Extensive market research commissioned by the first respondent had established that the market was ripe for a second major pizza franchise in Victoria (Statement of Claim, par 7(1)(d))
181 The applicants' evidence was that Gabriel Christou and Reyes had made this representation.
182 As already noted, Reyes gave evidence that, at the meeting on 5 September 1990, he had said that, given the turnover figures for Pizza Hut, he believed that there was room for Pizza Haven in the Melbourne market; and that, at the meeting on 12 September 1990, Gabriel Christou had referred to Pizza Hut as being the only major brand in competition with Pizza Haven in Victoria. In cross-examination, Gabriel Christou substantially agreed that, at the 12 September 1990 meeting, he had referred to Pizza Hut as the major competitor in Victoria (although he denied that either he or his brother had referred to market research).
183 On the evidence, it is more probable than not that at some stage both Gabriel Christou and Reyes referred to Pizza Hut as the other major competitor to Pizza Haven in Melbourne. Reyes most likely did so on 5 September 1990 when he was showing the Pizza Hut turnover figures to Sanders and Taylor. Gabriel Christou repeated the reference in discussions on 12 September 1990. At most, however, their evidence established that they represented that there was only one major competitor in the relevant market and that, in this situation, Pizza Haven could be expected to compete successfully. None of this evidence supported the making of a representation in the terms pleaded by the applicants, which involved a reference to market research commissioned by the first respondent.
184 Bearing this in mind (as well as the matters referred to in connection with the representations pleaded in pars 7(e) and (f) of the statement of claim), the applicants have not discharged their burden of proof in relation to this alleged representation.
All five operating stores in Melbourne were trading at a level which meant they were returning a profit (Statement of Claim, par 7(1)(g))
185 The evidence of Zienkiewicz and Sanders was to the effect that, in their meeting with Reyes on 12 September 1990, Reyes showed them and Taylor a table of then current sales figures for the Vermont, Dandenong, Werribee and Knox stores; and that Reyes said that, whilst the stores had only been operating for "a few months", they could see from the profit projections table that they were trading profitably. The only document in evidence recording these figures is a copy of a fax dated 14 September 1990 from Evan Christou to Reyes, which was later provided to Hughes (see below). This document did not include the figures for Elsternwick, which opened in July 1990.
186 Taylor did not recall whether this information had been shown to him at any meeting with Reyes and the applicants. Reyes denied that he gave this information to the applicants and Taylor at any meeting with him. He maintained that this information had been given to Hughes at Hughes' request. In cross-examination, Hughes agreed that Reyes had sent the Victorian store figures to him.
187 I accept the evidence of Reyes, ultimately supported by Hughes, on this point. Given that in the Kaytonruby litigation, Zienkiewicz gave a different account to the present one of how he came by this information; that Hughes agreed that Reyes sent this information to him; and that Taylor (who by reason of his knowledge and experience would have been the most likely person to recall the information) had no recollection of Reyes showing it to him, I find that Reyes did not show the Victorian sales figures to the applicants and Taylor at the meeting on 12 September 1990, and that this information was sent by Reyes to Hughes, apparently without comment, after Hughes had requested further information.
188 Hughes was an accountant, and I have little doubt that he fully appreciated that these very limited figures said nothing about the profitability of the four Victorian stores referred to in the table. The information plainly showed that, whilst the stores had had opening sales of between $4,197 and $6,510, no store had been operating for more than three months, and that two stores (Werribee and Knox) had only been operating for between two and three weeks. In this context, I reject the proposition that the first respondent made the representation as alleged.
Pizza Haven was expanding and would have about 50 stores in Victoria by July 1992 (Statement of Claim, par 7(1)(h))
189 Zienkiewicz and Sanders gave evidence that Gabriel Christou stated that there would be 50 stores trading by July 1992 at the meeting with them at Franchise Developments in September 1990. Taylor and Louis Christou gave no evidence about a representation of this kind. Gabriel Christou's evidence was that he said that they "were looking forward to having 50 stores set up in Australia within about two to three years". Reyes gave evidence to the like effect as Gabriel Christou.
190 I accept that Gabriel Christou made some statement about the number of stores that he hoped would open in the ensuing two or three years. It is impossible to determine on the evidence whether his statement related to the stores to be opened nationally or merely in Victoria. Indeed, the relevant pleading in the original statement of claim was merely that the first respondent had represented that Pizza Haven would "have about 50 stores by July, 1992 … ". As counsel for the respondents noted, the first respondent did in fact have 50 stores open in Australia by July 1992. Given the matters set out at [167] - [177] above, there is no reason to prefer the applicants' evidence to that of Gabriel Christou. The applicants have not discharged their burden of proof in relation to this alleged representation.
A Pizza Haven franchise was an attractive investment (Statement of Claim, par 7(1)(i))
191 Zienkiewicz and Sanders gave evidence that Reyes told them that the acquisition of the franchise store at Ormond was a good investment since it would enable them to recoup their investment within a year. Taylor did not give evidence to this effect. Reyes conceded that he knew that the applicants and Taylor were intending to be investors; that he "believed in" Pizza Haven; and that he probably told the applicants and Taylor that he believed that a Pizza Haven franchise was a "good investment". Reyes denied, however, that he made this representation specifically in connection with Ormond (see below).
192 On Reyes' own evidence, it is more probable than not that he told the applicants and Taylor that, in his view a Pizza Haven franchise was a good (or attractive) investment, although, as appears below, I am not satisfied that he made any such statement specifically about the Ormond franchise. I accept that the representation as pleaded was made, assuming that Reyes (who was an employee of Franchise Development) is also to be regarded as an agent for the first respondent.
A Pizza Haven franchise was an ideal investment opportunity for investors rather than owner/operators (Statement of Claim, par 7(1)(j))
193 Sanders and Zienkiewicz gave some evidence that might support this alleged representation in their first witness statements and, in Zienkiewicz's case, in a subsequent statement.
194 The respondents denied the alleged representation. Gabriel Christou's evidence was that, despite the fact that he was not looking for investors but for owner/operators, he approved the applicants' and Taylor's applications because he was impressed with Taylor's experience, their proposal to hire a Pizza Hut manager, and with the fact that their wives were to be involved in the business. For the following reasons, and notwithstanding my doubts about the reliability of Gabriel Christou's evidence generally, I accept that these factors affected his decision to approve the applicants and Taylor as franchisees. First, his evidence was consistent with that of Reyes and Young, who also said these matters impressed them. Secondly, the applicants and Taylor too regarded these factors as important. Thirdly, each of the Christous (including Evan), Reyes and Young gave consistent evidence that, in undertaking franchising, the first respondent was looking to recruit owner/operators, rather than investors. Fourthly, their evidence was in keeping with the feasibility study and the franchise programme prepared by Franchise Developments, and the owner/operator model was the evident basis on which the profits projections table (in the Disclosure Document) was prepared. Fifthly, the letter of 5 September 1990 addressed to Taylor in terms reflected an assumption that franchise applicants would be owner/operators.
195 Taking account of this context, and bearing in mind the matters set out at [167] - [177] above, I am not satisfied that this alleged representation was made. The applicants have not discharged their burden of proof with respect to the representation in par 7(1)(j) of the statement of claim.
It would be of advantage to the applicants to take up more than one territory (Statement of Claim, par 7(1)(k))
196 Sanders' and Zienkiewicz's evidence was generally to this effect. They said that they had not intended to take more than one territory but that Gabriel Christou told them that they could only have the Ormond territory (which was a particularly desirable one) if they took a franchise over two territories. According to them, Gabriel Christou said that the offer was open for two weeks only. The version of Zienkiewicz's diary discovered in 1993 contained the notation "Had to buy two territories seeing we were investors". This was of equivocal significance, however: it may have recorded what Taylor said to Reyes and the Christous and not what they said to Taylor and the applicants (see below).
197 As already stated, the evidence showed that, by the time the applicants and Taylor met Gabriel Christou, they had decided to apply for two territories. Taylor, whose evidence was inconsistent with the applicants' evidence, was clear that, from the beginning, he told Reyes that his (and therefore the applicants') aim was to own two or three Pizza Haven stores. His evidence was that he had reiterated this to Gabriel and Louis Christou (in the applicants' presence). Zienkiewicz's diary note is entirely consistent with this (and other possibilities). According to Taylor, he and the applicants were told that, if they took the Ormond territory, then they could put a holding deposit on the Springvale territory. He said nothing of the offer being open for a limited period. Taylor's evidence was that Gabriel Christou had said Pizza Haven would relinquish Ormond as a company store if they liked, in order to get them up and running (emphasis added).
198 Gabriel Christou's evidence agreed, in substance, with Taylor's on this matter. He said that the applicants led by Taylor proposed to take two territories and that he granted their applications as owner/investors because of the particular features of their applications (see above). As I have stated, I accept his evidence in this regard. After discussing the applications with Young, Gabriel Christou said that he sought the inclusion of the Special Conditions that were to form part of the Ormond franchise agreement. His evidence on this point was consistent with that given by Young. The Special Conditions required the applicants and Taylor to open their first store within three months of the date of the agreement, and their second store within six months of "the commencement of the first operation".
199 I reject the applicants' evidence that they were required to take two territories to secure the Ormond territory or that Gabriel Christou (or anyone else on behalf of the first respondent) told them that it would be of advantage to them to take up more than one territory. It is true that, in cross-examination, Reyes conceded that he could have said that the acquisition of one or more Pizza Haven franchises was an outstanding opportunity, although he denied making any such statement with reference to Ormond. This concession, however, fell short of the alleged representation.
200 Subject to these matters, the matters set out at [167] - [177] above are also relevant in connection with this alleged representation. In this instance, I prefer the evidence of Taylor (and Gabriel Christou in so far as it is consistent with Taylor's evidence) to that of the applicants. I reject the proposition that the first respondent (through its director or otherwise) made the alleged representation.
The first respondent would organise an aggressive program of advertising and promotion of the Pizza Haven chain in Victoria (Statement of Claim, par 7(2)(a))
201 According to Zienkiewicz, Gabriel Christou said that Pizza Haven's success in Adelaide was attributable to "aggressive marketing and promotional campaigns" and that the applicants and Taylor "could expect the same in Melbourne". Reyes and Gabriel Christou gave evidence that Gabriel Christou had told the applicants that Pizza Haven had marketed the business aggressively in South Australia and planned to do the same in Victoria. (Neither Sanders nor Taylor gave evidence on the subject. Louis Christou was also silent on the matter.)
202 In substance, the respondents conceded that the first respondent, through its director, represented that it planned to organise an aggressive program of advertising and promotion of Pizza Haven in Victoria. The applicants have made out this representation as pleaded.
Each franchisee was required to pay to the first respondent each week an advertising contribution not exceeding 5% of its gross sales (Statement of Claim, par 7(2)(b))
203 This representation was plainly made. As noted in [42] above, the Disclosure Document informed prospective franchisees that franchisees were required to pay a weekly advertising contribution equal to 5.0% of their gross weekly sales.
204 The requirement was in fact contained in cl 2(ah) of the franchise agreement, which provided:
The Franchisee shall pay to the Franchisor a contribution in respect of all advertising and marketing conducted by the Franchisor or its agents during the term of the Franchise … in accordance with the calculations … set out in Schedule 12 … together with such additional amounts as the Franchisor may require … provided that such additional amounts are not opposed by a majority of the Franchisees.
Schedule 12, headed "Advertising Contribution", stipulated an amount of 5% of gross sales calculated and payable weekly.
3% of a franchisee's gross weekly sales being part of the advertising contribution would be spent by the first respondent on television, radio and newspaper advertising (Statement of Claim, par 7(2)(c))
205 The evidence does not establish that this representation was made prior to signing the Ormond franchise agreement. The franchise agreement provided in cl 3(g) for an advertising fund to pay the costs of publishing advertising and promotional material "in such manner as the Franchisor in its sole discretion" deemed appropriate.
2% of a franchisee's gross weekly sales being part of the advertising contribution would be spent by the first respondent on the distribution of promotional leaflets (Statement of Claim, par 7(2)(d))
206 The evidence does not establish that this representation was made prior to signing the Ormond franchise agreement. The terms of cl 3(g) of the franchise agreement are noted above.
The marketing and promotion of the Melbourne Pizza Haven stores would be similar to that for the Adelaide Pizza Haven stores (Statement of Claim, par 7(2)(e))
207 I refer to what I have said with respect to the representation alleged in par 7(2)(a) of the statement of claim. At the 5 September 1990 meeting, Reyes showed Sanders and Taylor a video of an advertisement that had been shown on Adelaide television, and told them that Pizza Haven planned to do similar advertising for Victoria. The evidence (see above) established that Gabriel Christou represented to the applicants and Taylor prior to signing the franchise agreement that the first respondent planned to carry out marketing and advertising in Melbourne that was similar to that carried out in Adelaide. The applicants have made out this representation as pleaded.
An advertisement which was televised in Adelaide would also be televised in Melbourne; alternatively, a new commercial of the same quality would be made for the promotion of the Pizza Haven chain in Melbourne as soon as 8 or 10 Pizza Haven stores were opened in Melbourne (Statement of Claim, par 7(2)(f))
208 I refer to what is set out above in connection with pars 7(2)(a) and 7(2)(e) of the statement of claim. The evidence did not show, however, that the first respondent represented that the advertisement that had been televised in Adelaide would also be televised in Melbourne. Nor did the evidence establish that the first respondent made a representation in the terms pleaded.
209 Sanders and Zienkiewicz gave evidence that Gabriel Christou told them that a television advertising campaign would begin when 8 to 10 stores had opened. They said nothing about any particular new commercial. No other witness gave evidence to the same effect as the applicants, and there is no written corroboration of this allegation. Bearing in mind the matters referred to [167] - [177] above, the applicants have failed to establish that this representation as pleaded was made.
The Ormond franchise was an outstanding investment opportunity (Statement of Claim, par 7(3)(a))
The Ormond franchise was going to be one of the better performing franchises (Statement of Claim, par 7(3)(b))
The Ormond franchise business would be established quickly and provide funds to enable the applicants to commence the Springvale franchise business (Statement of Claim, par 7(3)(g))
The applicants and Taylor would recoup their investment in the Pizza Haven chain within 12 months of operating the Ormond franchise (Statement of Claim, par 7(3)(i))
210 I deal with these four alleged representations in the following paragraphs.
211 The gist of Zienkiewicz's evidence was that Reyes had told the applicants and Taylor that the Ormond franchise was an outstanding investment opportunity, since investment in Ormond would enable them to recoup their investment within 12 months and generate the income to open Springvale. Sanders agreed that Reyes told them that Ormond was an outstanding opportunity, and that they would recover their investment in a year. Sanders and Zienkiewicz also said in evidence that Gabriel Christou had told them that a site had been chosen for Ormond, which the Christous planned to make a company store. According to Sanders, Gabriel Christou also said that it had been chosen as a company store "because of its outstanding properties".
212 Reyes gave evidence that he told the applicants and Taylor that he himself was buying the franchise for Syndal. He also said that he told them and that he would have taken the Ormond outlet for himself because it was closer to where he lived but he had been told that it was reserved for a company store. In cross-examination, Reyes, as we have seen, admitted that he believed that a Pizza Haven franchise was a good investment and that he could have said as much to the applicants and Taylor. He also said that he told them that Ormond had been picked out as a company store and that it was close to being operational. He consistently denied, however, that he told them that the Ormond franchise, in particular, was a good investment; that they would recoup their investment within 12 months; or that, because the Ormond store was close to being up and running, they would generate income from it for the opening of the Springvale store. Statements of this kind would, he said, have been contrary to Franchise Developments training and procedures.
213 Evan Christou (who despite being indisposed when he gave his evidence) impressed me as a truthful witness. He gave evidence in cross-examination that the Christous had "picked up the Ormond store because the store there had offices at the back which could be used for training in the first instance and the second thing is [we] thought Ormond would do okay". I accept this evidence. (Gabriel Christou said that he had chosen the store as a company store because it had a food permit, although he later noted that many places had food permits.)
214 Gabriel Christou denied that he told the applicants and Taylor that the store would be one of the better performing stores. When pressed in cross-examination about his expectations for the Ormond store in September 1990, he said:
I would have been happy to do 25, 30 per cent of Pizza Hut because that's, I guess - I start off very low and build it up.
This was about $2,500 to $3,000 per week. Ultimately, he said:
Well, it's hard to say. How do I remember my view? If you ask me my view, what's going to be the store that I'm opening in Chang Rai in Thailand I can tell you. But if you ask me what my view was 10 years ago in that particular store it would have been positive and it would have been something which - that it was part of my job to make it work.
I accept this latter evidence and that, as Gabriel Christou said, he would have been positive about the Ormond franchise in his discussions with the applicants and Taylor. Such optimism was consistent with Gabriel Christou's personality, his belief in his product, and the evidence of Evan Christou. It does not follow, however, that Gabriel Christou made the specific representations alleged against him.
215 Gabriel Christou denied that the applicants and Taylor had asked him about the expected turnover for the Ormond store. He said, "[T]hey already had an idea. They were not interested in the sales". When asked whether they asked him how the Ormond store was going to go, he answered:
No, look, from what I understood, they already had a plan with a Pizza Hut guy to go in there and do whatever they can to build it up. They've been to other stores. They spoke to franchisees. They've done their homework.
216 I reject as improbable Gabriel Christou's evidence that the applicants were "not interested in the sales", although, again, it does not follow that the representations alleged to have been made by him were in fact made. Taylor's evidence is corroborative of Gabriel Christou's evidence that they had "done their homework"; and that the applicants and Taylor told the Christous and Reyes about the plans they already had.
217 I reject the proposition that Reyes told the applicants and Taylor that, if they took the Ormond franchise, then they would recoup their investment in a year. I also reject the proposition that the applicants were told that they would be able to finance the opening of Springvale from the business of the store at Ormond. As already noted, in answer to a series of questions from the respondents' counsel, Zienkiewicz conceded that he had not told the Christous or Reyes the precise quantum or structure of the applicants' borrowings. Sanders' evidence was to similar effect. It became clear in cross-examination that the applicants' allegation that they would recoup their investment in 12 months was based upon their own reading of the profit projections table, and what they might have mistakenly hoped to achieve at Ormond.
218 Further, I accept that, as Reyes stated, statements of this kind (including a statement about the Ormond franchise in particular) would have been contrary to his training and that, generally speaking, he did as he had been trained to do and complied with Franchise Developments procedures. This was confirmed by his supervisor, Rod Young, whose evidence was that, amongst prospective franchisees, the most commonly asked question was, "Where in these levels should I expect to trade," and that he instructed his staff to say, "You should speak to an existing franchisee and make your own assessment." Taylor's evidence also supported Reyes' evidence that it was the applicants and Taylor who proposed to acquire more than one franchise, and he, Reyes, said nothing about the financing of Springvale from the Ormond business.
219 The applicants have been unable to point to any written corroboration of their evidence in this regard, save for an entry in Zienkiewicz's diary, which is of equivocal significance. As already noted, the version that was discovered in 1993 (before Zienkiewicz made his alterations) contained a note "Leo Reyes backed up all claims by Gabriel, profit, sales, buying power". Presumably, whatever Gabriel Christou said about these matters was "positive" but the note gives no indication as to the precise content of these positive statements.
220 Further, the Special Conditions in the Ormond franchise agreement are inconsistent with a representation about opening Springvale with profits from the Ormond business. The Special Conditions required the applicants and Taylor to open their first store within three months of the date of the agreement, and their second store within six months of "the commencement of the first operation". (The evidence shows that the applicants and Taylor investigated the opening of the store at Springvale within a time-period consistent with the obligations imposed by the Special Conditions.)
221 The matters set out at [167] - [177] above are relevant in this connection too. There is no reason to prefer the applicants' evidence to that of Reyes or Gabriel Christou. The applicants have not discharged their burden of proof in relation to these alleged representations.
Research commissioned by the first respondent had shown that the Ormond franchise would initially turn over $10,000 to $12,000 a week and that turnover would rise to $15,000 per week (Statement of Claim, par 7(3)(c))
A turnover of $4,500 per week would be easily achieved by the Ormond franchise and the applicants should expect to achieve a turnover of at least $7,000 per week at the Ormond store (Statement of Claim, par 7(3)(f))
The applicants should expect to achieve a turnover of at least $7,000 per week at the Ormond store (Application to amend Statement of Claim, par 7(3)(f))
222 The last representation (referred to above) was the subject of an application for leave to amend the statement of claim by deleting the reference in par 7(3)(f) to a weekly turnover of $4,500. As appears below, I would not accede to this application.
223 In support of their application, the applicants submitted, first, that the representation about the $7,000 weekly turnover had been part of their case from the beginning. Secondly, they submitted that the respondents would not be disadvantaged by the amendment, if allowed, because they had confronted a similar allegation in the Kaytonruby litigation and, thirdly, that the respondents had, in any event, cross-examined the applicants and Taylor on what was said in the conversations on 5 and 12 September 1990.
224 I accept that the respondents would suffer significant prejudice if the amendment were allowed and that this prejudice could not readily be overcome. Bearing in mind the history of the litigation, the respondents were entitled to formulate their defence on the basis that they were to meet the representation as pleaded in par 7(3)(f) of the statement of claim: cf Banque Commerciale SA, en liquidation v Akhil Holdings Limited (1990) 169 CLR 279, at 286-7 per Mason CJ and Gaudron J. The respondents chose to meet the representation as pleaded in par 7(3)(f) by denying that they made the representation and putting the applicants to their proofs. If a representation in the terms of the proposed amendment had been pleaded, the respondents may very well have chosen to advance a "reasonable grounds" defence in the terms of s 51A of the TPA. In the circumstances of this case, where it had been made clear at an early stage of the trial that the proceeding would be conducted on the pleadings, and given the reverse onus effect of s 51A, it would be unjust to the respondents to permit the applicants to substitute a new unpleaded representation for the representation as pleaded: cf Cummings v Lewis (1993) 41 FCR 559, at 567 per Sheppard and Neaves JJ. This is not a case where it was clear from the conduct of the trial that the applicants were relying on an unpleaded representation: cf Cummings v Lewis, at 581 per Cooper J and Miba Pty Ltd v Nescor Industries Group Pty Ltd (1996) 141 ALR 525 (Miba), a 542-3 per Merkel J. Further, I accept that the respondents' cross-examination may well have been conducted differently had they been on notice of a requirement to meet a representation solely concerned with a $7,000 a week turnover and not the representation pleaded in par 7(3)(f) of the statement of claim.
225 It must be borne in mind that (1) the litigation, which commenced in 1992, has provided numerous opportunities for the amendment of pleadings, including in 1996, when the decision was made to include par 7(3)(f) in its current form; (2) the evidence in the case concerned events that happened more than a decade ago; and (3) the evidence-in-chief was presented in writing. Moreover, given the protracted history of the litigation, the length of the trial to date, and the patent difficulties associated with recalling principal witnesses to give further evidence, the prejudice to the respondents could not reasonably be met by permitting the case to be re-opened: cf Ting v Blanch at 551 per Hill J.
226 The evidence concerning the pleaded representations on turnover would also have been relevant to the representation that was the subject of the leave application. Notwithstanding that, for the reasons given, I would not accede to this application, I have discussed below the $7,000 weekly turnover representation as though it fell to be considered on the current state of the evidence (and leave had been granted) because the applicants' case ultimately rested so heavily upon it.
227 In the original statement of claim, the applicants pleaded only a representation that they would "achieve a turnover of at least $7,000 per week". The pleading remained in this form in two further versions of the statement of claim, and was not altered until 1996, when par 7(3)(f) took its present form. In making the application to amend, the applicants' counsel conceded that there was "no evidence as to the $4,500 per week" and that the applicants did not seek to rely on "any representation or part of a representation as to $4,500 per week". This concession effectively disposed of the second of the representations set out above. Further, although the applicants did not abandon the first of these representations, the gist of the applicants' final submissions was inconsistent with it. Practically speaking, the applicants' case relied on the $7,000 per week representation.
228 The applicants' case in final submissions was that Gabriel Christou, supported by Reyes, had told them that, after the initial start-up phase, they should expect to achieve a turnover of at least $7,000 per week at the Ormond store, and that at some time in the future they could expect even higher levels of trading (emphasis added). This was notwithstanding that the evidence given by the applicants and Taylor in cross-examination was, for the most part, that Gabriel Christou told them that they could expect the Ormond store to start at a weekly turnover of about $7,000 (emphasis added). The applicants also claimed in evidence that they were led to believe that the Ormond store would have a turnover of $10,000 to $12,000 in the first trading year. This again was not entirely consistent with the way in which they ultimately sought to put their case.
229 In his first witness statement, Zienkiewicz maintained that Gabriel Christou told the applicants and Taylor that market research showed that they could expect a weekly turnover of $7,000 on the opening of the Ormond store, rising to between $10,000 and $12,000, and this could rise to $15,000 after the first trading year. Sanders' first witness statement was to similar effect. (Emphasis added.)
230 In cross-examination, Zienkiewicz reiterated that Gabriel Christou said that the store would begin at $7,000 (said by Christou to be easily achievable) rising to between $10,000 and $12,000. Also in cross-examination, Zienkiewicz said that, based on what Gabriel Christou had told him, he "had an anticipation that [he] would be doing 12,000 within 12 months". (Emphasis added.)
231 Sanders' evidence in cross-examination was that, based on what Reyes and the Christous told him, he expected that the Ormond store would have a weekly turnover "in the order of $7,000 ... from starting" (emphasis added). When counsel for the respondents asked him, "were you working on a guarantee of 10 to 12 thousand dollars quickly achievable?", he answered:
It had been said that 10 to 12 thousand would be achieved, not immediately but probably towards the end of the first year's trade. My concern was that we were going to trade profitably from the outset and I was more than confident, given the confidence that Gabriel and Louis Christou had divulged to us - their confidence as a result of the market research they had undertaken.
232 Sanders also referred to a "guarantee of 10 to 12 thousand dollars being quickly achievable". He said, in cross-examination, that "the guarantee was such that if it failed to perform the franchisor would be in to see that it got back up to that volume of turnover".
233 Taylor did not mention any figures in his witness statement, although he said that Gabriel Christou had told him and the applicants that Ormond would be "a very busy store" and that he, the applicants and the Christous had discussed "the level of sales they said the store would achieve". In cross-examination, he said:
What I can recollect is that Ormond was presented that there was already a leasing place to Pizza Haven and it was going to be used as a training store, high visibility. They had already done market research to say that it had, you know, a ripper potential basically based on what they had told us. You know, figures were quoted or insinuated of between 7 and 8 thousand starting a week. You know, a big store and it was going to be their flagship which, if I think back, I mean, that was probably one of the reasons why we took that. It was going to be up and running quicker. You know, quicker sales, quicker cash flow, and the added bonus was we had a store manager that worked three or four kilometres away.
234 In re-examination, Taylor said that Gabriel and Louis Christou told them that "based on the market research and where they thought it would sit, it would start at 7 to 8000 and it would be a very good store and it was set up and running, or it would be set up and running". There was, as will be seen, no reference to these figures in his earlier witness statement.
235 There was some documentary corroboration for the evidence given by the applicants and Taylor. At some time when the applicants were trading, probably about August 1992, Zienkiewicz had noted on a copy of the Disclosure Document (on p 17) "told us Ormond was to be a company store and expected to start at $6,000 and quickly jump to $10,000" and (on p 18) "would easily do $7,000 under management".
236 As already noted, in a file note for 12 September 1990, Zienkiewicz's accountant, Hughes, recorded that he had had a discussion with Zienkiewicz, noting "an indication of a turnover of $7000 per week predicted" (emphasis added). The note was silent as to the source of the prediction, whether the prediction related to turnover on opening or some later time, and whether the prediction related to a store at Ormond or generally. In cross-examination, Zienkiewicz was asked whether he told "Mr Hughes at the meeting of 12 September that the sum of $7000 per week was predicted" and he answered "I would have told him what was said to me at that meeting [with Gabriel and Louis Christou]".
237 Weighing against the applicants' case was the fact that Zienkiewicz himself did not refer to weekly turnovers of $7,000 or $10,000 to $12,000 in an affidavit sworn by him on 1 August 1996, and filed in the Kaytonruby litigation (see above). Further, in the form discovered in 1993, Zienkiewicz's diary contained no mention of any particular turnover figures. When, however, Zienkiewicz amended the diary some years later, he added the note, "Would do any thing to make sure stores achieved $4,000 - which was break even for store under management - would be in store after month and make sure". In the circumstances (including for the reasons outlined earlier) I would attach little, if any, weight to Zienkiewicz's evidence on the matter of turnover.
238 I remain doubtful about the reliability of Taylor's evidence on the topic, since, as noted above, at the time of trial, his recollection of the events and conversations in September 1990 was sketchy. He was unable to explain satisfactorily his inability to recall other matters of apparently equal moment to the matters he could recall or his failure to include a reference to turnover figures in his first witness statement. Further, for the reasons already given, there were also doubts about the reliability of Sanders' evidence. In any event, the applicants' evidence that Gabriel Christou or Reyes represented that the store at Ormond would have a weekly turnover of $7,000 from start-up was contrary to the inherent probabilities of the case. Any such representation was plainly contrary to the warnings in the Disclosure Document and was inconsistent with the range shown in the profit projections table, as well as with the actual figures on the Brighton store's performance that were provided to the applicants' accountant.
239 Reyes' evidence was that, even if asked, neither he nor the Christous would discuss particular turnover figures with prospective franchisees, and that Gabriel Christou did not do so with the applicants and Taylor in this case.
240 Gabriel Christou also denied telling the applicants and Taylor that they could expect a weekly turnover of $7,000 and that, once established, the Ormond store would turn over between $10,000 and $12,000 weekly. He did, however, recall them mentioning Pizza Hut and that "the sales that they were doing, Bentleigh was doing 10,000 or something". When asked whether he himself had expressed a view, he answered:
No. Look, they knew more than I did. I didn't want to show that I knew more than - I mean, they appeared - especially Taylor, he appeared to be more knowledgeable in his areas than what I did. I didn't want to interfere.
He later said:
Look, these guys knew beforehand - Taylor was overpowering the whole issue.
241 The evidence about the representations concerning turnover at the Ormond store was confused, as reflected in the applicants' late application to amend. The documentary evidence from the applicants' side was inconclusive. The documentary information provided by the first respondent to the applicants and Hughes did not support the representations, and was mostly contrary to them. There was no evidence that the applicants complained to the respondents at any time in their first year of trading that what they described as a "key" representation was not being fulfilled. Even if Gabriel Christou said something about the weekly turnover at Ormond, the applicants failed to establish precisely what he said.
242 Subject to the matters noted above, the matters referred to at [167] - [177] are also relevant in considering the turnover representations. The applicants have not discharged the burden of proof with respect to the representations as pleaded. Were leave to amend to be granted, I would not be satisfied on the evidence before me and on the case as it now stands that the representation the subject of the leave application had been made out.
That the Ormond franchise was expected to produce sales and profit in the range of the figures in the franchise profit projections or better (Statement of Claim, par 7(3)(l))
243 Generally, what is set out above in relation to pars 7(3)(c) and (f) is relevant to this alleged representation.
244 The pleaded representation was not made by the provision of the profit projections table to the applicants. The table fell to be read in the context of the Disclosure Document of which it formed part. As already noted, the warnings preceding the table specifically included statements that:
The figures on the following page are estimates. The figures are based on the experience of Pizza Haven in its company owned and franchised stores.
Pizza Haven does not represent or warrant that all franchisees will achieve the results shown on the following pages, since results in any particular case will depend on the ability and work performed by the individual franchisee, strict operational control and location and amongst other factors.
The notes to the franchisee profit projections are given to enable your independent financial advisors to examine the soundness of the information and to determine on your behalf, the projected results of your particular franchise. It may take up to twenty four months to fully establish a store that has no trading history. [Emphasis added.]
245 Nor did the applicants' evidence about their understanding of the table support the alleged representation. Both Sanders and Zienkiewicz understood that the figures in the table were estimates giving a simplified account of the experience of Pizza Haven as at the relevant date.
246 Neither of the applicants gave evidence that Reyes or the Christous told them that they should expect the Ormond store to produce profits in the range in the profit projections table or better. The thrust of the applicants' evidence was inconsistent with such a case.
247 Further, the proposition that the first respondent (through its directors or otherwise) represented to them that the Ormond store would produce sales in the range of the table ($5,000 to $12,000) is inconsistent with their evidence on turnover, which is set out above. The alleged representation is inconsistent with Sanders' evidence that based on what Reyes and the Christous told him he expected that the Ormond store would have a weekly turnover "in the order of $7,000 ... from starting", and that a "guarantee of 10 to 12 thousand dollars [would be] quickly achievable". This representation is also inconsistent with Zienkiewicz's evidence that Gabriel Christou said that they could expect a weekly turnover of $7,000 on the opening of the Ormond store, rising to between $10,000 and $12,000, which could rise to $15,000 after the first trading year.
248 As I have already said, even if Gabriel Christou said something about the weekly turnover at Ormond, the applicants failed to establish precisely what he said. I am not, moreover, satisfied on the balance of probabilities that Gabriel Christou said anything about profits. It would have been plain enough to him that he did not know a number of relevant matters (including the amount that the applicants were to pay their manager or the amount of their borrowing expenses). In giving evidence, Gabriel Christou appeared to be a canny and experienced businessman. He would have appreciated the risks inherent in making any statement about profits in these circumstances. This, together with the warnings in Disclosure Document, made it improbable that he would have made any representation about the profits that the applicants and Taylor could expect from the Ormond franchise. The applicants have failed to discharge their burden of proof with respect to the pleaded representation.
Labour costs would not exceed 21.6% of sales (Statement of Claim, par 7(3)(e))
The Ormond franchise would make a profit of at least 21.6% of sales (Statement of Claim, par 7(3)(h))
A franchisee's weekly food costs would not be greater than 25% or alternatively 30% or thereabouts of weekly total gross sales (Statement of Claim, par 7(5)(a))
249 Save for the 30% figure, the basis for these allegations was the profit projections table in the Disclosure Document. The 30% figure was derived from the information about the Brighton store that was given to Hughes (see above).
250 The applicants' evidence did not support the first two allegations. Sanders agreed in cross-examination that, in discussions with Reyes and the Christous, no representation was made to him concerning labour costs. Zienkiewicz conceded that no representation was made about the cost of a manager, and he could not recall a representation to the effect that "the Ormond franchise would make a profit of at least 21.6% of sales". Moreover, for the reasons already stated, I accept that it is improbable that Gabriel Christou made any representation concerning the profits that the applicants could expect from the Ormond store.
251 Further, there was no evidence given by the applicants (or anyone else) that, at meetings on either 5 or 12 September 1990, either of the Christous or Reyes represented that weekly food costs would be no more than 30% of total gross weekly sales. Indeed, Zienkiewicz gave evidence to the contrary. His evidence in cross-examination was that he was told that food costs would represent 25% of total gross weekly sales, although he did not refer to any source for the figure other than the profit projections table in the Disclosure Document, which referred to a figure of 25%.
252 In providing the table with this 25% figure, however, the first respondent did not represent that the applicants' and Taylor's food costs at the Ormond store would not be greater than 25% of gross weekly sales. As already noted, the table fell to be read as part of the Disclosure Document. The warnings that accompanied the table (set out above) plainly stated that the figures in it were no more than estimates based on Pizza Haven's experience, and that Pizza Haven did not represent or warrant that all franchisees would achieve the results set out in the table.
253 None of these pleaded representations were made out on the evidence.
That the franchise profit projections provided by the respondents to the applicants on 5 September 1990 and again on 12 September 1990 as part of the disclosure document contain figures based on the actual experience of Pizza Haven in its company owned and franchise stores and in particular contained:
(i) projected sales figures based on the actual experience of Pizza Haven at company owned and franchise stores;
(ii) projected total annual franchise/store income (profit) based on the actual experience of Pizza Haven at its company owned and franchise stores (Statement of Claim, par 7(3)(j))
254 As already noted, the profit projections table in the Disclosure Document was preceded by certain observations, including that:
The figures on the following page are estimates. The figures are based on the experience of Pizza Haven in its company owned and franchised stores.
…
The notes to the franchisee profit projections are given to enable your independent financial advisors to examine the soundness of the information and to determine on your behalf, the projected results of your particular franchise. It may take up to twenty four months to fully establish a store that has no trading history. [Emphasis added.]
The table included figures for projected annual sales and income.
255 Although the table did not purport to set out the actual trading experience of the Pizza Haven stores as at October 1989, the note said that it was "based on" that experience. That is, the note represented that the figures in the table were projections over up to a twenty-four month period of the possible performance of a new store based on the trading history of Pizza Haven stores in South Australia. The applicants' evidence did not show that they read the table in any other way. Sanders said that he understood that the figures were "a result of the knowledge that the franchisor had regarding the trading in South Australia over previous years". Zienkiewicz also acknowledged that the figures were "based on actual performances from the Adelaide stores". With these observations in mind, it is apparent that the pleaded representation was in fact contained in the Disclosure Document.
That the figures for the Pizza Haven company owned store at Brighton, South Australia, provided to the applicants' accountant, Hughes, on or about 14 September 1990 showed the typical actual profit and loss experience for the Pizza Haven company owned and franchised stores (Statement of Claim, par 7(3)(k))
256 The applicants submitted that this representation arose from the provision of the Brighton store figures to Hughes on 14 September 1990, following a request for actual profit and loss figures for a Pizza Haven store or stores. (The applicants themselves did not see the figures although Hughes relied on them in giving his advice.) Neither Hughes nor Reyes recalled the provision of the figures or any discussion about them. They recalled only that Hughes had asked for some actual figures and that, in consequence, those for the Brighton store had been sent to him. Reyes gave evidence that he told Hughes that "if he had any further queries about the performance of franchised stores in South Australia, he should speak with Tino Bettiol". Hughes did not give evidence about any such discussion that he may have had with Bettiol and Bettiol did not give evidence. There is, therefore, no direct evidence that Hughes was told or led to believe that the figures were "typical" in the sense alleged.
257 At one stage, the applicants invited the court to draw an inference adverse to the respondents from their failure to call Tino Bettiol, who was apparently living in Sydney. I have not accepted this invitation. Young, who was his superior (if not employer) gave evidence that he had first-hand knowledge of most of the work done by Franchise Developments for Glev and Glev Franchises, including the preparation and review of the profit projections table (see below). I am not satisfied that there was any real basis in the evidence as it ultimately stood to warrant the course that the applicants urged.
258 In the circumstances existing at the time, in providing the figures to Hughes concerning its Brighton store, the first respondent necessarily represented to Hughes that the figures were relevant to the applicants' consideration of the acquisition of the franchises for which they had applied. In the absence of evidence as to the terms of Hughes' request and what, if anything, was said to him about the figures, I am not satisfied, however, that it was more probable than not that the Brighton store figures were held out as "typical" of the actual profit and loss experience for all Pizza Haven stores. Hughes gave evidence, based on file notes contemporaneous with the discussions he recorded, that Reyes told him on 14 September 1990 (about the time he received the Brighton figures) that there were two areas available to the applicants, Springvale and East Bentleigh (Ormond). It is entirely possible that he was told that the Brighton figures were indicative figures for stores in areas such as these.
259 It is possible that Hughes was told that the Brighton figures were indicative figures for a company-owned store, rather than a franchise store. This is notwithstanding that Hughes said in evidence that he did not know that Glev owned the Brighton store, i.e, as a company-owned store. I would place little weight on his evidence in this regard, since he had virtually no independent recollection of the discussions in September and October 1990.
260 Hughes' evidence was that he gave particular consideration to a number of issues (manager's salary, cost and structure of borrowings) by reference to the applicants' own circumstances. If Hughes conveyed any of his concerns to Reyes or Bettiol, Hughes may have been told that there was no typical "actual profit and loss experience" relevant to the applicants. There was simply no evidence as to whether Hughes' request was general or specific and as to whether the Brighton figures were the subject of discussion between Hughes and Reyes (or Bettiol). In this circumstance, the applicants have not discharged their burden of proof as to the alleged representation.
261 In any event, the applicants have not satisfied me that, on the balance of probabilities, the provision of these figures would have been misleading had the representation in fact been made. I accept that, as Evan Christou purported to demonstrate in his third witness statement, in September 1990 (in its third year) the Brighton store was performing either at an average level of turnover or about 6% above the average for Adelaide metropolitan stores (depending on whether or not the figures for Glenelg were excluded). The Brighton store's performance in its first year (at a $4,300 weekly turnover) and in its second year (at a $5,000 weekly turnover) was not shown to be atypical of the trading history of the generality of Pizza Haven stores.
If a franchise business did not reach projected sales then the respondents would become actively involved with the franchisee's business to find out why that business was not achieving projected sales and help it to do so (Statement of Claim, par 7(4)(c))
262 The applicants' evidence fell well short of this pleaded representation. In his first witness statements, Zienkiewicz maintained that Gabriel Christou had said that, if the applicants and Taylor failed to trade "at a point above break even", then he would personally come to the store, roll up his sleeves, and make pizzas. In cross-examination, he modified this, saying:
He did say that he'd roll up his sleeves and come into a store to support a poorly performing franchise. Specifically about the break-even, I'm not sure.
263 In his diary as discovered in 1993, Zienkiewicz recorded that "G Christou will be in store to help if we don't achieve sales". Opposite, he had written "What if we don't achieve sales". He had subsequently amended his diary to include a note that "Would do any thing to make sure stores achieved $4,000 - which was break even for store under management - would be in store after month and make sure".
264 The diary as discovered in 1993 confirmed that the applicants and Taylor probably asked Gabriel Christou whether they could expect help if they failed "to achieve sales" and that, as Reyes thought probable (see below), Christou had reassured them on this score. Precisely what was asked, however, and, what Gabriel Christou said in reply did not appear. The diary as amended referred to $4,000 but this reference cannot, in the circumstances already referred to, be regarded as reliable evidence of what was said. In cross-examination, as noted above, Zienkiewicz resiled from his earlier statement as to the "break even point".
265 Sanders' evidence was also general. He said in his first witness statement that the applicants and Taylor had asked "what support we could expect from the franchisor if we failed to trade profitably" and that Gabriel Christou had said that "in the past, on the odd occasion, a store had gotten into difficulty [and] he and his brothers had rushed right in, rolled up their sleeves, helped with product preparation, and manned the phones". Neither applicant gave evidence that the Christous had said that, if their business did not reach "projected sales", then the respondents would attempt to "find out why".
266 Reyes' evidence was inconclusive too. In cross-examination, Reyes was asked:
Do you recall Gabriel Christou saying to my clients that any franchise which was not performing was a problem for Pizza Haven and that they would work with the franchisee to make sure that the franchise was a success?
He replied:
They probably said it. I don't recall the particular thing, because it was, you know, trying to make it operate well. That was the sort of help the franchisor provided.
267 Gabriel Christou denied that he made any such representation.
268 Bearing in mind these considerations and the matters already referred to above, the applicants have failed to make out this alleged representation.
Summary
269 In summary, the applicants have made out the following representations:
1. The Pizza Haven chain was extremely successful with a proven track record of profitability (statement of claim, par 7(1)(a));
2. A Pizza Haven franchise was an attractive investment (statement of claim, par 7(1)(i));
3. The first respondent would organise an aggressive program of advertising and promotion of the Pizza Haven chain in Victoria (statement of claim, par 7(2)(a));
4. Each franchisee was required to pay to the first respondent each week an advertisingcontribution not exceeding 5% of its gross sales (statement of claim, par 7(2)(b));
5. The marketing and promotion of the Melbourne Pizza Haven stores would be similar to that for the Adelaide Pizza Haven stores (statement of claim, par 7(2)(e));
6. That the franchise profit projections provided by the respondents to the applicants … as part of the disclosure document contained figures based on the actual experience of Pizza Haven in its company-owned and franchise stores and in particular contained:
· projected sales figures based on the actual experience of Pizza Haven at company-owned and franchise stores;
· projected total annual franchise/store income (profit) based on the actual experience of Pizza Haven at its company-owned and franchise stores (statement of claim, par 7(3)(j)).
k: the nature of the representations
(i) Puffery - statement of claim, pars 7(1)(a), 7(1)(i) and 7(2)(a)
270 A further question arises in this case as to whether any of the representations made out by the applicants ("the representations") were statements in the nature of commendatory puffery and not of an actionable kind. In relation to this question, each of the representations falls to be considered in the light of the particular facts and "in the light of the ordinary incidents and character of commercial behaviour": see General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164, at 178 per Davies and Einfeld JJ.
271 In Pappas v Soulac (1983) 50 ALR 231, Fisher J held that a number of the statements made by the vendor's agent (a Mr Spencer) to the purchasers of a shopping centre were of this kind. His Honour said, at 234-235:
It is important to appreciate that many of the statements alleged or admittedly made by Mr Spencer were wholly or in part statements of opinion, not capable of being objectively proved to be true or false. They were also essentially the type of introductory comments, in the nature of puffery, made at the start of negotiations for the purpose of attracting the interest of a possible purchaser. As such they became irrelevant or of little, if any significance when detailed information is subsequently given a fortiori, to a potential purchaser with commercial experience To the extent that they are essentially puffery, it is proper to be reluctant to elevate them to the status of potentially misleading conduct.
His Honour held, at 238, that a statement by Mr Spencer that the shopping centre was a good investment was "the type of puffing which would normally fall from a selling agent and which was incapable of being proved to be correct or incorrect". See also Hanave Pty Ltd v LFOT Pty Ltd [1998] FCA 1051 (31 August 1998) per Moore J and Kaytonruby Pty Ltd v Glev Franchises Pty Ltd [1998] FCA 650, at p 29. In Kaytonruby, Ryan J held that a representation to the effect that Pizza Haven was a success story was in the nature of puffery.
272 In the present case, the representations pleaded in pars 7(1)(a), 7(1)(i) and 7(2)(a) of the statement of claim (that Pizza Haven was extremely successful; that a Pizza Haven franchise was an attractive investment; and that the first respondent would organize an aggressive marketing campaign) were in the nature of puffery. They were the kind of puffing that one might ordinarily expect to be made at the commencement of negotiations on behalf of a franchisor seeking to sell franchises.
273 In the case of the representations pleaded in pars 7(1)(a) and 7(1)(i), their significance for the applicants' decision faded away when the applicants received more detailed financial information of the kind contained in the Disclosure Document. In any event, I doubt that the applicants would have placed any reliance upon these representations, if they were present to their minds when they signed the Ormond franchise agreement. It may be recalled that there was no evidence that the applicants were ever made aware of the contents of the letter of 5 September 1990 sent by Reyes to Taylor, referring to "a proven track record of profitability"; and any representation as to Pizza Haven's success was, practically speaking, overtaken by the details in the Disclosure Document. Furthermore, the applicants had by then taken Hughes' advice on the suitability of a franchise as an investment for them. They made up their minds on this matter based on Hughes' advice (which took into account information in the Disclosure Document, the Brighton figures and the trading figures for the Victorian stores), Taylor's experience, and the availability and experience of Skilling (see below).
274 The representation pleaded in par 7(2)(a) was in substance a statement of opinion about the character of the advertising and marketing that the first respondent would organise and, in Fisher J's words, "was not capable of being objectively proved to be true or false": see Pappas v Soulac cited above. Again, its importance was overtaken by the information about marketing and promotion contained in the Disclosure Document and the actual provisions concerning advertising in the franchise agreement itself (which had been reviewed by the lawyers retained by the applicants and Taylor): see, e.g., franchise agreement, cls 3(d)(iii) and 3(f) and 3(g). Furthermore, in view of the Disclosure Document information and these contractual provisions, I doubt that the applicants would have placed any reliance on this representation had it been present to their minds on 21 September 1990.
(ii) Representations as to future matters - statement of claim, par 7(2)(e)
275 Did any of the representations constitute a representation as to a future matter? If so, then s 51A of the TPA has an operation. The meaning of "future matter" for these purposes has been discussed in this Court in a number of cases: see, e.g., Ting v Blanche at 552-553 per Hill J; Miba, at 536 per Merkel J; and Sykes v Reserve Bank of Australia (1998) 88 FCR 511 ("Sykes"), at 514-5 per Heerey J and 518-520 per Sundberg J.
276 In Ting v Blanche Hill J found that the respondent had represented that, if the applicants purchased a warehouse, then they could rent it out for between $70,000 and $80,000 a year, and that this was misleading and deceptive. In considering s 51A, his Honour said, at 552-553:
It will be readily apparent that a representation as to future conduct or a future event will generally imply (and sometimes explicitly state) that the maker of the representation was of a particular state of mind as to the future conduct or event as at the time the representation was made. A representation that a particular occupancy rate for a hotel might in the future be achieved, or, as alleged here, that a particular rent for nominated premises could be achieved in a future letting, impliedly involves a representation that the maker of the representation believed that the occupancy rate or rental could be achieved. It would be no less a representation as to the future by virtue of this implication. If the actual term of the representation is that the maker of the representation is of the view at the time that the occupancy rate or rental nominated could be achieved in the future, does that express statement turn a representation as to the future into a representation as to existing fact?
…
Whatever may be the case where there is an express representation as to the maker's state of mind concerning a future matter, it is not, in my opinion, correct to treat a representation as to an event or conduct in the future, be that in a form of prediction or otherwise, as not being a representation with respect to a future matter merely because it implies a representation as to the maker's present state of mind.
…
A representation as to future rental, for example, will be a representation with respect to a future matter, even if also, impliedly, a representation as to the existing state of mind of the maker.
(As noted above, his Honour ultimately dismissed the application, on the ground that the representation had not been pleaded.)
277 In Miba, on the other hand, Merkel J held that a representation about potential turnover was not, in the particular circumstances of the case, a representation as to a future matter. The applicants in Miba alleged that, in order to induce them to enter into a franchise agreement, the respondents made representations about the takings that the business would make. They relied on a letter from one of the respondents in which it was said that the weekly sales achieved at another franchise store ranged from between $14,780 to $18,396 over a six-week period, and that the sales were expected to settle down to between $14,000 and $16,000 per week and then gradually increase. The letter stated the writer's "understanding" that the average operator at the shopping centre in which the prospective franchisee proposed to open his store achieved sales in the order of $10,000 per week. This was compared with operators at another shopping centre, and the letter concluded by saying that "this would lead us to believe that a well managed operation … could achieve sales of between $8,000 and $12,000 per week after adjusting for competition and demographics". Merkel J held that this last mentioned representation was not within s 51A of the TPA, observing, at 536:
[I]t is my view that [the representation] is properly characterised as a statement as to a present belief based on the grounds set out. In that context it relates to the capacity of the proposed outlet to achieve the sales projection. Although the sales projection necessarily has a future element in it that element does not transform the characterisation of the representation into one which is with respect to a future matter. In my view the applicability of s 51A is to be ascertained by a proper characterisation of the representation made in each case. It is difficult to see how s 51A can operate in a case such as the present where the grounds for the sales projection are expressly stipulated and an assessment of their reasonableness is left for evaluation by the representee. In these circumstances a representation that the grounds are reasonable, rather than that the representor believes that they are reasonable, is consistent with the representation made.
278 Miba was distinguished in Sykes, at 515 per Heerey J and 521 per Sundberg J, upon the ground that Sykes was not a case where the grounds for a projection were expressly stipulated and an assessment of their reasonableness left for evaluation by the representee. As Sundberg J observed in Sykes at 521:
The significance of Miba for present purposes is its insistence that whether a statement is with respect to a future matter depends on its proper characterisation in the context in which it is made.
See also Gardner Corporation Pty Ltd v Zed Bears Pty Ltd [1999] WASC 1043 at p 38 per Steytler J; Lobendhan v West Perth Investments Pty Ltd [1998] FCA 1257 (2 October 1998) per Heerey J at p 16; Holz v Lane [2002] WASCA 164 at [4]-[9] per Wheeler J; and Tomlinson v Cut Price Deli Pty Ltd (1995) ATPR (Digest) 46-151per Drummond J.
279 In the present case, the representations included representations as to the future advertising that the applicants should expect to occur (in statement of claim, pars 7(2)(a) and 7(2)(e)). I have found, however, that the representation pleaded in par 7(2)(a) was no more than commendatory puffery and, for present purposes, might be put aside. This left the representation pleaded in par 7(2)(e), which was as to a future matter. Although it contained a representation about the maker's state of mind, it essentially related to future events.
l: were the representations misleading or deceptive?
Representation as to future advertising - statement of claim, par 7(2)(e)
280 As noted at the beginning of these reasons (at [9] and following), where a corporation makes a representation with respect to a future matter without reasonable grounds for making the representation, s 51A deems the representation to be misleading for the purposes of s 52. Since the applicants have made out one such representation in this case, it is convenient at this point to determine whether or not the respondents have shown that, in September 1990, they had reasonable grounds for the representation. This was that the marketing and promotion of the Melbourne Pizza Haven stores would be similar to that for the Adelaide Pizza Haven stores.
281 I am in little doubt that the respondents established that they had reasonable grounds for this representation. In his first witness statement, Evan Christou stated that amongst the very first matters discussed with Franchise Developments when it was consulted about the possibility of franchising was Pizza Haven's experience of advertising, including what form of advertising had been found most effective and the cost of advertising, expressed as a percentage of (gross) sales. Pizza Haven identified the cost of advertising, based on its experience, as about 5% of gross sales. The subsequent feasibility study found that a franchisee's business could support an advertising levy (5%) equal to the percentage figure that Pizza Haven had identified. Prior to the introduction of franchising in Victoria, Evan Christou's evidence was that the advertising expense for stores in Adelaide remained 5% of sales, and the same percentage was projected to be spent in Victoria.
282 As Young noted, the franchise programme also "identified that advertising and promotion would play a critical role in development success of the Pizza Haven group". As he said in his witness statement, the franchise programme also recommended
that in view of the projected franchisee profitability and Pizza Haven's then current advertising budget per store and precedents set in the fast food industry generally an advertising levy equal to 5% of each franchisee's gross receipts would be feasible. It was specifically provided in the Franchise Agreement however that the franchisee advertising contribution could be increased above 5% of gross sales provided the majority of franchisees agreed. This was considered useful for special corporate programs such as television campaigns and billboard programs.
283 As at September 1990, the advertising contribution in South Australia and in Victoria was fixed at 5% of sales. As we have seen, this was reflected in the franchise agreement, which provided for an advertising contribution of 5% of sales (subject to variation). A franchisee's contribution was paid into an advertising fund and, under the franchise agreement, was to be spent on advertising for the group.
284 As at September 1990, Pizza Haven spent advertising monies in Adelaide on radio advertising, Yellow Pages, TV advertising and local leaflet advertising. The Disclosure Document referred to advertising of this kind too. Subject to the proviso that television advertising would not begin until about 10 stores had opened in Melbourne, the evidence was that Pizza Haven planned to advertise in Melbourne as it had done in Adelaide. Given this and the recommendations of Franchise Developments in the feasibility study and in the franchise programme, including as to the quantum of the advertising contribution, the respondents have established, on the balance of probabilities, that, in September 1990, they had reasonable grounds for representing that the marketing and promotion of the Melbourne stores would be similar to that for the Adelaide stores. The fact that, as Evan Christou said, a decision was subsequently made to alter the franchisees' contribution did not change the fact that the respondents had reasonable grounds to make the representation at the time it was made.
285 The first respondent in fact arranged advertising and marketing through the mediums referred to in the Disclosure Document, including television advertising in July 1991.
Representations as to present and past matters
286 The application of s 52 of the TPA is not restricted to conduct that is intended to mislead or deceive: see Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 ("Puxu"), at 197 per Gibbs CJ; Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216, at 225 per Stephen J; and Fried v Dixie Holdings Pty Ltd [2000] FCA 1048, at [55] per Weinberg J. As Gibbs CJ observed in Puxu, at 197:
A corporation which has acted honestly and reasonably may therefore nevertheless be rendered liable to be restrained by injunction, or to pay damages, if its conduct has in fact misled or deceived or is likely to mislead or deceive.
287 The conduct complained of must, however, be viewed as a whole. Again, as Gibbs CJ observed in Puxu, at 199:
It would be wrong to select some words or act, which, alone, would be likely to mislead if those words or acts, when viewed in their context, were not capable of misleading. It is obvious that where conduct complained of consists of words it would not be right to select some words only and to ignore others which provided the context which gave meaning to the particular words.
Statement of Claim, par 7(2)(b)
288 The representation, pleaded in par 7(2)(b) of the statement of claim, that a franchisee was required to pay a weekly contribution not exceeding five per cent of its gross weekly sales was contained in the Disclosure Document. It was a statement of legal obligation arising from a franchise agreement made at the relevant time (September 1990): see cl 2(ah) of the Ormond franchise agreement (set out at [204] above). Schedule 12 to the Agreement provided for an amount of five per cent of gross sales calculated and payable weekly. The pleaded representation was true at the time it was made and was not misleading and deceptive.
289 It may be noted that the obligation in cl 2(ah) was subject to the proviso that this amount might be varied and a franchisee be required to pay to the franchisor "such additional amounts as the Franchisor may require … provided that such additional amounts are not opposed by a majority of the Franchisees". As it happened, the advertising arrangements for Victoria were varied to reduce the contribution required under cl 2(ah) upon the basis that local advertising would be in the discretion of each franchisee. (There is no evidence that the applicants and Taylor did not consent to this change and to any consequential variation of the franchise agreement.) These arrangements were subsequently varied again, with the result that the contribution required by cl 2(ah) returned to its former level (5% of gross sales), although each franchisee retained the discretion with regard to local advertising. (There is evidence that this variation was made with the approval of a majority of the franchisees.)
Statement of Claim, par 7(3)(j)
290 As it turned out, the representation that has called for most attention in these reasons is the representation pleaded in par 7(3)(j) of the statement of claim. This was to the effect the first respondent had misled the applicants in representing that the profit projections table in the Disclosure Document was based on the actual experience of Pizza Haven in its company-owned and franchise stores and, in particular, contained (a) projected sales figures based on the actual experience of Pizza Haven at company-owned and franchise stores; and (b) projected total annual franchise/store income (profit) based on the actual experience of Pizza Haven at its company-owned and franchise stores.
(a) Young's evidence
291 As already noted, Franchise Developments initially prepared the profits projection table for the Disclosure Document. Young's evidence was that "[t]he disclosure document was to provide a guide to the franchisee as to their expectations in terms of performance, to give them and their advisers some basis to consider taking up a franchise". The applicants' evidence was to the effect that they too appreciated that the profit projections table was intended to be no more than indicative of the range of potential performance for a store and, as the notes accompanying the table indicated, a store might take two years to establish.
292 As noted at the beginning of these reasons, the profit projections table in the Disclosure Document given to the applicants derived in part from a similar table that had been prepared by Franchise Developments in late 1986 - early 1987. Young gave evidence that he participated in the preparation of this first Disclosure Document, which was based upon Franchise Developments' research into the performance of Pizza Haven stores in Adelaide, the data for which was provided by Pizza Haven. In his witness statement, Young said that the information in the Disclosure Document
was based upon the experience of Pizza Haven in its company owned stores as translated to the experience of a franchisee in which situation it was expected there would be savings in respect of wages, WorkCover and some reduction in the cost of goods sold figure. The other operating expenses largely mirrored the company owned situation. FD then took the actual sales figures for the company owned locations and attempted to estimate the likely level of sales which may be experienced by franchisees and the impact on the various operating expenses at the different sales levels. These levels would assist a franchisee in assessing where the likely break-even figure would be in operating the franchise based on the assumptions in the Disclosure Document. In establishing a set of financial projections it is obviously very difficult to predict the future in that many variables may impact upon a business' [sic] turnover, its operating expenses and therefore its profitability. FD in these circumstances can really only take the actual figures being experienced by the company in its own locations then attempt to assess all possible factors and variables which may impact on those figures (ie. what threats there are to the business, what weaknesses and strengths in the business and its procedures and its staff and then make an estimate of the expected performance to the client's business in the future). We provide a range of variables to take into account the highest expected performance as opposed to the lowest expected performance.
293 The data provided by Pizza Haven not only included information as to turnover levels but also included the estimated cost of producing pizzas expressed as a percentage of sales, rebates and other subsidies from suppliers, staff requirements and labour costs, other expenses (including cleaning, electricity, rent, repairs and maintenance, rubbish removal, stationery and printing, telephone, insurance and motor vehicle expenditure), as well as capital set-up costs and the like.
294 In cross-examination, Young reaffirmed that the figures in the profits projection table given to the applicants were based on Pizza Haven's actual experience in South Australia. Asked to explain what this meant, he said:
We've got to start somewhere in terms of putting together a financial structure that we expect a franchisee may be able to achieve and a very sound benchmark for that would be to actually have where the existing company-owned stores fall in that benchmark. But we then start to look at factors such as an uplift factor for a typical franchisee and what he may do in terms of performance. … So we need to think of what this business might be doing one to two years out and then you take into account what the other players in the marketplace are doing, what the competitors are doing. In the case of Pizza Haven, we would look at the existing pizza businesses that were in the market in Melbourne and Adelaide. … So we would get a relative benchmark of independent businesses … . [W]e tended to gather a fair amount of data on actually what the turnovers were. … . [I]t hasn't got much science to it but the weight of that starts to give us a ballpark figure in terms of what we would think other businesses were doing and we'd gather data on how the better performing Pizza Hut stores, for instance, were travelling. This would give us a guide as to what range of performance, independent and franchised businesses, in the pizza market were actually doing. From that basis we would then take a fairly educated decision on where the performance of these business might lie across a range that would be reasonable for a franchisee to expect his store might fall within.
295 Young was cross-examined on the charts that the first respondent had prepared for this litigation on the performance of Pizza Haven stores in South Australia. Asked to explain "how it was that you came to present in the profit projection table the range of sales as being between $5,000 per week and $12,000 per week", Young said:
Firstly, this disclosure document was to be used in the Victorian market so what we did was product a bottom figure that was generally representative of the average in Adelaide at that time. Because we had been actively involved in recruiting franchises in this market and preparing for this time for a period of time, we also had the benefit of not only seeing what independent pizza operators were doing in the Melbourne market at that time … but also the experience of Dial-A-Dino's which had been recently in the last year or couple of years purchased by Pizza Hut. We knew what the performance of the Dial-A-Dino's had been in Adelaide. Pizza Haven had started in Adelaide with three people in the market … . By 1989 Pizza Haven had competed quite successfully with Dial-A-Dino's, grown their store numbers. … . We had assessed that in terms of their ability to compete with a Dial-A-Dino's who was clearly the market leader up until the time Pizza Haven took them over in home delivery, that Pizza Haven could compete quite effectively and have a product offering in the marketing program that would work. We watched Dial-A-Dino's come into the market in Victoria and we had noted that their performance relative to our knowledge of what they had been doing in Adelaide was relatively greater. When they converted to Pizza Hut of course the benefit of that brand in the marketing drove sales forward again and so we constructed a disclosure document that was based on the performance of Pizza Haven stores in Adelaide, our experiences from independent stores in the Melbourne market that were trading between I think at that time about 2500 and 7 or 8 thousand dollars. We did some homework across the board and there were some independents trading as high as $11,000 a week. There were some chain operators as high as $11,000 a week at that time. Then we attempted to reflect a picture of what those stores might perform in terms of a range between now and say 1991, given that there would be a period of establishment and on that basis we formulated a disclosure document that we believed at that time accurately reflected what a capable franchisee may be able to, in that period going forward for the next two years. (Emphasis added.)
296 Young observed that "during the preparation of the entry into the market in Victoria we sat down with the directors of Pizza Haven and talked about the current performance of their existing franchisees". He stated that it was not unusual at that time for a franchisor to have no profit and loss statements for franchised stores, adding:
Franchisors tended to track sales and had a very good understanding of what the cost of sales and the operating costs were. So unless the franchisees were not paying their royalties which indicated a profit problem, there'd be a reasonable assumption that the franchisees were tracking reasonably well. The first person that they don't pay is the franchisor.
297 As Young noted, by September 1990, when the applicants and Taylor entered into the Ormond franchise agreement, no store in Victoria had been trading for more than four months, although, as he said, the trading figures for the Victorian stores appeared to be "following the South Australian experience (i.e., stores were beginning with sales figures of approximately $4,000 per week and were slowly building)".
298 According to Young, in 1989, Franchise Developments reviewed the Disclosure Document prepared in 1987 "in the context of Pizza Haven's experience in Adelaide both in its company owned and its franchised locations". He said that Franchise Developments confirmed, in the course of the review, that:
[T]he sales expectations, cost of goods and operating expenses figures would be in line with what may be expected in the Victorian market especially in the light of food being purchased directly from suppliers and prepared at the premises rather than purchased from a central commissary as in Adelaide.
299 Indeed, his evidence was that from 1989, when Pizza Haven began recruiting franchisees for Victoria, the Disclosure Document and the profit projections table were regularly reviewed by Franchise Developments in conjunction with Pizza Haven. He said:
The review considered the operation of the company owned stores and results being reported from the franchise stores to Pizza Haven.
300 Young gave evidence in cross-examination that he met regularly with his business partner, Sergio Alderuccio, and another employee, Tino Bettiol, to discuss the financial performance of Pizza Haven. He said that Franchise Developments spent "considerable time with the franchisor in the business having a look at his operation and spending time out in the stores talking to their managers and other staff". When asked to explain why little or none of the results of this research remained on Franchise Developments files, he said that this material was archived for about three years, and then destroyed since it was of no further use.
[H]istory tends to overtake it. Within a couple of years your pro forma projections have been established and they're either correct or in some cases they may not be correct and they're modified depending on the economic conditions on the market at the time.
301 Young denied that Franchise Developments uncritically adopted Pizza Haven's data. In cross-examination, Young stated that, whilst Franchise Developments did not "audit" the information provided by its clients,
[w]e certainly did challenge it if we saw inconsistencies in the numbers. For instance, in the Pizza Haven chain, as in probably every chain that we've looked at, there are aberrations. There will be better performing stores and there will be worse performing stores. In trying to pitch some sort of average, we sit down with the client and we go through why their stores are performing. We don't take the information as read from the client and simply accept it. … . So our experience was that we would certainly challenge unusual numbers within the set of numbers of a franchise organisation's performance.
302 The applicants contended that, at and prior to September 1990, the respondents had little or no information on the financial position of the franchise stores in South Australia. Young gave evidence, however, that he was actively involved in selection of a first franchisee for Adelaide, who opened the pilot franchise at Enfield. Young's evidence in his witness statement was that:
I assisted Pizza Haven in the recruiting of its first franchisees, being the first three or four franchises granted in Adelaide. These early franchises performed in accordance with the estimations in the Disclosure Document. They commenced with weekly takings of approximately $4,000 per week which steadily increased. Pizza Haven knew how much product was being used in the stores as they were supplying from a central commissary and this consumption was in line with the cost of goods sold estimates in the Disclosure Document.
303 Young also gave evidence in cross-examination that Franchise Developments was informed of the results from Enfield, and that the pilot was properly conducted "almost from the period of the first three months after the store started". Whilst he conceded that Franchise Developments did not receive documented figures for Enfield (or any other franchised store) until Enfield was due to be sold in August 1990, his evidence was that:
[D]uring our relationship with Pizza Haven I would have regular meetings with the directors of Pizza Haven or one of the directors, depending on who was responsible, to talk about performance of the operation and one of my key lines of questioning are, 'How are the existing franchisees going? How are their sales going? How is their performance? Are they happy?' It was my perception at least that Pizza Haven, by the way in which they answered these questions, were in close contact and had a very good feel for the performance of the business.
304 The applicants also challenged the representation that the figures were "based on" Pizza Haven's experience on the ground that these figures included an "uplift figure". Young gave evidence that Franchise Developments developed principles based on its experience "across a wide range of businesses", including that "if the existing company owned stores are profitable under management a franchised owner operator should perform at least as well, and in our experience 10 better than a company owned location in terms of both sales and profitability". This principle was applied when first calculating the figures for the profit projections table. In connection with the "uplift factor", Young said in cross-examination that:
[T]he uplift factor was one of several factors that arrived at these numbers, including the performance of both independent and other chain operators. Generally speaking, that uplift factor would have been in the realm of 10 to 15 to 20 per cent.
305 It is important to note, however, that Young said that the uplift factor was not necessarily applied on a continuous basis, "because as we get experience of franchise locations we're then able to take in the actual performance of franchisees".
306 Young was a credible witness. I accept his evidence as providing an accurate account of Franchise Developments' work in preparing and reviewing the profit projection table.
(b) Evan Christou's evidence
307 In his first witness statement, Evan Christou said that, prior to September 1990, Pizza Haven (through its directors and staff) also reviewed the Disclosure Document in the context of Victoria, particularly in light of the fact that "a commissary was not going to be operated in the early stages at least in Victoria". He said that Pizza Haven regularly provided sales data to Franchise Developments in order that it might review the Disclosure Document, including the Disclosure Document used in Victoria in October 1989. In connection with franchise stores, he said that, for the period before September 1990, Pizza Haven based "the estimates for most of the operating expenses (with the exception of cost of goods from our own company stores experiences) from information generally obtained or gleaned from information conveyed to us by franchisees".
308 Evan Christou's evidence was that he liaised closely with the proprietors of the Enfield store, and that he had a good knowledge of Enfield's trading experience. This was, he said, later confirmed by the store's trading accounts, which were received in August 1990. In his third witness statement, he augmented his evidence as follows:
In the course of the Enfield franchise operating as a pilot franchise, I was in regular communication with Mr. Botsaris Sr., the franchisee's father, who was managing the books of account for the franchise, concerning the performance of the franchise. They showed me details of all expenses by reference to cheque butts and cash book entries which Mr. Botsaris Sr. made. I knew details of sales, all purchases in relation to food, cleaning and uniforms, advertising, insurance, rent (the property belonged to, and still does, to one of our companies) expenses and royalties. I sought and regularly obtained details of all other expenses from the time of opening in December 1986. I had a keen interest in following this store's performance for approximately 12 to 18 months. The Botsaris family were family friends of ours, and we had a very cooperative relationship.
309 I accept Evan Christou's evidence. I accept that, besides having first-hand knowledge of its company-owned stores, the first respondent had, as Young and Evan Christou said, a good working knowledge of Enfield and subsequently other franchised stores.
310 Evan Christou gave considerable evidence to the effect that Pizza Haven's experience was reflected in the profit projections table. Exhibited to his first witness statement was a graph showing the sales levels of the stores in Adelaide (including company-owned and franchise stores) for the period June 1990 to December 1990. The graph showed that, as at 30 September 1990, the per store average of the South Australian stores was $6,085 per week.
311 Having noted this fact, Evan Christou went on to say that:
Weekly sales figures in excess of $12,000 were first achieved in May 1991 at the Modbury (SA) store ($13,125). The 1989 Disclosure Document advised potential franchisees that optimum sales levels may take up to 24 months to achieve. This had been our experience in Adelaide and in Victoria. In my experience stores start selling at different levels and take different times to achieve sales potential.
312 Evan Christou's evidence was that Enfield trading accounts, received in August 1990, "largely confirmed our view that the franchise models produced by FD and the estimates provided by Pizza Haven in the Disclosure Document of October 1989 were accurate". I accept this evidence.
313 There was other evidence, in the form of chart prepared by Evan Christou from information available to Glev at the time, that showed that in 1989-1990 the company-owned stores and Enfield had sales and profit generally in the range in the profit projections table given to the applicants and Taylor. I accept, as Evan Christou, stated, in his third witness statement:
[A]t the time the Applicants were enquiring as to the acquisition of a franchised territory in Victoria, the South Australian stores in metropolitan Adelaide were generally averaging about $6,500 per week … .
Glenelg was trading at approximately $14,000 per week (or approximately $11,000 per week if, as was unclear, the sum of $14,000 included restaurant sales). I reject the applicants' submission that Glenelg was properly to be excluded. There was, moreover, evidence that by May 1991 (7 months after the Ormond store had opened) the store at Christies Beach was achieving $15,119 per week.
(c) Louis Christou's evidence
314 The applicants sought to prove that the first respondent had little knowledge of the profitability of its company-owned and franchise stores as at September 1990. Whilst there was only a limited amount of contemporaneous documentary evidence about the financial position of Glev's company-owned stores (and even less for franchise stores), I was ultimately not satisfied that they had succeeded in making out this aspect of their case.
315 Louis Christou was cross-examined extensively on this matter. In order to understand the character of his response, I have set out the following exchange between him and the applicants' counsel at some length.
Counsel: You needed to know how the stores were going to know how they were going relative to one another, didn't you?
L Christou: Key information like the food costs was key information that we kept records on a weekly basis.
Counsel: You had that for all stores, didn't you?
L Christou: We had that for all stores because we had the commissary and we knew what the sales - we used to ring up the stores on a daily basis to get the sales and on a weekly basis we delivered to the stores, mainly once a week and I was able to develop those profits and losses for myself to see how things were going. We kept good tallies on the cost of food and labour for our company stores.
Counsel: Did you do profit and losses for all stores?
L Christou: Not all the time.
Counsel: Did you do them for each store at least once a year, each company store?
L Christou: I can't say. I think it was simply, yes, I want to do something now. As I said, we were very busy and we did things based on need or if the time allowed. So those things that you're talking about, it's purely my work that I did for myself.
…
Counsel: [C]an her Honour take it from the answers you've just given that there was no regular or formal process of preparing profit and loss statements for company stores? It wasn't done every three months or every six months?
L Christou: No, it wasn't.
Counsel: Was it done every year for each company store?
L Christou: I've taken windows - I'm not quite sure but I've taken windows. I mean, I've done them and I've done some things for a year but there was no guarantee that I will have basically say to you, 'Yes, I've done them for a whole year,' or 'I've done them for a month.' I don't know what you've got over here. I believe I've done them on a reasonably regular basis between 88 and 90.
…
Counsel: If you haven't done them for set periods such as one for each store for each year or one for each store for each six months or three months, then you may never have known whether any company store was profitable or not, Mr Christou?
L Christou: Let me explain to you. Up to 1986 there was one company store and brother Gabriel worked from there and made his living. Brother Bill, brother Evan worked from there, only on company stores and they've made their living. I came in 1987 and we've made our living and also on top of the micro evidence, looking at the overall position we knew we were making money.
…
Counsel: Is it possible that you may not have known from one year to the next whether any particular company store was profitable or not?
L Christou: We knew because of the sales and I said to you earlier that I kept on a weekly basis the cost of food and also the labour - those two main variables. Most of the other items are fixed costs.
…
Counsel: As I understand your evidence a little while ago, you would keep or make records for company stores on a need to know or time allowed basis?
L Christou: The food as you see it, but every week we knew what the cost of food was for each of our stores. We knew what the labour cost was for each of our stores. We controlled the advertising. So looking at those three things we knew how to drive the business because the rest of it was fixed cost.
316 As already noted, I have accepted that Louis Christou was an honest witness, whose evidence on these matters was supported by Evan Christou. I accept that, although Glev did not prepare formal profit and loss statements for each of its company-owned stores at fixed intervals, Glev, through its directors or staff, prepared some such statements from time to time and, at any one time during the relevant period, Glev knew its sales figures and the expenses of substance for each of its stores with a fair degree of accuracy. In addition to profit and loss statements, Glev also maintained a computerised record, showing sales, food costs, franchise fees, wages and advertising.
317 With the passage of time, it is unclear when and how Glev lost documents and computer records recording financial information pertinent to this case. I accept that it did. The applicants have not shown that these documents and records were lost for any reason connected with this litigation, or that the respondents' legal advisers should have done more than they did to ensure their safekeeping.
318 The applicants submitted that, although the profit projections table showed the estimated cost of food at 25%, the actual average cost of food for the South Australian stores was at least 30%. A chart, also prepared by Evan Christou from computer generated print-outs for 14 of the 17 company-owned and franchise stores operating as at 30 June 1990, showed these stores' weekly sales and the costs of food, packaging and drinks used in the stores. This information provided a means to analyse the evidence for annual sales and the cost of food percentages, as well as the printing and stationery, cleaning and uniform expenses (also recorded) of the 14 company-owned and franchise stores. Whilst the chart showed that a number of stores fell outside (and below) the total weekly sales range in the table, most lay within it. The chart also indicated that, as might be expected, the costs of goods sold varied (23% to 33.7%). I accept, however, that Pizza Haven believed, for the reasons given by Evan Christou in his first witness statement, that the cost of goods sold was more expensive in the case of stores using the commissary than for stand-alone stores. Stores that fell into this latter category were Port Pirie (23.74%), Murray Bridge (27.06%), and Glenelg (26.88%). I accept that this and a number of other factors referred to in Evan Christou's first witness statement were taken into account in settling on the figure of 25% in the profit projections table. Evan Christou's evidence was that, because commissary store food costs were higher than non-commissary stores, commissary stores in South Australia were converted from the commissary concept to the self-contained concept (for food preparation) from the beginning of March 1990.
(d) Evidence on the profit projections table representation summarised
319 The applicants have not established that the statement that the figures in the profit projection table were based on the experience of Pizza Haven in its company-owned and franchise stores was misleading or deceptive. The evidence given by Young and Louis and Evan Christou established that the figures were calculated from figures reflecting Pizza Haven's own experience, and that they were regularly reviewed by reference to that experience. I accept the evidence given by Louis Christou that he and others monitored the performance of company-owned stores. I accept that Young and Louis and Evan Christou had a working knowledge of the performance of franchise stores, commencing with Enfield, and that they took this knowledge into account in their reviews of the profit projections table in the Disclosure Document.
320 The fact that Louis Christou acquired information about Enfield in discussion with the father's proprietor, rather than through the regular provision of profit and loss statements, did not diminish the quantity and quality of his knowledge about the outlet's performance. The evidence, which I accept, is that he and Young scrutinised its operation from early in its trading and that, when the documented figures for Enfield were received, these figures confirmed the figures in the profit projection table. The Enfield figures showed that sales at this outlet rose from an average of $5,234 per week in 1987-88 to $5,674 per week in 1989-90, although the net profit (excluding wages and drawings by the proprietors) to the owner/operators fell. (I accept, however, that, for the reasons given by Evan Christou, nothing in this case was shown to turn upon this drop in net profits.)
321 As indicated already, the applicants sought, unsuccessfully, to show that the profit projections table was not based on the actual experience of Pizza Haven in South Australia since the company-owned and franchise stores were not profitable; alternatively, Glev did not know whether or not they were profitable. The evidence as to the actual performance of the company-owned and franchise stores prior to September 1990 (as set out in the analyses prepared by Evan Christou and accepted by me) confirmed that, for the most part, these stores were performing within the range in the table (although at the lower end). As at 30 September 1990, the store at Glenelg was, however, performing at the upper end of the range (in the store's home delivery business). Given that the table was expressed as setting out profit projections and that the notes accompanying the table advised that it might take up to two years to establish a store that had no trading history, it was also relevant that, within a two year period, there were other stores also performing at the upper end of the range.
322 Further, it does not follow from the fact that there were stores below the range (e.g., at Port Pirie and Blackwood) that the table was misleading. The notes accompanying the table themselves indicated that the trading results at any particular store would be affected by a number of considerations, including the period of its establishment, its mode of operation and location. The last-mentioned factor was relevant for the Port Pirie and Blackwood stores.
323 The applicants relied particularly on the evidence concerning cost of sales which showed that there was a difference between the 25% set out in the table and the historical actual cost of sales figures for individual company stores. The evidence showed, however, that the figure of 25% was based on store performance in South Australia, adjusted on account of a number of factors, particularly the use of the commissary. It was true that no store recorded the 25% figure. The profit projections table, however, was concerned to provide projected estimates, and not actual figures. In order to derive one figure from a variety of store experiences, there had necessarily to be some assumptions made upon which the calculation of a projected figure might be made. The applicants have not shown that these assumptions were misconceived. A relevant consideration was, plainly enough, the effect on food costs of the use of a commissary. It did not follow from the fact that this was borne in mind in calculating a percentage figure for cost of food compared with sales that the resulting figure was not relevantly based on actual store experience as well.
324 Further, I was not satisfied that the accounts for Glev Franchises and the Glev Unit Trust supported a finding that that the company stores did not make a profit in the period prior to 1991. I accept that, while the Trust operated the company stores and commissary, the Trust accounts included expenses that were not directly relevant to the stores at all. It was plain from the evidence that there were many disparate items included in these accounts, and that this fact made it unsafe to make any finding to the effect the applicants sought.
325 I accept that the applicants were not told of the 20% uplift factor that was introduced into the calculations for the profit projection table, but I reject the proposition that this necessarily made the figures in the table misleading. The Disclosure Document, the table and the notes accompanying it made it plain enough that the table assumed that the franchisee was an owner/operator. It was clear enough that the projected figures were calculated on this assumption. Whilst noting Young's evidence as to the introduction of the uplift factor into the owner/operator model, I accept that the significance of the uplift factor diminished as Pizza Haven and Franchise Developments acquired greater information and experience on the performance of franchise stores; and that, when they received the Enfield trading figures in August 1990, they satisfied themselves that these figures confirmed the projections in the profit projections table that was given to the applicants and Taylor in September 1990.
326 In any event, I doubt that the applicants can claim to have relied upon any misrepresentation that might have been conveyed by the profit projections table. If there were any capacity to mislead as to Ormond's turnover during the first two years, that capacity ought to have been dispelled by the provision of figures for the Brighton store and the Victorian store trading figures. The Brighton figures showed that in its first year the store averaged a turnover of $4,300 per week. That is, viewed historically, stores in South Australia did not trade only in a range above a $5,000 weekly turnover. Further, Victorian store figures showed trading levels between $4,000 and $7,000 in their first months of opening.
327 I note too that this representation was not pleaded until trial and that the applicants gave some evidence at trial that they did not rely on the Disclosure Document or on Hughes (see below).
m: the issue of reliance
328 Referring to the observations of Wilson J in Gould v Vaggelas (1985) 157 CLR 215, at 236, as applied in, for example, Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471, at 482-3, the applicants contended that they had been induced to enter into the Ormond franchise agreement by representations that proved to be false. In view of the findings that I have made in this case, it is not strictly necessary to discuss this contention further (although I have already touched on some issues of reliance earlier in these reasons.) Issues of reliance loomed large at trial, however, and, for this reason, I say something about them in the following paragraphs.
329 As already stated, I accept the evidence of Taylor (and the evidence of Reyes and Louis and Gabriel Christou to the extent that it was consistent with Taylor's evidence) that it was the applicants and Taylor who first proposed to acquire two territories rather than one. Further, as already stated, I accept that the applicants and Taylor met with Reyes and the Christous on 12 September 1990 (and not 5 September 1990 as the applicants maintained). It followed that the applicants and Taylor had determined to apply for the two territories before they met the Christous.
330 I reject the applicants' contention that the Christous and Reyes talked the applicants and Taylor into acquiring the Ormond territory in preference to other territories. The evidence (which I accept) was that the Christous were intending to run a company store at the Ormond location. There was no evidence that they had any reason to persuade the applicants that they should take up a franchise at Ormond; and the evidence does not support a finding that they did so. I reject Zienkiewicz's evidence in cross-examination that Gabriel Christou induced the applicants and Taylor to take Ormond instead of Springvale by making representations that Ormond "would do between 10 and 12 thousand and quickly rise to 15 and the expected turnover should be easily $7000".