238 CLR 304
Forrest v Australian Securities and Investments Commission [2012] HCA 39
Source
Original judgment source is linked above.
Catchwords
ss 51AD, 51AE, 52, 82, 87
Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth), cll 3, 6, 6B250 CLR 640
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60218 CLR 592
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25238 CLR 304
Forrest v Australian Securities and Investments Commission [2012] HCA 39225 FCR 508
Residual Assco Group Ltd v Spalvins [2000] HCA 33
Judgment (10 paragraphs)
[1]
Solicitors:
Haarsma Lawyers (Appellants)
Clayton Utz (Respondent)
File Number(s): 2015/11552
Decision under appeal Court or tribunal: District Court of New South Wales
Jurisdiction: Civil
Date of Decision: 17 December 2014
Before: Judge Norton SC
File Number(s): 13/33605
[2]
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
[3]
Judgment
MACFARLAN JA: I agree with Leeming JA's conclusion that the appeal should be dismissed with costs because the appellants have not demonstrated that the primary judge erred in concluding that they did not suffer loss or damage by reason of the conduct of the respondent alleged to have been in contravention of the Trade Practices Act, s 52 or s 51AD.
I add the following observations.
Determination of the issue of causation of loss in this case requires consideration of whether Mr Morgan, on behalf of the appellant company, relied upon the information contained in the "monthly cash flow projection" spreadsheet that the franchisor provided to him.
The documents that Mr Morgan signed at the time that the appellant company entered into the franchise agreement clearly stated that the franchisor did not make any promises or representations about financial matters. In cross-examination, Mr Morgan frankly conceded that he appreciated that the documents said this and accepted that he knew and understood that the franchisor was not making any promise that any information that it had supplied (which included the spreadsheet) "would turn out to be accurate". Earlier in his cross-examination, he had stated that he had given the spreadsheet to his accountant, Mr Julian, and had discussed the documents that the franchisor had given him, including the spreadsheet, at three meetings with Mr Julian. Consistently with this, Mr Morgan said that in causing the company to enter into the franchise agreement he was relying on Mr Julian's advice in relation to the documents and agreed with the proposition that "That's what was important to you, Mr Julian's advice on that material?".
In light of this evidence, it is clear that the primary judge did not err in concluding that the appellants did not rely upon the conduct of the franchisor alleged to have contravened the Trade Practices Act.
I add the following as to whether the franchisor in fact engaged in any misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act.
On appeal, the appellants' case was confined to four alleged errors in the monthly cash flow projection spreadsheet and three other matters.
The four alleged errors in the spreadsheet (regarding amounts of $26,000 representing consignment fees, $10,000 and $30,000 to be deposited to accounts shown in the spreadsheet and $5,188 shown as a negative balance in one of those accounts) each related to unusual features of the spreadsheet. To a person without accounting expertise, who was unable to understand the detail of the spreadsheet, these features were liable to render the spreadsheet as a whole, and in particular its final totals, misleading. However, the role that each of those four figures played in the calculations in the spreadsheet would have been readily discernible to a person with accounting expertise, at least, as in the case of Mr Julian, if the person was aware of the consignment agreement between the parties.
Thus, if the franchisor had provided the spreadsheet to Mr Morgan as an unadvised person without accounting expertise and Mr Morgan had acted upon it forthwith, misleading and deceptive conduct may have occurred. However, if the spreadsheet was acted upon at all, it was acted upon in circumstances where the franchisor was informed in writing by Mr Morgan that the franchisee had obtained advice from an independent accounting advisor, being Mr Julian. Indeed, Mr Julian's signed acknowledgement that he was the franchisee's accounting advisor, accompanied by his firm's stamp, was provided to the franchisor before the franchise agreement was executed.
In considering possible contraventions of s 52, it is necessary to have regard to the whole of the alleged representor's conduct up until the time at which it is acted upon (Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; 218 CLR 592 at [39]). Account must also be taken of the nature of the parties involved and their knowledge of each other's characteristics (ibid, [41]-[44]; see also Forrest v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486 and its repeated references to the need to consider the "intended audience" for statements alleged to have been misleading or deceptive).
In the present case, the effect of the appellants' submissions was that the franchisor's provision of the spreadsheet to Mr Morgan well prior to the making of the franchise agreement gave rise to representations about the accuracy of the matters contained in it which continued to be operative until the time of contract. Assuming this to have been the case, the person to whom the representations were addressed was by that stage a person whom the franchisor knew had independent accounting advice in relation to the proposed transaction. It was not therefore a case of representations being made to "plaintiffs of limited experience acting without professional advice in rushed circumstances" (compare to Butcher at [50]). Rather, because of Mr Julian's known role in giving accounting advice, Mr Morgan and the company he represented had become persons who the franchisor could expect to understand the subtleties of the spreadsheet and who would not simply rely upon the totals in it without examining it to ascertain how they were arrived at. It follows that the franchisor's conduct was not misleading and deceptive.
Of the other three matters that the appellants relied upon on appeal (see [7] above), two (to the effect that the business would be expected to earn $150,000 per year) were said to arise, at least primarily, from the spreadsheet but were inconsistent with the spreadsheet as properly understood. As a result, a conclusion that the franchisor made a representation to that effect was not available, at least not a representation continuing up to the date of the franchise agreement.
The third matter was an alleged representation "that the cost of Snap-On Products was approximately 65% of the List Price of Snap-On Products". Such a representation was discernible from the spreadsheet and was arguably misleading and deceptive but the appellants' claim based on it is answered by the conclusion stated above that the primary judge did not err in finding that Mr Morgan did not rely upon the spreadsheet.
LEEMING JA: This appeal turns on its own facts. The first appellant (franchisee) entered into a Franchise Agreement, on 27 October 2009, with the respondent (franchisor). There were, at the time, two directors and shareholders of the franchisee, Mr Paul Morgan, who is the second appellant, and Mr John McNeill, who did not give evidence and who was not a party to the litigation. The Agreement gave the franchisee the right to operate a "Snap-on" franchise: in essence, the exclusive right to sell various "Snap-on" branded tools and pieces of machinery throughout a large area in remote South Australia (including Ceduna, Roxby Downs and Olympic Park).
The franchisee fell into arrears with its franchisor. The Franchise Agreement was terminated, and the franchisor commenced proceedings in the District Court of New South Wales for recovery of the debt. It sued Mr Morgan on a guarantee. A verdict and judgment was entered in favour of the franchisor against both appellants, to which no challenge is made on this appeal.
Most of the eight days of the trial were occupied by the issues raised by the appellants' cross-claim, which the primary judge dismissed. Speaking generally, two aspects of that cross-claim were sought to be re-agitated on appeal. These were based on contraventions of ss 52 and 51AD of the Trade Practices Act 1974 (Cth). Both aspects were primarily directed to a spreadsheet described as a "monthly cash flow projection" which had been given to Mr Morgan in late 2008 prior to the Franchise Agreement being entered. The primary judge found that aspects of the document were misleading, although her Honour rejected some of the allegations advanced by the cross-claimants. However, her Honour found that Mr Morgan did not rely on the document when entering into the Franchise Agreement.
The claim based on s 51AD contended that the same spreadsheet breached the Franchising Code of Conduct. It was common ground that the Code (which is a schedule to the Trade Practices (Industry Codes - Franchising) Regulations 1998) was applicable, and the Code (or most of it) was attached to the contract. It was said that the spreadsheet contained "earnings information" which was not sufficiently disclosed, in contravention of the Code.
The primary judge accepted the franchisor's submission that the spreadsheet was not part of the disclosure documents, and so was not subject to the obligations in the Code. In addition, the primary judge found that it was not relied on by Mr Morgan, and so did not give rise to remedies under the Trade Practices Act. Very properly, her Honour determined damages against the possibility that she was wrong on liability.
The appellants appeal from the dismissal of their cross-claim. They challenge the findings adverse to them summarised above. The franchisor challenges, by way of notice of contention, certain of the findings adverse to it mentioned above.
The appellants' case on appeal is primarily documentary. That reflects the fact that the primary judge found all witnesses of fact to be unreliable, with Mr Morgan considered by her Honour to be "less unimpressive" than the two main witnesses called by the franchisor: at [228]. Her Honour said that the evidence of all three principal witnesses "must be checked against contemporaneous documents and evidence".
For the reasons which follow, the appellants have failed to demonstrate appellable error in the findings of the primary judge that the spreadsheet was not relied on in the decision to enter into the Franchise Agreement. That is sufficient to require the appeal to be dismissed.
[4]
The spreadsheet provided to the appellants
The primary judge recorded at [13] that "[a] great deal of time during the hearing was spent examining this document". The same was true of the appeal.
The spreadsheet contains serious errors. It purported to amount to a cash flow projection over the first 12 months of the franchise on various assumptions. It was not disputed that the spreadsheet proceeded on the basis that $10,000 of products would be sold each week. (The Court was told this represented amounts exclusive of GST; the evidence as to this on one view is equivocal, but nothing turns on it for the purposes of the appeal.) The assumptions included that of the $520,000 of annual sales, $144,000 would be paid for, relatively rapidly, either by cash or through two mechanisms provided by the franchisor (described as "ERA" and "Open Accounts"). However, 60% of total sales would be on "Revolving Accounts" or "RA", and would take longer to be paid. The balance ($64,000) would be unpaid at the end of the period. (No allowance was made for bad debts in the spreadsheet, nor was any complaint made of this.)
The spreadsheet proceeded on the basis that the franchisee would contribute $10,000 into a "Business Account" and $30,000 into something described as "RA Builder Balance". Entries in that row of the spreadsheet drew down on the RA Builder Balance over the opening months of the period by an amount equal to 65% of the sales made each month less the amounts collected. Functionally, this reflected the drawing down of what might be described as "working capital". It was common ground that the spreadsheet contained an error in this respect. In the ninth month, the spreadsheet permitted a negative amount to be found in the RA Builder Balance of -$5,188.40. It was common ground, and the primary judge found, that the consequence was to inflate the amount of cash in hand at the end of the period by $5,188.40. (Functionally, it was as though working capital of $35,188.40, rather than $30,000, had been used to pay for replacement stock purchased in the first nine months.)
The spreadsheet proceeded expressly on the basis that the average cost of inventory would be 65% of the list price (giving a gross margin of 35%). In addition, a row of the spreadsheet made provision for a 3% cash discount for stock purchases. The 3% was calculated upon the cost price, not the list price. The upshot is that the spreadsheet reflected a gross margin including the cash discount of around 36.8%.
[5]
The entry by the appellants into the Franchise Agreement
Between late 2008, when Mr Morgan first received the spreadsheet, and October 2009, when his company executed the Franchise Agreement, Mr Morgan raised with his friend Mr McNeill the possibility of acquiring and operating a franchise. A decision was made to operate the business through a company (the first appellant's name is derived from the men's initials). Mr McNeill became a 49% shareholder and one of two directors of the franchisee.
The respondent emphasised the temporal gap between the provision of the spreadsheet and entry into the Franchise Agreement. However, telling in favour of the continuing importance of the spreadsheet is that relatively shortly before entering into the Franchise Agreement, Mr Morgan requested, and received, a further copy of the spreadsheet "showing the income and expenditure". His expressed purpose in doing so was that "we are going to go into isuzu in the next week to see if we can get pre approved to finance the truck so we can get the ball rolling". Even that needs to be assessed in light of the email attaching the spreadsheet. He was told by the franchisor's business manager at the time: "You may need to change some of the figures[.] Any problems give me a ring". Mr Morgan could not recall whether he took any further steps following receiving a second copy of the spreadsheet.
[6]
Causation and the Trade Practices Act
Only if a contravention of s 52 is causally connected with a loss may a remedy under s 82 or s 87 issue. The High Court observed in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525 that the word "by" in s 82 expresses the concept of causation, although without defining or elucidating it.
True it is, as the appellants emphasised, that a representation which is calculated to induce entry into a contract may readily be inferred to have that effect: Gould v Vaggelas (1985) 157 CLR 215 at 236. But ultimately, the question is one of fact.
The primary judge found that there was no causal connection between the misleading aspects of the spreadsheet and the entry into the Franchise Agreement at [267]:
"Looking at all of the circumstances I find Snap-on have not contravened s 52 of the TPA and Mr Morgan did not rely on the representations in the spreadsheet when he entered into the agreement. He has not given evidence of the advice he was given by Mr Julian but he has agreed he received that advice and relied on it when executing the documents. By reading and executing the documents he must have been aware that Snap-on were making no representations other than those contained in the Disclosure Document."
There is a difficulty with the first half of the first sentence of that paragraph. It is true that there are occasions when a corporation may pass on information which is misleading or deceptive, but still not itself contravene s 52: see Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; 218 CLR 592 at [38]-[40], applying what was said in Yorke v Lucas (1985) 158 CLR 661 at 666. That may occur where, for example, an agent did "no more than communicate what the vendor was representing, without adopting it or endorsing it". But that is not this case.
It is clear that the franchisor held out the methodology in the spreadsheet as being appropriate to be used, perhaps with adjustments, by Mr Morgan to predict the cash flow of the franchise he was considering acquiring. It is also clear from earlier in her Honour's judgment, including in the immediately preceding paragraph [266], that (a) she found that the spreadsheet was misleading, and (b) it may have misled Mr Morgan. This is not a case like Butcher v Lachlan Elder Realty.
In Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304 at [24], French CJ noted that the question of whether conduct is misleading is "logically anterior to the question whether a person has suffered loss or damage thereby". That passage was cited with approval in the joint judgment in Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; 250 CLR 640 at [49].
[7]
The evidence and findings on causation
In the present case, the appellants claimed that the spreadsheet contributed to their decision to enter into the Franchise Agreement. It was to that issue that the balance of [267] was directed, and only if there be appellable error in her Honour's finding can this aspect of the appeal succeed.
As noted above, this is not a case where some erroneous information was provided almost a year prior to the contract being executed. On 31 August 2009, two months before the Franchise Agreement was executed, Mr Morgan requested another copy of the spreadsheet, because he was seeking pre-approved finance for the truck. Mr Morgan also gave evidence that it was provided to Mr Julian, the accountant who advised him prior to entering the agreement. That is supportive of his continuing reliance on at least some aspects of the spreadsheet. However, a deal of evidence detracts from that conclusion.
First, it is unclear on the evidence whether Mr Julian gave advice in relation to the errors in the spreadsheet. Some of the errors were obvious, others less so. The fact that the eighth column was "hidden" in the version given to Mr Morgan would have been readily apparent. The negative RA Builder Balance in the ninth column is also moderately conspicuous - it is the only negative amount in the entire table. The re-inclusion of the 5% consignment fee is more opaque, but it is clear that something described as the "2112 + 2109 Accounts" is added each month into the Business Bank Account and that it is different from the monthly gross profit. It is therefore the sort of entry which is apt to attract attention by anyone familiar with cash flow projections, because it is significant and recurring and because it goes directly to the bottom line (indeed, it is literally the row immediately above the "Closing Balance" which is highlighted as the "Business bank account").
In accordance with the Franchising Code of Conduct, the respondent required Mr Morgan to acknowledge and declare that he had received legal and accounting advice from a person who was not an independent legal advisor but who was an independent accounting advisor. Also in accordance with the Code, the advisor was also required to sign the documents. That occurred.
Mr Julian was not called. Mr Morgan conceded that he continued to practise as an accountant in Adelaide, and there was no "reason why he'd be unable to give evidence in these proceedings".
[8]
The Franchising Code of Conduct
The appellants contended that the primary judge erred in concluding that the spreadsheet was outside the scope of the disclosures required by the Franchising Code of Conduct. The Court was taken to divergent views on the operation of the Code in Manhattan (Asia) Ltd v Dymocks Franchise Systems (China) Ltd [2014] FCA 1143; 225 FCR 508 and Australian Competition and Consumer Commission v South East Melbourne Cleaning Pty Ltd (in liq) [2015] FCA 25. Both were reserved first instance decisions. The former was interlocutory, although it appears to have been fully argued. The latter consisted of reasons for the making of consent orders, in circumstances where not only was there no contradictor, but also the respondents were not represented. The inconsistency in approach may follow from the fact that the former decision was delivered shortly after judgment was reserved in the latter.
The primary judge was not taken to the first Federal Court judgment (I mean to convey no criticism; it was only delivered a fortnight before the trial began). The second Federal Court judgment post-dated the judgment of the primary judge.
The appellants contended that the former decision, to the extent that it held that a document not purporting to be part of the disclosure documents, did not have to satisfy the requirements of the Code, was incorrect and should not be followed. The respondent maintained the converse submission.
In my view, it is not desirable to express any view about those decisions, or indeed any view about whether the primary judge was correct to conclude that the Code did not apply to the spreadsheet. The issue is not unimportant and, if a view is expressed by this Court, it is apt to impact upon other parties who have not been heard: cf Residual Assco Group Ltd v Spalvins [2000] HCA 33; 202 CLR 629 at [18].
This appeal can be resolved on a narrower basis. Not only did the primary judge find that there was no contravention of s 51AD, but her Honour also, separately, found that there was no causal connection between the spreadsheet and the decision to enter the Franchise Agreement. The primary judge concluded at [280]:
"Further, I have found that neither JM & PM nor Mr Morgan in the relevant sense relied on the document when entering into the Franchise Agreement and thus I find neither is entitled to damages under s 82 for breach of the Code, nor to the franchise being set aside in accordance with s 87(1)."
[9]
Endnote
By the Competition and Consumer (Industry Codes - Franchising) Repeal Regulation 2014 (Cth).
[10]
Amendments
12 November 2015 - [62] - "whether" replaced by "where".
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 12 November 2015
Parties
Applicant/Plaintiff:
JM & PM Holdings Pty Ltd
Respondent/Defendant:
Snap-on Tools
Legislation Cited (4)
Trade Practices Act 1974(Cth)
Competition and Consumer (Industry Codes - Franchising) Repeal Regulation 2014(Cth)
It was common ground that in fact the average margin achieved in 2007 by Snap-on franchises throughout Australia was somewhat less than 35% (in fact, 32.6%). Small differences in margin, unsurprisingly, have an appreciable impact on profitability. Had the average of 32.6% been used in the spreadsheet, the Business Bank Account balance at the end of 12 months would have been $12,480 less than was shown. An attempt was made at trial and on appeal by the respondent to defend this, by reference to evidence that Mr Morgan had been told and had believed the margin was "around one third"; it will not be necessary for the purposes of this appeal to address the evidence and submissions on that issue.
Further, the franchisee's initial stock was provided on consignment, and a 5% "consignment fee" was payable at the time of sale until the consignment had been paid for. Aside from the cost of stock, the three largest disbursements shown on the spreadsheet were - and by a considerable margin - leasing of a van ($30,000), fuel ($33,600) and the consignment fee ($26,000, being 5% of the assumed total annual sales of $520,000). However, although the consignment fee was properly included as a disbursement, and thus was subtracted from the cash flow, it was also added back into the cash flow in a separate row in the spreadsheet. On one view, favourable to the respondent, that reflected the fact that the franchisee was receiving a credit towards its existing indebtedness for the initial stock. But that was not how the amounts were described. The largest font on the spreadsheet was the description on the bottom right corner of "Business bank account" which included the $26,000 of consignment fees which had been added back into the cash flow.
The consequence was, as the primary judge found, that the amount stated in the Business Bank Account at the end of the period was overstated by $26,000. The respondent conceded that "[i]t is over stated, we are not challenging that finding."
The spreadsheet highlighted that at the end of the year, the franchisee would have $120,000 of stock, would have accounts receivable of $64,000, and would have a "Business Bank Account" with a balance of $87,752.48. The errors in the spreadsheet relating to the consignment fee and the $5,188.40 by themselves overstated the position by more than $30,000. The use of a margin of 35%, as opposed to 32.6%, when added to those errors caused the Business Bank Account to be overstated by almost double what it should have been.
To anticipate what follows, the overstatements of $26,000 and $5,188 were different in nature from the overstatement of the margin. The former could be discerned on the face of the spreadsheet, although doubtless the ease with which the errors could be discovered would depend upon the sophistication of and the approach taken by the person reading it. On the other hand, the overstatement of the margin was an assumption which turned on matters known only to the respondent.
There were other errors in the spreadsheet. Some of the entries were misspelt ("Invenory", "EFPOS") and the entire column for the eighth month was "hidden" in the version given to Mr Morgan. There was also an amount of $100 per month which was treated in the same way as the consignment fee, and, as I understand the position, caused the amount in the Business Bank Account to be inflated by an additional $1,200. Nothing was said to turn on any of these matters.
The appellants maintained at trial and on appeal two additional ways in which the spreadsheet was deficient. They submitted that the spreadsheet did not make clear that the $87,752.48 incorporated the franchisee's contribution of a starting balance of $10,000 and the provision of $30,000 of working capital. The primary judge found that the spreadsheet sufficiently clearly explained those amounts.
Again, it will not be necessary to resolve the submissions directed to those amounts. It is sufficient to proceed on the basis that on any view the spreadsheet materially overstated the Business Bank Account balance at the end of the first year.
It seems probable, therefore, that the opening words of [267] are infelicitously expressed, to the extent that they convey that there was never a contravention of the statutory norm of conduct that a corporation must not mislead or deceive in trade or commerce. However, as was pointed out during the hearing of the appeal, what matters is not whether the document was misleading in the abstract and at some particular time, but whether, having regard to all the relevant circumstances of the case leading up to the entry into the Franchise Agreement, there was conduct which was misleading or deceptive or likely to mislead or deceive which was causally connected with the alleged loss or damage.
Mr Morgan also gave evidence about the advice he received from Mr Julian as follows:
"Q. You were satisfied you'd received sufficient advice from Mr Julian on the matters that were important to you?
A. Yes.
Q. Including the monthly cash flow projections?
A. Yes."
A little later in his cross-examination, Mr Morgan gave this evidence:
"Q. I suggest to you that you were at this time relying on inquiries you'd made of Mr Julian, his review of the documents you gave him and his advice on those documents?
A. I was relying on advice Mr Julian gave me with regards to this yes.
Q. That's what was important to you, Mr Julian's advice on that material?
A. Yes."
Those passages plainly support the finding in the second sentence of [267].
Secondly, Mr McNeill was not called. He had ceased to be a director of the franchisee by the time of trial. However, he had executed the Franchise Agreement on 27 October 2009 in the presence of Mr Julian. Again, there was no explanation of his absence.
Thirdly, the Franchise Agreement contained clauses squarely directed to the absence of any ongoing effect of the spreadsheet. Clause 29 was an entire agreement clause. It went beyond stating that the documents executed by the parties were the whole of the contract, by including in capitals:
"THERE ARE NO REPRESENTATIONS, INDUCEMENTS, PROMISES, AGREEMENTS, ARRANGEMENTS OR UNDERTAKINGS, ORAL OR WRITTEN, BETWEEN THE PARTIES HERETO OTHER THAN THOSE SET OUT HEREIN AND IN THE EXHIBIT HERETO."
Clauses 38 and 39 took the matter further. Clauses 38(2) and (3) were a representation, acknowledgement and warranty by the franchisee to the franchisor that:
"(2) Franchisee has not received from Snap-on any representations of Franchisee's potential sales, expenses, income, profit or loss, and has not received from either Snap-on, or anyone acting on its behalf, any representations other than those contained the Franchise Disclosure Document as inducements to enter this Agreement; and
(3) Franchisee understands that Snap-on makes no express or implied warranties or representations that Franchisee will achieve any degree of success in the operation of the Franchise and does not guarantee any return on investment or profit to Franchisee, and while Snap-on will provide Franchisee with training, advice and consultation as provided in this Agreement and the Franchisee Operations Manual, success in the operation of the Franchise depends ultimately on Franchisee's efforts and abilities and on other factors, including, but not limited to, market and other economic conditions, and competition".
Clauses 39(2) and (3) were acknowledgments that:
"(2) any advice and information given by Snap-on is not a representation, promise, term, condition, agreement, warranty or guarantee with respect to any of the matters referred to in the advice or information;
(3) in deciding to execute this Agreement, Franchisee did not rely upon any statement, representation or warranty made by Snap-on other than as set out in this Agreement."
To be clear, if those clauses stood alone, they would not necessarily be decisive. The position is as stated in Netaf Pty Ltd v Bikane Pty Ltd (1990) 92 ALR 490 at 502 (a passage not reproduced in 26 FCR 305):
"The appellants do not argue that cl 4 excludes the present claim, as a matter of law. Any such claim would be untenable, at least in this Court: see Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367, Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 98-99 and the authorities cited in those cases. The argument is put that cl 4 contains an admission of fact that no relevant representation was made: cf Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd (1989) ATPR 46-048 (Digest). In terms, cl 4 provides an admission that the purchaser did not rely upon any representations, not that no representation was made. But the two matters are closely related.
Keen Mar recognized that an exception clause, such as the present cl 4, as a matter of law, cannot exclude a claim under s 52 of the Trade Practices Act. But Morling J and I pointed out, in our joint judgment (at 53,146), that 'the fact that a claimant states, in an agreement into which he claims to have been induced to enter by misleading conduct, that he was not so induced may bear upon the question whether he should be believed in asserting that the misleading conduct was an inducement'" (emphasis added).
Fourthly, Mr Morgan was cross-examined about these clauses, at some length and with considerable effect. In particular, in respect of cl 38(3), he gave this evidence:
"Q. You see in paragraph 3 you represent, 'A franchisee understands that Snap-on makes no express or implied warranties or representations [that] franchisee will achieve any degree of success in the operation of the Franchise', you read that?
A. Yes, I read that.
Q. You knew that Snap-on was not making any express or implied warranty or representation that you'd achieve any particular degree of success in the operation of the business?
A. Yep.
Q. You knew that?
A. Yes.
Q. And you were content to give that representation?
A. Yes.
Q. You also read that, 'The franchisee understands Snap-on does not guarantee any return on investment or profit to the franchisee'?
A: Yep.
Q. You knew Snap-on was not guaranteeing any return on investment, that's correct?
A. That's correct, yes."
In relation to cl 39(2), Mr Morgan read the acknowledgement and agreed that he "knew and understood that Snap-on was not making a promise to you that that information would turn out to be accurate".
In relation to cl 39(3), the cross-examination was as follows:
"Q. ... [Y]ou read the acknowledgement that in deciding to execute this agreement the franchisee did not rely upon any statement, representation or warranty made by Snap-on other than set out in the agreement, you read that?
A. I did.
Q. You gave that acknowledgement by signing this agreement?
A. I did.
Q. You knew you were giving that acknowledgement?
A. I did.
Q. You had no difficulties in giving that acknowledgement?
A. No.
Q. That's because it was true?
A. If you say, I'd agree.
Q. You agree?
A. We already had the figures and everything given by the business manager.
Q. Can you answer my question please, Mr Morgan. I'll ask it again, you knew you had no difficulty giving this acknowledgement because you believed it was correct?
A. I didn't believe it was correct, but I gave the acknowledgment."
Consistently with what was said in the passage from Keen Mar and Netaf extracted and emphasised above, the primary judge was left to decide whether Mr Morgan was to be believed in his protests that notwithstanding that he said that he clearly understood the effect of the clauses in the Franchising Agreement, he continued to rely on the spreadsheet.
The primary judge found Mr Morgan's evidence of what he had relied upon more than five years earlier to be unreliable. The evidence amply permitted such a finding. For example, Mr Morgan's affidavit maintained that he gave the documents to Mr Julian, who said that it was a standard franchise agreement, and then added "Other than this, Mr Julian did not give me any advice" (affidavit sworn 24 November 2013, paragraph 138). His evidence in cross-examination, as will be evident from the foregoing, was directly contradictory, involving three meetings, and a deal of advice being given to him by Mr Julian. In any event, the finding of Mr Morgan's unreliability was not in any significant way sought to be challenged on appeal.
The ultimate question is whether it has been shown that there was appellable error in the findings by the primary judge on causation reproduced above. In light of the admissions elicited in cross-examination, coupled with the gaps in the appellants' case occasioned by the absence of Messrs Julian and McNeill, no such error has been shown.
That does not mean that in every case where there is an entire agreement clause, or where there are statements acknowledging the absence of any pre-contractual representation, the franchisee will inevitably fail; that is not the law. But the fact that such a clause may not absolve a defendant from liability does not mean that there was appellable error in the finding by the primary judge that Mr Morgan and his company had not shown that the spreadsheet impacted their decision to enter into the Franchise Agreement.
Counsel for the respondent emphasised, and counsel for the appellants acknowledged, properly, that the appeal would fail unless the findings of reliance at [267] and in the paragraph reproduced above could be overturned.
For the reasons earlier given, no appellable error is shown in relation to those findings. It was submitted on appeal that there was an important distinction in relation to the causality of the different alleged contraventions of s 52 and s 51AD. It was submitted that in relation to the latter, the question was whether Mr Morgan would have executed the Franchise Agreement had he been given details of the facts and assumptions on which the monthly cash flow projection had been based, and that this had not separately been addressed by the primary judge. I do not agree that this amounts to a material difference on the facts of this appeal. Mr Morgan was prepared to cause the franchisee to become bound, and to be bound himself as guarantor, on the basis that he was relying exclusively upon the documents disclosed within the agreement, and expressly on the basis that no earnings information was provided.
It was also put that Mr Morgan's affidavit evidence was that had there been disclosure, he would not have entered into the Franchising Agreement. The submission is true so far as it goes. However, the submission disregards Mr Morgan's cross-examination, and there was no error, in light of his cross-examination, in the finding made by the primary judge. In order to succeed on appeal it is necessary to establish appellable error in the finding that any contravention based on the spreadsheet played no part in the entry into the Franchise Agreement. I am unable to conclude that the appellants have done so.
I propose that the appeal be dismissed, with costs.
EMMETT AJA: The appellants, JM & PM Holdings Pty Ltd (JM&PM) and Mr Paul Morgan, claimed that they suffered loss and damage by conduct of the respondent, Snap-On Tools (Australia) Pty Ltd (Snap-On), that was engaged in in contravention of s 52 and s 51AD of the Trade Practices Act 1974 (Cth) (the Trade Practices Act), as in force at the relevant time. The conduct in question was engaged in in connection with the entry into between JM&PM and Snap-On of a franchise agreement. Mr Morgan guaranteed the obligations of JM&PM under the franchise agreement.
Snap-On sued Mr Morgan and JM&PM in the District Court for moneys owing under the franchise agreement when it was terminated. JM&PM and Mr Morgan filed a cross-claim for damages said to have been caused by the alleged contraventions. The alleged contraventions were the only defence offered to the claim made by Snap-On.
On 17 December 2014, for reasons published on that day, a judge of the District Court (the primary judge) directed a verdict and judgment for Snap-On in the sum of $113,329 against Mr Morgan and JM&PM. The primary judge also directed a verdict and judgment for Snap-On on the cross-claim. Her Honour ordered JM&PM and Mr Morgan to pay Snap-On's costs of the proceedings. Mr Morgan and JM&PM have now appealed to this Court from the orders made by the primary judge.
At relevant times, s 82(1) of the Trade Practices Act provided that a person who suffers loss or damage by the conduct of another person that was done in contravention of a provision of Pt IVB or Pt V may recover the amount of the loss or damage by action against that other person. Section 52, which is in Pt V, relevantly provided that a corporation must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. Section 51AD, which is in Pt IVB, relevantly provided that a corporation must not, in trade or commerce, contravene an applicable industry code. Under s 51AE, the regulations could prescribe an industry code for the purposes of Pt IVB and declare the industry code to be a mandatory industry code. By cl 3 of the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth) (the Regulations) (since repealed [1] ), the code set out in the Schedule to the Regulations was prescribed and declared to be a mandatory industry code.
The code set out in the Schedule is the Franchising Code of Conduct (the Code). Its purpose was to regulate the conduct of participants in franchising towards other participants in franchising. Clause 6 of the Code relevantly provided that a franchisor must, before entering into a franchise agreement, create a document (a disclosure document) for the franchisee. A disclosure document must, relevantly, be in accordance with Annexure 1 to the Code. Under cl 6B, a franchisor must give a "current" disclosure document to a prospective franchisee.
It was not disputed that the conduct relied on by JM&PM and Mr Morgan was conduct engaged in by Snap-On in trade or commerce for the purpose of s 52. It was also not disputed that Snap-On was relevantly a franchisor and that JM&PM was relevantly a prospective franchisee within the meaning of the Code.
Clause 19.1 of Annexure 1 to the Code relevantly provided that earnings information for the franchise, if it is given in a disclosure document, must be based on reasonable grounds. However, if earnings information is not given, cl 19.4 required that the disclosure document contain a statement that:
the franchisor does not give earnings information;
earnings may vary between franchises; and
the franchisor cannot estimate earnings for a particular franchise.
Under cl 19.2, earnings information could be given in a separate document attached to the disclosure document. Clause 19.3 provided that earnings information includes information from which historical or future financial details of a franchise could be assessed. Under cl 19.5, earnings information that is a projection or forecast must include, relevantly, the facts and assumptions on which the projection or forecast was based.
In November 2008, Snap-On, through its business manager, Mr Les Coppin, provided Mr Morgan with a monthly cash flow projection spreadsheet (the Spreadsheet). JM&PM and Mr Morgan asserted in their cross-claim that by providing the Spreadsheet, Snap-On represented that:
If JM&PM turned over an average of $10,000 per week, then at the end of 12 months it would have accessible cash of $87,752.48 in its business bank account and $64,000 in its accounts receivable;
JM&PM and Mr Morgan could expect to earn more than $150,000 per year from the proposed franchise business; and
The cost of Snap-On products is approximately 65% of the list price of Snap-On products.
JM&PM and Mr Morgan also alleged that the structure of the Spreadsheet obscured and concealed the fact that the sum of $87,752.48 identified in it included certain other amounts.
The cross-claim alleged that the provision of the Spreadsheet was misleading and deceptive or likely to mislead and deceive in contravention of s 52 of the Trade Practices Act. It alleged that, but for the provision of the Spreadsheet, Mr Morgan would not have incurred the costs associated with the incorporation of JM&PM, would not have caused JM&PM to enter into the franchise agreement, would not have entered into a deed of guarantee, would not have caused JM&PM to pay franchise fees to Snap-On and would have sought alternative employment at a level that was comparable with the employment previously held by him in the mining industry. It also alleged that, but for the provision of the Spreadsheet, JM&PM would not have entered into the franchise agreement and would not have paid franchise fees to Snap-On.
In addition, the cross-claim alleged that, by reason of the matters referred to above, Snap-On provided to Mr Morgan and JM&PM earnings information consisting of the Spreadsheet and that the earnings information failed to include the facts and assumptions on which the projection or forecast contained in the projection was based (as required by cl 19.5 of the Code). The cross-claim alleged that that constituted a contravention of s 51AD of the Trade Practices Act and that JM&PM and Mr Morgan had suffered the same loss and damage as a consequence of that contravention.
The primary judge found that Mr Morgan, and the other director of JM&PM, Mr John McNeil, expressly acknowledged that they understood that Snap-On did not make any representations. Her Honour concluded that Mr Morgan, by signing the relevant documents, had acknowledged that he was aware that Snap-On made no promises. Her Honour concluded that Mr Morgan could not be found to have relied on any representations made by the Spreadsheet. Her Honour found that Mr Morgan made the various acknowledgements on his behalf and on behalf of JM&PM. That included the acknowledgement that JM&PM did not rely on any statement made by Snap-On other than as set out in the agreement. Her Honour considered that a reasonable person in the position of Mr Morgan would have made enquiries of the franchisor, rather than signing an acknowledgement that he believed to be false.
The primary judge found that Mr Morgan took the documents, including the Spreadsheet, to his accountant, Mr Robert Julian, who gave him advice. Mr Morgan gave no evidence concerning the content of the advice, but agreed that he had the opportunity to receive it, that he did receive it, and that he acted on it. Mr McNeill gave no evidence, although Mr Morgan said that Mr McNeill was given the documents and was present at the meetings with Mr Julian.
The primary judge found that the Spreadsheet was misleading and contained errors and that Mr Morgan may have been misled by the document and may not have understood that the total amount that was projected to be in the business bank account included money not readily available to JM&PM. However, her Honour observed that Mr Morgan took independent advice on the franchise documents and the Spreadsheet and accepted that he had been told that he may need to alter some of the figures in the latter. He agreed that he had read the disclosure documents that he was given and signed the acknowledgements on behalf of JM&PM, including the acknowledgement that JM&PM did not rely on any statement made by Snap-On other than those set out in the agreement. Her Honour found that a reasonable person in the position of Mr Morgan, having taken advice, could not have formed the belief that the balance in question represented money that was available to the business after the first 12 months.
The primary judge found that, in all of the circumstances, Snap-On had not contravened s 52 of the Trade Practices Act and that Mr Morgan did not rely on any representations made by the Spreadsheet when he entered into the franchise agreement and guarantee. Her Honour found that by reading and executing the documents, Mr Morgan must have been aware that Snap-On was making no representations other than those contained in the disclosure document.
The primary judge concluded that the Spreadsheet could not realistically be considered to be part of the disclosure document. The Spreadsheet was handed over months before the franchise agreement was entered into and, when a second copy of it was provided, Mr Coppin informed Mr Morgan in writing that some of the figures may need to be changed. There was no evidence that Mr Morgan made any attempt to make any adjustment or seek advice on what adjustment needed to be made. Her Honour found it unlikely that he would have made no such enquiries if the document was central to his decision-making process. Her Honour found that neither JM&PM, nor Mr Morgan, in the relevant sense, relied on the Spreadsheet when entering into the franchise agreement.
There was no error on the part of the primary judge in concluding that, if there was a contravention of Pt IVB or Pt V of the Trade Practices Act, neither JM&PM, nor Mr Morgan, suffered loss or damage by conduct of Snap-On that amounted to such a contravention. I have had the advantage of reading in draft form the proposed reasons of Leeming JA. I agree with Leeming JA, for the reasons proposed, that the appeal should be dismissed with costs.