BB Australia Pty Ltd v Constanti
[2017] VSC 114
•17 March 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
JUDICIAL REVIEW AND APPEALS LIST
S CI 2016 00151
| BB AUSTRALIA PTY LTD | Appellant |
| v | |
| CONSTANTINE CONSTANTI and ANGELA CONSTANTI | Respondents |
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JUDGE: | Mukhtar AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 15 June 2016 |
DATE OF JUDGMENT: | 17 March 2017 |
CASE MAY BE CITED AS: | BB Australia Pty Ltd v Constanti |
MEDIUM NEUTRAL CITATION: | [2017] VSC 114 |
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EVIDENCE ― Franchise agreement ― Franchisees’ recurrent obligation to franchisor to pay licence fees according to reported trading ― Production of invoice with statement of money due and payable without revelation of underlying calculation of amount sought ― Whether mere production of invoice and evidence of non-payment is legal proof of claim
COSTS ― Costs of party in a proceeding ― Bases of assessment of costs ― Standard basis or indemnity basis ― Contractual stipulation about extent of enforcement costs in a judicial proceeding ― Court’s discretion to order costs consonant with enforcement clause ― Whether discretion disqualified by failure to explicitly plead special claim for costs in accordance with enforcement clause ― What amounts to sufficient pleading or notice of special costs claim
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APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr D Harrison | M & K Lawyers Group Pty Ltd |
| For the Respondents | Mr T Alexander with Mr H Kirimov | SMR Legal Pty Ltd |
HIS HONOUR:
This is a quarrelsome appeal from a decision of the Magistrates’ Court concerning the payment of licence and marketing fees due by an ex-franchisee under a franchise agreement. The franchisor, as plaintiff below, claimed fees of $66,064. The Magistrate allowed $47,831.19. In percentage terms, that was 72 per cent of the claim. The franchisor sought and was refused, an order for indemnity costs. His Honour ordered the franchisees to pay costs on a ‘party/party’ basis, which had become an obsolete term by changes to procedural rules. This appeal by the franchisor is over the disallowed $16,168.62 part of the claim and the Magistrate’s refusal to order costs on an indemnity basis. Despite the relatively small scale of the litigation, the appeal has been a laborious affair. As was said in opening by counsel for the franchisor at trial, ’…it is a reasonably straightforward contractual claim that unfortunately involves a little bit of gymnastics to work out the numbers…’[1] Gymnastics is the correct diction.
[1]Exhibit PEG-7, p7.
Constantine Constanti and his wife Angela Constanti were franchisees of a ‘Blockbuster Video’ shop business for the sale or rental of home entertainment video movies and products. One of their stores was in Neutral Bay in New South Wales. They operated their business under a written franchise agreement by which they were licensed to use ‘the Blockbuster System’. That means use of the Blockbuster business name; trademarks and commercial symbols; the distinctive exterior and interior store design; the Blockbuster method of business operation, management and financial control; and other such business tools. The franchise agreement imposed financial obligations on them as franchisees to pay a monthly licence fee and a marketing fund contribution, both based on a percentage of their gross monthly revenue from trading as reported by them to the franchisor.
In circumstances I shall expose later, after about 15 years in business the Constantis closed their video store in March 2015. The franchisor treated that as a repudiation of their contractual obligation to undertake the business until 1 September 2015. The franchisor then sought to do a final reconciliation of financial matters. It rendered invoices to the Constantis for undercharged franchise and marketing fees in the past due to miscalculations made by the franchisor’s finance department in past invoices. The franchisor also rendered invoices for unpaid marketing and licence fees from January 2015 to March 2015; that is, for the last three months before closure. It also sought a ‘surrender fee’ which was the loss to it of the franchisee not trading for the remaining full term as contractually obliged. That was equivalent to compensatory damages to put the franchisor in the financial position had the agreement been performed for its full term as agreed, known in contract law as expectation damages.
The franchisor sued the Constantis in the Magistrates’ Court for an aggregate claim of $66,064. There were, as I would present it, five heads to the franchisor’s claim at trial. First, there was a claim for $22,797.47 for the undercharged franchise and marketing fees for trading pre-July 2011. The Magistrate allowed that claim. Secondly, there was a claim for $9,443.43 for undercharged franchise fees for trading from August 2011 to January 2015. The Magistrate allowed that claim too. Thirdly, there was a claim for $3,814.80 for legal expenses incurred by the franchisor to enforce the franchisees’ contractual obligation to promptly hand over their trading database. The Magistrate allowed that claim of $3,814.80 as proven and as reasonably incurred. Fourthly, and most importantly for present purposes, there was a claim for $16,168.62 for licence and marketing fees due from January 2015 to March 2015; that is, for the last three months of trading. The Magistrate disallowed that claim entirely. His Honour decided that the underlying figures and calculation of the invoiced amount (which was certainly in dispute) had not been proven, and could not be proven by the franchisor merely producing into evidence an invoice as documentary proof of the claim. Fifthly, there was a claim for the expectation loss of $13,840.07. His Honour allowed that claim but reduced it by $2,604.58.
The franchisor appeals to this court under s 109 of the Magistrates’ Court Act. Under that section an appeal is not a review. To be competent, it has to be an appeal on a question of law. Such a precondition goes to the Court’s jurisdiction and the ambit of the appeal.[2]
[2]See Osland (No 2) (2010) 241 CLR 320, 333.
There are two heads of appeal. First, the franchisor appeals the decision to disallow entirely the claim for $16,168.62 for unpaid licence fees. It propounds various grounds of appeal which I think are all cut from the same cloth, and amount to saying this: the franchisor adduced into evidence the invoices rendered for $16,168.62 as evidence of this part of the claim, and as that evidence was ‘uncontested’ and not inherently improbable, the Magistrate was bound to find, or it was manifestly unreasonable for his Honour not to find, that the franchisor had proven this part of the claim for that invoiced amount, at least not without giving a relevant and adequate reason for not acting on the invoice as proof of the claim for payment due as stated in the invoice.
The tax invoices in question state a monthly date range and a figure. There was no extrinsic evidence of the underlying trading and sales data and the arithmetic basis of the figure. At trial, the franchisees said they had sought, before litigation, explanatory details of the calculations in the invoice for those three months but say information was not given, or not given adequately, to enable them to understand how the invoices were calculated or made up. In their statement of defence, the franchisees had explicitly put the underlying calculation of the invoice in issue. The franchisor was plainly being put to its proof. The franchisees did not put an affirmative case about the calculation, but stuck to their case that they could not work out the figures and that mere production of an invoice was not proof. It was only in that sense that the invoice, as a piece of paper, was not uncontested.
The first issue is an evidentiary one. It is whether a claim of this type, and in this case, can be proved at law by having a witness produce an invoice as a business document and saying it was unpaid, but without proving affirmatively how the underlying basis of the amount claimed in the invoice was calculated or made up where it is otherwise not self-evident. The Magistrate, accepting the franchisees’ submission, held that the invoice was a demand for payment, but not proof of the claim, more so in a case that had other instances of the franchisor’s mistakes or misunderstandings in calculations in other invoices.
The second issue on appeal issue concerns costs of the proceeding. The franchise agreement had a costs-of–enforcement clause. At the end of the trial, the franchisor sought an indemnity costs order as consonant, so it contended, with that costs clause in the contract. The Magistrate refused ‘…as the plaintiff has not pleaded indemnity costs on its statement of claim.’[3] In exercising his discretion, his Honour followed a decision of Vickery J in Taree Pty Ltd v Bob Jane Corporation[4] and held that a failure to explicitly plead and claim a special costs order as a contractual entitlement was a matter justifying a discretionary refusal of a special costs order. The Magistrate then pronounced an order that franchisees pay costs on a ‘party/party’ basis. Yet the party/party basis of taxation was revoked under the Magistrates’ Court General Civil Procedure Rules in July 2013 and replaced by the two-fold classification of ‘the standard basis’ and ‘the indemnity’ basis of taxation of costs.[5] The same has happened in this court.[6] The distinction between the standard basis and the indemnity basis was brought to the Magistrate’s attention in submissions albeit curiously by reference to the Supreme Court rules of procedure. Despite that, the Magistrate said ‘party/party’.
[3]T 85.
[4][2008] VSC 228.
[5]S.R. No. 89/2013, r 11, 12.
[6]Ex PEG 8, p 78.
The appellation of party/party costs in the Magistrate’s spoken order was erroneous. It must have been done out of a usage of old habit. His Honour would have been grateful to have had the simple error drawn to his attention for instant correction at the time the spoken order was made. The form of the later written court order had its venial defects too, which could have also been corrected. Putting those aside for the moment, the substantive issue is whether the Magistrate’s discretion to refuse indemnity costs miscarried. Did the Magistrate err in his appraisal that a special costs order, as a contractual entitlement, was not pleaded in the statement of claim? The franchisor says the costs clause was pleaded in black and white with other material terms of the contract, even though there was no stipulation of a claim to relief under that clause in the statement of claim. Therefore, the franchisor says, the stated basis of the Magistrate’s exercise of discretion was clearly wrong, making the discretion assailable under the limited grounds at law for challenging the exercise of a discretion on appeal.[7] The franchisor says it has suffered a miscarriage of justice because the it has incurred costs and disbursements of $54,000 in prosecuting the Magistrates’ Court case, including counsel’s fees, and has also incurred ‘internal costs’ (whatever that means) of $15,600. If true, its costs exceed the debt and damages of $47,831.19.
[7]See House v R (1936) 55 CLR 499, 505 and Aust Coal Shale Employees Federation v Cth (1953) 94 CLR 621, 627.
For the franchisees, it was submitted that for the purposes of appeal, it was enough to see that the Magistrate had obviously taken into account the question whether the costs clause had been pleaded, that being the relevant consideration for the exercise of discretion. Thus, having considered and formed a judgment that the pleading did not make explicitly a claim for a special costs order, the instrumental basis of the Magistrate’s discretion was properly considered and its exercise should not be interfered with even if an appellate court might come to a different view about the pleading. But, the franchisees’ position recognised that the expression of the costs order on a ‘party/party’ basis was an error and ought not stand, but that it be treated as accidental or mistaken ― a slip ― and be corrected on appeal (rather than remittal) to say ‘standard costs’ because in saying party/party it was apparent that the Magistrate had intended to allow costs on a less generous basis than the indemnity basis.
But during argument I perceived there to be an anterior and neglected issue. Was it right for the appellant, and it seems the respondent, to proceed below on the assumption that the contractual costs clause truly was consonant with the indemnity basis of assessment of costs under rules of the court? The language of the costs clause seemed to me to be closer to the standard basis of assessment and not the indemnity basis. Counsel for the franchisees came to adopt that view on this appeal.[8] Counsel for the franchisor, of course, did not.
[8]T 143.
Under the Magistrates’ Court rules, the court can order costs to be taxed on the standard basis, or the indemnity basis or ‘such other basis as the Court may direct’.[9] Counsel for the appellant invited me ultimately to do what Pagone J did in BB Australia v Bytan Pty Ltd[10] and direct the franchisees to pay the franchisor’s costs by specific reference to the costs clause in the franchise agreement. But the franchisor did not ask the Magistrate to make such a costs order by specific reference to the costs clause. BB Australia v Bytan was decided in 2012. It is the same plaintiff as in this case. The case was not brought to the Magistrate’s attention.
[9]Rule 63.28.
[10][2012] VSC 171 [17].
It comes to this. If the Magistrate’s reference to ‘party/party’ basis is treated as an obvious mistake or slip and one to be rectified by substituting ‘standard basis’, and if the contractual costs clause is closer to the standard costs basis under the rules than the indemnity basis, then even if the costs clause was pleaded then the destination is the same: a cost order consonant with the contract means standard costs. In that case, what is the point of this appeal on costs? If the costs clause does not truly equate with either standard costs or indemnity costs, or if it is not clear, should this Court on appeal re-exercise the discretion and make an order of the Bytan type when it was not sought below?
As there is an evidentiary issue on the first head of appeal, I will need to expose the complicated facts. Before then, I shall state the outcome of the appeal. The appeal on the claim for $16,168.62 will be dismissed. Mere production of the invoice was not proof. The appeal on the Magistrate’s order on costs has to be allowed anyway because of the erroneous reference to a party/party basis of taxation. On the issue on appeal, I think the costs clause was sufficiently pleaded. But its language did not translate into an order for indemnity costs. There cannot be a forced equivalence. The clause installs an express measure of reasonableness makes it close, but I do not think close enough to equate or be hand in glove to an order for standard costs. Section 109 (6) of the Magistrates’ Court Act permits this Court on appeal ‘…to make such order as it thinks appropriate…’ Despite the way the trial was conducted, I think the solution is to apply the principle of holding a party to the lawful terms of its contract, even if it be a contract of adhesion. The Magistrate’s order will be varied to state that costs be payable or assessed in accordance with clause 20.13.
The elements of those two outcomes are as follows.
First, there was an attack on the competence of the appeal. A ‘huge amount’ has been written about the distinction between questions of law and questions of fact.[11] I think each issue is amenable to appeal under s 109 as being on a question of law and did not involve usurping the fact finding function of the court below.
[11]Aust Finance Direct v Consumer affairs (2006) 16 VR 131, 145 [77]. For the latest contribution, see Haritos v Com of Taxation [2015] FCAFC 92.
I think too much was made by the respondent on the question whether there was a question of law concerning the decision to disallow entirely the claim for $16,168.62 for unpaid licence fees. The purpose of limiting an appeal to a question of law is to ensure that an appellate Court is not called upon to review the Magistrate’s fact finding. But I do not think this was a covert attempt at a merits review. The issue whether the relevant claim was proved was an evidentiary one: is an invoice proof, and proof of what? What amounts to evidence to support a factual conclusion is a question of law, whether it be cast as ‘bound to find’, or ‘not open to find’, or perhaps a perverse finding.
Secondly, overall I am bound to say the Magistrate was hearing a confusing case over financial reconciliations involving past mistakes, corrections and adjustments all in the context of an initial fixed agreement, then an interim period of renegotiation, and then an altered contractual relationship after mediation before Mr Ian Callinan AC QC, a retired Justice of the High Court of Australia. The evidence was not easy to follow nor was the evidence about reporting of trade information very clear. And there were, I detect, litigation strategies at play attributable to the inherent difficulties. In these conditions his Honour was looking to do justice according to the substantial merits of the case according to how it was presented.
The franchisor, on specific notice that the relevant claim and its underlying basis had to be proved, called evidence from its managing director to prove the act of rendering of an invoice, in a case where meticulous evidence to support the invoice was expectable. At the very outset, the franchisees put the franchisor to proof of the computational basis of the relevant claim and went into trial, unarmed, and with no offensive case on the calculation, to wait and see if the claim was going to be properly proved. The franchisor seemed content to just produce the invoice and say it was not paid.
Thirdly, although the reasons of the Magistrate could have been a little more explicative on the disputed claim now on appeal, it is clear enough to me that his Honour accepted the submission that a tax invoice making a demand for payment was not evidence proving the indebtedness under the contract. To prove the claim required evidence of the computational basis of the amount of the invoice. In my view the Magistrate was correct in reaching the legal conclusion that ‘There is simply not enough information as to how the claim is made out’.[12]
[12]TS 77.
Fourthly, I think the appellant made far too much about the Magistrate’s statement that ‘…the defendant is correct to say that the plaintiff’s claim is based on self-admitted miscalculations’. In my view that cannot be understood to mean self-admitted miscalculations in the invoice for the relevant claim, for there was no such evidence concerning the relevant invoice. Rather, having regard to the submission below from whence the expression ‘self-admitted miscalculations’ derived,[13] it is clear that the franchisees’ counsel was referring to the self-admitted miscalculations concerning the undercharging. The Magistrate was being asked to find that the invoices were only a demand for payment and were not proof of the claim, all the more in a case where elsewhere there was evidence of self-admitted miscalculations by the franchisor. It was a forensic point.
[13]TS 64.
Fifthly, the fact that other invoice claims were allowed does not make it wrong or unfair that this one was not. This one was singled out for proof. The Magistrate allowed other claims on invoices but the issue on those invoices was the percentage or royalty rate to be applied, and whether it was right for the franchisor after mediation and settlement to come back and claim an undercharge.
Sixthly, as for the costs order, an error in the exercise of discretion is a question of law. But it must appear that the Magistrate acted on a wrong principle; was guided or affected by extraneous or irrelevant matters; took a mistaken view of the facts; or did not take into account some material consideration.[14] If the nature of the error is not discoverable, but the decision is unreasonable or plainly unjust, then it may be inferred there has been a failure to properly exercise the discretion.
[14]House v The King (1936) 55 CLR 499, 505 and Australian Coal and Shale Employees’ Federation v The Commonwealth (1956) 94 CLR 621, 627.
Seventhly, I think there was sufficient in the statement of claim, and in an antecedent Calderbank letter of an offer to compromise to put the franchisees on notice of an intention to rely on the special costs clause in the agreement; or at least there was sufficient to remove an assumption that the plaintiff would if successful seek no more than costs on the ordinary or party/party basis. To that extent I think the Magistrate erred on the foundational basis of the exercise of discretion. But that does not mean it had to be indemnity costs under the procedural rules of court.
Eighthly, the assumption below was that the contractual costs clause equated with the indemnity basis under the rule 63.28. I think that was incorrect or unsafe. The franchise agreement has expressions or locutions suggesting it is based on a parental American contract, and a system of litigation costs orders or liability that differs from ours. The contract here is governed by Victorian law, substantive and procedural. The costs clause is not an exact fit, but textually I think it is closer to the standard basis than the indemnity basis. The standard basis rule in court allows ‘…all costs reasonably incurred and of reasonable amount…’ The contractual costs clause speaks of reimbursement for ‘costs and expenses’ of enforcing the agreement by reference to what is ‘reasonable’. But the ambit of the clause is wider than ‘standard’ as it extends to all costs ‘…whether incurred prior to, in preparation for or in contemplation of the filing of any such (judicial or arbitral) proceeding.’ The difference between the two may be one of ambit of the franchisor’s costs of enforcement, but what is conspicuous in the clause is the measure of what is reasonable, which is the basis of standard costs. The indemnity basis in the rules looks to all costs ‘…except in so far as they are of unreasonable amount or have been unreasonably incurred.’ The difference between what is reasonable and what is not unreasonable, for ‘all costs’, is not immediately clear to me but it would be for the Costs Court.
As can happen with relatively small claims and fights over costs, appeals to the Supreme Court can become overwrought. In this appeal, to contend for the evidentiary worth of the $16,168.62 invoice, the court was taken to the interstices of the financial accounting within the franchise relationship. That means the question and the determination of the refusal of the fourth claim for $16,168.62 cannot be considered without an exposure of the contractual relationship, and, the basis on which the franchisor’s other claims were sought to be proved and were allowed. I cannot avoid that because there is quite an informative history and the appellant expostulates on appeal that if the Magistrate allowed the other claims as having been proven according to invoices produced by the same witness, why not find the claim under appeal as also having been proven by an invoice when there was no evidence from the franchisee of a miscalculation?
The contractual relationship
The contractual relationship had its origins in a Standard Franchise Agreement made between Blockbuster Australia Pty Ltd as franchisor and Constantine and Angela Constanti as franchisee.[15] It is dated 4 December 2000. There is no need to refer to its contents in any detail. The franchisee was given a non‑exclusive licence to operate the store at Neutral Bay using the Blockbuster system for a term of ten years, commencing from the date of the agreement. An initial franchise fee of $5,000 was payable upon execution of the agreement. A licence fee of 3 per cent of the gross revenue of the store was payable by the tenth day of each month on the gross revenue of the store for the preceding month. A marketing fund contribution of 3 per cent was also payable by the franchisee on the gross revenue of the store for the preceding month, payable by the tenth day of each month (although evidence at trial showed that in practice, it was charged at 2 per cent). Clause 16 of this agreement gave, subject to certain preconditions, the franchisee a right to a ‘Successor Franchise’ upon expiration of the initial term of the agreement, for an additional term of five years commencing upon the expiration of the initial term. Clause 16.8 stated that an agreement for a Successor Franchise ‘…may differ materially from this Agreement, including by requiring higher or additional fees’.
[15]See Ex PEG-2 to the first affidavit of P.E Greenfield.
Upon the effluxion of that franchise agreement, an attempt was made to effect a renewal of the franchise under a Subfranchise Agreement between the appellant BB Australia Pty Ltd and the Constantis.[16] It appears BB Australia Pty Ltd succeeded Blockbuster Australia Pty Ltd[17] and became a Master Franchisee of its American principals and was thus able to give a sub franchise to the Constantis.[18] This agreement was not executed. The document in evidence was incomplete as it starts at page 123 with a Schedule, item 1 of which says that the date of this agreement is 4 December 2010. The schedule stated that the initial term of the agreement is from 4 December 2010 to 4 December 2013. A subfranchise fee of $7,000 was payable. The licence fee was 2.3 per cent of the gross revenue of the store by the tenth day of each month. The marketing fund contribution was 1 per cent of the gross revenue. These fees were lower than for the initial standard franchise agreement in December 2000.
[16]See exhibit PEG-9 to the second affidavit of P.E Greenfield.
[17]They have the same Australian Company Number.
[18]See ‘Item 5’ of the Subfranchise Agreement.
The evidence at trial was that this was an ‘in principle’ agreement for renewal.[19] Lawyers were involved. It is important to see that a reduced fee structure was negotiated. In evidence was a letter dated 1 March 2011 from the corporate legal counsel of the appellant to the Constantis franchisees’ lawyers which stated:[20]
I advise that Andres Gardiner has discussed this matter directly with your client and has informed your client that the reduced fee structure under the Subfranchise Agreement as submitted to you will commence as and from return of the executed document duly signed by your client.
[19]Ex PEG-7, p 12.
[20]Ex PEG-10.
I gather from the materials that the Constantis would not sign the document. Yet, they continued to trade and were charged a 2.3 per cent franchise fee and 1 per cent marketing fee according to the unexecuted Subfranchise Agreement. The Constantis also had a Blockbuster franchise in Chatswood and in Concorde.
Mediation, settlement, and extension of the franchise
The materials show that on 21 July 2011, a mediation of the dispute was conducted which resulted in a written Settlement Agreement dated 21 July 2011 under which the Constantis agreed to pay amounts outstanding under the Neutral Bay and the Chatswood franchises in three instalments. The parties also agreed to vary the initial ten year franchise agreement with effect from 5 August 2011 to extend the franchise to 1 September 2015. The deed said ‘The parties otherwise confirm the terms and continuation of the Franchise Agreements in full force and effect.’[21]
[21]Clause 1.1.
To avoid confusion, it helps to divide up three periods of time as follows. Under the original ten year franchise agreement from 4 December 2000 to 4 December 2010, the licence fee was 3 per cent and the marketing fee was 3 per cent of gross revenue. The period from 4 December 2010 to 5 August 2011 is best understood as the period of negotiation in which a ‘subfranchise agreement’ was proposed but not executed, but under which the licence fee was 2.3 per cent of gross revenue, and the marketing fund contribution was 1 per cent of gross revenue. Then, under the settlement agreement the licence fee was varied to being 2 per cent of retail sales of ‘DVDs, Blu-ray and TV on DVD of the STORE…’ payable by the tenth day of each month on those retail sales for the preceding month.[22] It also required payment of 3 per cent of the gross revenue of the store, less retail sales, by the tenth day of each month on the gross revenue less retail sales of the store for the preceding month. The marketing fund contribution was varied to state 1 per cent of the gross revenue of the store payable by the tenth day of each month.[23]
[22]Clause 1.2.10.
[23]Clause 1.2.11.
The costs clauses of the initial agreement remained in effect under the deed of variation. They are to be found in clause 20.13 and 20.14. They state:
20.13If FRANCHISOR or FRANCHISEE is required to enforce this Agreement in a judicial or arbitration proceeding, the party prevailing in such proceeding shall be reimbursed by the other party for its costs and expenses, including, without limitation, reasonable accountants’, lawyers’, lawyer assistants’, arbitrators’ and expert witness fees, staff and administrative costs of investigation and proof of facts, court costs, other litigation expenses and travel and living expenses, whether incurred prior to, in preparation for or in contemplation of the filing of any such proceeding.
20.14Subject to Clauses 20.17 to 20.28, if FRANCHISOR is required to engage legal counsel in connection with any failure by the undersigned to comply with this Agreement, FRANCHISEE shall reimburse FRANCHISOR for any of the costs referred to in clause 20.13 and expenses incurred by it.
The early closure of the business
In February 2015 the Constantis notified the franchisor of their intentions to close the Neutral Bay store on 29 March. A letter from the franchisor’s corporate legal counsel on 16 February 2015 notified them that a ‘Surrender Fee’ was payable for the remainder of the term, and required them to continue to submit store turnover figures and to pay all arrears outstanding to date. There was also a request to the Constantis to give over a full copy of their Blockbuster database within 48 hours, under threat of a court order for delivery of the data base.[24]
[24]Ex PEG-11.
This led to further correspondence of significance. In a letter dated 12 March 2015 from the franchisor’s legal counsel,[25] she enclosed a reconciliation of fees payable from December 2010 to July 2011 (which is the pre mediation period) and reconciliation of fees due from August 2011 to the present time (that is, under the variation). The letter stated that the franchisor has ‘completed a full reconciliation of the franchise fees for the Store from the date of the commencement of the August 2011 Deed’. The letter said (with my underlining):
We note that the 2011 Deed followed on from negotiations between the Franchisee and BBA over a period of time in 2010-11 regarding renewal of the Franchise Agreement.
We confirm that the Franchisor finance department has misinterpreted the wording around the rental-retail charging for franchise fees between 2% and 3%. You will note that the enclosed account details the undercharged franchise fees and shows a full reconciliation from August 2011 to the current date.
The franchisor apologises for this error and confirms that it is willing to enter into discussions with you regarding a time frame for payment of this account.
[25]Ex PEG-12.
As for the question of fees from December 2010 to July 2011 (before the Deed of Variation) the letter said:
We note that in November and December 2010, and prior to the August 2011 Deed, there were discussions between the Franchisee and BBA around a change of the rates of marketing and franchisee fees from 2% to 1%, and 3% to 2.3% respectively.
Although these discussions were not formally agreed to, and negotiations continued until the August 2011 Deed, the lower rates were incorrectly applied to the Store account for the period from December 2010 to July 2011.
We note that the correct rates to be applied to this period were those set out in the original Franchise Agreement, being 2% for marketing and 3% for franchise fees.
Accordingly, please refer to invoices No. 1975452 and 1975453 regarding the undercharge of marketing and franchisee fees from December 2010 to July 2011 (which also shows the correct charge rates in September-November 2010 for your reference.)
It is very important, I think, to see that these adjustments to the figures for undercharging involved only the application of a different percentage rate to pre-existing trading or base figures as previously submitted by the franchisor and which payments had been made.
A number of tax invoices and credit memos were in evidence. I shall not refer to these but confine myself to a summary put into evidence which lists the invoices and helps isolate the claim which was disallowed by the Magistrate.[26] If I put aside the damages claim for repudiation, and confine myself to the proof of the claim by invoice, it is sufficient to say the following −
[26]Ex PEG-14.
(a) the claim for the undercharged franchise fees from August 2011 to January 2015 (when the franchisee was erroneously charged 2.3 per cent rather than 3 per cent was the subject of an invoice 197540 for the amount of $9,443.43 which the Magistrate allowed according to that invoice;
(b) the claim for “External Legal Fees’ of $3,184.80 was the subject of invoice no. 1976445 for $3,814.80 which the Magistrate allowed as evidence of costs incurred for the franchisee’s failure to provide the database as requested; and
(c) the claim for unpaid licence fees and marketing fund contributions for $16,168.62 which the Magistrate disallowed was also the subject of a number of invoices which simply refer to marketing fee or ‘franchise-rental’ or ‘franchise-retail’ and a time period, state the amount due, and say no more.
Although it is repetitive, to keep focus on the gymnastics and the evidence in the case, I recapitulate that the statement of claim in the Magistrates’ Court proceeding had five heads of the claim, as follows.[27]
[27]The Complaint is Ex PEG-19.
The first head was a claim that the franchisees had wrongfully repudiated the franchise agreement by premature closure. The claim was for damages for $13,840.07.[28] In their defence, the franchisees said it was the franchisor that had repudiated the agreement beforehand by failing to maintain, adapt and develop the Blockbuster System in a way to permit franchisees to operate a profitable retail business.[29] The franchisees had given to the franchisor, but did not file, a proposed counterclaim that claimed damages for breach of the franchise agreement and contravention of the Australian Consumer Law.[30] This counterclaim comes home on the costs question because the franchisor complains that significant costs were thrown away in extensive discussions and correspondence concerning the proposed, but unissued, counterclaim. A countervailing claim to the franchisor’s repudiation case was not made at trial; indeed in his opening of the defence to the Magistrate at trial, counsel for the franchisees expressly abandoned any case of a counter-repudiation.[31] In the result, the Magistrate sustained the basis of this first head of the franchisor’s claim, but reduced the damages for repudiation to $11,775.49. In doing so, his Honour accepted the franchisees’ submission that the damages claim was inflated because it did not take into account the presence of closing down sales and a decline in the industry. It was an admitted fact that Blockbuster had reduced the number of stores from 380 to 100.
[28]See the Complaint at Ex PEG-19, paras 6-8.
[29]See the Defence at Ex PEG-20, para 12 ff.
[30]See Ex PEG-6.
[31]Ex PEG-7, p40.
What matters is that the Magistrate had evidence of the underlying basis of the damages calculation by which to assess this part of the claim, including turnover figures.[32]
[32]Ex PEG-13.
The second head was the claim for undercharged licence fees and marketing fees from December 2010 to July 2011 in the sum of $22,797.47. That is, the period after expiration of the initial ten year term and beginning of the variation, throughout which there was no formal agreement in place. The issue there was the applicable percentage rate, and no issue about the underlying base trading data and the computational basis. The Magistrate allowed that claim.[33]
[33]Ex PEG-8, p77.
The third head was a claim for undercharged franchise fees between August 2011 and January 2015; that is, under the variation or renewal. The franchisor had throughout that period charged the franchisees 2.3 per cent rather than 3 per cent from an error made by the franchisor’s finance department. Thus, it was only a question about the percentage rate. The Magistrate allowed the claim at 3 per cent and fixed the amount at $9,443.43.[34]
[34]Ex PEG-8, p76.
The fourth head, the subject of appeal, was for a total of $19,983.42.[35] That was made up of a claim for ‘External Legal Fees’ of $3,814.80, and unpaid licence fees and marketing fund contributions for $16,168.62. The Magistrate allowed the claim for external legal fees of $3,814.80.[36] That was incurred by the franchisor to retain lawyers to recover the database as demanded.[37] There seemed to be no issue or challenge to the amount and no issue that the franchise agreement gave the franchisor the right to get the database. His Honour held it was appropriate in the circumstances for the franchisor to retain lawyers to recover a database for that task as the franchisees did not respond promptly to a request to do so, and the amount claimed was not unreasonable.[38] But his Honour disallowed entirely the claim for unpaid licence fees and marketing fund contributions of $16,168.62. That was a debt claim on an invoice. His Honour found, accepting the franchisees’ submission, that there was not enough information as to how the claim was made out.[39]
[35]See the invoice at exhibit PEG-14.
[36]See the separate invoice no 1976445 in PEG-14.
[37]See PEG-11.
[38]See PEG-8, p76.
[39]PEG-8, p 77.
The pleadings
Paragraph 3 of the statement of claim pleaded some express terms of the franchise agreement concerning the duration of the agreement, the continuing licence fee, and the continuing marketing fund contribution. Those terms were material to the case for repudiation, breach and liability for fees. In the company of the pleading of the those primary terms, paragraph 3(f) pleaded the substance of clause 20.13 of the franchise agreement, being the costs clause. The ancillary costs clause, clause 20.14, was not pleaded even though it came to be relied on at trial on the costs question. In the same company, paragraph 3(e) of the statement of claim pleaded clause 8.6 of the franchise agreement which said –
FRANCHISEE and each of the Principal Owners must at all times indemnify and hold harmless, to the fullest extent permitted by law, FRANCHISOR, its Affiliates and the officers, directors, members, shareholders, partners, agents, representatives, independent contractors, servants, employees, successors and assigns of each of them (“Indemnities”), from all Losses and Expenses incurred in connection with any action, suit, proceeding, claim, demand, investigation or inquiry (formal or informal), or any settlement thereof (whether or not a formal proceeding or action has been instituted) which arises out of or is based upon any of the following: …
But clause 8.6 was not relied on for the application for indemnity costs. It is not an issue here, but I do not think reliance could have been placed on clause 8.6. It is not an enforcement costs clause but an indemnity for losses caused to the franchisor for suits brought by third parties for wrongful conduct by the franchisee.
There are no prayers for relief as are expected in a court of pleading. The Magistrates’ Courts Rules say that a statement of claim must, amongst other things, ‘state specifically the amount or other relief or remedy sought’.[40]
[40]Rule 13.01.
The defences
The content of the defence is very important. Much of it concerned counter- allegations of wrongful conduct by the franchisor in failing to maintain the Blockbuster system in a way to permit a proper retail business. But it is critical to see that for all but the claim that is the subject of this appeal, the issue truly was not a computational one but an issue whether the franchisor was entitled to claim an undercharge by reference to the percentage rates. That was a substantive not computational question. As I read the pleadings and follow the evidence (which is not easy to do) on all but the relevant claim on appeal, the Constantis as franchisees were saying that they were charged at the lower percentage rates but that was because the franchisors had agreed to those lower rates; and had induced an assumption at mediation that the lower rates would continue to apply in the past and in the future; and that it was unconscionable for the franchisor to resile from that position and now claim retrospectively that there was an undercharge. An estoppel was raised.
On the defence, what stands out about the proof of the fourth head of the claim is that it concerned a computational issue. Paragraph 7 of the defence pleaded that the franchisees ―
...do not admit the allegations as to the quantum asserted, as all relevant transaction details in relation to same are within the sole knowledge of the Plaintiff [franchisor] and the Defendants will respond further to the claim once the Plaintiff has provided a response to the request for further particulars, or after disclosure has been completed.[41]
[41]PEG-20.
It appears to me the claim for an undercharge involves essentially an adjustment to a pre‑existing known and paid figure by altering the royalty rate or the percentage rate. The unpaid licence fees that the Magistrate refused involved not just an application of a percentage figure but also the base trading information on which the percentage is applied and the break up, or the algebra, of the retail sale, the rental revenue and attributions of the figures. Whilst it might be supposed that the Constantis as franchisees would know what those sales and revenue figures were in order to get a good idea of the calculations, the evidence before the Magistrate from Mr Constanti was that he simply could not figure out how those figures were reached. That is why there was a non‑admission in the defence.
It strikes me as high risk litigation to proceed to trial, as the franchisees did, without pressing the franchisor to reveal beforehand by pre-trial processes the precise calculation upon which the invoice was rendered, and instead proceed to trial seeing how the franchisor proposed to prove its case. But one thing is clear: the plaintiff had to prove how this part of the claim was calculated or made up and it was something more than a perfunctory task. Moreover, having rendered the invoice presumably according to an antecedent accounting according to underlying data, and given the history of this relationship, one would think it was something capable of proof by the franchisor and its finance department. After all, such calculations must have been done before rendering the invoices.
That now leads me to exposing what occurred at trial.
The evidence at trial
The only witness called to prove the plaintiff’s claim was a Mr Paul Norma Uniacke who was the managing director of Blockbuster Australia. He proved the Standard Franchise Agreement for ten years. He said that although the franchise agreement stipulated a licence fee and a marketing contribution of 3 per cent, in practice, the marketing fee was charged at 2 per cent of turnover to all stores in the Blockbuster group, and acknowledged it was no part of the claim to claw back the difference between 3 per cent and 2 percent, based on that practice. He said that about 15 months before the expiration of the franchise agreement in December 2010, there were discussions between the parties about entering into a renewal agreement. He said that Blockbuster felt that it had an in principle agreement about the terms of a renewal by early December 2010 and sent documentation to the franchisee. As I follow the evidence, he was shown the subfranchise agreement, to which I have already referred, which showed the licence fee at 2.3 per cent and the marketing fund contribution of 1 per cent. He said that the franchisee refused to execute the document. He confirmed that by letter dated 1 March 2011, the franchisor had asked the franchisee’s solicitors to sign and return the renewal agreement.
He was then taken to the settlement agreement. He confirmed that that document was executed and the parties continued in their franchisee/franchisor relationship until early 2015. It was then that the franchisor conducted a full reconciliation of franchise fees from the date of the commencement of the settlement agreement in August 2011, and realised that there were undercharged franchise fees. Mr Uniacke explained, ‘It just wasn’t picked up in the finance department as the fees are charged on a monthly basis it was missed.’[42]
[42]Transcript at 18.
He then turned to proof of the expectation loss and explained that the turnover figures are self-reported by the franchisee and entered into the Blockbuster intranet system on a weekly basis and then collated monthly for the franchisor to then bill the franchisee. It was then explained that the undercharging under the settlement agreement between August 2011 and January 2015 occurred because the finance department was still applying a licence fee rate of 2.3 per cent instead of 3 per cent as was stipulated under the settlement agreement. That is, the finance department was still charging the 2.3 per cent under the unexecuted subfranchise agreement which came to be superseded by the settlement agreement.
Mr Uniacke was then taken to the various tax invoices that were rendered to the franchisee to require payment to effect the financial reconciliation. His evidence was that the relevant invoices had not been paid and are still owing. I pause here to say that it is noticeable that evidence of a financial nature concerning the calculations and an explanation of invoices were not being given by ‘the finance people’ but by a managing director. That does not make him unqualified. It is simply to point out that on a case which ended up turning on the underlying financial basis for the rendering of an invoice, the course of evidence that was taken by the franchisor before the Magistrate was simply to produce invoices. Yet, it was plain on the defence file that the plaintiff was not admitting certain invoices and putting the plaintiff to its proof about the underlying data in the invoices.
Mr Uniacke explained that there is in the Blockbuster system an Echelon portal where a franchisee enters its weekly revenues before lunchtime on every Monday. It is in this portal that the franchisee will enter sales revenue as between rentals, retail and other sources.[43] The evidence is not clear but doing the best I can, it seems that as part of the reconciliation exercise the franchisor had taken the total rental revenue figure and the total retail revenue figure as provided by the franchisee and charged 3 per cent on the rental and 2 per cent on the retail sales, believing that was the limits of its entitlement under the settlement agreement. Yet, part of the weekly reporting by a franchisee is ‘other’ revenue. Thus, Mr Uniacke explained, the franchisor did not charge a fee on that ‘other’ revenue.
[43]See exhibit PEG-15.
Exhibit ‘H’ before the Magistrate was a statement of account of sorts and a bundle of tax invoices and credit notes. The documentary exercise to which the Magistrate was taken is not easy to follow and required attention on appeal. The starting point is the statement of account or summary in exhibit PEG-14. There is a total amount shown there of $19,983.42. The invoice dated 1 April 2015 (No 1976445) is the invoice for external legal fees for $3,814.80 which stands to be differentiated because that amount was based on a solicitor’s bill and was clear in amount. The Magistrate allowed that part of the claim and it forms no part of the appeal. After deducting that amount from the $19,983.42, the balance is $16,168.62 and it is that amount that was found not proven by the Magistrate and which is the subject of this appeal. For that amount, exhibit PEG-14 shows a number of invoices and credit or adjustment notes. The plaintiff sought to prove the amount now in dispute by having Mr Uniacke acknowledge that they were the tax invoices sent, and that they were unpaid. It concerns the period January, February and March 2015. The invoices themselves do no more than refer to ‘marketing fees’ or ‘franchise fees’ and state the dates. This really is the heart of the problem. The invoices themselves do not purport to show how the fee is calculated or made up. That is, there is no reference made to the revenue figures or the sales figures to which a percentage is applied or a stipulation of the percentage as applied. I do not say that an invoice is bound to say this. The point to be made for the purposes of this appeal is that there was no evidence adduced on behalf of the franchisor as to how the invoiced sums were calculated or made up. On that issue, as I would say repeatedly, the franchisees put the franchisor to their proof and they were entitled to do so.
The upshot of this evidence according to a spreadsheet[44] was to show that there was an undercharge of franchise fees at 3 per cent of $9,443.43. That claim was allowed. As I study that exhibit, it is plain that the Magistrate was presented with documented evidence as explained by Mr Uniacke to prove by reference to the underlying trading data how it is that an uncharged franchise fee was calculated. That spreadsheets stops at 15 January 2015. The claim that is in dispute and which was not allowed was unpaid licensing fees and marketing fees for January, February and March 2015. To prove that claim, all that was before the Magistrate was an invoice claiming that amount. That is, it was not a case of an adjustment to a pre-existing charge. It was a claim for unpaid moneys, sought to be proved by the production of an invoice for the amount.
[44]See exhibit PEG-16.
That leads into the very short cross‑examination of Mr Uniacke that occurred at trial about the relevant invoices. The witness was asked in cross‑examination, ‘These invoices do not show the underlying amounts that were reported, do they?’ Mr Uniacke answered, ‘No’ as was obvious. He said that the fees were charged at the 3 per cent rate for February and March 2015. That was the limit of cross examination on that part of the claim with which this appeal is concerned.
In the case for the franchisees, the only witness called was the first respondent, Mr Constanti. Before then, counsel made a brief opening of the case to say that the plaintiff had not adduced evidence of the revenue reports underlying the invoices, there was no information to support the invoices and an invoice was no more than a demand and ‘the standard of proof is simply not met’. That explains the limited evidence that followed in chief. Nor was there much cross examination. This is what the Magistrate was dealing with.
Much of Mr Constanti’s evidence concerned the claim based on the undercharges. The facts are not clear anyway, but in essence his complaint was that the mediation and the resultant variation deed was supposed to give finality to financial claims, and the subsequent claims for undercharging were contrary to that. He said if he had known that financial adjustment were going to be made after the deed was made, he would have conducted a very different negotiation at mediation.
Mr Constanti gave evidence about the process for reporting revenue of his store. He said his software would generate a weekly revenue report which could then be uploaded. Every transaction was recorded on a software system which would collate the information and create a report and then puts the data in each of the fields of the ‘boxes’ in the report to the franchisor. After the figures are recorded, he would get a statement along with invoices for the previous month and he would pay it.
His evidence was that after being presented with demands for payment of arrears, he asked the franchisor for further details as to how the amounts were calculated. His concern was that he was being charged at 3 per cent in most of the arrears claims based on rental revenues yet, he said, a large portion of his revenue source was sales and not rental revenues which should have been charged at 2 per cent and not 3 per cent. That is, in February and March of this year. As for the claim for $3814.80 for legal expenses, he explained that his immediate unwillingness to return the database was that he wanted clarification to be satisfied that the database would not be used for any other purposes other than Blockbuster purposes.
Cross‑examination was not extensive. Mr Constanti acknowledged receiving a reconciliation of fees to January 2015 and Customer Balance.[45] He sent an email to the franchisor saying ‘I’m afraid I do not follow what your reconciliation is trying to show me’. He was shown an e-mail from the franchisor responding to his concerns. That e-mail was not in evidence. I mean to do no disservice, but it seems to me much of the cross‑examination was designed to try and discredit Mr Constanti to show that he had not protested about the absence of adequate information to help him understand the reconciliation.
[45]Ex PEG-12.
I cannot resist saying the adducing of evidence in an innately confusing case with a history such as this one could not have put the Magistrate in a highly informed position. On the arrears claim, the plaintiff was not being put to proof tactically but because Mr Constanti truly could not understand the basis of the invoice in a case where one would think the franchisor having rendered the invoice would be in a position to adduce the computational basis. The agreements are easily comprehensible but the great difficulty seems to have been the basis by which payments were calculated, and the confusion caused by the undercharges made on a belated realisation by the franchisors that it was applying the wrong rate. Although this is not an appeal in the form of a review, I am bound to say that putting myself in the Magistrate’s position, I can well understand his Honour was looking for, but not able to readily see, sufficient evidence to see how an invoice was calculated or made up.
On the part of the claim that is the subject of this appeal, the submission of the franchisee was elementary: has the plaintiff satisfied the burden of proof of proving that the unpaid amounts for January, February and March 2015 are claimable? The submission was it was insufficient to simply produce the invoice for an invoice is nothing more than a claim to money. As the franchisor accepted that the franchisee reported amounts, it was legally necessary for the plaintiff to prove how and in what way the fee was calculated or made up. In order to do that, it was submitted, there had to be evidence of the revenue on which the percentages were applied. An invoice is nothing more than a claim. It does not in and of itself prove anything. There is no evidence from the plaintiff as to how the amounts owing are calculated. There is not even evidence of the reported amounts of revenue, nor any other basis for determining what the revenue was. The submission was:[46]
And given that the plaintiffs’ –much of the plaintiffs’ claim is in fact based on self‑admitted miscalculations, it would be unreasonable for this court to rely on what are simply further demands for payment. The time has come and gone for the plaintiff to show exactly how these amounts are calculated.
[46]Transcript at 64.
In essence, the opposing submission was that the plaintiff has provided documentation which sets out exactly how the sum is calculated, together with the invoice. It was said that, ‘A plea by a defendant of “I don’t understand how you calculated your claim” is not a defence.’ It was submitted that the plaintiff had, on the balance of probabilities, established exactly how the claim was calculated or made up.
On 18 December 2015, his Honour convened court to give his decision and state reasons. I shall confine myself to the disallowed claim. His Honour said:
The third head of damages relates to the arrears being unpaid licence fees and marketing fund contributions up to the closure of the store on 29 March 2015. It also includes legal fees of $3,814.80. I accept the plaintiff’s contention that it was appropriate in the circumstances to retain lawyers in order to recover the database and the amount claimed is not unreasonable. However, in relation to the claim for $16,168.62, being the amount of unpaid arrears and fees, I accept the defendant’s contention that the plaintiff has not satisfied the burden of how those amounts are claimed. In my view the defendant is correct to say that given that the plaintiff’s claim is based on self-admitted miscalculations it would be unreasonable for a court to rely on what is simply further demands for payment. There is simply not enough information as to how the claim is made out. I am not satisfied that the plaintiff has proved on the balance of probabilities its entitlement to damages for unpaid arrears and fees. Accordingly, in relation to this head of damages I award the amount of $3,814.80.
As a matter of evidence, an invoice in trade and commerce may serve a number of purposes or be proof of a number of matters. There may be situations where its contents, more elaborate than the ones in question here, are capable of proving the facts on which a claim is made according to that invoice. But in this case they were not. They were, as was submitted, nothing more than a demand for payment and therefore did not prove a claim and there was no other extrinsic evidence from which the Magistrate could find proof of the claim. There was no other evidence at trial to proof or sustain the demand for payment. As the franchisors had the software containing reported data from the franchisee and had a finance department applying percentage rates to reported amounts, it was incumbent on the franchisor to properly adduce evidence about the underlying information.
Much was made by the appellant’s counsel of the Magistrate’s statement, ‘…given that the plaintiff’s claim is based on self-admitted miscalculations.” There was no evidence of self-admitted miscalculations on the invoices that are relevant to this appeal. But, I think the submission misunderstands the Magistrate’s obvious meaning. His Honour was saying no more than the history of miscalculations elsewhere intensified the need to be satisfied that the calculations in the relevant invoices were proved to his Honour’s satisfaction.
I see no error by the Magistrate on this question. To that extent the appeal will be dismissed.
The question of costs
After the Magistrate made his findings on the claims, counsel for the franchisor stated: ‘The plaintiff would be seeking costs on an indemnity basis which it says it’s entitled to under its franchise agreement under clause 20.13 and 20.14.’[47] He submitted that those two clauses referred to a claim for indemnity costs. From there he submitted rule 60.30 and rule 63.30.1 of the Supreme Court Rules (which are the same as the Magistrates’ Court General Civil Proceedings Rules 2010) made a differentiation between standard basis and indemnity basis. They do, but there is more to it than that.
[47]Transcript 78.
The starting point is rule 63.00.1 of the Magistrates’ Court Rules which states that ‘Costs for work done in a proceeding must be fixed or determined in accordance with Appendix A to these Rules.’ Whether the basis be standard or indemnity, the scale is the reference point.
Rule 63.28 states:
Subject to this Part, costs in a proceeding which are to be taxed must be taxed on –
(a) the standard basis;
(b) the indemnity basis; or(c) such other basis as the court may direct.
Rule 63.30 states that ‘Subject to Rule 63.00.1, on a taxation on the standard basis, all costs reasonably incurred and of reasonable amount must be allowed’.
Rule 63.30.1 states:
(1)Subject to paragraph (2), on a taxation on the indemnity basis all costs must be allowed except insofar as they are of an unreasonable amount or have been unreasonably incurred.
(2)Any doubt which the Costs Court may have as to whether the costs were unreasonably incurred or were unreasonable in amount must be resolved in favour of the party to whom the costs are payable.
Rule 63.31 states: ‘Except as provided by these Rules or any order of the Court, including the Costs Court, costs must be taxed on the standard basis’.
Care must be taken to understand the terminology in the esoteric field of costs. In the absence of submissions, I shall rely on the commentary in Williams, Civil Procedure in Victoria[48] to give the following brief survey.
[48][63.02.160] ff.
Before the changes to the costs rules, the usual order for costs was on a party and party basis. That was said to be the strictest form of taxation, confined to costs necessarily and properly incurred to conduct the litigation and no more. The previous ‘solicitor and client’ basis of taxation was said to afford a more generous recovery of costs than party/party in that all costs reasonably incurred and of reasonable amount were allowed. That means allowance of costs that were strictly not necessary and proper. But it falls short of an indemnity. Then there were costs orders on an indemnity basis. Such orders were made exceptionally in cases where the losing party had engaged in unmeritorious or delinquent conduct such as bringing an unmeritorious proceeding for an ulterior motive, or in wilful disregard of established facts and law and was a means for the Court to show its disapproval of such conduct. Such an order was not easy to get. If given, it meant that all costs actually incurred would be allowed unless they had been unreasonably incurred or were of a unreasonable amount. But, even then, an award of indemnity costs did not mean the losing party paid the winning party’s costs as charged by their lawyers according to their costs agreement, as if to say to the losing party ‘Here are the bills my lawyers have sent me ― now, pay it’. That would require an even more special Court order. Rather, a taxation of costs on an indemnity basis still meant taxation on the scale of costs in Appendix A for costs incurred which had not been unreasonably incurred or were not of an unreasonable amount.
According to the commentary, the ‘standard’ basis of taxation is a reflection of what was previously known as solicitor client basis, thus a more generous allowance than the ‘old’ party and party basis. The indemnity basis of taxation under the new rules does not provide a complete indemnity but enables the court to allow an indemnity against all legal costs so long as the items claimed have not been unreasonably incurred or are not of an unreasonable amount. What remains is this proposition: an order for indemnity costs under the new rule does not mean payment of costs according to the costs agreement in place between a party and their lawyers. It means indemnity costs on scale. Therefore, if the intention is to order that costs be taxed on the basis of the costs agreement in place between a party and their lawyers, that needs to be justified as a matter of discretion and stated in the order for costs under rule 63.28(c) which speaks of ‘…such other basis as the court may direct’.
These matters needed to be understood, and put properly before the Magistrate, before assertions were made about equivalence between the costs clause and the court rules.
Before the Magistrate, the franchisor said it was entitled to costs on an indemnity basis under clause 20.13 and 20.14 of the franchise agreement on the authority of Taree v Bob Jane Corporation Pty Ltd[49] a decision of Vickery J. The submission was:[50]
However, where there is a contractual right to the costs, as in this franchise agreement, the discretion should ordinarily be exercised so as to reflect that contractual right and it’s not necessary for the contractual agreement to actually include the obligation to pay costs on an indemnity basis. We say in accordance with that decision [the decision of Taree v Bob Jane Corporation] the court should construe that this contractual agreement states that the prevailing party should be awarded costs on an indemnity basis. We say that clause 20.13 clearly provides for the prevailing party in the proceeding to be reimbursed for its reasonable professional costs, fees and expenses without limitation. The requirement for costs on an indemnity basis under Rule 63.30.1 is reflected in the wording of clause 20.13. In addition to that, the parties have even agreed to pay each other’s costs incurred prior to and in preparation for the commencement of the proceedings so we say it’s far broader than costs on a standard basis and the wording ‘without limitation’ only adds to that. On that basis we say that costs in this proceeding should be awarded on an indemnity basis.
[49][2008] VSC 228.
[50]Transcript 79-80.
Taree concerned a franchise agreement in the automotive industry and a guarantee for a franchisee’s debts to a franchisor. The guarantors guaranteed the franchisee’s performance of all obligations under the franchise agreement, including the payment of all money on the dates and at the times in the manner provided in the franchise agreement. The franchisor made claims in a principal proceeding for the alleged defaults of the franchisees to make certain payments under the franchise agreement. The Court made declarations in favour of the franchisor concerning the termination of the franchise relationship. The franchisor then sought costs against most of the plaintiffs on an indemnity basis according to this contractual clause (with my underlining):
Upon the occurrence of an event of default by the Franchisee, the Franchisor will be entitled to recover from the Franchisee in addition to any applicable claim plus interest, legal fees, costs and expenses incurred by the Franchisor as a result of such default on an indemnity basis.
Taree supports the following propositions. First, the general rule is that, in the absence of an agreement to the contrary, a successful party is entitled to costs on a party and party basis but this may yield to the position where an alternative basis is shown either on some well recognised principle, or some contract plainly and unambiguously expressed. That general principle has been affirmed at appellate level in in Kyabram Property Investments Pty Ltd v Murray.[51] Secondly, even where a contractual term for the payment of costs on a basis other than party/party (or ‘standard costs’ as it is now) exists in plain and ambiguous language, the Court still has a discretion not to make a costs order consonant with a costs clause: see Russo v Buck (No 2).[52] Thirdly, the discretion to award costs in the case where there is a contractual right would ordinarily be exercised so as to reflect that contractual right: see Gomba Holdings (UK) Limited v Minories Finance Limited,[53] and Citibank Savings Ltd v Nicholson.[54]
[51][2005] NSWCA 87.
[52][2007] SASC 157.
[53](1993) Ch 171.
[54][1998] SASC 7096.
In Taree, Vickery J found that the guarantor’s obligation to pay indemnity costs was not stated in plain or unambiguous language, and declined to award costs against the plaintiffs on any basis other than a party and party basis. But more pertinently for present purposes, his Honour held that even if the language was thought to be plain, such costs order would be declined on the ground that the claimant for such costs should have revealed its intention in its pleadings to claim costs other than on a party and party basis. The Court in Kyabram had likewise exercised its discretion to deny indemnity costs on the basis that the mortgagor in that case only claimed ‘costs’ in the statement of claim, which would only be interpreted to mean costs on a party and party basis. In Taree there were features of the pleadings which pointed away from a special costs order as being the basis on which costs would be claimed, thus, Vickery J said:[55]
If the defendants intended to seek costs against the plaintiffs other than on the usual party and party basis it would have been essential in this case to define with clarity in the pleadings precisely what costs orders were sought, in favour of which of the defendants such orders were sought, against which of the plaintiff parties the orders were sought and to define which contractual terms were relied upon to support a special costs order. In this case, the absence of pleadings on the point was more than of mere theoretical significance because of the internal inconsistencies within the contractual documentation as to the basis upon which the plaintiffs could be liable for costs in the exercise of the discretion under the Rules.
[55][2008]VSC 228, [53].
Before the Magistrate, the Constantis complained they were taken by surprise as the statement of claim did not plead a claim for indemnity costs as a contractual entitlement. They said that a Calderbank-type offer sent to them before trial threatened a claim for indemnity costs without any reference to costs clauses in the franchise agreement. I have discovered that submission to the Magistrate was wrong. The Calderbank letter dated 28 October 2015 (a week before trial) from the franchisor stated in part:[56]
If this matter does proceed to a hearing, out client will be successful for the full amount of its claim in the sum of $66.064.39 together with interest and costs incurred on an indemnity basis pursuant to clauses 20.13 and 20.14 of the Franchise Agreement.
[56]See exhibit PEG-21.
After a short adjournment to consider Taree, the Magistrate said:
Having read that decision and considered the submissions, I accept the defendant’s submission that as the plaintiff had not pleaded indemnity costs on its statement of claim, I should exercise my discretion and refuse that claim for indemnity costs.
There is nothing in the claim to indicate that the costs will be claimed other than on the usual party and party basis, nor that the plaintiff would rely upon any contractual terms in support of its claim for indemnity costs made under the Rules.
Accordingly, in relation to the application by the plaintiff, I order the defendants pay the costs of the plaintiff on a party and party basis.
The pronouncing of the order making of a costs order on a ‘party and party’ basis was an error as such a basis had been repealed as from 1 July 2013 and substituted by the standard/indemnity distinction.[57] That error became enlarged. The authenticated record of the Court’s order ― called a Notice of Order Made ― states that ‘Parties are to agree on costs, in default of agreement the matter is referred to the Costs Court for taxation’.[58] That does not refer to party and party costs nor who is to pay them. If nothing is said about the basis of taxation, then under rule 63.31 costs must be taxed on the standard basis. However on a separate page of that Notice under the heading of ‘Remarks’ it says ‘Costs fixed on a party and party basis’ without stating by whom they are to paid. But those remarks do not form part of the order.
[57]See SR 89 of 2013, r 12.
[58]See exhibit PEG-1.
I am sure the error in the order could have been corrected in the Magistrates’ Court as a mistake or slip, but the order is in an unrectified state.
It is plain enough, as the appellant submitted, that the basis for the exercise of the discretion was founded upon the franchisor not having pleaded a claim for costs. No other basis for the exercise of the discretion is disclosed. The attack on the discretion here is that the Magistrate was simply wrong to decide that the contractual costs was not pleaded and, as that fallacy was the only basis of the exercise of discretion the costs order may be set aside and the discretion re-exercised on appeal.
The basic principle of the susceptibility of a discretionary judgment on appeal is stated in the joint judgment of Dixon, Evatt and McTiernan JJ in House v The King:[59]
It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.[60]
[59](1936) 55 CLR 499.
[60]Ibid 505.
On the appeal an additional argument was put that whilst Taree says a plain and unambiguous costs clause if pleaded would ordinarily attract a complementary costs discretion, a discretion existed to order indemnity costs even if the clause was not pleaded. Reliance was placed squarely on my decision in Broleb Pty Ltd v Naranto.[61] Such a submission, and that case, was not put to the Magistrate. But it is just as well I refer to it.
[61][2010] VSC 520.
Broleb was a typical case involving a mortgagee’s action for possession of land. Under a typical mortgage there was a typical cost-of-enforcement clause that obliged the mortgagor to pay the ‘solicitor and own client costs of enforcement’ of the mortgagee. The clause was not pleaded. Taree was not argued. I allowed costs according to that clause. Nevertheless, my judgment said:[62]
[62][2010] VSC 520 [13]–[19].
Secondly, it is elementary that a litigant is bound by the way it pleads its case, and any claims it seeks to make, and to have adjudicated, has to be pleaded. That is the function of pleadings and the procedural fairness they serve in enabling the defendant to know the case to meet. That is certainly so for substantive matters but not necessarily so for matters ancillary or consequential to the claim. It depends on the matter. For example a failure to claim any interest does not preclude the claim being ultimately made; or a failure to claim any costs. An amendment would overcome any technical procedural point being taken.
Paragraph 4 of the statement of claim pleads the registered mortgage and particularises it by reference to its dealing number in the register book. The mortgage has been identified for litigation purposes and the defendant cannot credibly say it was entitled to assume the MCP had no part to play in the case. The MCP is a notorious and convenient document used in mortgage lending.
I would accept that a replete pleading would have included an allegation of clause 11 of the MCP elsewhere. And ideally, the prayers for relief should have said “costs on a solicitor and own client basis under clause 11”. But I do not think the absence of the specific reference to clause 11 precludes the costs order as sought here. A costs order is consequential or ancillary to the adjudication of the claim. I do not think it unfair, in the sense of procedurally unfair, for a successful plaintiff to ultimately contend that it ought have an extraordinary costs after it has succeeded in obtaining its primary relief. For example, a plaintiff may at the end of a trial claim indemnity costs on the grounds that the defence was bound to fail as being in the face of established facts or law, or that the defendant had otherwise acted unreasonably, or on some other basis. In that situation, the defendant could not contend that such a costs order was not available because it had not been claimed in the statement of claim or otherwise put on notice.
I do not accept the assertion that the non-pleading of clause 11 has embarrassed or caused possible detriment to the defendant in its approach to the case. It would have been open at any time, even now at trial, for the plaintiff to amend its statement of claim or amend its prayers for relief to refer to clause 11. Unless the defendant could point to and prove some real prejudice in allowing the amendment, the plaintiff would have been allowed to make a clause 11 claim for costs. I think it is unconvincing, and certainly unproved, to assert that the defendant’s approach to this case (with a meaningless defence) has depended on its assumption that the plaintiff was only seeking costs on the ordinary or party/party basis. I think it is unreasonable to say “I was willing to defend this litigation by putting the plaintiff to its proof, but I might not have done that if I saw there was a claim for solicitor and client costs pleaded.” If there was no defence, the mortgagee should not have litigated.
In the end, I apply the principle that parties ought to be held to their bargain even if it be a contract of adhesion. To my mind it is not unfair to make the costs order sought because in any event the plaintiff can go about exercising its rights and obtain recovery of the moneys secured including enforcement costs under clause 11. In other words, one way or another, the mortgagee gets its solicitor and client costs. I apprehend that if the Court makes only the usual party/party costs order, disputations may subsequently arise whether that displaces the lender’s contractual rights under cl 11 after it takes possession of the land and seeks satisfaction of the moneys secured, including enforcement costs.
It is for those reasons that this Court made the costs order as it did.
I take leave to make this final remark. Pleadings nowadays are not always drawn by counsel, and possession actions are commonplace. Many borrowers are unrepresented, and in my experience obtain quite a shock when they seek a payout figure and are told the legal costs that have accumulated after lawyers are retained and litigation is undertaken. Lenders may spare no legal expense in taking enforcement steps. By the time judgment is sought there will have been billed costs and unbilled costs. I would strongly encourage lawyers to plead the contractual right to higher than usual legal costs and to claim costs according to those terms, in the interests of completeness and precision.
Counsel for the Constantis did not question the application of Broleb.[63] However he contended that if the Court concluded it was not pleaded that ought be the end of the matter because, unpleaded, there was real prejudice to the franchisees in not being able to consider the point or adduce evidence about the scope and intended meaning of the costs clause.
[63]Respondent’s written submissions, para 128.
Broleb was not argued below and cannot now be introduced on appeal given the way the case was conducted and decided below. (I should say, extrinsic evidence about the meaning and intention of the costs clause would be inadmissible, and there was no deprivation of an opportunity to argue the scope of the costs clause anyway.) But in any case, the point concerning Broleb is largely arid. I say largely, because of the absence of an allegation of clause 20.14. But principally, I think the franchisor’s statement of claim manifestly did allege the dominant clause 20.13. I cannot see the basis for his Honour concluding that was ‘nothing to indicate’ that the costs were being claimed other than on the usual party and party basis, nor that the plaintiff would rely upon any contractual terms in support of a claim for indemnity costs. The indications were there. True it is, the statement of claim did not plead clause 20.14 which concerns costs of engaging legal counsel, but even then clause 20.14 seems to link those costs with the obligation in clause 20.13. Clause 20.14 isolates the costs of having to ‘…engage legal counsel…’ but costs of retaining counsel would fall under costs of the litigation anyway. What was missing in the pleading was an ultimate statement that the plaintiff claimed an order for indemnity costs in accordance with those clauses, or a costs order under clauses 20.13 and 20.14. But that should not matter as there was no prayers for relief at all in this statement of claim, and the trial proceeded. One looks necessarily to the body of the pleading to see if a claim is reasonably discernible. As clause 20.13 was pleaded then to my mind that means it will have work to do. There is no point alleging a breach of clause 20.13. There was sufficient to make the defendants realise that a special costs order was being sought especially after the Calderbank letter. Thus, I think the Magistrate erred in concluding that the Constantis were allowed to assume that the franchisor would not be seeking anything but the usual costs. To that extent the appeal must be allowed in part.
Orders on appeal
I agree with the appellant’s submission that this Court ought re-exercise the discretion. The Magistrate retired from office very soon after the case, and it would be unfair now that this Court is seized of the matter to remit it to the Magistrates’ Court for another Magistrate to pick up the pieces again.
These are unusual clauses. Some of the descriptions of costs in clause 20.13 is apposite to the sort of costs recognised in the taxation of litigation costs in this jurisdiction. Other descriptions such as ‘…staff and administrative costs of investigation and proof of facts…travel and living expenses…’ are not. Clause 20.13 is injected with the measure of reasonableness which immediately gives it an affinity with the test of reasonableness for the standard basis of taxation ― that is, ‘…all costs reasonably incurred and of reasonable amount’. The extension of the clause to certain species of expense such as travel and the costs incurred ‘…prior to, or in contemplation of the filing of any such proceeding’ may go beyond what is ordinarily allowed on taxation but I do not see the clause as therefore graduating into the more giving indemnity basis of taxation. The indemnity basis under rule 63.30.1 noticeably differs from clause 20.13 in allowing all costs unless they are unreasonable.
I think it is wrong to force a fit with the rules. And I think this is where the costs application below was productive of problems, and why it is perhaps the Magistrate looking to do substantial justice was averse to an order for indemnity costs. On my view, an order for indemnity costs ought not to have been made, and on that determination, the Magistrate was right although for the wrong reason. But, even then, the parties conducted themselves without a proper engagement on the question whether the clause was consonant with an indemnity basis of taxation and I think the plaintiff was wrong in its contention that it was. And the plaintiff did not propose a costs order according to form of order, referable to the costs clause, made in its previous Supreme Court case in which it was party. Likewise, as I have found, the defendant was wrong to contend that the clause had not been pleaded, and wrong to say the Calderbank letter made no reference to costs according to the contract.
There are to my mind two possibilities for dealing with the question of costs below. One is to say that the contractual costs clauses are unusual for litigation here and therefore the just order is for standard costs which after all is based on what is reasonable, which is the control in clause 20.13. The other possibility is to recognise that the parties in a commercial dealing over a long time have conducted their affairs according to this agreement, and faithful to that, they should be bound by the costs clause. If the clause gives a little more than standard costs (but less than indemnity) there is still a test of reasonableness.
I favour the second course. In the disorder of this case, adherence to the clause gives some measure of certainty. The ambit of the clause and the reasonableness of costs to be claimed are matters for the Costs Court.
Disposition
I would dismiss the appeal on the disallowance of the claim for $16,168.62. I would allow the appeal on the costs order. Under s 109(6) I would set aside the two orders made by the Magistrates’ Court on 18 December 2015 that ‘PARTIES ARE TO AGREE, IN DEFAULT OF AGREEMENT THE MATTER IS REFERRED TO THE COSTS COURT FOR TAXATION‘ and instead order in each case that the defendant shall pay the plaintiff’s costs under rule 63.28(c) according to clause 20.13 and 20.14 of the Standard Franchise Agreement which is exhibit PEG-2 to the affidavit of P.E Greenfield sworn in this appeal on 25 January 2015.
That leaves the question of costs of appeal. I feel impelled to say this about costs. So much of this appeal has involved seeing the way the case was conducted below by the parties. The franchisor has lost the appeal on the claim for unpaid fees. The franchisee has lost the argument on the question whether the costs clause was pleaded, although that did not lead to the conclusion that an order for indemnity costs should have been made. This Court has looked to a costs order faithful to the contract, but which was not put below. These matters will be relevant to this Court’s discretion on the costs order on this appeal and maybe to the grant of an indemnity certificate under the Appeal Costs Act if one is sought.
Unless there is agreement on the costs order, I invite the parties to make written submissions on costs not to exceed 3 pages. The Court will decide the matter on those submissions. The submission are to be filed with my Associate by 24 March 2017.
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