Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd
[2010] NSWCA 188
•6 August 2010
NEW SOUTH WALES COURT OF APPEAL
CITATION:
ALPHA CENTAURI ENTERPRISES PTY LTD v MORTGAGE HOUSE OF AUSTRALIA PTY LTD [2010] NSWCA 188
FILE NUMBER(S):
2009/298348
HEARING DATE(S):
18 May 2010
JUDGMENT DATE:
6 August 2010
PARTIES:
Alpha Centauri Enterprises Pty Ltd (In liq) – First Appellant
Robert Alan Duncan – Second Appellant
Heather May Duncan – Third Appellant
Mortgage House of Australia Pty Ltd – First Respondent
Direct Mortgage Solutions Pty Ltd – Second Respondent
JUDGMENT OF:
Allsop P Hodgson JA Basten JA
LOWER COURT JURISDICTION:
Supreme Court
LOWER COURT FILE NUMBER(S):
SC 50041/05
LOWER COURT JUDICIAL OFFICER:
Hammerschlag J
LOWER COURT DATE OF DECISION:
12 June 2009
LOWER COURT MEDIUM NEUTRAL CITATION:
[<i>Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd</i>] [2009] NSWSC 333
COUNSEL:
M Vu – for the Liquidator of First Appellant
C Stomo – Second and Third Appellants
TRG Parker SC/AR Zahra – Respondents
SOLICITORS:
Second and Third Appellants Self-represented
Gokani & Associates Legal
CATCHWORDS:
STATUTORY INTERPRETATION – principles – definitions – whether the agreement was a franchise agreement for the purposes of the [<i>Trade Practices Act 1974</i>] (Cth) and the Franchising Code of Conduct made under that Act – whether cost of stationary at the full retail cost - payment to the franchisor of one-third of the sale price of business transferred by the franchisee - or payment to the franchisor of a fee, is indicative of a franchise agreement
TRADE PRACTICES – Franchising Code of Conduct – failure to serve disclosure document and notice of default – whether loss caused
TRADE PRACTICES – Franchising Code of Conduct – whether franchisor repudiated contract – whether appellant abandoned business
WORDS AND PHRASES – "franchise agreement"
LEGISLATION CITED:
Franchising Code of Conduct, cll 4, 21, 22, 23, Pt II
[<i>Trade Practices Act 1974</i>] (Cth), ss 51AD, 87, Pt IVB, Pt VI
Trade Practices (Industry Codes – Franchising) Regulations 1998, reg 3
CATEGORY:
Principal judgment
CASES CITED:
[<i>Master Education Services Pty Ltd v Ketchell</i>] [2008] HCA 38; 236 CLR 101
TEXTS CITED:
DECISION:
(1) Appeal dismissed.
(2) Appellants to pay the respondents’ costs.
JUDGMENT:
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 2009/298438
ALLSOP P
HODGSON JA
BASTEN JA6 August 2010
ALPHA CENTAURI ENTERPRISES PTY LTD v MORTGAGE HOUSE OF AUSTRALIA PTY LTD
Headnote
Mortgage House of Australia Pty Ltd, the respondent, operates a mortgage broking business providing financial services to members of the public through arrangements with “business partners”. Between 2001 and 2005 the appellant, Alpha Centauri Enterprises Pty Ltd, was one such business partner. In April 2005 the then current agreement between the appellant and the respondent was terminated. In proceedings commenced in the Equity Division, the appellant alleged that the respondent had repudiated the agreement and sought various declarations, orders for payment under the agreement, damages and rectification. The respondent cross-claimed, seeking relief for loss and damage suffered by it as a result of alleged repudiation by the appellant. On 12 June 2009 Hammerschlag J dismissed both the claim and the cross-claim: Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333. The respondent has not sought to challenge the dismissal of its cross-claim. The appellant, however, has brought an appeal against the rejection of some of its claims.
The issues for determination on appeal were:
whether the agreement was a franchise agreement for the purposes of the Trade Practices Act 1974 (Cth) and the Franchising Code of Conduct made under that Act;
if the agreement were governed by the Code, the consequences of the failure by the respondent to serve (a) a disclosure document, and (b) a notice of default;
whether the respondent repudiated the agreement;
whether the appellant abandoned the business; and
whether the primary judge erred in finding that the appellant had not, in any event, proved that it had suffered loss or damage.
The Court held, dismissing the appeal:
In relation to (i)
(per Hodgson JA, Allsop P agreeing):
The agreement between the respondent and the appellant constituted a franchise agreement. Satisfaction of paragraphs 4(a), (b) and (c) of the definition of "franchise agreement" were not in dispute. Paragraph (d) was satisfied in each of three ways: (i) the cost of stationery at the full retail cost; (ii) the payment to the respondent of one-third of the sale price of part or all of franchise business; and (iii) the payment to the respondent of part of each loan application fee: [3], [31]–[37].
In relation to (i) (the cost of stationery), the respondent was contractually entitled to require payment to itself for goods it supplied, and the appellant was contractually bound to pay the respondent for them. Under the agreement, no limit was set on the price that the respondent might require for the goods, and in particular no requirement that the goods be supplied at a wholesale price or market value; so the exceptions under cl 4(d) (v) and (viii) do not apply: [4].
In relation to (ii) (the payment to the respondent of one-third of the sale price of the business), the occasion for such a payment only arises on disposal of the business. However, the respondent had to agree, as a condition of entering into or continuing the business, that such a payment would be made in the event of a sale. Paragraph (d) is engaged not merely by actual payment, but also by the making of an agreement to pay: [5].
(per Basten JA contra):
In relation to (i) (the cost of stationery), the issue was whether the agreement required that payments be made to the respondent. The fact that the exclusion in cl 4(d)(v) is expressed in terms of wholesale price suggests that it is concerned with goods sold or services provided in the course of the business, at a price allowing a profit to the business. Incidental expenses for stationery did not fall within the purpose of that limb of the definition: [23]–[28].
In relation to (ii) (the payment to the respondent of one-third of the sale price of business), cl 19.3 did not provide for a payment to be made to the franchisor as a condition of the franchisee starting or continuing to operate the remainder of the business and therefore does not bring the agreement under the Code: [29]–[30].
(per Basten JA, Allsop P and Hodgson JA agreeing):
In relation to (iii) (payment of part of each application fee to the respondent), that fee was collected by the appellant and banked by it, subject to an obligation to account to the respondent for $375 for each loan that settled. This fixed amount may be properly described as a "franchise service fee" and satisfies cl 4(d)(iii) of the definition: [31]–37].
In relation to (ii)
(per Basten JA, Allsop P and Hodgson JA agreeing):
The disclosure document was required to identify in express terms that there had been a change in the agreement from an earlier version as to the rate at which trailing commissions were calculated. There was evidence that Mr Duncan would have noticed and taken issue with the change. However, the appellant failed to identify in what way provision of the disclosure document would have improved the appellant's position. The failure to provide a disclosure document was not shown to give rise to loss or damage: [42]–[49].
While the franchise service fee should have been disclosed as a payment required to be made by the franchisee to the franchisor, the appellant was fully aware that such a deduction was required by the respondent and had been made over the periods of the previous agreements. The failure to disclose that requirement was not demonstrated to have caused any loss or damage to the appellant: [50]–[51].
In relation to (iii)
(per Basten JA, Allsop P and Hodgson JA agreeing):
The representations made on 14 and 16 December 2004 did not amount to a repudiation of the contract but reflected a mutual concern as to the appellants' failure to generate business and the appellant's concerns about the administration of the agreement: [62]-[65].
It was not shown that the disconnection of the virtual private network removed the appellant's access to the respondent's electronic mortgage management system from 21 April 2005. Accordingly, that conduct did not amount to a repudiation of the agreement: [66]–[74].
In relation to (iv)
(per Basten JA, Allsop P and Hodgson JA agreeing):
The case on abandonment was put on two alternative bases: (a) the appellant had validly terminated the contract prior to leaving the business premises on 29 April 2005; or (b) if it had not validly terminated, the wrongful conduct of the respondent had forced it to abandon the business so that its abandonment could not be described as "voluntary". The appellant has not made good its complaints in relation to the respondent's conduct in these respects: [77].
In relation to (v)
(per Hodgson JA, Allsop P agreeing):
Assuming wrongful repudiation by the respondent on 22 April 2005, no losses were shown to result from the respondent’s breach of the Code and the Trade Practices Act: [6]–[7].
(per Basten JA):
On the basis that the appellant had an entitlement to a termination notice under cl 21 of the Code, the respondent's termination of the contract was repudiatory. As the notice need not have exceeded 30 days and there was no realistic possibility that the "breach" could have been remedied within that period, it followed that the right of the respondent to terminate could not have been avoided. The appellant did not present a case suggesting that it would have suffered a loss during a 30 day period of notice. In the absence of such evidence, it failed to prove that it had suffered damage: [82]–[88].
IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL
CA 2009/298438
ALLSOP P
HODGSON JA
BASTEN JA6 August 2010
ALPHA CENTAURI ENTERPRISES PTY LTD v MORTGAGE HOUSE OF AUSTRALIA PTY LTD
Judgment
ALLSOP P: I have had the advantage of reading the judgments of Hodgson JA and Basten JA. Subject to the comments of Hodgson JA, with which I agree, I agree with Basten JA and with his proposed orders.
HODGSON JA: I agree with the orders proposed by Basten JA, and subject to what I say below, I agree substantially with his reasons.
On the question whether the agreement of 19 February 2004 was a franchise agreement, within the meaning of the Franchising Code of Conduct, my view is that par (d) of cl 4.1 of the Code did apply by reason of (i) Clause 4.2 of the agreement requiring that the appellant “use only stationery … supplied by [the respondent] … at the cost of [the appellant]”, and (ii) Clause 9.3 of the agreement requiring that the appellant pay the respondent one-third of the sale price of the business when it was transferred.
As regards (i), in my opinion this was an agreement by the appellant to pay for goods which were to be supplied by the respondent. It is true, as pointed out by Basten JA, that the respondent might supply goods and require payment, not to the respondent or an associate of the respondent, but to an independent provider. But the respondent was contractually entitled to require payment to itself for goods it supplied, and the appellant was contractually bound in that event to pay the respondent for them. I do not think that par (d) of cl 4.1 of the Code could be evaded simply by leaving it open that a franchisor, in supplying goods or services to the franchisee, while being entitled to require payment for them to itself, might require payment to some third party. Under the agreement, no limit is set on the price that the respondent might require for the goods (except perhaps an implied term that it not be unreasonable), and in particular no requirement that the goods be supplied at a wholesale price or market value; so in my opinion, the exceptions under sub-pars (v) and (viii) do not apply.
As regards (ii), it is true that the occasion for such a payment only arises on disposal of the business. However, the respondent had to agree, as a condition for entering into or continuing the business, that such a payment would be made if those circumstances occurred. Paragraph (d) is engaged not merely by actual payment, but also by the making of an agreement to pay; and in my opinion, even though the circumstances in question may not arise, the making of that agreement engages par (d).
On the question whether any damages were shown to result from the respondent’s breach of the Code (and thus of the Trade Practices Act) through failure to serve a notice advising of the change affecting trailing commissions, the difficulty for the appellant is that the appellant had no entitlement to renew the agreement on existing terms, and prima facie could only either accept what the respondent was proposing or walk away. There is no evidence that the appellant would have been better off walking away. The Code does contain provisions for compulsory mediation, but there was no claim made and no evidence that the appellant would have pursued that course to its advantage.
On the question whether the appellant proved any damages, in the event that it were held that the respondent’s purported termination of the agreement was a repudiation entitling the appellant to terminate and claim damages, there was an expert’s report which, with the support of the underlying figures in Exhibit L, evidenced a value of the business as at 30 June 2004. However, what the appellant needed to prove was either the value of the business as at 22 April 2005, or the profits that would have been obtained from the business after 22 April 2005. The evidence supported the conclusion that, while the business appeared to have been profitable in the year ended 30 June 2004, it was no longer profitable at 22 April 2005. Accordingly, in my opinion, the evidence did not support any finding that the appellant had suffered substantial loss by reason of termination of the agreement on or about 22 April 2005. The evidence did not support any conclusion that profits had been lost thereafter, and there was no basis on which the valuation as at 30 June 2004 could have been applied to the position as at 22 April 2005.
BASTEN JA: Mortgage House of Australia Pty Ltd (the respondent) operates a mortgage broking business. It provides financial services to members of the public through arrangements with “business partners”, primarily, it appears, at locations on the east coast of Australia. Between 2001 and 2005 one such business partner was Alpha Centauri Enterprises Pty Ltd (the appellant), which acted on behalf of the respondent in a region which included Southport, in southern Queensland.
In April 2005 the then current agreement between the appellant and the respondent was terminated. In proceedings commenced in the Equity Division shortly thereafter, the appellant alleged that the respondent had repudiated the agreement and sought various declarations, orders for payment under the agreement, and damages. It also sought rectification. The respondent cross-claimed, seeking relief for loss and damage suffered by it as a result of alleged repudiation by the appellant.
Following a 10-day trial in April and May 2009, on 12 June 2009 Hammerschlag J dismissed both the claims and the cross-claims: Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333. The respondent has not sought to challenge the dismissal of its cross-claim; the appellant, however, has brought an appeal against the rejection of some of its claims.
Although it has no bearing on the substantive outcome of the appeal, it is convenient to note that there were parties additional to those identified above, both at trial and before this Court. The proceedings below were commenced by the appellant (as first plaintiff) and by Mr Robert Duncan (as second plaintiff). Mr Duncan asserted no personal interest in the proceedings, but was the person in control of the first plaintiff. His presence in the proceedings was necessary as a result of the cross-claim, by which the respondent sought from him an indemnity, Mr Duncan having been a guarantor of performance by the appellant of its obligations under the agreement.
Further, although it is convenient to refer only to the respondent, there were in fact four related companies each of which was a party to the agreement and a defendant in the Court below. Each was also joined as a respondent to the appeal. They were jointly represented at all stages and nothing turns on their separate status as contracting parties in the same interest as the respondent.
Finally, Ms Heather Duncan, the wife of Mr Robert Duncan, was joined as an appellant at the hearing of the appeal, on condition that she be subject to any order the Court may make as to costs: Appeal Tcpt, 18/05/10, pp 2-3. It appears that, in February 2010, the appellant was wound up, but that Ms Heather Duncan asserted an interest in her own name as the assignee of any rights of the appellant under the agreement. Although senior counsel for the respondent raised an issue as to the effectiveness of the assignment in the course of the hearing of a motion (prior to the hearing of the appeal) pursuant to which Ms Duncan sought to be joined, that issue was not addressed on the appeal. Because, for reasons set out below, the appeal must be dismissed, the effectiveness of the assignment need not be addressed.
Issues
The issues raised by the amended notice of appeal may be summarised as follows:
(1)whether the agreement of 19 February 2004 was a franchise agreement for the purposes of the Trade Practices Act 1974 (Cth) and the Franchising Code of Conduct made under that Act;
(2)the consequences, if the agreement were governed by the Code, of the failure of the respondent to serve -
(i) a disclosure document, and
(ii)a notice of proposal to terminate in accordance with cl 21 or cl 22 of the Code;
(3) whether the respondent repudiated the agreement;
(4) whether the appellant abandoned the business, and
(5)whether the primary judge erred in finding that the appellant had not, in any event, proved that it had suffered loss or damage.
Within the final ground (concerning damages) lurked a further issue concerning the admissibility of an expert report prepared for the appellant. The amended notice of appeal challenged his Honour’s rejection of the report. However, it transpired in the course of argument that the appellant’s reliance on the report was not directed to the opinions of the expert, but to the underlying material upon which those opinions were based. Both the report and the underlying material were initially admitted at trial as a single exhibit L, subject to the availability of the expert for cross-examination. When it became apparent that the expert would not be available, his report was rejected, but the underlying material was allowed to remain in evidence. Once that procedural history had been established, the appellant withdrew his challenge to the rejection of the evidence: Appeal Tcpt, p 22 (48). However, because the underlying material was not before this Court on the hearing of the appeal, the appellant was given leave to provide it later, with each party lodging brief supplementary submissions in relation to it.
At the hearing of the appeal, counsel for the appellant took a pragmatic approach, dealing first with the question of damages. That course involved a recognition that if the appellant failed to prove loss or damage, its other grounds would not avail it. On the other hand, establishing wrongful repudiation by the respondent could carry a right to damages for breach of contract, which might be nominal, but might have consequences in respect of costs. The difficulty in dealing with the question of damages first is that it requires an understanding of the nature and scope of the agreement, and hence of the allegations of breach. Accordingly, it is more convenient to address the substantive issues relating to the agreement before addressing loss or damage.
The contractual arrangement
Between August 2001 and April 2005 the respondent was described as providing financial products and financial services to the public through a network of branch offices. Primarily, so far as the evidence demonstrates, these were loans secured by way of mortgage over real property. The managing director of the respondent described its most popular loan product as a standard variable home loan, with flexible features. The business of a branch office, such as that run by the appellant, was to attract customers and complete applications to be forwarded to a prospective lender for its consideration.
The arrangement between the respondent and the appellant was set out in a written agreement known as a “Business Partner Agreement”. The parties entered into a number of such agreements, the first being dated 8 August 2001 and the last 19 February 2004. It is sufficient presently to refer to the terms and conditions of the last agreement, which was that in operation in April 2005. The initial period of the agreement was 12 months from the date of the agreement, but it continued by the automatic operation of a rolling one year option period, commencing at the end of the previous period. The agreement had thus been on foot for a little over 14 months when it was terminated and had a further 10 months to run. The appellant’s primary obligation was to procure prospective customers and to act “subject to the policies and procedures, directions and reasonable requests” of the respondent: cl 4.1(a) and 4.2(b). The appellant was entitled to a commission on any settled agreement with a customer and received an on-going trailing commission, payable monthly in arrears, during the period of the loan agreement with the customer. (It will be necessary to refer to the detail of the obligation to pay such commissions, in due course.)
The respondent operated an electronic mortgage management system (referred to as the “EMMS”), to which the branches had access by the means of a user name and password. One claim made by the appellant in relation to the alleged repudiation by the respondent was that the latter terminated the appellant’s access to the EMMS on 21 April 2005.
The agreement dealt with the rights of the parties as between each other: it did not provide instruction to the appellant as to how to conduct the business of mortgage broking. For that information, it was necessary to go to the Mortgage House Lending Manual & Product Manual, the latest version of which in the evidence appears to have been that issued in May 2002, which ran to 63 pages. As might be expected, it set out the basic requirements for security, insurance, maximum loan amount and loan/value ratio. It also contained details of the fees payable, which included an application fee of $600.
The appellant was required to comply with various obligations specified in cl 4 of the agreement, including reaching the “Key Performance Indicators”: cl 4.1(m). These identified the number of applications to be submitted per month for various periods, which increased over the length of the agreement. For the period exceeding 13 months, the relevant figure was 40, described as a “monthly average”: Schedule 1, item 4. As will be seen, the failure of the applicant to maintain compliance with the key performance indicators was a basis of purported termination by the respondent. Against this general background, it is convenient to consider the operation of the Franchising Code, and the allegations of repudiation on each side.
Franchising Code
Part IVB of the Trade Practices Act makes provision for the declaration by regulation of industry codes and provides that a corporation must not contravene an applicable industry code: s 51AD. Pursuant to that Part, the Trade Practices (Industry Codes – Franchising) Regulations 1998 prescribe, as a mandatory industry code, the “Franchising Code of Conduct”: reg 3 and Schedule. In order to determine whether the agreement between the respondent and the appellant constituted a franchise agreement for the purposes of the Code, it is necessary to have regard to the definition of that term in cl 4 of the Code which, so far as relevant, provided:
“4 Meaning of franchise agreement
(1) A franchise agreement is an agreement:
(a)that takes the form, in whole or part, of any of the following:
(i) a written agreement;
(ii) an oral agreement;
(iii) an implied agreement; and
(b)in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and
(c)under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol:
(i)owned, used or licensed by the franchisor or an associate of the franchisor; or
(ii)specified by the franchisor or an associate or the franchisor; and
(d)under which, before starting business or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example:
(i) an initial capital investment fee; or
(ii) a payment for goods or services; or
(iii)a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or
(iv)a training fee or training school fee;
but excluding:
(v)payment for goods and services at or below their usual wholesale price;
…
(viii)payment of market value for purchase … of … supplies needed to start business or to continue business under the franchise agreement.
(2)For subclause (1), each of the following is taken to be a franchise agreement:
(a)transfer, renewal or extension … of a franchise agreement;
….
(3)However, any of the following does not in itself constitute a franchise agreement:
(a) an employer and employee relationship;
(b) a partnership relationship;
….”It was not in dispute that paragraphs (a), (b) and (c) of the definition of “franchise agreement” were satisfied. The agreement between the parties was in writing, it provided for the appellant to carry on the business of supplying financial services, under a system controlled by the respondent and using the respondent’s commercial symbol or name. The dispute focused on the application of paragraph (d). The agreement did not in terms provide for the payment to the respondent of any fees, nor did it require the purchase (and therefore payment for) goods or services from the respondent. The appellant sought to bring itself within paragraph (d), however, in three ways. The first relied upon its obligation under cl 4.2(n) of the agreement to “use only stationery, forms, corporate brochures and business cards supplied by [the respondent] (which, after the complimentary initial pack, must be ordered by and will be supplied at the cost of [the appellant])”.
The appellant drew attention to two invoices which it had received for the cost of stationery dated July and September 2002 respectively and which, it contended, demonstrated that it had been charged the full retail cost. These payments were not, therefore, within the exclusion, permitting payment for goods at or below their “usual wholesale price” cl 4(1)(d)(v).
The primary judge rejected the appellant’s argument, at [439], for the following reasons:
“athe invoices do not reflect any payment to Mortgage House;
bpayment of the invoices could not have been made under the 2004 agreement which was entered into some two years later;
cno provision of the 2004 agreement which obliged Alpha Centauri to pay the amounts before or continuing the business was identified; and
dthere was no evidence as to the usual wholesale cost of the stationery concerned.”
With respect, I would not accept reasons b, c and d. That is in part because reliance upon the invoices was a distraction. The real issue was whether the agreement itself required that payments be made to the respondent. No doubt a literal reading of cl 4.2(n) of the agreement, requiring that stationery be “supplied by” the respondent, and be supplied “at the cost of” the appellant, is consistent with a payment being made by the appellant to the respondent; nevertheless, it is also consistent with a supply organised by the respondent from a third party, with the cost being met by the appellant making a payment directly to the third party, as evidenced by the invoices.
The fact that the exclusion in the definition is expressed in terms of wholesale price suggests that it is concerned with goods sold or services provided in the course of the business, at a price allowing a profit to the business. Incidental expenses of the kind presently being considered do not fall within the purpose of such an exception. On the other hand, the fact that the exception may be seen to be limited, is not a reason for reading down the scope of the primary inclusive provision.
More importantly, a payment for stationery, forms, brochures and business cards is a necessary, but relatively small, expense of running a business and is likely to take its colour from surrounding arrangements. In truth, the arrangements with respect to stationery may more readily be seen to fall within the exclusion in sub-par (viii) in respect of a payment at market value for supplies needed to start or continue the business under the franchise agreement. (Nothing turns on the reference to “franchise agreement” in the definition of that term, although a neutral expression would have been preferable.) The evidence did not establish that the stationery was not purchased at market value. In my view the payments for stationery were not of a kind, even if made to or at the direction of the respondent, which satisfied paragraph (d) of the definition.
The second form of payment relied upon by the appellant was that required when, on each of two occasions, it sought to reduce the scope of its territory. On each occasion it was required to pay to the respondent one-third of the sale price of the business transferred, pursuant to cl 19.3 of the agreement.
The primary judge rejected this argument on the basis that the payments were not made under the 2004 agreement, a conclusion which was, in each case, true. Again, however, evidence of actual payments was a distraction from the real question in relation to the operation of the Code, namely whether, under the agreement, such payments were required. Pursuant to cl 19.3, such a payment was to be made if the appellant sold the business. A distributive operation may be given to cl 19.3 so that, where only part of the business is sold, the payment is to be understood as a payment for the sale, or discontinuation, of that part of the business. It is not a payment required “before starting business or continuing” that part of the business which is sold. If the sale were at the instigation of the respondent, it might be seen as a condition of continuing to operate the remainder of the business, but that is not the case with cl 19.3. Accordingly, even when read distributively, cl 19.3 does not provide for a payment to be made to the franchisor as a condition of the franchisee continuing to operate the remainder of the business. For this reason, I would reject the appellant’s argument based on the operation of cl 19.3.
The third basis upon which the appellant argued that the agreement fell within paragraph (d) of the definition of a franchise agreement was the arrangement with respect to the $600 application fee paid in respect of a loan application. That fee was collected by the appellant and banked by it, subject to an obligation to account to the respondent for $375 for each loan that settled: see explanation given in evidence and accepted by the primary judge at [426]. However, the appellant was unsuccessful at trial in seeking to rely upon this payment, on the basis that the fee was in fact a payment to the franchisor for services rendered at or below their usual “wholesale” price. This conclusion depended upon evidence given by Mr Stevens on behalf of the respondent who, to an email dated 5 September 2002, attached a document entitled “Comparison of Branch Application Fees to Loan Costs as at 4 April 2002”. That document purported to demonstrate that the minimum “branch costs” were more than the $600 application fee.
Of the minimum amounts, $220 was assigned to “valuation” and $375 to “lender’s legal”. So far as the Court is aware, the evidence did not disclose who incurred costs of valuing property, but if Mr Stevens document were relied on, it was a “branch cost” and not a cost incurred by the respondent. (One assumption underlying this calculation was that the bulk of loans were financed not by the respondent, but by Macquarie Bank.) In the Lending Manual, section 19, an application fee in relation to the business of Mortgage House itself, is identified as “including valuation”. The amount on account of legal fees on the mortgage is identified as “$0 – payable by the lender”. Accordingly, at least in the latter respect, the basis of Mr Stevens’ calculation appears to be doubtful.
The respective arguments in relation to the application fees were complicated by the fact that although the agreement referred to the term “application fee” it did not define such a fee, nor give any indication as to who was to receive it, or on what account it was to be held. A specific duty imposed on the appellant by cl 4.1 was:
“(c)disclose to and draw to the prospective Customer’s attention the nature, and material terms and conditions, of the Application and Business Documents for the supply of any Services through and by the [respondent] to the Customers … including, but not limited to:
(iv)that all payments and charges (other than any Application fee) are to be paid by the Customer to the [the respondent], and not the [appellant].”
The respondent’s obligations included responsibility “for the ongoing management of Services, including but not limited to collecting all moneys payable by Customers for the Services (other than the Application Fee)”: cl 5.1(d). The respondent’s obligations did not include processing the application. As already noted, despite the capitalisation, “Application Fee” (although not always, see ‘fee’ in cl 4.1(c)(iv)) – was not a defined term. “Services” however was, and meant “any or all, as the case may be, of the mortgage, realty or financial services provided to or attempted to be provided to Customers procured by the [appellant] pursuant to this Agreement”: cl 1.1.
It may be inferred from these provisions that the application fee was to be recovered by the appellant, which was under no obligation to pay that fee to the respondent. The fee itself was not specified in the agreement, but in the manual.
Even if the respondent were expected to undertake the valuation, the cost being recoverable from the application fee, that amount clearly did not warrant recovery of $375 from the appellant. Even assuming that the credit reference fee (average $5.37) and the title search (average $6.20), and even the EFTPOS fee (assuming that “most application fees are paid by EFTPOS”) of $24 were payable by the respondent, those amounts, together with an average valuation fee of $260, amounted to less than $300 and certainly well short of the $375 payable by the appellant. (The obligation of either the appellant or the respondent to pay the lender’s legal fee is not consistent with the contract or the manual.)
The primary judge held that it was part of the arrangement between the appellant and the respondent that the appellant collect the application fee of $600 from a prospective customer, but pay $375 to the respondent: at [426]. That, according to the evidence which the primary judge accepted, was explained to Mr Duncan by Mr Lagana (for the respondent) in a conversation in July 2001. It formed the basis on which the appellant and the respondent did business throughout the relevant period. The amount of $375 was not shown to be a payment for goods or services provided by the respondent and, such evidence as there was before this Court, established on the probabilities that it was not such a payment. Rather, it was a fixed amount which might properly be described as a “franchise service fee”. Although identified as a fixed amount, it could also have been identified in percentage terms, being 62.5% of the application fee. In my view this arrangement satisfied paragraph (d)(iii) of the definition. It followed that the agreement was a “franchise agreement” within in the meaning of the Franchising Code.
Before leaving this issue, it should be noted that the appellant did not argue (and the respondent was therefore not required to address the proposition) that the commission sharing arrangement between the respondent and the appellant fell within the terms of paragraph (d). In practical terms, the respondent appears to have established a business as a financial service provider, creating “financial products”, no doubt in co-operation with lenders, but employing business “partners”, or agents, to locate and refer to it appropriate customers. As senior counsel for the respondent correctly contended, whether the arrangement constituted a franchise agreement will not necessarily be revealed by a careful analysis of specific payments, to determine whether they are covered by the sub-paragraphs (i)-(iv) of par (d) of the definition of “Franchise Agreement” or fall within one of the following exclusions. The amounts referred to are expressly identified as examples, indicating a genus, rather than a precise definition. Where the business as a whole obtains a particular flow of income which is divided on a percentage basis between two parties, that may properly be seen as indicative of a franchise, although the franchisee is not the recipient and does not pay a proportion of the income to the franchisor, because the bulk of the income flow, although coming from the customer, is routed through the lender to the franchisor, which in turn shares it with its partner or agent.
This last issue involves a large question as to the operation of par (d) of the definition, referring to a payment from the franchisee to the franchisor, which was not explored in the course of argument and cannot be resolved in the present proceedings. Similarly, there was a matter raised, though not fully explored, as to whether there was an onus of proof on the appellant or the respondent to establish that a particular payment could be attributable to services, and, if so, whether the amount was at or below their usual wholesale price (if they had such a price). This too should be left to another day.
Consequence of arrangement being a franchise agreement
The consequences which were said to flow from the fact that the arrangement between the appellant and the respondent was a franchise agreement were twofold, namely:
(a)a requirement that the appellant be given a disclosure document prior to entering into the 2004 agreement, and
(b)the requirement that the respondent provide notice of intention to terminate, before terminating the agreement.
As explained in Master Education Services Pty Ltd v Ketchell [2008] HCA 38; 236 CLR 101 at [25] (Gummow ACJ, Kirby, Hayne, Crennan and Kiefel JJ), in relation to Part IVB of the Trade Practices Act and the Code:
“The scheme is largely directed to the franchisor, who is obliged to provide that information and advice. Section 51AD may be seen to promote compliance with the Code, by providing, in effect, that non-compliance will amount to a contravention, for which there are remedies available under Pt VI. It is no part of the scheme, and unnecessary to the purposes mentioned, to strike down a contract made by a non-complying franchisor. It is sufficient for the purpose of the scheme that a franchisor is aware of the obligations imposed by the Code and that action may be taken by a franchisee under the Act with respect to a contravention of s 51AD.”
The disclosure document required to be provided under Pt II of the Code applies both in respect of a prospective franchisee and a franchisee proposing to renew a franchise or extend the scope or term of the franchise agreement: cl 6B(1). Relevant matters to be disclosed, in accordance with the disclosure document which constituted Annexure 1 to the Code included:
(a)recurring and isolated payments payable by the franchisee to the franchisor (cl 13.6);
(b)information as to the basis on which trailing commission would be paid with respect to particular mortgage loans.
Whether any particular clause in the disclosure document would have required provision of the information in (b) is not entirely clear and none was identified in submissions. (The provision of “earnings information” might have provided an opportunity for such disclosure – see cl 19.) However, as the appellant was aware from previous documents, the provision for ongoing trailing commissions was set out in Schedule 1 to the agreement, at Item 2B. The complaint was that there had been a change between the original agreement (of August 2001) which provided that a trailing commission would be payable on the “Home Loan Plus” product at 0.10% of the outstanding balance of the loan and on a “Lo Doc Loan” at 0.25% of the outstanding balance of the loan. In the second agreement (of August 2002) the commission payable for a “Home Loan Plus” was increased to 0.12% of the outstanding balance. However, in the agreement of 24 October 2003, which followed sale of part of the appellant’s territory, the reference to Lo Doc Loans was deleted. Thereafter, trailing commissions were payable, it was asserted by the respondent, at the same rate as for an ordinary loan of the same category. In other words, the trailing commission was the same for a home loan plus, whether in ‘lo doc’ form or otherwise. In practice, the result was that the appellant’s trailing commissions were reduced by approximately half on a significant proportion of its deals.
The changes were effected by simply deleting a line in Item 2B. Mr Duncan said in his evidence that he was given no notice of the change and, indeed, that he understood there had been no such change. However, the relevant issue for present purposes has two limbs, namely whether the disclosure document was required to identify in express terms that there had been a change and, if it were to do that, whether Mr Duncan (on behalf of the appellant) would have noticed and taken issue with the variation.
In relation to the second limb, it may well have been correct to say that he would have noticed and taken issue with the change. The evidence (accepted by the primary judge) was that there had been significant fluctuations in the trailing commissions paid from January 2003 through to October 2004 and that Mr Duncan had conducted an internal manual commissions audit which “revealed a multiplicity of anomalies including that trail commissions on loans that previously attracted a trail commission of 0.25% pa were now being paid at 0.12% pa, loans were missing upon which commissions should have been paid and there were cases of upfront commission either not being paid or incorrect amounts being paid”: at [161]. A series of emails from Mr Duncan sought clarification in that respect including, on 17 November 2004, an email to the respondent (which his Honour accepted was sent – at [176]) which sought to resolve the change in the agreements, which had by then had been identified.
The amount in issue was identified by his Honour as $14,697.27: at [239]. His Honour identified the claims in respect of that change as including relief by way of rectification of the 2003 and 2004 agreements, variation of the agreements under s 87 of the Trade Practices Act and claims for damages for misrepresentation and unconscionable conduct: at [233]-[238].
The primary judge rejected the application for rectification on the basis that the respondent had not intended that the additional line of trailing commissions on ‘lo doc’ loans should be included in the new agreement: at [327]. His Honour was not satisfied that the conversations which he described as “necessary for the claim of misleading and deceptive conduct based on representations to succeed” had occurred: at [328]. Because each of the agreements was accompanied by a letter inviting the appellant to “read them carefully and if appropriate take legal advice” his Honour was further not satisfied that the provision of the agreements was either misleading or amounted to unconscionable conduct: at [330]-[331].
On the assumption that the Code applied to each agreement (contrary to his Honour’s views in that regard) he noted that the appellant had failed to identify “either in the Summons or in submissions with any precision (or indeed at all) what requirement of the Code (presumably within Annexure 1 to the Code) was relevant to the present context or as to how any particular requirement had not been met”: at [332]. His Honour further noted that all that was put to him was that “there should have been disclosure of the change (or changes)”.
A similar difficulty arises with respect to the failure to identify in what way provision of the disclosure document would have improved the appellant’s position. The claim that failure to provide a disclosure document in conformity with Annexure 1 to the Code gave rise to loss or damage has not been made good and the claim must be rejected. Other aspects of his Honour’s findings, including as to the absence of unconscionable conduct, were not challenged on the appeal.
The other matter which should have been revealed in a disclosure document was the requirement, which appears to have found no place in the contractual documentation, but was accepted in practice, for payment to the respondent of $375 out of the application fee of $600 for each settled loan application.
A similar conclusion must follow in relation to the $375 payment. No doubt that payment should properly have been disclosed as a payment required to be made by the franchisee to the franchisor, in accordance with cl 13.6. However, as already noted, the appellant was fully aware that such a deduction was required by the respondent and had been made over the terms of the previous agreements. A specific disclosure of that requirement was not demonstrated to have caused any loss or damage to the appellant.
Termination of agreement
For some months prior to April 2005 there had been complaints by the appellant to the respondent in relation to the administration of their agreement. In particular, the appellant had been concerned that its expenditure on advertising had not resulted in expected benefits and believed that telephone contacts from its area to the central number used by the respondent were not being diverted to the appellant, as agreed. As already noted, there had also been complaint about anomalies in the payment system and in relation to the trailing commissions. However, no ground was pursued on appeal challenging his Honour’s findings in these respects.
On 16 April 2005 the National Sales Manager of the respondent wrote to Mr Duncan on behalf of the appellant stating:
“BREACH OF BUSINESS PARTNERS AGREEMENT
We refer to the above and note that the level of business being generated from your office is in breach of the Key Performance Indicators pursuant to the Business Partner Agreement (‘BPA’) dated 19 February 2004.
Consequently, we ask you to show just cause as to why we should not immediately terminate the BPA pursuant to clause 15.2(h) therein. We require your written response on or before 5pm 22 April 2005.”
On 19 April 2005 Mr Duncan responded, noting:
“It is not possible to show just cause unless we are notified of which Key Performance Indicators it is alleged we have breached, and the period when we are alleged to have breached them.
When we receive this information we will respond, but will need the six days, as allowed in your letter, to prepare our response. The six days will need to run from the date of receipt of your notification to us of what breach is alleged to have occurred.”
On the same day, solicitors for the appellant wrote to one of the respondent companies (Array Home Loans) complaining about the underpayment and non-payment of commissions. Unless the breach were rectified, it was stated that the appellant “will have no alternative but to close its branch”. A response by 12 noon on Friday, 22 April 2005 was sought. The letter concluded:
“In the absence of your agreement and receipt of the commissions owed we will be forced to accept that you have by your actions repudiated the Business Partnership Agreement. Our client reserves the right to rescind the agreement and sue for damages.”
On 22 April 2005 the appellant’s solicitors wrote to the solicitors for the respondent referring to the letter of 19 April 2005, noting that there had been no response, accepting the respondent’s actions as a repudiation of the agreement and rescinding the agreement.
On 28 April 2005 the respondent’s solicitors wrote rejecting the allegation of repudiation and asserting that the appellant had itself, by its purported wrongful attempt to terminate the agreement in fact repudiated it. The respondent elected to affirm the agreement and reserve its rights.
On the same day, the respondent itself, through its national sales manager, provided details of the failure to reach the key performance indicators. After setting out the monthly averages required over the period of the last agreement (see [21] above) the letter continued:
“You have consistently failed to reach this KPI since March 2004 to date. We attach a copy of a table detailing the number of applications submitted by you for this period. Pursuant to clause 15.2(h), the Agreement confers on us a right of immediate termination, in our sole discretion, if at any time you have failed to reach the KPIs.
Pursuant to clause 15.2(h) of the Agreement, in exercise of our sole discretion, we hereby give you notice that we are terminating the agreement effective immediately.
We note the consequences of our termination as set out in clause 15.4 of the Agreement, and in particular, the effect of clause 15.4(c), which provides that on termination of the agreement ‘all Commission accrued but not yet paid to [you] prior to termination of the agreement will be forfeited.”
The table attached to the letter indicated that the number of new applications submitted from October 2004 until April 2005 averaged less than one per month, whereas the KPI for that period required an average of 30, increasing to 40, applications per month. Even if the increases in existing loans were taken into account, the table indicated that in no month during that period were more than five deals (applications and increases) received.
The primary judge held that the appellant had failed to make good its claim in the letter of 22 April that the respondent had failed to pay commissions as they fell due: at [410]. His Honour noted that the appellant also sought to rely upon other breaches of the agreement (which his Honour held had not been made out) and the failure to give notice under cl 21 of the Code: at [413]-[414]. His Honour concluded that no notice had been given in accordance with cl 21, but that the agreement was not covered by the Code: at [443] and [440] respectively. He further found that the appellant had voluntarily abandoned the agreement from the date of its purported rescission on 22 April 2005: [444]-[446].
In its amended notice of appeal, the appellant repeated its contention that the termination without service of a notice under cl 21 of the Franchising Code constituted a repudiation of the agreement (ground 7) and challenged his Honour’s finding that the appellant had abandoned the business (ground 8). The respondent submitted that, even if the Code applied, the appeal should be dismissed because the appellant had abandoned the business. It further submitted that the primary judge had correctly concluded that the appellant had failed to prove any loss as a result of termination of the agreement. It is convenient to deal first with the question of abandonment.
(a) abandonment of business
His Honour having held that the abandonment occurred with the letter of 22 April, the appellant sought to rely upon events which predated the letter. In written submissions, reference was made to the appellant’s complaints about the reduction in trailing commissions on ‘low doc’ loans, the failure to redirect telephone calls to the branch and a matter identified with respect to training fees. The written submissions (prepared by Mr Duncan himself) did not say that these issues were relied upon to demonstrate repudiation, nor was it clear how that result was to be supported. Rather, under the heading “Repudiation”, reliance was expressly placed upon representations made by Mr Sheales, the National Sales Manager of the respondent, on 16 December 2004 and the disconnection of the Virtual Private Network (“the VPN”) which the appellant claimed was its sole means of access to the EMMS, which was critical to the operation of its business. That disconnection was said to have occurred on or around 21 April 2005.
The representations made on 14 and 16 December 2004 were not addressed in the course of oral argument, and may be dealt with briefly.
The facsimile of 16 December 2004 confirmed a discussion held at the appellant’s office on 14 December. It noted that Mr Duncan for the appellant had at that meeting raised his concerns about the current contractual arrangements, including with respect to “the variation in trail commission, the supposed under payment of commissions over an extended term and your [Mr Duncan’s] reluctance to enter our lead purchasing program”. Mr Sheales also noted that the appellant was actively seeking to sell the business. Mr Sheales raised concerns about the volume of business being generated, but indicated a willingness to allow the appellant to seek a buyer for the business “until the end of January”. Mr Sheales continued:
“Also during this time we intend to review the contract, its performance clauses and then assess what options we have and the process required for recouping the areas. I suggest as your process moves forward you stay in regular contact with me, reporting on all and any possible new business partners and what steps you are taking in promoting the sale.”
Those representations could not amount to a repudiation of the contract. They reflected, rather, mutual concern as to the appellant’s failure to generate business (primarily on the part of the respondent) and the appellant’s concerns about the administration of the contract. To the extent that they foreshadowed a termination of the arrangement, the primary expectation was that the appellant would sell its business, which it wished to do.
The second matter, which was addressed in oral argument, concerned the disconnection of the virtual private network. At the heart of the appellant’s complaint was the finding by his Honour at [447] in the following terms:
“Alpha Centauri’s access to the EMMS system was deactivated on 29 April 2005, according to Mr Davies, an information technology training and development manager who did some work for Mortgage House, but who was called by Alpha Centauri and whose evidence I accept.”
The appellant contended that the finding was misconceived. While Mr Davies had given evidence that he had deactivated the appellant’s access to EMMS on 29 April, that was not the subject-matter of the appellant’s complaint. Rather, the appellant contended that it only had access to the EMMS through the VPN, access to which had been denied on 21 April. Support for that contention derived in part from the oral evidence of Mr Davies. He stated (Tcpt, 28/04/09, p 128):
“Q. Now, the EMMS system operated out of the head office at Parramatta?
A. Yes.Q. Centrally, is that right?
A. Yes; that’s correct.Q. Branches could connect into that office?
A. Yes, they could.Q. How did they connect to that office?
A. Back early on in the piece [sic], I believe they used a virtual private network, a VPN, and that established a connection and then later on, they used an internet, so, a typical web address.Q. Was it the situation that between 2003, when you were involved, and April 2005, it was the VPN connection that was used?
A. To the best of my knowledge, I think so, yes.Q. And the internet connection came later?
A. That’s right, yeah.”Mr Neil Sayer, who was described as a “systems analyst/administrator” for the respondent, gave evidence which supported Mr Duncan’s claim that the VPN had been disconnected in April 2005: Tcpt, 14/05/09, p 654-655. However, according to Mr Sayer, the VPN was not necessary to obtain access to EMMS, as that was available through the public website of the respondent: Affidavit, 16 March 2007, par 30. In short, the respondent’s case was not a denial that it had disconnected the virtual private network, but that, from 14 February 2005 all branches were able to access the EMMS without using the VPN.
Mr Duncan, in his affidavit of 19 December 2008, stated at par 127:
“On the 21 April 2005 MHA without notice, cut off my access to the EMMS ‘VPN’ internet business system. Without access to EMMS I could not operate my business and I was unable to access any business records which resided in the EMMS system.”
In cross-examination, Mr Duncan was asked (Tcpt, 29/04/09, p 232):
“Q. Would you please go to paragraph 127 of your affidavit. It is not true, is it, that on 21 April 2005 Mortgage House cut off access to the EMMS system?
A. On 21 April 2005 I could not get on to the EMMS system from my office.Q. Accessible via the internet?
A. However it was accessed I could not get it done.Q. Did you try to get on via the internet?
A. In the way that this was prescribed.Q. If that were really true that would be a serious matter, wouldn’t it, that is that Mortgage House had without notice cut off access to the EMMS system?
A. Yes.Q. It’d be something you had a right to complain about?
A. Yes.Q. Did you in fact complain about it?
A. No.
Q. The next day when your solicitors wrote a letter purporting to [rescind?] the contract, he didn’t say one more word?
A. Who?Q. Mr Kennedy, to the Mortgage House or his legal representatives when he wrote the terms in [to terminate?] the contract?
A. I don’t believe he did.Q. As at that date you hadn’t been cut off from the EMMS system?
A. No.Q. In fact you retained access to the EMMS system if you had wanted it even after 22 April, didn’t you?
A. No, I didn’t.”The primary judge did not expressly deal with Mr Duncan’s allegation that he could not obtain access to EMMS after 21 April 2005. That is curious, because, under the heading “Repudiation and termination” in the fifth further amended summons, the appellant had pleaded at paragraph 54:
“Further, or in the alternative, on the 21 Apr 2005 the defendants cut off the first plaintiffs [sic] access to the EMMS internet business system, without access to which the first plaintiff could not operate the business and which conduct amounted to a repudiation of the 2004 agreement.”
It seems likely that his Honour considered the evidence of Mr Sayer sufficient to satisfy him that the appellant had access through the website, without using the virtual private network. Precisely how that access was to be achieved was not revealed in the evidence (or at least the evidence to which this Court was taken), but it must have required the use of a password if it were to be achieved from a public website. Mr Duncan did not say that he did not have such a password, nor did Mr Sayer give evidence about the need for a password. However, Mr Sayer was not cross-examined to suggest that access was not available through the public website.
In written submissions at trial, the respondent denied the allegation that access to the EMMS had been cut off prior to 29 April 2005, as claimed by Mr Duncan: submissions, par 44. The Court was not taken to submissions by the appellant at trial.
In the circumstances, the appellant has not made good its claim that it was unable to access the EMMS after 21 April 2005. There is simply a paucity of evidence as to how access was obtained through the website, whether Mr Duncan in fact sought access through the website, whether he had a relevant password and whether, if he had been used to obtaining access through the VPN, his failure to obtain access on 21 April and thereafter was explained otherwise than by reference to repudiatory conduct on the part of the respondent.
(b) application of Code
As noted above, the Franchising Code makes provision for the procedure to be adopted in the case of termination where there has been a breach by the franchisee. Clause 21 is in the following terms:
“Termination – breach by franchisee
21 (1) The clause applies if:
(a)the franchisee breaches a franchise agreement; and
(b)the franchisor proposes to terminate the franchise agreement;
(c) clause 23 does not apply.
(2) The franchisor must:
(a)give the franchisee reasonable notice that the franchisor proposes to terminate the franchise agreement because of the breach; and
(b)tell the franchisee what the franchisor requires to be done to remedy the breach; and
(c)allow the franchisee a reasonable time to remedy the breach.
(3)For paragraph 2(c), the franchisor does not have to allow more than 30 days.
(4)If the breach is remedied in accordance with paragraphs (2)(b) and (c), the franchisor cannot terminate the franchise agreement because of that breach.
(5)Part 4 (resolving disputes) applies in relation to a dispute arising from termination under this clause.”
Clause 23 provides that the franchisor does not have to comply with cl 21 if, amongst other events, the franchisee “voluntarily abandons the franchised business or the franchise relationship”: cl 23(c).
From the way the argument proceeded in this Court, it appeared that the appellant put its case on abandonment on one of two alternative bases. The first was that it had validly terminated the contract prior to leaving the premises on 29 April 2005. In the alternative, it if had not validly terminated, nevertheless the wrongful conduct of the respondent had forced it to abandon the business so that its abandonment could not be described as “voluntary”. In either case, the same conduct of the respondent was relied upon, namely disconnection from the EMMS system on 21 April 2005 and the failure to pay commissions. For the reasons already given, the appellant has not made good its complaints in relation to the conduct of the respondent in these two respects.
The case was run on the basis that the appellant had to demonstrate that the conduct of the respondent was, in an objective sense, wrongful, being in breach of its contractual obligations. It was not contended that an abandonment might not be “voluntary” if Mr Duncan, for the appellant, held an honest and reasonable belief that the appellant’s business had become unviable because of the wrongful conduct of the respondent.
With respect to such a belief, it appears to have been Mr Duncan’s evidence that he was accustomed to have access to the EMMS via the virtual private network. It was not in dispute that the VPN was cut off around 21 April 2005, apparently without notice to the branches, including that operated by the appellant. In the absence of cross-examination of Mr Duncan to demonstrate that he should have known that he had alternative access through the website, since February 2005, there may have been a basis for arguing that the conduct of the respondent was sufficient to give rise to an honest and reasonable (if mistaken) belief on the part of the appellant that it had been deprived of access to the EMMS. Whether abandonment in such circumstances could properly be described as voluntary would raise an issue which has simply not been addressed at any stage of the proceedings. Accordingly, and subject to one qualification, the conclusion of the primary judge at [444]-[449] that the appellant voluntarily abandoned the business, has not be shown to be erroneous. It follows that there was no breach of the Franchising Code in failing to give notice pursuant to cl 21.
The qualification referred to above arises from the artificiality of the way in which the case was presented. The respondent’s letter of 16 April invited the appellant to show cause why the agreement should not be terminated immediately for failure to comply with the key performance indicators. Assuming the Code were applicable, that demand was ineffective as notice leading to a valid termination. However, as a purported notice it may well have constituted wrongful conduct on the part of the respondent sufficient to render the later abandonment of the business other than voluntary. Although the appellant complained immediately that it was unable to respond without having particulars of the alleged breaches, it had a copy of the agreement, it had been referred to the relevant clause therein and would have readily appreciated that its business fell below the required standard.
This response to the allegation of voluntary abandonment appears not to have been pursued at trial or on the appeal, no doubt in part because there does not appear to have been any pleading of voluntary abandonment by way of response to the complaint in the appellant’s fifth amended summons of failure to comply with the Franchising Code, cl 21: see pars 75-76. No finding can therefore be made as to this approach. Nevertheless, on the assumption that the appellant may have had an entitlement to a termination notice under cl 21 of the Franchising Code, it is appropriate to consider the arguments with respect to loss and damage.
(c) damages for wrongful termination
For reasons given above, it may be accepted that the respondent’s termination of the contract was repudiatory, because there had been a failure to comply with cl 21 of the Franchising Code. Assuming the appellant had not voluntarily abandoned the agreement, the question is whether any damages or other relief are available to the appellant to Pt VI of the Trade Practices Act.
Despite rejecting the appellant’s claims, the primary judge dealt with the question of damages at [451]-[486]. For that purpose, he evaluated the evidence of Mr Gwynne, a licensed real estate agent and business broker who had provided a valuation on behalf of the appellant.
The value proposed by Mr Gwynne was a figure a little over $300,000. However, that included an amount of $50,000 for plant, equipment, fixtures and fittings, which had been supplied by the appellant. That matter aside, approximately half of the valuation was achieved by identifying the trailing commission income for the 2004 financial year, to which a multiplier of 2.5 was applied.
The primary judge made a number of criticisms of the calculations undertaken by Mr Gwynne, concluding that the evidence did not establish that the appellant would have made a profit, rather than a loss, during the financial year to 30 June 2004: at [471]. Accordingly, he concluded that the profitability of the appellant as at the date of termination had not been established: at [472].
His Honour then considered the likely life of the agreement, had it not been terminated. According to the terms of the agreement, which involved automatic annual renewal, his Honour noted that the respondent could have terminated it without cause from 19 February 2006: at [473]. At best, therefore, the business had 11 months to run. His Honour further noted that “at worst, its rights could have been terminated forthwith (as they were) because of failure to meet the Key performance Indicators”: at [473].
In this analysis, his Honour was considering the question of damages at large. On the premises set out above, it is only necessary to consider what loss was shown to have flowed from a failure to comply with cl 21 of the Franchising Code. The notice required under cl 21 need not have exceeded 30 days. Given that there was, on the evidence, no realistic possibility that the “breach” could have been remedied within that period, it followed that the right of the respondent to terminate could not have been avoided. It is also clear from the evidence that the respondent would have exercised that right, as its letter of 16 April 2005 indicated.
The appellant did not present a case suggesting that it would have suffered a loss during a 30 day period of notice, granted pursuant to cl 21 of the Franchising Code. In the absence of such evidence, it failed to prove that it had suffered damage. Accordingly, the appeal must be dismissed.
Orders
Although there have been aspects of the reasoning of the primary judge which were open to doubt, the appellant has ultimately been unsuccessful. The appropriate orders are that the appeal be dismissed and that the appellant pay the costs of the companies which constitute the respondent in this Court. Given the basis upon which she was joined as an appellant, Ms Heather Duncan must also suffer an order for costs against her. Although he appears to have had no legal interest in the proceedings in this Court, Mr Robert Duncan remained an appellant and should also bear responsibility for the costs of the appeal.
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LAST UPDATED:
9 August 2010
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