Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd - [2009] NSWSC 333

No judgment structure available for this case.

CITATION: Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333

HEARING DATE(S): 27, 28, 29, 30 April 2009; 11, 12, 13, 14, 15 & 18 May 2009

JUDGMENT DATE :
12 June 2009

JUDGMENT OF: Hammerschlag J

DECISION: Summons and Cross Claim dismissed. Plaintiffs to pay the defendants’ costs of the proceedings, except for the costs of the cross claim. Cross claimants to pay the cross defendants’ costs of the cross claim.

CATCHWORDS: CONTRACTS – rectification – whether agreements between the plaintiffs and defendants should be rectified to include a higher commission rate and an entitlement to ‘telephone diversion leads’ – held that there was no intention on the part of the defendants to include such terms in the contracts - general contractual principles - discharge, breach and defences to action for breach – whether the defendants breached express and implied terms of agreements between them and the plaintiffs – whether the defendants’ termination of the agreements was valid and effective – defendants cross-claimed that the first plaintiff had breached express terms of the agreement between the parties – held that the first plaintiff had breached a term of the agreement but that the defendants had not established that any loss flowed from that breach - construction and interpretation– held that the defendants’ construction of terms of the agreements between them and the plaintiffs was to be preferred as it accorded with the words used, and gave the terms a ‘reasonable and sensible’ meaning - TRADE AND COMMERCE - Trade Practices Act 1974 (Cth) and related legislation – whether the defendants had engaged in deceptive or misleading conduct or conduct likely to mislead or deceive in breach of s 52, in relation to the contents of agreements between the plaintiffs and the defendants and whether the first plaintiffs had established that it had suffered any damage as a result of any such conduct - whether the defendants had engaged in unconscionable conduct in breach of s 51AC, through engaging in misleading and deceptive conduct and failing to comply with disclosure requirements under the Franchising Code of Conduct - enforcement and remedies – whether the first plaintiff had proved any damage flowing from any misleading or deceptive, or unconscionable conduct on the part of the defendants - DAMAGES - assessment where the parties fail to provide raw material to which reference can be made to assess loss - STATUTES - by-laws and regulations – construction – whether the agreements entered into by the defendants and the plaintiffs were ‘franchise agreements’ under cl 4(1) of the Franchising Code of Conduct – whether the first plaintiff had voluntarily abandoned a franchise business or relationship under cl 23(c) of the Franchising Code of Conduct.

LEGISLATION CITED: Trade Practices Act 1974 (Cth)
Corporations Act 2001 (Cth)

CATEGORY: Principal judgment

CASES CITED: Muriti v Prendergast [2005] NSWSC 281 at [105]
Briginshaw v Briginshaw (1938) 60 CLR 336
Helton v Allen (1940) 63 CLR 691
Rejfek v McElroy (1965) 112 CLR 517
Watson v Foxman (1995) 49 NSWLR 315
Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
Kabwand Pty Ltd v National Australia Bank Ltd (1989) ATPR 40-950
Marks v GIO Australia Holdings Limited (1998) 196 CLR 494
Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286
Placer (Granny Smith) Pty Limited v Thiess Contractors Pty Limited (2003) 77 ALJR 768
Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332
The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64
Malec v JC Hutton Pty Ltd (1990) 169 CLR 638
Troulis v Vamvoukakis (Unreported) NSW CA 27/2/1998
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558
Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310
Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359
Apple Computer Australia Pty Ltd v Mekritzis & Ors (2003) 44 ACSR 518
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
Wenham v Ella (1972) 127 CLR 454
Smith v Smith [1991] FLC 78,753

TEXTS CITED: Meagher, Gummow and Lehane’s Equity Doctrines & Remedies, 4th ed (2002), Butterworths LexisNexis

PARTIES: Alpha Centauri Enterprises Pty Ltd ACN 052 158 255 (First Plaintiff)
Robert Alan Duncan (Second Plaintiff)
Mortgage House of Australia Pty Ltd ACN 081 508 054 (First Defendant)
Direct Mortgage Solutions Pty Ltd ACN 089 173 482 (Second Defendant)
Mortgage House Broker Services Pty Ltd (formerly Array Home Loans Pty Ltd) ACN 096 357 596 (Third Defendant)
Mortgage House Realty Pty Ltd ACN 088 962 725 (Fourth Defendant)

FILE NUMBER(S): SC 50041/2005

COUNSEL: P.H. Greenwood SC (Plaintiffs)
T.G.R. Parker SC with A.R. Zahra (Defendants)

SOLICITORS: Mooney & Kennedy (Plaintiffs)
Gokani & Associates Legal (Defendants)

- 1 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

HAMMERSCHLAG J

12 JUNE 2009

50041/05 ALPHA CENTAURI ENTERPRISES PTY LTD ACN 052 158 255 V MORTGAGE HOUSE OF AUSTRALIA PTY LTD ACN 081 508 054

JUDGMENT

INTRODUCTION

1 HIS HONOUR: The defendants are members of a group of companies known as Mortgage House. They carry on business as mortgage managers and originators through a branch network on the eastern seaboard of Australia.

2 For a little over four years the first plaintiff (“Alpha Centauri”), pursuant to four successive written Business Partner Agreements with the defendants, operated a Mortgage House branch on the Gold Coast of Queensland.

3 By Fifth Further Amended Summons (“the Summons”), Alpha Centauri claims rectification of two of those agreements, damages for their breach, and damages which it says it suffered by conduct on the part of the defendants which it alleges was misleading or deceptive or likely to mislead or deceive in contravention of s 52, or unconscionable in contravention of s 51AC, of the Trade Practices Act 1974 (Cth) (“the Act”), together with ancillary relief.

4 The second plaintiff, Mr Robert Duncan, who controls the first plaintiff, claims no relief in his own right.

5 The first defendant Mortgage House of Australia Pty Ltd, cross claims against Alpha Centauri for damages for breach of the agreements and it sues Mr Duncan as guarantor for Alpha Centauri’s obligations.

APPROACH TO THE FACTS AND CONSIDERATION

6 Because the complaints and counter complaints made in this suit span close to four years and range across a number of different albeit related subjects, a single chronological narrative would not facilitate an easy understanding of the issues.

7 Accordingly, the approach I have adopted is to begin with a brief history of the agreements and the setting against which the parties entered into them, then to set out the facts pertinent to the various disputes and to end with a narrative of the events leading up to the termination of the parties’ contractual relationship.

8 I will deal with each of Alpha Centauri’s claims generally in the order in which relief with respect to each is claimed in the Summons. Certain claims were not pressed. Findings in relation to some of the claims will be pertinent to resolution of others. I will deal last with Mortgage House’s cross claim.

FACTUAL BACKGROUND

The Players

9 Alpha Centauri was established in 1990 and initially engaged in importing and wholesaling fine jewellery.

10 In 1996, Mr Duncan established a company called Alpha Centauri Wines Pty Ltd (“Alpha Centauri Wines”). He was its Chief Executive Officer from 1996 onwards.

11 For some months until June 2001, through Alpha Centauri Wines, Mr Duncan worked for Wizard Home Loans (a non-bank mortgage lender) as a mobile lending manager.

12 Each of the defendants is a subsidiary of Global Mortgage Equity Corporation Pty Ltd (“Global”) of which Mr Kenneth (Ken) James Sayer is the sole director and majority shareholder. Mr Ken Sayer’s son, Mr Neil Sayer, also works for the group as a system analyst and administrator. Unless otherwise indicated, references to Mr Sayer are to Mr Ken Sayer.

13 The first defendant was at all material times a mortgage originator and mortgage manager, lending money at the retail level through branches it owned itself and branches privately owned by others with whom it had Business Partner Agreements. All branches used the Mortgage House name. It had arrangements with lenders (mostly banks) which enabled “badged” facilities to be offered to borrowers.

14 The second defendant (“DMS”) was at all material times a mortgage originator and mortgage manager lending money through referrals from third parties such as brokers and introducers. The brokers “on sold” the “products” under the name Direct Mortgage Solutions to customers.

15 The third defendant (“Array”) was previously known as Array Home Loans Pty Ltd. At all material times it was a mortgage broker seeking funding for brokers and Mortgage House branches for customers where the first defendant would not accept a loan application.

16 The fourth defendant (“MHR”) was at all material times a real estate agent.

17 Paladin Wholesale Funding Pty Ltd formerly Pr1me Pty Ltd (“Prime”) is a subsidiary of Global. At all material times it carried on business as a mortgage originator and provider of associated services. Prime entered into Origination Agreements with parties (originators) who undertook to assist Prime in originating mortgage loans. One of those originators was Mortgage Street Financial Services Pty Ltd.

18 The first defendant in its own right and the group of companies are both commonly referred to as Mortgage House.

19 For the most part it is not necessary to distinguish between the various defendant entities. I will use the expression Mortgage House to refer to the defendants collectively, unless it is necessary to distinguish between them. “MHA” is reference to the first defendant.

20 Forevision Pty Ltd (“Forevision”) is a subsidiary of Global which at all material times provided management and workflow process services.

21 At all material times the Head Office of Mortgage House was at 9-11 Argyle Street, Parramatta (“Parramatta”).

The 2001 agreement

22 In the middle of 2001 Mr Duncan, on the suggestion of a long time friend, Joan Bishop, called Mr Sayer with a view to becoming a Mortgage House branch on the Queensland Gold Coast, where Mortgage House at that time did not have a presence.

23 Mr Sayer referred Mr Duncan to Mortgage House’s Business Development Manager, Mr Phil Lagana. On Mr Lagana’s suggestion, Mr Duncan sent his CV to Mr Lagana. Mr Duncan also sent to Mr Lagana a business plan dated June 2001.

24 On 12 June 2001 Mr Duncan and his wife Mrs Heather Duncan, flew to Sydney and met with Messrs Sayer and Lagana.

25 At this meeting Mr Lagana told Mr Duncan of Mortgage House’s Electronic Mortgage Management System (“EMMS”). Mr Duncan says a conversation to the following effect took place:

ROBERT DUNCAN: Phil, as you well know the breakdown in processing of deals with Wizard was a core reason many Loan writers left that organization. They couldn’t get straightforward deals over the line in time! So how can I be sure it won’t happen like that here?

PHIL LAGANA: Mortgage House has an in-house IT system called EMMS which tracks everything within the time lines needed to settle the deal. Only MHA Branches have access to this brilliant system so there’s no need to worry. Your deals will settle and you will have an advantage over your competitors, who don’t have EMMS! You will need broadband and we will give you access on a virtual private network ‘vpn’ which will be very secure for us all.

ROBERT DUNCAN: Okay, so how does the 133 144 diversion actually work? I see clearly that is the key leads-generation mechanism, particularly in response to TV or other advertising campaigns. This is primarily what this business is based on, right?

26 Mr Duncan says that in about July 2001 he had a conversation with Mr Lagana to the following effect:

PHIL LAGANA: Robert, the way we operate is you collect an application fee of $600 from the client and bank it into your company bank account this will help with your immediate cash flow.

ROBERT DUNCAN: I understand that. Tell me more?

PHIL LAGANA: MHA will deduct $375 of the application fee from every loan that settles. It will show up on your invoice from us as a processing fee.

ROBERT DUNCAN: Okay, the $375 that you take from the application is some sort of a fee payable to MHA?

PHIL LAGANA: Yes.

27 Mr Lagana wrote to Mr Duncan on 23 July 2001 saying that Mortgage House proposed to provide Alpha Centauri with rental assistance and to contribute to advertising if it was satisfied with the proposed advertising.

28 On 1 August 2001 Alpha Centauri and Mortgage House entered into an interim joint venture agreement under which Alpha Centauri was appointed an agent of Mortgage House.

29 On 8 August 2001 Alpha Centauri (described as “the Business Partner”) and the defendants (described as “the Companies”) entered into a written Business Partner Agreement. Mr Duncan was a party to the agreement as a guarantor. I shall refer to this agreement as the “2001 agreement”.

30 Mr Duncan had the 2001 agreement checked by a solicitor friend, Mr Rod Hyland.

31 Under the 2001 agreement Mortgage House engaged Alpha Centauri for an initial period of 12 months (to be extended automatically by one or more Option Periods of a year unless either party chose not to extend) to act as the representative in procuring prospective customers. Mortgage House granted to Alpha Centauri the exclusive right to operate “a premises” in “the Territory”, which was defined to mean:

“The geographical area covered by postcodes 4209, 4210, 4211, 4212, 4213, 4214, 4215, 4216, 4217, 4218, 4219, 4220, 4221, 4223, 4224, 4225, 4226, 4227, 4228, 4229, 4230 (inclusive) or such other areas as agreed in writing by the Companies and the Business Partner.”

32 These postcodes pertain to areas on the Gold Coast of Queensland. They include the areas known as Tweed Heads and Burleigh Heads.

33 Clause 3.2 of the 2001 agreement was as follows:

“Exclusivity

(a) Subject to clause 3.2(c), the Companies grant to the Business Partner the exclusive right to operate a Premises in the Territory for the purposes of this Agreement.

(b) The Business Partner agrees that it will not and that it will procure that any Related entity will not operate more than one Premises in the Territory without first obtaining the written consent of the Companies.

(c) The Business Partner acknowledges that the Companies retain the rights to appoint a third party to operate a business in the Territory relating to the services offered by MHR.”

34 Clause 5.1(e) of the 2001 agreement was as follows:

“The Companies will, subject to availability from a telecommunications service provider of their choice, arrange for customer telephone calls that originate from the Territory to be diverted to the Business Partner’s Premises.”

35 Clause 5.1(f) of the 2001 agreement was as follows:

“The Companies will only receive Applications in relation to the Territory from the Business Partner and will not accept applications directly from an employee, mobile lender or an introducer of the Business Partner if and when knowledge of that relationship is made known by notice in writing from the Business Partner to the Companies.”

36 Clause 8.1(a) of the 2001 agreement was as follows:

“Subject to clause 8.4, the Business Partner will be paid a Commission as set out in Item 2A of Schedule 1.”

37 Clause 8.2(a) of the 2001 agreement was as follows:

“The Business Partner will be paid an Ongoing Trailer as set out in Item 2B of Schedule 1.”

38 Item 2A of Schedule 1 included the following:

Commission

Mortgage Loans

Mortgage Housing (sic) of Australia Pty Limited

Equity Gold	0.60% of 70% of the approved loan amount or 0.60% of the value of the settled loan, which ever is the greater
Elite Variable, Home Loan Plus and Easy Credit	0.60% of the value of the settled loan
Carpe Diem	no Commission
Fixed Rate Loans	0.60% of the value of the settled loan
Construction Loan	0.60% of the value of the settled loan
Low Doc Loan	0.60% of the value of the settled loan
Direct Mortgage Solutions Pty Limited
All loans	0.60% for the first $1 million in accumulated loans
0.80% on that amount of accumulated loans exceeding $1 million”

39 Item 2B of Schedule 1 was in the following terms:

“Ongoing Trailer

Mortgage Loans

Mortgage Housing (sic) of Australia Pty Limited

Equity Gold and Elite Variable	0.25% of the outstanding balance of the loan
Home Loan Plus and Easy Credit	0.10% of the outstanding balance of the loan
Carpe Diem	0.25% of the outstanding balance of the loan, paid after 6 months
Fixed Rate Loans	no trailer
Construction Loan	0.25% after fully drawn
Low Doc Loan	0.25% of the outstanding balance of the loan (emphasis added)
Direct Mortgage Solutions Pty Limited
All loans	0.25% for the first $1 million in accumulated loans
0.25% on that amount of accumulated loans exceeding $1 million”

40 Item 4 of Schedule 1 was in the following terms:

“Key Performance Indicators

The following benchmarks are the minimum performance standards required of the Business Partner by the Companies:

Conversion Rate per month

Enquiry to lead – 60%

Lead to Appointment – 60%

Appointment to loan – 50%

Application to approval – 80%

Approval to settlement – 80%

Complaints

No more than 2 Customer complaints per month.

Applications submitted per month

0-6 months - 10

7-12 months - 13

13-18 months - 18

over 18 months – 22”

41 The reference in Items 2A and 2B of Schedule 1 to “Low Doc Loan” is a reference to a low documentation (or low doc) loan. This type of facility is typically aimed at self employed applicants or small company borrowers where financial statements may not be available, or may not support the ability to service the proposed debt although the borrower is comfortable that he or she has adequate cash flow to service it. It entails provision of less information by the borrower and therefore less documentation.

42 “Home Loan Plus” refers to a mortgage facility described by Mr Sayer as Mortgage House’s “signature dish” or “flagship”. It was funded through a wholesale division of Macquarie Bank. It attracted a favourable “headline rate” – that is, the interest paid by the borrower. It had what he described as superior features such as telephone banking and associated electronic cards.

43 There was a low doc version of Home Loan Plus which attracted a higher rate of interest than the ordinary version.

44 With Mr Lagana’s assistance, Mr Duncan selected 89 Scarborough Street, Southport, Queensland to be the premises for Alpha Centauri’s new branch (“the Branch”). Alpha Centauri took a four year lease of the premises with a four year option.

45 From 6 August to 10 August 2001, Mr and Mrs Duncan attended a week long induction training course at Parramatta.

46 One of the subjects discussed at the course was EMMS and how to use it.

47 The Branch opened in about November 2001.

48 Mortgage House and Alpha Centauri each agreed to share 50% of the cost of an advertising campaign over a six month period.

49 Mr Greg Stevens commenced employment with Mortgage House in October 2001. Until April 2007 he was Relationship Manager, Branches.

50 Mr Stevens was promoted to the position of National Distribution Manager on 15 April 2002.

51 On 2 May 2002 Mr Stevens sent to Mortgage House branch operators (variously referred to as branches or principals) a Mortgage House lending manual which had been developed to assist in the proper assessment of a client’s eligibility to borrow and to provide insight into the approval and settlement process. It contained a section about the “Low Doc Documentation Loan”.

52 Mr Warren Stanley commenced employment with Mortgage House in June 2002 at Parramatta as General Manager for Array.

The 2002 agreement

53 On 4 July 2002 Mr Stevens sent a facsimile to Mr Duncan (amongst other principals) offering a new Business Partner Agreement. The letter was in the following terms:

“Dear Branch Principals

On behalf of Ken Sayer, I am pleased to offer Branch Principals the invitation to enter into a new Business Partner Agreement with Mortgage House of Australia Pty Ltd and its associated companies listed in the agreement.

One of the key changes to the Business Partner Agreement is the option for Business Partners to sell their business under the new section 19.3. We see the benefit of adding the selling option to the agreement that it will provide Branch Principals with even more incentive to grow the business and providing a future value on the business you build.

Please read the new Business Partner Agreement carefully and obtain independent legal advice if required.

Please find attached a copy of the new Business Partner Agreement.”

54 A proposed draft Business Partner Agreement in facsimile form (“the July 2002 draft”) was attached.

55 In addition to a new s 19.3, the July 2002 draft contained an amendment to the provision concerning diversion of customer telephone calls. It excluded from its ambit mobile telephone calls. This change was instigated by Mr Stevens because Mortgage House could not “deliver” on diversion of mobile phones seeing that it was not possible to monitor the place from where a mobile call emanated and therefore not possible to divert them on the basis that they emanated from a particular postcode area.

56 There were also changes to the Key Performance Indicators making them more onerous.

57 On 23 July 2002 Mr Stevens sent execution copies of the proposed new agreement to Mr Duncan.

58 On 1 August 2002 Alpha Centauri and the defendants signed a new Business Partner Agreement (“the 2002 agreement”).

59 The Schedules to the 2002 agreement with respect to commission rates did not relevantly change.

60 On 16 October 2002 Mr Stevens sent an email to Mortgage House branches concerning “New & Modified Commission Rates on Mortgage House Loan Products”. There was an issue between the parties as to the form in which Mr Duncan received this email. As is notorious, the format of an email received is not necessarily the format in which it was sent. Mr Duncan says that he received it in the following form:

“Good Afternoon Principals

On behalf of Ken Sayer, I am pleased to inform business partners of the new and modified commission rates set out below on Mortgage House of Australia loan products. All other commission terms & conditions contained in your executed business partner agreement apply.

Existing

61 The form in which Mr Stevens says it was sent was as follows:

“Good Afternoon Principals

On behalf of Ken Sayer, I am pleased to inform business partners of the new and modified commission rates set out below on Mortgage house of Australia loan products. All other commission terms & conditions contained in your executed business partner agreements apply.

Products	New	Existing
1. Loan Increases – Upfront Commission Terms & Conditions · Funder: Macquarie loans only. · Only on settled increases & on products where an upfront commission is paid. · Effective for loan increase applications dated 1 November 2002	0.60%	Zero
2. Monthly Business lodged – Upfront Commission Volume Incentives: 1. Monthly balances $ 10 million or above [on entire months balance] 2. Monthly balances $15 million or above [on entire months balance] Terms & Conditions · Until this type of payment can be automated, branches must invoice head office for these types of commission payment. · Only on settled loans and on products where an upfront commission is paid. Line of Credits are based on amount drawn down, not credit limit. · Effective for loans settled in the month of November 2002.	0.65% 0.70%	0.60% 0.70%
3. Carpe Diem – Trail Commission · On all outstanding loans effective 1 November 2002	0.12%	0.25%
4. Construction Loans & Lo Doc Loans – Trail Commission * Based on the trails paid on the applicable loan product such as Home Loan Plus. · On all outstanding loans effective 1 November 2002.”	*	0.25%

62 From Monday 3 February 2003 to Thursday 7 February 2003 at Parramatta, Mortgage House conducted what was described as a Sales Training Course. Mr Duncan was invited.

63 On 25 February 2003 Mr Sayer emailed Mortgage House branches stating that effective immediately, Branch Principals were required to submit all their advertising and marketing material and requests direct to Greg Stevens and Christina Sultana for written sign-off as accepted.

64 Interstar was one of the funders from which Mortgage House obtained loan funds for borrowers. On 29 February 2003 Mr Sayer informed Mortgage House branches in an email of improved commissions on Interstar funded loans. He wrote that “Effective from 1/2/2003 and forward Trailers on ‘Easy Credit’ Standard loans will be 0.25% Trailers on ‘Easy Credit’ Low doc loans will be 0.50%”.

65 Another one week sales course commenced on 5 May 2003.

The 2003 agreement

66 In July 2003 Mr Duncan proposed a business plan to Mortgage House involving the splitting of Alpha Centauri’s Territory into quadrants and selling some of them off.

67 On 12 August 2003 Mr Duncan put a revised proposal for the sale of part of Alpha Centauri’s Territory.

68 Mr Duncan says he had a conversation (presumably in August 2003) with Mr Stevens to the following effect:

GREG STEVENS: You can’t divide your territory the way you proposed. You would need to sell each territory as a separate entity and the purchaser of each territory would enter into a Business Partner Agreement with MHA which would be the same as yours, except you would loose (sic) some postcodes and they would gain those postcodes.

ROBERT DUNCAN: Okay Greg, I’ll resubmit the proposal.

69 On 18 August 2003 Mr Stevens informed Mr Duncan in an email that his proposal was unacceptable, making it clear that Mortgage House wanted one clean changeover subject to approval and quality of proposed purchasers.

70 On 24 August 2003 Mr Stevens sent an email to Mr Duncan stating the following:

“Are you still interest (sic) in proceeding, if so I recommend the following:

We agree to setting up a branch on the South as presented in your proposal, providing you agree to a reasonable sale price say $100,000 which excludes the purchasers branch set-up costs i.e. Mortgage House of Australia receive 33% of sale price eg $33,000 if $100,000.

We then enter into a New Business Partner Agreement with Robert Duncan less territory sold-off and we enter into a business partner agreement with the purchaser of the south Area. Also the funds will be required at time of business partner agreements being executed.

We will review the other purchasers when they are ready to commit and exchange funds. This way you can do one new territory at a time.

Once you have sold-off all territories we will consider 50/50 TV advertising for all Gold Coast branches, on the proviso all Gold Coast branches agree to participate in the proposed TV advertising.

Please advise.”

71 Mr Duncan says that he had a conversation (presumably in August or September 2003 – he did not date the conversation) with Mr Stevens to the following effect:

MR DUNCAN: Greg, I have an interested party wanting to purchase the Tweed South territory. He wants to know if the Business Partner Agreement will be exactly the same as the one I have.

I don’t want to give him a copy of my executed agreement. I would like to give him a photocopy of the unexecuted sample agreement you faxed to me on 4th July 2002.

The one that is exactly the same as mine but does not have names and post codes on it. Is that okay?

GREG STEVENS: Yes, Robert that’s okay, you can give him that sample document. The Tweed Business Partner Agreement will be exactly the same as your current one. It will have his post codes added in and those post codes will drop off your Business Partner Agreement. There will be no other changes.

ROBERT DUNCAN: Thanks Greg, let’s move on!

72 Mr Stevens accepted that Mr Duncan may have told him that he did not wish to show the purchasers of the business his agreement but he denied that he told Mr Duncan he could show the July 2002 sample or that the Tweed Heads agreement would be the same.

73 During September 2003 Alpha Centauri entered into an agreement to sell that part of its business covering the Tweed Heads South area for $150,000 comprising goodwill of $100,000 and equipment of $50,000.

74 On 29 September 2003 Mr Stevens sent an email to Mr Duncan in the following terms:

“Now you have an agreement, before we can proceed any further, we need the following executed & completed.

75 On 20 October 2003 Mr Stevens sent to Mr Duncan copies of Business Partner Agreements to be entered into in respect of the now to be created two branches, being Southport and Tweed Heads South. Amongst others the letter stated, “Each business partner is recommended to read their Business Partner Agreement carefully and obtain independent legal advice if required”.

76 Mr Duncan says that there was no discussion at any time about changes in the Business Partner Agreement other than the postcodes. His affidavit evidence was: “I was satisfied with the assurance that I had been given in a conversations (sic) with Greg Stevens, shortly before I signed the 2003 agreement, the substance of which follows:

ROBERT DUNCAN: Good morning Greg, I received the new Business Partner Agreements in the mail. As per our previous communications can you assure me that the only changes in this Agreement with my Branch, relates to the elimination of post codes that were given to Peter Carse at South Tweed?

GREG STEVENS: Yes. The only change is to remove the post codes that you sold to Peter Carse.

77 Mr Duncan did not date this conversation with any precision. Mr Stevens denies that he said the words Mr Duncan attributes to him and denies that a conversation to this effect took place. He says that prior to sending Mr Duncan an unexecuted copy of the proposed 2003 agreement, he had numerous telephone conversations with Mr Duncan (on dates which he can no longer specifically recall) during which he said to Mr Duncan words to the following effect:

“Mortgage House has changed the way it distributes leads. These changes will be reflected in your new Business Partner Agreement.”

78 On 24 October 2003 Alpha Centauri and the defendants entered into a new Business Partner Agreement in respect of the territory covered by postcodes 4209 – 4220 inclusive and 4226 – 4230 inclusive (“the 2003 agreement”).

79 Alpha Centauri paid Mortgage House 33% of the sale price (excluding equipment) which it received on the sale of the Tweed Heads South area as contemplated in the email from Mr Stevens to Mr Duncan of 23 August 2003.

80 Mortgage House entered into a Business Partner Agreement with Carse Investments Pty Ltd covering the Tweed Heads South postcodes.

81 In addition to the change of postcodes, the 2003 agreement differed from the 2002 agreement in a number of respects, two of which are central to the present contest.

82 Firstly, what had been cl 5.1(e) in the 2002 agreement, which obliged the defendants to arrange for customer telephone calls (excluding mobile telephone calls) which originated from the Territory (as defined) to be diverted to Alpha Centauri’s premises, was deleted.

83 Secondly, Item 2B of Schedule 1, providing for the rates of ongoing trailer commission, was varied by deleting the line:

“Low Doc Loan 0.25% of the outstanding balance of the loan”.

The 2004 agreement

84 On 28 October 2003 Mr Duncan emailed Mr Sayer to say that he had a candidate to open a branch in Burleigh Heads.

85 On 28 November 2003 Alpha Centauri entered into a sale of business contract with C.G. Wright Consulting Pty Ltd, under which it sold its business with respect to the Burleigh Heads Territory, covered by postcodes 4211, 4213, 4219, 4220, 4226, 4227 and 4228, for $160,000 comprised of $100,000 for goodwill and $60,000 for furniture.

86 As with the 2003 agreement, Mortgage House agreed to the spin off of the Burleigh Heads Territory on condition that Alpha Centauri paid it one third of the goodwill paid by the purchaser. Alpha Centauri paid this amount.

87 On 22 December 2003 Mr Stevens sent Mr Duncan, under cover of a letter, Business Partner Agreements for Southport and Burleigh Heads. The letter contained the statement, “Each business partner is recommended to read their Business Partner Agreement carefully and obtain independent legal advice if required”.

88 Mr Duncan says that he had a conversation (again not dated with any precision but presumably between 22 December 2003 and 19 February 2004) with Mr Stevens to the following effect:

ROBERT DUNCAN: Greg, I received the new contracts and I will take Glenn’s to him today. I can see you have taken the agreed postcodes from my territory and inserted them into Glenn’s agreement to form his territory. I can see the remaining postcodes in my territory are correct.

GREG STEVENS: Okay Robert, get the executed document back to me as soon as you can together with Glenn’s cheque.

89 Mr Stevens did not deny this conversation.

90 On 19 February 2004 Alpha Centauri and the defendants entered into a new Business Partner Agreement in respect of the territory covered by postcodes 4209, 4210, 4212, 4214, 4215, 4216, 4217, 4218 and 4229 inclusive (“the 2004 agreement”).

91 Save for the change in territory, the 2004 agreement did not differ in any material respect from the 2003 agreement.

92 Mortgage House entered into a Business Partner Agreement with G.C. Wright Consulting Pty Ltd in respect of the Burleigh Heads postcodes.

The telephone diversion problem

93 Under the terms of the 2001 agreement Alpha Centauri was entitled to have all telephone calls to the 133 144 number which emanated within the Territory (as then defined) diverted to its landline number.

94 There is evidence that on or about 17 October 2001 Mortgage House arranged for Telstra to divert calls to the 133 144 number originating in Alpha Centauri’s territory to its branch number 07-5591-644.

95 An agreed TV, radio and print media campaign commenced in February 2002.

96 Mr Duncan expected that all calls which originated in Alpha Centauri’s Territory would be diverted to the Branch number.

97 Mr Duncan’s evidence was that this diversion was critical to business success. He says this was one of the primary reasons for joining Mortgage House because it enabled the Branch to tap into the Head Office lead-generation system, and more particularly because Alpha Centauri was a significant distance from Mortgage House Sydney metropolitan and regional advertising. In addition, Mortgage House was a completely new brand name in Queensland and Alpha Centauri was actually paying for advertising when other branches were not doing so.

98 In the first week of advertising the Branch did not receive a single telephone call.

99 Mr Duncan spoke to Mr Lagana. A conversation to the following effect took place:

ROBERT DUNCAN: Phil, the advertising program has been in operation for a week now but we have not had a single phone call. Are you sure the phone numbers have been correctly diverted?

PHIL LAGANA: Yes I am sure that the phones have been correctly diverted. It is impossible that you have not had a call after 1 week. I think it would be wise to contact Mark Duclos directly and ask him to review the situation.

100 Mr Duncan then had a conversation with Mr Duclos to the following effect:

ROBERT DUNCAN: Mark our TV advertising has been on the air now for 1 week but we have not had a single phone call. Do you know if our phones have been correctly diverted?

MARK DUCLOS: Robert, that is nearly impossible to have the adverts running and not have a call. I don’t know if the phones have been diverted or not. Let’s have a look at the programming of the TV slots. Maybe if we rearrange the prime time slots and in their place put in more daytime slots it may help?

ROBERT DUNCAN: Okay Mark, let’s try that. It can’t be any worse!

101 On 7 March 2002 Mr Duncan wrote to Mr Lagana reiterating his complaint about the ineffectiveness of the television advertisements and saying amongst others that on checking with Telstra, some of the postcodes were missing, for example Surfers Paradise, so that calls would not have been diverted from 133 144.

102 Mr Lagana left Mortgage House shortly thereafter and Mr Stevens responded to Mr Duncan’s letter saying amongst others, that they had sought clarification from Telstra who had reconfirmed that the system was set up correctly and that Mr Duncan should take it up with Telstra.

103 From about August 2002, Mr Duncan suspected that Alpha Centauri was not receiving calls made to the 133 144 number as the 2001 agreement required. He raised the difficulty with Mr Stevens in September 2002.

104 He says (although he does not say precisely when) that he asked staff and their families and some of his friends to call 133 144 to test whether the diversion was working and the result was that calls made within the Territory were being answered by the Mortgage House Sydney call centre.

105 He says he sent a further email to Mr Stevens (although he did not precisely identify it) and then calls started being received via the 133 144 number.

106 In an email dated 30 September 2002 Mrs Duncan referred to having become aware that direct diversion to the Branch had been stopped.

107 In December 2002 Mortgage House was proposing a TV advertising campaign. Alpha Centauri was paying for the advertising in its area and Mr Duncan sought permission to have the advertisement personalised to the Branch phone number. This was declined.

108 Between May and July 2003 a decision was taken within Mortgage House to change the then system of telephone diversion to branches.

109 Instead, all calls went to a newly appointed telephone call centre operated by Link Communications which would inform the branches of any lead via EMMS. Mr Stevens said that he had no involvement with Link Communications. His evidence was that he gave his opinion that the agreement of the branches was necessary for the change but that Mr Sayer was the owner and leader of the company, he made the decision and Mr Stevens carried it out. He says that variation was instructed by Mr Sayer and it was not his position to question it once made public.

110 The television advertising campaign ended on the weekend of 8 February 2003. Mr Duncan asked for assistance with the costs of the advertisements. His request was declined.

111 In May 2003 Mr Stevens, apparently on the instructions of Mr Sayer, commenced to consider a new leads referral system to be in place by 1 July 2003 under which, instead of telephone leads being diverted to branches, they would be provided by Mortgage House via an external call centre operated by Link Communications, using Mortgage House’s software known as EMMS.

112 Mr Stevens recognised that this would not be in accordance with the terms of the Business Partner Agreements with the branches. He sought advice about a variation agreement from Mortgage House’s in-house lawyer Noel Dona. Mr Dona advised that the variation required the agreement of the branches.

113 No variation agreement was proffered to any branch. Nevertheless, Mr Sayer instructed that the leads referral change was to occur. In an email to the branches dated 3 July 2003 he said:

“ive (sic) been tied up with the Mac equity deal for the last couple of weeks

we have changed a couple of things

I will discuss with you personally in the very near future

sorry, time just got away”.

114 Mr Stevens’ evidence was that he implemented this change because he was required by Mr Sayer to do it, even though he was aware it did not accord with the branch Business Partner Agreements.

115 He says he first found out about the decision via the email dated 3 July 2003.

116 He says that once the decision had been made he discussed with Mr Sayer that the Business Partner Agreements would have to change and that they were then changed.

117 He says that Mr Duncan complained to him about the decision and he responded by telling him that Mr Sayer had so required it. He says that he received numerous complaints from Mr Duncan about this system.

118 Sometime during the period between May and August 2003 Mortgage House retained PowerTel Ltd (“Powertel”) (in place of Telstra) to be its telecommunications carrier.

119 The documentary evidence established that despite the implementation of the call centre, that at different times telephone calls were in fact diverted to the Southport branch. Mr Stevens’ oral evidence was that he understood there to be an arrangement between Mr Duncan and Mr Sayer that was limited to diversion taking place only during advertising campaigns.

120 Internal Mortgage House documents in July 2003 show that during such campaigns, calls from the far north coast of New South Wales would be included in the calls to be diverted to the Southport branch with the Queensland calls being diverted anyway.

121 At around this time Mr Derek Angel, according to Mr Stevens, took over operational responsibility for telephone diversion.

122 On 1 August 2003 Mr Duncan emailed Mr Stevens saying that not many calls had been received from the current batch of television advertisements and asking him to check with Telstra. Mr Stevens passed the enquiry onto Lisa Helleur who worked in the marketing department of Mortgage House.

123 On 5 August 2003 Mr Duncan in an email to Mr Stevens questioned whether the diversion was working properly and asked him to check it. Mr Stevens referred this enquiry to Ms Helleur.

124 On 6 August 2003 Mr Duncan emailed Mr Sayer in the following terms:

“On Greg’s advice I tried your mobile, however you were most likely busy.

I have been disappointed in the response to our last 2 TV campaigns as the response was extremely low.

My lending manager in Tweed rang me to say that when he phoned the 133 number from his home land line it diverted to Sydney rather than to my office and subsequently his mobile when he is on call. I also noticed that an unusual number of leads coming via email with land lines within my territory. This also has never happened before.

Upon further investigation I found that all leads that were usually coming to my office were not being redirected to Head Office.

Ken, this is unworkable for me. As you know, I pay for all television ads ( in fact all ads ) up here and I guarantee our clients that they will speak to a Mortgage Consultant 24/7.

I have found that the people taking these calls do not know the area up here (it is very large as you discovered) and I am sure I am loosing (sic) leads.

Also the time frames blow out, as you know one is in the office at say 8.00pm to take the email or on Sundays etc. So the client is being disadvantaged.

The system under which I was operating worked very well but now I feel that I am paying the bill and not getting the expected results. Can you help?”

125 On 7 August 2003 Mr Stevens emailed Mr Duncan as follows: “Spoke with Ken, he agrees with you and will arrange to fix”.

126 On 11 August 2003 Lisa Helleur sent an email to Cyril Edwards who worked in the Mortgage House IT department asking him to take off the NSW postcodes off the Southport branch.

127 On 14 August 2003 Mr Angel sent an email to Mr Stevens asking for the postcodes for the Branch so he could organise for “the leads to go direct”.

128 On the same day, Mr Stevens emailed Mr Angel those postcodes.

129 On 19 August 2003 Mr Angel sent an email to Powertel requesting that all leads be directed to the 133 144 number except for the Gold Coast postcodes relating to the Branch. Powertel responded on 20 August 2003 confirming that calls from the branches’ postcodes would be routed to the branch answering point, at that time 07 55916444.

130 On 21 August 2003 Mr Duncan sent an email complaint to Mr Stevens and Mr Sayer asserting that during the last two advertising campaigns which went to air on the Gold Coast, the telephone numbers appearing on advertisements had been directed to the Sydney office without his knowledge. He recorded that he had received an apology for the mistake but it remained that he paid for advertising of which he did not receive the benefit.

131 On 21 August 2003 Mr Stevens responded saying amongst others:

“Your reference to Mortgage House obtaining the benefit of your last 2 advertising campaigns and the branch missing out and invoicing us for the costing of advertising is reactionary. The owner of the business changed the distribution of leads on 1 July 2003, therefore you need to substantiate your claim, for presentation to Ken Sayer.”

132 On 15 October 2003 Mr Duncan sent an email to Mr Stevens in the following terms:

“I am still getting clients phoning 133 144 from land lines in my territory who are going directly to Sydney. I suspect that the phones again may be turned over or out of order. This is causing me a great deal of concern. Can I ask you to look into it as a matter or urgency?”

133 On 15 October 2003 Mr Stevens emailed Mr Angel and Mr Duncan in the following terms:

“Can you please review as Ken allowed Southport to get all leads direct as they are paying for their TV ads.

When their (sic) not advertising on TV, then leads go via Head Office. Up-to branch to advise us whey they are advertising on TV.”

134 On 27 October 2003 Mr Duncan emailed Mr Stevens in the following terms:

“The 133144 phone calls in our area are still going to Sydney.

I have spent over $10,000 in the last 3 months on continual advertising on TV. As per our agreement can you please have a word to those people who control the phones and ask them to please ensure that we are getting our leads direct.”

135 Mr Stevens referred the matter to Mr Angel. On 28 October 2003 Mr Duncan emailed Mr Sayer in the following terms:

“I have an update for you.

South Tweed is ready to open.

I have a gentleman who has 25 years finance experience in mortgage lending coming in to proceed to the next stage to open a territory in Burleigh (No 2 on the map I supplied you), this will be on Thursday morn.

In the mean time I am still having enormous problem (sic) to have the phones in my territory ring at our office when the client calls the 133144 number.

Peter Carse from South Tweed is also experiencing this problem.

We have been advertising steadily on TV up here over the last 3 months and I am sure that there is still leakage. Could I ask you to look into this for me?”

136 On 28 October 2003 Mr Sayer responded, “Will action immediately”.

137 On 29 October 2003 Mr Duncan sent an email to Mr Angel in the following terms:

“When Ken was up in June he game (sic) permission to receive all my 133144 leads direct to our office telephone numbers. There seems to be some problem with the diverting of these calls as clearly many are going to Sydney. Can you tell me of the problems that may be restricting us up here?”

138 On 29 October 2003 Mr Angel responded in the following terms:

“Need the answering point for the leads to come through and also what hours this telephone will be manned.”

139 On 29 October 2003 Mr Angel wrote to Mr Duncan in the following terms:

“This is currently being looked at and will be fixed within the next week.”

140 On 30 October 2003 Mr Duncan wrote to Mr Angel in the following terms:

“The phones are still not switched to us.

We have a brand new campaign starting on Sunday, can you guarantee that they will be switched over by then?”

141 On 30 October 2003 Mr Angel again wrote to Mr Duncan in the following terms:

“As previously mentioned, to change the infrastructure of the telephone system takes around a week to do. We rely on external parties so are unable to speed the process up.

We have someone working on this currently and will try and push through as fast as we can.”

142 On 5 November 2003 Mr Duncan wrote to Mr Angel in the following terms:

“The phones are still not transferred to our office number, it has been longer that (sic) a week as we requested this via Ken some weeks ago, can you advise me?”

143 On 5 November 2003 Mr Angel wrote to Mr Duncan in the following terms:

“Don’t disagree with you, we are applying as much pressure as we can. Unfortunately whilst I agree with the computer age we cannot get this moved any faster.

We are also addressing the company handling our leads so thanks for the feedback.

Once I have a definite time frame I will let you know immediately.”

144 On 5 November 2003 Mr Duncan wrote to Mr Angel in the following terms:

“All due respects Derek, IT is so advanced in 2003 I can’t believe that it takes 1 week to change over some phone numbers, nevertheless today is Wed and by my calcs 7 days is a week which means since last Thurs today is 7 days.

Please understand it is my money paying for these leads, if it was yours you would also be a little upset.

My lending manager Geoffrey Slater has just received a phone text message with a lead…. from Melbourne??

He was never meant to get text messages direct in any case ! but from Melbourne ???

Raises questions in my mind re the company handling the leads.”

145 On 5 November 2003 Mr Stevens wrote to Mr Duncan in the following terms:

“Please advise them as we have advised you that Derek is arranging the leads to be transferred to the branch and that we are in the hands of third parties as Derek has advised.

Advise them to be patient as it will be fixed very soon. Surely they are not overly lead dependant and they can do some business development while their (sic) waiting for some leads!”

146 On 11 November 2003 Mr Duncan wrote to Mr Angel in the following terms:

“Can I have an update on the progress of switching my 133 144 leads to my office phone?”

147 On 11 November 2003 Mr Angel wrote to Mr Duncan in the following terms:

“Can you try calling 133 144 and let me know the result. Needs to be from a line that the telco system will recognise as being a Gold Coast number.”

148 On 11 November 2003 Mr Duncan wrote to Mr Angel in the following terms:

“So far, numbers in the 07 5504 are of the Gold Coast are changed over thank you, however the numbers in the area 07 5513 down in the South Tweed territory are not ringing at his office.”

149 On 8 June 2004 Mortgage House again changed the system of leads distribution on a trial basis. Instead of the branches receiving leads and following up potential clients, a telephone team in the Box Hill office of Mortgage House would do the follow up work. The team would forward to the branches appointments for clients made on their behalf. The system applied to mobile phone calls as well.

150 To implement this new system, on 7 or 8 June 2004, Mortgage House gave a written instruction to Powertel that all postcodes were to be routed to the Box Hill numbers and when the numbers were engaged or not answered in 10 seconds they were to be directed to Mortgage House’s number in Parramatta.

151 On 10 June 2004 Mr Duncan complained that the new leads distribution mechanism was unworkable.

152 On 29 July 2004 Mr Duncan left for an overseas business trip leaving Mr Geoffrey Slater in charge of the Branch.

153 While Mr Duncan was away, on 10 September 2004 yet another different leads distribution mechanism was implemented. This involved the “purchasing” of leads. A branch would be required to “order” a specified number of leads for a month. An “outbound” telephone call centre (as opposed to the inbound one that took the telephone enquiries under the earlier system) would canvas for those leads and would invoice the branch for them.

154 Mr Duncan returned from overseas in early October and emailed Mr Sayer saying that he had learnt that many things had transpired while he was away and enquiring what the significant changes were that had been implemented in Queensland.

155 On 12 October 2004 Mr Duncan emailed Mr Sayer about a proposed meeting with him and a proposal Mr Duncan wished to put for Queensland involving him becoming the Mortgage House manager for Queensland.

156 On 18 October 2004 Mr Angel, on Mr Sayer’s instructions, informed Mr Duncan that they did not have plans in the immediate future to expand in Queensland.

157 As will be referred to below, Mr Duncan and Mr Sayer met on 3 December 2004. This meeting is referred to further below.

158 It does not appear that the question of telephone leads was discussed at the meeting or raised by Mr Duncan after 4 October 2003 as a complaint.

The Commission problem

159 After Mr Duncan returned from overseas in early October 2004, he noticed, he says, that the trail commission payment was approximately half of the expected amount.

160 The evidence showed significant fluctuations in trail commission from January 2003 through October 2004. The amount paid for August 2004 was about $11,000 and the amount for September 2004 was about $8,000. $6,465 was paid for October 2004 and then $2,490 for November 2004.

161 Mr Duncan says that an internal manual commissions audit 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.

162 On 19 October 2004 Mr Duncan emailed Mr Angel to ask who was responsible for preparing and balancing commissions, particularly trail commissions. Mr Angel gave him an email address to which to direct his enquiry.

163 On 20 October 2004 Mr Duncan sent an email to that address, saying as follows:

164 By 21 October 2004 he had not received a response and asked Mr Angel for help.

165 On 21 October 2004 he emailed Mr Angel as follows:

“I understand that the standard HLP is .12% trail in order to reduce the rate, but Lo Doc I understood to be .25% as there is a 1% loading. Could you please check this for me?”

166 On 3 November 2004 he received an email from Mr Angel (copied to Mr Sayer) as follows:

“Not sure where the misunderstanding may have arisen however, regardless of whether the HLP is lo doc or full doc the commission structure is the same. That is, trailer is the same.”

167 At around this time, that is October 2004, Mr Duncan engaged a business agent to find a buyer to sell the Branch.

168 On 12 November 2004 Alpha Centauri entered into a sale of business agreement with a buyer called Service Corp Pty Ltd.

169 On 12 November 2004 Mr Duncan emailed Mr Sayer and Mr Angel as follows:

“I tried to reach you on your mobile (3.30pm GC time). I need to inform you that I have, 5 minutes ago signed a contract to sell my branch, Southport.

There are a number of issues to take care of to effect the change over. The contracted change over date is 8th December 2004.

I would like you to have the name of the Business Brokers, Hallmark Business Sales, at Burleigh Heads, Office telephone number 07 55937344, in order to discuss the buyers bona fides. The principal of Hallmark Business Sales is Peter Gwynne.

My investigations show an accomplished business owner who has current mortgage loan writers as part of this organization.

Could you give me a call at your convenience in order to discuss the mechanics of this operation?

Also I have discovered a number of discrepancies in our monthly commissions that need to be addressed prior to settlement.

I would appreciate your urgent attention.”

170 On about 17 November 2004 Mr Duncan says he sent a letter to Mr Sayer at 9 – 15 Argyle St, Sydney 2000 (rather than Argyle St Parramatta – there is an Argyle St in Sydney itself) in the following terms:

“Further to our telephone conversation of Friday 13th November in relation to the sale of my business and the anomalies with the commissions invoices.

Whilst I appreciate your direction that your accounts department, are aware of some anomalies that have crept into the system, I will of course conduct my own internal audit of the commissions account and report back to you within 2 weeks.

I am concerned at one aspect of the commission statements however, and would like to draw your attention to it, with the view to rectifying the mistake.

I have noticed that there are a number of Lo (sic) Doc Home Loan Plus that are being paid a trail of .25% whilst a number of them are only being paid .12%.

I have checked with all my “Business Partner Agreements” since the very first one through to the current one.

The first one is signed and dated, see page 1 & pages 24-26, 8th August 2001. I would like to draw your attention to page 28 of the agreement. You will see under the heading of ITEM 2B – Ongoing Trailer, the last line refers to Low Doc Loan as being .25% of the outstanding balance of the loan. It does not mention, with the exception of Home Loan Plus. I also draw your attention to page 30, which states the Post codes that my agreement allows me to operate in.

At this point there is no provision in this business partner agreement that allows for the “Business Partner” to sell the business.

The 2nd “Business Partner Agreement” is signed and dated, again page 1 & pages 25-27, 1st August 2002.

This is a longer “Business Partner Agreement” as it has been superseded and now has a page added. On this page is a clause that was added to allow us to sell the business.

Again I draw you (sic) attention to pages 29 & 31. Pages 29 still refers to Lo (sic) Doc Loan as .25% trail and page 31 still refers to the same post codes as the original “Business Partner Agreement”. Apart from the insertion of the “Sale of Business by the Business Partner” clause, nothing else has changed.

On 24th October 2003 I received a new “Business Partner Agreement”. This new agreement was a result of my dissection of my authorized territory into quadrants to be sold off as autonomous branches of Mortgage House of Australia. The only thing that was to have changed in this agreement was the post code list on page 31. This was a verbal guarantee by Greg Stevens.

I draw your attention again to pages 1 & 25-27 and page 29. Also page 21. All these pages remain the same. Page 31 now reflects the sale of portion of my territory as 4 post codes are omitted as expected.

Page 29, however, now has the line “Lo Doc Loan .25% trail”, omitted. This was never mentioned and certainly never agreed to.

The next contract dated 19th February which relates to the sale of my next territory looks exactly the same as the previous one with the exception of page 31 which shows a reduced number of post codes. Again on Page 29 the line “Lo Doc Loan .25% trail” was omitted.

Upon closer scrutiny of our monthly statements, I saw that some of our Lo (sic) Doc loans had been reduced to .12% of the balance of the loan amount whilst others remained at .25%. I believe that this could well be an oversight as I was never informed either verbally or in writing that the “Business Partner Agreement” was to be altered in any way. I would, therefore, like to make the request that the statements be reviewed to reflect the .25% trail commission.

I will of course do my own internal audit and present it to you within 2 weeks.

This has become particularly important as it may affect the “Business Partner Agreement” that you present to the perspective (sic) purchaser of my business.

I request that you address the principal of the matter of Lo (sic) Doc loans carrying a .25% trail as far as my “Business Partner Agreement” is concerned, as a matter of urgency. We can each take our time to conduct our own audit of the statements and then make the necessary adjustments.

I look forward to your response.”

171 During the hearing, the question of whether this letter was sent became the subject of heated contest. The defendants, it seemed to me, flirted with the possibility of putting that it was not created at the time. Mr Duncan’s evidence was that he sent it by email and also posted it.

172 Clearly, if he posted it, he sent it to the wrong address. As to the emailed version, there was no document which proved receipt of the emailed version by Mr Sayer, but he did not deny its receipt, although it was clear that he had little recollection of it.

173 The email in the form originally discovered referred to an attached letter but showed no attachment. During the hearing a further version was produced by the plaintiffs referring to an attachment.

174 The defendants raised justified concerns about the plaintiffs’ discovery.

175 There was however other material, not in contest, which satisfied me that the document was not a recent invention and, whether or not it was sent to Mr Sayer, that it was created by Mr Duncan around 17 November 2004.

176 I also accept that an email version was sent as an email attachment.

The “poaching” problem

177 It is clear that Mortgage House accepted applications directly and arranged loans which had some connection to the Territory. Mortgage Street operated out of premises not far from the Branch.

178 There was evidence that a seminar was conducted on the Gold Coast by Mr Robert James, the principal of the Mortgage House Liverpool branch, but this was not taken any further.

179 On 4 July 2001 Alpha Centauri Wines entered into a written Commission and Software User Agreement with a finance and mortgage broker and facilitator called Australian Finance Group Pty Ltd (“AFG”) under which Alpha Centauri Wines became an “introducer” to introduce to AFG mortgage finance applications for a term of five years. The agreement was signed on behalf of Alpha Centauri Wines by Jarrod Duncan, Mr Duncan’s son, who was then a director.

180 Mr Geoffrey Slater is Mr Duncan’s nephew. On 14 January 2002, after some negotiations Alpha Centauri entered into a Service Agreement with Nubia Holdings Proprietary Limited, Mr Slater’s company, under which that company would sell the products and services of Alpha Centauri. The terms of the agreement were loosely based on provisions contained in the 2001 agreement.

181 Over the period November 2001 to April 2005 Alpha Centauri Wines arranged loans of something in the order of $13 M through AFG.

Events leading to termination of the 2004 agreement

182 On 14 December 2004 Mr Sheales, then National Sales Manager, attended at the Branch. He met with Mr Duncan. There was a contest between them about precisely what was said. Either way, it was a tense meeting.

183 After the meeting Mr Sheales sent an email in the following terms:

“I am sending this email to confirm our discussion at your office in Southport on Tuesday 14th December, regarding any on going relationship between yourself, Mortgage house and any associated companies. At that meeting it was apparent from your discussion that you were unhappy with the current contractual arrangements including you view on the variation in trail commission, the supposed under payment of commissions over an extended term and your reluctance to enter our lead purchasing program. It appears also that you have discussed the fact that you are unhappy with your current arrangement with some of the NSW branches as well as with Ken and today with me. Also you have the business for sale. Mortgage House feels it has always complied with your requests to grow your business including the division of areas so you could on sell them. The current arrangement is not working and we wish to grow our business in Queensland with people that wish to move in the same direction as the company. We have concerns at the volume of business being generated from your areas, considering the size of the area and the growth being delivered from real estate in your region, this is a major concern to us and something that is under review now.

As discussed we are prepared to allow you to actively seek a buyer for the business until the end of January. 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 contract with me, reporting on all and any possible new business partners and what steps you are taking in promoting the sale. If you have any queries you can contract me on (03) 9896 2222.”

184 On 23 December 2004 Mr Duncan’s and Alpha Centauri’s solicitors, Mooney & Kennedy, wrote a letter to Mortgage House in the following terms:

“We are the solicitors for Robert Duncan and Alpha Centauri Enterprises Pty Ltd trading as Mortgage House Gold Coast-Southport (MH Southport).

Our client has been put on notice that you will review your Business Partner Agreement with the view of resuming ownership of his business, Southport Branch, without any compensation by 31st Jan 2005.

We are instructed that despite your withdrawal from the sponsorship of the Brisbane Broncos and the closure, earlier this year, of your Brisbane corporate office, which was opened for less than six months, you have now expressed that you wish to expand into Queensland in early 2005.

Our client has invested 3 years as the pioneer for Mortgage House in Queensland, built the MHA name not previously known in Queensland and set a precedent by selling off two sections of his large Gold Coast territory as new MHA branches for $150,000 each which as resulted in financed benefits for you.

Our client was approached by Mr Greg Stevens, National Sales Manager, prior to his departure, to accept the position of Queensland State Sales Manager. This would indicate to us a level of confidence and satisfaction with our clients’ ability.

We understand there is currently a dispute between you and MH Southport, in relation to the reduction in trail income on the Mortgage House product known as Home Loan Plus Lo-Doc, which is likely to involve a significant sum of money. We believe any action by our client in this respect is likely to be successful.

We understand that you have instructed our client to pass over information on parties interested in purchasing his business known as MH Southport, prior to him signing a Contract of Sale. This we believe may not be in our clients’ best interests.

We would like to invite you to address each of these issues, with a view of making a reasonable commercial offer to our client enabling him to vacate the MH Southport Branch premises by 31st Jan 2005, a timeframe that you have indicated.

We await your response.”

185 Mr Duncan’s proposed purchaser did not proceed apparently because of discrepancies associated with trail commission.

186 On 16 April 2005 Mr Sheales wrote to Mr Duncan in the following terms:

“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 Partners Agreement (“BPA”) dated 19 February 2004.

Consequently, we ask you 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 5.00pm 22 April 2005.

We await your reply.”

187 Mr Duncan responded on 19 April 2005 in the following terms:

“We are in receipt of your fax dated 16/4/2005.

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.”

188 On 19 April 2005 Alpha Centauri’s solicitors wrote the following letter to Array (the evidence did not reveal why this communication was not sent to Mortgage House):

“The underpayment and non payment of commissions has become a matter of dispute between your company and our client.

The ability of our client to comply with the requirements of the Business Partnership Agreement is dependant on its receipt of the commissions as they become due.

The income of this company is almost entirely from Commissions, particularly Trailing Commissions. This income is used to pay the expenses incurred in operating the business in a way that complies with the Business Partnership Agreement.

There are now substantial amounts of commission in arrears. This is in clear and serious breach by the Mortgage House companies of the Business Partnership Agreement.

This fax is to put you on notice that unless you agree to pay the back commissions now due immediately, and agree to continue paying commissions as they become due, our client will not be able to continue operating in compliance with the Business Partnership, and will have no alternative but to close its branch.

Please confirm your agreement by 12 noon Friday 22 April 2005.

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.”

189 On 22 April 2005 Alpha Centauri’s solicitors wrote to Mortgage House’s then solicitors Clayton Utz in the following terms:

“We refer to our letter of 19 Apr 2005 addressed to your clients and faxed to them on that date.

Your client has not replied to the letter, and has given our client no indication that it will pay the commissions due.

In the circumstances your clients’ continuing breach of the terms of the Business Partner Agreement has prevented our client from obtaining the funds necessary to continue operating its branch successfully.

Our client accepts that your clients’ actions are a repudiation of the Business Partner Agreement, and hereby rescinds the Agreement, and will sue for damages.”

190 On 28 April 2005 Clayton Utz wrote to Mooney & Kennedy denying that Mortgage House was in breach of the 2004 agreement and asserting that Mortgage House’s purported rescission was wrongful and ineffective and itself amounted to a repudiation of the agreement. The letter ended with the following:

“With respect to your client’s own repudiation of the Agreement, our clients elect to affirm the Agreement and reserve their rights to sue your client for damages for its wrongful repudiation. The Agreement thus remains on foot.”

191 On 28 April 2008 Mr Sheales wrote as follows to Mr Duncan:

“We refer to the email and fax sent by your solicitors, Mooney & Kennedy, to our solicitors, Clayton Utz on 22 April 2005. We were surprised and disappointed that, despite your request for a response to your solicitors’ 19 April 2005 facsimile, you were not prepared to allow us sufficient time to give you such a response. Clearly you were uninterested in anything we had to say.

“the Agreement”

As Clayton Utz have further explained, your purported rescission of the Agreement is itself a wrongful repudiation of the Agreement. We do not accept that repudiation, and elect to affirm the Agreement.

“KPIs”

Applications submitted per month, monthly average

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.

‘all Commission accrued but not yet paid to [you] prior to termination of the Agreement will be forfeited’.”

192 Mr Sheales tried, unsuccessfully, to fax the letter to the Branch on 29 April 2005. He rang the Branch at around lunchtime and was told they were “moving out”. He ordered that Alpha Centauri’s access to EMMS be stopped.

193 On 2 May 2005 Mr Angel directed that no commissions were to be paid to Alpha Centauri until further notice.

RELEVANT CLAUSES IN THE AGREEMENTS

194 The following provisions appear in the 2001, 2002, 2003 and 2004 agreements.

195 Clause 1.1 contains the following definitions:

“Application” means any application form, including any relevant Business Documents, signed by a Customer requesting the provision of any Services by one of the Companies.

“Customer” means a person procured by the Business Partner, its servants, agents, contractors and related entities and accepted by a Company as a customer of a Company with respect to the Business of that Company.

“Initial Period” means 12 months from the date of this Agreement.

“Services” means 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 Business Partner pursuant to this Agreement.

196 Clause 2.2 is as follows:

“The Initial Period will be extended automatically by one or more Option Periods unless either the Business Partner terminates this Agreement in accordance with clause 15 or the Companies object to an extension by notice in writing to the Business Partner prior to the expiry of an Option Period.”

197 Clause 3.2 (which for convenience is repeated) is as follows:

198 Clause 4.1(b) is as follows:

“The Business Partner must…not seek funds directly from any Funder of the Companies”.

199 Clause 4.1(c)(iv) is as follows:

“The Business Partner must:

(iv) that all payments and charges (other than any Application fee) are to be paid by the Customer to the relevant Company, and not the Business Partner”.

200 Clause 4.1(h) is as follows:

“The Business Partner must…comply with all reasonable requests, directions, policies and procedures of the Companies or their nominee as notified by one or more of the Companies from time to time”.

“The Companies will only receive Applications in relation to the Territory from the Business Partner and will not accept applications directly from an employee, mobile lender or an introducer of the Business Partner if and when knowledge of that relationship is made known by notice in writing from the Business Partner to the Companies.”

370 Alpha Centauri submitted that on the proper construction of the provision Mortgage House was prevented from transacting any business in relation to the Territory other than through Alpha Centauri.

371 It tendered three folders of documents (marked as Exhibits R and Y respectively) in an endeavour initially to establish that Mortgage House facilitated mortgages with borrowers “in relation to the Territory” and earned upfront commissions of $103,474.32 as a consequence. No documents were tendered in relation to any trailing commissions.

372 The Court was not taken to a single document in the tender either with respect to the entry into of any particular transaction or with respect to any commissions allegedly earned in respect of it.

373 On the final day of hearing it was accepted that a significant number of the documents tendered did not assist Alpha Centauri. A Schedule (prepared by Mr Missen) was tendered and admitted (not as evidence of the truth of the document) but in aid of identifying the documents which were said to establish the underlying transactions wrongfully entered into in respect of which the upfront commissions earned amounted to $76,028.18.

374 Mortgage House put that even if it accepted applications in respect of these loans, that was not a breach of the provisions relied on.

375 It submitted that:

a its obligation was to receive only (and limited not to taking other than) “Applications” in relation to the Territory;

b Application is defined in cl 1.1 of all the agreements to mean an application form signed by a “Customer” requesting the provision of any “Services” by Mortgage House;

c “Services” is defined in cl 1.1 to mean services provided to or attempted to be provided to Customers of Alpha Centauri.

376 It submitted that the purpose of the clause was to ensure that Mortgage House did not receive Applications from “an employee, mobile lender or an introducer of Alpha Centauri” in respect of customers procured by Alpha Centauri. In other words, once Alpha Centauri had procured a Customer, an Application from that Customer could be received by Mortgage House only from Alpha Centauri.

377 It was put that the sensible business purpose behind the clause was to prevent Mortgage House, for example, from receiving an Application from a former employee of Alpha Centauri who attempts to personally submit a loan on behalf of a Customer and to prevent Mortgage House from receiving a new Application from a Customer of Alpha Centauri in relation to the Territory.

378 In support of its construction, Mortgage House pointed to examples of what it suggested would be the absurd operation of Alpha Centauri’s construction. One was that a person living in Sydney and having a relationship with a Mortgage House branch in Sydney who is purchasing a holiday property in Southport would be required to deal only with the Southport branch of Mortgage House in respect of the loan. Another was a customer of the Southport branch moved to Adelaide and wished to purchase a property in Adelaide. It was put that on Alpha Centauri’s construction, the Branch could not deal with the customer because the customer and/or the property were outside the Branch’s Territory and the Adelaide branch could not deal with the customer because he/she was an existing customer of the Branch.

379 I prefer Mortgage House’s construction. It better accords with the words used. Mortgage House’s obligation is to receive only Applications as defined and not applications at large. The agreements do not provide that Mortgage House will not do business in relation to the Territory other than through Alpha Centauri.

380 Alpha Centauri obtains the benefit of the exclusive right to operate “a Premises in the Territory”, and thereby to obtain Customers. When it does so, (a Customer being a person procured by it) and the Customer makes an Application, the benefit that flows from having obtained that Customer accrues to it and it alone, and Mortgage House cannot then deprive it of that benefit by obtaining that business via a different route.

381 On Mortgage House’s construction it would be alerted, on receipt of an Application, that no other application directly from that party or on its behalf could be accepted. On Alpha Centauri’s construction, Mortgage House would have to divine that an application is in relation to the Territory (a very wide ambit) without the benefit of knowing that it had come via Alpha Centauri.

382 Mortgage House’s construction is the more reasonable and sensible one, as the examples provided by Mortgage House illustrate.

383 Moreover, I do not consider that Alpha Centauri has proved any damage as a result of the conduct alleged to have been in breach.

384 There was no evidence about the circumstances of any of the applications allegedly wrongly accepted. No borrowers were called. In the circumstances I am unable to find that Alpha Centauri would have been the beneficiary of any of that business.

385 This claim accordingly fails.

The Prime claim

386 Prime entered into agreements with parties described as originators, one of which was Mortgage Street which operated in Alpha Centauri’s Territory. These appointments were to assist Prime in originating mortgage loans on behalf of third parties. Mortgage Street had the benefit, through its relationship with Prime, of the use of the EMMS system.

387 So far as breach of cl 3.2(a) is concerned there is no direct conduct of Mortgage House itself which is in breach of this provision. It has not granted to anyone but Alpha Centauri any right to operate “a Premises in the Territory”.

388 Additionally, there is no evidence which enables a finding that Mortgage House controls Prime. Both are controlled by Global, which in turn is controlled by Mr Sayer.

389 Accordingly the claim for breach of cl 3.2(a) is unsustainable.

390 So far as the pleaded implied terms are concerned, the Summons was amended during the hearing to insert the reference to related entities, no doubt because Mortgage House itself did not assist Prime or the originators.

391 The tests for the implication of terms are settled. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-3 the tests were articulated by the Privy Council as follows:

…for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

392 Four of the five alleged implied terms refer to “related entities” of Mortgage House.

393 No submissions were made on behalf of Alpha Centauri as to the scope of the term “related entities”. However, each of the agreements contains a definition of that term for the purposes of the agreements which gives to it the same meaning as is to be found in s 9 of the Corporations Act 2001 (Cth). That section provides that:

(b) a relative of such a promoter;

(k) a body corporate one of whose directors is also a director of the first-mentioned body;
(l) a trustee of a trust under which a person is a beneficiary, where the person is a related entity of the first-mentioned body because of any other application or applications of this definition.

394 In my view a term which comprehends this definition of “related entity” fails to satisfy at least three of the tests for an implied term. Its width makes it neither reasonable nor equitable, it is not necessary to give business efficacy to the agreements and it is not obvious.

395 Given that Alpha Centauri did not formulate any other definition I am not satisfied that the test of clear expression is satisfied either.

396 In addition it does not seem to me that any term embracing the conduct of a related entity (whatever definition is used) is necessary to give business efficacy to the agreements.

397 It may be accepted for present purposes that there is an implied obligation on each party to do all that is necessary on its part to enable the other party to have the benefit of the contract; see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607.

398 However, the complaint is not that Mortgage House did or refrained from doing anything. The conduct complained of is that of Prime and its conduct is said to be a breach by Mortgage House.

399 So far as the pleaded obligation of good faith, fair dealing and reasonableness is concerned it may be accepted that such a term is to be implied.

400 Such a term has been implied into a franchise agreement: Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310. In Far Horizons Pty Ltd v McDonald’s Australia Ltd Byrne J said at [120]:

Renard Constructions (ME) Pty Ltd v Minister for Public Works

401 But the term relates to the exercise by a party of a power conferred on it by the agreement, and no such power on the part of Mortgage House is in play in relation to the activities of Prime. It also does not relate in the present context to the performance or non performance by Mortgage House of the agreements.

402 The claim for breach of implied terms is accordingly unsustainable.

403 In addition I am not satisfied that Alpha Centauri has proved any damage as a consequence of the alleged breach.

404 There was no attempt made in submissions to quantify business that was allegedly lost via the Prime arrangement or the value of the opportunity that Alpha Centauri may have had to do that business.

405 Mr Sayer’s evidence, which I accept, was as follows:

406 I am not satisfied that any realistic opportunity was lost to Alpha Centauri as a consequence of the Prime arrangement.

407 This claim accordingly fails.

Repudiation and loss of bargain damages

408 On 22 April 2005 Alpha Centauri by its solicitor’s letter of that date, purported to terminate the 2004 agreement on the grounds that Mortgage House had repudiated it by refusing to pay commissions due.

409 The parties were not at issue that if there were other breaches or a repudiation that Alpha Centauri was at liberty to rely on them even though it did not do so in the letter (although it was not suggested that it was unaware of them): Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359.

410 However, as appears above I have found that none of the additional breaches relied upon to justify termination have been made out by Alpha Centauri.

411 It follows that Alpha Centauri has not established that on 22 April 2005 it was entitled to terminate.

412 There was no issue that on 29 April 2005 when Mortgage House purported to terminate, Alpha Centauri was in breach of the 2004 agreement by failing to meet the Key Performance Indicators.

413 Alpha Centauri put that Mortgage House was not entitled to terminate for two separate reasons: firstly, because Mortgage House had (by its breaches with respect to telephone call diversion, receiving applications which it should not have, and in relation to Prime), caused or materially contributed to Alpha Centauri’s breach and secondly, because it was obliged to give notice under cl 21 of the Code before it could terminate.

414 So far as the first reason is concerned I have already found that the breaches relied upon have not been made out. Also, as appears below, I have found that Alpha Centauri was in breach of cl 6.2(d) of the 2004 agreement. That breach was not, nor was it said to have been, brought about by Mortgage House. Under cl 15.2(a), Mortgage House was entitled to terminate for that breach as well.

415 So far as the requirement to give notice under the Code is concerned, there was no issue that the 2004 agreement satisfied cls 4(1)(a) and (c) of the Code in that it is a written agreement and that the business was to be substantially or materially associated with advertising or with a commercial symbol owned by Mortgage House.

416 The parties were at issue as to whether cls 4(1)(b) and (d) were satisfied.

417 Alpha Centauri pleaded with respect to the 2004 agreement that:

a it was a written agreement in which Mortgage House granted to Alpha Centauri the right to carry on the business of offering, supplying or distributing services in Australia under a system or marketing plan substantially determined, controlled or suggested by Mortgage House or an associate and under which the operation of the business was substantially or materially associated with a trade mark, advertising or a commercial symbol owned, used or licensed by Mortgage House or its associates; and

b it was a written agreement under which, before starting business or continuing the business, Alpha Centauri had to pay or agree to pay to Mortgage House or its associates amounts identified as:

i. $25,000 in respect of advertising;

ii. $66,600 in respect of the sale of the territories;

iii. $375 for each loan application;

iv. payments for stationery supplied by Mortgage House which Alpha Centauri was obliged to use and pay for; and

v. fees received by Mortgage House as a result of the work performed by Alpha Centauri.

418 Mortgage House submitted that the 2004 agreement did not satisfy either cl 4(1)(b) or (d) of the Code.

419 As to cl 4(1)(b), it was put that the evidence did not disclose that Mortgage House substantially controlled the system or marketing plan under which Alpha Centauri operated. I reject this submission. Alpha Centauri was obliged to act in accordance with the reasonable instructions of Mortgage House and to comply with its policies, ensure applications were made in the manner specified by Mortgage House, carry on the business as Mortgage House’s representative under the name Mortgage House, and use only its stationery, forms and corporate brochures. It was required to have its advertising vetted and to process applications using the EMMS system on pain of not being paid commissions.

420 So far as cl 4(1)(d) is concerned, as was pointed out by Mortgage House, the particulars relied upon are narrow and specific.

421 Each is particularised as an amount which Alpha Centauri had to pay under the 2004 agreement.

422 No submissions were directed to advertising payments or to any obligation to make them.

423 No provision of the 2004 agreement was identified as having given rise to any such obligation. There was an agreement reached before entry into of the 2001 agreement that Mortgage House would offer up to 50% of the costs involved in a foreshadowed advertising campaign but there was no obligation upon Alpha Centauri to make any payment let alone a payment to Mortgage House or any of its associates for advertising.

424 No submissions were directed to fees received by Mortgage House as a result of work performed by Alpha Centauri.

425 The goodwill payments which Mortgage House extracted from Alpha Centauri when it spun off parts of the Territory in 2003 and 2004, were not payments contemplated by cl 4(1)(d) of the Code. They were required as a condition to Mortgage House’s assent to the spin off by way of entry into of agreements with the purchasers and the 2003 and 2004 agreements. The amounts were not payable under the 2003 and 2004 agreements.

426 So far as loan application fees were concerned, the evidence established that for each application the customer paid an application fee of $600 of which $375 was on paid by Alpha Centauri to Mortgage House with respect to each application. Mr Duncan’s affidavit evidence was that in July 2001 he had a conversation with Mr Lagana to the following effect:

MR LAGANA: Robert, the way we operate is you collect an application fee of $600 from the client and bank it into your company bank account this will help with your immediate cash flow.

MR DUNCAN: I understand that. Tell me more?

MR LAGANA: MHA will deduct $375 of the application fee from every loan that settles. It will show up on your invoice from us as a processing fee.

MR DUNCAN: Okay, the $375 that you take from the application is some sort of a fee payable to MHA?

MR LAGANA: Yes.

427 In an email to Mr and Mrs Duncan on 5 September 2002, Mr Stevens provided an analysis of application fee costs which showed the breakdown of the costs associated with application fees and which indicated that the $600 application fee was less than the total costs associated with the fee.

428 Mortgage House put that the application fee was excluded under cl 4(1)(d)(v) of the Code as being a payment for goods and services at or below their usual wholesale price.

429 It put that the $375 paid in respect of loan applications was simply a component of the agreed $600 application fee and that the fee itself was less than the usual wholesale cost of the work required to be carried out in respect of each application and that this was evidenced by the breakdown provided by Mr Stevens in his 5 September 2002 email, in respect of which he was not cross examined.

430 It put that the underlying costs identified by Mr Stevens would be likely to increase and not decrease over time.

431 It put that on Mr Duncan’s own evidence, application fees were ultimately paid by the customer, that it was an industry wide standard to charge such fees and that they were to cover the cost of matters like valuations, searches and legal fees.

432 Whether there is a franchise under the Code must arise from the terms of the agreement. The elements of the definition of franchise agreement in cl 4.1 are cumulative; Apple Computer Australia Pty Ltd v Mekritzis & Ors (2003) 44 ACSR 518 at 577.

433 Apart from the facts that no provision of the 2004 agreement was identified as one under which Alpha Centauri “must pay or agree to pay” (as required by cl 4(1) of the Code) application fees and that they were paid by the client with Mortgage House taking a cut, in my view the onus of showing that the Code applies to the 2004 agreement rests on Alpha Centauri. This includes the onus of showing the amount to be paid for goods and services is not at or below their usual wholesale price.

434 Alpha Centauri has failed to discharge that onus with respect to application fees. The only evidence before the Court is that those fees were less than their actual cost.

435 With respect to stationery, Alpha Centauri relied on two invoices to establish that Alpha Centauri had to pay or agree to pay for goods and services as well as a conversation which Mr Duncan says he had with Mr Lagana in about July 2001 about how application fees were collected and dealt with.

436 The first invoice, for the amount of $1,185 including GST, was issued by Printforce Australia (presumably a printer) on 23 July 2002 for brochures and was addressed to Mortgage House with delivery to be to “Mortgage House Gold Coast” (presumably Alpha Centauri).

437 The second invoice, for the amount $1,402.50 including GST, was issued by Forevision Technology Group on 6 September 2002 to, and for delivery to be to, Mortgage House of Australia Gold Coast (presumably Alpha Centauri) also for brochures with the same description.

438 Alpha Centauri put that these two invoices reflected the supply of goods by Mortgage House to Alpha Centauri at a mark up, that is not at below the usual wholesale price and were accordingly a payment within cl 4(1)(d) of the Code.

439 I do not accept Alpha Centauri’s submission because:

a the invoices do not reflect any payment to Mortgage House;

b payment of the invoices could not have been made under the 2004 agreement which was entered into some two years later;

c no provision of the 2004 agreement which obliged Alpha Centauri to pay the amounts before or continuing the business was identified; and

d there was no evidence as to the usual wholesale cost of the stationery concerned.

440 In the circumstances Alpha Centauri has failed to establish that the 2004 agreement was a franchise agreement under the Code.

441 It follows that Mortgage House was not obliged to give Alpha Centauri notice under cl 21 of the Code.

442 It follows further that Mortgage House’s termination of the 2004 agreement for Alpha Centauri’s breach was valid and effectual.

443 Mortgage House put that it gave notice under cl 21 in any event and put that Mr Sheales’ email of 16 December 2004 was that notice. I reject the submission. The email concerned did not give notice that Mortgage House proposed to terminate because of breach, nor did it tell Alpha Centauri what it required to be done to remedy the breach.

444 Even if (contrary to what I have found) the Code did apply, in my view Mortgage House did not have to comply with cl 21 because Alpha Centauri voluntarily abandoned the franchise business or the franchise relationship as contemplated by cl 23(c) of the Code.

445 Although I was not taken to any authority pertinent to the meaning of the term of the words “voluntarily abandons”, it seems to me that Alpha Centauri’s conduct satisfies both the requirement of voluntariness and abandonment.

446 From its purported termination on 22 April 2005 onwards its position was that the 2004 agreement was rescinded and it left the premises on that footing. By 29 April 2005 Alpha Centauri was moving out. Mr Sheales could not get his fax through on the Branch fax number.

447 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.

448 In no way was Alpha Centauri compelled either to terminate the agreement or to leave. There was no suggestion that Alpha Centauri moved out because of Mortgage House’s termination. Indeed it has throughout challenged the efficacy of Mortgage House’s termination.

449 Alpha Centauri left of its own free will.

450 It follows that Alpha Centauri’s claim for loss of bargain damages fails.

451 I will nevertheless deal with the question of damages.

452 If one party repudiates its obligations the other acquires the right to terminate the contract. If that right is exercised the parties are discharged from the obligation further to perform. The right is exercised by “acceptance” of the repudiation, that is by the innocent party electing to terminate performance of the contract: McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 469-470.

453 Upon valid termination by the wronged party, that party obtains the right to sue for damages for the loss of the bargain it had. The measure of damages is that the plaintiff should be put in the position that it would have been in but for the breach, that is, the position if the contract had been performed: Wenham v Ella (1972) 127 CLR 454.

454 Alpha Centauri claimed that the damages it suffered by way of loss of bargain should be assessed as equivalent to the value of Alpha Centauri’s business then being conducted under the 2004 agreement, as at the date that agreement came to an end.

455 Alpha Centauri relied on the evidence of Mr Gwynne, a licensed real estate agent and business broker who provided a business valuation.

456 Mr Gwynne valued the business as the sum of:

a a multiple of 2.5 x trailer income (disclosed and undisclosed) for the 2004 financial year;

b the value of plant, equipment, fixtures and fittings; and

c a “franchise territory fee” .

457 With regard to trailer income, Mr Gwynne was instructed that disclosed trailer income for 2004 was $44,308 and undisclosed trailer income was $18,157 making a total of $62,465 which when multiplied by 2.5, yielded $156,163.

458 Neither his report or oral evidence disclosed why he chose the particular multiplier, beyond that he approached it on the basis that it was an operating business with a relationship and that it was market related. He did not identify a comparable transaction.

459 He attributed $50,000 to plant, equipment, fixtures and fittings.

460 He attributed $100,000 to a franchise territory fee on the basis that on previous occasions Alpha Centauri had sold part of its Territory and had been paid goodwill in respect of each part sold of $100,000. He also relied on “the presence of two offers around the time for between $150,000 and $200,000” to which reference will be made further below.

461 His valuation accordingly resulted in a total of $306,163.

462 Mortgage House submitted that Mr Gwynne’s evidence should not be accepted because he was not an independent expert but had been actively involved in trying unsuccessfully to sell Alpha Centauri’s business. He has no pecuniary interest in the present dispute. There is no reason not to accept his factual evidence as to earlier events and his connection with Alpha Centauri is not sufficient reason on its own to reject his evidence.

463 It was put that he should have adopted a comparable sales method of valuation as the best method, which he agreed it was.

464 The methodology chosen by him was apparently not chosen because he independently concluded it to be appropriate, but because as he said “Our inquiries based around comparable sales in an industry indicated that the third valuation method, which is the multiple of trailer income, was the most widely used method”.

465 Accepting that the methodology which he adopted was appropriate in the circumstances, there are a number of difficulties with his approach which drive to the conclusion that his evidence should not be accepted.

466 Firstly, the figure for undisclosed trailer income used by Mr Gwynne was described in his report as “Underpaid Commissions – as identified by the Independent Accounting Expert’s Loss Report, by the MBA Partnership Proprietary Limited”. This is a reference to the report of Mr Missen which was rejected.

467 Alpha Centauri did not establish any such undisclosed trailer income.

468 Additionally the information used by Mr Gwynne was unaudited and unverified.

469 Secondly, the value of the bargain which Alpha Centauri had, was the value of the rights it had under the 2004 agreement as at the date of termination. Mr Gwynne’s methodology did not involve valuing those rights.

470 Whilst Alpha Centauri had a right to receive trailer income on business transacted, it also had ongoing obligations under the 2004 agreement to operate the business. Mr Gwynne did not take into account the cost of doing so. His exercise was to value the benefit whilst leaving out of account the accompanying burden.

471 There was no evidence that Alpha Centauri would have made a profit rather than a loss during the year to which he applied a multiplier.

472 There is no basis upon which to find that Alpha Centauri would have made any profit from the agreement during the remainder of its life.

473 The 2004 agreement was entered into on 19 February 2004. Accordingly under cl 2.2, Mortgage House could have terminated it with effect from 19 February 2006, without cause. At most, Alpha Centauri had a right to conduct a business for a period of some 11 months from the date of termination. At worst, its rights could have been terminated forthwith (as they were) because of failure to meet the Key Performance Indicators.

474 On any realistic view, given the breakdown of the relationship between the parties it was improbable that the 2004 agreement would have extended beyond February 2006. In the circumstances both the starting point of a year’s trailer commission and the application to that figure of a multiple cannot be justified.

475 Even if one accepted that on its own, the right to receive trailer income in the future for the remaining life of the agreement had a value, no evidence was led as to that value as at the date of termination.

476 Mortgage House put that on termination, under cl 8.4(c) of the 2004 agreement it could in its absolute discretion refuse to pay trailing commissions. Alpha Centauri put that the provision was a void penalty provision. Clearly, if Mortgage House was entitled to withhold ongoing trailing commissions and did so there would be no right to assign which had any value. Having regard to my other findings it is not necessary to determine this question.

477 Thirdly, Mr Gwynne did not take into account that Alpha Centauri did not have an unconditional right to sell the business but needed Mortgage House’s approval under cl 19.3(b) and (c) of the 2004 agreement. I am not satisfied that Mortgage House would have given consent in April 2005. I think it is unlikely. Even if it would have consented, on the two previous occasions when Alpha Centauri sold part of its Territory, Mortgage House imposed a condition that one third of the goodwill had to be paid to it. Either way even if Alpha Centauri had sold, it is likely that any consent would have involved paying at least one third of goodwill received to Mortgage House so that Alpha Centauri would not have received a benefit of $100,000 as assumed by Mr Gwynne.

478 Fourthly, I am also not satisfied that a purchaser would have been prepared to pay any such fee in April 2005 given the state of the relationship between Alpha Centauri and Mortgage House.

479 Through the business agency of Mr Gwynne, on 12 November 2004 Alpha Centauri entered into an agreement with a company called Service Corp Pty Limited to sell its remaining Mortgage House business for $150,000 apportioned as to $100,000 for goodwill and $50,000 for equipment. The purchaser carried out investigations of the financial accounts of the business and was not satisfied with them. On 26 November 2004, it terminated the sale under a provision of the sale agreement as it was entitled to do.

480 On 20 January 2005 Alpha Centauri entered into a further sale agreement through the business agency of Mr Gwynne with a buyer called Ourways Pty Ltd for the sale of the business, this time for $200,000 of which $150,000 was attributable to goodwill and $50,000 to equipment. That purchaser also withdrew, as it was entitled to do, after auditing Alpha Centauri’s records taking the position that it had found a large number of discrepancies associated with trail commissions and that it appeared that over a period of time some of those trail commissions had been halved for no apparent reason.

481 Mr Gwynne accepted that the purchaser might have “pulled out” because it concluded that the business was not in fact worth the price. There was no other purchaser prepared to proceed during the time of his agency.

482 I do not consider that in the circumstances these aborted and uncompleted transactions are evidence of the value of the business; see for example Smith v Smith [1991] FLC 78,753 at 78,755 and the authorities cited there.

483 Fifthly, upon termination of the 2004 agreement Alpha Centauri still owned and did not lose the plant and equipment, which Mr Gwynne valued at $50,000. That component cannot be part of any loss of the bargain. Further, Mr Gwynne’s view was that this equipment looked like “a $100,000 fit-out every day of the week”.

484 For all of these reasons, I do not accept Mr Gwynne’s approach nor the conclusion which he reached.

485 Alpha Centauri did not contend for any other measure than that of Mr Gwynne.

486 In my view Alpha Centauri has failed to establish that it suffered any damage as a result of the loss of its bargain.

The cross claim

487 As Mortgage House put, the essence of the cross claim is that by the unlawful conduct of the defendants, they have been deprived of commissions in respect of loans placed by Alpha Centauri Wines through AFG rather than through Mortgage House.

488 Mortgage House put that cls 4.2(h) and (i) and 6.2(d) of all the agreements had been breached.

489 Clause 4.2(h) concerns churning which is defined in cl 1.1 as follows:

“Churning means where a Customer, at the unsolicited request or on the unsolicited recommendation of the Business Partner, its servants, agents, contractors or related entities enters into a refinancing transaction or requests the provision of certain Services which, in the reasonable opinion of the Companies, is not a bona fide refinancing transaction or provision of Services which is in the best commercial interests of the Customer.”

490 There was no evidence of churning.

491 Under cl 4.2(i) Alpha Centauri must:

“not itself, nor permit any Related Entity or employees of the Business Partners to, promote or sell the products and services of any third party which is the same or similar to the Services and which any Company, in its reasonable opinion, deems to be a competitor, without the express written approval of the relevant Company”.

492 Mr Duncan’s evidence was that loans were only passed to Alpha Centauri Wines if they could not have been accommodated by Array.

493 Mr Slater’s evidence was that this was not so. Mr Slater however was motivated by palpable malice and resentment of Mr Duncan arising out of an earlier souring of their business and family relationship. He was prepared to make assertions without direct knowledge of the facts. I do not consider that it is safe to rely on his evidence in any respect.

494 Mortgage House put that inferences should be drawn that the business could have been written by Array because some of the loans were in respect of current or former customers of Mortgage House, some of the loans were accepted by funders who were on the Array panel, some were written with an organisation called Home Loans which was funded by Adelaide Bank which was on the Array panel and Array had a large number of banks and non bank lenders on its panel.

495 There does not seem to be any logical reason why Alpha Centauri would have passed business on to Alpha Centauri Wines when it could have done the business itself. Although there are one or two instances where on the face of documents Mr Duncan’s evidence as to an invariable practice may be called into question, I accept as a general proposition, his evidence that business was not referred on unless Array could not help. Additionally, Mr Stanley gave evidence (which I accept) which amounted to him having communicated to Mr Duncan that if Array could not accommodate the client, the client should be protected by being directed elsewhere.

496 Moreover Mortgage House did not call any evidence from any borrower to establish the situation with respect to any particular loans. Just as it put with respect to loans in relation to the Territory written by it, the evidence does not establish that loans written through Alpha Centauri Wines would probably have come to it.

497 This means, in my view, either that in the particular instances Alpha Centauri Wines was not a competitor of Alpha Centauri or Mortgage House for the purposes of cl 4.2(i), or that Mortgage House has not established that it suffered any loss by reason of the alleged breach or breaches.

498 Under cl 6.2(d) Alpha Centauri was prohibited from using the Premises for any purpose other than operating the business in accordance with the relevant agreement.

499 It seems to me that Mortgage House has made out a breach of cl 6.2(d) in that Alpha Centauri allowed Alpha Centauri Wines to operate there.

500 But Mortgage House did not establish that any loss has flowed from that breach. It would be entitled only to an award of nominal damages.

501 It follows that the cross claim fails.

CONCLUSION

502 The Summons and Cross Claim will be dismissed.

503 Provisionally, I order that:

a the plaintiffs are to pay the defendants’ costs of the proceedings, except for the costs of the cross claim; and

b the cross claimants are to pay the cross defendants’ costs of the cross claim.

504 Unless written notice is received by my Associate within seven days after the date of this judgment, from any party that he or it opposes these costs orders, the orders will solidify.

505 I also give the parties leave to bring to my notice, by written notice to my Associate within seven days, any issue which may have been overlooked and which requires to be dealt with.

506 If notice is given, a further date may be fixed by arrangement with my Associate.

507 If no notice is given, Short Minutes of Order are to be brought in reflecting the outcome.

508 The exhibits are to be returned.

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Citations

Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333

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CITATION:	Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty Ltd [2009] NSWSC 333
HEARING DATE(S):	27, 28, 29, 30 April 2009; 11, 12, 13, 14, 15 & 18 May 2009
JUDGMENT DATE :	12 June 2009
JUDGMENT OF:	Hammerschlag J
DECISION:	Summons and Cross Claim dismissed. Plaintiffs to pay the defendants’ costs of the proceedings, except for the costs of the cross claim. Cross claimants to pay the cross defendants’ costs of the cross claim.
CATCHWORDS:	CONTRACTS – rectification – whether agreements between the plaintiffs and defendants should be rectified to include a higher commission rate and an entitlement to ‘telephone diversion leads’ – held that there was no intention on the part of the defendants to include such terms in the contracts - general contractual principles - discharge, breach and defences to action for breach – whether the defendants breached express and implied terms of agreements between them and the plaintiffs – whether the defendants’ termination of the agreements was valid and effective – defendants cross-claimed that the first plaintiff had breached express terms of the agreement between the parties – held that the first plaintiff had breached a term of the agreement but that the defendants had not established that any loss flowed from that breach - construction and interpretation– held that the defendants’ construction of terms of the agreements between them and the plaintiffs was to be preferred as it accorded with the words used, and gave the terms a ‘reasonable and sensible’ meaning - TRADE AND COMMERCE - Trade Practices Act 1974 (Cth) and related legislation – whether the defendants had engaged in deceptive or misleading conduct or conduct likely to mislead or deceive in breach of s 52, in relation to the contents of agreements between the plaintiffs and the defendants and whether the first plaintiffs had established that it had suffered any damage as a result of any such conduct - whether the defendants had engaged in unconscionable conduct in breach of s 51AC, through engaging in misleading and deceptive conduct and failing to comply with disclosure requirements under the Franchising Code of Conduct - enforcement and remedies – whether the first plaintiff had proved any damage flowing from any misleading or deceptive, or unconscionable conduct on the part of the defendants - DAMAGES - assessment where the parties fail to provide raw material to which reference can be made to assess loss - STATUTES - by-laws and regulations – construction – whether the agreements entered into by the defendants and the plaintiffs were ‘franchise agreements’ under cl 4(1) of the Franchising Code of Conduct – whether the first plaintiff had voluntarily abandoned a franchise business or relationship under cl 23(c) of the Franchising Code of Conduct.
LEGISLATION CITED:	Trade Practices Act 1974 (Cth) Corporations Act 2001 (Cth)
CATEGORY:	Principal judgment
CASES CITED:	Muriti v Prendergast [2005] NSWSC 281 at [105] Briginshaw v Briginshaw (1938) 60 CLR 336 Helton v Allen (1940) 63 CLR 691 Rejfek v McElroy (1965) 112 CLR 517 Watson v Foxman (1995) 49 NSWLR 315 Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253 Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 Kabwand Pty Ltd v National Australia Bank Ltd (1989) ATPR 40-950 Marks v GIO Australia Holdings Limited (1998) 196 CLR 494 Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 Placer (Granny Smith) Pty Limited v Thiess Contractors Pty Limited (2003) 77 ALJR 768 Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332 The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 Troulis v Vamvoukakis (Unreported) NSW CA 27/2/1998 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558 Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310 Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 Apple Computer Australia Pty Ltd v Mekritzis & Ors (2003) 44 ACSR 518 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 Wenham v Ella (1972) 127 CLR 454 Smith v Smith [1991] FLC 78,753
TEXTS CITED:	Meagher, Gummow and Lehane’s Equity Doctrines & Remedies, 4th ed (2002), Butterworths LexisNexis
PARTIES:	Alpha Centauri Enterprises Pty Ltd ACN 052 158 255 (First Plaintiff) Robert Alan Duncan (Second Plaintiff) Mortgage House of Australia Pty Ltd ACN 081 508 054 (First Defendant) Direct Mortgage Solutions Pty Ltd ACN 089 173 482 (Second Defendant) Mortgage House Broker Services Pty Ltd (formerly Array Home Loans Pty Ltd) ACN 096 357 596 (Third Defendant) Mortgage House Realty Pty Ltd ACN 088 962 725 (Fourth Defendant)
FILE NUMBER(S):	SC 50041/2005
COUNSEL:	P.H. Greenwood SC (Plaintiffs) T.G.R. Parker SC with A.R. Zahra (Defendants)
SOLICITORS:	Mooney & Kennedy (Plaintiffs) Gokani & Associates Legal (Defendants)