Brand2Content Pty Ltd t/as Franchise Works v Solar Australia Pty Ltd

[2018] NSWSC 56

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Brand2Content Pty Ltd t/as Franchise Works v Solar Australia Pty Ltd [2018] NSWSC 56
Hearing dates:	4 to 7 December 2017
Decision date:	07 February 2018
Jurisdiction:	Equity - Commercial List
Before:	Ball J
Decision:	(1)   Judgment for the plaintiff in the sum of $771,611.11. (2)   The cross-claim be dismissed.
Catchwords:	CONTRACTS – Breach of contract – Consequences of breach – Right to termination – Innominate terms – Principle from Koompahtoo case CONTRACTS – Construction – Interpretation – Whether franchise consultant’s negotiation of sponsorship agreements without authorisation from client breached obligation to act in good faith CONTRACTS – Construction – Whether an exclusivity provision prohibited sponsorship fundraising by franchise consultant CONTRACTS – Construction – Whether client’s authorisation for inclusion of unusual terms by franchise consultant was required CONTRACTS – Construction – Interpretation – Whether consultant breached obligation to act in good faith by failing to follow client’s instructions, misleading client, failing to provide honest answers to client CONTRACTS – Construction – Interpretation – Whether consultant’s obligation to act in good faith was breached by failure to inform client about special condition TRADE AND COMMERCE – Competition and Consumer Act 2010 (Cth) and related legislation – Misleading or deceptive conduct – Whether misleading or deceptive representations about an approval requirement for unusual terms and an exclusive territory of operation were made EVIDENCE – Opinion evidence – Exceptions – Expert opinion – Whether chartered accountant had specialised knowledge or sufficient evidence to make assumption about likely number of future sales CONTRACTS – Termination – Election – Whether parties agreed to terminate CONTRACTS – Termination – Repudiation of contract – Express refusal to perform CONTRACTS – Remedies – Damages – Loss of chance – Reasonableness of assuming completion of further franchise agreements after breakdown of client-franchise consultant relationship
Legislation Cited:	Australian Consumer Law s 18
Cases Cited:	Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61 Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268
Category:	Principal judgment
Parties:	Brand2Content Pty Ltd t/as Franchise Works (ACN 157 910 819) (Plaintiff | First Cross Defendant) Timothy Hugh Dixon (Second Cross Defendant) Solar Australia Pty Ltd (ACN 129 328 490) (First Defendant | First Cross Claimant) Get Off the Grid Pty Ltd (ACN 603 703 153) (Second Defendant | Second Cross Claimant) Solar Australia Franchising Pty Ltd (ACN 607 822 257) (Third Defendant | Third Cross Claimant) Solar and Batteries Australia Pty Limited (Fourth Cross Claimant)
Representation:	Counsel: S Balafoutis with R Clark (Plaintiff | Cross Defendants) MG McHugh SC with AD Justice (Defendants | Cross Claimants)   Solicitors: LegalWorld (Plaintiff | Cross Defendants) Osborn Law (Defendants | Cross Claimants)
File Number(s):	2016/349668
Publication restriction:	None

Judgment

Introduction

1. The first defendant, Solar Australia Pty Ltd (SA), was registered in January 2008 and carries on business of installing solar panels and batteries in both residential and commercial premises. It is based in Newcastle. Ninety per cent of the shares of SA are held by Mr Adam Dalby. The remaining shares are held by Ms Deborah Williams, SA’s financial controller. The directors of SA are Mr Dalby and his father, Mr John Dalby (Mr Dalby Snr). Mr Dalby was the managing director of SA between January 2008 and August 2015. However, he became unwell in about August 2014 and on 3 August 2014, SA entered into an agreement with AKCP Pty Limited, a company controlled by Mr Anthony Williamson, under which AKCP agreed to supply the services of Mr Williamson to act as general manager of SA. Prior to that time, Mr Williamson had managed SA’s Port Macquarie office.

2. The plaintiff, Brand2Content Pty Ltd, which trades as Franchise Works (FW), is a company through which Mr Timothy Dixon carries on the business of a franchise consultant. Mr Dixon has worked in franchising for approximately 20 years.

3. On 30 October 2014, FW entered into an agreement (the First Agreement) with SA by which it agreed that Mr Dixon would undertake a review of SA’s business and provide a franchising proposal. Following that work and presentations made by Mr Dixon, FW entered into an agreement (the Second Agreement) on 7 August 2015 with SA, the second defendant, Get Off The Grid Pty Ltd (GOG) “& associated entities”, which expression is taken to include the third defendant, Solar Australia Franchising Pty Limited (SAF). Under the terms of the Second Agreement, FW agreed to supply Mr Dixon’s services to recruit and manage franchises. GOG was incorporated as the entity which would license intellectual property to franchisees. SAF was the entity that would grant SA franchises to franchisees. Mr Dalby holds 80 per cent of the shares in each of GOG and SAF, Ms Williams holds 10 per cent of the shares in each and AKCP holds the remaining 10 per cent. It will be convenient to refer to SA, GOG and SAF together as the “SA Parties”.

4. In these proceedings, FW claims that SA wrongfully repudiated the Second Agreement. It contends that it accepted that repudiation and terminated the agreement. It claims damages including damages for loss of profits it says it would have earned under that agreement.

5. The defendants, on the other hand, contend that they were entitled to terminate the Second Agreement for breach of either the express terms of the agreement or of a number of collateral contracts on which they rely, and they claim damages in respect of those breaches of contract. They also plead an alternative case based on misleading or deceptive conduct, although that case was not pressed in final submissions and appears to have been all but abandoned.

Background

6. Mr Dixon met Mr Williamson through a mutual friend in June 2014 and shortly afterwards Mr Williamson recommended to Mr Dalby that SA should seek to expand its business through franchises. Following that recommendation, Mr Williamson and Ms Williams signed the First Agreement with FW.

7. Under the terms of the First Agreement, Mr Dixon agreed to conduct an initial business review and to design and develop a franchise system that SA could offer to potential franchisees. The agreement provided that FW was to be paid a development fee of $60,000 plus GST in three equal instalments together with $18,000 plus GST said to be for “Legal Agreements & Documentation”. The agreement also provided for additional payments to FW in the event that FW signed up new installers or franchisees. Item 6 of the schedule to the agreement set out a list of matters that would need to be addressed in developing the franchise system. The list including the following:

13.   Legal Territory Structuring Advice

8. The First Agreement could be terminated by either party giving six months’ notice. Clause 2.2 provided that “The parties will act with the utmost good faith in all of their dealings with each other.” Clause 2.3 provided “The Consultant [that is, Mr Dixon] is to report progress on a regular basis and as requested by the Client [that is, SA] from time to time.”

9. Mr Dixon undertook a review of the business of SA and provided information regarding his proposal for the franchising of SA’s business at a series of meetings in 2015. The first meeting occurred on 14 January 2015. It was attended by Mr Dixon, Mr Williamson, Ms Williams, Mr Dalby and Mr Dalby Snr together with Mr Timothy Osborn, Mr Simon Rutherford and Mr Eric Flammang. Mr Osborn was from Osborn Law, SA’s lawyers. Mr Rutherford and Mr Flammang were from PKF Lawler, who were business and accounting advisers engaged by SA. One of the issues discussed at that meeting was the establishment of GOG and SAF.

10. The same people attended a second meeting on 15 April 2015, at which the role of GOG, among other things, was discussed.

11. In May 2015, Mr Dixon was informed by Mr Williamson that Mr Dalby was interested in selling the SA business and during June and July 2015, Mr Dixon had direct negotiations with Mr Dalby about him buying the business, possibly in conjunction with Mr Williamson. Those negotiations came to nothing.

12. A further meeting to discuss the franchising proposal occurred on or around 28 July 2015. It is not clear who attended that meeting, but the attendees included Mr Dixon, Mr Dalby and Ms Williams. At that meeting, Mr Dixon made a presentation by reference to a spreadsheet on his laptop which contained different scenarios and the potential revenue that could be earned depending on how many franchise agreements were entered into. Mr Dalby says during that meeting, Mr Dixon said that he was sure the projections were achievable and that SA would make “heaps of money”. Mr Dalby also says that he said that he was happy for Mr Williamson and Ms Williams to approve the franchises if they corresponded to what FW had put in its proposal, but that “if anything is different I want to approve it before anything is agreed”. He says that Mr Dixon agreed.

13. Ms Williams gave evidence to similar effect. According to her, at a meeting in “July/early August 2015”, after Mr Dixon said that he would only work for SA, Mr Dalby said words to the effect:

I’m okay with it on the basis that I approve the franchises if they are changed from the normal agreement, otherwise [Mr Williamson] and [Ms Williams] can approve the franchise agreements.

Again, she says that Mr Dixon agreed. Mr Dixon denies both versions of the conversation.

14. Following the meeting on 28 July 2015, Mr Dixon sent to Mr Dalby and Ms Williams a document entitled “Thinking Big – Make Big – Together” (the First Thinking Big Presentation). That document contains some of the franchisee scenarios which had been presented at the meeting. It also proposed some terms on which FW would be remunerated and in that context contained the following statement:

Potential to park Franchise Works income and replace with commitment / income from Solar Australia engagement (Need to replace income in excess of $300,000 - $350,000.

The document also proposed that Mr Dixon obtain a 51 per cent controlling interest in SA for him to “drive” the results outlined in the proposal.

15. On 29 July 2015, Mr Dalby, Mr Dalby Snr and Ms Williams met with PKF Lawler to discuss the proposal set out in the First Thinking Big Presentation.

16. There was a further meeting between Mr Dixon, Ms Williams and Mr Dalby on 5 August 2015. During that meeting, Mr Dalby says that Mr Dixon said that he needed to work full time in the SA business and that he would therefore need to replace his current income of around $350,000 annually. Mr Dixon said that he was confident in guaranteeing the income he estimated for SA otherwise he would not give up his existing income of over $300,000. When pressed by Mr Dalby, Mr Dixon is said to have given a commitment that he was going to give up his other interests and only work for SA. Ms Williams gives evidence to similar effect, although in giving that evidence it is unclear whether she is referring to this meeting or the one that occurred on or about 28 July 2015. According to her, Mr Dalby asked Mr Dixon whether he would work “100% for Solar Australia” to which he replied that he would. Again, Mr Dixon denies those versions of the conversation. According to him, what was discussed was a reduction of his proposed monthly retainer from $20,000 per month to $15,000 per month and a reduction in the proposed master franchise fee from $50,000 to $20,000.

17. Following the meeting on 5 August 2015, Mr Dixon sent an email to Mr Dalby and Ms Williams attaching an amended draft contract and a further version of the First Thinking Big Presentation. That document removed the reference to Mr Dixon acquiring a 51 per cent interest in SA.

18. The final version of the Second Agreement is dated 7 August 2015. It was signed by Mr Dalby on behalf of the SA Parties and witnessed by Ms Williams.

19. The Second Agreement is poorly drafted. One difficulty with it is that it is drafted on the assumption that “the Consultant” will be a natural person (that is, Mr Dixon), although the relevant contracting party is FW.

20. Clause 2.1 of the Second Agreement states that the Consultant will provide the Client [the SA Parties] with the services set out in item 3 of the Schedule. That item is in the following terms:

Item 3 Franchise Development Services

3.1   Franchise Recruitment Services

•   Advice on franchise recruitment strategies

•   Managing franchise leads through the consideration process

•   Securing franchise sales

•   Managing the legal process of signing up franchisees

•   Guiding the on-boarding process of franchisees with CEO

3.2   Franchise Management Services

•   Conduct annual franchisee business plan reviews with franchisees

•   Review franchisee performance quarterly

•   Address in conjunction with the CEO, franchisees not porforming [sic] and manage legal notices if required

•   General advice and support on any legal issues with franchisees / or management of

•   General franchise advice / opinion

21. The SA Parties agreed to pay FW a monthly retainer of $15,000 per month and commission on franchise sales of $20,000 and 10% commission on the sale of Master Franchises, although on what the 10% is calculated is not made clear by the agreement. The SA Parties also agreed to pay a fee for franchise management services of 1% of gross sales conducted through franchises or master franchises.

22. The contract was expressed to be for a five year term ending on 31 July 2020. It contained the following termination clause:

7   Termination

7.1   Should the client believe that the consultant is not meeting the commitments outline [sic] in Item 3 of the schedule for either of the services, the following resolution process must be followed:

(a)   if the client is of the opinion the Franchise Development Services are not being met, they are required to give formal written notice detailing what Franchise Development Services are not being met by the consultant.

(b)   The consultant has 30 days notice to reply to the client effecting that they are meeting the requirements of the franchise development services.

(c)   If the consultant agrees with what is not being met or fails to respond, the consultant will have 90 days to rectify the franchise development services upon such formal notice and provide such evidence to the client that such has been rectified.

(d)   If both parties disagree, an independent franchise mediator will be used (50% split in cost) to resolve the differences.

(e)   Both parties agree to be bound by the findings of the independent franchise mediator in relation to performance of services.

7.2   If the mediator agrees the services were not rectified by the consultant and determines termination in favour of the client, the client has the right to terminate the agreement immediately. The effect of this termination is specific only to that service:

(a)   Failure to rectify Franchise Recruitment Services will result in the conclusion of the recruitment services. Termination of the monthly retainer and franchise recruitment commissions – excluding those detailed at 7.5 below.

(b)   Failure to rectify the Franchise Management Services will result in the client taking over such responsibilities and paying the consultant 24 x times the current commission month payment (equivalent to 2 x times annual income).

7.3   Termination of this agreement will apply on the completion of both the time periods outlined in the schedule and the provision of completed services and outlined payments to the Consultant.

7.4   Franchise Management Services & Franchise royalties income for such services will continue to be paid until the closure of each franchise and continues with renewals, options, sale, transfers of franchise licenses / master licenses plus franchisor sale, part sale or transmission of business. This ongoing income and franchise management role can be sold by the consultant to a party approved by the Franchisor (which will not be unreasonably withheld). The Franchisor will also have first right to purchase at the agreed sale price and provide those franchise development services themselves (within 7 days of notice given of sale).

7.5   Franchise commissions will be payable for propective [sic] franchisees handled prior to termination that come on board within 12 months after termination of the agreement.

23. The contract was expressed to supersede “any other agreement” (cl 1.4). It contained an entire agreement clause in the following terms (cl 14):

This Agreement is the entire agreement and understanding between the parties on everything connected with the subject matter of this Agreement.

24. Clauses 2.2 and 2.3 were in the following terms:

2.2   Utmost good faith

The parties will act with the utmost good faith in all of their dealings with each other.

2.3   Reporting to the Client

Reporting to the CEO, Anthony Williamson. The Consultant is to report progress on a regular basis and as requested by the Client from time to time.

25. In all, SAF entered into three franchise agreements. The first was entered into on 28 August 2015 with Camlev Pty Ltd.

26. The agreement with Camlev was in the standard form that had been drafted for use by SAF. It was for an initial period of five years with an option for Camlev to extend it for a further five years. It covered the area around Bendigo and Shepparton in Victoria.

27. The standard form of franchise agreement contained the following term:

3.2   No exclusive territory

The Licensed Partner acknowledges that this Agreement does not confer upon the Licensed Partner any right to an exclusive or protected territory.

28. The agreement with Camlev also contained the following special condition:

Item 29 Special Conditions

Solar Australia offers finance to the franchise fee of $100,000 and the initial cash flows of the business as detailed below:

Solar Australia offers to finance the franchisee and guarantors as follows:

1)   $100,000 franchise fee with zero interest

2)   The cash-flow shortages of the business in the first 12 weeks to cover wages, car leases and installations up to the level of $20,000 in commissions paid by Solar Australia to the franchisee each month. Any shortfalls below that figure, become finance provided by Solar Australia.

3)   Solar Australia will pay on the franchisees behalf, weekly wages to Steve and Blake of $1,500 each inclusive of superannuation for the first 12 weeks and re-imburse themselves from commission’s payable from that month.

4)   The objective of these clauses is to ensure core cash flow of running costs totalling $20,000 per month (commissions) for the first 12 weeks.

5)   All finance provided will be paid back through 50% of any amounts paid to the franchisee in excess of $20,000 each month, i.e. $30,000 commissions: franchisee will be paid $25,000 and the franchisor reduce the franchise debt by $5,000 until total financed debt is paid back – at which stage 100% of payable commissions will revert back to the franchisee in total each month.

29. That special condition was inserted following a conference call on 21 August 2015 between Mr Dixon and Mr Williamson and representatives of Camlev, in which the representatives of Camlev expressed concern about the requirement to pay a franchise fee of $100,000. According to Mr Dixon, Mr Williamson said in response:

From what I have seen and we have discussed, I am confident in your abilities and propose that for an initial term we pay your salaries from your commission.

30. At some stage, Ms Williams became aware of the special condition in the franchise agreement and complained to Mr Dixon about it. Subsequently, in October 2015, there was a meeting between Mr Dixon, Mr Dalby, Ms Williams and Mr Williamson. According to Ms Williams, she complained that she had not been consulted as financial controller in relation to the financing arrangements. According to her, Mr Dixon accepted that it was probably appropriate for her to have been consulted. Her evidence is that the conversation then continued in the following terms:

Mr Dalby said:   In future there are to be no additional arrangements made to the normal franchise agreement without my consent.

Mr Dixon said:   Okay understood.

However, in cross-examination Ms Williams accepted that she only had a vague recollection of the conversation and that she could not remember whether it occurred in June 2016.

31. Mr Dalby’s evidence of the conversation is that he told Mr Dixon that “From now nothing gets agreed to unless it goes through Debbie and me” and that Mr Dixon agreed. In cross-examination, he gave a somewhat different account of the conversation. He agreed that he said that anything out of the ordinary needed to go through him and Ms Williams. Mr Dixon, on the other hand, denies both Ms Williams’ and Mr Darby’s accounts of the conversation.

32. On 1 April 2016, a second franchise agreement was executed with Stralis Energy Pty Ltd. It was for an initial period of 10 years with an option for Stralis to extend it for a further five years.

33. The agreement contained the following special condition:

Item 29 Special Conditions

1.   $47,500 of the initial franchise fee is payable 6 months after the start date.

2.   If the licensed partner does not reach the minimum sales performance (96 systems) over the first 12 months of this agreement, then the licensed partner will have at their option (to be confirmed in writing within 2 weeks of the 12 month anniversary), the right to terminate the license agreement and receive a full refund of the $97,500.00 license fee.

3.   The Franchisor will not during the Term enter into a License Partner Agreement with any other party for the towns of Lismore, Ballina, Byron, Casino, Tweed Heads, Murwillumbah.

34. According to Mr Dalby, before the agreement was signed Mr Dixon in late 2015 or early 2016 told him that he had a lead in Northern NSW. They then had a conversation to the following effect:

I said:   “Okay, how much money?”

Tim said:   “Same as before, $100,000.00.”

I said:   “Okay keep me posted.”

35. On 22 January 2016, SAF entered into a third franchise agreement with MV Solar Pty Ltd, a company which operated out of Denman, New South Wales, which is close to the area in which SA operates. The initial term of the agreement was 10 years with an option exercisable by MV Solar to renew the agreement for a further 5 years.

36. Clause 3.2 of that agreement provided:

Exclusive Territory

The grant of the Franchise Licence pursuant to clause 3.1 is an exclusive licence to operate the Franchise Business for the supply and installation of Grid Connected PV Systems for first three (3) years of Term within the Territory and SA must not grant or attempt to grant any other Franchise Licence to any other person within the Territory.

37. “Franchise Business” is defined to mean “the provision of the Product & Services to Referred Clients for Grid Connected PV Systems”.

38. “Referred Client” is defined in the following terms:

[A] person, other than an Existing Client for the installation of a Grid Connected PV System:

(a)   to whom the Licensed Partner has been referred by SA to provide the Services and install Products; or

(b)   obtained and referred by the Licensed Partner to SA for the provision of Services and installation of Products by the Licensed Partner.

39. “Territory” is defined by reference to certain postcodes together with a map which is set out in Schedule 7 of the agreement.

40. The scope of the territory was the subject of considerable discussion.

41. Mr Dixon told Mr Dalby about his negotiations with MV Solar. According to Mr Dalby, in late 2015 he had a conversation with Mr Williamson in which Mr Williamson asked Mr Dalby what area Mr Dalby would be happy to license to MV Solar. Mr Dalby says he replied:

Singleton and no further east than Branxton. As you know, the area east of Branxton is one of our best areas; I am not willing to let that area go.

42. Mr Dalby says the following week he spoke to Mr Dixon and asked him whether he had seen the area that he had discussed with Mr Williamson the previous week. Mr Dixon said he had, although Mr Dixon denies that conversation.

43. On 4 February 2016, Mr Dixon sent an email to Mr Williamson asking for instructions in relation to the term that became cl 3.2 of the franchise agreement, which it appears was a term sought by MV Solar’s lawyers. It is not clear precisely what happened then but on 16 February 2016 Mr Williamson sent Mr Dixon an email in which he said:

We need to sort the map. Particularly with the extensive changes to the agreement. We can’t give them Dubbo/Tamworth/Maitland. They can go into the Dubbo area ect [sic] but Tamworth is big enough for a license by itself. I am not saying or blaming anyone just had not focused my head space on it till now

44. On 14 April 2016, Mr Dixon sent MV Solar an email concerning execution of the agreement, which was copied to Mr Williamson. The email proposed the inclusion of Schedule 7 setting out the postcodes of the areas where MV Solar was to have “exclusive on-grid solar system sales … for the first 3 years”. The list of postcodes included “2320”, which is the postcode for Maitland.

45. The area falling within the scope of the definition of “Territory” in the final version of the agreement goes substantially further east than the area that Mr Dalby said was acceptable to him and includes Maitland. Mr Dalby gave evidence that he received a number of complaints from MV Solar about the fact that SA was continuing to operate in the territory that had been given to MV Solar.

46. As a result of those complaints, Mr Dalby arranged a meeting on 25 May 2016 which was attended by him, Mr Williamson, Mr Dixon and a number of others. During that meeting, Mr Dalby asked Mr Dixon to explain the area in which MV Solar’s exclusive rights operated. Mr Dalby says that he could not get a straight answer.

47. Following that meeting, one of SA’s contractors, The Quote Company, gave Mr Dalby a map of the area that had been assigned to MV Solar. He then arranged a further meeting with Mr Williamson and Mr Dixon to discuss that map. During that meeting, Mr Dalby asked Mr Dixon whether he could confirm that the map described the area that had been sold to MV Solar. Mr Dixon replied that he could not be sure and Mr Williamson said that he knew nothing about it. Eventually, Mr Dalby says that Mr Dixon conceded that the map was correct.

48. There was a further meeting attended by Mr Dalby, Ms Williams and Mr Dixon in June 2016 which, although Mr Dixon did not know it, was recorded by Mr Dalby. The meeting lasted approximately half an hour and dealt with a number of complaints that Mr Dalby had, including complaints relating to the MV Solar territory. At the end of the meeting, it was agreed that Mr Dalby would be included in the signing of any future franchise agreements. Mr Dalby said that Mr Dixon would receive a warning.

49. On 1 September 2016, Mr Collogan, the business operations manager of SA, told Mr Dixon that Mr Williamson had left SA. A week later, Mr Collogan told Mr Dixon that Mr Dalby had become the CEO and Ms Williams the finance manager and that Mr Collogan would become the general manager.

50. On 14 September 2016, Mr Dixon sent an email to Mr Collogan and Mr Dalby regarding options going forward after Mr Williamson had left. There were three options. The first was for things to continue as they were. The second was that FW could sell its services to a new franchise consultant. The third was to end the existing arrangement on mutually agreeable terms, involving a payment to FW.

51. The following day there was a meeting between Mr Dalby, Mr Collogan and Mr Dixon. There are different accounts of that meeting. According to Mr Dixon, Mr Dalby was angry and maintained that SA would not pay FW’s most recent invoice, totalling $19,805.28 (including GST).

52. Prior to the meeting, Mr Dalby had obtained access to Mr Dixon’s FW email account and at the meeting Mr Dalby confronted Mr Dixon with a number of the emails he had obtained. They included emails concerning Mr Dixon’s involvement with a charitable music event known as MusicOz. They also included a number of emails concerned with a sponsorship agreement with a V8 motor racing team operated by Erebus V8 Motorsport Pty Limited (Erebus). In February 2015, Mr Dalby had become aware that Solar Australia had its logo on the Erebus racing car. He had raised the issue with Mr Williamson who had told him that Erebus did not have a sponsor and they asked if they could use SA’s logo at no cost. Subsequently, after Mr Williamson left, Mr Dalby became aware that SA had entered into an undated sponsorship agreement with Erebus for a 2 year term (2015 and 2016) for a base sponsorship fee of $1,300,000 per annum. It appears from the emails that Mr Dixon knew of the sponsorship agreement and had arranged for SA to enter into a sponsor agreement dated 20 August 2015 with Plutus Payroll Pty Ltd. Under the terms of that agreement, Plutus Payroll agreed to pay a sponsorship fee of $25,000 to Erebus and to provide its payroll services free of charge to SA. In return, SA agreed to provide from its major sponsorship with Erebus certain rights to Plutus Payroll including a logo on the vehicle. Plutus Payroll was a company to whom Mr Dixon had in the past referred business, sometimes in exchange for a commission. Mr Dalby held Mr Dixon responsible for these arrangements and for not telling him that they had been put in place.

53. During the course of the meeting, there was also a discussion of a settlement deed. Mr Dalby said that he wanted his lawyer to draft it. According to Mr Dixon, he said that he would look at it and consult his wife (who was a shareholder of FW) and speak to a lawyer. According to Mr Dalby, after he had confronted Mr Dixon with the emails and accused Mr Dixon of lying, Mr Dixon offered to give up any compensation and “reverse my whole contract”. Mr Collogan gave evidence that Mr Dixon said he would have to read and consider the deed and consult with his wife. He says that Mr Dalby concluded by saying “Tim, you are a liar. I hate liars.”

54. After the meeting, Mr Collogan suggested that Mr Dixon go home without staying the rest of the day to discuss the matters with his wife. Mr Dixon agrees that that conversation occurred.

55. Also following the meeting, SA terminated Mr Dixon’s access to its computing systems.

56. After trying to get remote access, Mr Dixon left a voicemail message for Mr Collogan asking him what was going on. He then sent an email asking what was happening. He did not receive a response. However, on the same day, Mr Dalby sent an email attaching a deed of settlement and release. The deed did not provide for the payment of any compensation to FW.

57. FW did not sign the deed of settlement and release and on 20 September 2016, FW’s lawyers, Clamenz Lawyers, sent Osborn Law a letter alleging the SA Parties had repudiated the agreement, stating that the Second Agreement had terminated and asking for all moneys due under the Second Agreement. Osborn Law replied on 26 September 2016 terminating the Second Agreement.

58. Subsequently, the franchise agreements with MV Solar and Stralis were terminated. The agreement with MV Solar was terminated by a deed that took effect on 27 November 2017. Under the terms of that deed, SA agreed to pay MV Solar the sum of $75,000. It is apparent from earlier negotiations that at least one reason the franchise agreement was terminated and SA agreed to pay money to MV Solar was because of the dispute concerning the territory in which MV Solar could operate. The agreement with Stralis was terminated by a deed entered into in January 2017. It appears that Stralis had only paid $50,000 of the initial franchise fee. Under the terms of the deed, the SA Parties agreed to refund the $50,000 Stralis had paid. It is apparent that the main reason the agreement was terminated was because of the poor sales achieved by Stralis. It is unclear what has happened to the agreement with Camlev.

Were the SA Parties entitled to terminate the Second Agreement?

59. The SA Parties submit that they were entitled to terminate the Second Agreement because FW engaged in a series of breaches of contract or of terms that formed collateral contracts to the Second Agreement. Although individually those breaches may not have been sufficiently serious to give rise to a right of termination, the SA Parties submit that taken together they deprived SA of a substantial part of the benefit for which it contracted and therefore gave rise to a right of termination in accordance with the principles said to have been accepted by the High Court in Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (2007) 233 CLR 115; [2007] HCA 61. Somewhat unconventionally, the SA Parties rely principally on the following statement of Gleeson CJ in the transcript of argument in that case ([2007] HCATrans 446):

Why can you not have a category of this kind? The contractual obligation is not of itself of such an essential nature that you can say any breach of it, however trivial, justifies termination, but repeated breaches of that obligation, regardless of what it conveys about the intention of the party in breach, can bring you to a situation where the other party can say, “That is the last straw”.

60. There are, however, difficulties with this submission. Statements made during the course of argument are not authority for anything. Moreover, Gleeson CJ’s statement was directed to multiple breaches of a single term, not breaches of a number of terms, including terms of collateral contracts. The principle for which Koompahtoo stands is that there is a class of term, often described as innominate or intermediate terms, the breach of which does not give rise to an automatic right of termination but which may give rise to a right of termination where the breach or breaches of the term are serious or gross: see (2007) 233 CLR 115; [2007] HCA 61 at [71]. The submissions made by the SA Parties are not clearly directed to an application of that principle.

61. The SA Parties rely on a variety of conduct said to have been engaged in by FW which justified termination of the Second Agreement. It is convenient first to summarise the obligations that are said to have been breached and then to deal with the alleged breaches.

The duty of utmost good faith

62. It is common ground that both agreements contained an express obligation on the parties to act in the utmost good faith. Relying on the decision in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268, the SA Parties submit that the obligation of good faith encompasses three related notions:

1. An obligation on the parties to co-operate in achieving the contractual objects;

2. Compliance with honest standards of conduct; and

3. Compliance with standards of conduct that are reasonable having regard to the interests of the parties.

For present purposes, that may be accepted as an accurate statement of the obligation.

The Territories Term

63. The Territories Term is pleaded to be a term of the First Agreement to the effect that FW and Mr Dixon would establish franchise territories taking into account the existing business of SA. The term is said to be express and implied. Insofar as it is express, it is said to be included in point 13 of Item 6 of the Schedule to the First Agreement. Insofar as it is implied, it is said to be implied to give business efficacy to the First Agreement.

The B2C Collateral Agreement, the Approval Representation and related terms

64. In their cross-claim, the SA Parties plead that at the meeting that occurred on 28 July 2015, FW or Mr Dixon entered into a collateral contract to the Second Agreement with the SA Parties to the effect that “all franchise sales and any terms that were different to that outlined in the B2C Proposal required the approval of [Mr] Dalby”. It is also pleaded that Mr Dixon made a similar representation at the meeting. The collateral contract is defined to be the “B2C Collateral Agreement”. The representation is defined to be the “Approval Representation”. In final submissions, the SA Parties characterised the collateral contract and representation as being to the effect that if there was anything out of the ordinary in a franchise agreement “Mr Dixon would run that by Mr Dalby”.

65. A similar agreement is said to have been reached at the meeting on 13 October 2015. In their cross-claim, the SA Parties characterise that agreement as a representation by Mr Dixon on his own behalf and on behalf of FW that “all subsequent approvals for new franchisees would come through Dalby and Williams”. That representation is defined as the “Second Approval Representation” and is also said to have given rise to a second collateral contract defined as the “Second B2C Collateral Agreement”. In final submissions, the SA Parties characterised the contract as a contract that all future proposed franchise agreements needed to be approved by Mr Dalby.

The Exclusivity Term

66. The SA Parties also plead in their cross-claim that it was an oral term of the Second Agreement that Mr Dixon and FW would work exclusively for the SA Parties in undertaking the work that was the subject of the Second Agreement (defined as the “Exclusivity Term”). That term is said to have been agreed at the meeting that occurred on 5 August 2015.

The MV Territory Representation

67. The SA Parties plead in their cross-claim that at a meeting in late 2015 between Mr Dixon and Mr Dalby Mr Dixon represented that “should a franchise agreement be reached with MV it would be on terms that MV was to be provided with a defined geographic area in which to operate its franchise business and that such area was to be around Singleton and no further east than Branxton”. In final submissions, the SA Parties submit that it ought to be found that it was agreed that the territory for MV was “to be west of Singleton and, at least not include Maitland”.

The Franchise Development Term and the Franchise Development Services Term

68. The Franchise Development Term is pleaded in the cross-claim to be a term of the First Agreement to the effect that Mr Dixon and FW “would perform an initial business review of [SA] and design and develop a licensee system to be implemented by [SA] or a related party”. The Franchise Development Services Term is pleaded to be a term of the Second Agreement to the effect that Mr Dixon would undertake the work described in the Second Agreement. Both terms are said to have been breached because of Mr Dixon’s or FW’s conduct in relation to the MV Solar franchise, although no submissions were made in support of that allegation. It is unclear whether the allegation is still pursued. For reasons that will become apparent there is no merit in the allegation.

The Stralis Franchise Fee Representation

69. Finally, the SA Parties plead in their cross-claim that in late 2015 or early 2016 Mr Dixon represented to Mr Dalby that Stralis would pay a franchise fee of $100,000 (defined as the “Stralis Franchise Fee Representation”) The conversation on which the SA Parties rely is the conversation referred to in paragraph 34 above. That representation is said to have been false because of the inclusion of special condition 29 in the Stralis franchise agreement.

Conduct in relation to Sponsorship Agreements

70. In their commercial list response, the SA Parties contend that FW breached its obligation to act in good faith by purporting to negotiate sponsorship agreements with the Gold Coast Suns and Erebus without authorisation from SA or SAF and that Mr Dixon misled SA and SAF about the nature of the terms of the sponsorship agreement with Erebus.

71. There is no evidence concerning the sponsorship agreement with the Gold Coast Suns. Consequently, that allegation can be put to one side.

72. There is no evidence that Mr Dixon negotiated the sponsorship agreement with Erebus, let alone that he did so without authorisation. The evidence is that the sponsorship agreement was negotiated by Mr Williamson. The agreement was signed on SA’s behalf by Mr Williamson, although there is no evidence that SA actually made any payments under the agreement. Mr Dixon gives evidence that Mr Williamson asked him for assistance in sourcing funding for the sponsorship. The result of that request was the agreement with Plutus Payroll. The emails with which Mr Dalby confronted Mr Dixon are consistent with that evidence.

70. SA’s real complaint, although not pleaded, appears to be that Mr Dixon became aware of the negotiations with Erebus and did nothing to alert Mr Dalby to them. But neither Mr Dixon nor FW owed Mr Dalby any such obligation. Under the terms of the Second Agreement, FW was engaged as a consultant to undertake certain tasks. Under cl 2.3 of that agreement, its obligation was to report to Mr Williamson, who at the time was the CEO, in relation to those tasks. It may be that the duty of utmost good faith imposed certain additional reporting obligations on FW where, for example, it became aware of a fraud committed by an employee, including Mr Williamson, on SA. But there is no such allegation in this case. It may be that the agreement with Erebus was imprudent, although without knowing more about the agreement, it is not possible to form a view on that question. However, negotiation of the sponsorship agreement with Erebus was not conduct in relation to the franchise and it is difficult to see how the duty of utmost good faith imposed some more general reporting obligation on FW in relation to the conduct of the rest of SA’s business. In any event, it was never put to Mr Dixon that he appreciated that the agreement was not in SA’s interest. It is not, therefore, open to SA to advance a case that FW breached its obligations by failing to tell someone besides Mr Williamson about the agreement for that reason.

Conduct in relation to Plutus Payroll and MusicOz

74. In their cross claim, the SA Parties allege that the work that Mr Dixon did for Plutus Payroll and MusicOz breached the Exclusivity Term.

75. I do not accept that submission. I am prepared to accept that at the meeting on 5 August 2015 Mr Dixon said something to the effect that he proposed to work fulltime on the consultancy with SA as a justification for the fees that FW proposed to charge. However, I do not accept that what he said conveyed the impression that he would do nothing else at all. Very clear words would be required to convey that impression. Nor do I think that what Mr Dixon said became a term of the agreement. The principal terms on which FW was to be engaged were reduced to writing and were the subject of negotiations in which SA was represented by lawyers. If the parties had intended to impose a contractual obligation on Mr Dixon not to engage in any other activities while working as a consultant (through FW) for SA, it is to be expected that the parties would have dealt with that issue in the agreement, which they did not. Clause 14 of the agreement specifically says that the document they signed contained the entire agreement between them. There is no reason not to give effect to that term in this context.

76. Even if the alleged term was a term of the agreement, in my opinion it was not breached. As I have said, in the absence of clear words, an agreement on the part of someone to work fulltime on a particular task cannot be understood as an agreement to do nothing else. In the present case, FW did some work in 2016 to raise sponsorship money from Plutus Payroll in respect of the Erebus sponsorship agreement. That work was consistent with its engagement as a consultant. Prior to the time the Second Agreement was signed, FW had referred work to Plutus Payroll and on occasions had been paid a commission for doing so. However, following signing of the Second Agreement, Mr Dixon’s evidence is that he wound down FW’s relationship with Plutus Payroll and brought it to an end. It is not entirely clear from the evidence when that happened. However, there is no reason not to accept Mr Dixon’s evidence that his involvement in referring work to Plutus Payroll came to an end and that his involvement with Plutus Payroll was minimal after the Second Agreement was signed.

77. The SA Parties point to several emails which they say suggest that Mr Dixon continued to do work for Plutus Payroll in 2016 and they submit that it is to be inferred that Mr Dixon continued to receive commission from Plutus Payroll during that time. However, although the relevant emails are not easy to follow, they appear to relate to Plutus Payroll’s involvement with the Erebus sponsorship. There is no evidence that FW actually continued to receive commission from Plutus Payroll. There is no suggestion that the work that Mr Dixon did do in connection with Plutus Payroll interfered with FW’s provision of services under the Second Agreement. In my opinion, those activities were not sufficient to involve a breach of any exclusivity obligation in the agreement.

78. As FW points out in its final written submissions, Mr Dixon was cross-examined extensively on the work that he did for MusicOz. He was also cross-examined extensively on his involvement with the terms on which SA obtained payroll services from Plutus Payroll. However, it is not pleaded that the work that Mr Dixon did for MusicOz was a breach of the exclusivity term. Nor is it pleaded that Mr Dixon’s introduction of the services of Plutus Payroll to SA involved a breach of some other term of the Second Agreement. Consequently, nothing turns on that cross-examination.

Breaches in relation to MV Solar

79. The SA Parties submit that FW breached its obligations in connection with the MV Solar agreement by negotiating the territory it did for that agreement and misleading Mr Dalby about the scope of the territory agreed with MV Solar. That contention is put in various ways. In particular, it is said to involve a breach of the Territories Term, the B2C Collateral Agreement, the Second B2C Collateral Agreement, the good faith term in both agreements, the Franchise Development Term, the Franchise Development Services Term and the MV Territory Representation.

80. It is difficult to see how the allegations in relation to the First Agreement could be made out or how they add anything to the allegations based on breaches of the Second Agreement. Although the Second Agreement did not specifically provide for termination of the First Agreement, the First Agreement had effectively been performed by the time the Second Agreement was entered into. Mr Dixon had designed and developed a franchise system that SA could offer to potential franchisees which formed the basis of the Second Agreement. To the extent that the First Agreement provided for the payment of additional fees in the event that FW signed up new installers or franchisees during the term of that agreement, those terms were superseded by the terms in the Second Agreement. It is not suggested that FW was entitled to be paid under both agreements for introducing franchisees.

81. Both agreements contain an obligation to act in good faith in the same terms. Consequently, it is difficult to see what the earlier term adds to the later one. In addition, it is impossible to see how the Territories Term can be implied from point 13 of Item 6 of the Schedule to the First Agreement, which simply identifies the scope of the work to be undertaken by FW. No argument was advanced to explain how the term was necessary to give business efficacy to the First Agreement. It is also difficult to see how the Franchise Development Term could have been breached in the way alleged. That term is simply pleaded as a term that Mr Dixon and FW would design and develop a licensee system to be implemented by SA. It is not alleged that the term required the relevant system to have any particular characteristics.

82. In any event, it is difficult to see what follows from breaches of the First Agreement. FW sues on the Second Agreement. It is not alleged and no argument is advanced that breaches of the First Agreement entitled the SA Parties to terminate the Second Agreement. Consequently, breaches of the First Agreement appear to go nowhere.

83. In my opinion, the B2C Collateral Agreement, the Second B2C Collateral Agreement and the representations that mirror them are not made out on the facts. I am not satisfied that there was a discussion either at the meeting on 28 July (or 5 August) 2015 or the meeting in October 2015 in which Mr Dalby said that if there was anything out of the ordinary in a franchise agreement Mr Dixon should run it past him or words to similar effect. The likelihood is that Mr Dalby and Ms Williams when giving evidence that Mr Dixon had been given those instructions have confused the earlier conversations with the conversation that occurred in June 2016 that was recorded by Mr Dalby and at which Mr Dixon agreed that all future franchise agreements would be signed by Mr Dalby.

84. At the time of the meetings on 28 July and 5 August 2015, neither Mr Dalby nor Ms Williams had seen a copy of the proposed franchise agreement. It is difficult to see why in those circumstances Mr Dalby would have asked to be informed of departures from it; and it is difficult to understand how he could have described what he wanted to be informed of except by reference to the expected terms of the agreement. At that stage, and at the time of the meeting in October 2015, Mr Dalby admits that he was not well and not focussed on the business. He therefore could have easily confused the earlier meetings with the later one. Ms Williams concedes that her recollection of the relevant conversations is vague. The Second Agreement provided that Mr Dixon would report to Mr Williamson, not Mr Dalby. It is to be expected that if Mr Dixon was to report to Mr Dalby on certain matters, the agreement would have said so. The person responsible for managing the business in Mr Dalby’s absence was Mr Williamson and, as might be expected, Mr Williamson signed the franchise agreements on behalf of the SA Parties. It would be natural in those circumstances for Mr Dalby to ask Mr Williamson, not Mr Dixon, to tell him of any terms he (Mr Williamson) considered to be unusual in the franchise agreements. It is also to be expected that if Mr Dalby had given some form of instruction about Mr Dixon reporting to him on unusual terms in the franchise agreements, he would have complained to Mr Dixon at the meeting in June 2016 that Mr Dixon had not followed those instructions. However, he did not do so.

85. The SA Parties submit that FW breached the obligation of utmost good faith in relation to the MV Solar franchise by failing to comply with Mr Dalby’s instructions that the franchise area should not extend any further east of Branxton and Mr Williamson’s email instruction that the franchise area should not include Maitland. There is also a suggestion that FW breached its obligation of utmost good faith by misleading Mr Dalby about the area covered by the franchise or by not giving Mr Dalby honest answers when asked about that issue.

86. There are, however, a number of difficulties with that submission.

87. The evidence is not sufficient to establish that Mr Dixon failed to comply with any instruction given to him by Mr Dalby or by Mr Williamson. The conversation between Mr Dixon and Mr Dalby on which the SA Parties rely is somewhat opaque. Even accepting that it occurred, what Mr Dalby asked Mr Dixon is whether he (Mr Dixon) had spoken to Mr Williamson about the area that should be covered by the franchise and had seen the area proposed by Mr Dalby. On his own evidence, Mr Dalby did not himself provide Mr Dixon with clear instructions on the territorial scope of the franchise. It would be natural in those circumstances for Mr Dixon to assume that Mr Williamson was in contact with Mr Dalby and that Mr Dixon should take his instructions from Mr Williamson, which is what the Second Agreement provided for and what Mr Dixon did. The agreement that was ultimately signed included Maitland in the scope of the “Territory” covered by the agreement. However, there is no reason to conclude that that was not ultimately in accordance with instructions that Mr Williamson had given Mr Dixon, given that the agreement was signed by Mr Williamson.

88. In any event, the MV Solar franchise agreement does not have the effect for which the SA Parties appear to contend. The SA Parties complain about the scope of the territory set out in item 22 of the Schedule to the franchise agreement, which includes an area east of Branxton, including Maitland (defined in the agreement as the “Territory”). However, the agreement did not set out an area in which MV Solar had an exclusive right to operate the franchise business. Rather, clause 3.2 of the agreement gave MV Solar an exclusive licence “to operate the Franchise Business for the supply and installation of Grid Connected PV Systems for first three (3) years of Term within the Territory”. “Franchise Business” is defined to mean the “provision of the Product & Services to Referred Clients for Grid Connected PV Systems”. “Referred Client” is defined in effect to mean a person other than an existing client of MV Solar who has been referred to MV Solar by the SA Parties. The result is that the provisions about which the SA Parties complain did not prevent SA from selling to customers in the Territory. They simply gave MV Solar an exclusive right to market to customers in the Territory that were referred to them, although it appears that neither Mr Dalby nor MV Solar appreciated that at the time.

89. Two points follow from this. The first is that the MV Solar franchise agreement did not prevent SA from selling in the Territory so that on any view it is difficult to see how Mr Dixon failed to comply with Mr Dalby’s instructions, assuming they were given. The second is that it seems apparent that Mr Dalby found Mr Dixon’s explanation of the scope of the territory covered by the agreement unsatisfactory because Mr Dixon was attempting to explain the true effect of the agreement, whereas Mr Dalby was faced with assertions by MV Solar that SA was operating in the territory given to it under the agreement.

90. It may be that Mr Dixon could have done a better job at explaining to Mr Dalby the true effect of the agreement. In the witness box Mr Dixon was inclined not to give direct answers to the questions asked of him and it may be that he adopted the same approach when answering questions asked by Mr Dalby. But even if that is the case, it is not sufficient to amount to a breach of the utmost good faith term. Mr Dixon negotiated a franchise agreement that did not place any restrictions on the area in which SA could operate. He provided copies of the draft agreement to Mr Williamson and had communications with him in relation to it. Ultimately, it was Mr Williamson who signed the agreement on behalf of the SA Parties. None of that involves a breach by FW of its obligation of utmost good faith.

91. No doubt one of Mr Dalby’s complaints is that he received complaints from MV Solar about the fact that SA was continuing to operate in MV Solar’s territory. However, those complaints appear to have been based on an incorrect reading of the franchise agreement by MV Solar. There is no suggestion that MV Solar’s misinterpretation arose from anything done or said by FW or Mr Dixon. Certainly, that was not put to Mr Dixon in cross-examination. Consequently, there is no basis for a case that FW breached its obligation of utmost good faith in that respect.

92. The SA Parties advance no reason for how it could be said that Mr Dixon’s conduct in relation to the MV Solar franchise could be a breach of the Franchise Development Services Term, assuming that there was such a term in the agreement. The Franchise Development Services Term is pleaded to be a term that Mr Dixon would undertake the works that were the subject of the Second Agreement. The term therefore adds nothing to the other terms of the agreement since it could only be breached if Mr Dixon (and therefore FW) failed to comply with some other term of the agreement.

93. For the reasons I have given, I am not satisfied that Mr Dixon made the MV Territory Representation or that it was false. Mr Dixon must have understood from the terms of the Second Agreement and from Mr Williamson’s position as CEO that he was to take his instructions from Mr Williamson. I do not accept that he was given some contrary instruction by Mr Dalby prior to the time that Mr Williamson left. To the extent that Mr Dalby said anything to Mr Dixon concerning the MV Solar Territory, the likelihood is that it was to the effect that Mr Dalby had been speaking to Mr Williamson about the territory and Mr Dixon should not agree to a territory beyond what he was told by Mr Williamson. For the reasons I have given, Mr Dixon did not breach those instructions.

Breaches in relation to Stralis

94. The SA Parties contend that the inclusion of special condition 29 in the Stralis franchise agreement involved breaches of the B2C Collateral Agreement, the Second B2C Collateral Agreement, the utmost good faith terms in both agreements, the Franchise Development Term and the Stralis Franchise Fee Representation although arguments are only advanced in favour of the B2C Collateral Agreements, the Approval Representations (although they are not pleaded in this context) and the utmost good faith terms.

95. I have already explained why I do not think that the SA Parties are entitled to rely on the pleaded breaches of the First Agreement in relation to the MV Solar franchise. The same conclusions apply equally in this context.

96. I have also explained why I do not accept that the B2C Collateral Agreement, the Second B2C Collateral Agreement and the Approval Representations were made in connection with the Second Agreement.

97. The only reason advanced for why FW breached the utmost good faith term in the Second Agreement in this context is that Mr Dixon did not inform Mr Dalby of special condition 29. But how that could be a breach of the obligation of utmost good faith is not explained. The position that the SA Parties appear to take is that Mr Dixon told Mr Dalby that the franchise fee under the agreement would be $100,000, from which it should be inferred that the agreement would not contain any term under which that fee might have to be refunded. I do not accept that submission. A statement that the proposed franchise fee was $100,000 without more is simply a statement concerning the level of fee payable under the agreement. Without more, it does not carry with it the implication that the fee will be paid come what may. It is simply a description of a term of the agreement.

98. The evidence is that Stralis had sold over 100 systems in the previous year. It was reasonable to infer that it would sell at least that number with the benefits of the franchise agreement. In that context, special condition 29 would not have seemed particularly noteworthy and was not a reason for thinking that there was little prospect of SAF actually receiving the franchise fee. Consequently, it is difficult to see why it should have been drawn to Mr Dalby’s attention in the context of what appears to be a casual discussion in which Mr Dalby asked Mr Dixon the amount of the fee that would be payable under the agreement, assuming the conversation occurred and assuming that special condition 29 was contemplated as a term of the franchise agreement at that time.

99. As I have said, the Second Agreement specifically imposed an obligation on Mr Dixon to report to Mr Williamson. Mr Williamson was clearly aware of special condition 29 since he signed the franchise agreement. The duty of utmost good faith cannot be interpreted as imposing some additional obligation on FW to report to Mr Dalby.

100. For the same reasons, the claim based on the Stralis Franchise Fee Representation must fail.

The case based on misleading and deceptive conduct

101. In their cross-claim, the SA Parties advance a case that FW engaged in misleading and deceptive conduct in contravention of s 18 of the Australian Consumer Law by making the Approval Representation, the Second Approval Representation and the MV Territory Representation in connection with the MV Solar franchise. They claim as damages the amount of $22,000 paid to FW in respect of that agreement together with a settlement amount of $75,000 paid to MV Solar in settlement of a claim made by MV Solar that the SA Parties had breached the franchise agreement by operating in the Territory (as defined in that agreement). Although not pleaded, the SA Parties also advanced a claim for damages based on the number of additional sales SA would have been able to make if the MV Solar franchise agreement had only given an exclusive right to MV Solar to market in the area that had been approved by Mr Dalby (that is, an area that was west of Branxton). In support of that claim, the SA Parties relied on an expert report prepared by Mr Gaudion, who is a chartered accountant. According to Mr Gaudion’s report, SA’s total loss on that basis is $455,015. I reserved the question whether that report should be admitted to be dealt with in my final judgment.

101. For the reasons I have given in relation to the contractual claim, none of the representations on which the SA Parties rely is made out. Consequently, it is not strictly necessary to consider the admissibility of Mr Gaudion’s report or SA’s claim for damages. However, I should say something about those issues.

102. For the reasons I have given, the claim for damages is based on a false premise – namely, that the MV Solar franchise agreement prohibited SA from selling systems in the Territory (as defined in the agreement). The evidence is insufficient to establish a connection between any settlement with MV Solar on the basis that the agreement did or arguably did have that effect and any breach of duty by FW.

103. There are a number of difficulties with the report of Mr Gaudion. But two seem to me to be fatal to its admissibility. First, Mr Gaudion makes assumptions about the number of additional systems SA could have sold if it had been entitled to continue to sell in the areas east of Branxton. However, he did not have the expertise to form an opinion on that question and there was no evidence that could form the basis of the assumption that he made on that question. Second, Mr Gaudion assumes that MV Solar would still have entered into the franchise agreement covering a smaller territory and consequently does not deduct from his calculations the income that the SA Parties would have earned under that franchise agreement. However, if the SA Parties had otherwise made out their case, there is no basis for that assumption.

Did the parties agree to terminate the Second Agreement?

105. The SA Parties contend that at the meeting on 15 September 2016 Mr Dixon agreed to terminate the Second Agreement on the basis that FW would not receive any compensation. That contention is based on the evidence given by Mr Dalby that Mr Dixon, after being confronted with the emails, agreed to “reverse my whole contract”. I do not accept Mr Dalby’s evidence in the unqualified form in which he gave it. According to Mr Dixon, he said that he would need to consider the deed and consult with his wife and obtain legal advice. That evidence is supported by the evidence given by Mr Collogan and I accept it. Mr Dixon’s wife is a shareholder in FW. It would have been natural for him to say that he wanted time to consider the deed and discuss it with his wife. The termination of the contract was a very serious matter and it is unlikely that Mr Dixon would have agreed to the termination without compensation before taking legal advice.

Did the SA Parties repudiate the Second Agreement?

106. Once it is accepted that the SA Parties were not entitled to terminate the Second Agreement and that the agreement was not terminated by agreement at the meeting on 15 September 2016, in my opinion, the SA Parties’ conduct was repudiatory. They made it clear that they were not going to continue to perform any part of the Second Agreement including making any further payments under the agreement. They sent FW a deed of settlement and release which made it clear that they intended to bring the agreement to an end. They terminated Mr Dixon’s access to its computing systems, which was essential for Mr Dixon to perform FW’s obligations under the agreement. Clamenz Lawyers, on behalf of FW, accepted that repudiation on 20 September 2016.

FW’s claim for damages

107. It is not disputed that FW is entitled to claim damages calculated by reference to the income FW would have earned if the Second Agreement had not been terminated. FW divides those damages into three heads of damage. First, there is the monthly retainer fee of $15,000 plus GST. Second, there is the fee of $20,000 plus GST for each new franchisee signed (FW makes no claim in respect of master franchises). Third, there is the royalty of 1 per cent of gross sales conducted through the franchisees.

108. In relation to the first head of damage, FW claims the monthly fee calculated from the date SA stopped paying that fee to the date that the Second Agreement expired – that is, 31 July 2020. At the time of termination, there were a further 47 monthly payments due of $16,500, making a total of $775,500. One of those payments was due on 15 September 2016, the date of termination. The other 46 payments were due in the future. FW accepts that the future payments must be discounted to their present value and submitted that an appropriate discount rate was 6 per cent. In its calculations it has discounted the value of the future payments back to the date of breach (15 September 2016). That approach and the discount rate appear to be reasonable. Although the SA Parties contended that a discount rate greater than 6 per cent should be applied, they did not offer any reasons for that submission.

109. FW also accepts that any costs incurred by FW must be deducted from the amount that it claims. It concedes that one of those costs was the incremental increase in the salary paid by FW to Mr Dixon following signing of the Second Agreement. The evidence suggests that the salary paid to Mr Dixon by FW before the Second Agreement was signed was $40,000. The salary paid to Mr Dixon after the Second Agreement was signed was $60,000 per annum. Consequently, the additional costs incurred by FW as a result of signing the Second Agreement were $20,000 per annum ($1,666.67 per month). FW did not have any other significant costs. As a result, FW submits that it is entitled to recover the sum of $16,500 that was due on 15 September 2016 together with 46 monthly instalments of $14,833.33 ($16,500.00 less $1,666.67) per month discounted at the rate of 6 per cent per annum. That appears to be a reasonable approach; and again SA advanced no reason for why it was not. On that basis, FW claims that it is entitled to $624,698 (that is, $608,198 plus $16,500). Again, the SA parties do not take issue with the calculations producing that figure. FW is also entitled to interest on the amount it claims at court rates from the date at which damages are calculated (15 September 2016) to the date of judgment. That comes to $48,007.61, making a total claim in respect of the first head of damage of $672,705.61.

110. In relation to the second head of damage, FW points to the principle derived from Armory v Delamirie (1722) 1 Stra 505; 93 ER 664. That principle was stated in these terms by Handley JA (with whom Mason P and Beazley JA agreed) in Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46 at 59:

[T]he Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party “whose actions have made an accurate determination so problematic” …

111. Applying that principle, FW submits that it is reasonable to infer that the SA Parties would have entered into another eight franchises as a result of introductions from FW during the term of the Second Agreement. It concedes that the assessment of this head of damage involves the assessment of the value of a lost chance. But it submits that a reasonable proxy for the value of that lost chance in this case is to assume that FW would have entered into a further eight franchises. In making that submission, it points to the fact that in the 13 month period the Second Agreement had been on foot, SA had signed three franchise agreements, other franchise agreements were in the process of being negotiated at the time the Second Agreement was terminated and the agreement had almost four years to run.

112. I do not accept that submission. It fails to take account of the fact that at the time the Second Agreement was terminated, Mr Dalby had lost all confidence in Mr Dixon. That fact, of course, did not relieve the SA Parties from their obligations under the Second Agreement. One of those obligations was to act in the utmost good faith. That obligation required the SA Parties to co-operate with FW to permit FW (and the SA Parties) to obtain the benefits of the agreement. However, it did not require the SA Parties to enter into franchise agreements that were imprudent or involved significant financial risk to the SA Parties.

113. Part of the reason Mr Dalby had lost confidence in Mr Dixon is that Mr Dalby thought that the terms of each franchise agreement that had been entered into were not satisfactory. The franchise agreement with Camlev involved SA providing financing to Camlev. Ultimately, that franchise was successful. But there was no certainty that that would be the case and in the meantime the SA Parties took a significant financial risk. The franchise agreement with MV Solar contained a term that unquestionably caused problems for the relationship between MV Solar and SA. That franchise agreement was terminated following termination of the Second Agreement. One reason, no doubt, was that Mr Dixon was no longer at SA to provide support. But the likelihood is that a further reason was the dispute in relation to the territorial scope of the franchise agreement. The franchise agreement with Stralis permitted it to terminate the agreement if it did not sell 100 systems in the first year of the agreement, in which event it was entitled to a refund of the franchise fee it paid. The result was that SA was obliged to pay FW the fee to which it was entitled in respect of that franchise and to incur costs in providing support to Stralis during the first year, but ran the risk that it would not be entitled to keep the franchise fee. In the events that happened, that risk came to fruition.

114. In my opinion, had Mr Dalby been the CEO at the relevant times, he would have been entitled to reject the special conditions in the Camlev and Stralis franchise agreements and to reject the terms of the MV Solar franchise agreement that became the source of difficulty. There is no reason to think that those agreements would have been signed in those circumstances. Consequently, the fact that the SA Parties had entered into three franchise agreements in the first 15 months or so of the term of the Second Agreement provides no guide to the likelihood that it would have been able to enter into further agreements in the future. There is no other evidence from which it could be inferred that it was realistic to expect the SA Parties to enter other franchise agreements. Had the Second Agreement continued, it is to be expected that Mr Dalby would have been reluctant to enter into further franchise agreements unless the SA Parties were contractually obliged to do so. I am not satisfied that they would have been.

115. It is true that the question is not how many franchises would have been signed but what was the value of the chance that further franchises would have been signed. That chance may have had value even if the prospect of further franchise agreements being signed was less than 50 per cent. Even so, in order to give the chance a value it is necessary to conclude that there was a real chance that further agreements would be signed. For the reasons I have given, I am not satisfied that there was.

116. In relation to the third head of damage, again applying the principle in Armory v Delamirie, FW submits that it is reasonable to value the expected royalty that FW would have received applying the formula:

Average monthly royalty X number of franchisees X average length of term

117. FW accepts that the amount calculated in accordance with this formula must be discounted to reflect its present value. However, it points out that sales were likely to increase over time with the result that the average monthly royalty would increase over time. Adopting a robust approach, it submits that it would be reasonable to assume that the discount to present value and the increase to reflect increases in sales would offset one another.

118. FW submits that the average monthly royalty at the time of termination of the Second Agreement was $1,100, that it was appropriate to assume that there would be 11 franchises and that the average length of the term of each franchise was 120 months. Applying the formula, it submits that its loss in respect of this head of damage is $1,452,000. It concedes that it is necessary to make an adjustment for the period during which the three franchise agreements that had been entered into had been on foot. It points out that the Camlev agreement had been on foot for 12 months, the Stralis agreement on foot for almost 6 months and the MV Solar Agreement on foot for almost 9 months. Therefore, it submits that it is appropriate to deduct 27 months’ fees (that is, 27 X $1,100 = $29,700), making a total claim of $1,422,300. To that it says must be added the royalty payable in August 2016 of $3,305, which had not been paid.

119. In principle, I accept the approach taken by FW. FW was entitled to be paid a royalty under the Second Agreement calculated by reference to the value of sales achieved by franchisees. Having regard to what has happened, the calculation of that amount necessarily involves a degree of estimation and guess work. The approach proposed by FW appears to be a reasonable way of estimating the royalty that FW would have received.

120. The rate of $1,100 is based on the royalty of $3,305 earned in respect of the three franchises for the month of August 2016. In my opinion, it would have been better to take an average of the past three or six months, but in principle it is reasonable to use the actual royalties paid or payable under the agreement as providing a basis for determining the royalties that would have been earned in the future and I am prepared to accept that a reasonable estimate of the royalty is $1,100 per month per franchise.

121. However, I do not accept the assumption concerning the number of franchises. I have already explained why I do not accept that there was a real possibility that the SA Parties would have entered into future franchise agreements. Stralis terminated its franchise agreement relying on special condition 29. The likelihood is that it would have done so whether or not the Second Agreement was terminated.

122. A dispute had arisen between MV Solar and SA concerning the area to which MV Solar had exclusive rights. That dispute may well have brought about the early termination of that franchise. In addition, given Mr Dalby’s opinion of Mr Dixon, it seems almost certain that the SA Parties would have terminated (or not extended) the Second Agreement at the earliest opportunity. The likelihood is that any franchise agreements on foot would have terminated shortly afterwards because SA was unable to provide the support the franchisees required. Taking those matters into account, in my opinion, a more appropriate assumption to make is that FW would have earned an average franchise fee of $1,100 in respect of one and a half franchises with an average term of 60 months. That is on the basis that the Camlev franchise would have continued for at least five years but there was a substantial risk that the Stralis and MV Solar franchises would have terminated when they did. On that basis, the amount that FW is entitled to recover in respect of this head of damage is $1,100 X 1.5 X 60, which comes to $99,000.

Conclusion and orders

123. On the conclusions I have reached, FW is entitled to damages and interest of $771,705.61 (that is, $672,705.61 plus $99,000). FW has been successful in relation to liability and has recovered substantial damages. In those circumstances, it appears that the appropriate order in relation to costs is that the SA Parties pay FW’s costs. However, before an order in those terms takes effect, I will give the parties an opportunity to make submissions on costs if they choose to.

124. On that basis the orders of the court are:

1. Judgment for the plaintiff in the sum of $771,611.11;

2. The cross-claim be dismissed;

3. Subject to order (4), the defendants pay the plaintiff’s costs of the proceedings;

4. If either party wishes to submit that some order in relation to costs other than order (3) should be made, they should notify my Associate and the other party of that fact within 14 days of the date of this judgment, in which event order (3) is of no effect and the court will hear submissions on costs at a time fixed with my Associate.

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Amendments

05 October 2021 - Fourth Cross Claimant added to coversheet

15 December 2021 - coversheet - corrected jurisdiction

Decision last updated: 15 December 2021