JJES Pty Ltd v Sayan

[2014] NSWSC 541

Supreme Court of NSW|2013-06-13|Before: Campbell J

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Source facts

Court

Supreme Court of NSW

Decision date

2013-06-13

Before

Campbell J

Source

Original judgment source is linked above.

Judgment (19 paragraphs)

[1]

Judgment 1The plaintiff company, which I will refer to as JJES was incorporated by Mrs Emily Navaei to conduct a small business. Mr Sayan is a solicitor in sole practice at Auburn. 2Mrs Navaei retained Mr Sayan to act on behalf of JJES on the purchase of a 7-Eleven franchise at Burwood Heights.

[2]

Legal arrangements for purchase of the business 3The purchase of the business was effected by two separate agreements. The first was an agreement for the sale of business made on 19th March 2007 between the outgoing franchisee of the Burwood Heights store and JJES. The purchase price was expressed as "for a total goodwill of $206,000" and a deposit of $20,600 was required. The deposit had been paid on 9th March 2007, ten days before the agreement was signed. And, I interpolate, before Mrs Navaei first consulted Mr Sayan. 4The sale was expressed to be subject to the following material conditions (Clause 3): (a)The approval by 7-Eleven of the purchaser as a satisfactory and suitable candidate to conduct the business as a franchisee; (b)Payment by the purchaser to 7-Eleven an initial franchise establishment fee of $84,920; (c)......... (d)Payment to 7-Eleven by the purchaser of $5,500 (including GST) by way of an application fee (the plaintiff said this was categorised as a training fee). 5The second agreement is styled "Store Agreement" between JJES Pty Ltd and 7-Eleven stores Pty Ltd, by which the latter granted a franchise to the former. It was executed on 30th March 2007. A number of the terms of this agreement are of particular relevance and need to be set out in full. In these terms JJES is referred to as the franchisee. The material terms are as follows: Article 2: Licence (a)7-Eleven hereby confers upon the FRANCHISEE leave and licence to enter upon, be in and use the Licensed Premises and (subject to the reservation in sub-article 2 (j)) to use Licence Equipment in conjunction therewith, solely for the purpose of operating the store at and upon the licensed premises in accordance with this agreement, and for no other purpose, subject to all of the terms covenants and conditions contained in this agreement from the Effective Date until the expiration of this agreement (as provided for in article 25 of this agreement). ..... (f) The FRANCHISEE acknowledges that 7-ELEVEN has no obligation to renew or exercise any option to extend the lease. Term, expiration and termination Article 24: Term and expiration (a)The term of this Agreement shall commence on the Effective Date and continue until termination of this Agreement as provided in Article 25, or until expiration of this Agreement on the earlier of: (i)The expiration of the primary term, or cancellation or termination of the Lease; or (ii)The expiration of the extended term of the Lease (if an option to extend the primary Lease has been exercised by 7-ELEVEN on the Effective Date or is executed by 7-ELEVEN during the term of the agreement); or (iii)Ten years after the Effective Date; (b)The term of this Agreement may be extended or renewed only by mutual agreement in writing between the FRANCHISEE and 7-ELEVEN. Article 2(e) incorporated an annexure styled "Exhibit A to the Agreement" which described the licensed premises. Exhibit A states that the licensed premises are leased by 7-Eleven and attaches the lease. Exhibit A also states that the current term of the lease expires on 16th September 2008. It provides for a 3 year term commencing on 17th September 2005 and expiring on 16th September 2008 with an option to renew for a period of 6 years "set out in Clause 3 of Annexure "A"", that is Annexure "A" to the lease. Clause 3 provides options "to renew the lease for a further two terms, each term to be for a period of three (3) years". 6It is also notable that Annexure "A" to the lease incorporated the provisions of a different registered lease numbered V269232, with express variations. The first variation deleted the words "seventeen (17) years" and replaced them with the word "three (3) years", as the term of the subject lease. The reference to 17 years has some relevance to an account given by Mrs and Mr Navaei, to which I will refer later.

[5]

Application to become a 7-Eleven franchisee 12It is essential to put the relationship between Mr Sayan and JJES in its proper context. Many of the following facts are also material to issues of causation. 13For the reasons I am about to give, if Mr Sayan did breach his duty of care as alleged, which I find he did not, it is in my judgment unlikely that JJES, through its sole director, Mrs Navaei, relied upon his advice in entering in the contracts by which JJES purchased the Burwood Heights store. In providing this narrative of the surrounding facts as I find them to be, I have borne in mind that Mr Sayan was not retained by JJES to act on the purchase of the business until about 9th March 2007. By then JJES was thoroughly committed to the proposed purchase to the extent that it had paid the deposit to the outgoing Franchisee (perhaps on the same day as Mr Sayan was retained), Mrs Navaei had commenced to undertake training with 7-Eleven (probably on 5th March 2007), and a business plan for the Burwood Heights store had been prepared by an accountant. These facts may not be decisive, but they are very significant. 14Mr Sayan was known to Mrs Navaei and her husband because he and Mr Navaei attended the same gymnasium and had become friendly there. Mr Navaei knew that Mr Sayan was a solicitor and Mr Sayan knew that Mr Navaei and his wife were interested in purchasing a 7-Eleven store, or some other franchise. He had indicated to Mr Navaei that he had acted on such purchases, and on the social occasion of an attendance at the gym, he may have remarked that 7-Eleven stores were good businesses. 15JJES Pty Ltd was not incorporated until 14th February 2007. It was brought into existence to be the trading vehicle to purchase and run the Burwood Heights store. Mrs Navaei was its sole shareholder and director. 16As at February 2007, Mrs Navaei was 34 years of age. She had been educated to Higher School Certificate level. After school she obtained TAFE qualifications in office administration and computer applications. Later, in 2000, she obtained an accounting certificate from TAFE. When she obtained her first qualification from TAFE, she obtained employment with one of the big four banks as an accounts officer. She may have had some time out of the workforce following the birth of her children. 17She had previous franchise experience when running a Michel's Patisserie between December 2000 and early 2003. She thereafter, ran her own takeaway food business until 2005. In her application form to 7-Eleven of 31st July 2006, she said that she had been able to successfully build and operate the takeaway business on her own, making money and selling it for a profit. She was confident of her ability to work hard. In her application she said: I have been in business and have been successful in operation (sic) She also stated that she was attracted to 7-Eleven because she had "researched it" and believed "that it has an exceptionally good system". 18She stated that her husband had helped in her previous businesses and would be supportive of her new business. 19She named three people, including her husband, as persons upon whom she would be relying on for advice about the franchise. She referred to Mr Angelo Andresakis, a solicitor who gave evidence before me. 20Interestingly, she also nominated Mr Sayan. I infer that by the time that application was made, Mr Navaei and Mr Sayan must have discussed 7-Eleven franchises at the gym. Mr Navaei's evidence was that the conversation was after the application was lodged (58.25T). But I think it more likely, the conversation occurred before the application was lodged as Mr Sayan is mentioned in it, notwithstanding that Mr Sayan's recollection also was that the conversation took place towards the end of 2006 (200.35T). 21After lodging the application of 31st July 2006 (Exhibit A) Mr and Mrs Navaei had an interview with Ms Shayne Howarth, the NSW Franchise Development Manager for 7-Eleven, sometime later in 2006. Mrs Navaei described it as "basically a job interview". Following the interview, a list of 7-Eleven stores for sale was provided by 7-Eleven to Mrs Navaei. 22Ms Howarth could not remember the particular meeting. She said that 7-Eleven received over 100 applicants per month. She did not remember the meeting with the Navaeis, although she remembered them. She relied on her invariable business practice to give evidence of the matters discussed with them from time to time. She said that she probably met Mr and Mrs Navaei about three times before they made a decision about buying the store. 23Mrs Navaei said she was looking for a family business that she could run for a couple of years, making a profit running it and when selling it. 24From Mrs Navaei's account by early January 2007, I infer that they had formed a specific interest in the Burwood Heights store. At times however, as I explain, Mrs Navaei said she was not committed to a particular store, or even 7-Eleven before consulting Mr Sayan. But in January, they had a second meeting with Ms Howarth who provided a bundle of documents relating to the proposed sale of that store only, which they took to their then solicitor, Mr Angelo Andresakis. The purpose of this meeting was to discuss the purchase of only the Burwood Heights store. 25Mrs Navaei's evidence was that in her dealings with Ms Howarth, Mr Andresakis, and later Mr Sayan no-one expressly stated that the original term of the lease on the Burwood Heights store expired on 16th September 2008, with only a possibility of renewal for two additional terms, each of three years. Indeed, her evidence is that no-one told her that the term of the Franchise Agreement was restricted to the term of the lease and that 7-Eleven had no obligation to renew or extend any lease; that ten years was a maximum term only. In fact, her evidence (as well as the evidence of her husband) was that Mr Sayan had informed them that the Burwood Heights store had a long lease of 17 years with an option for a further three years. 26I reject the evidence of Mrs Navaei and Mr Navaei in this regard. Before giving my reasons for this decision, I wish to record that the allegation that Mr Sayan advised them (on behalf of JJES) that the lease of the Burwood Heights store was for a term of 17 years is not raised in the Statement of Claim. Indeed it is inconsistent with [8] of the Statement of Claim which avers that Mr Andresakis drew to the attention of Mr and Mrs Navaei on behalf of JJES the terms of article 2(f) of the store agreement. There is a reference to "the lease and options renewals as set out" in that sub-article. [10] avers that Mrs Navaei, on behalf of JJES, informed Mr Sayan of these matters. The allegation against him is not that he advised that the lease was for a term of 17 years, but rather that he reassured her that "7-Eleven stores never close and that they are always looking for new ones" (SOC [12]) and that "the lease and franchise provisions were nothing to worry about" (SOC [13]). 27The gravamen of the case made in the Statement of Claim is that 7-Eleven's decision to terminate was unexpected because it contradicted the advice given by Mr Sayan, and as a result of the refusal by 7-Eleven to renew the lease JJES suffered loss and damage (SOC [20] - [22]). 28Requests for and answers to further and better particulars passing between the parties from 1st June 2011 to 22nd March 2010 were tendered (Exhibit 10). There is no particular that the defendant erroneously advised JJES that the lease of the Burwood Heights store had a term of 17 years.

[7]

Mrs Navaei's evidence 30In cross-examination, Mrs Navaei agreed that in her application to 7-Eleven, in answer to a question about her major concerns, she responded that she "would want information on the leased store". From being in business, she realised "that the lease is the most important thing" (112.10T) and she had previously seen the lease for her other businesses. 31She agreed that at her first meeting with Ms Howarth may have been around 3rd August 2006. She also said that as she made inquiries about various 7-Eleven stores she was interested from a list she had been given, she questioned the franchisee about the lease, but they said "they did not know anything about the - the leases". Then she said that in fact she only spoke to one storeowner and couldn't recall asking about the lease "to be honest" (113.30 - 114.30T). 32She agreed that she spoke to the outgoing franchisee of the Burwood Heights store more than once. She denied that she asked about the lease because she had been told by Ms Howarth, "the franchisees did not know about the lease and that would be something that would need to be investigated when [she] was purchasing the business through [her] lawyers" (116.10T). 33She then changed this evidence somewhat. She said she had been told that "7-Eleven controlled the lease basically" (116.25T), but she only found that out after she had purchased the store when she was in training (116.35T). She maintained that Ms Howarth had not said anything to her about the lease "not even generally" (117.5T). 34Mrs Navaei denied that Ms Howarth ever told her that the lease on the Burwood Heights expired in September 2008 with two option periods of 3 years and that there could be no guarantee 7-Eleven would exercise those options (119.5 - .10T). She asserted that it was only when Mr Sayan advised her that the Burwood Heights store had a 17 year lease that she made up her mind "100 per cent" to purchase it (119.30T). I interpolate that this, of course, cannot be correct. The deposit had been paid, training had commenced, JJES incorporated, and the business plan prepared, all prior to instructing Mr Sayan. 35The business plan, (Exhibit 4) which was prepared no later than 28th February 2007, opens with the following statement: JJES Pty Ltd was incorporated in New South Wales on 14th February 2007. The company was incorporated to purchase and operate the Burwood Heights New South Wales 7-Eleven franchise. The company will operate the business with the owners also working as employees. The business plan does not mention the lease, however. 36Mrs Navaei acknowledged that the folder of material she had been provided with in early January 2007 included both the proposed store agreement and a copy of the lease. She asserted she could not understand the lease on a "quick look" (120.45T). She denied noticing that the lease had a terminating date of 16th September 2008 (122.45T). She said that she relied upon her lawyer (Mr Sayan) to advice her "what was happening with the lease" before she purchased, so she did not read it carefully (123.25T). She then said "I didn't specifically get the lease" contradicting her earlier evidence (123.30T). 37She denied asking Mr Andresakis what the terms of the lease were and she denied that he told her what the terms of the lease were. She said he: Just advised me to be careful about the lease ... and he went through some of the clauses in the franchise agreement and just said that he would not be comfortable in purchasing the store and just said, "I could not act on your behalf in this matte"r. (125.5 - .10T). He also said "you need to make sure you are in control of the lease". She denied he ever said the lease is short (126.5T). She said she received advice from him that she should "make sure that 7-Eleven ... would actually renew" the options (126.15T). 38In response to questions asked by me (126.50 - 127.10T) it was clear that merely by looking at the lease Mrs Navaei understood the meaning of the term of 3 years, the commencement date and the terminating date. 39Before consulting Mr Sayan, Mrs Navaei had also applied for finance from Citibank to purchase the Burwood Heights store. Her application was supported by the profit and loss statements produced for that particular store. Exhibit 5 refers to the initial loan application date as 8th March 2007. 40She also agreed, after some hesitation (135.5 - .40T), that she commenced training in Melbourne on 5th March 2007. As I have said, the deposit for the Burwood Heights store was paid on 9th March 2007. 41She said she believed that she could pull out at any time until signing the store agreement (137.10T). She said that the price for goodwill was negotiated with the store owner during the week before the deposit was paid (137.40T), again before she consulted Mr Sayan. She asserted that she did not know what term remained on the lease at that time (138.30T). This is difficult to accept as she agreed that the term of the lease would be very important in determining goodwill (138.40T). 42In cross-examination, Mrs Navaei maintained the evidence she had given in chief that Mr Sayan had advised her that 7-Eleven always renew their leases and all of his clients who had bought 7-Eleven stores are happy. "7-Eleven never close stores". 43She maintained that Mr Sayan was certain it was a 17-year lease. And he said "all my other clients have always had their leases renewed". 44Mrs Navaei denied she was making up the account that Mr Sayan had told her it was 17-year lease (144.50 - 145.5T). She said that her solicitors had shown her "an older lease that was for 17-years for the same property", the implication being that Mr Sayan must have read the wrong lease. She first saw it on the first day of the Trial, 11th June 2013. But she maintained, contradicting herself somewhat, that she had first found out about the 17 year lease when Mr Sayan told her about it "before we actually went ahead and purchased it". However she agreed that she told Mr Sayan when she first went to consult him that she had decided to buy the Burwood Heights store (147.35T). It was obvious from the cross-examination that Mrs Navaei was able to read and understand Exhibit A to the proposed store agreement (150T). 45The copy of the current lease attached to the store agreement (Exhibit B) was shown to Mrs Navaei as she gave evidence. On its face is a stamped box bearing date 30th March 2007 and the initials "E N" above the printed word Franchisee/s. She agreed that she had initialled that document on 30th March. The box was directly adjacent to the information concerning the term and options. She still maintained that she did not read the lease, because it was not necessary to do so as she had received advice from Mr sayan that she could "go ahead and sign everything". She accepted that the contents of the lease were completely inconsistent with her account of the advice Mr Sayan gave about the lease, that is JJES's case, after all. 46She also acknowledged signing Exhibit 6 on 30th March 2007. This is an acknowledgement of receipt, inter alia, of the lease and the store agreement. The former on 13th February 2007 and the latter on 23rd January 2007. It also contained the following information: Current franchise agreement expires February 2017. Current property lease expires 16th September 2008. Further options, (at the discretion of 7-Eleven) 6 years. Moreover, the document acknowledged that Mrs Navaei had read, and had had a reasonable opportunity to understand, inter alia, "the expiry date of the franchising store agreement and the store lease term and options". She said she signed the document without thinking because her lawyer had advised her she could (153.35T). At 154.10T she was asked the following: Q. I will read it out to you if you don't agree. Do you agree it sets out the terms of the lease quite clearly? That is, the period terms? A. I suppose it does, yes. She then said it was just an acknowledgment of receiving the documents. 47She maintained that she was unaware, as at the date of the store agreement, that the lease expired on 16th September 2008. She said she did not find that out until prospective purchasers told her about the lease terms when they inquired about the sale. 48Mrs Navaei denied telling an officer of 7-Eleven on 23rd of April 2010 that she had been told "at the time of takeover" that there was a 6 year option. According to the business record made then, Mrs Navaei said nothing about a 17 year lease, but claimed "they were told it would definitely be 6 years by 7-Eleven" (see Exhibit 11). Mrs Navaei could not remember this conversation. In my judgment this business record is reliable and her evidence that she made no inquiries herself and simply relied upon advice from Mr Sayan that there was a 17 year lease with a 3 year option is inherently improbable. Moreover, it is directly contradicted by evidence I find acceptable. Before dealing with that evidence, it is necessary to say something about the evidence of Mr Navaei.

[9]

The evidence of Mr Andresakis 53Unwittingly Mr Andresakis appears to be the origin of the story of the 17 year term. He was consulted by and Mrs Navaei about the proposed 7-Eleven purchase in about late January or early February 2007. Mrs Navaei showed him the documents she had obtained from 7-Eleven, which he obviously read carefully because he caused a Land Titles Office search to be carried out on the previous registered lease referred to in Annexure "A" to the current lease. This was prudent as it was necessary for the purpose of providing advice about the terms of the lease. He placed that search with the papers he had been given by Mr and Mrs Navaei. The search was admitted as Exhibit G before me. It is a lease for the term of 17 years commencing on 17th September 1982 and terminating on 16th September 1999. I admitted it for the limited purpose of demonstrating what Mr Andresakis had before him when he gave the advice. It was not admitted to permit the plaintiff's case to range beyond the averments in the pleadings (189.5T). Nothing of substance in the case turns on this document. It seems to have come to light in the documents reproduced by Mr Andresakis under subpoena. 54Mr Andresakis gave the following evidence: When I was reading the franchise agreement, I have to say I did an initial perusal of the lease and that seemed okay but not in detail. And then my recollection is that I looked at the franchise agreement and what stuck out was that there was a clause in the franchise agreement that said that the franchisor had sole, I understood, my recollection is that at its sole discretion, does not have to renew the option for renewal of lease. And in view of the short initial term of that lease that I had a copy of, that was a concern. And I then did some enquiries in relation to that. The short term he referred to was the term expiring on 16th September 2008. 55He approached Ms Howarth for the purpose of exploring whether an amendment to the terms of store agreement could be negotiated to remove 7-Eleven's "arbitrary right" to refuse to exercise the option on the lease. His recollection is that he was told no amendments would be made (190.10T). 56At a subsequent conference he gave the following advice to Mr and Mrs Navaei: There's a problem. There's a clause in the franchise agreement that means that the franchisor does not have to exercise the option. ..... Effectively, if you go ahead with this you are only going to have, I think one year or two year lease or something and then there's no, there's no security of tenure. (190.20 - .25T). Mr Andresakis indicated to his clients that he was not happy to act and advised them against buying the business "that had such a short tenure" (190.35T). He gave the following evidence: Q. Did you say why you weren't happy to act in the matter? A. Yes, because of the clause in the franchise agreement and that the franchisor would not delete it or not amend it to exercise the option. That that, and in my view I, I wasn't prepared to act in a matter that to me seemed that, again I didn't, that was my thoughts. But I did say I wasn't happy to act in that matter and that I recommend that they don't buy the matter. He also told them he hadn't dealt with a 7-Eleven franchise before. He expressed relief that the clients did not insist upon him continuing (115T). 57In cross-examination, Mr Andresakis confirmed that he had advised Mr and Mrs Navaei that there was a short term left to run with two options, each of three years at the discretion of 7-Eleven (194.10T - 195.40). 58In answer to my question, he confirmed that he had passed on to Mr and Mrs Navaei that he had spoken to 7-Eleven about the prospect of amending the agreement and 7-Eleven's rejection of any such proposal (195.20T).

[11]

The evidence of the defendant - Mr Sayan 65 Mr Sayan confirmed he had a social conversation with Mr Navaei at the gym about the interest of Mr and Mrs Navaei in purchasing a franchise. I have related some of his evidence about this before. He said that he was approached by them to act in relation to the purchase of the Burwood Heights store on or about the 9th or 10th March 2014. They had a folder of documents and he asked them to leave them with him so he could look at them. He knew they had previously consulted Mr Andresakis because they told him so. They also told him they had done some training, or they were in the process of doing some training, and had paid a deposit on the purchase of the business. They asked him "To look at the franchise agreement and advise them about the franchise agreement and act for them" (202.10T). He accepted the retainer, but he did not prepare a written agreement. He read the file and saw the Navaeis again on the 19th of March 2007. He said he gave the following advice: (3)He explained the relationship between the termination of the franchise agreement and the lease: see sub-article 2(f); (4)He said, "The term of the franchise agreement is of crucial importance. It has shorter term and two lots of three, each being three option period." (sic) (5)He said he advised "that the franchise agreement has provisions in it which gives the franchisor an ultimate power not to give you any option. If the option is to be exercised it is a right with the franchisor, being the shop lessee, to exercise the option and then it is again in their ultimate discretion to confer that use of the lease to you". (6)He says he drew sub-article 2(f) and articles 24 and 25 to the specific attention of Mr and Mrs Navaei. In response to a direct question about the term of the lease he said that is "18 months of term and two lots of options. If it exercised and given to you, you will have it". (7)In response to a question "will they renew?" He advised "it's up to them to renew. If they want it they may renew but they are not under any obligation to renew". (204.5 - 205.30T). He completed the certificate of independent legal advice. 66He said he had acted on three previous purchases of 7-Eleven finances. He gave evidence that he had, in relation to one or other of those matters, sought to renegotiate the terms with 7-Eleven and had met with the response, "7-Eleven would never vary any terms of franchise agreement, especially when it is transfer of existing lease" (212.25T). 67In cross-examination he accepted that he had been told that the intention of Mr and Mrs Navaei was to run the business for a short period of time and then attempt to on-sell it. He didn't recall either Mr or Mrs Navaei saying that Mr Andresakis had a concern over the agreement other than Mr Andresakis did not want to act. He accepted that the length of the lease was an important consideration "in determining not only the price that you pay, but whether or not it would be advisable to enter into the agreement at all" (216.20T). 68He denied saying that 7-Eleven is a good store; that they are opening not closing businesses; they never close a business (216.40T). He denied seeing the old memorandum of lease (Exhibit G) for a term of 17 years. The only lease he saw was the current lease. He did not obtain a copy of the former memorandum which had been incorporated in the lease and he never discussed the former memorandum with Mr and Mrs Navaei. (218.25 - 219.20T). He said that he advised Mr and Mrs Navaei that the maximum term of the franchise was 10 years "but the life of the franchise agreement would co-exist with the length of the term of the agreement. There is a co-relation between franchise agreement and the lease, that co-extends" (sic). 69He maintained that he told the client that "the franchise you are going to purchase could last for as little as 18 months" (222.20T). 70He accepted that he did no more than tell Mr and Mrs Navaei that the lease was short. His role was to advise in relation to the agreement only and did not regard it as his obligation to advise on whether the agreement was an appropriate one they should accept (225.30T). It was not his role to advise his clients not to enter into the agreement and he did not give any such advice. He regarded that as a business decision. He said the obligation might vary according to the business nous of the client, but Mr and Mrs Navaei had experience and he formed the view they had made their own decision about the wisdom of going ahead with the deal. He made no attempt to re-negotiate the terms, he denied he mentioned any long lease, and he denied that he specifically told them that "it was ok to go ahead with the signing of the franchise agreement" (234.50T).

[12]

Summation of findings of primary fact 71I reject the evidence of Mr and Mrs Navaei that Mr Sayan told them that the Burwood Heights store was subject to a 17 year lease. I also reject their evidence that they were ignorant of the actual terms of the lease. I accept the positive evidence of Mr Andresakis that he explained the lease to them. I also accept the indirect evidence of Ms Howarth that she, in accordance with her invariable practice, would have explained the terms of the release relating to each store they inquired about and its relationship with the term of the store agreement. Specifically I infer she explain the terms of the Burwood Heights lease. In my judgment the contents of Exhibit 7 are an admission that Mrs Navaei knew the terms of the lease at the time of the purchase, even if she tried to say that she was assured by Ms Howarth that the options would be exercised. 72I am satisfied that when she initialled Annexure "A" to the lease which was attached to the store agreement Mrs Navaei was aware of its terms, and that she read the contents of Exhibit 6 at the time she signed it on 30th March 2007. 73Mrs Navaei was not an ingénue in business matters. She had previously run businesses, and was aware of the importance of the term of the lease of the premises from which a retail business was conducted. She said so in her application of 31st July 2006. When one considers the steps in fact taken to further this venture, it is beyond belief that she would have gone on in total ignorance of this vital matter right up until the time she saw Mr Sayan. 74Moreover, I accept that by the time she saw Mr Sayan on or about the 9th or 10th March 2007, she was well committed to the purchase, having taken a number of significant steps as detailed above in furtherance of it. The probabilities are that Mr and Mrs Navaei sensed Mr Andresakis's clear lack of enthusiasm for the purchase and were happy to go to Mr Sayan, if he had no desire to act for them on the purchase. Clearly because of the social relationship between Mr Navaei and Mr Sayan and their knowledge of the nature of his practice, he was someone they had in mind as a potential advisor, as is made clear in the contents of the application of 31st July 2006. 75 I accept Mr Sayan's evidence as to the advice he gave set out at [65] above. It seems to me that it accords better with the probabilities, is consistent with the evidence of other witnesses, including in particular Mr Andresakis and Ms Howarth, and sits better with the contemporaneous documents. 76Moreover, I found Mrs Navaei in particular to be somewhat evasive, prevaricating and inconsistent in her evidence as I have detailed above. I do not accept that Mr and Mrs Navaei passed on to Mr Sayan the advice they had received from Mr Andresakis. Indeed, they were not frank in evidence about the advice he gave, attributing to him, as I have said, the Delphic statement "be careful of the lease". 77I accept Mr Andresakis' evidence unreservedly that he not only advised them about the terms of the lease, its relationship with Articles 2(f) and 24 of the store agreement, but also of his attempts to negotiate a better deal with Ms Howarth; the results of which he passed on to them 78They were not forthcoming with me about the advice Mr Andresakis gave and I find they were not forthcoming with Mr Sayan. 79These findings of primary fact dispose of the claim enunciated at paragraphs [10] to [14] and [18], of the statement of claim and also the particular of negligence, 24. 80To put it another way, it also disposes of the second aspect of the plaintiff's claim set out in paragraph 11 above, based on the opinion of Mr Moses and it is unnecessary to consider that matter further. 81Given Mr Sayan's evidence that he did no more than give advice about the legal effect of the documents; did not give any advice about its business prudence; did not give any advice about the prudence of the proposed purchase in a financial sense; and did not attempt to negotiate any better terms with 7-Eleven, that still leaves for consideration with a claim as expressed by Mr Moses at 11 above.

[13]

The nature and content of a solicitor's duty of care 82In Provident Capital Ltd v Papa [2013] NSWCA 36 at [2] and [6] Allsop P said: [2] The extent of the responsibility of a solicitor in the provision of independent legal advice will depend on the retainer and the circumstances attending the retainer and its execution. It is therefore unwise to be in any way dogmatic in general terms about what needs to be done in fulfilment of the retainer. It is for that reason that any mechanical approach that limits independent advice to explaining the content of the legal obligations in the document in question may lead, in any given circumstances, to the provision of inadequate advice. If the retainer is to give legal advice, depending on the circumstances, that may (as it did here) extend to explaining the practical consequences of the legal obligations arising from the relevant document in the known circumstances. It may be apparent, as it was here, that the legal and practical consequences to a client of entering into a transaction may be significant, but are not such as can be assessed without financial or further financial information or advice. In such circumstances, the solicitor may be obliged to counsel in appropriate terms (perhaps strong terms) about the risks in proceeding without further information or advice. Depending upon the circumstances, such as apparent ties of loyalty, whether of blood or love, the apparent risks may have to be brought home with clarity and force. The giving of independent legal advice for a mortgage transaction (whether certified or not) is not some formality. It generally involves proper and adequate legal advice being given in and about executing a document or entering into a contract or a transaction. [6] I recognise the risk of simplistic encapsulation; but many clients look to and rely on an advising lawyer, not as the expounder of legal doctrine, but as the confidential adviser about the law, and its practical intersection with life. That is why they seek advice. That is why lenders require the interposition of the trained solicitor to give independent advice and, sometimes, to certify same. (See also Sackville AJA at [119] and [122].) 83Macfarlan JA who wrote the leading judgment said at [75] to [76]: It is well established that solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act (Polkinghorne v Holland [1934] HCA 28; 51 CLR 143 at 158; Citicorp Australia Ltd v O'Brien (1996) 40 NSWLR 398 at 418). Further, the correctness of the view expressed in Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 that a solicitor may have a duty of care extending beyond the ambit of the solicitor's retainer (a so-called penumbral duty) remains a matter of debate (Kowalczuk v Accom Finance [2008] NSWCA 343; 77 NSWLR 205 at [267] - [294]; Dominic v Riz [2009] NSWCA 216 at [89] - [90]; Keddie v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254 at [86] - [104]). However proper execution of a retainer to give independent legal advice concerning a loan and mortgage transaction may, depending upon the circumstances known to the solicitor, require more than an explanation of the legal effect of the documents to be executed. As Allsop P (with whom Hodgson JA and Handley AJA agreed) said in David v David [2009] NSWCA 8 at [76], after referring to the existence of a "penumbral" duty being doubtful: "If, however, the solicitor during the execution of his or her retainer learns of facts which put him or her on notice that the client's interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out, depending on the circumstances, the solicitor may be obliged to speak in order to bring to the attention of the client the aspect of concern and to advise of the need for further advice either from the solicitor or from a third party". In Dominic v Riz at [90] - [91] his Honour (with the concurrence of Hodgson and McColl JJA) referred to that statement as follows: "[The statement] was intended to do no more than posit the possibility that the performance of the retainer, and what is learnt during it, may affect how the retainer is properly discharged". 84At [80], his Honour said: A solicitor's obligation is not simply to explain the legal effect of documents but to advise his or her client of the obvious practical implications of the client's entry into a transaction the subject of advice. As Allsop P pointed out at [5]: ..... Kirby P said in Cousins v Cousins [1991] ANZ Conv R 245 at p 248: "Lawyers are trained, and the law of their profession requires them to be vigilant for their clients' interests. They must sometimes step in front of their client. They must provide advice to them against the follies of plans having a legal character, the full legal ramifications of which the client may not understand."

[14]

The evidence of Mr Moses 85As I have said already, Mr Moses is an extremely well qualified conveyancing solicitor. He graduated with First Class Honours from Sydney University in 1963 and was admitted as a solicitor that year. He was partner with the well-known conveyancing firm of Messrs Murphy and Malone from 1970 until 2002 when the firm amalgamated with Hunt & Hunt. At that time he was the senior partner of Murphy and Malone. He was a lecturer in conveyancing at Sydney University Law School from 1969 to 1975 and a member of Law Society Committees relevant to property and conveyancing for 30 years. 86In his report of 31st August 2012 (at [12]), Mr Moses acknowledges that it's difficult to obtain amendment to a standard form franchise agreements. In his experience they are normally offered on a take it or leave it basis. Notwithstanding this, it is standard practice for a solicitor to try to obtain better terms, and to advise the client "not to proceed with the purchase of the business from the existing franchisee" unless the franchisor agrees to a provision compelling it to exercise its option to renew, or to compensate the purchaser for the loss of the business if it did not. Naturally if the client wishs to proceed anyway, the solicitor is bound to follow instructions. 87Mr Moses also accepted that the commercial experience of a client was a relevant consideration. With a relatively sophisticated client, there may be no need to advise on financial matters. (Moses report [28]). However, it would remain necessary to emphasise, in advising the client, the limited nature of the tenure that could be assured and the risks involved if the franchisor failed to renew the lease. If the solicitor doubted the client's grasp of the financial implications he or she should advise the purchaser to seek financial advice from a properly qualified expert "as to the viability of the franchise, but also as to its ability to service any borrowings necessary to finance the acquisition of the business". 88In cross-examination, Mr Moses accepted the difficulties of negotiating with the franchisor in relation its standard-terms contract. However, he pointed out at [175.10T] the following: A solicitor is not just there to advise in relation to the law. When a solicitor sees something in an agreement which obviously constitutes a serious risk to the client in circumstances which can be, which can possibly occur it is usual to point out not merely that that is what the document says but also that the risk is such that notwithstanding the fact that it might be difficult to get the other party to change, it is nevertheless appropriate to try. He again emphasised that if the solicitor is reasonably satisfied that the client does understand the risk "then of course you are bound to follow your instruction". 89It was clear from Mr Moses' evidence that proper practice of conveyancing solicitors is flexible in the sense of being responsive to the client's "commercial nous, experience, sophistication". Each case has to be looked at in that light. 90I accept Mr Moses' evidence. 91He also said that if an attempt was made to negotiate with the franchisor, notwithstanding the usual difficulty of that task, some concession might be obtained. For instance it may have been possible to secure an agreement to exercise the first option, which would have guaranteed the client four and a half years. 92Although Mr Andresakis was not called as an expert, his conduct was clearly consistent with Mr Moses' opinion as to proper professional practice in the circumstances. Mr Andresakis read the documents carefully, advised about the risks in terms of the shortness of the guaranteed tenure and the uncertainty about the franchisor exercising the options, and attempted to negotiate a more favourable arrangement with the franchisor. Although he was relieved when Mr and Mrs Navaei decided to go elsewhere, I formed the view that he would have continued to act had they insisted on it.

[15]

Conclusions about liability 93It seems to me that the judgments in Papa, the opinion of Mr Moses and the example of Mr Andresakis persuade me that a reasonably prudent solicitor in the position of the defendant may have done more than Mr Sayan in two respects. First, by his own account he made no mention of the obvious financial risk involved in paying $260,000 goodwill for guaranteed tenure of 18 months only. He did no more than explain the legal effect of the document and left it to Mr and Mrs Navaei as to whether they wanted to go ahead or not. He did not advise against entering into the document in the circumstances because of sub-article 2(f), he did not see that as his role (224.30T). Nor did he regard it as his role to advise whether in the circumstances Article 2(f), read with Article 24 was "an appropriate one". Nor did he attempt to renegotiate the terms with 7-Eleven. In this regard I leave aside all questions of causation. 94The practical implications of JJES's entry into the proposed purchase of the Burwood Heights store were obvious in the sense used by Macfarlan JA in Papa at [80]. However, these omissions by Mr Sayan need not constitute negligence. From the law, the opinion of Mr Moses and to some extent the practice of Mr Andresakis, it must be borne in mind that the standard of professional practice accommodates a degree of flexibility according, to borrow Mr Moses' language, the commercial nous and sophistication of the client. In other words, the financial ability of the client to look out for himself or herself. And Mr Sayan did so. Not only did he form the view they had already committed themselves to the business (225.15T) but also he gave this evidence: Q. Would you agree with me that part of your role in giving advice was also to give advice not to enter the business because of Article 2(f). Not to enter into the agreement? A. It varies. If the purchaser is a purchaser who has never purchased a business, the first time he is getting into business, it is my role to warn him or her that he or she is a first time purchaser and it might not be advisable. But if a person is experienced and done franchise business in the past as in this occasion, and knowledgeable and knowing very well the impact of such clause, it is not necessary for a solicitor to, to advise whether or not they should go ahead. (Sic) 95This evidence, it seems to me is entirely consistent with the law, expert opinion and practice of competent conveyancing solicitors as disclosed by the evidence before me. 96In my judgment, it was reasonable for Mr Sayan to form the view that Mrs Navaei was, at least in relation to small retail businesses, including franchise arrangements, a person, on her own account, of significant commercial nous and sophistication. I have set out my findings in relation to her background. In my judgment they support Mr Sayan's conclusion. 97Moreover, I am satisfied that she had researched 7-Eleven franchises, had made extensive inquiries, had herself negotiated the purchase price with the outgoing franchisees, paid a deposit and otherwise committed herself to the venture. Notwithstanding the possible financial ramifications, I am of the view that she was confident she could build up the business sufficiently to make it attractive for 7-Eleven to exercise its option or options. In my judgment this was not a case where the somewhat extended duty prescribed in Papa, and spoken of by Mr Moses was engaged. In my judgment, Mr Sayan had no obligation in the circumstances of this case to do more than he did. 98This conclusion is really tantamount to a conclusion that in accordance with the provisions of s 5B Civil Liability Act 2002 (NSW) Mr Sayan was not negligent in failing to take precautions against a risk of harm. 99The relevant risk of harm is the risk of economic loss arising from a decision by 7-Eleven not to exercise either of the three year options at the expiration of the term of 16th September 2008. The relevant precaution included the following steps: (i)Identifying and advising of that obvious financial implication; (ii)Seeking instructions to attempt to negotiate an amendment; (iii)Advising the client against proceeding with the purchase if the amendment could not be secured. 100The risk was foreseeable. If 7-Eleven did not renew the lease after 18 months JJES would have no hope of recouping its outlay let alone making the expected profit. The risk was not insignificant. For ordinary small business people, the amount involved was large and they had no control over what 7-Eleven would do in the exercise of its commercial judgment to advance its own interests. 101However, I am not satisfied that in the circumstances a reasonable solicitor in the position of Mr Sayan would have taken those precautions. It was not obvious that harm would occur if the precautions were not followed. 7-Eleven may make no concessions, but against the background of operating the Burwood Heights store for a number of years, there was no real suggestion that they did not see its continuation as being in its own commercial interest. As I have said, the seriousness of the harm if it eventuated was significant for ordinary small business people. And the burden, from the point of view of the defendant, of taking precautions to avoid the risk of harm was slight. It involved no more than stating the obvious and perhaps making a phone call to 7-Eleven. 102Notwithstanding these considerations, I am of the view that in the circumstances a reasonable person in Mr Sayan's position would not have taken the precaution suggested. This judgment relates, as I have explained, to the commercial nous and sophistication of the clients. Neither the law nor good professional practice requires him to refuse to act. Quite the contrary according to Mr Moses in a case calling for a proper warning, once the warning is given the solicitor should continue to act on the basis of informed instructions. But as Mr Sayan's judgment was correct about the commitment of JJES to the purchase and the commercial nous of those responsible for controlling it, I am of the view that reasonable care did not require him to slavishly follow steps which were of no real practical utility in the circumstances of the present case. Although one can accept that it is sensible always to try and secure a better arrangement for a client, Mr Sayan had previous experience with 7-Eleven refusing to negotiate and there is no requirement that he undertake an exercise in futility. 103In my judgment Mr Sayan was not negligent.

[16]

Causation 104The particular harm suffered in the present case was the economic loss suffered when 7-Eleven resolved not to exercise the second option for three years beyond 16th September 2011. Assuming I am wrong in my conclusions about negligence, I am of the view that the failure of Mr Sayan to take the precautions I have identified was not a necessary condition of the occurrence of that harm. First, I am of the view that Mr and Mrs Navaei were well aware of the terms of the lease, the store agreement and the interaction of them, from their own inquiries with 7-Eleven prior to instructing any solicitor, and from the advice given by Mr Andresakis. The advice given by Mr Andresakis would not necessarily have absolved Mr Sayan of liability if he had been informed of it and told them to disregard it because 7-Eleven always renew their leases, allegations which I have rejected: Grant v Sun Shipping Co Ltd [1948] AC 549. I repeat that is not this case. 105I am also of the view that Mr and Mrs Navaei appreciated the risk and were prepared to take it because after extensive inquiries they had decided that the purchase of the Burwood Heights store was a venture in which they wished to be involved. All commercial activity involves risk; there can be no profit without the risk of failure. They saw themselves as successful business people; they knew the risk and were prepared to take it. 106For the same reasons, had Mr Sayan positively advised them, contrary to his perception of his role, against proceeding with the purchase, they would have rejected that advice and gone ahead with the purchase anyway. For the reasons I have rehearsed they were committed to it. 107On the basis of the evidence of Mr Andresakis and Ms Howarth attempting to negotiate with 7-Eleven it would have been an exercise in futility. Ms Howarth would have rejected all overtures as she always did. Mr Moses' approach that the solicitor should always try is laudable, with some franchisors it may be successful, but on the evidence before me not with 7-Eleven. 108I should also point out that Mr Moses' expectation was that the best that might be done with a flexible franchisor was to secure a commitment to exercising the first option. That happened here in any event. 109I do not find that but for the posited negligence, the economic loss suffered by Mr and Mrs Navaei would not have occurred. Rather, it was the coming home of the commercial risk they took in order to make the profit they envisaged. 110No question arises in the present case about the appropriate scope of a negligent solicitor's liability.

[17]

Quantum 111The evidence in quantum was scant, but I must do my best with the slight material available: Fink v Fink (1946) 74 CLR 127 at 143; State of New South Wales v Moss [2000] NSWCA 133; (2000) 54 NSWLR 536 at 554 [72] and 559 [87]. 112I have already characterised the loss as the loss of the opportunity to sell at a profit. A rebate was paid on the franchise fee, and the training fee, if that is what it was, did not go to waste. 113At the time JJES paid goodwill in the sum of $206,000 the best it could have hoped for was 7 years and 6 months tenure. In fact, it achieved 4 years and 6 months tenure. The franchise terminated 3 years short of the best possible outcome. Naturally, the expectation of JJES was that the business could be improved so that a greater sum could be achieved on resale. However, although I have heard there were formulae adopted and applied for calculating goodwill in relation to 7-Eleven businesses I was not provided with evidence of how they operated, or of gross turnover or net profit for the Burwood Heights store during the tenure of JJES. 114The best I can do is make an informed guess using $206,000 as my starting point. I also ought to make a discount to take account of the entrepreneurial risk inherent in the purchase and conduct of a business. If one divides $206,000 by 7.5 a quotient of around $27,500 is produced. Apportioning that sum to the lost 3 years, suggests a figure of $82,400. There have, however, of course, been changes in the value of money since 2007 and the damages should be assessed in today's values. On the other hand, as I have indicated a discount is called for to take account of the entrepreneurial risk. There was always a risk, regardless of any putative negligence, that the business would fail, or that for other less drastic reasons economic loss would be sustained. 115Balancing these considerations together, had I been of the view that Mr Sayan was negligent and that his negligence caused economic loss, I would have assessed damages in the sum of $85,000.

JJES Pty Ltd v Sayan

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Judgment (19 paragraphs)

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Cases Cited (11)

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