Bytan Pty Ltd v BB Australia Pty Ltd
[2012] VSCA 233
•31 October 2012
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2012 0084
| BYTAN PTY LTD (ACN 051 216 025) | |
| First Appellant | |
| GERD RUPERT LATTACHER | Second Appellant |
| JULIA EDWINA LATTACHER | Third Appellant |
| v. | |
| BB AUSTRALIA PTY LTD (formerly known as BLOCKBUSTER AUSTRALIA PTY LTD) (ACN 058 986 673) | |
| Respondent |
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JUDGES: | WARREN CJ, OSBORN JA and CAVANOUGH AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 19 June 2012 | |
DATE OF JUDGMENT: | 31 October 2012 | |
MEDIUM NEUTRAL CITATION: | [2012] VSCA 233 | |
JUDGMENT APPEALED FROM: | BB Australia Pty Ltd v Bytan Pty Ltd [2012] VSC 171 (Pagone J) | |
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CONTRACT – Construction of franchise agreement – Franchisor granted option to purchase ‘all the assets used in [the franchise business]’ – Whether the option extends to the franchisee’s freehold – Whether power to purchase assets and close the store conferred to enable franchisor to continue operating the franchise business on the site – Whether power could be used for a different purpose – Appeal dismissed – Equitable Life Assurance Society v Hyman [2002] 1 AC 408 not followed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Appellants | Mr IR Pike SC | Marque Lawyers |
| For the Respondent | Mr F Kunc SC | A’Beckett Lawyers |
WARREN CJ:
Introduction
This appeal concerns the interpretation of a franchise agreement for the operation of a ‘Blockbuster’-branded video store in Turramurra, NSW. The first appellant, Bytan Pty Ltd (‘Bytan’) was the franchisee under the agreement. The respondent, BB Australia Pty Ltd (‘Blockbuster’) was the franchisor.
Bytan and Blockbuster executed the agreement in January 2002 for a term of ten years. In January 2012, Bytan elected not to renew the agreement and it expired later that month.
Clause 18.13 of the agreement gives Blockbuster an option, upon termination or expiry of the agreement, to ‘purchase from [Bytan] all the assets used in the STORE’. If it chooses to exercise that option, cl 18.18 then gives Blockbuster a right to ‘require [Bytan] to close the STORE’ pending the completion of the purchase. There is no dispute that the word ‘all’ requires Blockbuster, should it choose to exercise the option, to purchase all of the assets that fall within that clause. Blockbuster cannot choose to purchase only some of the assets.
Importantly for this appeal, Bytan owns the land on which the store is located. In correspondence with Blockbuster, Bytan contended that the expression ‘all the assets used in the STORE’ includes its freehold. Blockbuster rejected that construction. On 3 February 2012, Blockbuster issued a notice purporting to exercise its right under cl 18.13 to purchase ‘all assets’ used in the store but expressly excluding Bytan’s freehold from the assets. The notice also purported to require Bytan to close the store pursuant to cl 18.18.
Later that month, Blockbuster instituted proceedings against Bytan in the Trial Division of the Supreme Court of Victoria. It sought a declaration that the expression ‘all the assets used in the STORE’ does not include Bytan’s freehold and that its 3 February 2012 notice was valid. It also sought an injunction requiring Bytan to close the store.[1]
[1]Clause 18.13 gives Blockbuster 60 days to exercise the option. The 60 days expired on 23 March 2012. However, the parties agreed that if the 3 February 2012 notice is held to be invalid, the time limit be extended until 7 days after the decision of the trial judge. Similarly, when the matter came to the Court of Appeal, Bytan agreed that the time be further extended until 7 days after the hearing and determination of the appeal.
The learned trial judge found in Blockbuster’s favour and granted Blockbuster the relief it was seeking.[2]
[2]BB Australia Pty Ltd v Bytan Pty Ltd [2012] VSC 171 (‘Trial Judgment’).
Bytan now appeals against that decision. It makes two principal submissions. First, that the expression ‘all the assets used in the STORE’ includes Bytan’s freehold. Secondly, that the right to purchase the assets under cl 18.13 and the right to require Bytan to close the store under cl 18.18 are subject to a limitation. The rights can only be exercised if, ‘as at the date the right is sought to be exercised, Blockbuster intended and/or was able to continue, either itself or through an incoming franchisee, to operate the franchise business’ at the existing site. Bytan contends that the 3 February 2012 notice was invalid because it expressly excluded the freehold and because at the time it issued the notice Blockbuster did not intend to and was unable to continue operating the store at the existing site. Bytan contends that the learned trial judge erred by failing to construe the franchise agreement in the manner just described.
The other defendants at trial were the second and third appellant (the ‘Lattachers’).[3] The Lattachers are guarantors of Bytans obligations under the franchise agreement. The trial judge ordered that the Lattachers, together with Bytan, pay the costs of the trial. The appellants contend that his Honour erred in ordering costs against the Lattachers.
[3]The fourth defendant, a former director of Bytan, was not served with the originating motion and did not appear in the proceeding.
For reasons that follow, I would reject Bytan’s construction of the franchise agreement, reject the challenge to the costs order and dismiss the appeal.
Applicable principles of construction
The applicable principles of contractual interpretation are not in dispute. First, the contract should be construed objectively:
The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.[4]
[4]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 [40].
Secondly, surrounding circumstances can be used to resolve ambiguities:
[E]vidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although … if the facts are notorious knowledge of them will be presumed.[5]
[5]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352 (Mason J, Stephen and Wilson JJ agreeing); Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 [3]–[5].
Thirdly, the contract must be construed as a whole and in the case of ambiguity the court should prefer a construction that does not lead to capricious or inconvenient results:
[T]he whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”… Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.[6]
[6]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109 (Gibbs J).
Freehold is not an asset used in the store
Clause 18.13 of the agreement, which gives Blockbuster the right to purchase ‘all assets used in the STORE’, provides:
18.13Upon termination of this Agreement by FRANCHISOR in accordance with its terms and conditions, upon termination of this Agreement by FRANCHISEE without cause, or upon expiration of this Agreement (without the grant of a Successor Franchise as now specifically described in Section 16), FRANCHISOR shall have the option, exercisable by giving written notice thereof within sixty (60) days from the date of such expiration or termination, to purchase from FRANCHISEE all the assets used in the STORE. Assets shall include, without limitation, leasehold improvements, equipment, furniture, fixtures, signs, inventory and lease or sublease for the Site. FRANCHISOR shall have the unrestricted right to assign this option to purchase.
Bytan submits that the freehold falls within the ordinary meaning of the words ‘assets used in the STORE’. At first blush, it may seem difficult to see how a freehold estate in the land on which the store is located could plausibly be described as something ‘used’ in the ‘store’. But, as Bytan points out, ‘STORE’ is a defined term in the agreement. The relevant definitions are as follows:
1.48“STORE” — The BLOCKBUSTER Video Store which FRANCHISEE is granted the licence to operate at the Site pursuant to this Agreement.
1.9 “BLOCKBUSTER Video Store” — A retail business that:
(a)offers Video Products, approved by FRANCHISOR and not later disapproved, for sale and rental, as well as other Approved Products;
(b)meets FRANCHISOR’S standards and specifications;
(c)operates using the Marks and the BLOCKBUSTER System; and
(d)is either operated by FRANCHISOR or its Affiliates or pursuant to a valid licence from FRANCHISOR.
1.46“SITE” — The location identified in Schedule Item 2 of this Agreement. As used herein, the term “Site” also refers to the interior and exterior of the structure housing the STORE.
It follows that the word ‘STORE’, as used in the agreement, does not mean the physical video store but the video store business. Clause 3.13 of the agreement requires the franchisee to maintain lawful possession of the site. Land out of which a business operates can plausibly be described as something that is ‘used’ in the business. Further, a freehold estate in land obviously falls within the ordinary meaning of the word ‘asset’. It follows, in my view, that the definition of the word ‘STORE’ and the rather vague word ‘used’ introduce a sufficient level of ambiguity into the phrase ‘assets used in the STORE’ to make that phrase capable, on a literal reading, of encompassing the freehold.
Bytan’s next principal submission is that cl 18.13 was included in the agreement for the purpose of enabling Blockbuster to continue operating the store on the same site, either by operating the store itself or by installing another franchisee. In that regard, Bytan heavily relies on the following finding made by the learned trial judge:
It is plain that the Franchise Agreement was drafted upon the hypothesis that a Franchisor would have the option to acquire the assets of the STORE for the purpose of enabling the Franchisor to permit another Franchisee to continue conducting the franchise business after the expiration of the Franchise Agreement.
Blockbuster does not challenge this finding but submits that his Honour did not say that the relevant purpose was solely to enable Blockbuster to continue operating the franchise business on the site. Blockbuster submits that ‘his Honour’s formulation, no doubt advisedly, says nothing about where that business might be conducted’.[7] Ultimately, no useful purpose is served in trying to determine whether Blockbuster’s construction of the trial judge’s finding is correct. It is quite clear from the context that the learned trial judge was not making any findings of fact. Rather, his Honour was simply expressing a view about the purpose of the provision derived from the text of the agreement itself.
[7]Respondent’s Written Submission (13 June 2012) [4].
Blockbuster submits that the ‘commercial interest’ behind cl 18.13 is to enable it to offer the assets to some other new franchisee, which may or may not be operating at the same location.[8] Blockbuster submits that the assets are largely movable and are not tied to a particular location. Further, many of the assets, eg shelving or signs, may be distinctive and unique to Blockbuster and therefore of little or no use to the outgoing franchisee. Hence, even where Blockbuster is not intending to install another franchisee on the site, it will be often be in the outgoing franchisee’s interest that Blockbuster purchase these assets.[9]
[8]Appeal Transcript 52.
[9]Ibid.
I reject that submission. In my view, the agreement was drafted on the assumption that the right to purchase assets would be used to continue operating the franchise business on the site. This is so for two reasons.
First, cl 18.13 expressly includes a lease in the definition of ‘asset’. Where the site is leased from a third-party landlord,[10] Blockbuster does not have the option of purchasing just the movable assets in order to transfer them to a franchisee at a different location. If Blockbuster wishes to purchase the assets, it is required to also purchase the lease. Further, if Blockbuster exercises its right to acquire the assets and thereby acquires the lease, cl 18.18 does not seem to contemplate that Blockbuster could terminate the lease. Instead, it requires Blockbuster to attempt to enter into a new lease for the site:
18.18… If the Site is leased, FRANCHISOR agrees to use reasonable efforts to effect a termination of the existing lease for the Site and enter into a new lease on reasonable terms with the landlord. In the event FRANCHISOR is unable to enter into a new lease FRANCHISOR will indemnify and hold harmless the FRANCHISEE from any ongoing liability under the lease from the date FRANCHISOR assumes possession of the Site.
[10]The agreement also contemplates a situation where the franchisee might be the landlord and operating pursuant to a lease granted to Blockbuster and then a sub-lease back to the franchisee. See n 12 below.
Secondly, cl 18.7 requires the franchisee to make whatever modifications are needed to stop the site looking like a Blockbuster store.[11] Yet this obligation is not triggered if Blockbuster elects to purchase the assets of the store:
18.7Upon the termination or expiration or FRANCHISEE Transfer of this Agreement, FRANCHISEE shall if FRANCHISOR does not purchase the STORE as provided in clause 18.15 [sic; 18.13], at the FRANCHISEE’s expense, make such modifications and alterations, including removal of all distinctive physical and structural features associated with the Trade Dress of BLOCKBUSTER Video Stores, as may be provided in the Operations Manual and as otherwise be necessary to distinguish the Site of the STORE so clearly from its former appearance and from other BLOCKBUSTER Video Stores as to prevent any possibility that the public will associate the site with BLOCKBUSTER Video Stores and any confusion created by such association.
(emphasis added)
[11]A Blockbuster store is decorated with standard colours and signage and adopts a largely pre-determined layout.
In contrast, other provisions requiring the outgoing franchisee to remove all references to Blockbuster are triggered by the termination of the agreement, for example:
18.3Upon the termination or expiration of this Agreement, FRANCHISEE shall remove all signs containing any Mark, and return to FRANCHISOR or destroy all signs, and destroy or dispose of all and [sic] materials containing or referencing any Mark or otherwise identifying or relating to a Blockbuster Video Store as designated by FRANCHISOR.
Obviously Blockbuster would want the outgoing franchisee to make alterations to the site, to ‘de-Blockbusterise’ it, if the site will no longer be used as a Blockbuster store after the termination of the franchisee agreement. Conversely, Blockbuster would not want the alterations made if the site will continue to be a Blockbuster store under a new franchisee. Yet cl 18.7 appears to assume that there is no need to make alterations to the site if Blockbuster chooses to exercise its option to buy the assets of the store.
It follows that cll 18.13, 18.18 and 18.7 all assume that the right to acquire assets would be used to enable Blockbuster to continue operating a franchise video store on the existing site. This in turn is a significant factor militating in favour of Bytan’s construction of the phrase ‘assets used in the STORE’. If the assets do not include the franchisee’s freehold, then the right to acquire assets could not be used to enable Blockbuster to continue operating a franchise video store on the existing site in circumstances where the outgoing franchisee owns the site.[12]
[12]There is one situation where it would be possible for Blockbuster to install another franchisee on the site without acquiring the freehold. Clause 3.9 gives Blockbuster the power to require a franchisee who owns the site to lease the site to Blockbuster, with Blockbuster then sub-leasing it back to the franchisee. The term of the lease is the same as the term of the franchise agreement. So if the franchisee agreement is terminated early, the lease will still have time to run. The franchisee’s sub-lease is expressly included in the ‘assets used in the STORE’ so Blockbuster can acquire it and use it to install another franchisee at the site for the remainder of the term of the lease.
This does not mean, however, that Bytan’s proposed construction is correct. In my view, this interpretive pointer is strongly outweighed by factors pointing in the other direction. There are three such major factors.
First, the agreement clearly contemplates that the franchisee might own the land on which the store is located. It makes express provision for this possibility in a number of places.[13] Yet it does not contain any provisions that expressly contemplate that Blockbuster might be purchasing a freehold estate in land as part of the ‘assets used in the STORE’. Further, the agreement contains a number of clauses that could have expressly made provision for this possibility but did not do so.
[13]Eg cl 3.9: see ibid.
First and foremost of these is cl 18.13 itself, which defines the phrase ‘assets used in the STORE’ to ‘include, without limitation, leasehold improvements, equipment, furniture, fixtures, signs, inventory and lease or sublease for the Site’. There is no mention of freehold. The definition is expressed to be ‘without limitation’ so the fact that the definition expressly includes ‘lease or sublease for the Site’ does not trigger the inclusio unius principle.[14] The fact remains, however, that freehold and freehold improvements could easily have been expressly included in the definition. They were not. This is a significant factor.
[14]Re Coldham; Ex parte Brideson (1989) 166 CLR 338, 345.
Another example, clause 18.17 provides for the transfer of the acquired assets to the franchisor:
18.17The purchase price shall be paid in cash, a cash equivalent, or marketable securities of equal value at the closing of the purchase, which shall take place no later than ninety (90) days after receipt by FRANCHISEE of notice of exercise of this option to purchase, at which time FRANCHISEE shall deliver instruments transferring to FRANCHISOR or its assignee:
(a)good and merchantable title to the assets purchased, free and clear of all liens and encumbrances (other than liens and security interests acceptable to FRANCHISOR or its assignee), with all sales and other transfer taxes paid by FRANCHISEE;
(b)all licences and permits of the STORE which may be assigned or transferred; and
(c) the lease or sublease for the Site.
Sub-clause (c) makes express provision for a lease but there is no express provision for any other interest in land. It would be curious indeed if this clause was drafted on the basis that a freehold estate in land would be covered by the general words of sub-cl (a) while making an express provision for a lease. Further, the clause does not contain any conveyancing machinery provisions that one might expect to see if one of the things being transferred is a freehold estate in land.
Yet another example of the omission of freehold is cl 18.16, which deals with valuation of assets in the event of disagreement:
18.16If FRANCHISOR and FRANCHISEE are unable to agree on the fair market value of the assets, the fair market value shall be determined by an independent valuer selected by FRANCHISOR and FRANCHISEE, and if they are unable to agree on an [sic] valuer, FRANCHISOR and FRANCHISEE shall each select one valuer, who shall select a third valuer, and the fair market value shall be deemed to be the average of the three (3) independent appraisals. Nothing contained herein shall restrict the manner in which the valuers so selected value the leasehold improvements, equipment, furniture, fixtures, signs and inventory.
(emphasis added)
The last sentence provides a list of things that a valuer will be valuing. It includes leasehold improvements but makes no mention of freehold. I accept that the list is not intended to be exhaustive. Nevertheless, this is yet another example of a provision where the parties have turned their mind to the things that are acquired as part of the ‘assets used in the STORE’ and expressly referred to a lease but said nothing about freehold.
Secondly, it seems unlikely that a franchise agreement would leave a freehold estate in land to be covered and dealt with by very general words. An option to buy land is a right of great commercial significance. It is simply improbable that the parties would use vague general words such as ‘assets used in the STORE’ to confer a right of such significance. If an option to buy land was intended, one would expect it to be fairly clear and obvious on the face of the agreement. Similarly, the acquisition of a freehold estate in land is a transaction of such significance that one would ordinarily expect to see express machinery provisions to deal with it. It would be surprising if parties left such an important transaction to be dealt with by general machinery provisions that also cover comparatively minor items, for example, shelving and used DVDs. This is particularly so when they made at least some express provisions for the acquisition of a lease.
Thirdly, the surrounding circumstances known to both parties also militate against Bytan’s construction. As Blockbuster’s counsel put it, Blockbuster is ‘in the business of franchising video stores’, not in the business of trading real estate.[15] On the other hand, ‘both parties were aware that Bytan was, amongst other things, an investor in real estate and that the land from which the franchise was to be conducted was a significant asset’.[16] The franchise agreement was for a term of ten years. It would obviously be difficult to predict the state of the real estate market over such a long period, thus for Bytan to grant Blockbuster an option to buy the land would be a significant gamble with its investment premises. Furthermore, there is no separate fee for the option.[17] As Blockbuster’s counsel put it, ‘it would be commercially surprising to say the least that in entering into a franchise to operate a video store the franchisee ought to be understood as conferring an option on the franchisor if it wished to purchase not only … the shelves, the videos, the day-to-day items used in the business, but what was in fact the principal asset of the franchisee, namely the land’.[18] This would be particularly surprising in circumstances where there was no fee for the option.
[15]Appeal Transcript 38.
[16]Trial Judgment [14].
[17]This is not to suggest that, on Bytan’s construction, there would be no consideration for the option. Clearly there is consideration moving both ways because the agreement confers various rights on both parties. On Bytan’s construction, the option to buy the land would simply be one of the rights that Blockbuster receives. The point is, however, that this is a standard form agreement that was also used by Blockbuster in circumstances where the franchisee did not own the land. What I mean when I say that there is no fee for the option is that the agreement does not seem to confer any additional benefit on Bytan that it would not have received if it did not own the land. At least it does not confer a direct monetary benefit. And Bytan did not suggest that the agreement sets the franchise fee that Bytan was required to pay to Blockbuster at a lower level to compensate for the option. Bytan did not take issue with Blockbuster’s submission that there is no fee for the option.
[18]Appeal Transcript 37.
I now turn to Bytan’s remaining arguments. Bytan submits that the location is a key factor in a store’s success. Hence, Blockbuster would have a commercial interest in having the option to buy the land so that it can install another franchisee at the same location if the location proves successful.[19] The answer to this submission is that if the location was so important to Blockbuster that it wanted the option to buy the land, it could have expressly included ‘freehold’ in the definition of ‘assets used in the STORE’. Further, Blockbuster could have protected this commercial interest by requiring a leaseback arrangement under cl 3.9.[20]
[19]Appeal Transcript 18.
[20]See n 12 above.
Next, Bytan submits that its construction is not commercially burdensome on Blockbuster. Blockbuster is not obliged to buy the land but merely has the option to do so. It is able to make a commercial decision whether to buy the assets, including the land. If it does decide to exercise the option, it only needs to pay ‘fair market value’ for the land. The cost of the land, while likely to be high in comparison with the cost of the rest of the assets, is a factor that Blockbuster can take into account when making its decision. Further, owning the land may well be commercially advantageous for Blockbuster — after all, Bytan obviously thought it was in its commercial interest to own the land.[21]
[21]Appeal Transcript 20–21.
I accept Bytan’s submission that its construction may not be all that burdensome on Blockbuster. But that does not take Bytan very far. As I have explained,[22] what makes Bytan’s construction uncommercial is not so much the burden that it imposes on Blockbuster but the burden that imposes on the franchisee.
[22]See [33].
In my view, the three matters mentioned above overwhelmingly suggest that the phrase ‘assets used in the STORE’ does not include a freehold estate in land. My conclusion would have been the same even without considering surrounding circumstances.
Blockbuster’s right to exercise the option is not restricted in the manner suggested by Bytan
Bytan’s second principal submission is that Blockbuster’s right to purchase the ‘assets used in the STORE’, or alternatively its right to require the franchisee to close the store, can only be exercised in limited circumstances. These circumstances are that ‘as at the date the right is sought to be exercised, Blockbuster intended and/or was able to continue, either itself or through an incoming franchisee, to operate the franchise business’.[23]
[23]Appellant’s Written Submission (8 June 2012) [11].
Of course, cll 18.13 and 18.18 are not, in terms, expressed to be subject to this limitation. Where, then, does the limitation come from?
Bytan’s submissions do not identify any legal basis or source of the limitation. Its submissions seem to proceed on the assumption that if it succeeds in establishing that the purpose of the rights conferred by cll 18.13 and 18.17 is to enable Blockbuster to continue running the franchise business on the site, Bytan will, ipso facto, also succeed in establishing the limitation. In my view, this assumption is not correct. An obligation not to exercise a contractual power for purposes extraneous to the contract is a major component of the duty of good faith.[24] However, leaving good faith aside, it is not generally the case that every contractual power is subject to an implied limitation that it be used only for the purpose for which it was conferred.[25]
[24]It appears to be uncontroversial that this is an incident of the duty of good faith if and where the duty exists: see, eg, Burger King Corporation v Hungry Jack's Pty Ltd (2001) 69 NSWLR 558 [185]. As to when the duty arises, see n 30 below.
[25]Cf Equitable Life Assurance Society v Hyman [2002] 1 AC 408 where Lord Cooke of Thorndon (Lord Slynn of Hadley, Lord Hoffmann and Lord Hobhouse of Woodborough agreeing) held that ‘no legal discretion, however widely … can be exercised for purposes contrary to those of the instrument by which it is conferred’: at 460. His Lordship appears to have derived this principle by analogy with administrative law and directors’ duties. In my view, this proposition does not represent the law in Australia to the extent that it extends beyond a duty of cooperation implied based on the test of necessity. Unless the proposition is read down, it would mean that something almost tantamount to a duty of good faith is implied into all contracts. No such general duty exists in Australia: see n 30 below.
Three possible doctrines could provide a legal foundation for Bytan’s limitation. First, the limitation could arise purely as a matter of construction of cl 18. Secondly, the limitation could be an incident of a general duty of good faith. Thirdly, the limitation could be a specific implied term.
In its written submission, Blockbuster asserted[26] that the limitation could only be an implied term meeting the test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[27] Despite being aware of this assertion, Bytan said nothing about the issue in its principal oral submissions. Blockbuster then repeated the assertion in its oral submissions:
The difficulty my friend has in trying to introduce this element of intention is if the words aren't there then it has to be by implication. There's no other legal theory that gets him to where he wants to go. So we are thrown straight into BP v. Westernport, Shire of Hastings [sic], and the five part test, and my friend neither before His Honour Justice Pagone nor in this court has made the slightest effort to explain how it is he could satisfy the five part test in BP.
[26]‘[I]f restrictions such as those advanced by Bytan are to be implied (and Bytan has never articulated precisely how it says its construction is to be found), they do not satisfy the test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266’: Respondent’s Written Submission (13 June 2012) [9].
[27](1977) 180 CLR 266 (‘BP Refinery’).
Bytan chose not to make any submissions in reply.
In these circumstances, Bytan can be taken to be proceeding on the basis that the proposed limitation is an implied term meeting the test in BP Refinery, that is, a term implied from considerations of business efficacy.[28] Blockbuster repeatedly asserted that the limitation had to meet the BP Refinery test and proceeded on that basis. Bytan had two opportunities[29] to take issue with this assertion but chose not to say anything. In my view, Blockbuster cannot be required to rebut every possible source of the limitation, none having been raised by Bytan. Nor can Bytan expect the Court to examine other possible bases for the limitation when they were not raised in the submissions of either party.
[28]See n 31 below regarding other kinds of implied terms.
[29]First, in its principal oral submissions and then in reply.
On a charitable view of Bytan’s submissions, they can perhaps be interpreted as relying on pure construction as the basis for the limitation. However, at the very least, Bytan’s conduct must amount to a renunciation of any reliance on a duty of good faith. Given the controversial nature of the duty,[30] Bytan surely cannot rely on it without making specific submissions. Similarly, Bytan must at least be taken to have renounced any reliance on an implied term of a kind other than a term implied from considerations of business efficacy.[31]
[30]This Court has held that a duty of good faith is not indiscriminately implied into all commercial contracts: Specialist Diagnostic Services Pty Ltd (formerly Symbion Pathology Pty Ltd) v Healthscope Pty Ltd [2012] VSCA 175 [86] (Buchanan, Mandie and Osborn JJA); see also Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228 [3] (Warren CJ), [25] (Buchanan JA, Osborn AJA agreeing).
[31]The most orthodox classification of implied terms is the three-partite classification into terms implied in fact from considerations of business efficacy, terms implied by law and terms presumed to apply because of the custom of a trade or business: see, eg Breen v Williams (1995) 186 CLR 71, 102–103 (Gaudron and McHugh JJ). Under that classification, Bytan’s limitation could only fall into the first category. However, in Carlton & United Breweries Ltd v Tooth & Co Ltd (Unreported, Supreme Court of New South Wales, 11 June 1985) Hodgson J held that there was another category — ‘[i]mplications contained in the express words of the contract’. The relevant passage was quoted with approval by Heydon JA in Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 [28]. Heydon JA’s judgment has in turn been cited a number of times in subsequent Australian decisions. It is unclear whether this category truly represents an additional type of implied terms or whether it merely refers to words read into the contract as a matter of pure construction (cf Gordon & Gotch Australia Pty Ltd v Horwitz Publications Pty Ltd [2008] NSWCA 257 [36]; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 345, 353 (Mason J)). In Brambles, Heydon JA appears to have adopted the latter view: at [31]. Bytan can be taken to renounce any reliance on this category if it goes beyond pure construction and represents a distinct legal doctrine for implication of terms.
This leaves two possible bases for the limitation — pure construction of cl 18 and a specific term implied from considerations of business efficacy.
Turning to the first of these bases, in my view, the limitation cannot be sustained as a matter of construction for four reasons.
First, this is not a case where the limitation could arise merely by giving some meaning to a particular word or expression used in cl 18. For example, it cannot seriously be suggested that the word ‘purchase’ in cl 18.13 can plausibly be read as meaning ‘purchase at a time when the franchisor intends to carry out the franchise business at the site’. The limitation involves reading in additional words, not giving meaning to the words that are already there.
Secondly, the detailed nature of the whole contract and, more particularly, the fact that the contract spells out in considerable detail the preconditions for the exercise of the right to purchase, militate against reading in an additional unexpressed condition as a matter of construction.
Thirdly, the limitation does not make a great deal of business sense. On the one hand, there are good reasons why Blockbuster would not want the right to purchase the assets to be subject to this limitation. Suppose that a franchise agreement expires and the franchisee does not wish to continue with it but Blockbuster wants to maintain a video store in the area. If the premises are leased and the lease expires at the same time as the agreement, Blockbuster may not be able to obtain a new lease. In that case, Blockbuster may well wish to purchase the assets to continue the business next door or elsewhere in the area. Yet the limitation would prevent it from doing so without the franchisee’s consent. On the other hand, it is not clear that, at the time of entry into the contract, the franchisee would be all that interested in having this limitation. The limitation would restrict the franchisor’s rights to acquire the assets of the store by reference to the franchisor’s state of mind. Yet this state of mind is a matter that would seem to be of little concern to the franchisee. Questions are immediately provoked: Why would the franchisee care why Blockbuster wants to purchase its assets when the franchise comes to an end? Why would it be prepared to grant Blockbuster an option to purchase the assets to continue running the business on the site but not to move it next door? Further, the franchisee may well prefer that Blockbuster buy the assets to deploy them at another location because many of the assets will be Blockbuster-branded and hence useless to the outgoing franchisee.
Fourthly, nothing in cl 18, looked at objectively, suggests that the parties have turned their minds to the possibility that Blockbuster may wish to acquire the assets without intending to continue the franchise business on the existing site and decided not to permit Blockbuser to do so. Rather, a reasonable observer looking at cl 18 would conclude that the parties have simply failed to turn their minds to this possibility.
For these reasons, the limitation cannot be read into cl 18 as a matter of pure construction.
I now turn to the second possible remaining basis for the limitation — a specific term implied from considerations of business efficacy. Such a term would need to meet the test in BP Refinery. In my view, the suggested limitation does not meet that test.
First, the suggested limitation is not necessary to give business efficacy to the contract. For the reasons set out earlier, I accept that the contract proceeds on the assumption that the right to acquire assets (and hence the subsequent right to close the store) would be used to enable Blockbuster to continue operating a franchise video store on the existing site.[32] However, that does not mean that the limitation suggested by Bytan is necessary to give the contract business efficacy. In my view, the franchise agreement, including cll 18.13 and 18.18, are perfectly efficacious without the limitation suggested by Bytan. Blockbuster has a right to purchase the assets and require the franchisee to close the store pending the completion of the sale. Blockbuster has to pay the franchisee fair market value for the assets. This scheme can operate perfectly well without the limitation. If Blockbuster exercises the option in order to move the assets elsewhere, on a literal reading of cl 18.7,[33] the old franchisee will not be obliged to make, and pay for, the alterations necessary to ‘de-Blockbusterise’ the old site. Yet, Blockbuster’s intellectual property remains protected by the tort of passing off and the prohibition on misleading and deceptive conduct. Similarly, if the site is leased, on a literal reading of cl 18.18,[34] Blockbuster will be required to enter into a lease with the landlord. Nonetheless, that is a commercial matter for Blockbuster. Blockbuster can choose to sell the lease. Alternatively, it could simply ask the outgoing franchisee to waive the Blockbuster’s obligation to enter into a new lease, leaving Blockbuster free to terminate the existing lease and indemnify the outgoing franchisee.
[32]See [19] et seq of these reasons.
[33]Without expressing any view on whether this literal reading is correct.
[34]See above n 33.
Further, the limitation would not completely avoid these anomalies. Bytan’s limitation is tied to Blockbuster’s state of mind ‘as at the date the right is sought to be exercised’. Presumably, once the right is exercised, the franchisee’s obligations would be triggered and would continue even if Blockbuster’s circumstances change. Bytan did not contend otherwise. So, for example, the prospective new franchisee that Blockbuster was intending to install at the site could withdraw and Blockbuster might not be able to find a replacement franchisee. Then again, Blockbuster could simply change its mind. In either case, consistently with Bytan’s limitation, Blockbuster will end up acquiring the ‘assets used in the STORE’ without continuing the franchise business on the site.
This case is quite different from a case where the contract confers on one party a power that, if used in a particular way, could defeat a benefit that the contract intends to confer on the other party. In the latter kind of case, the power may be subject to an implied limitation that prevents it from being used in that way.[35] The limitation is implied because it is necessary to enable the other party to obtain a benefit that it had been promised under the contract.[36] Here, no benefit promised to the franchisee would be defeated if the franchisor could exercise the power to purchase the assets and shut down the store in circumstances where it does not intend to continue operating the franchise business on the site
[35]See, eg, Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; Equitable Life Assurance Society v Hyman [2002] 1 AC 408.
[36]Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104, 124–125; Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459 (Lord Steyn, Lord Slynn of Hadley, Lord Hoffmann, Lord Cooke of Thorndon and Lord Hobhouse of Woodborough agreeing).
Secondly, for the same reasons, the limitation is not ‘so obvious that it “goes without saying”’. Further, the limitation is not obvious because it makes little business sense.[37]
[37]See [50] of my reasons.
For these reasons, Bytan’s limitation does not satisfy the test in BP Refinery.
It follows that Blockbuster’s rights to acquire the assets and close the store are not subject to the limitation suggested by Bytan.
Bytan’s remaining substantive grounds should be dismissed
Bytan’s amended notice of appeal, filed during the hearing, contains two remaining grounds of appeal (other than the costs ground). They are:
9.The learned trial Judge erred in finding that there was no evidence that the respondent was seeking to exercise the right in clause 18.18 to ‘punish’ or as a ‘defacto restraint’.
10.The learned trial judge erred in relying on a letter dated 19 March 2012 in determining whether the Respondent had an intention to use clause 18.18 to ‘punish’ or as a ‘defacto restraint’ or operate the business from the Site in circumstances where such letter and the letter to which it responded came into existence after the exercise of the option on 3 February 2012.
These grounds refer to the following passage from the decision of the learned trial judge:
16.… That it has no intention of conducting (or may not be able to conduct) the business from the Site is not relevant to an exercise of the contractual right. The Franchisor is entitled to protect its business interests by requiring the STORE to close until the purchase of the assets used in the STORE. In any event, there is no evidence that Blockbuster is seeking to exercise the right in clause 18.18 “to punish” or as “a defacto restraint” as was asserted. Indeed, in a letter dated 19 March 2012 from Bytan’s solicitors to Blockbuster’s solicitors the former conveyed to the latter Bytan’s instructions that it was “not prepared to lease the STORE” to Blockbuster. There is no basis upon which the Franchisor should not be entitled to exercise its right under clause 18.8 to require the closure of the STORE pending an expeditious purchase of the assets.
Bytan has made no submissions in support of ground 9. The ground should therefore be dismissed.
The only submission Bytan made in relation to ground 10 is the following:
His Honour also wrongly had regard to the letter dated 19 March 2012. That letter is irrelevant as it post-dates the purported exercise of the option and indeed the commencement of the proceedings, and was sent in circumstances where Bytan is under no obligation to grant Blockbuster a lease. In any event, the letter should be given no weight in the absence of any contemporaneous evidence of any intention by Blockbuster to continue to operate the STORE and the express disavowal of the notice of purported exercise of wanting any interest in the freehold which is only consistent with Blockbuster not having any intention to continue to operate the STORE.
In my view, this submission has no merit. The learned trial judge has found that there was no evidence to show that Blockbuster is seeking to exercise its right to shut down the store to ‘punish’ Bytan. Obviously that finding could not have relied on the letter because the finding was that there was ‘no evidence’. Bytan’s challenge to the finding failed. That being so, his Honour’s reference to the letter is of no consequence for the purposes of this appeal. Even if Bytan is right in that the letter can shed no light on whether Blockbuster intended to continue to operate the store at the time it purported to exercise its rights under cll 18.13 and 18.18, that makes no difference because Blockbuster’s rights were not subject to the limitation suggested by Bytan.
Costs
The appellants submit that the costs order should only have been made against Bytan. They submit that ‘it was clear at the hearing that no orders were sought’ against the Lattachers.[38] They submit that the Lattachers ‘did not take any substantive part in the proceedings’ and that there was ‘no basis’ for the costs order against them.[39]
[38]Appellant’s Written Submission (8 June 2012) [16].
[39]Appeal Transcript 31–32.
Bytan relies on the following exchange between the trial judge and Blockbuster’s counsel:
His Honour: So why are you suing the other two defendants?
Counsel:They are guarantors of Bytan’s obligations and I think the view was taken that they should be parties, but no specific relief is sought against them, save to the extent that if Bytan declined to fulfil some obligation under the agreement, then they’re guarantors and an order could be obtained against them to make good their obligation to cause Bytan to do something.
For practical purposes Your Honour doesn’t need to be troubled about the presence of the other defendants.
The relief that Blockbuster sought in its originating motion included an order that ‘the Defendants [plural] pay the Plaintiff’s costs of this application’. In my view, nothing in the exchange above suggests that Blockbuster was resiling from seeking costs against all of the defendants, including the Lattachers.
Whilst the Lattachers may have a sense of grievance at the costs order against them, the time to deal with their liability was well gone by the time of the appeal.
They could have applied to have proceedings against them struck out at trial or beforehand. Or they could have offered to submit to any order save as to costs. Furthermore, when Blockbuster applied for costs, the Lattachers could have raised the issue of whether costs should only be awarded against Bytan. They did not do so.
In these circumstances, I discern no error as the matter transpired before his Honour. I would not disturb the order, which involved the exercise of a discretion. The test to disturb the discretion has not been satisfied.[40]
[40]Australian Coal and Shale Employees’ Federation v Commonwealth (1953) 94 CLR 621, 627 (Kitto J).
Conclusion
For these reasons, I would dismiss the appeal.
OSBORN JA:
The factual background to this appeal is set out in the judgment of the Chief Justice and it is unnecessary to repeat it.
I agree with her Honour’s conclusion that the first ground of appeal must fail for the reasons she articulates and, in particular, the three major factors she identifies as supporting her conclusions. When the agreement is read as a whole, it cannot reasonably be understood to have been intended to convey an option to purchase the land.[41]
[41]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 [40]; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 [11].
I also agree that the second ground of appeal must fail for the reasons stated by the Chief Justice but I would add the following.
Clause 18.13 falls to be construed within the context of an agreement which has a series of features rendering it improbable that the parties necessarily intended that the option to purchase the assets of the store would only be exercisable in circumstances where Blockbuster has the intention of ‘operating the STORE’[42] either itself or through a proposed incoming franchisee.
[42]Amended notice of appeal, ground 5A.
First, the option is not an option to purchase the business but simply an option to purchase the assets of the business. The exclusion of goodwill as a factor to be taken into account upon the valuation of the assets confirms that the plain meaning of the phrase ‘all the assets used in the STORE’ reflects the intention of the parties.[43] Once it is appreciated that Blockbuster is not buying the franchisee’s business (the STORE as defined), it is difficult to see why any implication should arise concerning the business the assets are to be employed in.
[43]This is so despite the use of the phrase ‘… if the Franchisor does not purchase the STORE as provided in clause 18.15 [scil. 18.13]’ in cl 18.7.
Secondly, the option arises upon the termination of the agreement by one of the parties or upon its expiration. It arises when the franchisee no longer has an interest in the franchise business. It is a provision concerned with the disposal of the assets of a business which has ceased. If the franchisee has no interest in the business it is difficult to see on what basis it has an interest in where and how Blockbuster’s business should be continued. In turn, it is difficult to see why it should be supposed that the parties necessarily intended a limitation turning upon this issue.
Thirdly, the agreement does not assume that the franchisee will have any continuing interest in the premises. Although, in the present case, the franchisee remained the owner of the premises at the expiry of the franchise, the agreement plainly contemplated that the franchisee might at that time have no more than a leasehold interest which terminated with the franchise. Clause 3.13 of the agreement simply required the franchisee to maintain lawful possession of the site during its term.[44]
[44]‘FRANCHISEE shall maintain Lawful Possession of the Site and remain in compliance under the terms and conditions of any lease [or] sublease during the Term of the Franchise, and FRANCHISEE shall deliver to FRANCHISOR a copy of the signed lease or sub-lease for the Site within fifteen (15) days of the execution of this Agreement.’
Fourthly, upon expiry of the franchise term, the agreement gave the franchisee the right to a five year ‘successor franchise’ but gave Blockbuster the option to require the store to be relocated. Clause 16.1 provided that the franchisee was entitled to a successor franchise if, amongst other things:
(e)(i) FRANCHISEE maintains possession of and agrees to remodel and/or expand the Site, add or replace equipment (including computer hardware, operating systems and software), furniture, fixtures, and signs and otherwise modify the STORE to bring it into compliance with specifications and standards then applicable under new or successor franchises for BLOCKBUSTER Video Stores; or
(ii)if FRANCHISEE is unable to maintain possession of the Site, or if, in the reasonable judgment of the FRANCHISOR, the STORE should be relocated within the Territory, FRANCHISEE secures a substitute site within the Territory approved by FRANCHISOR in accordance with its then current site selection criteria, and agrees to use its best efforts to expeditiously develop, but in any event within ninety (90) days of the closing of the prior Site, such substitute site in compliance with specifications and standards then applicable under new or successor franchises for BLOCKBUSTER Video Stores;[45]
[45]Emphasis added.
The fact that the agreement entitled Blockbuster to make a ‘reasonable judgment’ as to whether the store should be relocated for the purpose of continuing the franchise business makes it fundamentally difficult to postulate any necessary intention by the parties that any continuation of the franchise business by Blockbuster following expiry or termination of the agreement would be linked to the specific site. Put another way, there is no necessary connection between ‘operating the STORE’ and the leased premises referred to in cl 18.
For the above reasons and for those articulated by the Chief Justice which I respectfully adopt, I do not accept the term contended for can be implied.
I also agree with Her Honour’s reasons with respect to the remaining grounds of appeal and it follows that the appeal should be dismissed.
CAVANOUGH AJA:
Overview
I have had the considerable advantage of reading in draft the judgment of the Chief Justice in this appeal. I agree with her Honour that the appellant’s first principal submission should not be accepted. However, unlike her Honour, I would accept the appellant’s second principal submission and would allow the appeal accordingly. My reasons follow.
As the Chief Justice says, this appeal concerns the interpretation of a franchise agreement for the operation of a ‘Blockbuster’-branded video store in Turramurra, NSW. The first appellant, Bytan Pty Ltd (‘Bytan’), was the franchisee and the respondent, BB Australia Pty Ltd (‘Blockbuster’), was the franchisor.
The agreement was executed in January 2002. It had a term of ten years. It was a standard form franchise agreement drawn by Blockbuster’s American parent. It was due to expire on 24 January 2012. As that date approached, Bytan informed Blockbuster that it would not take up its option of renewal under the agreement. The agreement thus expired on 24 January 2012.
The main issue in the appeal is whether a notice given by Blockbuster to Bytan shortly after the expiry of the agreement was valid and effective under the agreement so as to bring about a compulsory purchase by Blockbuster of property belonging to Bytan which had been used in the operation of the franchised business.
The clauses of the agreement of principal relevance are cll 18.13 to 18.18. They appear under the heading ‘FRANCHISOR’s Right to Purchase Assets of the STORE’. They apply upon the termination or expiration of the agreement. They provide for the conferral on the franchisor of an option, exercisable by giving written notice thereof within 60 days from the date of expiration or termination, to purchase what cl 18.13 describes as ‘all the assets used in the STORE’. Generally speaking, the expression ‘STORE’, where it appears in the agreement, refers to the franchised Blockbuster video store business as conducted on a particular site specified in the agreement.[46] It is common ground that, to be valid, the written notice must cover all, not merely some, of the relevant assets. However there are disputes about, among other things, the reach of the expression ‘all the assets used in the STORE’ and about the existence under the agreement of a requirement said by Bytan to impose a condition on any exercise of the option, being a requirement as to purpose.
[46]Occasionally the expression is used in a somewhat different sense. See further below.
Under cl 18.18, if the option to purchase is duly exercised, the franchisor may, pending the ‘closing’ of the purchase, appoint a manager ‘to maintain the operation of the STORE’ or may require that the STORE be temporarily closed.
Bytan has at all relevant times owned the land on which the STORE was located. Bytan had conducted an independent video store business at that location prior to becoming a Blockbuster franchisee. Since the expiry of the franchise agreement in January 2012 Bytan has reverted to conducting an independent video store business there. Prior to the expiry of the agreement, Bytan contended in correspondence with Blockbuster that the expression ‘all the assets used in the STORE’ included its freehold estate. Blockbuster disagreed. On 3 February 2012, Blockbuster issued a notice purporting to exercise the option under cl 18.13 of the agreement to purchase ‘all the assets used in the STORE’. The notice purported expressly to exclude Bytan’s freehold from the assets. The notice also purported to require Bytan to close the STORE pursuant to cl 18.18 pending completion of the asset purchase.
Shortly thereafter, Blockbuster commenced a proceeding by originating motion against Bytan in the Trial Division of this Court. Blockbuster claimed a declaration that the expression ‘all the assets used in the STORE’ did not include Bytan’s freehold and that its notice of 3 February 2012 was valid. Blockbuster also claimed an injunction requiring Bytan to close the ‘STORE’ pending completion of the asset purchase.
As mentioned above, cl 18.13 gives the franchisor 60 days to exercise the option. The 60 days was due to expire on 23 March 2012. However, before that date the parties agreed that if the 3 February 2012 notice were held to be invalid on the ground that any valid notice must include the freehold, then the 60 day limit would be extended to 7 days following the decision of the trial judge, in order to give Blockbuster an opportunity to issue a fresh notice covering the freehold. (Later, as a condition of obtaining from the Court of Appeal a stay of the trial judge’s order, Bytan agreed that the time be further extended until 7 days after the hearing and determination of the appeal.)
By an amended summons filed on 26 March 2012, Bytan cross-claimed for a declaration to the effect that, on the proper construction of the agreement, Blockbuster had no power to exercise the option to purchase assets unless at the date of the purported exercise of the option Blockbuster intended to continue the operation of the relevant Blockbuster-branded video store and was ready, willing and able to do so, either by itself or by a new franchisee. Further or alternatively, Bytan sought a declaration to the effect that Blockbuster had no power under the agreement to require Bytan to close the STORE pending the completion of the purchase of the assets unless the condition just mentioned was satisfied. In addition, Bytan sought a declaration to the effect that the condition was not satisfied.
Blockbuster was successful at trial and obtained the orders it sought.[47] Implicitly, the trial judge refused Bytan’s cross-claim.
[47]BB Australia Pty Ltd v Bytan Pty Ltd [2012] VSC 171 (‘Trial Judgment’).
At trial, the second and third appellants (‘the Lattachers’) were additional defendants. They had guaranteed Bytan’s obligations under the franchise agreement. They, as well as Bytan, were ordered to pay the costs of the trial. They say that, in any event, his Honour should not have ordered costs against them.
The appellants have appealed against all of the trial judge’s orders. On 10 May 2012 those orders were stayed, on terms, by the Court of Appeal (constituted by Osborn JA and me) pending the hearing and determination of this appeal.[48]
[48][2012] VSCA 116.
Essentially for the reasons stated by the Chief Justice, I do not accept the appellants’ first principal submission, namely that Bytan’s freehold fell within the expression ‘all the assets used in the STORE’. Hence, to that extent, I would also agree with the trial judge. However, I would accept the appellants’ second principal submission, namely that the option to purchase Bytan’s assets was only exercisable for the purpose of continuing the operation of the Blockbuster-branded video store at the Site where it was located; that that was not the purpose of Blockbuster’s purported exercise of the option; that Blockbuster’s notice of 3 February 2012 was invalid for that reason; and that therefore, by the time of the trial, Blockbuster no longer had any power under the franchise agreement to purchase Bytan’s assets compulsorily. It follows, in my view, that Blockbuster had no power under cl 18.18 to direct Bytan to close the STORE. Accordingly I would allow the appeal. If the appeal were allowed the order for costs made against the Lattachers at trial would fall away. However, I am in the minority. On the basis that the appeal is otherwise is to be dismissed, I would agree with the majority that the order for costs against the Lattachers should not be disturbed.
Principles of interpretation
This case involves the interpretation of a written, commercial contract. I agree in substance with the Chief Justice’s statement of the three relevant basic principles of interpretation, save that I would divide up and restate the first principle as follows. The contract should be construed objectively:
The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean.[49]
At least where there is ambiguity[50], interpreting a commercial document requires attention to ‘the objects which it is intended to secure’[51] or ‘the purpose and object of the transaction’.[52]
[49]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, [40]. See also Byrnes v Kendall (2011) 243 CLR 253, [17], [59] and [98]-[100].
[50]See Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45, [3]-[5].
[51]McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, [22] Gleeson CJ, quoted with approval in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, [15] (Gleeson CJ, McHugh, Gummow and Kirby JJ).
[52]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22].
It is common ground that the question raised by the appellants’ first principal submission (that the freehold is included in the assets) is to be determined simply as a matter of the interpretation of the actual words of cll 18.13 to 18.18 in their context in the agreement as a whole. However, in respect of Bytan’s second principal submission (that the option may only be exercised to continue the operation of the STORE) – and notwithstanding that the submission overlaps in large part with Bytan’s first principal submission – the Court needs to determine whether the question raised remains simply a matter of interpretation of the actual words of the agreement or whether the principles for implying a term to give business efficacy to an agreement (as specified in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council[53]) are applicable. I will return to this point when I come to Bytan’s second principal submission.
[53](1977) 180 CLR 266, 282-284. Compare Brambles Holdings Ltd v Bathurst CC (2001) 53 NSWLR 153, 164-165 [28]-[31].
The freehold
I agree in substance with the Chief Justice’s reasons for holding that Bytan’s freehold is not an asset used in the STORE. However, in my view (as mentioned above) there is a significant overlap between this issue and the issues raised by Bytan’s second principal submission and in these circumstances I would add the following observations.
Like the Chief Justice, I would reject Blockbuster’s submission that the ‘commercial interest’ behind cl 18.13 is to enable it to offer the assets to some other new franchisee which may or may not be operating at the same location. I concur with her Honour that the agreement assumes that the option to purchase assets would be exercised for the purpose of continuing the operation of the franchised business on the Site. Indeed I think that the agreement assumes that the option would only be used for that purpose.[54] This is so for several reasons.
[54]Later I will explain why I consider that this is not only a contractual assumption but a contractual condition.
The agreement must be read as a whole. The definitions in the agreement of the terms ‘STORE’ and ‘Site’,[55] in combination, are such as to indicate that the assets referred to in cl 18.13 are the assets of the business of the Blockbuster video store conducted at the specified site.[56] On purchasing the assets, Blockbuster gains all the warranties customarily given by ‘the seller of a business’: cl 18.4. In the franchise agreement the location of the video store is treated as a critical aspect of the agreement.[57] Further, under cl 18.13, Blockbuster must purchase “all” the assets used in the STORE. These provisions, read with certain other provisions referred to below, indicate that, in effect, Blockbuster must purchase the franchisee’s business as conducted at the specified site. The fact that, by virtue of cl 18.15 of the agreement, nothing is to be paid to the franchisee for the value of the goodwill does not detract from this. If anything, that clause merely confirms that the business is being acquired.
[55]Set out in the Chief Justice’s judgment.
[56]See cll 1.48, 1.9 and 1.46.
[57]See, e.g. cll 3.1, 3.12, 3.13, 3.14, 3.15, 3.16, 3.31.
As the Chief Justice points out, cl 18.13 expressly includes the lease or sub-lease within the range of ‘assets’ required to be included in the purchase. This is most striking. As her Honour says, if the Site is leased or sub-leased,[58] Blockbuster does not have the option of purchasing just the physical assets in order to transfer them to a franchisee at a different location. If Blockbuster wishes to purchase the assets, it is required to include ‘the lease or sub-lease for the Site’ as one of the assets to be purchased. Further again, Blockbuster is required by cl 18.18 to take additional steps relating to the lease of the Site, as follows:
18.18… If the Site is leased, FRANCHISOR agrees to use reasonable efforts to effect a termination of the existing lease for the Site and enter into a new lease on reasonable terms with the landlord. In the event FRANCHISOR is unable to enter into a new lease FRANCHISOR will indemnify and hold harmless the FRANCHISEE from any ongoing liability under the lease from the date FRANCHISOR assumes possession of the Site.
The obligation on Blockbuster to use reasonable efforts to enter into a new lease for the Site would be nonsensical absent at least a contractual assumption that Blockbuster would only acquire the assets in order to continue the operation of the STORE at the Site. The last six words of cl 18.18 expressly envisage that Blockbuster will indeed take possession of the Site.
[58]As the Chief Justice notes, the agreement also contemplates a situation where the franchisee might be the owner and operating pursuant to a lease granted to Blockbuster and then a sub-lease back to the franchisee.
Consistently with this, cl 18.7 of the agreement provides that where Blockbuster chooses to ‘purchase the STORE’ under cl 18.13, Bytan is, in effect, relieved of the obligation (to which it would otherwise be subject under cl 18.7) to take specified measures at the end of the franchise period to distinguish the site of the STORE so clearly from its former appearance as to prevent any possibility that the public will associate the Site with Blockbuster Video Stores. Similarly, cl 18.8 operates in those circumstances to relieve Bytan from related obligations to which it would otherwise be subject pursuant to cll 18.3, 18.5 and 18.6.
Again, in providing for the working out of the purchase price of ‘the assets of the STORE’ by reference to their fair market value, cl 18.15 refers to, among other things, ‘reasonable depreciation of leasehold improvements owned by the FRANCHISEE and the equipment, furniture, fixtures, signs and inventory of the STORE.’[59] Usually, ‘leasehold improvements’ and ‘fixtures’ are not easily moveable. Further, cl 18.15 goes on to empower the franchisor to exclude from the assets purchased any equipment, furniture, fixtures, signs and inventory that are not approved as meeting quality standards for Blockbuster Video Stores.
[59]Emphasis added.
Moreover, in clause 18.18, immediately before the part extracted above, the following provisions appear:
… If FRANCHISOR or its assignee exercises this option to purchase, pending the closing of such purchase as hereinabove provided, FRANCHISOR shall have the right to appoint a manager to maintain the operation of the STORE. Alternatively, FRANCHISOR may required FRANCHISEE to close the STORE during such time period without removing any assets from the Site. FRANCHISEE shall maintain in force all insurance policies required pursuant to this Agreement, until the date of closing.[60]
The plain tenor of these provisions is that the contemplated acquisition of the assets will be for the purpose of continuing the franchised business at the current site. In the first two sentences, that is confirmed by the italicised words. As to the third sentence, the obligation to ‘maintain in force all insurance policies required pursuant to the Agreement’ picks up, among other things, the obligation of the franchisee under cl 11.19(b) to maintain ‘all risk property and casualty insurance for the replacement value of the STORE and its contents (including leasehold improvements, furniture, fixtures, equipment, signs, inventory, supplies and materials) … ‘.[61] This particular reference to ‘the STORE’ is obviously a reference to a physical structure, notwithstanding that in the agreement ‘the STORE’ most commonly means the business. The possibility that, despite the definition of ‘STORE’ in cl 1.48, the expression ‘the STORE’ might sometimes have a physical connotation in the agreement is acknowledged in the definition of ‘Site’, which contains a reference to ‘the interior and exterior of the structure housing the STORE’.[62]
[60]Emphasis added.
[61]Emphasis added.
[62]See cl 1.46.
Hence I completely agree with the Chief Justice that the relevant provisions of the agreement assume that the option to acquire assets would be exercised to enable Blockbuster to continue operating a franchise video store on the existing site. I agree, too, that this in turn is a significant factor militating in favour of Bytan’s contention that ‘the assets used in the STORE’ include the freehold when it is owned by the outgoing franchisee. Generally speaking, where the outgoing franchisee owns the freehold, Blockbuster could not be assured of being able to continue the operation of the business on the Site unless the freehold were included in the assets to be purchased.[63]
[63]Blockbuster could ask the outgoing franchisee for a lease but without any assurance of obtaining one. As the Chief Justice notes, cl 3.9 provides for one situation where it would be possible for Blockbuster to install another franchisee on the Site without acquiring the freehold or obtaining a fresh lease from the outgoing franchisee.
However, like the Chief Justice, I remain unpersuaded that the freehold is comprehended by the expression ‘the assets used in the STORE’. I agree that the factors so far referred to are outweighed by factors pointing in the other direction, and, in particular, by the three major factors to which the Chief Justice refers.
I would only add that cl 18.17(c)[64] makes express provision for the delivery to Blockbuster of instruments transferring to it the lease or sub-lease for the Site, but clause 18.17 as a whole contains no express provision for the delivery of instruments transferring any other proprietary interest in the land. In light of para (c) of cl 18.17, it is extremely difficult to read para (a) as covering instruments for the transfer of the freehold in the land, and para (b) is obviously inapplicable.
[64]Set out in her Honour’s judgment.
The assets can only be purchased for the specified purpose
Bytan’s second principal submission is that it is a condition of the agreement that the option to purchase the assets is only exercisable for the purpose of continuing the operation of the franchised business at the relevant site. Alternatively, Bytan submits that it is a condition of the agreement that the power to direct the franchisee to close the STORE pending the closing of the purchase is only exercisable where the direction is given for the purpose of continuing the operation of the franchised business at the relevant site. Bytan contends that the condition was not met in either case.
It is not necessary to decide whether a direction to close the STORE might be given separately at a time later than the time of the exercise of the option to purchase. Here, the purported direction was included in the written notice dated 3 February 2012 by which Blockbuster purported to exercise the option to purchase. If the putatively required purpose was absent from the exercise of the option to purchase then presumably it was also absent from the giving of the direction to close the STORE. In any event, of course, the greater includes the lesser, and so it would be enough for Bytan to succeed on its second principal submission as distinct from its subsidiary, alternative submission.
As the Chief Justice’s judgment records, the trial judge observed that it was ‘plain’ that the agreement was drafted upon the hypothesis that the franchisor would have the option to acquire the assets of the STORE ‘for the purpose of enabling the Franchisor to permit another Franchisee to continue conducting the franchise business after the expiration of the Franchise Agreement’.[65]
[65]Trial Judgment [8].
The trial judge made this observation in the context of considering what I have described as Bytan’s first principal submission (ie its submission relating to the freehold). As indicated above, based on my consideration of the provisions of the agreement as a whole (especially cll 18.7, 18.8, 18.13, 18.14, 18.15, 18.16, 18.17, 18.18 and the definition clauses), I would make a similar, albeit stronger, observation, namely that the agreement was drafted on the assumption, at least, that the option to purchase the assets would be exercised for the purpose of continuing the operation of the franchise business at the Site, and only for that purpose.
The question now is whether it should be concluded, in accordance with Bytan’s second principal submission, that there was a contractual condition that Blockbuster could only exercise the option to purchase the assets for the purpose of continuing the operation of the franchise business at the Site.
The trial judge did not draw this conclusion, despite making the observation to which I have referred. It is not entirely clear from his reasons why he did not. Although Blockbuster had contended before his Honour[66] (and continues to submit on appeal) that the test specified in BP Refinery (Westernport) Pty Ltd v Shire of Hastings[67] for finding an implied term in a written agreement was not met, his Honour made no reference to the BP Refinery test in his reasons. In an early part of his judgment his Honour said that the task of construing the terms of a contract involves ascertaining the meaning of the words used by the parties to the contract by reference to what a reasonable person would understand the words to convey,[68] and his Honour proceeded to note that ‘both parties contend that their competing construction of the Franchise Agreement follows from the plain words used in the relevant clause in the context in which they are found in the Agreement itself’.[69] It is true that this was said in the particular context of the dispute as to whether the freehold was included as part of ‘all the assets used in the STORE’ within the meaning of that phrase in cl 18.13. However his Honour referred to no other arguments or principles relating to the interpretation of contracts when he came to deal with what he described as Bytan’s contention made upon ‘the separate and independent basis that “the right to exercise the option to purchase the STORE is only available when Blockbuster either itself or through a new incoming franchisee intends to continue operating the STORE – it is not available to simply [sic] punish the outgoing franchisee by shutting it down”’.[70]
[66]Blockbuster’s written submissions in reply dated 27 April 2012, [10].
[67](1977) 180 CLR 266. See further below.
[68]Citing, appropriately, Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181, 188 (Gleeson CJ, Gummow and Hayne JJ). See also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 [40] (sentence cited above).
[69]Trial Judgment [6].
[70]Trial judgment [15].
In dealing briefly, as he did, with this part of Bytan’s case, the trial judge did not clearly distinguish between what I have identified above as Bytan’s second principal submission (relating to the exercise of the option to purchase itself) and Bytan’s alternative thereto (relating to the exercise of the subsidiary power to require the STORE to close temporarily). It is true that, as already mentioned, the two points are closely linked in that the purpose said to be requisite is the same in each case and both powers were purportedly exercised in the one notice in this instance. However, to conflate the two points completely is to risk falling into error. I think that this is what happened below. Without having first referred to or considered in this context any of the various provisions in the agreement which, to my mind, reveal that there is at least a contractual assumption that the option to purchase would only be exercised for the purpose of continuing the franchised business at the Site, his Honour turned directly to a submission made by Bytan to the effect that the ‘overwhelming inference [from the evidence] [was] that the object which Blockbuster is seeking to achieve by requiring the STORE to be closed is a defacto restraint’.[71] Immediately after recording that submission, his Honour set out, in full, cl 18.18, being the clause which confers on the franchisor the (subsidiary) power to require the temporary closing of the STORE. Thereafter his Honour appeared to concentrate exclusively on the question of the propriety of the giving of the direction to close the STORE in the light of cl 18.18. His Honour effectively assumed that the cl 18.18 power had potentially become available, instead of first determining whether, in the light of all of the relevant provisions of the agreement, the power to purchase the assets compulsorily had been duly exercised.
[71]Ibid. My emphasis. His Honour here included a reference to BB Australia Pty Ltd v Karioi Pty Ltd (2010) 278 ALR, a case in which a different franchisee alleged that Blockbuster had acted in unlawful restraint of trade in another way.
In my view, on the proper interpretation of the franchise agreement, that power had not been duly exercised.
By its second principal submission, Bytan is not inviting the Court to read an implied term into the agreement in order to give the agreement business efficacy. Rather, if I may adopt and adapt the language of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales,[72] Bytan invites the Court to embark upon an orthodox exercise in the interpretation of the language of a contract, namely to assign a meaning to a particular provision or (as I would add) to a particular group of provisions.[73] Hence, contrary to Blockbuster’s submission, the BP Refinery test does not necessarily apply, even though there is a formal written contract complete on its face.[74]
[72](1982) 149 CLR 337, 345.
[73]See and compare Stanford v Bayne [1923] VLR 283, esp at 288 (Cussen J, with whom Schutt J agreed); cf at 289-290 (McArthur J, dissenting); Marcus Clarke (Vic) Ltd v Brown (1928) 40 CLR 540 at 549-550 (Knox CJ, Isaacs and Powers JJ); cf at 553-554 (Higgins J, dissenting); Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] QB 556, 577-578.
[74]Compare Parramatta Design and Development Pty Ltd v Concrete Pty Ltd (2005) 144 FCR 264 (Full Court).
In Brambles Holdings Ltd v Bathurst City Council,[75] Heydon JA set out five principles of contract law which were relevant in that case. After setting out the first four principles, his Honour said:
[75](2001) 53 NSWLR 153, 163-164 [24]-[28].
[28] The fifth relevant principle is that terms may be implied in one of four ways. The trial judge set out this orthodox classification in his unreported interlocutory judgment in Carlton & United Breweries Ltd v Tooth & Co Ltd (Hodgson J, 11 June 1985, unreported) but summarised at (1985) 6 IPR 319, which was quoted by Young J, the trial judge in that case (Carlton & United Breweries Ltd v Tooth & Co Ltd (1986) 7 IPR 581 at 605–606):
“A more precise classification of the different types of implied terms was given by Hodgson J in his first interlocutory judgment in the current proceedings. His Honour set out four classes of implied terms, the first two of which are in the class of terms implied in law, the second two the implied terms in fact. His Honour said:
‘There is a spectrum of different types of implied terms covering, inter alia, the following:
(i)Implications contained in the express words of the contract: see Marcus Clarke (Vic) Ltd v Brown (1928) 40 CLR 540 at 553–4.
(ii)Implications from the “nature of the contract itself ” as expressed in the words of the contract: see Liverpool City Council v Irwin [1977] AC 239.
(iii)Implications from usage (for example, mercantile contracts).
(iv)Implications from considerations of business efficacy: see BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 52 ALJR 20 at 26; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.’ ”
[29] The reasoning of the trial judge conformed to these principles. The submissions of the defendant did not.
(a) Implication of terms to give business efficacy
[30] The criticism based on failure to apply the principles as to the implication of terms fastened on the fact that the trial judge described what he did as a “drawing out of what is implied by the language of the contract itself ”. The defendant cited the leading cases about implying terms to give business efficacy and developed arguments designed to show that the terms found by the trial judge were not reasonable, equitable, necessary or obvious. This criticism is entirely baseless. The trial judge made it plain that he was not implying a term to give business efficacy. He said: “This is not an implication of a term by operation of law or on the basis of business efficacy; but rather the drawing out of what is implied by the language of the contract itself ”.
[31] The trial judge was indicating that, of the four implications he had referred to in Carlton & United Breweries Ltd v Tooth & Co Ltd (1985), he was not making implication (ii) or (iv), but (i). Despite the number of occasions on which the defendant said that what the trial judge “was really doing was implying a term and on a basis that didn't comply with the usual rules”, the processes he employed were processes of construction.[76]
[76]At 164-165 [28]-[31]. These observations were cited with approval in Boreland v Docker [2007] NSWCA 94, [111] and in McCourt v Cranston [2012] WASCA 60, [58]-[59] per Murphy JA (dissenting). See also Lewison and Hughes, The Interpretation of Contracts in Australia, 217-226 [6.01], esp at 222-225; Seddon & Ellinghaus, Cheshire & Fifoot’s Law of Contract, 9th Australian Edition, [10.40].
More recently, in Gordon & Gotch Australia Pty Ltd v Horwitz Publications Pty Ltd,[77] the New South Wales Court of Appeal likewise rejected an argument that an arbitrator had engaged inappropriately in a process of implication. The leading judgment was given by Allsop P and Sackville AJA, with whom Beazley AJA agreed. Allsop P and Sackville AJA said:
[77][2008] NSWCA 257.
What the arbitrator did was to seek to give content to the words of the written agreement by reference, primarily, to the text, structure and evident aims and commercial purposes of the document.[78]
Their Honours went on to comment that the taxonomy outlined by Hodgson J in Carlton & United Breweries Ltd as adopted by Heydon JA in Brambles was not authority for the proposition that the orthodox conception of interpretation is to be fully equated with the implication of terms. They said:
Interpretation is the ascertainment of the meaning which a document would convey to a reasonable person in the context … . That interpretation can shade into implication and, indeed, that both may perhaps be seen as part of the one process of the construction of words in a document to identify linguistic and legal meaning can be accepted. However, the distinction between interpretation and implication of terms is recognised (even if the limits of each are not capable of clear definition).[79]
Their Honours then cited with approval the following observations made by Steyn LJ (speaking for himself, Dillon and Rose LJ) in the Court of Appeal of England and Wales in P & O Property Holdings Ltd v Norwich Union Life Assurance Society[80]:
… [I]t is important never to forget the purpose of the process of interpretation. It is to assign to the language chosen by the parties the most appropriate meaning which the words can legitimately bear … (b)ut interpretation must not become a route to supplementing or changing the contractual regime which the parties have chosen by the language appearing above their signature. That is an end which can only be achieved by implication, in law or fact, of a term into the chosen language of the party. That process can, however, only be pressed into service if the implication is essential to make the contract work, or if it is otherwise entirely obvious.
[78]At [32].
[79]At [36]. Citations omitted.
[80]Unreported, 1 April 1993, extracted in [1995] LMCLQ at [19]. Emphasis added.
In the present case Bytan’s submission does not involve ‘supplementing or changing’ the contractual regime. This is not a contract which fails to deal at all with the matter in question. On the contrary, cll 18.13-18.18 deal with the matter in some detail. Bytan’s contentions are entirely consistent with the tenor of those provisions. Blockbuster’s contentions are fundamentally inconsistent with that tenor.
In Gordon & Gotch[81] Allsop P and Sackville AJA cited with apparent approval the decision of the House of Lords in Equitable Life Assurance Society v Hyman.[82] In that case the directors of the Assurance Society had purported to exercise a broadly worded, discretionary, contractual power (contained in article 65 of the articles of the Society) by declaring final bonuses on certain retirement policies in such a way that a group of policy holders effectively lost the benefit of a guaranteed annuity rate (‘GAR’) to which they were entitled under their particular policies. The House of Lords held that the decision of the Society was beyond its contractual power. Lord Steyn delivered the leading judgment. In his Lordship’s view, it was impossible to assign to the language of article 65 by construction a restriction precluding the directors from overriding the guaranteed annuity rates. Therefore the critical question was whether a relevant restriction might be implied into article 65. It was not a case in which a standardised term could be implied by law. His Lordship said:
If a term is to be implied, it could only be a term implied from the language of article 65 read in its particular commercial setting. Such implied terms operate as ad hoc gap fillers. …
... The process “is one of construction of the agreement as a whole in its commercial setting”: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, 212E, per Lord Hoffmann. This principle is sparingly and cautiously used and may never be employed to imply a term in conflict with the express terms of the text. The legal test for the implication of such a term is a standard of strict necessity. This is how I must approach the question whether a term is to be implied into article 65(1) which precludes the directors from adopting a principle which has the effect of overriding or undermining the guaranteed annuity rate.
The inquiry is entirely constructional in nature: proceeding from the expressed terms of article 65, viewed against its objective setting, the question is whether the implication is strictly necessary. My Lords, as counsel for the GAR policy holders observe, final bonuses are not bounty. They are a significant part of the consideration for the premiums paid. And the directors’ discretion as to the amount and distribution of bonuses are conferred for the benefit of policy holders. In this context the self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policy holder against a fall in market annuity rates by ensuring that if the fall occurs he will be better off than he would have been with market rates. The choice is given to the GAR policy holder and not to the Society. It cannot be seriously doubted that the provision for guaranteed annuity rates was a good selling point in the marketing by the Society of the GAR policies. It is also obvious that it would have been a significant attraction for purchasers of GAR policies. The Society points out that no special charge was made for the inclusion in the policy of GAR provisions. So be it. This factor does not alter the reasonable expectations of the parties. The supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights. These are the circumstances in which the directors of the Society resolved upon a differential policy which was designed to deprive the relevant guarantees of any substantial value. In my judgment an implication precluding the use of the directors’ discretion in this way is strictly necessary. The implication is essential to give effect to the reasonable expectations of the parties. The stringent test applicable to the implication of terms is satisfied.[83]
(emphasis added)
[81][2008] NSWCA 257, [36].
[82][2002] 1 AC 408.
[83]At 459. My emphasis.
Lord Cooke of Thorndon delivered a short, concurring judgment. His Lordship said:
My Lords, in his speech, which I have had the advantage of seeing in draft, my noble and learned friend, Lord Steyn, solves this case by invoking the principle that an implied term may be derived from the language of a document read in its particular factual setting. I agree with that way of viewing the case; but the same conclusion may be reached by starting from the principle that no legal discretion, however widely worded (here, by article 65(1), the directors may apportion bonuses “on such principles, and by such methods, as they may from time to time determine”), can be exercised for purposes contrary to those of the instrument by which it is conferred.
As Lord Woolf MR pointed out in his judgment in the Court of Appeal in this case …, this principle is common to administrative law (eg Padfield v Minister for Agriculture, Fisheries and Food[84]) and sundry fields of private law (eg Howard Smith Ltd v Ampol Petroleum[85]). In an administrative law context, violation of the principle may result in no more than invalidity; in a contractual context, it may result in a breach of contract, which should be rectified. In this case I think that the apportionment of the final bonus for an inadmissible purpose did result in such a breach of contract. Mr Sumption for the respondent, when pressed with the point, did not shrink from that proposition.[86]
[84][1968] AC 997.
[85][1974] AC 821.
[86]At 460. My emphasis.
Each of the other three members of the House of Lords expressed agreement with both the reasons of Lord Steyn and the reasons of Lord Cooke of Thorndon. That is to say, at least three other members of the House of Lords agreed with Lord Cooke that a discretion conferred by a contractual instrument cannot be exercised for purposes contrary to those of that instrument. The House as a whole agreed with Lord Steyn that the question whether, implicitly, the purposes of the instrument were indeed limited in a particular way was to be determined by having regard to the reasonable expectations of the parties. The reference to the reasonable expectations of the parties was no doubt a reference to what reasonable persons in the positions of the parties would have understood or expected, at the time of entering into the agreement, based on the very words of the agreement and on any other matters of relevance under the standard principles of objective contractual interpretation.
In Pegela Pty Ltd v National Mutual Life Association of Australasia Ltd[87] Redlich J (as his Honour then was) referred to the passages in the speeches of Lord Steyn and Lord Cooke of Thorndon in Equitable Life which are set out above. After considering various other cases referring to the concept of the reasonable expectations of the parties, Redlich J concluded as follows:
Any “reasonable expectations” of the plaintiffs will be material when considering the effects of the defendant’s conduct in relation to the claims of estoppel and misleading and deceptive conduct. The plaintiff’s “reasonable expectations” may, within narrow confines, also assume a relevance within well established principles which govern the interpretation of ambiguous contractual terms or where there is a question as to the implication of terms.
Construction questions are not to be resolved by reference to the uncommunicated and subjective views of one of the parties. This was not disputed during oral argument. The concept of “reasonable expectations” does not constitute a separate cause of action or a discrete basis upon which the plaintiff’s claims can be made out.
Regard to “reasonable expectations”, so defined, does not involve any variation or extension of existing principles concerning the resolution of ambiguous contractual terms or the implication of necessary terms. Where there is an ambiguity in the terms of the contract, reasonable expectations arising from an objective reading of the terms, viewed against the background facts, will be a relevant factor. Similarly, in relation to the implication of terms, the terms must be both reasonable and necessary, based upon an objective reading of the terms and the background facts. The result must be commercially sensible and one which, upon an objective view of the terms and background facts, was intended. Both at law and as a matter of good industry practice a life insurance company must avoid the creation of false expectations.[88]
[87][2006] VSC 507, [222]-[223].
[88]At [240]-[242]. Citation omitted. My emphasis.
An appeal from the judgment of Redlich J was allowed in part[89] but there is nothing in the judgment of the Court of Appeal which casts any doubt on the correctness of his Honour’s general observations set out above. The Court of Appeal did not refer (adversely or at all) to the concept of the reasonable expectations of the parties to the contract or to the judgment of the House of Lords in Equitable Life.
[89](2008) 21 VR 351.
In the present case, it seems to me that the very words of the franchise agreement would create in the mind of the franchisee (or in the mind of any reasonable reader) a reasonable expectation that the franchisor would not – indeed, could not – force the franchisee to sell any of the franchisee’s property to the franchisor otherwise than for the purpose of the continuation of a Blockbuster video store on the Site.
In my view, the agreement plainly assumes that the option to purchase would only be exercisable to continue the operation of the franchised business at the Site. This is sufficient to show that the relevant provisions are at least ambiguous as to whether a corresponding contractual condition is included.
In one respect, at least, Bytan’s position is considerably stronger than that of the disaffected policy holders in Equitable Life, who were in any event successful. The provisions of the franchise agreement which suggest a restriction or limitation as to purpose are the self same provisions which create and regulate the option to purchase. By contrast, in Equitable Life, the broadly expressed provisions of article 65 stood apart from the terms of the policies which were found to create the reasonable expectations of the plaintiffs. Despite this, Lord Steyn held that the limitation as to purpose was implied as a matter of “strict necessity”. In the present case, Bytan need not demonstrate “strict necessity”. Indeed it might perhaps be said that in a case like the present the onus is on Blockbuster to demonstrate that it has the power it claims to have.[90] In any event, the question is: what is relevantly meant by the complex of provisions contained in cll 18.13-18.18, in the context of the agreement as a whole. Those provisions are not to be read on the basis that the interests of the franchisee are of no account at all. Quite the contrary. It is no small thing to compel a company to sell, at a time not of its choosing, all of the assets it has been using in a business, especially where the company is otherwise free to continue to use those assets in another business at the same premises (as Bytan is presently doing) and where nothing is to be payable for the goodwill of the previous business. Further, a direction to submit to the on-site management of an outsider for up to 3 months or to ‘close the STORE’[91] for up to 3 months may be highly intrusive and highly burdensome.
[90]See Hart v McDonald (1910) 10 CLR 417, 427-429 (O’Connor J); compare (in relation to implications from ‘business efficacy’) Luxor (Eastbourne) Ltd v Cooper [1941] AC 108, 137 and the other cases referred to by Carter et al, Contract Law in Australia, 5th edition; [11-02].
[91]As to whether it was even possible for Bytan to ‘close the STORE’ on 3 February 2012, see below.
Clause 18.18 of the franchise agreement treats a direction to ‘close the STORE’ temporarily as a direct alternative to the appointment by Blockbuster of a manager ‘to maintain the operation of the STORE’. The very clear implication of cl 18.18 is that neither of these steps can be taken except for the purpose of maintaining (either continuously or with a brief interruption) the operation of the STORE at the Site. If that be so, then it surely follows that, to be valid, the prior step in the chain – that of exercising the option to purchase – can only be taken for that same purpose.
The relevant condition being embedded in the very words of the provisions which create and regulate the option to purchase, Bytan does not need to, and does not, rely on any general doctrine of good faith in the exercise of contractual powers nor even on a specific implication of good faith in the exercise of this particular contractual power. [92]
[92]See and compare Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL (Receivers and Managers appointed) [2005] VSCA 228; Meridian Retail Pty Ltd v Unity Retail Network Pty Ltd [2006] VSC 223 (Dodds-Streeton J), [162]-[200], [212]-[214]; Tote Tasmania v Garrott [2008] TASSC 86, [16]-[18]; Specialist Diagnostic Services Pty Ltd v Healthscope Ltd [2012] VSCA 175 [79]-[81], [86]-[91]; A. Terry and C. Lernik, Franchising and the Quest for the Holy Grail; Good Faith or Good Intentions (2009) 33(2) Melbourne University Law Review 542.
On my reading of the franchise agreement, the limitation as to purpose is not merely a contractual assumption but a contractual condition. There is nothing novel about discerning a contractual condition from or within a contractual assumption.[93]
[93]See Marcus Clarke (Vic) Ltd v Brown (1928) 40 CLR 540, 549-550 (Knox CJ, Isaacs and Powers JJ.) (Held: References in contractual documents to a ‘new’ car meant that car sold was warranted to be new). And for a recent example in relation to the sale of land, see McCourt v Cranston [2012] WASCA 60, [34]-[40] per Pullin JA with whom Newnes JA agreed (Murphy JA dissenting), noted at (2012) 86 Australian Law Journal 663. (Reference in contract for sale of land to expected sale by purchaser of purchaser’s own land held to create a condition of sale.)
My conclusion on this part of the appeal is based simply on my interpretation of the actual words of the contract. If this involves discerning an implication it is an implication within class (i) of the taxonomy of implications referred to by Heydon JA in Brambles. It does not involve reading in an implied term to give the contract business efficacy. Hence Bytan does not need to demonstrate compliance with the five strict requirements specified in BP Refinery for such cases. In any event, it is by no means clear that those requirements would not be satisfied.
One of the BP Refinery requirements is that the term be capable of clear expression. Blockbuster argued that no condition of the kind suggested by Bytan should be discerned in the agreement because it was possible that Blockbuster’s intentions or its ability with respect to the continuation of the operation of the STORE might fluctuate. I see no merit in that contention. It assumes in its own favour that all of the provisions in cll 18.13 to 18.18 are designed to confer unfettered powers on Blockbuster. In my view there is nothing unclear or unworkable about a condition that the requisite purpose must exist at the date of the purported exercise of the option. That is the moment at which the validity of the purported exercise of the option is to be tested. It is no answer that, after exercising the option, the franchisor might not wish to, or might not be able to, proceed with the continuation of the franchised business at the Site. That possibility is something which the franchisor can take into account and assess when determining whether or not to exercise the option. In such a situation the franchisor could of course seek to enter into negotiations with the franchisee to terminate the sale process.
Turning to the other BP Refinery requirements, there is certainly nothing unreasonable or inequitable about Bytan’s interpretation of the relevant provisions of the agreement. Further, it is consistent with the assumption on which, plainly, the agreement was framed, whereas Blockbuster’s interpretation is not. Thus the condition is necessary to give effect to that assumption and to the corresponding reasonable expectations of the parties. As to the remaining requirement stated in BP Refinery – that the term in question be ‘so obvious it goes without saying’ – I think that that the condition as to purpose is obvious and, indeed, that it has actually been ‘said’. It is discernable within the very language of the contract.
However, I need not and do not determine whether or not the BP Refinery requirements (had they been applicable) would have been met. It is enough that, in my view, the condition as to purpose is included in the agreement on its proper, orthodox interpretation.
Blockbuster did not seriously suggest that it had given the notice dated 3 February 2012 for the purpose of continuing the operation of the Blockbuster business at the Site. Plainly the notice was not given for that purpose. Some two weeks previously, by letter dated 19 January 2012, Blockbuster confirmed that at the expiration of the agreement Bytan was to comply with cll 18.3, 18.4 and 18.5 of the franchise agreement, ie to cease using and to remove all exterior and interior signage displaying the Blockbuster trademarks and to transfer relevant telephone numbers, directory listings, internet listings and internet accounts relating to the STORE. Blockbuster confirmed in that letter that it was ‘not interested in purchasing the real estate from which the Blockbuster Turramurra store operates’. As at 3 February 2012 there was no suggestion that Bytan would lease the premises to Blockbuster or to any franchisee of Blockbuster.[94] Moreover, by 3 February 2012 there was no ‘STORE’ left to purchase or to continue on with. In accordance with the mutual position of the parties as expressed in correspondence between them during January 2012, by 3 February 2012 Bytan had entirely ceased operation of the relevant Blockbuster video store business. That business no longer existed. Bytan had taken the measures required by clause 18.7 ‘to distinguish the site of the STORE so clearly from its former appearance as to prevent any possibility that the public will associate the Site with Blockbuster video stores’. It had also complied with its other, related obligations under the contract, as Blockbuster had insisted it should.
[94]It is true that by separate letters each dated 8 March 2012 Blockbuster’s solicitors told Bytan’s solicitors that Blockbuster had intended to review its position in relation to purchasing the land in the event that the Court’s decision on that point went against Blockbuster and also that Blockbuster was and had at all relevant times been willing and able to enter into negotiations with Bytan with regard to negotiating a lease for he premises. However those suggestions were only made by Blockbuster after the commencement of the proceeding and, indeed, only after Bytan had issued its cross-claim for declarations. I agree with Bytan that those letters should be given no weight in the absence of any contemporaneous evidence of any intention by Blockbuster to continue to operate the STORE and the express disavowal in the purported notice of exercise of the option of Blockbuster wanting any interest in the freehold: See Bytan’s outline of submissions on the appeal dated 8 June 2012, [15].
It follows that, in my view, the relevant contractual condition was not met and that Blockbuster’s notice of exercise of the option to purchase was invalid and ineffective. I consider that Bytan’s second principal submission succeeds accordingly. That would be sufficient to warrant the setting aside of each of the orders made by the trial judge.
The injunction requiring Bytan to ‘close the STORE’ should be set aside in any event
Strictly speaking it is unnecessary to consider Bytan’s alternative argument. If the option to purchase was not validly exercised, the direction to ‘close the STORE’, being merely consequential, could have no force or effect. Hence it could not properly be enforced by injunction or otherwise. Nonetheless I will consider Bytan’s alternative argument.
The argument is to the effect that, even if the power to exercise the option to purchase the assets was not subject to any condition as to purpose, the power to direct the franchisee to ‘close the STORE’ was subject to such a condition.
I agree with Bytan that, even if, on the proper interpretation of the agreement, the option to purchase the assets was relevantly unconditional, it should still be held that the existence of the power to direct that the STORE be closed depended on the franchisor having, at the time of giving the direction, the purpose of continuing the operation of the STORE at the Site. As mentioned above, cl 18.18 gives the franchisor two alternative powers in relation to the period pending the settlement of the asset purchase. First, the franchisor may appoint a manager ‘to maintain the operation of the STORE’. Alternatively, it may ‘require FRANCHISEE to close the STORE during such time period without removing any assets from the Site’. It is worth repeating that in the agreement ‘the STORE’ usually means the relevant Blockbuster video store business and occasionally means the relevant Blockbuster physical video store. Hence a manager can only be appointed ‘to maintain’ the relevant Blockbuster video store business or the relevant Blockbuster physical video store. Undoubtedly, the word ‘to’ is here used in a purposive sense. Hence, absent a purpose of maintaining the relevant Blockbuster video store business or the relevant Blockbuster video store, then, on the plain words of cl 18.18, the power to appoint a manager simply does not arise. Similarly, if the relevant Blockbuster video store business or the relevant Blockbuster video store is no longer operating and is never to be re-opened, it cannot be the subject of a direction to ‘close’ it in the sense intended in cl 18.18, ie to close it for a temporary or limited period only, namely the period ‘pending the closing of the [asset] purchase’.
In the present case, as indicated above, ‘the STORE’ was no longer operating as at the date of the purported direction (3 February 2012). The STORE was never to be re-opened thereafter. Hence it could no longer be closed in the sense intended by cl 18.18. It follows that Blockbuster’s direction to Bytan to ‘close the STORE’ was beyond anything contemplated in the agreement and was thus invalid and ineffective. Accordingly, Bytan’s alternative argument must also succeed.
If Bytan had succeeded in the appeal on this alternative argument alone, the consequences would have been limited. The injunction requiring Bytan to ‘close the STORE’ would have gone, but Blockbuster’s exercise of the option to purchase would have remained valid and Blockbuster might have been entitled to some kind of order to protect its equitable interest in the assets purchased. However I need not consider those matters further, because in my view the appeal should be allowed on the wider basis to which I have referred.
The position of the Lattachers
If the substantive appeal had fallen to be allowed in accordance with my views, the issue of the correctness of the decision of the trial judge to award costs against the Lattachers would have disappeared. However, the substantive appeal will in fact be dismissed in accordance with the views of the majority. In those circumstances I would agree with the majority that the decision of the trial judge to award costs against the Lattachers should not be disturbed. The Lattachers were guarantors of Bytan’s obligations under the franchise agreement and took no steps to extract themselves from the litigation prior to the time of trial.
The interlocutory stay
In view of the conclusion of all of us that the freehold is not comprehended within the expression ‘all the assets used in the STORE’, I apprehend that there is little or no prospect that either party will seek an extension of the agreed 7 day period currently in place for Blockbuster to consider the issuing of a fresh notice covering the freehold. Nor do I apprehend that the Court needs to consider any other matters arising from the terms on which Bytan obtained a stay of the trial judge’s orders. However, if either party so requested, I would be minded to reserve liberty to apply in that regard and/or in relation to costs for a suitable period.
Conclusion and orders on the appeal
I agree with the Chief Justice that Bytan’s first principal submission – to the effect that Blockbuster was required to include Bytan’s freehold estate in the proposed purchase of ‘all the assets used in the STORE’ – should not succeed. However I would allow the appeal on the ground advanced as Bytan’s second principal submission, namely that Blockbuster could only validly exercise the option to purchase for the purpose of continuing the operation of the franchised business at the current site and Blockbuster had no such purpose. I would also hold that, in any event, the direction to close the STORE was invalid and ineffective, for the reasons I have stated.
However, even if my views had prevailed, I would have seen no need to make declarations of the kind sought by Bytan’s summons. The Court’s reasons would have sufficiently covered the matters raised. The points on which Bytan has persuaded me are mainly in the nature of intermediate conclusions leading to the ultimate result. To that extent declarations of the kind sought would have been inappropriate.[95] It would have been sufficient to set aside all of the orders made by the trial judge and to order instead that Blockbuster’s amended originating motion be dismissed.
[95]Sidameneo (No 456) Pty Ltd v Alexdander (No 2) [2012] NSWCA 87, [14], [30].
Accordingly, I would make orders that the appeal be allowed; that the orders made by the trial judge on 4 May 2012 be set aside; that in lieu thereof, there be an order that the originating motion (as amended) be dismissed; that, subject to any submissions to the contrary, the respondent (Blockbuster) pay the costs of the appellants (Bytan and the Lattachers) of the trial and of the appeal; and that the parties have liberty to apply in relation to any stay or like order.
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