D'Arling One Pty Ltd v Eagle Boys Dial-a-Pizza Australia Pty Ltd

Supreme Court of NSW|2011-03-18|Before: Tamberlin AJ

Judgment 1This dispute arises out of a pizza franchise agreement dated 16 May 2005 between the plaintiff as franchisee and the defendant as franchisor in respect of premises at Nelson Bay New South Wales (the franchise agreement). 2Under the franchise agreement Eagle Boys Dial-a-Pizza Australia Pty Ltd (Eagle Boys) granted to D'Arling One Pty Ltd (D'Arling) the right to operate an Eagle Boys pizza store in the Nelson Bay area. The parties had had some prior dealings in that they had previously entered into a franchise agreement to operate an Eagle Boys store at Raymond Terrace in 2002. 3The plaintiff, D'Arling, began operation of the store at the Nelson Bay premises on or about 16 May 2005. Those premises were the subject of a lease which began on 16 May 2005 for a term of three years with an option to renew for a period of three years. The lessors of the property were Jim Vassiliadis and Kali Vassiliadis, who were the owners of the premises and were not connected with the plaintiff or the defendant. 4In order to exercise the option of renewal the plaintiff was obliged under cl 23.1 of the lease to give not less than three months and not more than six months' written notice prior to the expiration of the three year term on 3 May 2008. It is common ground that this was not done. 5Clause 29.5 of the franchise agreement provided: "The Franchisor may terminate this Agreement immediately upon written notice of termination to the Franchisee. If the Franchisee or any Guarantor commits, permits or suffers any of the following acts, events or omissions: ... (f) is fraudulent in connection with the operation of the Franchise Business. ..." 6On 9 June 2009 the defendant sent a notice of termination of the franchise agreement to the plaintiff and on the same date gave notice of rescission of a settlement agreement made between the parties on 21 January 2009 which had been arrived at after mediation in relation to a dispute as to the conduct of the franchise. This was in fact the second settlement agreement entered into by the parties and, for the avoidance of doubt, I will refer to it as such. 7The principal issue for determination is whether the defendant was entitled to rescind the second settlement agreement and terminate the franchise agreement as a consequence of representations said to have been made by the plaintiff as to the exercise of the option to renew the lease. More specific questions arise as to whether these representations were made by the plaintiff to the defendant concerning the lease and whether such representations amounted to fraudulent conduct on the part of the plaintiff in relation to both the franchise agreement and the second settlement agreement. 8The plaintiff originally sought a declaration that the second settlement agreement had not been rescinded and continued on foot. In its written submissions and arguments advanced at the trial, the plaintiff abandoned this claim and sought only damages for breach of the second settlement agreement. In the alternative, the plaintiff seeks a declaration that the franchise agreement was terminated by the plaintiff on or about 15 June 2009 as a consequence of the defendant's wrongful repudiation and damages are sought on this basis. A further and alternative declaration is sought that the defendant has engaged in unconscionable conduct that is in contravention of the Trade Practices Act 1974 (Cth) and damages are sought pursuant to s 82 of that Act. 9After commencement of the franchise agreement at Nelson Bay a dispute arose between the parties in relation to alleged non-compliance by the plaintiff with terms of the franchise agreement. 10Proceedings were commenced on 29 April 2008 in this Court seeking declarations and relief. This dispute was resolved after mediation and resulted in an agreement of 14 July 2008 (the first settlement agreement). 11Under this first settlement agreement the plaintiff was obliged to use its best endeavours to sell both the Raymond Terrace and Nelson Bay franchise stores. The plaintiff was required to appoint an independent valuer if the franchises did not sell by 14 November 2008. The first settlement agreement also required the plaintiff to have a software system (IPOS) operating in the Nelson Bay store by 31 October 2008. 12In order to facilitate sale of the franchise business at Nelson Bay on 6 August 2008 the plaintiff provided details in the form of a sales document entitled "Eagle Boys Pizza, Store Sales Proposal 'Nelson bay' " which was referred to by the parties and which I will refer to as the "Sales Pack". This document was initially provided to the plaintiff by Eagle Boys and contained that company's logo in the bottom right hand corner of each of the pages. The Sales Pack was completed by the plaintiff and contains an executive summary, a description of the franchise territory and delivery area, the Eagle Boys system of operation, store sales information, layout of the store and details of financial figures. Importantly for present purposes, it contains cl 6.0 which reads as follows: "6.0 Store Lease Address: Shop 9/29 Stockton Street, Nelson Bay Size: Approx. 81 m2 Rental: $1,862.00 per month plus GST Outgoings: $319.27 per month plus GST The lease agreement in place between D'Arling One Pty Ltd and Jim Vassiliadis C/- Century 21 Paradise Waters, Shop 1, 17-19 Stockton Street, Nelson Bay, is in the 1 st year of the 3 year option period that expires on 16 th May 2011 . The current annual rental is $22,344 + GST. The landlord has indicated that subject to normal pre-tenancy checks, it is prepared to assign the current lease in place, but it is preferred to commence a new five year lease agreement on the following basis : Rent at the same level as per the existing lease (ie. $2048.20 pm inc. of GST) The lease term is preferred to be five years , with a five year option Outgoings and other charges: The Tenant is required to pay council rates (currently $187.32 per quarter), Strata Levies (currently $866.25 per quarter), water rates (approximately $50 per quarter). These are indicative amounts have been advised by the landlord . The tenant will also need to pay the costs for preparing the new lease including the lessors legal costs, lease registration fees and stamp duty etc (estimated by the landlord at $1,000 to $1,500); and It is intended that all other terms and conditions will be the same as the current lease in place. Intending purchasers [sic] should liaise directly with the landlord to confirm the forgoing [sic] . Matters such as the level of rent payable, outgoings, potential lease incentives, any structural improvements or repairs required, and other amounts payable under the lease should be negotiated directly between the incoming purchaser and the landlord. (Emphasis added.) 13The above provision is of central importance because the defendant says that the statements in it as to the lease amount to a representation by the plaintiff that it had a lease in place in relation to the premises which was in the first year of a three year option period expiring on 16 May 2011 when in fact this was not the case to the knowledge of the plaintiff. 14This Sales Pack when completed was sent to Mr Tucker of the defendant on 6 August 2008 and a copy was sent to Mr Stewart who is the General Manager (Corporate) of the defendant and who has given evidence in this proceeding. 15After the Sales Pack was sent to the defendant a further dispute arose as to whether the plaintiff had performed its obligations under the first settlement agreement by: (i) failing to use its best endeavours to sell the store; (ii) failing to take steps to have a valuer appointed and (iii) failing to get the IPOS in operation by the specified date. This led to the issuing of a notice of breach by the defendant on 18 November 2008. 16Arising from this further dispute a second mediation took place on 21 January 2009 at which Mr Stewart was present on behalf of the defendant and this resulted in the second settlement agreement of that date which Mr Stewart executed on behalf of Eagle Boys. Clause 3.6 of the agreement provided that: "If the Nelson Bay franchise store is sold to someone other than the Franchisor, the Franchisee will be responsible for the transfer [of] obligations under the Franchise Agreements and for the assignments of the leases (including costs) for the store to a prospective franchisee." (Emphasis added.) 17The defendant contends that the reference to assignments of the "leases" in the above paragraph amounted to a further misrepresentation by the plaintiff that there was in force an existing current lease for a term of three years at that time over the Nelson Bay premises when in fact there was only a holding over on a month-to-month tenancy and that this provided a basis for terminating the franchise agreement and setting aside the second settlement agreement. 18The second settlement agreement provided in cl 3.2 that if the Nelson Bay store was not sold and settled by 18 May 2009 a transfer of the franchised store would be made to the franchisor and the franchisor would pay the franchisee $250,000 exclusive of stock. 19It also provided in cl 3.7 that from 18 May 2009 the franchisor, franchisee and guarantors were released from any ongoing obligations and claims. It also provided that the first settlement agreement was no longer in force and was superseded by the second settlement agreement.

Plaintiff's submissions 20The plaintiff's case is that the defendant is liable for damages at common law or under the Trade Practices Act (Cth) resulting from a breach of the second settlement agreement and wrongful termination of the franchise agreement. The plaintiff says that it complied with its obligations under both agreements. 21In relation to the cross-claim for misleading and deceptive conduct and fraud brought by the defendant the plaintiff says that there was nothing misleading or deceptive or deceitful in anything done by it. 22The plaintiff says that the Sales Pack document and the reference to the lease are only statements made in a draft document when seen in context and did not amount to a representation by the plaintiff as to the term of the lease or its operation. It says that the Sales Pack should be seen as a request for assistance in drafting a suitable document to be presented to third parties on the assumption that the information would be correct when delivered to any parties interested in purchase and likely to rely on it. 23It submits that the Sales Pack was never directed by way of a representation to the defendant because at that point of time it was not anticipated that the defendant would purchase the business. It also relies on a statement in cl 6 to the effect that "intending purchasers should liaise directly with the landlord to confirm the foregoing" and that having been made in early August 2008 it no longer operated as a representation five months later when the second settlement agreement was entered into. 24The plaintiff says that the language when read in context was not a misrepresentation and that on the evidence there was no reliance by the defendant on the document or alleged representation at the time of execution of the second settlement agreement. It says that there was no reference to the status of the lease at Nelson Bay at the January 2009 mediation and that there is no mention in the agreement of cl 6 of the earlier document or of its contents. That clause was not in dispute. They say there is no reasonable basis on which to infer reliance and that it would have been unreasonable to rely on the statement in the Sales Pack. 25In relation to the reference to assignments in cl 3.6 of the second settlement agreement the plaintiff says that this was not a misrepresentation because this was not an assertion that leases were in place in relation to the premises. Clause 3.6 was a clause directed to the allocation of responsibility in respect of equipment, leases and the like and it could not reasonably be read as an assertion that there was a lease of the real estate in force which was capable of assignment. Further, the plaintiff says that in fact there was a lease capable of assignment in the form of a monthly tenancy pursuant to a holding over clause (cl 24 in the original lease) which commenced on 16 May 2005. 26In signing the second settlement agreement the plaintiff says that cl 3.6 cannot be taken as a representation that a lease option had been exercised and to do so would be a misinterpretation of the clause. 27In relation to the fraud count the plaintiff denies that it knew the statements to be false because there was reasonable ground to believe that in the near future the option could be exercised and that it was reasonable for the plaintiff to act on the basis of assurances from agents that there would be no problem with exercising the option. 28In relation to its claim of unconscionable conduct under the Trade Practices Act (Cth) the plaintiff says that the timing of the termination of the second settlement agreement indicated it was intended to avoid compliance with the obligation to purchase the business and in anticipation of the contemplated termination of the franchise agreement with a view to obtaining the business without payment of the agreed price. It states that there had been no compliance by the defendant with the franchising code of conduct provision for termination of the settlement agreement. The plaintiff says that even if the representations had been fraudulent, they were not "in connection with the operation of the franchise business" as provided for in the exception cl 23(f) of that code. 29Regarding damages, the plaintiff relies in part on a report of a Mr Goodwin Gower, an accountant jointly instructed by the parties. The plaintiff says that it is entitled to recover the amount set out at paragraph 73 of his report and that the plaintiff has lost $98,472. The plaintiff claims an additional amount of $38,052 in respect of profits which the plaintiff says Mr Gower wrongly factored into his calculation as a deduction.

Defendant's submissions 30The defendant seeks a declaration that the second settlement agreement is not enforceable by the plaintiff because the plaintiff has engaged in misleading and deceptive conduct in breach of s 52 of the Trade Practices Act (Cth) which induced the defendant to enter into the second settlement agreement and a declaration that it would suffer loss if the agreement is not set aside. The defendant says that the misrepresentations as to this agreement being in place are made in the Sales Pack document and/or the reference to assignments of "the leases" in the second settlement agreement in cl 3.6. It says that these were untrue positive representations by the plaintiff that the option had been exercised and that an enforceable lease was in place over the premises until May 2011. Therefore the defendant says it should be relieved from its obligations under the second settlement agreement or should be awarded damages equivalent to any amount it might be held liable to pay to the plaintiff arising out of the second settlement agreement. Alternatively it contends that the second settlement agreement should be set aside on the ground there was an innocent misrepresentation and by way of further alternative on the ground that there was a fraudulent misrepresentation and deceit in making the statements relied on. The defendant says it was justified in terminating the franchise agreement on the basis of this fraudulent conduct and denies that it was engaged in unconscionable conduct. Finally the defendant contends that the plaintiff has suffered no loss.

LEGAL PRINCIPLES 31The relevant legal principles are those relating to misleading conduct and misrepresentation and, in the alternative, fraud. 32The defendant bases its right to terminate the franchise agreement on the existence of fraudulent conduct on the part of the plaintiff. In relation to the second settlement agreement the defendant relies on s 52 of the Trade Practices Act (Cth) in that it says there has been misleading conduct arising from misrepresentations by the plaintiff in relation to the execution of that agreement and it also relies on fraudulent misrepresentation based on the submissions that the plaintiff knew of the falsity. Both these representations relate to the alleged assertion that there was a lease or entitlement to a lease for a term on foot at the time the agreement was made. 33Section 52 of the Trade Practices Act (Cth) provides that a corporation shall not in trade or commerce engage in conduct that is misleading or deceptive or is likely to mislead or deceive. This is not the same concept as "misrepresentation" but is broader because it looks at the overall course of conduct which can include, of course, misrepresentations either express, implied or by way of silence. Under s 82 of the Trade Practices Act (Cth) a person who suffers loss or damage by conduct in contravention of s 52 may recover the amount of loss or damage from the person involved in the contravention. There must be reliance on the conduct and the conduct must cause the damage. 34By s 87 of the Act the Court is given a broad power and jurisdiction to make orders where it finds that a person who is party to the proceeding has suffered or is likely to suffer loss or damage by conduct of another person that was engaged in by it in contravention of s 52. 35In the present case the conduct relied on is in the form of misrepresentation as to the existence of tenure of the premises held by the plaintiff by reason of the exercise of an option. 36The principal elements of misleading conduct in a case of a misrepresentation were considered by Young CJ in Eq in Arnot v Hill-Douglas [2006] NSWSC 429 at [105]-[115]. His Honour there expressed the view that to be actionable a representation must be clear and unambiguous because this is relevant to the question whether the representation was sufficiently specific to be material and it must be capable of and in fact operating so as to induce reliance on the representation as a result of which loss or damage is suffered by the representee. 37In order to succeed under s 52 it is not necessary to show that the representor knew that the representation was false or that the representor should have known that the person to whom the representation was made was relying or likely to rely on the representation. However, informal representations are often not sufficient to constitute misleading or deceptive conduct because of the lack of precision as to the likely lack of recollection and implausibility concerning reliance. Young CJ in Eq also pointed out that it is important to be wary of introductory comments or statements made in the course of negotiations for the purpose of attracting the interest of a possible purchaser. The broad principle is that one must look at the substance and effect of the representation in light of the factual context and circumstances of the parties having regard to the history of the matter at the time when the representation was made. 38It is only when conduct can induce or be capable of inducing error that it is actionable as misleading or deceptive: see Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191 at 198. It is necessary to determine what constitutes the conduct in the context of the factual matrix relied on to make the conduct misleading or deceptive. This question is one of fact. Merely to establish that the conduct may be likely to produce confusion is not sufficient to characterise it as misleading. There must be a misrepresentation. The question is whether tested objectively the conduct is misleading or deceptive or likely to mislead or deceive: see Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11; (1978) 140 CLR 216. As is pointed out by Gibbs CJ in Parkdale the conduct is not confined to that which was negligent. A person or corporation that has acted reasonably may nevertheless be rendered liable to be restrained by injunction and/or be liable to pay damages if in fact it has misled or deceived another. 39Liability for the contravention of s 52 does not necessarily involve fault on the part of the person whose conduct is in question. In considering whether conduct is misleading regard should be paid to the position of and circumstances of the person to whom the representation is directed. When considering how a reasonable person might view such a representation for example the Court must be mindful that different reasonable interpretations can be given to the same statement and different responses evoked from different people acting reasonably: see National Exchange Pty Ltd v Australian Securities and Investments Commission [2004] FCAFC 90. 40In order to recover damages it is necessary to prove that the representee acted on the representation and suffered loss or damage: s 82. It is not necessary that the misleading or deceptive conduct should be the sole cause of the damage or reliance but it is sufficient if it is a material cause contributing to the reliance or causation of damages: see Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 525. Again causation is essentially a question of fact to be determined by reference largely to common sense and experience. 41Where a representation is material and it is capable of inducing a representee to enter into a contract it can be prima facie inferred that the representation in fact operated as an inducement: see Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215 per Wilson J. It is necessary that there be a sufficient causal link between the loss or damage alleged to have been suffered and the misleading or deceptive conduct: see Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494. 42In relation to fraud, the relevant principles are set out succinctly in Magill v Magill [2006] HCA 51; (2006) 226 CLR 551 by Gleeson CJ who adopted the principle at [17] that a false representation is fraudulently made if the defendant made it knowing it to be false, or recklessly, neither knowing nor caring whether it was false or true. That is fraud in the strict sense. It is well settled that an allegation of fraud calls for strict proof: Magill at [211]; Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362. 43In the present case therefore to succeed in its claim in relation to its purported termination of the franchise agreement the defendant must establish that the conduct and the alleged representation by the plaintiff occurred in circumstances which show that the plaintiff acted knowingly and recklessly. 44Further, in order to establish reliance in a case where it is said that a misrepresentation was a material cause in the representee entering into the contract it will generally be necessary to show that the representation was present to the mind of the person said to be relying on it. To take an extreme example suppose a representation were made several years ago in a document of which the representee is aware and he later enters into a contract but has forgotten about the representation. It could not, in my view, be said that there had been reliance. The representation must operate on the mind of the person said to have acted on it at the time when the subsequent contract is made. In other words representations which may have been in the mind of a representee at a certain stage may not be present several months later when a transaction has been entered into. If this is the case it cannot be said that there has been loss or damage "suffered by" the misleading or deceptive conduct even if at the time the conduct or misrepresentation occurred it could have been characterised as misleading.

Misrepresentations 45The first question to be considered is whether the plaintiff engaged in misleading conduct so as to entitle the defendant to terminate the second settlement agreement. The first basis on which misleading conduct is alleged by the defendant is that cl 6 of the Sales Pack relating to the term of the Nelson Bay tenure as conveyed to the defendant in August 2008 was misleading because it stated that: "The lease agreement in place between D'Arling One Pty Ltd and Jim Vassiliadis ... is in the 1 st year of the 3 year option period that expires on 16 th May 2011. The current annual rental is $22,344 plus GST. The landlord has indicated that subject to normal pre-tenancy checks, it is prepared to assign the current lease in place, but it is preferred to commence a new five year lease agreement ..." 46The defendant's case is that the option in the original three year lease had in fact not been exercised to the knowledge of the plaintiff and that the time for exercise had expired and the plaintiff only had a month-to-month holding over tenancy on the expiration of the lease term. It is said that it follows that the statement amounted to untrue and misleading conduct in contravention of s 52 of the Trade Practices Act (Cth). 47In order to determine whether the statement constituted misleading or deceptive conduct by way of misrepresentation it is necessary to consider the context in which it was made. In doing so it is necessary to take into account the following considerations. 48First, it is clear from emails between the plaintiff and Mr Tucker of the defendant, which were copied to Mr Stewart, that the Sales Pack was a document intended to be presented to third parties, namely prospective purchasers, when finally settled. The exchange of emails of 5 and 6 August 2008 referring to the Sales Pack show that the plaintiff was awaiting feedback on the document from the defendant and that further action was necessary to settle the document. It was a draft. The Sales Pack was intended to give a purchaser (not the defendant) a clearer idea of the proposed business and a starting point for the purchaser to carry out direct negotiation with the landlord for a new and different lease. 49Secondly, cl 6.0 of the Sales Pack states that: "Intending purchases [sic] should liaise directly with the landlord to confirm the forgoing [sic]. Matters such as the level of rent payable, outgoings, potential lease incentives, any structural alternatives ... should be negotiated directly between the incoming purchaser and the landlord." The reference to foregoing includes the statement which the defendant says it relied on referred to earlier together with detailed reference to the intentions of the landlord as to its preference for a new lease. The emphasis in cl 6.0 is on the prospective purchaser negotiating a new lease with a five year option. There are references to indicative amounts advised by the landlord and a reference to all other terms and conditions being the same as the current lease in place. There is a clear urging in cl 6 for direct contact between the purchaser and the landlord as to the tenure of the store lease. 50Thirdly, as at August 2008 the defendant did not intend to exercise its right to purchase the franchise business, but to assist the plaintiff to sell it to a third party. The reference to the current lease in cl 6 therefore was not directed to the defendant or intended by the plaintiff to be relied on by the defendant. This is not conclusive but is a relevant factor to take into account when deciding whether the statement amounted to a material misrepresentation. In fact the Sales Pack was never sent out to prospective purchasers, who were the intended addressees of the statements in the draft Sales Pack. 51Fourthly, in my view the plaintiff as at August 2008 had reasonable grounds for the belief that there would be in place a lease as a result of negotiations with the landlord and there would be no problem with renewal of the lease for a three year term based on discussions with the agents for the landlord. 52In this regard, the evidence of Mr D'Andilly, the director of the plaintiff is important. Mr D'Andilly impressed me as being a frank and direct witness and I accept his evidence that he genuinely believed that there would be no problem with the store lease position because of assurances from the agents. When he made the statements in cl 6.0 of the Sales Pack he believed that the landlord would be prepared to allow the exercise of the option out of time because in April or May he had conversations with Mr Kirby, an agent who told him that the option may still be available to him and Mr D'Andilly accepted and believed that this was a fact. He also relied on statements by Ms Barbara Vidler of Century 21 Real Estate prior to 6 August 2008 that the plaintiff would still have the right to exercise the option and secure the tenancy. 53Mr D'Andilly was questioned as to why he did not exercise the option if he believed it was still open to him to do so. He said that the solicitors were attempting to settle the disputes between the defendant and himself and the building was in the process of negotiation for sale to a new third party so that the position was somewhat complex. His evidence as to his intent and knowledge was not significantly diminished in cross-examination. His recollection was at times imperfect but overall I accept his evidence. 54The Sales Pack was not provided to the defendant for the purpose of the mediation leading to the second settlement agreement which was made five months after the Sales Pack was sent to the defendant and which is now sought to be set aside. At that time in this period the defendant itself had no intention to buy the premises and I accept that it was never the belief of the plaintiff that the statement in cl 6.0 might be relied on by the defendant as alleged by it. The draft Sales Pack was prepared on the assumption as to what would be the position when presented to prospective purchasers. 55While none of the above considerations taken alone is conclusive I consider that cumulatively they support a conclusion that there was no misleading or deceptive conduct arising from the details in cl 6.0 of the Sales Pack as relied on by the defendant to provide a basis for setting aside the second settlement agreement. 56The second basis relied on by the defendant to support the claim of misleading conduct on the part of the plaintiff is the statement in cl 3.6 of the second settlement agreement which states that the parties had agreed: "3.6 If the Nelson Bay franchise store is sold to someone other than the Franchisor, the Franchisee will be responsible for the transfer [of] obligations under the Franchise Agreements and for the assignments of the leases (including costs) for the store to a prospective franchisee." 57This provision in terms is concerned with the allocation of responsibility for the transfer of obligations under the franchise agreement and leases for the store and its contents. It is a general provision as to who should arrange for what to be transferred and at whose cost. It is not sufficiently clear and unambiguous in my view to amount to a representation on the part of the plaintiff that there was a lease of the Nelson Bay store in force and effect for any specific period or with any specific rights. It does not make any mention of any option or the exercise of any option. If the defendant had attached any importance or significance to the exercise of the option or the duration of the tenure to the store premises it would have been a simple matter to have made provisional reference at least to it in the second settlement agreement. There is no such provision which makes reference to any discussion of consideration of the exercise of the option or duration of any lease pertaining to the real estate at or about the time of the second settlement agreement. Mr Stewart agreed that the focus of attention in that provision was on the allocation of responsibility for arranging the transfer of obligations and the associated costs. I am not persuaded that cl 3.6 therefore was a representation either taken alone or in conjunction with the statements in the Sales Pack which was misleading or deceptive conduct which could be used as a basis for setting aside the second settlement agreement. 58Accordingly, I am not satisfied that there has been any contravention of s 52 in this case because there has been no misleading or deceptive conduct. 59It is also claimed that there has been a misrepresentation at common law which entitles the defendant to set aside the agreement. For reasons given above in relation to the claim based on the Trade Practices Act (Cth) I also reject this submission.

Non-Reliance 60Even if I am wrong as to whether the statements in cl 6.0 of the Sales Pack and cl 3.6 of the second settlement agreement constituted misleading and deceptive conduct, a second and independent basis for refusing the relief sought by the defendant is that there has been no reliance established by the defendant on the alleged misleading conduct. 61The evidence of Mr Stewart as to reliance was central to the defendant's case because at the time of entry into the second settlement agreement he was in effect the defendant and his beliefs and understanding must be attributed to the defendant. 62The claim of reliance is based on the assertions by Mr Stewart that on 21 January 2009 in entering into the settlement agreement he relied on the statement in cl 6.0 of the Sales Pack and cl 3.6 of the second settlement agreement and that they induced him to enter into that agreement and that but for the misrepresentation the defendant would not have entered into the second settlement agreement. There are several considerations which lead me to reject the assertion of reliance. 63The first is that I do not accept that Mr Stewart had in mind or relied on in any way the statement in the Sales Pack because there is a strong doubt as to his recollection in relation to the matters on which he relied. Having regard to his earlier confusion as to precisely what he relied on in relation the first settlement agreement I consider his evidence is open to doubt to such an extent that I am not persuaded that there was any representation to him by the plaintiff on which he acted five months later. In earlier evidence he had inconsistently asserted that he relied on assertions as to there having been "an assignment" in the first settlement agreement. There was in fact no such statement. His recollection of this important point indicates a real uncertainty as to precisely what he relied on when he entered into the second settlement agreement in January 2009. 64A further consideration is that there is no record that any importance was attached to or indeed mention made of cl 6.0 of the Sales Pack between early August 2008 and 21 January 2009 which is a period of five months. Nor is there any mention or evidence of any consideration of the Sales Pack cl 6.0 or its provisions in evidence prior to or at the time of entry into the second settlement agreement. 65Mr Stewart was copied in through the emails of August 2008 from the plaintiff to Mr Tucker of the defendant and he must have been aware that the document passing between the parties was a draft which required further consideration and settlement before being sent out to prospective purchasers. Moreover, his evidence is that he had not looked at it since he saw it in about early August on a computer screen. He said that he printed it out. However, the only copy to which he referred is in a file in Brisbane and he gave no evidence of looking at it or considering its contents prior to the execution of the second settlement agreement. 66In substance his evidence is that what he regarded as an important statement in the Sales Pack five months earlier was present to his mind on 21 January 2009. In the absence of any record or documentation or other corroboration and relying solely on his memory five months earlier in relation to the Sales Pack document, I do not accept there was any earlier representation made by the plaintiff which was present to his mind and which was relied on by him when entering into the second settlement agreement. 67In my opinion, it is inherently unlikely that he would have recalled the somewhat oblique reference to the lease being in its first year option period after such a substantial period had elapsed without any evident reference to the terms of the agreement or consideration of it around the time of the second settlement agreement. In the absence of any consideration by him of the Sales Pack over the five month period and the fact that he had only seen it on a screen and ordered a print out I consider that his evidence is based on a reconstruction rather than on an accurate recollection as to his state of mind in entering into the second settlement agreement. 68A third matter is related to cl 3.6 of the second settlement agreement. Mr Stewart agreed that it was concerned with the general assignment of responsibilities for leases and for purposes including personal property and equipment of the store. Again, if importance had been attached to this clause it might have been reasonably expected this would be reflected in the second settlement agreement. There is no such reflection. Given his evidence as to the purpose of cl 3.6 I do not accept that he relied on the fact that there was a reference to the word assignment in that provision or that it conveyed to him or was capable of conveying to him at that time that there was a representation that the original lease continued by reason of exercise of the option. 69Accordingly, for these reasons I do not consider that the relief under the Trade Practices Act (Cth) or any other relief should be granted to the defendant based on misrepresentations or misleading or deceptive conduct because I find on the evidence there was no relevant representation or reliance by the defendant.

Fraud 70For the reasons given above I find there has been no fraudulent conduct on the part of the plaintiff in this matter because I am not satisfied that there was any misrepresentation or misleading or deceptive conduct on the part of the plaintiff. In particular, having regard to the relevant degree of satisfaction required in making a finding of fraud I am not persuaded that the evidence establishes that the plaintiff knew or intended that any statements made in relation to the lease were false in any way. There was in my view a genuine and well founded belief based on reasonable grounds on the part of the plaintiff that at the time the Sales Pack came into existence the statement in the first part of cl 6.0 of the Sales Pack would be accurate. In relation to fraud specifically I also do not consider that the plaintiff ever intended or believed that the statement would operate in the future or that it would be relied on or could deceive in any way the defendant in this proceeding. I also do not consider that there is any fraud established in relation to the reference in cl 3.6 of the second settlement agreement to the general transfer of obligations and assignment of leases because I find that it has not been shown that the plaintiff knew that the statement was false or intended it to be false or that it contemplated the defendant would rely on such a provision in the second settlement agreement to act to its detriment. I am not satisfied that any damage has been demonstrated to have been caused by the reference to assignments of the leases as referred to in that provision. As a consequence I find that the defendant had no contractual right to terminate the franchise agreement under cl 29.5(f) or to terminate the second settlement agreement for fraud.

DAMAGES 71Mr Goodwin Gower, an accountant, was jointly instructed by the solicitors for each of the parties to determine the quantification of the plaintiff's alleged loss if any. In his report of 24 February 2011, he notes that his instructions are to quantify the alleged loss in the following respects: (a) loss of profits for the remainder of the term (including options for renewal of the term) of the franchise agreement or such earlier transfer of the franchised store to the defendant: (i) this claim will reflect the lost opportunity to derive profits that are the difference be tween: the profits (if any) that the Plaintiff would have made if it continued to operate the franchised business for the balance of the term of the Franchise Agreement; and the profits (if any) that the Plaintiff has made and will make operating the Replacement Business for the balance of the term of the Franchise Agreement; (ii) from that amount will have to be deducted the relocation costs referred to by the Plaintiff in its affidavit material as those costs would have been incurred irrespective of the termination of the Franchise Agreement; (iii) derive the profits referred to above and undertake the calculation of the difference referred to above; (b) loss of chance to make profits for the term of the renewal: (i) this claim will reflect the lost opportunity to derive profits that are the difference between: the profits (if any) that the Plaintiff would have made if it continued to operate the franchised business for the renewal term of the Franchise Agreement; and the profits (if any) that the Plaintiff will make operating the Replacement Business for the renewal term of the Franchise Agreement; (ii) derive the profits referred to above and undertake the calculation of the difference referred to above; (c) loss due to the Plaintiff's inability (in the event that the Court finds as such) to transfer the Nelson Bay franchised store to the defendant pursuant to the Mediation Settlement Agreement between the parties dated 21 January 2009; such loss being at least $250,000 representing the payment due under clause 3.2(b) of the said agreement: (i) this claim will reflect the lost opportunity to derive the difference between: $250,000 that would have been paid under the Mediation Settlement Agreement plus the costs of relocating the Replacement Business; and The value of the Replacement Business and the profits derived from it to date; and (d) loss of chance to sell the Nelson Bay Franchise, or, alternatively, loss of goodwill of the Nelson Bay business: (i) this claim will reflect the lost opportunity to derive the difference between: the value of the franchise business as at the date of termination; and the value of the Replacement Business, the profits derived from it to date and the costs of relocation. " 72Mr Gower's conclusion in a detailed reasoned report which I accept, is as follows: Loss of profits for the remainder of the term of the Franchise Agreement No Loss

Lost opportunity to derive profits for the renewal period of the Franchise Agreement No Loss

Loss due to D'Arling One's inability to transfer the Nelson Bay franchise to Eagle Boys pursuant to the Mediation Settlement Agreement 98,472

Loss of chance to sell the Nelson Bay franchise No Loss

73Mr Gower was cross-examined but I do not consider that his evidence was weakened in any material respect. I therefore adopt his report since I have found that there was a loss suffered by the plaintiff in being unable to enforce the terms of the second settlement agreement as a consequence of the repudiation of that agreement it follows from the report that the loss amounted to $98,472 and I therefore propose to enter a judgment in favour of the plaintiff for that amount. 74Counsel for the plaintiff, Mr Burchett, has submitted that there ought to be an additional amount of $38,052 awarded to the plaintiff above the $98,472 estimated by Mr Gower. That is because in arriving at the higher figure, Mr Gower had deducted the net present value of profits derived from the replacement business as at 9 June 2009 including relocation costs in an amount of $38,052. Mr Gower did precisely what the parties instructed him to do and calculated damages on the basis of his instructions and deducted this amount. There is no evidence to support the submission of the plaintiff on this aspect and I do not accept the challenge to Mr Gower's calculation. 75In response counsel for the defendant, Mr O'Brien, contended that if the defendant is found liable then there should be a deduction from the amount of $98,472 in the sum of $31,226 which was included in Mr Gower's figure in arriving at the sum of $98,472 solely because this was not pleaded. I do not accept this submission because the parties agreed to leave the question of damages to Mr Gower and gave him joint instructions. He has seen fit to include this amount as the costs of relocating in the exercise of his professional judgment. I do not think it is correct to disallow his finding on the sole ground that there was no specific pleading in relation to this amount. 76I note that Mr Burchett has submitted that 50 per cent per annum is the rate of interest which should apply from 18 November 2009 to date. He relies on cl 3.2 of the second settlement agreement which relates to a purchase by the franchisor in the event that the sale of the business was not settled by 18 May 2009. Clause 3.2(c) of the second settlement agreement provides that if the amount of $50,000 being part of the purchase price is not paid within six months then the franchisor would pay the franchisee interest at the rate of 50 per cent. I do not consider that it is appropriate to apply this figure to the damages awarded in the present case. In my opinion interest should be applied at the usual Court rate pursuant to the Civil Liability Act 2005 (NSW), s 100 and Practice Note No. SC Gen 16 from 18 May 2009 when the defendant was to purchase the franchise according to cl 3.2 to the date of judgment.

CONCLUSION 77Having regard to the foregoing, I am satisfied that the defendant has breached the second settlement agreement and was not entitled to terminate the franchise agreement. In view of the above findings it is not necessary to deal with the claim of unconscionable conduct. I am also satisfied that the cross-claim should be dismissed.

ORDERS 78The orders which I make are as follows:

Judgment and verdict for the plaintiff in the sum of $98,472, plus interest from 18 May 2009 at the prejudgment Court rate as set out in Practice Note No. SC Gen 16.
The cross-claim be dismissed with costs.
The defendant pay the plaintiff's costs of the proceeding.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 April 2011

Trade Practices Act 1974(Cth)

Civil Liability Act 2005(NSW)

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