139 Poulet Frais followed up the notice of demand by letter dated 1 May 2000. Again the Bakers responded promptly, on 3 May 2000. Their letter indicated they could not pay the claimed arrears to Lenard's. They added:
'Richard, we have been telling you for sixteen months now that we need to achieve gross sales of $8,000-8,500 per week to cover our costs. This is the figure you quoted us before we signed up …'
140 They reiterated the need for a much greater pedestrian traffic flow in the shopping centre, and their concern as to why the Hilton shop was chosen as a Lenard's shop. The Poulet Frais response of 29 May 2000 simply asserted the ongoing defaults within 28 days. Although an agent had been attempting to sell the Hilton shop over the preceding few months, nothing had come of those efforts to then.
141 In my judgment, the factors which led to the gross profit percentage achieved by the Bakers for the first many months of their operation of the Hilton shop are not related to the alleged poor quality of their management, or to their lack of industry. The immediate factors are likely to be several, but underlying them is in my view the reasonable steps which the Bakers took in the need to increase sales. They attempted to keep the window display impressive, to keep service levels at the highest, and to respond to the suggestions of others including Mr Hamood and Mr McDonnell but the steps taken to boost sales must have involved other inefficiencies. When some equilibrium was eventually reached in the running of the Hilton shop, the average gross profit percentage reached and was maintained at acceptable levels.
142 On 12 July 2000, by notice of termination Poulet Frais terminated the franchise of Silver Fox for failing to pay to Lenard's the advertising levy, and to Poulet Frais the service fee. The amount outstanding was then said to total $24,684. At the time, Silver Fox had paid rental to the second week of August 2000.
143 In the four weeks immediately preceding 12 July 2000, Silver Fox had had gross sales of $9,044, $8,321, $8,560 and $8,114. That was the first occasion there had been a period of four successive weeks in which the gross sales had exceeded $8,000. That information was, I find, known to Lenard's and Poulet Frais at the time.
144 The respondents contend that the Bakers became franchisees of the Hilton shop based upon their own judgments and independent advice, and not upon anything conveyed to them by the respondents or any of them.
145 The Bakers did not go into a franchise agreement in respect of the Hilton shop ingenuously. When they first became interested in a Lenard's franchise, the Bakers took the precaution in about mid 1997 of speaking to some other franchisees of Lenard's shops in South Australia. I accept their evidence that they did so for the purpose of ensuring that there were no particular issues about the relationship between Lenard's or Poulet Frais and the licensees. They did not get any information which discouraged them from pursuing the prospect of becoming franchisees of a Lenard's shop. Indeed, the picture they got was generally favourable.
146 However, I also accept their evidence that they did not use those meetings for the purpose of testing the quality or accuracy of the financial information which they had received in the past or for the purpose of forming their own judgment about their financial prospects were they to become franchisees of a Lenard's shop or of the Hilton shop in particular. Nevertheless, I think they came away from those meetings with the general sense that hard-working franchisees of Lenard's shops who followed the Lenard's systems were able to make an acceptable level of earnings.
147 Moreover, when considering whether to apply for the franchise of the Lenard's shops proposed at the Unley shopping centre in 1997 (the Bakers were unsuccessful candidates), and whether to pursue a franchise of a Lenard's shop at Stirling (the Stirling shop ultimately opened with another franchise also in September 1998), in particular Mr Baker undertook further inquiries himself. In each case, he examined the existing shopping facilities, and their proximity to the proposed Lenard's shop. He did so for some time. He made observations about the proposed Stirling shop which tended to put the Bakers off that option. He thought the pedestrian traffic around the proposed Unley shop (which was already a specialist chicken shop) was good. He looked up some census information. He looked at maps to assess the local neighbourhood and tried to check out the extent of the possible local competition. He also prepared some projected figures himself in relation to the proposed Unley shop. They were based in part upon the information in Disclosure Document 1.
148 I do not think those inquiries, or other evidence, lead to the view that the Bakers did not rely upon the material supplied to them by Poulet Frais leading up to the Franchise Agreement being executed on 4 September 1998. In the case of the Hilton shop, there was no existing trading to observe. There is nothing to indicate that Mr Baker sought to form an independent view about the catchment area of, or the competition to, or the socio-economic mix of the residents around, the Hilton Shopping Centre.
149 Mrs Baker explained that the documentary material received gave them the confidence that a Lenard's shop would be profitable if it were operated assiduously and in accordance with Lenard's systems. She described the significance of their inquiries about other franchisees as follows:
'… there had been a lot of people gone through before us and signed these documents and they're working profitably. They're still in business and they're doing all right. That's what we thought of. We thought if they can do so, so can we.'
150 They were also aware that the success of a particular Lenard's shop was tied to its turnover, and that the extent of pedestrian traffic past a particular Lenard's shop was a general indicator of the prospect of turnover. As noted, they had, when applying (unsuccessfully) for appointment as franchisees of the Lenard's shop at the Unley shopping centre, sat and watched the extent of the pedestrian movement around the proposed shop site.
151 As noted, the Bakers sought legal advice before signing the Franchise Agreement. Firstly, that concerned the corporate structure by which the Hilton shop might be run. Secondly, on 14 August 1998, they were taken through the Franchise Agreement to make sure they understood its terms. That advice did not touch specifically upon the quality of the proposal that they would through Silver Fox became franchisees of the Hilton shop. Nor did it touch in any specific way upon the quality of the information which, by then, the Bakers had received from Poulet Frais. (It is not presently necessary to deal with the other respondents' accountability for those communications). I do not consider that legal advice was a substitute for, or the basis or one of the material bases for, the Bakers deciding that it was an appropriate financial investment to undertake the franchise of the Hilton shop.
152 The Bakers also counselled the accountants Hincks & Smith (Mr Farrow). That too took place in July and August 1998. There is little evidence about what advice was given. I find that the Bakers were informed about the risks associated with undertaking a business such as a franchise of the Hilton shop. They were generally aware of those risks, and the advice would have reinforced that. I do not find that the advice involved any analysis of, or commentary upon, the documentary material provided at least by Poulet Frais. The evidence indicates the Bakers were told that the Hilton shop would need to have gross takings of about $11,000 per week for them to make a reasonable income. How that figure was arrived at was not explored. I assume it allowed for payment of interest on the borrowing from the bank and for a reasonable level of directors salaries or drawings. How much was allowed for the Bakers' drawings was not explored. I am sure that advice also pointed out to the Bakers the risks associated with any such business generally. However, I infer that the advice was given premised upon figures provided at least by Poulet Frais, rather than by any critical analysis of those figures. There is nothing to indicate the accounting advice either independently made any assessment of the prospects of the Hilton shop, or that the accounting advice led to the Bakers deciding to proceed with a franchise of the Hilton shop irrespective of the information provided to them at least by Poulet Frais.
153 None of those steps indicate, in my view, more than the exercise of ordinary common sense. The Bakers did not have the general business experience, nor any particular knowledge, which would have enabled them to convert their observations into any reliable measure of the potential turnover of the Hilton shop, or to form any reliable judgment about the potential performance of the Hilton shop relative to (or in the spectrum of performance of) other Lenard's shops in metropolitan Adelaide. They did not in fact undertake any such task. They relied upon the Poulet Frais judgment that the proposed Hilton shop was an appropriate location for a Lenard's shop. Their general information did not give them cause not to rely upon that judgment. Beyond that I do not accept the contention of the respondents that the Bakers made a judgment based upon their own experience and their own inquiries and independently of the information provided to them to become franchisees of the Hilton shop. In my view, the contrary is the case.
154 It is now necessary to consider whether the respondents' conduct, that is the communications to which I have referred, amounts to the making of representations as alleged and, if so, whether any of those representations was misleading and in fact mislead the Bakers so as to induce them to enter into the Franchise Agreement.
155 I have earlier identified six written 'representations' or communications from one or more of the respondents to the Bakers which now require further consideration. I have elsewhere found that no oral representations were made as alleged, and to the extent that the amended statement of claim relies upon other parts of the contents of documents that those parts of the documents did not convey any relevant representation.
156 It is convenient to deal with the first two of those 'representations' together. They are alleged to derive from the weekly operating reports of three unidentified Lenard's shops, and from the sales and profitability hypothetical target figures and hypothetical operating profit outcomes potentially achievable by the franchise of a Lenard's shop. The hypothetical figures were in fact reviewed and adopted by Mr Hamood as applicable to South Australia.
157 In my judgment neither of those communications is a direct and specific representation to the Bakers that the Hilton shop would, or was likely to, achieve a particular outcome. On their face, they do not assert that. The Bakers appreciated that the documents in their terms did not specifically assert that a particular level of earnings or profit would be achieved at the Hilton shop. They each gave evidence that they understood that those documents did not warrant or nominate that the Hilton shop would achieve a particular level of earnings or profit.
158 The fourth and fifth 'representations' can also be dealt with together. The fourth concerns the minimum performance level of $7,000 per week specified in the schedule to the early copy of the Franchise Agreement. The fifth concerns the observation in the Information Pack about the range of cost of Lenard's franchises. In the fourth case, what is conveyed does not directly represent any matter concerning the potential earnings of the Hilton shop. It is simply what it is said to be, a minimum weekly sales level which might, if not reached on a regular basis, provide the basis for termination of a franchise agreement. It is a term in the proposed Franchise Agreement apparently to protect the respondents from an underperforming franchisee and to provide a means of ensuring the intellectual property in the Lenard's name and standing is not degraded by a poorly performing franchise. The Bakers saw that expression and understood it. In the fifth case, on its face, the statement about the range of prices payable for Lenard's franchises is not shown to be inaccurate. The Bakers do not claim that it is inaccurate. Indeed their complaint is based upon its assumed accuracy. The purchase price of $192,402 for the Hilton shop comprised the franchisee fee of $50,000 plus plant equipment and fitout costs (including the Poulet Frais consulting fee) of $123,418 and establishment costs of $18,984. The final breakdown of the plant equipment and fitout approximated the estimate. The final establishment costs also approximated the estimate. The establishment costs include the training cost (payable to Poulet Frais) of $3,500, and legal fees for the Franchise Agreement and the lease of $4,300. The quoted price, as those figures confirm, is not in fact related to the anticipated gross turnover. I accept that Mr Hamood did not suggest to the Bakers that it was. That was something which they inferred for themselves.
159 The gravamen of the Bakers' complaint is that the documents together, notwithstanding their repeated emphasis on the information being hypothetical and not directly applicable to the Hilton shop, and notwithstanding their repeated insistence that the recipient should not rely upon them but should seek independent counsel, represent that:
(a) provided a franchisee complied with the Lenard's system, a representative net operating profit was indicated by the targets set in the sales and profitability target figures, and
(b) a minimal performing shop would produce an operating net profit of about $50,000 per annum and a high performing shop would produce an operating net profit of about $145,000 per annum.
160 Those representations were, it is said, confirmed or supported by the minimum performance level of $7,000 per week, as that suggested that the respondents expected the Hilton shop would ordinarily turnover significantly greater than that sum. In written submissions (albeit with respect to the altered minimum performance figure of $6,000 per week) counsel for Poulet Frais and Mr Hamood accepts that the expression of the minimum performance figure may disclose the expectation of the parties to the Franchise Agreement that the Hilton shop would trade at more than the minimum performance figure in the normal course. As Mr Hamood was the source of those figures, I attribute to him that expectation.
161 Those representations were, it is said, also confirmed or supported by the asking price for the Hilton shop, it being in the middle of the range of prices for a Lenard's shop specified in the Information Package. That, the Bakers believed, lead to it being appropriate to apply to the Hilton shop the middle of the range of sales and profitability target figures in the financial package accompanying Disclosure Document 1 and Disclosure Document 2.
162 I do not consider that step is reasonably available. The Information Package states that Lenard's franchises are available for approximately $160,000 to $275,000 depending on the location, cost of fitout, establishment costs and size of the particular shop. Whilst it is understandable that a reader of the whole of the material might take the step taken by the Bakers, I do not consider that the statement in its context conveys, or has the meaning to reasonable members of the class of persons to whom it is directed that the Bakers drew from it: see e.g. Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191; Campoman Sociedad Limitada v Nike International Limited (2000) 202 CLR 45 at 86. The statement refers to factors which mainly are cost items. The reference to 'location' may reflect some element of the quality of the particular franchise. But the Baker's claim is that the representation arises in relation to, and when, a particular purchase price was nominated. It was not nominated in a vacuum. The nominated price contained a break-up of the $192,402 into the cost components and the franchise fee or goodwill payment. The franchise fee or goodwill payment was expressed to be $50,000. When the Bakers saw their solicitor on 14 August 1998, they gave him the details of the break-up, at least as between the cost components of the fee and the franchise fee or goodwill payment. In my view, the Information Package and the letter of offer conveyed only that the goodwill payment in the proposed purchase price was $50,000, but they did not and were not reasonably capable of conveying that the Hilton shop should be assessed by them by reference to the mid-range in the range of hypothetical sales targets and operating profit outcomes.
163 I find however that the material to which I have referred did convey to the Bakers the representations that, provided they complied with the Lenard's system, a representative and reasonable weekly gross sales target was $8,000 per week, and was achievable, and that a representative and reasonable net operating profit was $50,000 per annum and was achievable. I also find that the material to which I have referred did convey to the Bakers the representation that a minimal performing Lenard's shop selected by Poulet Frais would produce a weekly gross sales figure in the order of $8,000 per week and an annual net operating profit in the order of $50,000, and that a higher performing shop would produce considerably higher outcomes. There was no information represented to the Bakers by reason of which, in my judgment, they could have concluded that the respondents or any of them represented the potential turnover or net profitability of the Hilton shop would be a specific higher figure or in a range of specific higher figures.
164 That is not to say that it was unreasonable for the Bakers to expect over time potential turnover and profit figures higher than the minimum to which I have referred. There was no particular reason why they should not have had such an expectation. But their expectation, in that regard, was not one which I find was founded upon any representation of any of the respondents (I shall hereafter call this 'the sales/profitability representation').
165 The other representation alleged by the Bakers is that the respondents choose locations carefully, and in this instance, chose the Hilton shop for a Lenard's franchise carefully. That is a specific assertion in the Information Pack. The fact of its making was not really in dispute. I shall hereafter call it 'the site quality representation'.
166 I further find that the Bakers relied upon both the sales/profitability representation and the site quality representation in entering into the Franchise Agreement. I have rejected above the contention that they did not rely on any information provided to them by the respondents or one of them, but relied only upon their own investigations, and have given reasons for that view. In addition, as I observed earlier in these reasons, the provision of information such as that in Disclosure Document 1 and Disclosure Document 2 is presumably for a purpose. It is not information divorced from reality. It would be oxymoronic to suggest that it is. Notwithstanding the strictures in those documents (and others provided to the Bakers, including the Franchise Agreement), the information conveyed must have a purpose. It is to inform. The information is to be taken as relevant and apposite, rather than irrelevant and inapposite. It may be qualified. It may be explained. It may be the subject of express reservations. But in the end, it is a communication for a purpose. In my judgment, as I have said, the purpose was at least to set a lower range below which a Lenard's shop would not, or was unlikely to, perform and to provide the assurance of the application of due expertise to the selection of the site for a Lenard's shop.
167 In the case of the sales/profitability representation, I consider this to be a representation with respect to a future matter. The future matter is as to how the Hilton shop would perform, if competently operated in accordance with the Lenard's systems, if the Bakers became its franchisees. Consequently, the norm of conduct imposed by s 52 of the TP Act will be contravened unless the respondents who made the sales/profitability representation prove that they had reasonable grounds for doing so: s 51A of the TP Act. See e.g. Ting v Blanche (1993) 118 ALR 543 at 552; Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR 46-179 at 54,432; Sykes v Reserve Bank of Australia (1999) 88 FCR 511. I observe that in Australian Competition and Consumer Commission v Universal Sports Challenge Ltd [2002] FCA 1276 at [46], Emmett J suggested that s 51A requires only that the maker of the representation as to a future matter only need go into evidence for the normal onus of proof (i.e. that the maker of the representation did not have reasonable grounds for making it) to be restored to the applicant. In this instance, counsel for the respondents proceeded upon the basis that s 51A of the TP Act shifted the onus of proof to their clients (to the extent they respectively made the sales and profitability representation) to show they had reasonable grounds for making it. I do not, therefore, need to address the issue raised in the UniversalSportsChallengecase.
168 The site location representation is not with respect to a future matter. Although in the Information Pack provided before the Hilton shop was selected by Poulet Frais, and so at that time with respect to a future course of conduct, it is a continuing representation. By offering the Hilton shop to the Bakers on 29 June 1998, together with Disclosure Document 2 which indicated Poulet Frais was responsible for site selection, and the Information Pack, the site location representation was as to the quality of the process of selection of the Hilton shop for a Lenard's franchise. Indeed, Mr Hamood maintained throughout his evidence that he had carefully chosen the Hilton shop for a Lenard's franchise.
169 I shall therefore first address whether the site location representation is shown to have been misleading. That requires consideration in a little more detail of the Hilton shopping centre and its surrounds, the evidence of Mr Hamood, and of the other evidence touching on the process undertaken by Mr Hamood.
170 The Hilton shopping centre has a total floor space on the evidence of 4060 square metres, of which 2512 square metres is given to food retailing and 548 square metres to non-food retailing. The Woolworths shop occupies 3082 square metres. The Lenard's shop of Silver Fox occupies some 45 square metres.
171 There are retail and commercial premises along Sir Donald Bradman Drive, particularly extending to the east, as well as along Henley Beach Road which also runs east-west about 1 km to the north. Behind the arterial roads, the usage is mainly residential. To the south east, extending from about 1 km from the shopping centre, there is an extensive area of industrial land use.
172 Within a radius of 2 km from the centre, there are 19 other retail centres, of which seven are within about 1 km. Within the 2 km radius, the only shopping centre containing a substantial supermarket is that at Henley Beach Road, Torrensville. That shopping centre has a total area of 4871 square metres, but the supermarket is a little smaller than the Woolworths supermarket in the Hilton shopping centre.
173 The Baker's Delight franchised shop commenced operating in mid December 1998. By then all shops in the Hilton shopping centre were occupied. The franchisee of that shop Jarrod Smith (Mr Smith) described the turnover as low for some six or seven months. He attributed that to the size of the shopping centre which he called 'a relatively small regional shopping centre', the newness of the shopping centre, the competing shopping complex at Torrensville with the supermarket, and the attitude of the local community. The turnover in that shop then progressively increased over the succeeding two years. During that period the Baker's Delight shop traded on Sundays. Mr Smith confirmed that Silver Fox did open for a period of successive Sundays but without apparent success.
174 The other 'lay' evidence about Lenard's shops in South Australia led on behalf of the applicants was given by Grant Jarrett (Mr Jarrett), who became the franchisee of a Lenard's shop in Stirling in the Adelaide Hills. Mr Jarrett commenced that franchise also during September 1998. That business also failed. Poulet Frais also took over the operations of that shop in September 2000 in accordance with a deed dated 15 September 2000. I do not draw any real assistance from Mr Jarrett's evidence. It relates to a different premise. He was not present during any of the Bakers' dealings with Mr Hamood. The expectations of Mr Jarrett, and the performance of his business, are not shown to give rise to any inference specifically applicable to the dealings of Mr Hamood with the Bakers or to the performance of the Hilton shop.
THE LOCATION OF THE HILTON SHOP
175 The decision to establish the Hilton shop was made by Mr Hamood.
176 I find, as Mr McDonnell said, the Hilton shopping centre was the smallest shopping centre in which a Lenard's shop had been established, at least in South Australia. Mr McDonnell also noted that the Hilton shopping centre was new, and that the Lenard's franchise was one of the first specialty tenants. It was also the first occasion that a Lenard's shop had been set up in a new shopping centre, at least in South Australia. However, by about December 1998 the specialty tenants were all more or less in place, and the low level of sales compared to what I have found to have been the mutual expectations of the parties persisted for many more months.
177 The only witness called by Lenard's and Lenard's Leasing was Paul Bardwell (Mr Bardwell), one of its directors. He described the history of Lenard's, and its structure, including its relationship with its master franchisees. He had few direct dealings with the Bakers. He visited the Hilton shop twice during 1999. I accept his evidence generally. I have not placed much weight on his observations of the Hilton shop on the occasions of his visits, as they were only relatively short visits and the picture of how the Bakers operated the Hilton shop is more likely to be reliably drawn from the evidence of persons such as Mr McDonnell and Mr Hamood who saw its operations on many more occasions, particularly during 1998. Mr Bartwell also acknowledged that, by the time of his visits, the Bakers were 'up against it' as they had been financially struggling for some time.
178 The Master Licence Agreement between Lenard's and Poulet Frais as master franchisee for South Australia is consistent with the picture that I have from the whole of the evidence, namely that the dealings of individual Lenard's franchisees on a day to day basis are with the master franchisee for the relevant territory. Hence, the Bakers dealt almost exclusively with Poulet Frais, through Mr Hamood, Mr McDonnell and other staff. Lenard's maintained responsibility for the Lenard's system and the manuals to give effect to it. It received the advertising levy and the franchise fee.
179 Lenard's had no direct role in the selection of the Hilton shop as a site for a Lenard's franchise. The identification of potential franchise sites in South Australia was the responsibility of Poulet Frais. The operations manual which Lenard's provided to its master franchisees provided guidance on finding and assessing the suitability of potential sites.
180 The operations manual contains a 'Business Development' section which addresses site assessment. It gives direction about Site Assessment. It includes a site assessment form to be used to determine the potential trading level of a site. Attention is directed to the date the shopping centre opened, the extent and nature of car parking and its accessibility, its trading hours and the pedestrian traffic flow. In addition, the site assessment form directs attention to geographical details about the shopping centre and its competitors in the potential catchment area, the location of the prospective site in the shopping centre, the existing fresh food traders in the shopping centre, the opinions of other traders, and pedestrian traffic flow and car parking accessibility. Mr Bardwell confirmed that a key factor is the tenancy mix. With the operations manual there is a flow chart which, under the heading 'Site Selection', has the following steps:
Finding sites
Site assessment
Sales Forecasting
Estimating Costs
Site Viability
Negotiations
181 The topic 'Evaluating Opportunities' follows the step of site assessment. The ultimate objective is to establish profitable franchised outlets. For that objective, this part of the document explains that it focuses firstly on operating profit and secondly on return on investment. It obliges a master franchisee to assess the financial viability of the prospective site. It adds:
'You must have a reasonable basis for making any such assessment and a duty of care is necessary to minimise potential litigation issues.'
182 The first subheading is 'Operating Profit', which requires the estimate of weekly gross sales. The document explains that the estimate of weekly gross sales begins with the site assessment form. It directs attention to the type of shopping centre (major, regional, community or neighbourhood) and to the core business of the shopping centre. It suggests:
'… an assessment can be made of the potential average sale for a Lenard's store in the area by looking at the average sales being achieved in existing Lenard's stores with comparable demographics and competition.'
The estimated average sale, and the estimated customer count (determined from the traffic flow past the prospective site compared to that of an existing Lenard's shop) is said to give an indication of gross sales. Other factors for consideration are mentioned, including the nature of the traffic flow, the nature of neighbouring shops, and the display space (too large a counter is said to be difficult to keep full and fresh looking if turnover is low).
183 From the weekly gross sales, an operating profit is to be forecast. The gross operating profit is specified as 47 per cent of gross sales. The expenses to be estimated are then identified, but no figures provided. The point is made that the exercise is for 'viability purposes only' and is not to be used as a projection for a prospective franchise.
184 It is not presently necessary to refer to other parts of that document.
185 Mr Hamood has considerable experience in selecting and arranging for the establishment of Lenard's shops in South Australia. Since the appointment in 1993 of Poulet Frais as Master Franchisee for South Australia, he had arranged the establishment of 15 Lenard's shops by the end of 1997.
186 He explained at some length both his usual process in selecting the site for a Lenard's shop, and what he did to select the Hilton shop. There was no real issue about those matters. The issue was really as to the adequacy of what he did. Some of the considerations, with hindsight, seem obvious. He focused on shopping centres. He looked for an anchor tenant, generally a supermarket. He looked for complementary traders. He looked at the location of the potential site in the shopping centre. He looked at the physical layout of the proposed site. He looked at the quality of, and general facilities in, the shopping centre. And he looked at the proximity of and retail mix in other shopping centres in the surrounding areas to assess the potential competition.
187 In those processes he was assisted by the operations manual provided by Lenard's. Included there, as discussed above, is the site assessment form. He completed that form and submitted it to Lenard's in respect of the Hilton shop.
188 Mr Hamood became interested in the Hilton shop as a possible site for a Lenard's shop during construction of the Hilton shopping centre. In April 1998, he inspected the centre when it was nearing construction. He learned of the prospective tenants including Woolworths, Baker's Delight, a newsagent, a pharmacy and Smokemart. He contacted Baker's Delight to confirm its interest. He learned no butcher's shop tenancy was proposed, so the direct competition for a Lenard's shop would only come from poultry and meat sales in Woolworths.
189 Mr Hamood then entered into negotiations with the managing agent for a lease of the Hilton shop. During that period, he obtained demographic information focusing on a radius of 2 km from the shopping centre. It was not comparative information of the type referred to by Mr Tutte (as discussed below). Mr Hamood recognised that the general profile of the nearby population was older first generation migrants, but he thought that demographic was changing to a younger working group seeking a lifestyle close to the city. He considered the latter group is well disposed to the sort of products provided by Lenard's. He looked at the area to confirm there were no natural barriers to access to the shopping centre from neighbouring areas.
190 In the negotiating period, Mr Hamood completed and sent to Lenard's the site assessment form. The shopping centre was described as a neighbourhood one (the lowest of the four classifications on the form: 'major/regional/community/neighbour'. The form noted the car parking facilities as very satisfactory. It noted no customer counts were possible as it was a new shopping centre. It noted the fine location of the Hilton shop in relation to the Woolworths supermarket, and the estimated annual sales of the Woolworths supermarket as provided by the shopping centre's agent. It noted that the area is the 'up and coming area where older ethnic families are being replaced with young couples'. The positive was recorded as the absence of other major shopping centres in the area other than the supermarket at Henley Beach Road, Torrensville, but the negative was the high degree of loyalty to that supermarket. It noted the proposal for a Baker's Delight shop also to be established in the shopping centre. The section headed 'Physical Site' estimated weekly sales by circling the 'low' and 'medium' options and not the 'high' option.
191 To understand that assessment, Mr Hamood explained that existing Lenard's shops had a weekly turnover range between $8,000 and $20,000, and he regarded the range from $8,000 to $12,000 as low and then to $16,000 as medium.
192 Ultimately terms of a lease were agreed upon, and a lease duly executed on 20 July 1998, although Mr Hamood had committed Poulet Frais to the lease on 8 May 1998.
193 The monthly comparison reports, the weekly operating reports and the weekly historical reports in Disclosure Document 1 and Disclosure Document 2 were sourced by Mr Hamood. Further, the ranges in the sales and profitability targets for gross profit percentage and for expenses were selected by Mr Hamood having regard to his experience of Lenard's shops in South Australia. So too were the figures for plant and equipment and for fitout costs. He maintained the range for gross sales between $8,000 and $16,000 per week, having regard to the fact that at the time the Lenard's shop in South Australia with the lowest average weekly turnover was in excess of $8,500 per week and the highest in excess of $20,000 per week. The lowest grossing Lenard's shop was the Arndale shop. By the time of Disclosure Document 2, the Lenard's shop with the lowest weekly turnover was still the Arndale shop, then averaging about $9,700 per week. The recently opened Unley shop was averaging about $9,800 per week.
194 There were two expert witnesses called on behalf of the respondents in relation to Mr Hamood's selection of the Hilton shop. Mr David McArdle (Mr McArdle) is a consultant in strategic property advice, and asset planning and management. I ruled that he had the expertise to give expert opinion on the topic he addressed.
195 Mr McArdle concluded in his report of 23 December 2002 firstly that the Hilton shop selected in the Hilton shopping centre is and was in 1998 suitable for the operation of a Lenard's shop. He secondly addressed the site assessment form, and the population statistics, used by Mr Hamood in making the selection of and forming a judgment about the capability of the Hilton shop. He commented:
'Whilst this research is limited the information obtained is consistent with my investigations of the Centre and Mr Tutte's retail gravity model analysis.'
Finally, Mr McArdle expressed the view that the extensive investigation suggested by Richard Krantz (Mr Krantz), whilst ideal, is not necessarily fully adopted in practice. Mr McArdle says that it is normal to investigate a site until sufficient information is available to reach a conclusion about the suitability of the proposed site, and that reliance on experience and business judgment is an acceptable component of the process.
196 Mr McArdle's views must be weighed in the light of his failure to have regard to several matters which, in cross-examination, he accepted as also relevant. Those factors included:
1. the performance of the operators of the Hilton shop since July 2000;
2. the profile of the residents in the vicinity of the shopping centre, that is whether those persons were typical of persons who buy products from Lenard's stores;
3. the extent of the pedestrian traffic or potential pedestrian traffic in the vicinity of the Hilton shop.
197 Mr McArdle identified the five major factors relevant to his opinion as being the state of the local economy, the quality of the property 'in locational terms', the design and condition of the property, the quality of the shopping centre management, and specific terms of the proposed lease.
198 Alistair Tutte (Mr Tutte) is an urban and regional planner. His expertise was not challenged. He has developed what he called a 'retail gravity model' to distribute the sum of household retail expenditure from each 'collector district' to retail centres, depending on distance and centre size. The model calculates turnover from food and non-food expenditure. It does not operate from any determination of a particular catchment area for the retail centre under consideration.
199 Mr Tutte's analysis of persons living within a 2 km radius of the Hilton shopping centre showed that:
· personal incomes and household size are lower than the metropolitan median;
· there are fewer children and many more persons over 60 years of age than the metropolitan median;
· unemployment is higher than the metropolitan median;
· the number of households without a motor vehicle is nearly double that of the metropolitan median;
· household incomes are concentrated, much more so than the metropolitan median, in the second and third (lower end) quintiles; the lower end quintiles spend significantly less on retail purchases than the upper end.