Battery World Pty Limited v Heavenly Bound Pty Limited
[2009] NSWSC 1309
•1 December 2009
CITATION: Battery World Pty Limited v Heavenly Bound Pty Limited & Ors [2009] NSWSC 1309 HEARING DATE(S): 25/11/09
JUDGMENT DATE :
1 December 2009JURISDICTION: Equity Division
Commercial ListJUDGMENT OF: Einstein J DECISION: See paragraph 43. CATCHWORDS: Practice - Separate Questions - Franchise Agreement - meaning of 'termination' LEGISLATION CITED: Trade Practices Act 1974 CATEGORY: Separate question CASES CITED: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191
Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99
Australian Casualty Co Ltd v Federico (1986) 160 CLR 513
Campbell Discount v Bridge [1962] AC 600
Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471
Hide and Skin Trading Pty Limited v Oceanic Meat Traders Limited (1990) 20 NSWLR 310
Homburg Houtimport BV v Agrosin Private Limited [2004] 1 AC 715
International Air Transport Association v Ansett Australia Holdings Ltd (subject to deed of company arrangement) (2008) 242 ALR 47
Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769
McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579
Orrong Strategies Pty Ltd v Village Roadshow Ltd (Habersberger J, Supreme Court of Victoria, 25 January 2007, unreported)
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
R v Secretary of State for Social Services, ex parte Kahn [1973] 2 All ER 104
Ryledar Pty Ltd v Euphoric Pty Ltd (2007) Aust Contract R 90-254; [2007] NSWCA 65
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
United Group Rail Services Ltd v Rail Corporation of NSW [2009] NSWCA 177
Victoria v Australian Teachers Union (1993) 49 IR 149
Wickman Machine Tool Sales Limited v L Schuler AG [1974] AC 235PARTIES: Battery World Pty Limited (Plaintiff)
Heavenly Bound Pty Limited (First Defendant)
Jack Tannous (Second Defendant)
Roseanne Tannous (Third Defendant)FILE NUMBER(S): SC 50096/09 COUNSEL: Mr M Jones (Plaintiff)
Ms C Champion (Defendants)SOLICITORS: Corrs Chambers Westgarth (Plaintiff)
Spanko Soulos & Co (Defendants)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST
Einstein J
Tuesday 1 December 2009
50096/09 Battery World Australia Pty Limited v Heavenly Bound Pty Limited & 2 Ors
JUDGMENT
The separate question
1 The proceedings are presently before the Court for the determination of the following separate question:
On the proper construction of the Franchise Agreement between Battery World Australia Pty Ltd, Heavenly Bound Pty Limited, Jack Tannous and Roseanna Tannous dated 14 May 2004 (Franchise Agreement), do clauses 9, 12 and 14 have potential application upon the termination of the Franchise Agreement for reasons other than those described in clause 11, including termination upon the expiration of the term of the Franchise Agreement.
The principles of construction
2 It is as well to commence by briefly setting out the well-known recognized principles which inform the proper approach to the construction of commercial contracts:
i. The role of the Court in construing a contract is to “ascertain and give effect to the intentions of the contracting parties”, [ Homburg Houtimport BV v Agrosin Private Limited [2004] 1 AC 715 at 737] acting objectively, having regard to the expressed intention; [ Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40]; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [34]] recognising that meaning is to be determined by what a reasonable person would have understood the contract to mean, taking into account the text, the surrounding circumstances known to the parties and the purpose and object of the transaction. [ Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 [40]; International Air Transport Association v Ansett Australia Holdings Ltd (subject to deed of company arrangement) (2008) 242 ALR 47 at 63 [53]] cf Ryledar Pty Ltd v Euphoric Pty Ltd (2007) Aust Contract R 90-254; [2007] NSWCA 65.
ii. Commercial contracts are to be construed with a view to making commercial sense of them. [ Hide and Skin Trading Pty Limited v Oceanic Meat Traders Limited (1990) 20 NSWLR 310 at 313-314; United Group Rail Services Ltd v Rail Corporation of NSW [2009] NSWCA 177].
iii. When the Court ascertains meaning of a document by reference to the reasonable business person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract, it seeks to give the contract a businesslike interpretation. [ McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at [22] per Gleeson CJ].
v. A semantic and syntactical analysis of a word in a commercial contract that leads to a conclusion that flouts business commonsense and reasonableness and produces an absurd result, must be made to yield to business commonsense and reasonableness and avoid absurdity. [ Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201; Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 at 109; Lewis Construction (Engineering) Pty Ltd v Southern Electric Authority of Queensland (1976) 50 ALJR 769 at 775; Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520].iv. It is well accepted that narrow, technical or artificial interpretations of commercial contracts are to be avoided. [ Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300 per Isaacs J] Therefore, although the Court ought not approach construction with abstract preconceived notions of reasonableness, it is necessary for the Court to take into account the reasonableness and commerciality of the outcome of a particular construction; the more unreasonable the result, the more unlikely it is that the parties intended it. [ Wickman Machine Tool Sales Limited v L Schuler AG [1974] AC 235 at 251 per Lord Reid]
Matters which are common ground
3 It is common ground that on or about 14 May 2004 the plaintiff as franchisor, the first defendant as franchise owner, and the Second and third defendants in their capacity as directors of the first defendant, entered into a franchise agreement in relation to the operation of a Battery World Australia franchise outlet at the Fairy Meadow Premises known as “Battery World Fairy Meadow”
4 There is no issue between the parties but that the term of the Franchise Agreement expired on 24 February 2009 due to the effluxion of time.
The disclosure document
5 Notably pursuant to the Franchising Code of Conduct enacted by the Commonwealth Parliament as a mandatory code for the purposes of section 51AD of the Trade Practices Act 1974, the defendants were furnished with a Disclosure Document. This document was admitted into evidence and generally summarised many of the conditions of the agreement. Of particular relevance were sections of Clause 17 of the Disclosure Document examined below.
Exposing the respective arguments
6 Unfortunately it becomes necessary to examine a number of clauses in order to expose the respective arguments. I proceed accordingly.
7 A number of clauses in the Franchise Agreement are expressed to have operation upon “termination” of the Franchise Agreement. They are:
i. Clause 12(a)(i) of the Franchise Agreement : which provides that on “termination” of the Franchise Agreement the first defendant was obliged to deliver to the plaintiff all of the plaintiff’s property, confidential information, franchise assets, any unsold products and other information pertaining to the operation of the Franchise including without limitation the names and details of customers, methods of operations, marketing strategies, stationery, any apparel or article used in connection with the Franchise, business cards, account information, signage, franchise lists, agreements, specifications, correspondence, price lists, catalogues, and other documents or property relating to the Franchise (“Delivery Up Term”).
ii. Clause 12(a)(iii) of the Franchise Agreement : which provides that on “termination” of the Franchise Agreement the first defendant was obliged to provide to the plaintiff all information whether documented or otherwise the plaintiff requests concerning the Franchise and the Franchise’s customers in an honest and detailed manner and, if requested, by the plaintiff, to do so in writing (“Disclosure Term”).
iii. Clause 12(a)(iv) of the Franchise Agreement : which provides that on “termination” of the Franchise Agreement the first defendant was obliged to transfer to the plaintiff or as the plaintiff directs any permits or other approvals whatsoever which the first defendant holds as may be required to conduct the Franchise in the Territory, the Business Name, any telephone and facsimile numbers, post office box numbers and email and website addresses as may be used in the Franchise (“Transfer Term”).
v. Clauses 14(b) and (c) of the Franchise Agreement : which provide for restraints of trade upon termination.iv. Clause 12(a)(v) of the Franchise Agreement : which provides that on “termination” of the Franchise Agreement the plaintiff had the option to require the first defendant to assign to it the Lease of the Premises (“Assignment Term”).
8 Other clauses relied upon by the plaintiff in these proceedings are incidental to these principal obligations:
ii. Clauses 9(a) and (d) of the Franchise Agreement : which provide that the Defendants indemnify the plaintiff against any loss which the plaintiff may suffer as a result of the first defendant breaching the Agreement, such indemnity being a continuing indemnity notwithstanding termination of the Franchise Agreement (“Indemnity Term”).
i. Clause 14(e) of the Franchise Agreement : which provides that if the First, Second or third defendant was in breach of the Restraint Term, the plaintiff is entitled to obtain injunctive relief and recover damages and loss of profits together with interest and costs and including legal costs on a full indemnity basis (“Damages for Restraint Term”).
The cross contentions
The central parameters of the plaintiff’s submissions
9 The plaintiff submits that if the common English meaning of the word “termination” is to be applied to the above clauses, they clearly could have application upon the expiration of the term of the Franchise Agreement. On its ordinary meaning, “terminate” includes (Macquarie Dictionary (3rd revised ed):
1. bring to an end; put and end to;
2. to occur at or from the conclusion of;
4. to end, conclude, or cease.3. ……
10 On its ordinary meaning, “termination” includes (Macquarie Dictionary (3rd revised ed) “the fact of being terminated”.
The central parameters of the defendant's submissions
11 The defendants claim that clauses 9, 12 and 14 are not operative in circumstances where the Franchise Agreement expires through effluxion of time. This contention relies upon the argument that clause 11 (which clearly refers to early termination in described circumstances) is the only “termination” being contemplated in clause 12.
12 It seems plain that for this contention to be accepted, one needs to ascribe a special and heavily qualified meaning to the word “termination”, on the basis that it is only to have ascribed to it a sub-set of its ordinary meaning. That is, “termination” only means termination during the period of the Term.
13 The defendants do not appear to dispute that if the plain and ordinary meaning of the word “termination” is to be applied to clauses 9, 12 and 14 of the Franchise Agreement, then those clauses would have operation upon the termination of relations between the parties through expiration of time.
14 The defendants appear to wish to apply a special, meaning to the word “termination”, to facilitate the surprising commercial result for which they contend. As the plaintiff has contended this surprising commercial result is reasonably well illustrated by a number of submissions made by the defendants:
ii. Secondly, it seems to be suggested that the parties must have also contemplated that the plaintiff would be left to the maintenance of potentially complex process to enforce these common law, equitable and statutory rights.
i. First, the defendants appear to contend that the parties made a specific agreement in relation to the transfer/assignment of assets to the plaintiff if there had been a “ termination” of the Franchise Agreement at any time during the term of the Franchise Agreement (including up to the day before expiration of that term), but decided to leave all of their rights and obligations upon “expiration” of the term entirely dependent upon the operation of common law, equity and statute, by not making any allowance for that latter circumstance in the Franchise Agreement.
15 There is no rational commercial reason proffered as to why commercial parties would take a course productive of uncertainty, delay and additional cost (as the defendants’ preferred construction would have as a consequence).
16 In order to achieve this commercially surprising result, the defendants put forward the following contentions.
i. First, it is suggested that the parties have had in mind a fine distinction sought to be drawn by the defendants between “ termination” and “ expiration” .
ii. The cases principally relied upon are first instance decisions of the Supreme Court of British Columbia, which itself appears to have relied upon a decision of the Queen’s Bench Division in England. Otherwise, the cases cited by the defendants do not deal with the distinction that is contended for.
iii. Neither case principally relied upon could be said to be well known – much less likely to form part of the surrounding circumstances of the entry into of the Franchise Agreement. That being so, they cannot be used to inform the meaning to be attributed to the word “termination” in this case. Further, the cases concern different contracts, with different terms, in different factual contexts. For example, in Jostens, one of the critical clauses concerned with distribution of rights and obligations clearly attributed some to arise upon “ termination” or “ expiration” and others upon “ termination” (a direct contrast being apparent). In that context it was considered that the parties must have turned their mind to different consequences.
v. Second , the fine distinction now sought to be drawn by the defendants is said to be supported by a commercial rationale. However, when one comes to consider the defendants’ description of commercial rationale, it is plain that it is unnaturally confined so as to accommodate their arguments. In the defendants’ submissions, the commercial rationale behind clause 12 seems to be first described as enumerating “ what the franchisee must do to effectively place the plaintiff into the shoes of the franchisee. However, this rationale is thereafter further confined to placing the plaintiff into the shoes of the franchisee “ thereby ensuring the continued operation of a franchise that has not run its course because the conduct that is within the control of the franchisee and which may harm the plaintiff’s goodwill if not acted upon by the plaintiff by terminating the Franchise Agreement.iv. The defendants are unable to point to any equivalent distinction drawn in any clause of the Franchise Agreement that plainly distinguishes “ termination” and “ expiration” as appeared in Jostens . They point out that “ termination” is used in various clauses of the Franchise Agreement. None of those clauses seek to draw any distinction between the “ termination” and “ expiration” of the Franchise Agreement. Heavy reliance is placed upon clause 16(d), yet that clause draws no distinction of the type claimed, and is not even referring to the Franchise Agreement in the context of expiration.
17 The terms of the Franchise Agreement are not consistent with the additional qualification. I accept that if that was the true commercial rationale, one may well have expected:
i. the transfer of certain contact details (clause 12(a)(iv));
iii. the restraint on termination (clause 14),ii. the assignment of the lease (clause 12(a)(v)); and
- to be limited to the balance of the Term of the Franchise Agreement. They are not.
18 The defendants return to the theme of commercial rationale later in their submissions, where the rationale is described as “to allow the franchisee to benefit from the franchisor’s established goodwill and extend that goodwill into a wider geographical area for the benefit of the franchisor”. That is accepted, and provides a rationale for the transfer of rights at the end of the term. Otherwise, the plaintiff’s goodwill could be at risk.
19 Third, the defendants initially sought to rely upon extrinsic evidence, some of which was admissible on the construction issue some of which was not. With respect to the inadmissible material the defendants , during the hearing abandoned their contention that the terms of an agreement entered into between the parties 12 months after the relevant contract in respect of a different franchise was admissible as to the construction of the particular agreement in issue.
20 There otherwise appear to be three matters that the defendants rely upon as being surrounding circumstances in aid of construction:
i. The defendants seek to rely upon part of the Disclosure Document that applies to the Franchise Agreement in question. In particular, the defendants seek to rely upon the consideration paid by the defendants for the franchise. That does not, with respect, aid construction one way or the other. It is plain that whatever was paid, it was paid for the body of rights contained within the Franchise Agreement. More significantly for present purposes, in section 17 of the Disclosure Document, which is headed “ Summary of Other Conditions of Agreement” it is recorded:
17.1 Summary of the conditions of the Franchise Agreement (or references to the relevant conditions of the Franchise Agreement, if attached) that deal with the following matters:
…
| (g) The franchisee’s goodwill, if any, on termination or expiry | Refer attached Franchise Agreement – Section 12(a)(viii) |
| (h) the franchisee’s obligations when a franchise agreement is terminated, expires or is not renewed | Refer attached Franchise Agreement – Section 12 |
| … | |
| (q) restrictions on the franchisee’s operation of other businesses during or after the term of the franchise agreement | Refer attached Franchise Agreement – Section 14 & 16 |
It is plain that those descriptions in the Disclosure Document are consistent with the plaintiff’s construction and inconsistent with the defendants’ construction. The clauses referred to are described as applying upon expiry as well as termination. Clause 14 is described as applying, inter alia, after the term.
iii. Third , the defendants refer to various clauses of the Franchise Agreement in an attempt to contend that none of the matters in clauses 9, 12 and 14 are necessary for the protection of the plaintiff’s goodwill upon expiration of the Franchise Agreement. The contentions, whilst difficult to follow, appear to be capable of being distilled to the proposition that certain of the clauses are concerned with matters that the defendants claim are not directly reflected in certain assets identified in the Franchise Agreement, or the defendants claim that the plaintiff could take other steps to protect its interests. The defendants’ contentions do not directly address the “ termination” versus “ expiration” issue which is otherwise the principal focus of the defendants’ argument. In reality, what the submissions appear to be directed at is the commercial justification of some of the rights, rather than the existence of the rights and the occasion upon which they can be exercised. In short, these internal contextual indicators provide no assistance to overcome the obvious uncommerciality of the defendants’ position.ii. The defendants seek to rely upon parts of the Franchising Code of Conduct as assisting in interpretation. The defendants principally rely upon sections 6 and 7 (and clause 17.1 of annexure 1) and section 22 of the Code. In terms of sections 6 and 7 and clause 17.1 of annexure 1, it is to be noted that those provisions include expressions used in the Disclosure Document, that direct attention to the clauses in issue in these proceedings (see the relevant parts of the Disclosure Document identified in the quote above). Section 22(1) of the Code refers to termination before the Franchise Agreement expires. The addition of the further qualification “ before it expires” would be superfluous if termination and expiration were entirely different concepts. In short, the various references to the Code relied upon by the defendants are not supportive of their construction.
21 The defendants also sought to place reliance upon Orrong Strategies Pty Ltd v Village Roadshow Ltd (Habersberger J, Supreme Court of Victoria, 25 January 2007, unreported). In those proceedings the court was called upon to construe what objectively was meant by a particular paragraphs in a letter which, in dealing with Termination Bonus included the following words:
"PAZ to receive a termination bonus of [3] times his average performance bonus over the three preceding financial years upon the termination of this contract for any reason (including death) other than, of course, gross misconduct resulting in termination"[paragraph 329].
22 At paragraphs [328-331] his Honour observed as follows:
[328] It was common ground between the parties that in construing the termination bonus, regard could be had to the relevant surrounding circumstances.
[329] The construction issue is whether "termination for any reason" includes termination by expiry or effluxion of time, as maintained by Orrong. VRL submitted that Orrong’s construction was wrong. First, it was submitted that the letter did not say that the bonus was payable "upon termination"; it said "upon termination for any reason." Thus a "reason" is required. It was not sufficient that the 1995 Agreement merely ran its course. VRL submitted that effluxion of time was not "a reason."
[331] One of the reasons why I consider that the termination bonus was not payable on the expiration of the agreement by the effluxion of time is that the agreement refers to the five year contractual period "ending June 30, 2001" as well as referring to "termination for any reason." In accordance with the principle that where the parties have used different words in the one agreement it is presumed that they intended to refer to different things, the difference in terminology suggests to me that the draftsman, Mr Ziegler, saw a distinction between a contract ending or expiring at the end of an agreed period and "termination." It is interesting to note, however, that in his memorandum to the proposed arbitrator, Mr Wilson, dated 18 May 2000, explaining the disagreements between Orrong and VRL, Mr Ziegler referred to the termination bonus:[330] Secondly, VRL submitted that the expression "the termination of this contract for any reason (including death) and other than, of course, gross misconduct resulting in termination" referred to two "reasons." One "reason" ("death") was included and another "reason" ("gross misconduct resulting in termination") was excluded. Both were "events." The effluxion of time was not an event. Furthermore, VRL submitted, both of the reasons referred to were reasons that relevantly occurred before the expiration of the term of the agreement. The termination bonus would not be payable if Mr Ziegler died after the expiration of the agreement. Equally termination for gross misconduct involved termination during the term of the agreement. Therefore, the "termination" with which the clause was concerned was termination before the due date for expiry.
- being the amount payable by VRL on the termination or expiry of the consultancy agreement on June 30, 2001.
23 At [335] His Honour dealt with a number of authorities including a judgement of Lord Radcliffe in Campbell Discount v Bridge [1962] AC 600 at 620where he is Lordship said:
"terminate is an ambiguous word since it may refer to termination by right under the agreement or by eight condition incorporated in it or by deliberate breach"
24 At [336] Habersberger J referred to R v Secretary of State for Social Services, ex parte Kahn [1973] 2 All ER 104, where the employer failed to confirm the renewal of the appointment of the medical assistant. The contract provided that the appointment was for two years "reviewable subject to confirmation, for an indefinite period". The Court of Appeal held that this was not a "termination". Lord Denning MR said:
The rival arguments are nicely balanced. I think that the word 'terminate' or 'termination' is by itself ambiguous. It can refer to either of two things — either to termination by notice or to termination by effluxion of time. It is often used in that dual sense in landlord and tenant and in master and servant cases. But there are several indications in this paragraph to show that it refers here only to termination by notice. (1) The main heading speaks of 'Notice of Termination.' (2) The cross-heading is 'Representations against dismissal.' (3) The words 'is being unfairly terminated' point to some positive action on the part of the board by way of termination, such as by giving notice or shutting him out, as distinct altogether from an automatic coming to an end. (4) The words 'the Board's decision to terminate the appointment' are to the same effect. (5) The words 'before the expiry of the notice given' contemplate that the employment will be terminated by notice, and not by an automatic ending.
25 At [338] Habersberger J observed that in Kahn, Buckley LJ (who with Kamrinski agreed with Lord Denning) added:
As counsel for the Secretary of State has pointed out, the verb "terminate" can be used either transitively or intransitively. A contract may be said to terminate when it comes to an end by the effluxion of time, or it may be said to be terminated when it is determined at notice or otherwise by some act of one of the parties. Here in my judgement the word " terminated" is used… in the transitiive sense, and it postulates some act by somebody which is to bring the appointment to an end, and is not applicable to a case in which the appointment comes to an end merely by effluxion of time.
26 At [340] mention was made of the need to refer to the context in connection with the judgement of Northrop J in Victoria v Australian Teachers Union (1993) 49 IR 149 at 155 who noted as follows:
"The word 'terminate' is defined to mean, in the relevant sense 'to bring to an end, to put an end to'. This definition is given in both the Shorter Oxford English Dictionary and the Macquarie Dictionary. Essentially the word 'terminate' means to bring to an end. Of itself the word is not determinative of how the end is brought about. It is neutral in this regard. In this respect the word 'terminate' is ambiguous. It is true meaning can only be ascertained from the context in which it appears".
27 Ultimately [at 346 et sec] one finds that Habersberger J took the conventional approach of looking at the commercial sensibility of the alternative approaches. His Honour's approach was to consider first, the proper meaning of the word in question; then to examine surrounding circumstances; and to look at the commercial purpose and the commercial result depending as the Court might preferred one particular construction over another.
28 To my mind none of these steps were inappropriate.
29 Indeed in recent times the relevant principles have been affirmed by the New South Wales Court of Appeal in terms of the proposition that even if evidence of surrounding circumstances is admissible it cannot be used to construe a meaning to the document that is contrary to the express language: cf Ryledar supra where Tobias JA affirmed the approach of Palmer J at first instance, quoting his Honour as follows (at [108]-[109]):
“However, that does not mean that when the Court begins the task of construction it puts the words of the document aside and endeavours first to ascertain the commonly known factual context and purpose of the transaction, often only by resolving a strenuous contest between the parties. The Court does not, once it has found the commonly known factual context and purpose, then look at the words of the contract and, if they do not readily accommodate the context and purpose so found, force them to do so by a process of interpretation”.
30 I take it as axiomatic that when the Court is construing a commercial contract, it begins with the words of the document: there it often finds expressed the factual context known to both parties and the common purpose and object of the transaction. But the Court is alive to the possibility that what seems clear by reference only to the words on the printed page may not be so clear when one takes into account as well what was known to both parties but does not appear in the document. When that is taken into account, the words in the contract may legitimately have one or more of a number of possible meanings. It is then the Court's task to identify which of the possible meanings represents the parties' contractual intention.
31 Returning to the defendant's contentions in the instant matter, Ms Champion appearing as counsel for the defendants was not able to show how the decision of Habersberger J furthered her client’s case presently.
Dealing with the matter
32 The purpose and object behind clauses 12 and 14 is to ensure that the plaintiff is placed in as best position as possible to continue to exploit the benefit of the franchise that was then operating after the incumbent franchisee has ceased filling that position.
33 This is achieved by ensuring that the essential components of the franchise business are available to the plaintiff upon “termination”. Those essential components include the property relating to the Franchise (the subject of the Delivery Up Term), information concerning the operation of the Franchise, including the identity of its customers (the subject of the Disclosure Term), the means of communicating with the Franchise (the subject of the Transfer Term), the permits and other approvals that enable the Franchise to operate (also the subject of the Transfer Term), and the availability of the premises from which the Franchise was operated (the subject of the Assignment Term).
34 The circumstances identified in clause 11 for termination other than through the effluxion of time are:
- failure to remedy a notified breach in a timely fashion;
external administration;
failure to commence trading within 3 months of commencement;
failure to hold necessary licences;
abandonment of premises;
purchasing products from unauthorised suppliers;
conviction of a serious offence;
operating in a way that endangers public health or safety;
acting fraudulently;
breaching duties of good faith and honesty;
acting in a way that is likely to diminish the value of the customer base or sales in the Territory applicable to the Franchise Agreement.
35 Each of the circumstances described in that clause concern negative impacts on the relationship between franchisor or franchisee, the ability of the franchisee to operate the business, or the maintenance of operations by the franchisee in a way that could negatively impact upon the franchisor’s business. The purpose and object behind clause 11 is to ensure that the franchisor is not left in an unsatisfactory franchise arrangement for the entire Term in such circumstances.
36 Each of clauses 12 and 14 on the one hand and clause 11 on the other serve different commercial purposes. There is no rational commercial reason as to why they ought to be tied together (as they must on the defendants’ construction).
37 A meaning of “termination” in clauses 12 and 14 confined in the manner suggested by the defendants is productive of uncommercial and absurd outcomes. By way of illustration only:
i. On the defendant’s construction, if a circumstance qualifying under clause 11 occurred 12 months before the expiration of the 5 year term, the plaintiff would have all the benefits of clauses 12 and 14, but if the event did not occur it would have none.
iii. Further, the plaintiff is in no position to sensibly plan for the prospects of securing such valuable rights, since it is unlikely to have significant advance warning of those rights becoming available to it.ii. This means that the parties must have agreed that a large number of highly valuable rights to the plaintiff (including property rights and rights retraining certain competition) come and go by the happening of events entirely outside the control of the plaintiff.
38 The defendants’ construction is even more extreme, as it has the consequence that upon termination of the Franchise through effluxion of time the plaintiff is not even entitled to the return of its own confidential information, strategies, price lists, catalogues, or other material displaying its own logo and get-up. Again, its ability to protect its own property must be said to have been left entirely to matters outside its own control.
39 The terms cannot be rationally reconciled with their operation only for termination during the period of the Term. That cannot be reconciled with a restraint term that is set by time from termination, not by reference to the Term; nor can it be reconciled with the Assignment Term (which is not limited to an assignment only for the balance of the period of the Term).
40 A construction leading to such results ought to be avoided, particularly, as here, a sensible construction can be achieved by the application of the ordinary English meaning of the words the parties have chosen.
41 I accept that clearly expiration through the effluxion of time “terminates” the Franchise Agreement between the parties, on the basis that by effluxion of time it is brought to an end. It is not possible, as a matter of ordinary meaning, to classify it otherwise.
42 In the result the separate question is answered "Yes".
Order
43 The Court makes the following orders:
2 The defendants are ordered to pay the plaintiffs costs incurred by reason of the litigation of the separate question
1 Separate question ordered on 25 September 2009 answered "Yes"
2