NKV Enterprises Pty Ltd v Suarez as Trustee and Anor

[2] The plaintiff, NKV Enterprises Pty Ltd, sued the first defendant, Lorenzo Suarez as Trustee for the Suarez Family Trust for breach of a certain franchise agreement entered into between the parties and claims $213,925 as due and owing under the agreement. The plaintiff also seeks damages, as amended at the hearing, in the sum of $99,397 being loss of income it would have received under the franchise agreement had the first defendant duly performed his part of the bargain.

[3] The plaintiff sues Lorenzo Suarez in his personal capacity as guarantor of the due performance of the first defendant's obligations under the agreement.

[4] The proceedings came on for hearing on 5 April 2007. There was no appearance by the defendants. On 4 April 2007, the previous day, the Chief Justice, in the Applications jurisdiction, gave leave to Hawthorn Cuppaidge & Badgery as solicitors on the record for the defendants to withdraw. The affidavit of Elizabeth Lorimer, who had carriage of the file at the firm for the defendants, revealed that no instructions had been received after signing the request for trial date in November 2006.

[5] After the defendants were called Mr P Hackett for the plaintiff sought to proceed pursuant to r 476(1) of the Uniform Civil Procedure Rules. It provides

"If a defendant does not appear when the trial starts, the plaintiff may call evidence to establish an entitlement to judgment against the defendants, in the way the court directs."

[6] The plaintiff filed a claim and statement of claim on 23 January 2006 seeking the relief indicated. A notice of intention to defend and defence was filed by the defendants on 3 March 2006 but not served on the plaintiff who attempted to enter default judgment in the Registry on 31 March 2006. That was refused. The plaintiff then sought summary judgment against the defendants by application filed on 18 April 2006. That application was heard on 29 May 2006. The defendants had very recently retained solicitors who sought an adjournment of the application the better to prepare an amended defence for the defendants and affidavits to support that defence. By consent the application was adjourned to 23 June 2006 and directions given for the filing and serving of an amended defence and supporting affidavits.

[7] An amended defence and counterclaim was filed on 14 June 2006 raising defences to the plaintiff's claim and counterclaiming on various bases including for misleading and deceptive conduct and breaches of the Franchise Code of Conduct.

[8] The plaintiff filed a reply and answer on 18 August 2006.

[9] Nicholas Varthas, a director of the plaintiff, gave oral evidence to support the plaintiff's claim on this hearing. The plaintiff trades as National Hospitality Systems Queensland. The plaintiff is a Master Franchisee who had entered into an agreement with the National Franchisor. The franchise business is to advise and assist small businesses to operate more profitably. To that end the Master Franchisee sources potential clients for the franchisee, arranges initial training for the franchisee and provides software and manuals to facilitate the services provided by the franchisee to the small business clients. No particular previous experience or qualification is required. At the time the plaintiff commenced negotiations with Mr Suarez it had entered into a franchise agreement with one other who operated on the Sunshine Coast. There were at the time of hearing no other franchisees of the plaintiff in Queensland (or elsewhere). The plaintiff did not operate a franchise itself, that is, it did not, through Mr Varthas or anyone else advise small businesses but merely facilitated the franchisee obtaining business, arranging the training and providing the manual and software.

[10] The admissions on the pleadings reveal that Mr Varthas and Victor Hawkins, of the National Franchisor, and Mr Suarez had discussions between 24 November 2004 and 12 January 2005 about the franchise business. On 30 December 2004 the plaintiff and Mr Suarez entered into what is described as Preliminary Agreement and Due Diligence Deposit, exhibit 1. The purpose of the agreement was to allow Mr Suarez to conduct due diligence and to that end gave him access to confidential information contained in certain documents described in cl 1(b) of that preliminary agreement.

[11] Mr Suarez agreed to and did pay $5,000 to the plaintiff upon signing the preliminary agreement. Mr Varthas said in evidence that the disclosure documents were handed to Mr Suarez and, although denied in the defence, Mr Suarez has acknowledged receiving the disclosure documents, exhibit 2 page 17.

[12] The parties entered into a formal franchise agreement on or about 12 January 2005, exhibit 3. The defendants admit that Mr Suarez executed that agreement but contend that it did not reflect the whole of the agreement between them. The oral part of the agreement was said to relate to the provision of information and representations about profitability. Mr Varthas denied that any pre-execution conversations were representations or formed part of the agreement. By cl 32 of the agreement, the first defendant agreed that the whole contract was contained in the written agreement. More to the point, information given to Mr Suarez in the course of pre-contractual negotiations stated

"Please note we make no representations on what you can earn, but indicate the possibilities should you become a business development consultant within National Business Developers." Exhibit 7

That document is couched throughout in the language of opportunity. Mr Suarez agreed to become a Senior Partner Business Development Consultant by purchasing six User Licences which entitled him to employ six persons to take advantage of the training and software and manuals provided by the National Franchisor.

[13] Mr Varthas said he received a text message from Mr Suarez prior to executing the Agreement that he had received legal advice from a solicitor.

[14] The relevant terms of the Agreement are set out in the statement of claim as follows

1. The person or persons named in Item 1 (National Franchisor)

2. The person or persons named in Item 2 (Master Franchisee)

3. The person or persons named in Item 3 (Franchisee)

4. The person or persons (if any) named in Item 4 (Guarantor)

...

1. DEFINITIONS AND INTERPRETATION

1.1 Definitions

In this Document:

...

Franchise means the licence and rights granted to the Franchisee under this Document.

...

Franchise Fee means the sum specified in Item 11.

...

Master Franchisee's Expenses means the sum if any specified in Item 13.2.

...

Service Fee means the fee paid by the Franchisee to the Master Franchisee set out in Item 19.

1.2 Interpretation

In this document:

(f) reference to an Item is a reference to an item in the Schedule.

...

2.1 Grant

(a) Subject to the terms of this Document, the Master Franchisee grants to the Franchisee for the Term a licence within the State to:

(i) provide the Service; and

(ii) use the Image, the Knowhow and the Intellectual Property in connection with the Service.

...

3. PAYMENTS TO BE MADE BY THE FRANCHISEE

3.1 Franchise Fee and Expenses

The consideration payable:

(i) for the grant of the Franchise is the Franchise Fee; and

(ii) for equipment are the Master Franchisee's Expenses; and

(b) to the National Franchisor for training is the National Franchisor's Expenses;

payable on or before execution of this Document.

...

3.7 Service Fee

The Franchisee must pay to the Master Franchisee the Service Fee in accordance with clause 5.1.

...

3.10 Interest on Default of Payment

If any monies due under this Document are not paid on the date those monies are required to be paid under this Document, the Party required to make the payment must pay interest at the rate of two per centum above The National Australia Bank Base Rate for overdrafts of less than $100,000 on such monies from the due date for payment under this Document until the date such monies are actually paid.

...

30. DEFAULT AND TERMINATION

30.2 Default - less than 30 days notice

If any of the matters listed in clause 30.3 applies to the Franchisee and that default is capable of rectification, the Master Franchisee may give written notice to the Franchisee specifying:

(a) what action the Master Franchisee requires the Franchisee to take to remedy the default; and

(b) the period of not less than seven days in which the default is to be remedied;

and after service of the notice the default is not remedied to the satisfaction of the Master Franchisee within the period stated in the notice the Master Franchisee may terminate this Document by giving written notice of termination to the Franchisee.

For the purposes of clause 30.2 the matters are:

...

(b) the Franchisee failing to pay any moneys owing to the Master Franchisee when due;

...

40. TIME OF THE ESSENCE

Time is of the essence in this Document in all respects and no extension or variations operate as a waiver of this provision.

...

42. COSTS

(b) If the Master Franchisee or the National Franchisor is required to engage legal counsel in connection with any failure by the Franchisee to comply with this Document, the Franchisee must reimburse the Master Franchisee or the National Franchisor for any solicitors' costs on a solicitor/own client basis and any expenses incurred by the Master Franchisee or the National Franchisor.

SCHEDULE

2. THE MATER FRANCHISEE

NKV Enterprises Pty Ltd (ACN 101 730 223) of 21 O'Keefe Street, Woolloongabba, QLD, 4102

3. THE FRANCHISEE

Suarez Family Trust (ABN 24111 800 410) of 6 Harrogate Terrace, Birkdale Queensland 4159

4. THE GUARANTOR

Lorenzo Suarez of 6 Harrogate Terrace, Birkdale, Queensland 4159

8. COMMENCEMENT DATE

19 January 2005

9. TERM

10 years

...

13. TRAINING AND EQUIPMENT EXPENSES

...

13.2 Equipment Fee: $7,500.00

...

19. SERVICE FEE

$150 per week to be paid fortnightly in arrears for a single licence plus an additional $20 per week to be paid fortnightly in arrears for each additional licence issued."

[15] The first defendant admits that he did not pay the Franchisee Fee, the Master Franchisee Expenses or the Service Fee of $150 per week per single licence plus $20 weekly for each additional licence.

[16] On 29 March 2005 by email, Mr Suarez wrote to Mr Varthas saying that he was actively seeking to sell his interest in the franchise agreement business because of his uncertain future due to his health. He said that he would instruct his lawyers "to make available to you within 21 days of this notification the sum of money you so desire, to complete the agreement signed with you", exhibit 6. He went on to say that he would not commence the business or undertake his training because of his health. He decided that having given notice of his intention "I hope that any potential buyer that I may refer to you is treated in an appropriate and business manner, in pursuit of a sale and the end of any potential business agreement we may have had." I questioned Mr Varthas about Mr Suarez' ill-health. He tended to minimise it, or rather, indicated that he thought Mr Suarez was exaggerating, but he did say that the illness was cancer of the stomach for which he underwent chemotherapy. Whilst this suggests cases such as Boast v Firth (1868) LR 4 CP 1 which would allow incurable illness to excuse non-performance of a contract for services, the defendants do not raise it as a defence after they had the benefit of counsel and solicitors. Therefore the issue must be put aside.

[17] The plaintiff gave notices of default and termination dated 4 November 2005 pursuant to cl 30.2 of the agreement. The defaults were not rectified and no moneys were paid under the agreement.

[18] It is convenient to consider the counterclaim before turning to the damages claim. I have dealt with the defendants' allegations that representations were made about profit and the failure to provide information. The documentary evidence does not support the allegations of breach of the Franchise Code of Conduct, nor that the plaintiff engaged impermissibly in "pyramid selling", nor that Mr Suarez suffered from any special disadvantage. There appears to be no basis for the relief sought by way of declaration for a claim that the franchise agreement and guarantee were void ab initio or that the provisions should not be enforced.

[19] The plaintiff has also claimed damages for loss of fees associated with the performance of the agreement for a period of 18 months. The plaintiff had only one franchisee at the time and has not attracted another since. Mr Varthas calculated his lost earnings from Mr Suarez by using the plaintiff's income from that single franchisee, augmenting it to take account of the fact that Mr Suarez had purchased six licences to cover the whole of the Brisbane area and that he would target more potential clients. He explained his calculations at transcript page 11

"Would you tell, explain to her Honour how it is that you arrived at your calculation?-- Okay. What I do, I keep records of all clients that we make contact with, in terms of their response and whether they request what we call a business performance evaluation and whether or not they come on board as a client. This is all in an Excel spreadsheet that I keep up-to-date as best as possible. Based on those figures I create I have a section of that report that is headed up "Queensland's response ratios" and for a date period I am able to ascertain the total number of clients that I have mailed out to, the number of leads that I have received, the number of business performance evaluations that were undertaken and the number of clients that have been brought on board during that period. Based on my initial discussion with Mr Suarez the figures that I was operating under at that time was for approximately five months, and I had an average - I was averaging a point nine or approximately one client per month. This is based - this was based on a smaller amount of leads per month because I was dealing with the Sunshine Coast. In the Brisbane area Mr Suarez was buying the Brisbane area. My calculations based on 550 businesses per month, and based on those percentage returns the amount comes to 198,795 which was - is on the basis that I have just recently gone through and updated all my database."

[20] Later Mr Varthas said that he arrived at one new customer per month for Mr Suarez himself and calculated the income he would have received based on those customers. Mr Varthas said that he would have to pay the National Franchisor approximately 50 percent of the fees received from Mr Suarez. This was not taken into account in the pleadings and, in any event, he conceded that those calculations were incorrect. Using the limited information which Mr Varthas had put into his spreadsheet, exhibit 5, he calculated a net income for 18 months from Mr Suarez at $198,795.14 which he accepted would need to be reduced by 50 percent to reflect his putative loss from Mr Suarez's failure to implement the franchise agreement.

[21] It may be assumed that the plaintiff has suffered some loss by virtue of the non-performance by the first defendant of the franchise agreement but Mr Varthas' evidence and his spreadsheet do not leave the court with much confidence as to what that is. Sun Valley Poultry Pty Ltd v Micro-Biologicals Ltd & Integratori Vaccini Zootechnici SAS, a decision of the English Court of Appeal of 4 May 1990 (The Times) 14 May 1990 (Transcript: Association), casts some light on possible approaches to the assessment of damages where the evidence is less than complete. In that case, the plaintiff's abandoned purchasing vaccines needed for their poultry breeding business from the defendants after they were supplied with a contaminated batch. Those defendants claimed their own loss of profits from the loss of the plaintiffs as clients from the supplier of the vaccine. The calculations were based on actual sales in a recent year to the plaintiffs and projected through the following years by reference to a growth rate achieved by another customer said to be comparable to the plaintiffs. It was argued on appeal, referring to the old case of Dixon v Deveridge [1825] EngR 839; (1825) 2 C & P 109 quoted in McGregor On Damages, that where it is virtually impossible to assess damages because of want of evidence where a right has been infringed only nominal damages may be awarded. The court rejected this approach on the basis that although there were other ways in which the loss might more satisfactorily have been proved, the customer chosen for comparison was comparable. See also Tai Hing Cotton Mill Ltd v Kamsing Knitting Factory (A Firm) [1979] AC 91.

[22] There are so many imponderables here and, statistically, one franchisee in an entirely different part of the State is an unsatisfactory comparable. There was no particular expertise to suggest that Mr Suarez would have been successful either himself or in attracting up to six others to participate. That no other franchisee has been attracted is telling. I estimate the loss of the chance to earn income from Mr Suarez' successful operation of his franchise at $5,000.

[23] Accordingly, there should be judgment for the plaintiff for breach of the franchise agreement in the amount of $213,925 being money due and owing pursuant to that agreement and $5,000 for damages for breach of the agreement against the first defendant. The plaintiff should also have judgment against the second defendant pursuant to the guarantee in the amount of $213,925. No claim is made in respect of the damages for loss of income. Interest is awarded pursuant to cl 3.10 of the franchise agreement on $213,925 and on the damages pursuant to the Supreme Court Act 1995. The franchise agreement in cl 42 provides for costs to be assessed on the indemnity basis and nothing has emerged which would persuade me that that should not be the case here.

1. Judgment for the plaintiff against the first defendant:

(i) in the sum of $213,925 for breach of the Franchise Agreement together with interest thereon pursuant to cl 3.10 of the Agreement being exhibit 3 herein; and

(ii) for damages for breach of the Franchise Agreement in the sum of $5,000 together with interest thereon pursuant to the Supreme Court Act 1995.

2. Judgment for the plaintiff against the second defendant in the sum of $213,925 pursuant to a guarantee together with interest pursuant to cl 3.10 of the Franchise Agreement being exhibit 3 herein.

3. The defendants pay the plaintiff's costs to be assessed on the indemnity basis pursuant to cl 42 of the Franchise Agreement being exhibit 3 herein.