CATCHWOPDS TRADE PRACTICES - Ccnsumer protection - Invitaticn cto participate in business actlvlty - Statements as to profitability and qross turnover of proposed business - Whetner person making statements recklessly indifferent to truth of those statements. Trade Practices Act 1974, ss.59(2), 75B. 82 MARK CAMPPELL JONES +v. GLEN HOUN HOLDINGS PTY. LUMTTED (IN LIQUIDATICN) and ANOR. No. G 360 of 1983 Neaves J. 26 July 1985 Canberra IN THE FEDERAL COURT OF AUSTRALTA NEW SOUTH WALES DISTRICT REGISTRY No. G 360 of 1382 GENEPAL DIVISION ~~ eee BETWEEN : MAPK CAMPBELL JONES Applicant AND: GLEN HOUN HOLDINGS PTY. LIMITED (IN LIQUIDATION) First Respondent KEVIN JCHN ROBINSON Second Respondent MINUTE OF ORDER JUDGE MAKING ORDER : Neaves J. DATE OF ORDER : 26 Julv 1985 WHERE MADE : Canberra THE COURT ORDERS THAT: 1. There be judgment for the applicant against the first and second respondents in the sum of $21.187.90. The respondents pay the applicant's costs of the application. Settlement and entry of orders 1s dealt with in Order 36 of the Federal Court Rules. D IN THE FEDEPAL COUPT OF AUSTFALTA ) NEW SOUTH WALES DISTEIIT FEDISTRY ' No. G 360 of 1327 GENEPAL DIVIZION ) BETWEEN : MARK CAMPBELL JONES Applicant AND: GLEN HOUN HOLDINGS PTY. LIMITED (iN LIQUIDATION) First Respondent KEVIN JOHN ROBINSON Second Respondent CORAM: WNeaves J. DATE: 26 July 1985 REASONS FOR JUDGMENT The applicant. Mark Campbell Jones. claims to recover against Glen Houn Holdings Pty. Limited (In liquidation), the first respondent, and Kevin John Robinson, the second respondent, in respect of loss or damage alleged to have been suffered by conduct of the respondents that was done in contravention of sub-section 59(2) of the Trade Practices Act 1974 (Cth). That sub-section provides - "(€2) Where a corporation, in trade or commerce invites. whether by advertisement or otherwise, persons to enqaqge or participate, or to offer or apply to engage or participate, in a business activity requiring the investment of moneys by the werscnt roneerne i and rhe carfermance 7 rnem of work asseri1ated with the rivesrment, rhe corseraticn shail not mak®. with respect ta the profitapriirty or ylgk oy any ofner material aspect sf rhe pusinecs activity, 2 35atement tnat 13 False or misleading in A Material particular. ' ' Alternative sases for tne cialm were set out in the statement of claim filed on behalf cr the applicant on 22 November 1983 but those alternative bases were nor pursued. When the matter came on for hearing neither the firsr nor the 3econd respondent waz represented or took any part in the proceedings. There was on rhe file. however. a defence to the arolicant's statement of claim filed on behalf of the serond respondent on 22 Mav i984. 'bt whould. cerhaps. be noted that on 4 April 1984 fhe Supreme Court of New South Waies granted ieave., pursuant to sub-section 401(2) of the Companies (New South Wales) Code, to the applicant to proceed with the Present application against the first respondent which was in liquidation. In support of his claim the applicant relied upon statements contained in certain advertisements inserted by the first respondent in the "Sunday Teleqraph" newspaper published in Svdney and statements made to him by the second respondent. The first respondent, at the material time. carried on the busines3 of dealing in video cassette trapec. Th carried on that business under the skvle "G.H. Video Marr". The second us respondent waz a director of the firsr rezpondent and managed 1ts Dsusiness. ° The . anplicsant wave evidence Fnat he saw an : ' Advertisement in the "Surdav Teleqraph' newsvaper on 12 June 139?. the advertisement being in the tallowind form - "TIDES UNTQUE CASH FLOW OPPORTUNITY Jein the winning team. EXISTING STORES: Waaqga Waqaa, Bathurst, Orande, Lithaow, Queanbevan. Nowra. Condobolin, Kandos. Bellingen, Grafton, Forbes, Pt Macquarie, Temora, Kempsey, Regents Park, Boolaroo. dJunee, Newcastle, Wollongona, Gordon, Parramatta. NEW STORES OPENING: Cobram, Dubbo. STORES NOW AVAILABLE IN ALL CITY AND COUNTRY AREAS You WILL double your investment in 8 weeks. VIDEO - THE WORLD'S FASTEST GROWING INDUSTRY. s you to double ment in a ftew m. Investment Glenhouns unique packaqe allow or even triple your invest weeks. Join the winning tea opportunities from only $6,500. RING NOW 498-6299 Monday-Friday GH VIDEO MART A Division of Glen Houn Holdings Pty. Ltd." 4. The acrlictantc soudnt thetnar detarls of the investment opecrrunres ov telernicning tre number given in rhe adverr.gemanc. On lA June oe? he was intarmea by a person. nck vbherwi3e identified. who nad regpondea -> his request for further detaiis thar the amounc of 36,590 mentioned in the advercisement was sufficienr only for a person wishing to aad a video collection to an existing pusiness and that. if the applicant wished to start a new business, he would need to invest a larger sum. Having read an identical advertisement in the "Sunday Telearaph" newspaper the following Sunday. i9th June 1983, the applicant arranged to go to the offices of the First respondent on oy shortly after 20 June 19983 and there spoke with the second resrcondent. He unformed fhe second respondenr that he wished to discuss s3etting up a video business. The second respondent asked how much monev did he. the applicant, have to Me] invest. According to the applicant. the second respondent said that the applicant would need to "at least purchase their $13,000 video package plan to start a business from scratch". He further said that for the investment of that amount the company would provide the applicant with 100 titles plus a number of other items included in the package. He also told the applicant that he should consider purchasing a further 50 titles, the additional cost beina $80 per title or $4,000. Acieraing fc the applicant the meeting lasted some hour3 durinas which ne raised many questions about tne viability of such a opusiness. He said chat the second respondent informed him that 1f he opened a business with 150 titles he would "have a successful business from tne beginnina" and that the applicant "could expect a turnover of $900 per week from the fime Cthe business] opened and within a short time that fa Hay ' i) would increase ro around 31.000 rer week". Acenrding ro applicant fae second responde io]eel t a + Dp dowhat he. the applicant. regarded as very impressive figures as toa the turnover of some of the stores that the first respondent had in 1ts chain and about the success of a home video package that the first respondent's sales team were seiling to the public. There was also discussion about the obtaining of finance to commence the business. the second respondent stating that finance could be arranged through Custom Credit Corporation Limited. The applicant unformed the second respondent that he had looked at the possibility of starting a video business in the Balmain area and had made enquiries of various real estate agents about possible premises. The second respondent said that he would need tq inspect the proposed owremises and he would then aqive his advice as to whether he considered the site suitable. Following this discussion the applicant proceeded to look at the feasibility of opening a business and continued enquiries into possible locations. He arranged to inspect a shop in Balmain in ocampany wirtn Ehe teccnd respondent. According =o the apo.vizant tne ui 'b rr] ua :3 fey s 0) uw aS oswa iy DB iT (@] w b fom , 'than the location was rood, rivht im fhe shopping ntre: and with a beh of work on 'ne shop itsesif ce woe 1t could be made yurte sulrabie:; ana Ae wenr on fa sav that he woula make gure that tne shop itself was well dertorated and elenty of posters and display3; and he sromisea me any manpower I needea to assist in renovating." Asked what enquiries he had made the applicant answered - "Well, I had gone into #xisting video stores, particularly ones that were operating nearest to me, and seen how they were operating, the titles that they had on their shelves, observed the people going in and out of the shop at different times, spoken fo somebody in the shop nearest to where I was planning to open and asked various questions about their business. They were the main things. Also. I looked at trving to find a location ina particular part of the suburb that I was planning to open. namely right in the shopping centre." The applicant aqreed he had made no enquiries concerning the turnover or profitability of the businesses to which he referred. He said he had spoken to one operator "who gave me the impression that they were doing extremely well". There were two shops already in business renting video cassette tapes in the near vicinity of the premises at which the applicant commenced his business. one about four blocks away and the other distant about half a mile. The applicant said everyone he spoke to said that business was booming. On 27 June 1253 an agreement was sianed between the applicant and the first respondent the terms of which were as follows - "(1) GLENHGUN shall 3ell 160 movies, 100 Blank movie qovers, s1gnwriting, 59 movie cataloques. shelvinda, initial adverticznqg and promotion for Thirteen Thousand Dollars ($12,060.60) (2) GULENHOUN agrees bata) exchange Rach calendar month from the owner's stock on hand 270% of the video mevie library ztock owned by MAFF CAMPBELL JONES and exchanged from GLENHOUN at a ecnst of Ten Dollars ($10.00) per movie per month and MARK CAMPBELL JONES agrees to accept such exchange. (3) MAPK CAMFPELL JONES aaqrees to display the name G.H. VIDEQ-MART in a prominent position associated with the video movie library and will abide by any reasonable request made by GLENHOUN in this regard. (4) Additional video movies are to be purchased by MARK CAMPBELL JONES from GLENHOUN at a cost of eighty dollars ($80.00) per movie. (4a) Additional video machines and software and accessories are to be purchased by MARK CAMPBELL JONES at the cost paid by GLENHOUN plus 5%. (5) MARK CAMPBELL JONES agrees to purchase all video machines and video movies from GLENHOUN. (6) That the said parties will be bound by the terms of this agreement for the fixed term of one vear from the date of commencement which date is deemed to be Twenty Seventh June, 1983 (27.6.83) The agreement shall thereafter continue for further periods of one year at the option af MARK 'CAMPBELL JONES and GLENHOUN. This option will be granted ~I All monies are pavable to GLENHOUN NOLITNGS PTY LIMITED ten '16' working days perlor to the iscneduled opening date whitn 13 deemed to, be Wednesaay Lith Taly, L387. ' The agreement bears e@endersenanrs that the applicant had aise Purchased 50 movies ah an agreed price of $4,909 and tnat the vy first respondent had received from the applicant payment of the 1Dxe] sum of $17,600. At the time of signing the agreement the applicant handed to the second respondent a list of 150 titles of video cassette tapes which he wished to have to open the business. The applicant on the same day, 27 June 1983, entered into an agreement with Custom Credit Corporation Limited whereby the applicant borrowed the sum of $5,053 at an interest rate of 28.8 per centum per annum. The whole amount of principal with interest. namely $6,564 was repavable by 24 monthly instalments of $273.50. Of the principal sum borrowed. $5,000 was payable to the first respondent, the balance being the amount of the premium under a related policy of life assurance. The applicant took a lease of the premises at Balmain from 1 July 1983 at a monthly rental of $827.30. At the commencement of the lease a letting fee equal to one month's re) rent wa3 pavabie. The asplicant remained the lessee of the premises until 31 Auaqust 1324. The total amount paid by nim under the lease was 32481.20. The applicant spent money on fittinas and fixtures for the shop whicn opened for business on 13 Juiv i983. Video eassette tapes, 150 in number, wer2 delivered to the premises on that day but the cassettes delivered contained only 47 of the titles which the applicant had specified in the list handed to the second respondent on 27 June 1982. The applicant complained to the second respondent that manv or the cassettes were in poor condition and that ctthers were of little interest to the public. Subsequently a further 10 titles were delivered to the premises put, according ta the applicant, these were "aven worse than the titles that had originally been delivered". Tendered in evidence were sheets from the cash book maintained by the applicant in respect of the business. The takings of the business as recorded, covering the period from 13 July 1983 to 10 August 1983 inclusive, were - 13 July 1983 to 17 July 1983 $162.50 Week ending 24 July 1983 379.45 Week ending 31 July 1983 238.00 Week ending 7 Auqust 1983 128.00 8 and 9 August 1983 39.00 $937.95 10. On 3 August 1583 the applicant wrote to the first respondent in the fFoliowing terms - ween us for lmain G.H. ed by tne "T refer fo the franchise agreemenr o the establisnment and operaticn of the Fideo Mart Deing the agreement consti document signed between us on 77 June various other rerms and conditions ad us. Because the representations concerning the turnover and profitability of the business made by you to induce me to enter into this agreement were not correct I hereby rescind the agreement between us, All stock and fittings are held by me for delivery to vou in return for the sum of $17,000.00 paid to you less an adjustment for your costs of s1gnwriting. This action is also in accordance with your agreement made in consideration of mv entering into the franchise arrangement that if the business did not perform as represented you would re-acquire it from me. I propose that we settle the rescissicn of the franchise agreement by me delivering the stock and fittings in return for the said money on Friday 5 August at the premises at 392A Darling Street, Balmain." A meeting took place between the applicant and the second respondent on 3 Auaust 1983. According to the applicant. Mr Robinson began by stating that he was not qoing to give the applicant his money back. During the course of the conversation that followed Mr Robinson offered to raise the turnover of the business to $500 per week although he did not indicate how this was to be done apart from saving that he ll. woula do geme cinvaz3sing in tne area for sales of the neouse video package that his company was prcmotina. Following that mesting, the first respondent wrote to the applicant a letter dated 4 August 1983 sianed on its behalf by a Mr I. Hamilton who was described as the company's accountant. The letter read - "Further to our meeting of 2 Auqust 1983 we are sorry to hear that your business has not reached your expectation. We wish to confirm our discussions and advise that this company 13 prepared fo put in canvassers ta promote the library with the view of increasing your turnever to $500.60 minimum per week. When this turnover is reached we will have a further meeting to discuss the future of vour shop. We look forward to hearing from you regarding this proposal." A further meeting with the second respondent was arranged for 5 August 1983 but that meeting did not take place, the second respondent informing the applicant that he was unable to attend. The applicant claims damages of $21,187.90 particulars of which are as follows - "Ll. Capital $12,000.09 =. Loan and interest 6,564.00 3, Business cards 87.00 4. Address labels 30.00 5. Rupber stamp 13.090 *. Further labels 20.96 °, Stationery cabiner ind rill 209.00 9. Eleccrician 127.600 9. Security arilis . 825.00 io, penn (1.7.87 ta 1.9.83) '$827,20 ver month = 3, 2, 4R1.90 zi. Printing 60,90 12. Extra advertising (Ciny Express! 790,00 a2 Carpet 777.06 24,187.90 Less 3.906.00 Totai $21,187.90" The amount of $3,000 for which credit is qiven represents the amount realised by the applicant on the sale of the 147 video cassette tapes that remained in the shop when the business ceased trading. The applicant said in evidence that he understood from reading the advertisements and from the second respondent's statements that he could double his investment of $17,000 in eight weeks and that the business would have a turnover of $800 per week from its inception with that figure subsequently increasing. Tt ais. of course, apparent that. even 1f the turnover were $1,000 per week and no allowance were made for the expenses of running the business, the total receipts of the business over eight weeks of trading would be only $8,000. maraging dirertir om oA cimeany tilied Deasane Pty, Linired lieo . He said rhnac, sefors becoming manatiny ditre@cror, he nad been general marager ag thar eemeany far 13 aonrhs and tnat, ctridr to tnat, ne nad w ni) had avrcroximateiy 13 vearz cenalr xperienc? in tnat business in New South Wales. He further said that in July and Auaust 1383 he was familias with the operation of retail outlets selling or hirina video cassette tapes in the Sydney metropolitan area. Asked wnether in his opinion a retail store at Balmain with 150 video cassette tapes would be able to qenerate a ross weeklv turnover of $800 tc $1,000 a week, Mr Crisfori said that 16 would be possible fo do so but only at the busiest time of the year. that is during the Christmas - New Year period. and oniy 1f the Fapes available were of the bop movies available at the time. He expressed the opinion that in 1983-84 a retail store at Balmain could probably gross $400 a week in July with an increase of up to 20% in holiday periods over Christmas - New Year and in May and September. Asked whether in his experience 1t would have been possible in 1983 to double an investment of $17,000 in eiaht weeks ina retail shop of the nature of that operated by the applicant at Balmain. Mr Crisford said it would have been impossible. Asked on what basis he formed that opinion. he said - "Well. with the video iundustry, with running a video store, there 15 f[s$1c] two very important things to do - with any retail business. The first thing is to qet the customers into the store by the va rignt sort af pramsnicens. The sec of iourse. 15 ance aA TUuStoMer, you qat them intzc {ne store, 138 to «wees them tner2 ana-keep them coming back as sacicfired customers The only way yeu would rE telv a2 btmar 13 to improve the ievel of stack Ld vlur shore contipucusiy ana if i3 very importanc to puy nev release3 - that 13 thangs tnat have been t2leased stcaignt from the aistrioutors - as vell AS plrkiny us second-hand products 1f you can pick tnem up cheaply ta bc3a3st your range. If the store was making - aven ir the store was maxing 3300 a weer, as he was tela it would make. pv the time che expenses were paid - tne rent. the wages - being 3a seven dav a week business till late at night. no ene can work seven days aiwesk. You would have to bring in probably casual wages and pay someone. Because of that this would bring in expenses. plus your lighting, your stationery costs - which are high in videos. Those other costs would probably bring in around the $5800 marx - at the minimum $600. That means he would only allow $200 to put back into new stock and that buys him two new movies, because a new release straight from the suprlier 13 around the $80 mark. That then means you couid only buy two new releases. Now, most customers would look at between ten and twenty per cent of the movies in your store. If vou have 150 movies, say, at the most they would want to view thirty per cent of them depending on the quality of the movie. That means that once a customer came in there, of 150 movies at the very most he would want to view 50 movies. So, what would happen is that eventually, 1f you did not get any new movies in, you would run out of new stock. So, you would have to have probably ten new movies in every week to satisfy each customer. So, two 1s not enough. 50, you would never increase your stock at all, your previous stock. If he had paid $100 for the new releases, for the movies he originally bought. and as he said they were worth about $20. So. from day one the value of his investment has reduced down to where it is only valued at about $3.000. The only way that investment can be improved is the addition of new stock, and at two cassettes a week, of course, 1t would not improve. It would not double ain any way. In fact. by the time he lost cassettes through cassettes not returning, which you lose, especially as you increase vour turnover: damaged cassettes ~ cassettes get damaged in people's machines ~ you lose more than two a week just in that way alone. Even in a well run computer controlled business, you still lose that amount of cassettes. So, under those figures he would never actually imorove his level of stock; and as he was never imerivizny, aLac nok putting anv income away, thers 13 nO way nis ousires > would improve. in fart. om fni3e sort oof figures at woulda yo backwards cerause ne vwoula loge Che tustomecs tnac ne nad estaclicned oy net haying tne new movies in che thes. red to the sed the rs cy 1p) apolicrant oy cne firsce respondent, Mr Tristord exp opinion tnat the gross weekly turnever which the applicant could have achieved with those titles in Tuly 1983 was of the arder of $300 - 350 with some increase in that figure over the Christmas - New Year period. The applicant relied on the representation contained in the advertisement published in the "funday Telegqraph" newspaper that the investment would be doubled in eight weeks and the oral representations made by the second respondent that the business would be profitable and vould generare a weekiy gross turnover of $800 increasing to $1,000. I accept the applicant s evidence of what was said to him by the second respondent and find that representations were made as to the turnover and profitability of the proposed business. Those representations were, as were the representations contained in the advertisements, clearly representations of a kind falling within sub-section 59(2) of the Trade Practices Act 1974 (Cth) and were, as I find, relied upon by the applicant in reaching the decision ne did to enter into the agreement with the first respondent on 27 June 1983. a td iP) tu k "4 " b o fu efed fe ta a ra) Ww = =] Tt Hey 7] v wa 'D fe te a fu a ctc a TT o n wr @ lon Ut Dp that the statements relied upon were false or misieading ina Material particular. AS the ctatements were forecasts or predictions as to tne future. the applicant must show that the perscn making the sratements did not believe that the forecasts Or predictions would be satisfied or was recklessly indifferent ecsncerning 'nem: see Thompson v. Masterroucrh T.V. Services Pty. Gta. (1977) 15 ALLE. ¢87 at 0.495; Reardon +7. Aquaier Holdings 63.4.) Pry. Ltd 161982: A.T.F.R. 49-228 at p.43, 994, It is not sufficient to show, as he did, that it became apparent in the first few weeks that tne business was operatind that the forecasts or predictions would not be fulfilled and fed indeed. were not capable of being fulfilled. However, accepting as I do the evidence of Mr Crisford to which I have already referred. the inference 1s clearly open that the second respondent, in making the representations as to the profitability and turnover of the proposed business venture, could not conscientiously have believed in the truth of those representations and was recklessly indifferent concerning their truth. That inference may the more readily be drawn because of the failure of the second respondent to qive evidence as ta the basis upon which the representations were made. It is also, T think, sianifacant that, at the meeting with the applicant on 3) August 1983 and in the first respondent's letter of that date. there is no assertion that the weekiv qroscs turnover of tne business tould be increased ta QO and what was ur Si Rary uw w HA a ct fe) . The oniv fizurs nenticned was Justily tne attainmenc cf eaven that flyure was far me, s re) =] I. cherersre, find that tue representations made ov were representations with yespect tro the orofitability or risk of the proposed business activity within sub-section 59(2) of the Trade Practices Act 1974 'Ctn) and that those representations were false. I also find that the second eespondent was a person involved in the contraventions of sub-section 59(2) by the first respondent: see sections 75B and &2 Upon those findings tne applicant 15 entitled to damages to reimburse him for the moneys lost as a result of entering into the aareement with the first respondent on 27 June 1983. I assess those damages at $21.187. The applicant should have judgment against the first and second respondents for that sum together with his costs of the application. I certify that this and the preceding 16 pages are a true copy of the Reasons for Judament herein of the Honourable Mr Justice Neaves. Kecoerarel Dated: 26 July 19485