Walcan v Superior Coffee & Cakes Pty Ltd

Federal Court of Australia|2002-09-30|Before: Kiefel J

REASONS FOR JUDGMENT 1 Mr and Mrs Canham were the sole shareholders in the first applicant ("Walcan"). Mr Shortell was a director of the first respondent and, at relevant times, of the third respondent. In about January 1995 the first respondent purchased master franchise rights for BB's Coffee and Bake outlets from the fourth respondent for the areas of south-east Queensland and northern New South Wales. The outlets are situated within shopping centres and involve the sale of coffee and food to a uniform menu and standard. Thereafter he set up seventeen franchise outlets within that territory. 2 These proceedings concern the purchase by Walcan from the first respondent of a sub-franchise located in the Sunnybank Hills Shopping Centre, together with necessary licences, on or about 7 July 1999. Mr and Mrs Canham provided guarantees of Walcan's performance under the agreements. Mr and Mrs Canham say that the agreements were entered into because of certain misrepresentations made by Mr Shortell concerning the level of sales and profit which could be achieved. The loss and damage initially alleged to have been suffered by the applicants, or Walcan, has been reduced consequent upon their sale of the business. Relief is no longer sought against the third and fourth respondents.

The representations pleaded 3 Mr Shortell was alleged to have represented, in the first set of representations said to have occurred in or about June 1999, that if a franchisee could not be found for the site in question, then the first respondent would itself set up a business. He does not dispute this. He says that it was his intention. The only remaining representation alleged to have been made by Mr Shortell to Mrs Canham at the shopping centre on this occasion was in these terms: "If the applicants purchased the BB's Coffee & Bake franchise business to be established at the Sunnybank Hills Shopping Centre, they would achieve gross sales of eight thousand dollars ($8,000) per week in each month of their operation of the franchised business." (par 7(c) of the statement of claim). It is then alleged that in late June 1999 Mr Shortell further represented to Mrs Canham that: "(a) if the Applicants purchased the BB's Coffee & Bake franchised business to be established at the Sunnybank Hills Shopping Centre they would be able to operate the franchised business with a cost of sales of 31% of gross sales; (b) BB's Coffee & Bake franchised businesses operate at an average cost of sales of 31% of gross sales; (c) if the Applicants purchased the BB's Coffee & Bake franchised business to be established at the Sunnybank Hills Shopping Centre they would be able to operate the franchised business and would achieve gross sales of eight thousand dollars (8,000.00) per week in each week of their operation of the franchised business; (d) if the Applicants purchased the BB's Coffee & Bake franchised business to be established at the Sunnybank Hills Shopping Centre they would achieve gross sales of $416,000.00 per year in each year of their operation of the franchised business; (e) if the Applicants purchased the BB's Coffee & Bake franchised business to be established at the Sunnybank Hills Shopping Centre they would incur one hundred and sixty-nine thousand, two hundred and fifty dollars ($169,250.00) in expenses in undertaking gross sales of four hundred and sixteen thousand dollars ($416,000) in each year of their operation of the franchised business. (f) if the Applicants purchased the BB's Coffee & Bake franchised business to be established at the Sunnybank Hills Shopping Centre they would generate a net profit of one hundred and seventeen thousand seven hundred and fifty dollars ($117,750.00) before payment of a wage to the Second Applicants for labour contributed to them in the operation of the franchised business." (par 8). The original allegation in par 7 was that the representations were made to both Mr and Mrs Canham and in par 8 to "the second applicant" without identifying one of them. This matter was clarified by particulars. On each occasion, the representations were said to have been made to Mrs Canham alone. It was further alleged that Mr Shortell represented to both Mr and Mrs Canham, in June 1999, that if they purchased the BB's Coffee & Bake franchise business to be established at the shopping centre that: "(a) BB's Coffee & Bake franchised businesses located in Queensland achieved average gross monthly sales of thirty-two thousand and sixty-five dollars ($32,065) in the period June 1997 to June 1998; (b) the Applicants would achieve gross monthly sales of at least thirty-two thousand and sixty-five dollars ($32,065) in each month in which they operated the franchised business;" (par 9). The first of these last two representations was said to have been contained in a document entitled "BB's Queensland Average Monthly Sales" allegedly given to Mr Canham by Mr Shortell. The second representation was said to have been made in a conversation between Mr Canham and Mr Shortell. 4 It was alleged that, relying upon those representations, Mr and Mrs Canham utilised the information referred to at pars 7(c), 8(a), 8(c), 8(d), 8(e), 8(f), 9(a) and 9(b): "… as a basis for predicting the future gross sales, costs of sales, gross profit and net profit that they would achieve during the duration of their operation of the franchised business to be established at the Sunnybank Hills Shopping Centre"(par 10(a). and that in June 1999 they: "…informed their Accountants Messrs Hartmann-Cox of the information provided to the female second applicant by the first respondent referred to in paragraphs 7 to 9. (par 10 (b)) 5 Further particulars were subsequently provided of some of the allegations. Two are of relevance in connexion with an assessment of the applicants' case. The information contained in the representation in par 7, that Mr and Mrs Canham would achieve gross sales of $8,000 per week from the business, is said to have been relayed on to the Canhams' accountant by Mrs Canham in a telephone conversation in June 1999. The representation alleged to have been made to Mr Canham about achieving sales of $32,065 per month, in par 9(b), is alleged to have been conveyed during a telephone conversation between Mr Shortell and Mr Canham in June or about 1999. 6 Each of the misrepresentations alleged was said to be misleading or deceptive, or to have that effect, because Walcan did not, since 30 August 1999, operate at a cost of sales of 31 per cent of gross sales; BB's Coffee & Bake franchise businesses generally did not operate at that level at the time the representation was made; Walcan did not achieve gross sales of $8,000 per week during its operation, nor $416,000 in the period of one year from 30 August 1999. Walcan did not incur expenses of $169,250 in undertaking gross sales at the level just mentioned. Walcan had not generated a net profit of $117,750 before payment of a wage to Mr and Mrs Canham, but in fact incurred a trading loss in the yearly period referred to. It did not achieve gross monthly sales of $32,065. 7 On the third day of the hearing of this matter, leave was given to the applicants to further amend their statement of claim with respect to the circumstances in which the representation concerning gross sales of $8,000 per week was made. The representations to this effect alleged to have been made to Mrs Canham nowhere appeared in her statement, which stood as her evidence-in-chief. In that statement she did refer to Mr Shortell making the statements about his company itself opening the BB's Coffee & Bake store at the Sunnybank Hills shopping centre if necessary, but she did not say that Mr Shortell had told her that the turnover would be $8,000 per week. The representation subsequently pleaded was that: "The applicants would achieve gross weekly sales of at least $8,000." The subsequent pleadings also alleged that this representation was made in a conversation between Mr Shortell and Mr Canham in late June 1999, at the shopping centre. 8 A consequence of the amendment and the lack of Mrs Canham's evidence would appear to be that the claim that Mrs Canham had passed on the cash flow figure of $8,000 per week to their accountant after she had received it from Mr Shortell should be taken to be withdrawn, although this step was not taken. That leaves the question as to why the claims were made in the first place. The evidence also revealed that the newly pleaded representation, combined with Mr Shortell giving Mr Canham certain graphs to support it, was critical to the Canhams' assessment of the purchase. For the most part, the other representations were not established upon the Canhams' own evidence.

The Evidence 9 Mr and Mrs Canham had some experience in business prior to the purchase of the franchise in July 1999. In the 1980s they had conducted a service station business, a motel business and a mechanical workshop. In late 1992 they operated a small supermarket business at a new shopping centre in Brisbane through Walcan. The business was very profitable and was sold in mid-1996. In November 1996 Walcan commenced trading in another supermarket business at a new shopping centre at Crestmead, and this was sold in about March 1999. An earlier contract for its sale, entered into in late 1998, was not completed. 10 Mrs Canham says that in the second half of 1998 she became aware of the franchise chain "BB's Coffee & Bake" as a result of reading advertisements of businesses for sale. After some discussion with her husband she telephoned and spoke to Mr Shortell. She does not recall the substance of that conversation. 11 Mrs Canham's recollection of the first meeting with Mr Shortell is that it took place "In or about July-August 1998" at Mr Shortell's residence. The location of the residence by Mrs Canham is said by Mr Shortell to be incorrect. Little, if anything, would seem to turn upon it. Mrs Canham says that while she cannot recall the exact words, she has a good recollection of the general effect and content of what Mr Shortell said. She says that Mr Shortell told her of the success of the BB's Coffee & Bake franchise business in Australia and overseas, that BB's training facilities "were second only to McDonald's" and that this training ensured uniform high standards no matter where a customer purchased a BB's product. All new operators had to undergo six weeks training, he said, and BB's were in England and were going to expand through Europe. He said that the BB's product was like McDonald's, in that you could get the same standard product at any store in the chain. Mr Shortell then discussed the costs of purchasing a BB's franchise business, including the "set-up costs". He told Mr and Mrs Canham of a number of store sites which were becoming available, including stores at Beenleigh, Sunnybank and Mt Gravatt. 12 Mr Canham also recalls references by Mr Shortell to McDonalds; and that BB's Coffee & Bake would soon surpass it. He recalls average set-up costs of $200,000 to $250,000 being mentioned. 13 At the conclusion of the meeting Mrs Canham said that she felt enthusiastic about the prospect of acquiring a BB's franchise business. Mr Canham felt Mr Shortell to be trustworthy. They subsequently attended at some of the proposed franchise locations, and they attended the opening of the Beenleigh Shopping Centre. She observed that the BB's store was very busy, but her husband expressed some reservations about the way in which it was set up, and she herself had some concern as to the quality of the fittings in the dining area. No further step was taken because Mr and Mrs Canham heard that the sale of their supermarket business was not going to complete and they stopped looking for another business to purchase. 14 Mr Shortell's recollection of this first meeting differs. He says that in or about February 1999 Mrs Canham telephoned him with an enquiry in relation to the BB's franchise system and he arranged to meet Mr and Mrs Canham at his residence at Birkdale. He says the meeting took place within a week of the initial conversation. He recalls that at the meeting one of them asked him about the cost to set up a franchise. He said that each site differed, but that normally the range was $220,000 to $280,000. His recollection is that the budget for the Beenleigh outlet's set-up costs was $220,000, and that is the figure he gave. He said that a new site to be set up at the Logan Hyperdome was to be the most expensive so far, probably between $280,000 and $300,000. 15 At that meeting Mr Shortell gave Mr and Mrs Canham information about the business, the products and the types of sites that were chosen. He says that he did not liken the BB's product to McDonald's or say that the chain was second only to McDonald's, or would soon surpass it in numbers of outlets. He suggests that it would have been ridiculous to make that comparison. He also denies saying that the BB's training facilities were second only to McDonald's. He says that he required franchisees to attend six weeks of training at dedicated training facilities and, as far as he knew, it was only BB's and McDonald's who had dedicated training facilities. He said that if they wished to proceed there were a number of options for new stores, and indicated them. At that time they said they preferred the Logan Hyperdome shopping centre. 16 Mr Shortell says that during that meeting he showed them a standard disclosure document and the "financial part of the document which is at Appendix A-3". He says that it is the same document as appears in the disclosure document later provided to Mrs Canham on 3 June 1999. The disclosure document (Exhibit 4 and IGS-2) comprises, amongst other documents, two such documents and in them two sets of financial information, one an overview of the franchise operations within Australia, save for those where the information was not available, and the other refers to sub-franchise operations within the first respondent's territory. The reference by him to Appendix A-3 is to the latter document. The same type of information is in Appendix B-3 to what was referred to as the "material" disclosure document. It is convenient to refer to both sets of information here, although it was not suggested that all of this information was provided to Mr and Mrs Canham prior to 3 June 1999. 17 Appendix A-3 is entitled "STATEMENT OF REPORTED AVERAGE SALES AND EXPENSES FOR A ONE WEEK PERIOD EXTRACTED AND ANNUALISED FROM FRANCHISEE FINANCIAL INFORMATION REPORTED IN RESPECT OF THE FINANCIAL YEAR ENDED 30TH JUNE 1998 (EXPRESSED AS A PERCENTAGE OF SALES)". The percentages which are relevant in these proceedings are the costs of goods sold and the corresponding gross profit. Income Column 1 Column 2 Column 3 % % % Sales 100.00 100.00 100.00 Cost of goods sold 30.66 35.82 25.72 Gross profit 69.34 64.18 74.28

The sales to which they refer are set out in Appendix A-2: Income Note No. Column 1 Column 2 Column 3 $ $ $ Sales (i) 8739 6528 13399 Cost of goods sold (ii) 2680 2338 3446 Gross profit (iii) 6059 4190 9953

The columns are explained at the foot of the page: "Column 1 represents the average weekly reported sales and expenses for the financial year ended 30th June 1998. Column 2 represents the lowest average weekly reported sales for the financial year ended 30th June 1998 and the average reported expenses of that particular Franchisee. Column 3 represents the highest average weekly reported sales for the financial year ended 30th June 1998 and the average reported expenses of that particular Franchisee." 18 Above those descriptions the following statement also appears: "This Statement indicates gross margins and expenses which have been reported by responding Franchisees in the Profit and Loss statements for the financial year ended 30th June 1998 which have been supplied to the Franchisor. There is no guarantee that you will achieve these figures, nor is it intended that you should rely on them as a guarantee." 19 Expenses in twenty categories are then detailed. On the last line of the page the reader is told to read the statement in conjunction with the notes forming part of Appendix A. 20 Appendix A-2 of the national disclosure document lists reported average sales, costs of goods sold and gross profit as follows: Income Note No. Column 1 Column 2 Column 3 $ $ $ Sales (i) 8961 4665 14823 Cost of goods sold (ii) 2933 1417 4587 Gross profit (iii) 6028 3248 10236

21 The figures for costs of goods sold and gross profit, expressed as a percentage of the sales in Appendix A-2 appear in Appendix B-3 as follows: Income Column 1 Column 2 Column 3 % % % Sales 100.00 100.00 100.00 Cost of goods sold 32.74 30.37 30.95 Gross profit 67.26 69.63 69.05

22 Various warnings about the use of the figures were given in the same terms in each document. It is not necessary to detail them. It is not suggested that the figures were incorrect or that Mr and Mrs Canham were misled by the information provided in them. 23 Returning to Mr Shortell's account of the first meeting, he says that he spoke with the Canhams of four key areas of costs in the expenses listed: the cost of goods sold (about 32 per cent); wages (about 15-25 per cent); rent (about 15 per cent); and franchise fees (10 per cent). He told Mr and Mrs Canham that all franchisees had to be approved by the franchisor, gave them an application form to complete and a list of all the existing franchisees and their contact details. 24 Mr Shortell recalls some further discussion about how they could assess whether they were suited to the enterprise and about the Logan Hyperdome site. They said they were interested in it, but he indicated that the site had not as yet been secured. He recalls saying that franchising is not a guarantee, and what was provided was a system that worked. He says that there was no discussion about profitability or sales turnover at any site during that meeting. Approximately a week or ten days later, Mr and Mrs Canham returned the application form, which was then submitted to the franchisor. 25 Whilst Mr Canham was overseas, in May 1999, Mrs Canham said that she read another advertisement concerning BB's franchise stores at Springwood and Sunnybank Hills. She spoke to her husband and it was agreed that she would make some enquiries. She spoke to Mr Shortell and arranged to meet him at the Sunnybank Hills store site. 26 The site of the proposed store had been a coffee shop which had closed. Mrs Canham asked Mr Shortell why that had occurred, and he offered her some explanation and advised her of changes in the centre which would increase custom. At the conclusion of the meeting she told Mr Shortell that she would discuss the matter with her husband and get back to him. She says that she spoke to her husband by telephone and "told him of the details of my meeting with Mr Shortell at the Sunnybank Hills Shopping Centre". She was again enthusiastic about the prospect of buying the franchise. Her husband told her that if she was keen she should have their accountant, Mr Hartmann, do some financial projections for the trading of the site so that they would be available when Mr Canham returned from South Africa. 27 The following day Mrs Canham says that she telephoned Mr Hartmann and advised him that she and her husband were interested in purchasing a franchise at the shopping centre. She later saw Mr Hartmann on 13 May 1999 and requested the financial projections. She said that she asked him what he would need in order to undertake the projections, and he said that he would need some information from Mr Shortell in order to produce them. 28 Mrs Canham then says that she telephoned Mr Shortell and explained that she and her husband were interested in looking further into the question of a purchase. They met again at the Sunnybank Hills Shopping Centre somewhere between 7 and 13 May 1999. She says that she told Mr Shortell that they wanted their accountant to undertake some projections and that the accountant had requested information about the running costs of the business. She says that she telephoned Mr Hartmann on her mobile telephone whilst meeting with Mr Shortell, and conveyed the information provided by Mr Shortell which comprised some of the expenses of running a BB's store, expressed as a percentage, presumably of gross profit. She did not write the figures down but relayed them directly to Mr Hartmann. Apparently Mr Hartmann did not keep a note either. She recalls passing on percentages which related to rent and wages and costs of goods. Mr Hartmann said that he would advise when the projections were ready. She had some further conversation with Mr Shortell concerning his proposal to open the store himself and put a manager in, about the training to be provided to franchisees and how uniform standards were monitored and maintained. She again says that she felt "very positive" about the prospect of a purchase of the franchise, largely because Mr Shortell was confident enough to open the franchise himself. 29 Mr Hartmann says that some time after 13 May 1999 he received a telephone call from Mrs Canham about the BB's franchise business. She had earlier spoken to him about their interest in a purchase of a franchise. She told him that she was with Mr Shortell and asked what details he needed in order to produce the financial projections they had requested. He asked for, and she relayed, details of the expected business turnover, costs of sales, gross profit percentage and major expenses such as rent and wages. He wrote them down at that point but did not retain a note of them. 30 Mrs Canham's enthusiasm was not initially shared by Mr Canham when he returned from South Africa. She says that he was non-committal and said he wanted to look at the figures and have a look at the site. On 31 May 1999 they met with Mr Hartmann, who advised that he had not yet finished the figures but they would be ready shortly. She says that she clearly recalls telling the accountant that she wished his opinion because she did not wish to make a decision "based on emotion". She advised him that she favoured the purchase of the site because it was close to where they lived, it was in a shopping centre and part of an established franchise system. 31 Mr and Mrs Canham were unclear in their evidence as to when they met with Mr Hartmann and received his financial projections for the business and as to when they had received the disclosure documents which included the financial information. Mrs Canham placed the meeting between 31 May 1999 and 10 June 1999 and Mr Canham some time in June. It was following this meeting that both Mr and Mrs Canham said that they had determined to proceed with the purchase. Mrs Canhan gave evidence that it was also after this meeting that her husband told her about some graphs Mr Shortell had given him and showed them to her. They reassured her in the sense that the figure of $8,000 tallied with those in Mr Hartmann's projections. Mr Hartmann recalls that he was provided with a photocopy of Appendix A-2, B-3 and A-4 of the document entitled "BB's Coffee & Bake Disclosure Document for Franchisee or Prospective Franchisee", together with a document entitled "BB's Coffee & Bake Sunnybank Hills Set-up Cost Estimate" after an earlier meeting. He says he used the financial percentages and the set-up data in those documents, together with the earlier information provided by Mrs Canham. Mr Hartmann says he was also provided with a document entitled "BB's Coffee & Bake Sunnybank Hills - Set-up Expenses" which was included in the bundle of franchise documents earlier handed to him by Mr and Mrs Canham. 32 In late May or early June 1999, Mrs Canham says that she and her husband met with Mr Shortell at the shopping centre. She showed her husband the shop site and reiterated the advices of Mr Shortell about the repositioning of the store and features which would create a better business. Mr Canham recalls discussion as to the reason for the failure of the coffee shop. Although he is not entirely sure, he believes that it was at this point that Mr Shortell gave him two documents entitled "BB's Coffee & Bake Sunnybank Hills Set-up Costs Estimate" and "BB's Coffee & Bake Sunnybank Hills Set-up Costs Estimate - Equipment". Mr Canham indicated an interest in looking at the BB's franchise at the Carindale Shopping Centre but was told it had been sold. Mr Shortell said that if the Canhams did not buy Sunnybank Hills he was going to open it himself. Mr Canham says that at this stage he was not convinced that they should purchase the store at Sunnybank Hills, as he was concerned about the customer levels and the position of the site. In particular he was not convinced that a coffee shop in a food court would do very well. Mr Shortell attempted to address his concerns. 33 The two disclosure documents referred to above bear Mrs Canham's signature and an acknowledgment by her that she received them on 3 June 1999. I shall refer to them as a composite document, as the witnesses did. Mrs Canham does not know how she came into possession of the composite document. She did not read all of it, as it consisted of over 100 pages of material, but she did look at the financial projections in Appendices A-2 and B-3. She recalled noting that the percentages for the expenses and costs of goods shown in Appendix B-3 were similar to those which Mr Shortell had given to her and she had relayed to Mr Hartmann. She observed that the projections indicated profitable trading if the turnover figures contained in the columns were achieved. She felt reassured of her view after she read these projections, but still wanted her own accountant's opinion on the viability of the site. 34 Mrs Canham says that between late May and 21 June 1999, whilst she and her husband were at the Sunnybank Hills Shopping Centre looking at the site, she received a telephone call on her mobile telephone from Mr Shortell. He enquired as to whether they had a business plan concerning the franchise store and she said they did not, but that they had a company and a company superannuation fund. He replied that that was good because "you're going to make some serious money". He then made some comment about tax implications, and she was again reinforced in her confidence about the money that they would make if they purchased the store. Mr Canham recalls a reference to "some serious money". 35 Mr and Mrs Canham say that at some time between 21 and 30 June 1999, they met with Mr Shortell at the shopping centre. On this occasion Ms Julie Canham, Mrs Canham's daughter accompanied them. Ms Canham did not give evidence. They inspected the plant, equipment and goods that had been part of the café which had closed, and they discussed refurbishment of the shop. They say their daughter said to Mr Shortell, "Mum and Dad better make a lot of money out of this - they've got to pay for my wedding next year" and he replied, "Don't worry about that - they'll make plenty …". Mr Shortell does not recall a meeting with Ms Canham prior to completion of the sale. He does recall meeting her after the business had been operating for some time, at which point she commented upon her impending marriage and that her parents were paying for the wedding. He denies that he said at any point that her parents would make plenty of money. 36 Mr Canham says that he has a good recollection of his conversation with Mr Shortell. The conversation assumes importance in the applicants' case. He says that the refurbishment of the shop was discussed in greater detail. Mr Canham expressed concern as to how much would have to be sold to meet their commitment, and whether the store could turn over enough sales to support himself and his wife. Mr Shortell said that the coffee and muffin products that they would sell would be more than enough to meet their commitments, and that other sales would be "icing on the cake". He then went to his briefcase and took out some documents which he gave to them. They consisted of a series of printed graphs. The first was entitled "BB's Queensland Average Monthly Sales per Store" and the other documents were average monthly sales for New South Wales and Victoria BB's stores. They took the form of graphs. As he gave them to Mr Canham he said words to the effect, "This will help you make up your mind. This store will do at least $8,000 per week …". Mr Canham looked at the documents and commented that it looked good. After the meeting Mr Canham perused the documents in more detail and observed that the average monthly turnover of the Queensland stores in a one-year period between July 1997 and June 1998 was over $8,000 per week. He made a note at the top right-hand corner of the document "Supplied by Ian Shortell". 37 Mr Canham said that prior to seeing those documents he had been concerned and was not inclined to purchase the store, but that after he received the graphs, and Mr Shortell's assurance that it would turn over at least $8,000 per week, his position "completely changed". He says, "I now knew that I could trade the store at a good profit and still meet all of my commitments". He showed the document to his wife and told her of Mr Shortell's assurance. 38 The origin of the graph document "BB's Queensland Average Month Sales per store" was gone into by the respondents. Mr Shortell denied providing it to Mr Canham. Ms Jennings was employed by Alford's accountants at that time and her client was the Retail Food Group, an entity connected with the franchisor. She first saw the document when it was shown to her by Ian Shortell on 11 February 2002. She says that in February 2000 she had prepared a document showing the monthly sales figures for every BB's store on an annual basis. When she compared that with the graph it appeared to her that the figures calculated in her document may have been used to create the graph. 39 Without examining the graph in detail the impression gained is that average sales in Queensland are more than $30,000 and less than $35,000. Mr Best, who was an accountant with Alfords Accountants and Business Advisors, and was seconded as an in-house accountant to the Retail Food Group in May 1996 had not seen the graph before. Mr Shortell says that he had not seen them and did not provide them to the Canhams. He points out that they may have been created by someone and provided them to the Canhams at any time during the period in which they operated the coffee shop. 40 The exact date of the meeting between Mr and Mrs Canham and Mr Hartmann was not recalled by any witness. The document which Mr Hartmann prepared for them is entitled "Walcan Pty Ltd Projected Income and Expenditure Statement BB's Coffee & Bake Sunnybank Hills". His hand-written draft of it had five columns headed with weekly gross sales of $4,000, $6,000, $8,000, $10,000 and $15,000. In the final typed version he reduced the columns to three, and dealt with income as follows: $6000 $8000 $10000 Weekly Weekly Weekly Annual Turnover (1) 312 000 416 000 520 000 Cost of Sales 31% 97 000 129 000 161 000 Gross Profit 215 000 287 000 359 000

41 The document then lists some eleven items of expenses. They do not correspond to those in Appendix A-2 of the disclosure document. Mr Hartmann added the following notes to his document: "1. The minimum expected weekly turnover is $6,000. Based on the proprietor's intentions, this weekly turnover figure is expected to increase to $10,000 over a reasonable period of time. 2. The proprietors wages is based on the directors being paid $35,000 each." 42 On reading the document Mr Canham observed that the Sunnybank Hills store was going to make a net profit of between $67,750 and $167,750 if it achieved a turnover between $6,000 and $8,000 weekly. He realised that those figures did not take account of wages payable to him and his wife, but he could see that they showed that he and his wife could be comfortably supported, even if it only turned over $6,000 per week. In that event they would still be able to pay themselves over $67,000 per annum. Whilst Mrs Canham does not recall when she received the document. She made similar observations. 43 Mr Hartmann was questioned about the task he undertook and the extent to which he had performed his own assessment. Aspects of his evidence were vague. He recalls that he was to advise them as to a break-even point. Mrs Canham had been told a range of figures, up to $14,000. He determined that if gross sales were $8,000 the business was viable. He formed his own opinion about a number of the items of expense. The cost of sales figure of 31 or 32 per cent which he utilised was said by Mrs Canham to have been provided by Mr Shortell. Mr Hartmann says that it was then up to Mr and Mrs Canham to satisfy themselves whether the required sales figure was achievable. They believed they could achieve gross sales of $10,000 over time. They did not tell him that Mr Shortell had told them they would make $8,000 in sales each week nor did they show him the graph said to have been provided by Mr Shortell. 44 After the meeting with Mr Hartmann, Mr and Mrs Canham decided to purchase the sub-franchise at the shopping centre, Mr Canham says. He says that he decided to proceed with the purchase because he knew they were going to make money from it, because Mr Shortell had told him it would turn over at least $8,000 per week and because "this was backed up by the graphs he had given me". They agreed that Mrs Canham would ring Mr Shortell and advise him that they wished to go ahead and purchase the business. 45 Mr Shortell's account is different in many respects. Mr Shortell says that on about 19 May 1999 he received a telephone call from Mrs Canham who said that they were still interested and ready and keen to proceed. They met the following day at the Sunnybank Hills Shopping Centre, where they looked at the site and explained what had happened with the previous cafe. He then met with Mr and Mrs Canham at the site in late May 1999. He explained why he thought the previous café on the site had failed. He recalls Mrs Canham asking how much the business had been turning over, and he said he did not know but thought it was slightly more than $2,000 per week. She said that that was of concern to her. He explained that the site had been orientated incorrectly, but this was going to be resolved. They then discussed the rent, shop fittings and changes to the shop, together with equipment and the franchise fee. He thought that it would cost somewhere between $200,000 and $220,000 to set it up, and that it would be closer to $200,000. Mr Canham said he could pay cash for that, although for tax reasons he preferred to borrow some money. They advised that they would go away and let him know if they were interested in the site. He says there was no discussion about the likely turnover of the site or the specifics of the costs of running the business. 46 Mr Shortell says that Mr Canham telephoned him a few days after the meeting and confirmed that he intended to proceed with the purchase and asked what was necessary from that point. He said that he, Mr Shortell, had to provide a disclosure document and undertook to do so. He subsequently arranged to meet Mrs Canham at the site to give her those documents. On or about 3 June 1999 Mr Shortell says that he met Mrs Canham at the shopping centre and provided her with a copy of the disclosure documents. He says that he said to her that she must read the disclosure document; she must obtain independent advice from a solicitor and from an accountant; that this is the information you would need to give them; that the document was more pertinent for their accountant's purposes, and the sub-franchise agreement would be more important for the solicitor. He pointed out the sections that the solicitor and the accountant needed to sign. During that meeting he says that Mrs Canham said that they had done a business plan with David Hartmann and he needed the documents to check some of the things they had done. She said, "We have worked on 31% costs of sales. Is that reasonable? Is that achievable?" He replied that it was and had been done by several stores in Queensland. He said that nationally it is 32 per cent but that a competent operator might achieve 31 per cent. He does not recall Mrs Canham asking him for any details on the running costs for the business so that her accountant could do projections. Mrs Canham had clearly stated that her accountant had done projections and was seeking confirmation . 47 Mr Shortell says that he spoke to either Mr or Mrs Canham on about four occasions in June and early July 1999 regarding either documentation or the fit-out of the store. There was another meeting at the site in June 1999 with Mr and Mrs Canham, the shopfitters and himself. It was concerned with the cost of the fit-out and when it could be undertaken. The shopfitter subsequently provided a detailed fit-out costing, and that quote was accepted. On the date when that contract was signed he met again with Mr and Mrs Canham at their home. They gave him the disclosure document and they discussed the fit-out costs. He then engaged a solicitor to prepare the documents to forward to their solicitors. On 26 July 1999 he says that the shop sub-franchise agreement was executed, together with a prior representations deed, outlet licence agreement and a deed of guarantee and indemnity. 48 The Shop Sub-Franchise Agreement and Deed of Guarantee and Indemnity were signed by Mr and Mrs Canham and dated 7 July 1999. Their solicitor signed a certificate to the effect that he had explained the transaction and had advised them to obtain independent financial and accounting advice in connexion with them and the transactions. The solicitor was not called to give evidence at the hearing, although Mr and Mrs Canham each denied that they had received any significant explanation. 49 Mr and Mrs Canham also completed, separately, questionnaires and a "Prior Representations Deed" in which they denied that representations concerning historical, present or future turnover or about income, profit or profitability and other representations had been made to them. Clause 3.7 of that deed permitted the first respondent to plead it in bar of any claim based upon representations. This was done but at the hearing the respondents only sought to place reliance upon the answers provided by Mr and Mrs Canham in the questionnaire as likely to be true. I shall refer to Mrs Canham's answers. Mr Canham's are virtually the same. They had discussed the answers they were to give before writing them down. 50 The questionnaire contained instructions. It was to be completed prior to completion of the Deed of Prior Representations and was to be sworn before a competent person. It was then said: "The questionnaire is directed to ascertaining what statements were made to you other than those contained in the Franchisee Agreement or Franchisee Documents or Disclosure Documents. Statements that are contained in those documents should not be repeated in your answers." 51 The questionnaire then commences with the following general enquiry: "Could you tell us in regard to each of the following questions whether any written or oral statement has been made to you or anyone else. You should also identify the name of the person who has made the statement." 52 In relation to the topic of historical, present or future turnover of the business or any other outlet within the franchise system, Mrs Canham circled "yes", and in the following question identified the source of that as being the disclosure document appendix A-2. It was then said "this information did not influence our decision". She answered "no" to the enquiry as to whether there had been any statements about the historical present or future income or profit or profitability of the business. There followed a series of negative answers in relation to topics such as the success or economic viability of the business. In relation to the statements about the overheads or costs of goods sold or any other costs of the business or any other outlet within the franchise system she answered "yes". She then wrote "Ian Shortell advised operating costs ie .. It did not influence our decision". Further affirmative answers were given with respect to the topics of the location of proposed competitors and the allowable usages under the lease. In the case of the former topic, Mrs Canham said that: "Ian Shortell advised us of competitors. It did not influence our decision." In relation to the allowable usages under the lease she identified the 'outlet licence agreement' and said that 'yes we did rely on this to sign up'. A similar answer was given with respect to statements about the terms upon which the lessor of the premises may be willing to lease them. She said that they had received statements about the nature or value or ownership of any intellectual property rights according to the shop sub-franchise agreement and that 'yes this influenced our decision'. She said that they had received statements about the nature or value or ownership of any intellectual property rights according to the shop sub-franchise agreement and that "yes this influenced our decision". She said that they had statements made to them about the hours of work required "as discussed with Ian Shortell" and "yes, this did influence our decision." She also said that Mr Shortell had discussed the initial training period required and the provision of any financial facilities needed to acquire and operate the franchise and that in both cases this did influence their decision. In each case the questionnaire appears to have been witnessed by their then solicitor. 53 On 20 November 2000 the solicitors for the applicants wrote for the first time to the fourth respondent advising of their intention to commence proceedings and seeking an opportunity to resolve the matter. The respondents point out that there had been no complaint up to this point. Mr and Mrs Canham do not refute this. Mr Shortell said that he visited the site at least once a month and had a number of conversations with Mr Canham in the 12 month period after they commenced trade, the end of August or the beginning of September 1999. He said that on several "if not most" occasions, Mr Canham would ask how he could sell the business or "get out of the business". Mr Shortell encouraged him to be patient but it was clear that he was unhappy. When Mr Shortell asked on one occasion whether he was unhappy with the sales figures, he replied that the business "was not for him". In about February 2000 Mr Canham did apparently say that he was unhappy with the sales being achieved and as a result the then franchise service officer, Mr Wick, and Mr Shortell discussed a marketing plan which was undertaken and had the effect of lifting sales. Evidence was also given by Mr Alford who was the general manager of the franchise system. He had contact with Mr and Mrs Canham through the period August to December 1999 and visited them on about six occasions. No complaint was made to him, although Mr and Mrs Canham did say that they did not consider it was appropriate to discuss their difficulties either with Mr Wick, who was an employee of Mr Shortell's, or with Mr Alford. They say they no meaningful conversation with Mr Alford. Mr Williams, who was then chairman of the Retail Food Group board, attended at their premises on two occasions but no complaint was made to him. In a letter which he wrote in late October 1999, Mr Williams appears to predict that they will have problems in the franchise.

findings 54 Mr and Mrs Canham's evidence did not establish the representations alleged in pars 7(c) to (f) of the statement of claim. In her statement Mrs Canham did not say that those representations had been made and agreed in cross-examination that they had not. Mr Canham however gave evidence that he passed on the figure for gross sales of $416,000 to his wife. He had calculated it by reference to the figure of $8,000 per week he had been told by Mr Shortell that they would receive. There are some difficulties with this aspect of Mr Canham's evidence. There is no reference in his statement to this having occurred and it is not consistent with the allegation in the statement of claim that Mr Shortell gave that figure to Mrs Canham, albeit an allegation which Mrs Canham later accepted did not accord with the facts. Mr Canham agreed that he had no idea where the figures of $169,250 for total expenses and $117,750 for net profit came from. The obvious answer is that they were taken from Mr Hartmann's projections and were sought to be attributed to Mr Shortell. No explanation was provided as to how they came to be pleaded as specific representations made by Mr Shortell. Mrs Canham's evidence concerning the information she relayed from Mr Shortell to the accountant was limited to items of expense. She did not suggest that any figures relating to cash flow or operating profit were provided on this occasion. It would seem to me from this, and other aspects of the evidence, that Mr Hartmann was mistaken in his recollection about having received some such information from Mrs Canham. 55 The case as originally pleaded did contain a reference to the graphs said to have been given by Mr Shortell to Mr Canham, although it was not claimed that they were supportive of a representation concerning weekly sales. Rather it was alleged that the graph, provided to both Mr and Mrs Canham, conveyed that they would achieve gross monthly sales of $32,065. How that figure was arrived at by reference to the graph was not gone into. It was alleged that Mr Shortell himself gave that figure to Mr Canham in a telephone conversation. It now emerges that there was never any discussion about a monthly figure. Almost all of the original allegations lack a basis in fact. Again, it is difficult to understand how they could have been made and pursued to trial. 56 I do not doubt that at some point Mr and Mrs Canham became focussed upon the figure of $8,000 for gross weekly sales. This is the figure which they and Mr Hartmann assessed as necessary to achieve if they were to have a viable business. Mr Hartmann explained that the task he was engaged upon was to ascertain that figure. He was endeavouring to find some middle ground. The higher figure for sales he recalls Mrs Canham having been told about, up to $14,000, is consistent with her having received and conveyed to him the information in Appendix A-2. 57 The evidence given by Mr and Mrs Canham, if accepted, went no way towards establishing the case as originally pleaded. It is not possible, in my view, to conclude that some errors were made in translating their versions of events to pleadings and particulars. The pleadings were specific and detailed. The particulars showed that the applicants were apparently able to recall when, and in what circumstances, the figures were provided by Mr Shortell. In any event no explanation was offered. 58 The case set up against the respondents was that the applicants and their accountant had based their assessment of the prospective business on figures representing all the key aspects of a business. The case is now much different and limited only to a representation on one occasion. It would appear that what was originally undertaken was to attribute most of the figures in Mr Hartmann's projections to Mr Shortell. Clearly Mr Shortell was not the person who calculated those sums, let alone conveyed them. A conclusion that the case was concocted in these respects seems inescapable. 59 The effect of these findings upon Mr and Mrs Canham's credit is substantial. A review of the evidence does not assist them. The evidence does not suggest that the representation now alleged to have been made by Mr Shortell was likely to have been made. 60 The fact that the figure of $8,000 alleged to have been represented accords with the figure that Mr Hartmann identified as the amount of gross sales which the business would need to make each week was not explained. That is to say, the process by which Mr Hartmann might have arrived at that figure was not explained. It may however be observed that the figure of $8,000 arrived at in his projections is close to the mid-range in Column 1 of Appendix 2, in either the national or territory disclosure documents. The possibility that the figure of $8,000 per week for gross sales was given by Mr Shortell is no more likely than the possibility that they were working on average figures, it seems to me. Indeed on an overall view of the evidence the latter emerges as the more likely. The likelihood that they undertook an assessment of their own is supported by Mr Hartmann's evidence that they were to satisfy themselves that $8,000 could be achieved and further that they determined that they might achieve $10,000 in the future. Against the possibility that Mr Shortell did provide the figure is to be weighed the fact that the Canhams at no time advised Mr Hartmann that he had done so. 61 There are other aspects of the evidence concerning the important meeting with Mr Hartmann and the meeting with Mr Shortell when he is alleged to have given the assurance about the figure and produced the graph. The first relates to the timing of these events. It is necessary to recall that it was following, or soon after, the meeting with Mr Hartmann that they said they made their decision to purchase. 62 Both Mr and Mrs Canham placed the meeting between Mr Shortell and Mr Canham, which took place in the company of Ms Julie Canham, as between 21 and 30 June 1999. This was the occasion when Mr Canham says that the critical representation was made to him and when the graphs were produced. It was not suggested by Mr Canham that Mrs Canham took part in it, but rather that she was told of Mr Shortell's assurances and the graph he had produced afterwards, which I take to mean shortly afterwards. Mrs Canham did not give evidence of this taking place. Mr Canham's evidence had this conversation occurring prior to the meeting with Mr Hartmann. He was unable to put a date to the latter. The prospect that Mr Shortell made some such representations after they had met with Mr Hartmann and seen his projections would not be consistent with the applicants' case. It would no doubt raise problems about reliance. 63 There is a difficulty squaring Mr Canham's evidence with that of Mrs Canham. She puts the meeting with Mr Hartmann as taking place between 31 May and 10 June 1999, prior to the occasion when Mr Shortell is said to have provided the initial assurance. Further, on her evidence it was after the meeting with Mr Hartmann that her husband showed her the graph and told her of the assurance. Assuming the graph was given at a point prior to the meeting, it is not apparent why Mr Canham would wait until a later time to advise his wife of such an important piece of information, but I put that observation to one side. For present purposes it would not seem possible to view the versions as consistent. 64 I have taken into account that the Canham's selection of dates might not be accurate, but how one could place these events in the necessary sequence is not obvious to me. If one assumes that the date given for the meeting with Mr Shortell, between 21 and 30 June, is correct, and that he gave the assurance prior to them seeing Mr Hartmann, the meeting with Mr Hartmann would have taken place in July. This is not consistent with anyone's recollection. Further, the agreements were signed in early July and they would have had time to see Mr Hartmann and meet with their solicitor in this short period. If one assumed the conversation with Mr Shortell occurred prior to the meeting with Mr Hartmann and that the latter occurred later in June, it would be necessary to have Mrs Canham's evidence further explained, including her evidence of other conversations between them and Mr Shortell in the period between late May and 21 June 1999. 65 The dates provided by Mrs Canham of the meeting with Mr Hartmann, as occurring between 31 May and 10 June 1999, do however appear to be consistent with their receiving the disclosure documents with the financial information contained in them on 3 June 1999. The evidence suggests they probably saw him on two occasions in this period - the first being in late May and the second some time between 3 and 10 June. If Mr Shortell is to be believed, they had already committed to a purchase by 3 June. The projections later prepared by Mr Hartmann might also be viewed in that light. They were apparently to be provided to possible financiers for the purchase. However these matters were not gone into in submissions and nothing of consequence should be drawn from it. 66 It may then be considered whether a representation that gross sales of $8,000 would be made every week of operation, was likely to have been made in the circumstances. 67 There was no trading history for the business. One may then accept that some such information in relation to potential earnings might have to come from the respondents. This would perhaps be more likely if Mr Hartmann did not reach a conclusion about that figure from his own calculations. There is no evidence as to this. A difficulty, amongst others, for the applicants is that it is just as likely that they and their accountant derived the desired figure of $8,000 gross sales per week from Appendix A-2. They were persons having had some success in business and may have reasoned that they could do as least as well as the reported average and then improve upon it. 68 The applicant's case about the alleged representation has another difficulty. It requires one to believe that a potential purchaser with a background in business might take such an assertion as seriously made and to be acted upon. There was no trading history and the only information Mr Shortell had provided to this point were the average figures for income and expenses. Why they would have thought it could have any basis was not gone into. Mr Canham was apparently immediately persuaded by Mr Shortell's assertion that they could make a good living from the store, when he had not been persuaded by information which showed the same figure for gross sales as what was earned on average, by stores performing in the mid range. It is hard to accept that he would not have made some connection with the financial information in the disclosure documents. The evidence is that Mrs Canham received the documents on 3 June. Mrs Canham's evidence about the impact of the representation is even more problematical, as earlier discussed. She considered it to have confirmed the projection Mr Hartmann had already made, and this does not accord with Mr Canham's sequence of events. 69 The graph document, if analysed, might show monthly averages in the order of $32,000. The applicants contention in this regard, one infers, is that that if Mr Shortell gave the graph to Mr and Mrs Canham it may more readily be concluded that he used it to support a representation. It shows only average monthly sales in Queensland and Mr and Mrs Canham were not able to explain how they felt this supported or strengthened the representation alleged to have been made. It also suggests considerable variation in earnings, not a steady rate of sales each week. The representation alleged to have been made was specific to the site in question and definite, if not emphatic, as to what they would turn over every week. Additionally, the evidence concerning the graph suggests that it was produced some time after Ms Jennings compiled the information upon which it was apparently based, which is to say after February 2000. 70 The fact that neither Mr or Mrs Canham told Mr Hartmann of Mr Shortell's alleged assurance about the sales which could be achieved is of some importance. It is difficult to believe that such information would not have been conveyed to an accountant, particularly since it is the figure upon which they were focussed. Indeed the case originally pleaded was that the same representation was made by Mr Shortell to Mrs Canham and then conveyed to Mr Hartmann. No explanation was provided as to why the representation ultimately relied upon, and the graph, were not provided to Mr Hartmann or mention even made of them. One possible explanation is that they were not relied upon, if they were provided. On the view I have taken of the threshold question, as to whether the representation was likely to have been made, it is not necessary to determine whether this was the case. 71 One fact appears reasonably clear from both accounts. Mr Shortell agrees that he confirmed average costs of sales at 31 or 32 per cent. This would reflect a gross profit of 69 per cent or 68 per cent. This is consistent with Appendix B-3, where it refers to sales of around $8,000. Apart from disclosing someone's focus on a figure of around $8,000 the evidence on this point does not further the Canhams' case. Mr Shortell says he had provided that figure at the first meeting. Mr Hartmann and the applicants say they were enquiring after the figure as important to their assessment. It is not clear whether they seek to derive anything from this fact. They were given the figures in the disclosure documents on 3 June 1999. One may accept that Mr and Mrs Canham sought, and were given, an assurance by Mr Shortell as to the average figures, but neither the accuracy of these figures or Mr Shortell's evidence on this point detracts from his creditworthiness. 72 In this case, the answers provided by Mr and Mrs Canham in the prior representations deed are of significance. In I00F Australian Trustees (NSW) Ltd v Tantipech (1998) 156 ALR 470 a Full Court reiterated that an agreement such as that contained in the deed in this case cannot bar a claim based upon misrepresentation (478-480). The fact that an applicant says they were not induced by particular representations may bear upon the question whether they should be believed when they later assert that they were (480). Here, tellingly, Mr and Mrs Canham responded in some detail to the questions posed. This is not a case where it can be discerned that they rushed through the document and were not focussed upon the questions. One would have expected them to be more consistent in their denial that representations had not been made to them if they were concerned, as they now say, that they might lose the sub-franchise if they did identify areas where they had been influenced by what was said to them. They identified information which did amount to representations to them, of the kind enquired about, and further identified those which had operated as influential upon them. Appendix A -2 was identified as falling into the category of representations, but was said not to have been influential. Mr Shortell was said to have advised the applicants of operating costs, but again this was said not to have been influential. Other information provided to them, perhaps not likely to be of great significance to a franchisor, was identified as influential. It is the applicant's own case, on this aspect of the evidence, that they lied. That is always a difficult point from which to start, but is sometimes susceptible of an explanation. To accept the effect of their argument, that they selected areas to identify as influential and therefore deflected attention from the information they considered had influenced them, would seem to me tantamount to concluding that they were devious. It is sufficient to conclude that their answers detract further from an acceptance of their evidence that influential representations were made. The likelihood is that they were honest in their answers to the questionnaire. 73 I have also considered the lack of complaint made by them as inconsistent with their reliance upon anything Mr Shortell had said to them. Whilst one may accept some reluctance to complain to employees, and that circumstances during every visit by franchisor personnel or Mr Shortell might not provide an opportunity, there was sufficient time and opportunity to make some complaint to someone in authority when it was obvious that they were not achieving the sales that they had been promised. 74 As I have previously indicated, the applicants are not able to point to facts which would render it likely that Mr Shortell gave the assurance they contend for. They fail on their own case. It is therefore not necessary to analyse Mr Shortell's evidence in detail. Nothing in it provides support, of substance, for the applicants' case. Even if one accepts that he may have understated his enthusiasm for the site in his evidence, it does not take the applicants' case far. It may be that he drew some analogy with McDonalds at the first meeting. That he was enthusiastic generally about the franchises in this period was accepted by him, but without more these do not weigh much against his evidence generally, which was not shown to have any major shortcoming. 75 In view of my findings it is not necessary to deal with the issue of damages.

conclusion 76 The applicants have not established the making of the representations upon which they are said to have relied. An acceptance of their evidence was rendered very difficult when one compares the case pursued at the conclusion of the hearing when it is compared with the allegations originally made. They lacked a foundation in fact. There was no independent evidence to suggest that the critical representation was likely to have been made. The evidence for the applicants was itself inconsistent, unreliable and lacking in necessary explanation. 77 The proceedings will be dismissed with costs. I certify that the preceding seventy-seven (77) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kiefel.

Associate: Dated: 30 September 2002 Counsel for the Applicant: Mr T D North SC

Date of Hearing: 3, 4 and 5 June 2002

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Cases Cited (1)