93 Mr Rafferty said that he was concerned to ensure that the prototypes would be completed by the end of January 2008. He feared that if they were not they would be caught up in the Chinese New Year and not completed until after February 2008.
94 Between the date of the execution of the JVSA (that is, 23 November 2007) and the date of execution of the RA (that is, 19 December 2007), Mr Donovan continued to tell Mr Rafferty that the prototypes would be ready by the end of January 2008. Mr Rafferty believed that Mr Donovan had an agreement with an organisation called CIMC or Duowie (as I have said, he was quite unclear as to which) to manufacture the prototypes. He said that he did not know that Mr Donovan did not have an agreement with any manufacturer to manufacture the prototypes.
95 On 15 December 2007, Mr Rafferty received a copy of an email sent by Mr Donovan to a third party. The email refers to a recent trip to China by Mr Donovan. It suggests that on that trip Mr Donovan "set in place" a manufacturing relationship with Duowie Corporation and had the agreement of a business called B & Q Retail and Wholesale Distributors to sponsor Mr Donovan's project and prepare all schedules of fixtures and fittings for the prototypes and manage the supply chain on behalf of the project.
96 Mr Rafferty said that the statement in this email about a manufacturing relationship with the Duowie Corporation was consistent with his understanding at the time. It was only later that Mr Rafferty learnt that there was no agreement with the Duowie Corporation. He referred to an email sent to him on 14 March 2008 with an attachment containing a copy of an email from Mr Brunner to a Mr Leong Kok Yin dated 3 December 2007. That shows quite clearly that, as at 3 December 2007, no plans or drawings had been sent to the Duowie Corporation because that company had not yet signed a confidentiality deed.
97 By Christmas 2007, Mr Rafferty was unhappy with Mr Donovan because every time he asked Mr Donovan for a commitment about when the prototype would be available he was told it would be ready in about six weeks. In early January 2008, Mr Rafferty began to suspect that a prototype was not being constructed. It became clear to him from his discussions with the architects and engineers that the prototype was some way from being ready to be manufactured.
98 By about the third week in January 2008, it was clear to Mr Rafferty that the prototype would not be ready by the end of January. He spoke to Mr Donovan and asked him to send him a program setting out the work required to complete the prototype. A program was prepared by Hassells, a firm of architects, and sent to Mr Rafferty. It showed a scheduled completion date in June 2008 and it did not identify a manufacturer. It is clear from the evidence that that prototype relates to the prototype for tourist accommodation not the prototype for mining accommodation. Mr Rafferty said by that time the two types of prototype were becoming blurred.
99 By late February or early March 2008, Mr Rafferty was convinced that Mr Donovan was not telling him the truth about the status of the prototype. In early March 2008, Mr Brunner told Mr Rafferty that Mr Donovan had decided not to go ahead with the Duowie Corporation and that he was now in discussion with Sunscape and Bluescope.
100 At about this time, Mr Rafferty, Mr Worthington and Mr Donovan travelled to China to meet with manufacturers. Mr Rafferty attended a meeting with Madame Wong Kong of Sunscape and a meeting with Bluescope. Mr Rafferty said that it was apparent to him that Mr Donovan was still trying to convince each of them to manufacturer the units.
101 On his return from China, Mr Rafferty had another conversation with Mr Donovan about when the prototypes would be available. Mr Donovan told him that they would be ready in August 2008. There was a discussion about money and, in the course of that discussion, Mr Donovan accused Mr Rafferty of embezzlement. Thereafter, the relationship between Mr Rafferty and Mr Donovan broke down and they ceased to have any direct dealings with each other.
102 Mr Rafferty, on his own behalf and on behalf of Santora and Karaville, sought legal advice from the firm, Cosoff Cudmore Knox, in or about May 2008. On behalf of the applicants, Cosoff Cudmore Knox wrote to Madgwicks, who, at that time, were acting on behalf of the Donovan interests, by letter dated 23 May 2008. One of the assertions in the letter was that the Franchising Code of Conduct applied to the HOA and the RA, that the Franchising Code of Conduct was a mandatory industry code under the TPA, and that the HOA and the RA were illegal and void ab initio. Cosoff Cudmore are acting for the applicants in this proceeding.
103 The applicants paid a total of $1,700,000 under the agreements. The sum of $200,000 was paid into the trust account of Madgwicks and certain expenses were paid. The balance, which Mr Rafferty believes is about $100,000, was paid into a National Australia Bank account in the name of T2W. The sum of $500,000 designated in the agreements as being for working capital was paid by Mr Rafferty into a Commonwealth Bank account in the name of T2W. A sum of approximately $314,000 remains in that account and a sum of $25,000 is in a term deposit account. The sum of $1,000,000 was paid into the trust account of Madgwicks and thereafter it was distributed as follows:
1. Time Developments Pty Limited: $200,000.
2. T2SA: $300,000.
3. Time 2000 Pty Limited: $250,000.
4. Gemhall Holdings Pty Limited: $250,000.
104 Mr Rafferty said that he did not obtain legal or financial advice in relation to the agreements. Prior to May 2008 he was not aware of the Franchising Code or any requirement for a disclosure document. He was never given a disclosure document by Mr Donovan or any other person or entity.
105 Mr Rafferty said that before the detailed terms of the HOA were discussed, someone, he could not remember who, asked him if he wanted to obtain legal advice. He said that he did not think things had "got that far yet". Neither Mr Donovan nor anyone else from the respondents suggested to Mr Rafferty that he obtain legal advice.
106 Mr Worthington gave evidence for the applicants. He was an honest witness and I accept his evidence. Mr Worthington is a valuer and property consultant. He has had substantial experience in dealing with property in Western Australia and, in particular, in the mining regions and the north west of Western Australia. He is a personal friend of Mr Rafferty, and he has known him for eight to ten years. One of Mr Rafferty's sons is married to his daughter.
107 In September 2007, Mr Rafferty spoke to Mr Worthington and told him that he had entered into an agreement to obtain the rights to sell MAUs in the State of Western Australia and in the Northern Territory. He asked Mr Worthington for his assistance. Mr Worthington agreed and he became a Regional Sales Manager. He was to be remunerated by commissions on sales.
108 Ms Davis is Mr Rafferty's niece. For some time prior to her involvement in the venture which is the subject of the agreements, she had worked in Katherine in the Northern Territory. Mr Worthington understood that she had been engaged by T2W on a similar basis to his engagement.
109 Mr Worthington went to the Northern Territory on 30 October 2007. He understood that he was to meet Ms Davis and Mr Donovan in Katherine. There were to be a series of meetings with potential customers of MAUs. Mr Worthington, Ms Davis and Mr Donovan were to meet with representatives of an organisation called Nitmiluk Tours.
110 Mr Worthington met Mr Donovan at the airport in Darwin and they drove to Katherine. During the trip to Katherine, Mr Donovan told Mr Worthington that he had a company in China near Beijing arranged to build the MAUs and Mr Donovan called the company "Do Wei" or similar. Mr Worthington does not recall Mr Donovan specifically saying that he had a contract with Do Wei, but he did tell Mr Worthington about the business and manufacturing process of Do Wei in substantial detail.
111 At about 8.00 am on 31 October 2007, Mr Worthington, Ms Davis and Mr Donovan met with two representatives of a local women's group which was looking at the possibility of accommodation for a women's short term shelter at Timber Creek. After that meeting, Mr Worthington, Ms Davis and Mr Donovan met with representatives of Nitmiluk Tours. Those representatives included Mr Clive Pollack, who Mr Worthington understood to be the chief executive officer of the business Nitmiluk Tours, Mr Brian Kittel, the chief financial officer, and Mr John Ah Kit, the chairman. Ms Davis had identified Nitmiluk Tours as a potential customer and Mr Worthington understood that they were interested in purchasing as many as 80 MAUs as tourist cabins over two potential sites. Mr Donovan made a presentation to the representatives of Nitmiluk Tours. He offered to provide each unit at a price of $70,000 fully furnished. In the course of the presentation, Mr Donovan said that a prototype was being built in China and that he could guarantee to have a display prototype "here" by the end of February 2008. Mr Donovan said that he could arrange for the whole village to be installed by May or June 2008 at the latest. Mr Pollack said words to the effect that subject to the representatives of his organisation carrying out an inspection of the prototype which was satisfactory and subject to agreement with plans, specifications, final costing and a fit-out schedule, Nitmiluk Tours were, in principle, happy to proceed with an initial order of accommodation units. Mr Pollack said that Nitmiluk Tours wished to receive the plans and specifications and fit-out schedule within two weeks. Mr Pollack said that Nitmiluk Tours would be interested in 40 units by way of the first stage. There was also discussion about finishes and the dimensions of the units. It was clear that Nitmiluk Tours were looking at MAUs of a high standard.
112 After the meeting with Nitmiluk Tours, Mr Worthington, Ms Davis and Mr Donovan drove to Darwin. That evening they had dinner with a person who was a representative of the Federal Government and a person from Connell Wagner who were consulting to the government. The meeting concerned the possible purchase of MAUs for housing, as part of the Federal Government's intervention in indigenous communities in the Northern Territory. During the course of that meeting, Mr Donovan told those present that he had sold 40 units to Nitmiluk Tours that morning. That concerned Mr Worthington because he considered it to be untrue.
113 In late November 2007, Mr Worthington went to Melbourne with Mr Rafferty. They met Mr Donovan. During the course of the meeting, Mr Donovan told them that a prototype of the MAU was "being built" by "Do Wei".
114 In late January or early February 2008, Mr Worthington became concerned about the lack of progress with the MAU prototype. By then, it was clear that no prototype would be available in February 2008, as Mr Donovan had promised Nitmiluk Tours. They had a meeting with Mr Downes of Deloitte and expressed their concerns about the lack of progress. They then had a meeting with Mr Downes and Mr Donovan.
115 In late March or early April 2008, Mr Worthington learned for the first time that "Do Wei" were not contracted to manufacture the MAU prototypes and that, to that date, no company had been contracted to manufacture the prototypes.
116 In mid April 2008, Mr Worthington, Mr Rafferty and Mr Donovan went to China. They met Madam Wong Kong who represented Sunscape. After the meeting, Mr Donovan had a further meeting with Madam Wong Kong. That night, Mr Donovan told Mr Worthington and Mr Rafferty that he had "signed up" Sunscape. The next day, Mr Worthington, Mr Rafferty and Mr Donovan met with representatives of Bluescope. It was clear from the meeting that Bluescope had not yet signed a confidentiality agreement.
117 Ms Davis also gave evidence for the applicants. She too was an honest witness and I accept her evidence. Ms Davis said that she commenced working as a consultant for T2W in about October 2007. She expected to be compensated solely by commission on sales. Ms Davis said that during the meeting with the representatives of Nitmiluk Tours, one of the representatives said words to the effect that Nitmiluk Tours wanted to have units on site for the beginning of the tourist season which was in April 2008. Mr Donovan said that a prototype was being built and he said that a display prototype would be available in China by December 2007. There was some discussion about flying the representatives of Nitmiluk Tours to China around the first week of February 2008 so that they could inspect the prototype. There was discussion about that being done at Time 2000's expense. Mr Donovan said that the units would be available for inspection by then. There was discussion about whether the units would be available by 1 April 2008. The representatives of Nitmiluk Tours said that it would be acceptable if units could be available on site by 1 May 2008. Mr Donovan assured the representatives that this could be done. Ms Davis said that during the meeting with the representatives of the Federal Government that evening Mr Donovan took out the business card of Mr Ah Kit and put it on the table and said words to the effect that "an order has been received today from this person for 40 units". Ms Davis said she knew this statement to be untrue.
118 In her oral evidence, Ms Davis said that she recalled a breakfast meeting with representatives of the Timber Creek Community Council at the All Seasons Hotel. That took place before the meeting with the representatives of Nitmiluk Tours. The representatives of the Timber Creek Community Council were interested in accommodation for an aged care facility. During the course of the meeting, Mr Donovan said that a prototype for the BMA units was currently being built in China. There was discussion as to whether a unit of that nature would be sufficiently robust for aged care accommodation. Ms Davis also said in her oral evidence that at the meeting with the representatives of the Federal Government, Mr Donovan said that a prototype was being built in China and that the prototype would be available for viewing in December. Mr Donovan referred to the prototype as the BMA prototype. He spoke to some drawings when giving his explanation of the BMA prototype.
119 The only direct evidence against Mr Rafferty's version of events was given by Ms Donovan. I put to one side for the moment some minor inconsistencies between Mr Rafferty's evidence and that given by Mr Levy. Those inconsistencies are dealt with below (at [193]).
120 Ms Donovan was the only witness called by the Donovan respondents. Mr Donovan did not give evidence at the trial. He was available and, in fact, he sat in Court for most of the trial.
121 Ms Donovan said that she attended a dinner in mid-June 2007 at the CNF Café in Chapel Street, South Yarra, Melbourne. The persons present at the dinner were Mr Rafferty, Mr Luff, Mr Donovan, Mr Brunner, Mr Detsis, Mr Koch and herself. Ms Donovan said that there was a discussion about the accommodation units and the modules that Mr Donovan was developing. Mr Donovan told those present that he had attended a meeting with Mr Frances Price from BHP. Mr Donovan said that the meeting had gone well. He said that Mr Price would contribute $200,000 for a prototype to be used for a mining village. He said that this was subject to approval of the plans. The prototype would be used as a display unit at BHP's coal mining site to allow BMA to test it. Mr Donovan said that the idea of the unit was that it would comprise three rooms to be occupied by single men. Mr Donovan said that Mr Price had said that he would like to be involved in Mr Donovan's mobile accommodation unit concept. Ms Donovan does not remember Mr Donovan saying that any such units were being built at that time. Mr Donovan did say that he had instructed Idle Architects and Cardno Engineers to commence preparing the required plans. Mr Donovan said that he had hoped the module could be built by Christmas and he said words to the effect of "we will see how things will go".
122 Ms Donovan attended the lunch at the winery on the Mornington Peninsula. There were about 20 people present. Ms Donovan said that a number of bottles of wine were brought out during the course of the lunch. She recalls Mr Rafferty drinking a fair amount and that by the end of the lunch he was slurring his words. At about 4.00 pm, Mr Rafferty, Mr Luff, Mr Donovan and Mr Brunner went to another area. Mr Luff and Mr Brunner came back to the table. Mr Rafferty and Mr Donovan spoke by themselves for about three minutes. After the lunch, members of the group went to the Imperial Hotel. The group at the Imperial Hotel were Mr Rafferty, Mr Luff, Mr Donovan, Ms Donovan, Mr Koch and Ms Donovan's sister, Anya. Ms Donovan said that Mr Rafferty and Mr Luff were drinking heavily. At some point, the group moved to a Greek restaurant to have dinner. They were joined by a man in a cowboy hat. The drinking continued. Ms Donovan does not recall anyone talking much about business. She said that Mr Rafferty became very drunk and fell off his chair. I should add that Mr Rafferty said that he did not have any more to drink than anyone else on that day.
123 Ms Donovan attended a lunch in March 2008 in Melbourne. Mr Rafferty, Mr Donovan and a Chinese delegation were present. In addition, Mr Downes, Mr Levy and Mr Worthington were present.
124 The principal significance of Ms Donovan's evidence appears to be her recollection of what her husband said at the dinner at the CNF Café.
125 I have carefully considered Ms Donovan's evidence. It does not cause me to doubt Mr Rafferty's honesty or reliability. His evidence is consistent with what Mr Donovan said to him both before and after the dinner at the CNF Café. It is possible that Mr Donovan made the comments attributed to him by Ms Donovan but Mr Rafferty did not hear them. That seems unlikely having regard to Mr Rafferty's recollection of what was said. In my opinion, Ms Donovan must be mistaken in her recollection.
126 There are two additional reasons for accepting Mr Rafferty's evidence about what he was told by Mr Donovan. First, Mr Donovan did not give evidence and, in those circumstances, I can infer that his evidence would not have assisted the Donovan respondents and I can more readily accept Mr Rafferty's evidence: Jones v Dunkel (1959) 101 CLR 298. Secondly, the evidence of Mr Worthington and Ms Davis about Mr Donovan's statements concerning the construction of a prototype in China may be used as tendency evidence. The evidence was admitted without objection. In any event, I would have allowed the evidence under s 97 of the Evidence Act 1995 (Cth). It met the conditions for admissibility. Had I been asked, I would have dispensed with the requirement of notice (see s 99 and s 100 of the Evidence Act 1995 (Cth); O 33 r 18 Federal Court Rules) and the evidence has substantial probative value.
127 Furthermore, there is Mr Donovan's statement in an email to a third party dated 11 September 2007 (Exhibit A28):
"This prototype [for mining accommodation] is currently under construction in China."
128 The statements in an email from Mr Donovan apparently to Mr Luff dated 14 August 2007 do not lead to a contrary conclusion.
129 Mr Rafferty gave evidence in support of his case that he would not have entered into the agreements had he been told there was no prototype in China and no manufacturer under contract to make a prototype or production models. He also gave evidence of what he would have done had the Franchising Code been complied with. He called two solicitors to give evidence of the legal advice they would have given him had he consulted them in October 2007. Although the Donovan respondents and Madgwicks disputed the applicants' case on a number of grounds, it is fair to say that an alleged lack of reliance or failure to prove causation was a major ground.
130 Mr Rafferty explained his reasons for not seeking legal or financial advice in relation to the venture. He said that he did not think he needed legal advice because a lawyer from a reputable legal firm (that is, Madgwicks) was drawing up the agreements. Neither Mr Donovan nor anyone from Madgwicks ever said that Madgwicks were not advising him. As far as financial advice is concerned, none of Mr Donovan, Deloitte or Madgwicks ever said to Mr Rafferty that he should obtain financial advice.
131 Mr Rafferty said that if he had been told that he should obtain legal advice he would have spoken to Mr Cosoff. He said that if he had been told that he should obtain independent accounting advice he would have spoken to his regular accountants in Perth, Moore Stephens.
132 Mr Rafferty had limited knowledge of Mr Donovan's companies and he did not know anything of the business experience of the managers or staff of those companies or their trading or business history. Mr Donovan spoke very confidently about agreements with BHP on mining site accommodation units, and about the manufacture of the prototype in China. Mr Rafferty said he had little information about likely sales levels. Mr Rafferty said that he would not have signed the agreements if he had known that there was no current agreement with a manufacturer able to provide the products in a timely fashion. That was critical to his understanding of the business and his expectations of financial viability. He believes he was not provided with the information he needed to make an informed decision about whether to enter into the agreements and, in fact, the information he was given in relation to the manufacturing arrangements and the availability of prototypes was false or incomplete.
133 Mr Rafferty said that if he had received advice from his lawyers, Mr Cosoff or Mr Marryat, in the terms set out in their affidavits before he signed the HOA, then he would not have entered into the HOA. Based on his previous dealings with Mr Cosoff, he would have accepted and followed the advice provided to him by Mr Cosoff and Mr Marryat. Mr Rafferty trusted Mr Cosoff and followed his advice. Mr Rafferty said that he would have informed Mr Cosoff and Mr Marryat of the representations and he would have told Mr Cosoff that the timing of the availability of the product, which was the subject of the proposed HOA, was important to him. He would have instructed Mr Marryat to negotiate on his behalf with the lawyers acting for Mr Donovan, namely, Madgwicks, for an agreement on different terms and on terms which accorded with the advice which Mr Cosoff and Mr Marryat say they would have provided to him. In particular, Mr Rafferty states that if he had received the advice outlined by Mr Cosoff and Mr Marryat, he would have provided instructions that he would not commit to, or execute, any agreement until he had seen a prototype modular building unit or been able to satisfy himself that such a prototype would be ready by Christmas 2007. He would have instructed Mr Marryat to ensure that his interests were fully protected in the event that the manufacture of a prototype modular building unit was not completed in China before Christmas 2007, in the event that Mr Donovan or his associated companies had not entered into a contract with a company in China known as "Duowei" to manufacture modular building units in China or in the event Mr Donovan or his associated companies had not entered into a contract with an entity known as BMA for the purchase by that entity of approximately 100 modular building units. Mr Rafferty said that he would have instructed Mr Marryat to negotiate an agreement that recorded either no payments were to be made by him, or on his behalf, or by any entities associated with him, in the terms contemplated by the HOA unless and until the representations were satisfied, or if any of those payments were made, they were to be held by a stakeholder for return to him if conditions relating to the representations made to him had not been satisfied. Mr Rafferty states that he would have instructed Mr Marryat to ensure that his interests were properly protected under the provisions of the Franchising Code and he would have instructed Mr Marryat to negotiate on his behalf an agreement, in accordance with the advice of Mr Marryat and Mr Cosoff, which properly protected his commercial interests.
134 I will return to the important question of whether I should accept Mr Rafferty's evidence of what he would have done had there been no contraventions of the TPA.
135 Mr James Cosoff is a partner in Cosoff Cudmore Knox. He gave evidence before me. He was an honest witness and I accept his evidence. In reaching that conclusion, I have had regard to the fact that Cosoff Cudmore Knox are the solicitors acting for the applicants, and that they wrote to the solicitors then acting for the Donovan interests in May 2008 in this proceeding in the terms I have described above (at [102]. Nevertheless, Mr Cosoff was a straightforward witness and nothing was put to him in cross-examination which leads me to conclude that I should not accept his evidence.
136 Mr Cosoff was admitted as a practitioner of the Supreme Court of South Australia in or about December 1978. He has practised as a solicitor since that date. His main area of practice is in the area of commercial disputes. He also has experience in the management of legal firms. Cosoff Cudmore Knox was established in October 1998, and Mr Cosoff has been the managing partner of that firm since late 2004.
137 Cosoff Cudmore Knox has a commercial transactions practice, and Mr William Marryat has been head of that section of the practice since late 2004. Cosoff Cudmore Knox also has a commercial disputes section, and, prior to his appointment as managing partner, Mr Cosoff was the head of this section.
138 Mr Cosoff met Mr Rafferty in about 1997. Mr Rafferty was a director of a private company called Labtech Essa Pty Ltd (Labtech Essa). Labtech Essa became a client of Cosoff Cudmore Knox following the establishment of the firm in October 1998. Mr Cosoff had frequent dealings with Mr Rafferty following the establishment of Cosoff Cudmore Knox and many of those dealings related to intellectual property matters in which Cosoff Cudmore Knox acted for Labtech Essa. Some of those matters led to litigation in this Court.
139 Mr Cosoff did not know that Mr Rafferty had entered into the transaction embodied in the agreements until April 2008. Mr Cosoff was asked to assume that Mr Rafferty contacted him on or about 1 October 2007 and provided him with a copy of the HOA. On that assumption, Mr Cosoff was asked to answer four questions.
140 First, Mr Cosoff was asked what he would have done in response to Mr Rafferty's inquiry and who he would have involved in the matter. Mr Cosoff said that he would have asked Mr Rafferty for as much information as possible and that he would have arranged to meet Mr Rafferty in Adelaide. He would have involved Mr Marryat in providing advice to Mr Rafferty. He would have read the documents prior to meeting with Mr Rafferty and he would have had a discussion with Mr Marryat about the matters to be raised with Mr Rafferty.
141 Secondly, Mr Cosoff was asked what questions or issues he would have raised with Mr Rafferty. He said that he would have asked Mr Rafferty about his experience in the industry referred to in the HOA and his knowledge of Mr Donovan and his associated entities. He would have discussed with Mr Rafferty the risks associated with the transaction. He would have raised with Mr Rafferty the amount of money he was putting into the venture in circumstances where, while he was contributing a significant amount of money and time, Mr Donovan did not appear to be contributing any money. He would have raised with Mr Rafferty the level of borrowings associated with the money to be contributed by him. He would have raised with Mr Rafferty whether he had seen the prototype referred to in the HOA. He would have raised with Mr Rafferty the question of whether he had taken any accounting advice or any other advice. He would have raised with Mr Rafferty a number of general matters about the structure of the arrangements, the control of the arrangements, how the venture would be funded and what the consequences would be for Mr Rafferty if the venture failed or indeed if the venture succeeded.
142 Thirdly, Mr Cosoff was asked whether he would have discussed the Franchising Code with Mr Rafferty. Mr Cosoff said that he would have discussed the Franchising Code with Mr Rafferty. Mr Cosoff said he would have agreed with Mr Marryat that he (Mr Marryat) would raise the matter during the meeting with Mr Rafferty as he had far greater experience with the Franchising Code.
143 Fourthly, Mr Cosoff was asked what advice he would have given to Mr Rafferty. Mr Cosoff, on the assumption that nothing was said during the hypothetical interview with Mr Rafferty which would have led him to form a different view, would have advised Mr Rafferty not to proceed with the transaction, at least on the terms contemplated. He would have given this advice for a number of reasons. First, Mr Rafferty was paying a significant amount of money to people who, so far as Mr Cosoff knew, were not well known to him, to do something in an industry where, so far as Mr Cosoff knew, he had no experience. Secondly, that was being done in circumstances where Mr Rafferty appeared to be funding the venture in full and, in addition, putting in his time. Thirdly, the control of the venture would not be in the hands of Mr Rafferty. Mr Cosoff considered that the transaction appeared very risky for Mr Rafferty and very uncommercial. The terms of the HOA struck him as being very complex.
144 Mr Cosoff was asked to assume that the Donovan respondents had made the following representations to Mr Rafferty:
1. That manufacture of a prototype Modular Building Unit was to be completed in China before Christmas 2007.
2. That Mr Donovan or his associated companies had entered into a contract with a company in China known as "Duowei" for Duowei to manufacture modular building units in China.
3. That Mr Rafferty would be able and permitted to finance an anticipated investment of an additional $3.3 million from his profit from sales of modular building units.
4. That Mr Donovan or his associated companies had entered into a contract with an entity known as "BMA" for the purchase by that entity of approximately 100 modular building units.
145 In light of these matters, Mr Cosoff said that he would have advised Mr Rafferty that it would be imprudent to commit to payment of any substantial amount of money without having personally confirmed, by a visit to China if necessary, that a prototype was complete or substantially so. Mr Cosoff would have advised Mr Rafferty that he should verify personally all of the matters which were essential to the success of the venture before executing the HOA and before making any significant financial outlay. He would have advised Mr Rafferty that, given the size of the proposed investment, he should meet the manufacturer and satisfy himself in person of the manufacturer's expertise and capability.
146 Mr William Marryat is also a partner in Cosoff Cudmore Knox. Mr Marryat was an honest witness and I accept his evidence. I make the same observations as I have in connection with Mr Cosoff (at [135]).
147 Mr Marryat was admitted to practice in 1980. His areas of practice are advice with respect to commercial transactions, taxation matters, franchise agreements, intellectual property, licensing agreements and similar arrangements. He has experience in relation to corporate matters including providing advice on shareholders' agreements.
148 Mr Marryat met Mr Rafferty at least once before October 2007.
149 Mr Marryat was provided with a copy of the HOA and he was asked to assume that he was asked by Mr Cosoff to attend a meeting with Mr Rafferty in October 2007. Mr Marryat said that he would have discussed the matter with Mr Cosoff before the meeting and he would have made notes of the structure and the commercial transactions contemplated by the HOA. Mr Marryat said that he would have pointed out to Mr Rafferty certain key features of the HOA. He would have expressed concern to Mr Rafferty about the fact that, despite the payment of the seed fee and the other party making no contribution, the Rafferty interests would be in the minority in T2W and that all decisions of shareholders were to be by simple majority. Mr Marryat would have told Mr Rafferty that the payment of any moneys in circumstances where the actual shareholders agreement had not been seen, let alone agreed, was unwise. He would have advised Mr Rafferty that the payment of any money into a company which he did not control and where any decision could be made by simple majority, particularly as he had contributed all the money, would not be prudent. He would have advised Mr Rafferty that if the HOA had been terminated he, Mr Rafferty, would forfeit the seed fee. He would have pointed out the fact that the HOA required the Rafferty interests to make substantial financial contributions in circumstances where the other party contributed nothing and yet controlled T2W.
150 Mr Marryat would have considered whether the HOA was a franchise. He would have raised the matter with Mr Rafferty and he would have discussed the ramifications of a franchise and, in particular, the disclosure documents that must be provided under the Franchising Code. He would have given Mr Rafferty advice about the Franchising Code and he would have told him that, given the fact that Embleton and T2SA, were associates the HOA "may very well be a franchise agreement". In any event, he would have told Mr Rafferty that far more work needed to be done before any agreement of this nature was executed. Mr Marryat would have been alarmed about the terms of the proposed Rights Agreement and in particular the payment of the initial fee for the grant of the right in the sum of $1 million which was in effect coming from the Rafferty interests. He would have advised Mr Rafferty of those concerns. He would have encouraged Mr Rafferty to see his accountant. If Mr Rafferty had seen his accountant, and his accountant had considered that the transaction was viable, Mr Marryat would have advised Mr Rafferty to seek a second view. Mr Marryat considered that unless the $1 million fee payable to Embleton could be confirmed by a qualified accountant or business adviser as being a discount on the true value of the licence or commercially sensible on some viable ground, then the arrangement did not appear to make any commercial sense. It appeared to be a mechanism whereby the T2SA group required the Rafferty interests to fully fund a business that might potentially benefit the Rafferty group if successful. On the other hand, the arrangement would definitely benefit the T2SA group. Mr Marryat would have advised Mr Rafferty not to sign the HOA in its then form.
151 I turn now to the evidence called by Madgwicks. Madgwicks called two witnesses, Mr Graham Levy, who at the relevant time was a partner, and Ms Susan Harris, who at the relevant time was a solicitor employed by the firm. I have considered their evidence carefully. Their knowledge or lack of knowledge about whether the Franchising Code applied to the agreements is an important issue in the cases for reasons which will become clear. I consider that they were honest witnesses.
152 Mr Levy was admitted to legal practice on 1 April 1971. Since 1975, he has been a partner in Madgwicks, a firm of solicitors based in Melbourne, Victoria. He has practised primarily in the areas of commercial and corporate law, insolvency and reconstruction, and commercial litigation.
153 In July 2007, Mr Levy was introduced to Mr Donovan of Time Developments by Mr Graeme Adams, a partner of Deloitte. Mr Levy was told of Mr Donovan's development of a new concept in modular housing and of the legal issues upon which Mr Donovan may need advice. Mr Levy first met with Mr Donovan on 5 July 2007. Mr Adams and another member of Deloitte were also present. Mr Donovan explained to Mr Levy his plans for the development of his concept of modular housing. It is fair to say, that Mr Donovan had extensive plans, including the development of his modular building concept in Europe. Mr Donovan advised Mr Levy that Time Developments had persons working for it that were not being paid anything but had an expectation of receiving an interest in the company. A number of names were mentioned, including Mr Brunner, Mr Detsis and Mr Koch. On 9 July 2007, Mr Levy was instructed by Mr Donovan to carry out various items of legal work. I do not need to set out the details as to the various letters of retainer. It may be noted that the retainer letter of 23 November 2007 referred to the drafting of the Heads of Agreement between T2SA and BM Alliance Coal Operations Pty Ltd (called BMA Coal) for the purpose of BMA Coal entering into a supply contract with the company created by Mr Donovan, called Time 2000 Dysart Pty Ltd, subject to the production of a prototype satisfactory to BMA Coal.
154 Mr Levy's understanding was that during the time he was advising Mr Donovan, Deloitte was also advising Mr Donovan.
155 On 19 September 2007, Mr Levy met Mr Donovan in Madgwicks' offices. Mr Donovan told Mr Levy that he had an investor, Mr Patrick Rafferty, who wanted to invest in the Time 2000 project. He gave Mr Levy details of what was proposed.
156 On 21 September 2007, Mr Levy went to the offices of Deloitte. He first met with Mr Donovan. Later in the meeting he was joined by Mr Adams and another partner of Deloitte, Mr John Downes. The group in Melbourne had a telephone conversation with Mr Rafferty. Among other things there was a discussion about prototypes and Mr Donovan said that Mr Rafferty's involvement would fast-track a prototype for ecotourism. Mr Rafferty said that he would need a small, single bedroom unit and he said he would be happy to fund such a unit.
157 At some stage, either at this meeting or at another meeting, Mr Donovan advised Mr Levy that he would like confidential documents and other mail to be sent to him care of his mother's address. That was because he was concerned with preserving the confidentiality of documents from his employees.
158 On 25 September 2007, Mr Levy again went to the offices of Deloitte. Various members of Deloitte were present, including Mr Adams and Mr Downes. Mr Donovan attended the meeting. They discussed the proposed deal with Mr Rafferty. Later, there was a telephone call with Mr Rafferty. It was agreed that they would meet at 11.00 am on Thursday of that week. Mr Levy's evidence that Mr Rafferty said he would bring a solicitor with him to act in the matter.
159 Mr Downes subsequently prepared a document headed "Time 2000 and Patrick Rafferty - Thoughts for Discussion".
160 On 27 September 2007, Mr Levy and Ms Harris of Madgwicks went to the offices of Deloitte, where a meeting was held. Initially, Mr Donovan, Mr Adams and Mr Downes, were present. At an early stage of the discussions, Mr Levy or Ms Harris raised the question of the Franchising Code and whether it would apply to the proposed transaction. One or other of them said that there was a risk that the proposed transaction would be a franchise and that that would necessitate compliance with the Franchising Code. Mr Levy or Ms Harris said that there were strict compliance requirements including disclosure obligations and that Madgwicks would give further consideration to the matter. Those discussions took place before Mr Rafferty joined the meeting. Mr Rafferty joined the meeting and at some stage, he said that $200,000 could be provided to engage consultants to prepare the prototype and the balance could be provided as required for working capital. During the meeting, there was reference to a manufacturing contract and it was suggested that three prototypes be obtained from the same factory.
161 On 28 September 2007, Mr Levy and Ms Harris received instructions to commence drafting a Heads of Agreement. At that time, Ms Harris started to investigate the issues which might arise under the Franchising Code.
162 On 1 October 2007, Ms Harris sent an email to Mr Downes. Attached to the email was a letter from Madgwicks dated 1 October 2007 and a draft Heads of Agreement. The letter from Madgwicks was signed by Mr Levy and Ms Harris. It is in the following terms:
"Attached is a draft of a heads of agreement for consideration by you, Graeme Adams and Stephen Donovan. We have provided a draft directly to Stephen Donovan.