Gregory John King v Cake It Away Pty Ltd and ors

Gregory John King v Cake It Away Pty Ltd and ors - [2003] NSWIRComm 242 - NSWIRComm 2003 case summary — Zoe

[36]

16 In reaching the decision that he did to dismiss the appellant's claim for relief against all respondents, Marks J made certain factual findings and conclusions. The conclusions of his Honour in pars [85] and [86] of his judgment are particularly pertinent. Those passages of the judgment are as follows: [85] In determining whether there was any relevant unfairness with respect to the franchise agreement I take into account the following matters: 1. The applicant stated that he would not have entered into the agreement had it not been his understanding that all stores had sales figures of at least $5000 per week. 2. As against this, there is the evidence of Tony Tartak with respect to the manner in which the applicant misrepresented his assets when making application for the grant of a franchise. Mr Tartak said, and I accept, that he would not have agreed to the grant of a franchise by the franchisor if the applicant has disclosed his true financial position. 3. The applicant was given a list of franchisees and contacted all of those in the Sydney area. There is no evidence as to the precise information which the applicant sought from these franchisees, but he professed himself to be satisfied that the situation was as represented by Mr Tony Tartak and the franchisor in all respects material to him. 4. The applicant was advised to obtain independent financial advice but chose not to do so. 5. The documentation issued by the franchisor contained clear qualifications and warnings and the applicant chose to disregard them. The applicant was, to use his own words, 'foolish' and, from the evidence given in the proceedings naive in terms of business relationships. He did not conduct himself in a business-like fashion and conceded that having no business experience was a disadvantage. 6. It was clear that the baker employed by the applicant was incompetent, yet he took no steps to terminate his services and replace the baker with someone more competent. In this, consistent with the evidence of Ms Herico, the applicant allowed personal concerns for Mr Pearce to intrude into any business-like decision to terminate his services. 7. The applicant acknowledged in evidence that he understood that the success of the franchise operation depended upon his own efforts and depended also on him following the franchisor's procedures. However there is ample evidence that the applicant did not follow the franchisor's procedures and that his own personal efforts were not deployed in a positive fashion in assisting the business. My understanding of the evidence including the documentation issued by the franchisor is that the intention was that the franchisee would principally be 'hands on' in the operation of the business rather than relying on the labours of others, as occurred in this case. 8. The applicant commenced trading at the beginning of September 1997. By the beginning of October it was clear that the business was not being operated in a proper and appropriate manner, as evidenced by the comprehensive report of Graham King. There is no satisfactory explanation on the evidence as to why there was a fall off in sales other than the impact of a period of hot weather in October 1997. There is no analysis of the number and quantity of sales, the product purchased, and the reasons for what the applicant said was a steady decline in sales. There is no evidence that indicates that the particular location was inappropriate. In any event, the location was chosen as a result of the active involvement of the applicant. The applicant said that by the end of February he had given up and that he coasted thereafter until the business closed in April 1998. At most, the business traded for six months only. 9. There is no evidence that the applicant suffered any particular loss or that his trading position was affected in any relevant manner by any malfunctioning of the oven or other equipment or the fact that some of the equipment may have been second-hand. In any event the applicant was offered compensation of $3000 with respect to some second-hand panels. [86] The applicant submitted that Mr Tony Tartak had misrepresented the turnover of shops within the Cake It Away group. Presumably the representation was alleged to have been made in 1996, both orally and within the disclosure document, and during the course of negotiations at the beginning of 1997. Such evidence as has been produced shows that as at June 1997 and June 1998 some stores did not have turnover on an annual basis of $5000 per week. The reasons therefore were not introduced into evidence. Whilst prima facie Mr Tony Tartak may have misrepresented the situation in this way, it does not follow conclusively that a finding of unfairness should result. In determining the question of unfairness it is necessary to take into account the totality of the circumstances between the parties and it is impossible to ignore what occurred after the franchise agreement was entered into. Any representation of this kind may have led to a finding of unfairness if the applicant endeavoured to operate the business consistent with the franchisor's operating procedures and had genuinely persisted until it was apparent that the business might not be able to operate at the level represented by or on behalf of the franchisor. (emphasis added)

[59]

39 The particular profit and loss statements of the respective Cake It Away franchises to which we were referred had been obtained under subpoena by the appellant in the hearing before Marks J. The appellant called no oral evidence in relation to them. In allowing them to be tendered over the respondents' objections, his Honour said at pars [74] to [77] of his judgment: [74] The applicant based his claim in part on misrepresentations allegedly made by Mr Tony Tartak concerning the turnover of other stores within the Cake It Away group, including franchised stores. For this purpose a number of financial reports were admitted into evidence, although some were excluded because they were not in a form which created any confidence that they had been prepared on a proper and appropriate basis by a person competent or qualified to do so. [75] The profit and loss statement of the Moorebank store showed sales for the year ended 30 June 1998 at $345,048 and for the previous financial year at $350,674. A profit and loss statement prepared with respect to the Meadowbank store showed sales for the 1997 financial year of $136,269 and for the 1998 financial year $166,052. A profit and loss statement purportedly for the Kogarah store showed sales for the 1998 financial year of $233,680 and for the 1997 financial year $235,112. A file note produced by Advance Bank concerning the trading position of the Baulkham Hills store dated 14 March 1996 suggests average takings over a period of nine months of $6,700 per week. [76] Some of these takings are less than the $5000 per week figure indicated by Mr Tony Tartak to the applicant as minimum takings encountered by any shop, save the St Marys shop. Others of these stores seem to have achieved takings which exceed the $5000 figure. [77] The difficulty about this evidence is that it consists of the profit and loss statements compiled in a form usually utilised by accountants. There are no underlying figures or other evidence to support the material contained in the documents and they were admitted into evidence over the objection of the respondents who were given an opportunity of addressing the Court as to their ultimate relevance and weight. The other difficulty which arises in connection with this evidence is that Mr Tony Tartak said that he was not privy to all of the information pertaining to all of the shops because some proprietors declined to forward to the franchisor sales figures as required by the respective franchise agreements. On this basis there is no evidence that Mr Tony Tartak was aware of the specific trading position of any shop. On the other hand his inability to obtain this basic information from all of the shops may have required that he qualify the statements which he made to the applicant concerning the trading position of the shops. Overarching all of this are the disclaimers and warnings contained within the franchise documentation to which I have earlier referred. The applicant has chosen to disregard all of this material.

[64]

46 The appellant also appealed against his Honour's findings to dismiss the application for relief in relation to the eight and ninth respondents. Again, it is pertinent to reflect on the findings made by his Honour in respect of those two respondents, to be found in pars [92] to [96] of his judgment as follows: [92] As against the eight and ninth respondents the applicant alleged in effect that their support gave him the confidence to go on. There is no evidence that these respondents suppressed any information or advice which was available to them because of the relationship of Advance Bank Ltd with the Cake It Away group as its bankers nor is there any evidence of any unfair conduct on the part of the Bank or any of its officers who were involved with the application for and grant of finance facilities to the applicant. [93] The applicant asserted that he had a fiduciary relationship with Advance Bank Ltd and its subsidiary and that the Bank therefore had an obligation to advise him in connection with the franchise arrangement. I am unsure as to the exact nature of the advice which the applicant says should have been tendered to him by the Bank, but certainly there is no evidence that the Bank was aware that any of the franchisees were in financial difficulties. To the contrary, the evidence is that the Bank regarded all of the franchisees whom it had funded as meeting their obligations under their financial arrangements. [94] Overarching all of this is the fact that Mr Tony Tartak indicated to the applicant after he commenced training that he could get out of the franchise arrangement, and Mr Hudson conveyed similar information to the applicant on 2 September 1997 before he signed the Bank papers. [95] Paragraphs [25], [26] and [27] of the grounds in the summons relate to allegations against the Bank. The fact that the applicant met a representative of the Bank on the premises of the first and second respondents could not, of itself or in combination with any other matters create any unfairness in the conduct of the Bank. The various sub grounds contained within para [26] do not either individually or collectively, or in association with any other grounds create any relevant unfairness. I do not find any of the grounds made out on the basis of the evidence. The same comments apply with respect to para [27]. (emphasis added) [96] In all of the circumstances I am unable to find that there was any unfairness on the part of the eighth or ninth respondents for the purposes of s106 of the Act. In making this finding I refrain from making any finding as to whether there was in existence any contract as defined between the eighth and ninth respondents and the applicant for the purposes of s106 of the Act.

[72]

54 There was another document titled "Module P - Present Proposal and Background" before his Honour. That document was in the appeals books but the appellant did not take us to it. That document is referred to by his Honour in par [29] of his judgment. That document reads as follows: Module P - Present Proposal and Background Comments: Applicant has been referred to us by Tony Tartak, franchiser of Cake It Away Pty Limited. (For background details of this connection refer master file enclosed). Since commencement of our association with Cake It Away we have financed five of the ten outlets currently in operation, Baulkham Hills, Moorebank, Blacktown and Croydon Park and soon to be opened in Belconnen, ACT with all stores generating expected projected results and profitability. In addition, we recently provided increased FDA assistance, taking exposure to $1.9m to franchiser company to expand their Merrylands head office and purchase properties. As per the Company's plans to continue expansion into specific areas we have now been requested to provide funding for an outlet at Canley Heights. The proposed franchisee will be Greg King who has been through the usual detailed screening undertaken by the franchiser and presents as an impressive individual who is willing to work hard along the company's strict guidelines. Background resume is enclosed. Basically main employment has been as a high school teacher with a degree in Behavioural Science and History. However this will have little relevance on the proposed purchase, as Cake It Away will provide their ongoing training and reporting guidelines which monitors and directs operations. Purchase price of the franchise is $235k and the head lease is obtained by Cake It Away on a 5x5 year basis on a fixed rental lease in line with their other stores. Accordingly funding is required as follows: 1. Purchase Business $235,000 Bank FDA $100,000 Bank CHP $100,000 Borrowers funds $ 35,000 2. Costs $ 10,000 Borrowers funds $ 10,000 Total $245,000 $245,000

[81]

65 On an overall consideration of his Honour's judgment, particularly having regard to those passages to which we have directly referred and his Honour's finding of a 'prima facie' misrepresentation by Mr Tony Tartak, we consider that the inescapable conclusion is there was a misrepresentation in relation to the franchise agreement that was entered into between the appellant and the second respondent. That misrepresentation came about as a result of the oral representations made by Mr Tony Tartak on behalf of the second respondent as to the income projections for a Cake It Away franchise operation. Further, that oral representation was reinforced by the information contained in the Disclosure Documents given to the appellant by Mr Tony Tartak on behalf of the second respondent in February 1997. Those representations, taken in totality, were misleading and even on his Honour's own view, the oral representations made by Mr Tony Tartak were such that 'may have required that he qualify the statements which he made to the applicant concerning the trading position of the shops.' Mr Tartak never made any qualification and despite other actions by the appellant, which we will refer to in due course, those representations were, as we have viewed the evidence, material in the decision made by the appellant to enter into the franchise agreement. 66 Mr S A Levitt, solicitor, on behalf of the first to seventh respondents conceded that Marks J would appear to have made a finding as to a misrepresentation. When pressed, he expressed his submission is this way: It appears to me that his Honour has made a finding and the way he expressed it, there may have been a misrepresentation but he treated the misrepresentation in a similar way, the way the Full Bench did in Swan v Ultratune - gilding of the lily - and what he says there may have been a misrepresentation by Mr Tartak which he does not make any clear finding about but there may have been some tendency to exaggerate but notwithstanding that there is no evidence that the applicant relied on those misrepresentations or even if there were misrepresentations the applicant relied upon that the problems which he suffered were as a result of that misrepresentation because there is evidence that there were stores that did perform at the level that was represented and Mr King simply didn't do anything he was supposed to do; he didn't work; he gave up the ghost. He shunned offers of assistance. What his Honour did is he looked at the evidence and said he was not making findings of specific misrepresentation but there is a flavour where I think there was some exaggeration by Mr Tartak. In other words, he may have said our stores do over $5000, some do $8000 which was true but there were stores doing less. It wasn't such a gross misrepresentation and it didn't make the success in relation to St Mary's acknowledged by Mr King in his own evidence that Mr Tartak positively told him there was one store was trading very poorly - as it happens there were two or three. But in the scheme of things, his Honour is saying there were so many other factors which operated; the misrepresentation by Mr King to get into the franchise agreement; the length of time, the fact that he was an educated person, the fact he was someone who was given the opportunity to get out of it and the fact he refused obdurately and deliberately to follow the practices and procedures of the franchiser made it possible for the Judge to find those representations insofar as his outlet is concerned fall because he didn't give it a go.

[87]

73 Secondly, there is no dispute that the appellant did mislead the Bank as to his financial position in his application for finance in relation to entering into the proposed franchise undertaking. The appellant had already been refused funding by the State Bank and requested the assistance of Mr Tony Tartak to secure finance for him by referring him to the bank used by the second respondents. This Mr Tartak did. The information that the appellant then gave to the Bank and upon which the second respondent relied for the purposes of assessing his financial suitability as a franchisee, was a matter that was of considerable significance in the ultimate conclusions arrived at by his Honour. On this point, having regard to the factual circumstances and the conclusions drawn by his Honour, we note his Honour's judgment at pars [30], [31] and [32] as follows: [30] The information which the applicant gave to the Bank in connection with his application for finance and which, coincidentally, he also supplied to the Cake It Away group assumed some significance in connection with the proceedings. Included was a statement of financial position originally prepared in connection with the application made to the Cake It Away group for the franchise but which was also given to the Bank. It showed cash assets of $45,000, a home valued at $125,000, no other real estate, insurance policies and superannuation valued at $10,000 each, cars and personal effects valued at $25,000 each making total assets of $240,000. The statement showed no liabilities. [31] In evidence in the proceedings the applicant conceded that of the $45,000 cash assets, $35,000 had been borrowed from his half brother Mr Sullivan and that probably a further $10,000 had also been borrowed from Mr Sullivan. He also conceded that he had failed to disclose his half ownership in the Collaroy Plateau property and his borrowings from the State Bank in connection with the mortgage over the Collaroy Plateau property. The applicant endeavoured to rationalise the information disclosed on this document in a number of ways. In connection with the cash asset he said in evidence that it having been loaned to him by Mr Sullivan he then regarded it as his. When asked to explain why no liability had been shown for the same amount, he said that he may have entered into some arrangement with his half brother to sell his half interest in the Collaroy Plateau property to him to discharge any indebtness and therefore did not consider himself indebted to Mr Sullivan. He attempted to explain the failure to disclose the Collaroy Plateau property as an asset and, more importantly, the borrowings from the State Bank by way of mortgage over that asset on the basis that he had entered into some loose arrangement to sell his half interest in the property to Mr Sullivan, who then, presumably, would have taken over the totality of the liability to the State Bank. Mr Sullivan in his evidence confirmed the loan made to the applicant but stated that he had no discussions with the applicant concerning the transfer of any interest in the Collaroy Plateau property. [32] I infer from this evidence that the applicant is prepared to endeavour to rationalise his conduct and his circumstances in order to promote his own interests. This will become important when discussing the evidence concerning the history of the operation of the franchise by the applicant. There are two additional matters of significance which flow from the failure of the applicant to disclose his true financial situation to both the franchisor and to the Bank. Mr Tony Tartak gave evidence that the franchisor assessed the financial viability and overall suitability of applicants for the grant of a franchise. Mr Tartak said, and I accept, that if the applicant had disclosed that the $45,000 had been borrowed from his half brother and was not an asset, then the franchisor would not have granted a franchise to the applicant. In addition, Messrs Maresca and Hudson gave evidence that if the applicant had disclosed that the $45,000 shown as an asset was represented by borrowed funds and had further disclosed his exposure to the borrowing from the State Bank in connection with the Collaroy Plateau property, the Bank would not have approved the financial facility to enable the applicant to have acquired the franchise.

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Judgment (103 paragraphs)

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