King v Cake It Away Pty Ltd & Ors

King v Cake It Away Pty Ltd & Ors - [2002] NSWIRComm 140 - NSWIRComm 2002 case summary — Zoe

[20]

106 Power of the Commission to declare contracts void or varied (1) The Commission may make an order declaring wholly or partly void, or varying, any contract whereby a person performs work in any industry if the Commission finds that the contract is an unfair contract. (2) The Commission may find that it was an unfair contract at the time it was entered into or that it subsequently became an unfair contract because of any conduct of the parties, any variation of the contract or any other reason. (3) A contract may be declared wholly or partly void, or varied, either from the commencement of the contract or from some other time. (4) In considering whether a contract is unfair because it is against the public interest, the matters to which the Commission is to have regard must include the effect that the contract, or a series of such contracts, has had, or may have, on any system of apprenticeship and other methods of providing a sufficient and trained labour force. (5) In making an order under this section, the Commission may make such order as to the payment of money in connection with any contract declared wholly or partly void, or varied, as the Commission considers just in the circumstances of the case. 4 The grounds upon which the applicant brings the proceedings as outlined in the summons are extensive. Because of the diverse nature of the evidence which was given in the proceedings it is necessary to set out in full a substantial part of these grounds: "8. Between March 1966 and September 1997 the applicant negotiated the purchase of a Cake It Away franchise with Tony Tartak and Michael Tartak, who represented themselves and the other respondents in these negotiations. 9. On 7 May 1997 the applicant signed the unfair contract entering into the Cake It Away franchise to be conducted from a shop at 1/194 Canley Vale Road, Canley Heights ("the shop") under the business name of Cake It Away (Canley Heights) ("the franchise business"). 10. The applicant conducted the franchise business between 4 September, 1997 and 13 April 1998. 11. Prior to entering into the unfair contract, the applicant was given two disclosure documents:- (a) In March, 1996 Tony Tartak gave him the March 1996 disclosure documents. (b) In February, 1997 Tony Tartak gave him the August 1996 disclosure document. 12. The following information from the August 1996 disclosure document induced the applicant to enter into the unfair contract and commence operating the franchise business: (a) On page 5 under the heading "the Cake It Away business" the statement "the easy step by step recipes are backed by well developed operational systems, making it easy for a person without prior cooking or pastry chef experience to learn to operate and manage the business after an initial period of intensive training." (b) On page 6 under the heading "concept and presentation of Cake It Away", the statement "Cake It Away has made a substantial investment in developing its corporate image establishing operational systems and further refining the Cake It Away business concept." (c) On page 19 under the heading "annual franchisee income projections", the statement "the information given has been compiled from data available to the franchisor through the operations of existing Cake It Away outlets" and "the directors of Cake It Away ((Franchising) Pty Ltd believe these assumptions are realistic having regard to the experience of Cake It Away outlets." (d) On page 21 under the heading "annual franchisee income projections", the statement "annual sale - four annual sale levels have been projected for Cake It Away franchises based on the performance of existing outlets in New South Wales." (e) On page 21 under the heading "annual franchisee income projections" the statement "gross profit - existing Cake It Away outlets have experienced a cost of goods sold including packaging of between 28% and 34% of gross sales depending on promotion and damaged stock. A cost of goods sold of 30% has been used in the projections." (f) On page 21 under the heading "annual franchisee income projections" the statement "accounting - estimated expenditure based on the anticipated needs of an independently owned Cake It Away franchised outlet. It has been assumed the ongoing bookkeeping functions are performed internally by the franchisee." (g) On page 20 under the heading "annual franchisee income projections based on existing outlets" the statements and in particular: (i) The level 1 income which was stated to be $5,000 per week (apart from the first two weeks of operation the applicant did not achieve sale of $5,000 per week); (ii) The level 1 net earnings of $59,058 per annum. (The applicant did not achieve sufficient sales to enable him to achieve such earnings); (iii) The level 1 net earnings percentage breakdown. (The applicant did not achieve sufficient to enable him to achieve such a percentage breakdown); (iv) The level 1 costs of goods sold percentage breakdown. (During the applicant's operation of the franchise business, the costs of goods sold percentage breakdown was approximately 35-36% not 30%; (v) The level 1 insurance percentage breakdown. (During the applicant's operation of the franchise business the insurance percentage breakdown was approximately 2.9% not 0.5%). 13. In addition to the representations made in the august 1996 disclosure document the applicant was induced to enter into the unfair contract by representations made to him by Tony Tartak that based on experience of other Cake It Away franchisers the applicant could expect the shop to turn over more than $5,000 per week. Details of those representations are set out in paragraphs 7 to 24 of the applicant's affidavit sown in these proceedings. 14. The March 1996 disclosure document contained a guarantee on page 6 in the following terms: "The Cake It Away Guarantee: Cake It Away guarantee that if a franchisee, during the first six months of operating a Cake It Away franchise does not have a period of four consecutive weeks where the turnover averages $6,000 per week, Cake It Away will refund to a franchisee the cost of leasehold improvements equipment and fittings and the initial franchise fee for training." Without notice to the applicant the guarantee did not appear in the August 1996 disclosure agreement. 15. In about May 1997, Tony Tartak completed a cash flow projection sheet for the franchise business (which he knew the applicant was obtaining to support an application for finance) and gave it to the applicant. It projected without any qualification:- (a) twelve months sales of $260,000 an average of $5,000 per week; (b) twelve months expenses of $184,904 an average of $3,555 per week; and (c) a resulting average profit of $1,444 per week. 16. The disclosure documents provided that the second respondent had agreed to comply with the franchising code of practice as at 1 January 1995. 17. The second respondent did not comply with the franchising code of practice in at least the following respects: (a) On page 6 of the code, dealing with the following requirement - "standard of conduct" - in this regard the respondents did not: (i) provide financial information in relation to the operation of franchise business that was reasonable and realistic: The information that the respondents provided in relation to projected income was inflated and did not represent the true earning potential of the franchise business; (ii) The respondents had access to the relevant financial information that would have enabled them to provide the applicant with realistic and reasonable financial information; (iii) The respondents therefore did not truly represent the risk that the applicant would be taking in purchasing the franchise; (iv) The respondents overvalued the equipment that the applicant would be acquiring when the franchise business commenced operation. (b) On page 8 of the code dealing with "disclosure document requirements" The respondents did not disclose that Tony Tartak, one of the second respondents corporate consultants, was an undischarged bankrupt in the March 1996 disclosure document and a discharged bankrupt in the August 1996 disclosure document. 18. Pursuant to the unfair contract the applicant paid, or was obliged to pay the second respondent: (a) an initial franchise fee of $35,000 (b) an initial fit out fee of $172,000 (c) an opening promotion fee of $5,000 (d) a franchise service fee equivalent to 8% of the weekly gross sales of the franchise business (e) a franchise advertising fee of 2% of the weekly gross sales of the franchise business.

[21]

Prior to opening the franchise business the applicant entered into a sub lease of the shop with the second respondent dated 2nd September, 1997. 20. In order to assist him to pay the franchise fee and other payments required by the franchise agreement and to make the shop ready for the franchise business the applicant: (a) borrowed $1000,000 from the Advance to cover the cost of the shop fit out and to purchase the equipment for the franchise business. (b) borrowed another $100,000 from the Advance Bank which was secured against the property 24/6 Clifford Ave, Canley Vale. (c) borrowed $35,000 from his brother John Sullivan which he used to pay the initial franchise fee. (d) later borrowed additional amounts from his brother totalling $14,000 over the expenses of the franchise business. 21. Pursuant to clause 3 of the unfair contract the second respondent agreed to provide training to the applicant and his initial staff at a level which was adequate to properly instruct the applicant and his staff in the efficient conduct of the franchise business and to provide supplementary training during the term of the franchise when appropriate. 22. The arrangement, whereby the applicant was funded to enable him to enter into the franchise agreement, was an unfair contract. 23. The loan agreements between the applicant and the Advance Bank Ltd and Advance Leasing Ltd were a necessary precursor for the applicant to enter into the franchise agreement which is itself unfair. 24. Advance Bank Ltd was and the Eighth Respondent (sic) is the banker for the First and Second Respondents and some or all of the Third, Fourth, Fifth, Sixth and the Seventh Respondents. Accordingly Advance Bank Ltd had a pecuniary interest in the successful expansion of that business including through the entering into agreements with franchisees. 25. The Fifth Respondent Mr Tony Tartak arranged the meeting between the applicant and Mr Mark Hudson an officer of the Advance Bank Ltd. That meeting occurred in early May, 1997 at the offices of the First and/or Second Respondent. The applicant never attended a meeting at the bank premises of Advance Bank Ltd. 26. The conduct of the Advance Bank Ltd in loaning money to the applicant was unfair in several ways including: (a) The Advance Bank Ltd by acting for both the franchisor and the applicant breached its fiduciary duty. (b) The Advance Bank Ltd, through its authorised employee(s) made negligent mis-statements both misrepresenting the financial strength of the franchise business and the level of support which would be provided by the franchisor. (c) The Advance Bank Ltd was negligent in that it failed to monitor and advise about the risks involved in the franchise operation. (d) Mr Hudson relied on Mr Tartak for the cash flow projection even though Mr Hudson knew that at least one franchise (the St Marys franchise) was not achieving the cash flow projections that had been made by Tony Tartak. (e) Mr Hudson did not tell the applicant about the St Marys franchise until after the applicant had made financial and other commitments to commencing the franchise business. (g)(sic) Mr Hudson made no enquiries about the applicant's capacity to run the franchise business but relied on the training and monitoring of the franchisor. (f) Mr Hudson relied on Mr Tartak's assessment of the applicant's capacity to make loan repayments rather than establishing the capacity independently. (g) Mr Hudson in the presence of Mr Tartak stated that the loan would be able to be paid off easily, when he knew or ought to have known that this was not the case and that the applicant was relying on the expertise of the bank to finance loans. (i)(sic) Mr Hudson knew or ought to have known that the applicant had already been refused a loan from his own bank in respect to the franchise operation. (j) Mr Hudson did not ensure that the applicant obtained professional and independent advise (sic) about the mortgage and the hire purchase agreement. Further Mr Hudson himself provided inadequate explanation as to the risks involved in committing to the mortgage and the hire purchase agreement. (k) Mr Hudson relied entirely upon the security provided by the applicant for the mortgage and hire purchase agreement instead of making a proper assessment of the applicant's capacity to meet the load repayments from the franchise operation. (l) The Advance Bank Ltd did not disclose to the applicant that the bank had a pecuniary interest in the expansion of the Cake It Away franchise business including an interest in the First and Second Respondents entering into franchise agreements with new secured franchisees. 27. The Hire Purchase Agreement with Advance Leasing Ltd is unfair in that: (a) The schedule indicates that the equipment was new whereas some or all of the equipment was second hand when purchased. (b) Advance Leasing Ltd knew or ought to have known that the value of the goods was substantially lower than the purchase price; and (c) Advance Leasing Ltd, as arranged through Advance Bank Ltd, relied solely on Cake It Away (Franchising) for the value of the equipment. 28. At all material times Mark Hudson held himself out as having the authority to act for and on behalf of Advance Bank Ltd and Advance Leasing Ltd. 29. The second respondent did not provide proper training to prepare the applicant, or his staff to conduct the franchise business. For example: (a) Bookkeeping for the franchise - The applicant's obligations in relation to keeping records for the franchise business were demonstrated in a session lasting about one hour. He was not given a manual. He was given only a one page document which was a copy of a month's transactions which he was to follow. He was not given any necessary practical exercises to learn. (b) Cake Decorating - The applicant was not shown how to decorate cakes. He had no experience and had to rely upon his staff member Marivic Herico who had minimal experience herself. (c) Baking - The applicant was shown briefly what to do and then left to do it himself. He was not taken through the baking process step by step nor was he shown how to operate all the machinery. (d) Health and Customer Relations - Two afternoons were spent training the applicant about very basic health and customer relations. He was also given time to serve customers in the Merrylands shop. (e) Ordering stock - The applicant was advised how to contact Cake It Away nominated suppliers. He was given a list of approved suppliers by Paul Jonak, manager of the Merrylands Cake It Away store. 30. After he opened the franchise business it became clear to the applicant that the second respondent had not provided new equipment for the fit out of the shop as required by the franchise agreement. The applicant relies on paragraphs 58 to 61 of his affidavit. 31. During the period in which the applicant conducted the franchise business sales only exceeded $5,000 per week on two occasions. (a) the first week's sales totalled $7,994.44; (b) the second week's totalled $5,075.63; (c) thereafter sales did not rise above $5,000 per week again. There was a steady decrease in sales; (d) gross sales for the period 1 September 1997 to 13th April 1998 (when the applicant closed the franchised business) totalled $89,203.65 an average of $2,787 per week for the thirty week period. 32. Despite his best endeavours the applicant was unable to increase sales from the franchise business so that by 14 April 1998 he was losing substantial amounts from the conduct of the franchise business. 33. The franchise business was open for trade seven days a week from 9am to 7pm. The applicant worked in the franchise business an average 70 hours per week from the time that it opened on 4 September 1997 to the time that it ceased operations on 13th April 1998. He performed the following tasks: (a) managing the business; (b) opening and closing the shop; (c) supervising and assisting staff; (d) serving customers; (e) cleaning the shop; (f) administrative paperwork; and (g) wholesaling client canvassing. 34. By 13th April 1998 the applicant could no longer afford to fund the losses being made by the franchise business. He was forced to close it. He is now working as a Community Worker. During his conduct of the franchise he injected further funds into the business. 35. The applicant had made the following additional payments in relation to the franchise business. (1) to the Advance Bank Ltd total payments of: (a) $7,781.55 in relation to the housing loan; (b) $18,915.00 in relation to the equipment lease. (2) to the second respondent in relation to the franchise agreement: (a) $35,000 for the franchise fee. (b) $172,000 for the fit out cost. (c) $5,000 for the opening promotion. (d) $5,347.36 for the opening items required for the set up. (e) $6,983.11 for the ongoing franchise fee. (f) $1,563.80 for the advertising fees. (g) $10,433.31 for rent. 36. The applicant currently has the following substantial liabilities which he incurred in relation to the franchise and the conduct of the franchise business:- (a) he owes the Advance Bank Ltd about $190,000 plus interest. (b) he owes his brother John Sullivan about $52,000 plus interest. To provide living expenses the applicant has drawn about $8,000 from his life insurance policy with AMP Society and his State Bank Mastercard."

[100]

83 Before dealing with the specific allegations of unfairness I should make some general observations about the processes by which and the principles utilised for the determination of whether the requisite unfairness exists. A convenient starting point is contained within the joint judgment of Fisher CJ and Hungerford J in the Full Court of the Industrial Court of New South Wales in Baker v National Distribution Services Ltd (1993) 50 IR 254. At 271 their Honours said: "The test of unfairness within the meaning of s 88F of the Industrial Arbitration Act, and hence s 275 of the present Act, has received much attention by the Court and by the previous Industrial Commission over very many years, but, in our review of the cases, the approach stated by Sheldon J in Davies v General Transport Development Pty Ltd [1967] AR (NSW) 371 over 26 years ago has endured; his Honour commented (at 374) that unfairness of a contract or arrangement was to be determined according to "the common sense approach characteristic of the ordinary juryman ….It is a plain matter of morals not law." His Honour cautioned, however, (at 374,375) that the section's "massive power makes it imperative that it should be exercised with proper restraint … it should not permit itself to become a refuge for those who are merely disgruntled with a bargain entered into on even terms. … the discretion should be exercised to protect victims of wrong dealing not to prescribe anodynes." Those words by his Honour echoed what had been said earlier by Beattie J in Agius v Arrow Freightways Pty Ltd [1965] AR (NSW) 77 at 89 that it was a matter of deciding "in each particular case by the application of the tribunal's common sense and sense of justice whether a particular transaction is unfair, harsh and unconscionable". The nature of the unfairness attracted by s 88F was considered later by the Industrial Commission in Court Session (Perrignon and Dey JJ, Cahill J dissenting) in A & M Thompson Pty Ltd v Total Australia Limited [1980] 2 NSWLR 1 at 13 as follows: "It has been said that fairness is determined by the commonsense approach of a juryman and that it is a moral and not a legal issue ( Davies' case). Whether this be so or not, it does seem that in distinguishing between what is fair and what is not fair the Judge must apply standards which appear to him to provide a proper balance or division of advantage and disadvantage between the parties who have made the contract or arrangement. In doing so he would always have to bear in mind the conduct of the parties, their capability to appreciate the bargain they had made and their comparative bargaining positions when entering into the contract or arrangement." (at 271-2).

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85 In determining whether there was ay relevant unfairness with respect to the franchise agreement I take into account the following matters: 1. The applicant stated that he would not have entered into the agreement had it not been his understanding that all stores had sales figures of at least $5,000 per week. 2. As against this, there is the evidence of Tony Tartak with respect to the manner in which the applicant misrepresented his assets when making application for the grant of a franchise. Mr Tartak said, and I accept, that he would not have agreed to the grant of a franchise by the franchisor if the applicant has disclosed his true financial position. 3. The applicant was given a list of franchisees and contacted all of those in the Sydney area. There is no evidence as to the precise information which the applicant sought from these franchisees, but he professed himself to be satisfied that the situation was as represented by Mr Tony Tartak and the franchisor in all respects material to him. 4. The applicant was advised to obtain independent financial advice but chose not to do so. 5. The documentation issued by the franchisor contained clear qualifications and warnings and the applicant chose to disregard them. The applicant was, to use his own words, "foolish" and, from the evidence given in the proceedings naive in terms of business relationships. He did not conduct himself in a business-like fashion and conceded that having no business experience was a disadvantage. 6. It was clear that the baker employed by the applicant was incompetent, yet he took no steps to terminate his services and replace the baker with someone more competent. In this, consistent with the evidence of Ms Herico, the applicant allowed personal concerns for Mr Pearce to intrude into any business-like decision to terminate his services. 7. The applicant acknowledged in evidence that he understood that the success of the franchise operation depended upon his own efforts and depended also on him following the franchisor's procedures. However there is ample evidence that the applicant did not follow the franchisor's procedures and that his own personal efforts were not deployed in a positive fashion in assisting the business. My understanding of the evidence including the documentation issued by the franchisor is that the intention was that the franchisee would principally be "hands on" in the operation of the business rather than relying on the labours of others, as occurred in this case. 8. The applicant commenced trading at the beginning of September 1997. By the beginning of October it was clear that the business was not being operated in a proper and appropriate manner, as evidenced by the comprehensive report of Graham King. There is no satisfactory explanation on the evidence as to why there was a fall off in sales other than the impact of a period of hot weather in October 1997. There is no analysis of the number and quantity of sales, the product purchased, and the reasons for what the applicant said was a steady decline in sales. There is no evidence that indicates that the particular location was inappropriate. In any event, the location was chosen as a result of the active involvement of the applicant. The applicant said that by the end of February he had given up and that he coasted thereafter until the business closed in April 1998. At most, the business traded for six months only. 9. There is no evidence that the applicant suffered any particular loss or that his trading position was affected in any relevant manner by any malfunctioning of the oven or other equipment or the fact that some of equipment may have been second-hand. In any event the applicant was offered compensation of $3,000 with respect to some second-hand panels.

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