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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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.

As to the alleged representations concerning the prospect of competition by Mr Harwood I have, once again, no hesitation in preferring the evidence of Mr Gardner to that of Mr Stenning. It seemed to me that Mr Gardner's recollection in this respect was clear and unhesitating and that his version of events is consistent with what was an extraordinarily bullish approach adopted by Mr Stenning at that time. Comments made by Mr Stenning, at the time, both to Mr Gardner and to Ms Hansen and then, later, to Mr Gardner, during the early period of Mr Stenning's operation of the Fremantle store, show that he had an enormous belief in his own ability to make a substantial profit in virtually any circumstances and, indeed, to outdo all competitors. There seems to be little doubt that Mr Stenning was very positive, to say the least, and that his keenness to acquire the Fremantle franchise during March 1995 verged on desperation.

Moreover it is, I think, noteworthy that when Mr Stenning discovered that Mr Harwood, or persons associated with him, had recommenced trading from his former premises he complained of the fact that the competing store was trading as a Gardner Electronics franchisee and not of the fact of the competition itself.

As to the amount of the royalty fee Mr Stenning acknowledged that he knew, prior to taking on the Fremantle franchise, what was the royalty fee which had been paid by Mr Clifford, being $479 per week. He was, as I have said, aware, prior to signing the franchise document (as was Mr Myers), that this same fee would be payable by the franchisees and not that referred to in the franchise document. The defendants were consequently not misled in this regard.

As to the representations with respect to the training program Mr Gardner said that Gardner Corporation made a point of telling prospective franchisees that they should have 30 days of training without charge. He said that he preferred that they did so and that he ensured that this training was available to them.

However, he said, Mr Stenning told him, prior to commencing operations in the Fremantle store, that he was knowledgeable in business and that he needed training only as regards the specific items of electronic equipment that Gardner Corporation sold. Mr Gardner said, and I accept, that the manager of the Cannington store, Mr Manning, was told to put Mr Stenning under his wing but that Mr Stenning only came in for two or three half days of training and did not otherwise want any training prior to the opening of his store. He said that Mr Stenning "felt he had learned enough and he was ready to roll". Mr Gardner said also that Mr Stenning considered that if he needed any help he could get it from the staff who had previously been employed by Mr Clifford. No one else on behalf of the franchisees received any training from Gardner Corporation or sought it.

It was put to Mr Stenning that he had intended to take over the bulk of the management of the store when it was still operated by Mr Clifford and that he must consequently have been confident that he could run the business. He said that he was.

Gardner Corporation also led evidence from Mr Manning in this regard. He said that he was asked to give Mr Stenning, with the assistance of another employee, a week's training prior to Mr Stenning commencing business in Fremantle. He too said that Mr Stenning only came in for "maybe a few hours for roughly two or three days of that particular week [in] which I was made aware that we were going to train him". He said that others involved in the training process were Mr Ric Mondi and Mr Kim Pollock. He said that he believed that there were only three training sessions and that these lasted no more than about three hours each. He said that Mr Stenning was "fairly blase about the whole situation". Apart from learning something about the products, he said, Mr Stenning did not appear to be "too overwhelmingly keen about learning anything". He said that Mr Stenning appeared to want to get things under way as quickly as possible and that in the last couple of training sessions he seemed to have no particular interest in learning anything.

I am, in the light of the evidence to which I have referred, satisfied that the representations as regards advice and training were soundly based. That advice and training was at all material times available. However Mr Stenning chose not to take advantage of it.

The representations as regards exclusive products

As to the representations with respect to exclusive products Mr Gardner said that there were a number of products which carried the Gardner Electronics brand name and which were exclusive to the Group albeit the same products might, in some cases, be obtained elsewhere under a different brand name. He said that the products bearing the Gardner Electronics name had good warranties which made them more saleable.

Mr Gardner said that there were only two occasions upon which products were sold or attempted to be sold under the Gardner Electronics name otherwise than to members of the Group. The first involved the sale, in Western Australia, of such a product by a company which had imported the product into Melbourne. The second involved the business known as Neltronics (which traded as a wholesaler and retailer of car electronic products) which had included some Gardner brand products in its mail order catalogue for the purpose of distribution in country areas and in Queensland.

Mr Ed Nelson, whose family company owns the business of Neltronics, was asked, in the course of evidence led from him at the trial, about the Neltronics mail order catalogue. He said that he had an agreement with Mr Gardner as regards one of his catalogues "that was distributed primarily in the Eastern States through magazines" that Neltronics would "carry his products in the magazine and sell them exclusively in States other than Western Australia on a retail basis". He said that he made sure that the catalogue was distributed only in the Eastern States. He also said that the publication of the catalogue did not, in any event, result in the sale of any products bearing the Gardner Electronics name.

Neither of the two events to which I have referred occurred until after the franchisees had acquired the Fremantle franchise and there was nothing in the evidence to suggest that, prior to that time, anyone on behalf of Gardner Corporation knew or should have known that events of that kind might occur.

Mr Gardner said also that there were other products, not under the Gardner Electronics name, which were exclusive to the Group, at least in Western Australia.

I am prepared to accept Mr Gardner's evidence, and that of Mr Nelson, in all of these respects. I accept also that it was a major advantage of a Gardner Electronics' franchise that it could obtain exclusive products. The evidence established that Gardner Electronics products had a good name and, even if similar products could be obtained under other labels, these Gardner Electronics branded products remained an attractive proposition because of their reputation and the warranty which attached to them.

The only complaint made by the defendants (other than generalised complaints which were unsupported by any evidence) as regards the sale of products bearing the Gardner Electronics name by persons other than members of the Group was that in respect of the Neltronics' catalogue which, as I have said, was intended for distribution only outside the Perth metropolitan area and did not, in fact, result in any sales of Gardner Electronics brand products. In any event, as I have also said, that catalogue was only distributed after the acquisition by the franchisees of the Fremantle franchise.

I am consequently satisfied that these representations, too, were soundly based.

The representations as regards bulk buying advantages

That brings me, next, to the representations as regards bulk buying advantages.

Mr Gardner said that these were based upon his own experience, prior to the date of preparation of the franchise document, and on common sense. He said that the more stores there were for which purchases could be made the greater would be the buying power of the Group and the greater would be the discount which it could achieve on prices. He said also that he was, himself, a good purchaser, able to achieve good prices for the Group.

With one exception, Mr Gardner negotiated every deal which Gardner Corporation entered into with suppliers of products sold by the Group. That exception was a deal which was negotiated by Mr Pollock with Mr Gardner's approval.

Mr Gardner said that negotiations of this kind followed a similar pattern. In each case he would ascertain what products might be offered to the Group, whether the Group might have an exclusive entitlement to those products and what was the best price which the Group could negotiate. The outcome of the negotiations was then notified to the various franchisees by way of facsimile transmissions. He referred, by way of illustration, to a price list which was sent to him by a business known as Boston Audio Works which offered to Gardner Electronics a 13 per cent discount off its standard "Majors" price list. Mr Gardner said that Gardner Corporation purchased stock from Boston Audio Works at that discounted price.

Mr Gardner also gave evidence of an offer from Boston Audio Works which was made to Gardner Corporation in early April 1995 whereby the Group could purchase products from that business at a 5 per cent discount for cash plus an additional 3 per cent discount for carton lots. In addition the Group had been offered a bulk deal on an item of audio equipment which resulted in a significant discount on the ordinary price of that equipment.

Mr Gardner said that there were many other such instances of bulk buying benefits being obtained on behalf of the Group both before and after the sale of the Fremantle franchise to the franchisees.

He put in evidence, by way of example, correspondence from a business known as Tenvox Australia, a wholesaler of car audio systems, which set out the terms of the trading relationship which was put into effect between that business and Gardner Corporation. These were to the effect that Tenvox Australia would deal directly with each store in the Group, giving to each a 10 per cent discount off its current price list on products ordered in a carton quantity.

Mr Gardner also gave evidence of arrangements which he had made with Audiovox Pacific Pty Ltd, a supplier of car audio equipment and the like, which encompassed a requirement that any bulk purchase special offers on Audiovox cellular products would be presented only to Gardner Corporation and not to the franchisees. This was said to provide Gardner Corporation with the "opportunity to bulk order for the Group so that all member stores can benefit" although it was also agreed that any special bulk purchase offer which was not taken up by Gardner Electronics might be offered to individual franchisees with the approval of Gardner Corporation (upon the basis that approval would not "normally" be withheld).

Next Mr Gardner gave evidence that in early September 1995 he was able to negotiate an agreement with Mr Allia, a representative of a business known as Arena Distributors, another wholesale supplier to the Group, whereby the latter would reduce its prices by 5 per cent in respect of products sold to members of the Group. While Arena Distributions agreed to pay to Gardner Corporation a 5 per cent rebate, each franchisee was able to obtain a 5 per cent discount for prompt payment and a further 5 per cent "carton discount". Those prices were effective from 14 September 1995.

In May 1996 Mr Gardner negotiated, on behalf of the Group, an arrangement with a cellular telephone distributor known as Myline whereby Myline agreed to provide to Gardner Corporation a fee of $60 per phone and to provide advertising funds in an amount of $40 per phone sold by the Group in return for Gardner Corporation purchasing some $200,000 worth of stock. Also, Myline agreed to pay a "lifetime commission" on telephone calls made on telephones supplied by it. Gardner Corporation told its franchisees that it was prepared to make available the stock so purchased by it from Myline on consignment to individual franchisees.

Mr Gardner said that the prices negotiated by him, even allowing for a surcharge of 10 per cent imposed by Gardner Corporation in cases in which it supplied goods directly to franchisees (which was reducible to 5 per cent in cases of prompt payment) and for the "rebate" (usually 5 per cent) which was later paid to Gardner Corporation by suppliers with whom franchisees dealt directly, were such as generally to be lower than the franchisees could obtain by themselves had they not had the benefit of the Group buying power.

I accept Mr Gardner's evidence in all of these respects.

Mr Gardner's evidence was supported by the evidence of a number of suppliers.

One of these was Mr Robert Barton who was a director of a company, Martello Holdings Pty Ltd, which traded as "Concord Distribution". Mr Barton had had dealings with Gardner Corporation in that capacity over a period of four years prior to July 1997. Concord Distribution supplied to Gardner Corporation car security products and other motor vehicle accessories. Mr Barton's evidence was that his company gave to Gardner Corporation the "keenest price" which it could. He said that Gardner Corporation purchased around $20,000 per month worth of products from Concord Distribution in and around March 1995. It was, he said, one of the "top" five or six customers of Concord Distribution in Australia. In Western Australia Gardner Corporation was one of Concord Distribution's top two clients. He said that on average Gardner Corporation would get products between 10 and 15 per cent cheaper than the price at which individual franchisees could obtain them. He also said that in many cases Concord Distribution would, rather than give a monetary price discount to Gardner Corporation, give to it a discount in the form of free products.

Mr Barton acknowledged (as did Mr Gardner) that, after a period of time, arrangements between Concord Distribution and Gardner Corporation altered, with individual franchisees being entitled, if they chose to do so, to deal directly with Concord Distribution subject to the payment to Gardner Corporation, by Concord Distribution, of a "rebate" of 5 per cent of the value of products sold directly to the franchisees. It was put to Mr Barton that if the 5 per cent rebate was not paid to Gardner Corporation by Concord Distribution the value of that rebate would have been passed on to franchises who dealt directly with Concord Distribution in the form of a further price reduction. He disputed that proposition saying that he was able to "prove the contrary". He said that not only did the individual franchisees buy very much less of its products than had been bought by Gardner Corporation on behalf of the Group generally but they also appeared to him to "be under financed" resulting in a higher risk and therefore a higher price.

He said that individual stores were, unlike Gardner Corporation, charged Concord Distribution's list price although he did give them "generous" terms as regards the time for payment of accounts and, he said, even then, a lot of the time they did not pay within the time allowed. That, he said, was "a big risk factor so there is no reason for any discounts".

Mr Barton said that he specifically remembered being asked by Mr Stenning for better prices when Mr Stenning was dealing directly with him but said that he "certainly didn't come to the party on that". No issue was taken with this in the course of cross-examination.

Evidence was also led from Mr Pierre Wigger who had been a salesman and director of Arena Distributors during a period in which it had, in 1995, sold to Gardner Corporation various products including loudspeakers. He said that Gardner Corporation always purchased in bulk and therefore obtained substantial discounts off Arena Distributors' listed prices. He said that individual franchisees could only have obtained the same discounts if they bought similar quantities of products.

Mr Wigger was asked whether the individual franchisees, once they began to deal directly with Arena Distributors, were able to obtain better prices than those obtained through Gardner Corporation. His response was that " ... as a rule of thumb I would expect 10 to 15 per cent better purchasing ... " by Gardner Corporation because of the greater quantities purchased by it. He said that Arena Distributors categorised clients as big, medium or small and that individual franchisees would have fitted into the "small" category.

Evidence in this respect was also led from Mr Nelson who, as I have said, traded as a wholesaler and retailer of car electronic products under the name Neltronics. He dealt mainly with radar detectors.

He, too, said that the greater the quantity of items purchased the bigger would be the discount. He said that Gardner Corporation was in 1995, and still is, one of his biggest clients and that it was, until early 1997, his largest client. In 1995 it purchased from Neltronics an average of around $20,000 worth of products per month. Mr Nelson was asked whether franchisees such as the owners of the Fremantle franchise would, if they had dealt individually with Neltronics, have got as good a price as Gardner Corporation got at the time. He answered by saying "Absolutely not".

Mr Nelson said that not only did Gardner Corporation purchase products in bulk but it also expended significant sums on advertising and this, too, caused him to look favourably upon it in terms of pricing.

Mr Nelson said that Gardner Corporation was at "the lowest price level" in respect of products sold by Neltronics.

Mr Ivor Metlitzky, who is the managing director of Dynamco Pty Ltd, a company which produces and distributes vehicle security systems, also gave evidence in this regard.

Dynamco Pty Ltd supplied Gardner Corporation with its products during 1995. Gardner Corporation had, Mr Metlitzky said, a "reasonable" profile and bought a sufficient quantity of product to entitle it to a discount. He said that Gardner Corporation was also a reasonable credit risk and that this, too, was taken into account so far as pricing was concerned. He said that Mr Gardner was "a fairly aggressive negotiator with respect to pricing".

Mr Metlitzky said that he dealt with Mr Stenning after the Fremantle franchise had broken away from the Group. He said that he believed that the prices at which Mr Stenning was supplied with Dynamco Pty Ltd's products after the breakaway would have been between 5 and 10 per cent greater than those at which Gardner Corporation had acquired products and that the 10 per cent differential "may very well be not the exception". He said that the discount which was provided by Dynamco Pty Ltd to Gardner Corporation during 1995 and 1996 would have been one of an average of 10 per cent but that it certainly could have been higher in a number of cases. When asked whether it could have been lower in some other cases he responded by saying, "minimally".

While some evidence was led to the contrary on behalf of the defendants through two former Gardner Electronics franchisees, Messrs Peter Loughton and Peter Chandler that evidence was not, for reasons which I shall explain, sufficient to cause me to doubt the evidence of Mr Gardner or that of the other witnesses to whom I have referred under this heading.

Mr Loughton (who had, at different times, operated the Midland and Joondalup stores) said that, so far as car alarms were concerned, in order to be competitive his store had to purchase those alarms directly from Concord Distribution. He dealt, in that respect, with Mr Barton. He said that it would cost him between $20 and $30 more to buy the same alarm from Gardner Corporation. He also said that he found it difficult to compete effectively as regards price in respect of such items as radio cassettes and CB radios which, he said, could be purchased more cheaply from sources other than Gardner Corporation. He also said that some mobile telephones could be obtained by him $30 to $40 cheaper from sources other than Gardner Corporation. He said, next, that some radar detectors were available more cheaply from Neltronics than they were from Gardner Corporation.

However Mr Loughton's evidence as regards his dealings with Mr Barton of Concord Distribution was never put to the latter when he gave evidence notwithstanding that Mr Barton's evidence was inconsistent with that of Mr Loughton. Similarly, notwithstanding that the owner of Neltronics, Mr Nelson, gave evidence which was inconsistent with that later given by Mr Loughton the effect of Mr Loughton's evidence was never put to him.

Also, Mr Loughton was unable to produce any documents to support his contentions and said that he had not looked for any. He relied solely upon his memory.

Mr Chandler (who had operated the Balcatta franchise from 1992 until the beginning of December 1996), too, spoke of "a lack of buying price competitiveness". He said that the price at which some items were purchased from Gardner Corporation did not "allow a sufficient profit margin to be able to gain a substantial profit ... ". He gave a number of examples of prices with which he was dissatisfied and which, he said, were not competitive.

However, even if it be accepted that there were instances in which franchisees were not able to obtain items from Gardner Corporation at a price which enabled them to compete effectively as regards the sale of those products as, no doubt, there were, this did not mean that the franchisees did not otherwise have the advantage of Group bulk buying power which enabled the franchisees to obtain a range of products at a price cheaper than that at which they could otherwise have obtained them. The whole of the evidence was, in my opinion, sufficient to establish that they did.

Mr Anthony Maio, a public accountant who gave evidence on behalf of the defendants, also dealt with the prices charged by Gardner Corporation. He said that, as an accountant, he had been involved with a number of clients, including Gardner Electronics franchisees, who had electronic retail stores. He was a director of one of Mr Harwood's companies in 1994, 1995 and 1996 and Mr Harwood has been a client of his since 1988. He was involved with the Fremantle store operated by Mr Harwood between 1988 and late in 1994. He was also involved in what he referred to as the "re-established" store started up by Mr Harwood's company at 3 Queen Victoria Street, Fremantle.

I have referred below to the contents of Mr Maio's evidence insofar as it touches upon the issue of the reasonableness, or otherwise, of the prices charged by Gardner Corporation to franchisees and also upon what he saw as the absence of benefits to the Fremantle franchise in bulk buying by Gardner Corporation. It is enough to say, at this stage, that I have preferred Mr Gardner's evidence to that of Mr Maio where the two are in conflict and that nothing in the evidence of the latter has dissuaded me from accepting the evidence led on behalf of Gardner Corporation to which I have referred and which, I have found, established that, albeit there were some exceptions, the Group's bulk buying power was generally such that it was able to secure a low buying price together with other priveleges and that individual franchisees were generally able to obtain products at prices cheaper than could have been achieved by them as "stand alone" stores.

While Mr Maio said, in his statement of evidence tendered at the trial, that he knew the wholesale and retail prices of most items of stock, he acknowledged, in the course of cross-examination, that this comment was "probably a little bit loud" as, without looking at documents, it was difficult for him to remember what wholesale and retail prices were in 1995 and 1996. He also very frankly acknowledged that he was unable to produce invoices from wholesale suppliers of the products to which he referred in support of his contentions as regards the prices at which those products might have been obtained by the Fremantle franchise had it dealt directly with suppliers and that he had relied upon his memory of his own experiences in the electronics business. I am in these circumstances reluctant to accord much weight to his evidence in this respect.

The defendants attempted to support Mr Maio's evidence on this issue by way of evidence from Mr Lindsay Stagoll, a chartered accountant called by them. However Mr Stagoll admitted that he had not seen wholesale price lists from suppliers. The only information about wholesale prices to which Mr Stagoll referred was the price schedule prepared by the defendants to which I have earlier referred and which listed, inter alia, a range of prices charged to franchisees by Gardner Corporation and set out what the defendants' contended was an excessive mark-up by that company on its own cost of acquiring these products. Gardner Corporation successfully disputed the accuracy of much of that schedule, including the amounts shown as its "mark-ups". This cut away the basis for Mr Stagoll's conclusion that there were no or limited bulk buying power benefits passed on to franchisees which conclusion was, as I have foreshadowed, based only upon his review of the alleged mark-up percentages in the price schedule. Mr Stagoll had himself performed no comparison of the price at which Gardner Corporation acquired the products which it on-sold with that at which others might have acquired those products and nor had he himself compared the prices charged by Gardner Corporation with those of other suppliers.

I am consequently satisfied, even after taking into account the evidence which was led on behalf of the defendants, that Gardner Corporation did have a good name in the industry and that its ability to purchase large quantities for the Group as a whole, coupled with its good name and reputation for creditworthiness, enabled it, at the time of preparation of the franchise document and, indeed, thereafter, generally to obtain and supply products to franchisees at prices which were cheaper than those which might have been obtained by any individual franchisee even allowing for the fact that franchisees were also required to make royalty payments. While there may, as I have said, have been some cases in which franchisees were themselves able to obtain similar, or even better, prices, I am satisfied that this was the exception rather than the rule.

Also, while there was some evidence that individual franchisees, such as Mr Stenning (who had a very large mobile phone trade), were able to achieve good prices from telecommunications carriers on their own I remain satisfied, on the evidence as a whole, that there were, as Mr Gardner's evidence in respect of the arrangement with Myline demonstrated, reasonable grounds to support the representation that the franchisees as a group were able to receive benefits, even "large" benefits, from negotiations on behalf of the Group as a whole, even as regards telecommunications carriers.

I am consequently satisfied that the representations complained of under this heading had a reasonable basis and were neither false nor misleading.

The representation with respect to the "flat royalty", which I have set out above, was to the effect that the franchisee would pay only a flat royalty regardless of turnover but that the royalty would increase or decrease "in line with the CPI +2% p.a." The defendants contend, and Gardner Corporation disputes, that this representation meant that no other fees would be paid whether based on turnover "or otherwise". The defendants complain that there were "other fees" in the form of the rebates, to which I have earlier referred, which Gardner Corporation was paid by suppliers from whom individual franchisees in the Group bought products directly, the surcharge imposed by Gardner Corporation on goods supplied by it to the franchisees and the $10 fee or levy which was, for part of the period of operation of the Fremantle store by the franchisees, paid to Gardner Corporation in respect of mobile telephones purchased directly from suppliers.

I have already mentioned instances in which rebates or commissions were paid to Gardner Corporation by suppliers of products to the franchisees directly. There were other similar instances.

So, for example, Mr Gardner gave evidence of arrangements which he entered into with Arena Distributors. Those arrangements were such that Arena Distributors would deal directly with each franchisee (as from 16 May 1995) with Gardner Corporation receiving a 5 per cent "Head Office Administration fee", to be calculated on gross sales including sales tax. I have earlier mentioned the similar agreement which was later made with that business in September 1995.

Arrangements were also made by Gardner Corporation with a supplier known as "Force Technology" for the payment of a "rebate" by it to Gardner Corporation calculated as a percentage of the value of goods sold directly by it to members of the Group. These arrangements came into effect on 15 May 1995.

Mr Gardner next referred to arrangements which Gardner Corporation made with another wholesaler, S J Pontague & Associates. That business agreed to pay to Gardner Corporation a 5 per cent rebate on the net amount received by it in respect of sales of its products directly to franchisees.

A similar arrangement was entered into with Westec Electronics Pty Ltd which, from 1 July 1995, dealt directly with franchisees but paid to Gardner Corporation a rebate of 5 per cent of "invoice value" calculated on gross sales including sales tax.

A similar arrangement was also made with Audiovox Pacific Pty Ltd as from 10 July 1995 save that the "rebate" paid to Gardner Corporation was 2.5 per cent of "total invoice value" other than in the case of Audiovox cellular products, in respect of which no rebate was paid.

Mr Gardner also gave evidence of an arrangement made by him with a business known as Autosound which agreed to sell its products to each of the franchisees in the Group upon the basis that it would pay to Gardner Corporation "a rebate of 5% on the total gross sales made ... to each of the ... stores except on purchases of Mobile Telephones where the rebate would only be 2%" with any "special deals that are made with any of the franchise's [sic] that are outside of the above arrangements" being "done through your administration".

A similar arrangement was also entered into between Gardner Corporation and TDJ Australia Pty Ltd as from 1 September 1995. That company agreed to deal directly with each franchised store upon the basis that Gardner Corporation would receive a 5 per cent rebate "of gross sales with tax".

Mr Gardner also said that Gardner Corporation received from Tenvox Australia "three monthly rebates in the form of 2% Advertising and 5% Head Office account keeping fee".

Mr Stenning said in evidence that the fact of the rebates was initially kept secret from him and that it was only after it had been discovered from sales representatives of companies who were paying the rebates that Mr Gardner made a full disclosure. Mr Gardner said in evidence that he had never made any secret of the fact of the rebates. While it did seem to me that no disclosure was made to Mr Stenning until after he had learned of the fact of the rebates from a supplier or suppliers, I am not persuaded that there was any deception by Gardner Corporation in that regard and nothing turns upon the fact of Mr Stenning's late discovery of their existence. It is important to mention, in this respect, that there was no evidence that any such rebate was paid or even anticipated at any time prior to the acquisition of the Fremantle franchise by the franchisees.

I do not accept, in any event, that the commissions or rebates which were paid to Gardner Corporation should be categorised as royalties or payments in the nature of royalties. Apart from anything else these payments were not made by the franchisees but by the suppliers themselves. Moreover, counsel for the defendants acknowledged, rightly in my view, that Gardner Corporation was entitled to be paid an administration fee in respect of its dealings with suppliers to the Group, even if individual members of the Group were entitled to (as could only occur with Gardner Corporation's consent), and chose to, deal directly with those suppliers. The commissions or rebates received by Gardner Corporation amounted, in effect, to remuneration for its dealings with suppliers on behalf of the Group (and it should not be overlooked that, under the franchise agreement, Gardner Corporation would otherwise have itself supplied those products to franchisees at prices determined by it) and, even if it might be said, as the defendants contended, that that remuneration was excessive, this does not alter its character in such a way as to make it a "royalty" fee. Nor do I consider that the 10 per cent surcharge levied by Gardner Corporation (or 5 per cent in cases of prompt payment) on goods supplied by it directly to franchisees and the $10 fee payable in respect of mobile telephones purchased directly from suppliers by individual franchisees could properly be categorised as royalty fees.

I am, in all of the circumstances, satisfied that there was no misleading or deceptive conduct on the part of Gardner Corporation in respect of the representation relied upon under this heading.

The written representations as to profitability

As to the written representations as regards profitability there is no doubt that the franchise document, which I have found was provided to Mr and Mrs Stenning by Gardner Corporation on 31 March 1995, contained the various representations pleaded by the defendants and extracted in those paragraphs which I have numbered (d), (e) and (g) in that part of these reasons which deals with the background to the dispute.

As to the representation in para (d), the evidence established that a well managed store was at all times material to this action able to attract a yearly sales turnover of $520,000 or more by the end of its first year of operation. No submissions were pressed to the contrary.

Mr Gardner said in evidence that the yearly sales turnover of $520,000 referred to in the franchise document was based on three things. The first was his own experience at the Cannington store which, he said, had averaged around $520,000 per annum sales turnover for about five years. The second was discussions which he had had with his accountant over many years. The third was the annual sales figures which he had been able to ascertain from the various franchisees (albeit he could not obtain their gross profit figures). Each month a form would be faxed to each franchisee and the franchisees would fill in their sales figures for that month although, Mr Gardner said, he sometimes experienced considerable difficulty in extracting these figures from the franchisees.

Documents which were tendered in evidence in this regard demonstrated that over the period January 1994 to February 1995 the average turnover of the various franchised stores generally exceeded $10,000 per week with some substantially exceeding this and others achieving considerably less than this. The figures put into evidence disclosed that the Fremantle franchise was, in the 12 months preceding its acquisition by Mr Stenning, achieving a turnover much in excess of $10,000 per week.

It is important to note, in this respect, that the franchise document disclosed that not all stores were able to achieve a turnover of $520,000 per annum and that it specifically recorded that the lowest achieving store had a turnover of only $3,500 per week.

There was consequently no real issue as regards the accuracy of the representation in respect of gross turnover.

The more contentious questions in this respect were those relating to the representations set out in paras (e) and (g).

So far as the representation set out in (e) is concerned the first question which arose is that of whether what appeared in the franchise document (namely that once an annual turnover of $520,000 had been achieved expenses were such that "an annual net income (pre-tax) of $166,000 should be ... [earned] by the franchisee") meant, as the defendants say it did, that this referred to the annual net profit (pre-tax) earned by the franchisee or, as Gardner Corporation says it did, that this referred to the net return to the franchisee after allowing for all expenses other than tax and other than those which might be understood as comprising income, or benefits in the nature of income, to the franchisee, including wages and superannuation benefits accruing to the franchisee or, if it be a company, to one or more of its directors.

It will be apparent from what I have said below that it matters little which of these constructions is preferred. In either case the representation had no sufficient foundation. The evidence disclosed, and I will expand on this below, that, as at the date at which the franchise document was handed to Mr and Mrs Stenning, the experience of the existing franchisees demonstrated that the net return to the proprietor, before tax, was likely to be significantly less than the amount represented even if a turnover of $520,000 should be achieved. While this was probably not known to Mr Gardner because franchisees were consistently unwilling to disclose their profit or loss figures to him, at least in any useable form, the fact remains that, as I will explain, nothing else was pointed to in the evidence which provided any adequate basis for the making of that representation.

That said, it seems to me that in the context in which the representation was made it conveyed that, once an annual turnover of $520,000 was achieved, the franchisee was likely to achieve a return, before income tax, of $166,000 after allowing for all proper expenses, not including wages and superannuation payments paid to or for the benefit of the franchisee or, as the case may be, one or more of its directors.

The question is consequently that of whether the representation to which I have referred, understood in that way, was misleading or deceptive. I will consider that question together with the further question whether the representation in para (g), being that to the effect that the "average Company profit is 50% mark up", was misleading or deceptive. I should say, in this last respect, that the defendants invited me to proceed to answer that question upon the basis that the representation conveyed and was understood by them to mean that the average profit on sales of stock was equivalent to a gross profit of 33.3 per cent.

Mr Gardner said in evidence that his assumptions about profitability, made in the franchise document, were based upon a number of factors.

One of these was his own experience. He said that he had started as a "one man show back in 1988" and had run a shop on his own for about 10 years. He said also that he had run his Cannington store for some time on his own with one "back-up installer", that being the model which he had used for the purpose of making the prediction as to profitability. He said, in this last respect, that the assumptions in the franchise document were based, as that document explained, on the assumption that the franchisee would work with one "installer-helper" although it was recognised in the franchise document that extra staff might be required as turnover increased.

He said that, "as of March 1995", he used to visit the various stores in the Group from time to time and talk to the franchisees about how they were operating. He said that until Mr Clifford took over his store every franchisee had started with one operator and one assistant or, in some cases, no assistant.

Mr Gardner acknowledged that it would have been helpful for him to have known what was the net profit of each of the franchisees at the time of preparing the franchise document. However, he said, knowledge of those figures was not essential because he knew what was the performance of Gardner Corporation's own store in Cannington and he did know, at least, what was the turnover of the franchisees. Moreover, he said, most of the franchisees indicated to him that they were profitable.

Mr Gardner said that the franchise document was first prepared in about 1986 or 1987 and that it was, from time to time, revised but that he did not revise the turnover figure of $520,000 or the figure of $166,000 because "nothing much had changed" in respect of those figures.

Mr Gardner acknowledged that he would have been "disturbed" to learn that most of his franchisees were not achieving a net return of $166,000. However he maintained that even if he had known of that he would not have revised the figures in the franchise document. Rather, he said, he would have investigated the business practices of the franchisees in question in order to see "what they were doing wrong".

Mr Gardner insisted that he had done all that he could in order to attempt to obtain the franchisee's profitability figures "almost to the point of badgering".

Mr Gardner said that, in arriving at the figures to which I have referred, he relied also upon discussions which he had with Gardner Corporation's accountant, Mr Anthony MacLean. Mr Gardner put into evidence a letter dated 19 November 1986, upon which he said he placed some reliance for the purposes of the preparation of the franchise document, which he had received from Mr MacLean. In that letter Mr MacLean said that it "would be expected that a gross profit percentage of approximately 55 per cent should be achieved in an owner operated type of outlet where there is constant local control over the operation of the outlet and the proper incentive is there to make sales". Over the years 1984 to 1986 inclusive Gardner Corporation had itself been achieving a gross profit percentage of around 45 per cent.

Mr Gardner prepared, for the purposes of the trial, a profit and loss projection for what he described as a standard owner operated franchise which assumed sales of $520,000 and a gross profit of $260,000 and which also assumed total expenses, including a franchise fee of $395 per week, of $93,468. This projection of expenses assumed that the franchisee had no financing costs and that wages of $25,000 were paid. It also assumed that the shop was operated by its owner with only one additional staff member. It did not allow for any depreciation or for salary for the owner. This, he said, supported the accuracy of the projections contained in the franchise document.

However Mr Gardner acknowledged that there was an inconsistency between a comment, made in the franchise document, that "Most sites require sales figures of about $7,000 per week to break even" and that, effectively repeated in his profit and loss projection, to the effect that a net income (pre-tax) of $166,000, based on a turnover of $520,000, should be earned. It is obvious that if the annual break-even figure is $364,000 (52 x $7,000) then, on a turnover of $520,000, it is impossible to make a net profit of $166,000.

Mr Gardner said that the reference to the average company profit being "50% mark-up" was intended to convey, contrary to what might be thought to be its ordinary meaning, that the selling price of the product was, on average, double that of its purchase price by the franchisee. This, too, he said, was based upon his own experience in his own stores. He said also that his accountant had advised that a gross profit of this order should be achieved by franchisees. However, even if it be assumed that the cost of stock before other expenses is 50 per cent of gross profit (rather than the 66.6% of gross profit which would be incurred if there was only a 50 per cent mark up on the cost of the stock) then, to return a figure of $364,000, the cost of stock would be $182,000. This must mean that other expenses would take up the remaining $182,000. If the cost of stock for the additional turnover of $156,000 ($520,000 less $364,000) was half that amount ($78,000) then the overall net profit on a turnover of $520,000 would be only $78,000, assuming that no other expenses would be incurred in earning the additional $156,000.

In the profit and loss projection which was prepared by Mr Gardner for the purposes of the trial a cost of stock sold of 50 per cent of the gross profit was surmised together with additional expenses of $93,468. It will be apparent that those figures do not tally in any way with a break-even figure of $7,000 per week. Mr Gardner explained this by saying that the figure of $7,000 per week was conservative (albeit he said, at another point in his evidence, that it was based upon the expenses which his own stores were incurring at the time at which the franchise document was first prepared) and that a figure of $6,000 per week was more realistic. However even that figure does not accord with the profit and loss projection. A break-even figure of $6,000 per week amounts to an annual break-even figure of $312,000. If half of that was to be ascribed to cost of stock then the remaining expenses must amount to $156,000.

A later version of the franchise document, current in November 1996, shows a figure of $6,000 per week as the break-even figure. When asked whether he had consulted an accountant in relation to this change Mr Gardner said that he could not recall whether he had done so but doubted that he would "specifically" have raised this issue with his accountant. He said that while he had had a number of discussions with his accountant over the years he could not recall having "specifically" raised these figures with him since the initial discussion to which I have earlier referred. He said that there would be no real point in his having done so because "nothing has ever really changed" so far as is relevant to the figures under discussion.

A document was also tendered in evidence which, Mr Gardner said, was prepared on 1 July 1990 and which estimated the operating costs of the various non-franchised stores then in existence. It showed the Cannington store's total costs as $148,387 per annum, the Innaloo store's costs as $127,826 per annum, the Midland store's costs as $117,781 per annum and the Morley store's costs as $122,382 per annum. The document also records that the Cannington store required sales of $5,706 per week at a gross profit of 50 per cent in order to break even while the Innaloo, Midland and Morley stores respectively required sales of $4,918, $4,530 and $4,708 per week at a gross profit of 50 per cent in order to break even.

Gardner Corporation also tendered in evidence estimated costings in respect of the Melville franchise which had been prepared on 15 August 1995. Those suggested that that franchise's total expenses, excluding franchisee's wages, should be $111,867. It also tendered what was referred to as an operating schedule for Gardner Corporation's Cannington store operating as a "fully established franchise totally run under management" prepared on 21 August 1995. That reflected total costs of $271,826 (the wages bill amounting to $157,326) giving rise to a net profit of $119,859 on an annual turnover of $1,051,151 and a gross profit of 34.88 per cent.

Evidence was led on behalf of the defendants from Mr Glen Richardson who, through his family company Grisco Pty Ltd, operated the Morley and, later, Northbridge franchises. Mr Richardson said that the year ended 30 June 1995 was very competitive and that there were not "huge margins" to be made. He said that his trading figures "were typically sort of break-even or a small loss" until 1996.

Grisco Pty Ltd's turnover at the Morley store for the year ended 30 June 1995 was $819,960 with a "cost of sales" of $559,358. The "trading profit" for that store was $260,602 and its total expenses, including wages and superannuation, amounted to $265,938. The 1994 figures show a gross turnover for that store of $698,710 and that it then operated at a small loss of slightly over $1,000 after taking into account wages and superannuation. The 1995 figures for the store demonstrate that interest was paid in an amount of $6,022 ($8,116 in 1994) and that relatively small amounts were allowed by way of amortisation and depreciation. Mr Richardson said that he was then paying himself a salary of around $35,000 per annum, which was included in the cost of wages.

Evidence was also led from Mr Loughton, who, as I have said, operated the Midland store from December 1989 until October 1993 and then, through a family company, operated that store and the Joondalup store until July 1997.

The financial statements for the Midland store for the year ended 30 June 1994 showed that that store had a total turnover of $531,287, earned a gross profit of $140,372 and operated at a loss of $40,245 after allowing for expenses including interest of $8,381, various items of depreciation and amortisation, directors' salaries ($32,356) and superannuation for directors ($966).

In the year ended 30 June 1995 the Midland store had a total turnover of $646,878, made a gross profit of $248,791 and made a net profit (after allowing for similar expenses to those incurred in the 1994 year) of $4,630. Mr Loughton said that he had been a frequent source of complaints to Gardner Corporation about the "non-profitability or the unprofitability" of the Midland store. Although it was not plain from his evidence when these complaints were made I inferred from his evidence that they were made from an early stage in his operation of that store, bearing in mind that he (or his family company) operated that store from December 1989 until July 1997.

Evidence was also led in this respect from Mr Peter Chandler who, as I have said, operated the Balcatta franchise from 1992 until the beginning of December 1996.

He confirmed that he had been asked by Gardner Corporation to provide profit and loss and trading figures for his store for the financial year ending in June 1994 but that he had, by 1 March 1995, failed to do so. He said that he did later provide those figures but he was unable to say when they were provided.

The defendants led evidence from Mr Maio with respect to the net profit likely to be earned by a franchisee in the Gardner Electronics Group at the material time. He calculated the various expenses which, he said, such a business would expect to incur and, assuming sales of $520,000 per annum, a gross profit margin of 24.5 per cent and total expenses (not including the cost of products sold) of $148,653, he concluded that the business would suffer a net loss of around $21,253. His assumption as to a gross profit of only 24.5 per cent was based upon assumed cost prices of products sold which were, in turn, based upon a sample of "possibly 100 to 200 invoices" looked at by him. He performed a separate calculation assuming a slightly higher gross profit margin of 26 per cent which showed a net loss of $13,453.

Even if the gross profit percentages assumed by Mr Maio are too modest (and, as I shall make plain when dealing with his evidence in respect of the issue of what were reasonable wholesale prices in respect of products supplied to stores which traded in the Group, I am reluctant to place much reliance on his evidence in respect of the prices at which individual Gardner Electronics franchisees might have acquired or did acquire the products sold by them), his estimate of expenses, which is, I think, more reliable, contradicts the figure of $166,000 in the franchise document which, even if a gross profit of 50 per cent is assumed, assumes (if the reference to the break-even figure of $7,000 per week is ignored) total expenses, on a turnover of $520,000 per annum, of only $94,000.

Evidence was also given in this respect by Mr Stagoll. While he has had no experience in the electronics field he has had experience in what he described as "very similar retail-type businesses".

Mr Stagoll performed a calculation based upon the assumption that gross sales of $520,000 would be achieved by a business with a cost of sales of $346,667 (assuming that there was a 50 per cent mark-up on cost). This, he said, produced a gross profit of $173,333. If there was deducted from that sum the advertising and royalty fees identified in the franchise proposal this would leave an amount of $137,193 required to meet all of the operating costs of the business, provide a return for the labour of the franchisee and provide a return on capital investment by the franchisee.

Mr Stagoll also performed a calculation in respect of the comment in the franchise document to the effect that most "sites" required sales figures of approximately $7,000 per week to break even. This showed that, based upon sales of $7,000 per week and a 50 per cent mark-up on cost, a gross profit of $121,334 would be derived, from which it might be concluded that the operating expenses of the store at that level of turnover would be this sum. Mr Stagoll next produced a calculation which again assumed annual sales of $520,000 and a cost of sales of $346,667 (allowing for a 50 per cent mark-up). From the resulting gross profit of $173,333 he deducted annual expenses based upon a break-even turnover of $7,000 per week which, as I have said, amounted in all to $121,334. He then deducted a further sum of $52,000 which, he said, catered for the cost of the increased turnover, being an extra $3,000 per week (the sum of $52,000 being derived by multiplying the sum of $121,334 by 10, dividing it by 7 and substracting the sum of $121,334 from the result). This produced a net loss of $1.

Mr Stagoll also commented on the list of expenses which had been produced by Mr Maio. He said that most of the estimates made by Mr Maio were reasonable albeit in some cases he found the figures to be slightly high, or slightly high compared with the actual experience of franchisees, although he also said that the wages figure was lower than that in fact paid by some of the franchisees and depreciation had been overlooked as an expense. He also identified some costs which, he said, should more properly be regarded as part of the cost of sales and not as separate expenses.

Mr Stagoll prepared a profit and loss statement based upon his analysis of Mr Maio's expenditure estimates and an assumed annual turnover of $520,000. He also assumed different gross profit percentages ranging from the 26 per cent used by Mr Maio up to the approximately 33 per cent which, on his understanding of it, was referred to in the franchise document. The assumption of a 26 per cent gross profit produced a net profit of $6,157 and an assumption of a gross profit of 33 per cent produced a net profit of $42,557.

Mr Stagoll also prepared a report which reviewed financial statements made available to him in respect of the Balcatta, Midland, Joondalup and Morley franchises covering, primarily, the 1993/94 and 1994/95 financial years but including, in the case of Balcatta, the 1992/93 financial year and excluding, in the case of Joondalup, the 1993/94 financial year (which preceded its establishment).

He concluded that the average annual sales for each of the four stores was $522,421 and that their average gross profit percentage was 32.2 per cent with an average mark-up percentage of 47.4 per cent. The average net position of the four stores showed a net loss of $1,455 although this was calculated after allowing for proprietors' wages and other similar items. It also took into account interest paid, depreciation and amortisation although, Mr Stagoll said, depreciation was a "very real cost of a business".

The trading results of the four stores showed expenses ranging from $104,561 to $231,355 with an average of $169,440 (albeit these expenses included such items as directors' or proprietors' wages).

Mr Stagoll said (and I accept) that, in his opinion, profit predictions of the kind contained in the franchise proposal should only be made after taking into account the sales and gross profit history of other franchised stores, their expense history, ratios to sales of other stores, issues specific to the particular store such as population, demographics, product mix and the like and levels of royalty and advertising charges to the franchisee.

Indeed, Mr Stagoll said, Gardner Corporation's own Cannington store was, as its operating schedule dated 21 August 1995 disclosed, operating at a profit of only $119,859 (without any deduction, in the list of expenses, for wages and superannuation of associated persons) on a turnover of $1,051,151.

Mr Stagoll was shown financial data which had recently become available in respect of the operation of the Melville franchise over the years ended 30 June 1994 and 30 June 1995. He said that these did not materially alter his conclusions.

Mr Stagoll said (and I also accept) that it is important for an intending franchisee to know all of the matters which bear upon an estimate of profitability, even if the intending franchisee has been given the actual trading records of the franchised store it is proposing to acquire. This, he said, is so because there might have been some particular difference about the way in which that particular store had previously been run. So, for example, he said the previous franchisee might have been selling different goods or might have had a particular expertise. He said that the fact that one person was able to achieve a particular result did not mean that anyone could do so.

Mr Russell Morgan, a chartered accountant with some 21 years experience in what he referred to as the "high-tech" industry, encompassing electronics, gave evidence on behalf of Gardner Corporation. He questioned a number of the expenses assumed by each of Mr Maio and Mr Stagoll in the profit and loss calculations done by them. He suggested, in particular, that the assumed expenses for accounting, advertising and bank and merchant fees were overstated as were the telephone expenses, wages and motor vehicle expenses. He adjusted Mr Stagoll's estimated expenses accordingly, arriving at a total figure of $108,635.

Mr Morgan prepared his own analysis of the financial information provided by the Balcatta, Melville, Midland, Joondalup and Morley stores although, he said, this was not comprehensive because of missing information. He also regarded it as significant that the information was unaudited and apparently prepared for the purposes of income tax returns. However there was no evidence to suggest that any of that information was inaccurate.

He prepared a schedule in which he adjusted the franchisees' recorded net profit or loss so as to add back proprietors' wages, interest and finance costs and also depreciation and amortisation expenses in order to arrive at what he referred to as the "net income". That produced, for Balcatta, a net income of $19,826 for the year ended 30 June 1993, $37,186 for the year ended 30 June 1994 and $51,053 for the year ended 30 June 1995. The gross sales receipts for each of those years were respectively $313,159, $448,135 and $559,230. The respective gross profit margins were 33.1 per cent, 32.4 per cent and 29.1 per cent.

The adjusted figures for the Melville store showed a net income for the year ended 30 June 1994 of $10,669 and a net loss for the year ended 30 June 1995 of $9,843. The gross sales receipts were respectively $116,224 and $258,406 with the gross profit margins being respectively 52.7 per cent and 27.5 per cent. However Mr Morgan said that the decrease in gross profit margin for the year ended 30 June 1995 suggested that the result for that year was not reliable.

The Midland figures produced a net income for the year ended 30 June 1994 of $6,280 and one of $53,211 for the year ended 30 June 1995. Gross sales receipts for those two years were $531,287 and $646,878 respectively. The gross profit margins were 26.4 per cent and 35.6 per cent respectively. Mr Morgan suggested that the result for the first period was not reliable as the gross profit margin was only 26.4 per cent.

The Joondalup figures for the year ended 30 June 1994 disclosed a net loss of $4,041 and, for the year ended 30 June 1995, a net income of $21,609. Gross sales receipts were respectively $5,265 and $301,092. The gross profit margins were respectively 13.1 per cent and 40.3 per cent. Mr Morgan said, as seems plain, that the result for the first period is not reliable as the gross profit margin was only 13.1 per cent.

The Morley figures disclose a net income of $41,010 for the year ended 30 June 1995 with gross sales receipts of $822,887 and a gross profit margin of 32.02 per cent.

It seems to me, after considering all of this evidence, that the representation as to the profitability, after expenses, of a Gardner Electronics franchise, even if understood in the manner contended for by Gardner Corporation, was insupportable. It was not based upon any reasonable grounds.

Plainly the figures appearing in the franchise document were self contradictory. I have demonstrated that the break-even figure there specified contradicts the "bottom line" figure of $166,000, based on an annual turnover of $520,000. I have also demonstrated that even the break-even figure of $6,000 per week which was used in a later version of the franchise document cannot support that "bottom line" figure.

Also, the figures in the franchise document do not seem to me to be supported by Mr Gardner's own experience in the Cannington store when regard is had to that store's trading results in the periods immediately prior to March 1995. Nor are those figures supported by the experience of the franchisees to whom I have referred over periods up to and including March 1995. While I am prepared to accept that Mr Gardner did not know the franchisees' net profit (or loss) figures it seems probable from Mr Loughton's evidence that Mr Gardner did, at least, know that Mr Loughton had frequently complained about the lack of profitability of the Midland store.

It also seemed to me that such input as Mr MacLean might have had into the figures which appeared in the franchise document was less than reliable (and, as I have mentioned, he was not a witness at the trial). His input was as far back as 1986 and there was nothing to say upon what it had been based.

Taking into account all of these matters, together with the other evidence to which I have referred, I am led to the conclusion that this estimate of profitability, even understood in the manner contended for by the plaintiff, was fundamentally flawed and insupportable.

While it is true, as counsel for Gardner Corporation pointed out, that the representation was one that a figure of $166,000 "should" be earned and not one that it "would" be earned, this seems to me to matter little. There was, on the whole of the evidence, simply no supportable basis for suggesting that that figure "should" be earned.

Argument was also addressed to me on the question whether this representation as to profitability should properly be characterised as one with respect to a future matter, attracting the operation of s51A of the Trade Practices Act, or one as to a present belief based upon stipulated grounds. Counsel for Gardner Corporation contended that it fell within the latter category.

It seems to me that it was both. It is true that a representation as to a future matter will often impliedly convey a further representation as to an existing state of mind in respect of that future matter. However I adopt, in that respect, what was said by Hill J in Ting v Blanche [1993] FCA 524; (1993) ATPR 41-282 at 41,764 as follows:

"Whatever may be the case where there is an express representation as to the maker's state of mind concerning a future matter, it is not, in my opinion, correct to treat a representation as to an event or conduct in the future, be that in the form of a prediction or otherwise, as not being a representation with respect to a future matter merely because it implies a representation as to the maker's present state of mind. The language of s51A is very wide and the words 'with respect to' are, like the words 'in respect of ' discussed by Dickson J, delivering the judgment of the Supreme Court of Canada in Nowegijick v The Queen (1983) 144 DLR (3d) 193 at 200 (a discussion cited with approval by Toohey J in Smith v Federal Commissioner of Taxation [1987] HCA 48; (1988) 164 CLR 513 (at 533)):

' ... words of the widest possible scope. They import such meanings as "in relation to", "with reference to", or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject-matters.'

A representation as to future rental, for example, will be a representation with respect to a future matter, even if also, impliedly, a representation as to the existing state of mind of the maker."

The representation that an intending franchisee should, if he, she or it acquired a franchise, be able to earn an annual income (pre-tax) of $166,000 once an annual turnover of $520,000 or more had been achieved is, when read in its overall context, in my opinion one with respect to a future matter. The representee is, in effect, told that this is what can reasonably be expected to be achieved in the future by that representee if a franchised store is acquired and properly run and once it achieves the required turnover. Once it is accepted, as I consider that it should be, that a representation of this kind is one, or at least encompasses one, as to a future matter (see Ting v Blanche, supra, and cf Jacques v Cut Price Deli Pty Ltd (1993) ATPR (Digest) 46-102; Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) ATPR 41-534 and Cummings v Lewis (1993) ATPR (Digest) 46-103) then it is enough to find, as I have done, that Gardner Corporation has failed to show that it was made on reasonable grounds in order to establish its misleading character. (See ss51A(1) and (2) of the Act.)

That said, it seems to me that the representation should be found to be misleading even if it did not fall within the compass of s51A. It was, I consider, implicit in it that the maker of the representation had reasonable grounds for saying that a net income (pre-tax) of the magnitude of that specified should be achieved once the requisite turnover was achieved (cf James v ANZ Banking Group Ltd [1986] FCA 41; (1986) 64 ALR 347; Global Sportsman Pty Ltd v Mirror Newspapers Ltd [1984] FCA 180; (1984) 2 FCR 82 and Tobacco Institute of Australia Ltd v The Australian Federation of Consumer Organisations Inc [1992] FCA 630; (1992) 38 FCR 1). I have already said that I am satisfied, on the evidence, that Gardner Corporation did not have reasonable grounds for making that representation.

I am consequently satisfied that Gardner Corporation has, in this respect, engaged in conduct in breach of s52 of the Act (and, if it matters, s59(2) thereof, the representation having, in my opinion, been misleading in a material particular in that the important "bottom line" figure of $166,000 was insupportable). It was not in dispute that, if I should reach this conclusion, Mr Gardner, as the person responsible for compiling the franchise document and providing it to the defendants, was knowingly concerned in the contravention and therefor a person involved in the contravention for the purposes of s82 of the Act (as to which see s75B thereof).

That brings me finally, under this heading, to the representation that the "average Company profit is 50 per cent mark up". I am not satisfied, if it matters, that any of the defendants was misled by that representation, even if it was somewhat ambiguously formulated. I have already mentioned that the defendants read it as conveying that sales of stock would realise a gross profit of 33.3 per cent. There was no real contest as to the proposition that there were reasonable grounds to support a representation to that effect. So much appeared from the evidence of Mr Morgan (which I preferred to that of Mr Maio and Mr Stagoll in this respect and which was not contradicted in cross-examination), from that of Mr Gardner and, indeed, from the experience of many of the franchisees.

Reliance by the defendants on the representations

That brings me, next, to the issue of reliance by the defendants on the representations to which I have referred.

The plaintiff contends that none of the defendants placed any reliance on any representations made to them by Gardner Corporation. It relies in this respect primarily on the course of dealing between Mr Stenning on the one hand and Ms Hansen and Mr Gardner on the other from which, it contends, it is readily apparent that Mr Stenning and those associated with him were determined to acquire the Fremantle franchise for no reason other than that they believed that, on the strength of what had been achieved by Mr Harwood, that franchise was a particularly profitable one.

The plaintiff relies next upon the fact that prior to 8 July 1996 no complaint was ever received by Mr Gardner from the defendants with respect to any misrepresentation alleged to have been made to them.

It relies lastly, albeit to a lesser extent, on the provisions of cl 41.9 of the Franchise Agreement. That clause reads as follows:

This Agreement contains the entire understanding and agreement of the parties hereto concerning the matters herein contained. The Franchise Owner agrees and acknowledges that it has not been induced to enter into this Agreement in reliance upon, nor as a result of any statements, representations, warranties, promises or inducements whatsoever, whether oral or written and whether directly related to the contents hereof or collateral thereto made by the Franchisor, its officers, directors, agents, employees or contractors."

In order to obtain relief under ss82 and 87 of the Act the defendants must establish, for present purposes, that they have suffered loss or damage "by" conduct engaged in by Gardner Corporation in breach of s52 or s59(2) thereof. In Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 Mason CJ said at 525:

"The statutory cause of action arises when the plaintiff suffers loss or damage 'by' contravening conduct of another person. 'By' is a curious word to use. One might have expected 'by means of', 'by reason of', 'in consequence of' or 'as a result of'. But the word clearly expresses the notion of causation without defining or elucidating it. In this situation, s82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v Stramare (E & M H) Pty Ltd [1991] HCA 12; (1991) 171 CLR 506, except insofar as that concept is modified or supplemented expressly or impliedly by the provisions of the Act. Had Parliament intended to say something else, it would have been natural and easy to have said so."

Moreover, it is well established that the representation need not be the sole inducement and that it is sufficient so long as it plays a part, even if only a minor part, in contributing to the formation of the contract. (See Gould v Vaggelas [1984] HCA 68; (1958) 157 CLR 215 at 236.)

It is consequently necessary, for the purposes of this case, for the defendants to establish that the misleading representation which I have found to have been made by Gardner Corporation, and which constituted a breach of s52 of the Act and s59(2) thereof, played a part in contributing to the defendants' decision to enter into the franchise agreement.

I have, after considering all of the evidence, reached the conclusion that that representation (and, indeed, the other representations in the franchise document) played no part, not even a minor part, in contributing to the decision made by Mr and Mrs Stenning, and consequently by Zed Bears, to enter into the Franchise Agreement.

In reaching this conclusion it is unnecessary for me to place any reliance upon the fact of the disclaimer in cl 41.9 of the Franchise Agreement, quoted above. The courts have in that regard held on more than one occasion that, where a person is induced to enter into a contract containing an exemption or exclusion clause because of reliance upon misrepresentations, it is not open to the other contracting party to rely upon that exclusion clause in order to escape liability. Thus, in Oraka Pty Ltd v Leda Holdings Ltd [1997] FCA 297; (1997) ATPR 41-558 Burchett J said at 43,717:

"It cannot be thought that the very agreement that was obtained by a misrepresentation can be made good by incorporating in it a further misrepresentation falsely asserting that it was not procured by the means which were in fact employed. The agreement that so seeks to sustain itself was obtained by a misrepresentation, and no verbal magic of an added clause can change that."

(See also Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 at 371 and Petera Pty Ltd v EAJ Pty Ltd [1985] FCA 277; (1984) 7 FCR 375 and cf Benlist Pty Ltd v Olivetti Australia Pty Ltd (1990) ATPR 41-043.)

I have reached the firm conclusion that Mr Stenning was determined to acquire the Fremantle franchise long before he ever saw the franchise document. His determination was such that he was not influenced by any of the representations made to him in that document (cf Sutton v A J Thompson Pty Ltd (In Liq) (1987) 73 ALR 233 at 240).

That this is so is, I think, readily apparent from his exchanges with Ms Hansen (the whole of whose evidence I have accepted, as I have mentioned above) and with Mr Gardner (whose evidence I have preferred to that of Mr Stenning in this respect).

Mr Stenning, who had, as I have said, seen the enormously profitable nature of the business when conducted by Mr Harwood, believed, as he himself said in evidence, that even without having the same financial backing he was able to achieve a turnover of $20,000 per week. I have earlier remarked on the extraordinarily "bullish" nature of Mr Stenning's outlook. Indeed, I formed the impression that he believed that he would be able to achieve a turnover of significantly more than $20,000 a week within a short time.

The financial records included within the finance proposal which had been prepared on behalf of Tsalach and which had been looked at by Mr Stenning painted an undoubtedly attractive picture, so far as the profitability of the Fremantle franchise was concerned. I have mentioned that the profit and loss statement for the year ended 30 June 1994 disclosed sales of over $3,500,000 from which a gross profit of $1,260,313 had been derived. This produced, as I have said, a net profit of $473,670 after taking into account directors' salaries amounting to $242,000 and superannuation for the directors amounting to $75,000. The accounts also disclosed that interest was paid to the National Australia Bank in an amount of $38,769, that legal fees in an amount of $23,984 had been expended and that rental or property expenses of $31,163, unrelated to the Fremantle store, had been incurred. There were also travelling expenses of $14,521 and directors' motor vehicle expenses of $8,265.

Mr Stenning said in evidence that he did not regard the "break-even" figure of $7,000 per week contained in the franchise document as important because, as he put it:

"I thought I was going to do 20,000 a week. I wasn't looking at a break-even store. I was looking at a 20,000 a week store."

He added that he did not have the financial capacity to run "a $70,000 per week business" (approximately the turnover which Mr Harwood had achieved) as he would not have had enough stock to cover it. $20,000 per week was, he said, "a gut feel". This was the figure which he discussed with Mr Myers.

Mr Stenning also knew that the business had been acquired by Mr Clifford for a purchase price of over $1,000,000 and that, if he could himself secure the franchise, he would be obtaining it for only a tiny fraction of that sum. It was, as he acknowledged, on the face of it a remarkable "opportunity" for him. He had formed the clear impression, as is apparent from what he told Ms Hansen and Mr Gardner at the time and, indeed, from what he said in court, that Mr Clifford's problems were a product of the heavy vendor finance which he had to service, the "disappearing" stock and Mr Clifford's inability to handle the "day to day complexity" of the business rather than of any problems inherent in the business itself. I accept Mr Gardner's evidence that Mr Stenning told him that he considered that the business presented him with a potential gold mine. While Mr Stenning did need some financial backing, this being the reason why he had approached Mr and Mrs Myers, it seems to me that he was determined to get the business one way or another and that he would have gone ahead on his own if he had no other option. So much is, I think, apparent from what he said to Ms Hansen. He was, as I have mentioned, "begging to be considered as the next tenant" of part of the premises from which Mr Harwood had traded and was even prepared to pay a higher rent for those premises.

While I have no doubt that Mr Stenning preferred to trade from the premises at 1 Queen Victoria Street I have equally no doubt that he would have traded from any other useable premises if he could obtain them and that he had made that decision before receiving the franchise document on 31 March 1995. He had been told as early as 22 March 1995 that he would not be given a lease of the 1 Queen Victoria Street premises. He immediately started looking for alternative premises and those in Wray Avenue were located on 28 March 1995. Notwithstanding that those premises appear to have been less than desirable for the purpose of operating a Gardner Electronics store Mr Stenning remained steadfastly of the opinion that he wanted the Fremantle franchise and Mr and Mrs Stenning were willing to trade from these unsuitable premises if nothing better could be obtained. Moreover, Mr and Mrs Stenning paid the franchise fee of $20,000 at the very meeting at which they were given a copy of the franchise document and before they had gone through it. Also, as will be plain from what I have already said, this amount was paid notwithstanding that Mr and Mrs Stenning were "getting increasingly unhappy with the premises at Wray Avenue" and were looking for other premises. This in itself was indicative of their determination to secure the Fremantle franchise.

So far as Mrs Stenning is concerned I formed the very clear impression from her evidence that, as she frankly conceded, she left the "big picture" decisions to her husband. She said that she had little interest in figures and, as I have mentioned, that she did no more than "flip through" the franchise document. I formed the distinct impression that she played no part, at all, in the decision-making process and that she was content to rely upon her husband's assessment of the likely profitability of the business based upon the information which he had obtained at the time of advising Mr Clifford.

It is also noteworthy that, as I have said, neither of Mr and Mrs Stenning, nor anyone on their behalf, ever discussed with Mr Gardner any aspect of the franchise document at any time during 1995. Mr Stenning was asked, in this respect, whether he had asked Mr Gardner for any information concerning the breakdown of expenses of a franchised operation. He said that he had not and that, once he had decided how big his store would be, he knew what his expenses would be for staff and for rent as well as for the advertising levy. He said that he was able to work out the other expenses (although, later in his evidence, he said that he only calculated those expenses after he opened the store).

It is, finally, worth mentioning that Mr Stenning, in an affidavit sworn by him in interlocutory proceedings on 22 August 1996, set out what he then said were the untrue representations in the franchise document. These comprised only representations as regards bulk buying power, exclusive products, bulk buying of advertising space and the provision of management advice and assistance.

I am consequently satisfied that none of Mr and Mrs Stenning and, consequently, Zed Bears placed any reliance at all on the representation as to profitability in the franchise document (or, for that matter, on any other representation in that document) in deciding to acquire and operate the Fremantle franchise. Rather, as I have found, they had, before seeing the franchise document, already made that decision which was not influenced in any way by what was contained in that document.

However, Mr and Mrs Myers and, consequently, Krishell appear to have been more cautious.

While Mr and Mrs Myers, too, were no doubt impressed by the trading figures of the business at the time when it was operated by Mr Harwood, they were experienced franchise operators and were more concerned than were Mr and Mrs Stenning that the business should operate from suitable premises. They were not prepared to join in the venture unless suitable premises could be obtained. Also, they wanted to know that there would be available to the business support and opportunities of the kind that were provided by their existing Supa Valu franchise.

I do not doubt that Mr and Mrs Myers were attracted by the prospect of investing in the Fremantle franchise. They knew that Mr Stenning was negotiating for a lease of part of the premises from which Mr Harwood and, later, Mr Clifford had traded and that Mr Stenning had approached Mr Gardner in relation to the acquisition of the Fremantle franchise. They also knew that Mr Stenning had, in each case, said that they were to be parties to any agreement reached. They were, I find, content that he should do so. These events occurred before they had seen a copy of the franchise document. However it was plain from the evidence that their initial willingness to be involved in the acquisition of the franchise was conditional upon the availability of a lease of the premises at 1 Queen Victoria Street. Once they learned that those premises would not be made available and that Mr and Mrs Stenning were proposing, instead, that the business should trade from the Wray Avenue premises they declined to remain involved.

Their concern as to the location of the store demonstrated that they were not prepared to accept that the business, in any new location and with new management, would automatically repeat or even approach the turnover which had been achieved by Mr Harwood, with all of his experience and financial backing, in the store's previous location.

I accept the evidence of Mr and Mrs Myers that they were shown the franchise document shortly after Mr Stenning told them that the premises at 61 Queen Victoria Street were available for lease and that, in making the decision to invest in the business which was to be operated from those premises, they, and consequently Krishell, placed some reliance upon that document and, in particular, the representations with respect to profitability and (although nothing now turns on this) the advantages of bulk buying which were contained within it. I accept that they did so because of their concern that, once the store was to move from its original premises, its prior performance, under different management, might no longer provide any reliable guide as to its likely future performance.

Counsel for Gardner Corporation sought to make some capital from the fact that the representation in the franchise document as regards the income producing potential of a Gardner Electronics franchise was obviously flawed in the sense that it could not stand together with that in regard to the break-even costs of a Gardner Electronics franchise. He suggested that any serious examination of the franchise document would have disclosed that flaw and that the failure to detect it is indicative of a lack of reliance placed upon that document. I do not accept that submission. While it may be so that Mr and Mrs Myers did not give to that document the close attention which they might have given it this does not mean that I should reject their evidence that they relied, in part, upon the estimate of profitability or "net income (pre-tax)" contained within it. Mrs Myers said in evidence that she regarded the profit projection of $166,000 per year as being important. Mr Myers said that he was particularly impressed, inter alia, by the "profitability figures". I accept the evidence of each of them in this regard.

Gardner Corporation cannot be excused from liability merely because Mr and Mrs Myers did not perform an analysis of the figures which might have been performed by them. The figures were, as Mr Gardner frankly acknowledged, intended to be relied upon and they were relied upon. The failure to analyse them, in the circumstances, was not such as amounted to a failure to take reasonable care of their own interests on the part of Mr and Mrs Myers and Krishell of the kind discussed in Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193 and Argy v Bluntz & Lane Co Real Estate Pty Ltd [1990] FCA 51; (1990) 26 FCR 112 at 138. This was simply a case of failing to spot an error which was not immediately apparent (as is evident from the fact that Mr Gardner himself had not noticed it notwithstanding his preparation of successive drafts of the franchise document) and which could only be revealed once some calculations, even if only of a rudimentary kind, had been performed.

Counsel for the plaintiff also contended that reliance could not have been placed on the franchise document in circumstances in which the intending franchisees did not intend to run the franchise on the basis of a single operator with one "sales person/installer", that being the basis for the projection in the franchise document. I am unable to accept that submission. While it may be true that the intending franchisees never proposed to run the franchise on the basis of any such model the fact remains that Mr and Mrs Myers took comfort from, and were impressed by, the statement that even a franchise which was operated in that limited way should return a reasonable profit.

Next, I do not accept the submission, also advanced by counsel for Gardner Corporation, that the failure to make any complaint in respect of the contents of the franchise document until late 1995 or early 1996 is such as to indicate that Mr and Mrs Myers placed no reliance upon it. As will be apparent from what I have already said the operation of the franchise was left by Mr and Mrs Myers to Mr and Mrs Stenning who, as I have found, did not rely upon the franchise document. Moreover, I formed the impression that Mr Stenning believed, for some months at least after the business commenced operations, that it could be made to be profitable. In those circumstances it seems to me that little can be made of the Myers' failure to make any complaint about the terms of the franchise document until late 1995 or early 1996.

I am consequently satisfied, for these reasons, that Mr and Mrs Myers, and Krishell, relied, in entering into the Franchise Agreement, upon the representation in the franchise document to the effect that, once an annual turnover of $520,000 had been achieved, the expenses of a Gardner Electronics franchisee were such that "an annual net income (pre-tax) of $166,000" should be earned.

Next, Gardner Corporation contends that if one or more of the defendants did rely upon the franchise document that did not cause them to lose any money as a consequence. Rather, it contends, the financial difficulties experienced by the Fremantle franchise were a product of Mr Stenning's mismanagement of the store.

Mr Gardner's principal criticism (albeit this was not pleaded in the defence to counterclaim) in this respect was that the Fremantle franchise had deviated from Gardner Electronics "core product range" in that it concentrated on cellular telephone sales which were less profitable than other products. He said, in this respect, that only a very small profit, or perhaps no profit, might be made on the sale of a telephone and that it was only after the purchaser of the telephone was connected to the particular carrier, whether Telstra or Optus, that anything would be paid to the seller of the telephone by way of a commission. Gardner Electronics had initially dealt with Telstra but later changed to Optus, resulting in the loss of accrued commissions. However, Mr Stenning, in particular, had urged the change because he considered that receipts from Telecom were not sufficiently competitive.

Mr Gardner also made four other criticisms of the manner in which the Fremantle store was operated. The first of these was that the Fremantle franchise deviated from recommended prices and sold, in his opinion, many products far too cheaply. The second was that it deviated from Gardner Electronics' policies in other areas, as for example, the failure to wear company ties and the permitting of smoking by employees in the shop. The third was that the Fremantle franchise had very little street frontage and this operated to its detriment. The fourth, and last, was that its wages bill was far too high and steps taken to reduce the number of employees were taken too late, some time after it had become apparent that the turnover achieved, and the net profit derived from it, could not justify that number of employees.

As to the Fremantle store's concentration on mobile telephones Mr Gardner said that he had a number of discussions with Mr Stenning in the course of which he told Mr Stenning that this was causing detriment to the store's other business. However, he said, he could not persuade Mr Stenning of this.

The plaintiff also relied, in this respect, upon evidence led from Mr Morgan based upon his analysis of schedules provided by the defendants in respect of products which had been purchased by the franchisees from Gardner Corporation for on-sale in the Fremantle store. Mr Morgan's analysis demonstrated that the gross profit margin on sales of mobile telephones was significantly less than that on sales of other products. Allowing for estimated commissions received on sales of telephones the gross profit margin achieved by the Fremantle store on sales of telephones was 15 per cent whereas that on sales of products other than telephones was 34.9 per cent.

Mr Maio, in his evidence, said that, based upon his experience as an accountant and wholesaler in the car audio and communications market, the average mark-up on electronics goods, excluding mobile telephones, is one of 50 per cent, producing a gross profit margin of 33.3 per cent (although, he said, retailers were often obliged to offer a discount off the marked-up price of between 10 and 20 per cent in order to be competitive) whereas the gross profit margin on mobile telephones, taking into account commissions earned, is on average 10 per cent.

Mr Stenning himself also acknowledged that his business placed a strong emphasis on mobile telephones which, he said, averaged 38 per cent of the store's turnover during 1995 and 1996. He said that because of what he referred to as "Mr Gardner's mess-up with the changeover from Telstra to Optus" the telephone business went into limbo for three months in the first quarter of 1996 and telephone sales "went into an absolute decline". He said that he had made no conscious decision to emphasise telephone sales but that this was simply what the store's customers wanted.

I have, in the light of this evidence, little doubt as to the correctness of the proposition that mobile telephones were less profitable than other products. However there was insufficient in the evidence as it stands to persuade me that Mr Stenning was guilty of any mismanagement in that respect. There was nothing, in the evidence, to contradict his assertion that he made no conscious decision to emphasise the sale of mobile telephones and that he did nothing more, in that respect, than endeavour to meet the demands of customers.

Also, while it seems plain that the changeover from Telstra to Optus did have an adverse effect on the Fremantle store's profitability, there is nothing to suggest that this should, if it matters, be ascribed to mismanagement on Mr Stenning's part. I did not understand Mr Gardner to go so far as to suggest that the changeover should not have taken place and, it seems, he plainly agreed at the time that a changeover was appropriate even if it be accepted that the change was instigated by Mr Stenning.

There is consequently no basis upon which it might be found, upon the evidence as it stands, that there was any mismanagement on Mr Stenning's part in this respect.

Nor is there sufficient in the evidence to establish that the Fremantle store sold its products too cheaply. While this was asserted by Mr Gardner, very little evidence was produced in order to support that assertion and I am by no means persuaded that it has been made out, as matters stand. The effect of Mr Stenning's evidence was that prices were only reduced insofar as was necessary to meet those of competitors.

Similarly, it seems to me that, to the extent that the franchisees deviated from Gardner Electronics policies as regards the wearing of company ties and the permitting of smoking in the store, there is nothing in the evidence led to date to suggest that this had any adverse impact on the profitability of the store.

So far as the street frontage is concerned, Mr Gardner said that Mr Stenning decided, after the early months' trading had produced a high turnover, to increase the size of his store. He acquired additional space which virtually doubled the store size but got no additional street frontage. Mr Gardner said that he discussed this, too, with Mr Stenning. However there is nothing in the evidence to suggest what, if any, consequence followed from the fact that Mr Stenning did not acquire any additional street frontage (even assuming that he had been able to do so). There is consequently no basis, other than mere speculation, upon which I am able to find that this had any adverse impact on the profitability of the store. I should add, in any event, that no plea to that effect was made in the defence to counterclaim.

So far as the store's wages bill is concerned, Mr Gardner said that it was obvious that Mr Stenning employed too many people, more particularly as the store's turnover began to decrease. He was supported in this respect by the evidence of Mr Barton who said that he spent a lot of time in the Fremantle store in the course of selling products to the franchisees and that there appeared to be too many people in the store.

Mr Stenning did not deny that, for a time at least, the Fremantle store employed too many people. He said that once the store was fully operational he employed two installers and one salesman. In addition he did some selling himself and Mrs Stenning did the bookkeeping for the business. He acknowledged in cross-examination that he retained staff after he should have "put them off".

There is consequently no issue as to the proposition that, for a period at least, the Fremantle store's wages bill was higher than it should have been. However there was insufficient in the evidence for me to make any finding as to the time from when this occurred (albeit there was some suggestion that this state of affairs persisted throughout Mr Stenning's operation of the store) or what precise consequence this had for the overall profitability, or lack thereof, of the store. I am consequently unable to draw any final conclusion in respect of this issue.

There was one other factor which, while having nothing to do with any allegation of mismanagement, almost certainly had some impact on the profitability of the store. That was the competition from the store which re-opened from the premises at 3 Queen Victoria Street.

I have earlier mentioned that the Fremantle store appears to have made a reasonable start, at least so far as turnover is concerned. On 1 August 1995 Mr Stenning sent to Mr Gardner (who he described as "Mr Chas 'Best Mate' Gardner") his sales figures for the period April to July (with which he appeared to be satisfied) and a projected 1995/1996 figure of $1,800,000. As late as 9 November 1995 Mr Stenning wrote to Mr Gardner saying that his store had achieved $102,000 in sales over the previous month and that it was consequently "doing a few things right".

I have also mentioned that, after that, matters began to deteriorate. How much of the deterioration might be ascribed to competition from the store at 3 Queen Victoria Street, and when that competition began to bite, did not appear from the evidence. I am consequently unable to draw any final conclusion in this respect also if, indeed, the issue is relevant on the pleadings (there being no specific plea in this respect).

The parties have agreed that only issues of liability should now be decided with all questions of damages standing over for further determination. Moreover, counsel for the plaintiff suggested, during the course of argument, without opposition from counsel for the defendants, that the questions what, if any, value the franchise had at the time of its acquisition by the franchisees and whether it was inevitable that loss would be suffered by the franchisees once they acquired the franchise or whether their loss, if any, was caused by factors independent of reliance by either of them upon any misleading representation on the part of the plaintiff should stand over for later determination together with the determination of the question of what was the quantum of the loss so suffered, if any.

It does seem to me that the interrelationship between these issues is such that I should adopt the course which has been suggested to me, the parties having seemingly conducted their respective cases largely upon the basis of an assumption that matters would proceed in this way.

The consequence of this, subject to any further submissions which might be made in that regard, seems to me to be that, notwithstanding that I have been able to make some observations on the evidence to date, the matters to which I have referred will have to stand over for further evidence, insofar as that is appropriate having regard for the manner in which the trial has been conducted to date, and submissions at a later date.

The claims for relief arising out of the plaintiff's misleading conduct

I shall next consider the various claims for relief in the light of the findings which I have made.

I will deal first with those made under the defendants' counterclaim.

Zed Bears and Krishell have sought a declaration under s87 of the Act that the Franchise Agreement is null and void and an order setting aside that agreement. They have also claimed damages. While there is no claim by the third to sixth defendants for an order setting aside the guarantees given by the terms of the Franchise Agreement, the case was fought upon the basis that if the defendants were to succeed in their counterclaim then the third, fourth, fifth and sixth defendants would be relieved of their obligations under the guarantees as the Franchise Agreement would be set aside or declared null and void in its entirety.

The findings which I have made have, of course, the consequence that Zed Bears and Mr and Mrs Stenning have failed to make out their counterclaim against Gardner Corporation and are consequently not entitled to any relief whereas Krishell and Mr and Mrs Myers have succeeded in their counterclaim against Gardner Corporation and are entitled to relief.

I have already mentioned that the parties have agreed that the assessment of any damages ordered pursuant to the counterclaim is to be stood over pending the decision on the question of liability. I am consequently to decide, at this stage, only the question whether I should make a declaration, under s87 of the Act, that the Franchise Agreement is null and void ab initio.

It seems to me that to make an order of that kind would be inappropriate in the circumstances of this case.

Self-evidently it would be impracticable now to restore the parties to their original position. More importantly, perhaps, relief of that kind is inappropriate in circumstances in which only Mr and Mrs Myers and Krishell have made out their counterclaim. That being so, it seems to me, I should make such orders or declarations as might be necessary in order to have the effect that Krishell is relieved of any further obligations under the Franchise Agreement and that Mr and Mrs Myers are relieved of their obligations as guarantors under that agreement, in each case as from the date, in August 1996, upon which the franchisees ceased to trade as such but that I should otherwise confine Krishell to its claim for damages, with the question of the quantum of those damages, if any, being stood over for later determination.

However, before making any such orders or declarations I will hear further from the parties as to the form which they might take.

Gardner Corporation's claim for damages against Zed Bears and Mr and Mrs Stenning

Gardner Corporation's claim for damages encompassing its claims for lost goodwill, advertising contributions and franchise fees has, by consent, been stood over for later determination. However it is, I think, appropriate, before making any orders or directions in that regard, for me to hear further submissions from the parties as to what should be the fate of these claims against Zed Bears and Mr and Mrs Stenning in the light of the findings at which I have arrived. I consequently propose to give to the parties the opportunity to make submissions accordingly.

Gardner Corporation's claim in respect of unpaid franchise fees and advertising levies and for the price of goods sold

There remains Gardner Corporation's claim against the defendants for unpaid franchise fees and advertising levies and for the price of goods sold and delivered by it to the franchisees, in each case said to be due to Gardner Corporation as at the date upon which the franchisees ceased to trade as such.

Once again the parties are in agreement that the quantum of any claims for franchise fees and advertising levies should be referred to an inquiry and that I should determine only the question of the defendants' liability to pay them.

As will be apparent from what I have already said it seems to me that Gardner Corporation is entitled to be paid by the defendants whatever amounts might be due to it by the defendants in respect of unpaid royalty fees and advertising levies up to the date upon which the franchisees ceased to trade as such. I am consequently content to refer the question of quantum to an inquiry for determination.

So far as Gardner Corporation's claim for the price of goods sold up to that date is concerned the parties have agreed that I should first answer the question whether the defendants are right in their contention that it was an implied term of the Franchise Agreement that the plaintiff would act reasonably and in good faith in determining the prices for products sold by it to the defendants and that, in breach of that term, Gardner Corporation acted unreasonably and in bad faith in determining the prices for products ordered from it by and delivered by it to the defendants. They are in agreement that, if that question should be decided against the defendants, the determination of what amounts if any are owing to Gardner Corporation for goods sold and delivered should be referred to an inquiry. I will consequently deal first with that question.

The prices of goods supplied to the franchisees by Gardner Corporation and the alleged implied term

The breach of the implied term is said to be constituted by the fact that Gardner Corporation "incorporated a gross profit margin" on its cost price of products on-sold by it which was "substantially in excess of the margin which would have been charged by a wholesaler in a free and competitive market" and that its prices exceeded those at which the franchisees would have purchased those products had they traded as an independent electronics retailer.

Gardner Corporation acknowledges that it was an implied term of the agreement that it should act in good faith in fixing the prices for goods sold by it to the franchisees but denies that there was any implied term to the effect that it would act reasonably in that regard if, by that, there is imported a requirement, as the defendants contended there is, that each and every price charged by it had to be reasonable in the sense that it could not exceed that charged by other wholesale vendors of the product concerned. It also denies that it acted unreasonably or in bad faith in fixing the prices charged by it.

Clause 8.3 of the Franchise Agreement deals with the price of the goods supplied by Gardner Corporation to the franchisees. It reads as follows:

"The Franchisor shall use its best endeavours to supply to the Franchise Owner all products as may be necessary for the operation of the Business in accordance with orders received from the Franchise Owner specifying the quantities required. Such products shall be supplied at a price determined by the Franchisor from time to time. The cost of delivery of stock purchased by the Franchise Owner from the Franchisor will be borne by the Franchise Owner."

It seems plain that, when read in its context, cl 8.3 could not conceivably have been intended to operate in such a way as to enable the franchisor to charge whatever it liked. It is enough to refer, in that respect, to cl 9.5.7 of the Franchise Agreement which requires the franchise owner not to purchase any products or services from any person other than the franchisor without the prior written consent of the franchisor, "which consent the Franchisor may withhold in its absolute discretion ... ".

It is, no doubt, for that reason that Gardner Corporation has admitted that it was implicit in the Franchise Agreement that it was required to act in good faith in determining prices pursuant to the provisions of cl 8.3. However that admitted requirement seems to me necessarily to import the subsidiary requirement that Gardner Corporation was required to act reasonably in so doing (as to which see Godecke v Kirwan [1973] HCA 38; (1973) 129 CLR 629 and Sutton: Sales and Consumer Law in Australia and New Zealand, 3rd ed, at 113). It is difficult to see how it could otherwise act, in this context, in good faith.

However I am unable to accept that the Franchise Agreement imposed upon Gardner Corporation any requirement that it should sell each product at no more than the price at which that product could be obtained from other wholesalers. There is nothing in that agreement, as I read it, which should give rise to the implication of such a term which, apart from anything else, seems to me to be inconsistent with the express provisions of cl 8.3.

I will consequently approach this issue upon the basis that Gardner Corporation was required to do no more than to act reasonably, in all of the circumstances, in determining the prices to which I have referred.

What is reasonable will, of course, depend upon the circumstances, taking into account not only the interests of the franchisor but also those of the franchisees. Account must also be taken of the availability of supply, the state of the market at the time and any factors bearing upon the price at which each individual product was able to be acquired by Gardner Corporation (including any costs to it associated with that acquisition) and resold by the franchisees. Other relevant factors would include such matters as the price of competing products.

While the evidence established that Gardner Corporation, in some cases, charged prices which made it difficult for the franchisees to be competitive in respect of individual products it fell, in my opinion, short of establishing that Gardner Corporation acted unreasonably in fixing prices or that it otherwise acted in bad faith.

There was a dearth of admissible evidence to support the contentions of the defendants in this respect. Indeed, such evidence as there was seemed to me generally to favour the plaintiff's contentions.

The defendants' contentions, in the prices schedule which was tendered in evidence, as regards what they considered to be a reasonable price for the various items there appearing seemed to be based upon Mr Stenning's opinion without, in the majority of cases, resort to evidence to support that opinion in the form of invoices or other evidence from the suppliers of the products referred to.

It is also interesting, in this respect, that Mr Morgan, in his evidence, mentioned that the gross profit margin earned by the franchisees on the sale of goods purchased from Gardner Corporation was, as their own accounts demonstrated, greater than their average overall gross profit on sales of all goods. The gross profit margin shown in their business' financial statements for the year ended 30 June 1995 was 26 per cent (with sales of goods purchased from Gardner Corporation realising 27 per cent gross profit). In the year ended 30 June 1996 the gross profit margin on all goods was 19 per cent with the margin on goods supplied by Gardner Corporation being 32 per cent. Mr Morgan also pointed out that these accounts showed that the total trading stock purchases made by the franchisees from Gardner Corporation during the time of their operation of the Fremantle franchise comprised substantially less than one half of all purchases of trading stock made by them in the operation of that business. These conclusions were not challenged in cross-examination.

Mr Gardner, in his evidence, said that the prices of the products supplied by Gardner Corporation to the franchisees were generally competitive. He also said that he discussed the "mark-up" on the price of stock sold to Gardner Electronics franchisees with Mr Stenning before the franchisees acquired the Fremantle franchise and that Mr Stenning made no objection to this mark-up.

Mr Gardner said that at no time did Gardner Corporation ever add more than 10 per cent to the price at which it acquired the products which it on-sold to the franchisees. Moreover, as I have mentioned, only a 5 per cent surcharge was payable if the franchisees paid promptly for those products. The surcharge did not, according to Mr Gardner, include freight charges, any warranty costs likely to be incurred by Gardner Corporation or sales tax. Where appropriate each of these charges was added to the cost of the products supplied by Gardner Corporation. However in such cases the 5 or 10 per cent surcharge was calculated before taking such charges into account. Mr Gardner also contended that, even allowing for the 5 or 10 per cent increase, the franchisees still acquired the various products, or at least the large majority of them, more cheaply than they could have done had they purchased them independently.

He also said that it was wrong to regard the surcharge as profit to Gardner Corporation. Much, if not all of it, he said, was (as in the case of the 5 per cent "rebate" received from suppliers with whom the franchisees dealt directly) ascribable to administration costs incurred by Gardner Corporation. Mr Gardner said that a considerable amount of time and effort was expended in identifying appropriate products and suppliers and in negotiating with those suppliers. He suggested that he brought a considerable degree of expertise to those negotiations. Also, he said that sometimes Gardner Corporation would purchase large quantities of goods (purchases of large quantities being necessary in order to get good prices) without being able to on-sell all of them to the franchisees.

It was suggested to Mr Gardner in the course of cross-examination that there were instances in which franchisees were able to obtain better prices from other suppliers by dealing directly with them and thereby avoiding the 5 or 10 per cent surcharge imposed by Gardner Corporation. This was disputed by Mr Gardner who maintained, in effect, that it was only in very isolated cases that this was true.

It was also put to Mr Gardner on a number of occasions that Gardner Corporation had loaded the price at which it had acquired particular products by more than 10 per cent. In every case he disputed this, saying that any additional charges were ascribable to overhead costs of one kind or another, primarily freight and warranty costs and stamp duty.

Next, it was put to Mr Gardner that many, if not all, of the products in respect of which Gardner Corporation had charged warranty costs carried manufacturers' warranties. However Mr Gardner said that many such warranties were unsatisfactory and that defective items had ordinarily to be returned to the manufacturer who might be from another country or another State. That, in turn, involved Gardner Corporation in freight and handling costs and, in some cases, the delay involved in the return of the product was unacceptable and Gardner Corporation was obliged itself to provide the end purchaser with a replacement product and then to sell the repaired product as a secondhand product once it was returned to it.

He said that warranty costs charged by Gardner Corporation were based on its experience with individual products and the costs to Gardner Corporation associated with those products which, he said, were averaged out and added to the cost at which the products were sold to the franchisees.

Mr Gardner was supported in this by the evidence of Mr Nelson of Neltronics. He confirmed that, during 1995 and most of 1996, if radar detectors supplied by his company to Gardner Corporation failed while under warranty it was necessary for him to ship them back to the manufacturer. He said that the "turn around time" was sometimes "upwards of two months ... as long as three months".

It was also put to Mr Gardner that there were other cases in which Gardner Corporation had no justification at all for imposing warranty charges on the franchisees. He was cross-examined, for example, about warranty charges imposed by Gardner Corporation in respect of a particular brand of radar detectors which Mr Gardner said, were a constant source of problems. He was asked, in this regard, to explain his own circular to franchisees dated 6 October 1995 in which he had said that Gardner Corporation's Cannington store received very few complaints about radar detectors. He explained this by saying that the Cannington store took pains to explain to customers the shortcomings of the radar detectors so that they would be aware of what they could and could not do and so that they would consequently be less likely to return them if they proved to be ineffective in certain circumstances.

Mr Gardner also referred, in this regard, to a memorandum which he had sent to particular franchisees dated 6 October 1995 in which he had urged those franchisees to carry the full range of radar detectors saying that " ... notwithstanding the complaints you occasionally do receive, we all do, the radar detector market is a big market and it is essential to have a full range".

Mr Gardner insisted that where suppliers were reliable in honouring their warranties, and the circumstances of honouring those warranties were not such as to impose any cost upon Gardner Corporation, no charge was levied by Gardner Corporation upon the franchisees in respect of those products.

Similarly, Mr Gardner said, while freight charges were averaged in respect of particular goods he believed that Gardner Corporation did not charge more, overall, than its actual freight costs in that respect.

Mr Gardner insisted that, even allowing for these additions to the prices at which Gardner Corporation acquired its products, the franchisees still "bought everything from us cheaper than they could have done on their own". He said in this respect that Gardner Corporation's policy, which was well-known to the franchisees, was that if any franchisee found out that a particular product could be obtained at a price cheaper than that obtainable through Gardner Corporation then Gardner Corporation would guarantee at least to match that price and quite often would beat it. He said that there were many meetings of franchisees at which that policy was discussed.

Mr Gardner was referred, in this respect, to a circular which he had sent to all franchisees on 4 July 1996 in which Gardner Corporation offered all franchisees "price protection" on products that it sold for a period of 60 days after the purchase was made. It read, inter alia, as follows:

Gardner Electronics Admin offers all franchisees price protection on products that it sells, for a period of 60 days after the purchase is made.

This excludes products which are sold below cost on a clearance basis, but does include all products that have been reduced in price within the 60 days, and/or any product that you purchase form [sic] Admin that has been advertised or can be supplied from an alternative supplier cheaper.

Further, Gardner Electronics Admin categorically states that we will at least match or beat any price on any product purchased from any legitimate dealer. All you need to do to have price protection, is fax a copy of the invoice that you last purchased the goods from Admin [sic], and some form of written proof to show that the prices are cheaper elsewhere, and Gardner Electronics Admin will upon investigation match or beat the price."

However, Mr Gardner said (and there was no evidence to the contrary) that there was nothing new in this policy which, he said, had been in existence for some time prior to the date of the circular.

I am prepared to accept Mr Gardner's evidence in each of these respects. There was, in the end, little admissible evidence to contradict it and there was nothing to cause me to doubt his credibility in this regard. Moreover his evidence was lent some support by that of Mr Barton of Martello Holdings Pty Ltd, Mr Wigger of Arena Distributors and Mr Nelson of Neltronics, to which I have referred when dealing with the representation as regards bulk buying advantages. I will not repeat what I have there said.

While the defendants sought to draw support for their contention that Gardner Corporation acted unreasonably in determining prices from evidence given by Mr Maio there was nothing in that evidence which has, in the end, caused me to accept that contention.

Mr Maio endeavoured to say, from his own recollection, what, generally, were the prices charged by Western Car Audio, the name under which the electronics store at 3 Queen Victoria Street operated after it had ceased to be a Gardner Electronics franchisee. He said, on the stength of his recollection, that the Western Car Audio Group could "more than compete" with Gardner Electronics' store in Fremantle and "could actually beat its prices by far". He dealt, in his evidence, with what he described as the question whether the defendants "were able to purchase ... products elsewhere at a similar or the same or a higher or lower price". He was asked to give his opinion whether the franchisees paid a fair price for individual products. The effect of his evidence was that in many cases they did not.

Mr Maio, in giving this evidence, relied, as I have said, largely upon his recollection, supported by price lists which he had obtained from four or five different companies which supplied wholesale products to outlets such as the franchised stores. However his evidence was not supported by that of the suppliers themselves.

Also, in calculating the prices which had been paid by the Fremantle franchise during the period of its ownership by Mr Harwood, Mr Maio acknowledged that he had relied upon material which Mr Harwood had obtained from his computer in the form of various spreadsheets for the 1995 year. He could not himself vouch for the accuracy of that information.

Mr Maio also acknowledged that, in cases in which Gardner Corporation had not admitted the price paid by it for a particular item as set out in the prices schedule, he had made no independent assessment of the price of that item but had instead simply relied upon figures provided by the defendants.

Moreover, he said, his opinion as to the price payable by the franchisees if they had been an independent retailer comprised nothing more than an estimate based upon his experience in circumstances in which, in some cases at least, he was not himself familiar with the products supplied.

Counsel for the plaintiff challenged Mr Maio's ability to give expert evidence upon the basis that he was not independent. He pointed to the fact that Mr Maio had previously given evidence on behalf of Mr Harwood in litigation between himself and Gardner Corporation during 1996. He also relied upon the fact that Gardner Corporation had, in 1996, claimed that Mr Maio had understated the quantity of goods supplied by the business with which he was then associated to two of the franchisees and that it had subsequently instructed all franchisees not to deal with his business.

That challenge was, with respect, misconceived as Mr Maio, whether independent or not, was plainly qualified to express an opinion on the matters referred to by him. That being so, the objection was really one which went to the weight of his evidence.

While I am not prepared to make any finding which adversely impacts upon Mr Maio's integrity I should say that I considered that Mr Gardner's recollection which, very often, was supported by documentation or, indeed, by evidence from suppliers, was more reliable than that of Mr Maio which, as I have said, was often not supported by any documentation or other admissible evidence. The same criticism can, I think, be made of the evidence of Mr Stenning. I have consequently preferred the evidence of Mr Gardner to that of each of Mr Maio and Mr Stenning where there is any conflict.

There is accordingly insufficient in the evidence to persuade me that there has been any breach by Gardner Corporation of the implied term to which I have referred. It follows that the question of what amounts, if any, are owing by the defendants to Gardner Corporation for goods sold and delivered by it to the franchisees should be referred to an inquiry upon the basis that the prices of those goods have been properly determined by Gardner Corporation. I shall hear further from the parties as to what orders and directions should be made in that respect.

The upshot of the aforegoing, so far as the counterclaim is concerned, is that Krishell and Mr and Mrs Myers are entitled to relief upon the basis set out above but Zed Bears and Mr and Mrs Stenning are unsuccessful in their claims. As regards Gardner Corporation's claims against the defendants, I will hear further from the parties as to what should be the fate of its claim for damages encompassing its claims for lost goodwill, advertising contributions and franchise fees against Zed Bears and Mr and Mrs Stenning (that claim having failed against Mr and Mrs Myers and Krishell). However its claims for payment of any advertising contributions and franchise fees remaining unpaid as at the date upon which the franchisees ceased to trade as such, and for payment of the unpaid price of goods sold and delivered until that date, will be referred to an inquiry for determination. The inquiry as to the amount due in respect of the goods sold and delivered will be conducted upon the basis that the prices charged by Gardner Corporation for those goods were fixed in accordance with the terms of the Franchise Agreement.

I will hear further from the parties as regards the form of the orders which will be required in order to give effect to these reasons and in respect, also, of any other matters which might arise from these reasons.