Supreme Court of WA|1999-04-13|Before: Dr J, Steytler J

Gardner Corporation Pty Ltd v Zed Bears Pty Ltd (Acn 069 020 640) & Ors [1999] WASC 1043 (13 April 1999)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

HEARD : 24-27 & 30 NOVEMBER, 1-4, 7-10, 18 & 21 DECEMBER 1998

Contracts - Discharge, breach and defences to action for breach - Claim against franchisees and their directors as guarantors

Trade practices - Misleading and deceptive conduct by franchisor - Trade Practices Act 1974, s52, s59(2) and s87 - Representation as to future matter - What constitutes

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Bateman v Slatyer (1987) 71 ALR 553

Bell v Australasian Recyclers (WA) Pty Ltd (1986) ATPR 40-644

Bowler v Hilda Pty Ltd (1998) 153 ALR 95

Camila Pty Ltd v Actus Australia Limited (1994) ATPR 41-367

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Nescor Industries Group Pty Ltd & Ors v Miba Pty Ltd & Ors (1998) ATPR 41-609

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Pont Data Australia Pty Ltd v ASX Operations Pty Limited (1990) ATPR 41-007

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Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177

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Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596

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This is a dispute between Gardner Corporation Pty Ltd ("Gardner Corporation") and its Managing Director Mr Charles Gardner, on the one hand, and two companies, Zed Bears Pty Ltd ("Zed Bears") and Krishell Pty Ltd ("Krishell") and their directors (to all of whom I shall refer, together, as "the defendants") on the other.

The directors of Zed Bears are Mr Ronald Stenning and Mrs Jean Stenning and the directors of Krishell are Mr Denis Myers and Mrs Noreen Myers. The dispute arises out of the sale by Gardner Corporation to Zed Bears and Krishell (together "the franchisees") of what was referred to as a Gardner Electronics franchise. That sale was effected by way of an agreement dated 14 May 1995 ("the Franchise Agreement") between Gardner Corporation as franchisor and Zed Bears and Krishell as franchisees. By the terms of the Franchise Agreement each of the directors of Zed Bears and Krishell guaranteed to Gardner Corporation the due and punctual performance by those companies of the terms and conditions of the Franchise Agreement and also the payment of any damages which might flow from the breach of any obligation taken on by them under that agreement. They also guaranteed the due payment by those companies of money owing in respect of all goods and services supplied by Gardner Corporation to the franchisees.

Gardner Corporation contends that the franchisees have breached the Franchise Agreement and claims damages accordingly. It also claims money in respect of goods sold and delivered by it to the franchisees and outstanding franchise fees and advertising levies which, it says, are payable pursuant to the terms of the Franchise Agreement. Those claims are brought against the franchisees and their directors as guarantors.

The franchisees and their directors dispute that there has been any breach, by the franchisees, of the Franchise Agreement. They contend that they were induced to enter into the Franchise Agreement by misleading and deceptive conduct on the part of Gardner Corporation in breach of ss52 and 59(2) of the Trade Practices Act 1974 ("the Act") and that Mr Gardner was knowingly concerned in that conduct. They say that they are, as a consequence, entitled to a declaration under s87 of the Act that the Franchise Agreement was null and void from its inception and also to damages to compensate them for losses which, they say, have been suffered by them in the course of the unprofitable operation of the franchised business. They dispute that there is anything owing by them to Gardner Corporation and they say in any event, so far as Gardner Corporation's claim for the price of goods sold and delivered is concerned, that there was an implied term of the Franchise Agreement that Gardner Corporation would act reasonably and in good faith in determining the prices to be paid for products sold by it to the franchisees and that the prices actually charged were unreasonable and not determined in good faith.

Events leading up to the acquisition of the franchise by the franchisees

Before dealing with these issues I will set out the background against which the dispute has arisen. In doing so I will mention some of the conflicts in the evidence before returning to them later in these reasons.

"Gardner Electronics" is a registered trade name owned by Gardner Corporation. Gardner Corporation was established in 1971. It initially traded under the name "Crazy Charlies". It changed its trading name to "Gardner Electronics" in 1987. It carried on business, primarily as a vendor of car sound and communication systems, accessories and other electronic products, from a number of different outlets around the Perth metropolitan area.

In 1988 Gardner Corporation began to sell a number of franchises. The first of these was the franchise for its Fremantle store. This was sold by it to a Mr Graeme Harwood in December 1988. Over the next few years franchises for all of its stores, with the exception of one in Cannington (which Gardner Corporation continued to operate), were sold to various franchisees. Those stores initially comprised stores in Morley, Midland and Innaloo. New franchises were sold by Gardner Corporation to cover the areas of Balcatta, Mandurah, Melville, Kelmscott, Joondalup and Canning Vale. Each franchise was for a term of 10 years.

Mr Stenning first developed an interest in the Fremantle franchise in October 1994. He was then in business as a finance consultant (although he had, in correspondence, described himself as a finance broker albeit he was never licensed as such). He was introduced to a Mr Julian Clifford who, through his company Tsalach Pty Ltd ("Tsalach"), was negotiating to purchase the Fremantle franchise from Mr Harwood or a company associated with him. Mr Clifford asked Mr Stenning to help him obtain finance for that purpose.

Mr Stenning was, in that capacity, given documents which had been prepared by Mr Harwood's business broker and which outlined the style of the business to be sold and provided a summary of financial information relating to the business, the price sought and other details of the business. He was also given financial statements of the business, which had been prepared by Mr Harwood's accountant and a report which had been prepared for Mr Clifford by an investigating accountant. Mr Stenning said that this report was "essentially an audit of the profit and loss statement of the ... business" and that, having read it, he "thought the accounts were reasonably accurate". He said also that he looked "carefully" at the profit and loss statement for the business for the year ended 30 June 1994. He was "certainly impressed" by the figures which he saw.

The financial statements demonstrated that the business had an annual turnover of over $3,500,000 and was very profitable. They showed that it had, in the year ended 30 June 1994, earned a gross profit of $1,260,313 and a net profit, after allowing for directors' salaries of $242,000 and superannuation contributions for directors of $75,000, of $473,670. The net profit, after adding back these and other items such as depreciation, interest and travelling expenses, was shown as $913,411. This figure was described as "Earnings before interest, tax and drawings". An attachment described as a "Budgeted profit and loss statement for 12 month period (without prejudice)" showed anticipated "Earnings before tax and drawings" of $607,580. An attached document showed that the business had earned a gross profit of 33.6 per cent over the period 1 July 1993 to 31 March 1994 and one of 40.1 per cent in the 1992/93 financial year.

Mr Stenning was also given a copy of the franchise agreement which had been made between Mr Harwood and Gardner Corporation.

Mr Stenning was instrumental in arranging vendor finance on behalf of Mr Clifford and the business changed hands on or about 30 November 1994 for a purchase price in excess of $1,000,000.

In February 1995 Mr Stenning learned that Mr Clifford was experiencing financial difficulty in respect of the business and that he needed, but could not afford, managerial assistance. He was, as he put it, "surprised and interested in this development" as he knew that the business "had been very successful". He thought that there might be an opportunity for him to acquire a share of the business by investing some capital in it and providing management. He said that he had in mind the "very attractive" figures that he had seen and that he saw this as an opportunity for himself.

With this opportunity in mind Mr Stenning met with Mr and Mrs Clifford at their home in February 1995 in the company of three other men, Messrs Richard Crawley, Kevin Berich and Ian Hatfield. The possibility was discussed that this group might invest capital and management in the business in return for a share of it. Mr Stenning said in evidence that as a result of what was said to him by Mr Clifford he concluded that the business had severe cash flow problems, that stock was "disappearing far faster than ... [Mr Clifford] actually sold it", that Mr Clifford was "totally overwhelmed" by the day to day complexity of the business, that Mr Clifford did not have much of a grasp of the current financial position of the business and that Mr Clifford welcomed the interest of the group and was amenable in principle to selling a share of the business.

However Mr Stenning was unable to reach agreement with the other three potential investors. He decided to proceed without them and to look for another suitable financial partner. He performed a rough stock take of the business which, when looked at in conjunction with the trading figures, suggested that the business had operated at a substantial trading loss since Mr Clifford had acquired it.

Mr Clifford suggested to Mr Stenning that he should ring Mr Gardner. He believed that Mr Gardner's approval was required if Mr Stenning was to invest in the business. Mr Stenning consequently telephoned Mr Gardner several times in the second half of February 1995.

On 2 March 1995 Mr and Mrs Stenning made a written offer to Mr Clifford to purchase a share of his business. A copy of the offer was sent to Gardner Corporation.

In their offer the Stennings made what they described as a three stage proposal. They proposed, firstly, to take over "the bulk of day to day management of the business" and to address various issues which they saw as being vital to its survival. Next they proposed, if they formed the opinion that the business could be saved, to invest an amount of not less than $45,000 and not more than $50,000 into the business. Finally if, following that initial investment, the business was able to demonstrate a reasonable capacity to run profitably they proposed to invite a third party or parties to contribute a further $50,000 to the business. The Stennings proposed that they should receive, in consideration of their financial investment, a 26 per cent interest in the business and that the third party or third parties should receive a 25 per cent share of the business in return for the additional $50,000. The offer contained a provision to the effect that the Stennings "and/or the additional equity partners would like to negotiate an option to purchase the balance of the business on some mutually agreeable terms". It recorded that Mr and Mrs Stenning wanted "to make it abundantly clear that they are making their offer wholly as a result of their own investigations and researches ...".

Mr Stenning said in evidence that he made the offer primarily because he wanted the opportunity to establish whether Mr Harwood's trading figures "could be achieved again". He said that if those figures could be achieved the business was very valuable.

As matters transpired Mr Stenning never did take over the management of the business but instead continued to investigate its books and accounts. By 6 March 1995 he had reached the conclusion that the business could not be saved and he consequently decided not to pursue the proposal to invest in it.

Mr Stenning said that on that afternoon he telephoned Mr Gardner and told him that Mr Clifford's business was not, in his opinion, salvageable and that he did not intend to pursue any investment in it. Mr Gardner confirmed this in his evidence but added that Mr Stenning then raised with him the possible purchase, in his own right, of a Gardner Electronics franchise.

Mr Stenning's evidence of this telephone conversation was that, in the course of it, Mr Gardner made a number of representations as to the profitability of the franchised stores. He said that Mr Gardner "expressed broad, general profitability" in respect of each of the stores other than the Melville store and said that the Cannington and Morley stores were making in excess of $100,000 profit. Mr Gardner denied that he made any such representation and nor is any representation of that kind pleaded by the defendants to have been made on 6 March 1995.

Mr Stenning wrote to Mr Gardner on 7 March 1995, placing it "on record" that he was "very interested in taking on some suitable Gardner's Franchise". He said that if anything should become available he would be "very interested in being given an opportunity to look at it". He said that his only regret was that "Fremantle at this time is probably beyond my financial capacity".

Mr Stenning said in his evidence that he was, at that time, "impressed" by Mr Harwood's trading figures and believed that with proper management the Fremantle franchise could be very profitable. Prior to writing to Mr Gardner he had told him that he would be interested in a new franchise on the same premises if such a franchise was available.

On 7 March 1995, after receiving Mr Stenning's letter, Mr Gardner went to Mr Clifford's store and, with the latter's agreement, closed it down and took away most of its trading stock.

Mr Stenning said that, while he was at that time very enthusiastic about the possibility of taking on a franchise (and he said that from 7 March 1995 "it was abundantly clear that ... [he] could get a Gardner franchise"), he had not committed himself to do so because there was much that he still wanted to find out. He said that he knew very little about the electronics retail industry or about the day to day operations of the business of the Fremantle franchise or the overall operations of the Gardner Electronics Group (the "Group"). He said that he was also concerned about the availability of technical and marketing support from Gardner Corporation and wanted to know about the profitability of the other franchisees in the group.

Mr Gardner, on the other hand, said that it was made apparent to him by Mr Stenning, in the course of a discussion with him on 7 March 1995 and again repeatedly thereafter, that Mr Stenning wanted the Fremantle franchise from the moment that Mr Clifford's store closed.

Because he did not have the financial resources to establish a large new franchise business on his own Mr Stenning discussed that prospect with Mr and Mrs Myers who were clients of his.

Mr and Mrs Myers, through their family company Shellkrist Pty Ltd, had successfully operated a Foodland store (described as a "Supa Valu Store") since 1989. Mr Stenning had acted as the Myers' finance broker when the business was purchased and the Stennings and the Myers became friends thereafter.

Mr and Mrs Myers had first been approached by Mr Stenning in connection with the possible acquisition of a controlling interest in Tsalach in February 1995. However the Myers were not interested in any such acquisition. Mrs Myers said in evidence that she was then shown some figures by Mr Stenning on a social occasion and that, because she had no interest in the proposal, she only "briefly glimpsed at them".

In early March 1995 Mr Stenning approached Mr and Mrs Myers once again and told them that Tsalach was closing its Fremantle business and that he wanted Mr and Mrs Myers to assist him in starting a new retail electronics business in Fremantle in part of the premises from which Mr Clifford had traded, being premises at 1 and 3 Queen Victoria Street. He said that he thought that he could get a new Gardner Electronics franchise for Fremantle.

Mr and Mrs Myers said that they might be interested so long as no "hands on" involvement was required of them. Mr Myers had by then seen the financial statements for the business which had earlier been given to Mr Stenning. He said that he did not study those figures but that he was made aware that the "Clifford business ... was turning over about $3.5 million" and was told that "the net before tax was somewhere round about the $600,000 mark" and that the business was sold to Mr Clifford for $1.2 million. Mr and Mrs Myers agreed that Mr Stenning should find out if he could secure a lease of the premises at 1 Queen Victoria Street.

On 9 March 1995 Mr Myers approached his bank in order to be sure that he could borrow the necessary funds. At that time he and Mrs Myers assumed that an investment of $50,000 would be sufficient.

The owner of the premises at 1 Queen Victoria Street was a company, CPA Automatic Transmissions Pty Ltd. That company was represented by Ms Sue Hansen, a solicitor in the employ of a law firm, Parker & Parker. On 7 March 1995 Mr Stenning telephoned Ms Hansen. He told her that he was an "opportunist", that he was a friend of Mr Clifford and that Mr Clifford would be closing down his store on the following day. He said that the closure was "related to the bad business deal with [Mr] Harwood" and that he wanted to take over the lease of the store. He told Ms Hansen (whose evidence I accept in its entirety, that evidence having been largely uncontradicted) that he was "begging to be considered as the next tenant" because he wanted to "have a franchise there". Ms Hansen said that Mr Stenning told her that he was prepared to pay "higher rent" although he also said that he did not want to lease that half of the existing shop premises which was owned by Mr Harwood, being 3 Queen Victoria Street. He also said that because he was not buying an existing business he would have "hugely reduced overheads" compared to Mr Clifford. Ms Hansen suggested to him that he put something to her in writing.

Mr Stenning said that on the morning of 10 March 1995 he went to the offices of Gardner Corporation at Cannington in order to discuss "the future" of the Fremantle premises with Mr Gardner. He said that he had a cup of coffee with Mr Gardner at the Carousel Shopping Centre in the course of which Mr Gardner offered him his full support in leasing the premises at 1 Queen Victoria Street. Mr Stenning said that he had, earlier on that day, talked with Mr Kim Pollock of Gardner Corporation and that the latter had agreed that he would put together some information about the Group for him. Upon returning to the office of Gardner Corporation with Mr Gardner, Mr Stenning said, Mr Pollock produced the documents which he had put together and one or other of Mr Pollock or Mr Gardner gave them to him. One of these was headed "Electronics Franchise" and contained a good deal of information with respect to Gardner Electronics franchises. Many of the representations which, the defendants allege, were made and which constituted misleading and deceptive conduct by Gardner Corporation are contained within this document (to which I shall refer as "the franchise document").

However Mr Gardner, in his evidence, denied that he or Mr Pollock gave the franchise document to Mr Stenning on 10 March 1995. While he could not specifically recall what he and Mr Stenning had then talked about he said that the discussion focused on what ideas Mr Stenning had to improve the operation of the Fremantle franchise.

Mr Stenning said (but Mr Gardner denies) that Mr Gardner also then told him that all of the franchises were very profitable (the defendants' pleading uses the words "highly profitable", although an earlier version of it suggests only that the representation was that the franchised stores were "profitable") and that when Mr Stenning asked Mr Gardner how profitable they were he said that this varied depending upon their size and location but that the Cannington, Morley and Midland stores would all have made well over $100,000 per annum. He said also that Mr Gardner said that the Melville franchise (which Mr Gardner offered to sell to Mr Stenning if the current franchisee would agree to exchange it for another store) was profitable on sales of only $6,500 per week but there was a good opportunity to build it up and make it substantially better. Mr Stenning said that he was not interested in the Melville franchise.

Mr Stenning also said that on or about 10 March 1995 Mr Gardner handed to him a copy of the franchise agreement dated 17 December 1988 made between Mr Harwood and Gardner Corporation and told Mr Stenning that the terms of that agreement were the same as would apply to the franchise agreement which the defendants would be required to sign. That agreement provided, by cl 2(6)(a), that in order to ensure that all products sold by the franchisee were of the highest quality the franchisee was required to purchase all of those products directly from Gardner Corporation or from suppliers approved by it in circumstances in which its approval would not unreasonably be withheld. Clause 2(6)(b) provided, inter alia, that if Gardner Corporation or a supplier approved by it was unable to supply all or part of an order by the franchisee within 14 days of receipt of the order then the franchisee was at liberty to acquire any outstanding items from an alternative supplier approved in writing by Gardner Corporation, which approval would not unreasonably be withheld.

Mr Gardner said that at no time did he give to Mr Stenning or anyone else on his behalf a copy of the franchise agreement which had been made with Mr Harwood. Indeed, he said, he specifically told Mr Stenning that the current franchise agreement had been rewritten in order to overcome problems which he had experienced with Mr Harwood. He said that he would have told Mr Stenning this as early as 1 or 2 March 1995.

Mr Stenning said that when he got home that day he and Mrs Stenning read the franchise document. Mrs Stenning's evidence-in-chief was to similar effect. She said that at some time early in March Mr Stenning brought the franchise document home with him and the two of them read through it.

Mrs Stenning also said that she first met Mr Gardner in mid-March 1995 when she and her husband met with him in his Cannington store and thereafter went to the Carousel Shopping Centre for coffee. She said that during the discussion over coffee Mr Gardner "painted a very rosy picture of his franchise group".

Mr Gardner could not recall any meeting involving Mrs Stenning in mid-March. No record of any such meeting appeared in his diary, in which other meeting times and events are recorded. Moreover, he said that on 10 March 1995 he had been to a home show with his wife and thereafter took her to lunch. He also said that he said nothing to the effect that all of the franchised stores were profitable, either then or at any other time. Rather, he said, when he spoke to Mr Stenning on 6 March 1995 by telephone he did speak about every franchisee but did not say anything about profitability other than that the Melville store was doing "poorly" because of an inexperienced franchisee. Indeed, he said, Mr Stenning then told him that Mr Stenning regarded the opportunity of acquiring the Fremantle franchise as being "a golden opportunity" or said words to the effect that that franchise "was a gold mine".

Mr Gardner did say, however, that he told Mr Stenning that the Midland franchisee had purchased a second franchise (being the Joondalup franchise) and that the Innaloo franchisee had also purchased a second franchise (being Kelmscott). He also said that the Morley franchisee was considering purchasing a second franchise.

He said that he was in no position to comment on the profitability of individual franchisees because, although he had tried to get profitability figures from them, he had not been able to do so.

On 10 March 1995 Mr Stenning sent to Ms Hansen by fax a 10 page document entitled "Preliminary Application to Lease Commercial Premises". That document records that the applicants (Mr and Mrs Stenning and Mr and Mrs Myers) "seek a new Lease of as long a duration as possible" of the premises at 1 Queen Victoria Street. The document also records that the applicants had been "offered a full 'Gardner Electronics' Franchise" and that the "usage will be substantially the same as previous tenants". Mr Stenning said that he and Mrs Stenning intended "running the 'Gardner' store in Fremantle". He provided "background details" in respect of each of himself, Mrs Stenning, Mr Myers and Mrs Myers.

Mr Stenning said in the document that he had worked as a finance broker for in excess of eight years (although he had, as I have said, in fact been only a finance consultant and had never held a broker's license). He said that he wanted "the Gardner Franchise for Fremantle" and that he would "do anything possible to obtain it".

He concluded by saying that he could not "overemphasise how anxious we are to obtain a 'good clean Lease' to these premises" and that the applicants did "not want just any Gardner Franchise somewhere in Fremantle" but wanted "these premises".

Attached to the document were statements of assets and liabilities and a statement of profit and loss for the business "Supa Valu Mt Lawley" for the year ended 30 June 1994 which had been faxed to him by Mr or Mrs Myers at 8.58 that morning.

He said that he had told Mr and Mrs Myers that he would be sending off the "Preliminary Application to Lease" and that Mr Myers had said that this was "worth pursuing". Mr Myers said in this respect that he had told Mr Stenning to see if he could "get the lease and we'll talk about it later". Mrs Myers, too, said that she saw the position as being such that Mr Stenning should "secure the lease, then we will talk".

On 12 March 1995 Ms Hansen received from Mr Stenning a faxed copy of a letter dated 11 March 1995. In it Mr Stenning said that Ms Hansen should be aware from earlier conversations and from his application that he was "extremely keen" to obtain a lease over the premises at 1 Queen Victoria Street. He said that he was prepared to offer a 20 per cent increase on the existing rental in respect of the premises, taking that rental from $36,000 per annum to $43,200 per annum. He said (although this was not true) that "at the moment I am paying to hold a good team of staff together so that we can get the business going again with the minimum disruption".

On 14 March 1995 Mr Gardner sent to Mr Stenning a fax in which he suggested that the latter purchase the Melville franchise then operated by Mr Terry Doyle. He said that the franchise had had an average turnover of $6,500 per week over the last 12 months or so and that "the figures could easily be vastly improved with the correct operators". However Mr Stenning was not interested in that store.

Ms Hansen said that on 15 March 1995 she was telephoned by Mr Stenning. Mr Stenning told her again that he was "holding staff together" and that he was waiting for the owner of the premises to let him know whether or not he could "go in" (although he acknowledged in evidence that he was not in fact "holding staff together" in any sense other than that he had then hoped that former members of Mr Clifford's staff would agree to work for him if he acquired the Fremantle franchise, and that he had given some of them oral encouragement to do so). Mr Stenning also told Mr Gardner, at about that time, that he was "concerned about keeping the various staff from the former franchisee, mainly the key people, as he was saying he wanted to get experienced personnel and they wouldn't wait around forever ... ". Mr Gardner said, and I accept, that, when he went to look at Mr Clifford's former premises in order to enable Mr Stenning to explain to him proposals for remodelling them, he saw some of Mr Clifford's former staff "floating around". This was on 12 March 1995.

Mr Stenning said in evidence that he had exaggerated about "holding staff together" because he was trying to "get the guy [presumably the landlord of Mr Clifford's former premises] to get a hurry on" because he "had seen a business that had a three and a half million dollar turnover" and "wanted to replicate as much of that business as ... [he] could as quickly as ... [he] could ... provided everything else was okay".

Ms Hansen received a further telephone call from Mr Stenning on 17 March 1995. Her note of that conversation recorded that Mr Stenning said that he had received a telephone call from Mr Gardner and that it was intended by Mr Stenning and Mr Gardner that Messrs Stenning and "Miles" (presumably a mistaken entry for "Myers") should be the occupiers of the premises. Mr Stenning also told her that while Mr Gardner did not usually run a franchise himself he wanted to keep these premises for the Group "so badly" that he was prepared to be the head lessee.

On 20 March 1995 Ms Hansen received a faxed copy of a letter written by Mr Gardner to CPA Automatic Transmissions Pty Ltd. In it Mr Gardner recorded that all that Gardner Corporation was interested in doing was "selling a Franchise to Mr Ron Stenning and Myers as they have already been approved by us".

On 20 March 1995 Mr Stenning sent a fax to Ms Hansen attaching a "formal notification of interest in leasing commercial premises" relating to 1 Queen Victoria Street. In that application Mr Stenning indicated a preparedness to pay an annual rental of $50,000. He said that there would be four equal shareholders in the "Group" which would "be the lessee", being Mr and Mrs Stenning and Mr and Mrs Myers and that each of them would guarantee the lessor's obligations under the lease. He said, once again, that the applicants had "been offered a full 'Gardner Electronics' Franchise". He also mentioned that he had received a quote for the cost of converting the premises to retail usage. Mr Stenning said again that he could not "overemphasise how anxious we are to obtain a 'good clean Lease' to these premises". He also repeated that he did not want "just any Gardner Franchise somewhere in Fremantle" and that the applicants wanted "these premises".

Mr Stenning said that on 27 March 1985 Mr Gardner asked him to let him have an application for a franchise showing details of the proposed franchisees. He prepared a "preliminary application" and sent it to Mr Gardner by fax on that day. Mr Gardner confirmed in evidence that he received the application but denied the suggestion, put to him in cross-examination, that he did not accept it. He said that he "accepted the first one and this one". He said that after he received the first application he did not regard the later applications as significant.

That application showed Zed Bears (although it had then yet to be incorporated) and Mr and Mrs Myers as the proposed franchisees. It provided a statement of assets and liabilities of Mr and Mrs Stenning (who were of course proposed to be the directors of Zed Bears) and also of Mr and Mrs Myers. It named referees for Mr and Mrs Myers and Mr and Mrs Stenning.

Notwithstanding this, Mr Stenning said, he had not himself decided whether to become a Gardner Electronics franchisee and he had no authority from Mr and Mrs Myers to commit them to the acquisition of such a franchise. He said that he saw the application as "being merely a description to Charles Gardner of the parties we would propose if we were to take out a franchise".

On 22 March 1995 Mr Stenning had been told by CPA Automatic Transmissions Pty Ltd that it would not enter into a lease with him in respect of 1 Queen Victoria Street. He said that he had anticipated that this would happen and that he had previously started looking for alternative premises. However Mr Myers said that when Mr Stenning told him that he had been unable to get a lease of the Queen Victoria Street premises he and Mrs Myers were "no longer involved in the proposal".

On 28 March 1995 Mr Stenning invited Mr Gardner to join him in inspecting premises which he had located at Wray Avenue in Fremantle. At that time, Mr Stenning said, Mr Gardner gave him an original of the franchise document that had a printed form of franchise application at the back of it and asked him to fill out the form. Mr Gardner confirmed this in his evidence (save that he was unsure whether that document was given to Mr Stenning on 28 or 29 March) but said (and I accept) that this was the first occasion upon which the franchise document or any copy thereof was ever given by Gardner Corporation to Mr Stenning. He said that he gave that document to Mr Stenning "just for the application form, for no other purpose". He also said (and I accept) that neither Mr Stenning nor anyone else on behalf of the franchisees ever asked him any question in respect of this document or ever discussed it with him at that time or at any time during 1995.

The franchise document contained the following representations, each of which is material to these proceedings:

(a) Gardner Electronics franchisees had the advantage of Group "bulk buying power" and the Group name, backed up by a continued history of heavy purchases, allowed it "a low buying price together with other privileges". The franchise document also provided in this respect that, even allowing for royalties which would have to be paid, the franchisee would "generally be buying stock for less than ... [the franchisee] could do on ... [its] own."

(b) A major advantage of a Gardner Electronics franchise was the ability to obtain exclusive products.

(c) Other major advantages were that the franchisee could obtain management, administration and sales advice, latest promotion and marketing advice, initial and ongoing training as required and technical advice and assistance when required. Clause 10 of the franchise document provided, under the heading "Training Programme", the following information:

"TRAINING is generally conducted at the Cannington Head Office Store. Initially a minimum of 30 days training is required before a new franchise can commence. This training (as with all training conducted at Head Office) is at no charge ...

Training varies from person to person, but the longer a trainee can spend training, the better his own franchise will operate.

Once the New Franchise is opened, we offer a further 10 weeks (one day per week) onsite training by one of our Senior Managers. This is all at no charge. Periodical store checks, advice and guidance will follow indefinitely for the length of the Franchise agreement.

The Franchisee can obtain as much training as he requires for himself or any of his staff at any time for the length of the Franchise agreement at our Head Office all at No Charge.

Any additional on site training is available but a charge will be levied."

(d) "Each store will be placed to attract a yearly sales turnover of $520,000 plus. This figure may not be achieved in the first year of operation, but it is expected that each store should achieve the figures by the end of the first year".

(e) "Once at that level of sales, the expenses are such that an annual net income (pre-tax) of $166,000 should be earnt (sic) by the franchisee".

(f) "A flat [royalty of] $395 per week is payable regardless of turnover" and this would increase or decrease "in line with the CPI + 2% p.a.".

(g) "The average Company profit is 50 per cent mark up. This is a remarkably high percentage and is mainly attributed to our bulk buying power. Naturally on some lines the mark up is as little as 10% but on some it is as high as two hundred percent."

(h) "[Royalties are] ... a necessary expense. On an average our huge buying power saves you well in excess of the fee."

(i) There would be "[l]arge benefits from ...[head office] negotiations on behalf of the group dealers (ie Telecom MobileNet Premium dealer), special contributors [sic] from suppliers for promotion of their goods etc etc."

I will return to each of these representations later in these reasons.

Mr Stenning said that a few days later he filled in the application form which had been attached to the franchise document. The evidence disclosed that it was faxed to Gardner Corporation on 31 March 1995.

Mr Stenning said that the application form did not include Mr and Mrs Myers as franchisees because Mr Myers had told him that he would not invest in a business located at the Wray Avenue premises. However Mr Stenning said that, because premises in Fremantle were difficult to find, he and his wife decided to take the Wray Avenue premises and to "consider" proceeding on their own.

Mr Stenning said that on 30 March 1995 Mr Gardner invited him to bring Mrs Stenning out to discuss the situation. He at first said (as he had earlier said in a statement initially signed by him for use in these proceedings) that Mr Gardner invited him to bring Mrs Stenning "to meet him". However he then corrected this, saying Mrs Stenning had reminded him that she had been at the earlier meeting with Mr Gardner and that, having been reminded of this, he had "some slight recall of that meeting". Mrs Stenning, in her evidence, initially said in this respect that she first met Mr Gardner 7 to 10 days before the end of March 1995 on an occasion upon which they left his Cannington store to have a cup of coffee in the Carousel shopping centre. She said that she had by then already seen a copy of the franchise document. She said that she might have "flipped through" that document by herself. She said that her husband later brought another copy of that document and that she "also just quickly flipped through" it. However Mrs Stenning also said that she had little interest in "figures" and that "big picture" business decisions in regard to what she and Mr Stenning did were left by her to Mr Stenning. She did not read documents which her husband prepared in regard to "applications for leases and the like" and "trusted his judgment".

Whatever may be the situation in that regard (and I will return to this issue below) there is no dispute as to the fact that Mr and Mrs Stenning agreed to meet with Mr Gardner at 10.00am on the following day in order to "discuss the agreement". The appointed time was suggested in a fax sent to Mr Stenning by Mr Gardner on 31 March 1995 which concluded with the words "By the way congratulations". Mr Gardner said in evidence that this was a reference to "the deal being struck or ... choosing the franchise, committing to it or whatever".

The appointed meeting duly took place at Mr Gardner's office. According to Mr Stenning Mr Gardner repeated "his very rosy picture of the overall profitability of all stores" (once again the defendants' pleading is to the effect that the franchised stores were then represented to be "highly profitable" or, in an earlier version, "profitable"). Mr Stenning said also that Mr Gardner said that Fremantle was "a special case" as he had started it himself and that it had always been a very profitable location.

Mr Stenning said that at no stage during his discussions with Mr Gardner did they discuss the "financials" of the Fremantle franchise as run by Mr Harwood. He said that he did not even know whether or not Mr Gardner had the "figures" for the franchise.

Mr Stenning said that he also then discussed with Mr Gardner his concerns about competing with Mr Harwood in Fremantle. I have already mentioned that Mr Harwood owned the premises at 3 Queen Victoria Street, Fremantle and that Mr Harwood had operated Gardner Electronics Fremantle from those premises and from 1 Queen Victoria Street until such time as he sold that business to Mr Clifford. Mr Stenning said that he told Mr Gardner that he did not want to open a Gardner Electronics store in Fremantle if Mr Harwood was going to be his direct and immediate competitor, particularly if he was to operate from the premises at 3 Queen Victoria Street.

Mr Harwood had been sent to jail for three years for dealing in stolen goods but, Mr Stenning said, he was aware that in about two or three years time Mr Harwood might reappear as a competitor.

He said that Mr Gardner assured him that Mr Harwood would be out of business in Fremantle for many years to come, that Gardner Corporation's solicitors had the matter in hand and that Mr Gardner would "move vigorously" to have all of Mr Harwood's stores closed. He said that Mr Gardner also claimed "to have legal right and the financial capacity to achieve these ends".

Mr Gardner's recollection was that the discussion as regards Mr Harwood took place on 12 March 1995. He said that it was he who raised with Mr Stenning the prospect that Mr Harwood might be a problem for Mr Stenning, particularly as Mr Harwood owned the premises which were adjacent to those in which Mr Stenning then proposed to trade. Indeed, Mr Gardner said, he raised the prospect that there might be physical threats to Mr Stenning. He said that Mr Stenning responded by saying that if Mr Harwood gave him any trouble he would "get him chucked back in gaol". Mr Gardner also said that he told Mr Stenning, at that time, that his understanding was that deficiencies in the legal system were such that he would not be able to stop Mr Harwood from trading. He said that his legal advice was that this "would be very hard to enforce".

Mr Stenning said that Mr Gardner asked, on 31 March 1995, for a cheque for $20,000 as a franchise fee. Mr Stenning said that, although he thought the request to be premature, he was interested in pursuing "the possibility of the franchise" so he gave to Mr Gardner a cheque for that amount. He did this notwithstanding that, as he put it, he and Mrs Stenning were "getting increasingly unhappy with the premises at Wray Avenue" and were looking for other premises. He also said that Mr Gardner asked him for the completed franchise application and that, because he had not brought it with him, he faxed the application to Mr Gardner when he got home after the meeting.

Mrs Stenning, too, said that on 31 March 1995 she and her husband went to see Mr Gardner at his office in Cannington. She said that Mr Stenning was very enthusiastic about the Fremantle franchise and she was prepared to "back his judgment that we should buy it". She said that Mr Gardner "again" enthused "over how good his businesses were" and that she "felt that we were making the right decision". She said that Mr Gardner then asked for a cheque for $20,000 as the franchise fee and that she was a little surprised by this as it seemed "a bit premature". However, she said, "... whatever Ron [Mr Stenning] had decided I went along with".

Mr Gardner said that the "deal" was formally "struck" when the cheque for $20,000 was paid although, as far as he was concerned, "the deal was struck on 7 March when ... [he] took the stock out of Mr Clifford's store". He said that Mr Stenning made it plain that he and his wife, together with Mr and Mrs Myers, wanted to buy a franchise. Mr Gardner said that he had discussions with Mr Stenning "about how he was going to come into our group". Indeed, he said, "Mr Stenning was dying to buy the franchise". He said also that it was never mentioned to him that this was dependent upon the intending franchisees securing any particular premises. Rather, he said, "it was anywhere in Fremantle".

Shortly after 31 March 1995 Mr and Mrs Stenning decided that the Wray Avenue premises were unsuitable and, at about that time, located other premises at 61 Queen Victoria Street which might be available. Mr Stenning mentioned these premises to Mr Myers and, after inspecting them, he and Mr Myers agreed that they were suitable.

On about 5 April 1995 Mr Stenning met with Mr and Mrs Myers and told them that the 61 Queen Victoria Street premises were available for lease from 11 April 1995 and that "we would lease the premises". He said that he thereafter showed them the franchise document and that they read it through in detail with him, spending three quarters of an hour or more in doing so but not he said, analysing it. He said that they discussed the advantages of the Group as described in the document and that Mr and Mrs Myers then said that they were prepared to go into the venture as partners with Mr and Mrs Stenning if the premises could be obtained.

Mr Myers gave similar evidence. He said that a day or so after he had been shown the premises at 61 Queen Victoria Street Mr Stenning came to his supermarket and told him that the premises could be leased and asked whether he and Mrs Myers would like to go into the business as partners. He said that Mr Stenning brought with him the franchise document which, he said, he thought had been previously shown to him by Mr Stenning (although Mr Stenning said that he did not show the franchise document to Mr and Mrs Myers before 6 April 1995). He said he, Mrs Myers and Mr Stenning sat down in his office and looked through the document in detail for some 40 minutes to an hour and discussed it. He also said that he knew the franchise industry well and that what was said in the document suggested to him that the franchise had all the ingredients of a successful franchise operation. He was particularly impressed by the bulk buying advantage stated in the document and the profitability figures which, he said, led him to conclude that Krishell would show at least a 50 per cent return on its investment.

He said that on the basis of the statements in the document he and Mrs Myers agreed to go into the venture as partners and told Mr Stenning so. He later saw his accountant who suggested that two companies should be formed to go into business as partners.

Mrs Myers said that it was the description of the Gardner franchise business and its attributes in the franchise document (which, she said, she examined closely) that persuaded her to agree to invest in the business. She said that she was "not at first enthused by the project, but after reading the franchise document ... became comfortable with the proposal". She was particularly impressed by Mr Gardner's profile as set out in the document. The important aspects of the proposal, as she saw it, were the flat rate royalties, the support provided by the franchisor, the huge buying power of the Group, the profit projection of $166,000 per year and the prophecy of a "possible turnover of $20,000 per week, in view of the fact that Gardner already had one store averaging $24,832 per week during the month of June 1994". It was these, she said, which persuaded her to "agree to be a partner in the business". She said that she could not recall a discussion with Mr Stenning as regards projected turnover "apart from what ... [she had] seen in the ... [franchise] document" although she later said that during the discussion of the terms of the franchise document Mr Stenning might have predicted that the business would "reach" a turnover of $20,000 per week.

Mrs Myers said that the meeting between her, Mr Myers and Mr Stenning lasted about an hour. She had not previously seen the franchise document.

Mr Stenning told Mr Gardner about the premises at 61 Queen Victoria Street and on about 7 April 1995 he inspected and approved them. On 9 April 1995 Mr Stenning prepared a new franchise application (headed "Version Number 9743") which showed the proposed franchisees as Zed Bears and Mr and Mrs Myers. He sent it to Mr Gardner on that date. At that stage, Mr Stenning said, he regarded himself as committed to the purchase of the Fremantle franchise. In making that commitment, he said, he relied "very substantially" on what had been said by Mr Gardner and upon what appeared in the franchise document.

Mr Stenning said that the franchise document impressed him "very much". He said that it was "a strong and positive statement" of the advantages of being a Gardner Electronics franchisee and that he took it at face value.

None of Mr and Mrs Stenning or Mr and Mrs Myers ever asked anyone on behalf of Gardner Corporation for any explanation of, or further information in respect of, the franchise document before the date of purchase of the franchise. Indeed, Mr and Mrs Myers did not speak to Mr Gardner at all before that date.

A lease of the premises at 61 Queen Victoria Street was signed on 12 April 1995 and, on that date, possession was taken of those premises.

Mr Stenning arranged to employ three of Mr Clifford's former employees to assist with the fit out of the premises. One of these left on 1 May 1995 and was replaced by an experienced salesman.

Thereafter Zed Bears and Krishell were incorporated and took over the operation of the franchise.

Mr Myers said that he gave a cheque for $30,000 to Mr Stenning on 28 April 1995 and a further cheque for $20,000 to him on 9 May 1995.

The franchise agreement was thereafter prepared by Gardner Corporation's solicitors and sent to Zed Bears and Krishell.

When Mr Stenning and Mr Myers read the proposed agreement they found that it provided for a higher franchise fee than had been stated in the franchise document and also that the franchisor was entitled to require the franchisee to buy solely from it or from suppliers nominated by it. Mr Stenning asked Mr Gardner to explain why these provisions differed from what had appeared in the agreement made with Mr Harwood and, in particular, cl 2(6)(a) and (b) thereof. He said that Mr Gardner told him that because the Fremantle store was a "big" one a higher franchise fee was payable and that the restrictions on buying stock were imposed in order to protect the franchisees from buying inferior stock and damaging themselves and the Group and to protect them from suppliers who would otherwise deal with each store "to everyone's disadvantage". Mr Gardner told him that if he could find stock cheaper than that being sold to him by Gardner Corporation then Gardner Corporation would buy it for the whole Group. Mr Stenning and Mr Myers accepted these explanations and the agreement was executed on 14 May 1995.

Mr Stenning attended at Gardner Corporation's Cannington store for training sessions prior to the opening of the Fremantle store. However, he said, he was given little training. He was introduced to Mr Greg Manning, the manager of the Cannington store but, he said, Mr Manning was busy for most of the time and he was left to his own devices. He was given little information and felt that he was getting in the way. He said that he spent a total of about four hours on one day and two hours on another occasion at the Cannington store. He believed that he was getting very little benefit for his time. When he asked for literature with respect to the stock sold he was told that there was nothing more than a product information manual which he had already received. He had in fact also received a "Technicians Vehicle Installation Manual" and a procedure manual and had been offered, but declined to receive, a "Retail Selling Skills" manual.

Mr Stenning said that later, in early May 1995, he asked Mr Gardner for some training at the shop but was told that the latter was short staffed at that time and could not spare anyone. He said that no training was ever given to him or his staff in his own premises.

Also, he said, when he and his wife sought advice from Mr Kim Pollock in respect of the management and administration of the shop they were merely referred to the procedures manual which had been supplied to them.

He said that between May and October 1995 the only visits made to the shop by Gardner Electronics staff were two visits by Kim Pollock when he assisted Mrs Stenning with "warranty paper work".

Mr Stenning also said that, about a week after the new Fremantle store was opened in April 1995, a company controlled by Mr Harwood re-opened a shop in the premises of the original Gardner franchise at 3 Queen Victoria Street, complete with Gardner signage, Gardner docket books and the same product range, including exclusive Gardner Electronic products.

While Mr Stenning conceded that the new shop controlled by Mr Harwood was later forced to change its name to Western Car Audio he said that the Fremantle store never operated without this substantial competitor and never had exclusive rights in Fremantle to Gardner Electronics products.

Indeed, Mr Stenning said, the "so-called exclusive Gardner Electronics stock" had Gardner Electronics stickers on it but otherwise was the same as products sold by other retailers. He also complained that Nelson Corporation, which, under the name "Neltronics", supplied Gardner Electronics with stock imported by it, marketed "exclusive" Gardner Electronics' stock, together with its own stock, in its catalogue.

Mr Stenning also said in evidence that he gradually came to realise that the prices charged to franchisees for stock supplied by Gardner Corporation were as high or even higher than those at which he could have brought that stock directly from suppliers had he been allowed to do so.

There was tendered in evidence on behalf of the defendants a schedule of prices ("the price schedule") charged to the Fremantle store by Gardner Corporation in respect of goods sold by it to the franchisees, showing the amount of the mark up or surcharge imposed by Gardner Corporation over and above the cost of those goods to it and showing also the price at which the defendants maintain they could have purchased those items had they dealt directly with suppliers.

Mr Stenning said that increasingly, over the period of the franchise, Gardner Corporation arranged for the Fremantle franchise to deal direct with certain approved suppliers. However, he said, Mr Gardner told him that he would not allow the Fremantle franchise to deal with a supplier who would not agree to pay a fee or "rebate" of 5 per cent on all purchases by franchisees to Gardner Corporation. This, he said, meant that the Fremantle franchise was denied the opportunity of dealing with some suppliers of good quality stock. He said also that the 5 per cent commission was, in effect, an indirect cost to the franchisees who could, he suggested, otherwise have obtained the products in question from their suppliers for 5 per cent less than the price in fact paid.

Mr Stenning also said that, in the case of mobile telephones acquired for re-sale by the Fremantle business, Gardner Corporation at first charged prices which were too high to enable the business to compete effectively and then later allowed the business to acquire the telephones direct from the supplier (initially Telstra) but charged the Fremantle business a $10 levy for every telephone purchased. This, he said, later applied to purchases from Optus when a decision was made to change suppliers (although the fee was abolished by Gardner Corporation at the end of May 1996). He said that he received no buying advantage with either of Telstra or Optus as a result of the Fremantle store being a member of the Group and that, had he initially been able to purchase telephones direct from Telstra or Optus, he could have done so at prices as good as or better than those obtained through Gardner Corporation.

It seems that the Fremantle franchise initially traded well under the stewardship of Mr and Mrs Stenning. The trading figures for the first six months demonstrated a high turnover and the store appeared to be operating successfully. That Mr Stenning formed a similar opinion is apparent from a number of faxes which he sent to Mr Gardner indicating some degree of satisfaction with his own performance. One illustration of this is a document sent by Gardner Corporation to Mr and Mrs Stenning on 19 July 1995 congratulating them for having become the major Telecom telephone retailer in Fremantle which was re-faxed to Gardner Corporation by Mr Stenning with the notation "NEXT Month - No. 1 Franchise over-all - Sorry Cannington you need leadership or I'll just buy you." Another example is comprised by a fax sent by Mr Stenning to Gardner Corporation in late August 1995 indicating that a weekly turnover of $32,000 had been achieved. The fax depicts two Gardner Corporation employees being "blown out of the water by Fremantle". These were Mr Greg Manning, the person who had been chosen to teach Mr Stenning sales techniques, and Mr Ric Mondi, Gardner Corporation's sales manager. A further fax dated 2 November 1995 informed Mr Gardner that the Fremantle franchise had achieved total sales of $102,851.92 in October, not including some $12,000 owed to it by Telstra.

However, the performance of the Fremantle franchise began to deteriorate.

Mr Stenning tendered in evidence accounts prepared by his accountant in respect of the store. The accounts for the year ended 30 June 1995 show total sales of $111,838.34 and a net loss of $54,359.12. The expenses of the business for that period, apart from the cost of stock, amounted to $84,006.19. The accounts for the year ended 30 June 1996 show a net loss of $114,336.41 on total sales of $848,701.55 (with the cost of stock sold amounting to $687,355.56 and other expenses amounting to $287,800.24).

In August 1996 Mr Stenning and Mr Myers decided that the Fremantle business could not carry on trading. They had decided that the Fremantle business could not be profitable so long as it remained a Gardner Electronics franchise. On 9 August 1996 Mr Myers wrote to Gardner Corporation terminating the franchise agreement. That letter, which was written on behalf of Krishell, recorded that that company had entered into the franchise agreement in reliance upon the franchise document, that "Prime material statements" in that document were false and that Krishell had no alternative than to advise Gardner Corporation that "we now rescind and annul the franchise agreement since its inception".

The accounts for the Fremantle franchise for the period ended on 14 August 1996 demonstrates sales of $66,168.58 with the cost of the stock sold being $71,500.22 and other expenses amounting to $112,998.44 producing a total loss of $118,330.08. While the earlier accounts were, as I have said, prepared by an accountant the accounts for the period ended 14 August 1996 were prepared by Mr Stenning himself.

Mr Stenning said that Zed Bears and Krishell have introduced net capital into the business amounting to $138,467.19. He said that $87,743.93 was contributed by Zed Bears of which $6,633.90 was repaid by way of drawings and that $92,537.00 was contributed by Krishell, of which $35,179.84 was repaid by way of drawings and return of capital. These last figures were confirmed by Mr Myers.

Mr Stenning said that during the period of trading from April 1995 to August 1996 the business incurred losses of $128,533.43 (although this figure does not appear to be consistent with those given above).

Notwithstanding this Mr Stenning wanted to continue the business, after 9 August 1996, but not as a Gardner Electronics franchisee. However Mr and Mrs Myers did not want to do so. Consequently Mr and Mrs Stenning opened a new business in the name "New Guard Electronics" and subsequently in the name "New Deal Electronics". That business proved to be unsuccessful and has since closed down.

The representations relied upon by the defendants

I propose first to consider, against this background, the evidence in respect of each of the representations said to have been relied upon by the defendants, being those said to have been made orally by Mr Gardner on 10 March 1995 and 31 March 1995 respectively and those made in writing in the franchise document.

The oral representations as to profitability of members of the Group

So far as the meeting of 10 March 1995 is concerned, I have preferred the evidence of Mr Gardner over that of Mr and Mrs Stenning.

I do not accept that there was, on that day, a meeting between Mr Gardner and Mr and Mrs Stenning. Mr Gardner was confident in his recollection and I had little hesitation in accepting his evidence in that respect. I was, on the other hand, considerably less confident in accepting the evidence of Mr Stenning in that respect.

I should say that I was, generally, reluctant to accept the evidence of Mr Stenning where it conflicted with other evidence. He is, by his own admission, a man who is inclined to exaggerate.

He acknowledged, on more than one occasion, that he had "over-egged the pudding" in his dealings with Ms Hansen. He described himself as "an exuberant writer". One illustration of this was his comment to the effect that he was "paying to hold a good team of staff together" when that was not in fact the case, at least in the sense that no payments were then being made to the persons to whom he referred. He had done no more than buy those persons a beer and lend one of them $200 although he was, as I have said, anxious to retain their services.

Also, Mr Stenning acknowledged that notwithstanding that he had never been a licensed finance broker he had, on a number of occasions, described himself as such.

There were also instances in which Mr Stenning's recollection appeared to be unreliable.

The first is that when Mr Stenning was first asked from where he had obtained the financial information relating to Mr and Mrs Myers in his preliminary application to lease commercial premises faxed by him on 10 March 1995 he said that he had done an enormous amount of finance work for the Myers over the years and had a file full of their figures. He said that he did not seek their permission before sending off their personal details and their financial information. He said that he already had that information on file. However, as I have earlier mentioned, the evidence disclosed that that information had been faxed to him earlier that morning by one or other of Mr and Mrs Myers.

The second is that, as I have earlier mentioned, when first he was asked what was his understanding of the purpose of the meeting on 31 March 1995 Mr Stenning responded by saying that Mr Gardner had not met his wife. When this was repeated to him he immediately retracted that statement saying that he did not know why Mr Gardner asked both himself and his wife to meet with him.

Finally, in this respect, it is, I think, noteworthy that Mr Stenning, in the course of his cross-examination, revealed that he "hated" Mr Gardner "with a passion".

Mr Gardner's evidence as to the fact that there was no meeting on 10 March 1995 was, in any event, lent some support by the contents of his diary. Also, the initial response of Mr Stenning (which, while it was, as I have said, almost immediately retracted by him, was consistent with an early version of his statement of evidence prepared for use in the trial) that the purpose of the 31 March 1995 meeting was in order to have Mr Gardner meet Mrs Stenning is inconsistent with the fact of an earlier meeting.

While I have no doubt that Mrs Stenning was honest in her evidence as regards this meeting it seems to me that her recollection in this respect was faulty.

Also, I do not accept that on 10 March 1995 Mr Gardner gave to Mr Stenning a copy of the franchise document. Once again, I have preferred the evidence of Mr Gardner in that respect. It is not in dispute that, on 30 March 1995, a copy of that document was given by Mr Gardner to Mr and Mrs Stenning and it is difficult to know why he should have given to them more than one copy of that document. Mr Stenning did not suggest that the first copy given to him did not have a franchise application form annexed to it.

Mr Stenning's evidence in this respect was also not entirely consistent. At one point in his evidence he suggested that it was Mr Kim Pollock, one of Gardner Corporation's employees at its Cannington store, who gave him the franchise document on 10 March 1995. However this was not consistent with his earlier evidence or the defendants' pleading, which is to the effect that it was Mr Gardner who "handed" Mr Stenning the franchise document. I should mention, in this respect, that while counsel for the defendants sought to make something of the failure, by Gardner Corporation, to call Mr Pollock as a witness I am not persuaded that there was, in the circumstances, any need for it to have done so and I draw no adverse inference from that omission.

While Mrs Stenning was, once again, patently honest in her evidence, it seems to me that her recollection was also faulty in this respect and that she may have been confusing the franchise document with some other document which had earlier been given to her. As will be apparent from what I have said above she said, in this respect, that she had "flipped through" that document by herself. It seems to me to be most unlikely that she would have "flipped through" a document of that kind on her own without discussing it with her husband who, she said, made all of the "big picture" business decisions. It is also worth noting that this evidence was inconsistent with her earlier evidence-in-chief to the effect that, when her husband first brought this document home, the two of them read through it. Another indication that Mrs Stenning may have confused different events is provided by her evidence-in-chief to the effect that she first discussed with her husband the possibility of the purchase of an interest in Mr Clifford's business in March 1995 when, as will be apparent from Mr Stenning's evidence, much of what took place in that respect occurred in February 1995 although the written offer to purchase an interest in that business was made on 2 March 1995.

Finally, in this respect, it seems to me to be most unlikely, if Mr and Mrs Stenning received a copy of the franchise document as early as 10 March 1995, that they would only have shown it to Mr and Mrs Myers in the following month.

I am also not prepared to accept that any representation was made by Mr Gardner on 10 March 1995 or, for that matter, at any time, that the various franchised stores were "highly profitable". I have formed the opinion that Mr Stenning's evidence to this effect was an example of his self-confessed tendency to "over-egg the pudding" or to use language "exuberantly".

It seems to me to be much more probable that in early March 1995 Mr Gardner said no more to Mr Stenning than that the Midland and Innaloo franchisees had each purchased a second franchise and that the Morley franchisee was considering purchasing a second franchisee. It may very well be that Mr Gardner also said, or implied, that each of these franchisees must consequently have been satisfied as to his or its performance. However that is not to say that he made any representation as to the fact that these stores were "highly profitable".

I should say that Mr Gardner presented as an honest witness. He did not at any stage hesitate in answering questions put to him or attempt to avoid difficult issues. His evidence impressed me as being generally reliable.

I have also no hesitation in rejecting Mr Stenning's evidence that, at the meeting on 31 March 1995, Mr Gardner repeated "his very rosy picture of the overall profitability of all stores". I have mentioned that the defendants' pleadings initially alleged only that Mr Gardner said that the various stores were "profitable". I doubt that Mr Gardner said even that much and, as I have mentioned, prefer his evidence to the effect that he said no more than that he believed that the existing franchisees were satisfied with their performance. It is interesting that Mrs Stenning said, in that respect, that Mr Gardner enthused "over how good his businesses were" and it may be that Mr Gardner made some comment as regards his satisfaction with the overall performance of the Group and in particular his own Cannington store. However that is not the representation which has been pleaded by the defendants.

The representations concerning Mr Harwood and the amount of the royalty fee

I have, next, no hesitation in preferring Mr Gardner's evidence over that of Mr Stenning in relation to Mr Gardner's denial that he provided to Mr Stenning, on 10 March 1995, a copy of the Franchise Agreement dated 17 December 1998 made between Mr Harwood and Gardner Corporation. Mr Stenning (whose evidence in this respect was somewhat contradictory) himself acknowledged that he had, by then, already examined a copy of that document which he had obtained in the course of his dealings with Mr Clifford. I also reject the suggestion that Mr Gardner said anything to the effect that the terms of that agreement would be the same as those which would be contained in any franchise agreement which Mr Stenning or interests represented by him would execute. I have mentioned that Mr Gardner said that he had already, by then, revised the terms of the franchise agreement used by Gardner Corporation and there would have been no need for him to make any such representation. I accept that it would consequently make little sense for him to have done so. I accept, also, Mr Gardner's evidence that on 1 or 2 March 1995 he had in fact told Mr Stenning that he had rewritten the standard franchise agreement in order to overcome problems which had been experienced with Mr Harwood.

Gardner Corporation Pty Ltd v Zed Bears Pty Ltd

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (460 paragraphs)

Gardner Corporation Pty Ltd v Zed Bears Pty Ltd (Acn 069 020 640) & Ors [1999] WASC 1043 (13 April 1999)

Parties

Legislation Cited (1)

Cases Cited (32)