Franchise Council of Australia Legal Symposium. 9 October Case & Legislation Update

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1 Franchise Council of Australia 2011 Legal Symposium 9 October 2011 Case & Legislation Update by Philip Colman 1 & Nigel Jones 2 Introduction The period since the last Legal Symposium has seen a number of franchisors and franchisees fighting out their battles in the Courts, but there have been no discernable cases of significance that create new principles, rather many cases where well established principles have been applied to particular fact situations. There has also been no change to any franchise specific legislation. There have been some important new laws coming into existence that will affect the franchise sector including: The Competition and Consumer Act 2010 (Cth) replacing the Trade Practices Act 1974 (Cth); and The Personal Property Securities Act 2009 (Cth), the commencement of which is now being deferred until Further, the Lower House of the South Australian Parliament has passed the Small Business Commissioner Bill 2011 and at the time of writing that Bill is awaiting detailed consideration by the Upper House. This paper will not deal with these new laws. This paper will deal in detail with 4 cases which we consider are significant decisions that will assist our learning and that of our clients in relation to the application of existing laws and underlying principles. They are: 1. Body Bronze International Pty Ltd & Ors v Fehcorp Pty Ltd 3 ; 2. Stones Corner Motors Pty Ltd trading as Keema Automotive Group v Mayfairs W'Sale Pty Ltd trading as Suzuki Auto Co 4 ; 1 PHILIP COLMAN is a Principal at Mason Sier Turnbull Lawyers who practices exclusively in commercial dispute resolution and litigation. He is an Accredited Specialist in Commercial Litigation and currently chairs the Victorian Law Institute's Commercial Litigation Advisory Committee 2 NIGEL JONES is a Partner at Norton Rose Australia and practices in commercial dispute resolution and intellectual property law. 3 [2011] VSCA 196 1

2 3. SPAR Licensing Pty Ltd v MIS Qld Pty Ltd (No 1 5 ); and 4. D'Arling One Pty Ltd v Eagle Boys Dial-a-Pizza Australia Pty Ltd 6. At the conclusion of this paper we have also included short case notes in relation to a number of other cases that have had a franchising flavour. Body Bronze This case, decided by the Victorian Court of Appeal on 1 July 2011 serves as warning against adding statutory claims under the Competition and Consumer Act to a simple breach of contract claim for the main purpose of seeking to attribute liability to the individuals behind the corporation in breach of contract. Section 18 of the Australian Consumer Law 7 prohibits individuals and corporations in trade and commerce from engaging in conduct that misleading or deceptive or is likely to mislead or deceive. Section 22 of the Australian Consumer Law 8 prohibits individuals and corporations in trade and commerce from engaging in unconscionable conduct. Section 75B of the Competition and Consumer Act has the effect allowing liability to be attributed to a person who has: Aided, abetted, counselled or procured; Induced, whether by threats or promises or otherwise; Been in any way, directly or indirectly, knowingly concerned in, or party to; or Conspired with others to effect, a contravention by a corporation of Part IV, IVA, IVB, V or VC, or section 95AZN of the Competition and Consumer Act. Such liability is often referred to as "accessorial liability". The predecessors of these sections in the Trade Practices Act came into play in Body Bronze. In this case the Victorian Court of Appeal allowed an appeal by the CEO and the sole director of a franchisor (Body Bronze) against findings by the County Court that they 4 [2010] FCA [2011] FCA [2011] NSWSC Schedule 2 of the Competition and Consumer Act 2010 (Cth), formerly section 52 of the repealed Trade Practices Act 1974 (Cth) 8 Formerly section 51AC of the repealed Trade Practices Act 1974 (Cth) 2

3 were personally liable to a franchisee (Fehcorp) for losses of $325, together with interest of $38, The case is an example of a plaintiff winning its breach of contract claim, but ultimately losing its statutory claims. Facts Prior to Body Bronze entering into a franchise agreement with Fehcorp there was an agreement between Body Bronze and Fehcorp for Body Bronze to lend money to Fehcorp to cover the cost of fit out of a tanning salon to the extent that the cost exceeded a trigger point of $250,000 (which Fehcorp contended, meant $250,000 inclusive of GST) ("the Loan Arrangement"). Certain expenses were incurred and when Body Bronze received an invoice from the Landlord for some fit out costs amounting to $22,207.08, it passed it onto Fehcorp for payment on the basis that the trigger point for the loan had not been reached. Fehcorp refused to pay the invoice contending that, as the relevant trigger point had been reached, Body Bronze should make the payment as part of the Loan Arrangement. Body Bronze refused to do so. Body Bronze then served a breach notice on Fehcorp for its failure to pay the invoice for $22, As Fehcorp did not remedy the alleged breach, Body Bronze terminated the franchise agreement and evicted Fehcorp from the business. Fehcorp alleged that Body Bronze's conduct was unlawful and sought, as damages, its costs of establishing the business and its trading losses. Decision at First Instance The County Court made the following findings 9 : The trigger point under the Loan Arrangement had been reached; Body Bronze could not rely on Fehcorp's failure to pay the invoice of $22, as a basis for terminating the franchise agreement; Body Bronze had breached the franchise agreement by terminating it in the way it did; Body Bronze was liable to compensate Fehcorp for breach of contract; Body Bronze also engaged in misleading and deceptive conduct by representing (falsely or without reasonable grounds) that it would lend Fehcorp so much of the fit out costs that exceeded $250,000; 9 Fehcorp Pty Ltd v Body Bronze International Pty Ltd & Ors [2009] VCC

4 The Appeal Body Bronze engaged in unconscionable conduct (by refusing to comply with the Loan Arrangement, then relying on the non-payment of the invoice of $22, as a basis for terminating the franchise agreement); and The CEO of Body Bronze, Scott Meneilly, and its sole director, Brian Mitchell, were knowingly concerning in the breaches of the misleading and deceptive conduct and unconscionable conduct laws and were therefore liable as accessories. Body Bronze was not a party to the appeal. No attack was made on the ruling that Body Bronze had breached the franchise agreement (something that Meneilly and Mitchell could not be personally liable for). Meneilly and Mitchell appealed against the findings that they were personally liable. Their appeal had two limbs: Firstly that the finding that Body Bronze engaged in misleading and deceptive conduct and unconscionable conduct was flawed (meaning that Meneilly and Mitchell could then not be liable as accessories); and Secondly that even if Body Bronze Body Bronze engaged in misleading and deceptive conduct or unconscionable conduct, Meneilly and Mitchell were not sufficiently knowingly concerned in such contravention. In relation to the allegation that Body Bronze had engaged in misleading and deceptive conduct, the Court of Appeal categorised the representation (that Body Bronze would lend Fehcorp so much of the fit out costs that exceeded $250,000) as a representation as to a future matter. This brought into play section 51A of the Trade Practices Act 1 that deems representations as to future matters to be misleading and deceptive unless the maker has reasonable grounds for so doing, and threw the onus onto Body Bronze to prove that it had reasonable grounds for representing to Fehcorp that it would make the loan in the future. The Court of Appeal then: Restated the general principal that the mere fact that representations as to future conduct or events do not come to pass does not of itself make those representations misleading and deceptive 10 ; Accepted that at the time Body Bronze made the representation that it would lend Fehcorp so much of the fit out costs that exceeded $250,000, it intended to do so; 10 Paragraph 48 of Judgment 4

5 Noted that the reason the loan was not made was due to a cash shortage caused by a downturn in the solar tanning industry generally; and Concluded that Body Bronze did have reasonable grounds for making the representation at the time it was made and that, accordingly, it had not engaged in misleading and deceptive conduct. In examining the Trial Judge's finding that Body Bronze had engaged in unconscionable conduct the Court of Appeal noted that the Trial Judge relied upon three matters: Body Bronze s knowledge of the importance of the proposed loan to Fehcorp in deciding to enter the franchise agreement and being able to operate the tanning salon business; The relative strengths of Fehcorp and Body Bronze in terms of experience and financial resources; and The circumstances in which Body Bronze enforced what it believed to be its strict legal right to terminate the franchise agreement and exclude Fehcorp from the tanning salon business. The Court of Appeal, in overturning the decision of the Trial Judge, accepted that there was no controversy as to the first of the above three matters, but found that the Trial Judge had misapplied the law in relation to the other two matters. The Court of Appeal restated the relevant principles for the application of section 51AC of the Trade Practices Act 11 (which will have the same application for section 22 of the Australian Consumer Law): "(a) (b) (c) The scope of s 51AC is wider than that of s 51AA or the common law. The meaning of unconscionable for the purposes of s 51AC is not limited to the meaning of the word according to established principles of common law and equity: The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up by the use of the word in s 51AC. When used in that section, the expression requires that the actions of the alleged contravener show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment Normally, some moral fault or moral responsibility would be involved. This would not ordinarily be present if the critical actions are merely negligent. There would ordinarily need to be a deliberate (in the sense of intentional) act or at least a reckless act." 11 Now section 4 of the Australian Consumer Law, being Schedule 2 of the Competition and Consumer Act 2010 (Cth) 5

6 The Court of Appeal concluded that the notion of unconscionable conduct requires a high level of moral obloquy. The Court of Appeal found that the Trial Judge had not properly taken into account all the evidence regarding the relative strengths of Fehcorp and Body Bronze and concluded that had the Trial Judge done so, this would have lead to the conclusion that there was no serious imbalance in the relative strengths of Fehcorp and Body Bronze. The Court of Appeal considered whether mere breaches of contract automatically lead to the conclusion that the party in breach had engaged in unconscionable conduct. Macaulay AJA said: 122 "In applying these principles to conduct which involves the breach of a contract, it should be recognised that not every breach of contract, even a deliberate breach, necessarily involves the moral obloquy that the authorities suggest needs be present for unconscionable conduct in breach of s 51AC to be made out. Although it may be true that for an act to have that moral character it will usually be conduct that is intentional or at least reckless, it does not follow that any breach that is intentional necessarily has that moral character. A decision may be taken to break a contract because, upon rational commercial considerations, the burden of performance may be greater and more onerous than the liability to be incurred if the conduct amounts to breach. The party committing the breach may know that it will deliver to the opposite party an opportunity to exercise rights both under and outside the contract that flow from the breach, and that the opposite party has the means to exercise and enforce those rights. There may be nothing offensive to conscience in a commercial participant taking such a commercial decision in given circumstances. Whether or not it amounts to unconscionable conduct does not simply flow from it being a deliberate breach; it must be evaluated in all the circumstances. The real question is what more is required than conscious breach to convert it into unconscionable conduct. The answer to that question must, at least in part, lie in the value judgment of the particular decision maker. It means, of course, that minds can reasonably differ. However some guidance in the exercise of that judgment is to be found in the list of matters to which s 51AC(3) directs the court to have regard. That judgment is not to be informed merely by a sense of distaste for the impugned conduct." The Court of Appeal ruled that Body Bronze s conduct in declining to lend more money, issuing a notice of default, and taking the risk of breach by taking possession, is neither attended by a high degree of moral obloquy nor irreconcilable with what is 12 Paragraphs of Judgment 6

7 right or reasonable, nor does it demonstrate that Body Bronze showed no regard for conscience. In reaching this conclusion the Court of Appeal noted the looseness of the language of the promise to lend, the lack of knowledge that Body Bronze had of all the relevant information relating to the nature of Fehcorp's fit out expenditure, the scope for debate about the character of all the payments, Body Bronze s own tight financial position, its concern about the workability of its relationship with Fehcorp and that it foreshadowed its action to Fehcorp whom it knew had access to legal advice and a demonstrated capacity to employ such advice effectively. Having found that Body Bronze had not engaged in misleading and deceptive conduct or unconscionable conduct, Meneilly and Mitchell avoided liability. The Court of Appeal served a reminder that just because a director, officer or employee might have been the individual who allegedly engaged in misleading and deceptive conduct or unconscionable conduct on behalf of their company or employer, it does not follow that such a person will be liable as an accessory under section 75B of the Trade Practices Act or Competition and Consumer Act. In such a case, a plaintiff must establish that the individual either: Intentionally aided abetted, counselled or procured the company's contravention (this entailing knowledge of both the making of the representation or its falsity); or Had knowledge of the essential facts constituting the representation and knew of its falsity. Things to take from this case Body Bronze is an example of how a dispute over the payment or non-payment of a small debt escalated into a trial in the County Court and an appeal to the Court of Appeal. It was noted in the judgment that the requisite element of trust between franchisor and franchisee had disappeared. This may have explained why Fehcorp did not pay the $22, with a reservation of rights and preserve its business. Although Fehcorp's position as to the breach of contract by Body Bronze was vindicated, one must suspect that the reason why this appeal was so hard fought might have been a strong desire by Meneilly and Mitchell to avoid personal liability. The strong statements by the Victorian Court of Appeal should serve as a warning to litigants and practitioners considering making allegations of unconscionable conduct in pleadings. It does not follow that because a party is offended by what the other party has done, that a plea of unconscionable conduct will succeed. In the days where Courts are quite willing to make adverse costs orders where a discreet cause of action is not made out, allegations of unconscionable conduct should not be made without solid provable evidence backing up those allegations. The case also serves as a reminder of the double edged sword that applies to representations as to future matters that do not come to pass - although such representations are deemed misleading and deceptive by section 4 of the Australian 7

8 Consumer Law, if the representor can prove the existence of reasonable grounds (in this case, the intent to lend the money), liability for the representor can be easily escaped. Finally, the restatement of principles governing accessorial liability is yet another reminder that, in or to succeed against an alleged accessory there is a need to prove intention or knowledge of falsity. The mere fact that a person was the person involved in or responsible for a corporation's breach of the relevant provisions does not mean he or she is liable as an accessory. With the prohibitive provisions in the Australian Consumer Law now extending beyond corporations to individuals, it is now more likely that direct allegations will be made against the relevant individuals rather that reliance being placed on section 75B. Stones Corner This case, decided by the Federal Court of Australia, is a good example of the application of principles relating to the granting of an interlocutory injunction in circumstances where a franchisor was seeking to terminate a franchise agreement. An interlocutory injunction is an order that is made by a Court usually well before the trial of a proceeding that prevents a party from doing something pending the hearing a determination of the proceeding at trial. To obtain an interlocutory injunction an applicant must, based upon evidence contained in affidavit material and submissions, convince the Court that: There is a serious question to be tried; and The "balance of convenience" (i.e. weighing up all the pros and cons of granting an interlocutory injunction) favours the making of such an order. Having jumped these hurdles, the applicant must then proffer to the Court an undertaking to compensate the other party for any losses it suffers by reason of the interlocutory injunction being granted, if at trial, the applicant fails to sustain its claim. This is often called the "undertaking as to damages". When applying these principles Courts do not generally receive oral evidence from the witness box and, hence the matters deposed in supporting affidavits are not tested like they are in a trial through cross-examination of witnesses. That is why the Court only has to be satisfied that there is a serious question to be tried and that the balance of convenience supports the granting of an interlocutory injunction. Respondents to applications for interlocutory injunctions will therefore argue that there is no serious question to be tried and/or that the balance of convenience is not in favour of granting an interlocutory injunction. This occurred in Stones Corner with the Court ultimately concluding that an interlocutory injunction should be granted. Facts 8

9 Stones Corner Motors Pty Ltd trading as Keema Automotive Group ("Keema") was a longstanding new car dealer of Mayfairs W'Sale Pty Ltd trading as Suzuki Auto Co ("SAC"). Keema also had other dealerships with Honda, Hyundai, Nissan, Isuzu Ute, Kia and Great Wall. It conducted Suzuki dealerships at Springwood, Cleveland and Mt Gravatt. The relationship between Keema and SAC started with a "shake of hands" in 1975, when Keema commenced operating the Springwood dealership. No written agreement was ever entered into between the parties but the terms alleged by Keema were that it will use its best endeavours to promote, sell and service Suzuki vehicles and SAC will supply vehicles to Keema at wholesale price. Over time SAC issued to its dealers non-mandatory numeric sales targets, known as "stretch targets". According to Keema, SAC never suggested there would be any consequences if these targets were not met. In May 2009 representatives of Keema and SAC met to discuss Keema's sales performance and Keema's desire to start selling Great Wall vehicles. SAC subsequently expressed great concern about Keema's sales performance and desire to sell Great Wall vehicles. On 24 June 2009 SAC wrote to Keema pointing out the decline in sales of Suzuki vehicles but, in so doing, consented to Keema selling Great Wall vehicles on the condition that Keema agreed (by countersigning the letter) to meet minimum sales targets during three stages of review ("Performance Requirements"). Keema rejected this proposal noting that the Performance Requirements were unachievable and alleging that what SAC was attempting to do contravened the Franchising Code of Conduct. On 8 July 2009, lawyers for SAC wrote to Keema re-iterating SAC's position regarding the Performance Requirements and asserting that SAC had the right to immediately terminate its agreement with Keema if those Performance Requirements were not met. Representatives of Keema and SAC subsequently met where it was alleged by Keema that it was being discriminated against because no other dealer had similar Performance Requirements imposed on them. In September 2009, Keema started selling Great Wall vehicles. Thereafter: SAC reported to Keema that it has met its stage 1 Performance Requirements; SAC asserted that Keema had not met its stage 2 Performance Requirements and demanded a strategy to ensure that stage 3 Performance Requirements would be met "in the event that SAC chooses not top terminate the agreement relating to the Springwood dealership; 9

10 Keema created and submitted to SAC an Action Plan for July to December 2010 for the Springwood dealership; Keema alleged that following submission of this action plan, SAC accepted it. Then, on 10 August 2010, SAC served on Keema a notice of termination of the Springwood dealership agreement to take effect on 31 December 2010, relying upon the failure by Keema to meet the stage 2 Performance Requirements. Keema applied to the Federal Court of Australia for an interlocutory injunction restraining SAC from giving effect to the notice of termination. The Decision Mr Justice Greenwood concluded: There was a strong serious question to be tried that SAC's unilateral imposition of the Performance Requirements would give rise to a right to terminate the oral distribution agreements if those Performance Requirements were not met. The argument put forward by SAC that it was entitled to terminate on reasonable notice and that reasonable notice had been given would involve contested questions of fact (no doubt better determined at trial); There was a serious question to be tried as to whether SAC had acted unconscionably in breach of section 51AC of the Trade Practices Act and that the indicia set out paragraphs (f) and (ja) of section 51AC(3) are engaged 13 ; He could not infer lack of good faith on the part of SAC; There was no serious question to be tried as to whether SAC had infringed clause 21(2) of the Franchising Code of Conduct; There was a serious question to be tried as to whether reasonable notice of termination had been given (it being accepted that agreements with indefinite terms can be terminated by either party on reasonable notice 14 ; Having regard to the longstanding relationship between the parties, it may mean that a failure to give reasonable notice in the circumstances might also amount to unconscionable conduct. The balance of convenience favoured the grant of an interlocutory injunction despite SAC's contentions that: 13 Section 51AC sets out various factors a Court may take into account in determining whether a person has engaged in unconscionable conduct. Paragraph (f) deals with the extent of consistency of conduct with others involved in similar transactions and paragraph (ja) dealt with unilateral contract variations. 14 Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR; The Software Link (Australia) Pty Ltd v Texada Software Inc [2005] FCA

11 (a) (b) (c) If unreasonable notice of termination was given Keema would only be entitled to a relatively short extra period of notice; It would not be able establish a new dealership in the Springwood area; and Keema could be adequately compensated by damages. Hence, an interlocutory injunction should be granted. Things to take from this case Clearly SAC was concerned about Keema's declining sales performance and its desire to start selling Great Wall vehicles. The lack of a written dealership agreement with specified sales performance criteria and the refusal by Keema to accept the proposed sales performance criteria placed SAC in a position where it either had to accept the status quo or take action to bring the distribution agreement to an end. Clearly it had the right to bring the distribution agreement to an end upon reasonable notice, but one wonders, with the benefit of hindsight, whether linking Keema's desire to open a Great Wall dealership and SAC's desire to impose a tighter reign on sales performance to the decision to terminate, was the right move. The unilateral imposition of the Performance Requirements (despite protest from Keema) in circumstances where, for 35 years, there had been no performance requirements rigidly imposed, then seeking to rely upon a failure to meet those Performance Requirements (when it was arguable they were of no contractual significance) as a basis for termination, no doubt influenced Greenwood J in making his decision. The reasoning of Greenwood J in relation to whether there was a serious question to be tried is sound, but His Honour's determination of where the balance of convenience sat, was rather dismissive. The case highlights the risks for franchisors having "loose" or "handshake" type arrangements with franchisees and the uncertainties this can bring. This case should be thrust in front of the eyes of clients who resist formally documenting their franchise agreement in a detailed way. It should also be taken into account by all of us when advising our clients in circumstances where there is a right to terminate on reasonable notice. In this case Greenwood J was not satisfied that 4.5 months was sufficient notice to hold there was no serious question to be tried on this point. SPAR Licensing This case, decided by the Federal Court on 9 September 2011, is an interesting counterpoint to the Stones Corner case in relation to the consideration of an 11

12 application for urgent interlocutory relief arising from the proposed termination of a franchise agreement. Facts The case involved the cut-price supermarket industry. The applicants, SPAR Licensing Pty Ltd and SPAR Australia Limited (together SPAR ), were wholesale suppliers of groceries to the cut-price supermarket market. The first respondent, MIS Qld Pty Ltd ( MIS ), operated a cut-price supermarket under the SPAR brand at Moreton Bay near Brisbane. It did so as a SPAR franchisee under an extensive written franchise agreement. Under the franchise agreement, MIS was obliged to acquire its wholesale groceries from SPAR. On 19 August 2011, MIS wrote to SPAR purporting to terminate the franchise agreement. Negotiations ensued but proved fruitless. Unless restrained by the Court, it appeared that MIS would cease to be a SPAR franchisee and would take up instead with Metcash Trading Limited ( Metcash ) to operate one of its IGA stores under a Metcash franchise agreement. Accordingly, SPAR commenced proceedings seeking, in effect, to prevent MIS going over to Metcash. SPAR put their entitlement to injunctive relief on three bases: 1. SPAR was entitled to orders preventing MIS from terminating the franchise agreement; 2. SPAR was entitled to orders preventing MIS from acquiring its groceries from other than SPAR; and 3. SPAR was entitled to injunctive relief on the basis of certain competition law claims. The Decision Mr Justice Perram commenced his determination with a review of the key provisions of the franchise agreement. In particular, he noted that the franchise agreement did not confer any rights of termination on MIS. Consequently, MIS had no entitlement to terminate the franchise agreement unless SPAR had repudiated or breached one of its conditions. It was not suggested that this had occurred. Although there was some evidence to suggest that an oral arrangement permitting termination on notice may have been discussed, there was nevertheless a serious question to be tried as to whether MIS was entitled to terminate the franchise agreement. MIS submitted nevertheless that no injunction should issue for the following reasons: 1. The evidence as to irreparable harm was inadequate. 2. There was no basis to restrain MIS directors, even if there was a basis for restraining MIS itself. 12

13 3. The Court would not, in effect, order specific performance. 4. The franchise agreement did not bind MIS to purchase groceries from SPAR once MIS had ceased operating a SPAR franchised store. 5. If the injunction were granted, considerable harm would be caused to MIS because it had already taken substantial steps towards implementing the IGA store. The Court dealt with each of these submissions in turn. 1. The evidence as to irreparable harm was inadequate. The Court did not accept MIS submissions in this regard. The Court noted that proof of irreparable injury does not require proof of an injury which cannot be repaired but only of an injury for which damages would not be adequate compensation. In this regard, SPAR gave evidence about the various difficulties which would arise if the franchise agreement were terminated. MIS store was the only cutprice supermarket in the area which was not supplied on a wholesale basis by Metcash. Evidence was also given to the following effect: Metcash supplied 98% of the cut-price supermarket market whereas SPAR supplied only 2%; Metcash s strategy articulated internally in the organisation was to kill SPAR. Metcash had been contemplating aggressive tactics to persuade SPAR franchisees to switch to IGA such as: free stock, compensation and increased trading terms. The loss of the MIS franchise might make it considerably more difficult for SPAR to find and retain franchisees. The Court determined that if, as appeared to be the case, Metcash was attempting to drive SPAR out of the market, then the switching of sides of SPAR s fourth largest store to IGA would be likely to be a significant event from a commercial perspective and such harm could not be compensated through money. 2. There was no basis to restrain MIS directors, even if there was a basis for restraining MIS itself. The Court accepted MIS submissions in this regard. 3. The Court would not, in effect, order specific performance. The Court did not accept MIS submissions in this regard. The Court determined that the observance by MIS of its contractual obligations would be 13

14 unlikely in the short term to require much in the way of superintendence. The franchise agreement in simple terms required MIS to keep a store open and buy groceries. There is no longer a general prohibition against specific performance. The true principle requires a close attendance to the particular circumstances of each case and to the degree of supervision which would be necessary. 4. The franchise agreement did not bind MIS to purchase groceries from SPAR once MIS had ceased operating a SPAR franchised store. The Court did not accept MIS submissions in this regard. The Court determined that MIS was not permitted to evade the obligation to purchase groceries from SPAR by breaching its obligation under the franchise agreement to conduct the franchise. It is well established that a contract will not be construed as permitting a party to benefit from its own wrongdoing or by its conduct to deprive the opposing party of the benefit of the contract. 5. If the injunction were granted, considerable harm would be caused to MIS because it had already taken substantial steps towards implementing the IGA store. Conclusion The Court did not accept MIS submissions in this regard. The Court determined that many of the steps which MIS had taken since it purported to terminate the franchise agreement were of little consequence. Further, those which would constitute a prejudicial change of position (such as ordering and paying for a shipment of groceries from Metcash) were all self-inflicted and that nothing that SPAR had done in any way fostered the notion that MIS could simply walk away from the contract. Accordingly, the Court accepted that MIS should be restrained from walking away from the franchise agreement and more particularly from acquiring its groceries from anyone but SPAR. Trade Practices Competition Claims A competition case was also argued by SPAR. It was founded upon a conversation between an MIS director and a SPAR employee in which the MIS said: We approached IGA because we want to be able to protect our store from IGA. IGA has given us a guarantee that if we converted our SPAR store to an IGA-branded [store] then they would not develop the existing Foodworks site. You would know it would really hurt our business if they put a bigger sized new IGA store on the island, we need to protect ourselves and do whatever we need to stop them building it, it is why we need to move to them. The argument was that MIS and Metcash were in competition with each other and that an understanding between them had been reached under which Metcash would restrict the provision of its goods and services by not opening the larger IGA store at the Foodworks site. It was also asserted that such an arrangement would substantially 14

15 lessen competition in the relevant market. The Court accepted that there was a serious question to be tried in this regard despite the fact that there may ultimately be objections to it. Accordingly, under the competition laws, the Court determined that SPAR was entitled to orders requiring MIS to acquire its groceries from SPAR. The three MIS directors were knowingly involved in the arrangement with Metcash and thus orders were made against them as well. Costs Prior to the commencement of proceedings, SPAR wrote to MIS and suggested that MIS give an undertaking to continue operating as a SPAR store and that SPAR would then urgently commence proceedings on an expedited basis to resolve the issues which existed between the parties. That course would have obviated the need for an interlocutory injunction. The Court determined that, in these circumstances and given that the claim against MIS regarding its lack of an entitlement to terminate the franchise agreement was essentially overwhelming, it was unreasonable for MIS not to accept SPAR s proposal. That provided a basis for making a departure from the usual costs order on an urgent interlocutory injunction. Accordingly, MIS was ordered to pay SPAR s costs of and incidental to the application. Things to take from this case The take-outs from this case are as follows: Obviously, if one is to take steps to terminate a franchise agreement, a clear contractual entitlement to do so needs to be identified. Detailed evidence about the various difficulties which will be experienced by the aggrieved party and which will result in irreparable harm is required. Courts are prepared in a franchising context to order specific performance of a franchise agreement despite the fact that it is a franchisee which has purported to walk away from the franchise relationship. Self-inflicted harm carries little weight in the Court s consideration of where the balance of convenience lies. D Arling One This case, decided by the Supreme Court of New South Wales on 15 April 2011, is a good example of the application of principles relating to misleading or deceptive conduct and fraud in the context of the termination of a Franchise Agreement by the Franchisor. Facts 15

16 D Arling One Pty Ltd ( D Arling ) was the Franchisee of an Eagle Boys pizza restaurant operated a Nelson Bay in New South Wales. Eagle Boys Dial-a-Pizza Pty Ltd ( Eagle Boys ) was the Franchisor. The background to the dispute is quite complex. However, the key matters were as follows: The franchised premises were the subject of a lease which had expired and was being operated on a month-to-month tenancy. This was due to the failure by D Arling to have exercised an option to renew the lease within the prescribed time limits. The parties had previously been in dispute about D Arling s alleged noncompliance with certain terms of the franchise agreement. Litigation ensued but was resolved on the basis of a settlement agreement entered into at mediation ( the First Settlement Agreement ). The First Settlement Agreement required D Arling to use its best endeavours to sell the Nelson Bay store and another Eagle Boys store that it operated at Raymond Terrace. There were also other obligations upon D Arling in relation to the appointment of a valuer and the installation of point of sale software. In order to facilitate the sale of the Nelson Bay store pursuant to the First Settlement Agreement, D Arling prepared a Sales Pack of information which contained a pro-forma Eagle Boys document as completed by D Arling ( the Sales Pack Document ). The Sales Pack Document contained a range of information about the franchise territory, the Eagle Boys system, the layout of the store, financial information and details of the lease. It was the details of the lease which formed the key basis of the subsequent dispute between the parties. The lease details included the following statements 15 (among others): o The lease agreement in place with the landlord was in its 1 st year of a 3 year option period that expires on 16 March o The landlord s preference was to commence a new five year lease agreement with the purchaser. o Intending purchasers should liaise directly with the landlord to confirm the foregoing information about the lease and other matters. After the Sales Pack Document had been sent to Eagle Boys by D Arling, further disputes arose between the parties in relation to D Arling s alleged non-compliance with the First Settlement Agreement. As a result, the parties proceeded to a second mediation and entered into a second settlement agreement ( the Second Settlement Agreement ). The Second Settlement Agreement superseded the First Settlement Agreement and contained a clause which noted that, if the Nelson Bay store was sold to someone other than Eagle Boys, D Arling would be responsible for the transfer of obligations under the Franchise Agreements and for the assignment of the leases for the store to a prospective franchisee. 15 Which have been paraphrased for the purpose of this article. 16

17 Eagle Boys subsequently contended that the representations made by D Arling about the existence and terms of the Nelson Bay lease in the Sale Pack Document and in the Second Settlement Agreement were misleading, deceptive and fraudulent. In particular, it was alleged that these representations amounted to a representation that the option to renew had been validly exercised and that there was in force an existing current lease for a term of three years when in fact there was only a holding over on a month-tomonth tenancy. Eagle Boys asserted that it relied upon the representations in this regard to its detriment when entering into the Second Settlement Agreement. Eagle Boys contended that this provided a basis for termination of the Franchise Agreement for fraud and setting aside the Second Settlement Agreement. Eagle Boys terminated the Franchise Agreement on this basis (in reliance upon an express contractual right to do so) and refused to be bound by the Second Settlement Agreement. The Decision D Arling responded by asserting that Eagle Boys was liable in damages at common law or under the Trade Practices Act 1974 (Cth) resulting from Eagle Boys breach of the Second Settlement Agreement and wrongful termination of the Franchise Agreement. Mr Justice Tamberlin included in his decision a useful review of the key authorities in relation to misleading or deceptive conduct and fraud. The principles for misleading or deceptive conduct are well known and will not be repeated in this article. However, it is worth briefly noting the principles in relation to fraud in the context of a misrepresentation. The Court stated that the relevant principles are succinctly set out in Magill s case 16 which adopted the principle that a false representation is fraudulently made if the defendant made it knowing it to be false, or recklessly, knowing nor caring whether it was false or true. That is fraud in the strict sense. It is well settled that an allegation of fraud calls for strict proof. The Court noted that in the present case, to succeed in its claim in relation to its purported termination of the Franchise Agreement, Eagle Boys must establish that the alleged representation by D Arling occurred in circumstances which show that D Arling acted knowingly and recklessly. The Court made the following findings: Misrepresentations In relation to the content of the Sales Pack Document, the Court determined that: The context in which the statement was made must be considered. The Sales Pack Document was in draft form and was intended to be presented to 3 rd party prospective purchasers when finally settled. s exchanged between the parties showed that D Arling was awaiting feedback from Eagle 16 Magill v Magill [2006] HCA 51 at

18 Boys about the Sales Pack Document and that further action was necessary to settle the document. The Sales Pack Document was intended to give the purchaser (not Eagle Boys) a clearer idea of the proposed business and a starting point for the purchaser to carry out direct negotiation with the landlord for a new and different lease. As at the date of submission to Eagle Boys of the Sales Pack Document, Eagle Boys did not intend to exercise its right to purchase the franchise business but to assist D Arling to sell it to a third party. Accordingly, the references in the Sales Pack Document to the lease were not directed to Eagle Boys or intended by D Arling to be relied upon by Eagle Boys. Although not conclusive, this was a relevant factor to take into account when deciding whether the statement amounted to a material misrepresentation. D Arling had reasonable grounds to believe that there would be in place a lease as a result of its negotiations with the landlord and there would be no problem with renewal of the lease for a three year term based on D Arling s discussions with the agents for the landlord. The Sales Pack Document was prepared on the assumption as to what would be the position when presented to prospective purchasers. The Sales Pack Document was not provided to Eagle Boys for the purpose of the mediation leading to the Second Settlement Agreement. The mediation took place five months later. In relation to the content of the clause in the Second Settlement Agreement which noted that D Arling would be responsible for the assignment of the leases for the store to a prospective franchisee, the Court determined that: This provision was concerned with the allocation of responsibility for the transfer of obligations under the franchise agreement and leases for the store and its contents. It was a general provision as to who should arrange for what to be transferred and at whose cost. It was not sufficiently clear and unambiguous to amount to a representation by D Arling that there was a lease of the Nelson Bay store in force and effect for any specific period or with any specific rights. Accordingly, the Court was not satisfied that there had been any misleading or deceptive conduct in the matter. Non-Reliance In the event that the Court was wrong as to the absence of misleading or deceptive conduct, it determined that a second and independent basis for refusing the relief sought by Eagle Boys was that there had been no reliance established by Eagle Boys on the misleading conduct. Eagle Boys General Manager had given evidence that, in entering into the Second Settlement Agreement, he had relied on the representations referred to above and that but for these representations he would not have done so. In this regard, the Court determined that: 18

19 There was strong doubt as the Eagle Boys General Manager s recollection in relation to the matters upon which he asserted he relied. There was no record that any importance was attached to, or mention made of, the relevant part of Sales Pack Document in the five month period leading up to the second mediation or at the time of entry into the Second Settlement Agreement. It is inherently unlikely that the General Manager would have recalled the somewhat oblique reference to the lease being in its first year option period after such a substantial period had elapsed and in circumstances where he had only seen the Sale Pack Document on a computer screen. If importance had been attached to the content of the clause in the Second Settlement Agreement it might have been reasonably expected that this would be reflected in the Second Settlement Agreement. There was no such reflection. Accordingly, the Court found on the evidence that there was no relevant reliance by Eagle Boys. Fraud The Court found that there had been no fraudulent conduct on the part of D Arling because the Court was not satisfied that there was any misrepresentation or misleading or deceptive conduct on the part of D Arling. The Court was not persuaded that the evidence established that D Arling knew or intended any of the statements made in relation to the lease were false in any way. Instead, there was a genuine and well founded belief based on reasonable grounds that at the time that the Sales Pack Document came into existence the relevant statements in it would be accurate. D Arling also did not intend or believe that the statement would operate in the future or that it would be relied on or could deceive Eagle Boys. Similar reasoning applied in relation to the relevant clause in the Second Settlement Agreement. Accordingly, there was not any contractual right on the part of Eagle Boys to terminate the Franchise Agreement or the Second Settlement Agreement for fraud. Damages The Court then considered D Arling s entitlement to damages based upon the assessment undertaken by an expert jointly appointed by the parties. Ultimately, D Arling was awarded $98,472 plus interest. Things to take from this case The take-outs from this case are as follows: It is obvious that the context within which alleged misrepresentations are made is very important. 19

20 Termination for fraud is an extremely serious step and should only ever be taken after a comprehensive assessment of the legal and factual position. Query whether material matters on which a party relies for the purpose of settling a franchise dispute at mediation should be recorded in the settlement agreement or included as a form of warranty. A detailed analysis of the evidence to support reliance is fundamental prior to proceeding to trial. Some Other Cases Parker, In the matter of Purcom No 34 Pty Ltd (In Liq) 2010 FCA 263 A case (now often cited) that involved allegations of breaches of director duties by directors of a franchisee who, in order to get out of a franchise agreement, but still continue operating the same business under a different brand, formed a new company to do so. It was held that the directors breached their duties to the franchisee company (that went into liquidation) by implementing this action plan. It should be noted that the lawyer who advised in relation to the action plan was joined in this proceeding, but the proceeding against the lawyer was subsequently settled. Sportsco Pty Ltd v Singh Group Pty Ltd [2011] VSC 390 A case (which may be subject to appeal) where Sportsco unsuccessfully applied to set aside a Creditor's Statutory Demand from a prospective franchisee demanding a refund of a franchisee fee of $70,500 paid on the basis that the franchise agreement was subject to finance which was not forthcoming. Sportsco argued that there was a genuine dispute as to whether the payments made by the prospective franchisee should be refunded, but failed to put forward sufficient evidence to Gardiner AsJ of the Victorian Supreme Court to support the argument. The case highlights the need for practitioners to be diligent in preparing evidence to support these applications and the fact that the applicant bears the onus of proving that a genuine dispute exists. Broad Spectrum Tanning Pty Ltd & Ors v Bidding Buzz Ltd & Ors [2010] FMCA 932 A decision by Federal Magistrate Lucev where it was held that a misleading a deceptive conduct claim brought by a franchisee should be adjourned pending the holding of a mediation under the Franchising Code of Conduct. The case also involved an unsuccessful application for security for costs. VIP Home Services (NSW) v Swan & Anor [2011] SASC

21 A case where the South Australian Supreme Court considered and concluded that a contractual term under which VIP agreed to allocate to the Swans regular customers whose business was worth $500 per week, was an essential term. As VIP had breached that term the Court concluded that such breach entitled the Swans to terminate the franchise agreement. The Court also considered whether there was a total failure of consideration for the payment by the Swans of the franchise fee at the commencement of the franchise agreement and concluded there was no total failure of consideration and that the Swans could not recover the franchise fee paid by them. ACCC v Allphones Retail Pty Ltd (No 4) [2011] FCA 338 A case where Allphones was held to be in contempt of court by contravening undertakings given to the Court in other proceedings to not withhold consent to assignment of franchises on the basis that the franchisee refuses to release Allphones from liability or on the basis that the assignee must sign a form of franchise agreement different to the assignor's franchise agreement. Australian maintenance and Cleaning Pty Ltd v AMC Commercial Cleaning (NSW) Pty Ltd [2011] NSWCA 103 A case involving the construction of a Master Franchise Agreement and whether it permitted the Master Franchisee to further Sub-Master franchise the rights to the territory comprising the Australian Capital Territory. An important aspect of the decision concerned whether amendments made to the Operations Manual formed part of the Master Franchise Agreement and thus affected the construction of the relevant provision of the Master Franchise Agreement. 21