Hardy v Your Tabs Pty Limited [2000] NSWCA 150 | Case summary

Hardy v Your Tabs Pty Limited [2000] NSWCA 150 | Case summary | Zoe

[9]

The trial judge's findings: liability 8 The relevant findings of the trial judge on liability were as follows. In early 1996 Mr Matthews was 58 and Mrs Matthews was 55. They and their sons Robert and Glenn, who were 27 and 24 respectively, ran a gold foil stamping business in Alexandria. Mr Matthews hoped to sell that business and acquire a franchise business which, after he retired, his sons could operate. 9 In early 1996 Mr Hardy was 48 and Mrs Hardy was 46. From 1993 they had been running, under franchise from Glev Franchises Pty Ltd, a "Pizza Haven" home delivery pizza business at Castle Hill. It serviced an area known as Pizza Haven Franchise Area No 41. The trial judge found that this area: "was divided into two sections. One of them was south of Showground Road. The other was north of it. The southern section included Castle Hill and Baulkham Hills. The northern section included South Dural, Glenhaven and Kellyville. The northern section formed part of a quickly expanding residential area in what was known in town planning as the North West Sector": Red 56K-Q. 10 The main competitor of the "Pizza Haven" chain was the "Pizza Hut" chain. The latter chain was much larger than the former. In Pizza Haven Franchise Area No 41 there was a "Pizza Hut" home delivery business but it did not deliver north of Showground Road. 11 On 7 May 1996 Pizza Hut lodged a development application with Baulkham Hills Shire Council for a new "Pizza Hut" home delivery business to be located at the corner of Anella Avenue and Victoria Road, Castle Hill, about 500 metres south of Showground Road in Pizza Haven Franchise Area No 41. The business operated by the defendants was at 301 Old Northern Road, Castle Hill, about 3½ kilometres away, to the east, just inside the eastern boundary of Pizza Haven Franchise Area No 41. 12 On 10 May 1996, three days after Pizza Hut had lodged its development application, Mr Corelli, who throughout the ensuing negotiations acted as agent for the defendants in their dealings with the plaintiffs, wrote a letter to Mr Hardy confirming the instructions of Mr Hardy to attempt to sell his Pizza Haven franchise business for $550,000. 13 On 14 May 1996 the Pizza Hut development application was advertised in two local newspapers (though the trial judge incorrectly said at Red 58J that the description included the words "as Pizza Hut": Blue 1/5-6). 14 On 27 May 1996 the Council granted development consent for the new Pizza Hut business. 15 On 1 June 1996 in the "Businesses For Sale" section of the Sydney Morning Herald there appeared an advertisement for the sale of the defendants' "Pizza Haven home delivery business". Under a large heading, "$4,800/week net", the advertisement stated: "An opportunity exists to purchase one of the top performing stores in a major Australian food franchise chain. Turnover has consistently increased with still more potential and have the backup of the most successful organisation in the industry. Contact Carlo Corelli (02) 3157964."

[10]

The awkward style is accounted for by the fact that in the original draft, not properly copied in the published advertisement, the following words appeared after the word "potential": "for growth. You will earn an incredible income, be fully trained and supported": Black 2/505P-Q. 16 Mr Matthews saw that advertisement. He telephoned Mr Corelli and made an appointment to see him on Thursday, 13 June 1996 at the Golden Wings lounge, Ansett domestic air terminal, Sydney Airport. Mr Corelli gave Mr Matthews a form to take home and fill in providing personal details. 17 A second meeting between Mr Matthews and Mr Corelli took place at the Golden Wings lounge on Thursday, 20 June 1996. By this time Mr Matthews had committed himself to sell his printing business at Alexandria. He had also told his accountant, Mr Purkiss, of Erina on the Central Coast, of his interest in the Pizza Haven business, and agreed with him that Mr Purkiss would not review the financial viability of the business until Mr Matthews had been approved by the franchisor of the business as its new franchisee. 18 At the second meeting between Mr Matthews and Mr Corelli on 20 June 1996, Mr Matthews gave Mr Corelli the completed form providing his personal details. Mr Corelli gave Mr Matthews an undated and unsigned document entitled "Pizza Haven Castle Hill (NSW)" commonly referred to as "the profile". Mr Corelli said: "The price is $550,000 plus stock in hand". Mr Matthews asked, "Is there a lot of interest in it?" Mr Corelli replied, "Yes, quite a bit. It's the number one store in New South Wales, the jewel in the crown in New South Wales." 19 The document which Mr Corelli gave to Mr Matthews described the demographic character of Baulkham Hills, the potential for growth in Kellyville, Bella Vista, South Dural and Glenhaven, the hours of work of the Hardys, the fact that the outlet was the number one Pizza Haven outlet in New South Wales, the sales figures since 1993, and the staff structure. 20 A third meeting between Mr Matthews and Mr Corelli took place at the Golden Wings lounge on 26 June 1996. Robert and Glenn Matthews also attended. Mr Matthews asked Mr Corelli: "Why are [the defendants] selling when the business is so profitable?"

[11]

Mr Corelli replied: "This fellow Hardy has talked his brother-in-law into buying the North Parramatta Pizza Haven franchise. He's in trouble. So Alan is going to sell out of Castle Hill and help his brother-in-law out. Part of the selection process for you is meeting the New South Wales State Manager of Pizza Haven [Miss Coles], that probably should have been done already." 21 Mr Corelli arranged a meeting with Miss Coles at the New South Wales head office of Pizza Haven at Pagewood for Wednesday, 24 July 1996. 22 At this time Mr Matthews was concerned about possible competition in the area. He drove around it. He noticed an existing Pizza Hut restaurant at Baulkham Hills which he regarded as "old and tired and generally unattractive". He noticed a "Domino's" pizza business at Baulkham Hills. At Castle Hill he noticed a McDonald's, a Red Rooster, numerous other food outlets, and a small Pizza Hut shopfront that did not offer home delivery. 23 In late June and early July 1996 Mr Matthews also sat outside the premises of the business under offer on three Friday and Saturday nights to observe personally the level of trading. He concluded that it was very busy. 24 Mr Matthews did not read local newspapers or make any inquiries at the Council. 25 On 16 July 1996 a local newspaper, The Hills Shire Times, published an advertisement by "Pizza Hut" announcing the opening of its proposed new home delivery business at Castle Hill and seeking part-time employees. No member of the Matthews family learned of this advertisement, though Mr Hardy read it. The trial judge rejected Mr Hardy's evidence that his reading of this advertisement was the first knowledge of Pizza Hut's intention to open a new home delivery business in the area. 26 From at least early June to at least mid August 1996, Mr Corelli sent weekly written reports to Mr Hardy about his attempts to find a purchaser. In his report of 19 July 1996 Mr Corelli reported that of six previously interested prospective purchasers only two were left. One was Mr Matthews. Mr Corelli reported that, of the other four, two had "withdrawn due to Pizza Hut". Under "Comments" he wrote: "Alan, it is obvious the Pizza Hut opening has already made an impact. I will call you later today to discuss it again." 27 On 23 July 1996 The Hills Shire Times published another advertisement by Pizza Hut announcing the opening of its proposed new home delivery business at Castle Hill, again seeking part-time employees. The defendants saw that advertisement, but the plaintiffs did not. 28 On 24 July 1996 Mr and Mrs Matthews and Glenn Matthews met Miss Coles at the Pagewood offices of Pizza Haven. The purpose of the meeting was to enable Miss Coles, the New South Wales Manager of Pizza Haven, to assess the Matthews for possible approval of them as replacement franchisees for the defendants. Miss Coles expressed to Mr Matthews doubts as to whether it was a good idea for someone of his age to be driving at night between the business and his home on the Central Coast. Mr Matthews expressed confidence in his ability to do this. Miss Coles said: "You will have competition. Other franchises could start up in Castle Hill because it's an affluent area. McDonald's is around the corner." 29 Though Miss Coles recommended against approval of the plaintiffs, on or about 24-26 July 1996 they were approved as new franchisees by Pizza Haven head office in Adelaide. On 26 July 1996 Mr Corelli informed Mr Hardy and Mr Matthews of the approval. 30 Mr Corelli then arranged a fourth meeting with Mr Matthews at the Golden Wings lounge. It took place shortly before 22 August 1996. Its purpose was to enable Mr Matthews to meet Mr and Mrs Hardy. Mr Matthews and Glenn Matthews attended. Mr Matthews said to Mr Hardy: "Why are you selling?"

[15]

There were no relevant express statements, warranties or conditions in the contract relevant to Condition 20. Special Condition 1 of the contract provided: "The Vendor, at the Purchaser's request, has made available to the Purchaser such records, accounts and information as sought by the Purchaser in order to assist the Purchaser in conducting the Purchaser's inquiries and investigations. The Purchaser expressly acknowledges the provision of these records, accounts and information by the Vendor is not intended by the Vendor to be a warranty and/or representation nor is it relied on by the Purchaser for that purpose. The Purchaser acknowledges having relied solely and wholly on its own inquiries and investigations and its own independent financial and legal advice." 36 Between 18 September 1996 and 15 October 1996 Mr Matthews and his two sons underwent a full-time Pizza Haven home delivery business training course at Warwick Farm. One Saturday evening in mid September Mr and Mrs Matthews, the two sons, and the wives of the two sons went to the Pizza Haven store at Castle Hill to meet the staff. 37 On 24 September 1996 a local newspaper, The Hills News, published a Pizza Hut advertisement seeking staff. The defendants were aware of this, but the plaintiffs were not. 38 On 27 September 1996 a franchise agreement and sublease were executed granting Your Tabs Pty Ltd the right to carry on the business under the Pizza Haven name. Though the franchisor had at all material times from at least 24 July 1996 been aware of the impending opening of a new Pizza Hut home delivery business at Castle Hill, its officers made no disclosure to the plaintiffs. 39 On 1 October 1996 advertisements were published in The Hills Shire Times and The Hills News seeking staff for the new Pizza Hut business. The defendants were aware of this, but not the plaintiffs. 40 On 11 October 1996 the new "Pizza Hut" home delivery business opened, and the opening was announced in The Hills Shire Times on 15 October 1996. The defendants were aware of this but not the plaintiffs. 41 After completion of the four week training course, Mr Matthews took a week's holiday at home on the Central Coast. He then settled the purchase of the Castle Hill Pizza Haven business on 23 October 1996, having mortgaged his home to do so. 42 From 23 October 1996 Mr Matthews and his two sons commenced to operate the business. Mr Hardy stayed with them for a fortnight pursuant to a contractual two week vendor tuition arrangement. 43 The plaintiffs did not discover that the new Pizza Hut home delivery business had opened until 5 November 1996. On that day Mr Purkiss advised the plaintiffs to wait to see what impact the Pizza Hut business would have. On 13 November 1996 Mr Matthews met his solicitor and Mr Purkiss. On 20 December 1996 the plaintiffs sent a solicitor's letter contending that the plaintiffs should have been informed by the defendants prior to contract about the new Pizza Hut business. Despite various attempts by the plaintiffs to mitigate their losses in the face of steadily falling sales, sales continued to fall. In March 1997 Mr Matthews put the business on the market for sale, but no purchaser could be found. On 11 November 1997 he closed the store and abandoned the business, having on 6 August 1997 commenced these proceedings. 44 On causation, the trial judge said (Red 95H-L): "if the defendants had revealed to the plaintiffs before they entered into the contract that a new Pizza Hut home delivery business was shortly going to commence at Castle Hill the plaintiffs would not have entered the contract. Mr Matthews so said and I believe him."

[16]

See also Red 68E-W. 45 The above findings relate to the plaintiffs' case on non-disclosure of the new Pizza Hut outlet. The trial judge also made findings which were ultimately favourable to the defendants on liability in relation to one other issue, because though he found that the conduct in question was misleading or deceptive, it did not induce the plaintiffs to enter the contract. The evidence in relation to that conduct, however, caused the trial judge to make adverse credit findings in relation to the Hardys. This conduct concerned the fact that from 3 August 1995 to 26 June 1996, the weekly sales figures for the Pizza Haven franchise included sales from Cherrybrook and West Pennant Hills, which were outside Franchise Area No 41. During that period the Pizza Haven franchise store which serviced those suburbs had been closed for renovations, but after 26 June 1996, those suburbs ceased to be available to the franchisee of Pizza Haven Franchise Area No 41, when a new Pizza Haven franchise opened to service the region of which they were part. This was not disclosed to the plaintiffs by the defendants, who did not discover the facts until about 7 November 1996. Mr Hardy gave evidence that he disclosed this in August. In fact the trial judge found that no disclosure was made at all, and that the non-disclosure was deliberate: Red 75H-K and 77K-N. Consequences of non-challenge to the trial judge's credibility-based findings 46 The Notice of Appeal complained about the finding that the defendants deliberately did not disclose the contribution of sales from Cherrybrook and West Pennant Hills in the period 3 August 1995-26 June 1996 (Ground 10(m)). The Notice of Appeal also contained (Ground 10(l)) a challenge to the trial judge's finding that it was not until after settlement on 23 October 1996, i.e. on approximately 7 November 1996, that sales figures for the Pizza Haven business for the period 2 August 1995-26 June 1996 had included sales outside the territory to Cherrybrook and West Pennant Hills. Both grounds of appeal were abandoned. The abandonment entails the withdrawal of challenges to Mr Matthews' credibility, which in turn tends to strengthen other findings of the trial judge turning on Mr Matthews' credibility even though they remain under challenge. 47 The same consequences flow from the fact that there are also other credit-based findings of the trial judge against which no appeal has been brought. (a) At Red 74W-75D the trial judge said: "Mr Hardy said that prior to the contract he instructed Mr Corelli to tell all prospective purchasers about it. Mrs Hardy said that her husband told her that he was going to do that. I disbelieve both of them. Mr Hardy gave no evidence of ever checking with Mr Corelli to see whether his alleged instruction had ever been carried out. Nor did he give any explanation for not having done so."

[20]

(d) A further area where the trial judge's credibility-based conclusions are unchallenged relates to Mr Corelli (Red 86P-91C): "Mr Corelli's written statement of evidence was not completed and signed and dated until mid-morning on [day] seventeen of the hearing. The statement, undated and unsigned, had been served on 10 September 1998 as already noticed. When tendered on Day seventeen of the hearing it contained many alterations in ink made that morning by counsel for the defendants, Mr Russell, on Mr Corelli's instructions. In its original state it had been prepared in consultation with the former solicitors for the sixth and seventh defendants (the Franchisor and Miss Coles). By Day seventeen of the hearing eighteen other witnesses had given evidence (five for the plaintiffs and thirteen for the defendants). I find that Mr Corelli's statement was deliberately altered by him on day seventeen of the hearing in a conscious effort to make it tie in with the evidence of other witnesses for the defendants, rather than to record his own independent recollection. This was particularly so in relation to paragraphs 7.1 and 15. Paragraph 7.1 referred to Mr Corelli's third meeting with Mr Matthews at the Golden Wings lounge at Sydney Airport. The original (typed) version read: 'I believe this meeting occurred on Wednesday 26 June 1996 and that Glenn and Robert Matthews also attended this meeting.' I find that to be true. However, counsel for the defendants, on Mr Corelli's instructions, had in ink on the morning of Day seventeen crossed out that statement and, in ink, inserted the words, 'but I do not recall the date'. Mr Corelli ultimately admitted that the original version was correct. He did not do so, however, until confronted with a letter in his own handwriting dated 24 June 1996, addressed to Mr Matthews, appointing 26 June 1996 as the date of the subject meeting. The first sentence of paragraph 15 of Mr Corelli's statement, before words were deleted from it in ink by Mr Russell on behalf of the defendants on Mr Corelli's instructions, read: 'I agree that another meeting was held at the Golden Wings lounge at Sydney Airport.' Added in ink by Mr Russell on behalf of the defendants, on Mr Corelli's instructions on the morning of Day seventeen, between the words, 'held at' and the words, 'the Golden Wings lounge' were the words, 'before the week ending 12 July 1996.' I find that the subject meeting in fact took place in August 1996, shortly before 22 August 1996 on which date Mr and Mrs Matthews departed Australia for their two weeks holiday in America. The inked in addition made on the morning of Day seventeen was significant because it put the meeting well back before the date of the contract (13 September 1996). Another ink alteration to paragraph 15 made by Mr Russell for the defendants on Mr Corelli's instructions was the deletion of the typed words: 'There was general discussion at the meeting between all those present about the fact that Pizza Hut were opening a new delivery [store] in the territory.' That statement was inconsistent with the evidence of the defendants. They said that they had not become aware of the impending opening of the new Pizza Hut store until 16 July 1996 when Mr Hardy read a local newspaper announcement published on that date. The deleted statement was in no way supported by the evidence of the defendants and I infer that that was why it was deleted on Day seventeen of the hearing. There was one very important piece of evidence by Mr Hardy which was not supported by Mr Corelli. Mr Hardy had said that he had instructed Mr Corelli in mid-July 1996, prior to the date of the contract, to tell Mr Matthews that a new Pizza Hut home delivery business was about to open at Castle Hill. Mr Corelli gave no evidence to support that assertion. He gave no evidence of any conversation at any time between himself and any of the Matthews at which there was any mention of the proposed new Pizza Hut business. References to that matter in the original typed version of his statement had been deleted in ink by Mr Russell for the defendants on Mr Corelli's instructions (paragraphs 9, 15 and 19 (wrongly numbered '29')). The matter was not revisited in Mr Corelli's oral evidence. In the result Mr Hardy's allegation that he had instructed Mr Corelli, prior to the date of the contract, to tell Mr Matthews that a new Pizza Hut home delivery business was about to open at Castle Hill was not supported by Mr Corelli. Mr Corelli did not deny the following allegation by Mr Matthews (paragraph 12 of his statement): 'He (Mr Corelli) did not in any of our meetings mention that a new Pizza Hut home delivery store was opening at Castle Hill.' In respect of the meeting at the Golden Wings lounge at which Mr Corelli was present with Mr and Mrs Matthews and Mr and Mrs Hardy, Mr Corelli did not deny the following allegation by Mr Matthews (paragraph 18 of his statement): 'Mr Corelli, Mr Hardy and Mrs Hardy did not say anything about a Pizza Hut home delivery store opening in Castle Hill and I did not then know that this was happening.' I find that that meeting was the fourth one at the Golden Wings lounge. It was the one which I have found to have occurred shortly before 22 August 1996. There were other aspects of Mr Corelli's evidence which were unsatisfactory: (i) He was unable to explain why the inked alterations made to paragraph eight of his statement on the day on which he gave evidence had been made. He agreed in cross-examination that they should not have been made. (ii) Paragraph 11 of his statement conflicted with a contemporaneous record made in Mr Corelli's own handwriting on or about the date in question (26 July 1996) confirming that Mr Matthews had by then been approved by the Franchisor as the new franchisee for the Castle Hill Pizza Haven business. Whilst that approval was subject to Glenn and Robert Matthews being made Directors of Your Tabs that was, in the circumstances, a mere formality. Not only did paragraph 11 suggest that there had been no approval at all of Mr Matthews by the Franchisor prior to 26 July 1996 but it conceals the fact, as I find, that on 26 July 1996 Mr Corelli telephoned Mr Matthews and told him, without qualification, that he had been approved. I find also that in that telephone call Mr Corelli appointed the fourth meeting at the Golden Wings lounge for a date shortly before 22 August 1996. I further find that Mr Corelli's purpose in appointing that meeting was to enable the Matthews and the Hardys to meet each other, for the first time, following the Franchisor's approval of Mr Matthews, as indicated in the subject telephone call. (iii) Paragraph 18 of Mr Corelli's statement alleged an assertion by Mr Matthews that while in America, between 22 August and 7 September 1996, he had met a Pizza Hut representative (Mr Tidyman) 'who talked about the opening of a Pizza Hut store in the Castle Hill area'. Mr Corelli was vague and evasive in cross-examination about that allegation. Mr Tidyman's evidence on the point has already been referred to. I believe Mr Tidyman and disbelieve Mr Corelli."

[21]

(e) It followed from the fact that Mr Corelli did not give evidence supporting Mr Hardy's claim that he asked Mr Corelli to advise Mr Matthews of the impending opening of the new Pizza Hut and that Mr Corelli did not give evidence advising that he had informed Mr Matthews of that fact that Mr Matthews' evidence that he had not been so advised before contracts were exchanged on 13 September 1996 was to be accepted. 48 In general the preference which the trial judge expressed for the evidence of Mr Matthews as compared to that of Mr Hardy in relation to disputed conversations, which is not challenged in any part of the Notice of Appeal which is now pressed, must have had so damaging an effect on Mr Hardy's credibility as to affect every controversial question on which he gave evidence. This in turn must have had an extremely favourable impact on Mr Matthews' credibility, particularly in relation to issues on which credibility is unusually important, such as his evidence as to what he would have done had the truth been revealed to him. 49 The decision of the defendants to make only relatively limited challenges to the trial judge's reasoning was realistic, but it naturally limited the types of argument which they were able to mount on the appeal. In particular, they were not able to contend that there had been disclosure of the impending Pizza Hut franchise to Mr Matthews via Mr Corelli: Mr Corelli did not support it and there was no challenge to the trial judge's disbelief of Mr and Mrs Hardy. They were not able to submit that their non-disclosure did not matter in view of Mr Tidyman having revealed the truth to Mr Matthews because Mr Tidyman testified that he had not revealed it. Mr Hardy gave elaborately detailed accounts of first Glenn Matthews telling Mr Hardy what Mr Tidyman told his father (Blue 2/326J-327F) and of Mr Matthews himself telling Mr Hardy what Mr Tidyman told him (Blue 2/327G-S). Mrs Hardy gave an account of Mr Matthews telling her what Mr Tidyman said (Blue 2/388H-L). Mr Brooks, an employee of Mr Hardy's, did the same (Blue 2/442F-H). So did Mr Corelli (Blue 3/578N-P). The defendants' evidence about Mr Tidyman was important, because it was used by Mr Hardy to explain why, on his evidence, he did not advise the plaintiffs about the impending Pizza Hut opening, which he accepted was an absolutely essential and important matter (Black 2/503-507). He said he learned of the opening on 16 July 1996, and told Mr Corelli to pass on this news soon after to Mr Matthews, but he did not check on whether this had been done, and explained his failure to take any other steps thus (Black 2/508C-F): "I wasn't in direct contact with [the plaintiffs]. The next time I saw them after this, Glenn Matthews raised the subject with me that he knew about it. And the next time I saw Roy Matthews he raised the subject with me that he knew about it. I didn't get the opportunity to tell them because they said to me they already knew."

[29]

The defendants submitted that in fact there were already three Pizza Hut businesses of varying degrees of significance. One was a home delivery business in Windsor Road, Baulkham Hills, near the intersection with Seven Hills Road. A second was a restaurant at 353 Windsor Road, Baulkham Hills: Blue 2/331P-R and 332X-333F. A third was a small Pizza Hut outlet which did not offer home delivery: Red 62R and Blue 1/10-11. The second and third Pizza Hut businesses were immaterial. While the first of these three businesses did not compete north of Showground Road, it competed with the defendants' business south of Showground Road, in which area were to be found 80% of the households in Pizza Haven Franchise Area No 41. Further, the defendants' Pizza Haven outlet did not have a monopoly of pizza home delivery services north of Showground Road. Domino's Pizza, too, had a nationally available telephone number which could be called to get home delivery: Black 2/488V-489D. Other pizza shops had a home delivery service, though not necessarily throughout the area: Black 2/489K. 54 The defendants also contended that it was erroneous to speak of "pizza home delivery services" as something in respect of which there could be a monopoly: the correct line of trade was fast food, or perhaps services for the home delivery of fast food. 55 The trial judge said that from the Pizza Hut development application it could "be inferred, and I so find, that the proposed new Pizza Hut home delivery business was likely to be a significantly more intensive business than the 'Pizza Haven' home delivery business which up till that time had been so profitably operated by the Hardys": Red 57K-P. The defendants contended there was no evidence to support this inference. The trial judge also said (Red 57R-S): "The proposed new Pizza Hut business was much closer to the expanding Kellyville area north of Showground Road than was the [Hardys'] Pizza Haven business". This was attacked as irrelevant to businesses which depended on telephone calls from customers' homes. 56 The trial judge said (Red 57V-Z): "A significant factor in the profitability of the [Hardys] business was that in substance it had operated since inception in 1993 without competition from Pizza Hut. In early 1996 that was about to change. Clearly, by then, the area had been researched and targeted well by Pizza Hut."

[30]

The first sentence was said to be wrong, because the existing Pizza Hut home delivery business was a presence to the south of Showground Road. In relation to the last sentence, Ground 10(e) of the Notice of Appeal said it was wrong to hold that "by early 1996 Pizza Hut had researched and targeted the appellant's Pizza Haven business". 57 The conclusion of the trial judge depends on the failure of the defendants to disclose what they knew about the impending Pizza Hut business despite occasions on which it was appropriate for them to have done so - when inquiries were made on separate occasions of Mr Corelli and Mr Hardy as to why the defendants were selling the business; when inquiries were made of Mr Hardy as to the growth potential of the business; and when trading figures, and information as to the growth potential of the business, were supplied by the defendants or Mr Corelli to the plaintiffs and Mr Purkiss. 58 Accordingly the case is not one where it matters that the parties were at arms' length, or experienced in business and under no disability, or had independent professional advisers, or failed to ask questions precisely and specifically focusing on what the plaintiffs eventually discovered had not been disclosed. Nor did it matter that the undisclosed information was known by some members of the public (such as the defendants): in any event some of the newspaper material postdated entry into the contract on 13 September 1996, and all of it appeared in newspapers not circulating in the plaintiffs' area of residence. 59 The defendants' argument that the emergence of a new Pizza Hut home delivery service was not important in view of the nature of the trade and the existing Pizza Hut presence is unsound. From the geographical range of the existing Pizza Hut home delivery outlet (which did not deliver north of Showground Road), the location of the new outlet (in the north-western part of Pizza Haven Franchise Area No 41, just south of Showground Road), and the increasing population to the north of Showground Road, together with the unlikelihood of Pizza Hut going to the trouble of obtaining development consent for a new outlet without conducting research into the area, it could be inferred that Pizza Hut had decided to make a major effort in the Baulkham Hills area, particularly north of Showground Road. The inference which the trial judge drew from the development application, namely that the new Pizza Hut home delivery business was likely to be significantly more intensive than the defendants' business was not unsound. Its area was to be 97.5 metres. It was to be open 91 hours per week, with staff present for another 24 hours per week preparing food and cleaning up. Pizza Haven operated for 58.5 hours per week: Blue 4/1037. At any one time there would be between 2 and 14 employees on site: Blue 1/255-258. The judge may have been wrong to call the existing Pizza Hut home delivery business old, though its age hardly matters, but it was insignificant in the northern part of Pizza Haven Franchise Area No 41. And he may have been wrong to say the defendants had a monopoly of pizza home deliveries north of Showground Road, but Pizza Hut was not there, Domino's Pizza was the only single national number outlet operating, and the other pizza delivery services were only small local shops. He was wrong to say that the defendants' business had operated without competition from Pizza Hut; but it had so operated north of Showground Road. These were insignificant slips. The trial judge did not actually find, as Ground 10(e) of the Notice of Appeal suggested, that Pizza Hut had researched and targeted the defendants' Pizza Haven business, but it would have been a reasonable inference from the success of that business that Pizza Hut would have been motivated to enter the area with some vigour. The proposition that "the area had been researched and targeted well by Pizza Hut" was at one stage said to be unsupported by evidence. In fact there was convincing evidence to support it. Mr Tidyman (Black 2/268J-L and 268T-269E), a Pizza Hut executive of 20 years' experience with the organisation, said the new Pizza Hut delivery outlet in Castle Hill was opened because there were areas in the neighbourhood to which Pizza Hut did not then deliver: if callers rang from outside the delivery zone, delivery would be refused and callers would be directed to the nearest take-away store or restaurant. Further, Mr Purkiss (Black 2/401P-402M), on the basis of 30 years' experience, was of the following opinion: "Pizza Hut targeted the Pizza Haven at Castle Hill as the number one store in the State run by Pizza Haven and [the] Pizza Hut group clearly were looking to take back market share. They opened the store, a new store in close proximity to Castle Hill store and their objective there, like any competitor, was to take back market share. Other stores like Red Rooster or Hungry Jack's or whatever are in a different part of the food market. The Pizza Hut delivery operation was put there principally by Pizza Hut to take back market share."

[31]

He said information moved around the industry so freely that "They would have known exactly how many pizzas" the defendants' business was making. The new geographical location was not irrelevant to telephone ordering, because speed of delivery is important. 60 But the fundamental difficulty with this aspect of the defendants' argument is that it unduly downplays Pizza Hut. An aspect of the representations made to the plaintiffs was that the area north of Showground Road was one of considerable population growth and potential. Before 1996 the defendants' Pizza Haven business had no competition in relation to home delivery of pizza from Pizza Hut there, according to Mrs Hardy (Blue 2/389E), Mr Hardy (Blue 2/333D; Black 2/466W-467J, 488Q and 533K-L) and Mr Tidyman (Black 2/268 line 20-269 line 6). After 1996 the defendants' Pizza Haven business would face competition from Pizza Hut in the new expanding area. It is irrelevant to determine in this s 52 case a question which might matter under ss 45, 45A, 46, 47 or 50, namely, what the precise product market is, particularly where the point of the inquiry is whether there has been an injury to competition. Here the issue is not injury to competition, but injury to a particular competitor and an estimation of what that competitor would reasonably have expected to have had revealed. Whether the precise product market is fast food, home delivered fast food, pizza, home delivered pizza or anything else, there could be little doubt that home delivered pizza was a significant line of trade. And there could be little doubt that Pizza Hut could be a very powerful force in that line of trade in a particular area if it chose to exert its full energies, and capable of causing real damage to others in that line of trade. For this there was a considerable body of evidence apart from Mr Tidyman's evidence and Mr Purkiss's evidence. Mr Hans Neumann, State Operations Manager of Pizza Haven (Black 5/1116 line 13), said he believed in October 1996 that the new Pizza Hut business was "a major long term threat" to the Pizza Haven franchise which the plaintiffs were buying. He believed that it "could lead to a permanent depression of sales" in the territory: Black 5/1136 line 14-1138 line 35. This was because Pizza Hut was Pizza Haven's major competitor and was the competitor "most feared" by any Pizza Haven franchisee. It was owned by PepsiCo, a multinational company. It had an enormous advertising budget and it did not hesitate to use its advertising power: Black 5/1138 lines 7-33. 61 Mr Hardy admitted that any new competitor for his business, such as a Pizza Hut home delivery outlet, would slow down his sales because Pizza Hut would "flood the market with advertising and cheap deals". While he said he saw this as being only short term, and while he said he perceived himself as having many fast food competitors, within the pizza market he saw Pizza Hut as his major competitor. He believed it was absolutely essential that any prospective purchaser of his business be told of the opening of a new Pizza Hut because it was only fair to do so and because it would be misleading and deceptive not to do so: Black 2/503R, 504C-G and P-S, 505E-H and L-N, 506D-J and Q-T and 507U-W. This was a fair concession on his part, because even a short term impact might prove very injurious to the business in new hands. 62 There was other evidence emanating from the defendants pointing to the importance of the new Pizza Hut delivery outlet in Pizza Haven Franchise Area No 41. Counsel for the defendants elicited from Mr Matthews an affirmative answer to the proposition that in 1996 "you, in your own mind, understood Pizza Hut and Pizza Haven to be the two big competitors": Black 1/129H. Mr Walker, who in 1996 was a Pizza Haven field service manager, said that the plaintiffs should have been told of the new Pizza Hut outlet "at the very start, beginning of the proceedings of the sale", so that they "could make an informed decision about whether to buy the store or not", because he knew the opening would have an "adverse" impact on the Pizza Haven franchise: Black 4/865P-866K. Mr Baird, the State Operations Manager for New South Wales responsible for the area which included Castle Hill, said the plaintiffs "certainly" needed to know about the new Pizza Hut outlet because it would bring "a significant element of new competition" for the plaintiffs, particularly since the new Pizza Hut outlet would be servicing part of Pizza Haven Franchise Area No 41 not previously serviced by Pizza Hut. This was "something that had to be taken very seriously by the incoming franchisee", and Mr Baird would have been "alarmed" if they did not. He would have wanted the plaintiffs to be informed about the new Pizza Hut opening: Black 3/780N-781M. Mr Achison, a consultant in the franchising industry, said that on the assumption that Mr Hardy had been managing the Pizza Haven business up to and including 22 October 1996 in accordance with the high standards which Mr Achison had praised, it was likely that the drop in sales shown in the last two weeks was caused by the opening of the new Pizza Hut outlet on 11 October 1996. He was unable to agree on this likelihood being overwhelming because of a lack of familiarity with the locality: Black 4/959C-U. He also accepted that, assuming the Matthews were running the Pizza Haven outlet as well as or better than the Hardys, the opening of Pizza Hut was a reason for the decline in sales after it opened: Black 4/963D-H, 964G-J and 965L-966C, read with Blue 1/64. Miss Coles, the Pizza Haven State Manager for New South Wales, realised on 16 July 1996, the day she met Mr Hardy, that it was important that Mr Matthews be told about the impending opening of the Pizza Hut outlet: Black 4/1029W-Y. 63 While various of the defendants' witnesses said that the Pizza Hut outlet would only have a short term impact, that view was not shared by Mr Purkiss. When he heard of the opening he advised Mr Matthews that it was far too early to assess its impact, and advised consideration of it over the next few weeks (Blue 1/163P-Q). Contrary to the defendants' arguments, that does not support their witnesses' contention. 64 The next group of arguments advanced by the defendants centred on the trial judge's conclusions in relation to the defendants' motives for selling. The trial judge found that at the August 1996 meeting, Mr and Mrs Hardy: "deliberately withheld from the Matthews their knowledge that a new 'Pizza Hut' home delivery business was about to open at Castle Hill. I find that they both knew about that prior to instructing Mr Corelli at some time before 10 May 1996 to try and sell the business for them. I find that the reason why Mr and Mrs Hardy sold the business was because they were fearful of strong competition from the new Pizza Hut business": Red 66Q-W.

[34]

He found that though Mr Hardy gave as a reason for selling that he was tired (Red 77P), and though he had not arranged for any employment or business to go to after selling, he in fact took up employment quickly in January-April 1997 and then purchased a business involving long hours of devotion and hard work (Red 80B-U). He said (Red 80W-81D): "This point reinforces my finding that the Hardys sold out of their Pizza Haven business in a hurry because they believed that they needed to sell as quickly as possible before the new Pizza Hut business established itself as a trade competitor. There was no need for any such hurry if the reasons for selling given to Mr Matthews by Mr Hardy and his selling agent Mr Corelli were true." 65 There is an aspect of these findings which raises a question. As the plaintiffs conceded, there is no direct evidence, though it is possible, that the Hardys knew of the impending Pizza Hut delivery business prior to instructing Mr Corelli before 10 May 1996 to sell their business. If they had known, that would support the conclusion that the defendants at all times intended to sell because of the new Pizza Hut outlet. But if their knowledge post-dated the initial decision to sell, the trial judge's conclusions could not stand in their totality. Rather, the evidence would suggest that the defendants' silence after 16 July was motivated by a fear that if the truth were told, the business which they had earlier formed a desire to sell would not be sold, or sold for so high a price as $550,000, and the impending arrival of Pizza Hut created an additional reason to sell. The trial judge was entitled, in view of the adverse credit findings against the Hardys on other issues, to disbelieve the defendants' evidence that they did not know of the new business until 16 July 1996. Mere disbelief in evidence does not amount to positive evidence of the opposite of what is believed (Gauci v Federal Commissioner of Taxation (1975) 135 CLR 81 at 87), unless the witness disbelieved is a party and the evidence is disbelieved because it is held to be a fabrication showing a consciousness of guilt (Chamberlain v R (No 2) (1984) 153 CLR 521 at 564). The trial judge did not in terms employ this reasoning, though he certainly made many findings of fabrication. It is not necessary for this Court to investigate whether the trial judge was correct in dating the knowledge of the new Pizza Hut business before 10 May or in treating that as a reason for selling from the outset. That is because it was obvious from the time when the defendants learned of the new Pizza Hut business, if it was on 16 July 1996, that disclosure of that fact to the plaintiffs would have a chilling effect on any sale. Even if it was not inherently obvious, it must have been so after Mr Corelli reported in writing on 19 July 1996 that of six intended purchasers, four had withdrawn, two citing the new Pizza Hut outlet as the reason, and stated that it was obvious this had "already made an impact". The defendants would be liable for misleading conduct constituted by a failure to disclose at any time at least up to the exchange of contracts on 13 September 1996. Whatever their original reasons for selling, by at least 16 July 1996 they had one more reason to sell and a powerful motive to stay silent. The additional reason for selling - escape from the competition of the new Pizza Hut outlet - was likely to have been at least an operative and substantial reason. Thus the main burden of the trial judge's reasoning supports his conclusion of liability. 66 In short, even if the trial judge should have found that the desire to sell the business so as to avoid competition from the new Pizza Hut outlet only operated as a reason for sale, and as a motive for non-disclosure, after 16 July 1996, his reasoning is to that extent not shown to be wrong. 67 It was submitted by the defendants that the trial judge was in effect prevented from making findings about reasons why Mr and Mrs Hardy desired to sell the business because Mr and Mrs Hardy were not challenged as to their reasons for selling the business. In fact they were: Black 2/497M-499D and 522M-P; 3/586R-T. 68 The defendants presented written argument that the trial judge erred in dating the fourth meeting at the Golden Wings lounge at shortly before 22 August rather than 26 June. The reasons offered do not suggest that any exception permitting appellate interference with credit-based findings applies. No oral argument on the point was put. 69 The question posed by s 52 is "whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive": Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 41 per Gummow J (Black CJ and Cooper J agreeing at 31 and 46 respectively). At 32 Black CJ said: "Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of 'mere silence' or of a duty of disclosure can divert attention from that primary question. Although 'mere silence' is a convenient way of describing some fact situations, there is in truth no such thing as 'mere silence' because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed."

[36]

Concurrence with this has been expressed by French J in Famel Pty Ltd v Burswood Management Ltd (1989) ATPR 40-962 at 50,509 and by Heerey J in Bowler v Hilda Pty Ltd (1998) ATPR 41-625 at 40,857. 70 When Mr Matthews asked Mr Hardy in August 1996 why the defendants were selling the business, he ought to have received the answer: "Because Pizza Hut are opening a new delivery outlet in Pizza Haven Franchise Area No 41" if that was one of the reasons for continuing with the sale, as the trial judge in effect found that it was. The positive assertion of various reasons for selling without disclosing that one was misleading. The context of the question and the answer gave rise to a reasonable expectation that the whole truth would be disclosed. 71 When Mr Hardy was asked by Mr Matthews at that meeting in August 1996: "what do you see as the growth potential for the business?", the answer, which spoke of substantial expansion in housing developments, should have included a reference to the qualifying effect on that potential of the competition to come from the new Pizza Hut outlet. The unqualified statement of potential, whether treated as a statement of present fact or as a statement as to the future, was misleading without the qualification, because the qualification would have pointed to the possibility that the potential would not be fulfilled. The context of the question and answer, which included similar material in the profile handed over by Mr Corelli at his meeting with Mr Matthews on 20 June 1996 (Blue 1/23) gave rise to a reasonable expectation that the whole truth would be disclosed. 72 For the same reasons, when at the August meeting Mr Matthews, on Mr Hardy's evidence, asked, in relation to growth potential, "What about with the existing market?", the answer, which spoke of consolidation, redevelopment and population growth, as well as the lunch time trade, should have been qualified by a reference to the effect of the new Pizza Hut outlet opening. 73 Further, when trading figures were supplied by the defendants to the plaintiffs before 13 September 1996, the successful picture presented was misleading unless accompanied by a qualification that there might be difficulty in maintaining those figures once the new Pizza Hut outlet opened up. In the case of figures supplied before 16 July 1996 (such as those in the profile (Blue 1/25-26) handed over by Mr Corelli at the 20 June 1996 meeting), if 16 July 1996 was when the defendants first heard of the Pizza Hut outlet, it was misleading to permit those figures to remain unqualified by the new information. 74 The defendants submitted that the August meeting was quasi-social, involving only pleasantries. This is unsound. The meeting followed three other serious meetings at that place attended by Mr Corelli, and all present at the fourth meeting had travelled long distances to be there. Mr Matthews asked important questions, one of which he had asked at one of the earlier meetings, others of which related to the material in the profile handed over at one of these meetings. 75 The plaintiffs submitted that the questions asked by Mr Matthews at the August meeting "did not directly address or could not reasonably be expected to call for any knowledge of competition or potential competition (including the new Pizza Hut)". While it is true that the questions were not specifically and precisely targeted at the impending Pizza Hut outlet, the answers actually given were misleading by reason of failure to mention it, given the importance of that event in relation to the business being sold and the connection between that event and the general subjects of the questions and answers. 76 The defendants also drew attention to admissions by Mr Matthews that he had no complaint about the correctness of the figures given in the profile (Black 1/121J-L) and by Mr Purkiss that all his requests for information were met reasonably promptly and frankly, and that the sales figures given were true (Black 2/375F-K). The defendants also argued that Mr Hardy was not cross-examined to suggest that "his answer concerning growth potential was inaccurate, a fabrication or not reasonably based." The problem, however, is not the literal accuracy in itself of what was communicated, but the fact that what was not communicated made that which was misleading. 77 The defendants criticised the following finding (Red 98K-N): "Although the trading figures which were supplied were expressly referrable to the past and present, inferentially they were intended to show a strong existing trading situation unqualified by fears of imminent dangerous competition."

[40]

The causal relationship between the defendants' non-disclosures and the plaintiffs' entry into the contract 80 As was noted above, the trial judge accepted Mr Matthews' evidence that had he been told of the impending Pizza Hut delivery outlet, he would not have proceeded with the contract. 81 The defendants attacked the conclusion that the misleading conduct caused entry into the contract in two ways. One attack was a factual attack: it turned on the supposed failure of the plaintiffs to take care of their own interests, or, so far as they tried to do so by making inquiries, contended that they relied on the results of those inquiries. The other turned on a supposed proposition of law that in this type of case a plaintiff cannot recover unless that plaintiff gives evidence of arriving at a positive mental state which would have been different if that which was not disclosed had been disclosed. 82 The first group of contentions commenced by asserting that Mr Matthews and Mr Purkiss never raised the question of potential competition with the plaintiffs or Mr Corelli (Black 1/232S-X). The defendants also pointed to evidence that Mr Matthews relied on his own inquiries and on Mr Purkiss (Blue 1/13V-X, Black 1/97P-S, 157E-H, 247X-248C). Mr Matthews was said only to have driven around the franchise area and examined the phone book to see "what we were up against" (Blue 1/10T-11D; Black 1/97J-K and 123U-V). 83 The defendants contended that the plaintiffs failed to make the inquiries which a reasonably prudent purchaser would have made in two respects. First, at no time prior to exchange of contracts on 13 September 1996 or settlement on 23 October 1996 did Mr Matthews make any inquiries of the local council for development applications (or instruct his solicitor or accountant to make those inquiries) or examine local newspapers, even though he knew that any business is required to lodge a development application with the local council (Red 62Z-63B; Black 1/139Y-140G, 163Q, 231Y-232D and P-R). Secondly, it was said that Mr Matthews, having identified some of the existing competition in the area, failed to observe that there was a Pizza Hut take-away/home delivery unit at the corner of Seven Hills Road and Windsor Road, Baulkham Hills; and failed to discover that it had been there well before the defendants commenced business in 1993 and delivered to that area of the franchise below Showground Road which contained 80% of the households in the franchise area (Blue 1/10T-U and 2/331-333E; Black 1/124M-126K and 145Q; 2/265Q-266M, 298P, 379P and 467X). 84 The defendants argued that the plaintiffs failed to heed the warning given by Miss Coles of Pizza Haven about the prospect of competitive businesses opening in the area (Red 65H-J). That warning made Mr Matthews aware of the danger of someone opening up a shop in competition with the business being bought in a manner which could impact upon its sales (Black 1/129L). Despite Miss Coles' warning, Mr Matthews did not undertake any inquiries of the local council or otherwise and did not inform Mr Purkiss of Miss Coles' warning (this misstated the evidence: in fact Mr Matthews was not sure that he did: Black 1/232E). 85 The defendants contended that Mr Matthews did not heed the warning of Mr Purkiss on 9 September 1996 about the competitive nature of the fast food market (Red 68C). At the time of the meeting Mr Purkiss was aware that Pizza Haven Castle Hill was the number one store in New South Wales, and that it was a common marketing tactic of Pizza Hut and other multinationals to target stores such as Pizza Haven Castle Hill because it was the number one store in New South Wales and to open competitive businesses in order to get back market share (Black 2/401P-402L and 404V-406S). While Mr Purkiss could not recall specifically whether he warned Mr Matthews that multinationals (including Pizza Hut) might target the subject business because it was the number one store in New South Wales, he nevertheless expected that the competitive nature of the industry was mentioned at the meeting in general terms (Black 2/406-407). The defendants said that Mr Matthews did not heed the warning of Mr Purkiss given on 9 September 1996 about the competitive nature of the fast food market (Red 68C). They pointed out that after the meeting the plaintiffs decided to purchase the business without either themselves or Mr Purkiss undertaking any more investigations or inquiries (Blue 1/13U-14E, Black 1/156X-157C and 163Q-R; 2/387L-P). "The clear inference is that the respondents relied on the advice of Mr Purkiss and not anything left unsaid by the appellants." It was submitted that the "absence of any reliance" was confirmed by clause 20 and Special Conditions One and Eleven in the contract (Red 21). Special Condition One of the contract provided that the defendants had made available to the plaintiffs all information which the plaintiffs had sought. It also provided that the plaintiffs had relied solely on their own inquiries and their own independent financial and legal advice: Mr Matthews said that that was his position at the time of entering into the contract: Black 1/247Y-248C. The defendants also pointed to the deletion of clause 26 and item (v) in the schedule, so that the defendants were not warranting gross takings (Black 1/243C-T). "There was no evidence that the respondents sought to raise any term or condition that they had relied on any statement or conduct of the appellants." 86 Finally, the defendants submitted that there was no evidence to support the trial judge's finding (Red 99L-M) that the responses received by Mr Matthews from his inquiries of Mr and Mrs Hardy and Mr Corelli convinced him that he need not inquire further and there was no evidence upon which any reasonable inference of that kind could be made. Further, the finding was said to be perverse and contradicted by the fact that Mr Matthews made his own inquiries about competition in the period 26 June to 24 July 1996, the fact that despite Miss Coles' warning on 24 July 1996, Mr Matthews undertook no further inquiries or investigations as to competition or potential competition, the fact that immediately after the meeting with Mr and Mrs Hardy and Mr Corelli in August 1996, Mr and Mrs Matthews went on a holiday in the United States of America from 22 August 1996 to 7 September 1996, and the fact that despite Mr Purkiss' warning on 9 September 1996, the plaintiffs entered the contract on 13 September 1996 without further investigation and relying on what Mr Matthews had done and on Mr Purkiss' advice. 87 In my judgment the conduct of the plaintiffs cannot be described as being so wanting in regard for their own interests as to demonstrate that there was no causal link between entry into the contract and the non-disclosure. They made appropriate physical inspections, sought appropriate financial information, had a competent accountant analyse it, and cannot be blamed for not noticing newspapers which were not circulated in the area where they lived. Nor can they be blamed for not noticing the construction of the new Pizza Hut premises: there was no evidence of whether the site was readily visible. Nor, so far as the plaintiffs relied on their own inquiries and on what Mr Purkiss told them, can it be concluded that the trial judge was wrong in finding that if the truth had been told the plaintiffs would not have entered the contract. What was not disclosed was of fundamental importance, radically different from what the plaintiffs had learned. It was one thing to be aware of various types of actual competitive activity and to have received generalised warnings; it was another to be told of impending new entry by Pizza Haven's most powerful rival. The likelihood of the plaintiffs not proceeding with the contract had they been told the truth is supported by their shock when they did discover the truth, and by the urgency of the actions they then took: Blue 1/16P-18H; 163H-166Z. It was notable that Mr Purkiss did not expect any move from Pizza Hut into the area because there was no evidence that that was going to happen: Black 2/406T-X. Further, when Mr Matthews told Mr Purkiss on 9 September 1996: "there are no multinational fast food competitors who specialise in a home delivery pizza service in close proximity" with the business being bought, Mr Purkiss "considered this a critical point as approximately 85-90% of the sales generated by the [business] were in the form of a home delivery pizza service. On the basis that the [business] had experienced strong sales growth, despite the presence of the [competitors Mr Matthews spoke of], I considered and advised [Mr] Matthews that there was a strong probability that the historically strong sales performance could be maintained" (Blue 1/161J-P). Of course Mr Matthews was mistaken, because Pizza Hut was delivering in the area south of Showground Road. But had Mr Matthews known that Pizza Hut were going to start up with a new delivery service, it is likely that he would have told Mr Purkiss and it is likely that this would have alarmed Mr Purkiss and caused him to alter his advice. Further, it would have caused him to do much more than merely talk generally about the competitive nature of the industry. See also Black 2/312H-R. 88 The submissions of the defendants which centre on clause 20, Special Conditions One and Eleven, and the deletion of clause 26 and item (v) in the schedule are beside the point. The case does not turn on reliance by the plaintiffs on express representations or the deletion by the defendants of particular clauses; it turns on what the plaintiffs would have done if they had been told what they were not told. In any event, Mr Matthews said he did not understand at the time that the defendants were not giving any warranty as to past takings in relation to clause 26: Black 1/243T. 89 So far as the defendants attack the trial judge's finding that the answers Mr Matthews did receive convinced him that he need not inquire further by reference to events before the August meeting, the attacks are immaterial: it was at that meeting that Mr Matthews received the answers to which the trial judge referred at a time when, on Mr Hardy's own evidence, he had learned the truth (on 16 July). But let it be assumed that the finding attacked is erroneous, and let it be assumed that it had never been made: that would leave as a finding the trial judge's conclusion that had the plaintiffs been told the truth they would not have proceeded. That finding is very difficult to attack, being credibility-based and being inherently probable. In my judgment the attack on it fails. 90 The second group of contentions advanced by the defendants by way of attack on the trial judge's conclusion that the misleading conduct caused entry into the contract were as follows. The defendants submitted that the relevant test is whether the defendants' conduct by silence "reasonably raised a false assumption on the part of the purchasers which they then relied upon in entering the purchase." The defendants submitted that the plaintiffs must fail that test because "they gave no evidence at any time that they formed any assumption based on our silence or failure to make a disclosure … They did not say because of our answer to that question about our reasons for selling they formed the assumption that there was no Pizza Hut about to open in the area and in reliance on that assumption they entered the contract." 91 This "reliance" submission fails at a factual level because the plaintiffs did say that had they known the new Pizza Hut outlet was opening they would not have entered the contract, and the only mental state consistent with that is that they were operating on the false assumption that there would be no new competitors. The defendants submitted that one other mental state consistent with the evidence was that they did not turn their mind to that question. That submission is incorrect. In deciding to enter the contract, Mr Matthews relied on Mr Purkiss' evidence that the purchase was "a viable proposition". Mr Purkiss' evidence statement said that on 9 September 1996 he attended a meeting with Mr Matthews and discussed the following (inter alia) (Blue 1/161C-P): "The competitive fast food marketplace - I raised the issue of the competitive nature of the fast food industry and in particular asked how many volume driven multinational competitors were located within 5 kilometres of the Business. Roy Matthews said 'Kentucky Fried Chicken and Macdonalds are in Castle Hill and Pizza Hut and Dominos are in Baulkham Hills'. … He said 'Pizza Hut at Baulkham Hills is principally operated as a restaurant, has a poor reputation and is generally unimpressive. In addition, its home delivery trade is minimal. In other words, there are no multinational fast food competitors who specialise in a home delivery pizza service in close proximity to the Business'. I considered this a critical point as approximately 85-90% of the sales generated by the Business were in the form of the home delivery pizza service. On the basis that the Business had experienced strong sales growth, despite the presence of the previously mentioned competitors, I considered and advised Roy Matthews that there was a strong probability that the historically strong sales performance could be maintained."

[41]

The trial judge struck out certain material after the second sentence above on formal grounds, but gave leave for further oral evidence on the topic to be called. In oral evidence in chief Mr Purkiss narrated the conversation thus (Black 2/312G-R): "Q. Put it in the first person please insofar as you can, doing the best you can, to remember? A. I said, 'The fast food market place is an incredibly competitive market place'. HIS HONOUR: Slow down please. 'I said the fast food market is an incredibly competitive place.' Yes, thank you? A. 'There are a number of multinational players including Kentucky Fried, or KFC and McDonald's, Pizza Hut and so on. That these operations have unlimited access to marketing and advertising budgets. For example, Pizza Hut is owned by Pepsico and a direct consequence of their competition with Coca Cola is that their marketing and advertising budget exceeds $500 million per annum. All of these players use high profile celebrities to market their products and I am concerned that these operators could make it difficult for the Pizza Haven store at Castle Hill.' Roy [replied], 'Kentucky Fried and McDonald's and Dominos have been in the area for some time so their impact on the sales figures of the Pizza Haven store at Castle Hill would already be factored in and that the Pizza Hut store at Baulkham Hills was of average appearance and was not known for its competitive position in the market place.' I said, 'The Pizza Haven at Castle Hill was predominantly a home delivery pizza service and that is a critical issue for this purchase.' Roy said, 'The Pizza Hut store at Baulkham Hills had a minimal take-away - sorry - a minimal delivery service and as a result it is not a key issue with competitors at this point.'" 92 This evidence shows an acute concern on the part of Mr Purkiss about competition from Pizza Hut. It was a concern conveyed to Mr Matthews. On Mr Matthews' partially erroneous understanding of the position, Pizza Hut had only "a minimal delivery service". Mr Matthews therefore formed the view that competition from Pizza Hut was not "a key issue … at this point". That demonstrates an assumption that Pizza Hut was not then, and would not in the immediate future, be a competitor. In short, Mr Purkiss turned his mind to the question and succeeded in turning Mr Matthews' mind to it. They arrived at an assumption, contributed to by the silence of the defendants, that no Pizza Hut delivery service was about to open; in reliance on that assumption Mr Purkiss advised Mr Matthews to enter the contract, and Mr Matthews relied on that advice. The conclusion that the plaintiffs arrived at that assumption is supported by their shocked reaction when the truth came to light in November 1996 (which contrasts with the lack of reaction, from which non-reliance was inferred, in Eatten's Pty Ltd v JLW (NSW) Pty Ltd (1998) ATPR 41-619 at 40,773 and Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 904 at para [27]). 93 That leaves the question whether the test contended for by the defendants conforms to the law. They cited the following authorities: Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 94-96; Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ATPR (Digest) 46-054 at 53,195; Lamb v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 at 476, 477 and 479; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 34, 35, 40, 41 and 43; Eatten's Pty Ltd v JLW (NSW) Pty Ltd (1998) ATPR 41-619 at 40,771-40,774; and Anema E Core Pty Ltd v Aromas Pty Ltd [1999] FCA 904 at paras [25]-[27]. It is true that in some of these cases "reliance" was found by reason of the plaintiff having arrived at a particular mental condition as a result of the defendant's conduct. But in none of these cases was the validity of the test propounded by the defendants here debated and in none of them was it in terms even propounded. However, it is not necessary to decide in these proceedings whether or not the defendants' submission is correct as a matter of law.

[42]

Prior knowledge gained by the plaintiffs independently of Mr Corelli and Mr Tidyman 94 The defendants submitted, in support of Ground 4 in the Notice of Appeal, that the trial judge erred in failing to find as a fact that prior to completion of the contract on 23 October 1996 the plaintiffs knew of the opening of the new Pizza Hut outlet having regard to the evidence of Miss Coles, Mr Walker, Mr Leatham, Mr Baird and Mr Neumann. 95 In evaluating the trial judge's conclusions in relation to these witnesses on this point, it must be remembered that Mr Matthews denied the substance of the evidence, and the trial judge's favourable and largely unchallenged findings on Mr Matthews' credibility constitute critical factors. 96 The trial judge's findings in relation to Miss Coles on this point were as follows (Red 83N-84C): "She said orally that she had said to Mr Matthews and his two sons: 'In light of possible further competition their training was especially important at that stage.' She said that Mr Matthews replied that he had no concern about Pizza Hut and that he had already been looking at marketing initiatives he would put in place when the new Pizza Hut store opened. I find that that evidence was fabricated and that there was no such meeting. There was no such meeting referred to in her diary, on which she said she relied generally. I find that Miss Coles had only one meeting with Mr Matthews and that it was on 24 July 1996. Neither in her written statement nor in her oral evidence did Miss Coles assert that there was reference in that meeting to the impending opening of a new Pizza Hut business at Castle Hill. I find that Miss Coles never had any discussion with any of the Matthews in which that was referred to." 97 The trial judge also found that Miss Coles knew that the Matthews were unaware of the proposed new Pizza Hut delivery business but deliberately did not disclose her own knowledge of it. 98 There were several other respects in which the trial judge did not accept Miss Coles. His general observations of her were as follows (Red 82L-83D): "Miss Coles was the Pizza Haven State Operations Manager. She was an unimpressive witness. She was nervous, defensive and tried to divert attention from relevant questions by rushing off into unnecessary detail on peripheral matters. She was frequently unresponsive, confused as to sequence of events and on occasions flippant. She feigned reliance on notes headed 'Diary Notes' which were not contemporaneous diary entries but notes made much later than the events to which they referred. She could not remember whether they were made in 1997 or 1998. The relevant events had occurred in 1996. Her written statement was inconsistent with the notice of defence which had been filed on her behalf in the proceedings and with the further and better particulars of it. The defence and particulars alleged two meetings with Mr Matthews prior to the date of the contract (13 September 1996). The two alleged meetings were said to have occurred on 2 and 11 September 1996. It was alleged that at both of them the impending opening of the new Pizza Hut home delivery business was discussed. Miss Coles' written statement made no such allegation." 99 The written submission which the defendants put about Miss Coles was as follows: "Ms Coles was never moved from her evidence. Further, it was never put to her or suggested that she had any interest or reason for giving anything other than a true account of the events. The only possible reason was that she was a defendant in the proceedings. Nevertheless, just before the commencement of the hearing, the respondents settled their claim against her on the basis that each party walk away and bear its own costs."

[44]

The trial judge also found that Mr Baird knew that the Matthews were unaware of the proposed new Pizza Hut delivery business but deliberately did not disclose his knowledge of it. 101 The defendants submitted in writing: "Mr Baird was never seriously challenged on his evidence … It was not put to Mr Baird that his evidence had been fabricated and that he had deliberately not disclosed his knowledge of the new Pizza Hut knowing that Mr Matthews did not know of the new Pizza Hut. Nothing was put to Mr Baird to suggest that he had any interest or reason for giving anything other than a true account of the events." 102 In oral address it was conceded that Mr Baird had been challenged. Mr Baird's evidence actually attributed the statement quoted by the trial judge to Mr Hardy, but did not have Mr Matthews recording any protest. There was a challenge to Mr Baird's evidence: Black 3/786K-L, 786X-787E and 790L-M. The challenge was that he was making the evidence of the conversation up, or alternatively that he had confused what was said at a meeting in November with what was said on 23 October 1996. The cross-examiner joined issue with Mr Baird generally. The conversation was said to have taken place in Mr Hardy's presence (Black 3/772T), but he did not support Mr Baird's evidence. No oral argument was put in relation to Mr Baird. It was not submitted that any of the exceptional areas permitting appellate intervention against credibility-based findings applies. Accordingly, the submission relating to Mr Baird must be rejected. 103 The trial judge made the following findings about Mr Neumann (Red 91J-92D): "Prior to his meeting [with] Mr Matthews Mr Neumann was aware that a new Pizza Hut home delivery business was about to open at Castle Hill. He said that when he met Mr Matthews he asked him, in the presence of Mr Gerry King, the Training Manager, whether he was concerned about the new Pizza Hut business. He said that Mr Matthews replied to the effect: 'I anticipate I will lose a couple of thousand dollars a week in sales initially but we will be able to get that back.' I find that that alleged conversation did not occur. Mr King was not called to corroborate it and no reason was given for that. I prefer the evidence of Mr Matthews who said, and I find, that he did not become aware of the new Pizza Hut business until after settlement of the purchase. I find that it was not until after settlement that Mr Matthews said anything to his accountant Mr Purkiss about the new Pizza Hut business. Mr Matthews relied heavily on Mr Purkiss in relation to his purchase of the business and would, I find, have consulted him promptly if he had become aware of the new Pizza Hut business at any earlier time. The fact that he did not convinces me that his first knowledge of the new Pizza Hut business was on or about 5 November 1996. It was on that date that Mr Matthews telephoned Mr [Purkiss] about it for the first time."

[45]

He also found that Mr Neumann knew that the Matthews were unaware of the proposed new Pizza Hut delivery business but deliberately did not disclose his own knowledge of it. 104 The defendants put the following written submission: "Mr [Neumann] did not resile from his evidence. It was never put to Mr [Neumann] that he had deliberately not disclosed his knowledge knowing that Mr Matthews did not know of the new Pizza Hut. Nothing was put to Mr [Neumann] to suggest he had any interest or reason for giving anything other than a true account of events." 105 In oral address it was conceded that Mr Neumann's evidence had been challenged. His recollection was poor (Black 5/1132U-1133W). He was "not really very strong on … specific dates" (Black 5/1135K-L). After extensive cross-examination (Black 5/1136H-1145C), the possibilities that the conversation had not taken place and that his memory was playing tricks on him were put (Black 5/1145D-G). It was put that the conversation had never occurred (Black 5/1140R). He was also cross-examined critically on his failure to report the matter to his superiors. No oral argument was put in relation to Mr Neumann. It was not submitted that any of the exceptional areas permitting appellate intervention against credibility-based findings applied. Accordingly, the submission relating to Mr Neumann must be rejected. 106 Mr Leatham, Field Services Manager for Pizza Haven New South Wales, gave evidence in re-examination that during the training period at Warwick Farm he asked Mr Matthews what he thought about Pizza Hut opening in the area, to which Mr Matthews said only: "We will have to get together for some creative marketing" (Black 4/915E and Q). The trial judge also found that Mr Leatham knew the Matthews were unaware of the proposed new Pizza Hut delivery business but deliberately did not disclose his own knowledge of it. This is plainly inconsistent with Mr Leatham's evidence, which the trial judge must be taken to have rejected. At Red 113S-W the trial judge said of a group of witnesses including Mr Leatham: "In one way or another I found each one of those witnesses to have exaggerated and been biased or prejudiced against the Matthews and in favour of the Hardys …"

[47]

The facts are that the evidence was rejected; and he was challenged (Black 4/918P-919D). In oral argument it was submitted: "it wasn't put firmly and fairly to him that he was fabricating that evidence." 107 So far as the rule in Browne v Dunn (1894) 6R 67 had to be complied with, it was. Further, Mr Leatham's evidence was inconsistent with that of Mr Baird. The latter, who was Mr Leatham's superior, said that Mr Leatham had told him that Mr Leatham had only found out about the new Pizza Hut at the completion of the sale to the Matthews (Black 4/792H-N). This contradiction was put to Mr Leatham at Black 4/898L-W and 918U-919D. In oral argument the contention that Mr Baird had not had the allegations put to him was maintained, but without justification. It was not submitted that any of the exceptional areas permitting appellate intervention against credibility-based findings applied. Accordingly, the submission relating to Mr Leatham must be rejected. 108 The trial judge's findings on Mr Walker were as follows (Red 81Q-82J): "Mr Walker was a former Field Service Manager for Pizza Haven. He had left and purchased his own pizza restaurant at Drummoyne. He had overseen the training of Mr Matthews and his two sons at Warwick Farm between 18 September and 15 October 1996. Mr Walker said that during the second week of training he said to Mr Matthews: 'Are you aware that a Pizza Hut store will be opening in your area? Do you believe that will be a problem?' He said that Mr Matthews replied: 'No. Alan Hardy has got marketing things happening within the store that we intend to keep pushing.' I find that evidence to have been fabricated. Mr Walker was an unsatisfactory witness generally. He feigned confusion and lack of memory on various points. He was defensive and nervous and evasive. His oral evidence did not match his written statement. His evidence was inconsistent with the notice of defence which had been filed on behalf of the sixth and seventh defendants (the Franchisor and Miss Coles)."

[49]

Did the misleading conduct cause the loss? 112 The defendants contended that even if (which they denied) the plaintiffs had proved that they had suffered loss, that loss had not been caused by the defendants' misleading conduct. 113 The argument took two forms. First, it was said that it had not been demonstrated that any loss had been caused by the impact of the new Pizza Hut delivery business. Secondly, it was said that the loss had been caused by the business ineptitude of the plaintiffs. 114 The trial judge found (Red 100L) that as a result of the defendants' misleading conduct the plaintiffs suffered loss or damage. At Red 113G-114R he said: "The defendants mounted a lengthy and vigorous attack during the hearing on the business competence of Mr Matthews. They claimed that the losses which the business sustained under his ownership and management were caused solely, or mainly, by what was claimed to have been his 'business ineptitude'. Many witnesses were called to try and make out that allegation. It was submitted that his alleged business ineptitude was a 'supervening event' which destroyed any, or any significant, nexus between the conduct complained of and the subsequent trading losses. I have given close and detailed attention to that submission and all of the evidence on which it was based. After careful and final consideration I find that the allegation has not been proved. It would unnecessarily further lengthen this judgment to set out why in respect of each witness I have not been persuaded that the allegation is true. The witnesses who gave evidence on the point included Mr and Mrs Hardy, Miss Wilkinson, Ms Sonter, Mr Brooks, Mr O'Callaghan, Mr Leatham, Mr Acheson and Mr Christou. In one way or another I found each one of those witnesses to have exaggerated and been biased or prejudiced against the Matthews and in favour of the Hardys to the extent that, ultimately, I could not accept their evidence on this aspect of the case. Some of those witnesses were personal friends of the Hardys. One of them had been sacked by Mr Matthews, others had been disciplined by him. One had until just before the hearing worked for Mr Hardy in his glass business. Two of them were from interstate and purported to give evidence as 'expert' witnesses. In many respects their evidence, although not objected to, contravened the expert witness principles set out in Clark v Ryan (1960) 103 CLR 486. In many instances the so called 'experts' did little more than state the inferences upon which the defendants' case rested and did so on hearsay and double hearsay material. To some extent I do believe that Mr Matthews may have lost interest in the business. To the extent that that may have been so I find that it was due to his understandable response to having been what he termed 'dudded' by the defendants. Accordingly, any such negative reaction by him was directly caused by the defendants' conduct which I have found to be compensable. In the circumstances the defendants' allegation of business ineptitude fails. I find that Mr Matthews was not relevantly inept and that overall he did all that he reasonably could to operate the business successfully." 115 The first causation argument rested on a supposed proposition of law that where a s 82 action is brought for a breach of s 52 in relation to the acquisition of a business, damages are being assessed by comparing the price paid and the real value, and subsequent events are looked at to illuminate the real value of the business, evidence of reduced subsequent takings is inadmissible unless the decline is related to the misleading aspect of the conduct. The defendants relied on the following passage from Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 291: "In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s 52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it. Nevertheless, although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date. A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement. Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false but also to prove the true value of the business as at the date of purchase. Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible 'subject to due allowance being made for any differences in relevant conditions'. But if it is established that the decline in takings has been caused by business ineptitude or unexpected competition, evidence of subsequent takings is not admissible to prove the value of the business as at that date, events such as ineptitude and unexpected competition being regarded as supervening events" (footnotes omitted). 116 The distinction drawn in Kizbeau Pty Ltd v W G & B Pty Ltd between subsequent events arising from the nature of a business and subsequent events that arise from sources supervening upon or extraneous to the misleading conduct was employed by the defendants to suggest that any cause of reduced takings other than competition from the new Pizza Hut business was a cause "supervening upon or extraneous to" the misleading conduct. A question of burden of proof arises. The defendants accepted the burden of proving one of the High Court's instances of extraneous conduct, namely business ineptitude, in paragraph 9 of their Amended Defence (Red 45J). If that decision were sound, it would follow that the defendants bore the burden of identifying any other extraneous cause and establishing it. If the defendants are correct that the evidence does not permit an identification of the reasons why the business declined, the case ought to be decided against them on this issue. 117 Let it be assumed that the defendants' employment of Kizbeau Pty Ltd v W G & B Pty Ltd is correct and that the burden of proof lay on the plaintiffs to demonstrate that it was competition from the new Pizza Hut delivery business which caused the loss. Let it also be assumed that the cause of the loss was not the business ineptitude of the plaintiffs (that issue is dealt with below). In my judgment, if one excludes the plaintiffs' business ineptitude as a possibility, the evidence demonstrated on a balance of probabilities that the decline in the takings of the business was caused by the new Pizza Hut business, and the trial judge was correct so to find at Red 100L. 118 The defendants argued that there was no evidence that the opening of the new Pizza Hut business caused the long term drop in sales of the business which the plaintiffs bought. In particular, there was no evidence as to what sales were being achieved and what marketing activities were being undertaken by either of the Pizza Hut delivery businesses in the franchise area at any time. And there was no evidence of what sales were being achieved or marketing activities undertaken by any other fast food operation in the franchise territory. The defendants put arguments, necessarily repetitive of the arguments they put in relation to misleading conduct, that for years there had already been a Pizza Hut delivery outlet operating south of Showground Road, i.e. servicing 80% of households in the area. It was reasonable to assume that it had been successful. They argued that the Pizza Haven business did not have a monopoly south of Showground Road because of Domino's and small pizza stores. The defendants argued it was wrong to find that the proposed new Pizza Hut business was likely to be a significantly more intensive business than that of the defendants. The defendants argued that it was wrong to find that a significant factor in the profitability of their business was want of competition from Pizza Hut, and wrong to find that Pizza Hut had researched and targeted the business. The defendants submitted that the trial judge exaggerated Pizza Hut's power. They submitted that the trial judge erred in relying on the drop in sales for the weeks ending 15 and 22 October 1996 and the subsequent decline in sales because the drops in these two weeks was consistent with the fluctuating sales of the business and had occurred on other occasions, was to be explained by the ending of the school holidays, and was part of a long term trend beginning in January 1996. The defendants submitted that the trial judge erred in assuming the market to be pizza home delivery or pizza only. Finally, they submitted that the trial judge erred in failing to accept certain evidence given by Mr Acheson and Mr Christou to the following effect:

[60]

(g) the fact that driver discounts (discounts on sales given by drivers to customers as a result of complaints) increased from 0.42% of sales under the defendants to 1.3% of sales under the plaintiffs. They also pointed to the fact that Mr O'Callaghan stopped ordering from the plaintiffs because of the decline in product and service compared to the position under the defendants, and that he now ordered from other pizza suppliers including Pizza Hut. 120 Though the defendants contended that there were many possible causes for the decline of the business apart from competition from the new Pizza Hut delivery outlet, there was no specificity as to what they were, except the claim of business ineptitude. In several respects the trial judge's rejection of business ineptitude was based on credit findings. First, the rejection of the nine witnesses on the subject was credit based. Among those nine witnesses were two who were subjected to particularly severe attack, mostly not appealed against, namely Mr and Mrs Hardy. Another of the nine witnesses was Mr Brooks, severely damaged by his purported support for Mr Hardy's fabricated evidence about Mr Tidyman. Yet another was Mr Leatham, whom the trial judge had rejected in relation to this evidence that Mr Matthews had known about the new Pizza Hut delivery outlet before completion. Secondly, the trial judge's credit-based acceptance of Mr Matthews favoured adoption of his evidence that he had done all he reasonably could to make the business work. He, Glenn Matthews and Linda Matthews, worked long hours. The store operated for longer periods than required by the Franchise Agreement. He opened the store for lunch every day. He terminated payment of his wife's salary. He monitored food costs. He instituted numerous measures to increase productivity. He advertised extensively by means of "killer leaflets" (offering very cheap product) and in other ways (Blue 1/17-18 and 264-266; Black 223Q-1/228R). 121 There was some independent evidence that the decline of the business coincided with the commencement of the new Pizza Hut delivery outlet. In order to assess the significance of that evidence, it must be remembered that despite the defendants' attack on the plaintiffs' business competence, and as part of that attack, the defendants tendered through Mr Leatham, Pizza Haven Field Service Manager for New South Wales, certain Pizza Haven business records, being records of surveys of shoppers. These revealed that in the last months the defendants were in charge (between July and October 1996) they scored 62%, 61% and 60%. In the early period of the plaintiffs' operation, they scored 60%, 70%, 86%, 76%, 50% and 76% from October 1996 to June 1997 (Blue 2/535 and 537-542; Black 4/893-896). Mr Leatham agreed that the total score percentage line showed in general an improvement from and after November 1996, in which month the plaintiffs began to run the business without any assistance from the Hardys. This is evidence of superiority under the plaintiffs, even though Mr Leatham said the desired target was 90% and anything below 80% required action. The defendants submitted that the percentages referred to, though they reflect the results of individual survey forms completed during random surveys of members of the public within Pizza Haven Franchise Area No 41 by Pizza Haven Head Office, show the experiences of only eight members of the public over a year. They submitted that the lower scores gained by the defendants for the last month of their tenure related to only three customers; the results for the previous year were not in evidence; and the July, September and October 1996 period was not a representative sample. It was the defendants who put this evidence in, and presumably could have put in evidence for other periods; Pizza Haven must have thought the surveys had value as a guide to efficiency; and the defendants must have thought so too, because their counsel went to great lengths to obtain explanations about the genesis and significance of the documents in Mr Leatham's oral evidence in chief (Black 4/879-893). 122 The defendants also called evidence in the form of Pizza Haven business records tendered through Mr Christou, who with his three brothers ran the Pizza Haven franchisor company, proving the sales of the business from the time when it opened in the week ending 15 June 1993 to the time when it was sold by the franchisor in September 1998. These documents revealed a growth from $10,919 in the first week in June 1993 to a peak of $30,086 in the week ending 2 January 1996. The figures for the four weeks before the new Pizza Hut delivery outlet opened on 11 October 1996 were $20,574, $21,536, $22,401 and $21,596. The next week (being the first week that the new Pizza Hut outlet operated) produced sales of $18,775. The next week grossed $16,363 (a fall of $5,233 in two weeks, or 27% - not a fact, incidentally, revealed to the plaintiffs before completion). Those two weeks were the last two weeks of the defendants' ownership. Though the defendants pointed to other quite large drops and rises from week to week from 1994 to 1997, there had never been so large a fall over a two week period. That is, on occasion there was a large fall in one week followed by a partial recovery in the next. Over the previous three years the trend was always up. The next two weeks, under the plaintiffs' ownership but with the defendants in attendance helping, produced $15,661 and $16,602. From then on there was a steady decline. The two weeks in 1996-7 corresponding to the week ending 2 January 1996 (which generated $30,086) grossed $14,632 and $16,760. In the week ending 11 November 1997 the plaintiffs abandoned the business and the franchisor took over. The figures achieved under its control were even worse. That fact alone negates the plaintiffs' business ineptitude as an explanation for what happened: if the franchisor itself, which purported to train, advise and warn franchisees, with its nation-wide and intense experience of operating the Pizza Haven chain, could not do better than the plaintiffs and return the business to where it had been, there must have been an external circumstance confronting the business which was beyond the control of even the most capable operator. If, as the defendants submitted, the decline was caused by simple matters such as the failure of the plaintiffs to deliver pizzas quickly or at a warm temperature (the evidence for which was not extensive in any event), it must have been capable of being arrested by the franchisor. It was not. The only evidence of an external circumstance incapable of being controlled by an efficient business operator was the evidence that on 11 October 1996 the new Pizza Hut delivery outlet opened. 123 Neither side sought, by means of subpoenaing Pizza Hut documents or large-scale consumer surveys, to demonstrate what levels of success the new Pizza Hut outlet had. An endeavour to do so would no doubt have caused the costs to swell beyond their already wholly disproportionate levels. There is some force, however, in the conclusion that Pizza Hut planned to enter the area with a view to success, did so on a large scale, and were accustomed to compete vigorously. The evidence of Messrs Tidyman, Purkiss, Neumann, Hardy, Walker, Baird and Acheson discussed in paragraphs 59-62 above, suggests that the threat which Pizza Hut posed was likely to be damaging when it materialised. If total sales were unchanged, the likeliest cause of Pizza Haven losing sales would be Pizza Hut's gains in sales. There was no evidence as to whether total sales were unchanged. There was some generalised evidence that the entry of Pizza Hut would have been likely to cause total sales to rise. But even if they did rise, Pizza Hut was facing much greater competition in 20% of the area than before, accepting that it enjoyed something less than a monopoly. Mr Neumann said Pizza Hut was "a major long term threat" to the defendants' franchise which "could cause a permanent depression of sales". Mr Baird saw it as "a significant element of new competition" which "had to be taken very seriously by" an incoming franchisee. Mr Acheson said, contrary to the arguments of the defendants on appeal about endemic sales fluctuations and the ending of school holidays, that even if Mr Hardy had been managing the business up to and including 22 October 1996 in accordance with his usual standard, it was "likely" that the drop in sales was caused by the opening of the new Pizza Hut outlet on 11 October 1996, and that that opening was a reason for the drop in sales thereafter, assuming that the Matthews were running the business as well as or better than the Hardys. There was evidence that they were. 124 In short, the arguments put by the defendants on the general character of the pizza delivery business as being merely a small part of the fast food market, and the position of the defendants' business in Pizza Haven Franchise Area No 41 just before 11 October 1996, as a means of attacking the trial judge's findings on misleading conduct were largely rejected above. The trial judge made some errors, but they were trivial. The redeployment of these arguments for the different purpose of attacking his conclusions on causation is equally unconvincing. 125 The defendants pointed to evidence that they had controlled costs, that costs rose under the plaintiffs, and that driver discounts rose under the plaintiffs. In particular Mr Christou's statement is full of ex post facto criticism of the cost levels under the plaintiffs. Leaving aside the fact that his company's officers apparently never told the plaintiffs much about this, if it were valid, at the time when it might have done the plaintiffs some good, none of this explains the steep fall in gross sales, which must have been the fundamental reason for the collapse of the plaintiffs' business. 126 The defendants in the end placed little reliance on the evidence of the nine "ineptitude" witnesses except for Mr Christou and Mr Acheson. Mr Christou was certainly well qualified by his experience of running the Pizza Haven franchise business as director of the franchisor. But his statement was prepared at a time when his company was a defendant. He had an interest in down-playing the impact of the new Pizza Hut business. Indeed, though in general terms the merits of Mr Christou's evidence were urged on the court, the court was taken to very little of it. 127 Rather, particular reliance was placed on Mr Acheson. He was on the face of it well-qualified and independent. The general character of his evidence consisted of generalised reasoning to the effect that the decline in sales could not have been caused by the new Pizza Hut outlet. The trial judge's criticisms of this evidence as not conforming to traditional criteria applicable to expert evidence have some force. Though the evidence was not objected to, those criticisms legitimately bear on its weight. 128 The defendants argued that the rejection on credit-based grounds of Mr Acheson's evidence related only to the issue of business competence. They submitted that they: "rely on his evidence on the issue of causation generally, in particular to show that the impact would be of short term duration only and could be mitigated by good marketing strategies and good service [Black 4/960R] and for the propositions that because the market is the fast food market generally, the expansion of competition in the pizza area does not produce a direct reduction in pizza sales [Black 4/971W]; because sales of pizza are inherently liable to fluctuation and influenced by a number of factors, causation by Pizza Hut's expansion cannot be inferred ([Black 4/957R] - referring to the decline in the two weeks immediately prior to settlement)." 129 The fundamental difficulty with Mr Acheson's reasoning is that he offered very general theories of franchising which were not closely anchored to the facts of Pizza Haven Franchise Area No 41. An example is his evidence which the defendants relied on at Black 4/957R. At Black 4/957R-958N the following appears: "Q. You are happy to attribute the whole of the fall in sales in the weeks ending 15 October and 22 October to the opening before Pizza Hut? A. Well, not necessarily but - Q. What else might have caused it, Mr Acheson? A. A myriad of factors. Q. Such as? A. There could have been particular events in that area at that time, people may be paid monthly, I haven't -- Q. - I am sorry, people paid monthly? A. People could be paid monthly or fortnightly. Q. These are sales figures? A. Sorry. The way the customers are paid can effect the weekly sales. The way they are paid by their employers, not the employers of the outlet, I'm sorry. Q. I'm sorry, I don't understand your last answer at all, could you explain it? A. I am not suggesting that it necessarily is a factor here but in certain localities the way that you will occasionally get greater sales if people in that locality are paid by their own employers, not the Pizza Hut or Pizza Haven, they are paid monthly or fortnightly rather than monthly so they have more disposable income. Q. If that were the case you would [expect] the sales to jump up in the succeeding weeks, wouldn't you? A. Yes. Q. They didn't you can see that? A. They have gone up in the last week of the month. Q. They haven't gone within cooee of the 21,600 which was the level of the week end of 18 October 1996 have they, so you can rule out that hypothesis? A. It is not a large factor in this situation, no. Q. The overwhelming probability, in your expert opinion, Mr Acheson, is that the fall in sales in the weeks ending 15 October and 22 October 1996 was caused by the opening of Pizza Hut? A. That's likely to be the major factor, I don't know what was happening in the actual outlet, I can't be definitive in the sales. Is it when the Pizza Hut opened, what sort of sales they did, there may have been a McDonalds that opened." 130 The plaintiffs launched a strongly worded attack upon Mr Acheson's objectivity. They referred the court to extensive passages of his cross-examination. Those passages do demonstrate several instances of what was at best very feeble reasoning uninformed by the particular facts of the matter. For example, paragraph 15.1 of Mr Acheson's statement said that on "taking over the Pizza Haven Castle Hill store, the Matthews family elected to take on a more distant role in the operation of the business and were not 'hands on' operators" (Blue 2/550T-U). One basis of that was that Mr Matthews took a two week holiday in the United States before entering the contract and a one week holiday before completing it: that does not support the conclusion proffered. Another was that he lived on the Central Coast and "was somewhat senior in years" (Black 4/923F-924D). Paragraph 15.2 of his statement said: "The Matthews family were often not on hand during the busiest periods of the business" (Blue 2/550W). The evidence for this was that he had been told that the Matthews "were apparently having some refreshment across the road" on one occasion (Black 4/924M). Paragraph 15.4 of his statement said: "No steps were taken to improve the performance of the store both in terms of profitability and in delivery of quality product and service" (Blue 2/551G). That was contradicted by the evidence of the steps which Mr Matthews did take. At Blue 2/553R-S Mr Acheson's statement asserted: "I believe that the loss suffered by Mr Matthews was occasioned by poor management control by him and the other members of his family who were not involved but had cars, salaries and other expenses charged to the business". In cross-examination he revealed complete ignorance of who were and who were not involved in the business and what expenses were charged (Black 4/927C-928V). At Blue 2/564J he said: "I do not understand why Linda Matthews was being paid a wage". In cross-examination he said, amid a degree of evasiveness, that it did not occur to him to inquire whether she was working in the business (Black 4/928W-930V). He attributed the increase in sales achieved by the defendants to their careful attention to the operations manual without making inquiries on the subject and without listing other contributing factors (Black 4/934H-936N and 939G-H). The trial judge's finding that Mr Acheson exaggerated and was biased or prejudiced against the plaintiffs and in favour of the defendants cannot be said to lack foundation. 131 The defendants' submissions went to quite extreme lengths. The submissions had to face the difficulty that as at 13 September 1996 there were particular competitors in Pizza Haven Franchise Area No 41, followed, after completion, by a drop in takings occurring more or less contemporaneously with the entry of the new Pizza Hut delivery outlet, coupled with evidence that nothing that the plaintiffs were doing in the running of the business could in itself account for the drop in sales. By themselves those facts would be a sufficient basis for drawing an inference that it was the introduction of Pizza Hut, a new and powerful competitor, that was causing the drop in sales. The defendants submitted that for that inference to be drawn the plaintiffs had to discharge a: "burden of showing that everything was equal once they took over the business, so that the only explanation for their decreased takings was the new Pizza Hut. It would have been impossible for them to do it, because the mere fact that they were new proprietors was a change in the management."

[65]

Instead the trial judge started with the sale price achieved for the business on 4 November 1998 of $210,000. He said (Red 109E-110N): "The contract of sale of the business to the Fernandos on 4 November 1998 for $210,000 did not contain any special conditions. It was an arm's length transaction and not a forced sale. I find that it fairly represented market value of the business at that date. It is true that at that date weekly sales had dropped to well below what they were at 13 September 1996 and for quite some time thereafter. However, low as those weekly sales were they had levelled out to quite some extent. The new Pizza Hut business had been in operation for just over two years and its effect in the marketplace was known. As at 13 September 1996 the new Pizza Hut business had not yet opened. But it was about to. A prudent purchaser would have been extremely concerned and would have been advised to be extremely concerned. The risk of incurring trading losses would have been great. The prudent purchaser knowing that the new Pizza Hut business was about to open (it opened in fact on 11 October 1996 between contract and settlement) would have been in a sound bargaining position to enforce a substantial discount from what would otherwise have been fair market value. That fair market value (in the absence of the new competing business) was agreed by the parties to have been the $550,000 which was paid. Another bargaining point which the prudent purchaser could have exploited was the inclusion in the produced trading figures of the 'one off' eleven months of sales to Cherrybrook and West Pennant Hills. In my opinion a downward adjustment of $5,000 to the sale price of $210,000 in the contract of sale to the Fernandos would represent the true value of the subject business at 13 September 1996. That value I therefore determine to be $205,000. It will be seen that the value of $205,000 is $10,000 more than the amount apportioned to 'plant fittings and chattels and fixtures' ($195,000) in the contract of sale dated 13 September 1996 to Your Tabs. At the outset of the hearing, as I have already noticed, I asked counsel whether that figure of $195,000 was a bona fide fair valuation or simply a device, for example, to minimise ad valorem stamp duty. I was assured, and therefore accept, that it was a bona fide and fair valuation. In my opinion this operates as an appropriate check on my deduced true value of $205,00 for the business at 13 September 1996."

[67]

He then reduced the $122,279 by one-third to avoid double counting, and allowed the balance of $81,519. He also allowed certain sums as consequential damages. One of these was $16,555 for accounting fees. 136 The first argument of the defendants was that the parties fought the case on the basis of the contest between the accountants. They submitted: "Both Mr Sincock and Mr Purkiss agreed that in valuing the business for the purpose of fixing a price, the capitalisation rate should take into account not just existing competition but the threat of further competition. Mr Sincock used a 40% capitalisation rate and Mr Purkiss had adopted 30%. Mr Sincock's oral evidence … was that the opening of a new Pizza Hut did not affect the valuation which had probably accommodated the risk of further competition and that matters occurring subsequent to contract could not detract from such a valuation. …. Mr Purkiss in cross-examination conceded that the risk of further competition had been taken into account by him and that the price paid was not an over-value … All that Mr Purkiss was saying was that had he known of the opening of the Pizza Hut, he would have liked to see the purchase delayed so that he could ascertain and take into account any drop in sales … Essentially, Mr Purkiss failed to give sufficient weight to the risk which he had identified … by adopting the rate of 30% rather than 40% or a figure in that vicinity. If the respondents accordingly made a bad bargain that is not attributable to the appellants." 137 Though the trial judge did not say so, the possibility that a new Pizza Hut outlet might open in the future - in 1996, 1997 or 2000 - would appear to be radically different in its impact on the value of the defendants' business as at 13 September 1996 from the impact of the fact that for months Pizza Hut had been preparing for it to open on 11 October 1996. 138 The defendants did not seek to demonstrate in any detail why the trial judge was wrong to reject the proposition that the business should have made a profit by manipulating the actual trading figures. They have not shown that he was wrong in that part of his approach. 139 The second argument of the defendants was that the subsequent sale was not comparable because it took place two years later, at a time when revenue had declined by over 50%, and because there was no evidence as to comparative market conditions. The defendants submitted that there was no exploration of the impact on value of the conditions of the sale. 140 They said: "For example, is a sale by franchisor the same as a sale by mortgagee in possession? Does it have the same depressing effect on the market? What do people think about a business where the previous owners shut the doors and walked out and sold the plant and equipment? Does that depress interest? Does that make people less enthusiastic? What is the effect, for example, when a business is being sold by the owner who is the top operator in the country as compared to the situation when a business is being sold by the franchisor in possession?" 141 The defendants did not propound any ground of appeal to the effect that they had not received natural justice in the sense that the case had been decided on a basis which they had not appreciated. They did, however, draw attention to the fact that the trial judge had rejected evidence of sales of other Pizza Haven outlets in competition with Pizza Hut which did reveal substantial amounts being paid for goodwill (though again no ground of appeal complained of this). 142 In my opinion, the general approach of the trial judge was permissible. Evidence of what the business was worth in 1998 had significant relevance to what it was worth in 1996. Evidence of sales of other businesses in other areas had much less relevance and little weight without a full exploration of the relevant circumstances. The radical alteration in the revenue of the business as between 1998 and 1996 is not a materially different factor. Once it is accepted that the opening of the Pizza Hut delivery outlet caused, and was likely to cause, that reduction, and once business ineptitude was removed as a significant factor, it was clear that the business was afflicted by a radical disadvantage from the time when Pizza Hut decided to open the outlet. The fall in revenue was merely an outward indication of the disadvantage which had been part of the business from the time of the Pizza Hut decision. Neither the plaintiffs nor the franchisor despite their considerable efforts could overcome that disadvantage. That was one reason for the trial judge to conclude that the business was worth approximately what was paid for it in 1998. Another reason, as the trial judge noted, is that had the plaintiffs been informed of the full truth in 1996 they would have been able to negotiate a considerable reduction in the $550,000 charged. The complaint of the defendants about the unknown impact on value of a sale by a franchisor in possession relates to a matter on which, in my opinion, they bore an evidential burden. They did not satisfy it. 143 Though no specific complaint was made about this in the Notice of Appeal, there is one flaw in the trial judge's reasoning. It is unclear why he adjusted the sale price of $210,000 downwards by $5,000. If he did so to reflect the misleading inclusion of the Cherrybrook/West Pennant Hills figures for 1995-1996 as a guide to earnings from 13 September 1996 onwards, that was simply an element in the lack of value in the business in 1996. The Fernando sale was not affected by that misleading element. If the downward adjustment was for any other reason, the reason is not stated. In my opinion the value of the business should be treated as $210,000. 144 In relation to operating losses, the defendants made two criticisms. The first was put thus: "The trial judge relied upon the total operating losses of the first respondent of $122,279 … Those losses do not reflect the true operating losses of the business as they include many non-operational expenses …".

[71]

This makes three points. The last is that of the $16,555, $11,590 was for accounting fees charged by Mr Purkiss by way of advice as the business declined: the defendants contend that $2,000 would be a reasonable allowance, based on evidence of Mr Sincock and Mr Acheson to that effect. There is no reason to interfere with the trial judge's conclusion. While in normal times $2,000 might be a reasonable figure, Mr Purkiss was rendering services occasioned by the dramatic crisis confronting the business being operated by the plaintiffs which had been caused by the defendants' misleading conduct. The second point is that $4,365 was charged for preparing for the legal proceedings (Blue 1/188), and it was in effect said that the plaintiffs should not be able to recover that sum both as damages and as costs. The work was in fact done well before the legal proceedings started, and prima facie would not be recoverable as costs. The problem was solved when counsel for the plaintiffs undertook on behalf of the plaintiffs not to seek to recover the sum of $4,365 as part of the costs (assuming the plaintiffs succeeded in the appeal) if the plaintiffs were permitted recovery of it as damages. In my judgment it is appropriate that it be recovered as damages. In relation to the third point, the plaintiffs said that though the $800 was incurred by Classic Gold Stamping Pty Ltd, it was for work related to the decline of the business (Blue 1/184U). At Black 2/443E-J the following evidence appears: "Q. Accountancy services for Classic Gold Stamping are not really losses incurred by Your Tabs, are they, in these proceedings? A. Initially from memory - and I need to have a look at the schedule, I have a pretty detailed schedule to support that - initially we were going to buy the franchise in the name of Classic Gold Stamping. There were some initial costs incurred there. Well, that's two parts, that 800. It's on schedule A which was attached to that. Negotiations with the ANZ Bank re funding problems that resulted from Your Tabs liquidity crisis. So there were some fees incurred by our firm in attending to Classic Gold's liquidity problems that resulted from Your Tabs' liquidity problems."

Hardy v Your Tabs Pty Limited

At a glance

Court

Decision date

Before

Source

Judgment (79 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (9)

Cited By (4)