SUSAN ELIZABETH DAVID AND ANOR V TFAC LIMITED AND ANOR CA CA26/2008

SUSAN ELIZABETH DAVID AND ANOR V TFAC LIMITED AND ANOR CA CA26/2008 2 March 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA26/2008 [2009] NZCA 44BETWEEN SUSAN ELIZABETH DAVID First Appellant AND UAR LIMITED Second Appellant AND TFAC LIMITED First Respondent AND GEOFFREY ALAN GRISDALE AND AMANDA MARY GRISDALE Second Respondents Hearing: 15 September 2008 Court: Arnold, Potter and Harrison JJ Counsel: C Walker for First and Second Appellants D Connor for First and Second Respondents Judgment: 2 March 2009 at 10 amJUDGMENT OF THE COURT A The appeal is allowed. B In relation to the counterclaims, we require further submissions on the question of mitigation. C Costs are reserved in the meantime.REASONS OF THE COURT(Given by Arnold J)Table of ContentsPara NoIntroduction [1]Factual background [8]Claim in the High Court [28]Basis for appeal [35]Discussion [40](i) Misleading or deceptive conduct [41](ii) Disclaimer or acknowledgement clauses [59](iii) The counterclaims [68]Decision [74]Introduction[1] In 1993 an Australian, Robert James, started a franchise operation in Queensland, known as James' Home Services (JHS). JHS offered services such as exterior and interior house cleaning, lawn and garden care, car cleaning, pet grooming, carpet cleaning and pest control. The operation was successful and expanded into Victoria and New South Wales. Mr James' holding company, Rushlyn Pty Ltd (Rushlyn), granted "State Masters" (or head) franchises for the three States; the State Masters then granted regional franchises to "Regional Masters"; and they in turn granted sub-franchises to contractors. [2] Mr James decided to expand his JHS operation into New Zealand. In March 2005 the second appellant, UAR Limited (UAR), purchased the master franchise for New Zealand from Rushlyn. The first appellant, Mrs David, and her husband had established UAR for this purpose. Neither had any expertise in the provision of home services or franchising. [3] In August 2005 Mrs David met the second respondents, Mr and Mrs Grisdale (the Grisdales), at a franchising expo, where she made a presentation to them about JHS and its success in Australia. There were then further discussions between the Grisdales and Mrs David and/or Mr James, after which the Grisdales decided topurchase the regional master franchise (RMF) for "Auckland – Eastern Suburbs" from UAR. They incorporated the first respondent, TFAC Limited (TFAC), and on 23 December 2005 it entered into a RMF agreement with UAR. In addition, TFAC gave a certificate in which it made various acknowledgements (the text of the certificate is set out at [23] below). The Grisdales also gave a personal guarantee in respect of TFAC's obligations under the RMF agreement by way of a Deed of Guarantee and Indemnity (the guarantee). Shortly after TFAC made an initial franchise payment totalling $202,500 to UAR. [4] TFAC started trading on 1 February 2006. Almost immediately, Mr Grisdale, who had resigned his job to give his full attention to the JHS franchise, began to have second thoughts. He was most unhappy with the training and support provided. On 21 March 2006 TFAC wrote a letter of complaint to UAR. The following day UAR gave TFAC notice that it was in breach of the RMF agreement. After further correspondence TFAC gave UAR notice on 2 June 2006 that it was cancelling the RMF agreement. On 15 June 2006 UAR wrote disputing TFAC's right to cancel and itself gave notice that it was cancelling the RMF agreement. [5] TFAC and the Grisdales then issued proceedings against Mrs David and UAR alleging breach of the Fair Trading Act 1986 (FTA) and breach of the Contractual Remedies Act 1979 (CRA). UAR counterclaimed against TFAC for wrongful repudiation and breach of the RMF agreement and against the Grisdales under the deed of guarantee and indemnity. [6] In relation to the FTA, TFAC and the Grisdales alleged a number of instances of misleading and deceptive conduct. In the High Court, Baragwanath J rejected most of these allegations: HC AK CIV-2006-404-3984 11 December 2007. But the Judge upheld one aspect of the FTA claim (the Judge did not need to address the CRA claim). He cancelled the RMF agreement and the guarantee under s 43 of the FTA and awarded the respondents damages totalling $258,761, comprising the initial franchise payment of $202,500, various set-up costs and other expenses, and $26,000 for loss of income from Mr Grisdale's employment.[7] Mrs David and UAR now appeal. They argue that the Judge was wrong to find against them as the particular ground upon which he relied was not pleaded and, in any event, was not supported by the evidence. UAR also seeks to have judgment entered in its favour on both of its counterclaims.Factual background[8] Before UAR purchased the New Zealand master franchise in March 2005, Rushlyn had granted the RMF for Eastern Suburbs to Jeff Johnson. That RMF arrangement was terminated in September 2005, at which time Mr Johnson had made no sales. [9] When Mrs David first met the Grisdales at the franchising expo in August 2005, she said that only five to eight per cent of the New Zealand market for home services was being met. At a meeting soon after, she told the Grisdales that she and her husband were fielding too many calls to handle. [10] On 5 October 2005 the Grisdales met with Mrs David and Mr James. Mr James talked about his success with JHS in Australia and gave the Grisdales a booklet entitled Master Franchise Opportunity. This booklet, which was in no sense a sophisticated production, had three features which assumed importance in the case: (a) On the cover the words "Secure Your Future with a Proven System for Success" appeared, boxed and highlighted by shading. (b) On the first page the booklet said: "The James' formula is proven in the market place where it counts and the thirteen steps in this book will get you started in a positive way." (c) Finally, the booklet dealt with obtaining professional advice. It said that intending franchisees must take the draft copy of the master franchise agreement to their solicitors who should be specialists in franchising. It said that it was the solicitors' job to explain the agreement, and that the solicitors must provide a letter confirmingthat this had been done. The booklet said that if potential franchisees wished to take accounting advice, they should follow the same steps. It noted that the execution of the agreement had to be witnessed by a solicitor or justice of the peace. We return to these features of the booklet in our discussion below. [11] After that, Mrs David and Mr Grisdale spoke by telephone to an Australian regional master franchisee, who said that he had sold 16 franchises in 16 months. The Grisdales were asked to complete questionnaires for the purpose of personality profiling, and travelled to Brisbane in early November where they met some Australian regional master franchisees and sub-franchisees, all of whom were very positive about JHS. [12] In addition, on 3 November 2005, Mr James spent three hours reviewing the results of Mr Grisdale's personality test with him. Mr Grisdale's scores for self- esteem and assertiveness were low. Mr Grisdale said that Mr James attributed this to the fact that Mr Grisdale's father had left when he was young. [13] On 9 November 2005, Mr Grisdale met with Mrs David. She told him that a large number of calls were coming through on an 0800 number for potential franchisees and that the inquiry levels were so high that the Davids could not keep up. Mrs David explained the low number of existing franchisees by saying that she was focussing her efforts on obtaining regional masters, and said that there were various potential franchisees in prospect. Mrs David described the JHS system as "proven". She told Mr Grisdale to base his projected sales figures on the experience in Australia and his discussions with other regional masters, and told him to prepare a business plan and cash flows for her review. She provided him with an example business plan. [14] During this meeting the Grisdales paid UAR $2,000 as a deposit in respect of the Eastern Suburbs RMF. UAR provided a disclosure document dated 8 November 2005, signed by the Davids as directors of UAR, a draft master franchise agreement and a draft sub-franchise agreement. The disclosure documentpointed out that entering into a franchise agreement was a serious undertaking and that the Grisdales should read the relevant documents carefully and make their own enquiries. It said:You are required to have the Regional Master Franchise Agreement and associated Sub-Franchisee Agreement explained to you by a Solicitor experienced in franchising. You should also get independent accounting and business advice from an Accountant and a Business Advisor experienced in franchising before signing the Regional Master Franchise Agreement.[15] The disclosure document then outlined the Davids' background and described JHS, the nature of the franchising arrangement, the fees involved, the training provided and facilities required. It also said:9. Regarding Franchises and Franchisees 9(a). Number of existing franchises2 as at date of disclosure document – see attached Schedule9(b). Number of franchises terminated or not renewed2 as at the date of the disclosure document.The two franchisees referred to in the schedule were Wayne Grenbury, who started on 22 September 2005, and George and Ali Cervinka, who started on 10 November 2005. The terminated franchisees were Mr Johnson (see [8] above) and Brenda Bennett, who had a sub-franchise in Christchurch which was terminated on 17 September 2005, apparently because she had difficulties in delivering pamphlets. [16] In his evidence Mr Grisdale said that he had read this disclosure document carefully, and marked key passages of it with a highlighter. [17] Mr Grisdale then formulated several business plans and met with Mrs David on 16 November and with both Mrs David and Mr James on 30 November (the Butterfly Creek meeting) to discuss them. In his evidence Mr Grisdale said that his initial draft cashflow document was prepared on the basis that he would achieve no sales in the first three months, but would achieve nine sales in the remainder of 2006.He said that Mrs David encouraged him to be less conservative and to plan for 13 sales in 2006. He said her optimism gave him confidence. [18] At the Butterfly Creek meeting, Mr Grisdale showed Mr James a cash flow based on 13 sub-fanchisee sales in the first year and asked whether this was realistic. Mr James replied: "You will achieve what you want to achieve". Mrs David produced a list of the enquiries to the 0800 number. There was a notation "Jeff" alongside several of the entries. Mr Grisdale asked who Jeff was. The reply was that he was a previous regional master franchisee who "didn't cut it". ("Jeff" was Mr Johnson.) [19] Mrs David gave Mr Grisdale drafts of a RMF agreement and a sub-franchise agreement. He took these to his lawyer for review. Mr Grisdale also had an accountant review the draft cash flows which he had prepared. [20] On 19 December 2005 Mrs David provided Mr Grisdale with the RMF agreement and a certificate for execution and return. These were provided with a covering letter from Rushlyn's solicitors, McColm Matsinger. That letter advised the Grisdales to read carefully and understand the agreement and the disclosure documents. It said that the Grisdales were required to obtain independent legal advice concerning the effect of the agreement from a solicitor experienced in franchising prior to execution of the agreement. It also strongly recommended that the Grisdales obtain independent accounting advice. [21] Mr Grisdale took the documents to his solicitors and subsequently raised various queries about the RMF agreement with McColm Matsinger, to which they responded. [22] On 23 December 2005 Mr Grisdale executed the RMF agreement on behalf of TFAC at his solicitors' office and the Grisdales executed the guarantee. The Grisdales' solicitor, Mr Bradley of Miller Bradley, certified to UAR that he had explained the legal obligations arising under the RMF agreement to TFAC and that he was satisfied that it understood the nature of the obligations it was assuming. Mr Bradley also certified that he had explained the effect of the guarantee to theguarantors and that they understood the "general nature and effect" of it. TFAC's accountant, Mr Stone, certified that he had explained the financial data in the disclosure document to Mr Grisdale and had provided him with appropriate accounting advice in relation to the franchise arrangement. He certified that he was satisfied that Mr Grisdale had understood the financial effect of the transaction. [23] In addition, TFAC provided a certificate. It read:Regional Master Franchise Certificate1. The Regional Master Franchisee received a Regional Master Franchise Disclosure Document from the National Master Franchisee at least fourteen (14) days prior to signing the Regional Master Franchise Agreement. 2. The Regional Master Franchisee has received a copy of the Code (as defined in the Regional Master Franchise Agreement) and a copy of the Code of Ethics. 3. The Regional Master Franchisee acknowledges and warrants that it has (by its Sole Director, Geoffrey Alan Grisdale) received, read and had a reasonable opportunity to understand the Regional Master Franchise Disclosure Document, the Code and the Code of Ethics. 4. The Regional Master Franchisee acknowledges represents and warrants that it has (by its sole Director, Geoffrey Alan Grisdale) received read and had a reasonable opportunity to understand the Regional Master Franchise Agreement. 5. The Regional Master Franchisee has received advice in relation to the Regional Master Franchise Agreement and related agreements from: (a) an independent legal advisor, namely CCG Bradley of Miller Bradley, Solicitors, Auckland; and/or (b) an independent business advisor, namely .; and /or (c) an independent accountant, namely Bruce Stone of Bruce Stone & Associates – Chartered Accountant, Auckland. OR The Regional Master Franchisee acknowledges that he has been told to seek advice from each of the abovenamed but has decided not to seek that advice. 6. If the Regional Master Franchisee is a Trust the Regional Master Franchise warrants and acknowledges that the Regional Master Franchisee as Trustee is empowered by the Trust Deed constituting the Trust to enter into the Regional Master Franchise Agreement.7. The Regional Master Franchisee has made its own judgment as to the commercial viability of the Regional Master Franchise and further agrees that the National Master Franchisee is not qualified in this regard.Mr Grisdale signed this certificate in his capacity as sole director of TFAC and in his capacity as a guarantor. As the certificate indicates at paragraph five, the Grisdales did not take advice from an independent business adviser. [24] The RMF agreement set out TFAC's obligations in relation to the development of the franchise areas in accordance with a development schedule (part 5), training, standards, performance reviews, and a wide range of similar matters (part 8), compliance with manuals (part 10), advertising (part 11) and reporting (part 12). For its part, UAR was obliged to provide TFAC access to the JHS system, manuals, advice, training and similar support (part 6). The RMF agreement provided for a seven-day "cooling off" period, and provided for the payment of various fees (part 7). [25] TFAC began operating on 1 February 2006. In his evidence Mr Grisdale said that he commenced his training in mid January 2006. In terms of the RMF agreement he was to undertake four weeks of training, two of which were to be in Mooloolaba, Queensland. Mr Grisdale said that he was shocked to learn that the initial training consisted of the rote learning of lengthy telephone and presentation scripts. He said that he immediately began to lose confidence in the JHS system. The second week of the training dealt with "the secrets of success". Again Mr Grisdale had concerns about this. He said that by the end of the two weeks in Queensland he was becoming "extremely concerned" about JHS. These concerns increased over the following weeks, to the point that by the conclusion of a regional masters' meeting at Mooloolaba on 22 February Mr Grisdale realised that he had made a serious mistake in becoming a JHS franchisee. [26] On 21 March Mr Grisdale (for TFAC) wrote a letter of complaint to UAR. He said that the cashflow projections (which contemplated 13 sub-franchise sales in the first year) were unrealistic. He expressed concern about the amount of time that it would take to recruit sub-franchisees and about whether the JHS system could work in the New Zealand context. He said that Mrs David had seriously misled himas to what was achievable in the first year of the franchise. He also complained about the quality of the training that he had received, and about the position of an existing sub-franchisee. He invoked the dispute resolution process contained in the RMF agreement. [27] UAR responded the following day, asking what outcome TFAC was seeking. In addition, UAR gave notice of breach of the RMF agreement arising out of TFAC's obligations in respect of sub-franchisees. Mr Grisdale responded by letter dated 27 March saying that the outcome which he was considering was termination of the RMF agreement and recovery of his investment. He disputed UAR's breach notice. There was then further correspondence between the parties, which ultimately culminated in first TFAC and then UAR cancelling the RMF agreement. TFAC and the Grisdales then issued proceedings against the appellants.Claim in the High Court[28] The first cause of action against UAR and Mrs David alleged breaches of ss 9 and 22 of the FTA. It was alleged that there were oral and written misrepresentations as to six matters. As the Judge rejected the respondents' claims in relation to the first five alleged misrepresentations and there is no appeal in relation to them, we focus on the final alleged misrepresentation, which related to the New Zealand JHS operation. The pleading was:2.22 UAR Limited and Susan David both orally and by conduct and through Robert James made representations to Geoff and Amanda Grisdale that JHS was proven and successful in New Zealand.Particulars of New Zealand Operation2.22.1 The JHS Opportunity Booklet represented amongst other things that, "The James' formula is proven in the market place where it counts"; and 2.22.2 By arranging for Geoff and Amanda Grisdale to travel to Brisbane to observe the JHS operation in Australia, UAR Limited and Susan David represented that the New Zealand JHS Operation was similar to that of the Australian JHS Operation; 2.22.3 The New Zealand operation of JHS is not proven and is not successful.[29] The pleading then went on to allege material non-disclosure in certain respects. Although they related to representations other than those at paragraph 2.22 of the third amended statement of claim, some were important to the Judge's decision so we set them out below. It was alleged that UAR and Mrs David concealed the following facts that were known to them:2.25.3 Through the Disclosure Document or otherwise, that the previous Regional Master Franchisee, Jeff Johnson had made no sales between 28 February 2005 and September 2005. 2.25.4 At the Butterfly Creek meeting, when Geoff Grisdale saw the reference to "Jeff" on some documents and queried who "Jeff" was, UAR Limited and Susan David stated, through Robert James, that he was a Regional Master Franchisee who, "didn't cut it", or words to that effect concealing: 2.25.4.1 any further details about "Jeff" including that he had operated as a Regional Master Franchisee in the Auckland Region; 2.25.4.2 that "Jeff" had operated as a Regional Master Franchisee between 28 February 2005 and September 2005; and 2.25.4.3 that "Jeff" had made no sales between 28 February 2005 and September 2005. 2.25.5 The conduct referred to in paragraph 2.25.4 above further implied that any information about "Jeff" was irrelevant to Geoff and Amanda Grisdale and TFAC. . 2.25.8 That contrary to the advice in the JHS Opportunity Booklet, there was no evidence that the James formula was proven in the New Zealand market place or "a proven system for success"; 2.25.9 That, in fact, Geoff Grisdale's personality test results revealed that he was ill-suited to the role of Regional Master Franchisee as revealed by the personality tests conducted for, or on behalf of, UAR.[30] As we have said, Baragwanath J dismissed most of the respondents' contentions. However, the Judge found (at [55]): I am satisfied that [the respondents] have made out their primary case that their execution of the [RMF] agreement was secured by misleading and deceptive conduct and unfair trade practice in breach of the [FTA] which is not saved by the exemption provisions in the contractual documents.[31] The basis on which the Judge found that the appellants were liable was essentially that they had withheld and misstated information about the current reality of the market for the JHS product in New Zealand and its comparison with Australia (at [66] – [77]). The particular grounds were: (a) The Grisdales had been given the message that "the success of the Australian operation provided a solid basis for the success of the New Zealand operation at the stage they were asked to participate" (at [69]). (b) Mrs David, knowing that the New Zealand operation was unproved, asserted that both the New Zealand and Australian markets were the same and that the successful Australian operation provided a firm foundation for the Grisdales' planning (at [70]). (c) Underlying the claims that "[t]he James' formula is proven in the market place where it counts" and that it was "a proven formula for success" were representations as to both the fact of demand and of the existence of support systems. The Grisdales could not be expected to have had knowledge of such matters (at [72]). (d) The representation of "more work than people available" gave the Grisdales a reasonable assurance of securing clientele (at [73]). [32] The Judge then said:[74] Such assertions required, if they were not to mislead, that there be evidence to support them. They also required disclosure of other facts known to the [appellants] that gave an inconsistent picture. With the advantage of discovery, evidence and hindsight there is simply no evidence of the "more work than people available". Rather the truth is of virtually unrelieved failure of the New Zealand operation. Yet Mrs David encouraged Mr Grisdale to base his decision on Australian examples when she knew that there was no basis for representing that it formed any basis for an assertion that the [Grisdales] could base their plans for a New Zealand operation upon it. [75] While the results of the psychological tests indicated that Mr Grisdale did not relish hard selling, those results were well known to the [appellants] who persisted with their pitch that the [Grisdales] had thecapacity to succeed. Underlying that pitch was the fact that there was no solid basis for such representation. [76] I am satisfied that Mrs David did not offer an oral explanation of the actual position regarding Ms Bennett or, save to make passing response to an enquiry about "Jeff", disclose the unvarnished facts of Mr Johnson's lengthy term as Regional Master and total absence of sales. Mrs David was in the invidious position of needing to meet UAR's and her personal obligations to Rushlyn and to secure revenue for the business for which she and her husband had paid dearly. Mr James had his own incentives to draw the [Grisdales] in to his operation.[33] In relation to the disclaimer and acknowledgement clauses in the disclosure document, the certificate and elsewhere in the material given to the Grisdales, the Judge found that: (a) Mrs David knew that the JHS approach was not proven in New Zealand, but made statements to the Grisdales, or withheld relevant information, which lulled them into a false sense of security about its prospects in New Zealand. This included putting the Grisdales in touch with Australian franchisees. Mr James also promoted this idea when he provided the Master Franchise Opportunity booklet with its assertions: "Secure Your Future with a Proven System for Success" and "[t]he James' formula is proven in the market place where it counts " (at [89]). (b) Mrs David and Mr James asserted that Mr Grisdale was suited to be a regional master despite the results of his personality profile, which showed "strikingly poor results for self-esteem and assertiveness" (at [90]). The Judge said that it was the JHS people who had the experience, not the Grisdales, and that they had consistently made a "pitch" to the Grisdales, the effect of which was to secure the Grisdales' confidence in the prospects for the JHS system in New Zealand. In light of these factors, the Judge seems to have considered that it would be unreasonable to allow the various disclaimers and acknowledgements to nullify the effect of "the pitch".[34] The Judge concluded:[99] I am satisfied that considering the overall effect of the defendants' conduct they were in breach of s 9. The fundamental point is the pitch that there was basis for belief that the Australian experience was transferable to New Zealand so that the Grisdales could rely upon it as an investment with solid prospects for them. In truth the New Zealand market was never proved. [100] In the law of contract there is concept of "mere puff" which is not actionable. Under the Fair Trading Act the test ([16] above) is not altogether the same. The fact that the concepts of "proven system for success" were general rather than specific does not exonerate the [appellants] if the Grisdales have in fact been misled. The total pitch represented the franchise to have greater substance and the Grisdales to have greater capacity to succeed with it than was in fact the case. That is sufficient for them to succeed. [101] The requirement by the [appellants] that a lawyer and an accountant should be engaged excludes the gullible and unintelligent element of the test approved in [Marcol Manufacturers Ltd v Commerce Commission [1991] 2 NZLR 502 (HC)] in relation to matters which they could reasonably have been expected to discern. But it cannot be said that the Grisdales or their lawyer or accountant can be regarded as acting quite unreasonably so as to insulate UAR from misleading and deceptive conduct. A defendant who engages in such conduct cannot rely upon the failure of the plaintiffs to find it out by stipulating that they employ a lawyer, an accountant and a business adviser to audit what it has asserted. [102] There is in this case what were once called suppressio veri andsuggestio falsi: suppression of the true position, that there was no basis for belief that there was a transitional capacity in New Zealand such as would give the Grisdales solid grounds to believe they could succeed; and asserting, contrary to the fact, that there was.Basis for appeal[35] For the appellants Mr Walker advanced six grounds of appeal: (a) Baragwanath J found against the appellants on a claim that had not been pleaded and was not advanced by the respondents at trial, either in opening or closing. Mr Walker said that the Judge had developed the claim "on his own initiative". Accordingly the appellants did not have an opportunity to address the claim, either in evidence or submissions.(b) In any event, the Judge should not have found that the respondents entered into the RMF agreement on the basis of the misleading and deceptive conduct which he found. The respondents' evidence was that they had entered into the agreement on the basis of the pleaded representations, which the Judge largely rejected. (c) The Judge was wrong to disregard the disclaimer and acknowledgement clauses. (d) The Judge erred in his assessment of loss, in particular because the respondents called no evidence to show that the RMF was worth less than they paid for it. (e) The Judge erred in avoiding the RMF agreement and the guarantee under s 43 of the FTA. (f) The Judge should have found for the appellants on their counterclaims. [36] We propose to focus only on the second and third of these grounds, and the last. Before we move on to consider those grounds, however, we should say something about the pleading point (ground (a)). [37] We acknowledge, of course, the critical role of the pleadings in civil litigation. It has been emphasised by this Court in cases such as Brownlie v Shotover Mining Ltd CA 181/87 21 February 1992 at 19 and Waller v Davies [2007] 2 NZLR 508 at [40] and [90]. [38] We also accept that the basis on which the Judge determined the case was not the same as the basis on which it was pleaded. In terms of JHS in New Zealand, the respondents' allegation was that the appellant had represented that "JHS was proven and successful in New Zealand" (paragraph 2.22 of the third amended statement of claim (see [28] above)). But the basis on which the Judge found against the appellants was that their conduct led the Grisdales to believe that the Australianexperience was transferable to New Zealand, so that they could rely on it as indicating a sound investment, whereas in reality the New Zealand market was not proven (at [99]). Mr Walker submitted that because the pleadings did not frame the case in this way, the appellants had not presented relevant evidence or submissions. Nor, he said, had the respondents. [39] While we acknowledge the force of Mr Walker's submission, it is unnecessary to determine the case on the basis of the pleading point. This is because we disagree with the Judge's assessment on the merits. Accordingly, we propose to focus on the three grounds which we have identified.Discussion[40] Section 9 of the FTA provides that "[n]o person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive". The critical question in the present case is whether there was misleading or deceptive conduct that caused loss. We address that question before turning to consider the disclaimer or acknowledgement clauses.(i) Misleading or deceptive conduct[41] The question of what amounts to misleading or deceptive conduct was addressed by this Court in AMP Finance v Heaven (1997) 8 TCLR 144. There the Court said (at 152) that whether there was such conduct should be determined by asking whether: (a) The conduct at issue was capable of being misleading; (b) The plaintiff was in fact misled; and (c) It was reasonable for the plaintiff to have been misled. [42] The key to the Judge's liability finding was that Mrs David and Mr James had made "the pitch that there was basis for belief that the Australian experience was transferable to New Zealand so that the [Grisdales] could rely upon it as aninvestment with solid prospects for them" when in fact, the New Zealand market was never proven (at [99]). The assertions referred to by the Judge (see [30] above) went to that essential proposition. The other important element of the Judge's analysis related to representations about Mr Grisdale's capacity to operate successfully as a regional master franchisee. As the Judge put it, "[t]he total pitch represented the franchise to have greater substance and the [Grisdales] to have greater capacity to succeed than was in fact the case" (at [100]). [43] Whether or not the successful Australian experience with the JHS system was transferable to New Zealand, or the Grisdales had the capacity to run a successful franchise, were, of course, matters of opinion. As this Court said in Premium Real Estate Limited v Stevens [2008] 8 NZBLC 102,220 at [50]–[55], the expression of an opinion that subsequently turns out to be incorrect does not, of itself, give rise to liability for misleading or deceptive conduct under s 9. However, the expression of an opinion involves at least one and perhaps two representations of fact. The first is that the person expressing the opinion honestly holds it and the second is (in some cases at least) that he or she has a reasonable basis for the opinion. [44] Dealing first with the transferability of the JHS system to the New Zealand environment, there is no basis in the evidence for any suggestion that Mrs David did not honestly believe that the system was transferable to New Zealand. The critical question, then, is whether Mrs David had a reasonable basis for her opinion. The Judge considered that she did not. [45] We return to a portion of the judgment previously quoted:[74] Such assertions required, if they were not to mislead, that there be evidence to support them. They also required disclosure of other facts known to the [appellants] that gave an inconsistent picture. With the advantage of discovery, evidence and hindsight there is simply no evidence of the "more work than people available". Rather the truth is of virtually unrelieved failure of the New Zealand operation. Yet Mrs David encouraged Mr Grisdale to base his decision on Australian examples when she knew that there was no basis for representing that it formed any basis for an assertion that the Grisdales could base their plans for a New Zealand operation upon it.[46] In our view, the Judge has erred in this passage. In particular, although it is linked with "discovery" and "evidence", we do not see "hindsight" as having any relevance in this context. (It may be relevant where subsequent events give rise to an inference that a person did not genuinely hold an opinion at the time it was expressed, but this does not apply here.) [47] The question whether Mrs David had reasonable grounds for her opinion must be assessed at the time she expressed the opinion or, at the latest, at the time TFAC entered into the RMF agreement. (The later time is relevant because, if there had been some significant development of which Mrs David was or should have been aware and which undermined the reasonable basis for her opinion, she might arguably have breached s 9 if she had failed to disclose that changed circumstance. But there is no evidence of any such development here.) We consider that it is wrong in principle to have resort to retrospective evaluation in the way that the Judge did. It was not a fair reflection of the evidence as at 23 December 2005 (when TFAC entered into the RMF agreement) to describe the New Zealand operation as a "virtually unrelieved failure". In fact it had barely commenced, as the Grisdales well knew. We now develop this point. [48] Mr Grisdale acknowledged in his evidence that he knew JHS was a greenfields operation as far as New Zealand was concerned. He visited or contacted Australian franchisees to discuss the JHS system with them because there was no body of experience in New Zealand. Mr Grisdale knew from the disclosure document (see [14]–[15] above) that as at 8 November 2005 two franchises had been granted and two terminated. He said in his evidence that he thought these involved the same franchisees, so that only two franchises had been granted overall. In fact, he was wrong about this, and there were four franchises in total, two of which had been terminated. [49] But either way, when TFAC went ahead with the RMF agreement Mr Grisdale knew that the New Zealand operation was just commencing, and did not have a significant number of franchisees. He must have appreciated that JHS' status as a new entrant in the New Zealand market meant that there was some degree of risk involved in the venture. In any event, there is simply no basis in the evidencefor saying that Mrs David knew or should have known at the end of 2005 that the New Zealand operation was a "virtually unrelieved failure". [50] In relation to demand, an assessment as at December 2005 when the allegedly misleading conduct was said to be operative and an assessment as at the time of trial (June 2007) are two very different assessments. As at late 2005, JHS was successful in Australia. Clearly there was some demand for home services in New Zealand as there were other companies operating in the market. There was no evidence that there was some feature of the market which meant that what had succeeded in Australia was unlikely to succeed in New Zealand. While the 8 November 2005 disclosure document (see [14]–[15] above) revealed that two of four franchisees had been terminated, that of itself does not establish that the JHS system was unlikely to succeed in New Zealand. In these circumstances, we consider that Mrs David had a reasonable basis for the view that the JHS system was capable of succeeding in New Zealand. There was no obvious reason to indicate that it would not. [51] In relation to the type of support available, that again involves an assessment at the time that TFAC entered into the contract. If subsequently there was a failure to provide promised training or support, that is not a FTA issue. Under the RMF agreement UAR undertook obligations in relation to training and support. If it breached those obligations, the remedy lay in contract, not in the FTA. [52] On the question of Mr Grisdale's capacity, the Court faces a difficulty arising from the late amendment of the pleadings. The respondents alleged that the appellants made certain misleading or deceptive representations. They went on to allege that in making the representations, the appellants "failed to disclose and/or concealed facts that were known to them". On the morning of trial, the respondents sought and were granted leave to add a further particular of non-disclosure (paragraph 2.25.9), namely that:Geoff Grisdale's personality test results revealed that he was ill-suited to the role of Regional Master Franchisee, as revealed by the personality tests conducted for, or on behalf of, UAR.[53] The Judge said that this amendment was permitted on the following basis:Following argument, counsel, in the light of a series of intimations of my view, are agreed that the third amended statement of claim is appropriate. That is subject to a proviso in relation to paragraph 2.25.9 that given the late application for amendment it is accepted that there is no onus on the [appellants] to adduce evidence from Mr James.[54] Mr Walker said that this meant that the respondents had to call Mr James. Mr Connor disputed that, submitting that it meant merely that if the appellants did not call Mr James it should not count against them. Obviously, it is difficult for us to resolve this difference. But, as a matter of logic, if there was no onus on the appellants to call Mr James, the responsibility had to rest with the respondents if Mr James' evidence became material, as clearly it did. [55] Mr Walker submitted that the results of the testing were supplied to Mr Grisdale. They showed on their face that Mr Grisdale's aptitude for selling was low and would need to improve. He also said that the Judge had made a factual error in attributing the hand-written notes on Mr Grisdale's results sheet to Mr James (at [29]–[30]), which led to a finding that the appellants had failed to disclose these comments to Mr Grisdale (at [75]). In fact, most of these notes were written by Mrs David in February 2006 (after TFAC had entered into the RMF agreement) during the course of a discussion with Mr James about what she needed to do to assist Mr Grisdale. Another was written by Mr David around the same time. [56] We accept Mr Walker's submissions on this point. The test results did show on their face that Mr Grisdale had a low aptitude for selling. Mr Grisdale said in evidence that he and Mr James discussed the results for approximately three hours and that Mr James explained the negative aspects away on the basis that they resulted from the fact that Mr Grisdale's father left the family when he was a young child. But the critical point is that Mr Grisdale was aware of the test results and what they showed. He ought to have appreciated their implications for the undertaking that he was contemplating. Accepting that Mr James did attempt to explain the results in the way Mr Grisdale indicated, that explanation was something that Mr Grisdale was well able to evaluate for himself. The tests having identified the relevant personality characteristics, Mr Grisdale was much better placed than Mr James to understand how those characteristics had developed and whether he could address them satisfactorily in the context of his proposed undertaking.Mr James was not under any obligation to disclose to Mr Grisdale what he already knew. [57] It is clear from the evidence that Mr Grisdale became disenchanted with JHS shortly after he commenced his training. He said that he had not appreciated exactly what the system involved, in particular its requirement for "hard selling". Such selling was, he said, incompatible with his personal values. But there is no evidence that he was misled about the nature of the system. Whether or not it was a system that he was comfortable working within was an assessment that only he could make. We consider that this feature is the principal explanation for Mr Grisdale's decision to withdraw so quickly from the RFM agreement. [58] In the result, we agree with Mr Walker that there was no misleading or deceptive conduct in the respects identified by the Judge. Further, even if there had been, we doubt that there was the causal link necessary to justify relief under s 43 of the FTA.(ii) Disclaimer or acknowledgement clauses[59] Having reached this conclusion, it is not necessary that we deal with the disclaimer issue. But, having heard argument on it and in case our primary conclusion is wrong, we will address it. [60] The courts have long held that it is not possible to contract out of the FTA – see, for example, Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 98–99 (FCA), Picture Perfect Ltd v Camera House Ltd [1996] 1 NZLR 310 at 317 (HC) and Cornfields Ltd v Gourmet Burger Co Ltd (2000) 9 TCLR 698 at [35] (HC). The justification given for this is that as the FTA is consumer protection legislation, it would be contrary to its protective policy to allow contracting out – see Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454 at 472 (HC). [61] While that justification has force in relation to consumer transactions, it has less force in the context of commercial transactions involving substantialindependently advised parties negotiating from positions of equality. In the latter case, any resulting contract can be expected to reflect the parties' wishes as to the allocation of risk and it is difficult to see why they should not be permitted to allocate risks between them by contracting out of the FTA. [62] Drafters have attempted to circumvent the restriction on contracting out through various mechanisms. For example, there may be a requirement that parties take their own independent advice; or a clause which states that the parties (or one of them) have entered into the transaction on the basis of their own judgement and not on the basis of anything said or done by the other; or an "entire agreement" clause; or a clause which states that any information that one party has provided to the other was supplied in good faith on the basis of information provided by an identified third party. [63] While such mechanisms are not determinative, it has been accepted that they are relevant to the s 9 analysis. For example, in Kewside Pty Ltd v Warman International Ltd (1990) ATPR (Digest) 46-059 (FCA), French J said (at 53,222):A disclaimer or exclusion clause will affect liability for misleading or deceptive conduct only if it deprives the conduct of that quality or breaks the causal connection between conduct and loss. Whether it has that effect in a given case is a question of evidence and not a question of law.See also Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at [50]–[51] (HCA). But a disclaimer or similar clause may be overwhelmed by oral assurances or other conduct – see Phyllis Gale Ltd v Ellicott (1997) 8 TCLR 57 at 65–66 (HC) and Cornfields at [41]. [64] The Judge appears to have decided it was unreasonable to give weight to the independent advice requirement and acknowledgement clauses in the present case for three reasons: (a) The information asymmetry between the Grisdales and Mrs David and Mr James (at [92]).(b) The fact that some of the conduct which he found to be misleading occurred before the relevant documents were provided to the Grisdales (at [96]). (Presumably the Judge considered that this prior course of dealing overwhelmed the impact of the documentation.) (c) "A defendant who engages in [misleading or deceptive] conduct cannot rely upon the failure of the plaintiffs to find it out by stipulating that they employ a lawyer, an accountant and a business adviser to audit what it has asserted" (at [102]). [65] While we hesitate to disagree with the Judge on an assessment of this type, we consider that the Judge was wrong to discount the effect of the independent advice requirement and acknowledgement clauses in the way that he did. The JHS documentation was consistent in saying clearly and repeatedly that those considering taking up a JHS franchise should obtain independent legal, accounting and business advice from people with experience in franchising. The documents made it clear that JHS would assist those independent advisors by providing information and such like. Far from being downplayed or "buried", this advice was placed to the forefront. [66] We accept that the failure to take independent advice in the face of a recommendation or requirement to take it will not excuse conduct that is misleading or deceptive. Where a person wrongfully conceals information for example, it is no defence to say that the other party could have discovered it by seeking independent advice or asking the right questions. But here the purpose of emphasising the need for advice from experienced independent advisors was so that those advisors could assist potential franchisees, particularly those without experience, by advising on the legal, financial and business aspects of the proposed franchise arrangement. Clearly the JHS people were unwilling to provide such advice themselves, but were willing to provide relevant information to independent advisers. [67] A significant basis for the Judge's finding of liability was that Mrs David misled the Grisdales as to the prospects for JHS in New Zealand. Given that the Grisdales knew that JHS was new to New Zealand, and that Mrs David was new to JHS, we consider that the requirement for independent advice, including from abusiness perspective, was a powerful one for the Grisdales. In other words, it was unreasonable for them simply to rely on any assurances that they thought they had been given on this aspect, rather than on independent advice from someone experienced in franchising from a business perspective. So on that ground also, we would allow the appeal.(iii) The counterclaims[68] As we have said, UAR brought counterclaims against TFAC and against the Grisdales personally. Its claim against TFAC alleged that UAR cancelled the RMF agreement following its wrongful repudiation by TFAC. Mr Walker said that UAR was "entitled to receive the franchise fees and contributions to costs that it would have received if TFAC had performed the RMF agreement". Mr Walker said that UAR's losses were as follows:a. TFAC would have paid to UAR franchise sale fees of at least $196,875 (including GST) being $2,500 plus GST for each of the minimum seven new franchise areas per year for the ten-year term of the agreement. b. TFAC would have paid to UAR further regional master continuing franchise fees of $177,486.76 (including GST), calculated in accordance with clause 7.4 and item 8A of the Schedule, for the remainder of its ten-year term. c. TFAC would have paid to UAR a share of the joint marketing and advertising costs for the period from June 2006 until the end of the term of the agreement. Mrs David estimated those to be $2,545.97 (excluding GST) per month: . This is more than the $2,057.63 (including GST) per month estimated in the statement of counterclaim. For the remaining 115 months of the term of the franchise agreement from June 2006, the total amount of TFAC's contribution would be $292,786.55 plus GST. d. UAR is entitled to interest at the rate set by clause 22.10 of the RMFA on the amounts above, from the date payment was due until the date upon which payment is made in full. Mrs David gave evidence of Westpac New Zealand Ltd.'s prime lending rate, which its overdraft rates will always exceed: . e. UAR is also entitled to costs pursuant to clauses 14.7 and 20.1, being the costs to the end of March 2007 set out in Mrs David's first brief and all further legal costs incurred in this matter to date.[69] Mr Walker said that the counterclaim against the Grisdales under the guarantee simply followed on from the counterclaim against TFAC. [70] Mr Connor offered no submissions on this aspect of the case saying simply that "[i]f the appeal succeeds the counter-claims must be assumed to succeed also". We understand that he took this view because, if matters reached this point, his clients were in an impossible situation from a financial perspective. [71] In principle, UAR is entitled to the entry of judgment on its counterclaims. However, we raised with Mr Walker the question of the obligation to mitigate. Mr Walker's response was that mitigation was irrelevant in this context. [72] We doubt that that is correct, and are not prepared to give judgment for UAR on the basis sought without proper consideration of whether or not mitigation is relevant. We note that there has been discussion of this in franchising cases in the United States and Canada: see, for example, Schumacher & Toomey "Recovering Lost Future Royalties in a Franchise Termination Case" (2001) 20 Franchise Law Journal 116. Accordingly we ask for further submissions on this aspect of the case, unless the parties advise by 31 March 2009 that they have resolved the matter by agreement. [73] We emphasise that the further submissions should deal with the point of principle, namely whether mitigation is relevant in this context. If we conclude that it is, we will have to remit the case to the High Court for the necessary factual findings to be made. In that event, the respondents will have the onus of proving that UAR failed in its duty to mitigate.Decision[74] We allow the appeal. The effect of this is that the guarantee remains in effect. In respect of the counter-claims, we require further submissions on the question of mitigation (assuming that the parties are unable to resolve this aspect by agreement). UAR is to file and serve its submissions by 5 pm on 16 April 2009.The respondents are to file and serve their submissions in reply by 5 pm on 30 April 2009. We will then consider whether a further oral hearing is required. [75] Costs are reserved in the meantime.Solicitors: Gilbert Walker, Auckland for Appellants Jones Law, Auckland for Respondents