Denian Enterprises Pty Ltd v Northern Beaches Enterprises Pty Limited as trustee for the Northern Beaches Trust

1. [1]

   These proceedings commenced on 5 May 2020 by the filing of a statement of claim. They arise out of the purchase of a Domino’s franchise at Manly by the first plaintiff (Denian Enterprises Pty Ltd). The second and third plaintiffs, the directors of the first plaintiff, were the guarantors.

2. [2]

   The plaintiffs entered into a Business Sale and Purchase Agreement with the first defendant, Northern Beaches Enterprises Pty Limited and Hot Cell Pty Ltd (together “the Seller”), and a Sub-franchise Agreement with the fourth defendant, Domino’s Pizza Enterprises Limited. The negotiations were carried out between the plaintiffs and the third defendant (Daniel Evans) who was a director of Northern Beaches. Northern Beaches and Hot Cell were in a partnership in the business of operating Domino’s Pizza stores including the store at Manly. Hot Cell was a wholly owned subsidiary of Domino’s.

3. [3]

   The claims against the various defendants include claims for breach of contract of both the Business Sale and Purchase Agreement and the Sub-franchise Agreement; misleading and deceptive conduct contrary to ss 18 and 21 of the Australian Consumer Law (ACL); unfair terms of the Sub-franchise Agreement; and negligence against Mr Evans.

4. [4]

   The solicitors acting for Hot Cell and Domino’s (“the applicants”) considered that the statement of claim served upon them was fundamentally flawed. In an attempt to avoid an interlocutory dispute, the solicitors wrote a detailed letter to the plaintiffs on 29 May 2020 identifying what they said were the fundamental flaws, and inviting the plaintiffs to file an amended pleading which addressed those matters. On 26 June 2020 the plaintiffs filed an amended statement of claim.

5. [5]

   The solicitors for the applicants considered that the amended statement of claim failed to cure the defects in the pleading. Accordingly, by a notice of motion filed 14 July 2020 they sought an order pursuant to r 14.28 of the Uniform Civil Procedure Rules 2005 (NSW) that the amended statement of claim be struck out, alternatively, that a large number of specified paragraphs of the amended statement of claim be struck out.

6. [6]

   The applicants’ written submissions say that the defects about which they complain relate to the following aspects of the claim:

7. [7]

   The applicants say that they cannot currently identify which parts of the plaintiffs’ case they actually have to meet. They also do not know to what extent they bear an evidentiary burden (for example, to establish that they had reasonable grounds for making the alleged representations; or to establish that a particular contractual provision protects a legitimate interest of theirs); or to what extent it is necessary to lead evidence as to their knowledge, or to the alleged falsity of particular representations.

8. [8]

   Shortly before the hearing of the motion, the plaintiffs served a proposed further amended statement of claim (the “proposed pleading”) in an endeavour to take account of the complaints made by the applicants about the pleading. The hearing of the motion was conducted on the basis that this proposed pleading was the relevant one for consideration. The service of this document clarified some, but not all, of the applicants’ complaints.

9. [9]

   Mr Bannan of Counsel for the applicants refined his written submissions to four significant matters which he said remained unresolved by the proposed pleading. They were:

Legal principles

1. [10]

   In McGuirk v The University of New South Wales [2009] NSWSC 1424 Johnson J said:

(a) The position of Mr Evans

1. [11]

   Paragraph 6 of the pleading set out the role of Mr Evans as follows:

2. [12]

   Paragraph 8 then set out what was said to be the further role of Mr Evans as follows:

3. [13]

   Paragraph 26 pleaded that Mr Evans made representations on behalf of the Seller during the course of negotiations. These representations were called “the Oral and Written Inducement Representations”, and were set out in paragraphs 27 to 30.

4. [14]

   Paragraph 42 pleaded that Mr Evans acted as the agent of Domino’s for the purpose of Domino’s compliance with the Franchising Code of Conduct, and paragraph 43 pleaded that Mr Evans made representations on behalf of Domino’s during the course of negotiations for the acquisition of the sub-franchise agreement.

5. [15]

   The applicants submitted that although Mr Evans was the person who was alleged to have made each of the representations pleaded, it is not clear to what extent he is alleged to have made those representations in a personal capacity, or on behalf of Northern Beaches, Hotcell, the partnership (the Seller) or Domino’s. The applicants submitted that paragraphs 6, 8, 42 and 43 allege that Mr Evans was the duly authorised agent of the Seller and Domino’s, and that he engaged in conduct on behalf of the Seller, Northern Beaches and Hotcell individually, and Domino’s.

6. [16]

   The plaintiffs submitted that the pleading was set out in such a way that it was clear when it was being said that Mr Evans was acting on behalf of the applicants, and when he was acting on behalf of Domino’s. What appeared in paragraphs 26 to 30 were representations on behalf of the Seller, and what appeared at paragraph 43 were representations on behalf of Domino’s.

7. [17]

   Although I consider that the applicants have overstated the extent of any confusion arising from the pleading in this regard, there is nevertheless some lack of clarity which became apparent during the course of the submissions of Mr Green of Counsel on behalf of the plaintiffs. A particular difficulty arises from paragraph 43 which reads:

8. [18]

   In the first place, it does not appear that what is contained in particular (b) is a representation. Rather, it appears to be a statement to the effect that what was in particular (a) was a misrepresentation. However, the real difficulty arises from particular (e) which seemingly picks up all of “the Oral and Written Inducement Representations” in paragraphs 26 to 30. During submissions the following exchange occurred:

9. [19]

   That, of course, cuts across the principal submission of the plaintiffs that the pleading makes clear which entity Mr Evans is acting for when he makes any representation. Although paragraph 26 says that Mr Evans made those representations on behalf of the Seller, he apparently made them on behalf of everyone. Although paragraphs 42 and 43 are said to concern Domino’s, it seems that paragraphs 26 to 30 also concern Domino’s.

10. [20]

    There is the further difficulty that, although paragraph 43(e) purports to pick up all of those representations, it is doubtful if paragraphs 28 and 29 concern “Earnings Information”. Mr Bannan said that the Agreement defined “Earnings Information”, but a copy of the Agreement was not vouchsafed to me at any time. The point is, however, that although paragraph 43 refers to “Earnings Information” as if it is a defined term in the pleading, what is referred to in particular “d” seems to be different from what is referred to in particular “e”.

11. [21]

    Although Mr Green may ultimately have made the matter clearer, if not pellucid, in his submissions, that clarity does not appear from the pleading as it stands. The pleading is embarrassing. The issue of whom Mr Evans was speaking for when he made representations needs to be re-visited.

(2) Representations as to future matters

1. [22]

   The applicants submitted that a number of representations pleaded in paragraphs 25, and 27-30 are or appear to be representations in relation to future matters. The applicants said that the representations are alleged to be misleading only because they were not fulfilled. The applicants said there is clear authority that the mere non-fulfilment of a representation does not make it misleading. The applicants submitted that the matter was significant because s 4(2) of the ACL imposes an evidentiary onus on the defendants where the allegation is that a representation as to a future matter is made and the representation is misleading and deceptive. In that way, the applicants needed to know whether they had to adduce evidence on the point. The importance of that matter, the applicants said, was underscored by what was said by the High Court in Berry v CCL Secure Pty Ltd [2020] HCA 27; (2020) 94 ALJR 714; (2020) 381 ALR 427 at [66] and [72].

2. [23]

   The plaintiffs submitted that whether or not there was a reasonable basis for making the representation is a matter for evidence. The plaintiffs submitted that because in many cases the future promises were broken almost immediately, it is apparent that the representations were misleading.

3. [24]

   The applicants relied on what was said in SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (2014) 314 ALR 35 to submit that there was a requirement to plead that at the time the promise was made the promisor knew it to be false. Reliance was also placed on the provisions of the UCPR.

4. [25]

   In SPAR Buchanan J said:

5. [26]

   SPAR was a decision at a final hearing, and the issue was one of substance and not pleading, although it may be noted that the pleading of the misleading and deceptive representations (set out in the judgment at [14]) did not assert other than that the misrepresentations were misleading and deceptive.

6. [27]

   However, the decision of Bill Acceptance Corporation Pty Ltd v GWA Ltd (1983) 50 ALR 242 was a case concerned with the pleading of matters alleging representations as to future conduct. In that case all that was pleaded was (as Lockhart J said at 247):

7. [28]

   His Honour then went on to say (at 247):

8. [29]

   The application in Bill Acceptance Corporation was to strike out the statement of claim on the equivalent Federal Court rule as is now contained in r 14.28 UCPR. Justice Lockhart made an order striking out the statement of claim, saying (at 252):

9. [30]

   In Berry, Gageler and Edelman JJ said in a case concerning s 52 of the Trade Practices Act 1974 (Cth) at [66]:

10. [31]

    That the issue concerning representations relating to future matters is a matter of pleading as well as substantive law is confirmed by two other matters. First, s 4 of the ACL relevantly provides:

11. [32]

    Subsection (1) points strongly to the view that the pleading of an absence of reasonable grounds is essential to distinguish representations relating to future matters which simply did not come to pass. A defendant needs to be alerted to the distinction because of the obligation under subs (2) to adduce evidence of the reasonable grounds.

12. [33]

    Secondly, s 4 coupled with the obligation under r 14.14 of the UCPR to plead specifically any matter that may take the defendant by surprise, means that if a liability is asserted to flow from reliance on a representation relating to a future matter, it must be pleaded that the representor had no reasonable grounds for making the representation.

13. [34]

    Quite apart from the foregoing, paragraphs 53 and 60 of the proposed pleading say that the Selling Representations and the Code Inducement Representations were misleading,

14. [35]

    The defendants should not be left in the position of having to guess which representations are in respect of future matters on the one hand, and which relate to matters which simply did not come to pass, or are merely predictions which are not within the scope of ss 18 and 29 of the ACL: Thompson v Mastertouch TV Service Pty Ltd (1977) ATPR 40-027 at 17,364. In that way the pleading is embarrassing.

(3) Accessorial liability

1. [36]

   The applicants submitted that it is not clear if the amended statement of claim is alleging that Mr Evans’ liability was accessorial liability, or whether he was acting merely as an agent of one or more of the defendants. The applicants pointed to paragraphs 8 and 53 of the amended statement of claim which said that Mr Evans was a person involved in the contravention of, variously, chapters 2 and 3 of the ACL and ss 18 and 21 of the ACL.

2. [37]

   The applicants pointed to statements by the plaintiffs in their written submissions in which they say that where accessorial liability under the ACL is alleged, the amended statement of claim uses words such as “agent” of the body corporate, “acting within his scope of his actual and/or ostensible authority”, and “made representations on behalf of the seller”. The applicants say that those words and phrases echo the language of s 84 of the Competition and Consumer Act 2010 (Cth) (“CCA”) which is concerned with attributing conduct to a corporation. On the other hand, accessorial liability is found in s 75B of the CCA and s 2 of the ACL.

3. [38]

   The applicants submitted that it was important to understand the basis of the liability alleged against Mr Evans, noting that it could be a liability pursuant to s 84 of the CCA, a liability as identified in Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59, or accessorial liability which is quite different, because in that case a plaintiff must show that the accessory knew the statement was false, or at the very least knew of matters which rendered the statement false.

4. [39]

   The applicants submitted that although paragraph 8 of the amended statement of claim alleges that Mr Evans was a person involved in contravention of the provisions of chapters 2 and 3 of the ACL, a response to a request from the applicants’ solicitors asking for identification of the provisions of chapters 2 and 3 that were relied upon only identified provisions in chapter 2. It was clarified during the hearing of the motion that the provision in chapter 3 was s 29. The proposed pleading refers to ss 18 and 21 of the ACL but does not refer to s 29. Given the drafting of s 29, a defendant is entitled to know which paragraphs of s 29 are relied upon.

5. [40]

   The plaintiffs submitted that Mr Evans’ liability, in an accessorial sense, is influenced and controlled by his level of knowledge as to what was being said and how accurate that representation might or could be. The plaintiffs submitted that where the Seller made representations, then they are liable, and where Mr Evans made a representation with a sufficient degree of knowledge and involvement, then he bears an accessorial liability. The plaintiffs submitted that there is no confusion in the statement of claim where accessorial liability is alleged, and where the primary liability of the seller is.

6. [41]

   It should first be noted that Mr Evans is not one of the applicants in the present motion, and that although counsel for Mr Evans appeared at the hearing of the motion, no complaint was made by him about this issue. The complaints made in respect of accessorial liability have only a peripheral connection with the interests of the present applicants. The applicants say they cannot tell from the proposed pleading which contraventions they are said to be guilty of involve an accessorial liability on the part of Mr Evans.

7. [42]

   For the reasons I have given in relation to the first two areas of complaint, I intend to strike out the existing amended statement of claim but give leave to re-plead otherwise than is set out in the proposed pleading. In an attempt to minimise further interlocutory skirmishes about pleading, I will briefly say something about this complaint.

8. [43]

   The definition of involved in s 2 of the ACL is as follows:

9. [44]

   Sections 236-239, 246 and 248 of the ACL then deal with the consequences for persons who are involved in the contravention of specified provisions of the ACL.

10. [45]

    What was made very clear in Yorke v Lucas (1985) 158 CLR 661 at 667-8 is that knowledge and intent are necessary elements of being involved in a contravention, in contradistinction to the strict liability which is applicable for the principal contravenor. The plurality judgment said (at 670):

11. [46]

    There appears to be some misunderstanding on the plaintiffs’ part which is evident from paragraph 13 of the plaintiffs’ written submissions. Mr Bannan is correct to say that the phrases referred to in that paragraph relate to the direct liability of the contravenor, as s 84 of the CCA shows.

12. [47]

    It may be taken from the plaintiffs’ oral submissions referred to above that any accessorial liability of Mr Evans is confined to representations made by the Seller. Contrary to the plaintiffs’ submissions, although paragraphs 6 and 8 of the proposed pleading say that Mr Evans was a person involved in contraventions of provisions of chapters 2 and 3 of the ACL, nowhere is knowledge and intent on his part pleaded as part of a claim that he was a person involved. The only direct liability pleaded against Mr Evans is a claim in negligence. It follows that there is no pleading identifying the contraventions, and by whom, in which Mr Evans was involved.

13. [48]

    It is embarrassing for the pleading to assert that Mr Evans was a person involved in the contraventions, but not to identify which, and not to plead, if it is the case, that he had the knowledge that the representations were misleading and deceptive but made them intentionally in any event.

(4) Causation and loss

1. [49]

   The applicants submitted that it was not clear from paragraphs 62 to 69 of the proposed pleading what case was being made by the plaintiff for what relief. The applicants submitted that paragraphs 63 to 65 appeared to suggest a claim for compensation in the form of a more profitable contract. That, the applicants submitted, was not something available under s 82 of the CCA or s 236 of the ACL. On the other hand, the applicants submitted that the plaintiffs may be seeking to plead a no-transaction case on the basis that they should be put back into the position they would have been in had they not entered into the contracts concerned. The applicants made reference to what was said in the judgment of Gageler and Edelman JJ in Berry at [72].

2. [50]

   The plaintiffs submitted that the proposed pleadings claims relief in the alternative, and accepts that at some point an election between remedies will have to be made. The plaintiffs submitted also that claims are made for breach of contract and negligence where the concept of loss is wider than a no-transaction claim.

3. [51]

   In Berry, the judgment of Gageler and Edelman JJ said at [72]:

4. [52]

   It was not at all clear, until counsel for the plaintiffs said so during the hearing, that the claims for damages on the one hand, and for orders avoiding the transactions on the other, were made in the alternative. All the prayers for relief claim both a refund (presumably on the basis of a no-transaction case) and damages in addition. Paragraphs 62 to 69 of the pleading seem to claim both. On the other hand, nowhere is it pleaded, if it be the case, that if the plaintiffs had known the true position they would not have proceeded with the purchase.

5. [53]

   The counterfactual needs to be pleaded to establish the causal link between the misleading and deceptive conduct and the loss claimed, as Berry makes clear. All of the defendants need to understand the basis of the claim the plaintiffs are making.

Conclusion

1. [54]

   Both the amended statement of claim and the proposed pleading are defective in the ways detailed above. The amended statement of claim should be struck out. Leave should be given to re-plead, but not as is proposed in the pleading which formed the basis of this judgment. Since any re-pleading will be the fourth attempt on the part of the plaintiffs, there would need to be powerful reasons to permit further re-pleading if the next iteration does not properly deal with the matters identified in this judgment:

2. [55]

   Accordingly, I make the following orders: