Miba Pty Ltd v Nescor Industries Group Pty Ltd

REASONS FOR JUDGMENT The applicants, Mr and Mrs Thompson, claim damages from the respondents, under s 82 of the Trade Practices Act 1974 (Cth) (the "Trade Practices Act"). The damages are claimed for loss which they claim to have suffered as a result of misleading or deceptive conduct on the part of the first respondent (ICA) infringing s 52 of the Trade Practices Act. The second respondent, Mr Atchison, is alleged to have been involved in the contravention of s 52 and thus, by reason of s 75B, is liable also in damages measured by the loss resulting from the contravening conduct. That conduct comprised, so the applicants allege, misrepresentations by Mr Atchison on behalf of ICA as to the suitability of premises in Engadine for the conduct of an "ice creamery" and as to the turnover which the applicants could expect if they conducted a franchised ice creamery at the site. Induced by the representations, the applicants say, they entered into a franchise agreement and a lease of the premises, and subsequently purchased the freehold of the premises. The applicants claim that the representations were untrue and that as a result they suffered loss. They claim also that, in making the representations, the respondents breached a duty of care owed to the applicants. Background Facts (a) The Respondents Mr Atchison and his wife purchased an ice cream parlour in Weston Creek, a suburb of Canberra, in 1977. In the same year they started an ice cream parlour in Batemans Bay. Mr Atchison's evidence was that each parlour was very successful and that he and his wife received many enquiries from people interested in starting similar parlours. They began franchising ice cream parlours in 1982; in 1984 they established ICA, of which they are joint managing directors; since its establishment ICA has been the franchisor of franchises to conduct ice cream parlours trading under the name "The Great Australian Ice Creamery". By 1991 ICA conducted, from its headquarters in Bowral, New South Wales, a large and successful franchising operation. A large number of ice cream parlours operated under franchise from ICA in metropolitan, coastal and country areas of New South Wales and in other states. Only three parlours had failed; Mr Atchison attributed the failures, in one case to the operators, in another to a combination of the attitude of the operators and the demographics of the area where the parlour was situated and, in the third, to a variety of circumstances including, particularly, a strike by air traffic controllers which substantially reduced the number of tourists in the area. Great Australian Ice Creameries were painted and decorated in a uniform and distinctive manner; each sold substantially the same range of products as the others, principally ice cream products; each provided seating for customers consuming "ice cream meals". This reflected ICA's marketing strategy: the object, principally, was not to secure passing "impulse" trade but the repeat business of the "Australian family at leisure" making a "planned purchase". The aim was to encourage families to regard a Great Australian Ice Creamery as a destination in itself, planning visits to it as part of the ordinary round of family activities and for special occasions, for example, children's birthday parties. The aim being to attract repeat business and planned purchases, a Great Australian Ice Creamery offered ice cream sundaes and other products of a more elaborate, and more expensive, kind than one might expect to find in a milk bar or a booth offering passers-by conventional ice cream cones and packaged, branded ice cream products. The evidence demonstrates that the Atchisons paid considerable attention both to the appraisal of potential franchisees and to the selection of sites. An enquiry from potential franchisees elicited a package of documents concerning the ICA franchising system and some pro-forma financial information. If the potential franchisees expressed interest in proceeding, the Atchisons' custom in 1991 was that they would conduct (jointly) a lengthy interview, lasting several hours, with them; the purpose, as Mr Atchison explained it in evidence, was both to enable Mr and Mrs Atchison to obtain a clear impression of the suitability of the potential franchisees and to enable the potential franchisees to gain an understanding of the nature and requirements of the business to which they were contemplating committing themselves and an acquaintance with those who controlled the franchisor, with whom they would deal. Following that interview, the potential franchisees, if they still wished to proceed, would submit a formal application, with references. I shall consider the question of site selection and approval in more detail later in these reasons. For the present, it is sufficient to say that the evidence indicates that Mr Atchison and employees of ICA spent a considerable amount of time looking for potential sites; and the process of approving a particular site involved the completion of a form of site evaluation report; the report dealt with characteristics of the area in which the site was located (for example, population numbers and demographics) and those of the particular site (for example, size, zoning, rental and other terms of the lease offered). If the franchisees and the site were approved, the franchisees would pay ICA a franchise fee and a fee for initial training and the franchisees and ICA would enter into a franchise agreement in a standard form. That agreement entitled, and required, the franchisees to use the business name "The Great Australian Ice Creamery" and "other symbols, designs, insignias, logos and descriptions" belonging to ICA; it required the franchisees to sell only ice cream and other products which were approved by ICA; it required the franchisees to "adequately use the Company's System" (that is, "the distinctive style and method of carrying on the business of presenting, supplying, retailing and serving ice cream and other food products developed by the Company and as adapted from time to time"); ICA was to make available advice, information and guidance in relation to the management of the ice creamery and to provide training for the franchisees and their staff; the franchisees were required to attend ICA's Annual Conference and (presumably also annually) an "Industry Product and Menu Updating Seminar". To the extent that ICA received, from the supplier, rebates on approved products sold, the franchisees were relieved of any obligation to pay royalties to ICA (the evidence demonstrates that in fact rebates were received and royalties were not claimed). There were restrictions on the sale by the franchisees of the franchised business. ICA agreed not to franchise any other person within the area allotted to the franchisees. Finally, there were provisions for termination of the agreement by ICA on default by the franchisees. (b) The Applicants Mr Thompson had been employed by the Commonwealth Bank from 1964, shortly after he left school with the Intermediate Certificate, until about 1990 when he accepted voluntary retrenchment. After an initial period as a teller, his duties with the bank were largely clerical. He was for a time involved in the process leading to the approval of loans by the bank, but never had authority himself to approve loans. He spent some time in the hire purchase operations of the bank, involved mostly with debt collection and account monitoring; in 1988 he was seconded to a team designing a new computer system for the bank's hire purchase operations. While employed at the bank, Mr Thompson undertook casual work also, from time to time, for example at a service station. Mrs Thompson was employed by the Bank of New South Wales for seven years after leaving school. She left full-time employment shortly before their first child was born in 1979. She undertook part-time employment from 1984 to 1991. Mr and Mrs Thompson have four children, the youngest of whom was born in July 1990. Until 1991, neither Mr nor Mrs Thompson had any experience in running a business. Both shortly before Mr Thompson's retrenchment and afterwards, they had considered various business possibilities, including a chicken shop at Cronulla and a Wendy's Ice Cream outlet. In about April 1991 Mr and Mrs Thompson, having heard of Great Australian Ice Creameries, took a day trip to Kiama, visited the Great Australian Ice Creamery there and picked up a brochure which offered franchise opportunities within the ICA Group. Mr Thompson telephoned ICA and asked for some information about the group. Mr and Mrs Thompson Become ICA Franchisees On about 8 April 1991, ICA sent Mr Thompson a package of information concerning the ICA franchise system. The information included a copy of the standard form of franchise agreement. Shortly afterwards, probably on Friday 12 April, Mr and Mrs Atchison met Mr and Mrs Thompson at the Thompsons' home in Engadine (Mr Thompson suggested in evidence that it might have been earlier, but plainly it could not have been much earlier and, in submissions, counsel for the applicants appeared to accept 12 April as the date of the meeting). The parties differ as to the length of the meeting - the Thompsons put it at about one and a half hours whereas Mr Atchison says it lasted considerably longer - and as to what was said at the meeting. Clearly enough, however, the meeting was a preliminary interview of the kind which I have described. It was, at least in part, a "getting to know you" meeting on each side and the Atchisons gave the Thompsons some information as to the history, aims and methods of the ICA franchise system; in particular, Mr Atchison took the Thompsons through the terms of the standard franchise agreement. Evidently, Mr Thompson was both impressed and enthusiastic. His evidence was that "a day or so after the meeting" he was telephoned by someone from ICA who said, "Once you have a suitable site, we will offer you a franchise". Having already ascertained that Cronulla, which he said was his first choice, was unavailable, Mr Thompson gave evidence that he thought of Brighton-Le-Sands as a potentially suitable area; he and Mrs Thompson visited Brighton-Le-Sands and identified two properties which he thought might be suitable; he telephoned Mr Atchison and told him about the two sites to which, Mr Thompson says, Mr Atchison replied "I'll get back to you". Mr Thompson's affidavit evidence was that at that point he would have accepted, had it been offered to him, an ICA franchise for a site in Brighton. His affidavit evidence was: At that stage I was set upon a Brighton-Le-Sands site and would have walked away from the First Respondent if they could not give me a franchise in that location. Substantially, Mr Thompson maintained that evidence in cross-examination: You say today that was subject to me getting finance approved to actually pay the money to get the franchise? - Yes, that's correct. Subject only to that reservation you had made up your mind that you wished to have the Great Australian Ice Creamery franchise in Brighton? - Yes. At about the same time, Mr Thompson says, he met an old family friend, a Mr McAlpine, to whom he said: I've found a couple of possible sites for an ice cream parlour I'm opening at Brighton-Le-Sands. I'm just getting all the details together at the moment. Mr McAlpine gave evidence about that conversation to similar effect. The next event of significance was a meeting between Mr Thompson and Mr Atchison which took place, at least in part, at the McDonald's restaurant at Engadine. The conversation during the meeting is crucial to the case; there is a significant conflict of evidence both as to how the meeting came about and as to what was said during it. Mr Thompson's account was that Mrs Thompson told him that Mr Atchison had telephoned to say that he had found a site in Engadine and would ring the Thompsons later that day. Mr Atchison then telephoned Mr Thompson, and suggested that they meet at McDonald's at Engadine. The meeting, Mr Thompson says, took place at McDonald's on about 15 April 1991. Mrs Thompson confirmed that account; she gave evidence of the initial telephone call from Mr Atchison and said that she was certain that the call was received on 15 April, that being her birthday. Mr Thompson's account of the meeting at McDonald's, which he maintained in cross-examination, was as follows: I met Mr Atchison on about 15 April 1991 at the McDonald's at Engadine. We had a conversation in words to the following effect:- Mr Atchison "I have found a good site for you." Me: "Where?" Mr Atchison: "Here in Engadine next door to the bicycle shop. It is currently leased as an amusement parlour but the Landlord is unhappy with the tenant. The tenant is currently on a monthly lease so immediate occupancy is available. The rent is around $750 per week, inclusive and is within market range." Me: "As you know I have been looking for a site in the area of the Promenade at Brighton-Le-Sands and we are currently awaiting replies from the estate agents. Wouldn't this be better suited to selling ice cream?" Mr Atchison: "No. Ours is a "planned" not an impulse purchase. Once people are aware than an ice creamery has opened they will "plan" a visit just as they do with McDonald's." Me: "The only ice cream parlours we have ever visited have been at seaside resorts. If we were to treat our children to an ice cream we would automatically head to Cronulla as a days outing while in Sydney." Mr Atchison: "Ours being a planned purchase it is not necessary for our shops to be located at the beach or even in the main shopping centre." Me: "I have not previously considered Engadine as a suitable site for an ice creamery." Mr Atchison: "Engadine currently supports the three major food outlets, McDonald's, Pizza Hut and Kentucky Fried Chicken so an ice creamery will fit in well." I have spoken to friends at Wendy's and other businessmen who say that the Engadine site is well suited to an ice creamery." Me: "Exactly where is the shop?" Mr Atchison: "Nearly opposite where we are now. It is also opposite the video shop, a few doors up from the Library and Bus stop." Me: "That's a long way from the main shopping area and where the people are." Mr Atchison: "Jeanie and I have been successfully retailing ice cream for 14 years. Over the next few months we will have opened over 60 shops with only one shop ever having failed and this was due to the poor performance of the Franchisees. Most of these have been away from the main shopping centres which allows us to negotiate better rents for you. People also can't get parking in the main street. McDonald's have a very high success rate when it comes to site selection and we consider that we enjoy a similar success." Me: "With the shops that failed what was the problem?" Mr Atchison: "The Franchisees were not suited to selling ice cream and decided not to continue." Me: "Are the rest of your shops profitable?" Mr Atchison: "Yes" Me: "My wife is paranoid about mortgaging our house. Are there any risks?" Mr Atchison: "Our system has been proven over many years so I cannot foresee any problems." Me: "What sort of turnover can I expect from this site?" Mr Atchison: "There is a 470% mark up on scooped ice cream and I would expect sales of $250,000 in your first year, beyond that it is entirely up to you. Nett profit is worked on 30% of sales so your profit will be in the vicinity of $75,000." Me: "Is this in line with the financial information you have already forwarded?" Mr Atchison: "The figures we supplied are actually written down by 15% for taxation purposes. Many owners are able to draw upwards of $500 per week in undeclared earnings, but this is up to you." Overall our conversation lasted for approximately three quarters to one hour. On several further occasions during the course of our conversation, Mr Atchison said words to the effect of:- "There is a lot of profit to be made in scooped ice cream;" and "This site (referring to the Engadine site he had selected) is perfectly suited to our system of retailing ice cream." He referred to Ice Creameries of Australia as being the "McDonald's of Ice Cream retailing." Mrs Thompson gave evidence that Mr Thompson told her he was going to McDonald's to meet Mr Atchison. Her evidence continues: Prior to this, my husband and I had never discussed the possibility of Engadine as the location of the ice creamery. When my husband came home we had a conversation in words to the following effect: Peter: "Alan has recommended a site in Station Street where Timezone is." Me: "Why there? I hate that end of town, it's got a real hooligan element, it is the dead end of town. I hate going that far and there is never any parking." Peter: "Alan knows about these things. It's near the video shop, bus stop and library and opposite McDonald's. He has convinced me that is where the shop should be." After further discussion I left the selection of the Engadine site to my husband. Mr Atchison's version is rather different. He gave evidence of a recollection that the meeting was arranged not by him but by Mr Thompson, Mr Thompson having found the Engadine site. His affidavit evidence was as follows: In about mid April I received a telephone call from Mr Thompson. During the telephone call Mr Thompson said to me words to the following effect: Mr Thompson: 'I've found a site in Engadine. Would you please come and look at it.' Mr Thompson then told me the address of the site. Thereafter, I met Mr Thompson at the site in Station Street, Engadine. I observed that the site was being used as a pinball and video game parlour. I had a discussion with Mr Thompson, partly in front of the site and partly at McDonald's, to the following effect: Mr Thompson: 'This site is becoming available because it is going to have to close down due to community pressure. The community pressure includes the local member of parliament seeking its closure. The police are also seeking to have it closed. Other community groups are also seeking its closure. The reasons for this activity are that a bad element is being attracted, there are suspicions of alcohol and drugs being available on the premises and many parents are concerned for the sake of their children.'