Australian Competition & Consumer Commission v Grant [2000] FCA 1564 | Case summary

Australian Competition & Consumer Commission v Grant [2000] FCA 1564 | Case summary | Zoe

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introduction 1 This is an application for declarations and injunctions under s 80 of the Trade Practices Act 1974 (Cth) ("the Act") for conduct allegedly in contravention of ss 52 and 59(2) of the Act. The respondent is alleged to have aided and abetted, or to have been directly or indirectly knowingly concerned in or a party to, contraventions of the Act by Furniture Wizard Pty Ltd (in liquidation) ("FW"). 2 FW is a trading corporation registered on 9 September 1996. It carried on business in Queensland and elsewhere as a mobile furniture repairer, and as a franchiser of mobile furniture repair businesses in South Australia, Victoria, New South Wales, Queensland and Western Australian known as "Furniture Wizard" ("the franchises"). Its franchisees essentially operated a mobile furniture repair service at the site at which furniture to be repaired was located; on some occasions furniture was transported to a workshop to be repaired. FW contemplated that furniture repairs carried out by franchisees would be for major furniture manufacturers and retailers, commercial businesses, furniture removalists, and private individuals. FW was put into liquidation on 26 March 1999. 3 FW was the brainchild of the respondent. 4 The applicant alleges that FW engaged in misleading and deceptive conduct in breach of s 52 and s 59(2) of the Act in relation to the sale of franchises to · Gino Cepon ("Mr Cepon") · Stephen Kingham ("Mr Kingham") and Kerry Kingham (together, "the Kinghams") · Brian Wood ("Mr Wood") and Patricia Wood (together, "the Woods"), and · Barry McIntyre ("Mr McIntyre") and Roslyn McIntyre (together, "the McIntyres"). The applicant also alleges that FW engaged in similar conduct in contravention of the Act with respect to other purchasers of franchisers from FW. 5 The respondent, in his defence and in his evidence, did not dispute that FW engaged in the contraventions of the Act which the applicant alleges. The respondent however denies that he aided or abetted the contraventions, or that he was directly or indirectly knowingly concerned in or a party to the contraventions. That is principally because, he claimed, he acted in good faith, and he did not have the necessary state of mind to be liable under s 75B of the Act for those contraventions.

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relief claimed 6 The relief claimed is firstly an order restraining the respondent from aiding or abetting, or from being directly or indirectly knowingly concerned in or a party to a corporation, in the course of selling or granting franchises or rights for the distribution of products and services or in the course of conducting any business of distributing products, publishing, broadcasting or otherwise making a representation concerning:- (a) expected gross or net profit for work to be done or carried out by, and for products sold by, franchisees; (b) the extent of work required of franchisees to produce the profits referred to in sub-paragraph (a) above; (c) the existence and level of demand for the services and products to be sold pursuant to any franchise granted; (d) the existence and identity of genuine and established sale outlets or customers for the services to be sold pursuant to any franchise granted; (e) the size of any geographic area specified in a franchise proposed to be granted to an incoming franchisee; (f) the level of assistance to be provided to franchisees in terms of marketing and training; that is untrue or which the respondent has no reasonable grounds to believe is true. 7 The respondent does not resist that order, as he says he has no intention of entering the franchise industry in the future. The applicant also seeks orders that, if the respondent is in any way concerned in the sale or prospective sale of a franchise by a corporation, he ensure that the corporation discloses the existence of these proceedings and any orders made in the proceedings. Again, the respondent does not oppose the making of that order for the practical reason that, he says, he does not intend to enter the franchise industry again. However, the Court is not empowered to make any such orders unless it is satisfied that the respondent has engaged in conduct in contravention of the Act as alleged by the applicant. 8 The applicant further claims orders that the respondent refund in full monies paid to each of the four mentioned franchisees above in the following amounts: · Mr Cepon $48,500 plus interest calculated from 16 April 1998 · the Kinghams $24,201.31 plus interest calculated from 29 August 1997 · the Woods $48,500 plus interest calculated from 24 July 1997, and · the McIntyres $48,000 plus interest calculated from 28 August 1997. 9 The respondent resists that claim on the basis that all monies received from those franchisees were received by FW and applied properly for its purposes. He says that he did not receive any money from FW other than an appropriate salary. 10 The applicant further seeks orders that the Court make findings of fact under s 83 of the Act. No doubt, this is for the purpose of subsequently seeking on behalf of other franchisees of FW orders for payment of compensation against the respondent or to facilitate those persons themselves in bringing claims for damages against the respondent: see s 87(2). As the findings of fact sought provide a convenient description of the nature of the applicant's case, it is convenient to set them out in full. The findings of fact sought are: 1. In the period October 1996 to 26 March 1999 FW in trade or commerce:

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"In determining who is civilly liable for a s. 52 contravention under s. 75B(a) no question arises as to whether the person upon whom liability is sought to be imposed knew that another person would or might be misled or deceived by the contravening conduct. But s. 75B(a) does require knowledge of the acts constituting the contravention and of the circumstances which give those acts the character which s. 52 defines, namely, "misleading or deceptive or … likely to mislead or deceive". As the net of civil liability for a contravention does not catch those who would not be caught if s. 52 created an offence, honest ignorance of the circumstances which give a representation a misleading or deceptive character or the character of a representation which is likely to mislead or deceive is inconsistent with civil liability under s. 75B(a)." 17 In Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167, one issue argued was whether the person for whose conduct a corporation was vicariously liable for contraventions of the provisions of the Act could himself be made liable as an accessory under s 75B as a person involved in those contraventions. The Full Court (Sheppard, Morling and Wilcox JJ) rejected the contention that, because the conduct of the individual was the conduct for which the corporation was liable, that individual could not himself be knowingly concerned in the contravention: see at 178. Reliance was placed upon the specific terms of ss 80 and 82 of the Act. 18 The principal issue therefore is whether the respondent is a person who, by virtue of s 75B of the Act, was involved in the contraventions alleged against FW. It is, however, necessary to determine whether those contraventions are made out, as the respondent's general acknowledgment of those contraventions was not directed to a specific contravention or representation. Indeed, in the course of his evidence, he protested his personal innocence in relation to, or ignorance of, the misleading quality of the alleged representations by FW. In some instances he did dispute the fact of the representation having been made at all. As the conduct alleged against FW, and consideration of the respondent's role in relation to that conduct, is closely related, it is convenient to deal with those two aspects together.

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"… derived from two basic precepts designed to ensure a fair trial according to law. The first one is of common justice: no witness should be attacked - and it is of prime importance that no party and no witness should think that it has happened - behind his back; he should have a fair opportunity of meeting whatever challenge is offered to his evidence and the substance of any testimony that is to be adduced to contradict it. The second precept is based on the practical needs of a trial under the adversary system: a judge (or jury) is entitled to have presented to him (or them) issues of fact that are well and truly joined on the evidence; there is nothing more frustrating to a Tribunal of fact than to be presented with two important bodies of evidence which are inherently opposed in substance but which, … have not been brought into direct opposition, and serenely pass one another by like two trains in the night." 21 In that case, at 375, Wells J indicated that a failure to comply with the rule in Browne v Dunn may justify a trial judge directing a jury that because a particular part of a particular witness's evidence has not been challenged in cross-examination, the jury would have no justification for rejecting it. He regarded the rule as "an essential characteristic of a fair trial". 22 The respondent sought to explain, in the course of submissions, that he had not challenged the evidence of any deponents other than Mr McKenzie and Mr Eddington, although he proposed to give to some degree evidence which was inconsistent with some affidavits. He gave the reasons that he was representing himself, and that he did not have the resources to adequately prepare to cross-examine them. In the circumstances of this matter, his failure to challenge by cross-examination certain evidence of those deponents is not of particular moment. Ultimately, the evidence which he gave was rarely in direct contrast with that of a deponent. Mostly, he indicated only that he was unable to recall the occasion or the event to which reference was made and sometimes that he did not think that he would have engaged in that particular conduct. I do not think there were any occasions when, with confidence, he positively disputed a piece of evidence from one of those deponents. In all those circumstances, I consider it appropriate as a starting point to accept the accuracy of the unchallenged evidence of the deponents where it was not positively controverted by the respondent. In addition, for reasons which appear below, I have formed the view that the respondent was not a reliable witness on critical matters of fact. For that reason, quite apart from his failure to comply with the rule in Browne v Dunn, I accept the evidence of the deponents where it conflicts with the evidence of the respondent. 23 Mr McKenzie was one of two witnesses for the applicant who was cross-examined by the respondent. He met the respondent in 1994, and had some ongoing informal business contact with him after that time. In March 1996 he started working for the respondent or for enterprises with which the respondent was associated. Initially he was contracted to work for The Australian Mobile Car Care Company (a business operated by the respondent) and subsequently FW, and another company in the telecommunications industry The CommGroup Pty Ltd ("the CommGroup"). Each of those companies was controlled by the respondent either alone or with his wife Elizabeth Grant ("Ms Grant"). 24 Mr McKenzie on 1 March 1997 was employed by FW as its "National Operations Manager", although his duties were, as he described them, essentially administrative. He impressed me as an honest and straightforward witness, and I accept his evidence. He confirmed that the respondent essentially controlled the operations of FW and drafted the Information Pack. He confirmed that the earnings figures for potential licensed franchisees in the Information Pack were prepared by the respondent. Mr McKenzie did prepare certain of the other documents of FW provided to franchisees, but specifically obtained the respondent's approval before them being sent out. That is in accordance with the respondent's evidence. He also said that the documentation for a further franchising business promoted by the respondent called Surface Master was prepared by him, on instructions from the respondent, simply by taking existing FW documentation and adapting it in minor respects. 25 That evidence tends to indicate that the respondent at least approved of all the FW documentation, but in the final analysis the respondent did not really dispute that responsibility for that documentation rested with him. He confirmed also that the respondent drafted the advertisements, except perhaps for the editorial entitled "How to earn $96,000 in twelve months" which appeared in "Franchising and Own Your Own Business Magazine", December/January 1997, which the respondent settled, and decided upon what newspaper advertising was inserted. He also gave evidence that the respondent drafted the Q & A document, and that the respondent approved the Business Plan and the Disclosure Document. He also gave evidence that FW had no contracts with any of the significant enterprises described as clients of FW, and about the telemarketing process adopted by FW. That process involved telephoning businesses for appointments for franchisees to seek potential sources of work. The relevant franchise would then be told of the appointment (if one had been able to be made) or of the contact, so that the potential source of work was followed up. Ultimately, the respondent did not really dispute his responsibility for those documents in any significant respect, or the other evidence to which I have referred. 26 Mr McKenzie also gave evidence that warning letters to franchisees complaining of failures to comply with the terms of their franchisees were prepared by FW, but that in some instances the original was never sent although the copy was kept on the franchisee's file. The inference was that this was a device to avoid the repayment obligation after twelve months. He also gave evidence that, at the respondent's request, he participated in the artificial sale of FW franchisees to himself and to at least one other person and the cancellation of the sale of those franchises. The purpose of those transactions, he said, was to produce funds by way of "refund" to be paid from FW into an account associated with the respondent to provide capital to start up Surface Master. I have not found it necessary to make findings on those two topics for the purposes of deciding the application. 27 Mr Eddington worked for FW as its franchisee development manager from 31 April 1997 to about 22 October 1998. He had previously worked for "The CommGroup", a telecommunications hardware vendor operated by Ms Grant. It is evident that the parting was not amicable, and that relations between the respondent and Mr Eddington remain unfriendly. There is outstanding litigation between them. 28 The respondent's evidence attributed to Mr Eddington responsibility for a number of the relevant documents in which FW made representations to prospective employees. Mr Eddington denied that he had that role. I accept his evidence, as the evidence of other witnesses which I accept (and which is referred to below) indicates that those documents were brought into existence before Mr Eddington started to work for FW. There may have been certain variations to certain of those documents to which Mr Eddington contributed. However, the respondent did not indicate any relevant change in those documents with which he disagreed, or which he claimed was made without his approval. The respondent also claimed that the oral representations made to the Woods and to the McIntyres were made by Mr Eddington. Whilst that is clearly the case to a large extent, the significant representations were contained in FW documentation. In addition, in his cross-examination, the respondent tended to confirm Mr Eddington's evidence that what Mr Eddington told the Woods and the McIntyres was consistent with the FW documentation and was also consistent with information which the respondent conveyed orally to other potential franchisees. There was no oral representation made by Mr Eddington which I find to have been made in terms beyond those which the respondent had authorised. In the overall analysis, in my view, the respondent's criticism of Mr Eddington's evidence on matters directly germane to this proceeding was misplaced. Mr Eddington's evidence about the respondent's role in FW, about the respondent's responsibility for the terms of the documentation in so far as they relate to the representations, and about the respondent having authorised him to make oral representations in the terms that he did so was not really contradicted by the respondent. The capacity of FW to provide work to franchisees, including by reason of existing contracts with national companies, and the earnings being achieved by franchisees, are also matters dealt with in the documentation. The respondent's evidence was in essence that he believed the representations on those matters were accurate, rather than that they should not have been made. Mr Eddington's evidence was also consistent with the evidence of Mr McKenzie in significant respects. In those circumstances, I accept Mr Eddington's evidence on those topics. 29 One of Mr Eddington's responsibilities was the preparation of territories or areas for franchisees. Again, his evidence about how franchise areas were created was confirmed by the respondent. I accept his evidence also on that topic. I have made findings having regard to that evidence later in these reasons, as they relate to the alleged misrepresentations about the extent of research undertaken to identify franchise areas and about the capacity of franchise areas to provide sufficient work to enable franchisees to attain a certain level of earnings. 30 There were other matters in which the evidence of Mr Eddington differed from the evidence of the respondent. That evidence concerned issues such as the extent of Mr Eddington's access to the records of FW, his motivation for giving evidence in this matter, the extent that he had provided information to Robert Bray ("Mr Bray") in relation to proceedings Mr Bray is conducting against the respondent, the basis for Mr Eddington's claims against FW and the respondent after his employment with FW came to an end, and the like. They are not matters which were directly relevant to determination of the claim, and I have not found it necessary to resolve those conflicts. I do not consider that those conflicts reflect adversely upon the credit of Mr Eddington in relevant respects. As noted above, I do not consider that, on important matters, there was much in Mr Eddington's evidence which the respondent directly contradicted. I also do not think it is necessary to resolve those conflicts to determine the weight I ascribe to the respondent's evidence; there are more significant factors to that assessment which I have dealt with below. 31 Although in general the representations made to persons who became franchisees of FW were similar, there are some differences in the material with which they were provided and what they were told. It is therefore necessary to consider separately the evidence relating in particular to each of the four franchisees on whose behalf compensatory orders are presently sought.

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"All the areas have had intensive market research carried out in them. It cost a fortune. All our areas are huge and they are all excellent. All will make $2,000 per week when they are up and running. … The market research cost a fortune and we left no stone unturned. We know the whereabouts of any large company that deals with furniture." 38 The respondent in cross-examination acknowledged much of that conversation, including that he may have referred to franchisees earning $2,000 per week when they are up and running. He said that is what he in fact believed. Earlier in his evidence, however, he positively denied having said to Mr Cepon that after a couple of weeks, FW will turn the tap on fully and he would be earning $2,000 per week. He said that it was not represented that FW would supply all the work or that franchisees would earn $2,000 per week within a couple of weeks. He said that he meant to convey that that earning potential would be reached within 6-8 weeks, rather than a couple of weeks. He denied saying that all franchisees would do so, because he was aware by February 1997 that one of them was earning considerably less. He denied having said that the market research "cost a fortune", because the fact was (as the respondent acknowledged) that the market research was done essentially by himself and by others employed by FW. I accept Mr Cepon's evidence as to what he was told by the respondent. For reasons which appear below, I did not think the respondent was a satisfactory witness, and the answers referred to I regard as an attempt now to come to terms with what the respondent well knew in 1997 and 1998. 39 On 22 March 1997, Mr Cepon attended yet a further seminar at which the respondent made a presentation on behalf of FW to promote the sale of FW franchises. It was effectively along the lines previously given, and nothing was said which diminished in Mr Cepon's mind the significance of what had previously been conveyed to him. 40 I accept Mr Cepon's evidence that he then decided to acquire a franchise from FW. I also accept that Mr Cepon signed a franchise agreement and ultimately commenced operating the franchise upon the basis of those oral representations, and those made in the documents referred to. The written representations were contained largely in the Information Pack. It was a document of eleven pages plus attachments, and was broken into sections headed: Introduction, Company History, The Service, The Market, and Income and Expenses. 41 The company history in the Information Pack stated as follows:

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"It all started back in 1978 when Bob Bray started work as a furniture restorer. … Bob decided to see if he could create a service that was both mobile and that would decrease the amount of turnaround time involved in furniture repairs and restoration. … Over the years new products were researched and developed, as were new and innovative methods of carrying out the work to the high standards he had been trained in. It took 9 years of constant trial and error to bring the products, systems and work methods up to an acceptable standard. Bob handed in his resignation and set out working for himself, going around to manufacturers, importers and retailers and showing them what he could do. The response was overwhelming with more contracts being allocated than it was possible for him to complete on his own, so, true to the Australian entrepreneurial spirit, employees were hired and the company went from strength to strength. Bob knew that his business was a natural opportunity just waiting to be franchised. The demand was so high for the business that no matter where someone operated, they would have the benefit of having work provided to them from the company's existing national contracts. After two years of trying to franchise his business on his own he realised that he needed the help of franchising experts to ensure that he could maintain the quality control needed to ensure his standards were adhered to. An experienced franchising group was approached to set up the necessary systems to enable the operation to be franchised. After months of working together the franchise group was so impressed with the work, the reputation and innovation of the people involved they joined the company as partners. After an extensive period of assessment, evaluation and trialing of training and support systems, franchises were offered for sale. The response from our clients was impressive with work being offered to the organisation and its franchisees in every area and territory we opened." 42 Significant sections of that company history were untrue. Mr Bray had worked as a furniture restorer for many years, in New South Wales, providing an on site furniture repair service. There is no reason to think that his quality of service was other than of high standard. Nor is there any reason to think that his business, and his business techniques, were not profitable. Beyond that, however, there is simply no evidence to support the claim that the demand was so high for his business that no matter where someone operated, they would have the benefit of having work provided to them from the company's existing national contract. On the evidence, including that of the respondent, there were no existing national contracts that FW had with national furniture manufacturers or suppliers. Indeed, the evidence shows that there were no 'national contracts' with any significant business for FW to continue to carry out its furniture repairs. The fact that Mr Bray himself may have been busy, perhaps overly busy, bearing in mind that on the evidence he serviced significant parts of New South Wales and on occasions interstate, provides no foundation for the claim that anyone operating with his systems and techniques, but restricted to a franchise area, would effectively be unable to meet demand. Mr Bray did not approach "an experienced franchising group". He was approached by the respondent, as the respondent acknowledged, to add some colour to the history of FW. FW in fact was an infant corporation. If the reference to an experienced franchising group is other than to FW, there was no such body. Nor was FW an experienced franchising group. Nor did FW, as claimed, "join the company as partners". In fact Mr Bray became an employee of FW and its nominated trainer (until about July 1997). FW was a new enterprise. It did not acquire a business from Mr Bray. He did not become a shareholder in FW, nor form a partnership with FW. He was paid nothing for the "goodwill" which that company history tends to suggest must have existed. The respondent knew all of that. The massive overstatement of company history, presenting FW as a long standing and experienced business with franchising experience in furniture repair through franchising mobile services was simply wrong. 43 The respondent acknowledged in his cross-examination that he approached Mr Bray to ascertain whether Mr Bray would mind if he (the respondent) "built a story" around Mr Bray as it would look better if he was able to say that the business had been operating for a number of years. In fact it was not. He did so "for the purpose of improving the credibility of the business". It was important to him to build a story around Mr Bray to add that credibility. He also acknowledged that that amounted to a certain amount of "puffery" or "marketing", but he did not regard it as misleading because he assumed that those receiving that information would then obtain their own independent advice. In another part of his cross-examination, he said that telling a story around Mr Bray's business was not telling lies, although he wanted to be able to present the picture of a thriving franchising business involving large sums of money, which was financially sound, and which had been operating for some time. He claimed that Mr Cepon and other franchisees knew that those facts were not entirely true, as they knew they were early franchisees to the FW business. The respondent worked with Mr Bray himself only for a few days during 1996, but then had a number of conversations with him. The Information Pack was "to create interest and desire", but he expected that, although he was "puffing the thing up", franchisees would then undertake their own due diligence process. He agreed that that part of the Information Pack and oral comments to the same general effect were misleading, but he claimed that they were not intended to be misleading because they were intended to create interest and desire, but that then he expected potential franchisees to carry out their own due diligence. 44 In my judgment, the respondent's acknowledgment as to his knowledge of the true facts compared to the facts as asserted in that part of the Information Pack demonstrates that he was, in the relevant sense, aware of the misleading nature of those representations. Indeed, in my view, he set out to mislead by authorising those misrepresentations in the Information Pack in those terms. The respondent accepted full responsibility for all documents issued by FW, including the Information Pack. He also said that, in hindsight, and based upon legal advice, he acknowledged that they were misleading in the respects alleged by the applicant. 45 The revised Information Pack substituted a fresh page for the company history page, but it was, for practical purposes, in the same terms. It was obviously amended to remove specific reference to Mr Bray after he left FW in about July 1997. Mr Bray's activities as a furniture restorer are referred to, without using his name. In other respects the representations in the "Company History" section of the revised Information Pack in my view are effectively the same. 46 In his affidavit filed in the Supreme Court of New South Wales action, matter 4950 of 1997 in which FW and the respondent were defendants, and sworn on 11 September 1998, the respondent said:

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"Over the past several years we have developed a unique number of products, systems, services, pricing structures and industry contacts that ensure a long term supply of interesting and highly paid work. With little competition and a loyal group of regular clients we have acquired an enviable status in the furniture repair and maintenance industry … Because of the high need for our service, we have developed alliances with several organisations that we not only consult to but who actually use and recommend the services of The Furniture Wizard on a regular basis. Organisations such as: · Furnishing Industry Training Council · Transport Training Ltd · Australian Furniture Removers Association · National Association of Manufacturers Agents · National Retail Chains · Government Departments · Importers Listing many of the major retailers, manufacturers, importers and wholesalers amongst our client base ensures we have an industry relationship that is second to none. We are proud of the reputation our people have in the marketplace and are sometimes overwhelmed with the number of enquiries we receive from companies wanting us to service their furniture maintenance requirements. The Furniture Wizard is approached regularly by prospective clients to assist them with the repair and maintenance of their products and at the moment we have more business than we can deal with. With this reason in mind the opportunity to release franchises to suitable applicants has been made and those applicant (sic) will become part of our network of Repair and Restoration Technicians. New franchisees, after training and evaluation, are given their own territory and client base." 49 That text did not change in the revised Information Pack. 50 It is clear that the representations in the Information Pack about the market were untrue. They were clearly misleading. The respondent, in my judgment, was aware of their untruth. He acknowledged in his cross-examination that FW did not have any formal "alliance" with any of the Furnishing Industry Training Council, Transport Training Ltd, Australian Furniture Removers Association, or National Association of Manufacturers' Agents. Nor had they any informal arrangements with those entities. He acknowledged further that there were no written arrangements or contracts with any of the national retail chains, of which he said there were three or four, or with any government departments, or with any importers. FW had "telemarketed" the national retail chains, government departments and importers or some of them and so had had some contact with those entities. But it was quite untrue, to the respondent's knowledge, that FW had "developed alliances" with organisations such as those organisations. Describing those entities as being amongst FW's client base was itself misleading to the knowledge of the respondent. He also acknowledged, in the course of his cross-examination, that the claim to have been overwhelmed with enquiries, and to have more business than FW could deal with, was itself puffery. 51 The respondent's evidence on such matters as the source and assuredness of work was quite unsatisfactory. He acknowledged authorship of the "Company History" in the Information Pack, including the use of the words "existing national contracts". He said that expression was based upon what Mr Bray had told him. Even if Mr Bray had told him that he (Mr Bray) had some contracts with national entities, they were not contracts of FW. FW had no contracts. The respondent knew that. Moreover, the mere fact that he may have hoped, or even in his own mind have expected, to be able to adopt the Bray contracts (if there were any) does not provide a basis for the assertion. He knew that in fact FW had no such contracts. He did not have any agreement with Mr Bray for Mr Bray to assign to FW the benefits of any such contracts. 52 The respondent explained that, in his plans, there were three ways in which a franchisee would get work. The first was a job sheet allocated from FW to the franchisee by a particular piece of work. The second is by what was called a "Lead Sheet" following telemarketing by FW through its staff. It did not involve any guarantee of work. In effect, it simply amounted to FW through its staff (generally the respondent's wife) telephoning a particular client to explain the services which FW through its franchisees was able to offer and, provided that the contact was not entirely negative, the Lead Sheet would then issue. It was then up to the franchisee to attend at that premise and endeavour to lobby for work. Ultimately it was the responsibility of the franchisee to get work. The third step was by the franchisee directly canvassing for work. 53 The respondent in his evidence was unimpressive about the nature of the representations concerning the availability of work to franchisees. He disputed that FW had represented that it would supply all or almost all the work to franchisees. I find it plainly did. It was, to the knowledge of the respondent, untrue that it would do so or that it intended to do so. He then indicated that, in the course of his own planning, FW planned to "supply" 80 per cent of the work. Upon further questioning, that meant "directly or indirectly" supplying such work, and that in turn meant no more than providing the Lead Sheet to the franchisee for the franchisee to canvass for the work. The process of the Lead Sheet was, as I have noted, to record a telephone contact with a particular client which, unless it was particularly negative, was sent to the franchisee to follow up and if more positive was sent to the franchisee to attend an appointment to canvass for work. That plainly does not involve supplying work in the way in which it was conveyed in the Information Pack and in other documents. The general tenor of the Information Pack representations was that FW already had in place very significant contractual arrangements with sufficient enterprises that there was a demand from those enterprises for work to be done by franchisees of FW which was there for the taking. It was that "we find the work for you". The respondent knew that that plain meaning was untrue. It did little credit to the respondent that he attributed responsibility to franchisees (effectively all of them) for failing to convert leads into work through (he asserted) not adequately selling their services. 54 The representations about the history of the company and the capacity of FW to provide work are also confirmed in the Q & A document. It includes the following:

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". All work supplied by franchisor upon commencement with future scope to generate own clients when established and confident with methods. . Contractual arrangements with leading furniture retailers assuring continuity of work by a payment system (7 days). . Written guarantee to refund entry fee at completion of 12 months if not happy after following the recommended mode of operations as instructed by the Franchisor." 57 The respondent admitted in the course of his cross-examination that there were no contractual arrangements with leading furniture retailers assuring continuity of work. Although he attributed that document's authorship to someone else, he acknowledged that he was responsible for and aware of its terms and approved its distribution. 58 The Income and Expenses section of the Information Pack contained what it described as "actual earnings and net projections" for a four week period. The figures were: Week One $2,195 Week Two $2,085 Week Three $1,950 Week Four $2,140 Total monthly income $8,370. 59 In a more detailed sheet of the Information Pack referring to "actual earnings and not projections", the weekly figure of $2,195 for week one is shown as being earned in 39.5 hours. The total expenses are shown as $570.70 (including payments of $329.25 to FW for royalty payments and promotion fund) leaving income after expenses per week of $1,624.30 for a 39.5 hour week. Those figures are repealed in the revised Information Pack, although elsewhere in the document in the section headed "The Opportunity", the text has been altered to change the investment franchise fee to $48,500 from $48,000, and the income potential has been changed from $2,000 per week to $1,850 per week. Those changes are not significant. 60 The evidence clearly demonstrates that those representations of actual earnings were misleading. I find also that they were misleading to the knowledge of the respondent. It did not inure to his credit that he sought to explain them as his belief as to potential earnings based upon his belief as to the potential capacity of franchisees. There was no foundation for that belief. It was not based upon the earnings of any of his franchisees. 61 The respondent received weekly reports from the franchise agents of FW. Between 24 November 1996 and 2 March 1997 FW had only one franchise agent. That franchisee earned an average of a little over $300 per week gross. Thereafter until the week ending 11 May 1997 there were two franchisees. The total of their weekly earnings, on average, was a little over $350 per week for the whole of the period, and almost $400 per week for the period 9 March 1997 to 11 May 1997. Thereafter, until 29 June 1997, there were four franchisees (although one appears not to have lodged regular weekly reports). Of the weekly reports provided, they demonstrate that the average earnings per week of all franchisees was still in the order of a little under $400 per week. 62 From 1 July 1997 to 31 August 1997 the weekly reports indicate that there were only three or four franchisees reporting. In the case of one of them, weekly reports were rarely submitted. In that period of time, one franchisee earned a figure of $2,285 for one week, but his average earnings per week during that time were about $1,180 per week. Of the thirty weekly returns received for that two month period, only two reported a week's income in excess of $1,600 per week and only eight of the thirty (including the two referred to) reported a week's income in excess of $1,000 per week. The average earnings of all franchisees, as then reported, was only $550 per week or thereabouts for the period FW had been operating. The average earnings of all franchisees over that two months period only was about $870 per week. 63 For the balance of 1997, that is the last four months, the position did not improve. By the end of December 1997, the average earnings of all franchisees since FW commenced franchising was about $580 per week, and for that last four months of 1997 was about $590 per week. During that four months, 208 weekly returns were provided to FW of which only five returns showed earnings in excess of $1,600 for a week and only thirty-two disclosed earnings for the week in excess of $1,000 per week. There were two weeks only in which the earnings of a franchisee exceeded $2,000. Over the whole of the period to 28 December 1997, franchisees lodged 299 weekly reports, and only four of those weekly reports showed earnings in excess of $2,000 in any week and only seven of them showed earnings of in excess of $1,600 for any one week. 64 On the evidence, the gross average weekly earnings of all franchisees in any one week exceeded $1,000 for four weeks only (two weeks in August 1997, one week in February 1998, and one week in May 1998). Over that period, only three of thirty-one franchisees averaged gross weekly earnings in excess of $1,000 per week, and in no instance were those average gross weekly earnings in excess of $1,200 per week. 65 However one looks at that information, which the respondent ultimately acknowledged considering from time to time (albeit I considered that he was somewhat reluctant to do so), he knew and understood that the gross weekly earnings of franchisees were not in fact any where near the $2,000 per week or the $1,850 per week represented. His reluctance to acknowledge his awareness of what was in the weekly returns, although he insisted upon receiving those reports from franchisees, in my view is a factor weighing against his credibility. He ultimately acknowledged that, by June 1997, he was aware that the earnings of franchisees were nowhere near $2,000 per month. Despite that, he claimed and insisted on maintaining that he did not mislead people. That too impacts adversely upon his credit. It is perhaps a measure of his preparedness to ignore those facts, perhaps in his unwarranted belief as to the future, that he said in evidence that the potential franchisees should not take the figures provided in the Information Pack as "God's gift" because they had to do their own due diligence. He acknowledged that he did not tell any of his potential franchisees including the Woods, the Kinghams, the McIntyres or Mr Cepon, that the average weekly earnings of the franchisees to June 1997 were only in the order of about $550 per week. 66 The respondent also sought to explain that he understood at all times that those earnings could not be made from week one, but might be achieved from a period after about three months work. The Information Pack does not say that. It presents actual earnings as starting from "Week One". Moreover, as the analysis of the weekly reports showed, the respondent knew that the representations in this section of the Information Pack were not true, whether they relate to week one or week fourteen or thereafter of a franchise operation. 67 In the sections of the Information Pack headed "Training and Support", "The Opportunity" and "Your Next Step" appear some further passages which, in my view, amounted to misrepresentations. They include the following:

[60]

"After initial training you will be introduced to bookkeeping methods, marketing skills, customer service skills and reporting procedures. You will then be allocated your client list and start work. Income is immediate after your introductory period. … Promotional and corporate sales are handled for you by head office with resulting work and leads sent to you by our nation-wide, custom designed communications network. Industry magazines, newspapers, special promotions and information workshops are used as a medium of promoting our service. All this is combined with corporate and industry presentations to ensure year round work flow. … Territory allocation is generous with a minimum content factor of 40,000 population, selected major retail stores, mid sized stores, manufacturers outlets and general work to the public. … Review the benefits of our business, for example: · We find the work for you · $2,000. p.w. projected income after your first three months [later changed to $1,850] · No previous experience required · Comprehensive training and support system · Unique systems and products · Ongoing research and development · Career and company advancement opportunities · Low overheads · Generous territories · Extensive market awareness campaigns." 68 The market research, as the respondent explained it, was to start with the assumption that a population figure of about 40,000 persons was an appropriate one for a particular franchise area. There was no market research done to identify that population number as appropriate. No real foundation for that number having been selected was proffered. It was, however, simply a starting point. Once lines were drawn on a map to identify a population of about 40,000 within a geographical area, the "research" involved reference to computer data and the like to identify the number and nature of the various businesses within that particular area. The respondent or Mr Eddington looked at the number and mix of those businesses, and made a judgment about how much could be earned from each business type per year. There was no science in that intuitive judgment, and no research undertaken with respect to it. The identification of businesses included, for instance, furniture manufacturers, furniture retailers, hotels and motels, insurance companies and other large commercial premises. They were identified simply from the computer register. There was in fact no independent market research done at all. The estimated potential earnings per year from each type of business was also not supported by any research, but reflected an intuitive judgment by the respondent. He nevertheless claimed that he had belief in the accuracy of his intuitive judgment. 69 In my judgment the representation to potential franchisees, including to Mr Cepon, concerning the viability of franchise areas based upon market research carried out for FW (and in Mr Cepon's case, that that research was carried out at considerable cost) was clearly misleading to the knowledge of the respondent. His cross-examination demonstrated that FW had not done intensive market research into franchise areas, in particular to indicate whether franchise areas or any of them were capable of supporting the projected level of income. There may have been, as the respondent asserted, a considerable period of time spent by FW staff in drawing notional lines on maps to identify geographical areas with a population in the order of 40,000, and in extracting from records the number and nature of businesses within an area. There may have also been considerable time spent by FW staff, including the respondent and Mr Eddington, in adjusting the lines on the map, so that on the assumed value of the furniture repairs revenue to be earned from each of those business enterprises in that area, there would be work sufficient for the franchisee to earn $2,000 per week. There may, in addition, have been some telephone calls to certain of the larger businesses within an area to indicate the nature of the services which FW was proposing to offer through its franchisees, and to explore whether the business might be prepared to offer furniture repair work to FW. I do not consider that that amounted to market research as represented. This provides an illustration of the applicant's failure to focus on the clear meaning of what he was conveying to franchisees such as Mr Cepon, perhaps because he was carried away by his own confident belief in the ultimate success of FW through its franchisees. That is not a sufficient basis for him to have made those particular representations. They were made. They were misleading. He knew they were misleading because he knew that such "market research" as had been carried out was not independent, and it was simply intuitive. He knew there was no proper foundation for the representation. Such inquiries as were undertaken were carried out by his own staff, without much if any detailed contact with any business enterprises at all. 70 That picture is confirmed by the evidence of Mr Paviour. He also became a franchisee of FW. In late 1996, as a result of an enquiry, he was contacted by the respondent and subsequently received from the respondent the Information Pack. 71 On 10 January 1997, Mr Paviour met Mr McKenzie and the respondent to further discuss the prospect of obtaining a franchise. The respondent then told him that he had contracts with Harvey Norman (a national retailer of furniture) to carry out its repair work. Mr Paviour asked to see those contracts. The respondent told him that he could not see the contracts because Mr Paviour was not yet involved in the business, and would not disclose information that could be used to the detriment of the business. The respondent did not deny that that conversation had occurred as Mr Paviour had said. In my judgment, it adds to the picture of the respondent recognising the inaccuracy of what was being represented and endeavouring to conceal that inaccuracy from Mr Paviour. It tends to confirm my view as to the unreliability of his evidence. 72 I note, incidentally, that on 24 January 1997, Mr Paviour signed a franchise agreement for an area known as Geebung. He then underwent his training period and commenced work as an FW franchisee on 3 March 1997. He was given a list of contacts, and visited most of those contacts within the next few days. He found that not one of those contacts had ever heard of FW and none had made arrangements to provide any work to FW. In July 1997 Mr Bray's position as a trainer for FW was terminated by the respondent, and Mr Paviour was asked to become the national trainer. He continued to conduct his franchise until he terminated it on about 27 April 1999. 73 Mr Cepon said, and I accept, that as a result of those various representations he believed:-

[70]

74 In fact, Mr Cepon was not in March 1997 in a position to commence operating the franchise, as his current employment had not come to an end. He applied for a redundancy payment in March 1997. That is consistent with his intention then to acquire the franchise. As it happened, the redundancy took a considerable period of time to be approved. During the next nine months or so he kept in touch with FW, including the respondent about his plans. From time to time, the respondent contacted him on the same matter, urging him to make a decision. At one point, the respondent warned Mr Cepon that if he did not make a decision quickly, it was likely that the cost of franchises would significantly increase to $72,000. In December 1997, when the proposed redundancy was imminent, Mr Cepon tentatively had discussions regarding the area which he was to be given as an FW franchise. He also, at the invitation of the respondent, contacted three franchisees to ascertain whether they had or expected to earn $2,000 per week. Two of them said it was possible to earn about $1,850 per week and the other said he was earning very considerably less than that but had been urged by FW to continue with endeavours. On 19 December 1997, Mr Cepon received from FW a proposed franchise contract. 75 Mr Cepon consulted his solicitor regarding it. There were a number of matters of concern to him. On 13 January 1998, he raised them with the respondent, who was reluctant to acknowledge any of Mr Cepon's changes but nevertheless agreed to consider them. On 6 March 1998 a revised contract was sent to Mr Cepon. On 13 March 1998 he again met with the respondent. He was still unhappy about a number of matters. However, he found that the respondent on behalf of FW was not prepared to further alter the contract. He therefore signed it on that date. It included provision for a franchise fee of $48,500. On 16 April 1998 Mr Cepon paid that sum from the account of Gino Cepon and Nora Cepon. Shortly thereafter he commenced training, and on 1 June 1998 started work as an FW franchisee in the Springwood area. 76 The venture failed. He worked long hours for little reward. He received very little work at all, despite extensive touting, and virtually none was referred from FW. He got very little work from major furniture resalers, wholesalers or furniture removalists. As the project was so unsuccessful, on 22 September 1998 he paid a further $5,000 to FW to transfer his area to Toowong, a Brisbane suburb. He persisted in endeavouring to operate the franchise until February 1999 but was unsuccessful. Over the whole of that period he made $14,000 only. I accept his evidence about his efforts to perform the franchise in the way proposed by FW, and the genuineness of those efforts. I find that the franchise only produced the level of income to which he referred. I accept that he lost his investment of $48,500.

[71]

(c) The Respondent's Evidence 77 Although it is necessary to consider the respondent's state of knowledge in respect of each of the acknowledged misrepresentations alleged by the applicant, it is convenient at this point to make some general observations about his credibility. 78 In my judgment, the respondent was not a reliable witness on the topic of his knowledge of facts which demonstrate that the representations alleged by the applicant were misleading or as to his belief in the accuracy of the representations. He insisted throughout his evidence that at no time did he personally intend to mislead, even though he now accepted that in the ways alleged by the applicant, the representations were in fact misleading. In my view, his evidence does not support his overall claim that he did not know at the time that the representations were in fact misleading. I have indicated earlier in these reasons a number of matters which lead to that conclusion. I do not accept his evidence that at the time the representations were made, he did not know of facts which made them misleading. The impression gained from his evidence is that he had a firm, if not vehement, belief in the potential of FW as a franchising business enterprise. In my judgment, that belief caused him to lose sight of the focus upon the particular representations which were made. It is apparent, for reasons which I have set out, that the representations about the history of FW contained in the Information Pack were representations which were untrue, and which he knew to be untrue. 79 The respondent accepted that, at the time they were made, they contained a certain amount of puffery. He described the representations in the Information Pack, and in other documents, as being designed to create an interest rather than to secure a commitment, and as being made upon the basis that the persons receiving those representations would then undertake their own "due diligence" before committing to acquire a franchise from FW. In effect, as I perceived the thrust of that evidence, he took the view that it was permissible to make misleading statements to induce others to an interest in an FW franchise on the assumption that they would then undertake their own due diligence. In addition, in significant respects, I found his evidence on matters of detail to be unreliable. In relation to the prospects of FW providing to its franchisees all or most of the work which would be available, he knew that the level of secured work available in a new franchise area was minimal. He may well have believed that it would be procured, but that was not the representation which was made. 80 The respondent also cavilled about the use or understanding of franchisees such as Mr Wood that there were contracts with existing national suppliers or clients. He preferred to use the word "agreements". He sought to distinguish a contract, which he described as a written and legally binding document, from an agreement, but I considered that his explanation of the difference was artificial and untrue. Underlying that, he sought to distance himself from any representation that work would be provided, or that most of the work would be provided, to franchisees but in fact in various documents of which he was the author he made that representation at times when he knew that there were no arrangements with national suppliers or others. In practical terms, there were none. At best, as he knew, there may have been some informal acknowledgment of some national manufacturers or distributors of furniture that the services provided to date by FW franchisees, or proposed to be provided, might be used by those enterprises. He had no basis for expecting any particular level of usage and no contractual commitment. As he explained in another point in his cross-examination, FW really did little more than identify potential sources of work from a computer disk for each proposed franchise area, and then make some calls by telephone on the larger of the businesses in that area to explore whether the FW services might be used. That falls far short of the actual nature of the representations. In fact, as the respondent ultimately acknowledged in his evidence, he had no contracts with any of the national organisations referred to in the Information Pack. He also acknowledged that there was no pressure from such bodies to expand, despite him having said that. 81 I also thought that the respondent was evasive in other respects, particularly when he was being pressed on the basis of statements in the Information Pack as to prospective earnings. He acknowledged that it was unrealistic to expect such earnings to be available early in the life of a franchise, or before the expiration of three months. He simply did not accept that the document was misleading, when its plain words convey that representation. That is, I think, in part indicative of his artificially euphoric approach to his business and his inability to recognise that the facts which he knew to be true did not justify the "puffery" (to use his word) contained in the information provided to potential franchisees.

[74]

The investment was said to be $48,500. 84 That prompted Mr McIntyre's interest, he subsequently had some discussions with Mr Eddington on the topic. Amongst Mr Eddington's comments were that FW had existing service contracts with major companies in the furniture retailing industry and with removalists and manufacturers and in the hospitality industries. The respondent acknowledged in cross-examination that communication of those matters was consistent with Mr Eddington's instruction, except that he should have used "verbal agreements" instead of "contracts". Mr Eddington also told Mr McIntyre that 80 per cent of the work comes from "our national client network" and he gave some names of companies. Again, in cross-examination, the respondent acknowledged that that was consistent with what he told other potential franchisees and with communications which he had authorised. 85 Mr McIntyre subsequently received on 30 June 1997 the revised Information Pack. It does not refer to Mr Bray in the company history. It maintained the representation that franchisees would earn $2,000 per week projected income after the first three months (that figure as later reduced to $1,850 in the revised Information Pack). It represented actual earnings of franchisees in accordance with the Information Pack referred to above. He also received the Q & A document. 86 Subsequently, during July 1997, Mr McIntyre had further discussions with Mr Eddington. On 13 August 1997, he travelled to Brisbane and met the respondent, Mr Eddington, Mr McKenzie and others. He did not get any information inconsistent with information previously provided. He was provided on the occasion of that visit with the FW Disclosure Document and a proposed franchise agreement. He subsequently discussed with Mr Eddington the suitability of Bendigo as a franchise area and his concerns concerning certain terms of the proposed franchise agreement. On 25 August 1997, the respondent told him that FW would not alter the franchise agreement, although he "noted" matters of concern. He decided to proceed notwithstanding that attitude, because of the "money back guarantee". On 28 August 1997, the McIntyres signed the franchise agreement, and together they paid $48,000 as trustees for the B & R McIntyre Family Trust to FW. 87 I accept that they did so on the basis of representations contained in the documents referred to, and of the representations of Mr Eddington consistent with those documents, to the following effect: · the demand for the service was incredible · FW had more work than it could handle · Head Office support team would supply work from its existing client base · earnings of $2,000 per week were assured · FW was an established organisation · actual earnings would amount to $8,370 per month · Head Office would find the work for a new franchisee · a new franchisee would earn $2,000 per week after the first three months · the services of FW have been used by its clients since 1979 · the business had a high profile · if the McIntyres did not wish to proceed, FW would give them back their $48,000 · the essence of the business of FW was that it already had agreements with most of the major retailers, manufacturers and freight companies so that all a new franchisee had to do was to plug into an existing market base · FW had done nine years of intensive research and development in its product services and marketing. For reasons already given, I find those representations were misleading and I also find that, in the relevant sense, they were known by the respondent to be misleading. 88 After his period of training, he commenced operating the franchise on 6 October 1997. He found that none of the national retailers, manufacturers or freight companies with whom he made contact had heard of FW or had contracts with it. FW supplied him with little or no work. He was not able to earn $2,000 per week or anything like it. He spent a considerable time canvassing in the next months, but was unable even to meet his expenses for some six months. Early in his operations, in the first week, he was given information that FW had booked eight appointments for him with local furniture retailers. He attended those appointments, but the common response was that there had been a telephone inquiry only which someone would follow up about repairing furniture; he was the follow up. There were no contracted jobs. He found that the pricing structure of FW was significantly higher than that provided by others providing such services in Bendigo. 89 By November 1997, McIntyre realised that the business was in trouble. FW was not providing most of the work as it had promised. He had received no work from the "national client base" which he had expected to provide about 80 per cent of his income. Most of his work was one off jobs without follow up, and he was struggling to find any work at all. He nevertheless persisted until September 1998 when he ceased trading under the name FW. He sought return of the $48,000 franchise fee, but FW refused to return it.

[76]

"The service, established in 1988, caters to a variety of consumers and was developed in response to a need in the market place for fast, efficient turnaround times for furniture and surface repairs. … Every territory is large enough to subdivide to enable you to grow or to recoup your investment within twelve months. … Head office (sic) Support Team supply work from our existing client base as well as your own area client base. We grown your business with you ensuring target earnings of $2,000 per week are achieved." 92 After first denying authorship of that advertisement, the respondent acknowledged that it was his document and it was "based on building a story" around Mr Bray. He claimed that franchisees would expect a certain amount of puffery, and that the advertisement was designed to overcome initial inertia and to create interest. If, as a result of that interest created by that "puffery", a potential franchisee was interested, he expected the proposed franchisee to undertake due diligence. In effect, the respondent acknowledged that he knew that the statements in that advertisement were not true. 93 Mr Wood was attracted by the fact that FW was an organisation established since 1988, and that he would have a ready and waiting client base, presently making more demands than could be serviced with existing facilities. He was also impressed by the promises of ensuring target earnings of $2,000 per week were achieved. He made a response to the enquiry. He then received the Information Pack on 11 June 1997. It was the version which included reference to Mr Bray. The detailed financial figures are the same, but later in that version it said that the franchise fee was $48,500 and the income potential was $1,850 per week. It also said: "$1,850 pw projected income within your first twelve months". 94 In addition to the matters which he had derived from the advertisement, Mr Wood was reassured because FW had agreements with most of the major retailers, manufacturers and freight companies, by the money back guarantee, and (as he understood it) by the representation that he could earn $400 per week in the first month and more than $2,000 per week from the eleventh month, that FW would "find the work for me", and that he would simply "plug into their existing client base." It is not clear how he arrived at the figure of $400 per week. The representation was that FW would find the work for you, and that there was $1,850 per week projected income within the first twelve months. In addition, the actual income and expenses figures were the same as those in the Information Pack throughout, showing a total monthly income of $8,370, a week one income of $2,195, and an income after expenses per week of $1,624.30. The respondent acknowledged that that was based on forty hours chargeable work without any time allowed for canvassing. At that time, the respondent was aware that FW's best franchisee was Mr Paviour, whose average weekly income (the respondent claimed) was about $1,100. The respondent, when confronted with that fact, did not have any further explanation to offer as to why he maintained that claim, except to say that he did not mislead people because some people could achieve that result although others could not. He had no foundation for claiming that to be the actual earnings of any particular franchisee. In fact, Mr Paviour commenced as a franchisee in the week ending 9 March 1997. He averaged to the week ending 8 June 1997 some $550 - $560 per week, and in only one week up to that time had his earnings exceeded $1,000. Nor, in my view, did the applicant have any proper basis for claiming (as he suggested) that it was based upon Mr Bray's earnings. 95 Mr Bray did not give evidence. There was no information in any documentary form as to Mr Bray's earnings. The respondent, contrary to what he expected of others, did not see any audited or final financial accounts of Mr Bray's business or his taxation returns, and he did not conduct any due diligence with respect to Mr Bray's previous activities. Mr Bray's business, based upon his personal contacts established over many years and his ability to service an unrestricted geographic area, provided no foundation for the respondent's representation. I do not accept the respondent's evidence that, despite those obvious differences, he believed that it did provide such a foundation. In addition, in my view, it is beyond belief that the respondent could have thought that Mr Bray was earning so much, when the respondent was able to absorb Mr Bray and his expertise and such contacts as he had into FW without paying for any goodwill or without Mr Bray seeking other than employment as a trainer for FW. 96 Mr Wood remained concerned about ensuring he did not have to canvass too much for work. He had a discussion with Mr Eddington in June 1997 when he was assured that FW had an established client base and would provide him with the work. He did not have to sell door to door. Mr Eddington told him that FW had established accounts with trade centres and would provide 80 per cent confirmed work supply. That was reassured on a number of telephone conversations with Mr Eddington. On 28 June 1997 he met Mr Eddington at the FW office in Brisbane. Mr Eddington told him that he would be earning $2,000 per week and $100,000 a year after the first year, but it would take some time to develop the business to that level. The respondent did not say that Eddington was not authorised to say that, and it was in fact consistent with what was already conveyed by documents of which the respondent was the author or for which he had given his approval. He said in his cross-examination that it was more realistic to expect to earn that amount after one year and that two years would be more realistic. In my view, that is another illustration of the respondent's sliding responses to difficult questions to maintain the claim that he believed the representations, in the face of facts which he was shown to know and which clearly indicated to the contrary. 97 I accordingly find that FW represented to Mr Wood that · FW had agreements with most of the major furniture retailers and manufacturers and freight companies for the repair of furniture; · he would earn $400 per week in the first month and more than $2,000 per week from the eleventh month; · it would find the work for him as a franchisee; · he would simply "plug into their existing client base"; · there was plenty of work available to FW franchisees; · there was a twelve month money back agreement if he wished to withdraw; and · he would get 80 per cent of his work directly from FW. For reasons already given, I further find that those representations were misleading and that the respondent knew of the facts which rendered them misleading. I am satisfied that he was a person involved in those contraventions. 98 Mr Wood purchased a franchise in the eastern suburbs of Adelaide in early September 1997. His franchise fee was $48,500. I find that he did so on the basis of the representations referred to. The franchise agreement was signed by Mr Wood on behalf of B & P Wood Pty Ltd as trustee for Wood Family Trust. 99 After his period of training, the business commenced operations on 10 November 1997. He received notice from FW of a number of businesses that he was supposed to have had appointments with to receive work. He attended them. Almost all of those businesses did not know of any contact with FW, and the balance said they were not interested. He only received two jobs from those entities. He was then told that it was up to him to go out and get the work. The demand for service did not exist. FW, at least in respect of his area, did not have more work than it could handle. His targeted earnings of $2,000 per week were not achieved. FW gave very little if any work to him. Mr Wood spent most of his long hours soliciting unsuccessfully for work. He found FW did not have agreements with most of the major retailers, manufacturers or freight companies. He sought refund of his franchise fee but was refused it. He did not earn $400 per week in his first week or any where near $2,000 per week from the eleventh week onwards. 100 As his trading statement shows, for the period 20 November 1997 to 30 October 1998 (forty-nine weeks) he had gross sales of $25,491 and after client expenses a net trading profit of $2,828.

[78]

"The amount of work would be the same in any State, because we are expanding nationally due to the pressure from major retailing clients and manufacturers to do so. In fact one of the clients I have just signed up is Removals Australia, the government removalist." 105 The respondent denied having said that Removals Australia had been signed up. He did not otherwise deny that reference to that entity was made in the conversation. I accept Mr Kingham's evidence that the respondent said that FW had signed up Removals Australia. Mr Kingham was familiar with Removals Australia from his previous employment, and he knew that it was a major government removalist. The reference to that contract gave him significant assurance. At that time, FW had no such contract. It had no pressure from major retailing clients or manufacturers to expand nationally. The respondent knew those facts; his representations then to Mr Kingham were hubristic. 106 During March 1997, Mr Kingham had a further conversation with the respondent. The respondent told him that, from the national client data base, FW would supply him and other franchisees with over 80 per cent of their work. The Kinghams subsequently approached a lending institution for finance, and as a result in late March 1997 Mr Kingham again contacted the respondent by telephone to get information about possible clients in Adelaide to pass onto that lending institution. The respondent said he would not provide those names because "it could affect our final negotiations that are in progress". He offered to send down final expense and income figures for the first year of operation to assist in the finance operations. 107 The respondent agreed that Mr Kingham may have contacted him with the enquiry about identifying possible clients in Adelaide, and his response, if the conversation had occurred, would have been that which Mr Kingham described. He said he was not trying to conceal the truth, but was reluctant to provide clients' names. In fact, upon being pressed, he acknowledged that there was no national contracts at all, no national pressure to expand, and such contacts as would be provided would only come from telemarketing. In effect, he was concealing the fact that there were no clients names for Adelaide which he could provide. 108 The respondent in addition caused FW to send to Mr Kingham further financial figures. They purported to show the income and expenses of an FW franchise for the first and second years of operation. They comprised two sheets of paper. They are the financial figures document referred to in par 10(3)(d) of these reasons. The financial figures document showed total income for year one as $63,910, and expenses of $16,616, leaving income after expenses per year of $47,294. On that sheet there is no break-up of the source of income. The first months total income is $2,165, and the income after expenses of $1,602. The monthly figures progressively increase. There is a note on that sheet which reads: "Year two $2,000 - $2,500 per week". The financial figures document for year two shows income of $91,503, expenses of $23,790 and income after expenses of $67,713. That document was not provided to any other of the franchisees. On its face it is inconsistent. The respondent was not cross-examined about it, nor did he give evidence about it. Mr Kingham was not asked about it. He does not say that he placed any great weight on it. It does not seem that he read it carefully, although he submitted it to his lending institution. It demonstrates the rubberiness of the earnings representations, and the knowledge of the respondent on that matter. 109 Further discussions ensued between Mr Kingham and the respondent and Mr McKenzie. As a result, on 4 April 1997 the Kinghams sent a cheque of $1,000 as a deposit to secure a franchise. They continued to carry out investigations. Enquiries they made indicated that no-one had heard of FW, and it was not clear what market research had been done by FW for South Australia. The respondent in April 1997 told Mr Kingham, when confronted with those matters, that FW was a name that was not known throughout Australia because it was only in the process of franchising. He said "FW had conducted full market research into all areas and these figures are achievable for all States". A revised version of the financial figures document providing franchisee income and expenditure for a two year period was presented. It showed income for year one of $63,910 ($2,165 in month one), less expenses of $16,947, and income after expenses of $46,963. Year two showed income of $101,003, expenses of $26,260, and income after expenses of $74,742. That version of the financial figures document has the date December 1996, as does the earlier version of the financial figures document. The difference in the figures was not explained by the respondent. 110 The Kinghams still had trouble procuring finance. In the meantime, in the April/May edition of "Franchising and Own Your Own Business" magazine they saw the advertisement regarding a $15 billion industry. They were reassured by the representations in that advertisement that there were: · existing national account clients · a ready and waiting client base · more work than can be handled with current operator levels · regular repeat work · and that FW would ensure "target earnings of $2,000 per week are achieved". 111 Despite the difficulties of getting finance, the Kinghams were persuaded to pursue enquiries into acquiring an FW franchise because of the claims made in the FW advertisements and orally by the respondent about national contracts, potential income, and the money back guarantee. At the instigation of the respondent, the Kinghams applied for a $20,000 personal loan from their bank and a $2,000 personal loan secured by their house (the respondent had offered to finance the other $26,500 with an interest free loan for three years). That loan was obtained in August 1997. The application was, so far as the lending institution concerned, unrelated to the FW franchise. 112 On 24 August 1997 they received a copy of the proposed franchise agreement. They sought legal advice. As a result, Mr Kingham contacted FW to secure the Disclosure Document. It was received in late August 1997. In the meantime, and without further legal advice, on 27 August 1997 the Kinghams signed the franchise agreement and paid $22,000 to FW. At that time, it had been conveyed to Mr Kingham by the respondent that, unless they moved quickly, they would be unable to secure the franchise area of their choice. I accept that they did not look carefully at the Disclosure Document. 113 I find that at that time, the Kinghams believed as a result of the advertisements, the Information Pack, the Q & A document, and the oral representations, that · the FW business was expanding because of pressure from its national clients · the return on investment was excellent with an abundance of work available · the franchisee would have the benefit of having work provided from FW's existing national contracts · FW had more work than could be handled · a franchisee would be able to earn in a week enough to lead a very comfortable lifestyle · FW had developed a group of loyal regular clients over a period of years · FW had alliances with several organisations who used and recommended its services regularly, including the Furniture Industry Training Council, Transport Training Limited, the Australian Furniture Removers Association, the National Association of Manufacturers Agents, national retail chains, government departments and importers · FW was sometimes overwhelmed with the number of enquiries it received · total monthly income would exceed or be equal to $8,350 · a franchisee would earn a weekly income of $2,195 from 39.5 hours work · net income per week would be $1,624 · a new franchisee would be allocated a client list from which income would be immediate · FW would find the work for new franchisees · a new franchisee would earn $2,000 per week after the first three months · FW had a high profile · if, after twelve months, a franchisee's business did not perform through no fault of the franchisee, FW would give the money back · the essence of FW's business was that it had legally enforceable agreements with most of the major retailers, manufacturers and freight companies so that all the franchisee had to do was to "plug in" to FW's existing client base · the amount of work for a new franchisee would be the same in any state because FW was expanding nationally due to pressure from major retailing clients and manufacturers · Removals Australia had signed a legally enforceable agreement to use exclusively franchisees of FW. I further find that they relied on those representations in purchasing the franchise. I also find that those representations were misleading and that in the sense explained in Yorke, they were misleading to the knowledge of the respondent. 114 In September 1997, Mr Kingham underwent a period of training. He did not find it very satisfactory. It was conducted by Mr Paviour. Mr Bray by that stage had left FW. In the course of his training, Mr Kingham received a contact list of all businesses in his franchised area which operated in the areas of real estate, insurance, hotel/motels, restaurants and furniture removals/retailers. He was also given a copy of "the Furniture Wizard client list" listing all furniture retailers, manufacturers, removalists and insurance agencies who were said to be national clients of FW. 115 On 29 September 1997 Mr Kingham started his operation. The Kinghams contacted all of the businesses provided by FW of the list of businesses in their franchise area, and then through the Yellow Pages. The general response was unsatisfactory. Most businesses had not heard of FW, or had existing arrangements for the repair of furniture. It became clear to them that no national contracts existed with those entities which were in Adelaide and which were nominated as national clients. The FW client list purporting to be of clients with whom there were national contracts had only a few South Australian entities of furniture manufacturers. The other names on that list did not have businesses in South Australia. Between October 1997 and February 1998, the Kinghams' income was about $434 per week on average. None of the national accounts had heard of FW and very little if any work was referred to them by FW. FW's alleged high profile did not exist. The supposed national accounts with major retailers and manufacturers and freight companies did not exist in South Australia. There was not an abundance of work. The pricing was not competitive. 116 The Kinghams persisted, as did other franchisees, with little work referred from FW. In June 1998, after renegotiations, they commenced repaying their three year interest free loan to FW. By 2 September 1998 they had paid a total of $2,350.18 in repayments. On 2 September 1998 they terminated their FW franchise and sought repayment of the monies paid. That repayment was refused. During the period of the franchise, the Kinghams earned gross average income of $430 and expenses resulted in a net loss of $10,267. I am satisfied that the $22,000 as part payment for the franchise, and the loan repayments made were of no value to the Kinghams.

[80]

conclusions 120 For those reasons, I am satisfied that FW engaged in misleading and deceptive conduct in the respects which I have found above. I also find that the respondent was aware of, and authorised the making of the representations, in circumstances where he knew of the facts which rendered the representations misleading and deceptive and in a number of instances where he also expressly realised that the representations were misleading and deceptive. Accordingly, in my judgment, the respondent aided and abetted the contraventions of the Act by FW which I have found to have occurred, and was knowingly directly concerned in and a party to those contraventions. I propose to make declarations accordingly. 121 As noted earlier, the respondent for practical reasons, did not oppose the making of the injunctive orders sought by the applicant. I consider that, in the light of my findings, it is appropriate to make those orders although I propose to limit the period of those injunctions to a period of three years. In reaching that view, I have also had regard to the evidence of the respondent's activities once it became apparent to him that FW was not likely to succeed, as well as his role in franchising activities prior to 1996. 122 The respondent has been engaged in other franchising operations. The Australian Mobile Car Care Company operated between October 1991 and January 1995; the respondent was its director when it ceased operating. In about January 1995, a company Conrose Pty Ltd changed its name to The Australian Mobile Car Care Company with the respondent as a director and its major share holder. On 1 June 1998, Surface Master Pty Ltd ("Surface Master") was registered, with the respondent as its director. The sole shareholder of Surface Master is The Firms Holdings Pty Ltd of which Ms Grant is the director and sole shareholder. 123 Surface Master then operated as a franchisor. 124 The evidence also demonstrates that much of the Surface Master documentation for franchisees and potential franchisees, including an Information Pack, bears close resemblance to that previously presented to franchisees or potential franchisees by FW. The evidence shows that the Surface Master documentation was prepared, on the instructions of the respondent, simply by adapting the FW documentation. 125 Mr Dodgin became interested in acquiring a Surface Master franchise as a result of seeing an advertisement for Surface Master in the November/December 1998 edition of 'Franchising and Owning Your Own Business' magazine. In February 1999 he decided not to pursue the purchase of a franchise. He then had a discussion with the respondent, as a result of which he resumed negotiations with the person with whom he had been dealing and subsequently he became a Surface Master franchisee. In the May/June 1999 edition of "Franchising and Owning Your Own Business" magazine, Surface Master advertised for the sale of franchises. It also procured in that magazine an article directed to promoting the sale of its franchises. Although the respondent ceased to be a director of Surface Master on 4 December 1998, I accept the unchallenged evidence of Mr Leckie, a person who became a Surface Master franchisee on 12 March 1999, that at least up to that time the respondent had a significant management role in respect of Surface Master franchises. The respondent continued to communicate, at least with Mr Leckie, concerning Surface Master until September 1999. 126 Mr Reed responded to an advertisement in the "Franchising and Owning Your Own Business" magazine of June 1998 in relation to the possible purchase of an FW franchise. In October 1998, the respondent told Mr Reed that "due to excessive demand" for FW franchises, no more were being offered. The respondent directed him to a new business called Surface Master involving repairing laminex and ceramic surfaces in homes and commercial outlets. As a result of discussions with the respondent, and receiving certain Surface Master documentation, on 10 January 1999 Mr Reed became a Surface Master franchisee. The respondent countersigned the agreement under the seal of Surface Master on that date, even though he was no longer a director. The respondent had further communications with Mr Reed on behalf of Surface Master up to 11 November 1999. In effect, up to that time, the respondent was his sole contact in relation to technical and non-administrative enquiries concerning his Surface Master franchise. 127 Mr Keeble was an FW franchisee in a suburban area of Brisbane from May 1998 to April 1999. Shortly after FW ceased operating, he received an offer from another person called David Munns to participate in a new mobile franchise opportunity called Furniture Master. The invitation was sent on Surface Master letterhead. The Furniture Master proposed franchise covered the repair and restoration of furniture. As a result of expressing an interest in responding to that invitation, he received a disclosure document indicating that the respondent was a senior consultant to that business. He met with the respondent on 9 June 1999 in relation to purchasing a Furniture Master franchise, and negotiated with him in relation to the terms of the proposed franchise agreement. He signed that agreement on 9 June 1999 and subsequently has operated as a Furniture Master franchisee for the Brisbane area. The respondent continued to be his principal point of contact in relation to conducting that franchise at least until December 1999. 128 The activities outlined above indicate that there is a real prospect that the respondent will continue to operate or be involved in the sale or prospective sale of franchises through trading corporations in the future. That prospect is one which, in my judgment, warrants the additional injunctive relief sought by the applicant, and referred to in pars 6 and 7 above. 129 I also order that the respondent refund the following amounts to the following persons, namely (a) $48,500 plus interest calculated at 10.5 per centum per annum from 16 April 1998 to Mr Cepon (b) $24,201.31 plus interest calculated at 10.5 per centum per annum from 29 August 1997 to the Kinghams (c) $48,500 plus interest calculated at 10.5 per centum per annum from 24 July 1997 to the Woods, and (d) $48,000 plus interest calculated at 10.5 per centum per annum from 28 August 1997 to the McIntyres. 130 In each instance, I have found those amounts were paid by those persons respectively for an FW franchise in reliance upon misleading and deceptive conduct of FW to which the respondent was a party in the sense described by s 75B of the Act. These orders are made under s 87(1A) and (1B) of the Act and are authorised by s 87(1D)(c) and (d) of the Act. The rate of interest is that prescribed by O 35 r 8 of the Federal Court Rules in accordance with s 52 of the Federal Court of Australia Act 1976 (Cth). I note that the payment by the Kinghams of $2,201.31 (in addition to the sum of $22,000 as part payment for their franchise) was in part repayment of a "loan" by FW for the balance of the price for their franchise. There is some evidence that their repayments of that "loan" were a little higher than that figure, so I have selected the lower figure on the basis that it has been nominated by the applicant as the appropriate figure. 131 I have recorded my findings of fact in the course of these reasons for decision. I do not consider it necessary to extract those findings and to set them out again so as to satisfy the applicant's submission based upon s 83 of the Act. In my view, that section does not contemplate the need for that additional step. 132 I consider that the respondent should pay to the applicant its costs of the application to be taxed. I so order. I certify that the preceding one hundred and thirty-two (132) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.

Australian Competition & Consumer Commission v Grant

At a glance

Court

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Before

Source

Judgment (84 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (5)

Cited By (2)