Baines, T.A. v Donut King Australia P/L

[1993] FCA 806

806    1 9 3

JUDGMENT No. ." .......,,,,,,,. ,,,,,,, ,

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY	NO VG 447 of 1993
GENERATA DIVISION

BETWEEN:  T A BAINES & ANOR

(Applicant)

AND :  DONUT KING AUSTRALIA
PTY LINITED & ORS

(Respondent)

Coram:  Ryan J

Place: Melbourne

RECEIVED

Date:  05 November 1993

15 NOV 1993

FEDERAL COURT OF

AUSTRALIA

EX TEMPORE REASONS FOR JUDGMENT 3

PRINCIPAL

REGISTRY

9

A

Rvan J: The applicants seek summary judgment pursuant to 0.20 of the Rules of this Court for part of the relief claimed in their application namely, rescission of three agreements referred to in paragraphs 6, 8 and 9 of the statement of claim. Those agreements were a franchise agreement dated 14 February 1992 between the applicants and the second respondent Keatsville Pty Ltd ("Keatsville"); a licence agreement dated 14 February 1992 between the applicant and Keatsville whereby Keatsville granted to the applicant sole occupancy of the franchise premises; and a deed dated 14 February 1992 between the applicants the first respondent, Donut King Australia Pty Ltd ("Donut Klng") and Keatsville.

Franchisee." Donut King is identified in the same agreement as	Donut King" and in it Keatsville is described as "the Master
"the Company." Pursuant to that agreement the applicants paid to Keatsville a franchise fee of $80,000. The terms of the agreement included the following:

The franchise agreement is entitled "Shop Sub-franchise Agreement

"5.1	The Franchlsee shall, within two (2) months of the signing of the Premises lease remodel such premises strictly m accordance with the specifications of the Master Franchisee to bring ~.t into conformrty with the Donut King image.
5.4.1	Unless otherwise advised, the Master Franchisee shall take the Head Lease of the Premises. The Premrses shall be sub- leased or lrcensed to the Franchlsee ln accordance with the terms and conditions of the Head Lease. The sub-lease or licence shall be for a period of not more than at least one day less than the head lease. The sub-lease or licence shall contain such provrsrons that shall provrde for the termmatron of the sub-lease or lrcence on the terminatron
or explrat~on of the Franchise Agreement.
The Franchisee shall ensure that ~t complies wrth all the terms and conditions of the sub-lease or licence held by it.
The Master Franchisee shall, at the request of the Company, grant to the Company an option over the Head Lease Agreement held by it and the sub-lease or licence agreement with the Franchisee such options being available to be exercised by the Company upon the expiration orterminatron of the Master Franchise.
All premrses used in Franchised operation shall comply w ~ t h the specification set forth by the Company from time to time and shall comply with the Donut King image.
The Franch~see shall not be permitted to establish a Donut King shop at any location that has not received the prior written approval of the Master Franchisee."

The premises were identified in a schedule to the agreement as	Shop 154A Forest Hill Chase, Canterbury Road, Forest Hill,
Victoria 3131. In the same schedule the following stipulations occur.

"7. TERM. The in~tlal term of the Head Lease less one (1) day.

RENEWAL TERM as per the Head Lease.

8.    COMMENCEMENT DATE: 30th day of March 1992 or such other date mutually agreed upon by the parties to this Agreement.

. . .

10:  FRANCHISEE'S TRADING NAME Downyflake-Forest Hrll Chase."

It appears from the evidence of Mr Abbott, adduced on behalf of the second respondent, Keatsville, that there was in fact, on 14 February 1992, no head lease subsisting between Keatsville and the head lessor Forest Hill Shopping Centre Pty Ltd. A lease of the subject premises had been concluded in April 1991 between Keatsville and the head lessor. That head lease specified the permitted use of shop 154A as:

"Prrmarily the retail sale of croissants, muffms, cookres and crepes and as a subordinate and ancrllary use only also the retarl sale (not manufacture except for manufacture of cake donuts through a robot donut maker) of donuts, hot and cold beverages, soft serve (1.e. not hard frozen) rce cream dispensed from one machine only wrth dips and/or sweet toppings."

However, in about September 1991 Keatsville assigned the head lease of the premises with the consent of the head lessor to a M r and Mrs Goldfarb. It was a term of that assignment that the

description of the permitted use of the premises be amended to
read:

"Primarily the retail sale of crorssants, muffins, cookres and crepes and as a subordinate and ancillary use only also the retail sale (not manufacture) of donuts (excluding yeast donuts) hot and cold beverages, soft serve (1.e. not hard frozen) rce cream dispensed from one machine only with dips and/or sweet topping but the manufacture of cake donuts through a robot donut machrne shall be permrtted as a subordrnate and

ancillary use."

It appears that Mr and Mrs Goldfarb committed certain breaches

of the lease which had been assigned to them. In consequence the head lessor re-entered shop 154A thereby bringing the head lease to an end. The head lessor then permitted Keatsville to occupy shop 154A pursuant to what Mr Abbott on behalf of Keatsville has sworn was an oral agreement for a lease on the same terms as the original head lease before its variation upon assignment to Mr and Mrs Goldfarb. If a lease were executed pursuant to that

agreement it would contain a restriction on the use of the subject premises in identical terms to that in the original head lease which I have just quoted.

The evidence does not permit a conclusive finding as to whether there was an agreement for a lease in the terms contended for by

Mr Abbott. Apparently on 19 February 1992, the head lessor

forwarded to Keatsville a draft lease. The description of the permitted use in the schedule to that draft lease was in the same, more restrictive, terms as that which had been inserted at the time of the assignment to Mr and Mrs Goldfarb. According to Mr Abbott, on receiving the draft lease he spoke to two officers of the head lessor, and:

"informed them t h a t Keatsvr l le would execute a new lease i f t h e usage

c lause was i n accordance with t h e t e r m s of t h e agreement t o lease . I

then a l t e r e d t h e usage c lause l n t h e new lease ( t o r e f l e c t t h e

agreement t o l e a s e ) , arranged f o r Keatsvi l le t o execute t h e l e a s e and

returned it t o t h e l e s s o r wrth a cheque i n payment of	t h e approprrate
l e g a l c o s t s and	stamp duty."

M r Abbott's affidavit then continues:

"15. The new l e a s e has not been executed by t h e lessor . In t h e

meantime Kea t sv i l l e has continued t o occupy shop 154A pursuant t o
t h e agreement	t o lease ."

However, on 7 April 1993 the head lessor wrote to Keatsville in these terms:

"Re:  Shop 154A Forest H i l l Chase.

We r e f e r t o our recent discussrons concerning t h e s a l e of donuts t o

which you should be m no doubt a s t o our posi tron on t h i s matter.

The company w i l l not execute t h e document submitted by you u n t i l w e

have your au thor i ty under s e a l t o reinstate item 8 of t h e f i r s t

schedule concerning yeas t donuts.

Should you wlsh t o d lscuss t h i s matter fu r the r please contac t t h e

undersrgned a s soon a s possible."

- 5 -

That tends to suggest that there was, at the date of that letter, no concluded agreement for a lease. However, I regard it as unnecessary to resolve, on the present application, the question of whether there was or was not a concluded agreement for a lease between Keatsville and the head lessor. I say that because in any event it was a term of the franchise agreement that there was in existence a head lease under which Keatsville could assure the applicants of quiet enjoyment of the subject premises if their primary use of those premises were for the sale of doughnuts, croissants, muffins, cookies, crepes and hot dogs.

Dr Buchanan QC, who appeared with MS Loughnan for Keatsville and for Mr Abbott, sought to reconcile that term with the restriction in the alleged agreement for a lease which permitted "as a subordinate and ancillary use only" the retail sale of doughnuts. He sought to do that by contending that a primary use of premises for the sale of the whole collection of goods comprised in the phrase "donuts, croissants, muffins, cookies, crepes and hot dogs" could still be consistent with a subordinate and ancillary

use of premises for the sale of doughnuts as a single species. In my view the approach indicated by Barwick CJ in General Steel	Industries Inc v Commissioner for Railways New South Wales (1964)
112 CLR 125 can be adapted to apply to the examination of a defence propounded by way of resisting an application for summary judgment. In that case the learned Chief Justice said at 129:

"Dixon J ( a s he then was) sums up a number of au thor i t i e s i n Dey v

Victorian Ra~ lways Cornmissloners (1949) 78 CLR 62 where he says a t p.

91:

"A case must be very clear indeed to justrfy the summary intervention of the court to prevent a plaintrff submitting his case for determination in the appointed manner by the court with or without a jury. The fact that a transaction rs rntricate may not disentitle the court to examine a cause of action alleged to grow out of it for the purpose of seeing whether the proceeding amounts to an abuse of process or is vexatious. But once it appears that there is a real question to be determmed, whether of fact or law and that the rights of the parties depend upon it, then it is not competent for the court to dismiss the actlon as frivolous and vexatious and an abuse of process."

~lthough I can agree wlth Latham CJ in the same case when he said that the defendant should be saved from the vexation of the continuance of useless and futxle proceedings, in my oprnron great care must be exercised to ensure that under the guise of achrevlng expeditious finality, a plaint~ff is not improperly deprrved of his opportunity for

the trial of his case by the appointed trrbunal. On the other hand, I

do not thrnk that the exercrse of the jurisd~ction should be reserved for those cases where argument 1s unnecessary to invoke the futility of

the plaintiff's clam. Argument, perhaps even of an extensive k ~ n d m a y

be necessary to demonstrate that the case of the plaintiff is so
clearly untenable that it cannot possibly succeed."

Taking that approach to an examination of the defence propounded on behalf of the respondent, I have concluded that a breach of the franchise agreement occurred upon Keatsville's making available to the applicant possession of the subject premises on terms which prohibited their primary use for the sale of doughnuts standing alone. The evidence suggests that Downyflake outlets focused primarily on the sales of doughnuts, icecream and beverages. Thus the Downyflake technical manual issued in April

a further 12 items in what is called the "Downyflake yeast	1993 shows six varieties in the Downyflake "cake doughnut range",
doughnut range", only one variety of mu£ f . . ins, one variety of hot dogs, two varieties of ice cream and 11 varieties of beverages.
The introduction to the same manual recites:

"With over 100 stores expected by December 1993 nationally and growlng rapidly, Downyflake are the only Australian-owned franchise group to exclusively focus on donuts, icecream and beverages and retail these products in a professional manner."

In clause 2.1 of the same manual it is recited:

"Generally cake donuts (cinnamon and iced) comprise up to 35 per cent of total sales m Downyflake stores. The importance of cake donuts to your store stems not only from the minimal preparation that is involved in them but for their high profitability. Cake donuts are one of the cheapest food items to manufacture on the Downyflake menu. There is considerable potential to Increase sales with the take home or "king" packs which are a high ticket item. When produced throughout the day the aroma of cooking donuts will often lure customers to your store."

Clause 3.1 of the manual recited:

"Yeast donuts are the backbone of your business. Although not necessarily the largest selling component of your product range, it is the yeast donuts that occupy the prlme display space m your counter. The presentation and appearance of your yeast donuts will have a major lmpact on customers buying decisions. Hrgh quality, well displayed yeast donuts will encourage sales of all other produce llnes. Yeast donuts should comprrse a minrmum of 25 per cent of your total sales."

Moreover, in discussions with the applicants, Abbott of Keatsville prepared a sketch plan of the proposed fit-out of the franchised premises on which something over one-third of the counter space was designated as "D/N (doughnut) counters". As well a "Donut King franchise disclosure document" suppliedtothe applicants recited, amongst other things, on page 3 under the heading "the Donut King Business":

"The franchisee's business approach will be as a professional takeaway food business with its main menu items being iced donuts, cinnamon donuts, rcecream and hot and cold beverages. The franchlsees will

devote their time and effort to customer service, quality food	products, cleanliness, quick and efficient service and attention to
overall standards. Donut King's food products appeal to a vast range of shopping centre customers. The flexibilrty of the Donut King concept and design has been purposely determrned to ensure a Donut King outlet can locate in sites such as major shopprng centres and city locations (CBD)."

In the light of that evidence I conclude that it is a necessary implication arising partly from the terns of the franchise agreement and the supporting documents themselves that the applicants would be entitled, if they wished, to use the premises for the primary or principal purpose of selling yeast and cake

donuts as a single species of food.

I further conclude that a use in accordance with that term of the franchise agreement would contravene the terms of the alleged agreement to lease which permitted the use of the subject premises for the sale of doughnuts only as subordinate and ancillary to the retail sale of croissants, muffins, cookies and crepes, only one of which, muffins, as a single variety, was part of the Domyflake range promulgated by Donut King.

It was argued on behalf of the respondents that the applicants are disentitled to rescission of the agreement specified in the statement of claim because of their delay in electing whether or not to keep the agreements on foot and their delay in instituting these proceedings. On 1 March 1993 the solicitor acting on behalf of the applicants wrote a letter to the manager, Retail Food Group, marked for the attention of Mr Abbott. That letter, omitting formal parts, was in these terms:

"We have been instructed by our above-named clients to wr~te	to you
confirm that our clients are prepared to vacate the shop premises at	regarding recent discussions held by you with our clients. We wish to
154A Forest Hill Chase, cancel the Franchise Agreement and release your company from any further claims in respect of loss and damages suffered by them with respect to the above-mentioned franchise, provided that they are in receipt of the sum of $90,000 plus the value of stock at cost prlce and provided that such payment is made to our clients within
30 days from the date of t h ~ s letter.
Also note that an adjustment will be required in respect of any rent pre-paid in relation to the above-mentioned shop premises by our client in the event that such settlement is effected prlor to the expiration of the next rental period.
We conflrm that in n e w of the prohlbltion on the sale of yeast donuts by Pacific Shopping Centres, our clients continue to suffer loss and
damage. In the event that settlement is not forthcoming wlthin 30
days, then this offer of settlement will be withdrawn."

On 9 March 1993 Mr Tatchell, the applicant's then solicitor,

wrote a further letter again marked for the attention of Mr

Abbott seeking an urgent response to his letter of 1 March 1993. On 18 March 1993 Mr Abbott wrote to the applicant's solicitors in these terms:

"In reply to your letter of 16.3.93 I wish to advise that we will provide $90,000 to your client on the sale of the above, sub~ect to the following: (1) We get a suitable purchaser for shop 103 (Don's Deli) who rs prepared to pay the purchase and relocation costs;

(2) That Pacifrc Shopping Centres will assign the lease for shop 103 to

our Company;

(3) That Pacifrc Shopping Centres will assign the lease for Downyflake,

Shop 154A to another incomrng tenant."

In about early July 1993 Mr Sheedy, the applicant's present

solicitor, took over the practice of Mr Tatchell and was

instructed by the applicants to act on their behalf. Mr Sheedy

has deposed in paragraph 8 of his affidavit:

"The applicants instructed Mr Tatchell that they would agree to accept the sum of $90,000 upon termination of the Sub-Franchise Agreement and they contrnued to operate the Franchise to enable the second and thrrd respondent to obtarn satisfaction of the conditions set out in the letter. Subsequently, nothing having eventuated in relation to the terminatron of the Sub-Franchise Agreement, the applicants instructed me to take action on their behalf to have the Sub-Franchise Agreement termrnated and claim damages. On August 16 1993 I sent to the second respondent a letter demanding that it agree to the termrnation of the Sub-Franchise Agreement with the applicants."

Mr Sheedyfs letter of 16 August 1993 was in these terms:

"We refer to our previous correspondence in relation to this matter.

As you are aware, the lease of the premises in whrch our clients conduct their business only permits the sale of donuts as an "ancillary and subordinate use". You are also aware that the lessor has threatened to commence legal proceedings against our client if they ignore this restriction and sell donuts as a primary use of the premises. The restrrction on the sale of donuts was, or should have been, known to you at the time the franchise agreement was negotiated wrth our clrents, and the failure to disclose the restrrction amounts to misleading and deceptive conduct under 9.52 of the Trade Practrces Act, and 6.11 of the Fair Trading Act.

It is clear that the primary objective of the franchise agreement rs the sale of donuts rn accordance with the Donut King system. The restriction in the lease makes thrs impossible wrthout committing a default under the lease, and as a consequence our client's income and

the value of the business have been seriously diminished. In these crrcumstances the only reasonable and acceptable remedy for our clrents is for the Franchise Agreement to be terminated and the initial franchise fee refunded, together with any amounts for prepaid rent and stock on hand at the date of termination.

It is proposed that the franchise agreement be terminated on 31 August 1993 and we request your agreement to this proposal within 10 days of the date of this letter. Our clients are not prepared to allow the present state of uncertarnty to continue, and unless we receive confirmatron of your agreement to the above proposal wrthrn the time stated, we wrll receive rnstructions from our clrents to rssue proceedings for damages for misleading and deceptive conduct.

You should note that our client's claim wrll relate not only to the failure to disclose the restriction rn the lease, but also the followrng representatrons which were false and/or mrsleadrng and

rnduced our clients to enter ~ n t o the Franchise Agreement

(i)   that New Zealand Ice Cream, an adlornrng tenant, would not sell soft serve rce cream in competition with our clients;

(ri) that our clients would be able to sell par-baked donuts;

(rii) that our clients would be able to place tables and charrs rn the

vrcinrty of the premises for use of customers.

The crux of our cllent's claim, however, is that the inability to sell donuts as a primary use of the buslness is entrrely contrary to the nature and substance of the business and the franchise. The premises cannot properly be used for a donut franchrse, and to hold out that they could amounted to misleading and decept~ve conduct of the most serious and fundamental kind. The effect has been that our clrents have not obtained the franchise for which they had bargained and they are therefore entitled to seek determination of the Franchise Agreement and the refund of their purchase price and expenses.

We trust that the rssue of legal proceedrngs wlll not be necessary and request advrce wrthrn the next 10 days of the arrangements you propose to make wrth respect to the termination of the Franchise Agreement, and the refund of the amounts paid by our client in this matter."

That letter elicited the following reply from Keatsville dated

19 August 1993:

to advrse you that we are currently trying to resolve the situation to	"We acknowledge receipt of your letter dated 16 August 1993. We wish
everyone's mutual interest, and either ourselves or our solrcitors wrll be contacting you withrn the next few days."

In reply to that letter Mr Sheedy, on 23 August 1993, reiterated the applicants' interest in resolving the matter, but ins~sted that if agreement were not reached by 27 August 1993 proceedings would be issued without further notice to Keatsville.

On 26 August 1993 Mr Sheedy wrote to Messrs Garland, Hawthorn, Brahe, solicitors, who by then were acting for Keatsville, saying:

"We refer to our telephone conversatron thrs morning in which you advised that you act on behalf of Keatsville Pty Ltd. Our clrente have agreed to wrthhold action in this matter pendrng your drscussions wrth m Abbott on Monday, August 30 1993. We have been instructed, however, to advise that our client's position in relation to the Franchise Agreement has not altered from that set out an our letters to your client of August 16 and 23 1993. We reiterate that our clients require the termrnation of the Franchise Agreement and the refund of the rnitial franchise fee paid to your clrent, together with their costs and expenses.

We are further instructed to advise that your clrent has failed to achieve any success m havrng this matter resolved over the last eight months, and our clients are not prepared to tolerate any further delay. The continuation of the business is causing our clients loss and damage and unless an acceptable proposal for the termination of the agreement and a refund of all moneys paid by our clients is agreed to immediately, they wrll have no alternative but to take further action.

We request that you advise us on Monday afternoon of the outcome of your discussrons wrth your client, so that we can obtain further instructrons. "

The application initiating these proceedings was filed on 20 October 1993. In the circumstances, since Keatsville was, up to the end of August 1993, holding out a prospect that the applicants would be enabled to quit the franchise without resort

to litigation, and since Keatsville did nothing thereafter to	indicate that such an outcome was no longer attainable, I do not
regard the applicants as having delayed unduly in commencing proceedings about seven weeks after Keatsville had failed to comply with their solicitor's ultimatum.
It was also put in issue by Mr Greenberger of Counsel for Donut King that summary relief was not available against that respondent because it was not a party to the franchise agreement. I accept that, in accordance with the principles outlined by the High Court in International Harvester Company of Australia Pty
Limited v Carrigans Hazeldene Pastoral Company ( 1958 ) 100 CLR 644
the evidence does not permit a finding that Keatsville or Mr Abbott was an agent in the legal sense of the first respondent. However, Donut King, was entitled as "the Company" to exercise certain rights under the franchise agreement. It was also a party in its own right and under its own seal to the document entitled: "Deed of Indemnity Single Unit Sub-Franchise Donut King". That document was also dated 14 February 1992. I therefore conclude that Donut King is a proper party to the proceedings and ought to be bound by the summary judgment which I propose to pronounce for rescission of the last-mentioned deed of indemnity.
[ After further submissions from Counsel, his Honour indicated
that summary judgment would be pronounced in favour of the applicants for rescission of the agreements specified in paragraphs 6, 8 and 9 of the statement of claim and against Keatsville for repayment of the sum of $80,000 paid pursuant to
the franchise agreement. His Honour invited the parties to bring in minutes of orders thought appropriate to reflect the above
reasons fox judgment and any procedural directions necessary for the determination of matters remaining in issue between the parties. It was then indicated that all parties would then be given an opportunity to speak to those minutes. His Honour also intimated that, subject to any submissions which Counsel may wish to make on the question, he was minded to order that Keatsville pay the applicants, costs of and incidental to the motion on notice dated 20 October 1993, and that there be no order as to
Donut King's costs of and incidental to that motion.]

I certify that this and the

preceeding twelve (12) pages are a true copy of the ex tempore reasons for judgment of his Honour

Mr Justice Ryan.

Associate:

Date :  (fLAb-

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