Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3)
[2019] FCA 72
•8 February 2019
FEDERAL COURT OF AUSTRALIA
Australian Competition and Consumer Commission v Geowash Pty Ltd (Subject to a Deed of Company Arrangement) (No 3) [2019] FCA 72
File number: WAD 230 of 2017 Judge: COLVIN J Date of judgment: 8 February 2019 Catchwords: CONSUMER LAW - application for orders and pecuniary penalties against a company, its sole director and its 'national franchising manager' - whether company and individuals engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law - consideration of s 29(1)(i) of the Australian Consumer Law - where representations made on company website to prospective franchisees about expected revenue and profit - where representations made on company website that the company has a commercial affiliation with several brands - where representations on website were false - where dealings as to charges to be made to franchisees created the overall impression that franchisor intended to charge in a particular way - where overall impression was false and misleading as to the franchisor's intentions as to the way it would charge - finding that the company did engage in misleading conduct
CONSUMER LAW - whether company engaged in unconscionable conduct in contravention of s 21 of the Australian Consumer Law by its charging practices - where franchisees were charged in staged payments and told these payments would be applied for the set-up and fit-out of their franchise - where the payments were instead applied to meet the expenses of the company generally and pay commissions to staff - where the payments were not applied to the set-up and fit-out of the franchise - finding that the company did engage in unconscionable conduct
CONSUMER LAW - whether company did not act in good faith towards franchisees in contravention of cl 6 of the Franchising Code of Conduct - consideration of the meaning of good faith in the unwritten law - where the company's charging practices did not accord with the terms of the franchise agreements entered into - consideration of significance of facts occurring prior to commencement of operation of cl 6 - finding that the company did not act in good faith
CONSUMER LAW - consideration of accessorial liability of company director and 'national franchising manager' for contraventions by company - whether individuals were knowingly concerned in contraventions - where director and 'national franchising manager' were principal actors and principal financial beneficiaries of the conduct - finding that sole director was knowingly concerned in all contraventions - finding that 'national franchising manager' was knowingly concerned in some contraventions
Legislation: Competition and Consumer Act 2010 (Cth) ss 51ACB, 51AE, 83, 137H, Schedule 2 ss 4, 18, 20, 21, 29 37 Cases cited: Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51
Australian Competition and Consumer Commission v IMB Group Pty Ltd [2003] FCAFC 17
Australian Competition and Consumer Commission v TPG Internet Pty Ltd [2013] HCA 54; (2013) 250 CLR 640
Australian Competition and Consumer Commission v Ultra Tune Australia Pty Ltd [2019] FCA 12
Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Byrne & Frew v Australian Airlines Ltd [1995] HCA 24; (1995) 185 CLR 410
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12; (2000) 202 CLR 45
Commonwealth Bank of Australia v Barker [2014] HCA 32; (2014) 253 CLR 169
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; (2006) 229 CLR 577
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903
Kobelt v Australian Securities and Investments Commission [2018] FCAFC 18
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268
McGrath; in the matter of Pan Pharmaceuticals Ltd (in liq) v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2; (2008) 165 FCR 230
Meehan v Jones [1982] HCA 52; (1982) 149 CLR 571
North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1
Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17
Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50; (2015) 236 FCR 199
Peters (WA) Ltd v Petersville Ltd [2001] HCA 45; (2001) 205 CLR 126
Quinlivan v Australian Competition and Consumer Commission [2004] FCAFC 175; (2004) 160 FCR 1
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45
Rural Press Ltd v Australian Competition and Consumer Commission [2003] HCA 75; (2003) 216 CLR 53
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84
Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222; (2010) 41 WAR 318
Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315
Topseal Concrete Services Pty Ltd v Sika Australia Pty Ltd [2008] WASC 57
Unique International College Pty Ltd v Australian Competition and Consumer Commission [2018] FCAFC 155
United Group Rail Services Ltd v Rail Corporation (NSW) [2009] NSWCA 177; (2009) 74 NSWLR 618
Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd [2017] FCAFC 190
WMC Resources Ltd v Leighton Contractors Pty Ltd [1999] WASCA 10; (1999) 20 WAR 489
Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661
Date of hearing: 18-22, 25-26 June 2018 and 10-12 September 2018 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Category: Catchwords Number of paragraphs: 779 Counsel for the Applicant: Mr SM Davies SC and Mr AJC Mossop Solicitor for the Applicant: Norton Rose Fulbright Counsel for the Respondents: Mr M Rennie Solicitor for the Respondents: Roderick Storie Solicitors
Table of Corrections 11 September 2020 At [619] the word 'injury' has been amended to correctly read 'inquiry': '(the first causation inquiry) … (the second causation inquiry)'. ORDERS
WAD 230 of 2017 BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION
Applicant
AND: GEOWASH PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ACN 153 078 776)
First Respondent
SANAM ALI
Second Respondent
CHARLES CAMERON
Third Respondent
JUDGE:
COLVIN J
DATE OF ORDER:
8 FEBRUARY 2019
THE COURT ORDERS THAT:
1.There be judgment for the applicant.
2.On or before 1 March 2019 the applicant do file and serve a minute of the declarations and orders it seeks to give effect to, and consequent upon, the reasons of the Court delivered on 8 February 2019.
3.There be a case management hearing as to the further conduct of the proceedings to be held on a date to be fixed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
COLVIN J:
From 2013 until 2016, Geowash Pty Ltd (Geowash) offered carwash franchises to interested parties in Australia. The franchises were for hand car wash and detailing businesses to be conducted at particular sites identified in accordance with the policy of Geowash.
The standard Geowash franchise agreement provided that the franchisee was responsible for the payment of the costs of fit‑out. In some cases, the fit‑out was to include a café area where a customer could obtain refreshments while waiting for a car wash to be completed. In other cases, the franchise was to be located in a car park near a shopping area where cars could be washed or detailed while the customer was shopping. Some potential sites had existing buildings and hardstand areas that could be converted to the needs of a carwash. Others were vacant sites that required all the necessary facilities to be constructed. It was also possible for the franchise to be for the operation of carwash carts in a carpark. So, there was considerable variation in what may be required for the fit‑out of a particular Geowash site.
Franchisees also had to pay Geowash for the equipment required to conduct the carwash business and there were other fees payable by franchisees such as an establishment fee, documentation fee, site selection costs and expenses and an initial training fee.
Although Geowash did itself take a lease of some sites and then sublease the sites to franchisees, in most instances once a site was identified a lease was negotiated and entered into by the franchisee with the owner of the site. Nevertheless, Geowash negotiated the leases.
There were 18 Geowash franchisees who commenced trading. Geowash also entered into a number of other franchise agreements but for various reasons outlets were never opened by those other franchisees.
At all material times, Ms Sanam Ali was the sole director of Geowash and Mr Charles Cameron was the 'national franchising manager' for Geowash.
In 2011, the Australian and New Zealand rights to the Geowash business concept were licensed to Hibah Til Noor Pty Ltd (HTN) by Zonda Trade LLC. HTN is a company controlled by Ms Ali. HTN in turn licensed Geowash which was the entity that entered into agreements with franchisees. HTN was not involved in the franchising activities of Geowash.
The Australian Competition and Consumer Commission (ACCC) claims that Geowash made representations to prospective franchisees that were not true and to the extent that they concerned future matters were made without reasonable grounds. Some of the representations are alleged to have been made by Geowash publishing material about average monthly earnings and the clients of Geowash on its website. Others concern the manner in which Geowash would charge its franchisees for the costs of establishing a franchise at a particular site.
The conduct of Geowash in making each of the representations is said to have been misleading or deceptive or likely to mislead or deceive in contravention of s 18 of the Australian Consumer Law (ACL). Certain of the representations are also said to have contravened s 29(1)(h) and (i) and s 37(2) of the ACL, each of which is a civil penalty provision.
There is a separate claim that Geowash, by Ms Ali and Mr Cameron, engaged in conduct in dealings with Geowash franchises that was unconscionable in contravention of s 21 of the ACL. The unconscionability claim focusses upon the manner in which Geowash dealt with its franchisees in respect of the costs of establishing a franchise, particularly the costs associated with the fit‑out for the site from which the franchise business was to be conducted.
As to dealings with franchisees that occurred after 1 January 2015, the same conduct is said to have contravened the obligation under cl 6 of the Franchising Code of Conduct upon each party to a franchise agreement to act towards another party in good faith. It is a contravention of s 51ACB of the Competition and Consumer Act 2010 (Cth) (CCA) to contravene the Code.
Ms Ali and Mr Cameron are both alleged to have been knowingly concerned in or a party to the various contraventions alleged against Geowash.
The ACCC seeks extensive relief against Geowash, Ms Ali and Mr Cameron, namely declaratory relief, orders for pecuniary penalties, injunctions, orders requiring attendance at a compliance seminar, the publication of a corrective notice, orders for payment of consumer redress, orders disqualifying Ms Ali and Mr Cameron from managing a corporation for five years, orders against the respondents for the purposes of s 83 and s 137H(3) of the CCA, costs and such further relief as the Court deems fit.
At the final hearing, there was no appearance for Geowash. The Court was informed that the ACCC has given an undertaking to the administrators of Geowash not to enforce any relief that may be obtained without first obtaining the leave of the Court to do so. Subject to that undertaking, the matter proceeded to a final hearing of the claims to relief against each of Geowash, Ms Ali and Mr Cameron.
For the following reasons, Geowash (a) engaged in false, misleading or deceptive conduct of the kind alleged (save for the claim that s 29(1)(i) of the ACL was contravened); (b) engaged in unconscionable conduct as to its charging practices; and (c) breached cl 6(1) of the Code by failing to act towards four of its franchisees in good faith concerning its charging practices. Ms Ali was knowingly concerned in and a party to all the contravening conduct of Geowash. Mr Cameron was knowingly concerned in all the contravening conduct except the making of the revenue, profit and affiliation representations.
I am also satisfied that there should be declarations of contravention and orders for pecuniary penalties in amounts to be determined. As the parties did not otherwise address in their submissions the nature and extent of relief that might be granted if the claims by the ACCC were upheld there should be a further hearing at which the parties should make submissions as to the form of relief including whether any of the other relief sought by the ACCC in its application should be granted and, if so, in what terms.
PART I: THE CLAIM, DEFENCE AND ISSUES FOR DETERMINATION
The representations
The ACCC claims that in the course of marketing franchises on its website, Geowash made representations to prospective franchisees that they could make average revenues of $70,216 and estimated gross profits of $30,439 in an average 28 day period. These are referred to by the ACCC as the Revenue Representation and the Profit Representation respectively.
The ACCC also claims that in the course of marketing franchises on its website, Geowash represented that it had a commercial relationship or affiliation with each of Nissan, Kia, Renault, Audi, Emirates, Shell, Hertz, Holden, Ikea and Thrifty. This is referred to by the ACCC as the Affiliation Representation.
These three representations are said to have been made by publication on Geowash's website in a form that appeared on the website between 21 May 2015 and 13 May 2016.
The ACCC also claims that, as to the costs and expenses of establishing an operating franchise site, Geowash represented to prospective franchisees that it would charge franchisees in accordance with the terms of a standard form franchise agreement and a disclosure document. It says that the representation was made by the provision of the franchise agreement and disclosure document (in various versions) to franchisees. This is referred to as the Charging Representation.
The ACCC alleges that Ms Ali and Mr Cameron were each knowingly concerned in or were parties to the representational conduct of Geowash.
Alleged falsity of the representations
As to the Revenue and Profit Representations, the ACCC claims that the statements were untrue. Further, the figures were based on a single 28 day period of trading by one franchisee specifically selected for that purpose. It is said that the figures were not for a calendar month, were not an average and were not representative of the overall performance over a year. Therefore, the figures used could not be reasonable grounds for the statements made.
The statements are also said to be false statements as to a material particular concerning the profitability of the business activity of conducting a Geowash franchise contrary to s 37(2) of the ACL.
To the extent that the Revenue Representation and Profit Representation were with respect to future matters, reliance is placed upon s 4 of the ACL.
As to the Affiliation Representation, the ACCC claims that the statement was untrue because Geowash had no commercial relationship with the various brands featured on its website. It is also said to be a false statement that Geowash had sponsorship, approval or affiliation with those brands contrary to s 29(1)(h) of the ACL.
As to the Charging Representation, the ACCC claims that a disclosure document and a draft standard form franchise agreement were provided by Ms Ali and Mr Cameron to potential franchisees. The documents had specific provisions about charging. None of them allowed for an up front capital sum to be charged. Rather, they allowed for recoupment of actual costs of fitting out premises and costs of set‑up that were incurred by Geowash. It is alleged that the presentation to prospective franchisees of the franchise agreements and disclosure documents in that form represented that charging for fit‑out and set‑up would occur in the manner expressed in those documents.
The case advanced for the ACCC as to the falsity of the Charging Representation is that the dealings by Ms Ali and Mr Cameron with franchisees concerning payments to be made did not reflect the terms of the franchise agreements and disclosure documents provided to prospective franchisees. Instead, Ms Ali and Mr Cameron dealt with franchisees in the following way:
(1)Ms Ali or Mr Cameron or both of them would ascertain the maximum budget of the prospective franchisee;
(2)negotiations with the franchisee would be undertaken on the basis that a franchise could be acquired for a lump sum which was discussed and agreed being typically the maximum budget of the prospective franchisee;
(3)shortly after a franchise agreement was entered into, Ms Ali or Mr Cameron or both of them would demand on behalf of Geowash the payment of a lump sum;
(4)the demand for the lump sum amount was made without reference to the actual costs of fit‑out or set-up of the franchise site; and
(5)it was the business model or practice of Geowash to make a demand for a lump sum payment shortly after a franchise agreement was entered into by the franchisee.
In opening the case for the ACCC senior counsel explained that the reference to 'budget' was to be understood in terms of the 'franchisee's capacity to pay'. The case alleged is that because of the evidence of the actual dealings with franchisees as to payments to Geowash, the matters stated in the disclosure documents and the franchise agreements as to the manner in which franchisees would be charged were not true. It is said that the matters stated in those documents conveyed a representation as to what Geowash intended to charge when the intention of Geowash, through Ms Ali and Mr Cameron was to act in the way that they did. They were not intending to recover actual costs. Rather, it was always their intention to charge lump sums by reference to amounts established by reference to an assessment of the capacity of the individual franchisee to pay and then apply significant parts of those monies for their own benefit.
To the extent that the statements in the disclosure documents and franchise agreements were statements about how Geowash would charge in the future, reliance is again placed on s 4 of the ACL.
The conduct in relation to charging franchisees is alleged to contravene s 18 and s 29(1)(i) of the ACL. Section 29(1)(i) proscribes the making of a false or misleading representation with respect to the price for the acquisition of services. The dealings by Geowash concerning the charges to be made under the franchise agreements are alleged to concern the amount paid or payable for the acquisition of services from Geowash. The ACCC made no real submissions as to how the case it advanced fell within the terms of s 29(1)(i) beyond asserting its application to the facts as alleged.
Defence of misrepresentation claims
Ms Ali accepts that she arranged for the statements about gross revenues and profits in an average 28 day period to be published on the Geowash website, but says that they were based upon actual figures for the then most recent 28 day period of trading by the Geowash franchise in Osborne Park. She says that they were presented as monthly figures. Ms Ali claims that the use of the term average was in the nature of commendatory puffery. Further, she claims that they were not statements in respect of a 'material particular' for the purposes of s 37(2). So, even if the statements on the website contravened s 18 of the ACL, they could not give rise to any liability to pay a pecuniary penalty because they did not involve a contravention of s 37(2). It is said that there were reasonable grounds for the statements because they were based on actual trading figures for a Geowash franchisee.
Mr Cameron relies upon the same matters as Ms Ali and says, in addition, that he did not take any steps to publish the information on the website because that was handled by Ms Ali. He accepts that he knew that the information had been published and that he spoke to Ms Ali about the statements at about the time they were published.
As to the Affiliation Representation claim, Ms Ali and Mr Cameron admit that Geowash did not have established client relationships with the parties concerned. They say that Geowash International (the owner of the brand) did have those affiliations. They say that they believed that they could rely on the relationship with Geowash International to support the statements made about client affiliations. Mr Cameron also claims that he could rely upon relationships between individual franchisees and their dealings with businesses associated with some of the brands. For those reasons they say that they were not parties who were knowingly concerned in any conduct by Geowash that may contravene the ACL.
Again as to affiliation with the various brands, Mr Cameron says that he did not take any steps to publish the information on the website because that was handled by Ms Ali. He accepts that he knew that the information had been published and that he spoke to Ms Ali about it at the time.
As to the Charging Representation claim, Ms Ali and Mr Cameron say that there was nothing in the disclosure documents or the franchise agreements about how the franchisees would be invoiced. They say that in their dealings with the franchisees they asked for a budget in order to ascertain how much the franchisee wanted to spend, to avoid exploring inappropriately cheaper options and to act in the franchisee's interest to pursue the best opportunity available. Further, they say that the way in which Geowash charged its franchisees was explained in plain English documents given to all prospective franchisees. It was those documents that franchisees relied upon when entering into the franchise agreements and it was not misleading in any way to deal with franchisees in relation to charges for fit‑out and set‑up costs in a way that reflected those documents.
Ms Ali and Mr Cameron also say that franchisees were charged in accordance with the terms of the franchise agreements or at least their understanding of how those documents operated which understanding was based on legal advice received by Geowash.
Mr Cameron says that Ms Ali was responsible for preparing the estimates upon which invoices to franchisees were based.
They accept that monies received from franchisees were used to pay amounts to each of them that were calculated based upon a percentage of those amounts, but they say that Geowash was entitled to pay those amounts from the monies received from the franchisees. They say that the percentage based amounts were to remunerate Ms Ali and Mr Cameron for the work that they did to negotiate lease terms, establish the franchise premises and arrange the fit‑out, permits and other matters required for each site. On that basis, they were part of the costs that Geowash was entitled to charge franchisees.
To the extent that the Charging Representation is alleged to contravene s 29 of the ACL, they say the case advanced by the ACCC concerns a representation about how the franchisees were to be invoiced, not a representation about the total price to be charged to franchisees. Therefore, it could not be a basis upon which to establish a contravention of s 29(1)(i) because it did not allege the making of a representation 'with respect to price'.
They also say that by reason of the legal advice given to Geowash, they believed that the charging conformed to the requirements of the franchise agreement and, on that basis, they could not be knowingly concerned in or party to any misrepresentation about price by Geowash.
Unconscionable conduct and lack of good faith
The ACCC claims that Geowash, by Ms Ali and Mr Cameron, engaged in unconscionable conduct and did not act towards its franchisees in good faith by:
(1)negotiating the sale of franchises to prospective franchisees who were typically unsophisticated when it came to owning and operating a business;
(2)ascertaining from the prospective franchisees their maximum budget;
(3)negotiating with prospective franchisees as if a franchise could be acquired for a lump sum, being typically the maximum budget;
(4)engaging in the above conduct despite it being inconsistent with the terms of the franchise agreement and disclosure document;
(5)representing that the prospective franchisee would be able to acquire an operating Geowash franchise within the discussed budget;
(6)invoicing for lump sums under franchise agreements when there was no right to do so;
(7)demanding and pressing for urgent payment of lump sums that were usually more than the budget that had been discussed;
(8)failing to deliver an operating car wash to the majority of its franchisees; and
(9)spending a significant portion of the funds received from franchisees for purposes that were not permitted under the franchise agreements, including payment of general operating expenses of Geowash, the payment of commissions to Ms Ali and Mr Cameron and transferring funds into assets directly or indirectly controlled by Ms Ali or Mr Cameron.
As to the unconscionable conduct, in broad terms the ACCC says that Geowash dealt with prospective franchisees by agreeing a lump sum amount to be paid for a franchise that reflected the budget of the franchisee. Those agreements were reached with franchisees at a time when there had been no fit‑out. The ACCC claims that although Geowash was entitled to undertake the fit‑out as agent for the franchisee and charge for the fit‑out costs and certain other specific charges, what occurred was that Geowash, without regard to actual fit‑out costs or charges that could be made by Geowash under the franchise agreement, invoiced franchisees for two instalments of the lump sum amount. It says that when the instalments were paid, a considerable proportion was used to pay amounts to Ms Ali and Mr Cameron based upon a percentage when the franchise agreement did not allow Geowash to charge franchisees for such commissions. It also says that the instalment amounts were applied to meet general operating costs of Geowash rather than to meet the cost to fit‑out the premises for the particular franchise. Ultimately, it is claimed that Geowash failed to deliver an operating car wash franchise to the majority of its franchisees.
As to the alleged failure to act towards the franchisees in good faith, the ACCC relies upon the same conduct to the extent that it occurred after 1 January 2015.
Defence of claims of unconscionable conduct and breach of good faith
A number of answers are advanced by Ms Ali and Mr Cameron to the claims of unconscionability and failure to act in good faith. They say that the franchisees did not lack sophistication in business matters. They say that the representations that they made to the franchisees about the way in which they were to be charged and the dealings they had with franchisees were consistent. So, even if Geowash did not charge in accordance with the terms of the franchise agreements (which is disputed), they could not be found to have engaged in unconscionable conduct or to have dealt with franchisees in a manner that was not in good faith because in their dealings with franchisees they acted in a manner that was consistent with what they told each franchisee. They also claim that the franchisees committed to their franchises based upon the information that Ms Ali and Mr Cameron provided, not upon a close reading of the disclosure documents and the franchise agreements. On that basis, they contend that there could be no exploitation or taking advantage of franchisees by Geowash acting consistently with the information that had been provided.
As to the charges that were made, Ms Ali and Mr Cameron say that Ms Ali developed an estimate as to what the development cost would be for a particular site based on a business model that involved Ms Ali and Mr Cameron doing work 'in‑house'. This enabled them, it was said, to keep costs to franchisees at a competitive level. By invoicing franchisees in lump sum 'staged payments' they say that they were acting in accordance with legal advice to Geowash. They also say that the advice was to the effect that Geowash could include the percentage based payments made to Ms Ali and Mr Cameron as part of the staged payments.
They say that operating carwash businesses were delivered to the franchisees.
As to the claim that Geowash acted towards its franchisees in a manner that was not in good faith, Ms Ali and Mr Cameron advance the same responses that they raise in respect of the claim of unconscionability. In addition, they say that the ACCC has not identified with precision the aspects of the conduct relied upon. They contend that it is only conduct that occurred after 1 January 2015 that is relevant and that for the franchisees who gave evidence, they all committed to their franchise agreements before 1 January 2015.
A submission was also advanced for Ms Ali and Mr Cameron that the case as advanced by the ACCC concerning unconscionability and the failure to act towards franchisees in good faith is confined to dealings with those franchisees who gave evidence at the final hearing.
No submission is advanced to the effect that the activities the subject of the proceedings were not undertaken in trade or commerce.
Issues for determination
The Court was presented with a great deal of written evidence to which no reference was made, both in the form of documents and written testimony. The evidence of franchisees raised complaints about aspects of their dealings with Geowash that were not the subject of the claims made by the ACCC. The case proceeded to final hearing on the basis of a concise statement. There was no application by the ACCC to amend. In those circumstances, it is important to ensure as a matter of fairness that the case as advanced by the ACCC is confined to the concise statement.
I directed that the parties file closing submissions in which the findings that the Court was invited to make were stated. Much of the evidence was not addressed in those submissions. In particular, submissions advanced for Ms Ali and Mr Cameron were not constrained by the discipline of a close consideration of the documents, affidavits and oral evidence. Instead, the submissions were constructed at a level of generality that failed to engage with the detail. The Court was not taken to many of the documents that were received into evidence whether by way of references to support submissions or findings the Court was asked to make or otherwise. These reasons reflect the way matters were addressed by way of closing submissions and the findings that the Court was invited to make.
Aside from the claims concerning the Revenue, Profit and Affiliation Representations, the main case advanced by the ACCC focussed upon the way Geowash charged franchisees who entered into a franchise agreement and what it did with the money. Although a lot of evidence was led to place those dealings in context, ultimately, the case concerned only the dealings by Geowash (through Ms Ali and Mr Cameron) in relation to those charges. Speaking broadly, the case alleged by the ACCC as to what franchisees were charged reduced to two main parts.
The first part of the charging case advanced by the ACCC was that Geowash represented that the charges it would make for the fit‑out and set‑up of each franchise site would be for the actual costs incurred by Geowash when the intention was to charge by reference to what each franchisee was willing to pay and use the money to pay commissions and meet general operating costs and expenses of Geowash (being costs that included, but were not confined to, the fit‑out and set‑up of each outlet). Geowash kept no records showing how the money it charged to each franchisee was spent on fit‑out and set‑up. Key to this aspect of the case was the making of payments by Geowash to Ms Ali and Mr Cameron that were described in its bank statements as 'commissions'. Ms Ali and Mr Cameron maintained that the commissions were actually payments for work done to establish and set‑up each franchise. The ACCC maintained that they were payments made for securing the 'sale' of a franchise. Linked to this part of the case was the claim that charges were rendered by Geowash to franchisees on the basis of what they were willing to pay. It was this manner of charging that provided the means by which Geowash could plan to pay the commission payments and then use the balance of the amounts received from franchisees to meet actual fit‑out and set‑up costs.
The second part of the charging case advanced by the ACCC was that the way franchisees were charged was unconscionable or in breach of the duty to act in good faith in dealing with franchisees. Essentially, franchisees were told they could acquire a franchise within a budget, they were then invoiced lump sum amounts that Geowash was not entitled to charge that were often more than the budget and a considerable part of those amounts was applied to pay commissions to Ms Ali and Mr Cameron and to meet general operating costs of Geowash rather than to meet the costs of establishing the franchise. Ultimately, Geowash failed to deliver an operating car wash to a number of franchisees. The franchisees were relatively unsophisticated when it came to setting up a franchise business.
Although there were attempts by both the ACCC on the one hand and Ms Ali on the other hand to construct from the available information figures as to where the money was spent, in the result neither party was able to demonstrate in a meaningful way to the requisite standard how much of the amounts paid by franchisees was spent on each franchise. So, in order to determine the issue as to where the money was spent it is necessary to consider the course of dealings with franchisees and general evidence as to what Geowash did with the money, including whether franchise sites were actually established with the money.
Given the context in which the allegation about the failure to establish an operating car wash is made, the case alleged by the ACCC is that the failure to establish the car wash was a consequence of the way Geowash applied the funds it received. In effect, the scheme or system alleged involves failing to deliver a car wash. No such case was established by the ACCC.
The issues for determination are:
(1)were untrue statements made on the Geowash website about the average revenue and gross profit that a leading Geowash franchisee had earned;
(2)were the statements about revenue and profit no more than commendatory puffery;
(3)to the extent that they concerned future matters (namely an indication of the levels of revenue and profit that a leading Geowash franchisee could earn in the future) was there a reasonable basis for the statements about revenue and profit;
(4)were the statements about revenue and profit misleading having regard to the context in which they were made;
(5)were the statements about revenue and profit false or misleading in a material particular concerning the profitability, risk or other material aspect of the business activities of Geowash;
(6)was it misleading to display the international logos on the Geowash website under the heading 'Our Clients';
(7)did the display of the logos involve a false or misleading representation that Geowash had a sponsorship, approval or affiliation in respect of the companies who used those logos;
(8)did Geowash engage in misleading or deceptive conduct in respect of its communications with franchisees about how they would be charged;
(9)did Geowash make a false or misleading representation with respect to the price of goods or services in respect of its communications with franchisees as to how they would be charged;
(10)are the claims against Ms Ali and Mr Cameron alleging unconscionability and a failure to act towards franchisees in good faith confined to those franchisees who gave evidence at the final hearing;
(11)did Geowash engage in unconscionable conduct of the kind alleged;
(12)what is the nature and extent of the relevant obligation under the Code to act towards the franchisees with good faith;
(13)did Geowash breach its obligation under the Code to act towards the franchisees in good faith in the manner alleged;
(14)was Ms Ali involved in any contravention by Geowash;
(15)was Mr Cameron involved in any contravention by Geowash; and
(16)should the relief sought by the ACCC be granted?
PART II: OVERVIEW OF COURSE OF DEALINGS BETWEEN GEOWASH AND FRANCHISEES
The evidence at the final hearing demonstrated that, for the most part, dealings by prospective franchisees with Geowash followed a similar course. Certain of the documents exchanged between Geowash and individual franchisees were similar in content. The evidence of Ms Ali and Mr Cameron was also to the effect that certain steps were taken with respect to most franchisees and that Geowash adopted what was described as an invoicing practice that involved staged payments.
It is convenient to deal with my findings as to these matters at the outset before considering the evidence of dealings with particular franchisees.
If a franchisee made an inquiry then an initial email would be sent to the prospective franchisee. The form of the response changed over time. It was an email of a few paragraphs. Attached to the email was a document described as 'Franchise Overview'.
The Franchise Overview was a colour brochure describing the Geowash hand car wash business. Under the heading 'Low Establishment Investment' it contained information depicting the range of costs for a Geowash site. It referred, for example, to ranges from $89,000 for a car park franchise to $250,000 for a car wash and café.
It also had a section describing a five stage application process. Stage 5 was expressed as follows:
ŸAfter 14 days, you can now legally sign your Franchise Agreement and pay the balance of your initial Franchise Fee …
ŸAfter 7 days cooling off period, you may now proceed and pay the balance of your Franchise Purchase Price.
After the reference to Stage 5, the Franchise Overview then stated:
Geowash Hand Car Wash franchise development department will now take-over and begin specific negotiation on your preferred location. Once a site is secured with acceptable rental terms, a timeline for your training and pre-opening planning will be put in place so you will know what is happening over the coming weeks and months leading up to your new Geowash Hand Car Wash opening.
Under the description of the five stage application process was a note expressed as follows:
NOTE: Applicants that complete Stage 5 will be securing the rights to opening a Geowash Hand Car Wash in their preferred location. A specific site is not identified and negotiated until the applicant has signed their franchise agreement and paid their deposit. In the unlikely event a suitable site is not secured within 12 months, the franchisee can take up another site that might be available, or receive a refund of their deposit less reasonable costs incurred as per the franchising code of conduct.
Geowash also used a document entitled 'Franchisee FAQs'. It was provided to prospective franchisees. It stated that the total initial investment for a franchise ranges between $140,500 and $350,000. It also stated:
At what stages, am I required to pay?
You pay franchise establishment fees … to become part of the Geowash brand. You pay 50% of the balance of your purchase price upon selection of your site. You pay 50% remainder upon commencement of site construction/set up.
A separate document entitled 'Your Next Step' was also provided to prospective franchisees. It contained an application form with details to be completed by the potential franchisee. Under the heading 'Application Form For Purchase of Geowash Franchise', the document set out five stages:
Stage 1
Complete the details at the back of this profile and E‑mail them back to [email protected]. Please also include the signed copy of the Confidential Non‑Disclosure Agreement.
Your application will be reviewed where we will hope to ensure you have the ideal characteristics for the business structure. If your application is successful, you will be invited to proceed to the Second Stage.
Stage 2
At the Second Stage, Geowash will make an offer to purchase the rights for your selected region, territory, state or country.
Stage 3
Once the offer is accepted, you will be asked at this point to sign the Franchise agreement and pay the Franchise Fees for the purchase of your Geowash Franchise.
Stage 4
Once you have purchased the Geowash Franchise, we will provide you with further information required for the establishment of your outlet. You will be trained under our comprehensive training program.
Stage 5 (Final Stage)
With our personal assistance you will commence your business.
At about the time the above documents were provided, meetings were arranged between the prospective franchisee and Ms Ali, Mr Cameron or both of them. Sometimes other parties involved with Geowash attended the meetings. In particular, Mr Barjesh (Barjji) Kalyan and Mr Amandeep (Garry) Gujral, the Geowash master franchisees in Western Australia, were involved in some meetings with some franchisees.
Each prospective franchisee was invited to pay a refundable deposit of the order of $4,000 or $5,000. If they did then they would be provided with a Disclosure Document and draft franchise agreement (prepared by the solicitors for Geowash, Madgwicks). In some cases there was some discussion and revision of the terms of the draft franchise agreement. After that, if the franchisee decided to proceed, Madgwicks provided a final version for signature.
Once the formal documents were signed, Geowash immediately issued an invoice for the establishment fee (about $35,000), less the deposit already paid. A commission of 40% of the establishment fee was then paid by Geowash to Ms Ali or Mr Cameron (depending on who was responsible for securing the sale of the franchise) or the commission may be split between them.
There were then discussions between the parties about the site for the Geowash franchise. In some instances, those discussions were a continuation of earlier discussions about possible sites that had commenced prior to the signing of the formal documents.
Once a site was selected, Geowash immediately invoiced the franchisee for the first instalment of a 'Purchase Price', usually being 50% of the balance of a specified amount that had been raised in discussions between the parties before the franchisee committed to signing the documents.
A further invoice for the remaining 50% was issued by Geowash to the franchisee at the time that work was to commence on the site.
The two instalments of 50% were the amounts that were described as 'staged payments' by Ms Ali and Mr Cameron.
Issues arise as to the practice that was followed by Geowash in its dealings with franchisees concerning the 'Purchase Price', how the amount was established and its precise character having regard to the terms of the Disclosure Document and the franchise agreement. I deal with the evidence and my findings concerning those issues separately below.
At this stage I note that neither the Disclosure Document nor the franchise agreement provided expressly for the payment of a purchase price or for payment of fit‑out and other set‑up costs in two instalments. Rather, the documents referred to the payment of a franchise establishment fee and the actual costs associated with the fit‑out of the site.
The Disclosure Document typically stated that costs of 'Fit‑out of kiosk and storage including plans, signage connection of water and power' being 'Approximate cost $35,000‑$400,000 (exclusive of GST) depending on the type of site' were to be paid, in the case of new businesses, 'to the franchisor or direct to contractor or supplier' and to be due 'as required by the franchisor or supplier/contractor preforming [sic] work'.
The franchise agreement stated that where Geowash elects to conduct the fit‑out as agent for the franchisee then 'the Franchisee must pay the Fit Out Costs to Geowash or its appointed representative prior to commencement of the Fit Out': cl 4.7(c). The definition of the term 'Fit Out Costs' was amended in August 2014, but at all times it was defined in terms that referred to actual costs such as architect costs, fit‑out management costs, lessor approval costs, permit costs, building contractor's costs, pre-fabricated kiosk, materials, equipment and installation costs.
There was evidence from Ms Ali and Mr Cameron (considered below) to the effect that Ms Ali estimated the costs of fit‑out and that an amount of up to 20% of the purchase price or staged payments was due as 'commission' when those payments were received by Geowash.
In that context, issues arise as to whether the instalments were based upon a price that was an agreed purchase price for a Geowash franchise or whether they reflected an estimate of likely fit‑out costs undertaken by Ms Ali or whether the instalments were, in substance, a demand for payment of the maximum amount that the franchisee was willing to pay irrespective of the actual costs that might be incurred in establishing the particular franchise. Further, there are issues as to what Geowash was entitled to charge for the fit‑out of each site, what Ms Ali and Mr Cameron said about charging for fit‑out, how the payment of the amount of 20% of the instalments was to be treated in charging franchisees and whether Geowash was obliged to account to individual franchisees in the event that the actual fit‑out costs incurred were less than the amount of the instalments.
It is alleged by the ACCC that individual franchisees were invoiced for amounts that were not based upon estimates of fit‑out costs but rather were determined based on the assessment by Geowash of the maximum amount that the franchisee was willing to pay to secure a Geowash franchise. Further, the ACCC alleges that the 20% of instalments from franchisees was paid by Geowash as a commission to Mr Cameron or Ms Ali as the case may be and was not properly chargeable as fit‑out costs under the terms of each franchise agreement.
There was evidence from seven people who made enquiries in relation to a Geowash franchise and, through various company or trust structures, entered into a franchise agreement with Geowash. I deal with the evidence of each of these witnesses separately below, but first I consider the terms of the franchise agreement used by Geowash.
PART III: THE FRANCHISE AGREEMENT
In evidence were the franchise agreements that had been entered into by Geowash with each of the 18 franchisees with whom Geowash concluded agreements for the operation of a franchised hand car wash business. As to the arrangements and payments to be made by franchisees in respect of the establishment and fit‑out of a franchise, each of the agreements was in substantially similar terms.
First, the franchise agreements provided for initial payments to Geowash of a number of fees including an Establishment Fee: cl 2.1. In each case the Establishment Fee was $35,000 or thereabouts. The deposit which was to be paid upon submission of application for a franchise was credited towards the amount of the deposit when a franchisee entered into an agreement. Other fees were payable as initial payments, including payment for such equipment as was required by Geowash to be utilised in the operation of the franchise: cl 2.1(d).
Second, if no site was identified in the agreement, the franchisee must use its best endeavours to select and secure a site in accordance with Geowash's site selection policy: cl 4. It was usual for Geowash to enter into franchise agreements without a site having been identified.
Third, there was an obligation upon the franchisee to enter into a lease and other agreements relating to occupation of the selected site: cl 4.2.
Fourth, the franchisee was responsible for payment of Geowash's costs and expenses incurred in relation to site selection, obtaining a lease and other agreements to establish the right to occupy the site and be provided with services at the site (including a step‑in agreement for Geowash): cl 4.4. However, it is to be noted that the Disclosure Document indicated that such costs would be up to $8,000. It did not contemplate a large charge for such costs.
Fifth, where fit‑out was required by Geowash, the franchisee was responsible for payment of the 'Fit Out Cost': cl 4.7(a). The term Fit Out Costs was defined to mean:
Such amount as may be necessary to cover the costs of the Fit‑Out including architect costs, fit‑out management costs, lessor approval costs, permit costs, building contractor's costs, pre‑fabricated kiosk, materials, equipment and installation costs.
In later versions of the franchise agreement the definition was changed to add after 'management costs' the words '(including any Geowash management fees for managing the process of design and Fit Out)'. It may be accepted that these additional words allowed Geowash to render an account to franchisees for fair and reasonable costs of managing the design and fit‑out of a franchise site. I note that there is no evidence that Geowash rendered any accounts for management fees or took steps to assess a fair and reasonable fee for any such fees.
Significantly, the obligation was to pay actual fit‑out costs. The agreement did not contemplate the payment of an agreed price to Geowash for arranging the fit‑out that was set by reference to some measure other than cost (such as the budget as to the amount that the franchisee was willing to pay). Nor did it refer to the payment of sales commissions to Geowash staff or a master franchisee. Further, by specifying particular costs it was evidently not a means by which Geowash could request franchisees to pay monies to be applied by Geowash in meeting its general operating costs and expenses.
Sixth, the agreement provided for the franchisee to appoint Geowash as its agent to conduct the fit‑out of the site unless Geowash required the franchisee to conduct the fit‑out: cl 4.7(a)(ii).
Seventh, where Geowash elected to conduct the fit‑out as agent for the franchisee the franchisee was required to pay the Fit Out Costs prior to the commencement of the fit‑out. There was no reference to staged payments. There was no reference to a payment being required to be made upon selection of the site which could be well before the commencement of the fit‑out and before the nature and extent of the fit‑out was known and estimates or quotes had been obtained by Geowash. Even so, there was provision whereby Geowash could require the payment of the Fit Out Costs in advance if it was conducting the fit‑out as agent for the franchisee.
Eighth, there was provision whereby Geowash may require the payment of a security deposit as specified in the agreement (being an amount of $10,000) if any monies payable under the agreement were more than seven days overdue: cl 22. However, there was no other provision whereby Geowash could require a lump sum payment in advance of amounts falling due under the franchise agreement.
So, although the terms of the franchise agreement may have justified requests for substantial staged payments on account of expected Fit Out Costs, it defined those costs. There was no power to make a general request for payment of amounts as part of an assessment as to what the 'purchase price' might be for a franchise. Further, any such amount that was paid in advance would have to be accounted for by Geowash. It could only be retained if indeed Fit Out Costs in that amount were incurred.
PART IV: DEALINGS WITH INDIVIDUAL FRANCHISEES
As I have noted, evidence was given by seven people concerning the history of their dealings with Ms Ali and Mr Cameron in relation to a Geowash franchise. The evidence was advanced by the ACCC to support more general findings based upon commonality in those accounts as to how Geowash and Ms Ali and Mr Cameron on its behalf generally dealt with potential and actual Geowash franchisees. There was said to be a scheme or system as to how Geowash (through Ms Ali and Mr Cameron) dealt with all franchisees.
In the following sections I provide a separate chronological account of those dealings for each of the seven people who gave evidence. Although I do not state at each point that I make findings in the terms recorded, it is my intention that statements in this part of my reasons as to what happened be read as recording my findings. So, where I have recounted evidence without then making an express finding that the evidence is not accepted then I make findings in the terms recounted. Where there is a need to consider conflicting evidence on material aspects then I deal with that aspect expressly in the course of the chronology. For reasons that appear separately I have found the evidence of Ms Ali to be unreliable. Therefore, I prefer the evidence of other witnesses to her account of dealings with franchisees. For that reason, I have not dealt with all her evidence that conflicted with the chronological account of others. Where I have not dealt with her evidence expressly I have not accepted her account. Finally, where I have quoted from documents I have not corrected typographical errors in the original.
Rajvinder Singh and Keeran Pty Ltd (Geowash Domain Car Park)
Mr Rajvinder Singh is the sole director and shareholder of Keeran Pty Ltd.
Mr Singh has a Bachelor of Commerce degree which he obtained in India. His first language is Punjabi. He migrated to Australia in around 1999.
For about 12 months in 2004 to 2005 he was in partnership with a friend trading as Group Matrix Security. They provided security guard service on a subcontract basis. They both worked in the business. There was one other staff member.
From around 2005 or 2006 to May 2013, Mr Singh was a taxi driver. From May 2013 to July 2014, Mr Singh worked part‑time as a nursing assistant employed by Baptist Care Sydney.
Keeran started trading on 11 September 2014 as a Geowash franchisee in the Domain Car Park in Sydney. The business ceased trading in July 2016. Since then, Mr Singh has worked as a field officer for Service Stream performing gas disconnections and reconnections for residential and commercial customers and as a bus operator for the State Transit Authority of New South Wales.
Mr Singh was cross‑examined about his experience in business. He said that as a taxi driver he worked 'under an ABN'. He agreed that he had a history of forming a company and appointing himself as a director. He agreed that he had been a business owner in different industries and different formal business arrangements. He said that he partially understood numbers. He said that he had obtained his commerce degree back home in India in a different country with different business structures.
It was put to Mr Singh that the arrangements that he made for the businesses in which he had been involved 'aren't unsophisticated business arrangements'. He said he did not get what was meant by 'unsophisticated'. Rather unhelpfully it was then put to him that he was 'not an unsophisticated business person'. When it was suggested to him that he had 'some experience in business' he responded, 'not really'. He accepted that he had previously had experience as a business owner. It was put to him that he had by the time he approached Geowash, $200,000 to invest in a business. He explained that the money had come from selling his home. After paying out the mortgage on his house the remaining balance was around $230,000 and he put this aside to invest in a business.
Mr Singh had no previous experience with any franchise business. He had not worked in a car wash.
It can be seen that Mr Singh had no significant small business experience as at the time he approached Geowash. His lack of experience is shown by the evidence as to the early exchanges that he had with Geowash as a prospective Geowash franchisee.
In August or September 2013 Mr Singh found the Geowash website and sent an inquiry via the website contact.
On 23 October 2013 Mr Singh received a version of the initial email from Geowash in response to his inquiry. It attached the Next Steps document and the Franchise Overview.
Mr Singh was cross‑examined at some length about what he understood from those documents. His responses were to the effect that the amount to be paid was dependent on the particular site and how much it was going to cost. He understood that once there was a fixed site he needed to pay the balance of the purchase price which 'was going to be on the basis of what your site would be'. He was asked about his understanding of a statement in the Franchise Overview to the effect that after seven days of signing a franchise agreement the franchisee may now proceed and pay the balance of the Franchise Purchase Price. He said his understanding was that the payment 'will be … based on what your site is going to cost because you wouldn't make the payment without knowing what your site is and how much it is going to cost'.
Mr Singh understood that there could be a range of franchise purchase prices depending on the site. The purchase price would not be payable until he knew the site and how much it was going to cost.
After reading the Franchise Overview, Mr Singh was interested in the potential for a car wash and café site option based upon the range of set‑up costs quoted in the Franchise Overview. He responded by saying that he was interested in 'the standalone with café' and asked if there was any such site available. After that he had a number of phone calls with Ms Ali. He told her that he had sold his house to get the money to invest in the business and he had a maximum investment budget of around $200,000 and he was not willing to go above that figure. He also had some phone calls with Mr Cameron.
On 12 November 2013 Mr Singh met with Ms Ali, Mr Cameron and Mr Garry Gujral (to whom he had spoken previously and who identified himself as the Geowash master franchisee). In that meeting Mr Singh said that he wanted to stay within his means and was not willing to invest more than $230,000. He was told he would need to pay an initial deposit of $4,000 and Geowash would send him the franchise paperwork. He paid the deposit of $4,000.
Mr Singh told Ms Ali at the meeting that he was interested in securing a standalone site with a car wash and café within his maximum budget of $230,000 and Ms Ali said that was no problem and should be okay. Mr Cameron says there was no such conversation. Having regard to the terms of the emails set out below I accept the evidence of Mr Singh. I note that the emails refer to the cost of an individual Geowash outlet not exceeding $230,000 and ask questions about products to be sold in the café and the supplier of 'coffee/milk/muffins/sandwiches'.
Mr Singh then received a franchise agreement and disclosure document which he read. He asked Ms Ali in a telephone conversation to confirm that his total investment cost to establish a traditional car wash and café site would not exceed $230,000. He received an email from Ms Ali dated 4 December 2013 stating:
Our disclosure document is intended to provide a range of costings to enable prospective franchisees to know rough figures for items pertaining to the establishment of an individual Geowash outlet.
To assist you I can be more specific and confirm that your investment to establish your Geowash outlet shall not exceed $230,000.
I will talk to you tomorrow morning to go through all your questions.
On 6 December 2013, Mr Singh sent the following email to Ms Ali:
Sanam i have few queries, which i could not understand myself, seems like i have to go to some lawer.
1. Will i only be dealing with you or i have to deal with Zonda and Hibah tul noor etc too?. If there is any issues that arise between geowash australia and the mentioned companies, will i be responsible for any cost realating to that. Could anything impact me if you are having/ future issues between you and the said companies?
2. Disclosure document page 16, 9.1(c,d) an associate of franchisor....when i buy/aquire any goods from the nominated supplier, do you make any commision out of that?
3. p.16, 10.1(a) Will you set the products to be sold in the cafe, how we going to agree what to keep/sell without having any set menu....and who will the supplier be for coffee/milk/muffins/sandwiches etc,. It will be approved by you or i will be open to choose.
4. p 37 17c.1(b,c,d,e,f) Can you please explain me these clauses in writing with example appologies for not undestanding them properly.
5. Franchise agreement p6 5.l Training, Sanam can you please advise me in writing that all the staff training will be done by franchisor for the opening of new site.
6. p 20, 18 What could be the special resolution? and how will that be passed, will it only be franchisor's decision or franchisee would participate in it.
7. p20, 19 Minimum requirements....if the minimum levels not achieved, will there be minimum franchise fees payable?
8. Franchise fees is % of gross revenue? before taking out any expences ?
9. Sanam the 230000 amount you have advised, that should include eveything, including the setup, initial payments, cafe setup etc.
10. This $4000 is part of franchise establishment fees?
Thats all for now, i will have more questions to ask, i am legaly illetrate so pardon my ignorance about some of the questions.
The nature of the email reveals two matters. First, Mr Singh payed close attention to the terms of the agreement, but did not have a sophisticated understanding of its terms. Second, he was concerned to ensure that the $230,000 amount would include all of the costs of securing the Geowash franchise. These are matters that would have been plain to Ms Ali as the recipient of the email at the time.
Ms Ali sent an email responding to the questions that Mr Singh raised in his email of 6 December 2013.
In response to question 2 concerning commissions Ms Ali responded:
We don't receive undisclosed commissions or rebates On products we buy at wholesale rates for Australia. Your franchisee pricing is dependent on quantities ordered.
As to question 5 concerning staff training for the opening of the new site Ms Ali responded:
Yes Raj. I personally will supervise the opening of your site on site. Please let's make sure the coffees good and we have lactose free milk (cater for my not so good stomach, I am Lactose intolerant).
As to question 9 concerning the $230,000 amount 'including the setup, initial payments, cafe set up etc', Ms Ali responded 'Everything'.
It was put to Mr Singh in the course of giving his oral evidence that the franchise agreement did not tell him about when he would be invoiced. He responded:
It did. As I mentioned, it will be based on the site so they can't just invoice me without finalising the site so just by putting seven days you don't even know what the site is and how much it's going to cost or any details about that.
Later, it was put to him that he understood that once a site was selected he would be liable to pay the franchise payment price. He responded 'That's right but only after they have given me the amount'. When asked what he meant by amount, he explained 'Like, once they selected the site and given me the amount that how much it's going to cost'.
Later, he was asked whether he understood the specific expenses referred to in the franchise agreement were part of the franchise payment price. He responded 'That's right'. Given the context in which the answer was given, this answer was not a concession that he understood there would be other charges that were not referred to in the franchise agreement. The question was asked without any emphasis on the word 'part'. There was certainly no suggestion at the time the question was put that there might be substantial selling commissions and Geowash management fees that formed part of the franchise payment price. The answer must be read in the context of Mr Singh's later evidence that the franchise payment price was payable only after Geowash had selected the site and Mr Singh had been given the amount of how much it was going to cost.
The clear impression created for a person in the position of Mr Singh by these dealings is that he will be able to secure an individual car wash franchise site with a café for an amount that would not exceed $230,000 and the final amount would reflect the actual cost of establishing the site. He would have to pay an amount that depended upon those costs and that would be the purchase price for his franchise.
On 16 December 2013 Mr Singh advised Ms Ali that the franchise documents would be signed. On 17 December 2013 Geowash sent him an invoice for the 'Geowash Franchise Purchase Establishment Fees'. The covering email stated:
As explained, at this stage, you are only required to pay the Franchise Establishment Fees and part payments will be required as we head towards the next stage.
Mr Singh obtained legal advice about the franchise agreement. He signed the franchise agreement and disclosure document on 18 December 2013 (and later re‑executed it in February 2014).
On 24 December 2013 Mr Singh paid $34,500 to Geowash being the balance of the establishment fee.
On 6 January 2014, Ms Ali sent an email to Mr Singh identifying some sites to consider and also mentioned that Geowash was in discussions with InterPark Australia (InterPark) regarding the Sydney Domain car park site.
In the first few months of 2014 he had a number of discussions with Ms Ali about a site in Mona Vale in Sydney. They also exchanged emails, copied to Mr Cameron, about dealings with Inter Park concerning the Domain site.
On 21 March 2014, Ms Ali sent a further invoice for $107,250, which was said to be 'Part Payment for Purchase of Geowash Franchise Site in NSW'.
In discussions with Ms Ali concerning the Mona Vale site, Mr Singh was told by Ms Ali that the total setup costs would be within his budget of $230,000.
An issue arose as to whether the $230,000 included GST.
On 27 March 2014, Mr Singh sent an email with a number of questions. Ms Ali responded with an email inserting answers. That email is as follows (amended to depict Ms Ali's responses in italics):
1. As you are aware of my financial position, my maximum capacity is 230000 including everything, which has to be including the Gst and all the documtation cost.
You can claim all the GST back. I can't do justice to this site by you effectively reducing another 10% off the price. GST is claimable.
2. If I spent everything I won't be left with any working capital, to be comfortable I have to have some working capital to cover at least first 2 months, I hope things will be good from the day we open the site but we have to be cautious, and this site will be very important for myself as well as for the Geowash as we both have great hopes. I want to be successful and wish to grow business. The initial shocks can be challenging for the business while we will be trying to built the clientele, I am happy to go ahead if you can finance me the working capital.
Are you saying you don't now want the site then?
3. Sanam as we spoke, what offer are we making for the site, try to negotiate your best, if they are not coming down much, can you try to negotiate not to increment the rent for first 2-3 years.
We are wanting to get in there and get the best deal for you. I've given you the best deal I can to which you agreed and I invoiced for the payment. Delaying that is risky as the agent has already told me the owner is also fielding two offers to buy the site. Whilst it may be a ploy, I don't like the uncertainty of not being able to go in and put your details up and get best deal we can. We'd hate to miss out on the site, whilst we go back and forth.
I will get back to you if I have anything else to ask, I hope these will be my main concerns.
Mr Singh decided not to proceed with Mona Vale. Nevertheless, he paid the invoice because he thought Geowash had the legal right to demand that he pay the set‑up costs for a franchise and to secure the Domain site and also smooth his relationship with Ms Ali.
On 5 April 2014, Mr Singh emailed Ms Ali about the Domain car park site. Ms Ali responded that Geowash was preparing a proposal for the approval of management at the Domain car park site. The email included the following:
I am utilising the services of, who I believe is, the most professional car wash builder in the country. We envisage a shopping centre type operation and in our proposal are seeking access to car spaces for detailing and washing in a central location. The position we have requested for this site that you have chosen as your Geowash location is at the second level right next to the exit/entrance for pedestrians …
We propose the permanent set up on the second level … but are also going to request roaming access to the other floors with carts located at strategic points tragetting [sic] parkers there.
On 15 April 2014 Ms Ali sent a copy of the proposal submitted to the Domain car park and stated, amongst other things: 'Once proposed set up is finalised, at that stage, we crunch some numbers'. The proposal depicted three examples. Each depicted storage lockers and extensive signage. The proposal also outlined the branding of the car wash with an extensive Geowash booth, car park exterior signage, installation of attractive branding throughout the ramps of the car park, signage at the entrance, access to a storage area of up to 20 square metres, installation of drainage and lighting and access to a cashier office. It showed carts and referred to roaming access to the car park for Geowash carts.
Accordingly, the proposal depicted a traditional car wash and roaming carts with substantial signage throughout the car park and rebranding of the cashier office as a Geowash booth.
On 21 May 2014, Ms Ali sent an email to Mr Singh (copied to Mr Cameron) stating that 'commencement date at the moment is on 1.7.14'. On the same date, Ms Ali (copied to Mr Cameron), requested Mr Singh to sign an acknowledgement that he had selected the site from a number of potential sites and that Geowash had made no representation as to the suitability of the site.
Keeran Pty Ltd was registered early in June 2014.
On 8 July 2014, Mr Singh received a further invoice from Geowash for $107,250 described as 'payment for purchase of Geowash franchise site in NSW'.
Mr Singh sent an email to Ms Ali on 8 July 2014 concerning the final instalment, as follows:
Sanam as we been discussing from the very beginning, my budget is up to 230000 including everything, I have already made payments of over 140000, altogether. I have about 80000 left.
Ms Ali responded stating:
Ok. I'm working on a tight schedule so please pay the $80,000.00 now so that we can progress and not hold up your design & build. As final costings come in we'll see what can be done with the balance.
Mr Singh responded:
Sanam please let me know the 80000 will be the final instalment, as no more amounts are available.
Ms Ali responded as follows:
As previously explained to you, the site has been costed and budgeted at $230,000 plus GST and we previously had discussions on this.
Geowash can't fund working capital and I explained to you that GST you pay to Geowash is claimable back by you.
Once I have the final costings, I can try to work something out there with the payment arrangements. I am being flexible by allowing the process to continue although you have indicated to me that you don't have the monies to pay in full at this stage.
At the moment, all I know is, I haven't gotten the costings process started on‑site yet because the license agreement needs to be finalised and sent back to inter park, and unless we have done that we won't be allowed access to the property. The rent will commence as of 1.8.2014 regardless and we need to in a timely manner engage the project managers to do their part. That is the reason why I am asking you to pay the $80,000 now and lets get the ball rolling and discuss the remainder at a later stage.
Mr Singh responded suggesting that the business start with two or three mobile carts and more carts can be added at a later stage once the business is up and running and that should bring the cost under control.
Apart from the clear concerns being raised by Mr Singh to ensure that costs were kept within his budget, the significance of the above exchange is the position being maintained by Ms Ali that the instalments of the purchase price reflect actual costs being incurred by Geowash in relation to the fit‑out. Of course, this reflects the terms of the Disclosure Document and franchise agreement. It is inconsistent with the case advanced by Ms Ali and Mr Cameron that the parties agreed a lump sum purchase price and the instalments requested by Geowash were for payment of that purchase price.
On 10 July 2014 Ms Ali sent a further email to Mr Singh as follows:
Yes I did confirm your Geowash Site would be $230,000.00.
GST is a separate matter, its a tax, it doesn't form part of an investment. You also claim it back. And I really thought you would understand that as a given system of purchasing any business in Australia.
Please see email below where I explained to you that I cannot include GST, doing so means I pay your GST then you claim it back? As I said before I am aware of you're [sic] constraints now and will assist as site is established but you cannot simply not proceed. How am I to design and build this site to have you open for business on the 1st of August, 2014 (3 weeks)?
Please pay the $80,000.00 today so that at least I can continue to get things moving to set up the site, we can get site designed and move ahead, we can work out between the two of us how we can get the balance organised, I think you've seen by now that I'm quite easy to work with, I just want to get the store opened and earning you money, at the moment it's a dead investment. I can also wait for you to claim back GST before paying that component towards Geowash. We can work out a payment system between us without pressurising you.
Please urgently remit the funds required to move ahead.
On 13 July 2014 Mr Singh and Keeran executed the licence agreement for the Domain car park site with InterPark.
The amount of $80,000 was paid on 16 July 2014.
On 20 August 2014 Ms Ali advised Mr Singh that the builders would be on site 'as of tomorrow'.
When Mr Singh paid the $80,000 he thought he would get a costs breakdown from Geowash for the work done on the site and planned to argue about it if he was asked to pay more than the $230,000 including GST.
On 25 July 2014, Mr Singh met with Ms Ali and Mr Cameron in the Domain car park. That time he was told by Ms Ali that the work for the site was going to progress in two stages. In Stage 1 the mobile carts would be used in the car bay area and for Stage 2 a more permanent set up with pressure washers would be built. In the meantime council approvals would be sought and everything would be up and running in a couple of months.
Mr Singh next visited the site on 8 September 2014 a few days before the site was due to officially open. He described the state of the site in the following terms:
It appeared that not much building work had been done. There were no drainage points at the car bays and no work had been done on the storage area, which was full of rubbish. At that time, the only work that had been done was:
(a)some painting work on the wall behind the car bays, roughly 15‑20m long and 8 feet high. This was painted in a green paint that was very similar to the green colour of the paint that was already inside the Domain car park;
(b)painting of two pillars;
(c)installation of around 6‑8 tube lights;
(d)installation of two sets of taps but no plumbing for the washing machine or chemical dispensers and
(e)installation of two sets of power points.
Later on the same day, Mr Singh took delivery of five Geowash washing carts accompanied by only two batteries. To operate the carts, one battery was needed for each cart.
Also on that day, Mr Singh received the following email from Ms Ali:
I have some great news for you today. We will be commencing the training of your store on Thursday 11.9.2014. This means your store opens for trade as of this date.
Garry will be e‑mailing you a training action plan during the course of today. Garry will be conducting the training process which basically covers the 'Geowash Operations Manual' in a detailed manner. He will get in touch with you to coordinate the training schedule for the next two weeks. He is there to assist you in all of your store operational requirements on an ongoing basis.
Can you please make yourself available full‑time as of 11.9.2014?
I will be there to oversee and launch the opening of your brand new store.
Significant in this email is the use of the term 'store'. This is consistent with Mr Singh's evidence that the arrangement agreed was for the provision of a car wash site. A later email on the same date advised that Geowash had decided to provide a sponsored employee 'to assist you in your staffing requirements for your store' at a cost of $4,380 per month.
Trading at the Domain car park commenced on 11 September 2014.
Immediately after the opening, Mr Singh raised the possibility of completing the fit‑out in the downstairs section of the Domain car park.
In an email dated 19 October 2014, Mr Singh said:
Sanam as you are aware that the site is not fully operational and the signage, electrician, plumber had not completed the jobs i was expecting that i should not be asked for the Franchise fees for the period till we finish phase‑2.
On 8 November 2014, Ms Ali sent an email to Mr Singh in which she said, amongst other things:
You purchased your Geowash store from us for $230,000 plus GST. This accounted for Cart Model + Traditional Car Wash in the dedicated car park bays only. There was no provision of a café in this setup.
…
To date, there remains a shortfall in the payment of an amount of $24,772 plus GST which we agreed would be addressed prior to undertaking of phase 2 works.
…
In your case, there is a difference, meaning we have already provided you a site with the cart model allocating the addition of the traditional hand car wash and detailing service either around your dedicated car park bays the Domain Car Park or at the downstairs existing car wash bay location, again within the car park. We have heavily invested into signage around the car park and continue to invest into improving signage options around the car park.
It is apparent from the terms of this email that two matters were being discussed. First, consistently with the evidence of Mr Singh, there were works to be undertaken to complete the traditional car wash in the dedicated car park bays. Separately, there had been discussions about relocating the site, before these works were undertaken, to another site where there might also be a café. However, what is clear from the email is that Ms Ali was requiring a further payment before undertaking those works even though the construction of a traditional car wash had always been part of the arrangement.
After that, the possibility of the Stage 2 works being undertaken on the ground floor (rather than the original location) and the approvals for that to occur continued to be pursued.
On 12 June 2015, Mr Singh sent an email to Joanna Mardjetko, the General Manager of Geowash, in which he said:
Joanna just checking what is the progress for phase 2 work, I have a complaint that I never get any updates in written, do I have any say?
I was originally advised that phase 2 work will be ready in 2 months which is overdue by 7 months now. I personally have no issue against you, as you were not part of Geowash at that stage. I've never been shown any plans, never been forwarded any sketches, any documents, is there any issue that I'm supposed to be kept at last to know what is happening at the site I run. I have paid all the investment upfront for the full site including proper washers, I was never in favour of these carts. I was convinced into it that pressure washers will be up and running within 2 months.
Now even after our meeting with interpark the plan was actually changed from the things we discussed. I was again not even advised if the downstairs plan had been dropped.
The signs that have been put at the time of opening are of no use, I am loosing money on a daily basis, I know you are trying but these things should have been thought before the opening of site. Trying is still not helping me, honestly this is not a work of any global brand. I can't even show this place to any of my friends or relatives as I feel embarrassed that I have invested nearly quarter of mill on this.
The matter proceeded to arbitration. There was a question raised before the arbitrator by the principal as to whether the exercise of the contractual power was qualified by a requirement that it be exercised reasonably. Despite that, the case was fought before the arbitrator on the basis, in effect, that the power had been exercised reasonably. The arbitrator found that the power had not been reasonably exercised. On an appeal to the Court, it was found that the power was not qualified by a requirement of reasonableness and the arbitrator had been in error. Then, on appeal, Priestly JA (Handley JA agreeing) found that the decision of the primary judge was in error because the case before the arbitrator had been fought on the basis that there was a requirement of reasonableness. Therefore, leave should not have been given to appeal on a basis that had not been fought substantively before the arbitrator.
Meagher JA, in dissent, found that the primary judge was correct in rejecting the submission that reasonableness could be imported as a limitation on the exercise of the power. However, he found that the principal could not have been satisfied as required because the principal's mind was so distorted by prejudice and misinformation that the required state of satisfaction could not be formed.
Priestley JA found as a matter of construction that there was an obligation to act reasonably as well as honestly in forming the opinion that the contractor had failed to show cause.
Priestley JA found that requirements of reasonableness were to be implied both in forming the view whether cause had been shown and in deciding whether to exercise the contractual power: at 257, 259 and 262. The implication was to be made both in the particular circumstances of the case (that is, in fact or ad hoc) and in law. His Honour then expressed obiter views to the effect that there were many strands to support 'the existence in all contracts of a duty upon the parties of good faith and fair dealing in its performance': at 268. It was an obligation that was equated by his Honour with the obligation of reasonableness in performance that his Honour considered was to be implied: at 263. It is significant that his Honour saw the obligation as requiring reasonableness both in forming the required state of non‑satisfaction and in making the decision to exercise the powers to take over the works or cancel the contract. The issue was not considered by other members of the Court, although Handley JA did express general agreement with much of what had been written by Priestly JA on the issue: at 279.
Alcatel
In Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, Sheller JA, after reviewing the state of the authorities concluded at 369 that a duty of good faith both in performing obligations and exercising rights may by implication be imposed upon parties as part of a contract. Consideration was then given to whether the implication of that duty had any implications for the resolution of the dispute.
The case concerned the requirements of a fire order imposed by a local council. Under the provisions of a long term lease, the tenant was obliged to meet the costs of compliance with the order. It was claimed that the landlord had pressured the council into imposing stricter requirements and in those circumstances and to that extent, there was no liability to meet the costs under the lease. However, Sheller JA found that it had not been demonstrated that the requirements of the fire order were unreasonable. His Honour held at 369-370:
In a commercial context it cannot be said, in my opinion, that a property owner acts unconscionably or in breach of an implied term of good faith in a lease of the property by taking steps to ensure that the requirements for fire safety advise by an expert fire engineer should be put in place…If the respondents felt that the council requirements were insufficient, as it had been advised, I see no reason why they should not press for more stringent requirements.
Garry Rogers Motors
In Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903 at [34]‑[35], Finkelstein J found that the implication of a term of good faith was to be implied not as an ad hoc term but as a legal incident of the relationship 'in appropriate contracts'. It was described as an obligation to act in good faith and fairly in relation to the performance of a contractual obligation and in the exercise of power conferred by a contract.
Burger King
In Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558, the Court held at [163], after surveying cases since Alcatel that 'the obligations of good faith and reasonableness will be more readily implied in standard form contracts, particularly if such contracts contain a general power of termination'. The Court then considered what is involved if those terms are implied. It is to be noted that the Court was dealing with a term that implied obligations of 'good faith and reasonableness', but noted that the Australian cases made no distinction between an implied term of reasonableness and that of good faith: at [169]. The two were equated. However, it was said that the implication of such a term does not mean that the parties were not entitled to have regard to their own legitimate interests in exercising a discretion, but must not do so for a purpose extraneous to the contract: at [185].
Topseal Concrete Services
In Topseal Concrete Services Pty Ltd v Sika Australia Pty Ltd [2008] WASC 57, Beech J considered whether the question whether a party had exercised a contractual power in breach of the obligation of good faith was to be evaluated by reference to its effect. Beech J found at [56] that the question was to be addressed by reference to the intention or purpose with which the power was exercised.
Overlook Management
In Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, Barrett J considered the content and effect of the implied term to act in good faith in the performance of a contract: at [63]. At [67] his Honour stated:
… the implied obligation of good faith underwrites the spirit of the contract and supports the integrity of its character. A party is precluded from cynical resort to the black letter. But no party is fixed with the duty to subordinate self-interest entirely which is the lot of the fiduciary … . The duty is not a duty to prefer the interests of the other contracting party. It is, rather, a duty to recognise and to have due regard to the legitimate interests of both the parties in the enjoyment of the fruits of the contract as delineated by its terms.
His Honour then referred to a number of authorities in support of the proposition that the obligation was, in many ways, 'best regarded as an obligation to eschew bad faith'. It was, by such reasoning, not to be understood as an affirmative obligation to act in a way that was in the interests of another or to subject one's own interests to those of the contracting counter-party, but rather in pursuing one's own interests to refrain from exercising those contractual rights, powers and discretions conferred by law in a manner that may be described as being in bad faith: see also the reasoning of Gummow J in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84.
Macquarie International Health Clinic
In Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 the Court was concerned with a contract in which the parties had agreed expressly to act with the utmost good faith in the performance of their duties, the exercise of their powers and in their dealings with each other. In dealing with the meaning of the phrase 'utmost good faith', Allsop P referred to the notion of good faith in the performance of contracts being well‑known to the common law: at [12]. His Honour described the usual content of the obligation in the following terms:
(a)obligations to act honestly and with a fidelity to the bargain;
(b)obligations not to act dishonestly and not to undermine the bargain entered or the substance of the contractual benefit bargained for;
(c)an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.
It was then noted at [13] that:
None of these obligations requires the interest of a party to be subordinated to those of the other. It is good faith or fair dealing between arm's length commercial parties by reference to the bargain and its terms that is called for.
Strzelecki Holdings
The Court of Appeal in Western Australia considered the meaning of good faith as expressed in a contractual term in Strzelecki Holdings Pty Ltd v Cable Sands Pty Ltd [2010] WASCA 222; (2010) 41 WAR 318. In that case, the parties entered into a memorandum of understanding to govern their dealings in relation to the sale of certain land by Cable Sands to Strzelecki. They agreed to deal with each other in good faith. Under the memorandum, Cable Sands was required to arrange for an environmental engineering study concerning a strategy to deal with tailings on the land. Strzelecki was to carry out a feasibility study in relation to subdivision and development of the land and provide a copy to Cable Sands. Then, after the feasibility study, Strzelecki was to advise whether it wished to proceed with negotiations to conclude a contract to purchase the land on the basis of certain specified terms. If, after that, the parties acting in good faith could not conclude a contract of sale within a specified period then their dealings would be at an end.
In the course of their dealings, Cable Sands demanded an indemnity and a bank guarantee. Its conduct in doing so was alleged to be a breach of the obligation on Cable Sands to deal with Strzelecki in good faith.
In considering the meaning of the term as used by the parties in their agreement, Pullin JA (Newnes JA agreeing) reviewed the authorities on the content of the obligation to act in good faith in the performance of a contract. His Honour adopted the approach of Allsop P in United Group Rail Services Ltd v Rail Corporation (NSW) [2009] NSWCA 177; (2009) 74 NSWLR 618 to the effect that it imported a requirement to bring an honestly held and genuine belief about the parties mutual rights and obligations and about the controversy between them to the negotiations and to negotiate by reference to such beliefs: at [56]. His Honour found that the content of an offer did not need to pass some objective test of reasonableness as assessed by the courts in order to meet the requirement to negotiate in good faith: at [62]. If conduct was shown to be unreasonable or capricious then that would be relevant 'but only insofar as it provided evidence from which it may be inferred that a party was not honestly subjecting themselves to the process of negotiation or not keeping an open mind and therefore not acting in good faith': at [63].
Paciocco
I have already made reference to the decision in Paciocco in the course of dealing with the claim that Geowash engaged in unconscionable conduct. The case also dealt with good faith as developed in the common law cases as an obligation attending the performance of a contract. Allsop CJ (Besanko and Middleton JJ agreeing) described the burden of the obligation at [288]:
The usual content of the obligation of good faith that can be extracted from cases such as Renard Constructions, Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (1993) 31 NSWLR 91, Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187; 69 NSWLR 338, Alcatel Australia Ltd v Scarcella [1998] NSWSC 483; 44 NSWLR 349, and United Group Rail Services Limited is an obligation to act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.
Allsop CJ described the contractual duty of good faith as imposing a standard of conduct. The standard was summarised in the following terms at [290]:
The standard of fair dealing or reasonableness that is to be expected in any given case must recognise the nature of the contract or relationship, the different interests of the parties and the lack of necessity for parties to subordinate their own interests to those of the counterparty. That a normative standard is introduced by good faith is clear. It will, however, not call for the same acts from all contracting parties in all cases. The legal norm should not be confused with the factual question of its satisfaction. The contractual and factual context (including the nature of the contract or contextual relationship) is vital to understand what, in any case, is required to be done or not done to satisfy the normative standard.
Significantly, the content of what may be required to satisfy the good faith obligation is not the same in all cases. It is a standard that is to be applied having regard to the context. Two large corporations dealing with the terms upon which the interests comprising a large international business may be acquired will not be required to do the same things to fulfil the obligation as a franchisor dealing with franchisees with little business experience. The standard is the same in both cases. However, what must be done to satisfy the standard must be evaluated in the particular circumstances.
YUM! Restaurants
In Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd [2017] FCAFC 190, the Court considered whether compliance with an implied obligation of good faith and reasonableness as applied to the exercise of a discretionary contractual power to fix maximum prices was to be adjudged subjectively or objectively. The power was found to have been exercised honestly: at [152]. However, it was said that it also had to be exercised in a manner that was objectively reasonable.
The Court found that the obligation of good faith and reasonableness 'is to be considered in a composite and interrelated sense': at [164]. Reasonableness was not be evaluated separately from good faith as if it were akin to a tortious duty. Rather, reasonableness was part of the quality of the conduct to be evaluated so as to 'discern whether it was capricious, dishonest, unconscionable, arbitrary or the product of a motive antithetical to the object of the contractual power'. It was consideration of the relevant conduct 'within those confines' that informed whether or not the conduct had been exercised in good faith. The Court then said at [165]:
The converse in our opinion, also follows. Where, as in this case, there is a finding of good faith (or, specifically, a finding that there was an absence of bad faith: in effect, not having demonstrated that there was a lack of good faith) attaching to the exercise of the contractual power, then that exercise must necessarily also have been reasonable.
Therefore, the reasonableness aspect of the obligation of good faith and reasonableness was not to be regarded as a duty to exercise due care and skill or to produce a reasonable outcome: at [178]. Rather, the focus must be upon the conduct of a party and whether it is to be seen as capricious or arbitrary or dishonest or for a purpose foreign to the objective of the contractual obligation or power having regard to acceptable norms of commercial conduct: at [183]. So, the question is whether the way the contracting party was behaving manifested a lack of good faith and reasonableness as being the posture of the party, not whether the exercise of power or discretion may be viewed objectively as unreasonable. The latter may inform the former, but it is the former that is the extent of the duty to be implied as an incident of the contractual relationship.
Ultra Tune
The only decision to consider the use of the term good faith in cl 6(1) of the Code is the recent decision of Bromwich J in Australian Competition and Consumer Commission v Ultra Tune Australia Pty Ltd [2019] FCA 12. His Honour dealt with a number of the authorities to which I have referred. At [358]‑[362], his Honour accepted submissions by the ACCC as to the meaning of the term good faith that:
… a franchisor must not use the powers and opportunities available to it to the detriment of a franchisee in the absence of any objective legitimate interest in doing so; and must co-operate to the extent possible with a franchisee or potential franchisee, providing that such co-operation is not to the detriment of the franchisor.
and also:
the obligation to act in good faith requires consideration by the franchisor of the position and interests of the franchisee, however, the franchisor is entitled to prefer its own commercial interests where there is a competition. What is prohibited is conduct that harms the franchisee where such conduct is not necessary for the protection of the franchisor's interests.
Good faith within the meaning of the unwritten law
Having regard to the above authorities which indicate some progression and development in the understanding of what is required by an obligation to act in good faith in a contractual context, I would summarise the current state of the unwritten law as to the meaning of good faith for the purposes of cl 6(1) of the Code in the following terms:
(1)the term 'good faith' imports a normative standard to be observed by the parties in dealings as to matters to which the standard is applied;
(2)the normative standard embraces an obligation to act honestly and with fidelity to the bargain concluded between the parties;
(3)the normative standard also embraces an obligation to act co-operatively in matters related to performance;
(4)the standard does not require a party to subordinate its legitimate interests to those of the counterparty, but is does require due regard to the legitimate interests that both parties have in the performance of the contract they have made;
(5)conduct which is dishonest, capricious, arbitrary or motivated by a purpose which is antithetical to the evident object of any provision of the franchise agreement or the Code that governs the conduct being scrutinised or conduct which is otherwise motivated by bad faith will not meet the standard;
(6)where the scrutinised conduct, viewed in the particular context, is objectively unreasonable then the unreasonableness may form part of the basis for a conclusion that there has been a lack of good faith, but objective unreasonableness is insufficient of itself to amount to a lack of good faith; and
(7)the quality of the scrutinised conduct is to be evaluated having regard to the circumstances of the particular parties, particularly their sophistication, commercial power and the relative significance for each party of the subject matter of the conduct.
I note that sometimes the standard is described as incorporating an obligation to act fairly or engage in fair dealing. However when such terms are used they must be understood as being subject to the ability of a party to pursue its own legitimate interests. Further, as I have noted, in s 6(1) of the Code the good faith obligation extends to dealings between the parties before entering into an agreement. The common law use of good faith in such a context appears not to embrace a notion of fair dealing as is indicated by the decision in Strzelecki Holdings. Argument has not been addressed to that aspect. In the view which I take, it is not necessary to consider in this case the extent to which the good faith obligation may import an obligation of fair dealing as to the terms proposed in negotiations. Accordingly, that is an issue that will remain for consideration on another occasion.
In the early decision in Renard, Priestley JA referred to the ideas of unconscionability, unfairness and lack of good faith having a great deal in common (at 268). Those terms each express a normative standard of behaviour that is imposed by the law in particular contexts. However, there are important differences. As I have explained above, unconscionability involves a considerable departure from accepted business norms of behaviour such that the conduct is plainly or obviously conduct of a kind that is outside the bounds of those norms. Good faith requires both honesty as well as a genuine commitment to the purposes of the agreement.
Clause 6(1) of the Code imposes a standard that is applicable to the manner in which franchisor and franchisee must act toward each other in any action or dealing that is governed by the terms of the franchise agreement or the Code. This follows from the language of cl 6(1) expressing a standard that must be observed by franchisor and franchisee in the way they act towards each other 'in respect of any matter arising under or in relation to' the agreement and the Code. It is not a provision directed towards ensuring that the terms of all franchise agreements meet an objective standard of fairness or reasonableness. Rather, the Code has provisions that are designed to ensure that franchisees have all the information to make an informed decision as to whether to enter into a franchise agreement and, if so, on what terms: as to the disclosure obligations see Ultra Tune at [26]‑[57].
So, application of cl 6(1) in any particular case requires the identification of the matter arising under or in relation to the agreement or the Code in respect of which there has been a failure to act in good faith by one party towards the other. It does not enable a general claim to be made that there has been a failure to act in good faith. So, it is to be expected that where a complaint is made as to the conduct of a franchisor 'the focus of an obligation of good faith should ordinarily be on a franchisor's use of powers and opportunities available by reason of the franchise relationship': Ultra Tune at [358].
Application of principles to the present case
As I have noted, the case advanced by the ACCC was to describe a number of aspects of dealings with franchisees that were alleged to be part of a pattern of behaviour and then to make a general claim that conduct of that kind was unconscionable or in breach of the good faith obligation under the Code. There was no attempt by the ACCC to identify in submissions the provisions of the franchise agreements or the Code that applied to the conduct. Rather, the case for the ACCC was advanced on the basis that the same conduct that was unconscionable was also a breach of the good faith obligation in cl 6(1). I have some difficulty with a case formulated in that way given the terms of cl 6(1) which do not impose a general overarching obligation to act in good faith, but rather require the parties to observe the good faith standard when dealing with each other in respect of a matter that arises under or in relation to the agreement or the Code.
However, having regard to the nature of the case advanced, I am satisfied that it focussed upon two aspects of the charging practices of Geowash. First, the nature of the statements made in the Disclosure Document (being a document required to be provided to franchisees under the terms of the Code) about the nature of charges to be made by Geowash, particularly those for fit‑out and set‑up of the franchise site. Second, the way the two staged payments were applied by Geowash having regard to the terms of the franchise agreements entered into with its franchisees. Having regard to the way the case was run, I accept that a claim was made by the ACCC that the manner in which Geowash said it would charge its franchisees in the Disclosure Document and the manner in which it did charge its franchisees (being respectively matters arising under the Code and the agreement) involved a failure to act in good faith.
However, much of the evidence relied upon by the ACCC concerned events that occurred prior to 1 January 2015. The ACCC then claimed simply that to the extent that the conduct occurred after 1 January 2015 (when cl 6(1) of the Code took effect) there had been a contravention of that provision. There was no attempt to identify with any precision what occurred after 1 January 2015 in respect of the dealings with any particular franchisee. Clause 6(1) did not provide for the establishment of a breach by demonstrating a general course of dealing. Rather, it was necessary to demonstrate that there had been conduct after 1 January 2015 by Geowash in dealing with particular franchisees that was a failure to act towards that party in good faith.
Further, the case advanced by the ACCC was that conduct of the kind described in relation to the unconscionability claim also breached cl 6(1). Accordingly, no case was advanced which segregated that conduct such that part of it, considered separately, amounted to a different kind of conduct that was a breach of the good faith obligation. The character of the conduct alleged to breach cl 6(1) involved each of the aspects of the conduct that was said to be unconscionable. In the circumstances, the ACCC must be confined to the case alleged.
Nevertheless, having regard to the nature of the claim made by the ACCC, where Geowash has been shown to charge franchisees after 1 January 2015 then, in the context of the nature of the dealings that I have found to amount to unconscionable conduct, it has been demonstrated that there has been conduct after 1 January 2015 of the kind alleged. That is to say, charging by Geowash after 1 January 2015 cannot be divorced from the earlier dealings concerning the nature of those charges even though they occurred before 1 January 2015. In that context, if there was charging after 1 January 2015 as part of the course of dealing that I have found to have occurred then there has been conduct of the kind alleged by the ACCC to which the Code applies.
As a result, it is first necessary to identify the timing of the dealings with each of the franchisees the subject of evidence.
As to Mr Singh and Keeran (Domain Car Park), the Disclosure Document was provided in early December 2013, the franchise agreement was signed in late December 2013 and invoices for the staged payments were sent in March and July 2014. The site was set up later in 2014. Thereafter, there was an extended dispute about the site. In those circumstances, I am not satisfied that the case advanced by the ACCC has been demonstrated as to conduct that occurred after 1 January 2015 in respect of Mr Singh and Keeran.
As to Mr Chhina and SSS WA Services Pty Ltd (South Fremantle), all dealings occurred before 1 January 2015 and the franchise outlet was opened in August 2014. There has been no conduct to which the Code could apply in relation to dealings with Mr Chhina and SSS WA Services Pty Ltd.
As to Mr Brar and B Company for You (Northbridge), the Disclosure Document was provided in June 2014 and the franchise agreement was signed in July 2014. The staged payments were invoiced and paid later in 2014. From 1 January 2015 the dealings between the parties concerned the dispute that arose when finance could not be obtained. Therefore, the case advanced has not been demonstrated by conduct that occurred in respect of Mr Brar and B Company for You prior to 1 January 2015.
As to Mr Khalid and Western Care (Palmyra), after dealings about cost, the Disclosure Document was provided on 19 August 2014 and the franchise agreement was signed in September 2014. The first staged payment was invoiced in September 2014 and paid in part in 2014 and the balance of $30,000 plus GST was paid in February 2015. Thereafter, Geowash pressed for payment of further monies according to the staged payment process. On the evidence, those demands were made by reference to the 'previous discussions' that had occurred before 1 January 2015. In doing so, Geowash's conduct in 2015 was engaged in to give effect to the earlier dealings and therefore is to be understood in that context. In those circumstances, I am satisfied that the conduct alleged by the ACCC has been demonstrated to have occurred after 1 January 2015 as to dealings with Mr Khalid and Western Care.
As to Mr Kalyan and the Rhods Family Trust (East Perth), the Disclosure Document was provided in August 2014. The franchise agreement was signed in September 2014. The invoices for the staged payments were sent in 2015. The invoices were sent on the basis of the staged payment process and in respect of amounts that had been established in the manner alleged by the ACCC. On that basis it has been demonstrated that Geowash gave effect to charging arrangements of the kind alleged and did so by the manner in which it invoiced the franchisee in 2015. On the findings I have made, those invoices were applied in the manner alleged by the ACCC. On that basis, Geowash engaged in the alleged conduct in its dealings with Mr Kalyan and the trustee of the Rhods Family Trust after 1 January 2015.
As to Mr Kumar and Shri Ganpate Namah (Baldivis), there were dealings from November 2013. The franchise agreement was entered into in December 2014. In 2015 demands were made for payment. The demands were made in the context of the earlier dealings. Payments were made in 2015. On that basis, Geowash engaged in the alleged conduct in its dealings with Mr Kumar and Shri Ganpate Namah after 1 January 2015.
As to Mr Bhaur and Panjab Pty Ltd (Wanneroo), the Disclosure Document was sent in September 2014. Some payments were made in 2014. The second stage invoice was sent in November 2015 and paid in late 2015 and early 2016. Therefore, Geowash engaged in the alleged conduct in its dealings with Mr Bhaur and Pajab Pty Ltd after 1 January 2015.
Therefore, as to four of the franchisees, Geowash charged the franchisee in relation to the fit‑out and set‑up of the outlet on the basis of the dealings that I have found to amount to unconscionable conduct. For those four franchisees only, for the following reasons I find the conduct of Geowash to have been in breach of cl 6(1) of the Code.
For reasons I have given, the amounts were invoiced and received by Geowash on a dishonest basis. They were presented as being invoices for the costs of set‑up and fit‑out when they were actually invoices for amounts to be used to pay sales commissions and to be applied to meet general fees and expenses of Geowash. They were charges that were not made in accordance with the franchise agreement but were invoiced on the basis that they were due under the franchise agreement. The nature of the bargain made was that Geowash would apply the funds to meet fit‑out costs and amounts it was otherwise entitled to charge under the agreement. Notwithstanding the conduct of Geowash in presenting the staged invoices as being for amounts that were needed to set‑up the franchise, they were actually to be applied to generate considerable returns for Ms Ali and Mr Cameron. The conduct went beyond a failure to observe the terms of the franchise agreement. As the conduct concerned the charges that Geowash as franchisee could render to franchisees it was conduct in respect of a matter arising under the franchise agreement.
PART XII: ACCESSORIAL LIABILITY OF MS ALI AND MR CAMERON
The principles to be applied in determining whether a party was knowingly concerned in or a party to contravening conduct are well established. The person must have knowledge of the essential matters which constitute the contravening conduct and have been an intentional participant in the essential elements constituting the contravention: Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 667. These matters are related because intentional participation is based upon knowledge of the essential elements: Australian Competition and Consumer Commission v IMB Group Pty Ltd [2003] FCAFC 17 at [133]. It is not necessary that the accessory be demonstrated to know that those matters constitute a contravention: Rural Press Ltd v Australian Competition and Consumer Commission [2003] HCA 75; (2003) 216 CLR 53 at [48].
As to the conduct of Geowash concerning the manner in which franchisees would be charged for establishing their franchise, on the findings I have made, Ms Ali and Mr Cameron were the architects of the business practices that were followed in the dealings with prospective franchisees, they were the principal actors, they knew all the relevant facts and they were the principal financial beneficiaries of the conduct. They both knew how the funds were being applied, particularly that they were being used to make the commission payments and to meet general costs and expenses of Geowash. Therefore, they have been shown to be knowingly concerned in and parties to the misleading conduct, the unconscionable conduct and the breach of cl 6(1) of the Code by Geowash that I have found.
Ms Ali and Mr Cameron sought to place reliance on their knowledge of the legal advice from Madgwicks. I have found that there was no relevant legal advice given concerning the conduct. Therefore, it is not necessary to consider the circumstances in which the receipt of legal advice to the effect that the conduct does not contravene the law might be relevant to determining whether a party is an accessory.
It was submitted that if the conduct of Geowash was unconscionable or in breach of the good faith obligation then Ms Ali and Mr Cameron each lacked knowledge of an essential element of the claim that Geowash engaged in unconscionable conduct because they had a positive belief that they were not acting contrary to the franchise agreements and that they charged according to the two staged approach which is what they told franchisees would occur. The first part of the submission amounts to a claim that Ms Ali and Mr Cameron did not know they were breaching the law. Rather, the question is whether they knew the essential elements of the contravening conduct. They did. The second part of the submission fails to place the relevant conduct in the overall context. It was not merely the two staged invoice process that meant there was a contravention.
As to the revenue and profit representations, Ms Ali knew the nature of the information and she was personally responsible for the form in which the website information was presented. The addition of the information was made at her request and on her authority. The information was added to the website at the specific request of Ms Ali. It was the only information on the website of that character. It was considered important enough that Ms Ali made arrangements to add it. The information is presented as an annual average. Any cursory examination would have revealed that the most recent figures of one franchisee were being presented as an average annual level of earnings. In those circumstances I find her evidence that she did not pay particular attention to the manner of use of the word average to be implausible and I do not accept it. I find that Ms Ali read the information on the website at or about the time it was first published.
Ms Ali said that Mr Verebes advised her that she could put financial information on the website as long as they were actuals. I do not accept that Ms Ali had advice from Mr Verebes about financial information on the website. But even assuming, contrary to that finding, that evidence of the kind stated was provided, it was not advice that suggested it was appropriate to present actual monthly information of the kind that was presented in the manner in which it was presented. Ms Ali was knowingly concerned in and a party to the contravening conduct in respect of the income and revenue representations.
Mr Cameron was not involved in the publication of the financial information about average earnings and profit. His evidence, which I accept, was that Ms Ali made the update to the website and then asked him to look at it. He was told that it was the actuals from Osborne Park. He did not go through the information in detail.
As to the affiliation representation, Ms Ali accepted when questioned that the inclusion of the logos conveyed a representation that Geowash had a commercial relationship or affiliation with the companies associated with those logos. She also accepted that was not the case and she knew that not to be the case at the time. I find that she was knowingly concerned in and a party to the contravening conduct of Geowash in publishing the logos on the website.
Mr Cameron spoke to Ms Ali about the inclusion of the logos at the time that they were added to the Geowash website. He knew they had come from the website for Geowash International. He said that Ms Ali told him that the brands could be used because of the international connection.
At the time, Mr Cameron knew that Geowash did not have any relationship with all the international brands included on the Geowash website. He knew that the inclusion on the website was representing that there was an affiliation with Geowash and that was why he asked the question of Ms Ali. Objectively viewed by any reasonable person in the position of Mr Cameron, the fact that there was an international affiliation was not a sufficient basis to support the manner in which the logos were included on the website.
In the course of evidence he tried to explain that the reference to the brands might be justified because a particular franchisee might have a local association with one of the brands. I do not accept that a consideration of that kind was discussed between Ms Ali and Mr Cameron at the time. Nor would a consideration of that kind provide any reasonable basis for the manner in which the logo information was presented on the website.
Nevertheless, on the evidence, I find that it has not been demonstrated that Mr Cameron was responsible for the addition of material to the website or its presentation to the public. That was a matter for Ms Ali. There is no suggestion that Mr Cameron instigated the inclusion of the financial information or the logos or that he was influential in their publication. There is no suggestion that he referred to the information in any of his dealings with franchisees. Therefore, I find that he was not an accessory to the revenue, profit or affiliation representations.
On the findings I have made, I reject the submission that Ms Ali and Mr Cameron have demonstrated that the requirements for the exercise of the power conferred by s 226 of the ACL have been established.
PART XIII: REMEDIES
As I have noted, the ACCC seeks extensive relief against Geowash, Ms Ali and Mr Cameron. I am prepared to grant declaratory relief in respect of the contraventions I have found and to make orders for pecuniary penalties to be assessed. No submissions were advanced as to why other relief in the particular form sought should be granted. There should be an order that the ACCC file and serve a minute of the orders that it will seek in light of these reasons. The parties should confer as to those orders. A case management hearing should be convened to program a hearing to deal with any outstanding issues as to the final orders and the assessment of pecuniary penalties.
I certify that the preceding seven hundred and seventy-nine (779) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Colvin. Associate:
Dated: 8 February 2019
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