariha then asked whether she could open a Gold Coast Hospitality agency. Mr Davis says that Mrs Stariha suggested she had a strong hospitality background and hospitality rather than retail was her passion.
710 Mr Davis notes that Mrs Stariha and Semolina contend that between June 2007 and September 2007, Frontline represented to them that all of its franchisees had “operated a financially successful business”. Mr Davis says that he did not have any conversations with Mrs Stariha during that period about whether other franchisees were financially successful. Mr Davis also notes that Mrs Stariha contends that during the same period Frontline represented to them that no franchise business of any of its franchisees “had financially failed”. Mr Davis says that he did not have any conversations with Mrs Stariha about the financial performance of other Frontline franchisees during this period. Mr Davis also notes Mrs Stariha’s contention, in the same period, that Frontline represented to Semolina (and her) that Semolina would be “financially successful” if it purchased the Gold Coast Hospitality franchise. Mr Davis says he cannot recall any conversations with Mrs Stariha when Semolina was in the process of purchasing the Gold Coast Hospitality agency.
711 Mr Davis then addresses the question of the “100% success rate” contention.
712 Mr Davis notes Mrs Stariha’s contention that he told her that “the best news was that Frontline had a 100% success rate”. Mr Davis denies saying that to Mrs Stariha. Mr Davis acknowledges and accepts that a reference to a “100% success rate” was used in some Frontline advertising and in some articles which Frontline published online. He says, however, that these articles were not published until after August 2007 and the particular words did not appear on Frontline’s website until 2008. Mr Davis puts in evidence snapshots from Frontline’s website at different times from an archival website retrieval facility called the “Wayback Machine” which show that the “100% success rate” claim was first published in August 2008. Mr Davis says that these snapshots are consistent with his own recollection of the website at that time.
713 Mr Davis says that the words “100% success rate” are not words which he would ordinarily use and he has searched Frontline’s records to try and identify where the phrase first appeared. Mr Davis says it appears in emails between Frontline’s General Manager, Mr Downer and a marketing consultant, Katrina Drewer in 2007. Mr Davis says the earliest use of the phrase “100% success rate” is in a Microsoft Word document which Ms Drewer created which he understands Ms Drewer copied and pasted from the “Baker’s Delight” website for the purpose of developing text for a website advertisement on a website described as “franchisebusiness.com”. Mr Davis notes that the Baker’s Delight slogan had said “over 90% success rate” and he thinks that is why the first version of the words adopted “over” rather than simply “100% success rate”.
714 Mr Davis says that he approved the text by an email to Ms Drewer dated 30 August 2007 and whilst it was not the sort of phrase he would use, it was a phrase promoted by Ms Drewer because we only had a limited number of words for the advertisement and “the words appeared punchy on the Baker’s Delight website”.
715 Mr Davis says that he is certain that he did not use the words “100% success rate” either orally or in writing at any time before those words were suggested to him by Ms Drewer in 2007, and Mr Davis says that he “definitely did not say anything about a ‘100% success rate’ at Julianne’s Discovery Day in November 2006”. Moreover, Mr Davis says that he “never made any assertion about a 100% success rate during any of the Frontline conferences in January 2007 in Melbourne, April 2007 in Auckland, or July 2007 in Sydney or at any other conference, to the best of his recollection” (para 366).
716 Mr Davis then has a number of observations about the conduct of the franchises by Julstar and Semolina.
717 Mr Davis says that his view was that Mrs Stariha would become one of the best franchisees Frontline had ever had. Mr Davis says Julstar’s sales figures for its first year of operation were very good and he assumed that the business was very profitable. He says that Mrs Stariha sat on Frontline’s marketing committee and on its finance working party. He says that as a member of the finance working party, she reviewed current contracts and reported back to Mr Davis with any recommendations the working party had developed. Mr Davis says that Mrs Stariha was also sought out by other franchisees at conferences and she apparently had many good ideas on expense reduction. Mr Davis says that in his assessment, franchisees sought out Mrs Stariha because she was trading well and they wanted to listen to her. Mr Davis says that he made a practice of sitting in on most of the working groups for part of their sessions and his observation of Mrs Stariha was that she seemed to assume a leading role within her committee groups.
718 As to training, Mr Davis says this. A standard part of operating all new franchises is that the purchase price includes a $15,000 training fee. If the incoming franchisee is a staff member of the outgoing franchisee, Mr Davis says that $5,000 of that training fee is paid to the outgoing franchisee on account of the training provided to the staff member and as partial compensation for losing a staff member. Mr Davis says that Mrs Stariha was provided with “the normal level of training that was given to a new franchisee who was an existing staff member” and this would consist usually of “over the telephone” mentoring by the training operations manager or another franchisee. Mr Davis notes Mrs Stariha’s contention that Julstar sought and was refused initial formal training. Mr Davis says that he did not instruct Frontline employees to refuse to provide training to Julstar or Mrs Stariha and he is not aware of any Frontline employee refusing any requests from Julstar. Mr Davis notes a copy of an email held within Frontline’s business records in which Mr Downer offers Mrs Stariha training and she responds to the email, by email, saying that she does not need any training. Mr Davis says that he has made enquiries of staff within Frontline to determine whether there is substance in Mrs Stariha’s claim that she made numerous oral requests of Frontline Head Office staff for training. Mr Davis has made enquiries of the senior Frontline staff including Ms Briede and Ms Moseley and others and has not been able to identify any references to requests made of Frontline of this kind.
719 As to replacements, Mr Davis says that he recalls that in Mrs Stariha’s first few months of operation, Mrs Stariha experienced “a bad run of having to replace candidates” and his recollection is that she established a Frontline record of 16 credits in a row without a placement with the result that she accumulated 16 replacement credits before she was able to fill any of those roles with a replacement. Mr Davis says that in this period we had numerous phone calls with her and he particularly discussed with her the contractual obligations the clients have as some of those replacements were “replacements of replacements and the guarantee in the contract did not require replacements of replacements”. Mr Davis says that Mrs Stariha’s approach was to provide excellent customer service and he discussed with her the difference between customer service and being taken for granted by clients. During this period, Mr Davis says he had at least three discussions on the client’s contractual obligations with Mrs Stariha. Mr Davis says that until issues arose with Mrs Stariha towards the last few months of her operating the Gold Coast franchise, she provided every client that had a candidate who fell out, with a replacement regardless of whether they had paid the invoice within seven days. Mr Davis says that Mrs Stariha never sought approval or direction from Frontline to do this. Mr Davis says: “I assumed that Julianne understood that she was obliged to provide replacements, even if the client had not paid within terms because Julianne never questioned doing this and from the beginning of her time operating the franchise she provided replacements when clients hadn’t paid on time …”. Mr Davis says that Mrs Stariha knew this because “we had discussed it on Discovery Day”.
720 Mr Davis says this, as to the first occasion on which Mrs Stariha raised an issue about being compelled to provide replacements when a client had not paid the placement fee within seven days (at para 377):
In early 2010, Julianne suddenly started complaining about having to provide replacement candidates for clients who did not pay within seven days. She said that she was refusing to provide those replacements on legal advice.
721 Mr Davis denies that he imposed any requirement upon Mrs Stariha to relocate the franchisee’s business premises from the serviced office at Level 2, Pivotal Point, 50 Marine Parade, Southport. Mr Davis says that Mrs Stariha said to him that she wanted to relocate because she was unhappy that the serviced office had allowed a competing recruiter to operate from the same premises and also because she and her husband saw an opportunity to develop the premises in Scarborough Street and make some extra money. Mr Davis says that on Friday, 23 November 2007, he visited the almost finished office in Scarborough Street and at this visit he expressed his shock at the size and quality of the office. Mr Davis says that his view was that the office was too big and the fit-out was too expensive and it seemed extravagant. Mr Davis says that he asked Mrs Stariha how much the fit-out had cost and she said it had cost almost $60,000. Mr Davis says that he responded by saying that he was shocked at that amount and Mrs Stariha then responded with words to this effect: “Oh it is okay because Lee and I have a deal with the landlord to develop the premises and Lee has charged most of the cost to his other clients”. Mr Davis says that Mrs Stariha laughed and said words to the effect: “It’s developer to developer stuff”.
722 Mr Davis says that in day-to-day operational terms the effect of the GFC was “dramatic”. The first thing that happened was that clients who had active roles listed with Frontline withdrew approximately 70% of those positions with the result that all work-in-progress on those roles was wasted and it also meant that most agencies were over-staffed.
PART 15 – THE CROSS-EXAMINATION OF MR DAVIS
723 Mr Davis was taken to Exhibit 87 which is Frontline’s Disclosure Document as at September 2005, signed by him. On p 5 of the document, Frontline sets out the revenue growth over the last nine years in the Frontline Retail system from the financial year ending 30 June 1997 to 30 June 2005. Mr Davis confirmed that the table on p 5 accurately shows the growth figures for that period.
724 Mr Davis was asked about his discussion with Mrs Hart during the period of Hart Trading’s acquisition from Ellis Trading. Mr Davis said he could not “recall” or could not “recall ever saying to [Mrs Hart]” that the Gold Coast territory, as part of that acquisition, would need to be sold as a separate franchise “as soon as it was ready for sale” (T, p 459, lns 13-15; T, p 461, lns 1-3). In the course of exchanges between counsel, that answer seems to have been elevated to an expressly denied statement.
725 Mr Davis accepted that during the period of Mrs Hart’s purchase from Ms Ellis, Mrs Hart discussed the purchase price with him and how it might be calculated. Mr Davis thinks he would have said to her that the purchase price “in the region of two or three times EBIT would be reasonable” and that this is the kind of thing he has said to others (T, p 462, lns 12-21). In terms of calculating the EBIT, Mr Davis said that he was not able to do that unless he had the profit and loss statements available. Mr Davis denied the proposition that expenses were something that franchisees were meant to report back to Frontline about (T, p 462, lns 32-33). Mr Davis accepted that he discussed with Mrs Stariha and Mr Stariha the purchase price referable to Julstar’s purchase of the Gold Coast territory from Mrs Hart and that he mentioned a price based on two or three times EBIT earnings was considered reasonable (T, p 462, ln 41). Mr Davis said that when discussing the sale with Mrs Stariha he discussed with her the amount of working capital that she would require and described it as “three times her monthly expenses” (T, p 463, lns 24-28). Mr Davis then accepted that in order for him to arrive at such a figure, as an appropriate figure, he would need to have a clear understanding of what the monthly expenses would be (T, p 463, lns 30-32). Mr Davis then reflected on his previous answer and said that it was Frontline’s “policy that a franchisee has three months’ worth of expenses” as working capital (T, p 463, lns 35-36). Mr Davis then seemed to accept again that in order for him to form a view he would need to have “some idea of what the expenses involved in the three times monthly expenses would amount to” (T, p 463, lns 38-41). Mr Davis, however, did not accept that Frontline was “seized with information from the franchisees as to what their expense lines had been, both the categories and the quantum”. Mr Davis said that Frontline, for these purposes, worked from a forecast and in the case of Mrs Stariha it was the forecast that she provided to Mr Davis on the Discovery Day (T, p 464, lns 1-2). Mr Davis said that he looked at that document. Mr Davis said that the working capital requirement was a “policy” which had been adopted based on Frontline’s “experience of starting up agencies” (T, p 464, ln 9).
726 Mr Davis, in terms of presentations, accepted that he had described to potential franchisees the Frontline franchises as “potential millionaire makers” (T, p 465, lns 1-3) in the context of referring to some of Frontline’s old established franchisees. Mr Davis said he would refer to the fact that the agencies, when they were run very well, were quite profitable and would be “millionaire makers”. The term was used in the sense that the agencies would be millionaire makers in terms of providing cash flow for franchisees to invest in whatever particular investments they might wish to make. Mr Davis said that he made the remark on one occasion at a conference in Adelaide in April 2007 and the attendees at the conference were all franchisees, not potential franchisees. The conference was an Agency Owners conference (T, p 465, lns 11-42).
727 Mr Davis accepted that when talking to prospective franchisees he spoke to them about revenue and also the expenses side of the operation. The expenses side was based on a “forecast spreadsheet that we provided them” (T, p 466, ln 20). Mr Davis said that it was an Excel spreadsheet which had 12 monthly periods across it and down the left hand side it had sales columns followed by expense columns. In Mrs Stariha’s case, Mr Davis looked at the forecast provided by her to him rather than the other way around. Mr Davis accepted that at the time that Mrs Stariha was contemplating purchasing the business from Mrs Stariha, Frontline had developed a spreadsheet which identified the categories of expenses a franchisee would need to consider. The spreadsheet identified the categories of expenses which a franchisee could expect to incur should they purchase a franchise. The franchisee would then consider those categories of expenses and identify the quantum to be allocated to each category, the actual expense. Mr Davis said that the franchisee would identify the expenses and would usually use their accountant and the profit and loss information provided to them by their franchisee who were selling the business to them (T, p 467, lns 45-48, T, p 468, lns 1-2). Mr Davis said that he was presented with a spreadsheet by Mrs Stariha.
728 Mr Davis accepted that he did not discuss with Mrs Stariha the forecast expenses spreadsheet developed by Frontline identifying the various categories of expenses. Mr Davis regarded the spreadsheet presented by Mrs Stariha as reflecting substantially the same or very similar categories of expenses referred to in the spreadsheet that a potential franchisee might otherwise complete with her accountant or perhaps in conjunction with the franchisee selling the business. The categories of expenses identified by Mrs Stariha reflected, in Mr Davis’s view, those categories of expenses referred to in Frontline’s “RIB report”. Mr Davis thought that the items identified by Mrs Stariha were “almost exactly the same as the current forecast spreadsheet” used by Frontline (T, p 470, lns 10-13). Mr Davis accepted that the Frontline spreadsheet attempted to cover the field of the categories of expenses although the categories were similar but not exactly the same as the categories Mrs Stariha had identified.
729 Mr Davis accepted that Frontline asked franchisees to provide it with their expenses by reference to categories and expense amounts on a quarterly basis although Frontline had a lot of difficulty for a number of reasons in obtaining that information from franchisees.
730 Mr Davis regarded the best information concerning the expenses that Mrs Stariha would incur in operating the franchise to be “a calculation of what the actual expenses were going to be” and that was the calculation that Mrs Stariha had conducted and presented to Mr Davis. The quantum of the expense items in relation to the various categories of expenses Mrs Stariha had identified was a calculation Mrs Stariha had done and presented to Mr Davis (T, p 474, lns 24-25; lns 34-39).
731 Mr Davis was asked a series of questions about the history of the franchises and details of the three franchisees which had traded in excess of three years as at the date of the Discovery Day presentations, one of them being the Brisbane franchise. Mr Davis accepted that the TDR forecast he had undertaken was based on the sales reports for all of Queensland, all of Victoria and a part of New South Wales and the TDRs are intended to reflect or be a forecast or projection of income if the franchise is conducted according to the franchisor’s requirements, its processes and its KPIs. The TDRs do not relate to expenditure. Mr Davis gave evidence that Frontline had conducted in the 2006/2007 financial year a benchmarking study of expenditures for all its franchisees operating in that year. It began at the beginning of that financial year and it was a process whereby Frontline obtained figures presented by franchisees of their expense performance and Frontline measured and assessed those expenditures.
732 Mr Davis was asked a number of questions about aspects of the history he had recounted concerning particular franchisees. Mr Davis was asked questions about the Aura matter. Mr Davis accepted that the Aura matter was ultimately settled by a Deed of Release of 8 November 2006 (T, p 492, lns 22-23).
733 Mr Davis was taken to the 100% success rate assertion previously described. Mr Davis did not accept that the assertion of a 100% success rate, as reflected on the website, from the relevant date was based on a principle adopted by Frontline that if TDRs are achieved, and the method of their achievement, means that a franchisee has a 100% success rate across the franchise chain. Mr Davis said that the claim was referable to the fact that all agencies that Frontline had established up until that point in time were still operating and, secondly, that whenever someone had sold their agency they had sold it for more than they had paid for it. The proposition was put to Mr Davis that that explanation of the claim did not appear in correspondence by Frontline by Mr Davis to the ACCC. The notion in the letter was that the reference to a 100% success rate had been included on Frontline’s website based upon the principle that if a franchisee did particular things they could expect to enjoy a 100% success rate. Mr Davis explained that his letter to the ACCC failed to identify the two factors informing the “100% success” assertion on the footing that Frontline did not have as one of its criteria a claim of a 100% success rate. The proposition was put to Mr Davis that Frontline did adopt a criteria of having a 100% success rate because Frontline, through Mr Davis, had accepted that a claim had been made on the website of a 100% success rate and Mr Davis had sought to identify for the ACCC the “principle” upon which that claim would operate. Counsel for Mrs Stariha pressed Mr Davis with the notion that the two integer qualification he had given in oral evidence had not been included in Mr Davis’s letter to the ACCC and, why might that be so. Mr Davis was pressed with the notion that his letter to the ACCC was false and at the time that he signed it he knew it to be false. Mr Davis did not accept that proposition and said that he did not know, at the time he sent the letter, what the 100% success rate claim was based upon. Mr Davis said (T, p 494, lns 22-25):
When you look at the 100% success rate over a period of time, all our agencies were achieving TDR over the period of time at that point in time. Just because they went under TDR for one year or two years, they had all recovered and were achieving TDR. … I think the response that we gave the ACCC in November 2009 was not reflective of what the 100% success rate was meant to be when it was originally put forward in the ad and the website.
734 Mr Davis accepted that when he signed the letter to the ACCC in 2009, he “knew that the response was not reflective of what you say was the true position” (T, p 494, lns 33-34). Immediately after that question, Mr Davis was again asked whether at the time he sent the letter to the ACCC he knew what was set out in the letter was false and he said that he did not know it to be wrong at that time (T, p 494, lns 36-39). Mr Davis was pressed with the falsity proposition and said that the 100% success statement was a claim made by Frontline at the particular time. Mr Davis accepted that he was aware of “the genesis” of it. Mr Davis did not accept that the 100% success claim as explained in the letter to the ACCC was “not developed around TDRs”. Mr Davis was asked why he had said it was so developed and answered “because I didn’t know what it was developed around”. Mr Davis accepted that he did not speak to anyone before sending the letter to the ACCC. Mr Davis said that at the time of sending his letter he knew that all of Frontline’s agencies, over the time of their operation, had achieved 100% success rate. Mr Davis accepted that in his oral evidence he had said that the letter to the ACCC was not reflective of how the 100% success rate claim had been developed and he also accepted that if he knew at the time that the information in the letter was not reflective of the development of the claim, then it followed that what was being said to the ACCC was false (T, p 495, lns 40-42). This exchange then occurred (T, p 495, lns 44-47):
Q: And you were content to send the ACCC a knowingly false explanation?
A: No, well …
Q: Weren’t you?
A: Yes.
PART 16 – CONCLUSIONS AND FINDINGS
735 I have dedicated considerable time to examining the primary evidence of the principal protagonists in this proceeding both in terms of their statements and counter-statements and their cross-examination as to the matters in controversy. In this proceeding, it is fair to say that virtually every contention is met with a counter-contention across the entire field of factual issues raised by the claims of the applicants.
736 In these reasons, I have examined that evidence in detail but I do not propose to set out in these reasons the evidence of many of the other witnesses who were called in the proceedings. They include the evidence of Mr Wallace, Mr Miller, Ms Briede, Ms Moseley, Ms Manwaring, Ms Austin, Ms Baird, Ms Flavell, Ms Butcher, Ms Wilson and other accounting evidence. I have also had regard to the cross-examination of these witnesses. I can see no utility in reciting in these reasons the various points and counter-points arising out of the evidence of these other witnesses. Nevertheless, I have taken all of the material into account in reaching the conclusions determinative of the matter and in making findings.
737 In some senses, Mrs Stariha’s success in the period between August and November 2005 and more particularly between 7 November 2005 and December 2006 is also the source of her potential problem. Mrs Stariha was undoubtedly an energized, enthusiastic person who was very successful in these periods in generating placement income for Hart Trading. The tenor of the emails generated by Mrs Stariha in the period from October to December 2006 reflect her clear enthusiasm to purchase the business. Because Mrs Stariha had been successful and was intimately familiar with the placement revenues she had been generating, she was keen to purchase the business. She had an understanding of the top line revenues because she was the prime mover in generating sales from the Gold Coast office and in substance and effect the only person generating placement income from clients on the Gold Coast.
738 Plainly enough, Mrs Stariha wanted to understand the profitability of the Gold Coast business. She had had a discussion with Mrs Hart on either 5 October or 6 October 2006 and on 13 October 2006 she received spreadsheets from Mrs Hart setting out income and expenses for the financial year ending 30 June 2006 and for a period in the financial year ending 30 June 2007.
739 Mrs Stariha then began to investigate, very thoroughly, the field of potential expenses she would need to meet should she acquire the Gold Coast Agency and commence to operate it. She took the spreadsheets sent to her on 13 October 2006 and revised them to capture in a revised spreadsheet the field of expenses she would expect to incur. She also sought to identify the borrowing costs and other costs she might incur in financing an acquisition of the business by a debt facility through the ANZ Bank. She also examined the income line in the spreadsheets and sought to adjust it by taking account of anomalies that she had identified by force of her own intimate understanding of the revenues generated from placement work done by her with Gold Coast clients and thus attributable to the Gold Coast Agency she could purchase.
740 She then sent the revised spreadsheet to Mrs Hart and requested her to identify features of her analysis which appeared to be inaccurate. Mrs Stariha had a conversation with Mrs Hart about that document. Mrs Hart says that fundamentally, Mrs Stariha was taken up with concerns over the revenue line and was not so much concerned with the expenses. Nevertheless, Mrs Stariha had done a lot of work to produce a field of expense items by category and also sought to identify through her discussions with Ms Moseley the quantum of the costs she could expect to incur by reference to the categories of expenses she had identified.
741 Mrs Stariha says that Mrs Hart vouched for the accuracy of her analysis in the revised spreadsheet. Mrs Stariha says that Mrs Hart assured her of the accuracy of her analysis and on the footing of that assurance she went forward with the purchase, the Bank arrangements and entry by Julstar into the franchise. I am not satisfied that Mrs Hart represented to Mrs Stariha that the revised spreadsheet was accurate. I have no doubt that Mrs Hart said that “it looked right” but this is a very long way away from representing that each of the items of expenditure in each of the categories is true and correct. The document was not Mrs Hart’s document. It was prepared by Mrs Stariha. It was her own document. Mrs Hart, of course, was familiar with the management and operation of the integrated franchise consisting of Brisbane and the Gold Coast but she could not be expected to be carrying in her mind every item of expenditure under every category in Mrs Stariha’s spreadsheet on the footing that in a discussion with Mrs Stariha a remark to the effect that the revised spreadsheet looked right, carried with it a warranty or assurance as to the accuracy of the content of the revised spreadsheet as formulated by someone else. Mrs Hart said she did not see it as her job to verify Mrs Stariha’s revised spreadsheet. Mrs Hart invited Mrs Stariha to let Ms Hutt, the bookkeeper, have a look at the figures. A reflective useful verification of the revised spreadsheet might then have occurred and it may have revealed anomalies, or not. In any event, Mrs Stariha chose not to go down that path.
742 Mrs Stariha chose to act on the response she says she received from Mrs Hart. I find that Mrs Hart did not warrant the accuracy of the revised spreadsheet. I find that at its highest, Mrs Hart said that the revised spreadsheet looked accurate. Mrs Hart’s remark rises no higher than that.
743 I am not satisfied that Mrs Hart described the franchise as a cash cow or that the franchises were highly profitable.
744 In any event, the question of the profitability of the franchise, as it might exist as a separate Gold Coast Agency was the subject of an analysis by Mrs Stariha of her perception of the revenue and her assessment of the likely categories of costs and the quantum of those costs that would be attributable to a stand-alone operation.
745 I find that Mrs Stariha relied upon her own analysis in reaching a conclusion about the profitability of the business and the acquisition.
746 I will return to other aspects of the engagement between Mrs Stariha and Mrs Hart as to profitability in a moment.
747 The next feature of the evidence which causes me concern is the notion that Mrs Stariha had no understanding, according to her evidence, that a Frontline Retail operation had been opened and conducted by Ellis Trading on the Gold Coast in an earlier period which had come to an end by December 2004. Mrs Hart says that she talked about that earlier period and the trading experience quite extensively with Mrs Stariha. Mrs Stariha says she knew nothing of it and had she known of it, she wouldn’t have gone ahead with the acquisition. I find that Mrs Stariha went ahead with the purchase fundamentally because of her enthusiasm for the purchase, because of her experience in seeing the revenue generation and based upon her own analysis of the likely expenses. However, apart from that, I find it almost inconceivable that Mrs Stariha did not know that Ellis Trading had been operating a Frontline Retail placement business on the Gold Coast prior to Mrs Hart’s acquisition of the Brisbane/Gold Coast franchise from Hart Trading. Well before Mrs Stariha purchased the Gold Coast franchise, she had been engaging with individuals who had been working for Ms Karen Ellis in the Ellis Trading Gold Coast office. In these reasons I have set out the evidence of Ms Diane Knight and Ms Knight’s engagement with Mrs Stariha.
748 Although in relation to aspects of Mrs Stariha’s evidence there was a real possibility that she has come to passionately believe in the truth of the version of the events she propounds, I am not satisfied that there is very much room for accepting that Mrs Stariha has come to believe that she did not know of the Frontline Retail operation conducted on the Gold Coast by Ellis Trading through the recruiters consisting of Ms Diane Knight and also Ms Nikki Garnet-Palmer. I find that Mrs Stariha knew well before the purchase of the Gold Coast Agency that Ellis Trading had conducted a Frontline Retail operation on the Gold Coast and that Ellis Trading had ceased to operate that business at some point in time prior to Mrs Stariha commencing employment in August 2005 with Hart Trading.
749 Mrs Stariha says that at the meeting on 5 October or 6 October 2006, Mrs Hart gave her two spreadsheets which in Mrs Hart’s view would have to have been the spreadsheets Mrs Hart took to the meeting which, in turn, were the spreadsheets Ms Price formatted from the MYOB printout and provided to Mrs Hart. The evidence suggests, however, that the more likely position is that Mrs Hart did not give those spreadsheets to Mrs Stariha but that Mrs Stariha was, indeed, sent spreadsheets on 13 October 2006. The more likely position is that Mrs Stariha has come to believe, quite genuinely, that the spreadsheets she identifies as those which were given to her at the meeting, which she calls the initial meeting, were in fact spreadsheets sent to her on 13 October 2006 and which she placed in her “purchase box”. It is more likely that when Mrs Stariha came to examine the materials relating to her interaction with Mrs Hart and Mr Davis concerning the purchase, that she understood and believed the spreadsheets from 13 October 2006 were the spreadsheets Mrs Hart took to the meeting on either 5 October or 6 October 2006.
750 That likely position on the facts is supported by recognising that the spreadsheets sent by Ms Price to Mrs Hart did not contain entries for October 2006 whereas the spreadsheets sent on 13 October 2006 contained placement entries for October 2006, by then.
751 Mrs Stariha is extremely confident that she was handed spreadsheets at that meeting and Mrs Hart is equally confident that she did not hand Mrs Stariha spreadsheets at that meeting. Each witness has their own basis for that position. Mrs Stariha says her recollection is clear about it. Mrs Hart says that she retained the two documents because she made notes on them. Mrs Stariha says Mrs Hart made notes in her diary.
752 In any event, I am satisfied that the more likely position, and I so find, is that Mrs Hart took spreadsheets sent to her by email by Ms Price to the meeting and retained them. I find that spreadsheets were first sent to Mrs Stariha on 13 October 2006 and, using those spreadsheets, Mrs Stariha set about examining the accuracy of the revenue line according to her own knowledge of the placement income and set about making enquiries as to the categories and quantum of expenses that would need to be built into an understanding of profitability.
753 That raises the question of the factual elements of the case going to the profitability representations. In a nutshell, Mrs Stariha says that she was told that the profitability for the Gold Coast part of Hart Trading’s operation was $80,000 and that the purchase price had been determined by applying a multiplier of three to the EBIT calculation thus generating a purchase price of $240,000. Mrs Hart strongly denies that representation and sets out in some detail the basis upon which she came to a calculation of the purchase price. There is no doubt that Mrs Hart’s previous experience had been that the purchase price from Ellis had a relativity with three times EBIT earnings and Mr Davis had told Mrs Hart that she could reasonably look to a multiple of between two and three to calculate the value of the business. Mrs Hart, in the course of her cross-examination, recognised the commercial position that she was on the one hand selling the business to Mrs Stariha for a Gold Coast territory at $240,000 and on the other hand she had only 12 months earlier, purchased a conjoint franchise for the Gold Coast and Brisbane for $320,000 recognising, of course, that the valuable or lucrative part of that acquisition related to the Brisbane business.
754 Mrs Hart says that the business is worth what the business is worth based on arms-length negotiations between a willing buyer and a willing seller having regard to the earnings for the business. In the period between August 2005 and November 2006 but particularly 7 November 2005 to November 2006, Mrs Stariha had been responsible for generating a very substantial volume of placement business from Gold Coast clients. Oddly enough, she had created the value in that part of the business that she was now buying and the purchase price would be based upon a relativity between the EBIT as formulated by Ms Price in the spreadsheet based upon Ms Hutt’s MYOB coded entries and a multiple of those EBIT earnings.
755 The spreadsheets sent by Mrs Hart to Mrs Stariha on 13 October 2006 do not suggest EBIT earnings of $80,000 and the spreadsheets given to Mrs Hart by Ms Price for the early October meeting do not suggest EBIT earnings of $80,000. There is no communication from Mrs Hart to Mrs Stariha suggesting, in terms, EBIT earnings of $80,000 in the Gold Coast Agency and there is no email from Mrs Stariha to Mrs Hart on receipt of the 13 October 2006 spreadsheets saying something to the effect of “those spreadsheets are interesting but they are fundamentally flawed because they do not show the EBIT earnings of $80,000 as you have suggested to me”. Mrs Stariha conducted her revision of the spreadsheets and in doing so she identified four months where there were anomalies in the revenue (which Mrs Hart acknowledges) and she formulated her assessment of the categories of expenses and the relevant quantum of expenses for each category. That led Mrs Stariha to a view about profitability reflected in her revised spreadsheet. Mrs Hart says that the profitability in the Gold Coast Agency, as far as she was concerned, was the profitability reflected in the spreadsheets presented to her by Ms Price and as ultimately revised and sent to Mrs Stariha. Mrs Hart took the profitability figure of about $50,000, added the director’s wages and multiplied it by three. She says she applied a discount to it because it seemed excessive and it seemed to be more than she would have been willing to pay herself.
756 In the absence of contemporary documents asserting the claim of an $80,000 EBIT or documents over time (but prior to the claim itself) asserting a representation to this effect, I am not satisfied that Mrs Hart made a representation that Mrs Stariha should proceed on the footing that the EBIT earnings of the Gold Coast Agency were, or would be, $80,000 and I so find.
757 As to the question of “would be”, I am not satisfied that Mrs Hart made a representation as to the future profitability of the Gold Coast Agency. I am satisfied that Mrs Hart said that the business would go well or that she had confidence that it would go well or a belief in its success but expressing such a belief is well short of a representation that the business was and would be “highly profitable” or that the business was “a cash cow”.
758 The other aspect of this predictive representation Mrs Stariha asserts is that in the course of cross-examination, Mrs Stariha departed from the contention that a specific representation as to profitability had been made in the terms asserted. She rather moved her ground to suggesting that it was a necessary inference that the Gold Coast Agency was and would be highly profitable because she had been told by Mrs Hart that the business generated $80,000 of EBIT earnings. Ultimately, when pressed to identify the precise words, Mrs Stariha reasserted her original position but the truth of the matter is she has drawn inferences from something else which she says was said. However, I am not satisfied that a representation was made that the business would generate $80,000 in EBIT earnings.
759 Although emphasis is placed by the respondents on the documents put to the ANZ Bank and Mrs Stariha’s representation that the profit and loss spreadsheet data was given to her by the vendor, Hart Trading, I attach less significance to those statements than the respondents invite. Plainly enough, the spreadsheet was not done by the vendor but the spreadsheet does reflect a revision put to the vendor by Mrs Stariha on the footing that it reflected the earnings she understood had been generated from the Gold Coast activities under her period of involvement and the expenses as she understood them to be based upon her forensic enquiries. Mrs Stariha had put that document to Mrs Hart and was in the course of seeking to speak to her about it. Plainly enough, the application to the ANZ Bank could have recited that the revised spreadsheet had been formulated by Mrs Stariha but it was the outcome of a process of investigating the actual revenues in the historical period and Mrs Stariha’s perception of the likely actual expenses.
760 I am more troubled by Mrs Stariha’s arrangements with Mr Fitzpatrick to secure payment to Mrs Stariha of placement revenues which were actually payable to FRGPL and ultimately never reimbursed to FRGPL by Mrs Stariha.
761 As to the position in relation to the contentions advanced against Mr Davis and FRGPL, I accept the evidence of Mr Davis. I am not satisfied that Mr Davis made the representations which are attributed to him. I am satisfied that Mr Davis had no particular financial interest in securing a sale to Mrs Stariha. I accept that Mr Davis viewed Mrs Stariha as something in the nature of a star performer and no doubt he would have wished to have her within the franchisee cohort. However, his view was that whether the Gold Coast Agency was run by Mrs Hart or Mrs Stariha it would be successful and in the end result the franchisor would receive a modest amount of $10,000 as a result of processing the sale of the Gold Coast franchise to Mrs Stariha and facilitating Julstar’s entry into the franchise. I am satisfied and find that Mr Davis actually preached a cautionary approach to Mrs Stariha. I am satisfied that Frontline’s revenue expectation for Julstar was the first year revenue expectation and not a second year $240,000 revenue expectation. I am also satisfied that Mr Davis told Mrs Stariha about the Aura proceedings particularly having regard to the fact that the incoming buyer, Mr Sher, was in the next room undertaking training and that the probability is that Mr Sher’s entry into the franchise cohort for Sydney would have been talked about and the contextual circumstances which led to the sale of the franchise would have been talked about.
762 It is perfectly true that Mr Davis admitted in the course of pressing cross-examination to formulating an explanation of the “100% success rate” entry on the website (well after Mrs Stariha entered into her arrangements), which failed to contain the two qualifications he identified in his oral evidence and which led him to be confronted with the proposition that his letter to the ACCC was incorrect and moreover, he knew it to be incorrect at the time it was sent.
763 I do not accept that the content of the formulation of that letter and the concession that the qualifications he identified failed to find expression in the letter is a foundation upon which it is proper, as a question of credit, to overwhelm the evidence generally that Mr Davis has given. I found Mr Davis to be an impressive witness and although I do not believe that the resolution of the factual controversies in this case turns upon impressions of the witnesses in the witness box, I did not find Mr Davis to be a witness who obfuscated answers to questions. Nevertheless, the real question here is whether the oral versions of the events of Mrs Stariha can be preferred to those of Mr Davis.
764 I am satisfied that Mr Davis’s version of the events is the correct version.
765 I am satisfied that Mrs Stariha on 6 November 2006, was given the range of briefings he describes and that all of the content he describes was content delivered to Mrs Stariha.
766 I am satisfied that Mrs Stariha was told, knew and understood the replacement protocol and that Frontline did not adopt a position of giving strict force to the performance of the replacement obligation on the footing of a seven day payment by the client. The notion in the evidence that Frontline would probably have no clients if it strictly enforced that term, recognising that a 90 day replacement period is orthodoxy in the industry, seems to me an entirely plausible commercial position that a franchisor would adopt. The other difficulty with Mrs Stariha’s propositions about her particular understanding of the seven day payment/replacement matter is that she contends that she was raising her concerns about these matters orally “throughout” with Ms Moseley and Mr Davis. Yet, there is no written exchange or email exchange by which she expresses her concerns. Her failure to reduce that concern to writing is, it seems to me, only consistent with the notion that she knew and understood that the prevailing commercial protocol was that Frontline did not insist upon strict compliance with the seven day payment term as an answer to refusing to perform or discharge a replacement obligation.
767 I am led to the conclusion that Mrs Stariha simply did not believe the position she contended for to be true.
768 As to the hospitality arrangements, the odd thing at the outset about the hospitality arrangement is that Mrs Stariha entered into the Frontline franchise and then quite quickly agitated strongly with Frontline and Mr Downer to take up a franchise for Far North Queensland. This does not seem to be the conduct of a person who is concerned about having been led into the operation of a business on the footing of misrepresentations about EBIT earnings and returns. Having failed to secure that territory, Mrs Stariha then took up a hospitality franchise, approximately seven months after trading in the retail franchise. Again, Mrs Stariha has embraced striking a new franchise arrangement, through Semolina, with some of the same group of individuals, so far as FRGPL is concerned, that she had been dealing with in respect of which she says she was led into a retail franchise at an overvalue and one which was not ever profitable.
769 I accept the evidence that Mrs Stariha was historically interested in hospitality businesses which is apparent from her CV and I accept that when discussing the possibility of a hospitality franchise she expressed the view that she was interested in or passionate about hospitality. However, it seems to me that Mrs Stariha, on all the evidence, was keen to take up a second franchise and when the Far North Queensland possibility fell away she became interested in the hospitality franchise no doubt because she has an interest in hospitality and also because the franchise related to the territory in which she was then operating, namely the Gold Coast.
770 However, I am not satisfied that Mrs Stariha was led into taking up the hospitality franchise in the way she claims based on the representations she asserts. I do not accept that representations were made to her to the effect that no franchisee had failed or that the franchises were highly profitable. When it comes to a contest of evidence between Mrs Stariha and either Mr Downer or Mr Davis, I am satisfied that the version of events given by both Mr Davis and Mr Downer is to be preferred. I also find that the evidence of Mrs Hart is to be preferred to that of Mrs Stariha.
771 I also find it odd that after a period in which Mrs Stariha had been operating the retail business and then the hospitality business, which might be regarded as an objectively reasonable period for a new operator to come to grips with the realisation that the businesses were not profitable in the way she imagined based upon “things” said to her, no complaint is made in emails or correspondence about those matters. By then, it may well have been too late to seek to set aside entry into those businesses but it is odd that Mrs Stariha was not propounding in writing her contentions about the conduct with Mrs Hart, Mr Davis and Mr Downer.
772 Mr Stariha has given evidence in support of a number of matters contended for by his wife. His evidence, without disrespect to him, is a little detached because he simply was not sufficiently engaged with things such as what documents were in the mail or what documents may have been opened over dinner one night or such matters. He is not sufficiently familiar with what may or may not have been taken to the lawyers. He is more focused about the question of his enquiries at the Discovery Day and I accept that Mr Stariha expressed apprehension about the uplift thresholds in revenue requirements under the Franchise Agreement. However, the difficulty is that although Mr Stariha was concerned about the uplift, I am not satisfied that the income requirement for the first year was to be $240,000. That was a requirement which would have applied to the second year and I am not satisfied that the evidence is that Mrs Stariha would be regarded as anything other than a first year franchisee for the purposes of the new Franchise Agreement.
773 It follows from my analysis of all of this evidence, all of which I have weighed carefully due to the deeply entrenched contest on all matters, and the conclusions I am led to by the evidence, that Mrs Stariha’s claims against the respondents must fail and thus the claims of the applicants must fail.
774 There is one remaining matter that needs to be addressed and that relates to the claim by the applicants of a breach by FRGPL of the “Franchising Code of Conduct”.
775 Like so much of the evidence in this case, there is confusion about when Mrs Stariha or Julstar, received a Disclosure Document from the franchisor. Mrs Stariha strongly believes that she received two versions of the Disclosure Document and she puts into evidence as Exhibit 3 the documents she says she received in October 2006. Ms Briede sent Mrs Stariha a Disclosure Document on or about 23 November 2006 and Mrs Stariha signed a receipt document on 24 November 2006 acknowledging receipt of the Disclosure Document. The version of Exhibit 3 is called “Version 10”. The document was at one point spirax bound but the spirax binding no longer exists. Plainly enough, it was once a bound document that must have been sent to her rather than downloaded from an email attachment.
776 Although Mrs Stariha strongly believes that she received Exhibit 3 in October 2006 and a second document on 24 November 2006, it seems to me that the more compelling evidence is that Mrs Stariha believes that position to be true but is confused because of the references to a non-disclosure agreement in the earlier exchanges.
777 The more likely position on the evidence is that Exhibit 3 is the document that Mrs Stariha received by courier or post on 24 November 2006. There have been a number of versions of the Disclosure Document and relevantly for present purposes they are Versions 8, 9 and 10. Version 8 is a version as at September 2005. Version 9 is a version at September 2006 and Version 10 is a version at November 2006.
778 In Version 8, under cl 4 in relation to litigation, there is no reference to any particular proceedings. In Version 9 at cl 4, reference is made at cl 4.1 and cl 4.3 to Frontline having served breach notices upon a franchisee and the franchisee having sought an injunction against the franchisor. The entries under cl 4 make reference to a claim by the franchisee for damages and for unconscionable conduct in withholding particular commissions.
779 By Version 10 at November 2006, the references to that litigation are deleted and the document recites that there are no current proceedings, civil or criminal involving the franchisor.
780 The claims made by the franchisee recited in Version 8 of the Disclosure Document were settled and resolved in November 2006 and were the subject of a Deed of Release dated 8 November 2006. By then, the proceeding was no longer on foot. It was fully settled and compromised.
781 At the moment in time when Mrs Stariha received the Disclosure Document on or about 24 November 2006 it was not material to recite in that document references to the historical claims and cross-claims which by then had been resolved, and I so find.
782 I find that there was no breach of cl 18 of the Franchising Code of Conduct or any other clause of that Code and thus there was no breach of s 51AD of the Trade Practices Act 1974 (Cth).
783 Accordingly, the claims based on a contended contravention of the Franchising Code of Conduct must be dismissed.
784 Having regard to the conclusions I have reached, it has not been necessary to assess the measure of the loss contended for by the applicants. However, in principle, I accept that the expenditures about which Mr and Mrs Stariha have given evidence were incurred in furtherance of entering into each of the franchise arrangements. However, for the reasons already indicated, the causes of action upon which they rely in seeking remedial relief must necessarily fail.
I certify that the preceding seven hundred and eighty-four (784) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. |
Associate:
Dated: 12 December 2013
