BSB Pty Ltd v Stan Meyer Pty Ltd
[2017] VCC 320
•30 March 2017
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION GENERAL CASES LIST | Revised |
Case No. CI-15-01391
| BUSINESS SERVICE BROKERS PTY LTD |
| (ACN 069 049 994) |
| Plaintiff |
| v |
| STAN MEYER PTY LTD & Ors |
| (ACN 102 353 140) |
| Defendants |
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JUDGE: | HER HONOUR JUDGE MARKS | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 12, 13, 14 October and 10 November 2016 | |
DATE OF JUDGMENT: | 30 March 2017 | |
CASE MAY BE CITED AS: | BSB Pty Ltd v Stan Meyer Pty Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2017] VCC 320 | |
REASONS FOR JUDGMENT
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Catchwords:
FRANCHISE AGREEMENT – Where franchise agreement provided for airtime commission to be paid to franchisee at prescribed percentage rate – Where rate was varied by franchisor to a range of percentage rates – Whether variation was a breach of the agreement – Meaning of “prescribe”.
UNCONSCIONABLE CONDUCT – Whether variation of airtime commission was unconscionable conduct by the franchisor under s20 to s22 of the Australian Consumer Law, Schedule 2 of the Competition and Consumer Act 2010 (‘ACL’) or the unwritten law.
PENALTY – Whether variation of airtime commission amounted to a penalty.
LACHES – Whether defendants’ delay in bringing counterclaim should bar the bringing of the counterclaim either at common law or under s236 ACL.
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APPEARANCES: | Counsel | Solicitors |
| For the plaintiff | Mr A Monichino QC with Mr T Jeffries | Telco7 Legal Pty Ltd |
| For the defendants | Mr L McGowan | PCL Lawyers Pty Ltd |
HER HONOUR:
1 The plaintiff (“BSB”) operated a franchise called “TeleChoice” which sold telecommunication services in the retail market, such as mobile service and internet plans offered by Optus and other telecommunication service providers. In the relevant period it had around 100 to 120 franchises around Australia.
2 The first defendant (“Stan Meyer”) is a small family company which owned the Mornington TeleChoice franchise from April 2006 until April 2011. This case principally concerns allegations by Stan Meyer that BSB did not pay it ‘airtime’ commission at the rate due under the franchise agreement, or that by purporting to vary the rate of commission BSB acted unconscionably towards, or imposed a penalty on, Stan Meyer.
3 The directors of Stan Meyer were a married couple, Ian Stanley and Christine Stanley, and their son Alex Stanley. By late 2005 Stan Meyer had been successfully operating a Michel’s Patisserie franchise in Karingal for some years. By late 2005 Stan Meyer had funds to invest and decided to further its business enterprises by purchasing another franchise. A successful TeleChoice franchisee, Emad Captain, who used to buy coffee in the Michel Patisserie franchise, encouraged Stan Meyer to become involved with TeleChoice.
4 Stan Meyer made enquiries about purchasing the Mornington TeleChoice franchise. BSB gave Stan Meyer a franchise disclosure document, which it acknowledged receiving on 22 February 2006. The disclosure document suggested that Stan Meyer obtain independent legal and accounting advice before entering into a franchise agreement. Stan Meyer obtained accounting, but not legal, advice.
5 On 21 April 2006, Stan Meyer entered into the franchise agreement with BSB for the Mornington TeleChoice franchise business. Stan Meyer’s directors guaranteed its obligations under that agreement.
6 The Stan Meyer Mornington TeleChoice franchise was managed, for most of its term, by Alex Stanley. He was 25 when the franchise term commenced. He was sometimes assisted at the store by his younger siblings. Christine Stanley assisted the bookkeeper to maintain Stan Meyer’s financial accounts. She had no involvement in the day-to-day running of the TeleChoice business. Ian Stanley had no involvement in the business.
7 Alex and Emad Captain entered a separate franchise agreement with BSB for TeleChoice Cranbourne, just a few weeks before Stan Meyer entered the franchise agreement for TeleChoice Mornington. For three years between April 2006 and April 2009, Alex was involved in running both the Mornington TeleChoice franchise business and the Cranbourne TeleChoice franchise business. He also worked at the Karingal Michel’s Patisserie business.
8 The Mornington TeleChoice franchise agreement had a five year term which expired on 30 April 2011. This was consistent with the term of a licence agreement entered by the parties in respect of the Mornington premises, pursuant to which Stan Meyer effectively sub-let the Mornington premises from BSB.
9 The franchise agreement provided for payment of monthly franchise fees by Stan Meyer to BSB.
10 As franchisor, BSB shared its intellectual property and goodwill. As franchisee, Stan Meyer agreed to operate the business under certain guidelines and restrictions. By the terms of the franchise agreement, BSB provided manuals relating to the conduct of the business to Stan Meyer. Stan Meyer was obliged to comply with the requirements in those manuals.
Airtime commission
11 Stan Meyer earned income as franchisee in a number of ways. It earned an upfront commission when it signed a new customer to a carrier. It earned money where it organised repairs on phones. A significant proportion of Stan Meyer’s income under the franchise agreement came from selling telephone plans with various telecommunication providers, for which it earned commission described as ‘airtime’ commission. That commission was based on a percentage of the value of aspects of customers’ bills, which it earned when it had signed those customers up to contracts with telecommunications providers. Airtime commissions were paid by the carrier (Optus or Virgin) to BSB, who on-paid a proportion of this commission to the franchisees. Counsel for Stan Meyer explained in opening, by way of example of how airtime commission was calculated, that if a customer was to purchase a plan with Optus, and then spend (say) $100 on a telephone bill in a month, Optus would pay BSB (say) 10% of that $100 ($10) and Stan Meyer would be entitled to $6 of that $10.
12 Clause 13(c) of the franchise agreement provides:
“In the event that the Franchisee’s percentage or portion of Airtime commission has not been otherwise prescribed by the Franchisor, the Franchisee’s Airtime commission shall be the percentage or portion of the Airtime commission as is specified in item 21(b) of the Schedule.” (emphasis added)
13 Item 21(b) of the schedule sets out:
“6% or such other rate as is advised to the Franchisee by the Franchisor in writing from time to time.” (emphasis added)
14 No airtime commission rate was ‘otherwise prescribed’ at the time of entry into the franchise agreement. Stan Meyer was paid airtime commission at a rate of 6% until January 2008.
Introduction of FTT system, and 2007 variation
15 In 1 July 2007, BSB amended the way in which airtime commission payable to franchisees was calculated by introducing the Fit to Trade (“FTT”) system which then governed the amount of airtime commission paid by BSB to its franchisees.
16 An email bulletin sent by BSB to all franchisees on 18 June 2007 attached an operations manual, and details of airtime commission structure, which provided for three tiers relevant to the payment of airtime commission:
· Tier 1: 6%
· Tier 2: 7.2%
· Tier 3: 8%
17 The manual described the FTT system as:
“[A] national points based bonus program. It is a program that measures the performance of franchised stores in several different categories such as sales, merchandising and operations. FTT is designed to assist franchisees improve performance year on year and in simple terms is a Rewards and Recognition program with the opportunity to increase earning potential.”
18 The franchisees were ranked according to how many total points they each received, and on the basis of those rankings were allocated into the tiers which determined the percentage of airtime commission they received.
19 In February 2008, BSB modified the FTT system, advising the franchisees by an email bulletin. The modification adjusted the rates of airtime commission for the three tiers as follows:
· Tier 1: 3.5%
· Tier 2: 4.2%
· Tier 3: 4.67%
20 The airtime commission percentage applied is not directly comparable after February 2008 to that prior to February 2008. Evidence was given that the rate after February was applied to the total of customer bills, without excluding any amounts. Prior to February 2008 there had been carve outs of some items on those bills before the airtime commission rate was applied. The effect of that is that a franchisee could have received the same amount, in dollar terms referrable to its airtime commission on a customer’s bill, on the basis of a lower percentage rate after February 2008, as it would have received beforehand on the basis of a higher percentage rate.[1]
[1]An email bulletin sent by BSB to franchisees, on or about 26 February 2008, stated: “All stores were being paid 6%… of the Optus Commissionable Airtime since December 2005. This figure was calculated from a number of formulas and factors which impacted on the “Commissionable Airtime” and airtime was only being paid once factors were reached and customers [sic] minimum spend was reached on certain rate plans. The new method for calculating Airtime was introduced in a step phase from 1 April, 2007. This method removes most formulas and all factors and calculates “Commissionable Airtime” from total customer spend, enabling stores to accumulate airtime from customers from the moment they build on their account.”
21 On 7 April 2008, the FTT system was further modified with the introduction of six tiers (instead of three) by an FTT operations manual for 2008/2009 and an FTT airtime structure for 2008/2009:
· Tier 1: 2.5%
· Tier 2: 3.5%
· Tier 3: 4.2%
· Tier 4: 4.7%
· Tier 5: 5.2%
· Tier 6: 5.5%
2009/10 variation
22 On 1 April 2009, BSB circulated an updated manual for 2009/2010, which outlined that the tiers for the calculation of airtime commission rates payable under the FTT system remained the same as in the previous year. However, the updated manual for 2009/2010 included a rule that franchisees who remained on Tier 1 for four consecutive months would receive zero airtime commission (Rule 9).
23 From 14 January 2010, the FTT airtime structure was modified to increase the rate of the top two tiers. Tier 5 was increased from 5.2% to 5.5%. Tier 6 was increased from 5.5% to 6%.
FTT system
24 BSB sent monthly trading accounts to all franchisees. They included details of their points earned under the FTT system, and where then ranked against other franchisees in terms of their performance. Stan Meyer received monthly accounts recording income earned by Stan Meyer (including airtime and upfront commissions), expenses (including rent and hardware purchases) paid by BSB on behalf of Stan Meyer, and a net amount that was either payable by, or to, Stan Meyer.
25 The monthly trading accounts were accompanied by supporting documents which identified the amount and, usually, the rate of the airtime commission paid by BSB to Stan Meyer. (Only some of the monthly accounts over this period were in evidence. This was in part due to BSB’s inability to retrieve all documents due to the time that elapsed between the relevant events and the bringing of the counterclaim; and in part due to Stan Meyer also not producing all the accounts it had received. I infer that those which were in evidence are indicative of the overall pattern).
26 Evidence was given on behalf of BSB that the FTT system was introduced by BSB for the purpose of incentivising franchisees and improving standards and creating uniformity across the TeleChoice business.
27 Under the FTT system points were awarded in various categories covering the following aspects:
(a) Meeting sales targets;
(b)Compliance with trading account terms (i.e. being up to date in paying BSB amounts due to it);
(c) Business planning;
(d) Presentation of stores;
(e) Administration; and
(f) Attendance at state and national meetings.
28 Each category was awarded a number of overall points, with each category also being broken down into smaller subcategories to which points were allocated. The points available for compliance with trading account terms were about 10-15% of the available points. If a franchisee paid its trading account with BSB in time it would have 1000 points allocated. This was out of a total of 6300 points. There were 11 state meetings per year and the franchisee could earn 500 points for attending each. Attendance at the national meeting amounted to 2500 points. Trading events fell under the category of state meetings. 800 points were awarded for store audits which included checking for things like stock levels, staff availability, that staff had name badges, the shop was clean, and that key questions about the franchise could be answered. Points were also awarded for reaching sales targets, set after consultation between BSB and the franchisees, depending on the size of their stores and past sales results.
29 Throughout the course of the franchise, Stan Meyer was provided by BSB with information about Stan Meyer’s performance as a franchisee and how it could improve its business. In particular, David Tropea, the state manager for BSB communicated regularly with Alex, including several meetings a month, telephone conversations, and emails. Further information about improving the franchise business was provided by information given at BSB state meetings (most of which Alex attended), and BSB national meetings (at least two of which Alex attended).
Stan Meyer’s commission
30 Stan Meyer received airtime commission at the initial rate of 6% for nearly two years.
31 Between April 2008 and March 2009 Stan Meyer was on Tier 1, and received airtime commission of 2.5%. This was a significant reduction to the rate of commission it had been receiving previously, even allowing for the fact that commission rates before and after February 2008 are not directly comparable.[2]
[2]See paragraph 20 of this judgment.
32 In April 2009, Stan Meyer received 3.5% airtime commission. In May 2009 it received 4.2% airtime commission. From June through to November 2009 it received 4.7% airtime commission.
33 From April to June 2010, Stan Meyer was on Tier 1, receiving 2.5% airtime commission.
34 In mid-2010, Stan Meyer appointed a store manager to the Mornington franchise. Alex stopped working at the franchise and become a labourer.
35 From August 2010, Stan Meyer was demoted to zero airtime commission by reason of the triggering of Rule 9.
36 Stan Meyer’s debt on its monthly trading account grew from about $64,000 in August 2010 to about $131,000 in April 2011.
37 On 4 February 2011, BSB sent a letter to Stan Meyer outlining breaches of the franchise agreement, in particular failure to make payments of amounts due. It sought payment of the full amount due by Stan Meyer to BSB.
38 On 11 February 2011, Alex sent an email to BSB saying that he would like to start an exit strategy or move on.
39 On 30 April 2011, at the time of termination of the franchise agreement, $131,402.20 was due and payable by Stan Meyer to BSB pursuant to its monthly trading account.
40 On about 1 May 2011 Stan Meyer handed over possession of the Mornington premise to BSB. BSB then operated a TeleChoice business from the Mornington premises.
41 Between October 2011 and November 2013, Stan Meyer paid a total of about $93,000 to BSB in reduction of its trading account debt.
Proceedings
42On 30 October 2014, BSB commenced Magistrates’ Court proceedings to recover remaining outstanding franchise fees of $29,388.29 plus interest and costs from Stan Meyer and its guarantors (the second to fourth defendants). By close of the trial before me, it was agreed that (subject to the counterclaim which is also raised by way of set-off) BSB is owed $25,380.29 plus interest. There was an issue as to how much interest was due.
43 On 21 November 2014 Stan Meyer brought its counterclaim, first raising a complaint that airtime commission was not paid to it at the rate of 6%. The trial was principally concerned with the counterclaim.
ISSUES
44The issues in this case are:[3]
[3]There were initially additional issues which were not pursued by close of trial.
(A)Were the notices given by BSB to Stan Meyer about the variations in the airtime commission rate effective to change the airtime commission rate payable in accordance with the franchise agreement?
(B)Was BSB’s conduct in breach of implied terms of the agreement that it would act in good faith, or that it had a duty to co-operate?
(C)Was it unconscionable conduct for BSB to reduce the rate of the airtime commission?
(D)Was it a penalty for BSB to reduce the rate of the airtime commission?
(E)Does Stan Meyer’s claim amount to a claim in unjust enrichment?
(F)Does Stan Meyer’s delay in complaining about the reduced rates of airtime commission until 2014 mean it should not be able to claim now?
(G)What is the proper assessment of damages suffered by Stan Meyer?
(H)Was the franchise disclosure document provided by BSB prior to Stan Meyer entering the franchise agreement current? If not, should the Court make a declaration to that effect?
(I)What amount is BSB entitled to on its claim?
Witnesses
45 BSB called two witnesses. The Chief Operating Officer of BSB, Lilian Seifin, explained the process by which commissions were payable to franchisees. The state manager of BSB, David Tropea, also gave evidence. He was not responsible for the introduction of the FTT system, but was involved in overseeing and implementing it and the allocation of points to franchisees. He explained the process by which franchisees earned points, and gave evidence of his regular meetings with Alex Stanley, in the course of the franchise term, and of BSB’s endeavours to assist Stan Meyer improve its TeleChoice business performance. He was responsible for allocating points in the FTT system based on monthly state meeting attendance, store audits and business plans.
46 Stan Meyer called two witnesses. Christine Stanley said that to fund the franchise business Stan Meyer borrowed money, and that it supported the franchise business in part by income earned from Stan Meyer’s Michel’s Patisserie business. She said that her son Alex was the one principally running the business. She said, “This was Alex’s business and he did not want his mother looking over his shoulder.” She assisted Stan Meyer’s bookkeeper in keeping the accounts for Stan Meyer including for its Michel’s Patisserie business. Although she was a director of Stan Meyer, she was not involved in the running of the business and could not give direct evidence about most of the relevant events. She gave evidence of discussions she had or “would have had” with Alex about aspects of the business. Stan Meyer also called Peter Bruce Wilkinson, accountant, as an expert witness with a view to establishing loss caused by Stan Meyer by the changes in airtime commission paid to it.
47 The key witness who could have been called for Stan Meyer was Alex Stanley. He was the manager of the Mornington TeleChoice business responsible for its day-to-day running over the course of the franchise term. It is reasonable to expect that Alex could have given evidence regarding the notifications of airtime commission rates sent to Stan Meyer, the performance of the franchise, and the reasons the franchise was struggling. Although he was in Court during part of the trial, he was not called to give evidence.
A. NOTICES EFFECTIVE TO VARY THE RATE OF AIRTIME COMMISSION
48 Stan Meyer contends that BSB did not give it the necessary notice in writing (as required by clause 13(c) and item 21(b) of the schedule of the franchise agreement) of the variations to the airtime commission. Accordingly, it says that BSB has breached the franchise agreement by failing to continue to pay the airtime commission at 6% for the balance of the franchise agreement.
49 It contends that under clause 13(c) it was necessary for any change of commission rate from the initial 6% set out in item 21 of the schedule to the agreement to be “prescribed”. It said this needed to be done in writing, in advance of there being any change to the commission rate. It says that notification of a range of commission rates in accordance with the FTT system did not in any event amount to prescribing a rate, and that the commercial purpose of certainty of the franchise agreement required a specific rate be set.
50 Initially, Stan Meyer submitted that notification under clause 13(c) had to be given to Stan Meyer personally, and not by way of notification to other franchisees in the same correspondence. In closing, Counsel for Stan Meyer conceded that notification could be given by way of a general email to all franchisees including Stan Meyer. There was evidence this had occurred on numerous occasions. BSB gave evidence of the sending of those emails. Christine Stanley gave evidence that from her discussions with him she knew that Alex was aware of the introduction of the FTT system and of the proposed changes to the rates. Alex Stanley did not give evidence, although he was available to do so. In the circumstances, I accept BSB’s evidence that the emails were sent.
51 BSB said that it complied with the requirements of the franchise agreement in notifying franchisees of proposed changes to the commission rate. It referred to the bulletins sent to all franchisees which announced the change to the ranges of commission rate that would be applied in connection with the FTT system. It also referred to the monthly emails to all franchisees, indicating how they had fared in the tier system, and, for each of them, what percentage of commission they would therefore be earning, in accordance with the FTT system. It also relied on the invoices sent to Stan Meyer advising it of its specific commission rate. On some occasions the monthly statements behind an email sent by BSB would also note the commission rate, but not on every occasion. BSB says that those notifications amounted to advice in writing of the new rates, as required by item 21 of the schedule to the franchise agreement. Alternatively, it amounted to BSB otherwise prescribing a new rate in accordance with clause 13(c) of the franchise agreement.
52 To resolve this question it is necessary to construe the terms of the relevant provisions of the franchise agreement.
53 The legal principles applicable to the construction of commercial contracts are well-established. They were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited:[4]
[4](2015) 256 CLR 104. See also Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35]; and Impact Funds Management Pty Ltd (as Trustee for IIG 401 Collins Trust) v Roy Morgan Research Ltd [2016] VSC 221 at [25].
“[46] The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
[47] In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
[48] Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
[49] However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”.It may be necessary in determining the proper construction where there is a constructional choice…
[50] Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
[51] Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties … intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.
54 The clauses which require construction are:
“In the event that the Franchisee’s percentage or portion of Airtime commission has not been otherwise prescribed by the Franchisor, the Franchisee’s Airtime commission shall be the percentage or portion of the Airtime commission as is specified in item 21(b) of the Schedule.” (emphasis added) [Clause 13(c)]
“6% or such other rate as is advised to the Franchisee by the Franchisor in writing from time to time.” (emphasis added) [Item 21(b), schedule]
55 The Oxford English Dictionary defines the meaning of “advise” as “to give notice or intimation, to instruct, to inform, to appraise (a person)”.
56 “Prescribe” is defined in the same dictionary as to “lay down authoritatively” or “advise use of”. “Prescribed” is defined in the Macquarie Dictionary, 5th edition, as “[t]o lay down, in writing or otherwise, as a rule or a course to be followed; appoint, ordain, or enjoin. … [t]o lay down rules, direct or dictate”.
57 The Encyclopaedic Australian Legal Dictionary defines “prescribed amount” as:
“A phrase employed in legislation, a contract, or other legal document, typically referring to a number, quantity, or sum of a commodity, often money, which is defined elsewhere in the same or in another specified Act or document, or which is to be ascertained or calculated by reference to a formula set out elsewhere in the same or in another specified Act or document: (Cth) Safety Rehabilitation and Compensation Act 1988 s 96A; R v Hurle; Ex parte Anderson [1991] 2 Qd R 682; R v Castle and Hughes; Ex parte Hansen [1990] 1 Qd R 560.”
58 Elsewhere in the franchise agreement, the phrase “prescribe or specify” is used.
59 The franchise agreement had a formal notice provision. Clause 33 provided that where the agreement required notice to be given, a party or party’s solicitor must either personally serve it on the other party or post or fax the notice to the other party.
60 I infer that the parties intended formality in terms of how notice was to be given in some circumstances and did away with formality where other words such as “advise” were used. I find that the word “advise” is used in the franchise agreement when information is required to be passed from the franchisor to the franchisee but where there is no formality about how that information is passed on.
61 The scheme of provisions of clause 13(c) and item 21 of the schedule to the franchise agreement gave BSB the power to change the rate of airtime commission it paid franchisees, provided that the franchisees were advised of the relevant rates to be applied. This was a significant right for BSB, because airtime commission was an important source of income for franchisees. The right to change the commission was unilateral. There was no dispute resolution process set up in the event that a franchisee did not like the change. The notice requirement was to make the franchisees aware of such changes.
62 Stan Meyer submitted that the reason that formal notice was required by clause 13(c) was to give Stan Meyer the opportunity to arrange its financial affairs differently based on different commission rates, make changes to staffing rates or operation times, or to complain to BSB about the proposed changes. In fact, Stan Meyer had the ability to do all of these things on receiving the notifications it was given by BSB. I am satisfied that Stan Meyer was notified of the changes to airtime commissions, and of the range of commission available, in advance of them being applied, in the bulletins sent to franchisees. It was advised of the amount that it was receiving each month in the monthly invoices it received, which often stated the rate of airtime commission applied. The terms of the contract ensured that payment of airtime commission be made to franchisees within five days of BSB receiving the commission from the telecommunications provider (see clause 13(a)). While the advice of the specific rate applicable each month (as opposed to the range that could be applied) could be retrospective in relation to that month’s payment, it was provided by the time the commission was paid to the franchisee.
63 The Court is obliged to construe the franchise agreement in order to give it commercial efficacy. Commercially, notification of changes to the commission rate allowed for airtime commission needs to be given to Stan Meyer. It was given. In my view, the process suggested by Stan Meyer as to how prescription should occur is not required by the terms of the franchise agreement.
64 I find that the notifications that were given amounted to both prescribing new commission rates in compliance with clause 13 of the franchise agreement, and advising of the new rates under item 21 of the schedule to the franchise agreement. This construction accords with business common sense and commercial reality. There was nothing to be gained commercially, by requiring that some more formal sort of notification be provided to the franchisees.
65 Counsel for Stan Meyer said that the importance of airtime commission as income for Stan Meyer should be taken into account in construing the agreement. However, its importance does not alter the fact that what was required commercially was for Stan Meyer to know the commission rate it was receiving each month. The form of that notification does not alter the fact of it.
66 There is nothing in the wording of those clauses limiting the way the rate of commission could be calculated. To the extent that the commercial objective of the clauses was to let franchisees know what rates they would earn, they knew they could rely on getting the lowest rate in the range in any event, and could work towards earning more. Each month, with the invoices being provided, they knew what they were in fact paid by BSB in terms of airtime commission. In any event, what was done by BSB would have been to the same effect if only the lowest of the rates set out in the FTT systems was advised or prescribed with each change – and franchisees were then told they could earn higher airtime commission by earning higher points in the FTT system. There was always a base rate of commission which ranged from 6% initially to 2.5% in April 2008 for most of the period. When BSB introduced Rule 9 (zero per cent commission rate for those franchisees on Tier 1 for four consecutive months), franchisees were notified of the fact that this rate could apply to them for particular months going forward depending on their performance under the FTT system.
67 Stan Meyer referred to the contra proferentum maxim, saying that it assists Stan Meyer in the interpretation of the relevant provisions if there is ambiguity. However, Stan Meyer did not argue the relevant provisions were ambiguous. It is a maxim of last resort, as stated by Kirby J in McCann v Switzerland Insurance Australia Ltd:[5]
[5](2000) 203 CLR 579.
“Courts now generally regard the contra proferentum rule (as it is called) as one of last resort because it is widely accepted that it is preferable that judges should struggle with the words actually used as applied to the unique circumstances of the case and reach their own conclusions by reference to the logic of the matter, rather than by using mechanical formulae.”[6]
[6]Ibid 602.
68 I do not find the maxim of assistance here. The meaning of the words to be given to the relevant provisions is clear enough.
B. BREACH OF IMPLIED TERMS
69 Stan Meyer pleaded that by its actions in varying the airtime commission rate payable, BSB breached an implied term of the agreement to act in good faith. The allegation that BSB did not act in good faith was also pleaded in the context of the claim that its conduct was unconscionable. For the reasons discussed below,[7] I find that BSB did not breach the implied term of the agreement to act in good faith.
[7]See paragraphs [74] to [112] of this judgment.
70 Stan Meyer also pleaded that by its actions in varying the airtime commission rate payable, BSB breached a term of the agreement being an implied duty of co-operation. Limited argument was advanced by Stan Meyer as to the content of this duty and its relevance to the facts of this case. Counsel for Stan Meyer argued that the duty of co-operation is to allow each party to have the benefit of the contract, and if the airtime commission is being reduced to such a level as to effectively put the other party out of business, that duty of co-operation has independently been breached.
71 As stated by Mason J in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd,[8] quoting Griffith CJ in Butt v M’Donald:[9]
[8](1979) 144 CLR 596 at 607.
[9](1896) 7 QLJ 68 at [70] – [71] (Griffith CJ).
“It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.”
72 However, the duty to co-operate “is not a mechanism for alleviating the consequences of hard, even harsh or unconscionable, contractual provisions. The duty of cooperation does not extend to being nice or even reasonable to the other party.”[10] It is “a duty to afford the other party the benefit of what he has contracted for; not a duty to act generally in the other party’s best interests”.[11]
[10]Council of the City of Sydney v Goldspar Australia Pty Ltd (2006) 230 ALR 437 at [162] (Gyles J).
[11]Beerens v Bluescope Distribution Pty Ltd (2012) 39 VR 1 at [54] (Nettle JA).
73 The airtime commission was not reduced to such a level as to effectively put Stan Meyer out of business. Stan Meyer was not deprived of the benefit of what it contracted for in the sense contemplated by this duty. I find that BSB did not breach its duty of co-operation in varying the rate of the airtime commission.
C.UNCONSCIONABLE CONDUCT
74 Stan Meyer submits that the conduct of BSB in introducing the FTT system and reducing and varying airtime commission rates amounted to unconscionable conduct pursuant to ss20 to 22 of the Australian Consumer Law, Schedule 2 of the Competition and Consumer Act 2010 (“ACL”), or alternatively in the meaning of the unwritten law. Counsel for Stan Meyer said that the unconscionability arose from the second year of the FTT system.
75 In relying on ss20 to 22 of the ACL, Stan Meyer indicated that it incorporated the corresponding Trade Practices Act (“TPA”) provisions which preceded it by reference. The conduct Stan Meyer complains of took place from February 2008 to April 2011. The ACL came into operation on 1 January 2011. Only a few months of the conduct would therefore attract the operation of ACL. The TPA was the precursor to the ACL. Sections 51AA, 51AB and 51AC of the TPA were materially identical to ss20, 21, and 22 of the ACL over the relevant period from February 2008 to January 2011. Accordingly, where I refer to the tests under ss20 to 22 of the ACL, this encompasses the materially identical provisions of the TPA for the period prior to 1 January 2011.
76 Section 20 of the ACL provides:
“(1) a person must not, in trade or commerce, engage in conduct that is unconscionable, within the meaning of the unwritten law from time to time.
(2) This section does not apply to conduct that is prohibited by section 21 or 22.”
77 Section 21(5) of the ACL provides that section 21 only applies in connection with goods or services of a kind “ordinarily acquired for personal, domestic or household use or consumption”. It is not relevant to the supply of franchise services.
78 Section 22 provides:
“(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to another person (other than a listed supply company); or
(b) the acquisition or possible acquisition of goods or services from another person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.”
79 To assist in the determination of what may constitute unconscionable conduct in a given case, a non-exhaustive list of matters that the court may take into account in applying s22 is set out in s22(3). In deciding if there is unconscionable conduct the court is aided, but not controlled, by a consideration of these illustrative factors.
80 In the joint statement of issues handed up by Counsel, the question was raised as to whether or not the conduct of BSB in introducing the FTT system and reducing the commission amounted to unconscionable conduct. The arguments that were put by Stan Meyer concentrated on the allegation that BSB exercising its power to reduce the airtime commission rate as it did amounted to unconscionable conduct.
81 Stan Meyer submits that it was in a position of special disadvantage compared to BSB, in that it had “situational disadvantage arising out of the legal and commercial circumstances or derived from particular features of a relationship between actors in the transaction”. In particular, it pleaded that Stan Meyer was in a position of special disadvantage vis-à-vis BSB, arising out of BSB having a relatively strong bargaining position, the economic and power disparity between the two companies, and the form of the franchise agreement.
82 Stan Meyer referred to ACCC v Samton Holdings Pty Ltd & Ors.[12] There the Court held that the reference in section 51AA of the TPA to unconscionable conduct “within the meaning of the unwritten law from time to time” of the States and Territories is to reference the common law of Australia which defines the cases in which conduct, which shows no regard for conscience, or is irreconcilable with what is right or reasonable, attracts equitable relief.
[12][2002] FCA 62.
83 Section 22 of the ACL makes no direct reference to the unwritten law concerning unconscionability in the same way that s20 does. As the section requires consideration of what may or may not be unconscionable conduct, questions as to what amounts to unconscionable conduct at common law naturally arise. This in turn requires consideration of equitable principles at common law.
84 ACCC v Samton, like other authorities that have followed it, makes it clear that a finding of unconscionability requires identification of conduct which supports the grant of relief on principles set out in specific equitable doctrines, rather than unconscionable conduct at large. The section itself does not expand or in any way directly affect the unwritten law relating to unconscionable conduct. The case makes clear that the categories of special disadvantage are open, and may extend to situational disadvantage arising from a particular set of circumstances as well as constitutional disadvantages engendered by such disabilities as illiteracy or lack of education, illness or infirmity. However, characterisation of disadvantage as “special” involves the recognition that it would be unconscionable knowingly to deal with the person so affected without regard to his or her disability. It also makes clear that there must be something more than commercial vulnerability (however extreme) to elevate disadvantage into special disadvantage.
85 Stan Meyer argues that in considering whether BSB acted unconscionably, the fact that BSB had a relatively strong bargaining power compared to Stan Meyer, and that there was an economic and power disparity, should be taken into account.
86 It also alleges that BSB did not act in good faith. This is one of the factors to be taken into account in considering if behaviour was unconscionable under s22 of the ACL. (Stan Meyer also separately pleaded that it was an implied term of the franchise agreement that BSB act in good faith.)
87 Stan Meyer referred to the fact that that airtime commission was a trailing commission on telecommunications contracts which Stan Meyer had negotiated with customers over time. The amount of overall commission payable grew each month as more agreements were entered into and commission continued to be earned on earlier agreements. Airtime commission continued to be paid to BSB by the telecommunications providers until the customers’ contracts finished. Stan Meyer continued to be entitled to have airtime commission passed on to it by BSB at the relevant rate set out in the franchise agreement until the end of the franchise term. Stan Meyer submitted that any airtime commission not passed on to the franchisees during the franchise term was kept by BSB. It said that each month during which Stan Meyer received less than the 6% airtime commission initially agreed, BSB kept the balance.
88 Stan Meyer submitted that when Stan Meyer, over time, did not pay its trading account with BSB on time each month, this caused it to be on lower tiers under the FTT system, and hence to earn a lower percentage of commission. It said that this led to it receiving even lower (and finally zero) commission, which sent it into a ‘death spiral’ and finally meant that the franchise was worthless. It submitted that the FTT system was highly weighted towards franchisees being financial, meaning that they were punished by receiving lower commission rates if they were in default on their trading accounts.
89 Counsel for Stan Meyer conceded that under the franchise agreement BSB could have varied the commission down from 6% to a lower percentage without acting unconscionably. The question then became: by how much? He had difficulty enunciating how far BSB could have reduced it. He finally submitted that BSB could have reduced it by between 10% and 20%. A reduction of 20% from the 6% initial rate would amount to a rate of 4.8%. Counsel for Stan Meyer argued that varying the rate below that was unconscionable conduct. He submitted that it was up to the Court to determine the level below which varying the rate amounted to unconscionable conduct. In view of the fact that the commission rates before and after February 2008 are not directly comparable (as the post-February 2008 rates were applied to the total customer bills unlike pre-February 2008 rates[13]), I note that a rate of 4.8% on a pre-February 2008 basis might well equate to a lower than 4.8% commission rate in post-February 2008 basis. No evidence was given which would enable the Court to state how much lower.
[13]See paragraph 20 above.
90 I accept that BSB was in a position of relative strength compared to its franchisee Stan Meyer. I accept that there was an economic and power disparity and that the economic disparity at least became greater as Stan Meyer’s economic position diminished. However, of itself that does not attract an unconscionability finding. More is required. If the party in the stronger position used that strength and disparity to take advantage of the party in the weaker position it could be unconscionable. It is the manner of exercise of the disparity in power that is relevant.[14]
[14]See Australian Competition and Consumer Commission v Harrison [2016] FCA 1543 at [108].
91 Stan Meyer was an experienced franchisee. It had been running a franchise business of a different nature for some years before entering the franchise agreement with BSB. BSB did not put pressure on it at that time to enter into the agreement, or take advantage of some inequality of bargaining power that Stan Meyer laboured under. Stan Meyer freely entered the agreement. It was advised to seek legal and accounting advice, and chose to seek accounting advice only. Stan Meyer understood that the airtime commission rate could be varied under the agreement from the outset, according to the evidence of Christine Stanley.
92 Later when BSB introduced the FTT system and commenced varying the commission rate payable, it did not take advantage of its stronger economic or power status to force Stan Meyer to go ahead with the changes. BSB did not refuse to negotiate, or use ‘take it or leave it behaviour’ or withdraw services or threaten to do so, if Stan Meyer did not accept the changes. Stan Meyer acquiesced in all the changes without ever asking BSB not to proceed with any of the changes. Despite the regular discussions and meetings that Alex Stanley had with David Tropea of BSB about the franchise, there is no evidence of any complaint being raised by Stan Meyer.
93 The fact that the franchise agreement gave BSB the power to vary the rates unilaterally does not of course amount, without more, to unconscionability. There is no evidence of BSB misusing its power or taking advantage of its stronger bargaining power in order to have Stan Meyer agree to the inclusion of this term in the agreement. It is then a question of how BSB exercised that power in the course of the franchise term.
94 An unconscionable conduct allegation confronts difficulties when the conduct said to be unconscionable is specifically contemplated and permitted by the terms of the contract. Of course, sometimes something done pursuant to the strict contractual right of the party is nonetheless unconscionable. For example, in Olex Focas v Skodaexport[15] a party called on the full amount of a guarantee, which it was technically allowed to do under the contractual provisions. However, it did this when most of the money that was guaranteed had already been repaid. It was seeking double payment of the money which had already been repaid. As held by Batt J, this was “quite without conscience”.[16]
[15][1998] 3 VR 380.
[16]Although this case was decided in relation to s51AA of the TPA (the equivalent of s20 of the ACL) and not s51AC, the point is as applicable in relation to s22 of the ACL.
95 BSB conceded that there is an implied duty of good faith in all franchise agreements.[17] The duty of good faith required it to exercise its power to amend the airtime commission for a proper or legitimate purpose and not capriciously. It needed to ensure that it had regard to the legitimate interests of Stan Meyer in the enjoyment of the fruits of the franchise agreement, as set out by the terms of the contract.[18] Senior Counsel for BSB said that the power to reduce the commission rate could not be used to the extent of reducing the rate down to (say) 0.5% without some good commercial reason. However, its duty did not require BSB to prefer the interests of Stan Meyer ahead of its own legitimate commercial interests.[19]
[17] Bamco Villa Pty Ltd v Montedeen Pty Ltd; Delta Car Rentals Aust Pty Ltd v Bamco Villa Pty Ltd [2001] VSC 192; Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310 at [42]; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 at 191-3; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349, at 368-9 (Sheller JA); Garry Rogers Motors (Aust) Pty Ltd v Subaru Aust Pty Ltd (1999) ATPR 41-703 at [37].
[18][2002] NSWSC 17 at [67].
[19]Ibid.
96 BSB said that the variations that were introduced were not unconscionable because BSB had good commercial reasons for what it did. It brought the FTT system into existence in order to encourage all the franchisees to keep their franchises at a certain standard, sell as many phones and phone plans as they could, pay their bills on time, attend franchise meetings that would help them understand what was going on within the franchise and so forth. It was an incentivisation system.
97 A significant proportion of the FTT system was designed to ensure uniformity, and a basic set of standards across franchisees. As explained by David Tropea:
“The purpose of the FTT program was to create uniformity across all our TeleChoice sites, it would ensure that any customer that went to TeleChoice Mornington would get the same service at TeleChoice Frankston or TeleChoice Sunbury. It was to encompass, to makes sure that, no matter where you went, you got the same level of service, the same level of products, the same plans, et cetera, across the board. Similar to if you went to McDonald’s and asked for a Big Mac, you could get it anywhere; the same with TeleChoice.”
98 BSB says that although further down the track BSB kept some of the airtime commission that it would have passed on to Stan Meyer had the commission rate remained on the original basis, it did not retain all that it did not pass on. It was not the case, as submitted by Stan Meyer, that every dollar not given to Stan Meyer was kept by BSB. There were costs associated with setting up the FTT system, advising franchisees of what was required under it, monitoring their performances and notifying them each month. David Tropea gave evidence of the detailed first draft and reviews that BSB performed each month in relation to each franchisee’s performance under the FTT system, of the opportunity given to each franchisee to let BSB know of anything they were not happy with in terms of how their performance had been assessed, before results were finalised, and of airtime percentages applied. Any benefit BSB obtained by reducing the commission rate was accordingly reduced by those costs. Further, the commission rates before and after February 2008 were not comparable as later they were applied to customers’ total bills (without exclusions).
99 BSB says that Stan Meyer’s submission that the FTT system was highly weighted towards franchisees being financial, meaning that they were punished if they were in default on their trading account, is incorrect. The uncontradicted evidence of David Tropea is that the percentage of points under the FTT system for being financial is between 10-15%, depending on the month. In some months, when Stan Meyer was in default of payment of the deficit in the trading account, it still achieved the mid-ranking Tier 4. It says that the contention advanced on behalf of Stan Meyer, that under the FTT system if a franchisee was in default of its trading account it received zero airtime commission, is incorrect. The FTT system quarterly report for October-November 2009 shows that Stan Meyer received zero points for its trading account compliance but nevertheless achieved Tier 4 (4.7%).
100 In those circumstances, BSB says that it is untenable to label its decisions to change the airtime commission rate as unreasonable or capricious. I agree.
101 I find that BSB’s decision to vary the rate of airtime commission payable under the franchise agreement was an exercise of its power under the franchise agreement for a legitimate purpose. It exercised that power in good faith. It did so honestly and reasonably, in order to ensure appropriate standards were enacted across the franchises and to encourage good business practices. It was not capricious. It was in the interests of both franchisee and franchisor to ensure the TeleChoice brand was successful and that the Mornington TeleChoice franchise operated as strongly as possible.
102 Nearly two years after the commencement of the franchise agreement, it introduced a complicated incentivisation scheme with items, I accept, which were designed to encourage the franchisees to run their franchises in the best way possible. This benefitted BSB, but also all the franchisees, by improving the face the franchises presented to the world. Clearly, encouraging payment of BSB’s franchise fees on time would assist BSB. However, keeping up-to-date with payments to creditors is good business practice in any event and to the benefit of franchisees as well.
103 Whilst Stan Meyer submitted that the FTT system was unduly weighted towards sales, that the targets were unrealistic, and that the weighting was up to 50%, I find that this was not the case. This assertion was based on Christine Stanley’s evidence in re-examination, but there is no documentary evidence to support it. It was not put to David Tropea. Given how broad-brushed Christine’s evidence was about the business and her lack of knowledge of it on a day-to-day basis, I do not accept that assertion made by her without more. In any event, sales are necessary for a business to succeed. Christine’s evidence was that she was told prior to entering the franchise agreement by the national franchise manager, Borge Prinsloo, that 60 connections per month were required before the business would start to run at a profit. No evidence was given of how many connections per month were being achieved by Stan Meyer. Stan Meyer did not adduce any evidence to show that the sales targets set were unreasonable. They did not ask any questions of BSB’s witnesses in relation to this. The uncontradicted evidence of David Tropea was that the sales targets were set in discussions with the franchisees, having regard to the sales for the previous years as well as other factors.
104 It was submitted by Counsel for Stan Meyer that the introduction of the FTT system, and the consequent reduction of commission paid to Stan Meyer, put the business into a death spiral and caused the business to fail. I do not accept this. I am satisfied on the evidence that even if Stan Meyer had been paid airtime commission on the original basis of 6% throughout the franchise term, it would have made large losses. The losses it made over the course of the franchise term far exceeded the amount of commission reduction.
105 As already stated, Stan Meyer was run by Alex Stanley, who was 25 when he commenced running the business, with no previous experience of running a business or in the telecommunications industry. The business failed to meet sales targets on numerous occasions. That failure had an effect not just on airtime commission but on connection commission and other sources of income such as accessory sales. Alex was involved with the Cranbourne franchise he had bought with Emad Captain for much of the relevant period. He was therefore running two different franchises at the same time between April 2006 and April 2009, as well as working in the Michel’s Patisserie business owned by Stan Meyer. When the Cranbourne franchise was sold, the airtime commission earned by the Mornington franchise increased for a period. David Tropea gave evidence that when Alex sold the Cranbourne store and focused on the Mornington store, its performance improved. The figures relating to airtime commission show that the rate of airtime commission increased. Later, from mid-2010, when Alex worked elsewhere and Stan Meyer appointed a store manager, again the rates decreased. Alex was not called to give evidence, although he was the person running the franchise business. I infer that his evidence would not have assisted Stan Meyer.
106 Stan Meyer submits that the conduct was especially egregious because the movement to zero percent commission coincided with record returns for airtime commission from customers signed up by Stan Meyer. However, the spreadsheet prepared by Stan Meyer shows that had a 6% commission been paid in the first month following the reduction to zero per cent, it would have been $7,270.28, which is roughly the same as or less than the payments for the previous six months.
107 The fact that it was possible for a franchisee to earn zero percent if they remained on the lowest tier for four months is, to me, the most troubling aspect of the system. Incentives were already built into the FTT system to encourage franchisees to perform well, as it meant they earned more airtime commission. Reducing the commission to zero in certain circumstances could be seen as taking incentivisation to the extreme.
108 Asked why Rule 9 had been introduced, David Tropea said:
“My knowledge: what we were trying to do was to get under-performing stores up to a high level, and what happened was there was a lot of stores at the bottom level of 2.5%, and that is what they just banged on month in, month out. So, no matter what they did on their performance, no matter what sales they could achieve or didn’t achieve, they will get paid 2.5% of airtime.”
109 I find that Rule 9 was introduced to ensure that those franchisees performing badly, repeatedly, were encouraged further to endeavour to improve. Franchisees did not have to stay on the lowest tier. There were various things that could be done by the franchise to move upwards in the rankings even if the BSB trading account was not paid in a particular month. In October-November 2009, Stan Meyer moved up to earning 4.7% on Tier 4 even though it had not paid its trading account for that month. By improving their performance in areas such as increasing sales or the way they presented their stores, franchisees would move up and earn a higher commission.
110 As Croft J said, quoting Allsop CJ in Paciocco v Australia and New Zealand Banking Group Limited,[20] in North East Solution Pty Ltd v Masters Home Improvement Australia Pty Ltd:[21]
“The standard of fair dealing or reasonableness that is to be expected in any given case must recognise the nature of the contract or relationship, the different interests of the parties and the lack of necessity for parties to subordinate their own interests to those of the counterparty. That a normative standard is introduced by good faith is clear. It will, however, not call for the same acts from all contracting parties in all cases. The legal norm should not be confused with the factual question of its satisfaction. The contractual and factual context (including the nature of the contract or contextual relationship) is vital to understand what, in any case, is required to be done or not done to satisfy the normative standard.”
[20]236 FCR 199 at [290].
[21][2016] VSC 1 at [627].
111 Given the matters raised above, and having seen and heard BSB’s witnesses, I am satisfied that BSB instigated the variations to the airtime commission rate and introduced the FTT system, including the introduction of Rule 9, as an incentivisation scheme. It did so honestly and reasonably. It satisfied the normative standard introduced by good faith. There was not a “high level of moral obloquy” on BSB’s part.[22]
[22]See Paciocco v ANZ 333 ALR 569 per Gageler J at [188]; Attorney General of New South Wales v World Best Holdings Ltd (2005) 63 NSWLR 557; 223 ALR 346; [2005] NSWCA 261 at [121].
112 I am not satisfied that BSB’s conduct was unconscionable, including under the unwritten law from the time to time or under ss20 to 22 of the ACL.
D. PENALTY
113 Stan Meyer argued that the reduction of airtime commission by Stan Meyer pursuant to the FTT system or otherwise amounted to an imposition of a penalty.
114 No term of the contract was specifically identified by Stan Meyer as being a penalty clause. Rather, Stan Meyer claimed that with the introduction of the FTT system, the fact that lower airtime rates were paid when franchisees were on lower ranks, and the fact that franchisees could be put in the lower ranks for not paying debts due to BSB or not meeting the standards promulgated by BSB, had the effect that a penalty was being imposed for breaching clauses of the franchise agreement. Stan Meyer submitted that not being paid commission had the same effect as Stan Meyer having to pay BSB the equivalent amount. This was because the amount of airtime commission not received by Stan Meyer was not taken into account to improve Stan Meyer’s position in the running account between BSB and Stan Meyer.
115 Stan Meyer argues that the reduction of airtime commission is “extravagant and unconscionable in amount in comparison with the greatest loss” that could conceivably be proved to have followed from failure to meet the standards promulgated by BSB. He said it was skewed towards financial compliance and sales targets. David Tropea gave evidence that in relation to areas such as presentation Stan Meyer was performing well, yet its airtime commission was gradually reduced.
116 The principles governing the law of penalties have recently been clarified in two High Court cases: Andrews v Australian New Zealand Banking Group Pty Ltd[23] (“Andrews”) and Paciocco v Australian New Zealand Banking Group Pty Ltd.[24]
[23](2012) 247 CLR 205.
[24](2016) 333 ALR 569.
117 The law of penalties covers:
(a) Penalties in common law based on breach of contract; and
(b) Penalties in equity to secure performance of another contractual requirement (regardless of any breach of contract).
118 Lord Dunedin in Dunlop Pneumatic Tyre Company Limited v New Garage and MotorCompany Limited[25] stated:
“The essence of a penalty is a payment of money stipulated as in terrorem of the offending party. The essence of liquidated damages is a genuine covenanted pre-estimate of damage…
The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not the time of the breach…”
[25][1915] AC 79 at 86.
119 The High Court in Ringrow Pty Ltd v BP Australia Ltd[26] held that for a sum to be extravagant and unconscionable it must be out of all proportion to the potential loss.
[26](2005) 224 CLR 656
120 In Andrews,[27] the High Court reframed the penalty test by reference to primary and collateral stipulations:
“In general terms, a stipulation prima facie imposes a penalty on a party (“the first party”) if, as a matter of substance it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party.”
[27](2012) 247 CLR 205 at 216-7.
121 As stated above, in this case Stan Meyer does not identify any clause amounting to a penalty for breach of contract.
122 If there were a penalty in this case, then it would have to be a penalty in equity, to secure performance of another contractual requirement under the franchise agreement (regardless of any breach of the franchise agreement). Stan Meyer did not specifically allege that there was a penalty of this type or identify which contractual requirements were said to be secured by such a penalty.
123 I find that the reduction in airtime commission rate does not satisfy the test for a penalty. As set out above, BSB had an interest in ensuring the franchisees performed well. The power to amend was exercised to produce a range of airtime commission rates available to franchisees in order to incentivise performance. Further, reduction of airtime commission did not happen for any one reason: it happened when Stan Meyer did not perform on a number of fronts, some of which were also contractual obligations, but others which were not.
E. UNJUST ENRICHMENT
124 In its final submissions, BSB advanced a further argument to the effect that, on a proper analysis of Stan Meyer’s claim, it was necessary for Stan Meyer to show it made payments to BSB under a mistake of fact or law, when, having not been paid certain amounts referrable to commission by BSB, it nonetheless continued to pay down the running account between it and BSB. It says it amounts to a restitutionary claim for unjust enrichment.
125 BSB referred to the High Court statement in Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation:[28]
“The basis of the common law action of money had and received for recovery of an amount paid under fundamental mistake of fact should now be recognized as lying not in implied contract but in restitution or unjust enrichment”.
[28](1988) 164 CLR 662 at [11].
126 BSB argued that, in order to make a restitution claim based on unjust enrichment, Stan Meyer would need to show that BSB derived a benefit at its expense and that there is injustice involved. Mistake of fact or law is one kind of injustice.[29]
[29]David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 379.
127 BSB argued that as there was a running account, when the claimed commission was not received by Stan Meyer, this left Stan Meyer’s running account in debit to the extent of the non-payment. When Stan Meyer then paid further monies to BSB on the account, this amounted to Stan Meyer paying BSB the amounts that are now sought by way of commission. BSB says that at all times Stan Meyer knew what rate it was getting paid, settled the monthly accounts on that basis and paid money in reduction of its debt to BSB, and that now Stan Meyer is trying to have that money repaid to it. It says Stan Meyer is seeking to re-work the running account and claw back money it has already paid to BSB. It says that Stan Meyer cannot succeed in its claim as there was no relevant ‘mistake’ in it making those payments to BSB in the first place.
128 I disagree with this analysis. Stan Meyer paid money to BSB in relation to the debt said to be owing to BSB on the running account. The fact that it had possible claims which it could bring against BSB (and finally did bring), suing BSB for breaches of the franchise agreement or for damages for unconscionable conduct, does not mean that the payments it made in reduction of the running account prior to there being a judgment of the court in relation to those matters are now being clawed back. This is not a case where the common law action of money had and received is relevant.
F. LACHES
129 BSB argued that Stan Meyer was guilty of laches by its failure to complain about the calculation of airtime commissions or make any claim against BSB until proceedings were commenced. It says this disentitled Stan Meyer to relief in equity (in relation to its claims of unconscionable conduct in the unwritten law and penalties). This would only be relevant in the event that I had found that Stan Meyer had been entitled to relief. However, as some time was spent on this matter I deal with it here.
130 BSB says that Stan Meyer delayed proceedings with full knowledge of the material factors or knowledge of the circumstances from which the relevant fact is a clear inference and that such delay prejudiced BSB.[30] It says that 2014 was too late for Stan Meyer to bring the claims that it did in relation to BSB’s actions in 2008 to 2010. The fact that Stan Meyer never complained during the life of the franchise agreement meant BSB never had an opportunity to reconsider its stance and perhaps change its approach. Had a complaint been made at any of the different stages when it reduced to commission payable or had a complaint been made about the way the FTT system was being run, BSB might have changed its position.
[30]Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd & Ors [2005] QSC 233.
131 BSB says further that the delays meant that it was not able to get all the documents that it wanted to put before the Court including in relation to notice that was given of the changes to commission rates because certain emails were unable to be retrieved, and the length of time meant some witnesses were not available.
132 Stan Meyer argues that the issue of acquiescence or laches is only enlivened where the delay is unreasonable or inexplicable. It says here the delay was explicable in that the Stanley family’s five year relationship with BSB left Stan Meyer with approximately $500,000 in losses and Stan Meyer and the Stanley family as guarantors with a further approximately $125,000 in unpaid debt. It was submitted that the Stanley family could not afford to agitate their rights, and instead paid down approximately $100,000 of the BSB debt. Stan Meyer also argued that it had chosen to maintain its rights because it did not sign a deed of termination of franchise agreement at the end of the franchise term, which would have released the debt then owing by it of $107,922.32. Christine Stanley gave evidence that she did not want to sign the document because it “gave away my legal rights”.
133 Stan Meyer also argued that the calculations of commission claimed to be owing were complex, and that it was not until after numerous claims for discovery that documents emerged which enabled Stan Meyer to quantify its claim.
134 As stated in Hourigan v Trustees Executors and Agency Company Ltd:[31]
“If a party in a position to claim an equitable right which is not undisputed lies by and acts in such a way as to lead to the belief that he has no such claim, or will not set it up, and encourages the party in possession to so deal with his own affairs that it would be unfair to him and to others claiming under him to tear up the transactions and go back to the position which might otherwise have obtained, the Court of equity will not … disregard the election of the party not to institute his claim and treated as unimportant the length of time during which he has slept upon his rights and induced the common assumption that he does not possess any.”
[31][1934] 51 CLR 619 at 629-630.
135 I am not satisfied on the evidence that Stan Meyer could not afford to agitate its rights. There was nothing to stop it sending letters of complaint at an early stage to at least alert BSB to a potential claim. As a matter of logic, it follows that instead of paying down nearly $100,000 of the BSB debt it could have put some of that money towards instituting proceedings to uphold the claim it has now made on the counterclaim. There is no evidence that BSB was ever told of the reason why the deed of termination was not signed, or alerted to any claim in the nature of the counterclaim until it was issued in 2014. I find the delay in at least complaining about BSB’s conduct in introducing the FTT system and varying the rate of airtime commission to be both inexplicable and unreasonable.
136 Stan Meyer knew during the course of the franchise term that it was no longer receiving the commission initially specified under the franchise agreement. Although it may not have known the exact amount paid in commission each month (depending on what invoices were actually sent that month) it knew it was receiving less than initially, and then zero for some months, in relation to airtime commission. It knew enough to make a complaint, and to bring a claim, years earlier than it did. Details of the quantum claimed could have been particularised after discovery, as often occurs.
137 I do not accept that the delay affected BSB’s ability to put relevant evidence before the Court, as there was no evidence given of what else might have been put in evidence had it not been for the delay, or of who else BSB might have sought to call.
138 However, whatever financial difficulties Stan Meyer may have been suffering, a complaint (and indeed multiple complaints) could have been made at the time about the reduction in commission rates. Letters could have been sent complaining that it was not appropriate or alerting BSB to the deleterious effect the changes were causing to Stan Meyer’s financial position and the viability of its business, if Stan Meyer perceived that to be the case. Proceedings could have been issued. It is simply not fair to come along four to six years later and say that a system that was instigated across the whole franchise business without complaint at the time, and which operated for some years, should now be overturned. BSB was not given the opportunity to change the course it had taken in introducing the FTT system. In that sense, it altered its position in reliance on no claim being made.
139 If Stan Meyer had otherwise been successful, I would have upheld the defence of laches in relation to the common law claims.
140 In relation to Stan Meyer’s claims made under the ACL, Stan Meyer submits that the doctrine of laches is not relevant. However, awarding any relief for unconscionable conduct requires the Court to exercise its discretion to award damages under s236 of the ACL.[32] In Re Peninsula Kingswood Country Golf Club,[33] Robson J held that the defence of delay or laches was relevant to the exercise of his Honour’s discretion whether to grant an injunction for oppression under the Corporations Act 2001. In all the circumstances, had Stan Meyer otherwise established an entitlement to relief under the ACL, the delays by Stan Meyer would have led me not to exercise my discretion to award damages in favour of Stan Meyer under the ACL.
[32]Section 236 provides: “(1) If: (a) a person (the claimant) suffers loss or damage because of the conduct of another person; and (b) the conduct contravened a provision of Chapter 2 or 3; the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.”
[33][2014] VSC 437.
G. DAMAGES
141 If Stan Meyer had succeeded on any of its claim against BSB, various issues would have arisen as to the appropriate quantum of damages. I deal briefly with my view on these.
142 Damages for the breach of contract claim would have been at most the difference between the 6% airtime commission rate claimed and the amounts actually paid.[34]
[34]The difference between 6% and the lesser percentages actually paid was $137,919.54. However, this amount does not take into account the fact that the amounts to which percentages were applied changed after February 2008: see paragraph 20 of this judgment.
143 Damages for unconscionability or penalties would have depended on at what commission rate the Court held that the conduct offended the relevant equity. A different calculation would be involved if it only became unconscionable conduct, or amounted to a penalty, once the commission rate was varied, for example, to 3.5% as opposed to 2.5% or 0%. The difference in what was paid and what ought to have been paid had the wrongful conduct not occurred would be the relevant measure of damages.
144 Stan Meyer argued that it should receive damages that would have put it in the same position as if the franchise agreement had never been entered into, including recovery of its initial investment of the $89,000 licence fee and accumulated trading losses between 2006 and 2011. Amongst other things, it argued that, had it been paid the money it says it should at all times have received, its business would have been transformed into a profit making operation.
145 However, I find that no claim made in this case would entitle Stan Meyer to a refund of the $89,000 licence fee paid initially. This is not a case where it is alleged a misrepresentation induced entry into the franchise agreement, for example, where such a damages claim might then have been made. Further, I find that Stan Meyer would not have been entitled to its accumulated trading losses between 2006 and 2011. There was not the necessary evidence to link those losses to BSB’s conduct.
H. DISCLOSURE DOCUMENT
146 Stan Meyer submitted that the disclosure document provided to it at the outset of the franchise agreement by BSB was not current, as required by the Trade Practices (Industry Codes – Franchising) Regulations 1998 (“the Code”). By its pleading, Stan Meyer sought damages flowing from the alleged failure to give a current disclosure document. By close of trial, it sought only a declaration that the disclosure document was not current.
147 By clause 10 of the Code, a franchisor is required to give a copy of the Code, a disclosure document and a copy of the franchise agreement to a prospective franchisee. Clause 6(b) of the Code requires it to be a “current disclosure document”. The Code does not define what is meant by “current”. It will depend on the facts of the case. If something material, particularly financial, has altered between giving the disclosure notice and entry into a franchise agreement, notice needs to be given.[35]
[35]SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (No 2) (2012) 298 ALR 69.
148 Here, the disclosure document was dated 22 December 2005, acknowledged by Stan Meyer in February 2006, and the franchise agreement was entered into in April 2006. Stan Meyer did not submit that anything material in relation to the franchise had changed, that should have been disclosed, between the time of the disclosure agreement and the entry into the franchise agreement. Instead, Counsel sought a declaration on the basis that the Code requires strict adherence and because it may assist Stan Meyer in a claim for costs.
149 I am not satisfied that the disclosure statement was not current in the sense that is required under the Code.
150 I will not make the declaration sought.
I. BSB’S CLAIM
151 BSB claimed $25,388.29 was owing by Stan Meyer and its guarantors. This amount was agreed by the close of trial, but of course Stan Meyer said that its counterclaim should be set off against the amount due to BSB. There is no amount to be set off as Stan Meyer has not succeeded on its counterclaim. Accordingly, I find that the defendants are liable to BSB for $25,388.29.
152 When it filed its written submissions at the end of the trial, BSB claimed $44,268.20 by way of interest. It relied on a spreadsheet showing how this was calculated. It was on the basis of adding items of interest calculated on a monthly basis on the amount of money owing each month by Stan Meyer to BSB from April 2011. It relied on clause 21 of the franchise agreement which provides:
“In the event that any sum which is payable by the Franchisor to the Franchisee or under the terms of this Deed is not paid on the date due for payment, the Franchisee shall and hereby agrees to pay to the Franchisor interest on the sum outstanding at the rate of interest prescribed from time to time under section 2 (1) of the Penalty Interest Rates Act (Vic) 1983…”
153 Stan Meyer objected to interest being calculated on this basis. It said the first time it knew that interest was being claimed on this basis was at the end of the trial.
154 BSB’s initiating complaint[36] sought $29,388.29 plus interest “according to the franchise agreement, alternatively statute”. The amended statement of claim was to similar effect. It did not plead that it was claiming interest on the basis sought by BSB at the close of trial. Its pleading did not mention clause 21 of the franchise agreement, nor did it detail monthly amounts due and claim interest on those separate monthly amounts. This would be expected in order to found, and make clear, a claim for interest accruing on specific amounts for specific dates.
[36]BSB filed this proceeding in the Magistrates’ Court on 3 October 2014. After the defence and counterclaim was filed this proceeding was transferred to the County Court.
155 I will allow interest at the penalty interest rate on $25,380.29 from the time when BSB issued the proceedings.
156 I propose to order:
1. Judgment for the plaintiff.
2. The defendants pay the plaintiff $25,380.29.
3. The counterclaim be dismissed.
I will hear the parties on the terms of the remaining orders to be made including as to the amount of interest and regarding costs.
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Certificate
I certify that these 44 pages are a true copy of the reasons for decision of Her Honour Judge Marks delivered on 30 March 2017.
Dated: 30 March 2017
Samantha Marinic
Associate to Her Honour Judge Marks
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