Bamco Villa Pty Ltd v Montedeen Pty Ltd
[2001] VSC 192
•20 June 2001
| IN THE SUPREME COURT OF VICTORIA | |
| COMMERCIAL AND EQUITY DIVISION | Not Restricted |
COMMERCIAL LIST
No. 2175 of 1996
F.4583
| BAMCO VILLA PTY LTD | Plaintiff |
| v | |
| MONTEDEEN PTY LTD | Defendant |
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No. 4267 of 2000
F.5124
| DELTA CAR RENTALS AUSTRALIA PTY LTD AND ORS | Plaintiffs |
| v | |
| BAMCO VILLA PTY LTD | Defendant |
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JUDGE: | Mandie J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 17, 19, 24-27, 31 July, 1-3, 7-10, 15-17, 21-24, 30 August, | |
DATE OF JUDGMENT: | 20 June 2001 | |
CASE MAY BE CITED AS: | Bamco Villa Pty Ltd v Montedeen Pty Ltd; Delta Car Rentals Aust Pty Ltd v Bamco Villa Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2001] VSC 192 | |
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Damages – further assessment – breach of franchise agreement.
Contract – termination of franchise agreement for alleged breaches or repudiation – whether exercise of various powers was in breach of implied term of good faith and fair dealing – unconscionable conduct.
Costs – solicitor-client costs.
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APPEARANCES: | Counsel | Solicitors |
For Bamco Villa Pty Ltd | Mr R. Meldrum QC | Lander & Rogers |
| For Montedeen Pty Ltd and Delta Car Rentals Aust Pty Ltd & ORS | Mr P.R. Hayes QC with Mr R. Peters | B2B Lawyers |
HIS HONOUR:
There are two proceedings before the Court. The first and older proceeding (“the damages proceeding”) was commenced in 1996 and was an action by Bamco Villa Pty Ltd (“Bamco Villa”), a franchisee, against Montedeen Pty Ltd (“Montedeen”), a franchisor, claiming damages for breach of a franchise agreement in writing dated 11 June 1993. The second defendant in the damages proceeding was Mario Salvo, (“Salvo”). The second proceeding (“the termination proceeding”) is brought by Delta Car Rentals Australia Pty Ltd (“DCRA”), CLA Operations Pty Ltd (“CLA Operations”) and Montedeen (“the Delta parties”) against Bamco Villa seeking a declaration that the franchise agreement was terminated on 9 December 1999 alternatively 8 May 2000 and associated relief.
The damages proceeding has been tried and has been before the Court on a number of occasions. There was a hearing as to liability from 1-14 May 1997 the subject of reasons for judgment of the learned trial judge (Hansen J) dated 6 June 1997. On 3 July 1997 the trial judge dismissed an application by Bamco Villa to re-open its case. There was then a hearing for the assessment of damages from 22 to 29 September 1997, the subject of reasons for judgment dated 20 October 1997, and a hearing for the further consideration of assessment of damages on 19 November and 18 December 1997, the subject of reasons for judgment dated 18 February 1998.
On 27 February 1998 Bamco Villa obtained judgment for damages against Montedeen in the sum of $168,959 plus interest of $31,125. The proceeding against Salvo was dismissed. On 16 March 1998 the trial judge granted certain injunctions against Montedeen and ordered it to pay Bamco Villa’s costs of the proceeding. Then Montedeen appealed and Bamco Villa cross-appealed. The appeal and cross-appeal were heard by the Court of Appeal in December 1998 and in March 1999 and judgment was delivered on 18 May 1999.
Montedeen’s appeal was dismissed. Bamco Villa’s cross-appeal was allowed in part and the following orders made, inter alia:
“2. To the extent that paragraph 2 of His Honour’s judgment made 27 February 1998 is a final determination of Bamco Villa’s claims for damages for breaches of the franchise agreement between Montedeen and Bamco Villa dated 11 June 1993, it is set aside and the determination of the further damages suffered by Bamco Villa by reasons of the breaches referred to in paragraphs 96 to 132 and 165 of this Court’s reasons for judgment of 18 May 1999 is remitted to the Trial Judge, the Honourable Mr. Justice Hansen, or if he is absent or unavailable such other Judge as the Listing Master shall direct, so that he, or that Judge, may determine and award the damages (including damages by way of interest) which Montedeen must pay Bamco Villa.
3.The order made by the Honourable Mr. Justice Hansen on 3 July 1997 is set aside and, subject to paragraph 4 of these orders in lieu thereof the Court orders that Bamco Villa’s application to re-open its case [is] granted with costs.
4.To the extent that paragraph 4 of the Honourable Mr. Justice Hansen’s orders made 16 March 199[8] is a final determination of Bamco Villa’s claims for costs, it is set aside and the proceeding is remitted to The Honourable Mr. Justice Hansen, [or] if he is absent or unavailable, such other Judge as the Listing Master shall direct, so that he, or that Judge, may determine whether in addition to the order that the costs of the proceeding (including reserved costs and Bamco Villa’s costs of the application to re-open its case) be paid by Montedeen to Bamco Villa there should be an order that those costs be on a solicitor-client basis , and may order accordingly.”
The matters remitted by those orders, namely the assessment of further damages and the question relating to costs, were returned to Hansen J but his Honour was subsequently unavailable to deal with them due to the exigencies of court business and instead, without objection by the parties, came before me for directions and subsequent determination in the Commercial List. The termination proceeding was instituted in the Federal Court by Application dated 13 December 1999 and was transferred to this Court by Order of Heerey J made 3 February 2000. That proceeding was then entered in the Commercial List and the two proceedings were set down for trial together before me.
Montedeen was the owner of the “Delta Car Rentals System” and associated trademarks, the system and trademarks being used in the business of renting cars and trucks in Victoria and in some other States. By a series of franchise agreements it had licensed a number of franchisees to use the system and the trademarks. Montedeen also carried on business at a number of locations on its own behalf. It described as branches all the locations at which either it or one of its franchisees carried on business. It had in addition what it described as agencies, where it had what it called agents who hire out cars and trucks. At the time of the trial of the action in 1997 there were about 20 branches in Australia, some of them being conducted by Montedeen and the remainder by its franchisees. Salvo is the managing director and controller of the Delta parties, including Montedeen, and the litigation has been conducted on the accepted basis that these companies are his creatures.
Bamco Villa is one of Montedeen's franchisees and the trustee of the Vernuccio Brothers Unit Trust. Bamco Villa was controlled by two brothers, Tony and Orazio (Horrie) Vernuccio. Tony Vernuccio is now the only active controller. Although at one time friends and related by marriage, Salvo and Tony Vernuccio have been on bad terms for years. [All references to Vernuccio are references to Tony, unless otherwise indicated.]
The Court of Appeal said that:
“the bad feeling between them and the disputes giving rise to this litigation have fed the one upon the other, with the result that vast sums of money, by the standards of ordinary people, have been expended in legal costs in litigation conducted à outrance. The cost of the litigation to date must dwarf the damages that have thus far been awarded. It is Wagnerian in its length and complexity and the vehemence with which it has been conducted. The case came before one of the judges in the Commercial List on no less than 16 occasions before the trial began. This is no criticism of that judge, who has plainly at all times done his best to discourage the parties from conducting the litigation in the way they have chosen. To say that both sides have carried the litigation to unreasonable lengths is not, however, to say that it does not arise out of real and substantial grievances based upon wrongful acts, or that there has been no underhand behaviour such as might reasonably excite indignation in the other party”
These words of the Court of Appeal continue to be an apt description and the subject hearing has seen no abatement of the length and intensity of the dispute and of the litigation between the parties not to mention the further monumental costs incurred.
In 1989 a company named Burwell Nominees Pty Ltd (“Burwell”), controlled by Horrie Vernuccio and acting as trustee of his family trust, had begun operating the Oakleigh Delta branch as franchisee and in November 1990 that company had begun operating the Richmond Delta branch as franchisee. Throughout 1991 there were disputes between Salvo and Horrie Vernuccio about the territory of the Richmond branch and the rights which the franchisee was to enjoy in relation to that territory. In the first few months of 1992 Salvo and the Vernuccio brothers agreed that the brothers should, through a corporate vehicle, become the franchisees in respect of the Richmond branch and on 22 June 1992 Bamco Villa was incorporated. On 1 July 1992 it began trading as the Richmond franchisee. Initially it carried on business only at premises at 23 and 26 Swan Street, Richmond, but later it opened a second branch within the territory, situated at 434 Burke Road, Camberwell. Although Bamco Villa began trading as franchisee on 1 July 1992, it was not until 11 June 1993 that a franchise agreement, made wholly in writing, between Montedeen and Bamco Villa, was executed. That agreement gives as the date of the commencement of the franchise 1 December 1992. The franchise is to continue until 30 June 2010 unless in the meantime terminated pursuant to cl. 23. The franchise is granted by cl. 1.1:
“In consideration of the sum specified in Item 4 of the First Schedule hereof paid by the Franchisee to the Franchisor and subject to the terms and conditions hereof, the Franchisor hereby grants to the Franchisee and the Franchisee accepts the franchise and exclusive right (hereinafter called 'the Franchise') to use those parts of the System which are specified in Item 5 of the First Schedule in the operation by the Franchisee of the business specified in Item 6 of the First Schedule hereof (hereinafter called 'the Business') at the location or locations within the Territory previously approved by the Franchisor in accordance with Clause 14 hereof.”
By cl. 1.3 the franchisee acknowledges that it is aware that the franchisor has granted or will grant rights in respect of the franchise and the right to use the system to other persons in respect of locations outside the territory.
Item 1 of the First Schedule fixes a franchise fee of $1 and item 6 defines "the business" as the rental of cars and trucks including mini-buses and four-wheel-drive vehicles. Item 5 of the Schedule specifies the following parts of the system:
“1. The right to use the name 'Delta Car Rentals (Richmond)' and 'Delta Truck Rentals (Richmond)' and 'Delta Car & Truck Rentals (Richmond)' and 'Dam Cheap Car Rentals' and any other trade marks, servicemarks and logos either:
(a)required by the Franchisor to be used in the Business or
(b)necessary for the use of the said names by the Franchisee
2.Those matters and things described in Sub-clause (iii) of Recital A of this Deed.”
Recital A is as follows:
“'Delta Car Rentals System' is a system for the conduct of a motor vehicle rental business consisting of, inter alia:-
(i)the right to use and/or grant the right to others to use the names 'Delta Car Rentals', 'Delta Truck Rentals', 'Delta Car & Truck Rentals' or any similar names together with certain trade marks and logos and such other names, trade marks or logos as may be hereinafter used or adopted for use on or in connection with the Delta Car Rentals System ('The Marks');
(ii)valuable experience and know-how in the design, layout, operation and management of motor vehicle rental outlets;
(iii)distinctive signage, colour schemes, operation manuals, point of sale material, packaging, business techniques and procedures.”
Clause 4.3 deals with use of “the Marks”:
“The Franchisee's right to use the Marks shall be limited to the Franchisee's right to use the Marks in the Territory in connection with, and only with, the Business and then only in accordance with the conditions and procedures which are prescribed from time to time by the Franchisor pursuant to this Agreement.”
Clause 8.1 restrains the franchisee from competing, during the term of the agreement, with the Delta Car Rentals System. Clause 24.6 restrains the franchisee for 12 months after the date of termination of the franchise from competing with that system.
Clause 9 of the franchise agreement deals with advertising – cl. 9.1 requires the franchisee to co-operate in any advertising campaign and like activities in accordance with standards which the franchisor may reasonably prescribe from time to time – cl. 9.2 requires the franchisee to pay an advertising levy which “shall be reasonably determined from time to time by the franchisor having regard to the extent to which [the advertising] is applicable to the Business of the Franchisee and/or the Territory in which the Business is conducted”.
Clause 11.1 requires the franchisee to maintain “the time and kilometre rates [or other types of rates] which the franchisor shall from time to time prescribe for use by the franchisee”.
Clause 13 deals with motor vehicles and provides:
“13.1 The Franchisee shall use such motor vehicles in the conduct of the business as may be approved by the Franchisor and the Franchisee shall not so use any motor vehicle which in its sole discretion the Franchisor deems to be unsuitable for use in the business by reason of its make, model, age, condition or appearance. Without limiting the generality of the foregoing, the Franchisee shall use motor vehicles of such model and age as may be specified by the Franchisor from time to time (hereinafter called ‘the Vehicles’).
13.2The Franchisee shall keep and maintain the Vehicles in excellent mechanical and running order and in a safe, efficient, clean and presentable condition in conformity with all fleet reporting and inventory control requirements prescribed by the Franchisor from time to time…”
Clause 14, which is of some importance in the termination proceeding, deals with premises, and provides:
“14.1 The Franchisee shall establish and maintain physical facilities in the Territory within premises of which the Franchisor has previously approved (hereinafter called ‘the Premises’). Such approval may be granted or refused as the Franchisor so elects.
14.2In the selection of the Premises, the Franchisee shall have regard to the discretions of the Franchisor as to:
14.2.1size of the Premises;
14.2.2location of the Premises;
14.2.3proximity of the Premises to possible users of the Franchisee’s services;
14.2.4quality and standing of surrounding premises.
14.3For the purposes of maintaining the uniformity of the Delta Car Rentals System image, the Franchisee shall fit out the Premises in such colours, designs and layouts as may be prescribed by the Franchisor from time to time.
14.4The Franchisee shall maintain the Premises in a clean, safe and orderly manner so as to present at all times a neat and businesslike appearance for the Business.
14.5The Franchisor may enter upon and into the Premises, with or without its servants, agents and consultants at any time for the purpose of viewing the Premises and the operation of the Business in the Premises.”
In addition, cl. 17 provides:
“17.1 The Franchisee shall throughout the term of this Agreement maintain the Business in compliance with the Delta Car Rentals System image as prescribed from time to time by the Franchisor. Without limiting the generality of the foregoing, the Franchisee shall:
17.1.1repair and replace when necessary worn our or obsolete office equipment, floor and wall coverings, exterior signage and all other fixtures and fittings in or on the Premises…”
The clause dealing with operating standards, cl. 18, includes this provision:
“The Franchisee shall comply with the standards set by the Franchisor for the operation of the Business including without limitation:-
...
18.1.5participation in any Central Reservation System which the Franchisor may establish during the term hereof including without limitation complying with all of the terms and conditions applicable thereto, accepting and servicing all reservations received through such Central Reservation System and paying the Franchisor for each and every reservation placed under such Central Reservation System.”
Clause 19, which deals with “Transfer and Assignment”, and is also of importance in the termination proceeding, provides, inter alia:
“19.1 The Franchisee shall not assign, transfer, let, lease, underlet, grant the use of, surrender possession of, mortgage, encumber, charge, franchise, or sub-franchise or otherwise grant any interest whatsoever over or in respect of the Franchise, the Business, the Premises, or assets which include the Franchise, the Business or the Premises or any of them without the prior written consent of the Franchisor PROVIDED HOWEVER that the Franchisor shall not unreasonably refuse to give its consent in the case of a reasonable, respectable and solvent person and that such person shall first execute a Deed of Covenant in such form as the Franchisor may require whereby that person covenants with the Franchisor to observe all of the terms and conditions of this Agreement…”
Clause 22.1 requires the franchisor to permit the franchisee to conduct the business under the business name and to use the marks in advertising the business and in telephone and corporate listings.
Clause 22.4 provides:
“The Franchisor shall use its best endeavours to conduct the Delta Car Rentals System in a proper and efficient manner and shall promote the mutual business interest of the Franchisor and the Franchisee and shall encourage the use of the Delta Car Rentals System throughout Australia.” (emphasis added)
Clauses 24.4 and 31 are designed to ensure that the franchisor shall have at its disposal upon the termination of the franchise the franchisee's telephone numbers and directory listings.
Clause 25.1 provides:
“The Franchisor reserves the unconditional right from time to time to change the Delta Car Rentals System or any part thereof including without limitation any Marks, names, forms, bulletins, procedures and Standard Rental Agreements. The Delta Car Rentals System as so changed or amended from time to time shall for the purposes hereof be deemed to be the Delta Car Rentals System referred to in this Agreement.”
Clause 28.1 deals with the legal relationship between franchisor and franchisee: that of independent contractors and not agent, fiduciary, partner etc.
A map annexed to the Schedule defines "the territory" for the purposes of the franchise by means of hatching. The hatched area comprises a large part of the inner and eastern suburbs of Melbourne. Its boundaries are the Eastern Freeway, Hoddle Street, Victoria Parade, Spring Street, Flinders Street, St Kilda Road, Dandenong Road, Burke Road, High Street, Warrigal Road, Union Road, Whitehorse Road and Burke Road. Thus it extends, for example, from Abbotsford in the north-west to Burwood in the south-east and from Windsor in the south-west to Kew East and Canterbury in the north-east.
The Court of Appeal said that cl. 1.1 of the written franchise agreement - which was to be read in conjunction with cl. 1.3 – granted to the franchisee the "exclusive right" to use the parts of the system specified at the location or locations within the territory approved by the franchisor and that the description of the right as "exclusive" not only prevented the franchisor from licensing another franchisee in respect of the area of activity but also prevented it from itself exploiting the rights in question in respect of that area. The Court of Appeal said, citing authority, that a licence granting "the exclusive right" to use intellectual property will ordinarily be construed as preventing the licensor not only from granting other licences but also from using the property itself and that there was every reason for construing cl. 1.1 in the usual way.
Bamco Villa made a considerable number of claims against Montedeen. Among the matters of which Bamco Villa complained and upon which it succeeded were the allocation of "cells" for the purposes of a “131390” telephone number and the loss to the plaintiff of the so-called “Dam Cheap” franchise. The introduction of a centralised telephone system, with its 131390 number, when coupled with the allocation made by Montedeen of certain “cells” was held to have resulted in infringements of the rights of Bamco Villa under the franchise agreement. Another of Bamco Villa's allegations was that, in breach of the franchise agreement, Montedeen or persons associated with it had established car rental businesses including a Dam Cheap car rental business and a Crown Rent A Car business in Bamco Villa's territory in competition with Bamco Villa.
In defining what the Court described as the area of activity - the area in respect of which the franchisor was not at liberty either itself to use the intellectual property or to license another to use it - the Court of Appeal referred also to the following provisions of the franchise agreement: recital B, by which the right to be granted was described as "the right to adopt and use the Delta Car Rentals System in the territory specified ...", cl. 1.3 which in effect reserved to the franchisor the ability to grant the right to use the system to other persons "in respect of locations outside the Territory", cl. 4.3, under which the franchisee's right to use "the Marks" was limited to use "in the Territory", cl. 5.1, under which the franchise granted included the right to use a business name containing "words indicating the Territory" and cl. 9.2 under which the advertising levy was to be determined by having regard to the extent to which the advertising or similar matter was applicable to the franchisee's business "and/or the Territory in which the Business is conducted". The Court of Appeal considered that cl. 1.1 prohibited the advertising of a telephone number in a way which linked that number to the territory by showing it to be a number ostensibly linked to a location within the territory, whether by means of a full address or only a suburb. That point was found to be of importance when the Court came to deal with Bamco Villa's claims in relation to “the Touma affair”.
Much of the business of Delta franchisees comes to them through telephone enquiries. At first each branch (including those operated by Montedeen itself) had its own telephone numbers shown in Delta's Yellow Pages telephone directory advertisements. Montedeen allowed each franchisee to advertise three telephone numbers in the advertisement, each of these being shown as the telephone number for a given suburb. It was permitted to advertise the telephone number of its branch opposite the name of the suburb and two other telephone numbers, one for each of two other suburbs within its territory. Calls to those two other numbers were automatically diverted to the franchisee's branch.
By early 1992 Delta was also using a centralised system, in the sense that a single telephone number (359 2222) was in addition advertised. This was manned by an operator, who received enquiries and referred the callers to a particular branch by telling them which telephone number to dial.
During the first half of 1992 Salvo decided that Delta should avail itself of what Telstra called the Custom Net 13 System (“the 13 system”). This was a centralised system which was electronically operated. Under it a would-be customer of Delta dialled one telephone number and Telstra's computer diverted the call to a pre-programmed telephone number, being that of a particular Delta branch. Telstra divides its customers into geographic areas called "cells" and at the time when Montedeen introduced the 13 system Telstra's computer technology required it to divert all customers' calls originating in a cell to the same branch. Telstra took instructions from Montedeen on which branch was to receive the calls from a particular cell. The difficulty was that the boundaries of the territories of the Delta branches did not match the boundaries of the Telstra cells. In many cases Telstra's cells overlapped two or more territories, and so Montedeen had to choose which of two or more branches would receive all the calls from a particular cell. One complaint of Bamco Villa was not that a centralised telephone system was established by the franchisor but that in implementing it Montedeen took the benefit of all telephone enquiries originating in certain parts of Bamco Villa’s territory.
In 1993 a number - 131390 - was allotted to Delta and Delta was connected to it, so that it became necessary for Montedeen to make an allocation of cells. The number was used in the 1994 Yellow Pages. The allocation of cells made by Montedeen bulked large amongst the grievances which gave rise to the damages proceeding. Montedeen had also opened its own branch in St Kilda in late 1992, about nine months or so before the use of the 131390 telephone number began. Montedeen's St Kilda branch was only about 200 metres from the boundary of the Bamco Villa territory. Two of Telstra's cells - St Kilda/Windsor and Malvern - were predominantly situated in Bamco Villa's territory. The trial judge found that about two-thirds of the former and 80% of the latter fell within that territory. The allocation of cells was made by Salvo himself who, it was found, took all important decisions on Montedeen’s behalf. Salvo himself regarded the St Kilda/Windsor cell and the Malvern cell as of great importance to the successful operation of Montedeen’s new St Kilda branch. The Court of Appeal noted that he “admitted in cross-examination, with obvious reluctance, that if he was presently required to consider whether he should establish that new branch without being able to ‘get the business out of the St Kilda Road and Windsor cell and the Malvern cell’ he would probably not establish the branch”.
The trial judge made three findings (which the Court of Appeal found were mutually consistent and all impregnable) which directly concerned Salvo's - and so Montedeen's - motivation in introducing the 13 system and allocating cells. The first of these findings was that Montedeen allocated the St Kilda Road/Windsor and Malvern cells to its own St Kilda branch "for the simple reason of commercial expedience in the interests of that branch". His Honour later found that Salvo and Montedeen had been motivated by the same consideration in refusing to change the allocation of cells after it had been made, saying that they had refused to change the system "because of personal commercial advantage". His Honour also found that the 13 system had advantages and that it was introduced by Montedeen bona fide in the interests of the Delta business and that because the system did not then have the ability to divide the cell by streets Salvo made some allocations between franchisees on a basis which he regarded as fair and reasonable to affected franchisees and Montedeen.
The Court of Appeal further considered that it was clear on the said findings at trial and on all the evidence that there had been breaches by Montedeen of its obligations under cl. 22.4 of the franchise agreement (a) to use its best endeavours to conduct the Delta system in a proper and efficient manner and (b) to promote the mutual business interest of Bamco Villa and itself and that Montedeen fell foul of the franchise agreement not because it introduced the 13 System, but because in the course of so doing it made the relevant cell allocation so as to promote its interest at the expense of that of its franchisee. So although the introduction of the 13 System may have been "proper" conduct of the Delta System by Montedeen within the meaning of cl. 22.4, the allocation by it of the two cells in question contravened that requirement of the clause. Further, the Court of Appeal considered that it was tolerably clear that by pursuing its self-interest when allocating those cells, Montedeen failed to promote the parties' mutual business interest.
I note that Bamco Villa argued as part of its cross-appeal before the Court of Appeal that by setting up and operating its St Kilda branch, Montedeen competed with the Bamco Villa business within the Bamco Villa territory. This contention had been rejected by the trial judge and was also rejected on appeal. The Court of Appeal considered that the setting up of the St Kilda branch did not involve Montedeen in engaging in prohibited conduct and that the taking by it, at the St Kilda branch, of telephone-generated business from wherever the calls may have been made, including the Bamco Villa territory, did not amount to the doing of an act by Montedeen within that territory. Thus it was held that Montedeen's actions in setting up the St Kilda branch and the receipt and processing by it of telephone-generated business which may have come from within the Bamco Villa territory could not of itself amount to competition within Bamco Villa's territory.
Another part of Bamco Villa's original claim is of present relevance and the findings made by the Court of Appeal in relation to it are of importance for more than one reason. It related to three businesses which Montedeen said it had sold to the corporate vehicle of a man named Touma in August 1996. Bamco Villa complained that Montedeen had, in breach of the franchise agreement, caused these three businesses to compete with it within Bamco Villa territory. The answer made by Montedeen was that it had sold these businesses to Touma's company and that the competition with Bamco Villa was, as a result, solely competition by Touma's company.
However, Bamco Villa alleged that the contract of sale of the three businesses said to have been entered into by Montedeen on 8 August 1996 was a sham. Its case with regard to the three businesses, however, did not depend upon the acceptance of that allegation. The trial judge declined to find that the contract of sale was a sham and rejected an application by Bamco Villa to re-open its case on liability in an attempt to introduce further evidence bearing on whether the contract of sale was a sham. The cross-appeal covered both aspects. The Court of Appeal also said that the pleadings covered an allegation that there were breaches of contract even if the Touma sale was genuine. What follows extracts or summarises the judgment of the Court of Appeal on this aspect (the Touma sale).
The three “businesses” were those of Crown Rent A Car, Astoria Rent A Car and Real Cheap Car Rentals. By cl. 39 of the franchise agreement the right to use the name "Dam Cheap Car Rentals" or any similar name was to be taken to be included in the Delta Car Rentals System; compare item 5 of the First Schedule to that agreement. On 1 October 1993 Montedeen became registered as the person carrying on business under the name Astoria Rent A Car. It began using that name.
Some time in 1994 Montedeen registered the name Crown Rent A Car and on 4 August 1994 a company controlled by Salvo - NTL Corporation Pty Ltd - changed its name to Crown Rent A Car Pty Ltd. Salvo caused Crown Rent A Car to be advertised in the Yellow Pages in 1995, 1996 and 1997.
On 12 August 1996 Montedeen became registered in respect of the business name "Real Cheap Car Rentals". On the following day Montedeen instructed Telstra to change the Dam Cheap name advertised in the Yellow Pages to Real Cheap in the 1997 Yellow Pages.
On 20 November 1996 Montedeen instructed Telstra to divert the Crown, Astoria and Real Cheap numbers advertised in respect of non-existent branches in, among other suburbs, Richmond and Camberwell, to the City office of Montedeen.
The contract of sale which was found to be a sham was made with the corporate vehicle of a man named Touma. He was shown as State Manager for New South Wales in an organisation chart prepared for Montedeen by its then general manager, but Salvo swore at the hearing on liability that this was a mistake. According to Touma's evidence at that hearing, he controlled a company named Sportscar World Rentals Pty Ltd, which carried on in Sydney the business of hiring out "prestige vehicles, sports and convertibles" and in 1996 he discussed with Salvo the purchase of the Crown Rent A Car business with a view to establishing a branch of his own sportscar business in Melbourne. He said he was told by Salvo that the Crown business was to be sold together with Astoria Car Rentals and "a third listing to be decided upon" and that the purchaser would have to buy all three entities. The price of $180,000 was, he said "thrown at" him by Salvo.
On 26 July 1996 Touma wrote to Mr Woodrow Wunsch (“Wunsch”), Montedeen’s Finance Manager, asking Wunsch to prepare a contract. The letter stated:
“Re: Purchase of Car Rental Business
I wish to confirm my interest in the purchase of the Business of Crown, Astoria and Real/Just/Only Cheap Rent A Car. Real Cheap Car Rentals is my preferred option.
Please prepare contracts based upon our discussions.
Due to the time restraints and practical reasons I require you to act on my behalf regarding placing copy for 1997 Yellow Pages and of reserving new telephone numbers. I would also be obliged for an introduction to the Franchisee, Peter Castledene, as well as acting as my agent until possession date.
I will call to advise of the name of the new Company I am incorporating. This company will be the purchaser. Debbie Pavlicek will be the Director and acting on my instructions in Melbourne. Please assist with incorporating the company until the bank account gets opened.
Please document the sales documents on the terms we agreed.”
The evidence at the liability hearing was that the conversations in which the purchase was agreed upon were had by Touma not with Wunsch but with Salvo. A written contract came into existence, the parties being Montedeen and Sable Smooth Pty Ltd. Sable Smooth was a shelf company. Its first director was Debbie Pavlicek, a friend of Salvo, who lived in Melbourne and whom he had introduced to Touma on some social occasion. Sable Smooth was later - on 18 November 1996 - to change its name to Crown Rent A Car Pty Ltd. On 6 December 1996 Touma (according to the official records) became a director of the company, but at the time of trial its two issued shares were still held by Pavlicek. Touma said in evidence that he did not know how many shares Pavlicek held or how many shares he held. Wunsch could not recall any instructions Pavlicek had ever given him on behalf of Sable Smooth. Pavlicek opened Sable Smooth's bank account - Touma did not know with which bank - and was the sole signatory for the purposes of that account.
The Court of Appeal said that the contract of sale was unusual in a number of ways. Where the signatures appeared and provision for dating was made, no date was inserted, although the typewritten particulars of sale gave 8 August 1996 as the date of sale. Opposite the words "signature of vendor" and "signature of purchaser" appeared simply the signatures of Salvo and Pavlicek respectively. The business sold was described as "Crown Rent A Car and Astoria Rent A Car and Real Cheap Car Rentals (subject to confirmation)" and the price was said to be $180,000, payable by a deposit of $30,000 by 30 September 1996 and four instalments, the first instalment being due on 30 June 1997. The settlement date was described as the date on which the purchaser paid the deposit and the vendor gave possession of the business. Special condition 3 provided:
“Notwithstanding the foregoing provisions of this Contract the parties acknowledge that all right and entitlement to operate business through the name 'Crown', 'Astoria' and 'Real Cheap' shall pass exclusively to the Purchaser from the settlement date. The Vendor undertakes to maintain the goodwill of the business in a proper and businesslike manner. The Vendor further undertakes to answer all telephone calls for the Melbourne metropolitan area in the name of the Purchaser or such other trading name as the Purchaser may from time to time advise the Vendor.”
Special condition 5 provided for the purchase from the vendor of such motor vehicles as the parties agreed. In fact none were bought and the purchaser invariably obtained vehicles for its customers by hiring them from Montedeen.
The Court of Appeal went on to say:
“The evidence was that the deposit of $30,000 was paid on or about 30 September 1996 - at the latest, on 4 October. (Wunsch's evidence gives both 30 September and 4 October as the date). Although the purchaser was only a two dollar company and although it was to be let into possession on payment of only $30,000 out of a total price of $180,000, and notwithstanding the acumen and firmness which Salvo seems to have exhibited in his business dealings, no guarantee of the purchaser's obligations under the contract was taken by the vendor. This becomes the more striking when regard is had to the evidence that $80,000 was outlaid by Montedeen for the 1997 Yellow Pages advertisements, which, it was said, the purchaser had agreed to reimburse it. The evidence of Touma was that at the time of trial his company had reimbursed Montedeen only about $5,000 of that $80,000. (Wunsch claimed not to be able to say how much had been reimbursed.) A transaction of this kind with a two dollar company does not, we repeat, sit at all well with the clear impression of Salvo which one gets from the evidence, including his own, as a very capable and hard businessman. Performance of the franchisee's obligations under the franchise agreement was guaranteed by the Vernuccios.
Touma swore that his company had made payment of the first instalment of $30,000 under the contract of sale in addition to the deposit. Both Salvo and Wunsch, on the other hand, swore that only the deposit had been paid.
On 7 August 1996 - the day before the date of sale given in the contract of sale (which was according to the evidence the actual date of execution of that contract), Crown Rent A Car Pty Ltd sent a fax to Telstra reserving numbers for the 1997 Yellow Pages. Sable Smooth did not, as we have said, change its name until 18 November 1998, and at the time of this fax Crown Rent A Car Pty Ltd was the Salvo company NTL Corporation Pty Ltd under its new name, the name which it had adopted on 4 August 1994. The numbers reserved included two sets of three numbers for 46 Swan Street, Richmond and 444 Burke Road, Camberwell, Crown, Astoria and Real Cheap each being allocated one number in each of those two sets. The evidence showed that the two addresses were bogus, in the sense that the premises mentioned had no connection with Crown Rent A Car Pty Ltd, or ‘Crown’, or ‘Astoria’, or ‘Real Cheap’, except the connection created by the bogus advertisement itself. It will be remembered that Bamco Villa's premises - its genuine branches - were at 26 Swan Street, Richmond and 343 Burke Road, Camberwell. Notwithstanding Touma's professed intention to use Crown to establish a Melbourne branch of his ‘prestige’ sportscar hire business, he accepted that the Yellow Pages advertisements for 1997 which Salvo caused to be inserted - allegedly at Touma's request - showed in the Crown advertisement not a sportscar but a medium size family sedan.
On 14 November 1996 Touma wrote to Wunsch as follows:
‘Due to being so close to Christmas and several unforeseen minor problems I am experiencing I would like to postpone the settlement date to early January 1997 say 15 January 1997 and would be pleased if you could continue caretaking the business until that date as the new phone books are coming out now, please take the calls for the new numbers until we open.’
This is curious, because the deposit had, according to the evidence, been paid on or about 30 September 1996, the last day for its payment under the contract, with the result that settlement should have taken place on that date. Wunsch found himself at a loss when asked about this letter. On about 3 September 1996 a Crown franchise was established in Scoresby. The grant of this franchise was negotiated by Salvo.
On 28 October 1996 Montedeen instructed Yellow Pages Australia that Sable Smooth was the transferee of the advertisements in respect of Astoria, Crown and Real Cheap.
On 20 December 1996 Montedeen instructed Telstra to divert the Crown, Astoria and Real Cheap telephone numbers for the bogus addresses in Richmond and Camberwell from Montedeen's City office to the Crown franchisee at Scoresby. (Those were the six telephone numbers which a Salvo company then named Crown Rent A Car had reserved on 7 August 1996 and which had been diverted on 20 November 1996 to Delta's city office, that is, the City office of Montedeen.) On the same day Wunsch told Touma by letter that Delta could no longer service his calls at Delta's city location and told him that the telephone numbers had been diverted to the Scoresby franchise. He added, ‘Please get established as soon as possible’. Asked why Delta could no longer service Touma's calls, Wunsch said, ‘We didn't want to have anything to do with it’. Asked to explain this answer, Wunsch spoke of the need to look at all the other documents and discussions. He did not put forward as a reason the launching by Bamco Villa of proceedings for contempt of court on 17 December 1996, together with an application for an injunction requiring the defendants to divert to the plaintiff the six telephone numbers for the bogus addresses in Richmond and Camberwell. Nor would he accept the suggestion that it was as a result of those proceedings that the defendants had caused Touma to offer the use of telephone numbers to Bamco Villa and other franchisees of Montedeen.
The evidence was that Sable Smooth had an office in Sydney in the same building as Montedeen. There was also evidence that Sable Smooth conducted the Crown Rent A Car business in Melbourne at premises in Franklin Street let to it by a company controlled by Salvo, Pearce Valley Pty Ltd. Touma swore that he set up a branch in Franklin Street in January 1997. He said that a lease had been prepared but apparently not yet executed. A lease was put in evidence, undated, and executed only by Sable Smooth. Although the lease makes provision for the guarantee of the performance of the tenant's obligations, no guarantee was in fact given or (so far as the evidence shows) sought. Again this is striking in view of the financial position of the tenant as a two dollar company, its substantial obligations under the contract of sale and the lease and the business experience and shrewdness of the controller of the landlord. The lease creates only a monthly tenancy, commencing on 15 January 1997. It is an unusual and unsatisfactory document, partly because many of its provisions are appropriate to a lease creating a term of years rather than a mere monthly tenancy. Even the rent is expressed as an annual one - $36,000. A number of criticisms could be made of the lease and it gives the impression of having been hastily or at least ineptly prepared. It does nothing to dispel the suspicion created by a considerable number of circumstances.
One highly suspicious circumstance concerns the amount of the rent, expressed in the lease as $36,000 per annum including outgoings, payable monthly. According to Touma, the rent was ‘$3,000, $36,000 a year’. Yet the manager of the Crown business, Marion Atwill, gave evidence, as the person who had established and who administered the system, that the rent paid to Salvo's company was $5,000 a month. Wunsch's evidence on this point is noteworthy. He swore that the rent payable was $5,000 a month and that Sable Smooth had been paying at that rate. When it was pointed out to him that the lease reserved a rent of $3,000 a month, he said that the $5,000 a month had been paid by mistake. All this is very singular.
According to Touma, the manager of Crown's business engaged by him, Marion Atwill, was recommended to him by Salvo and was a former girlfriend of Salvo. He said he thought that Atwill had an assistant, but did not know the assistant's name or salary.
Wunsch was unable to mention any step which Touma had himself taken in the early days with a view - according to Wunsch - to the establishment of a business in Melbourne to be controlled by Touma. The steps which Wunsch took included instructing Montedeen's solicitors to prepare the contract of sale; instructing Montedeen's accountants to obtain a shelf company for Touma; causing requests or instructions to be made or given to Telstra concerning the reservation of telephone numbers, the form of advertisements, the diversion of telephone calls and other matters; arranging on 12 August 1996 for the registration of the business name ‘Real Cheap Car Rentals’, with Montedeen as the proprietor, and payment of the cost of that with Montedeen's money; arranging for the transfer of that business name in November 1996 from Montedeen to Sable Smooth; arranging for the transfer of the ‘Astoria Rent A Car’ business name from Montedeen to Sable Smooth in mid-January 1997.
We have drawn attention to provisions of the contract of sale which give the vendor a part to play in the conduct of the businesses sold. Whether this part is to be played before settlement, or after settlement, or both before or after, is as a matter of construction not always clear. Touma said it was his understanding that the contract provided that Salvo should ‘caretake’ the businesses until September 1996. We have raised the question whether special condition 3 required the vendor to answer telephone calls in the purchaser's name before or after settlement, or both. Special condition 12 requires the vendor virtually to manage what is - for some reason, or perhaps none - described as a national vehicle rental operation for one year from the date of settlement. Special condition 16 - contemplating an ‘agency agreement’ - speaks of the continuation of all three businesses sold until the purchaser has established an infrastructure (although Touma was emphatic that the businesses other than that of Crown were of no use to him). The vagueness of these provisions and their apparent conflict with the intentions of Touma as expressed in his evidence - for example, he never suggested that Montedeen was to promise to provide management services for his sportscar business in New South Wales as part of the consideration for the purchase - give further grounds for doubting the genuineness of the transactions. As regards special condition 12, Touma spoke of having a sportscar business in Melbourne added to his Sydney sportscar business. He never spoke in evidence of contemplating a ‘national operation’, either in the first twelve months or subsequently.
Montedeen and Touma claimed that the purchaser had been granted a franchise in respect of the eastern suburbs, with the franchisee having a branch in Scoresby. (We have already mentioned the Scoresby franchise.) As early as 3 September 1996 Wunsch sent a fax to Montedeen's City branch informing it that ‘a Crown Car Rentals Branch’ had recently opened in Scoresby and that Montedeen was ‘entering into an Agency Agreement with them’. Although the author of this fax, Wunsch had difficulty explaining it. He said that Montedeen's only connection with the franchisee (evidently Peterron Pty Ltd) was that it leased vehicles to it. Pressed, he added, ‘I'd have to see what else there might be’. Wunsch's explanation of the fax of 3 September 1996 is in our view unsatisfactory.
The ‘Peter’ of Peterron Pty Ltd was Peter Castledene. In the letter to Wunsch of 26 July 1996, asking for contracts to be prepared, Touma said, ‘I would also be obliged for an introduction to the Franchisee, Peter Castledene, as well as acting as my agent until possession date.’ This is puzzling in two respects. In the first place, the letter from Touma is dated about five weeks before Wunsch's fax. That fax says that the branch has ‘recently’ opened, but operation of the branch would be impossible without the provision of vehicles by Montedeen. In the second place, leaving aside the doubt about whether it is Montedeen or Castledene who is to act as Touma's agent, the notion of someone's acting as agent for the purchaser until the possession date seems strange. Perhaps the expression can be explained as a layman's choice of a word to describe the vendor as carrying on the business for the vendor's benefit but so as to preserve it for the purchaser between contract of sale and settlement. But we must say that the provisions of the contract and lease and even the words used in communications between Wunsch and Touma, taken in conjunction with other circumstances, raise very serious questions about the genuineness of the transactions of sale and lease. (It was not at the trial suggested on behalf of Bamco Villa that documents like the letter from Touma to Wunsch of 26 July 1996 and the contract of sale were manufactured documents, produced after the event. The allegation was that they were contemporaneous documents but that they did not relate to contemplated or actual genuine transactions.) As regards the words used in communications, the letter of 26 July 1996 from Touma to Wunsch is open to the comment that the author gives the impression of setting out to create evidence. ‘Due to the time constraints and practical reasons I require you to act on my behalf’ does not have a natural ring, nor, it may perhaps be said, does ‘Please document the sales documents on the terms we agreed’. The letter expresses a preference for the name ‘Real Cheap Car Rentals’ over similar names. But Touma's evidence was that the only name of value to him was the Crown name.
Touma said more than once that the Astoria and Real Cheap names or businesses were of no interest and no value to him: what he wanted, and was prepared to pay $180,000 for, was the Crown name - which he said usefully suggested a link with Crown casino - and the prominent Crown advertisements in the Yellow Pages. He acquired Crown, he said, as a means of establishing a branch of his ‘prestige’ sportscar business in Melbourne. His evidence fails altogether to explain his evident failure to take any steps to establish a Melbourne sportscar branch and his actual steps (by his own account) to establish or take over a business in Melbourne which would lease out ordinary vehicles. According to his account, in November 1996 he inquired about buying a few cars with which to run the Crown business in Melbourne, although he also said that he at no stage had tried to ascertain what the existing volume of Crown business was. He said also that in December 1996 he began negotiating with Salvo, and, as we have mentioned, the uncontradicted evidence was that Montedeen had supplied on hire all the vehicles used by Sable Smooth for leasing. A letter of 8 January 1997 records an agreement between Montedeen and Touma for the leasing of vehicles for use as stock at the Crown branch. The agreement is to last for a year. There is no suggestion of any steps having been taken by Touma with a view to the establishment of a sportscar branch, or where the money for that purpose would come from. Touma said that his inability to sell a house for $260,000 had made it necessary for him to arrange to pay the purchase price of $180,000 for the three businesses by instalments over a period of more than two years. The sportscars of which he spoke, ‘Porsches, Ferraris, Mercs, BMW's’ and so forth, are not cheap, and $260,000 would not go very far.
Of course it can be said that the 1997 Yellow Pages, with their ordinary family sedan Crown advertisement, could not serve as a springboard for a sportscar business, so that some delay was necessary once the advertisement had, at the request of Touma, been arranged. But this explanation meets the difficulty that Touma - despite his evidence that he wanted to buy the Crown name in order to conduct a sportscar business - seems to have contemplated from the start the possible indefinite use of Crown for the leasing of ordinary vehicles. For he gave evidence that he contemplated establishing ‘a number of Crown branches’ in Victoria if Crown was successful and in a letter to Wunsch of 13 January 1997 he wrote, ‘I do believe it will be many years before I expand to all the outer suburbs’. This letter, read as a whole, gives the clear impression that the business to be conducted ‘from my soon to be open city location’, which will from the outset service ‘some inner suburbs’, is not a "niche market" sportscar business but an ordinary rent-a-car business, and that it is this ordinary business which will in the fullness of time expand into all the suburbs. Grave doubt is thrown by the evidence as a whole upon Touma's statement that he bought the Crown business in order to create a Melbourne branch of his Sydney sportscar business, and thus grave doubt is thrown upon his credibility. Dealing with the position at the time of trial, he said that he had yet to decide whether the 1998 Yellow Pages advertisements would relate to sportscars. That decision was one which could not be put off for long.
We return now to the way in which, and the person by whom, the businesses sold were conducted after the sale. Wunsch said, ‘We agreed basically to take these numbers and caretake them for a time until he got established’. By the letter dated 14 November 1996 which we set out and commented upon earlier in these reasons, Touma asked Wunsch to postpone settlement until mid-January 1997 and to ‘continue caretaking the business until that date’. Touma's explanation for this request, given in evidence, was his difficulty in finding staff. Since he originally engaged only a manager, this explanation presumably relates simply to the filling of that post. Wunsch swore that for a short time after the release of the 1997 Yellow Pages (in November 1996) Montedeen ‘accepted’ the diversion of Crown calls to Montedeen's City location and that this was done until Crown could get established in its own right. It was on 20 November 1996 that Montedeen instructed Telstra to divert the telephone calls in question to its City branch. One month later, on 20 December, Montedeen informed Touma that it could ‘no longer service the diverted calls’. This, as we have said, was done three days after contempt and other proceedings relating to the telephone numbers were launched by Bamco Villa.
Touma was emphatic that he did not know, and had never inquired, how much business Montedeen had received as a result of the diversion of the Crown calls to it in November and December 1996. The implication is that it was treated by both Salvo and Touma as conducting the Crown business on its own behalf during that period. But our view on the issue of breach of contract would be the same even if Montedeen was conducting the Crown business on behalf of Sable Smooth. This was, in our view, a breach of Montedeen's obligations under cl. 1.1 and all three branches of cl. 22.4 of the franchise agreement…
We have referred in these reasons to a good deal, but by no means all, of the evidence bearing on this question, making at times comments in the course of our incomplete review. On the evidence as a whole very great suspicion is aroused. His Honour does not discuss any of the numerous particular considerations which to our mind point towards the conclusion that there was no real sale. To arrive at that conclusion requires the rejection of the evidence on the point of more witnesses than one. Conscious as we are of the many authorities on the advantage enjoyed by a trial judge where credibility is important - and we do not think it necessary to mention any of them specifically - we are nevertheless persuaded that we should disturb his Honour's finding on this point and determine that the sale was a sham, that Sable Smooth had never conducted any of the three businesses supposedly sold to it and that it was never intended that the supposed purchaser should do so, and that Montedeen has accordingly committed breaches of cll. 1.1 and 22.4 of the franchise agreement additional to those constituted by what took place in November and December 1996.”
The Court of Appeal added that, even without the finding that the sale was a sham, it would not regard the breaches of cll. 1.1 and 22.4 as limited to the use made by Montedeen of the telephone numbers in November and December 1996:
“For in addition it was clear on the evidence put forward by Montedeen itself that, if there was a genuine sale by it to Sable Smooth, it had done a number of acts for the purpose and with the effect of enabling Sable Smooth to compete with Bamco Villa by means of obtaining business through telephone numbers advertised as attached to premises [within] Bamco Villa's territory. For example, it had procured the shelf company which became the purchaser and competitor, provided it with premises in Franklin Street and assisted it in finding a manager and supplied it with stock in the sense of vehicles to lease. It is unnecessary to consider whether the mere act of selling to a purchaser a business to be conducted by it by the use of the telephone numbers would be a breach of the contract made with Bamco Villa. For the acts of Montedeen went far beyond this. Whether these acts amounted to a breach of contract by reason of the exclusive right conferred on Bamco Villa by cl. 1.1 need not be considered, for in our view they were performed in breach of the obligations imposed by all three branches of cl. 22.4. Clause 22.4 in terms imposes obligations to act, but we are of the view that it also prohibits certain kinds of conduct as inconsistent with the obligations assumed.”
The Court of Appeal rejected certain other aspects of the cross-appeal and summarised its conclusions on the various issues which were argued on the appeal (all of the reasons for which it is not now necessary to state) as follows -
“(a)Although his Honour erred in implying into the agreement the term which he did, Montedeen's allocation of the two relevant cells to its St Kilda branch was none the less in breach of cl. 22.4 of the franchise agreement.
(b)The sale of the businesses to a company supposedly controlled by Touma was a sham.
(c)Even if the sale of the businesses was not a sham, Montedeen managed and operated them in the Bamco Villa territory for the true owner, in breach of the franchise agreement.
(d)His Honour erred in not giving Bamco Villa leave to re-open its case on the ‘sham’ issue and adduce further evidence as to the true ownership of the businesses. "
In the course of the previous proceedings and appeal, reference was made to the Crown branch at Scoresby. In the present hearing a good deal of time was spent investigating the history of this business for reasons which will appear. It is now necessary to further outline some of the relevant facts and history of this matter and for this purpose to go back to December 1995.
On 7 December 1995 one Peter Castledine (“Castledine”) paid Montedeen $10,000 “as a sign of good faith” and probably for some kind of a promised franchise and he, or his father Ronald David Castledine (“Castledine senior”), also signed some form of agreement with Tocall in relation to the proposed lease of land proposed to be purchased by Tocall at 758 Stud Road, Scoresby.
On 11 January 1996 Castledine told the estate agent acting for the vendor of land at 758 Stud Road, Rowville (or Scoresby) that Salvo intended to buy that property. Tocall thereafter bought the property and retained a designer to prepare drawings for town planning and building purposes.
In March 1996 the damages proceeding was commenced.
On 26 July 1996 Touma wrote his letter confirming his interest in relation to the purchase of Crown, Astoria and Real Cheap and seeking an “introduction to the Franchisee” Peter Castledine. By this time Peteron Pty Ltd (a Castledine company) had commenced conducting a Crown rental business at Scoresby with six cars and two trucks all of which were leased from Montedeen. By 1 August 1996 Peteron had leased at total of 13 vehicles from Montedeen for use in its Scoresby car rental business.
On 7 August 1996 Salvo reserved the Crown, Astoria and Real Cheap telephone numbers for the 1997 Yellow Pages including numbers for the bogus addresses in Richmond and Camberwell.
On or about 8 August 1996 the sham sale of Crown, Astoria and Real Cheap to Sable Smooth Pty Ltd was documented (the Touma sale). The price was said to be $180,000, payable by a deposit of $30,000 and four subsequent instalments.
By September 1996 the building works on the Scoresby land were nearing completion and Salvo had organised Peteron’s Scoresby business as a “Crown franchise”.
On or about 30 September 1996 Sable Smooth paid the purported deposit of $30,000 under the Touma sale.
On 11 October 1996 Tocall sent a draft lease of the Scoresby property to Peteron together with an attached summary of acquisition and estimated building costs and calculating annual rent, at 10% of those costs, at $37,600.
On 28 October 1996 Montedeen instructed the Yellow Pages that the Astoria, Crown and Real Cheap advertisements had been transferred to Sable Smooth.
On 18 November 1996 Sable Smooth changed its name to Crown Rent A Car Pty Ltd.
On 20 November 1996 Montedeen instructed Telstra to divert the Crown, Astoria and Real Cheap telephone numbers for bogus branches (including Richmond and Camberwell) to Montedeen’s City branch of Delta.
On 6 December 1996 Touma became a director of Crown Rent A Car Pty Ltd (Sable Smooth).
On 20 December 1996 Montedeen instructed Telstra to divert the Crown, Astoria and Real Cheap telephone numbers for bogus branches including Richmond and Camberwell from Montedeen’s City branch to Peteron in Scoresby.
On 26 February 1997 Montedeen informed the Yellow Pages that Astoria and Real Cheap had been “franchised” to Marion Atwell (a Salvo functionary). At about that time a Crown City Office had been opened and was managed by Atwell.
On 21 April 1997 Tocall informed Peteron of the total costs for the Scoresby property ($380,000) and set the rent at $37,800 per annum.
In May 1997 the liability hearing in the damages proceeding took place and within a week of its conclusion Crown’s City office was closed. Judgment on liability was given on 6 June 1997. In July 1997 Bamco Villa’s application to re-open its case on the sham Touma sale issue was refused. The first damages hearing took place in September 1997 and judgment was given in October 1997. The second damages hearing was heard in November 1997.
An agreement entitled Deed of Settlement was devised by Wunsch (the Delta parties’ Finance Director) on Salvo’s instructions dated 26 November 1997 between Montedeen and Crown Rent A Car Pty Ltd under which Pavlicek purported to agree to sell the shares in Crown to Castledine senior for $10. The agreement provided for the resignation of the directors of Crown and the transfer of all books and records to Castledine senior. The agreement was signed by Pavlicek on behalf of Crown and Salvo on behalf of Montedeen. The recitals to the agreement referred to the settlement of “differences” between Crown and Montedeen and also alleged certain mutual debt and dealings between Montedeen and Crown which left a debt of $171,500 owing by Crown to Montedeen.
An agreement also dated 26 November 1997 was made between Pavlicek and Castledine senior (who was described as a car rental operator and director of “the Franchise of Crown”). Pavlicek agreed to sell Castledine senior all the shares in Crown for $10 and agreed to resign all her offices in Crown and also procure Touma’s resignation as a director.
On or about 9 January 1998 Peteron paid $40,000 by cheque to “Crown Rent A Car”. This sum of $40,000 was derived from moneys advanced to Peteron by an investor. The cheque for $40,000 was endorsed over to Montedeen.
On 2 February 1998 a lease of the premises at Stud Road, Scoresby was executed between Tocall and Peteron for a back-dated term commencing on 23 July 1996.
In February 1998 the second judgment on damages in the damages proceeding was given and in March 1998 Montedeen filed its Notice of Appeal in that proceeding.
In March 1998 (or possibly a little earlier) Peteron opened its Crown branch at 550 Riversdale Road, Camberwell.
On 1 April 1998 Bamco Villa filed a Notice of Cross-Appeal in the damages proceeding. In April 1998 Wunsch swore an affidavit in which he deposed that Bamco Villa would very soon be insolvent if it was not already. On 15 July 1998 Montedeen paid Bamco Villa’s solicitors the sum of $168,959 plus interest of $31,125 being the damages and statutory interest awarded in this proceeding.
On 2 July 1998 (by a letter on Montedeen’s letterhead addressed to Crown at Scoresby) CLA Trading (then called CLA Holdings Ltd) agreed to buy from Crown the Crown “business” in New South Wales and the Astoria and Real Cheap “business” in Victoria for $150,000. An endorsement of acceptance on the letter was signed by Castledine senior on behalf of Crown.
On 16 July 1998 CLA Trading paid the said price of $150,000 by cheque to Crown but Montedeen received from Crown, in a round-robin exchange through Crown’s bank account (which only had a small credit), a cheque for $148,000 in payment of a debt said to be owed by Crown to Montedeen.
By an asset sale agreement dated 15 October 1998 between Montedeen and another and CLA Holdings Ltd and CLA Trading Pty Ltd, Montedeen agreed to sell to Trading its “vehicle rental operating and franchising business, including the “benefit of the … Franchise Agreements” listed in Schedule 6. The list included a reference to particulars of the franchise agreement with Bamco Villa including the branches at Richmond and Camberwell. [I note that Montedeen sold its defined “Goodwill” and “Intellectual Property Rights” to Holdings. By an agreement dated 30 June 1999 between CLA Holdings and CLA Operations, Holdings transferred these particular assets as defined to Operations.] The asset sale agreement of 15 October 1998 further provided that Holdings and Trading were “not assuming any debt, liability or obligation of Montedeen” including “any claims or liabilities of Montedeen… arising in connection with the conduct of the Montedeen Business… including but not limited to… Claims or Liabilities for breaches of contractual obligations”. Clause 19.1 contained an assignment by Montedeen to Trading of all its right, title and interest in the Franchise Agreements (subject to any required consent by a franchisee) and cl. 19.2 imposed upon Trading all obligations after the completion date under all assigned franchise agreements.
On 21 November 1998 and after service of a statutory demand, Montedeen paid Bamco Villa's taxed costs of the damages proceeding of $231,412 (the bill of costs had sought in excess of $450,000). The appeal in the damages proceeding was heard in December 1998 and March 1999 and judgment was given on 18 May 1999.
On 5 and 24 May 1999 Montedeen carried out inspections of Bamco Villa's two premises and followed up with letters listing matters of concern in relation to such things as "office presentation, yard display and vehicle condition". A letter dated 30 June 1999 dealt with the Richmond premises.
By a Deed dated 21 October 1999 between Trading and DCRA, Trading assigned to DCRA all of its rights, title and interest in the listed franchise agreements (including that of Bamco Villa) to DCRA.
By notice in writing dated 22 October 1999 from CLA Trading and DCRA to Bamco Villa, notice was given of the assignments on 21 October 1999 of the franchise agreement from CLA Trading to DCRA. In the schedule to the notice, reference was made to the earlier assignment from Montedeen to CLA Trading.
Various notices of breach and termination were subsequently given to Bamco Villa to which later reference will be made.
The Witnesses
I found Vernuccio to be an essentially honest witness. I did not think that his credit was damaged by the accounting errors canvassed in cross-examination. Nevertheless I treated his evidence as to the effect of competition from Crown and the damage caused to Bamco Villa with appropriate scepticism. He was obsessed by the litigation.
I found Salvo to be a witness who was persistently and continually evasive and who feigned ignorance and a lack of recollection when it suited his case as he saw it. He was an astute businessman, an egotist with an engaging but arrogant personality who hated to lose.
Wunsch was an intelligent and efficient accountant, loyal to his employer and evasive whenever he perceived that to be in his employer's interests.
I found both Castledines to be honest to a point but generally alive to the “competition”issues which might affect Bamco Villa's claim to damages. On such issues I found their evidence to be slanted to protect their patron (Salvo) and his companies.
Assessment of further damages
Bamco Villa claims that it has suffered substantial damage as a result of the breaches of the franchise agreement by Montedeen found by the Court of Appeal (at paras 96-132 of the Court of Appeal judgment). Those breaches by Montedeen were acts inconsistent with the obligations of the franchisor under cl. 22.4, inter alia, to promote the mutual business interest of franchisor and franchisee (and, in part, also in breach of cl.1.1). The breaches were constituted by Montedeen engaging in competition with Bamco Villa in Bamco Villa’s territory through the “businesses” and business names of Crown, Astoria and Real Cheap. The key aspect of the breaches was the competition with Bamco Villa “by means of obtaining business through telephone numbers advertised as attached to premises without [I think that this should be ‘within’] Bamco Villa’s territory” (para. 132 of Court of Appeal judgment).
Bamco Villa’s claim for damages is contained in a Revised Calculation of Loss and Damage dated 24 July 2000 (Exhibit “E”). There is a claim for loss of profits which takes as its starting point the “loss of revenue resulting from the diversion of calls to the advertised branches for Crown, Real Cheap and Astoria” for the period 16 November 1996 to 30 June 2000. The loss of revenue is primarily based upon the number of telephone calls made to the “Richmond” and “Camberwell” telephone numbers of Crown, Astoria and Real Cheap together with part of the number of telephone calls made to the “Collingwood” telephone number of Crown, Astoria and Real Cheap and part of the number of telephone calls made to the “St Kilda” telephone number of Crown. The number of telephone calls attributed to the “Collingwood” and “St Kilda” telephone numbers was arrived at “after allowing for the proportion of Collingwood and St Kilda calls found by Hansen J to be outside [Bamco Villa’s] territory”.
Bamco Villa alleged that what it had lost was the income from or the opportunity to earn income from these telephone calls to Crown Astoria and Real Cheap “branches” within its territory.
The advertisements in relation to the relevant telephone numbers were inserted in the Melbourne Yellow Pages. The 1997 Yellow Pages contained on p. 491 a prominent advertisement for Crown Rent-A-Car with telephone numbers for “Richmond” and “Camberwell” at top left and second left of the nine numbers displayed; on pp.494 and 495 respectively of the same volume were prominent advertisements for Astoria and Real Cheap including telephone numbers for “Camberwell” and “Richmond”. On these pages there were also similar sized advertisements for competing companies including Delta itself.
The 1998 Yellow Pages contained a prominent advertisement for Crown similar to that appearing in 1997 (next to an advertisement for Delta) on p. 578; on pp. 500 and 503 respectively there were Astoria and Real Cheap advertisements similar to the 1997 advertisements.
The 1999 Yellow Pages contained on p. 511 a Crown advertisement similar to that appearing in 1997 and 1998. The 2000 Yellow Pages also contained a prominent advertisement for Crown with a different format but containing telephone numbers for “Camberwell” and “Richmond”. I note that the telephone number for Crown Camberwell given in the 1999 and 2000 Yellow Pages (9813-3433) was the number of Crown’s actual branch in Camberwell. In that respect, Bamco Villa sought to increase its estimated lost revenue for the period 30 June 1998 to 30 June 2000 by arbitrary amounts (because statistics were not available for the number 9813-3433) so that a total allowance inclusive of all relevant calls was estimated at 5,600 calls per annum.
It is appropriate at this stage to consider certain basic submissions (as I understand them) made on behalf of Montedeen in relation to Bamco Villa’s approach to the calculation of loss of revenue as outlined above.
Montedeen submitted that it was under no contractual obligation to transfer or direct to Bamco Villa calls made to the Crown and Real Cheap numbers for Camberwell, Richmond, Collingwood and St Kilda. Its true contractual obligation was not to advertise those numbers at all unless those numbers formed part of the Delta System. However, it conceded that Astoria was part of the Delta system so that calls to the Astoria numbers for the said suburbs should have been transferred or directed to Bamco Villa.
Montedeen submitted that Bamco Villa’s initial approach was based upon an unstated but false assumption that if the calls to the offending numbers had been unable to be made, those calls would have been made to Bamco Villa.
Thus, Montedeen submitted that, whereas in the case of calls to the 131390 Delta number (the subject of the original damages award) what Bamco Villa lost in the case of each diverted call from a relevant cell area (or part of a cell area) was the loss of an opportunity to convert that very call into a rental agreement, all that Bamco Villa lost as a result of Montedeen’s wrongful advertising of the offending Crown and Real Cheap numbers was the chance (in the absence of those advertisements) of those potential customers calling and doing business with Bamco Villa. Montedeen went on to contend that, on the evidence, the value of that lost chance was negligible.
In response, senior counsel for Bamco Villa (Mr Meldrum QC) conceded (at T.2028) that Bamco Villa was not entitled to treat all the telephone calls to the Richmond, Camberwell, Collingwood and St Kilda numbers advertised by Crown and Real Cheap as calls which Bamco Villa was entitled to receive. Mr Meldrum further accepted (at T.2028) that at best all the court could do was to assess the value of the chance that Bamco Villa would have got more business if the competitor (Crown and Real Cheap) had not existed.
Mr Meldrum submitted or conceded that in relation to Bamco Villa’s calculation of damages (Exhibit “E”) in substance:
¨ the telephone calls to the Crown and Real Cheap numbers could be used as a measure of the business the opportunity for which did not come to Bamco Villa but not as an absolute measure;
¨ the loss suffered by Bamco Villa was to be measured by what further business Bamco Villa would have got if “Crown” had not existed;
¨ in the “13 number” situation a call lost to Bamco Villa was a call to which it was contractually entitled – the claim here was different because the breach was not the diversion of calls to numbers to which Bamco Villa was contractually entitled but the competition from Montedeen using Crown and Real Cheap including the use of numbers attached to suburbs within Bamco Villa’s territory;
¨ if “Crown” had not competed, some of its business would have gone not only to Bamco Villa but also to various other competing rental companies;
¨ the value of business per call received by Bamco Villa would also have increased in the absence of “Crown” which was not only competing but undercutting the rental rates – regard should be had to this factor in assessing damages generally;
¨ all competition from Crown was a breach by Montedeen whether in relation to numbers attached to suburbs within or partly within Bamco Villa’s territory or not – with regard to numbers attached to places wholly outside Bamco Villa’s territory, even if abutting that territory, no specific damages claim was made but regard should be had to this factor in assessing damages generally (but the further the place was from Bamco Villa’s territory the less likely was the chance of any damage to Bamco Villa);
¨ the calls to the direct line of the Crown Camberwell branch (9813 3233) also provided no direct measure of any loss which Bamco Villa had suffered by the existence of this additional competition;
¨ all submissions relating to “Crown” covered “Real Cheap” as well – Astoria was in a different position because it was part of the Delta system. [I note that Montedeen conceded that Astoria did stand in a different category in assessing damages because it was part of the Delta system.]
In assessing damages I use the findings rationale and approach earlier adopted by Hansen J, but only where applicable, without setting out the same again.
I turn first to the loss of revenue caused to Bamco Villa by the failure to transfer direct telephone calls to Astoria to Bamco Villa. I find that the relevant calls were:
16/11/96 to 30/6/97
Collingwood 417 5992
Richmond 429 2227
Camberwell 809 049948
317
313678
1/7/97 to 30/6/98
Collingwood 417 5992
Richmond 429 2227
Camberwell 809 049990
415
4991004
1/7/98 to 30/6/99
Collingwood 417 5992
Richmond 429 2227
Camberwell 809 049943
312
256611
1/7/99 to 30/6/00
Collingwood 417 5992
Richmond 429 2227
Camberwell 809 049911
40
2172
By further joint written submissions dated 12 June 2001 the parties have agreed that, if the number of Astoria calls is as above set out, then (subject to any other defences) the total revenue lost by Bamco Villa was $252,478. This is on the basis that no allowance is to be made for "hoax calls" to Bamco Villa which were said to have artificially reduced the average value of a call to a “13” number. I am not satisfied on the evidence that any such allowance should be made.
The next question is what further allowances should be made to increase or reduce that lost revenue. The only issue between the parties here is whether a 6% advertising levy should be deducted. This would probably have been applicable if Bamco Villa had received the Astoria calls and accordingly, in my view, should be deducted.
The parties are agreed in that event (subject to any other defences), that the damages suffered by Bamco Villa in relation to the Astoria calls, plus interest to 30 June 2001, are as follows:
DAMAGES
INTEREST
RATE
DAYS
INTEREST
TOTAL
96/97
47,311
10.75%
1461
20,358
67,668
97/98
83,910
10.75%
1096
27,086
110,995
98/99
47,952
10.75%
731
10,324
58,276
99/00
3,678
10.75%
365
395
4,073
241,013
A small adjustment would need to be made to the extent that this judgment is given before 30 June 2001. However in the circumstances I will simply round off the total at $241,000.
I turn next to the loss of revenue caused by the existence of competition from Crown and Real Cheap. The question here is not the diversion of income but the reduction of the opportunity to earn further income. It is necessarily a broad estimate in the light of the various factors appearing from the evidence.
I take into account that the gross rental income of Bamco Villa increased gradually from 1992-5, peaked in 1995-6, fell substantially in 1996-8 and continued to fall thereafter (see columns 1 and 2 below):
Period Gross Revenue Diverted Revenue Total 92/93 987,322 - 987,322 93/94 1,426,948 11,404 1,438,352 94/95 1,571,761 65,844 1,637,605 95/96 1,581,614 29,532 1,611,146 96/97 1,370,135 81,656 1,451,791 97/98 1,164,116 11,817 1,175,933 98/99 1,125,322 - 1,125,322 99/00 1,003,220 - 1,003,220
71.I gave consideration to selling the property subject to a formal lease to Bamco [Villa], however I formed the view that it was not appropriate to do so as:
(a)unless the lease was stated to be for a long term at a significant rent, I believe that the existence of such a lease would significantly devalue the property and be opposed by the Bank;
(b)in my capacity as a director of Bamco [Villa], I had formed the view that if the downturn in Bamco [Villa]’s profitability continued, the Camberwell branch would, in any event, be closed.”
On 15 December 1999 the Camberwell property was sold by Bamco Investments at public auction for $600,000 on terms including vacant possession and settlement in 90 days. On or about 12 March 2000 Bamco Villa closed its Camberwell branch and gave up possession of the premises and Bamco Investments settled with the purchaser, giving the purchaser vacant possession as required by the contract of sale. Bamco Villa neither sought nor received the consent of Montedeen to the closure of the Camberwell branch and the giving up of possession thereof.
By their third amended statement of claim in the termination proceeding, the Delta parties allege that Bamco Villa surrendered possession of the Camberwell premises without the prior written consent of DCRA or Montedeen (para. 22) and that this surrender of possession without consent was a breach of cll. 14.1 and 19.1 of the franchise agreement (para. 23). The pleading goes on to refer to DCRA’s “Second Notice of Breach” dated 20 April 2000 (which relied on a breach of cl. 14.1) and a termination notice dated 8 May 2000 (paras. 24 and 26) and to DCRA’s “Third Notice of Breach” dated 20 April 2000 (which relied on a breach of cl. 19.1) and a termination notice dated 8 May 2000 (paras 27 and 29). In the alternative, the Delta parties allege that, if the franchise agreement was not validly assigned by Montedeen, Montedeen gave a “Fourth Notice of Breach” dated 20 April 2000 (relying on a breach of cl. 14.1) and a “Fifth Notice of Breach” dated 20 April 2000 (relying on a breach of cl. 19.1) (paras. 30 and 33) and termination occurred by notice from Montedeen dated 8 May 2000 (paras 32 and 35).
In its second amended defence and counterclaim, Bamco Villa admitted only that Bamco Investments Pty Ltd had surrendered vacant possession of the Camberwell premises.
The Delta parties submitted that the Camberwell premises had been “previously approved” within the meaning of cl. 14.1 of the franchise agreement and that Bamco Villa was therefore obliged under that clause to maintain physical facilities within those premises but had not done so. It was not sufficient compliance with cl. 14.1 to maintain physical facilities within the Richmond premises because cl. 14.1 applied to all premises within the territory which had been previously approved (reliance was placed upon cl. 38.1(iii) which provided that, unless the context otherwise required, a reference to the singular should include a reference to the plural). Further or in the alternative, the Delta parties submitted that the closure of the Camberwell premises was a breach of cl. 19.1 in that Bamco Villa had surrendered possession of “the Premises” without the prior written consent of the franchisor.
Bamco Villa submitted that cl. 14.1 was satisfied provided that a franchisee maintained physical facilities in one approved location or premises within the territory. Bamco Villa further submitted that cl. 19.1 did not apply to the closure of premises, alternatively that there had not been proved any “surrender” of possession within the meaning of cl. 19.1.
The essential right granted to a franchisee by the franchise agreement is the exclusive right to use the “Delta Car Rentals System” (as defined) in the operation of a specified business “at the location or locations within the Territory previously approved by the franchisor in accordance with [cl. 14]…” (cl. 1.1). “Location” seems to be used as a synonym for “premises at a particular location” because cl. 14.1 then requires a franchisee to establish and maintain physical facilities in the territory within premises of which the franchisor has previously approved – which are “hereinafter called ‘the Premises’”. Clause 14.1 goes on to provide that such approval may be granted or refused “as the Franchisor so elects”. Clause 14.2 requires a franchisee to “have regard to the discretions (sic) of the Franchisor” as to the size and location of the premises and related matters.
Clause 19.1 (see para [22] above) prohibits a wide variety of acts and transactions by the franchisee affecting the Franchise, the Business or the Premises or any interest therein without the consent of the franchisor. A reading of cl. 19.1 and cl. 19 as a whole shows that the main thrust is to prevent the transfer or assignment of the franchise or business to any non-approved person. Nevertheless, the prohibition expressly extends to a number of acts in relation to “the Premises” alone including the surrender of possession thereof. The prohibition against surrender of possession of the Premises arguably only makes sense in the context of an obligation to maintain physical facilities of the business at those premises for the duration of the franchise agreement – that is, the very obligation said to be imposed by cl. 14.1 of the agreement.
In my opinion, the exclusive rights of the franchisee, granted by cl.1.1, to use the Delta Car Rentals System for the term of the franchise at the location or locations previously approved within the Territory is matched by a correlative duty of the franchisee to the franchisor, under cl.14.1, to maintain physical facilities for the term of the franchise within each of the premises (or locations) so approved. There is thus placed upon a franchisee, in effect, an obligation to obtain and retain, in one way or another, security of tenure at any premises so approved for the expected duration of the franchise (in the absence of some contrary agreement or arrangement with the franchisor).
By closing the Camberwell branch, Bamco Villa therefore committed a breach of cl. 14.1 of the franchise agreement by failing to maintain physical facilities in the Camberwell premises. It is unnecessary to decide whether Bamco Villa also committed a breach of cl. 19.1 by surrendering possession of the Camberwell premises without the consent of the franchisor. It follows that, subject to other defences raised by Bamco Villa, the franchise agreement would have been terminated by notice given on 8 May 2000.
In its second amended defence and counterclaim (dated 30 August 2000) in answer to the Delta parties’ second amended statement of claim, Bamco Villa pleaded each of the following matters, in substance, in response to the Delta parties’ purported termination of the franchise agreement:
(i)it would be unconscionable in all the circumstances to allow the Delta parties to rely upon any proven breaches of the franchise agreement by Bamco Villa and the Delta parties were precluded from relying upon such breaches because in the circumstances that would constitute taking advantage of breaches of the franchise agreement by the franchisor, which breaches were the cause of any proven breaches by Bamco Villa;
(ii)the purported termination was in breach of cl. 22.4 of the franchise agreement and of an implied term of the franchise agreement that the franchisor would exercise its powers under the franchise agreement reasonably, in good faith and not capriciously;
(iv)Bamco Villa should be granted relief against forfeiture.
Having regard to my conclusions to this point, these responses need only be considered in relation to Montedeen’s termination based upon the closure of the Camberwell premises.
The circumstances relied upon by Bamco Villa were particularised (under para. 18(a)) and may be summarised as follows. The conduct of the Delta parties was the continuation of a concerted campaign by Salvo to force Bamco Villa out of business. That conduct and campaign included (inter alia):
¨ setting up Crown, Real Cheap and Astoria in competition with Bamco Villa;
¨ opening a Crown branch in Camberwell;
¨ the sham sale to Sable Smooth;
¨ the “second sham” in relation to the Castledines and Peteron;
¨ the conduct of the Crown business, insofar as it impacted upon Bamco Villa, at the direction of Salvo and his companies.
I have omitted matters which I consider immaterial for various reasons or which have not been made out.
In relation to the “second sham”, I set out in full what was alleged by Bamco Villa:
“D.It relies further upon the purported sale of 26 November 1997 of the shares in Crown Rent A Car Pty Ltd and the purported purchase of Astoria Rent A Car and Real Cheap Car Rental businesses and of the New South Wales operations of Crown Rent-A-Car in July of 1998 which purported sales were a sham. Alternatively, since November 1997 the operation of the Crown Rent-A-Car business insofar as it impacted upon Bamco was at the direction of Mr Mario Salvo or companies controlled by him.
The shams can be inferred from the following:
(a)the fact that Pavlicek signed the sale agreement dated 26 November 1997 at the direction of Wunsch;
(b)the transfer documents were drawn by Wunsch rather than a solicitor;
(c)the transfer documents were executed at Delta’s head office;
(d)Salvo companies acted as ‘marriage broker’ for the arrangements between Peteron and Crown;
(e)all negotiations for the sales were between Salvo and Castledine;
(f)the lack of adequate documentation for the transfer;
(g)Montedeen’s failure to terminate the sale by it to Crown Rent-A-Car Pty Ltd when the company failed to comply with its obligations under that agreement;
(h)the subsequent apparent purchase by Salvo companies of part of the businesses sold to Crown Rent-a-Car Pty Ltd rather than terminating the sale to Crown Rent-a-Car Pty Ltd’
(i)the immediate repayment by Crown Rent-a-Car Pty Ltd to Salvo companies of the vast bulk of the moneys paid by Salvo companies for the purchase of the Crown (Sydney), Astoria (Sydney and Melbourne) and Real Cheap (Sydney and Melbourne) businesses;
(j)the extension of credit to Crown Rent-a-Car Pty Ltd and Peteron Pty Ltd on uncommercial terms;
(k)the sale of shares in Crown Rent-a-Car Pty Ltd when that company had not traded for a considerable period;
(l)the extension of credit to Crown Rent-a-Car Pty Ltd and Peteron Pty Ltd when the Crown, Astoria and Real Cheap businesses were ostensibly competing with Delta;
(m)the uncommercial vehicle leases offered to Crown Rent-a-Car Pty Ltd;
(n)the lack of involvement by Peteron in the advertising of the Crown businesses;
(o)the assistance given by Wunsch to the compliance obligations of Crown Rent-a-Car Pty Ltd;
(p)the assistance given by Wunsch to the compliance obligations of Crown Rent-a-Car Pty Ltd;
(q)the consistent indebtedness of Crown Rent-a-Car Pty Ltd and/or Peteron Pty Ltd to the Salvo companies with little or no attempt by those companies to recover the indebtedness;
(r)the lack of a franchise agreement to Peteron Pty Ltd;
(s)the absence of franchise fees paid by Peteron Pty Ltd;
(t)the lack of any contribution by Peteron Pty Ltd to advertising expenses or an advertising fund;
(u)the absence of adequate accounts as to the Peteron Pty Ltd debt to the Salvo companies;
(v)the statement by Wunsch that Crown was a ‘sister’ company of Montedeen Pty Ltd;
(w)Crown Rent-a-Car Pty Ltd delivered its original documents including bank statements, cheque butts and company register to Montedeen when requested to do so;
(x)the involvement of Peteron Pty Ltd and Mr Castledine in the acquisition and construction of the Crown branch in Stud Road, Scoresby although that property was acquired by a Salvo company;
(y)the Crown businesses competed with Bamco Villa for business at rates that Bamco Villa could not match;
(z)the continued diversion of calls to the Crown, Astoria and Real Cheap telephone numbers of Delta branches;
(aa)the assistance given by the Delta companies to a suggested independent competitor;
(bb)the payment by Salvo companies for Yellow Pages advertisements for Crown, Real Cheap and Astoria businesses;
(cc)the involvement of Salvo companies in the lodgement of Yellow Pages advertisements for the Crown, Real Cheap and Astoria businesses;
(dd)the lack of directions given by Castledine as to Yellow Pages advertisements;
(ee)the continued focus by the Crown, Real Cheap and Astoria Yellow Pages advertisements on supposed branches in or close to Bamco Villa’s territory;
(ff)Salvo companies acting as ‘marriage broker’ for the arrangements between Peteron Pty Ltd and Crown Rent A Car Pty Ltd.”
There was in my view no “second sham” as such but I am satisfied that Bamco Villa established the factual substratum for sub-paragraphs (a) to (g), (i), (j), (l), (n), (o), (q) to (t), (v) (x) (z) and (aa) to (ff) above. Although I am satisfied that Peteron was beneficially owned by the Castledines and its business was not directly or indirectly owned or controlled by Salvo, I do find on the whole of the evidence that Salvo had a relationship with and degree of economic and financial influence over the Castledines and Peteron’s business that was sufficient to enable him to procure and did procure their cooperation in the decisions and moves which they took, or permitted the Delta companies to take in the name of Crown, Real Cheap and Astoria, which were competitive with Bamco Villa’s business. The relevance of this finding appears later below.
Bamco Villa’s written submissions emphasised the second of the pleaded matters summarised above (at [154]) in answer to the termination of the franchise agreement, by contending that the termination was itself a breach of:
(1) clause 22.4 of the franchise agreement;
(2) the franchisor’s fiduciary duty under the franchise agreement;
(3) an implied term of the franchise agreement of good faith and fair dealing.
The first point was that in purporting to terminate Bamco Villa for “unmeritorious” breaches of the franchise agreement, the franchisor had acted in a manner so as to benefit itself rather than “to promote the mutual business interest” of the franchisor and franchisee contrary to cl. 22.4. In my opinion, cl. 22.4 is in terms inapplicable to questions relating to the franchisor's express right to terminate the franchise agreement under other provisions of the agreement. The second point was to the same effect but based on the alleged fiduciary duty owed by the franchisor. As already stated, the franchisor does not owe any fiduciary duty.
The third point relied upon the implied term. The argument was based upon a term to be implied in a franchise agreement that each party should exercise the powers conferred upon it in good faith and reasonably and not capriciously or for some extraneous purpose. I would respectfully agree with, and in any event follow, the cases cited which support the implication of such a term as a legal incident of franchise agreements.[5] Montedeen accepted that such an implied term existed here.
[5]Far Horizons Pty Ltd v McDonald’s Australia Ltd [2000] VSC 310 at [42] per Byrne J; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft Systems International v Air Services Australia (1997) 76 FCR 151, 191-3, per Finn J; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, 368-9, per Sheller JA; Garry Rogers Motors (Aust) Pty Ltd v Subaru Aust Pty Ltd (1999) ATPR 41-703 at [37] per Finkelstein J.
Bamco Villa submitted that in terminating the franchise agreement, the franchisor had acted unreasonably, capriciously and for an improper purpose and thus in breach of the implied term governing its exercise of the power to terminate.
It is necessary to consider this submission only in relation to the termination based upon closure of the Camberwell premises.
I am satisfied that it is more probable than not that the franchisor’s conduct materially contributed to Bamco Villa’s financial difficulties which led to the closure of the Camberwell premises. The conduct of the franchisor was in breach of contract. It was intentional. The magnitude of Bamco Villa’s loss upon termination – a franchise which still has, on the evidence, a substantial value – would be great. It was not disputed that the franchise still had substantial value.
In all the circumstances to which I have referred, the termination was in my view made in breach of the franchisor’s obligation to exercise the power in good faith and reasonably. The opportunity to terminate arose in significant part from the franchisor’s conduct in breach of contract, which was intended both to harm Bamco Villa and to benefit the Delta parties. I note that the franchisor has caused or permitted the Delta parties to obtain a number of valuable benefits by the operation of Crown, Real Cheap and Astoria. Profits are made from the leasing or hiring of vehicles to Peteron by way of rebates on purchases from the vehicle manufacturers, margins on some lease and hire agreements and profits on the re-sale of vehicles. In addition, rental revenue is gained from telephone calls to the advertised Crown branch at Tullamarine.
In the circumstances, the failure of Bamco Villa to maintain the Camberwell premises was not a breach which the franchisor, acting in good faith and reasonably, ought to have relied upon as a ground for exercising the power to terminate the franchise agreement.
I note that Salvo, in cross-examination, testified that, had he been asked to consent to the closure of the Camberwell premises, he would have refused his consent. He said however that he would have considered buying the property and reducing Bamco Villa’s franchise territory so as to maintain services in that area or in some way tried to reach a negotiated solution with Bamco Villa. I consider that the hypothetical question as to what Salvo would have done had he been asked for consent is irrelevant, but, if it is relevant, his evidence demonstrates to my mind that having materially contributed to the financial state of Bamco Villa which caused the closure of the Camberwell premises, he would then have sought to derive benefit from that situation for himself or for the Delta parties.
I conclude that Montedeen’s termination of the franchise agreement was exercised in breach of the said implied term and was therefore of no effect.
In the alternative, Bamco Villa’s defence was that the franchisor’s termination of the franchise agreement constituted unconscionable conduct which should not be permitted in equity or that Bamco Villa was entitled to the equitable remedy of relief from forfeiture.
The Delta parties contended that relief from forfeiture was not a remedy available in the case of a mere termination of a contract but was available only in a case of forfeiture of some estate or interest in land or other proprietary or possessory right.[6] The scope of relief from forfeiture need not be considered because, notwithstanding that submission (and somewhat surprisingly), the Delta parties expressly conceded that the Court had general power in equity to restrain any unconscionable exercise of the right to terminate a contract, whether arising under the terms of the contract or by law.[7] This concession appeared to accept that there was a wider equitable principle pursuant to which a party should not be permitted to exercise a legal right in such a way that the exercise amounted to unconscionable conduct.[8]
[6]See Westminster Properties Pty Ltd v Comco Constructions Pty Ltd (1991) 5 WAR 191 (Full Court) and cases therein cited.
[7]Citing Stern v McArthur (1988) 165 CLR 489, 501, 513, 526-7 and 541 – which was a case of relief from forfeiture.
[8]Legione v. Hately (1983) 152 CLR 406, 444; Commercial Bank of Australia Ltd. v. Amadio (1982) 151 CLR 447, 461; Sunbird Plaza Pty. Ltd. v. Maloney (1988) 166 CLR 245, 263; Federal Airports Corporation v. Makucha Developments Pty. Ltd. (1993) 115 ALR 679, 700.
The Delta parties accepted that the factors relevant to determining whether the franchisor’s conduct was unconscionable included factors such as those stated by Mason and Deane JJ in Legione v Hateley :[9]
“It is impossible to define or describe exclusively all the situations which may give rise to unconscionable conduct on the part of a vendor in rescinding a contract for sale. None the less it may be said that where the conduct of the vendor, though not creating an estoppel or waiver, has effectively caused or contributed to the purchaser’s breach of contract there is ground for exercising the jurisdiction to relieve. And if it also appears that the object of the rescission is not to safeguard the vendor from adverse consequences which he may suffer as a result of the contract remaining on foot, but merely to take unconscientious advantage of the benefits which will fortuitously accrue to him on forfeiture of the purchaser’s interest under the contract, there will be even stronger ground for the exercise of the jurisdiction.
In the ultimate analysis the result in a given case will depend upon the resolution of subsidiary questions which inevitably arise. The more important of these are: (1) Did the conduct of the vendor contribute to the purchaser’s breach? (2) Was the purchaser’s breach (a) trivial or slight, and (b) inadvertent and not wilful? (3) What damage or other adverse consequences did the vendor suffer by reason of the purchaser’s breach? (4) What is the magnitude of the purchaser’s loss and the vendor’s gain if the forfeiture is to stand? (5) Is specific performance with or without compensation an adequate safeguard for the vendor?”
[9]Supra, at 449.
In my opinion, the franchisor is precluded by its unconscionable conduct from, or has engaged in unconscionable conduct by, terminating the franchise agreement for Bamco Villa’s failure to maintain facilities at the Camberwell premises. The franchisor’s breach materially contributed to the financial position of Bamco Villa and of the Camberwell branch in particular which led to the closure. Bamco Villa’s breach, while intentional and significant, was forced upon it. The harm suffered by the franchisor – principally the loss of Delta “coverage” in the Camberwell area is somewhat nebulous and it lies ill in the mouth of the Delta parties to complain of it given their instigation of and support for a Crown branch in Camberwell. On the other hand termination would lead to the loss of a valuable franchise by Bamco Villa and the re-gaining of a large and profitable territory by the Delta parties. However my primary conclusion is that the franchisor's termination was ineffective by reason of its breach of the implied term.
Repudiation
As an alternative to the franchisor’s termination of the franchise agreement under its express terms, the Delta parties alleged that Bamco Villa had by its conduct repudiated the franchise agreement which repudiation had been accepted by the franchisor and the agreement was thereby rescinded or terminated at law.
The Delta parties’ third amended statement of claim (para 36) particularised Bamco Villa’s repudiatory conduct as follows:
“ Particulars
The conduct of Bamco Villa is that it:
(a)failed to take any action in response to the May, June and October 1999 letters of Callegari and Wilson;
(b)ignored the requirement of the Fleet Standards by renting trucks which did not accord with those standards as specified in May, June and October 1999 letters of Callegari and Wilson and as specified in the Notice of Breach dated 5 November 1999;
(c)failed to cure defects in its signage, premises and fleet as specified in the Notice of Breach dated 5 November 1999;
(d)rented unroadworthy vehicles.
(e)failed to pay franchise fees and advertising levies for January and February 2000 until a notice of breach was served upon Bamco Villa in April 2000;
(f)failed to pay any franchise fees and advertising levies for the months of March 2000 onwards;
(g)abandoned the Camberwell Premises;
(h)has refused to participate with staff of the franchisor or to attend franchise meetings and would not deal with legitimate complaints from customers.”
It was common ground that the date of alleged acceptance of repudiation by Montedeen as franchisor was 29 May 2000 (the date of the first amended statement of claim). Montedeen must prove the existence of repudiatory conduct by Bamco Villa on or prior to that date which had not been rectified prior to the time of acceptance on that date.
In the correspondence and notices given to Bamco Villa, a large number of breaches of the franchise agreement were alleged but by the end of the trial some of these were no longer relied upon.
I will deal first with the breaches alleged in relation to the condition of the Richmond premises (comprised within particulars (a) and (c) above):
(i)At 26 Swan Street, the building and rear wall located at the side of the yard was in poor repair and its paint had worn out or faded. The facts are proved but I am not satisfied that the building and rear wall at the side of the yard form part of the premises or were within Bamco Villa’s power to repair or re-paint. In any event, I do not find this failure to rectify, if a breach, of itself to evince a repudiatory intent or to be a matter fundamental to performance of the franchise agreement. It is a relatively minor complaint.
(ii)At 26 Swan Street, signs on the building, rear wall, side wall and above the existing Delta Logo were worn out faded or did not comply with section 17 of the Manual. I make the same comments as to item (i).
(iii)The office at 23 Swan Street was dilapidated and had no guttering. The facts are proved. The “office” structure was used only for storage and was not the rental office which was at 26 Swan Street. It is a minor complaint. I do not find this matter or the failure to rectify it of itself to evince a repudiatory intent or to be a matter fundamental to performance of the franchise agreement.
(iv)At 23 Swan Street, the side walls had paint which was worn out or faded. I make the same comments as to item (i).
(v)At 23 Swan Street, the rear wash area was in poor condition and its paint was worn out or faded. The facts are proved. The rear wash area was nevertheless a serviceable area for the washing of cars and trucks. It is a minor complaint. I do not find this matter or the failure to rectify it of itself to evince a repudiatory intent or to be a matter fundamental to performance of the franchise agreement.
(vi)At 23 Swan Street there was rubbish in the yard around the office. There was rubbish at various times but I accept Vernuccio's evidence that it is removed regularly although some debris has remained. It is a minor complaint. It was not proved that this was a continuing feature. I do not find this matter of itself to evince a repudiatory intent or to be a matter fundamental to performance of the franchise agreement.
(vii)At 23 Swan Street the paint on all signs was worn out or faded or did not comply with Section 17 of the Manual. I am not satisfied that these matters were proved. In any event, see my general comment at paragraph [179].
(viii)At 23 Swan Street the poles and the support structure had paint which was worn out or faded. I repeat my comments as to item (vii).
In general and on the whole of the evidence, I am not satisfied that these matters or the failure by Bamco Villa to attend to them meant that the Richmond premises were overall in breach of the standards required by or under the franchise agreement. In referring to the evidence, I include the somewhat unsatisfactory “expert” evidence and also the view. Alternatively, I do not think that these failures taken together (if breaches) show any intent not to perform or to repudiate the franchise agreement or amount to a failure to perform any fundamental or substantial contractual requirement as the Delta parties contended.
The only other item comprised within particulars (a), (b) and (c) above is the alleged failure to comply with the “fleet standards”. In the end the sole complaint relied upon here was Bamco Villa’s admitted failure to comply with the franchisor’s standards as to the age of the vehicles comprising the rental fleet.
The Delta parties relied upon the fleet standards as to age of vehicles attached to Montedeen's letter to Bamco Villa dated 30 June 1999. The age guidelines, unlike other standards, applied not only to vehicles acquired after 1 July 1999 but also required all existing vehicles to be replaced so as to comply. The maximum age for cars was 18 months and various maxima were laid down for other classes of vehicles. The 30 June 1999 letter gave Bamco Villa until 30 July 1999 to comply. This time limit was in my view not reasonably prescribed (see cl. 4.6 of the franchise agreement). However, for present purposes, the repudiatory breach alleged is the admitted failure of the Bamco Villa fleet to comply with the age guidelines by 29 May 2000. Bamco Villa pleaded that compliance with these requirements was beyond its financial resources.
A letter dated 29 November 1999 from Bamco Villa's solicitors to the Delta parties' solicitors, in response to DCRA's notice of breach dated 22 November 1999, shows Bamco Villa's stance:
"Turning to the purported Notice of Breach of Franchise Agreement, for many reasons, including those set out above, our client contends that the purported notice is invalid and each of the purported breaches is without foundation. Notwithstanding these objections, our client is unable to comply with the vast bulk of the matters raised. That position has arisen because our client has suffered significant damages as a consequence of breaches by its franchisor with its obligations under the franchise agreement. One important breach is the fostering of the competitive Crown Businesses which we have referred to above. The assessment of the damages resulting from that conduct, together with an application for solicitor client costs of the proceedings is to be determined by the Supreme Court next year. Our client expects to receive very substantial damages and costs – in the order of hundreds of thousands of dollars – as a consequence of those proceedings. When those funds are to hand, it is prepared to work constructively with its franchsor to redress any legitimate objection to its operations. Alternatively, if your client or Montedeen is prepared to advance the funds necessary to attend to the matters raised, in order to avoid disputes our client will attend now to the matters your client has raised."
Vernuccio testified and I accept that Bamco Villa was unable to obtain finance to renew the fleet because of the existence of this litigation and of the attempted termination of its franchise. I am satisfied that the Delta parties have at all relevant times appreciated that Bamco Villa (like most franchisees) would not be able to meet the fleet age guidelines without finance but that Bamco Villa would not be likely to be able to obtain such finance in the said circumstances which were peculiar to it.
In my view, the imposition in June 1999 of the fleet age guidelines upon Bamco Villa was in all the circumstances in breach of the implied term earlier referred to and ineffective in that the guidelines were imposed in bad faith and, as against Bamco Villa, with the intent to make it practically impossible for it to comply. The age guidelines, although not of themselves unreasonable, were applied unreasonably at that juncture to Bamco Villa. The relevant circumstances include the harm caused by the franchisor’s breach of contract including the continuing competition from Peteron fostered by the franchisor and the cost burden of continuing litigation.
If it matters (and I do not think that it does), I find that there was no subsequent communication of the age guidelines to Bamco Villa. I accept Vernuccio's evidence in that regard and I reject the evidence of Sharon Fay Middling (a Delta employee) as to the franchisor's provision of the Manual to Bamco Villa by letter on or about 14 September 1999. I found her evidence unpersuasive.
Particular (d) is "rented unroadworthy vehicles". There was considerable (if not vast) evidence on this topic. In the end, the Delta parties relied only upon two unroadworthy vehicles in December 1999 (which were subsequently repaired). That of itself was not repudiatory conduct.
The next aspect of alleged repudiatory conduct relied on relates to non-payment of franchise fees and advertising levies and is covered by particulars (e) and (f) above. Bamco Villa did fail to pay the franchise fees and advertising levies for January and February 2000 until 2 May 2000 and only after a notice of breach was served in April 2000. In addition, Bamco Villa failed to pay franchise fees and advertising levies for the month of March 2000 and thereafter (a total of some $31,000 for March, April and May 2000) and running at about $9,000 per month. Franchise fees ("the System fees" – cl. 2.1) are required to be paid within 15 days of the expiration of each calendar month (cl. 2.3). System fees are calculated at 8% of gross revenue. The advertising levy is payable as "shall be reasonably determined from time to time" by the franchisor. The franchise agreement does not provide that the fees or the levy should be paid in full or without deduction. Bamco Villa took the view (as it turned out, correctly) that "very substantial damages and costs – in the order of hundreds of thousands of dollars" would be payable by the franchisor. The sum recovered for damages will most probably wholly extinguish and exceed the amount due for outstanding fees and the levy. In those circumstances I do not consider that the non-payment of fees and the levy evinces any intention by Bamco Villa not to be bound or not to perform the franchise agreement.
The next particular of conduct relied upon is the abandonment of the Camberwell premises which has already been dealt with. The final item is particular (h). I do not understand "has refused to participate with staff of the franchisor". I do not consider that, in the circumstances of this litigation or at all, the failure to attend franchise meetings is repudiatory conduct. I am not satisfied that Bamco Villa would not deal with legitimate complaints from customers or (if true) that this constituted repudiatory conduct.
Looking at the said conduct of Bamco Villa as a whole and in all the surrounding circumstances I do not consider that Bamco Villa's conduct may fairly be considered as a substantial failure to perform the franchise agreement or as evincing an intent not to be bound by or not to perform the franchise agreement. In relation to the question of substantial failure to perform, I take into account that the franchise agreement runs until the year 2010. The franchisee had performed its obligations under the agreement before this dispute broke out. The franchisee will in the future be bound to perform all of its obligations under the agreement and to remedy any outstanding breaches. The franchisor is not reasonably entitled to expect that the franchisee should raise finance to spend monies on upgrading its fleet and premises while the franchisor continues to foster competition against its franchisee in breach of the agreement and remains liable to the franchisee for substantial damages and costs.
Alternatively, I am of the view that the franchisor's purported acceptance of repudiation is ineffective as being either in breach of the implied term of good faith and fair dealing, or as constituting unconscionable conduct, in all the circumstances. I have already referred at various points to the relevant circumstances. I also take into account that the cash flow of Bamco Villa and its financial capacity to remedy any breaches has been seriously affected by the franchisor's breaches of contract and this litigation. The evidence shows that the whole of the damages and interest paid to Bamco Villa's solicitors in July 1998 were retained on account of costs and that Bamco Villa has since received none of this amount. The total monies paid by Montedeen of $200,084 (damages and interest) and $231,412 (taxed costs) fall short of the amount of $450,000 claimed in the taxable bill. I do not take into account the costs of the appeal or costs incurred subsequent to the appeal. In addition there is the further sum of about $263,000 awarded by this judgment.
Orders will be made in accordance with the above reasons. I will ask the parties to submit proposed minutes of orders for each proceeding within seven days and I will hear the parties on the question of costs in each proceeding.
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Key Legal Topics
Areas of Law
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Contract Law
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Commercial Law
Legal Concepts
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Breach of Contract
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Repudiation & Termination
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Implied Terms
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Unconscionable Conduct
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Compensatory Damages
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