The submissions
17 I note that in an endeavour to conserve costs in this matter, particularly given the way in which the case developed, the time the hearing took and the fact that the personal respondents resided in Queensland, submissions were put in writing. They were substantial.
18 The case advanced for the applicants, by Mr CD Freeman of counsel, was that the respondents were 'breaking their necks' to have the applicants acquire the two franchises. It was known that Mr Gallagher had a substantial superannuation payout due to him, indeed Mr Sam Montesalvo had been pursuing Mr Gallagher through his brother for some time. Mr Gallagher was selected as a franchisee after a four hour meeting with Mr Hughes. The two businesses were start ups, which were receiving limited income, given that it took some three months from contract to payment for an installed garage. It was submitted that the sales/profit estimates set out in the disclosure documents were unsustainable, given the start up nature of these businesses. Indeed, the actual sales achieved by Mr Sam Montesalvo were modest, which was not disclosed to the applicants and the businesses were making losses when they were taken over and continued to do so.
19 The two franchises were sold for $95,000 and $75,350 in circumstances where the respondents knew the applicants had no relevant experience in business, the businesses had no viable trading record and were not financially viable. The businesses lost $40,648 in the first month of trading.
20 It followed that the contracts were unfair, both as formed and performed. As to performance, it was relevant that the applicants had to support the businesses to the tune of $236,314 over the first three years of operation. The total amount expended on the businesses took up all of Mr Gallagher's superannuation savings, with a devastating effect on his retirement. Overdrafts and mortgages had been incurred in order to keep the doors open.
21 By way of contrast, Modern Garages had benefited by offloading two franchises costing it money in respect of continuing liabilities such as wages and rent, had received over $170,000 for them, and had sold its product at a markup to the applicants thereafter, of some $1,400,000.
22 Twenty-four precontractual representations were relied upon. In assessing the evidence as to these matters, it was submitted that neither the evidence of Mr John Montesalvo or that of Mr Hughes should be relied upon.
23 As to Mr Montesalvo, it was submitted that regard would be had to his former position as managing director of Modern Garages, the evidence that it went into liquidation with creditors of over $2million; that this included a loan of some $1,298,954 to the JM & AM Montesalvo Trust and a loan of $162,965 to Celstone Pty Ltd, neither of which were apparently recoverable; that Mr John Montesalvo was the trustee of that trust and a director of Celstone Pty Ltd, which on his evidence had no assets and did not trade and the fact that he was now in business again through Steel Buildings.
24 It was also relevant that the liquidator's dividend estimate for the creditors of Modern Garages was $nil, in circumstances where the company's major creditors were all entities controlled by Mr Montesalvo. He had, by way of contrast, started up an identical new business at Steel Buildings with more than 25 distributors/agents/licensees. His advice to the liquidator that Steel Buildings was not operating the same business as Modern Garages was plainly false, given his concessions in cross examination as to various matters, including that it markets and sells the same steel garage formerly sold by Modern Garages; its advertising flier had pictures and slogans taken directly from the Modern Garages brochures; it used the same logo as Modern Garages; the same internet address; was commonly referred to by the same acronym 'MGA'; charged the same fee for distributorships that Modern Garages had charged; took over Modern Garages' staff and exploited intellectual property rights attaching to the new garage product developed by Modern Garages.
25 It followed, that the Court would conclude that the liquidation of Modern Garages had been a convenient device to allow Mr John Montesalvo to operate the same business, selling the same products, in the same States, while sheltering himself from the consequences of this litigation.
26 Mr John Montesalvo's evidence as to the involvement of he and his daughter as directors of the business was patently unbelievable, as was his denial that he had not sought to arrange his personal affairs in order to avoid responsibility in this matter.
27 It would also be concluded that Mr Montesalvo had deliberately refused to comply with a notice to produce documents, which, on the evidence, were at the offices of Modern Garages before the liquidation, but later could not be produced by the Liquidator. The documents would have shown the franchisees or distributors which had failed and their turnover and would have supported the case the applicants sought to advance, particularly as to misrepresentation and problems with the product supplied. In the absence of this material the Court would reject any contentions that Modern Garage franchises had been successful. Mr Montesalvo's answers, in cross examination, as to these matters were such that the Court would be satisfied that he was contemptuous of the Court and intent on keeping information as to these matters from the Court, because it would not assist his case, particularly in relation to the purported quality of the Modern Garages' product.
28 It was further submitted that the Court would be satisfied that in various respects Mr Montesalvo's evidence was evasive and dishonest, including that given in relation to his own and his daughter's position at Steel Buildings and his evidence as to his presence at a meeting of franchisees of Modern Garages, where the quality of the new garages was discussed.
29 As to Mr Hughes, it was submitted that while his demeanour was different to that of Mr Montesalvo, being polite would not be accepted as equating to being truthful. His untruthfulness was particularly demonstrated by the evidence as to what he had informed Mr Gallagher to be the case in relation to the need for him to hold a builders' licence.
30 As to the evidence of Mr Vethman, it was submitted that it illustrated the completely different approach which he took to Mr Hughes, whose job he took over, and relevantly so far as the applicants were concerned, by demonstrating the unfairness of the respondents' precontract conduct.
31 Detailed submissions were advanced as to how the various alleged misrepresentations had been demonstrated on the evidence. I do not propose to outline those submissions here, but have had regard to them.
32 As to the evidence of Mr Gallagher, it was submitted that his evidence would be accepted, given his frank concessions even where they went against his interests. He was a witness of credit who would be believed, particularly having in mind the corroborating evidence of witnesses such as Mr Byrne, Mr Jamieson, Mr and Mrs Cuthbertson and Mr Winter.
33 As to the accounting evidence given by Mr Bell, it was relevant that it had first been made available to the respondents in 1997, but had never been challenged. It was relevant that it was uncontested that on the evidence of Mr John Montesalvo himself that he was unsurprised as to the evidence of these losses, consistent with the assessment of Ms Bourn, Modern Garages' accountant, that Mr Gallagher's business was in a parlous financial state.
34 The applicant's losses of $601,410 were not disputed. Mr Bell's methodology and the reasonableness of his approach had not been challenged and they would be accepted.
35 As to the comments by Mr John Montesalvo as to the 'value' of the business, its debts could not be overlooked. Despite long having had the opportunity to bring evidence demonstrating that Mr Gallagher was better off, this had not been availed of. If it were accepted by the Court that some account should be taken of any current value of the business, then it would be small given the respective positions of the parties.
36 Here the Court would have regard to the conduct of the parties, their respective capacity to appreciate the bargain which they had made and their comparative bargaining positions. Here the Court would conclude that the contracts were unfair as formed and performed. The contracts had been entered upon representations demonstrated to have been false, particularly as to the manner of conduct of the business and its resulting profit.
37 It was relevant that Mr John Montesalvo, Mr Hughes and Mr Sam Montesalvo were personally responsible for the representations made and had benefited from the contracts. Given their own positions with the corporate respondents, it followed that they ought to be held personally liable for the scheme of franchising and promotion of Modern Garages, it having been a particular creature of their entrepreneurial activities. (Halim v Fast Food Service Development Pty Limited (Formerly Big Al's Sandwich Joints Pty Limited) & Ors (1982) 2 IR 128 at 137 and Brown v Rezitis (1970) 127 CLR 157.)
38 It was further submitted that while the Court could not make orders against Modern Garages, as it was in liquidation, it could make factual findings concerning its position. The orders sought would be made against Mr John Montesalvo, Mr Hughes and Mr Sam Montesalvo, not only because of their personal responsibility for what had occurred, but also if it did not do so, the Court's orders would be practically unenforceable and nugatory.
39 The submissions advanced by Mr John Montesalvo were that while it was clear from Brown v Rezitis, that the Court may make orders under s106 of the Act against persons who were not parties to the contract, so long as the orders were reflective of their actual involvement, in this case the Court had no power to make any orders at all.
40 This flowed from s471B of The Corporations Law, which relevantly provided that no action could proceed against a company in liquidation without leave of the Supreme Court. Here no such leave had been sought or granted in respect of Modern Garages and it followed that no order could be made against that company.
41 If this was the case, it also followed that no order could be made declaring any contract to which it was a party void or otherwise varying it. If this was the case, it further followed that the Court was precluded from making any consequential orders against Mr John Montesalvo and Mr Hughes.
42 While the applicants had acknowledged the provision of s471B of The Corporations Law and their consequences, nevertheless, orders against Modern Garages were sought. The applicants' refusal to seek the necessary leave from the Supreme Court had rendered the proceedings useless. The opportunity to seek leave could not be availed of after the event. It followed that the proceedings were unlawful and there was no power to make any orders as to the primary questions concerning the fairness of the contract.
43 As to the submissions advanced by Mr Freeman for the applicants, it was argued that they ignored the evidence, particularly if it did not support the applicants' case and especially as to the alleged representations. It was further submitted that the evidence supporting the applicants' case was distorted and that a biased, one sided, half truth account of the facts had been put forward in the submissions, inconsistent with Mr Freeman's obligations as an officer of the Court.
44 The real position was that Modern Garages was not breaking its neck to sell the franchises to the applicants. Mr Hughes had interviewed a number of prospective franchisees who were found unsuitable prior to interviewing Mr Gallagher. He had interviewed Mr Gallagher over some six hours and had been impressed by his resume and by him. Mr Gallagher had already been sold on the idea of the franchises and was selling himself to Mr Hughes.
45 Mr Gallagher had been sold on the franchises, perhaps by his brother or by Mr Sam Montesalvo, to whom he had been speaking for months. The inference from the applicants' submissions was that the franchise should not have been sold to Mr Gallagher, a police officer with over 30 years experience, who was plainly intelligent, articulate and determined. Franchises had been sold to people from all walks of life, such as farmers, schoolteachers and shop owners. Mr Hughes' evidence was that some of them had become millionaires from their franchises. There was no reason why the franchise should not have been sold to Mr Gallagher.
46 The submissions advanced about budget estimates would not be accepted, particularly when the budgets in question were compared to budget estimates Mr Gallagher himself prepared when he decided to sell the Parramatta franchise. Nor would it be accepted that Modern Garages had hidden from him the fact that the two franchises were startup operations.
47 As to the trading figures upon which the Bell report was based, it would be accepted that they were false. They disclosed, for example, a loss of $40,000 in the first month of trading. During cross examination by Mr Freeman, Mr Montesalvo had recognised for the first time that the records showed advertising expenditure of $22,445 in that month. Mr Gallagher had spent three weeks in that month training in Brisbane. Under the franchise agreement the franchisor was responsible for the cost of advertising. There could not have been such an amount spent on advertising in that period; the account was a fabrication.
48 The report prepared by Ms Bourn in June 1996, on which the applicants relied, demonstrated that the applicants had kept no accounting records at that time. Mr Vethman's evidence was similar. It followed that the accounting records relied upon were prepared later, when the applicants were seeking legal advice. They were unreliable.
49 There were similar problems in the June 1994 trading figures in relation to matters such as consultant's fees, legal costs, licence permits, printing, postage and stationery, hire of plant, staff training and electricity and gas. This business involved the sale of garages. The premises were two showrooms. Mr Gallagher was in Brisbane for a substantial part of this time. What consultant had been engaged, what legal fees incurred, what licences and permits acquired, what plant hired and what staff training engaged in? Mr Gallagher had not provided information requested in relation to these expenses, he apparently not having retained the relevant records.
50 It followed that the 1994 accounts were a fabrication designed in order to benefit Mr Gallagher's case. It would also be accepted that within the first 12 months of operation, Mr Gallagher had drifted away from the franchise arrangement. He failed to follow the procedures laid out in the operations manual and had allowed his general manager to produce advertising inconsistent with that of Modern Garages. He also engaged in other businesses apart from that of the franchise. It was not now open to argue that his losses were the fault of Modern Garages.
51 It would be accepted that the alteration in the parties' respective positions were starkly different. Mr Gallagher was still operating a garage business at Penrith which had turned over $1.8million this financial year. Mr John Montesalvo had lost a business he had operated successfully for over 20 years. Mr Hughes was an ex-employee of Modern Garages seeking to earn a living.
52 It was submitted that the circumstances of the liquidation of Modern Garages had no relevance to the proceedings, particularly given that the misrepresentation case did not allege that any of the misrepresentations had been made personally by Mr John Montesalvo. It was submitted that the allegations made as to the liquidation of Modern Garages were unsubstantiated and unsupported by the evidence and that further, the submissions made as to the establishment of Steel Buildings and Mr John Montesalvo's interest in that business, were also irrelevant. It was further submitted that the liquidator's report demonstrated that a debt of Modern Garages had been secured by Mr Montesalvo's wife's home which had been sold to satisfy the debt. In those circumstances, how could it be concluded that the failure of Modern Garages was contrived? While on his evidence Mr Montesalvo had accepted his responsibility as a director of Modern Garages for its failure, which had had regrettable consequences for creditors, what bearing did this have on the case?
53 Account would be taken of Mr John Montesalvo's evidence that the Modern Garages business which had successfully operated for 20 years failed after decisions for change were taken which caused acrimony within the group and led to its demise. Franchisees like Mr Gallagher's, thereafter, continued operating, using the Modern Garages' logo, until it was pointed out that this amounted to passing off.
54 Nor would the inference that Mr John Montesalvo had closed one business and opened another be accepted. Steel Buildings had been operating since 1994 and its business was different to that of Modern Garages. It involved the sale of garages delivered directly to the end user, through agents who were paid a commission. It did not manufacture and sell garages to franchisees who resold and installed them.
55 The attacks on Mr John Montesalvo's credit would be rejected, they having no foundation in the evidence. It was rather the credit of Mr Gallagher which was at issue in the case, it being his evidence that various things had been said to him before he acquired the franchises.
56 As to the allegations made as to Mr John Montesalvo's failure to produce documents, they had been produced by Modern Garages and access given to them before the liquidation. At that time, no copies had been sought. After the liquidation, Mr John Montesalvo had no knowledge of what had happened to the documents and had believed that the case would not be pressed and hence had no interest in what had become of them. In any event, if the applicants had really believed a copy of the franchise agreements of other franchisees would have assisted their case, they could have been obtained from those franchisees, whose names and addresses the applicants had. Furthermore, the evidence had demonstrated that other franchisees had paid prices for their franchises ranging from $1 to $60,000. This reflected the cost of set up of the site in question, Modern Garages having been in the business of selling garages, not profiting from the set up of outlets.
57 As to the claim against Wellplace, the position was that it had not traded since 1995. In July 1995, it had assigned its interest in the franchise agreements to Modern Garages. While Mr John Montesalvo remained a director of that company, in these circumstances, no orders would be made against it.
58 It was submitted that it was irrelevant whether at the time the franchises were purchased they were making a profit or a loss because they were start up businesses, being sold without trading figures or history. Mr Gallagher, however, had obtained the benefit of $40,000 worth of work which had been taken on prior to his acquisition of the franchise.
59 As to Mr Hughes, his job was to assess potential franchisee's suitability, not to 'permit' them to purchase a franchise. Given his experience, he was well able to make such an assessment in the timeframe involved in his meeting with Mr Gallagher. Mr Gallagher began assessing the franchise in February 1994 and signed the agreements on 30 May. He had ample time to make his own assessments of the business he was acquiring. This accorded with the timeframe Mr Vethman gave evidence about.
60 Detailed submissions were made in relation to the alleged misrepresentations, to which I have also had regard, but do not outline here.
61 Submissions were also advanced as to the evidence of Mr Gallagher and the case otherwise advanced on his behalf. It was submitted that he would be accepted to have been demonstrated to be a liar. He was a policeman with over thirty years' experience, who advanced conversations of which there were no records on the one hand, suggested that he had never read or understood the franchise documents supplied to him on the other and yet expected his recollections of conversations to be accepted.
62 The evidence demonstrated that prior to the termination of the franchises, he had been in breach of the franchise agreement, including purchasing garages from a company which competed with Modern Garages, in direct breach of the franchise agreement. After he had terminated those agreements, he continued to trade using the Modern Garages' name. As to existing customers, he wrote giving them three options, which represented their choices in such a way as to make it inevitable that they would chose to do business with his new company.
63 After the agreement had been terminated, Mr Gallagher continued displaying the Modern Garages' name at his place of business in an illuminated sign visible to passing trade for 12 months. His evidence that he had never noticed the sign would be rejected. Mr Gallagher plainly had passed himself off as Modern Garages throughout that period.
64 Mr Gallagher had given evidence demonstrated to be false in a number of respects, including in relation to the circumstances in which Mr John Mountford had offered to buy the Parramatta franchise. In that context, he had supplied Mr Vethman with statements as to his profits and losses to be provided to potential purchasers, inconsistent with the case he advanced in these proceedings. That document showed profits of $78,363 to 30 June 1995, demonstrating that his claimed losses in these proceedings were a fabrication, or that he was prepared to deceive a potential purchaser.
65 Other documents prepared by Mr Gallagher, in order to sell the Parramatta franchise, had also to be considered. The statements made therein were diametrically opposed to much of the evidence Mr Gallagher gave in these proceedings. Either way, he had been demonstrated to be a liar and his evidence would not be believed.
66 It would also be accepted that the accounting records produced were internally inconsistent and a fabrication.
67 Mr Vethman, who had no vested interest in the proceedings, would be accepted as a witness of truth. His evidence as to Mr Gallagher's contact with Mr Vethman, who he knew was to be called to give evidence would be viewed with concern. He denied statements attributed to him by Mr Gallagher. Those denials would be accepted.
68 Various submissions were advanced as to the evidence of the Cuthbertsons and the failure to call evidence from other ex-franchisees. It was submitted, that it would be accepted that as they and Mr John Montesalvo had parted under acrimonious circumstances, it would not be expected that they would be called by Mr Montesalvo. They should have been called by the applicants.
69 As to suggestions that particular evidence was not challenged, it would be accepted, given the evidence in the affidavits, that while not every statement in the applicants' case may have been challenged, that did not make them true. If that were to be the test, it would be accepted that evidence of respondents' such as to the circumstances of the Mountford sale advanced by the respondents, would be accepted by the Court, given the applicants' failure to advance relevant challenges.
70 It would also be accepted that the evidence demonstrated that Mr Gallagher had breached the franchise agreements in numerous respects. His decision to leave the franchise network was not motivated by the complaints he advanced, but rather because he no longer needed or desired to remain a part of it.
71 Thereafter, Mr Gallagher pursued a profitable business, as a proper reading of his evidence demonstrated, set to achieve sales of $1.8million this year. It would also be accepted that any losses, which he had earlier suffered, had flowed not from the respondents' failures, but rather from factors identified by Ms Bourn, such as the failure to keep accounting records or to follow the franchise operations manual.
72 The evidence of Mr Byrne was that the applicants' advertising had been altered, because the applicants wanted to create an image. This was done at a time when Mr Gallagher was purchasing garages from other sources. Both he and Mr Byrne conceded they were then involved in more than one business. Losses incurred as a result could not be laid at the respondents feet.
73 In reply, it was submitted for the applicants that the only requirements for the Court's jurisdiction to be enlivened was for it to be established that the contract in question was one 'whereby work is performed in an industry'. In so far as orders were sought against particular respondents, it had to be demonstrated that they were 'involved in the contravention' (Brown v Rezitis).
74 Wellplace was the original contracting party and it followed that jurisdiction to make orders against it existed. Such orders would be made both against Wellplace, which was not in liquidation and against the natural respondents, if the necessary connection was established.
75 Section 471B of The Corporations Law only prevented orders being made against a company in liquidation, if leave of the Supreme Court was not first obtained. No orders requiring the payment of money or imposing any other obligation on Modern Garages were here sought by the applicants. If it were necessary to obtain orders from the Supreme Court, as put by the respondents, that would not be a matter for this Court, but rather for the applicants.
76 The respondents' approach to jurisdiction would, in any event, be rejected, because it would open the floodgates to recalcitrant respondents seeking to avoid liability under s106 by having the corporate vehicle in question put into liquidation and commencing activities under another corporate veil. For public policy reasons such an approach would not be countenanced.
77 As to the respondents' submissions in relation to the alleged misrepresentations, it was submitted that they focussed on the applicants' counsel rather than addressing the evidentiary and legal issues raised. It would, nevertheless, be accepted that Mr John Montesalvo was involved in making the representations, especially those made in writing in documents he himself had produced and that they were relevantly false and misleading.
78 Even if the respondents' submissions as to misrepresentation were correct, nevertheless, the contracts were still unfair as performed and hence offended s106 of the Act.
79 As to Mr Sam Montesalvo, account would be taken of the fact that he was available, but not called by the respondents. As to the veracity of the witnesses, Mr Gallagher would be accepted as a witness of credit, especially given the supporting evidence of credible and independent witnesses called by the applicants.
80 The submissions of the respondents would be accepted as being misleading and underlining his lack of credit.
81 As to the attack on the expenses in the first month of trading, it would be recollected that this was at a time when Mr Sam Montesalvo was running the business for Mr Gallagher, including being a signatory to the cheque account.
82 As to the submissions that Mr Gallagher was operating another business apart from that of the franchise, his evidence that he purchased products from other suppliers if Modern Garages did not provide the product or it was in short supply would be accepted, particularly as this was done in order to avoid loss of profits on particular jobs.
83 As to the complaints made as to passing off, it would not be ignored that in the contracts in question Mr Gallagher had placed orders with Modern Garages and later informed the customers of their choices.
84 As to complaints that Mr Hughes had late notice of the hearing, the fact was that he was represented by Barker Gosling, which had not filed a notice of ceasing to act for him when the hearing dates were fixed, but, in any event, the applicant had notified him of those dates. In any event, his evidence was that he had consulted another lawyer on 2 January 2000.
85 It would also not be accepted that Mr Hughes received no benefit from the transaction. He was director of the companies in question, made representations on their behalf and earned his living from them.
86 The natural respondents were clearly involved in the contravention and orders of the Court would be rendered unenforceable if they were not made personally against them.