7-Eleven Stores v Lanhai
[2023] VSCA 45
•8 March 2023
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2022 0035 |
| 7-ELEVEN STORES PTY LTD (ACN 005 299 427) | Applicant |
| v | |
| LANHAI PTY LTD (ACN 605 035 603) (AND OTHERS ACCORDING TO THE ATTACHED SCHEDULE) | Respondents |
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| JUDGES: | McLEISH, HARGRAVE JJA AND M OSBORNE AJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 9 February 2023 |
| DATE OF JUDGMENT: | 8 March 2023 |
| MEDIUM NEUTRAL CITATION: | [2023] VSCA 45 |
| JUDGMENT APPEALED FROM: | [2022] VSC 132 (Riordan J) |
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CONSUMER LAW – Misleading or deceptive conduct – Franchise agreement – Whether franchisor engaged in misleading or deceptive conduct – Whether franchisor’s conduct induced erroneous assumption as to term of agreement – Document provided to franchisees misleading – Earlier oral explanation did not immunise against misleading effect of document – Leave to appeal granted – Appeal dismissed.
PRACTICE AND PROCEDURE – Review of trial judge’s finding – Whether restraint warranted – Whether finding affected by impression of witnesses – Finding unaffected by impressions of witnesses.
Lee v Lee (2019) 266 CLR 129, applied.
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| Counsel | |||
| Applicant: | Mr PH Solomon KC with Mr MD Tehan | ||
| Respondents: | No appearance | ||
Solicitors | |||
| Applicant: | Norton Rose Fulbright | ||
| Respondents: | No appearance | ||
MCLEISH JA
HARGRAVE JA
M OSBORNE AJA:
Introduction
On 4 June 2015, the first respondent, Lanhai Pty Ltd as franchisee, entered into a franchise agreement with the applicant, 7-Eleven Stores Pty Ltd, in respect of a 7-Eleven store in Heathmont, Victoria. The Heathmont store was the subject of a lease between the owner of the property as lessor and 7-Eleven as lessee for a term expiring on 4 July 2021, with an option for a further five-year term exercisable by the lessee.
The franchise agreement was to expire on the earlier of:[1] the date on which the primary term of the lease expired; the expiration of any further term of the lease if the option was exercised by the franchisor within the terms of the franchise agreement; or 10 years from the date the store first opened for business under the agreement.
[1]The agreement would also expire if the franchisor exercised an option to purchase the franchisee’s interests under the agreement. See also [42] below.
In April 2021, 7-Eleven informed Lanhai that it would not be exercising the option to renew the lease and, as a consequence, the franchise agreement would come to an end on 4 July 2021, a little over six years after Lanhai had commenced operating the store.
It was accepted at trial that, prior to this, Lanhai believed that the term of the franchise agreement was 10 years and as a consequence it would be able to continue to operate the store until June 2025.
Lanhai obtained interlocutory injunctive relief, in substance restraining 7-Eleven from treating the franchise agreement as at end and permitting it to continue operating the store.
At trial, Lanhai sought permanent injunctions and damages arising from alleged contraventions of the franchising code of practice,[2] unconscionable conduct and conduct which was misleading or deceptive within the meaning of s 18 of the Australian Consumer Law.[3]
[2]Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth) sch 1.
[3]Competition and Consumer Act 2010 (Cth) sch 2.
Only the misleading and deceptive conduct claim succeeded. The trial judge held that 7-Eleven had falsely represented to Lanhai that the franchisee had a contractual entitlement to a 10-year franchise term.[4] The trial judge accepted that Lanhai entered into the franchise agreement by reason of the misleading or deceptive conduct and otherwise would have pursued a different business opportunity.[5] Lanhai was awarded damages for the loss of the opportunity in the sum of $595,246.40.
[4]Lanhai Pty Ltd v 7-Eleven Stores Pty Ltd [2022] VSC 132 [98] (‘Reasons’).
[5]Ibid [107]–[108].
An important plank in the trial judge’s reasoning was his rejection of evidence from 7-Eleven’s franchise development manager, Peter O’Hara, that, in accordance with standard practice, Mr O’Hara informed Lanhai’s directors, Yong Li (‘Ms Li’) and Zhe Wang (‘Mr Wang’) at his first meeting with them on 11 June 2014 that the 10 year term was subject to 7-Eleven exercising the option under the lease.[6]
[6]Ibid [96].
7-Eleven now seeks to appeal the trial judge’s decision. It accepted that, for it to succeed on appeal, it was necessary for it to establish that the trial judge erred in rejecting that evidence.
Although Lanhai was successful at trial, it did not appear at the hearing of the application for leave to appeal. 7-Eleven undertook that if it succeeded on appeal, it would not seek to recover the damages which had been paid to the franchisee nor seek any order for the payment of its costs either of the trial or of the appeal.
The evidence at trial
Lanhai’s directors, Ms Li and Mr Wang, gave evidence in chief in part by the tender of witness statements and in part orally. Those parts of their witness statements setting out what was said at the meeting on 11 June 2014 were struck out and they gave oral evidence as to what occurred at that meeting. Both Ms Li and Mr Wang were born in China. Ms Li had greater aptitude with written and spoken English. Mr Wang gave evidence with the assistance of an interpreter. Both gave evidence that at the meeting with Mr O’Hara, Ms Li translated much of what Mr O’Hara was saying into Mandarin for Mr Wang’s benefit.
Mr O’Hara’s evidence in chief was given by way of the tender of a witness statement. As was the case with Ms Li and Mr Wang, the parts of the witness statement relating to what was said at the 11 June 2014 meeting were struck out. Mr O’Hara was not asked to give further oral evidence in chief as to what was said at the 11 June 2014 meeting. In his witness statement, Mr O’Hara did however give evidence as to his standard practice at a first meeting with a prospective franchisee.
Relevantly, Ms Li gave evidence that Mr O’Hara explained the franchise business model, illustrating relevant aspects and, as part of the explanation, drew a handwritten note which included a diagram.[7] The handwritten note set out the profit split between 7-Eleven and the franchisee and explained the commission paid on fuel sales.
[7]See Appendix 1.
According to Ms Li, Mr O’Hara also explained the relationship between the lease and the franchising agreement by reference to an example involving a primary lease term of six years with two options of three years which gave a total of 12 years which covered the 10-year franchise agreement. A scanned photocopy of the relevant part of the handwritten note shows:
Ms Li said that, after the discussion which occurred with reference to the handwritten note, Mr O’Hara went to another room before returning with a copy of a document which listed the 7-Eleven franchise opportunities available as at June 2014 (‘the June document’).[8]
[8]See Appendix 2.
The June document detailed 18 different 7-Eleven franchise opportunities. Relevantly, the June document recorded in relation to a store in Mount Waverley:
(a)the ‘Franchise Agreement Term’ to be ‘As per Lease’; and
(b)the ‘Lease Term’ to be ‘16/2/17 + 1x5 Yr Opt’.
Immediately after the words ‘Lease Term’ in the second column of the table on each page, there was an asterisk. Below the table, the following note (‘the explanatory note’) was written in small font beside an asterisk:
* Options are not guaranteed and lease extensions will be decided on a case by case basis at the sole discretion of 7-Eleven. Note: Franchise Agreements continue until; the earlier of: 1) the date on which the primary (current) term of the Lease expires, or 2) the expiration of any further term of the Lease (but only if the option to extend is exercised by 7-Eleven during the term of the agreement) or 3) 10 years after the effective date. * Franchisee Fees are subject to change.
According to Ms Li, Mr O’Hara explained that the franchise agreement term was originally 15 years but was now 10 years. He said that they could choose any store from the list and if they were interested and he could provide them with the financial reports for that store. With reference to that part of the table which differentiated between the franchise agreement term of 10 years and that designated ‘As per Lease’, Ms Li said that Mr O’Hara explained the difference by saying that the table referred to the franchise agreement term as being ‘as per Lease’ if the total of the lease term plus the option was less than 10 years, but if the total exceeded 10 years the table showed the franchise agreement term as 10 years.
In cross examination, Ms Li agreed that Mr O’Hara explained that the relevant lease was between 7-Eleven and the landlord and that, in relation to the leases, there were primary terms and options. Ms Li said that Mr O’Hara told them that the lease included a primary period and an option but did not otherwise distinguish between them. She agreed that Mr O’Hara said that 7-Eleven had the opportunity to negotiate a new lease with the landlord near to the end of each period. Ms Li also agreed that the store could not open if the lease came to an end but she understood that this referred to the combined period of the primary period plus the option.
Mr Wang spoke little English and was dependent on his wife translating what was said into Chinese. He said that at the first meeting, Mr O’Hara referred to a standard franchise term of 10 years, the previous standard term having been 15 years. Mr Wang said that in response to a question he asked Mr O’Hara as to how the lease term interacted with the 10 year term of the franchise agreement, Mr O’Hara drew a handwritten note explaining that, in that example, there are three components, a primary term and two other things which total 12 years which ensures that they could finish the franchise term of 10 years. According to Mr Wang, in relation to the six year period shown in the diagram, Mr O’Hara said that this was called the primary term which runs for six years and in relation to which nothing could be changed, but that during the last six or eight months of the primary period, there was an opportunity to talk to the landlord about a new lease for a longer period or alternatively, if the time was not right, just to finish the first three years with the same opportunity arising again during the last months of the second period.
He said that his understanding was that the total lease period was 12 years consisting of three parts, with three opportunities to negotiate to obtain a longer lease.
In cross examination, Mr Wang denied that when Mr O’Hara was discussing the handwritten note he said that 7-Eleven might or might not exercise the option. Mr Wang maintained that when Mr O’Hara referred to the arrows pointing downwards on the diagram he did so for the purpose of explaining that these were the times at which opportunities arose to discuss a new lease with the landlord.
He also accepted that he now understood that an option in a lease gives one party the opportunity to end the lease but didn’t understand that back in 2014.
He maintained that Mr O’Hara did not say that when 7-Eleven does not exercise an option under the lease, the franchise agreement came to an end. He said that when his wife translated the words ‘prime’ and ‘option’ to him, she used the English words as ‘she didn’t really understand.’
In his witness statement, which stood as his evidence in chief, Mr O’Hara gave evidence as to his standard practice relevantly as follows:
15The first interview typically lasts for approximately two hours. I do not follow a set ‘script’ in the first interview, in the sense that I do not have a repetitive word-for-word statement that I use at every two-hour interview. However, as I conduct many such interviews each year, the interviews all largely follow the same lines. And in each of them, I have a standard practice of talking through the matters set out in paragraph 16 below.
16During the first interview, the following topics are discussed:
(a)about the first 80 minutes of the interview is focused on the Prospective Franchisee and what they have accomplished in their previous careers or businesses. During this period, I assess the Prospective Franchisee’s communication skills, including whether I can easily converse with them and whether I can clearly understand them and them me;
(b)I provide an overview of the 7-Eleven retail model with the Prospective Franchisee, which includes details of the following:
(i)the financial model;
(ii)how 7-Eleven shares gross profits,
(iii)likely franchisee expenses; and
(iv)7-Eleven’s likely expenses.
(c)I explain to the Prospective Franchisee details of the franchise agreement, including the term of the agreement and how it is linked to lease tenure. In this regard, the matters which I explain to the Prospective Franchisee are that:
(i)the term of a standard franchise agreement is 10 years or the term of the lease (including any options to extend the lease), whichever is shorter;
(ii)a lease typically has a principal term and then one or more options to renew the lease;
(iii)7-Eleven might exercise an option, or not, or the lease might not contain an option. I explain what happens in each of these situations. I also focus on the expiry of the initial term, and say that should we get to the end of this term, and there is no option to extend or we decide not to exercise an option, the franchise agreement would end;
(iv)it was not guaranteed that 7-Eleven would exercise the option, and that it depended on the performance of the business; and
(v)if a lease was expiring after its last option had been exercised, and 7-Eleven wished to enter into a new lease, 7-Eleven’s practice was to try to negotiate with the landlord for a new lease prior to the expiration of the last option term.
(d)I outline the skills and competencies that 7-Eleven seeks in its franchisees; and
(e)I provide a list of stores currently on the market. I outline the financial components of the franchise agreement and break down the investment required for each store. This includes discussion of the following information for each available store:
(i)the lease tenure, including the matters I refer to in paragraph 16(c). To help the Prospective Franchisee understand lease tenure and agreement tenure in relation to a particular available store, I draw a diagram that indicates the initial term of the lease and then some options. I discuss this diagram in further detail later in this statement. It is my standard practice to circle the initial term on the document, to highlight this issue as I am talking to the Prospective Franchisee;
(ii)the income generated by the store. Since the introduction of the minimum income guarantee by 7-Eleven, I also address whether the income generated by the store includes 7-Eleven’s minimum income guarantee; and
(iii)the franchise fee. I generally do not detail how the fee is calculated. However, since 2015, where there is a shorter lease tenure, I will refer to the fact that the franchise fee is for the shorter lease tenure rather than the standard 10-year tenure.
…
44The first interview occurred on or about 11 June 2014. I met with both Yong and Joe. Yong had asked if Joe could attend in her 30 May 2014 email which I refer to above. While my usual practice was only to have the applicant for a franchise attend an interview, I was comfortable with the applicant’s husband also attending.
45Joe barely spoke during the interview, other than during the introductions. When he did speak, I thought that his English skills were very poor and that he was not someone that we could consider as a franchisee. Conversely, I considered that Yong’s English skills were above average for someone who was born in mainland China, and for whom English was a second language.
…
49A copy of my handwritten notes and diagram from the first interview is at page 388 of the Plaintiffs’ Tender Bundle … This is the diagram of a type which I usually draw as I speak to the Prospective Franchisee. The document includes:
(a)references to $100,000 GP and ‘57%’ and ‘43%’. … ; and
(b)a table with ‘PRIM’, ‘OPT1’ and ‘OPT2’, with figures underneath it. …
50… my standard practice was to say that the term of a standard franchise agreement is 10 years or the term of the lease (including options), whichever is shorter. I do not describe a franchise agreement as simply having a ‘10 year term’ without also referring to the lease (including options).
51… It is not my standard practice to involve myself in the goodwill negotiation process by giving Prospective Franchisees a formula by which the goodwill price could be negotiated.
52… I do not recall whether I pointed to the words at the bottom of the June 2014 Franchise Opportunities Document. … I do recall some initial interviews in which I have specifically pointed to the words as I am talking about it, or in which I have asked the Prospective Franchisee to read it, but I cannot recall if I did on this occasion.
53… It is my standard practice to always encourage Prospective Franchisees to speak with other franchisees and if they are not comfortable in seeking out a franchisee I may suggest that they speak to someone.
…
55… My standard practice is described at paragraph 16 above, and includes saying that the term of a standard franchise agreement is 10 years or the term of the lease (including options), whichever is shorter.[9]
[9]Emphasis added.
In cross examination, Mr O’Hara accepted that he had no independent recollection of the 11 June 2014 meeting with Ms Li and Mr Wang and necessarily that he was not able to recall what was said or not said in the 11 June 2014 meeting, save that he would have followed his standard practice. He agreed that it was possible that he might not have covered each of the topics or sub-topics described in paragraphs 15 and 16 of his witness statement. He said that he used the diagram, the subject of his handwritten note, in every single meeting so he was confident that he would have followed his standard practice as to the manner in which he used that document.
He accepted that he would have said that ‘six plus three plus three equals 12 and that 12 years is enough to cover the franchise agreement’ but said that in addition he would have added the qualification that this would be the case ‘should all the options be exercised’. He agreed that this qualification did not appear in the handwritten note but said that he would have discussed this in the meeting, drawing attention to the circle drawn around the first column for the primary term which he said was him highlighting that if the options were not exercised then the agreement would only continue until 2020, that is until the end of the initial term of the lease. He accepted that his standard practice in relation to the handwritten note would differ ‘very slightly’ from diagram to diagram and also that what was said at each meeting would vary depending on what was asked, or not asked.
The trial judge asked: ‘[w]ould you have said to them that if 7-Eleven doesn’t exercise the option, then you won’t get a 10-year term. You’ll have to give up, at the end of that primary term of the lease?’ Mr O’Hara answered ‘yes’, further explaining by reference to the handwritten note, that the circling of the six in the column for the primary term was him indicating to Ms Li and Mr Wang that the term of the agreement in that event would be six years, not 10.
Mr O’Hara said that it was very unlikely that 7-Eleven would negotiate a new lease towards the end of the primary term if options were in place and that the time that 7-Eleven would seek to explore the entering into of a brand new lease was when there were no further option periods available. When he was asked about a number of alleged contrary negotiations in cross examination, he said that he was unable to comment as he was not involved on the leasing side of the business.
Following the meeting on 11 June 2014, Ms Li and Mr Wang sought further information from Mr O’Hara in relation to the Mount Waverley Store, emailing Mr O’Hara on 18 June 2014 in the following terms (omitting irrelevant parts):
I am interesting [sic] with the store 1089E Mt Waverley, but just worried about its lease, only 7 years left. How long has this store been in the market? When should I discuss price with the owner?[10]
[10]Reasons [20] (emphasis added).
In the section of the lease term for the Mount Waverley store shown in the June document, the lease term is shown as ‘16/2/17 + 1 x 5 Yr Opt’ (a total of about seven and a half years).
Mr O’Hara responded by email on the same day ‘Store 1089 has been on the market for about 3 months, you can start talking to the Franchisee now if you are sure that it is the right Store for you.’[11]
[11]Ibid [21].
Mr O’Hara accepted that he did not respond to this email by pointing out that the lease in fact only had about 2 years to run, explaining that the Mount Waverley store was very profitable so he assumed that the option would be exercised at the end of the first term (as in fact happened).
On 21 August 2014, Ms Li and Mr Wang met with Mr O’Hara and Sue Owen from 7-Eleven. Ms Owen informed them that their application for the Mount Waverley Store had been rejected.[12]
[12]Ibid [25].
At the meeting, Ms Li and Mr Wang were given a copy of another document entitled ‘Franchise Opportunities: VIC’ and dated ‘As at: August 2014’ (‘the August document’), on which 11 recommended stores were highlighted.[13]
[13]Ibid [26]; see Appendix 3.
Of the 11 stores, only three were noted as having a ‘Franchise Agreement Term’ of ’10 Years’. The rest were designated: ‘As per Lease’.
Relevantly, the ‘Franchise Agreement Term’ for the Heathmont Store is shown as ’10 Years’. The ‘Lease Term’ is shown as ‘4/7/21 + 1x5 Yr Opt’. As with the June document, there is an asterisk after the words ‘Lease Term’ with the same explanatory note in small font as set out in paragraph 17 above.
By email of 2 September 2014 to Mr O’Hara, Ms Li stated that she had agreed on a price with the franchisee of the Heathmont Store and on 4 September 2014, she sent a business plan to Mr O’Hara among other things setting out the factors influencing her decision to select the Heathmont Store:
1.Heathmont store is a suitable store for me to operate.
2.The store is an old and potential store.
3.The store located near the train station which brings more valuable customers to the store.
4.The store has long term lease.[14]
[14]Emphasis added.
Ms Li decided to delay the commitment to purchase the Heathmont Store until after the birth of her baby which took place in February 2015. About one month after the birth, Mr O’Hara contacted Ms Li and made arrangements to resume negotiations with respect to the purchase of the franchise of the Heathmont Store.
By Heads of Agreement for Sale of Business dated 24 March 2015 between the vendors of the Heathmont franchise and Ms Li, the vendors agreed to sell the business for a total goodwill of $633,500, subject to approval by 7-Eleven of the purchaser. On 30 March 2015, Lanhai was registered.[15]
[15]Reasons [32]–[33].
On or about 30 April 2015, Mr O’Hara gave Ms Li and Mr Wang various documents, including a 95-page disclosure document. On pages 81 to 82 of the document, there was a table setting out the relevant conditions of the franchise agreement which included, with respect to the term of the agreement, the following:[16]
[16]Ibid [34].
Article Relevant Condition (a) Term of the franchise agreement 1 (a), 24, 25, 29 & Exhibit A (b) Variation 2 (j) (c) Renewal, extension or extension of the scope 24 (d) Conditions the Franchisee must meet to renew, extend or extend the scope of the franchise agreement 24 (Extension or renewal can occur only by mutual agreement. There is no entitlement requiring that the Store Agreement be extended or renewed.)
Article 24 of the franchise agreement provides:
(a)The term of this Agreement shall commence on the Effective Date and continue until termination of this Agreement as provided in Article 25, or until expiration of this Agreement on the earlier of:
(i)the expiration of the primary term, or cancellation or termination of the Lease; or
(ii)the expiration of the extended term of the Lease (if an option to extend the primary term of the Lease has been exercised by [7-Eleven] on the Effective Date or is exercised by [7-Eleven] during the term of this Agreement); or
(iii)10 years after the Effective Date; or
(iv)[7-Eleven]’s exercise of its Option to Purchase in accordance with Article 27 of this Agreement.
(b)The term of this Agreement may be extended or renewed only by mutual agreement in writing between the FRANCHISEE and [7-Eleven].
On or about 12 May 2015, Ms Li and Mr Wang attended the offices of a solicitor, for the purpose of receiving legal advice with respect to the proposed franchise agreement and disclosure statement prepared by 7-Eleven, and they received a solicitor’s certificate confirming that they understood the nature and effect of the franchise agreement.[17] At trial, Ms Li and Mr Wang gave evidence, which was accepted by the trial judge, that they were not advised that the term of the franchise agreement was not 10 years but rather until the expiration of the primary term, unless 7-Eleven exercised the option.[18]
[17]Ibid [35]–[36]. No case was advanced at trial to the effect that any misleading conduct which occurred by reason of the provision of the June document and the August document in 2014 was overtaken by the provision of the full suite of documentation which set out the duration of the franchise agreement or that the causative chain was broken by the provision of documentation and the obtaining of legal advice.
[18]Ibid [37]. The solicitor gave evidence to the effect that she could not recall giving any advice as to the term of the franchise agreement.
The trial judge’s reasons
The trial judge held that 7-Eleven’s conduct was misleading in that it ‘had “a sufficient tendency to lead a person exposed to the conduct into error” (that is, to form an erroneous assumption or conclusion about some fact or matter)’.[19] His Honour considered that the erroneous assumption was that the contractual entitlement under the franchise agreement was to a term of 10 years, rather than the earlier of:
(a)approximately six years, being the expiration of the primary term of the lease on 4 July 2021; or
(b)ten years, if the defendant chose to exercise an option to renew the lease arising during the ten-year term.
[19]Ibid [88], quoting Australian Securities and Investments Commissionv Dover Financial Advisers Pty Ltd (2019) 140 ACSR 561, 586 [98] (O’Bryan J); [2019] FCA 1932.
His Honour reached that conclusion because he considered that:
(a)the August document incorrectly stated that the ‘Franchise Agreement Term’ for the Heathmont store was 10 years when in fact, under article 24(a) of the franchise agreement, the contractual entitlement was to a term expiring at the end of a primary term on 4 July 2021, which was a period of six years and one month from the date of the franchise agreement; and
(b)the erroneous assumption was reinforced by the fact that in the June and August documents, the ‘Franchise Agreement Term’ for some other stores was described as ‘as per lease’ rather than 10 years.[20]
[20]Ibid [89].
The trial judge found that the ‘as per lease’ description was used for those stores where the cumulative total of the primary lease term and all option periods was less than 10 years, and considered that the differentiation between ‘as per lease’ and ‘ten years’ would lead a reasonable reader to presume that, where the ‘Franchise Agreement Term’ was expressed to be 10 years, it was not subject to earlier termination by reason of the expiration of the primary lease term.
The trial judge accepted that it was necessary to consider the explanatory note in assessing whether the August document as a whole had a sufficient tendency to lead a person to form an erroneous assumption, but considered it did not erase the effect of the misleading representation contained in the August document because:[21]
(a)both the June document and the August document recognised the fact that prospective franchisees would be investing many hundreds of thousands of dollars to acquire the franchise business for sale, with the disparity between the 10-year term and the lesser term being very significant;
(b)the explanatory note was not featured prominently on the document, being in small print and worded in a confusing manner, which would be difficult for a lay person to understand, even one whose first language was English, much less Ms Li and Mr Wang;
(c)the asterisk referencing the explanatory note was placed after the words ‘Lease Term’ and not ‘Franchise Agreement Term’, which did nothing to communicate the effect the ‘Lease Term’ and options had on the ‘Franchise Agreement Term’; and
(d)Ms Li and Mr Wang’s evidence that the explanatory note was not brought to their attention at all was unchallenged, and Mr O’Hara did not contend that it was part of his standard practice to bring the explanatory note to the attention of prospective franchisees.
[21]Ibid [90], [92].
Nor did the trial judge accept that any misleading effect conveyed by the August document was erased by the statements made by Mr O’Hara at the 11 June 2014 meeting. Whilst his Honour accepted that the evidence of Ms Li and Mr Wang about a conversation which occurred some seven and a half years ago needed to be approached with caution, he also considered that some caution was required in determining what Mr O’Hara’s standard practice was at that time and whether, as part of that practice, he would have clearly explained that the 10 year term in the example set out in the handwritten note was subject to 7-Eleven:[22]
(a)exercising the option under the lease after the expiration of the six-year primary term; and
(b)exercising the option again after the expiration of the first three-year option,
and that 7-Eleven was under no obligation to do either (which the judge called ‘the reduced term explanation’).
[22]Ibid [94]–[96].
The trial judge was not satisfied that Mr O’Hara gave the reduced term explanation for the following reasons:[23]
(a)He accepted the evidence of Ms Li and Mr Wang that they did not recall Mr O’Hara saying anything about 7-Eleven having an ability to bring the 10-year franchise term to earlier termination by not exercising the option.
(b)He accepted that Mr O’Hara did not adequately explain to Ms Li and Mr Wang what options were and how they affected the term of the lease.
(c)He considered that Ms Li’s lack of understanding that the entitlement to the length of the franchise term was limited to the primary term was demonstrated by her email to Mr O’Hara on 18 June 2014 with respect to the Mount Waverley store, and was further supported by Mr O’Hara’s failure to give the reduced term explanation in his reply to Ms Li so as to disabuse her of her false assumption. The trial judge considered that Mr O’Hara’s explanation that he did not do so because he assumed that 7-Eleven would exercise the option for the Mount Waverley store was not consistent with a ‘standard practice’ of explaining the limiting effect of a primary term to prospective franchisees.
(d)Further, the trial judge considered that Mr O’Hara’s standard practice, even if followed, was not unambiguous, because a prospective franchisee told of the standard franchise term of 10 years and being provided with documents such as the June document and the August document could reasonably consider that any statement about 7-Eleven not being obliged to exercise options to renew leases applied to the period after the expiration of a 10-year term. Further, the trial judge considered that whatever explanation was given by Mr O’Hara, it was not sufficient to erase the effect of the representations made in the June document and the August document.
[23]Ibid [96]–[97].
7-Eleven’s submissions on appeal
The essence of the submissions made by 7-Eleven on appeal was that the trial judge should have approached the question whether 7-Eleven had engaged in misleading or deceptive conduct by: first, considering what was said at the 11 June 2014 meeting; and secondly, then determining whether the August document was misleading or deceptive in light of his findings as to what occurred at the 11 June 2014 meeting. Relatedly, 7-Eleven submitted that Mr O’Hara’s evidence that he would have given the reduced term explanation should have been accepted, because it was consistent with both his standard practice and the handwritten note.
Accordingly, 7-Eleven submitted that the trial judge should have been satisfied on the balance of probabilities that Mr O’Hara said or conveyed to Ms Li and Mr Wang at the 11 June 2014 meeting that:
(a)the term of a standard 7-Eleven franchise agreement is 10 years or the term of the lease of the store (including any options to extend the lease), whichever is the shorter;
(b)a lease typically has a principal term and then one or more options to renew the lease;
(c)7-Eleven might or might not exercise an option (and did not guarantee that it would exercise an option) or the lease might not contain an option;
(d)if 7-Eleven decided not to exercise an option, the franchise agreement would end; and
(e)by reference to a hypothetical lease commencing in 2014 with a six-year primary term with two options of three years each, if 7-Eleven did not exercise the options, the term of the franchise agreement would be six years.
7-Eleven argued that if Mr O’Hara had given the reduced term explanation on 11 June 2014, then the fact that Mr O’Hara did not correct any misapprehension of Ms Li in responding to the 18 June 2014 email was explicable because he had already given the reduced term explanation seven days earlier.
To similar effect, 7-Eleven submitted that the August document, including the reference to the explanatory note, needed to be considered in the context of the findings that ought to have been made in respect of the 11 June 2014 meeting and, in light of those findings, a lay person in the position of Ms Li and Mr Wang would have been able to understand the explanatory note, even in circumstances where it was not drawn specifically to their attention.
Consideration
7-Eleven asks the Court to substitute its findings as to what was said at the meeting on 11 June 2014 for those made by the trial judge.
A court conducting an appeal by way of rehearing is bound to conduct a ‘real review’ of the evidence given at first instance and of the trial judge’s reasons for judgment to determine whether the judge has erred in fact or law.[24] If the appellate court concludes that the judge has erred in fact or law, it is required to make its own findings of fact and to formulate its own reasoning based on those findings. The appellate court must exercise restraint with respect to a trial judge’s findings, if they are likely to have been affected by impressions about the credibility and reliability of witnesses formed by the trial judge as a result of seeing and hearing them give their evidence (including findings of secondary facts which are based on a combination of these impressions and other inferences from primary facts).[25] In that case, the court should not interfere unless the findings are ‘glaringly improbable’ or ‘contrary to compelling inferences’.[26] Otherwise, however, ‘in general an appellate court is in as good a position as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge’.[27]
[24]Lee v Lee (2019) 266 CLR 129, 148 [55] (Bell, Gageler, Nettle and Edelman JJ) (‘Lee’); Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679, 686 [43] (French CJ, Bell, Keane, Nettle and Gordon JJ); [2016] HCA 22; Fox v Percy (2003) 214 CLR 118, 126–7 [25] (Gleeson CJ, Gummow and Kirby JJ).
[25]Lee (2019) 266 CLR 129, 148–9 [55] (Bell, Gageler, Nettle and Edelman JJ).
[26]Ibid.
[27]Ibid, quoting Warren v Coombes (1979) 142 CLR 531, 551 (Gibbs ACJ, Jacobs and Murphy JJ).
7-Eleven did not submit that the trial judge’s findings of fact were ‘glaringly improbable’. It did however, initially submit that the findings as to what occurred at the 11 June 2014 meeting were contrary to ‘incontrovertible facts or uncontested testimony’ or ‘contrary to compelling inferences’ arising from such facts or testimony. It later contended that the trial judge’s conclusions as to that meeting were not likely to have been affected by impressions formed by the judge about the credibility or reliability of the witnesses, and this Court was therefore in as good a position as the judge to make its own decision.
The latter submission should be accepted. While the judge approached the evidence about the 11 June 2014 meeting with ‘caution’, that was attributable principally to the lapse in time, and not to any conclusion articulated by the judge about the witnesses and his impressions of them.
Specifically, 7-Eleven draws attention to:
(a)Ms Li and Mr Wang’s knowledge that the ability to operate a store was dependent upon the subsistence of a lease between 7-Eleven and the landlord;
(b)that Mr O’Hara drew Ms Li and Mr Wang’s attention to, and explained the difference between, the primary lease term and options at the 11 June 2014 meeting;
(c)that Mr O’Hara had a standard practice that he followed at meetings of the kind held on 11 June 2014 which included the preparation of a diagram consistent with the handwritten note; and
(d)that Ms Li simply did not understand the distinction between the primary term and the options.
This lack of understanding on the part of Ms Li is said to diminish the significance of Ms Li’s email of 18 June 2014 in which she elided the distinction between the primary lease term and the option and combined the period of the lease term and the option term when referring to the lease term for the Mount Waverley store, and similarly her mistaken characterisation of the Heathmont lease as a ‘long term’ lease in the email to Mr O’Hara of 2 September 2014.
On the balance of probabilities, we accept 7-Eleven’s contention that the facts identified by 7-Eleven are such as to establish that Mr O’Hara gave the reduced term explanation at the 11 June 2014 meeting.
Mr O’Hara gave unchallenged evidence that he had a standard practice, adopted in thousands of meetings over 11 years, which he said in answer to the judge’s question (set out at [28] above) would have included, in effect, the reduced term explanation. It is true that his written evidence in chief as to the exact nature of the standard practice lacked material specificity and was contradictory in some parts. It lacked material specificity, certainly insofar as it concerned the reduced term explanation, because it was not evidenced by anything like a written check list or script that dictated the content of Mr O’Hara’s explanations. Mr O’Hara also understandably accepted that it was possible that he did not follow the standard practice in all respects, and that precisely what is said at meetings is dependent on the general back and forth of discussion.
The evidence in chief was contradictory because it said that Mr O’Hara’s standard practice included him saying that ‘the term of the franchise agreement is 10 years or the term of the lease (including any options to extend the lease) whichever is shorter’. Words to this effect appear three times in Mr O’Hara’s witness statement. The witness statement was no doubt carefully drawn and was adopted by Mr O’Hara as his evidence in chief.[28]
[28]The fact that Mr O’Hara’s evidence of his standard practice was given by witness statement, and not orally like the other evidence about the 11 June 2014 meeting, is problematic. The ‘standard practice’ evidence was at the heart of the defence and unsupported by documentary evidence. In our view, it should have been given orally.
On the other hand, notwithstanding the difficulties we have identified with the written evidence in chief, we consider that it is likely that the substance of the reduced term explanation would have been given by Mr O’Hara as he said under cross-examination it would have been. It was a matter critical to the commercial relations of the parties, and the note of the meeting is not inconsistent with the explanation having been given. In contrast, while Ms Li gave evidence that Mr O’Hara did not address the distinction between a lease and an option, Mr Wang’s evidence was that she appeared not to understand what an option was.[29] He also did not understand that a lease comes to an end if an option is not exercised. It is clear that, whether or not Mr O’Hara gave the reduced term explanation, Ms Li and Mr Wang did not understand the subject matter. Their affirmative evidence that the explanation was not given at all was therefore of little weight. On the balance of probabilities, we infer that the reduced term explanation was given at the 11 June 2014 meeting. (However, as explained below, the fact that the explanation was not understood by Ms Li and Mr Wang is critical for other reasons.[30])
[29]She also accepted that she didn’t understand what an option was until 7-Eleven advised that it was not exercising the option, in April 2021.
[30]See [70] below.
7-Eleven took issue with the judge’s reliance on Ms Li’s email to Mr O’Hara of 18 June 2014 in deciding what was said at the 11 June 2014 meeting.[31] It will be recalled that, in that email, she combined the balance of the primary term with the option period for the purpose of identifying the franchise term. 7-Eleven seeks to discount the evidentiary value of this email in two ways. First, it complains about the sequence in which the trial judge considered the relevant events, submitting that the trial judge should have determined what was said at the 11 June 2014 meeting before considering the 18 June 2014 email. Secondly, it says that the conflation by Ms Li of the primary term and the option period is the product of her lack of understanding as to the distinction between the two and not the result of Mr O’Hara’s failure to provide the reduced term explanation.
[31]See [30] above.
We do not accept the first of these arguments. In circumstances where there is a conflict about what is said at a meeting, it is entirely orthodox for the fact finder to seek to resolve the conflict by looking at relevantly contemporaneous incontrovertible evidence found in documents and resolving the controversy by drawing available inferences from those documents. That is exactly what the trial judge did. However, we accept the second argument. For the reasons already given, the fact that Ms Li had an imperfect understanding of the distinction between a lease and an option after the meeting, and did not really understand what an option was, does not show that the explanation was not given. It shows only that, if it was given, she did not understand it. That is borne out by the June email.
Although we reach a conclusion different to the trial judge about what was said at the 11 June 2014 meeting, we reject 7-Eleven’s submission that this conclusion affects the way in which the later events are to be interpreted. That is principally because, as is not in dispute, Ms Li did not understand the reduced term explanation. This was made apparent in the 18 June 2014 email. This is the background against which the August document must be considered.
7-Eleven accepted on the hearing of this application that the provision of the August document on its own,[32] and coupled with the failure to draw the explanatory note to the attention of the recipient, did not adequately convey the complexities of article 24 of the franchise agreement to the recipient, in that it did not convey that the 10 year term is a default term or of defeasible duration.
[32]And necessarily the June document absent the reduced term explanation.
Such a concession recognises the misleading nature of the August document when considered in isolation. The fact that the August document identifies the Franchise Agreement Term as 10 years for the Heathmont store, in contrast to the other stores where it is described as ‘as per Lease’, conveys that unless the description ‘as per Lease’ is used, the franchise agreement term would be 10 years. The fact that the asterisk which drew attention to the explanatory note appears not against the Franchise Agreement Term, but rather against the Lease Term further supports the concession.
For the misleading effect of that document to be erased, 7-Eleven must be able to point to statements made by Mr O’Hara at the meeting on 11 June 2014 that were sufficiently clear to ameliorate the effect of the document later provided (and the relevantly similar June document). For oral statements to be misleading, the actual words spoken need to be proved with precision.[33] Correlatively, where the misleading effect of a document is to be erased by oral statements, those statements must also be proved with precision.
[33]Watson v Foxman (1995) 49 NSWLR 315, 318 (McClellan CJ in Eq).
Even accepting that Mr O’Hara gave the reduced term explanation at the 11 June 2014 meeting, we are not satisfied that he did so with sufficient precision to displace the misleading effect of the August document, in particular. His evidence as to the giving of the reduced term explanation was generic, not specific to any particular franchise. In the context of specific franchises, Ms Li had demonstrated in the 18 June 2014 email that she cannot have understood the explanation. More significantly, the August document was highly specific about individual franchises, and in a misleading way in relation to the critical Heathmont franchise. That misleading effect was not erased by the giving of the reduced term explanation at the 11 June 2014 meeting. Quite apart from the generic nature of that explanation, events had moved on, including by Ms Li demonstrating her lack of understanding in the 18 June 2014 email.
In the circumstances, we do not consider that the trial judge’s conclusion that 7-Eleven engaged in misleading or deceptive conduct should be disturbed. We would grant leave to appeal but dismiss the appeal.
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APPENDIX 1
APPENDIX 2
APPENDIX 3
SCHEDULE OF PARTIES
7-ELEVEN STORES PTY LTD (ACN 005 299 427) Applicant and LANHAI PTY LTD (ACN 605 035 603) First respondent YONG LI Second respondent ZHE WANG Third respondent
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