Conclusions as to reliance at the time of entering into the franchise agreement
287 It is necessary to say more about the course of events up until the point in time when the franchise agreement and the guarantees were entered into and events which occurred shortly thereafter.
288 On 30 January 2017, Mr Hagemrad responded to an email from Mr Chau who had asked "if the figures we used [in the Updated Cash Flow] are accurate". Mr Hagemrad confirmed that the Updated Cash Flow "appears to be in line with current expenses at the newly operating club in Western Sydney", namely Wetherill Park. This was incorrect in that the Updated Cash Flow did not contain any expense for hire purchase or operational leases. The Cash Flow Template which had been provided by UFG contained a line item for the former, but not the latter. Mr Hagemrad's response was not specifically pleaded as conveying a misleading representation, but it is referred to as part of the relevant events occurring before entering into the franchise agreement and guarantees.
289 When the two cash flows had been prepared and sent to Mr Hagemrad on 9 and 17 June 2016, Mr Hagemrad contemplated that the Life Fitness equipment was included in the estimate which he had given of $500,000 to $800,000 for "establishment costs". I reach that conclusion because:
The likely cost of a 48 month lease of the Life Fitness equipment would have been one of the major expenses, probably the second most significant after rent. Neither the Draft Cash Flow nor the Updated Cash Flow provided for such a significant expense as an operational expense. If Mr Hagemrad had intended for the Life Fitness equipment to be an operational expense, separate and additional to what was being discussed as "start-up costs", the expense would not have been overlooked when he considered the Draft Cash Flow and Updated Cash Flow in June 2016.
If Mr Hagemrad had intended that the Life Fitness equipment was an operational expense separate and additional to the equipment in paragraph (b) of Table 1 of the First Disclosure Document dated 31 March 2016, it would have been included in Table 2 or Table 3 of that disclosure document.
290 The conclusion is also fortified by the email sent by Mr Oman of Life Fitness on 24 June 2016 referred to earlier in which Mr Oman stated:
Whilst I was driving home, I had a think about the discussion we had around the $700,000 cost that you are indicating to potential franchisee[s]. I know this has been designed to accommodate the fit out costs and the costs of equipment, but it really doesn't need to. When you show a $700,000 cost in fitting out a facility, you are indicating that the equipment will cost the client $350,000 …. But that isn't really the case.
The equipment will be a monthly expense to the franchisee, and will have only a small impact on their capex initially. Whilst they will need to pay for the builder, the franchise fees and some of the soft accessory products up front, the bulk of the equipment will be leased over a longer period through our internal finance.
A new franchisee will only be liable for around $8,000 before they open the doors (their first monthly repayment). After that, the equipment repayments are simply a monthly expense on the budget and are considered in their profit and loss projections.
291 There is no reason to think Mr Oman's contemporaneous report of his conversation with Mr Hagemrad is anything but accurate.
292 After entering into the franchise agreement and guarantee, Mr Chau was surprised to learn that the Life Fitness equipment was not included in the amount of $800,000 which had earlier been discussed.
293 As noted earlier, on 28 March 2017, Mr Chau sent an email to Mr Hagemrad, Mr K Girgis and Mr S Girgis which included:
I just wanted to confirm with you what is the anticipated investment required to start up the gym, I understand that we can't be certain as each site differs but from my understanding from our previous discussion we have always discussed a figure of approx. 800k total.
I spoke to Jason today and he tells me it's more like 1.2M and that the 800k does not include the cost of the life fitness gym equipment. I have always been under the impression that 800k was the total investment inclusive of all equipment.
Can you please confirm
294 Mr Hagemrad responded by email on 28 March 2017 stating:
At all times including the most recent visit by Sherif and Karim the invested was purported fall within $700K to $900k plus GST. This figure is a best guess and is based on numerous variables and unknowns. The Life Fitness equipment has always been discussed as an operating lease and not a capital expenditure. I was present when the guys were discussing the numbers with Sam on site at Wetherill Park and the Life Fitness equipment was always reported to be on an operating lease.
In this instance the total investment remains in the vicinity of $700-$900 plus GST.
I hope this clarifies it for you.
295 Mr Chau responded by email on 29 March 2017, stating:
Thanks Maz for the confirmation
Any info you can provide me about the life fitness financing deal would be great so I can see what is required
296 Mr Chau's response of 29 March 2017 was not explained by the evidence. There are various possible explanations for it, none of which seem more likely than another.
297 I accept that Mr Chau was genuinely surprised to learn, shortly before he sent his email on 29 March 2017, that the Life Fitness equipment was not included in the total start-up costs of around $800,000 which had been discussed.
298 I conclude that, when entering into the franchise agreement and guarantee, Mr Chau:
(a) thought that the total for fit-out and all equipment for Wetherill Park was likely to be around $800,000;
(b) thought the Life Fitness equipment was included in Table 1 of Schedule 5 of the First Disclosure Document and in the estimates which had been given of start-up costs of between $500,000 and $800,000;
(c) did not know that the Life Fitness equipment for Wetherill Park was treated as an operational expense.
299 In cross-examination, Mr K Girgis stated:
What Mr Hagemrad was saying in this email is that you and your brother were told by Mr Husseini during the Wetherill Park tour that the Life Fitness equipment was not to be acquired as a capital expenditure, but on an operating lease. Do you agree with that summary of this email?---No. That wasn't the case, and Mr Hagemrad wasn't present when we asked Sam. He was at least 15 metres away, so that's a lie.
300 Later in cross-examination, Mr K Girgis stated:
But when you saw Mr Hagemrad's email of 28 March 2017, you did not respond to him saying that no such thing occurred during the Wetherill Park tour. That's the case, isn't it?---That's right. I had spoken to Paul about it, but not Mr Hagemrad.
And the reason why there was no email in response from you is because what Mr 15 Hagemrad set out in his email of 28 March 2017 did actually take place. That's the case, isn't it?---No. That's false.
The reason why you didn't see any need to correct what Mr Hagemrad had said was because, when you were on the tour of the Wetherill Park gym on 10 December 2017 20 - I'm sorry, 10 December 2016, Mr Husseini said to you, "The fit-out cost doesn't include the Life Fitness equipment. It will be an operating lease with life fitness." That's what was said to you, isn't it?---He did not say that. No.
301 I accept that Mr K Girgis had no recollection of being told by Mr Husseini that the Life Fitness equipment would be on operating lease. This is either because it was not said by Mr Husseini or because Mr K Girgis was not present when it was said or did not digest the comment.
302 I have earlier accepted that Mr K Girgis was told by Mr Husseini that he was "pretty sure [the Life Fitness equipment was] all included in the costs we've sent through" and that Mr Hagemrad later confirmed that it was included in the disclosure document previously sent. I conclude that, when entering into the franchise agreement and guarantee, Mr K Girgis:
(a) thought that the total for all fit-out and all equipment for a new UFC franchise in 1,000 square metre premises was likely to be around $800,000;
(b) thought the Life Fitness equipment was included in Table 1 of Schedule 5 of the First Disclosure Document and in the estimates which had been given of start-up costs of between $500,000 and $800,000;
(c) did not know that the Life Fitness equipment for Wetherill Park was treated as an operational expense.
303 I accept that, when entering into the franchise agreement and guarantee, Mr S Girgis:
(a) thought that the total for all fit-out and all equipment for a new UFC franchise in 1,000 square metre premises was likely to be around $800,000; and
(b) thought that the Life Fitness equipment was included in Table 1 of the First Disclosure Document and in the estimates which had been given of start-up costs of between $500,000 and $800,000.
304 Having regard to the evidence given by Mr S Girgis referred to earlier, it is possible that Mr Husseini said to Mr S Girgis on 10 December 2016 that the Life Fitness equipment for Wetherill Park was treated as an operational expense, either when Mr K Girgis was not present or in circumstances in which the statement was not properly digested by him. If he did, Mr S Girgis did not communicate that fact to Mr K Girgis or to Mr Chau before Mr Chau sent his email on 28 March 2017.
305 Even if Mr S Girgis was told by Mr Husseini that the Life Fitness equipment for Wetherill Park was treated as an operational expense, that does not alter my conclusion that Mr Chau, Mr K Girgis and Mr S Girgis each thought that the Life Fitness equipment was included in Table 1 of Schedule 5 of the First Disclosure Document and in the estimates which had previously been given by Mr Hagemrad of total start-up costs of between $500,000 and $800,000.
306 By the time they entered into the franchise agreement and guarantees, and because of the various representations which had been made over the course of their dealings with UFG, Mr Hagemrad and Mr Husseini, each of Mr K Girgis, Mr S Girgis and Mr Chau thought that the total cost of fit-out and all equipment would be in the order of $800,000.
307 On no occasion were they expressly told that the amount of $500,000 to $800,000 which had been discussed did not include the Life Fitness equipment. On no occasion were they told that the Life Fitness equipment was not included in Table 1 of Schedule 5 of the First Disclosure Document.
308 I accept that Mr Hagemrad said to Mr K Girgis that the Life Fitness equipment was included in the costings in the disclosure document previously provided. One reading of Mr Hagemrad's response in the 10 January 2017 email could lead one to conclude that the Life Fitness equipment was not included in the amount of $800,000 discussed in relation to Wetherill Park (unless it was included in "fit-out"), but none of Mr K Girgis, Mr S Girgis or Mr Chau in fact understood the response in this way.
309 I accept that when each of Mr K Girgis, Mr S Girgis and Mr Chau entered into the franchise agreement and their respective guarantees, each acted on the basis that the total cost of fit-out would be about $600,000. They had consistently been told it was likely to be less than that until 10 January 2017 when it was represented to be about $600,000 in relation to Wetherill Park. They were told there were preferential agreements in place with suppliers.
310 The fact that the cost of fit-out had earlier been represented as less would have given them comfort in working with a maximum figure for fit-out of about $600,000. The representations which had been made before 10 January 2017 and in the First Disclosure Document would naturally be taken into account in assessing both the risk of fit-out costs exceeding $600,000 and in considering the amount by which it might be exceeded, if at all.
311 I accept that Mr Chau knew that the total start-up costs might exceed $800,000, as he conceded. That does not detract from his reliance on what he had been told would be the likely start-up costs. The representations which had been made would naturally be taken into account in assessing both the risk of costs exceeding the range given and the amount by which the maximum in the stated range might be exceeded.
312 In cross-examination, Mr Chau gave the following evidence (at T305):
Isn't the true position this? You had done your due diligence. You had made up your mind to become a UFC franchisee, and you were not relying on anything which UFG, by this stage, was telling you about establishment costs?---If I had seen these costs [being those set out in the Second Disclosure Document], then I definitely wouldn't have entered. So does that answer the question?
313 I accept this evidence. The costs indicated in the Second Disclosure Document were significantly higher than what had been disclosed up until that point in time and would naturally have led to a re-evaluation of what the likely costs would be and a re-evaluation of whether to proceed.
314 I conclude that each of Mr K Girgis, Mr S Girgis and Mr Chau entered into the franchise agreement and their respective guarantees because of the respondents' conduct, which included the making of each of the representations which I have earlier concluded were conveyed. I recognise that, at the point of entering into the franchise agreement and guarantees, some of the representations were relied on more heavily than others. Nevertheless, having regard to the cumulative effect of the representations, it is right to say that the Balcatta applicants entered into the franchise agreement and guarantees because of each of the representations, assessed in the context of the whole course of conduct.
315 In reaching these conclusions, I have taken into account the specific circumstances of each of Mr K Girgis, Mr S Girgis and Mr Chau and their differing levels of experience, referred to earlier. I have also taken into account their evidence, set out earlier, including in particular about reading the First Disclosure Document, in particular the "boxed" section in Schedule 5 and the "Important Note" at the end of that schedule.