Aura Enterprises Pty Ltd v Frontline Retail Pty Ltd

[2006] NSWSC 902

Reported Decision: 202 FLR 435
(2007) ATPR 42-130

New South Wales

Supreme Court

CITATION:	Aura Enterprises Pty Limited v Frontline Retail Pty Ltd [2006] NSWSC 902
HEARING DATE(S):	19/07/2006
JUDGMENT DATE :	6 September 2006
JURISDICTION:	Equity
JUDGMENT OF:	Brereton J
DECISION:	1. Note that Defendant does not rely on certain letters as notices to remedy and/or of intention to terminate, and that it will not be open to Defendant to rely on them for that purpose in aid of any termination in the future.; 2. Declare that Defendant is not entitled to terminate franchise agreement because of certain grounds in reliance upon two notices.; 3. Order that Defendant be restrained from terminating franchise agreement because of those grounds in reliance upon those notices.; 4. Order that costs of the determination of the separate questions be costs in the proceedings.
CATCHWORDS:	CONTRACTS – Franchise Agreements - contractual notices – notice of breach and notice of intention to terminate – whether notices technically valid – requirements of notices - Franchising Code of Conduct, regs 21, 22, 23
LEGISLATION CITED:	(Cth) Franchising Code of Conduct (Cth) Trade Practices Act 1974, s 51AC (NSW) Conveyancing Act 1919, s 129 (NSW) Uniform Civil Procedure Rules 2005, r 28.2
CASES CITED:	Australasian Performing Right Association Ltd v Metro on George Pty Ltd (2004) 210 ALR 244 Carradine Properties Ltd v Aslam [1976] 1 WLR 442 Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) NSW Conv R 55-358 Delta Vale Properties Ltd v Mills [1990] 1 WLR 445 Etlis v New Age Constructions (NSW) Pty Ltd [2005] NSWCA 165 Fletcher v Nokes [1897] 1 Ch 271 Fox v Jolly [1916] 1 AC 1 Hometeam Constructions Pty Ltd v McCauley [2005] NSWCA 303 Hounslow London Borough Council v Twickenham Garden Developments Ltd [1971] Ch 233 Lactos Fresh Pty Ltd v Finishing Services Pty Ltd [2006] FCA 219 Mannai Investment Co Limited v Eagle Star Life Assurance Co Ltd [1997] AC 749 McIntyre v Marshall [2004] NSWSC 412 Minister for Public Works v Renard Constructions (ME) Pty Ltd (1989) NSWSC, Brownie J, BC8902548 MLW Technology Pty Ltd v May [2005] VSCA 29 Re Stewardson Stubbs and Collett Pty Ltd & Bankstown Municipal Council [1965] NSWR 1671 State of New South Wales v Austeel Pty Limited [2003] NSWCA 392 Wallera Pty Limited v CGM Investments Pty Limited [2001] NSWSC 96 P. Butt, “Uncertainty in Rent Review Notices” (2006) 80(7) ALJ 421
PARTIES:	Aura Enterprises Pty Limited (plaintiff) Frontline Retail Pty Ltd (defendant)
FILE NUMBER(S):	SC 2140/06
COUNSEL:	Mr T Alexis SC w Ms C Champion (plaintiff) Mr S Robb QC w Mr M Zammit (defendant)
SOLICITORS:	Matthews Folbigg Pty Ltd (plaintiff) Baybridge Lawyers Pty Ltd (defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BRERETON J

6 September 2006

2140/06 Aura Enterprises Pty Limited v Frontline Retail Pty Limited

JUDGMENT

1 HIS HONOUR: The defendant Frontline Retail Pty Limited conducts an employment recruiting business, specialising in the retail industry, by which it sources and places potential employees (called candidates) with employers (called clients). The plaintiff Aura Enterprises Pty Limited is Frontline’s franchisee for its Sydney Metropolitan territory, under a franchise agreement for a term of five years from 1 February 2003, with an option to renew for a further five years. Frontline has served several notices asserting that Aura is in default, and that if the defaults are not remedied as required by Frontline, it intends to terminate the agreement. Aura contends that the notices are invalid, and claims declarations that they have no force or effect, and an injunction restraining Frontline from taking any step in reliance upon any of them to terminate the agreement.

2 Frontline has undertaken not to take any step in reliance upon any of the notices until further order of the Court. The proceedings were expedited, and the final hearing was to have commenced on Monday 17 July 2006, but was unable to proceed due to the illness of Frontline’s then leading counsel. In order to salvage some of the time which had been set aside, and to reduce the issues for the final hearing, it was ordered, pursuant to Uniform Civil Procedure Rules 2005 (NSW), r 28.2, that certain issues [namely, those raised by paragraphs 1(a)(i), 1(b), 1(e), 2(a), 2(b), 3(a), 4(a), 5, 6(a) and 6(c) of Aura’s Points of Claim] be determined separately and before all other issues in the proceedings. Those issues relate to the technical validity of the notices, and the order for separate determination was made on the basis that they turned on the contents of the notices, assuming that Frontline could prove facts sustaining the defaults alleged in them. Thus, as Mr Robb QC, who appeared for Frontline, put it, the issues to be determined are essentially in the nature of a demurrer, in that Aura contends that Frontline would not be entitled to terminate in reliance on the notices, even if the facts said to constitute the defaults alleged can be established.

The Notices and the Issues

3 Frontline sent Aura a lengthy notice, entitled “Notice of Default”, dated 6 December 2005 (“the 6 December Notice”) (which Aura calls the first notice). It recites the right to terminate, and states (Part F) that if the breaches are not remedied as set out in the letter, Frontline will upon expiry of the period granted to remedy the breaches, serve a Notice of Termination on 16 January 2006. For present purposes, this notice contains two relevant parts. The first, Part B1, sets out conduct that Frontline says may justify it in terminating forthwith without notice, and purports to reserve its rights to do so. By par 1(a)(i) of its Points of Claim, Aura contends that Frontline is not entitled to terminate without notice on the grounds asserted in Part B1 of the 6 December Notice. Frontline contends that it has not yet purported to terminate without notice on those or any other grounds, and that in those circumstances there is no utility in determining prospectively whether it would or would not be entitled to terminate without notice.

4 Part B2 of the 6 December Notice contains a statement of intention to terminate upon twelve grounds, 2(a) to 2(l). By pars 1(b) and 1(e) of its Points of Claim, Aura contends that Frontline is not entitled to terminate in reliance on the 6 December Notice in respect of any of those grounds. However, in its written submissions and at the hearing, Aura did not press that contention in respect of grounds (h), (j) and part of (l); and Frontline did not seek to sustain the notice in respect of grounds (a), (g), (i), (k), and the balance of (l).

5 On 9 December 2005, Baybridge Lawyers, acting for Frontline, sent to Matthews Folbigg, solicitors for Aura, a letter (“the 9 December letter”), captioned “Notice of Default – Frontline Retail – Further Complaints”, which referred to the 6 December Notice, raised further complaints and alleged breaches by Aura, purported to require certain action of Aura, and concluded:

Given the current circumstances around the number of experienced staff resigning from your client’s business, your client’s suspicion of confidentiality issues in her business and the history of your employees going to competitors our client is extremely concerned that your client is not protecting the goodwill and confidential information (which it is required to do under its franchise agreement) and is now determining if more immediate investigation is required as what steps should be taken to protect these.

6 By paragraph 2(a) of its Points of Claim, Aura contends that Frontline has no right to terminate the agreement in reliance upon the 9 December letter (which it calls the second notice). Frontline, however, says that the 9 December letter was not, and was never intended to be, a notice of intention to terminate.

7 On 12 January 2006, Baybridge sent to Matthews Folbigg a further letter (“the 12 January letter”), captioned “Notice of Default – Frontline Retail”, referring to earlier notices and correspondence, pressing the remedial action which it had sought in Section C of the 6 December Notice, and concluding:

Our client is of the firm view that the action sought is necessary. In the event that your client fails to remedy the breaches referred to in the notice of default by 16 February 2006 then our client will be entitled to terminate the franchise agreement. While our client concedes that the inspection of the franchised operation and records may need to take place after this date, your client must provide the records and undertake the other actions required by 16 February 2006. …
If there is continued non-compliance by 16 February 2006 our client reserves its right to such action as it deems necessary after that date. Such action may include termination of the franchise agreement.
We also note that no attempt appears to have been made by your client to deal with or remedy the complaints made in the letter of 9 December 2005. Our client views these matters seriously and again reserves its right to such action as it sees appropriate.

8 By paragraph 3(a) of its Points of Claim, Aura contends that Frontline has no right to terminate the agreement in reliance upon the 12 January letter (which it calls the third notice). Frontline says that the 12 January letter was not intended by it to be an independent notice of default, but that it had the effect of extending the time required for remedying the breaches notified in the 6 December Notice from 16 January to 16 February 2006.

9 On 30 January 2006, Baybridge sent Matthews Folbigg a further letter (“the 30 January Notice”), captioned “Notice of Default – Frontline Retail”, asserting that Frontline had become aware of “another very serious breach of the franchise agreement”, and purporting to issue “a further notice of default”. The letter identified an alleged breach, and specified action required to remedy it; and it proceeded to assert that Frontline was currently investigating the full extent of the conduct complained of and whether there had been further breaches, reserving any right to take further action - including action arising as a result of fraudulent conduct - should it conclude that the evidence substantiates such an allegation. By paragraph 4(a) of its Points of Claim, Aura contends that Frontline is not entitled to terminate the agreement in reliance on the 30 January Notice (which it calls the fourth notice). Frontline presses the 30 January Notice as a valid and effective notice.

10 On 22 February 2006, Baybridge sent a further letter to Matthews Folbigg (“the 22 February letter”), captioned “Audit/Inspection – Frontline Retail”, requiring Aura to provide missing application forms within seven days and reserving its position in relation to other allegedly missing information and documentation. By paragraph 5 of its Points of Claim, Aura contends that Frontline is not entitled to terminate the agreement in reliance upon the 22 February letter (which it calls the fifth notice). Frontline says that the 22 February letter was not intended to be a separate notice, but was part of the course of correspondence in respect of the remedial action required by the original 6 December Notice.

11 On 24 March 2006, Baybridge sent to Matthews Folbigg a further letter (“the 24 March Notice”), captioned “Notice of Default – Frontline Retail Further Complaints”. After referring to “our previous Notice of Default dated 6 December 2005 and all subsequent accompanying Breach Notices”, this letter described itself as “a further Breach Notice” and proceeded to identify three further alleged breaches, and the action said to be required to remedy them. By paragraphs 6(a) and (c) of its Points of Claim, Aura contends that Frontline is not entitled to terminate the agreement in reliance upon the 24 March Notice (which it calls the sixth notice). However, Aura ultimately did not press this contention in respect of the first breach identified in the 24 March Notice, and Frontline does not seek to sustain that notice as valid and effective in respect of the second and third breaches.

12 The matters in dispute were thus reduced. Frontline does not seek to sustain the 6 December Notice in respect of grounds B2(a), (g), (i), (k), and (l) to the extent that Aura continues to impugn it. While Frontline relies on the 24 March Notice, the parties are agreed that Frontline cannot, in reliance on it, terminate the agreement because of the second and third breaches alleged in it. Frontline does not rely on the letters of 9 December 2005, 12 January or 22 February 2006 as notices of intention to terminate.

13 However, there is an issue as to whether any declaratory relief should be granted in respect of the letters on which Frontline does not rely. Mr Robb submits that it is inappropriate to declare invalid as a notice a document that never purported to be and was at no stage relied upon as such a notice.

14 The 9 December letter was captioned “Notice of Default”, specified a number of complaints and alleged breaches, and purported to require certain responsive action to be taken, though it did not state an intention to terminate. The 12 January letter specified no new default, but asserted that if there was continued non-compliance with the requirements of the 6 December Notice by 16 February, Frontline reserved its rights, including to terminate; it also referred to the 9 December letter but did not refer, at least explicitly, to any proposed termination in that context. The 22 February letter did not expressly assert a default or breach, nor threaten termination, and was not even captioned “Notice of Default”. However, the 24 March Notice refers to earlier “Breach Notices” in addition to that of 6 December, suggesting that there was more than one such additional notice. In those circumstances, Aura was entitled to be concerned that Frontline was relying on at least one or more of the earlier letters as a “Breach Notice”. While the use of the words “Notice of Default” in the captions of some of these letters is not conclusive that they purported to be such notices - those words could as well have been a means of identifying the subject matter of the dispute to which the letters relate, as a description of the letters as such a Notice – they are at least ambiguous, especially given their usage in the letters of 30 January and 24 March, which are maintained by Frontline to be valid notices. The lack of formality in the subsequent letters, as distinct from the 6 December Notice, is far from conclusive that they were not notices, since Frontline maintains that two of these less formal letters – those of 30 January and 24 March – are valid and effective notices. However, as Frontline plainly now eschews reliance upon them, it will suffice if I record that Frontline does not rely on the letters of 9 December 2005, 12 January or 22 February 2006 as notices to remedy and/or of intention to terminate, and it will not be open to Frontline to rely on them for that purpose in aid of any termination in the future.

15 As to the grounds for termination that remain in dispute, Mr Alexis SC, who appears for Aura, advances three main submissions. The first relates to all the defaults alleged in Part B2 of the 6 December Notice, and is that those alleged defaults could not justify termination, because each is a breach of a covenant but no separate notice referred to in sub-cl 9.2 of the agreement has been given (“the two notice point”): Aura contends that the breaches alleged in the 6 December Notice are not capable of constituting defaults authorising termination, in the absence of a prior notice under sub-cl 9.2. The second and third, which now relate only to grounds B2(b), (c), (d), (e) and (f) of the 6 December Notice, and to the 30 January Notice, are that, in respect of those grounds, the notice does not sufficiently identify the relevant termination event or breach, and/or the matters alleged in the notice, assuming that they can be made out, do not constitute a termination event.

The Content of a Notice of Proposed Termination

16 The requirements of a valid notice depend on the Franchising Code of Conduct, and the agreement. [For convenience, I shall refer to the numbered provisions of the Code as “Regulations”, and those of the agreement as “Clauses”].

17 The Code is made pursuant to Trade Practices Act 1994 (Cth), s 51AC, for the purpose of regulating the conduct of participants in franchising towards other participants in franchising [reg 2(1)]. The notice requirements imposed by the Code vary, depending upon whether the termination is for breach, or for some other reason, or for special circumstances. Regulation 21 deals with termination by the franchisor for breach by the franchisee, and provides as follows:

21 Termination — breach by franchisee

(1) This clause applies if:


(a) a franchisee breaches a franchise agreement; and

(b) the franchisor proposes to terminate the franchise agreement; and
(c) clause 23 does not apply.

(2) The franchisor must:


(a) give to the franchisee reasonable notice that the franchisor proposes to terminate the franchise agreement because of the breach; and

(b) tell the franchisee what the franchisor requires to be done to remedy the breach; and

(c) allow the franchisee a reasonable time to remedy the breach.

(3) For paragraph (2) (c), the franchisor does not have to allow more than 30 days.

(4) If the breach is remedied in accordance with paragraphs (2) (b) and (c), the franchisor cannot terminate the franchise agreement because of that breach.

(5) Part 4 (resolving disputes) applies in relation to a dispute arising from termination under this clause.

18 Whereas reg 21 applies to termination for breach, reg 22 is concerned with termination by the franchisor other than for breach by the franchisee, and provides as follows:

22 Termination — no breach by franchisee

(1) This clause applies if:


(a) a franchisor terminates a franchise agreement:

(i) in accordance with the agreement; and
(ii) before it expires; and
(iii) without the consent of the franchisee; and

(b) the franchisee has not breached the agreement; and

(c) clause 23 does not apply.


(2) For subparagraph (1) (a) (iii), a condition of a franchise agreement that a franchisor can terminate the franchise agreement without the consent of the franchisee is not taken to be consent.

(3) Before terminating the franchise agreement, the franchisor must give reasonable written notice of the proposed termination, and reasons for it, to the franchisee.

(4) Part 4 (resolving disputes) applies in relation to a dispute arising from termination under this clause.

19 Regulation 23 is concerned with special circumstances which are exempted from the notice requirements imposed by regs 21 and 22, as follows:

23 Termination — special circumstances

A franchisor does not have to comply with clause 21 or 22 if the franchisee:

(a) no longer holds a licence that the franchisee must hold to carry on the franchised business; or

(b) becomes bankrupt, insolvent under administration or an externally-administered body corporate; or

(c) voluntarily abandons the franchised business or the franchise relationship; or

(d) is convicted of a serious offence; or

(e) operates the franchised business in a way that endangers public health or safety; or

(f) is fraudulent in connection with operation of the franchised business; or

(g) agrees to termination of the franchise agreement.

20 The distinction between the circumstances in which reg 21 applies and those in which reg 22 applies turns on whether the ground for the proposed termination is or is not a breach of the franchise agreement. In the context of a contract, as a franchise agreement is, a “breach” has two elements: an obligation imposed by the agreement, and a state of affairs inconsistent with that obligation. There will be a breach of the agreement where the franchisee does something that the agreement prohibits, or fails to do something that the agreement requires. But not every “termination event” under an agreement is a breach of contract: an agreement may provide that one party is entitled, upon a specified event happening (which may or may not be in the control of the other), to terminate, without imposing any obligation on the other to prevent that event from occurring. In the context of the Code, such an event is one upon which (subject to reg 22) the franchisor may be entitled to terminate, but not a breach of the agreement within reg 21. [The distinction was recognised, in a different context, by McLelland J, as he then was, in Della Imports Pty Ltd v Birkenhead Investments Pty Ltd (1987) NSW Conv R 55-358].

21 In a case to which reg 21 applies, a notice will have to satisfy the requirements of reg 21(2), which involve:

· reasonable notice that the franchisor proposes to terminate the agreement because of the breach;

· information as to what the franchisor requires to be done to remedy the breach; and

· a reasonable time (not exceeding 30 days) to remedy the breach.

22 The requisite notice is one that the franchisor proposes to terminate … because of the breach. Although reg 21 does not in terms require that the notice specify the relevant breach, insofar as it requires notice that the franchisor proposes to terminate because of the breach, it is implicit that the breach must be identified. In Wallera Pty Limited v CGM Investments Pty Limited [2001] NSWSC 96, Davies AJ considered a franchise agreement, cl 8 of which provided as follows:

8. This agreement shall be terminated forthwith upon the following grounds:
(i) Should either party fail to remedy any breach committed by it of the provisions of this agreement within one month after being given notice by the other party that it requires such breach to be remedied.

23 Although what was required was notice by the giver that it requires such breach to be remedied, his Honour concluded that the notice must make clear what is the breach which is required to be remedied:

[22] Clause 8 of the Franchise Agreement requires that notice be given. It may be implied that notice be in writing. The use of the word "notice" imports an act of formality. The notice of 5 August 1999 was appropriate in that respect. In the context of clause 8, a notice must bring to the attention of the recipient the fact that it is alleged that a breach has occurred and that the franchisor requires such breach to be remedied. In this context, a notice must be sufficiently explicit to make it clear to the franchisee what is the breach which the franchisor requires to be remedied.

24 While there is no reference in his Honour’s judgment to the Code, those observations are apposite to the terms of reg 21. I therefore accept that the notice referred to in reg 21 must be sufficiently explicit to make clear what the breach in question is.

25 In circumstances where reg 22 applies, a notice will have to satisfy the requirements of reg 22(2), which involve:

· reasonable written notice of the proposed termination, and

· the reasons for it.

26 Specification of the reasons for the proposed termination would at the very least require identification of the relevant termination event that gave rise to the right to terminate.

27 The distinctions drawn between different circumstances of termination by regs 21, 22 and 23 of the Code are significant when considering cl 9 of the franchise agreement, which provides as follows:

9 Termination - Default
The Franchisor without prejudice to any other rights or remedies provided for hereunder or by law or equity may, upon service of reasonable notice of termination in writing upon the Franchisee, containing reasons for the proposed termination terminate this Agreement upon the occurrence of any of the events set out below. In respect of proposed termination pursuant to sub-clauses 9.1, 9.2, 9.3, 9.6, 9.7, 9.8, 9.9, 9.13, 9.14, 9.15 and 9.16 the Franchisor must inform the Franchisee as to what is required to be done to remedy the breach and allow the Franchisee a reasonable time to remedy the breach in respect of the remaining sub-clauses the termination shall be forthwith: …

28 The terminology of cl 9 makes clear that the draftsperson had in mind the provisions of the Code. This is clear from the use in cl 9 of terms which closely reflect the terminology of the Code: for example, “reasonable notice of termination” [cf reg 21(2)(a), 22(3)]; “reasons for the proposed termination” [cf reg 22(3)]; “inform the Franchisee as to what is required to be done to remedy the breach” [cf reg 21(2)(b)]; and “allow the Franchisee a reasonable time to remedy the breach [cf reg 21(2)(c)]”. There is also a correspondence between the provisions excluded from the list referred to in cl 9 (in respect of which notice to remedy is required) with those which are exempted from notice requirements under the Code by reg 23 of the Code. These matters support the conclusion that the draftsperson of cl 9 of the agreement had an eye on, and was endeavouring to give effect to, the relevant provisions of the Code - a conclusion which is fortified by cl 14 of the agreement, which provides that any part of the agreement that does not comply with the Trade Practices Act is void and of no effect to the extent of such non-compliance:

14 Trade Practices Act
14.1 Compliance
The parties to this Agreement shall do all such things that are necessary to comply with the Trade Practices Act 1974 (“the Act”).
14.2 Effect of Non-Compliance
If any part of this Agreement does not comply with the Act then such part of this Agreement as does not comply with the Act shall be void and of no effect to the extent of such non-compliance without thereby affecting the validity, legality or enforceability of the remaining provisions (or parts of those provisions) of this Agreement which shall continue in full force and effect. However, this Agreement will come to an end where such amendment does defeat the capacity of the Franchisor to grant the Franchise hereby granted and the ability of the Franchisee to lawfully conduct the Franchised Operation.

29 Accordingly, cl 9 should be construed from the perspective that it was drawn conscious of and in an attempt be consistent with the relevant provisions of the Code.

30 Whereas, in the Code, reg 21 deals with termination for breach, reg 22 with termination other than for breach, and reg 23 with special circumstances; in the agreement cl 9 is an omnibus clause, dealing with events some of which fall variously within regs 21, 22 and 23 of the Code. The first sentence of cl 9 has the effect that termination is authorised, reasonable notice containing reasons having been given, upon the termination events that are listed in cll 9.1 to 9.16. It is concerned with events, as distinct from breaches. Its terminology closely reflects that of reg 22(3) of the Code. Although I was at first attracted to Mr Robb’s submission that it referred to notice of actual termination, and that the word “proposed” was inapt, on reflection the words “reasonable” and “proposed” make clear that it refers to a notice of intention to terminate, which it requires to be “reasonable notice of termination in writing … containing reasons for the proposed termination”. Just as with cl 22, the requirement to give reasons involves, at the very least, a requirement to specify the termination event that is said to entitle the Franchisor to terminate.

31 The second sentence of cl 9 has the effect that, except when any of the specified termination events to which it specifically refers [namely, those referred to in sub-cll 9.1, 9.2, 9.3, 9.6, 9.7, 9.8, 9.9, 9.13, 9.14, 9.15 and 9.16] is to be relied upon, “the termination shall be forthwith”; but in the case of the termination events referred to in the specified sub-clauses, the Franchisor must first inform the Franchisee as to what is required to remedy the breach and allow the Franchisee a reasonable time to do so. This sentence closely reflects reg 21 of the Code, and the termination events that are excluded from the notice requirement closely correspond with those covered by reg 23. It is concerned, at least primarily, with breaches, as distinct from events. For the same reasons that apply to reg 21 of the Code, the requirement to inform the Franchisee of what is required to remedy the breach necessarily involves specifying the alleged breach.

32 Accordingly, cl 9 contemplates a notice of proposed termination, the precise requirements of which depend upon whether or not it relies upon a termination event in one of the sub-clauses specified in the second sentence. In any event, it must contain the reasons for the termination, which at a minimum requires identification of the relevant termination event. It must be “reasonable notice”, but where the termination event is not one of the specified sub-clauses, immediate termination is reasonable. Where the termination event is one of the sub-clauses specified in the second sentence, the notice must inform the recipient of what is required to remedy the breach, and allow a reasonable time to do so. Once again, in order to do so, the notice must be sufficiently explicit to make clear what the breach in question is.

33 In this case, the termination events relied upon are all “breaches” within reg 21 of the Code. The sufficiency of the notices depends, in part, upon the extent of particularity and detail that a notice must contain in respect of the relevant obligation and inconsistent state of affairs said to constitute the breach.

34 A notice need not be drawn with the formality of a pleading and need not specify every material fact relied upon as constituting the breach. In State of New South Wales v Austeel Pty Limited [2003] NSWCA 392, in the context of a notice of dispute triggering an arbitration, Mason P (with whom Meagher and Giles JJA agreed), said:

A notice must, like a pleading, attempt to capture or describe the essence of the existing dispute or difference, at least from the perspective of the initiating party, but like any business document it is to be construed fairly in its context. It was not submitted that it had to be drawn with all the formalities of a pleading.

35 Mr Alexis accepted that a notice did not have to specify and particularise every material fact that constitutes an alleged breach. However, he invoked Fletcher v Nokes [1897] 1 Ch 271, in which North J (at 274), said that a notice under the equivalent of Conveyancing Act 1919 (NSW), s 129, had to be sufficiently distinct to direct the attention of the recipient tenant to the particular things of which the landlord complained:

I think the notice which is to be given under s 14 ought to be such a notice as will enable the tenant to understand with reasonable certainty what it is which he is required to do. I do not mean that the landlord need go through every room in a house and point out every defect. But the notice ought to be so distinct as to direct the attention of the tenant to the particular things of which the landlord complains, so that the tenant may have an opportunity of remedying them before an action to enforce a forfeiture of the lease is brought against him. In my opinion, the notice which the plaintiff has given to the defendant is not sufficiently specific. Section 14 says that it is to be a notice 'specifying the particular breach complained of.' I do not think that is met by a notice which simply says, 'You have broken the covenants for repairing.' The plaintiff has not condescended upon any details, and, in my opinion, the notice is not sufficient under s 14.

36 Mr Alexis also referred to Fox v Jolly [1916] 1 AC 1, in which Lord Buckmaster LC said of the same provision that it must state with sufficient particularity the breach of which the landlord complained, and that it was not open to the giver to rely on other breaches of covenants not sufficiently specified in the notice (at 15):

The notice must state with sufficient particularity the breach of which the landlord complains, and that breach the tenant must satisfy within a reasonable time. If he does satisfy it, it would not be open to the landlord to allege that there was another breach of another covenant, which had been referred to in the notice, but had not been sufficiently specified, which had not been remedied.

37 In Wallera, Davies AJ (at [25]) relied on those cases to conclude that the term “notice” in cl 8 of the franchise agreement there under consideration required that the notice make clear what is the breach which if not remedied will lead to termination. However, as his Honour acknowledged, there was no equivalent in cl 8 of that agreement of the phrase “specifying the particular breach complained of”, and in Hometeam Constructions Pty Ltd v McCauley [2005] NSWCA 303, the Court of Appeal (McColl JA; Ipp and Tobias JJA agreeing) considered (at [147]) that this was a significant distinction. Nor is there any equivalent in reg 21 of the Code or in cl 9 of the agreement.

38 In Re Stewardson Stubbs and Collett Pty Ltd & Bankstown Municipal Council [1965] NSWR 1671, a building contract entitled the proprietor to terminate if the builder continued in default for 14 days after being given “a notice … specifying the default”. Moffitt J (as he then was) explained the requirement of such a notice in a way which shows that it will often be sufficient to identify the relevant clause of the contract under which the obligation arises, though it will sometimes be necessary to go further in particularising the manner in which the default has occurred (at 1675):

The question still remains, however, whether the notice ‘specifies the default’ … A default can be specified in two ways; one is by directing attention to the provision in the contract in respect of which default is made. The other is by giving particulars of the manner in which a breach has occurred. In order to specify the default I think at least the former must be pointed out. But each case will depend on its own circumstances as to whether in order to specify the default there must be added some particulars such as will identify the particular breach alleged … with regard to subclause … (2) … the mere reference to the clause said to be in breach may be sufficient to specify the default.

39 In Hounslow London Borough Council v Twickenham Garden Developments Ltd [1971] Ch 233, Megarry J said that all such a notice had to do was “to direct the contractor’s mind to what is said to be amiss” [see also Minister for Public Works v Renard Constructions (ME) Pty Ltd (1989) NSWSC, Brownie J, BC8902548]. In Hometeam v McCauley, McColl JA, after an extensive review of the authorities, concluded that it was sufficient for a notice of default to recite the terms of the contractual provision (which required that the building works be done with due diligence and within the time stipulated within the contract), and allege that the builder had failed to proceed with the building works with due diligence.

40 In Mannai Investment Co Limited v Eagle Star Life Assurance Co Ltd [1997] AC 749, Lord Steyn said (at 767) that notices containing errors may nonetheless be valid if sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to how and when they are intended to operate [for which his Lordship cited Delta Vale Properties Ltd v Mills [1990] 1 WLR 445, 454 E-G (Slade LJ; Stocker and Bingham LJJ agreeing); and Carradine Properties Ltd v Aslam [1976] 1 WLR 442, 444]. His Lordship added (at 771) that notices must be interpreted in accordance with business commonsense. Mannai established a “reasonable recipient test” for the construction of contractual notices - in essence, approaching the task from the perspective of a reasonable recipient, with knowledge of the terms of the relevant contract and taking into account the surrounding circumstances - which has since been applied consistently [Australasian Performing Right Association Ltd v Metro on George Pty Ltd (2004) 210 ALR 244; MLW Technology Pty Ltd v May [2005] VSCA 29; Etlis v New Age Constructions (NSW) Pty Ltd [2005] NSWCA 165; McIntyre v Marshall [2004] NSWSC 412; Lactos Fresh Pty Ltd v Finishing Services Pty Ltd [2006] FCA 219; P. Butt, “Uncertainty in Rent Review Notices” (2006) 80(7) ALJ 421].

41 Accordingly, for present purposes, a notice will sufficiently specify a breach if from its terms a reasonable recipient, who has knowledge of the terms of the contract, would, taking into account the surrounding circumstances, be able to identify the obligation and the manner in which it is alleged to have been breached – for which purpose reference to the relevant provision of the franchise agreement may in some cases suffice, but reference to facts describing how the breach is said to have occurred may sometimes also be necessary.

42 For the purpose of the determination of these separate questions, it has been assumed that Frontline could prove the facts asserted by it as constituting any relevant breach, and the order for separate determination was made on that basis. From the conclusion that a notice does not have to specify and particularise every material fact that constitutes an alleged breach, it follows that the circumstance that the particulars given in the notice of a breach do not specify every material fact which has to be proved, or every exception which has to be excluded, to sustain it, does not prevent Frontline from proving those facts at the hearing - so long as it has given sufficient notice of the relevant breach - and does not mean that the breach cannot be sustained. It is only if on no basis could the matters alleged, if proved, constitute a breach (as distinct from where they may or may not amount to a breach depending on further evidence) that Aura’s third submission could succeed.

43 Against this background, consideration can now be given to the specific complaints raised by Aura.

The Two-Notice Point

44 It is first convenient to deal with Aura’s submission that where the termination event relied on is a breach of covenant, at least two successive notices - one under sub-cl 9.2, and then one under cl 9 and reg 21 - must be given, before there is any entitlement to terminate.

45 Clause 9.2, which is one of the termination events specified in the second sentence of cl 9, itself contains a notice requirement:

9.2 Breach of Covenant
If and whenever there shall be a breach of any of the covenants and conditions herein contained and such breach continues for 14 days after service by the Franchisor of a notice on the Franchisee requiring him to remedy the same.

46 Aura submits that the combined effect of cl 9 and sub-cl 9.2 is that each of the defaults alleged in paragraphs B2(a) to (l) of the 6 December Notice involves an alleged breach of covenant; that under sub-cl 9.2, there is a termination event only if a breach of covenant continues for 14 days after service of a notice requiring Aura to remedy the breach; further, that because sub-cl 9.2 is one of the sub-clauses referred to in the second sentence of the prefatory part of cl 9, termination is authorised only if Frontline has first informed Aura as to what is required to remedy the breach and allowed a reasonable time to do so; accordingly, that before Frontline can serve a valid notice of intention to terminate under cl 9 for a prospective termination pursuant to sub-cl 9.2, it must first serve a sub-cl 9.2 notice to remedy and then must wait for 14 days before serving a cl 9 notice; that the 6 December Notice does not allege that any of the breaches has continued for 14 days after service of a notice to remedy; and therefore that there is no event entitling Frontline to terminate, and, accordingly, that the 6 December Notice does not support termination on any of the grounds B2(a) to (l).

47 The notice referred to in sub-cl 9.2 is a notice requiring the franchisee to remedy the breach. Thus before Frontline can terminate because of a breach of covenant, Aura must have been given a notice to remedy, and have remained in default for 14 days thereafter. The question is whether this notice requirement is necessarily cumulative with the requirement imposed by the second sentence of cl 9, or can be concurrent with it.

48 Mr Alexis points to several matters as supporting his submission. First, he refers to the serious consequences of termination, including surrender of the leasehold and loss of the franchise business, without any compensation for goodwill (cl 10). However, these are usual consequences of termination of leases, licences and franchises and do not suggest that two periods of notice or grace would be intended. Secondly, he points out that reg 21(3) in the Code refers to a 30-day period of notice, whereas sub-cl 9.2 refers to a 14-day period. However, the reference in reg 21(3) to 30 days is a maximum, in the sense that a franchisee is not required to allow more than 30 days to remedy, so this does not advance the argument. Thirdly, he submits that if the notice in sub-cl 9.2 were the same notice as that in the second sentence of cl 9, one would expect the contract to say so, and that the circumstance that the contract apparently refers to two notices suggests that two notices were intended. However, this begs the question, which is whether the contract does necessarily refer to two notices.

49 At first sight, the suggestion that a franchisee should be entitled to two notices to remedy before being in default so as to authorise termination is a surprising one. It is, to say the least, uncommon for a defaulting party to be entitled to two periods of grace or notice. Such a result would be so uncommercial and extraordinary that it is unlikely to have been intended. Clause 9 admits of an alternative construction, which is much more likely to have been intended, particularly given the apparent familiarity of the draftsperson with the Code, including in particular reg 21.

50 The first sentence of cl 9 is a general provision, governing all terminations. Under it, the franchisor can terminate if a termination event listed in cl 9 has occurred, so long as it has given the requisite notice (which must comply with the requirements of the first sentence, and also comply with the requirements of the second sentence in those cases to which it applies). One of the listed termination events is a breach of covenant which continues for 14 days after notice to remedy has been given: sub-cl 9.2. Where the termination event involves a breach of the agreement, the reason for termination will be the breach continuing for (at least) 14 days after notice to remedy.

51 Further, because a sub-cl 9.2 event is one of those specified in the second sentence of cl 9, such an event will authorise termination only if Aura has been informed what is required to be done to remedy the breach and allowed a reasonable time to do so. The second sentence of cl 9 refers to “the breach”, as does sub-cl 9.2, and not to “the event” or “the default”. The matters specified in sub-cl 9.1 and following sometimes but not invariably involve “breaches”, but all are “events”. Thus the second sentence of cl 9 governs a list of termination events, some of which involve “breaches”, but some of which do not. While this gives occasion to pause before concluding that “breach” in that sentence is a reference to the same “breach” as in, for example, sub-cl 9.2, nonetheless the better view is that it is. If it were otherwise, the reference to “breach” in the second sentence would have to be read as a reference to the failure to remedy the original breach of covenant within 14 days, but it is not possible to remedy such a breach - a failure to remedy the original breach within 14 days is incapable of remedy, because the time cannot be retrieved. Accordingly, at least in the context of sub-cl 9.2, the breach referred to in the second sentence of cl 9 is the same breach as that referred to in sub-cl 9.2, rather than the whole event constituted by sub-cl 9.2.

52 It follows that before Frontline can terminate under cl 9, pursuant to sub-cl 9.2 for breach of covenant, three conditions must be satisfied. The first is that Aura has been given notice to remedy and the breach has continued for 14 days thereafter [sub-cl 9.2]. The second is that Aura has been informed what is required to be done to remedy the breach and allowed a reasonable time to remedy it [cl 9, second sentence]. The third is that Aura has been given reasonable notice of the intention to terminate, stating the reasons for the proposed termination.

53 However, there is nothing that requires these three conditions to be satisfied consecutively, as opposed to concurrently, nor that there be separate notices to satisfy each of them. In my opinion, it is not essential that separate notices be served, first under sub-cl 9.2, and subsequently under the introductory part of cl 9, before the franchisor is entitled to terminate for breach of covenant. The same notice can require the breach to remedied, specify what is required to be done to do so, allow a reasonable time to do so (provided that that reasonable time is not less than 14 days), and state that reason for the proposed termination, namely the breach continuing for (at least) 14 days after service of notice to remedy. The franchisee is not entitled to two notices to remedy and two periods of grace. The same notice can satisfy the requirements of the second sentence of cl 9, as well as the requirements of sub-cl 9.2.

54 For present purposes, each of the matters alleged in paragraphs B2(a) to (l) of the 6 December Notice is, if established, a breach of covenant. The 6 December Notice, in Part B2, specifies 12 alleged breaches of covenant, stating “If you fail to rectify breaches as required then the Franchisor will take immediate action, which may include terminating the Franchise Agreement”. Part C specifies the remedial action that the Franchisor requires to be taken, by setting out in detail the what Frontline asserts is required to remedy the breach; the validity of those requirements does not fall for determination at this stage, but is to be assumed. Part F, headed “Failure to Remedy”, states: “Should you fail to remedy the breaches set out above, we will, upon expiry of the period granted to remedy the breaches, serve a Notice of Termination of the Franchise Agreement effecting termination on 16 January 2006”. Thus the notice specifies breaches of covenant, requires the franchisee to remedy the breaches, specifies what is required to be done to remedy them, allows at least 30 days (excluding the Christmas holiday period) - which, self-evidently, is more than 14 - for that remedial action, and states that Frontline will terminate if the breaches have not been remedied at the expiry of that time. Accordingly, Frontline has informed Aura of what is required to be done to remedy the breach and, upon expiration of the notice, will have at least the maximum 30 days required to do so; and it has served notice requiring Aura to remedy the breach, upon expiration of which the breach will (unless Aura has remedied it, and for present purposes the contrary is to be assumed) have continued for (at least) 14 days after service of the notice to remedy. The notice has the effect of giving, as the reason for the proposed termination, the failure to remedy the relevant breaches by 16 January 2006 – which is at least thirty days after service of the notice to remedy. Subject to (1) proof of the breaches and their continuance until 16 January 2006, which for present purposes is to be assumed, and (2) the sufficiency of the notice in specifying certain of the alleged breaches, addressed below, the three conditions for termination required by cl 9 are satisfied, and no further notice is required.

6 December Notice - Part B1

55 Part B1 of the 6 December Notice alleges two breaches, (a) the alteration of a named candidate’s curriculum vitae prior to its submission to a potential employer in a manner which increased her apparent experience and seniority; and (b) that Aura had been involved in or permitted the alteration of the Frontline Retail Database and had directed consultants to change database records for Aura’s benefit, in order to alter the evidence which would be available to the investigations then being undertaken by Frontline of potential breaches by Aura. It asserts, in respect of those alleged breaches:

These breaches may entitle the franchisor to immediately terminate the franchise agreement under section 9.10 of the franchise agreement or section 23(f) of the franchising code of conduct. The franchisor currently reserves its rights in this regard.

56 Clause 9.10 of the franchise agreement provides that a termination event is constituted, relevantly, by engaging in conduct which reflects unfavourably on the operation and reputation of the franchise or the services or the franchisor:

9.10 Misrepresentation
The Franchisee makes or has made any material misrepresentations relating to the acquisition of the Franchised Operation or the Franchisee engages in conduct which reflects unfavourably on the operation and reputation of the Franchise or the Services or the Franchisor.

57 Aura contends that the facts particularised in this part of the notice do not amount to fraud within reg 23(f), and that Frontline is therefore not entitled immediately to terminate the franchise agreement on that ground.

58 Clause 9 of the agreement permits immediate termination for a cl 9.10 event. Regulation 23(f) of the Code permits termination without notice if the franchisee “is fraudulent in connection with the operation of the franchised business”. If reg 23 is inconsistent with cl 9, then reg 23 prevails, and the franchisor may invoke it. If reg 23 is not inconsistent with cl 9, then it is available. Thus, whether or not reg 23 is inconsistent with cl 9, the franchisor may terminate without notice, if the ground referred to in regulation 23(f) is made out.

59 While, by Part B1 of the 6 December Notice, Frontline has informed Aura that it is investigating and reserving its right immediately to terminate on that ground, Frontline has not in fact purported to terminate the franchise agreement without notice. If it decides to do so, reg 23 means that it does not have to first give notice of proposed termination, so no question of validity of any notice arises, or would arise; the only question is whether the ground can be sustained when, if ever, it is invoked. In the case of termination for fraud under reg 23(f), there is no need to have given a valid notice of proposed termination.

60 There is therefore no utility in deciding whether in this respect the 6 December Notice is valid, or in declaring that Frontline would not be entitled to terminate immediately on the grounds specified in Part B1 of that notice, since the validity of any immediate termination does not depend on the adequacy of any notice. Accordingly, it would be inappropriate to grant any declaration in respect of Part B1 of the 6 December Notice.

6 December Notice - Ground B2(b)

61 Ground B2(b) in the 6 December Notice is as follows:

(b) You have breached the Franchise Agreement by submitting a candidate to an interview with a potential employer without requiring the candidate to complete an application in breach of franchise policy contrary to clause 3.16.3 of the Franchise Agreement and the Frontline Retail Policies and Procedures.
PARTICULARS
Lee Carver was submitted to City Beach on 26 August 2005 without an application form having been completed.

62 The agreement provides for Frontline to lend Aura manuals detailing procedures involved in carrying on the business, and deems a breach of any terms or conditions of any such manual to be a breach of the agreement. Clause 3.16.3 of the agreement provides as follows:

3.16.3 Property of the Franchisor
The parties agree that such material and Manuals must remain the property of the Franchisor and that copyright in such Manuals must on no account whatsoever pass to the Franchisee and that a breach of any terms or conditions of any manuals must be deemed to be a breach of this Agreement.

63 The agreement also obliges Aura to observe and maintain standards in the conduct of the franchised operation at least equal to those prescribed from time to time upon reasonable notice by Frontline, and, in particular, in all respects to comply with the regulations procedures and standards prescribed by Frontline in the “Frontline Retail Policies and Procedures Manual”, known as the “PPM”, a manual produced by Frontline (cl 2.20.1), and fully to comply with all regulations, procedures and standards prescribed in the PPM, provided that to the extent of any inconsistency, the franchise agreement prevails (cl 2.20.2).

64 The PPM is a document of some 124 pages, containing policies under several sections. In the section entitled “Consultant and Admin Policies and Procedures”, there is a policy entitled “Using Collection Statement”, which relevantly provides as follows:

From the above date any information collected from an individual, be it personal details i.e. candidates applying for positions; or personal opinion i.e. opinions from referees when conducting a reference check.
1. New Candidates

· Every candidate is to be provided with a copy of the Frontline Retail Collection Statement when they are given an Application Form to complete.

· Prior to the commencement of an interview, the interviewing Consultant must check that all four (4) Declarations on the Application Form are signed and dated.

65 The subject matter of that policy is not completion of applications, but collection statements for privacy purposes. Mr Robb did not identify, and I cannot find, any other suggested source of an obligation not to submit a candidate to interview without requiring the candidate to complete an application. The conduct alleged could not constitute a breach of any obligation imposed by the contract.

66 In some cases, particularisation of the facts said to constitute an alleged breach might sufficiently enable the obligation to be identified, even against a fairly general reference to the source of the obligation – such as by the reference here merely to the PPM, with or without reference also to cl 2.20 or 3.16.3. But in this case, if the PPM imposes any obligation not to submit a candidate to interview with a potential employer without first requiring the candidate to complete an application, then the notice does not enable the source of any such obligation to be identified. Thus, although the notice specifies with particularity the conduct that is said to be in breach of the agreement, it does not identify, sufficiently or at all, the obligation said to have been breached. In this respect, the notice does not sufficiently specify the alleged breach, because a reasonable recipient – even one familiar with the terms of the contract – would be unable to find the provision in the contract from which the relevant obligation is said to arise.

67 For two reasons, then – first, that the conduct alleged could not constitute a breach of any obligation imposed by the contract, and secondly, that the 6 December Notice does not sufficiently specify the alleged breach, because it does not identify the obligation said to have been breached - the notice is not a valid notice in respect of Ground B2(b), and Frontline is not entitled to terminate the agreement because of ground B2(b) referred to in the 6 December Notice, in reliance upon that notice.

68 In reaching this conclusion, I have not taken into account that the notice does not negative the applicability of the policy “Putting a Candidate Forward Prior to a Candidate Interview”, in the section “Candidate Policies and Procedures”, which provides as follows:

Sometimes extreme urgency is required in the process of filling a position or placing a candidate. A consultant may need to act outside of our standard procedure and discuss a candidate’s details with a client prior to that consultant meeting the candidate for a face-to-face interview.

69 If, contrary to my view, there were an obligation not to submit a candidate to interview without an application form having been completed, then the availability of an exception in circumstances of “extreme urgency” would not invalidate the notice: there would be a factual issue as to whether there was “extreme urgency” such as to justify departure from the (hypothetical) policy. A notice not requiring the formalities of a pleading does not need to allege every material fact necessary to sustain a breach, let alone to negative potential exceptions.

6 December Notice - Ground B2(c)

70 Ground B2(c) in the 6 December notice is as follows (sic):

(c) You have breached the Franchise Agreement by being involved in or permitted the alteration of a candidate’s curriculum vitae contrary to clauses 2.15, 2.22, 2.31 and 9.10 of the Franchise Agreement and the frontline Retail Policies and Procedures and its Ethical Code of Conduct.
PARTICULARS
Refer to the particulars at point 1(a) above.

71 Frontline does not press reliance on cll 2.15 and 2.31. Clause 2.22 of the franchise agreement, which Frontline presses, provides that Aura and those representing it were bound to be of good character, and not to engage in unethical or unconscionable conduct:

2.22 Be of Good Character
The Franchisee and those representing the Franchisee must be of good character and must not engage in unethical or unconscionable conduct.

72 Aura submits (1) that the conduct alleged (the alteration of a named candidate’s curriculum vitae prior to its submission to a potential employer in a manner which increased her apparent experience and seniority) could not sustain a breach of any of the clauses mentioned, and (2) that the notice, by referring to numerous provisions of the agreement and to the PPM without specifying any part of it or explaining how alteration of a candidate’s curriculum vitae is a contravention, does not make explicitly clear what is the breach required to be remedied.

73 As to the first of those submissions, however, alteration of a curriculum vitae in the manner alleged is obviously at least capable of being unethical conduct (contrary to cl 2.22), and/or conduct which reflects unfavourably on the operation and reputation of the franchise, within cl 9.10. As to the second, while the notice refers to multiple clauses, and those clauses contain multiple potential grounds, there is no difficulty in seeing how the conduct alleged could fall within at least one limb of each of cll 2.22 and 9.10. A reasonable recipient familiar with the contract and the events would look at each of the clauses referred to in the notice, and on doing so would recognise that the conduct described could be a breach of at least one limb of at least two of those clauses. A notice is not an indictment, and is not vitiated by duplicity, so long as the reasonable recipient can discern what the breach alleged is. Here, identification of multiple sources of an obligation, even though some contain several limbs, and conduct that could be a breach of at least one of them, does not deprive the notice of the character of one that identifies obligations and a state of affairs inconsistent with them, or at least some of them, so as to specify an alleged breach. The notice is not defective in respect of this ground.

6 December Notice - Ground B2(d)

74 Ground B2(d) in the 6 December notice is as follows:

(d) You have been involved in or permitted the alteration of the Frontline Retail Database contrary to clauses 2.15, 2.22 and 2.31 of the Franchise agreement and the Frontline Retail Policies and Procedures and its Ethical Code of Conduct.
PARTICULARS
Refer to the particulars at point 1(b) above.

75 Once again, Frontline does not press reliance on cll 2.15 and 2.31.

76 Aura submits (1) that the conduct alleged (involvement in the alteration of the Frontline Retail Database for Aura’s benefit, in order to alter the evidence which would be available to the investigations then being undertaken by Frontline of potential breaches by Aura) could not sustain a breach of any of the clauses mentioned, and (2) that the notice, by referring to numerous provisions of the agreement without explaining how alteration of the database is a contravention, does not make explicitly clear what is the breach required to be remedied.

77 However, the conduct alleged – altering a database for Aura’s benefit – could, depending on the evidence that emerges, be unethical, contrary to cl 2.22. It cannot be said that the conduct particularised, if proved, could not constitute a breach. And a reasonable recipient familiar with the contract and the events, looking at each of the clauses referred to in the notice, would recognise that the conduct described could be in breach of at least cl 2.22. For substantially the same reasons as apply to ground B2(c), the notice is not defective in respect of this ground.

6 December Notice - Ground B2(e)

78 Ground B2(e) in the 6 December notice is as follows (sic):-

(e) You have breached the Franchise Agreement by being involved in or permitting inadequate or misleading reference checks to be submitted to clients contrary to clauses 2.15, 2.22, 2.31 and 9.10 of the Franchise Agreement and the Frontline Retail Policies and Procedures and its Ethical Code of Conduct.

PARTICULARS
Complaints regarding the information submitted by the Sydney Agency to Colorado as follows:
(i) Daniel Beniston who was placed at Colorado Penrith on 4 July 2004. Colorado was not informed that he had been suspended from his position with City Beach for physical assault. Daniel Beniston was then placed in a position with Esprit (started 15 November 2005) and no reference checking with City Beach was undertaken by the Sydney Agency before proceeding with the Esprit placement;
(ii) Rebecca Sewtell who was placed at Colabro Formal Wear starting 26 May 2005. A reference was provided from Video Ezy from a person described as an Area Manager. Colorado later tried to check out the referee. He refused to give a reference check. Colorado then found out that Video Ezy does not have “Area Managers and that from the relevant Video Ezy Franchisee that Ms Sawtell had taken out a claim of constructive dismissal. This information was not forwarded by the Sydney Agency as part of its reference check;
(iii) Catherine Criniti who was placed as a store manager at Colorado Penrith. Two reference checks were sent to Colorado. Both of these were form Sportsgirl. They only had mobile numbers, they did not state employment dates and are not from a regional manager even though they both state “direct report”. The referee’s positions were simply described as causal and causal manager. A third reference check, although required under the policy and procedure, was not completed. Colorado has rejected these checks.

79 Once again, only cl 2.22 and 9.10 are now pressed, together with the PPM.

80 Aura submits (1) that the conduct alleged could not sustain a breach of any of the clauses mentioned, and (2) that the notice, by referring to numerous provisions of the agreement and to the PPM without specifying any specific part of a relevant clause, does not make explicitly clear what is the breach required to be remedied.

81 The relevant part of the PPM is the policy “Reference Check Standards”, in the section “Candidate Policies and Procedures”. That policy provides as follows:

Where there is cash handling and desirable stock there are possible thieves. One of the major concerns our clients have is that our candidates are thoroughly reference checked, prior to placing a candidate. A minimum of three reference checks must be completed by the consultant(s) putting that candidate forward for position(s).
In accordance with the NPP, the candidate must sign the reference declaration before the referees are contacted. The only referees that can be contacted are the ones on the application form. Any other checks cannot be made. If the candidate has not given enough referees or has missed one from a recent position this must be addressed in the interview, and further referees need to be filled in on the application form.
It is the interviewing consultant’s responsibility to ensure that the referees on the application form relate to the last three positions that the candidate has held.
A reference check must fit the following criteria:

(a) The Reference must relate to one of the last 3 positions held.

(b) The Reference must be a direct report or higher.

(c) Any gaps in the Candidate’s employment history addressed by the Consultant in the interview.

(d) If the contact number of the Referee is a mobile phone number, the identity of the referee must be confirmed (see below).

(e) Permission must be given by the candidate to: a) contact the referee and b) pass the reference check onto a third party (declaration on the application form).

(f) Permission must be given by the referee to: a) conduct the reference check and b) pass the reference check onto a third party (declaration on the reference check form).
Mobile Phone Numbers and Referees
Where mobile phone numbers are used for a referee, a further call should be made to confirm the details of the referee. To do this contact the company or HR dept. in the company they were working with the referee. Check the referee’s position and mobile phone number or take down the referee’s landline and call them back. … Be aware that it is not uncommon for a person to ask a friend to stand in as a false referee and supply their mobile number with the name of Regional/Area Manager from the company that they are stating they worked for.

82 The particulars, if established, identify conduct falling short of the standards required by that policy. Essentially, the particulars identify facts from which it is contended an inference is to be drawn that there had been inadequate reference checking, having regard to the requirements of the policy. The particulars identify specific candidates and placements. If the facts particularised were established, it is at least arguable that a failure to make reference checks in accordance with the policy would be inferred.

83 Mr Alexis submitted that there was no allegation in the particulars that Aura was aware of Ms Sawtell’s constructive dismissal claim. That is beside the point; the significance of these particulars is to allege that such a matter would have been discovered by proper reference checking (assuming that Aura was otherwise unaware of it), and that the failure to discover it supports an inference that there was not proper reference checking in accordance with policy. Mr Alexis also argued that, because the policy provided that there could not be contact with referees not named by the candidate, the particulars were insufficient in that, in the case of Mr Beniston, it was not alleged that City Beach was recorded as a referee on his application form. However, the policy required that there be at least three referees, and that if the candidate did not name three, that deficiency be addressed at the interview and additional referees obtained. In any event, it is not necessary that a notice not requiring the formality of a pleading state every material fact, let alone expressly negative the possibility that the candidate did not list sufficient referees.

84 Generally, it may be desirable that the obligation be more clearly specified than simply by a reference to the PPM, and in some cases, at least where the relevant part of the PPM cannot easily be identified, a notice that fails to do more may be inadequate. But in this case, the applicable obligations relating to reference checks can easily be identified in the PPM, where they are indexed under the heading “Reference Check Standards”. A person familiar with the terms of the contract would have no difficulty in finding the relevant provision, indexed under their title, and having found it would see that the facts particularised are inconsistent with a reference check in accordance with that policy having been conducted. For reasons explained elsewhere, the circumstance that other clauses of the agreement are also referred to does not vitiate the notice.

85 The notice is not defective in respect of this ground.

6 December Notice - Ground B2(f)

86 Ground B2(f) in the 6 December notice is as follows (sic):

You have breached the Franchise Agreement by actively soliciting clients or otherwise promoting or seeking to promote your services outside your territory, without the Franchisor approval contrary to clause 2.49 of the Franchise Agreement.
PARTICULARS
The recent actions of Brett Bailey from the Sydney Agency regarding the prospecting for Positions with Rebel sport in the Newcastle/Central Coast area.

87 By cl 1.1 of the agreement, Frontline granted to Aura a franchise to establish and operate an outlet under the “Frontline Retail” name and logo and using the Frontline system, within the Sydney Metropolitan Area, which was described on a map included in the agreement. Aura is obliged not actively to solicit clients or otherwise promote or seek to promote services outside the Sydney Metropolitan Area for its sole benefit, except where it had obtained Frontline’s prior written approval, by clause 2.49 of the agreement, which is as follows:

2.49 Conducting Business Outside the Territory
The Franchisee must not actively solicit clients or otherwise promote or seek to promote the Services outside the Territory for the sole benefit of the Franchisee except where the Franchisee has obtained the Franchisor’s prior written approval.

88 Aura submits that the breach alleged cannot be sustained, because it is not asserted that the actions particularised were conducted “for the sole benefit of” Aura.

89 However, by referring to cl 2.49 and the facts said to constitute the breach, the alleged breach has sufficiently been brought to the notice of Aura. A reasonable recipient of the notice, with knowledge of the provisions of the agreement, would understand the allegation, in the context of the reference to clause 2.49 and the facts particularised as constituting a breach of that clause, necessarily to involve that the conduct was for the sole benefit of Aura. An allegation that such conduct was contrary to clause 2.49 clearly includes an allegation that it was for the sole benefit of the franchisee. It does not matter that not every single material fact constituting a breach is explicitly alleged, and the absence of an explicit allegation that the prospecting with Rebel Sport was for the sole benefit of Aura does not prevent Frontline from proving that to be so by evidence; accordingly it cannot be said that the breach cannot be sustained.

90 The notice is not defective in respect of this ground.

30 January Notice

91 The 30 January Notice is relevantly as follows (sic):

Breach of Clauses 1.1 of the Franchise Agreement – Operating Outside Territory
Nature of Breach
On 14 June 2005 your client placed the Candidate Graeme Hauser in the Position of Victorian Sales/Retail Operations Manager based in Melbourne. The above candidate commenced employment on or about 6 October 2005 and your client received commission for this placement on 11 November 2005. This placement was outside the territory your client has been licensed to operate in pursuant to clause 1.1 of its Franchise Agreement and within the territory of another Frontline Franchisee (the Melbourne Franchisee).
Action Required
Your client is required to reimburse the Melbourne Franchise $19,271.20 for 80% of the value of the above placement. Your client is required to deposit this amount via Electronic Funds Transfer into the account of the Franchisor by no later than 5pm on Wednesday 1 February 2006. Your client is to contact the Frontline Retail national Operations for the details of the Franchisor account in which it is to deposit the above amount.

92 Reference has already been made to cl 1.1 of the agreement, which grants a franchise to establish and operate a franchise operation at the location within the territory defined as the Sydney Metropolitan Area, and cl 2.49, which governs the conduct of business outside that territory. Aura submits that cl 1.1 must be read with cl 2.49 and the “Out of Territory Placement Policy” (which provides for the sharing of remuneration between agencies in the event of an out-of-territory placement), and that the breach alleged cannot be sustained in the absence of an allegation that the placement was for the sole benefit of Aura or otherwise than in compliance with the Policy.

93 I agree that cl 1.1 must for present purposes be read with cl 2.49. The grant of a franchise within a territory is not necessarily breached by the conduct of the franchise business outside the territory; the obligation not to trade outside the territory is imposed by cl 2.49.

94 For reasons explained in connection with ground B2(f) in the 6 December Notice, the absence of explicit use of the words “for its sole benefit” in the notice does not detract from its validity in this respect; the reasonable recipient would understand – especially in the context of the 6 December notice, in ground B2(f), which expressly referred to cl 2.49, that the allegation involved an assertion that the placement was for Aura’s sole benefit. Moreover, although I would have reached the same conclusion without it, the statement of “action required” makes clear that what is sought is reimbursement to the Melbourne franchise of 80% of the value (leaving Aura with 20%), which itself is an indication that the placement had been for Aura’s sole benefit. Nor does the absence of those words preclude Frontline from proving that the placement was for Aura’s sole benefit, so it cannot be said that the breach cannot be sustained. This notice is not defective.

Conclusion

95 Frontline does not rely on the letters of 9 December 2005, 12 January or 22 February 2006 as notices to remedy and/or of intention to terminate, and it will not be open to Frontline to rely on them for that purpose in aid of any termination in the future.

96 Frontline concedes that it is not entitled to terminate the agreement in reliance upon the 6 December Notice for grounds B2(a), (g), (i), (k), and so much of (l) as relies on refusals to allow Frontline to interview Aura’s employees, referred in that notice, or in reliance upon the 24 March Notice for the second and third breaches alleged in that notice.

97 A notice need not be drawn with the formality of a pleading and need not specify every material fact relied upon as constituting the breach. For present purposes, a notice will sufficiently specify a breach if, from its terms, a reasonable recipient, who has knowledge of the terms of the contract, would, taking into account the surrounding circumstances, be able to identify the obligation and the manner in which it is alleged to have been breached – for which purpose reference to the relevant provision of the franchise agreement may in some cases suffice, but reference to facts describing how the breach is said to have occurred may sometimes also be necessary.

98 Before Frontline can terminate under cl 9, pursuant to sub-cl 9.2 for breach of covenant, three conditions must be satisfied: first, that Aura has been given notice to remedy and the breach has continued for 14 days thereafter [sub-cl 9.2]; secondly, that Aura has been informed what is required to be done to remedy the breach and allowed a reasonable time to remedy it [cl 9, second sentence], and thirdly, that Aura has been given reasonable notice of the intention to terminate, stating the reasons for the proposed termination. However, nothing requires these three conditions to be satisfied consecutively, as opposed to concurrently, and it is not essential that separate notices be served, first under sub-cl 9.2, and subsequently under the introductory part of cl 9, before the franchisor is entitled to terminate for breach of covenant. The same notice can satisfy the requirements of the second sentence of cl 9, as well as the requirements of sub-cl 9.2, by requiring the breach to remedied, specifying what is required to be done to do so, allowing a reasonable time to do so (provided that that reasonable time is not less than 14 days), and stating the reason for the proposed termination, namely the breach continuing for (at least) 14 days after service of notice to remedy.

99 There is no utility in determining whether Frontline would not be entitled to terminate immediately on the grounds specified in Part B1 of the 6 December Notice, since, no notice being required for an immediate termination under reg 23(f), the sufficiency of any such notice is immaterial.

100 The conduct alleged in ground B2(b) of the 6 December Notice could not constitute a breach of any obligation imposed by the contract, and the 6 December Notice does not sufficiently specify the alleged breach because it does not identify the obligation said to have been breached. Frontline is therefore not entitled to terminate the agreement in reliance upon the 6 December notice for ground B2(b) in that notice.

101 The 6 December Notice is not defective in respect of grounds B2©, (d), (e) or (f).

102 The 30 January notice is not defective.

103 On the separate questions, each party has had a measure of success. Their resolution is part of the overall dispute as to whether or not Frontline is entitled to terminate the agreement. The final hearing may find that on the grounds which remain available, Frontline is or is not entitled to terminate. Costs of the separate determination should be costs in the proceedings.

104 Subject to any submissions as to form, which should be notified to my associate and the other party within 24 hours, my orders are:

1. Note that the Defendant does not rely on the letters of 9 December 2005, 12 January or 22 February 2006 as notices to remedy and/or of intention to terminate, and that it will not be open to the Defendant to rely on them for that purpose in aid of any termination in the future.

2. Declare that the Defendant is not entitled to terminate the franchise agreement between it and the Plaintiff dated 1 February 2003:-


2.1 because of grounds B2(a), (b), (g), (i), (k), and so much of (l) as relies on refusals to allow the Defendant to attend the Plaintiff’s business premises to interview employees, referred in the 6 December Notice, in reliance upon that notice, or

2.2 because of the second and third breaches alleged in the 24 March notice, in reliance upon that notice.

3. Order that the Defendant be restrained from terminating the franchise agreement between it and the Plaintiff dated 1 February 2003:-


3.1 because of grounds B2(a), (b), (g), (i), (k), and so much of (l) as relies on refusals to allow the Defendant to attend the Plaintiff’s business premises to interview employees, referred in the 6 December notice, in reliance upon that notice, or

3.2 because of the second and third breaches alleged in the 24 March notice, in reliance upon that notice.


4. Order that costs of the determination of the separate questions be costs in the proceedings.

5. Standover the balance of the proceedings to the Expedition List on Friday, 8 September 2006 at 10.00 am for further directions.

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