Carlton v Pix Print Pty Ltd

[2000] FCA 337

Federal Court of Australia|2000-03-22|Before: Drummond J

View original source

At a glance

Source facts

Court

Federal Court of Australia

Decision date

2000-03-22

Before

Drummond J

Source

Original judgment source is linked above.

Judgment (53 paragraphs)

[1]

1 The second applicant entered into a master franchise agreement with the first respondent on 20 October 1995. In return for $140,000, it thereby acquired the exclusive right to licence the operation of Pix Print outlets in Queensland and the Northern Territory. The applicants claim the second applicant was induced to enter the master franchise agreement by written and oral representations, made on behalf of the first respondent, in contravention of s 52 the Trade Practices Act 1974 (Cth); s 51A is relied on in relation to certain of these representations. Though they also sought damages for breach of duty and negligence, at the trial the applicants limited their claim to relief by way of damages to ss 82 and 87 the Trade Practices Act; they also claimed under s 87, a refund of all moneys paid to the first respondent pursuant to the master franchise agreement.

[2]

2 The first applicants, Mr and Mrs Carlton, owned and controlled the second applicant, G & L Carlton Pty Ltd. Mr Pix, the second respondent, was a director of the first respondent, Pix Print Pty Ltd. He effectively controlled it. It is admitted that he acted on its behalf and as its agent. 3 On 25 August 1995, Mr and Mrs Carlton, who then lived in Melbourne, read an advertisement for Pix Print franchises in The Age newspaper. This was placed by Mr Spriggins who was then Pix Print's Victorian master franchisee. Mr Carlton telephoned Mr Spriggins and arranged to obtain from Mr Spriggins two tickets to the September 1995 Franchise Expo in Melbourne and some information in relation to Pix Print franchises, viz, a document entitled "disclosure document" and some Pix Print colour brochures. Mr Carlton received all this material on 6 September 1995. 4 The Carltons attended the Pix Print stand at the Expo on 8 September 1995. Mr Spriggins set up this stand with the knowledge and approval of Mr Pix, as a means of marketing Pix Print franchises. The Carltons were introduced by Mr Spriggins to Mr Pix. Mr Pix said he has no particular recollection of meeting with the Carltons there. I accept their evidence that the meeting took place and that they and Mr Pix discussed Pix Print franchises at length. 5 At the Expo, Mr Carlton obtained a magazine called "Businesses for Sale News". It contained an article about Pix Print entitled "Uncompromising Quality Leaves Its Imprint". Both the Carltons read it soon after. They also read the disclosure document and the Pix Print colour brochures before meeting Mr Pix again at his Melbourne hotel on the evening of 9 September 1995, where they had a long talk with him about Pix Print's franchising activities. 6 On 11 September 1995, Mr Carlton telephoned to tell Mr Pix that he wanted to speak to some Pix Print franchisees about the Pix Print business; he said that he knew of one, the Pix Print store in Greensborough. Mr Pix did not object to Mr Carlton visiting that store. After obtaining Mr Spriggins' consent as suggested by Mr Pix, Mr and Mrs Carlton visited the Greensborough store and spoke to the operator, Mrs Walker, about her business. On 15 September 1995 the Carltons visited Mr Spriggins at his Keilor Pix Print store. They also spoke to Mr Gillis, who was then the New South Wales master franchisee, at Mr Pix's suggestion. 7 On 19 September 1995, Mr Carlton received by mail a draft master franchise agreement from Mr Spriggins. Mr Carlton read it and arranged to see his accountant and solicitor the next day. He discussed with his accountant his possible investment in Pix Print; he had the disclosure document with him at that meeting. That afternoon, Mr and Mrs Carlton took the copy of the Pix Print master franchise agreement to their solicitor and sought his advice with respect to their proposed purchase of a master franchise. 8 On 23 September 1995, the Carltons and Mr Pix met over dinner at the Le Meridien Hotel in Melbourne to discuss Pix Print further. This meeting lasted about three hours. Although denied by Mr Pix, the Carltons say (and I accept) that Mr Pix referred to a magazine called "Franchising" and told the Carltons that "you should buy it because it contains articles about Pix Print". On 24 September 1995, Mr Carlton purchased the September/October 1995 edition of "Franchising". One of the articles the Carltons read concerned Pix Print and was entitled "Franchising Opportunities". 9 The Carltons' second meeting with their solicitor occurred on 25 September 1995; they sought further advice with respect to the purchase of the master franchise. They also then executed a lease agreement and a contract of sale for their swimming school business in Melbourne, which was to be settled on 2 October 1995. 10 Between 25 September and 20 October 1995, Mr Carlton and Mr Pix had a number of telephone conversations concerning the terms of the master franchise agreement; certain alterations were discussed and agreed. During one of these telephone conversations, on about 17 October 1996, Mr Carlton told Mr Pix that the Carltons had decided to purchase the Queensland and Northern Territory master franchise. In mid October 1995, the second applicant borrowed $30,000 from an associated company to fund the deposit for the purchase of this franchise. The agreement was executed by the first applicants, on behalf of the second applicant, on 20 October 1995 at their solicitors' office and they then paid over the $30,000 deposit. The applicants executed a lease on about 5 December 1995 of premises located opposite the Kenmore Shopping Centre in Brisbane intended to be the store the second applicant would operate as a Pix Print franchised outlet and which they would also use, as Queensland master franchisees, for training their own franchisees. A further $110,000 was borrowed by the second applicant from its associate and used to pay the balance of the purchase moneys due to Pix Print for the master franchise on 18 December 1995. 11 Before committing the second applicant to the master franchise agreement, Mr Carlton took a close interest in exploring Pix Print's operations, in his discussions with Mr Pix and by the other inquiries which he made and advice he sought to which I have referred. Mrs Carlton, though involved in most but not all of these activities, did not have the same close personal involvement that her husband had. 12 On 21 December 1995, the contract for the sale of the Carltons' house in Melbourne was settled and the Carltons moved to Brisbane. The applicants commenced to carry on the Queensland master franchise business and to operate the Pix Print store at Kenmore on 16 January 1996. It was an unsuccessful endeavour and ultimately, in late September 1997, the Carltons shut down the whole business and vacated the Kenmore store. A few days later the first respondent gave formal notice of termination of the franchise agreement between the parties.

[3]

13 The applicants' case is that between late August and late September 1995 no less than fifty-seven separate oral and written representations were made on eight separate occasions, each of which was misleading or deceptive. The applicants claim that they acted in reliance on each one of these representations in deciding to enter into the master franchise agreement and in embarking on various courses of action between 20 October 1995, when they executed the master franchise agreement and 18 December 1995, when they paid over the balance purchase moneys, with the result that they suffered losses in the form of the entire purchase price they paid for the master franchise and other losses. 14 The applicants' pleader appears to have combed through every document given to the applicants and everything they have said they were told by Mr Pix before they completed the agreement in order to identify everything that could possibly be said to be a misrepresentation. I suspect that the Carltons, without any deliberate attempt to mislead, have been led by their pleader's efforts into accepting that everything that the pleader has identified as a possible representation was, in fact, not only something to which they attached importance, but also something upon which they relied in committing themselves to their arrangement with Pix Print. Mr and Mrs Carlton and their advisers have, I think, done their case something of a disservice by not ensuring that the Carltons thought hard about just what it was they were told on behalf of Pix Print that led them to make that arrangement and by ensuring that they based their case only on those representations which truly influenced them to commit themselves to entry into and completion of the master franchise agreement. 15 However, I accept the Carltons generally as credible witnesses and, in particular, prefer their evidence where it conflicts with that of Mr Pix: his is a witness whose evidence, in my opinion, is entitled to little credence. Though I generally accept the Carltons as credible witnesses and also accept that the oral statements by Mr Pix which they say constitute representations upon which their case is based were, in fact, made, I do not accept that the Carltons actually relied on each and every one of these fifty-seven representations in deciding to commit themselves and their company to Pix Print the master franchising venture. Indeed, they do not suggest otherwise with respect to some of their pleader's fifty-seven representations, eg, that in The Age advertisement about low monthly overheads. 16 There is also force in the respondents' submissions that some at least of these fifty-seven representations can be characterised as introductory puffery which, though it served to whet the Carltons' interest in Pix Print, played no part in inducing them to enter into the master franchise agreement, eg, what appeared in the article in "Australian Business for Sale News" about having a goal of 100 shops. Moreover, a few of the representations pleaded may not have been misleading, eg, that to the effect that as Queensland master franchisees the applicants would receive $20,000 profit from the sale of each franchise. 17 There is force, too, in the respondents' submissions that the Carltons did not rely on some of the other representational statements made on behalf of Pix Print in the written material and orally by Mr Pix. For example, the Carltons, in their pleading, claim they relied on the statement in the disclosure document they received on 6 September 1995 about Pix Print having been able to negotiate keen pricing structures, training and constant supply from our major suppliers for paper, ink and chemicals. But they do not deal with this alleged representation in their affidavits, though they gave some oral evidence in cross-examination about their understanding of this statement. They cannot show any reliance on this representation. 18 Still others of the representations relied upon by the Carltons as founding the cause of action in damages upon which they rely may well have been discovered by the Carltons to be, in all probability, untrue, at least before they finally committed themselves to paying over the balance purchase moneys in December 1995. For example, they plead reliance on various oral and written representations with respect to the training they would receive, including representations concerning training as a master franchisee that were made by Mr Pix. Mr Carlton says he was given only quite brief training at Pix Print's premises in Sydney and expressed concern to Mr Pix about not doing enough training hours. He also makes complaints about topics not covered by his training. But he was aware of all these deficiencies by late November. Despite his concerns, the Carltons subsequently signed the contract for the sale of their Melbourne house, entered into the lease of the Kenmore premises and paid the balance purchase moneys of $110,000 to the respondents. They continued with the store without any further complaint about or request for further training until they closed the business in September 1997. It is difficult to see how they can make good their claim that any misleading representations that may have been made with respect to training were, in fact, inducements on which they relied to commit themselves to the arrangements with Pix Print, ie, to have been causes of the losses they claim they suffered. 19 However, counsel for the applicants identified the substantial case the applicants have for complaint in his final written submissions when he said that, taken broadly, their case is that the respondents were guilty of contravening s 52 the Trade Practices Act in presenting, by various representations they made to the Carltons, a picture of optimism and future profitability of the Pix Print organisation in which they could expect to share in circumstances where there was no foundation for those representations. 20 In my opinion, the applicants are entitled to a finding to this effect. I accept that fourteen of the written and oral representations which they have pleaded were made on behalf of Pix Print by Mr Pix or with his authority which are of importance in establishing the applicants' entitlement to recover the losses they have suffered at the hands of the respondents. 21 It is convenient to set out the fourteen representations using the statement of claim paragraphing:

[24]

22 I find that the cumulative effect of these representations made on behalf of Pix Print by or with Mr Pix's authority gave to the Carltons, and was deliberately intended to give them, the unfounded impression that Pix Print was in late 1995 a highly successful operation in a phase of rapid, profitable expansion and that a master franchisee could expect to share, to a substantial extent, in that profitability. The true position, as Mr Pix well knew when he spoke to the Carltons, was that Pix Print was in serious decline and its relations with its surviving franchisees were then such as to show that the whole Pix Print organisation was much more likely to collapse (as it fairly soon did) than to be on the point of expansion and continuing prosperity. 23 Most of these fourteen representations are as to future matters and I am satisfied that neither Mr Pix nor Pix Print had any reasonable grounds for making any of the representations in pars 5(d), (e), (g) and (h), 6(b), 7(b), 8(h) and 11(a) of the statement of claim. The representations alleged in pars 10(a), (b), (c), (d), (f) and (h) are as to existing matters of fact. All were misleading, that in par 10(c) being misleading by reason of Mr Pix's failure to disclose the difficulties certain of these stores were then facing and the difficulty Pix Print was then facing with them when he made this representation. 24 I have said that I reject Mr Pix's denials that he made any of the oral representations relied on by the applicants and that I prefer the applicants' evidence that he did make them. Mr Pix is an unimpressive witness. His volubility in cross-examination was, in my view, in large part adopted to avoid having to respond with a degree of precision to the questions put to him. From time to time, he did not hesitate in his prolix responses to contradict himself. I got the impression of a witness constantly attempting to tailor his answers in ways which would not harm the respondents' case. Mr Pix behaved as an enthusiastic salesman in his dealings with the Carltons in extolling non-existent advantages of Pix franchises. 25 It is appropriate to explain my reasons for the assessments I have made of the credibility of the applicants and the respondents. Although I am not prepared to accept the Carltons' evidence in its entirety, I do accept as sufficiently reliable to justify making findings in their favour, their evidence as to the oral representations made by Mr Pix which are relied on in the applicants' statement of claim. The oral representations which the Carltons say Mr Pix made to them are not at all improbable. They are consistent with Mr Pix's behaviour in seeking to persuade the Carltons to the view that Pix franchises were very successful and valuable property indeed. They are also consistent with the statements contained in the written material upon which the Carltons rely for which the respondents are responsible. 26 I do not regard Mr Pix as a witness whose evidence can be acted on unless it is satisfactorily corroborated by independent evidence. Initially at least, Mr Pix denied that the respondents had any responsibility for much of the material containing the written representations. Firstly, Mr Pix's position, in his affidavit and initially in his oral evidence, was that the respondents had no responsibility for The Age advertisement said by the applicants to contain some of the representations upon which their case was based: he said the advertisement was all the work of Mr Spriggins, Pix's Victorian master franchisee. However, Mr Pix ultimately agreed that his master franchisee "had permission to use the wording in this bottom ad", ie, in the "Franchising Opportunities" article in the "Franchising" magazine, which is the same wording in The Age advertisement and that that franchisee also must have had permission to incorporate that wording in The Age advertisement. The content of both published advertisements was authorised by Mr Pix acting for Pix Print. 27 Mr Pix initially denied any responsibility for the information published about himself and Pix Print in the article entitled "Uncompromising Quality Leaves Its Imprint" in "Australian Business for Sale News" (though it invited interested enquirers to contact Mr Pix himself and gave his contact number). He said it was copied by "Australian Business for Sale News" from another magazine report of an interview with Mr Pix and others associated with Pix Print. When questioned about this interview, he sought to distance himself from the article based on it, saying he was not present during the whole of the interview and that at times when he was present, he interrupted to tell the reporter that things his staff were saying were not correct. He claimed that there were numerous inaccuracies in the article. For example, the article attributes to Mr and Mrs Pix the statement that they generated over $3,000 income per week in running their original print shop themselves. Mr Pix denied making any such statement, saying: "I've never said that. That's just something that I don't know where that figure has come from." Soon after, however, he was saying: "I'm not saying it's unreasonable to expect $3,000 sales a week of income coming into a Pix Print either". When asked whether he took action to correct the inaccuracies in the article as published, he launched into an account of how he contacted the magazine for that purpose. Here, as in so many other parts of his evidence, he gave the impression of being prepared to make up a quite detailed story on the run, in the hope that what he was saying might be accepted as plausible. I accept Mr Carlton's evidence that he collected a copy of this magazine at the Expo at Mr Pix's behest and that he read the article about Pix Print. I find that the article contains information provided on behalf of Pix Print by Mr Pix. 28 In the course of the long meeting over dinner on 23 September 1995, Mr Carlton said that Mr Pix told him he had been offered $1M for the Pix Print franchise chain, but would not sell because he could make more money by expanding the chain. In his affidavit, Mr Pix denied saying any such thing. In cross-examination, however, though repeating this denial, he said it was true that he had been offered $1M and, in response to the suggestion that he would have drawn the offer to the attention of the Carltons as a prospective investor, he said "Well I believe that was private business of mine. It was not meant to be known by anybody". His proffered reticence with respect to this offer is implausible. I take what Mr Pix here said as confirmation that the $1M offer was mentioned. Mr Carlton did not make up a story about Mr Pix telling him of a $1M offer: he was told that by Mr Pix. I do not, however, accept that Mr Pix had ever received such an offer. No evidence was led by the respondents to support Mr Pix's assertions that it had been made, though it was the subject matter of a specific claim in the applicants' pleading. 29 Certain of the oral representations which the Carltons say Mr Pix made to them at the Melbourne Expo on 8 September were that Pix Print's operations were, in a number of particular respects, superior to those of its competitors such as Kwik Kopy and Snap. Mr Carlton said that Mr Pix told him that Pix Print franchises have a quicker break even point than Kwik Kopy or Snap businesses, a claim which Mr Pix denied in par 25(b) of his affidavit because "I have never known the break even point of Kwik Kopy and Snap businesses". At trial, he volunteered that he:

[28]

34 The representations by Mr Pix made at the meeting on 23 September 1995 contained in par 10 of the statement of claim set out above were each statements of existing fact. Mr Pix well knew each was a false statement. They were intended by Mr Pix to maintain the image he had sought to create by what he told the Carltons earlier in September and, in particular, what he then said to them which constitute the representations set out in pars 5(d), (e), (g) and (h) and 7(b) of the statement of claim that Pix Print was a highly successful operation with a very profitable future for anyone prepared to participate in its activities. The written representations referred to in pars 6(b), 8(h) and 11(a) generated by Mr Pix on behalf of Pix Print were intended to support the same optimistic picture of the Pix Print operation. Pix Print's trading history in the year or so prior to October 1995, when the applicants entered into the master franchise agreement and subsequently, demonstrate that Mr Pix and Pix Print had no grounds let alone reasonable grounds for making any of these predictions the subject of the last eight representations. 35 These representations, in all the circumstances, go beyond mere non-actionable puffery. They show a pattern of conduct by Mr Pix in falsely representing Pix Print's operation as highly successful and destined for future success and profitability, which was intended by him to impress the Carltons, as it did. 36 The respondents put forward annexure "A" to their amended defence and cross-claim as the "Trading History of Pix Print as at 25 October 1995", ie, when the applicants executed their master franchise agreement. Mr Pix verified its correctness. After amendment by counsel for the respondents at the start of the trial, annexure "A" became a list of fifteen franchised stores in New South Wales and Victoria which commenced operations between October 1993 and September 1995 and which were said by the respondents to be operating as at that date, 25 October 1995. In addition, annexure "A" lists a New South Wales master franchise (owned by Mr Le Nepvue and Mr Gillis) which commenced in June 1995 and a Victorian master franchise (owned by Mr Spriggins) which commenced in July 1995. Annexure "A" concludes with the statement:

[32]

37 Mr Pix also prepared for use at the trial a document he entitled "Chronology History of Pix Print Pty Ltd from November 1993 to October 1995". It purports to list the trading history of all Pix Print shops and its master franchises. After amendment by Mr Pix at trial, it shows that there were seventeen such stores operating in October 1995, as well as the New South Wales and the Victorian master franchises. (The sixteenth store is the applicants', though it only opened in January 1996; another is a store at Resivior, which the Chronology indicates commenced only in October 1995. It is not now operating.) In addition, the Chronology lists a further six stores which had ceased to operate by October 1995. 38 By the time Mr Pix gave evidence in December 1998, he said, in effect, that only three of the stores listed in annexure "A" and in his Chronology History as operating Pix Print franchise stores as at 25 October 1995 still retained any connection with Pix Print. He described one, the Bondi Junction store as "still under contract with us", though the franchisees had the store up for sale and intended to abandon it and return to England if they did not sell "in the time frame that they wanted to". He "vaguely" recalled receiving a royalty cheque from the operators "a month, a month and a half, or two months, at the outside," ago. The operator of the second, at Pymble, had not then paid monthly royalties for "probably three or four months". The operators of the other store at Smithfield were in a similar position. (He was here speaking of royalties paid to the new company, Pix Print Solutions, which he set up in late 1997 and to which Pix Print assigned these three franchises and those of its other franchises then remaining.) 39 By late 1998, the whole Pix Print franchising operation, then being conducted by Pix Print Solutions, had all but collapsed. The actual performance of the Pix Print franchise operations in the three years following October 1995 stands in stark contrast to the optimistic prognosis Mr Pix then gave the Carltons. 40 This collapse did not occur suddenly. On 13 September 1996 Mr Pix told his solicitor, in the course of arranging to divest himself of his interest in his home, that there were then only eight franchised stores in the Pix Print organisation, five in Sydney, two in Queensland and one in Victoria. A year later, in a newsletter to franchisees of November/December 1997, Mr Pix, in his "A Note From the Managing Director", informed recipients of "a fresh start", saying:

[34]

41 Mr Pix here explicitly acknowledges the poor trading history of Pix Print's franchising business. Mr Pix's case is also embarrassed by his activities of late 1996 which resulted in him transferring his interest in the house he owned with his wife into his wife's name and by the action he took in late 1997, referred to in the newsletter, to have Pix Print transfer its income stream to Pix Print Solutions. While it may not have been just the applicants' complaint made in November 1996 that the business was misrepresented to them that caused Mr Pix to divest himself of his interest in the matrimonial home, that was not, I think, a step taken by him merely because he got the idea at the franchising seminar he attended in early September 1996 that it would be prudent to do that. By then, Pix Print's franchising business was, in substantial part, a failure. He had only eight stores left and he told his solicitor in September 1996 that there was "still some potential litigation around, one or two Victorian franchisees and one in New South Wales". He knew then his personal assets were seriously at risk from potential creditors in the form of disaffected franchisees. By November 1996, he knew the applicants too, were threatening to sue, something they did soon after, in March 1997. 42 It appears from what he told his solicitors in late 1996 and from this newsletter of late 1997 that the number of franchised stores had fallen from the seventeen in Mr Pix's "Chronology History" that he claimed were operating as at October 1995 to eight by September 1996, then to six, though the number had risen back to eight by late 1997. This general decline however continued, with only three stores with any links to Pix Print remaining at trial a year later. This history provides evidence of the absence of reasonable grounds for the optimistic predictions Mr Pix made to the Carltons in October 1995: the respondents did not attempt to lead evidence to explain this decline as due to factors consistent with the claim in late 1995 having bright prospects. As will appear, they could not do that. 43 The decline in the entire Pix Print operation between October 1995, when the Carltons joined it, and late 1997, a decline which had, by late 1998, become an almost complete collapse, was not a process that only commenced some time after October 1995 and only thereafter struck down a business that was prospering in October 1995. Throughout the whole of 1995, Mr Pix was constantly embroiled in difficulties with his franchisees and his three New South Wales and Victorian master franchises. A number were facing serious financial problems in 1995. Many had not paid monthly royalties owing to the second respondent for extended periods and Pix Print had both threatened and had become involved in litigation with various of its franchisees and had terminated some of the franchises for these defaults. So much emerges from the respondents' documents which the applicants obtained on discovery and which record significant problems with not only Pix Print's franchisees, but also with the New South Wales master franchisees. 44 Having regard to the way the trial was conducted by the applicants, it is necessary to explain the basis upon which I consider I can have regard to this material. Though the documents were never formally tendered, being contained in exhibit C3X for identification, they are all commented upon by Mr Pix, either in his own affidavit evidence or in his cross-examination, in such a way as to show that he admits to having a thorough awareness of all the difficulties and problems referred to in them that were being experienced by his franchisees and master franchisees prior to and during the very period he was boasting the prospects of Pix Print's business to the Carltons and urging them to buy into it. It is well-established that the contents of a document not produced in evidence can still be proved by an admission by the opposing party as to the contents of the document in question. See s 48(1)(a) the Evidence Act 1995 (Cth) and Slatterie v Pooley 6 M & W 664. The existence and contents of these documents are not in issue in the action: not only were they discovered by the respondents, but they are available to me, having been assembled into the exhibit C3X, though only marked for identification. Some were the subject of oral admissions at trial by Mr Pix. I consider that, in view of Mr Pix's admissions, I can have regard to them and that, in order to understand Mr Pix's admissions, I can refer where necessary to the relevant documents. 45 The position is otherwise in relation to one of the documents obtained on discovery and appearing at p 735 of exhibit C3X, upon which counsel for the applicants relied heavily in his written submissions. It is a document listing the history of the Pix Print franchise stores in New South Wales up to 27 February 1996 prepared by Mr Chapman, who operated the Castle Hill, Newport and Dee Why stores. On 8 March 1996, Gadens Ridgeway, the respondents' solicitors, wrote to Mr Chapman describing his document as "inaccurate". The applicants never tendered the Chapman document; nor did they cross-examine Mr Pix upon it. Mr Pix has not commented on it in his evidence. Though there was reference from time to time, without objection by the respondents, to documents in exhibit C3X as if they were in evidence, in these circumstances I do not think it would be proper to make any use of the Chapman summary. 46 Mr Carlton, in his affidavit evidence, refers to many of these discovered documents in the seven volumes comprising exhibit C3X. The Carltons knew nothing of the bleak picture revealed until long after the applicants opened their franchised business. Both Mr and Mrs Carlton say that at their meeting with him at the Le Meridien Hotel on 23 September 1995, they specifically asked Mr Pix whether he was involved in any disputes with franchisees, to which he replied "No, no never", that they were all "a happy family" and whether all the existing franchisees were paying their royalties, to which Mr Pix replied in the affirmative, though he added that a few had been given a royalty-free period for a few months, something that Pix Print wanted to keep quiet. These responses by Mr Pix seriously misrepresented the true position, so far as Pix Print's relations with its franchisees were concerned. I think he was careful, when specifically asked by the Carltons during negotiations, to suggest he had had only a few minor problems with some franchisees in the past. Mr and Mrs Carlton say they were never given any indication of the magnitude of the difficulties faced by Pix Print franchisees revealed by the latter's discovered documents. They say that if they had been told the true position, they would have immediately lost any interest in buying into the Pix Print organisation as one of its master franchisees. I accept their evidence. I reject Mr Pix's evidence that he made a general but still informative disclosure of the problems Pix Print had and was encountering with its franchisees at the Le Meridien Hotel meeting. 47 I turn now to what the discovered documents the subject of evidence at trial reveal about Pix Print's operations. 48 Mr Carlton refers to the draft of a letter by Pix Print's solicitor to Mr Chapman, then the New South Wales master franchisee, in December 1994 that the solicitor sent to Mr Pix for his consideration. Mr Chapman was then in dispute with Mr Pix and had given notice of his termination of his New South Wales master franchise agreement. This draft letter set out a proposal by Pix Print to accept Mr Chapman's "purported recision" of the master franchise agreement if overdue royalties payable by the franchised stores in which Mr Chapman also had an interest at Castle Hill, Newport and Dee Why were paid to Pix Print immediately. The letter also refers to an unpaid loan by Mr Chapman's company "for set up costs". In his response to what Mr Carlton says about his ignorance of the matters revealed by this letter and the impact disclosure would have had on him, Mr Pix does not dispute the accuracy of the matters stated in the document. What he says is: "I did outline to Mr and Mrs Carlton the problems Pix Print had faced with a number of past franchisees and the reasons for their termination. After so advising Mr and Mrs Carlton, they did not ask at that or at any other time for details of the number of franchisees that had failed, were in financial difficulties or were unable to pay their franchise royalties". I consider that by this response Mr Pix admitted the truth of what is set out in this draft letter about Mr Chapman's master franchise. 49 Mr Carlton refers to a copy letter, dated 23 January 1995, from Pix Print's solicitors to Mr Chapman himself. By this letter, Gadens Ridgeway give Mr Chapman's company notice of termination by Pix Print of Mr Chapman's New South Wales master franchise agreement dated November 1994, of his franchise agreements in respect of Castle Hill and Newport, both entered into only a little over a year before, and also termination of his Dee Why franchise agreement, entered into about a year and a half before. The reason for termination is given as non-payment of royalties in respect of the three franchised stores, non-payment of the master franchise fee of $255,000 and numerous other breaches of the master franchise agreement. Mr Pix made a similar, but not identical response to what Mr Carlton said about this letter. 50 By 19 December 1995, Wong, the respondents' then-solicitor, was writing about their agreement to Mr Gillis and Mr Le Nepvue, who in June 1995 had replaced Mr Chapman as the new New South Wales master franchisees. Wong advised that Pix Print was terminating their master franchise agreement for various breaches, including non-payment of the master franchise fee in the sum of $48,000 due prior to October 1995. Again, in his response to what Mr Carlton has to say about how he would have reacted to this information, Mr Pix accepts the truth of the facts stated in the Wong letter, though he points out that the letter of termination (though not the default on which it was based) was only sent after the applicants had executed their master franchise agreement. 51 Mr Carlton refers to a letter of 6 October 1995 from Ms Jeckeln, the Westleigh franchisee, to Mr Pix's then solicitor Wong, in which Ms Jeckeln says that "of the eleven Pix Print franchises established in New South Wales in the two and a half year period prior to September 1995, some 73% have now been terminated following disagreement with your client's Managing Director …". Ms Jeckeln is Mr Pix's sister. The way Mr Pix deals with this letter in his response to Mr Carlton's evidence about it is, in my opinion, sufficient to entitle me to treat him as admitting as true the fact that by September 1995 most of the Pix Print franchises established in New South Wales in the preceding two and a half years had been terminated in contentious circumstances. That information was not given to the Carltons: Mr Pix deliberately concealed it from them for the obvious reason that he well knew that he would immediately lose a prospective customer, as Mr Carlton says would have been his reaction to being told of such a high termination rate. 52 On 25 October 1995, Pix Print's solicitor, Wong, again wrote to Ms Jeckeln referring to outstanding royalty payments the subject of notice given on behalf of Pix Print on 13 September 1995 that demanded rectification of that default. Mr Carlton says what his attitude to knowledge of these facts would have been: "Had I been aware that Pix Print franchisees were in default of their franchise agreement for non-payment of Royalties I would not have believed Pix's statements that all Pix Print stores were paying Royalties and that Pix Print stores were successful and that there were no disputes with franchisees, I would not have purchased the Pix Print Queensland and Northern Territory Franchise but for the latter representations made to me by Pix". In his response to Mr Carlton's comments about this letter, Mr Pix accepts the truth of what it records. 53 Mr Carlton also refers to the letter from Gadens Ridgeway of 11 March 1996 to Ms Jeckeln, which refers to the termination in September 1995 of her Westleigh franchise agreement and to litigation on foot between Pix Print and the Moss Vale franchisees (the Hartleys), who had been restrained from carrying on a business at their premises in competition with Pix Print after ending their franchise agreement; the letter ends threatening Ms Jeckeln with legal action "arising from the interference by [her] with the performance of the franchise agreements between Pix Print and the other franchisees". Though only written in March 1996, the letter refers to longstanding problems with two of Pix Print's franchisees. Mr Carlton says that: "Had I known that Pix was being untruthful with me when he told me that there were no disputes with his franchisees I would not have continued with negotiations for the purchase of a Queensland and Northern Territory Pix Print Master Franchise as I would have found it impossible to trust Pix". Mr Pix does again by his response accept the truth of the matters stated in his solicitor's letter. 54 In annexure "A" to the respondents' pleading, verified as accurate by Mr Pix, it is said that Ms Jeckeln's Westleigh franchise was terminated in January 1994 due to town planning and insurance problems encountered by her. In cross-examination, Mr Pix said the termination date was not January 1994, but rather January 1995. The Gadens Ridgeway letter demonstrates that yet again Mr Pix cannot be relied upon: this franchise was terminated in September 1995, just before he started negotiations with the Carltons, for default in payment of royalties. 55 Mr Carlton refers to the letter from the Hartleys, the franchisees of the Moss Vale store, dated 14 August 1995. Annexure "A" and the "Chronology History" indicates that the Hartleys opened the Moss Vale store only six months before. Both show it as trading as at 25 October 1995. The Hartleys wrote in August 1995 to Mr Pix describing their serious financial difficulties and their poor trading figures; they told Mr Pix they had sold both their cars and were living on credit card finance while trying to sell their house. They asked if they could come to some agreement to terminate the Moss Vale franchise. Mr Carlton says that, if he had known about the matters raised by the Hartleys in this letter, "I would not have gone anywhere near Mr Pix or his franchise chain". Again, Mr Pix by his response accepts that he knew of the Moss Vale franchisees' stated difficulties and desire to get out of the franchise only a little while before he met the Carltons. 56 Although in his annexure "A" and Chronology History, Mr Pix listed Homebush as a store operating as at October 1995, that store had not paid any of the monthly royalties due in the period June to November 1995. On 13 September 1995, Mr Pix wrote to the Homebush proprietors with respect to their longstanding financial difficulties. In November 1995, the operators were threatened by Mr Pix with immediate legal action if the $3,000 payment demanded was not paid by 8 November 1995. Mr Carlton says of these documents that Mr Pix never mentioned the difficulties Mr Pix was experiencing with Homebush, though he was threatening them with legal action to recover long overdue royalties within a fortnight of the Carltons signing the master franchise agreement. Again, Mr Pix's response amounts to an admission of the contents of his letter of 13 September 1995. 57 Mr Carlton refers to a letter of 3 November 1995, in which Pix Print was informing all its branches that the Terrey Hills franchise had been terminated by Pix Print's solicitors for non-payment of royalty, a default that must in all probability have been in existence when Mr Pix was speaking to the Carltons. Again, by his response Mr Pix admits the contents of this document. 58 Mr Carlton also refers to an exchange of correspondence in January 1996 between the Hornsby franchisees, the Florys, and Mr Pix in which there is reference by the Florys to the financial non-viability of their franchise during the period pre-dating the making of his arrangements with the Carltons, ie, in the eight months prior to 31 January 1996 and to its impact on their inability to sell the business at a reduced asking price. The way Mr Pix deals in a responsive way with this document is sufficient to amount to an admission by Mr Pix of the contents of this document. 59 Mr Spriggins, the only Victorian master franchisee Pix Print ever had, abandoned his master franchise for which he had no doubt paid Pix Print a substantial sum and which he had entered into only in July 1995. Later, in May 1996, Pix Print formally terminated it. Mr Pix suggested that Mr Spriggins abandoned the business for personal reasons and that the master franchise was a prosperous business with five franchised shops. However, Mr Pix acknowledged that, despite efforts on his part, he could not find anyone to take over the Victorian master franchise after Mr Spriggins left and only one of the five Victorian stores chose to stay with Pix Print. The inference is that well prior to May 1996, Mr Spriggins had encountered serious difficulties as Pix Print's master franchisee, so serious that within seven months of the Carltons entering into their own master franchise agreement Mr Spriggins simply abandoned an unprofitable arrangement with Pix Print. 60 By July 1996, the Kings, the operators of Pix Print Boronia in Victoria, had ceased to trade under the Pix Print name, though they continued to operate their printing business on their own behalf. Mr Pix acknowledged that Pix Print gave the Kings notice of termination of their franchise in July 1996, which included notice that Pix Print would take injunctive action similar to that taken against one of its New South Wales franchisees successfully for breach of the restraint of trade clause in their franchise agreement. He said:

[36]

61 In cross-examination he further acknowledged that quite a number of his former franchisees had terminated their links with Pix Print and traded thereafter as sole traders. 62 Against this background of the failure of numerous Pix Print stores and all three of its master franchises in New South Wales and Victoria, all in a relatively short period, Mr Pix's representations to the Carltons as to the future prospects of Pix Print's business, including the prospects for a Queensland master franchisee, were wholly lacking any reasonable basis. I consider that Mr Pix well knew that. These failures occurred throughout the period from January 1995 to May 1996. When regard is had to the decline in Pix Print's operations by late 1996 and their almost total collapse by late 1998, the inference is strong that, at the time Mr Pix was boasting Pix Print's operations to the Carltons, its true prospects were bleak indeed. Further, Mr Pix's representations as to all current stores operating successfully, paying their royalties and not being involved in any disputes with Pix Print were false, to Mr Pix's knowledge. Hornsby, Homebush, Moss Vale and Terrey Hills were then in default though all were listed in Annexure "A" as operating as at 25 October 1995. 63 Mr Pix's position, in the face of the Carltons' recitation of systematic non-disclosure by Mr Pix to acknowledge the wide-ranging and serious difficulties his franchisees and master franchisees were in throughout 1995, was that he made a verbal disclosure of everything relevant at the Le Meridien Hotel meeting. I reject his evidence It stretches credulity to believe that, if he had given the Carltons anything like an insight into the major problems Pix Print was then facing with its franchisees, that they would have proceeded to put $140,000 into the Queensland master franchise and move to Queensland to run it. The Carltons knew a little about some franchisees encountering some difficulties in paying the royalties from what Mr Pix mentioned to them at the Le Meridien Hotel meeting. But they were never given by Mr Pix anything like a reasonable indication of the massive problems that Pix Print had been encountering to late 1995 with many of its franchisees and all its master franchisees. 64 There is no basis for a finding that they affirmed the master franchise agreement with actual knowledge of the critical misrepresentations. They only learned the true position very late in the day. In my opinion, the representations to which I have referred and which created the impression for the Carltons that Pix Print was a highly successful business with a very good future as an investment continued to operate upon the Carltons as a powerful inducement to them to enter into the arrangements. The conclusion is, in my opinion, irresistible that, if the Carltons had known of the problems with Pix Print franchises and master franchises as at October 1995 that are recorded in this discovered material and of the problems touched on in Mr Pix's cross-examination, they would, as they repeatedly say, have ceased to have any interest whatsoever in purchasing the Pix Print master franchise and would have peremptorily terminated their discussions with Mr Pix. 65 The respondents rely on a number of matters in support of the submission that the necessary nexus does not exist between any of the representations for which the applicants base their case and the losses they seek to recover. As I have said, there is substance in this submission with respect to some of the representations relied on, but not with respect to the fourteen representations set out above. 66 The master franchise agreement as originally drafted required the franchisee to sell a minimum of four franchises each year. The Carltons were able to persuade Mr Pix to amend this to require them to sell only one franchise per year. No doubt it was not difficult given Mr Pix's eagerness to sell the Queensland master franchise against the background of his collapsing operations. That does not, I think, provide any reason for doubting that a major inducement to the Carltons to enter into the agreement was the picture created by the fourteen representations of optimism painted by Mr Pix. I think it reflects nothing more than caution on the part of the Carltons, who were entering into, what was for them, a new kind of business venture, printing and franchising. 67 The respondents developed a range of documents for use in their operations, including the disclosure document the Carltons obtained in early September 1995 and the second disclosure document they had available to them when they were discussing the prospect of investing in Pix Print with their solicitor. These documents contain acknowledgments by anyone who might enter into an agreement to buy a Pix Print franchise that they are acting on their own judgment rather than on representations made by Pix Print. The master franchise agreement itself contains an acknowledgment by the Carltons that the success of their franchised operation was dependent upon their own efforts and it also contains an "entire agreement" provision in cl 19(8), to the effect that the master franchise agreement represents the entire agreement between the second applicant and the first respondent "and supersedes all prior negotiations, representations, or agreements, either written or oral". (It may be doubted that this provision is so free of ambiguity that it should be read as meaning, as the respondents submitted it should, that it not only replaces all prior negotiations and representations, but is an agreement that such negotiations and representations are to be treated as having no legal effect or consequence.) 68 But that the Carltons received and read this documentation and executed the master franchise agreement and that they took advice from their solicitor and accountant before doing that does not justify the finding the respondents here seek that the applicants have failed to prove that they suffered loss "by" conduct of the respondents of the kind I have referred to. Mr Pix persisted in representing that Pix Print was a successful and prospering operation when he well knew that it was, in October 1995, already faced with major difficulties. That gave the lie to his representations to the Carltons. His misrepresentation of the matters referred to in par 10 of the statement of claim set out above are also as to matters of significance to the Carltons' decision, made in ignorance of the true position here, to enter into the master franchise agreement. The warnings, exclusions and provisions in Pix Print's documentation requiring acknowledgments by the Carltons that they were acting on their own judgment and the like, do not stand in the way of a finding in their favour, in view of the evidence of non-disclosure of material information and misrepresentation of the true position and in view of the Carltons' inherently probable testimony that if they had known of these major difficulties, they would not have touched a Pix Print master franchise. 69 The respondents rely on the applicants having continued to operate the business for twenty-one months as evidence indicating an absence of any causal relationship between relevant misrepresentations made by the respondents and the losses they complain of. But a person induced by fraud or by conduct contravening s 52 to acquire a business does not lose his right to damages because he retains the business for a time or indeed on a permanent basis. 70 The respondents also point to the fact that no complaint was made by the applicants of being the victims of misrepresentation by the respondents until November 1996, ie, until about ten months after they commenced to trade, and that they thereafter continued to trade for another ten months before closing down the franchised operations in late September 1997. This may be some evidence that the misrepresentations, which I consider to be material ones, should not be accepted as having resulted in the applicants' losses. But that is all it can be. It does not, in my opinion, tell against the strong, highly probable evidence of the Carltons that if they had known the true position about the matters concealed from them by Mr Pix to which I have referred and of which they long remained ignorant, they would never have entered into the agreement with Pix Print. 71 The respondents submit that matrimonial problems between the Carltons is evidence negativing the existence of any causal link between any misrepresentations for which the respondents may be liable and the losses. It was said that such problems also provided the explanation why the applicants' operations in both their Kenmore store and in respect of their master franchisee activities performed so badly. 72 At the end of August - early September 1996, the Carltons wrote to Mr Pix pursuant to their obligations under the master franchise agreement seeking Pix Print's consent to sell both the master franchise and the Kenmore outlet. They gave as their reason for wanting to sell "personal, family reasons". By reply dated 5 September 1996, Mr Pix, on behalf of Pix Print, consented to the sale. But both swore in their affidavits they have a long and happy marriage. Neither Mr nor Mrs Carlton was cross-examined about their having marital problems at any time. I accept Mr Carlton's denial that he told Mr Pix that he was experiencing both marriage and personal problems which were too great to permit the applicants to continue with the business, though it was "good and growing". 73 Mr Mackie, a real estate agent specialising in the sale of franchises, was retained by the applicants on 17 September 1996 to sell the Kenmore shop and master franchise. He says he was told by Mr Carlton that the reason for selling was that he had personal problems with his wife, who wanted to return to Melbourne with or without him. The Carltons deny ever telling Mr Mackie they had "marriage problems". Mr Mackie does not suggest they did. Rather does he say that when Mr Carlton spoke to him of having personal reasons for wanting to sell, he assumed that there were marriage problems. He acknowledged that Mr Carlton did tell him that they wanted to sell because they were working too hard and Mrs Carlton did not want to work in the shop for the long hours that they were having to put in. I think the probabilities are that, given the poor trading performance of their franchised operations, in comparison with what they were led to believe by Mr Pix, they had, by September 1996, become disenchanted with the business and the long hours they were working for little return and would have liked to have been able to sell it off. Mrs Carlton may well have been particularly unhappy with what had become her lot. Mr Mackie's evidence does not assist the respondents on these issues. 74 Mr Mackie says he did not do a great deal of marketing of the applicants' business, saying that "we have a fairly large contingent of potential buyers, but the advertising budget was virtually nil". That is a little surprising. If Mr Mackie could have quickly expected to have made a sale, he would quickly have earned his commission. In any event, he was unable to sell either the Kenmore store or the master franchise. 75 The respondents also allege the applicants failed to mitigate their loss. In early 1997, a Mr Monteiro (of whom Mr Mackie had no knowledge) approached Mr Pix, who told him to contact Mr Carlton about the possibility of purchasing the applicants' business. This came to nothing. Mr Monteiro wrote a series of letters to Mr Pix and Mr Pix's solicitors (and to the applicants' solicitors) between 19 March 1997 and 3 April 1997 recording his interest in purchasing the applicants' business. These letters of Mr Monteiro's are contained in exhibit C3X: they were never tendered by the respondents, though counsel for the applicants did not take this point. They do not, however, go beyond an expression of willingness by Mr Monteiro to "consider increasing our final offer to a maximum of $150,000" subject to various conditions being satisfied. This correspondence shows that Mr Monteiro never made an unconditional offer to buy the business: his offers were always expressed to be "subject to completion of satisfactory investigations". If he had investigated, he would be unlikely to buy an unprofitable business. Mr Monteiro's interest in the applicants' business appears to have terminated with his letter of 3 April 1997 to Mr Pix, saying that:

[41]

79 The theory he applied in calculating these losses was that: "The economic loss suffered as a result of the representations is that amount which would place the Applicant in the same position today that they would have been in had they not purchased the business." (emphasis added) By "today", it is apparent from the report that Mr Vincent meant up to September 1997, when the applicants closed the business. The justification he gave for this approach was that the business was "taken back" by the first respondent on 30 September 1997, without any payment being made to the applicants. 80 In accordance with this theory, he calculated the second applicant's capital loss by deducting from the purchase price of $140,000 the sum of $7,000 recouped by the second applicant from the sale in September 1997 of all the equipment it had acquired from Pix Print when it opened the business, twenty-one months before. The claim for the trading losses suffered by the second applicant he based on what is said to be their actual trading results from commencement in January 1996 to closure at the end of September 1997, adjusted to include an allowance for wages for Mr and Mrs Carlton and interest, both of which were said to have been incurred, but not paid. The allowance made for wages was Mr Vincent's assessment of what both Carltons should be regarded as having earned, which he made by applying to his estimate of the total hours they both actually worked between January 1996 and September 1997 the approximate award rate for an ordinary shop assistant. It was by reference to this same estimate that Mr Vincent quantified the claim by Mr and Mrs Carlton for their own loss of earnings. (If the second applicant could recover these trading losses, then Mr Vincent recognised that nothing would be allowable to the first applicants themselves in respect of their own claim for loss of ordinary earnings.) 81 Mr Vincent supported the second applicant's entitlement to a sum in respect of "loss of opportunity to earn a profit" by saying that the purchase of the business from the first respondent denied the second applicant the opportunity to acquire a profitable business elsewhere, a loss he further supported by the proposition that, if the second applicant had not spent the $140,000 acquiring its business from the first respondent, it would have been able to earn "a risk free rate of return of approximately 6%" on those purchase moneys. 82 In Radferry Pty Ltd v Starborne Holdings Pty Ltd [1998] FCA 1689, the Full Court examined in detail the principles to be applied in assessing damages where it is said that a business has been acquired in reliance on representations that amount to contraventions of s 52 the Trade Practices Act. The Court considered relevant High Court authority, including Marks v GIO Australia Holdings Ltd [1998] HCA 69 and Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281, together with various Full Court decisions. 83 In a case such as this, Radferry shows that the prima facie measure of damages recoverable under s 82 the Trade Practices Act by the purchaser of a business is the difference between the price paid and the value of the business at acquisition date. That value is to be assessed "according to what price freely contracting, fully informed parties would have offered and accepted for it": Marks at [49]. The value of a business at acquisition date will ordinarily be a reflection of its future profitability (or lack of profitability): Gould v Vaggelas (1985) 157 CLR 215 at 266, per Dawson J and Radferry at 27. Though the value is to be assessed as at the date of acquisition, subsequent events may be looked at, in so far as they illuminate the value of the business as at that date:

[45]

86 But, in my opinion, there is ample acceptable evidence to demonstrate that (apart from the disposal value of the plant supplied by the respondents to the applicants) the value of the business acquired by the applicants was zero at acquisition date. 87 What the second applicant acquired in return for its $140,000 payment was the right to operate the store at the premises it leased at Kenmore and which was fitted out with the equipment supplied by Pix Print, as if it were a Pix Print franchised store, but without having to make the payments to Pix Print that would ordinarily be due by the operator of such an outlet, and the right to conduct this "franchise outlet" as a training facility for the purpose of the second applicant's operations as Queensland and Northern Territory master franchisee. 88 The authorities demonstrate that the trading history of a business subsequent to its acquisition affords some evidence of the value of the business at acquisition date. That, in my opinion, is the position here. 89 The Schedule to these reasons shows a history of trading losses, which is some evidence indicating that the business at acquisition date then had no value, ie, no capacity to generate profits. The accuracy of the financial records upon which Mr Vincent produced his "Summary of Results" for trading by Pix Print Kenmore and Pix Print Queensland between January 1996 and 30 September 1997 was not challenged. Mr Robinson, Pix Print's expert witness, however, made some criticisms of the way Mr Vincent allowed for various of the items of expense and income in producing his own version of Mr Vincent's summary. After considering their evidence, I think that the profit and loss summary for the trading operations of the applicants through their Kenmore store, treated as a franchise outlet, and through their master franchise operations, treated separately, is as set out in the Schedule to these reasons. This Schedule is a copy of the "Summary of Results" included in Mr Vincent's report, adjusted by me for the reasons explained in my notes to it. As to note (9), some allowance should be made, as Mr Vincent recognised, for the wages that would have had to be incurred in carrying on the business. Over the whole period the applicants traded, a proper allowance would substantially exceed the $26,000 they actually drew, in the form of payments to themselves as directors. But it is unnecessary to attempt to quantify a proper allowance, since it is apparent from the Schedule that the applicants must, in fact, have incurred substantial trading losses in each of the financial years they operated and since I think it is proper to include in the first applicants' own damages award something in respect of payment for their efforts in running the business. The applicants ran the business they purchased from Pix Print at a substantial operating loss throughout the whole of the period of their activities, even in the first period, when they were able to sell a franchise at Capalaba. 90 I have referred to the evidence showing that, though Pix Print at the date of the acquisition by the applicants of their master franchise business had fifteen stores, which it might be said were then still operating in New South Wales and Victoria, and a master franchisee still operating in both those States, its entire operations were then in decline, they had declined significantly by late 1997 and had all but collapsed by trial, a year later. I have also referred to the evidence about the financial difficulties quickly experienced by many store franchisees both before, and in the period immediately following October 1995, and of the termination of store franchises in these same periods. I have also referred to the evidence that the respondents cancelled their first New South Wales master franchise because of his financial defaults in early 1995 and that the second New South Wales master franchisee met the same fate by December 1995 for defaults earlier occurring. The only Victorian master franchisee abandoned his business. His franchise was consequently terminated by Pix Print in May 1996 and Mr Pix was unable to persuade any one else to take it over. All this evidence supports an inference that neither a Pix Print franchise store nor a master franchise was ever likely to be a profitable business, ie, that the business the applicants purchased in October 1995 was worthless. 91 It is, I think, possible to discern why this was so. In a long passage at transcript pages 317 to 322, Mr Pix failed to demonstrate that a person who bought a franchise store or a master franchise got anything much in return for the fees they paid to the respondents. This, I think, is the likely explanation for such a high rate of quite early failure by Pix Print franchisees and master franchisees. 92 There is other evidence that points in the same direction. Mr Pix, in his affidavit, spoke of the great deal of effort and "thousands of dollars" he put into developing a complete franchise operating program available on compact disk for all franchisees' computers. He said "all franchisees run this program in their shops with great success … All franchisees embraced this revolutionary system and used it to the advantage of their business." He made this statement in October 1998, when he had only three franchisees surviving, with two of them apparently then on their last legs. Mr Pix's hyperbole does not establish that he provided electronic accounting services to his franchisees that were of any significant value. 93 Franchisors commonly enter into bulk buying arrangements with suppliers of the materials needed by their franchised stores to carry on business. That is often one of the important advantages which a franchisor claims to be able to make available to franchisees. The respondents made just such a representation in the disclosure document, a copy of which was given to the applicants in early September 1995 by Mr Spriggins, to the effect that:

[47]

94 But the respondents did not attempt to prove that they had negotiated discount supplies for franchisees. The respondents contented themselves with submitting that the statements in the disclosure document, which were said by the applicants to constitute a representation about cheap supplies being available to franchisees, were incapable of containing such a representation and were "no more than introductory commercial puffery". Clause 5(6) of the master franchise agreement is careful in identifying one of the so-called benefits provided by the first respondent to its master franchisee as not going beyond "assistance with the location of suppliers who demonstrate the ability to meet Franchisor's standards …". 95 Although the respondents may have "sourced" printing machinery for master franchisees to sell to franchised stores by telling them where they could buy it, it was all reconditioned second hand machinery. It was only in about mid 1998, ie, when the whole Pix Print operation was on the point of complete collapse, that Mr Pix unconvincingly claims he began to "source" new printing machinery. The Carltons' experience with the second hand machinery they purchased from the respondents suggests that even here, a franchisee got little of real worth or usefulness by paying for a Pix Print master franchise or a Pix Print franchise. 96 A number of store franchisees who abandoned their connections with Pix Print continued in the printing business, but under their own names. This too suggests that, while there might be money to be made from small printing operations, the owner of such an operation got little of value by paying to be associated with Pix Print. 97 Clause 5 of the master franchise agreement, under the heading "Benefits for Master Franchisee", lists what appear to be quite evanescent benefits. I have already referred to cl 5(6). Though cl 5(10), "Advertising", is listed under this heading of "Benefits for Master Franchisee", it provides for just the reverse, viz, that "the Master Franchisee shall pay the costs of Advertising to be placed in the Financial Review and the Melbourne Age and any other magazine or newspaper". 98 Mr Pix and Pix Print did little for the money they took from their clients. That, I think, is a major reason for the high early failure rate of franchised stores and for the early failure of not only the applicants' master franchise, but also the two New South Wales and the Victorian master franchisees. 99 That the applicants were able to sell one franchise at Capalaba does not, I think, provide much of an evidentiary foundation for the submission made on behalf of the respondents that the master franchise should be taken to have had some value at acquisition date. Like so many Pix Print franchisees, it promptly failed as a franchised store. The Capalaba store appears to have traded only from about July 1996 to September 1997. The Capalaba franchisee soon became dissatisfied with its purchase. By June 1997, its solicitors were writing to both the first respondent and the applicants complaining "that the franchise was totally misrepresented to them and in addition they have received minimal support in making the business viable". By September 1997, its solicitors had written to the applicants cancelling their franchise agreement. That the applicants were able to sell one worthless franchise is no evidence that their right as master franchisees to make that kind of sale was a valuable right. 100 In view of the general history of Pix Print operations and the short time the Capalaba franchise operated and the circumstances in which that franchisee shut it down, I do not think the fact that the applicants were able to sell one franchise in the first six months or so of the operations provides any evidentiary basis for throwing doubt on the inference to be drawn from all the other evidence that the business the applicants bought had a zero value when the applicants acquired it in October 1995. There is thus no justification for saying that the net profit the applicants made on the sale of the Capalaba store franchise should be brought into account in favour of the respondents in calculating the applicants' damages. 101 I do not think the poor trading history of the applicants' business can be said to be due to their ineptitude or lack of attention to the business. Both Mr and Mrs Carlton had fairly extensive experience in small business: they operated a swimming school business for nine years with considerable success, selling it for a substantial sum at about the time they purchased the Pix Print master franchise. I also accept they both worked long hours in their Pix Print business at Kenmore. It was not a failure because of their lack of effort. 102 For all these reasons, I consider that the business they bought from the respondents was an inherently worthless business, grossly over-promoted by Mr Pix. They are therefore entitled to repayment of the purchase moneys, less the value of the plant they acquired from Pix Print. 103 In so far as trading losses consist of injections of additional capital designed to keep the business going, they may be claimable as a head of damages. See Radferry at 26. But otherwise, the conclusion that a business has zero value at acquisition date already makes proper allowance in respect of such losses. No claim for trading losses, in addition to repayment of the purchase moneys, can be sustained here. Nor is the claim put forward by Mr Vincent in respect of loss of opportunity to earn a profit sustainable. As the Full Court said in Radferry at 27: "Once it is realised that the value of the business reflects future profitability, it is difficult to see any justification for allowing a further sum calculated by reference to the anticipated profitability of another, unidentified business". I will therefore not allow anything by way of damages for these two items. 104 As to the plant, cl 22 of the master franchise agreement evidences only that the price paid for it was $28,500, not that that was its value at acquisition date. It is true that Mr Carlton fitted out the Capalaba franchised store with equipment similar to that which the respondents supplied him and at a similar cost, ie, $27,000 to $28,000. But that evidence of price to the Capalaba franchisee or cost to the applicants does not show that the plant acquired by the applicants had that value at acquisition date either. I think that it is only if the evidence establishes that the plant should be accepted as contributing to the profitability of the business that it can have a value in excess of its disposal value. That, the evidence does not do. I also accept Mr Carlton's evidence that the plant supplied by the respondents was inadequate, both in its performance capabilities and in its reliability, to service a franchised outlet of the kind the applicants bought. The plant was second hand. Mr Carlton described some of it as "very old" and difficult to operate. There was a wide range of printing functions which that plant was incapable of performing, but for which there was a substantial demand by consumers of the services provided by those with whom the applicants were competing. Mr Carlton, in order to keep the business going, had to engage in the unsatisfactory expedient of sub-contracting out a range of the print work that his customers ordered. 105 Both Mr Vincent and Mr Robinson proceeded on the assumption that the proper value of the plant supplied by the respondents to the applicants was the amount recouped by the Carltons when they sold that same plant for $7,000, when they closed the business down. Since, in my opinion, the business had no value at acquisition date, ie, no capacity to generate and maintain profits, that seems to me to be the proper allowance to make in favour of the respondents in respect of the plant in calculating the applicants' damages. 106 Something is allowable to the Carltons personally in respect of loss of opportunity to earn ordinary income (as it is described by Mr Vincent). But they are not, as Mr Vincent assumes, entitled to be remunerated for the actual hours they worked in the business. In Cut Price Deli Pty Ltd v Jacques (1994) 49 FCR 397 at 404, the Full Court said, in the context of a claim for unpaid labour by the purchasers of an unsuccessful franchise business:

[49]

107 It is only the effort additional to that which the purchaser could have expected to have to put into the business purchased that can be the subject of a damages award where the purchase was wrongly induced. This, I think, gives proper recognition to the fact that the purchase of a business involves the risk that it may not be successful, a risk which Netaf points out is not one against which the vendor insures the purchaser. A vendor is never required to make good every loss that a purchaser suffers even if liable to the purchaser for wrongly inducing him to acquire the business. 108 Mr Robinson referred to average earning figures for and hours worked by owners of small print operations taken from the FMRC 1997 survey. This survey suggests that the proprietors of a small print operation like that conducted at the Kenmore shop could expect to earn $38,642 per annum profit before allowing for the owner's salary. The survey also shows that such owners in 1997, on average, worked 2,316 hours per year. In Radferry, the Full Court, in a slightly different context, was critical of the use of average figures in quantifying damages for misrepresentation inducing the purchase of a business. But I think the survey provides some indication of the hours the Carltons could have expected to work in the printing outlet if the business had been capable of generating profits. 109 It is only the hours the Carltons worked in excess of those which they would have been expected to work if they had not found themselves in the situation of trying to make a success of an inherently unprofitable business for a time for which compensation can be recovered. I am satisfied by Mr Carlton's evidence that he worked something like sixty-five to seventy hours per week, as a broad average, over the period the applicants operated the business as both a print store and a master franchise, ie, 3,500 hours over a full year, and that Mrs Carlton worked about thirty to thirty-five hours per week, which equates to about 1,700 hours in a full year. Together they worked in a year about 5,200 hours. The FMRC survey shows that owners of a small printing shop worked, on average, in 1997 a little over 2,300 hours a year. This suggests that Mr and Mrs Carlton, as the owners, put in about 2,900 hours a year more than the industry average for a print shop operation. They ran not only a print shop, but also a master franchise into which they would have expected to put some of their time. I therefore conclude, on the very broad brush approach that is all that is open to me, that they are entitled to be compensated for about 2,000 hours per annum more than they could have expected to have worked in trying to make a success of their unprofitable business. This equates to about 3,500 hours extra over the period from January 1996 to September 1997. In the last full year in which they carried on their swimming pool business, Mr and Mrs Carlton each earned about $41,000 net before tax. Given that, according to Mr Carlton, they worked long hours to achieve these returns, as managers and owners of a small business, a total of about seventy hours would seem to be a reasonable measure of their joint input into their swimming pool business. This equates to about $22 an hour. Mr Vincent suggests they should be compensated for wages at the rate of $12 per hour, roughly the hourly gross rate payable to a full time shop assistant without managerial responsibilities, for the very extensive hours they worked. I think that is too conservative a rate and an average of $17 per hour is the figure I will adopt. This yields $59,500. I do not think the drawings they made of $26,000 during the period they operated the business should be set off against this figure: this should be treated as part of the ordinary wages attributable to running the business for which they cannot claim compensation by way of damages. 110 There being no challenge to the amount of $10,321 quantified by Mr Vincent in respect of other costs incurred by Mr and Mrs Carlton in connection with the acquisition of the master franchise, I would include that amount in their damages. 111 The applicants are therefore entitled to damages as follows: The second applicant $133,000 capital loss The first applicants $59,500 for additional time put into running the business $10,321 miscellaneous expenses incurred in acquiring a worthless business. _______ $69,821 _______

[51]

113 The applicants did not make any claim by way of relief under s 87 for an order setting aside the master franchise agreement ab initio. It therefore becomes necessary to consider Pix Print's cross-claim. Though grossly unrealistic sums totalling in excess of $1M were claimed by Pix Print in the cross-claim as damages for breach of the master franchise agreement, at trial this was limited to a claim for a little under $9,000 for breach of the second applicant's obligation under cl 4(1) of the agreement and to a further $22,500 for the loss by the first respondent of the chance of receiving payment of the assignment fee provided for by cl 12.1.3 of the agreement by reason of what was said to be the applicants' unjustified refusal to accept Mr Monteiro's offer to buy the whole of its business. 114 Pursuant to cl 4(1) of the agreement, the second applicant was required to open one new franchised outlet from the date of the agreement, ie, from 20 October 1995, in each of the ten annual periods following that date. The first applicants guaranteed the performance of this obligation by the second applicant. It is said that, though the second applicant opened one store at Capalaba within seven months of executing the master franchise agreement, they ceased their operations on or about 23 September 1997 (something that is not now in dispute) with the consequence that the second applicant was in breach of its obligation to establish a second franchised outlet within the second annual period of its operations. Damages are claimed only in respect of the breach of this provision, which it is said occurred prior to termination of the agreement by the first respondent. The damages are quantified as against all applicants on the basis of the sum of $8,739.75 paid by the second applicant to the first respondent, pursuant to the master franchise agreement in respect of its opening of the Capalaba outlet. 115 However, cl 4(1), which incorporates the development schedule in annexure "A" to the agreement, only obliged the second applicant to have a second outlet "developed and in operation" by "two years from date of agreement", ie, by 19 October 1997. 116 In November 1996, the applicants first complained that the master franchise business had been misrepresented to them, though they did not then cancel the agreement. It was not until about 23 September 1997 that they took the step of closing the business down. It was only after that that the first respondent gave a notice purporting to terminate the master franchise agreement, relying on the applicants' abandonment of the premises on 23 September 1997 and what are described as consistent breaches of their obligations under the agreement prior to that date, in May, June and September 1997. 117 But by reason of the fourteen misrepresentations made by Mr Pix, which I have set out above, the falsity of which the applicants did not discover until after they shut the business down, the applicants were entitled in September 1997 to treat the agreement as at an end when they clearly enough did that, by closing down the whole operation. What the respondents sold to the applicants was a worthless business. Mr Pix's non-disclosures were tantamount to fraud. It does not matter that the applicants did not give the respondents' misrepresentations as the reason for their so acting. See Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 at 377 - 378. Since they were entitled to bring the contract to an end, as they did in late September 1997, they were thereupon discharged from further performance of their obligations under the contract, including their obligation to open a second outlet by 19 October 1997. This part of the cross-claim fails. 118 Pursuant to cl 12.1.3, the second applicant was obliged to pay to the first respondent the assignment or transfer fee therein referred to on the sale of the master franchise. 119 The first respondent relies upon Mr Monteiro's offer as demonstrating that, by reason of the applicants' conduct in not treating the offer seriously when they had had, for some time, the master franchise business listed for sale and were wanting to sell it, they wrongly deprived the first respondent of the chance of earning such a fee. 120 But for Mr Monteiro's offer, this part of the cross-claim could be dismissed out-of-hand in view of what I have had to say about it being a worthless business not likely ever to find an informed purchaser willing to part with money for it. But I have already explained why I do not think the Monteiro offer can be regarded as one ever likely to have ripened into a firm, unconditional offer and thus a sale, if only Mr Carlton had been more receptive to Mr Monteiro's approach. 121 The cross-claim must be dismissed. I will hear the parties on costs. I certify that the preceding one hundred and twenty-one (121) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond.

Carlton v Pix Print Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (53 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (7)

Cited By (2)