The Importance of Accuracy: Watt v Shepherd (No 3) [2021] FCA 1670

By Alicia Hill, Principal and Helena Swidron, Law Clerk

The case of Watt v Shepherd (No 3) [2021] FCA 1670 concerned a dispute that arose in the creation of a franchising business.

It was found in earlier proceedings that Shepherd had made misleading and unconscionable representations to Watt regarding the franchising business.

This case required the Court to consider how to calculate the loss and damage and what to award the mislead party.

Background

For context, readers may wish to refer to our article on the previous judgement here.

The dispute arose concerning a franchising business agreement between Espie Ian Watt (Watt) and Phillip Charles Shepherd (Shepherd). Watt operated a pharmacy business involving 15 retail pharmacies collectively known as the Watt Group. A company called Mazzawattie Pty Ltd (Mazzawattie, an Applicant) formed the head office for conducting Watt Group business. Mazzawattie had been the trustee of the Snowy Mountains Service Unit Trust (SMSUT).

The Applicants, including Watt, sought relief for the claims made in respect to 7 of the 15 pharmacies. Watt was partner or shareholder of 5 the pharmacies in particular: Tumbarumba, Batlow, Wagga, Tumut 1 and Young branches. The other pharmacies included Tumut 2 and Cootamundra branches.

The Proceedings

In April 2016, Shepherd and an associate (Steidle) approached Watt and proposed to purchase the Watt Group head office operations and establish a franchising business.

Upon negotiating this offer, Shepherd and Steidle made several representations regarding the future operation and prospect of the franchising businesses. They proposed that this franchising business was to be run by Summit Pharmacies Group Pty Ltd (SPG).

After 11 months, Watt was finally convinced by Shepherd to establish the pharmacy franchising business through SPG. SPG was solely owned by a company called RX Holdings Pty Ltd which both Shepherd and Steidle controlled.

Ultimately, in July 2021 (the second proceeding), Justice Rares declared that the representations made to induce Watt into the franchising business agreements were misleading and unconscionable. Therefore, it was ordered that the franchise agreements between SPG and the Applicants from 30 June 2018 onward were to be declared void.[1]

Issues

In this case (the third proceeding), the issue for consideration regarded what debts and compensation were owing after the voiding of the franchising agreements.

The Applicants were seeking to claim for the loss or damage suffered as a result of the Respondents’ misleading representation under the Australian Consumer Law (ACL) and both parties were seeking recovery of debts to some extent. The parties’ arguments centred around the quantum of damages and appropriate relief:

The Applicants’ had calculated their debts based on data found in their MYOB files totalling to $570,789.10. They had made comparisons of data regarding the 7 pharmacies from before and after Shepherd became involved.

In order to calculate this figure, the Applicants enlisted their accountant Michael Wakeling.

However, the Court found that several of his submissions were inadmissible. In turn, Courtney Inglis had taken over and filed her affidavit proving the basis for Wakeling’s calculations.

Upon receiving the MYOB data from the Applicants, the Respondents’ also enlisted an expert accountant to make calculations on their behalf. Alternate to the Applicants, the Respondents based their calculations on the total increase to net assets for both the pharmacies and SMSUT as a whole.

On 9 December 2021, upon their accountant completing these calculations, the Respondents provided the figures to the Applicants. In response, the Applicants were additionally seeking a refund of fees paid to the Respondents during the 16-month period that the Franchise Agreements were in operation between them.

On 10 December 2021, the Applicants submitted a detailed response contesting the amounts calculated by the Respondents, particularly outlining a significant sum that they had omitted regarding the 7 pharmacies and highlighted an error in the MYOB data.

Such arguments regarding the correct calculations continued as each party plead their case to Justice Rares.

Decision

Justices Rares found that it was difficult to rely on some of the data provided by the Respondents as it was raw data that had not been examined or explained.

The Respondents calculations sought to show that there had been an increase in the total net assets of the pharmacies over the period that the franchising agreements were in place.

However, Justices Rares found that it was inappropriate to consider the pharmacies as one unit, and rather they should have been given individualised consideration of each pharmacy’s net assets and income. This was particularly so as each of the pharmacies had entered into their own, separate franchise contracts. Therefore, the Respondents had utilised the wrong methodology in their calculations to the effect of not engaging with the way that the Applicants had put their claim.

Justice Rares concluded that it was not relevant that the Respondents were not able to fully defend themselves on the Applicants claims as ‘the measure of damages stipulated [is] the loss or damage of which the conduct was a cause. It [is] not limited to loss or damage of which such conduct was the sole cause. In most business transactions resulting in financial loss there are multiple causes of the loss’.[2]

Therefore, Justice Rares accepted the Applicants’ submissions regarding the loss that the 7 pharmacies had suffered and that accordingly each of these pharmacies were entitled to a refund of the net extra franchise fees that they had paid to Mazzawattie/SMSUT throughout the duration of the franchise agreements.

Justice Rares, as found in Watt v Shepherd (No 2) [2021] FCA 826, that Watt acted in reliance on the respondents’ misleading representations to assign Mazzawattie’s trade receivables to RX holdings and ordered that this transaction be reversed in order to return the parties to their original position.

Orders

Justice Rares ordered:

  • That Applicants transfer to the Respondents all shares and options for shares in the capital of RX Holdings that it holds or that it might be entitled to, and in return, the transaction of Mazzawattie assigning its trade receivables to RX holdings will be made void.
  • That any debts received by Mazzawattie owing as at 30 June 2016 or any other date is made void.
  • The Respondents pay $491,329.63 in total, plus interest, as a refund to the Applicants in respect of the net extra franchise fees paid by the 7 pharmacies.

 Take-aways

 One of the primary weaknesses of the Respondents in this case was their inability to produce evidence in a timely, accurate and persuasive manner. This ultimately led to greater expenditure of time and money for the Court and the Respondents themselves.

The Respondents’ failure to utilise the right methodology of calculating and analysing the data proved detrimental to their case.

This demonstrates similarly the importance of having access to correct records, relevant calculations and examination of the data at hand to justify your claims sufficiently.

The case also emphasises that there is no need to establish that the Respondent’s representations were the sole cause of the loss or damage in regards to breaches of sections 18 and 21 of the ACL, it is merely enough for the Respondent to have been a cause of the loss or damage.

 If you have any queries about any of the matters raised by this case, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au

[1] Watt v Shepherd (No 2) [2021] FCA 826.

[2] I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2002) 210 CLR 109 at 121–122 [33], Gleeson CJ.