Civic Video Pty Ltd v Paterson [No 3] - [2014] WASC 321

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: CIVIC VIDEO PTY LTD -v- PATERSON [No 3] [2014] WASC 321

CORAM: CHANEY J

HEARD: 16 - 19 JUNE 2014

DELIVERED : 15 SEPTEMBER 2014

FILE NO/S: CIV 2144 of 2008

BETWEEN: CIVIC VIDEO PTY LTD
Plaintiff
AND
ROBERT HENRY PATERSON
First Defendant
MALCOLM THOMPSON
Second Defendant
BARBARA THOMPSON
Third Defendant

Catchwords:

Franchise agreements - Repudiation of franchise agreements - Whether repudiation caused loss - Calculating damages - Loss of chance - Whether there was intentional interference with contractual relations

Legislation:

Nil

Result:

Plaintiff's claim of intentional interference with contractual relations by first defendant be dismissed
Plaintiff awarded damages for loss caused by second and third defendants' repudiation of contract

Category: B

Representation:

Counsel:

Plaintiff:     Mr I R Pike SC
First Defendant            :     Mr A Metaxas
Second Defendant        :     In person
Third Defendant           :     In person

Solicitors:

Plaintiff:     Marque Lawyers
First Defendant            :     Metaxas & Hager
Second Defendant        :     In person
Third Defendant           :     In person

Cases referred to in judgment:

Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (1995) 58 FCR 26
Boase v Seven Network (Operations) Ltd [2005] WASC 269
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156; (2012) 207 FCR 220
Highway Hauliers Pty Ltd v Matthew Maxwell [2012] WASC 53
Robinson v Harman (1848) 1 Exch 850; (1848) 154 ER 363
Sellars v Adelaide Petroleum NL; Poseidon Ltd v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332
Short v City Bank of Sydney [1912] HCA 54; (1912) 15 CLR 148

Table of Contents

The franchise agreements
The Thompsons' efforts to sell
Mr Paterson's involvement
The Thompsons' sale to Mr Paterson
The Thompsons' breach of contract
Damages for breach

Principles applicable to the assessment of damages
The plaintiff's evidence as to assessment of damages
Evidence as to second and third defendants' solvency and capacity to continue trading
Whether the plaintiff should be awarded damages for breach of the Durlacher franchise agreement
Whether the plaintiff should be awarded damages for breach of the Highway franchise agreement

The claim against Mr Paterson

Principles in relation to intentional interference with contractual relations
Whether first defendant intentionally interfered with the franchise agreements

Conclusion

CHANEY J: The plaintiff, Civic Video Pty Ltd (Civic), is a franchisor of video sales and rental stores, which trade under the Civic Video banner, throughout Australia. The second and the third defendants, Mr Malcolm and Mrs Barbara Thompson (Thompsons) are husband and wife who were the franchisees of two Civic Video stores in Geraldton, referred to as the Durlacher Street store and the Highway store. They operated those stores under franchise agreements with Civic.
In September 2006, the Thompsons entered into agreements with the first defendant, Mr Robert Henry Paterson, for the purchase by Mr Paterson of the assets of both the Durlacher Street store and the Highway store in terms that required both of the stores to be closed. Mr Paterson then owned, and still owns, a video store in Geraldton operating under a competing franchise known as Video Ezy. Upon his purchase of the two stores from the Thompsons, Mr Paterson closed the Durlacher Street store, and commenced operation of the Highway store under the Video Ezy banner.
In these proceedings, Civic claims that the sale by the Thompsons constituted a repudiation of the franchise agreements in relation to the two stores, which repudiation it accepted, and it claims damages against the Thompsons for breach of contract measured by the franchise fees and advertising expenses they would have received if the franchise agreements had run their course. Civic claims that Mr Paterson induced or procured that breach of contract and seeks damages from him on that basis.
The Thompsons deny that they breached the franchise agreements, but say that if they did, Civic has not suffered any loss because their businesses were failing and would have closed down in any event. Mr Paterson denies that he is liable for procuring or inducing any breach of contract and asserts that, in any event, Civic did not suffer any loss by the termination of the franchise agreements relating to the two stores because the Thompsons were insolvent and would not have continued trading if they had not sold the assets of the business to him.
In order to consider Civic's claims, it is necessary to set out the facts surrounding the sale of the assets of the two stores to Mr Paterson.

The franchise agreements

The Thompsons and Civic entered into a franchise agreement to operate the Durlacher Street store on 20 December 1999. The agreement was for a period of five years. On 20 December 2004, a further franchise agreement for the Durlacher Street store was executed (Durlacher franchise agreement). The term of the Durlacher franchise agreement was 10 years. The Thompsons occupied the Durlacher Street store pursuant to a sublease from Mr Richard Baylis, who apparently held a long‑term lease of the commercial property of which the Durlacher Street store formed a part.
On 2 June 2001, the Thompsons entered the initial franchise agreement in relation to the Highway store, which was located at 171 Northwest Coastal Highway, Geraldton, again for a term of five years. The agreement for the Highway store was renewed by the execution of a franchise agreement on 2 June 2006 for a further term of 10 years expiring on 2 June 2016 (Highway franchise agreement).
The franchise agreements for each of the Durlacher Street store and the Highway store were in substantially the same terms. Each franchise agreement included covenants that:
i.the franchisee must exercise its best endeavours to conduct and promote the franchise business, during such hours as are observed by similar businesses (clauses 10.2 ‑ 10.10);
ii.the franchisor had the right to terminate the agreement by immediate written notice if the franchisee voluntarily abandoned the business (clause 18.1(c)) or if the franchisee caused or permitted its rights of possession as lessee of the relevant premises to be terminated prematurely (clause 18.4(d));
iii.the franchisee was prohibited from selling, assigning or transferring any interest in the business or any rights granted under the franchise agreement without the franchisor's prior written consent (clause 17.1);
iv.termination would not release any party from the obligation to pay any sum then or subsequently owing to the other, or prejudice any right or remedy accrued to either party prior to termination (clause 19.1);
v.upon termination, the franchisee was obliged to pay to the franchisor any monies which had become due and remained unpaid, and to take steps to cease using material or signage or other matter relating to the Civic Video system (clause 19.2);
vi.upon termination, the franchisor had the option to:
•purchase all of the products (as defined in each agreement), fixtures and fittings, supplies or materials owned by the franchisee used in relation to the operation of the respective stores;
•take over or be granted a lease or licence of the premises occupied by the particular store; and
•take over or be granted a lease or licence of equipment used in relation to the operation of the particular store (clause 19.3(b)).

The Thompsons' efforts to sell

Both Mr and Mrs Thompson gave evidence. I consider that they gave their evidence honestly and, in general, I accept it.
Mr Thompson explained that, in early 2004, he recognised that a number of factors had affected the viability of the video industry and his own businesses in an adverse manner. As a result of advice given to him by his accountants, he listed both of his stores with a local real estate agent for sale. He also spoke to his landlord, Mr Baylis, himself a Civic franchisee, and requested that Mr Baylis make his business broker aware that the Thompsons' stores were for sale.
The Thompsons' desire to sell was known to Civic. A field report, prepared by Civic's Franchise Business Manager, Mr Michael O'Connell, and dated 4 October 2005, refers to a discussion between Mr O'Connell and Mr Thompson concerning the sale of the business within the following 12 months as a 'business plan'.
No offers were received in relation to the stores between August 2004 and mid‑2006. Mr Thompson said that, during that period, he and Mrs Thompson were encountering financial difficulties. They fell into arrears in relation to the franchise fees payable to Civic. By April 2006, Mr Thompson said that he could not continue to operate the Highway store because they could not afford to pay the rent. The lease for the Highway store expired on 14 April 2006, and the Thompsons decided not to exercise the option to renew the lease. By May 2006, the Thompsons were in arrears in relation to their rent for the Highway store, which by then they were holding over as monthly tenants. Proceedings were commenced by the landlord in the Magistrates Court at Geraldton seeking an order for possession. That claim was apparently settled by payment of the arrears for May and June pursuant to an agreement reached with the landlord and its agent. Mr Thompson said that he was also in arrears in relation to his rent payments for the Durlacher Street store.
In early 2006, Mr Thompson was introduced to Mr Steven Smith, a business broker, by Mr Baylis. Mr Smith also gave evidence. I found him to be a credible and honest witness.
Mr Smith said that, in early 2006, Mr Baylis had telephoned and told him that he wanted to engage Mr Smith because Mr Baylis' company, MCMC Pty Ltd, had a long‑term lease of a commercial complex at 89 Durlacher Street Geraldton, which included the Durlacher Street store, but that he did not have many tenants and the Thompsons were not paying their rent on time. Mr Baylis told Mr Smith that he was looking for someone to buy the head lease from him for approximately $500,000. He suggested that Mr Smith might telephone Mr Thompson. In early May 2006, Mr Smith telephoned Mr Thompson, who told him that he owned two Civic Video stores and that both stores were losing money. Mr Smith said that Mr Thompson told him that he had been trying to sell the stores privately without success, and that if both stores were not sold in the following six months they would have to close the doors as they would by then have run out of money. Mr Thompson said that he would like to engage Mr Smith to try to sell the stores, to which Mr Smith agreed.
In early June 2006, Mr Smith delivered an offer by Mr John Rock, who was an existing Civic franchisee, to purchase the two stores. The offer price was $405,000 plus stock at valuation for both stores. The offers were accepted by the Thompsons but were subject to certain conditions. Pursuant to clause 17 of the franchise agreements, the consent of Civic was sought to the sale. Mr Rock's proposal was that he would close one of the stores and transfer the stock to the other.
Mr Rod Laycock is the General Manager of Civic. It is part of his role to oversee and approve any proposed sale of a franchisee's business. In his evidence, he explained that, at the time of considering Mr Rock's offer, he decided it would not be in Civic's best interest to let one of its two Geraldton stores close. If that were to happen, Civic would lose a source of franchise fees and would also lose what Mr Laycock considered to be a strong market position in Geraldton. Accordingly, he spoke to Mr O'Connell and told him that Civic would not consent to the closure of one of the stores being a condition of the sale to Mr Rock. The agreement between Mr Rock and the Thompsons thereupon came to an end, apparently on the basis that the bank nominated to provide finance declined to do so because, like Mr Rock, the bank did not consider that conducting business from the two stores was viable. There was no dispute at trial that the refusal of Civic to consent to the closure of one of the stores was the essential cause of the termination of the contracts with Mr Rock.
Mr Thompson said, and I accept, that news of the fact that Mr Rock was not proceeding with the purchase was devastating for the Thompsons. The formal advice from Mr Rock's settlement agent that the contracts were at an end was dated 22 August 2006.

Mr Paterson's involvement

Mr Paterson has been involved in the video industry since 1983. He or his family are currently the owners of 17 Video Ezy stores in Western Australia. One of those stores was, and apparently still is, at 3 Bayley Street, Geraldton.
Up until 2006, there were five video stores in Geraldton. Mr Paterson said that, before 2006, he had not actively pursued expansion in Geraldton as he was of the opinion that there were too many video stores there for the size of the market. He considered, however, that in time, market pressures would cause some of those stores to close. By 2005 or 2006, Mr Paterson considered that he needed to grow his presence in Geraldton to at least two stores in order to spread his advertising costs base and operating costs.
According to Mr Smith, in mid‑August 2006, he telephoned Mr Paterson and, subsequently, he met with Mr Paterson and Mr Baylis at Mr Smith's South Perth office. There they discussed the possibility of Mr Baylis selling his lease of the Durlacher Street premises for $500,000. Evidence to the same effect was given by Mr Paterson. Mr Paterson said that he was interested in the proposal because it would give him control of the Durlacher Street premises from which the Durlacher Street store operated, and thus he could get control of the premises either at the end of the Thompsons' sub‑lease, or earlier if the Thompsons continued to be unable to pay their rent. Mr Paterson said that he was aware that the Thompsons were in arrears in their rental payments from discussions with Mr Baylis and Mr Smith around that time.
Both Mr Smith and Mr Paterson said in their evidence‑in‑chief, and steadfastly maintained under cross‑examination, that the discussions concerning Mr Paterson purchasing the head lease of the Durlacher Street premises preceded any discussion about the possibility of Mr Paterson purchasing the business assets of the Durlacher Street store and the Highway store from the Thompsons. The plaintiff argues that that proposition is inconsistent with the contemporaneous documents, and therefore should not be accepted. In order to consider that submission, it is necessary to examine the relevant contemporaneous documents and the evidence in relation to them.
Mr Smith said that he was initially contacted by Mr Baylis, who was then suffering from ill health and wishing to divest himself of various assets, in 'early 2006'. He said that Mr Baylis suggested that he (Mr Smith) might contact Mr Thompson, and that he did so in May 2006. Given that Mr Rock's offer to the Thompsons was dated 7 June 2006, and accepted by the Thompsons on 9 June 2006, it is likely, and I find, that Mr Thompson's engagement of Mr Smith to find a buyer for the two stores occurred sometime in May 2006. That is not inconsistent with the evidence of Mr Thompson who said that he was introduced to Mr Smith through Mr Baylis in early 2006.
That account of events is inconsistent with an assertion recorded in an email from Mr O'Connell to Mr Laycock of 24 October 2006. In that email, Mr O'Connell said:
I had a visit by Richard Baylis at the Perth office this afternoon.
I advised I was displeased with the outcome at Geraldton ‑ and that given our history ‑ I thought, at the very least, he should have called me when he learnt of Bob Paterson making an offer on the lease/freehold at Durlacher, seeing that the tenant was Civic Video.
He claims he had little to do with it ‑ he was approached by Steven Smith to see if he wanted to sell the freehold. The right price was obtained and he accepted the deal. The deal was $500,000 with a $20,000 commission paid to Smith.
I do not accept that that email is a reason to reject the evidence of Mr Smith or Mr Thompson that Mr Smith's first contact with Mr Thompson resulted from Mr Baylis contacting Mr Smith, and Mr Smith's evidence that the reason for that contact was to sell the head lease of the Durlacher Street premises. Mr Baylis was not called to give evidence, a step which would have been open to any party. I am not inclined to rely on Mr Baylis' untested assertion (as reported by Mr O'Connell) which was made in the face of obvious criticism by Mr O'Connell. It appears that Mr Baylis was at that time also a Civic franchisee, and it may well have been that he was simply seeking to place himself in the best possible light given Mr O'Connell's apparent displeasure with him.
The offer by Mr Rock was accepted on 9 June 2006, and the agreement was effectively terminated on 22 August 2006. According to both Mr Smith and Mr Paterson, they met with Mr Baylis at Mr Smith's office in South Perth in mid‑August 2006. The agreement to purchase the lease was executed on 28 August 2006. Mr Smith said that it was not until after the agreement between Mr Rock and the Thompsons fell through that he contacted Mr Paterson and told him that the Thompsons' stores were for sale and that they needed about $500,000 to pay their debts. Civic argues that I should find that Mr Smith contacted Mr Paterson about purchasing the two stores from the Thompsons before speaking to him about the purchase of the head lease from Mr Baylis, and that the two transactions were linked. That is a proposition which both Mr Smith and Mr Paterson expressly denied.
The plaintiffs' submission on this point relies upon two copies of offers by Mr Paterson to purchase the Thompson stores which bear a facsimile imprint of 25 August 2006. Little light was shed on those documents at trial. The facsimile imprint suggests that they were transmitted by 'Video Ezy' at 6:39 pm on 25 August 2006. They appear to bear the signature of Mr Paterson. They are not the offers which were ultimately accepted, which were for a greater amount and contained different conditions. The offers ultimately accepted by the Thompsons bear a transmission date of 14 September 2006, which is consistent with Mr Thompson's evidence that they were prepared by Mr Smith in September 2006.
Civic notes that the heads of agreement in relation to the sale of the head lease by Mr Baylis to Mr Paterson was dated on 28 August 2006. Thus it argues that the two transactions were occurring simultaneously, or, alternatively, that the proposal for Mr Paterson to purchase the Thompsons' two stores preceded the agreement with Mr Paterson to purchase the lease from Mr Baylis.
When questioned about the sequence of events, Mr Smith maintained that the two transactions were not linked, and that the question of purchase of the head lease preceded the discussions about Mr Paterson purchasing the Thompsons' stores. His explanation for the discrepancy in the dates of the documents was that the negotiations leading up to the execution of the heads of agreement, on 28 August 2006, for the purchase of the head lease, occurred over a period. He said that:
The property negotiations took some time and some changes. So if you're looking at the date of the final contract it could paint that picture, but that's not necessarily the case.[1]
[1] ts 268 (17 June 2014).
Mr Paterson said that the property transaction, by which he meant the purchase of the leasehold from Mr Baylis, was his 'priority investment', and that although the two transactions occurred within days they were not linked, but were separate transactions.

I find that, although the heads of agreement were not signed until 28 August 2006, the discussions which led to Mr Paterson purchasing the head lease from Mr Baylis occurred in mid‑August 2006. At that time, the agreements between Mr Rock and the Thompsons were still on foot. The thrust of the evidence of both Mr Smith and Mr Paterson, which I accept, was that agreement in principle for Mr Paterson to purchase the leasehold of the Durlacher Street store was reached at or shortly after the meeting in mid‑August in Mr Smith's office. I accept Mr Paterson's evidence that he saw it as a separate transaction which would enable him to gain control of the Durlacher Street premises which would ultimately enable him to obtain possession and establish his own store at that location.
It is clear that it was shortly afterwards that the agreements between Mr Rock and the Thompsons came to an end, and Mr Smith then spoke to Mr Paterson about the possibility of him purchasing the Thompsons' business assets. As Mr Smith said, with Mr Rock out of the picture, it was unlikely that a purchaser could be found for the businesses as a going concern, especially given that Mr Paterson, a competitor in the industry, would have control of the leasehold of one of the stores.

The Thompsons' sale to Mr Paterson

Mr Thompson said, and I accept, that the failure of the sale to Mr Rock was devastating for himself and Mrs Thompson. He said that he then contacted Mr Smith who mentioned that he could introduce another buyer outside of the Civic group, but advised that if Mr Thompson were to sell outside of the Civic group, he should seek legal advice. Mr Thompson did contact a lawyer and he said that the lawyer's final advice was he had a choice 'to go into administration or effect a sale to pay (his creditors) and have only one enemy, Civic Video'. Mr Thompson did not say precisely when he obtained that advice, but it must necessarily have been sometime between 22 August 2006 (when the sale to Mr Rock fell through) and 14 September 2006 (when the sale to Mr Paterson was agreed).
On 24 August 2006, Mr Thompson sent an email to Mr O'Connell, Mr Laycock and another senior officer of Civic, Mr Kafataris. The email expressed disappointment that the sale to Mr Rock had failed. It spoke of the consequences of the failure of the agreements, being that the landlord of the Highway store premises had indicated that he wanted the Thompsons to enter into a lease rather than the periodical arrangement which they then had, and that the bank was going to withdraw overdraft facilities should the sale not go through. Mr Thompson asserted that they had lost some $600,000 worth of assets over the previous three years through problems with their commercial rental property and the poor performance of the video stores. Mr Thompson asserted that they had outstanding accounts in excess of $140,000, and that they were experiencing pressure from the bank and the Office of State Revenue. Mr Thompson said 'we are going to try to hold out until after the school holidays and then we will be forced to shut both shops down'.
The email continued:
There might be one way of salvaging that would see me pay all my creditors and the $259,000 loan that we have on the shops. Steven Smith has said that he has a purchaser that will take up where John left off in the sale of the shops, but did not want to tell me who it is. Reading between the lines I think it is Video Ezy and they have been given information from Steven or John Rock. Steven and Richard Baylis also have a close relationship. Steven smith [sic] indicated that the extra party would close hway store and turn Durlacher into a megsastore [sic]. EZY lease must be up for renewal in there [sic] current location. Richard will be keen for this to happen as he will lease a building that he has not been able to lease in the past. Michael would fill you in on the situation at Durlacher. I would dearly love to negotiate a deal with Steven Smith that would see them pay $400,000 rather than let them gain for nil when the shops are closed. It is my opinion that they are leaving themselves vulnerable to the north side of town, again Michael would give you his opinion on this.
Can you release me from the franchise agreements so I can do a deal, this is grasping at straws on my part, but I am desperate. I would ask that you keep this strictly confidential between the tree [sic] of you and ask that you please find in my favour ... .
Mr Thompson was cross‑examined as to whether or not he in fact knew when he wrote that email that the proposed purchaser was Mr Paterson. Clearly, he suspected it was, but I am satisfied that Mr Smith had not, at that time, told him of the identity of the possible purchaser. The text of the email is entirely consistent with Mr Smith's evidence that he did not initially identify the potential purchaser, and with Mr Thompson's evidence to that effect. There is no logical reason why, if Mr Thompson knew that Mr Paterson was the potential purchaser, he would not have said so rather than simply speculating (as it turns out correctly) as to the identity of the potential purchaser.
Having seen and heard Mr Thompson give his evidence (which was consistent with the evidence of Mrs Thompson) I am satisfied that the contents of his email of 24 August 2006 were an honest reflection of his state of mind and position as at that date. The email was not, as the plaintiff argues, simply an attempt to evince maximum sympathy from Civic with the view to obtaining a release from the franchise agreements.
In particular, I am satisfied that, had the sale to Mr Paterson not proceeded, Mr and Mrs Thompson would have simply closed their doors at the end of the school holidays (which the evidence revealed was on 16 October 2006), rather than to continue to trade and incur further debt.
Mr O'Connell said that on 25 August 2006, he telephoned Mr Thompson and told him, in effect, that the Thompsons' obligations under the franchise agreements prohibited them from selling the stores without the consent of Civic, and that he would try to find a suitable buyer for the Thompsons' businesses. Mr Thompson disputes that he received a call from Mr O'Connell within days of his email of 24 August 2006. He said that he received a call from Mr O'Connell 'some weeks' after 24 August 2006. Mr O'Connell also said that he made a telephone call to Mr Thompson on 1 September 2006, in which he expressed disappointment that Mr Rock's offer had fallen through, and repeated that he would persist in trying to find a buyer.
Both Mr O'Connell and Mr Thompson gave evidence that they did have a conversation in which Mr O'Connell said that he would like to meet with Mr Thompson after he had returned from a Civic conference in Hong Kong. Although the precise words recollected by each of Mr Thompson and Mr O'Connell differed, the substance of the conversations to which they refer is the same. Mr Thompson suggested that that telephone conversation occurred on 28 September 2006. Mr O'Connell, in his written statement, put that date at 4 October 2006, although in his oral evidence he corrected subsequent references in his written witness statement to the date of the conference (which the statement said ran from 8 October 2006), saying that it actually took place in Hong Kong from 10 September 2006, with Mr O'Connell returning to Perth from Hong Kong on 22 September 2006. I find that that conversation is most likely to have occurred shortly before 10 September 2006. That finding is consistent with Mr O'Connell's version of the conversation in which he says that he would 'be away for the next couple of weeks' and is also consistent with the tenor of the conversation as described by Mr Thompson which was to the effect that the conference was imminent.
Given the confusion on both sides as to dates of conversations, I am not satisfied that Mr O'Connell did telephone Mr Thompson in the days following 24 August 2006. That is for two reasons. The first is that Mr Thompson adamantly denied such a conversation. The second is that an email which Mr O'Connell sent to Mr Kafataris and Mr Laycock at 9:41 pm on 24 August 2006 sets out options available to Civic in light of Mr Thompson's request to be released from his franchise agreements. The email makes no mention of any proposal to contact Mr Thompson and it is clear that Civic's response to Mr Thompson's email was at that stage uncertain. The email was apparently written whilst Mr O'Connell was in South Australia. The email recites that Mr O'Connell planned to meet with Mr Smith on his 'return to Perth on Monday' to try to confirm the identity of the potential purchaser. The following Monday would have been 28 August 2006.
Whether or not Mr O'Connell rang Mr Thompson on 25 August 2006 is, in any event, of little moment. What Mr O'Connell said he told Mr Thompson in that conversation was that the Thompsons were not permitted to sell without Civic's prior consent. I am satisfied that Mr Thompson was aware of that position regardless of whether Mr O'Connell told him of it. That is because, as mentioned above, Mr Thompson obtained legal advice as to his position should he sell outside of the Civic group and it is clear from the summary of that advice, set out above, that Mr Thompson must have appreciated that his franchise agreements required that he have Civic's consent to a sale of the business.
Mr O'Connell said that he met with Mr Smith on 28 August 2006 when Mr Smith told him that it was Mr Paterson who was interested in purchasing the Thompsons' stores. Mr O'Connell also said that he told Mr Smith that he was to meet with Mr Rock later that day to see if Mr Rock would revisit the Geraldton offer to purchase the Thompsons' stores. Mr Smith gave no evidence about that meeting, and was not cross‑examined about it. It is consistent with the course of action foreshadowed by Mr O'Connell in his email to Mr Kafataris on 24 August 2006, and I accept that the meeting took place. I also accept that Mr O'Connell met with Mr Rock subsequently and attempted to persuade him to reconsider his offer. It is likely that Mr O'Connell told Mr Thompson that Mr Rock would not revive his offer during the telephone conversation in which a meeting, following Mr O'Connell's return from Hong Kong, was foreshadowed.
As noted above, the offer by Mr Paterson to purchase the assets of the businesses was eventually accepted by Mr Thompson, and based on the facsimile date on the original copies of the agreement, I find that occurred on or shortly before 14 September 2006. Settlement occurred on 3 October 2006 and the Thompsons closed their stores on that date.
There is no evidence as to Mr O'Connell making any endeavour to meet with Mr Paterson after his return from Hong Kong on 22 September 2006, up until 9 October 2006, when Mr Thompson emailed Mr Laycock advising him that they had shut both stores as at 3 October 2006. In that email, Mr Thompson said that they were forced to close because they were unable to pay their accounts and they became aware that Mr Paterson had 'purchased the premises for the stores'. He expressed disappointment that they had been forced into that position and expressed disappointment that their plea for help had been virtually ignored by Civic.

The Thompsons' breach of contract

Civic claims that the Thompsons wrongfully, and in breach of each of the franchise agreements, repudiated the franchise agreements by their email of 9 October 2006 which reported that they had ceased operating the businesses and sold them to a competitor. By their defence, the Thompsons do not admit the breach and rely on their email of 24 August 2006 informing Civic that the businesses were failing, that they had lost money, and that they wanted to be released from their agreements.
The sale of the assets of the businesses, and their closure, clearly amounted to a repudiation of the franchise agreements by the Thompsons. The fact that the Thompsons notified Civic of their difficulties and sought a release from the franchise agreements does not provide an excuse for their subsequent breach. Essentially, the Thompsons' position is that they really had no choice; they received no assistance from Civic to deal with their plight; they were effectively insolvent; they would not have been able to continue to operate the businesses; and Civic would not have received franchise fees in any event (including the arrears of franchise fees which the Thompsons ultimately paid).
It is therefore necessary to turn to the question of damages which flow from the Thompsons' repudiation of the franchise agreements.

Damages for breach

In the statement of claim, Civic particularised its loss and damage said to have been caused by the Thompsons' repudiation of the franchise agreements as follows:
1.loss of franchise fees and royalties payable pursuant to the franchise agreements;
2.loss of opportunity to procure a purchaser of the respective stores, or to acquire the stores from the franchisee;
3.loss of reputation and goodwill in the Geraldton area.
At trial, Civic adduced evidence as to the first of those categories of loss, being an opinion of a forensic accountant, Mr Temple‑Cole, as to the present value of the loss of anticipated franchise fees and advertising fees had the franchise agreements run their full terms. There was no evidence, and no submissions, in relation to the question of loss of reputation and goodwill of Civic in the Geraldton area, and I take that element of the damages claim to have been abandoned.
Nor was there any evidence specifically as to the value of any loss of opportunity to procure a purchaser, or for Civic to acquire the stores from the Thompsons and operate them as 'corporate stores'. Operating the stores as corporate stores was a course which, from Mr O'Connell's email to Mr Kafataris of 24 August 2006, appears to be one which Civic did not wish to pursue. Given the attempts by the Thompsons over a number of years to sell the businesses, and the fact that, other than attempting to revive the offers from Mr Rock, Civic did not proffer any suggestions as to how a purchaser might be found, it is not surprising that it made no attempt to lead evidence as to the prospect of those events occurring. Mr Laycock gave some evidence as to the possibility of corporatising stores which he said was generally not his first preference, especially in relation to stores in remote locations like Geraldton. He explained that corporate stores are looked after by a manager based in Sydney who would be required to fly to Geraldton three or four times a year if the stores were corporatised. He said that the costs associated with corporate stores are always higher than for franchise stores. No attempt was made to analyse the likely profit, if any, if the two Geraldton stores had been corporatised, and there was no basis upon which any damages could be ordered on the assumption that Civic might have run the stores, or either of them, as corporate stores.
Thus, the only basis upon which damages can be assessed in relation to the Thompsons' breaches is by reference to the loss of franchise fees and other payments which would have been received had the contracts been performed. That is the basis upon which Civic put its damage claim at trial. As will be seen, however, the loss of opportunity to procure a purchaser can be valued by reference to the potential franchise fees that might have been earned.

Principles applicable to the assessment of damages

In approaching the question of damages for breach of contract, it is necessary to have regard to the applicable principles. The general rule as to damages for breach of contract is that where a party sustains a loss by reason of a breach, it is, so far as money can do it, to be placed in the same situation as if the contract had been performed.[2] As Brennan J explained in Commonwealth v Amann Aviation Pty Ltd:[3]
The measure of damages prescribed by Robinson v Harman ensures that the parties to the contract are kept to the benefits and the burdens of the contract they have made: the plaintiff recovers no more than the net benefit he would have received under the contract; the defendant acquires no right to profit by his breach.
[2] Robinson v Harman (1848) 1 Exch 850; (1848) 154 ER 363, 365.
[3] Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 99.
In the same case, Mason CJ and Dawson J said:[4]
The corollary of the principle in Robinson v Harman is that a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed.
[4] Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 82.
I also note in passing the observations of Mason CJ and Dawson J in Amann Aviation Pty Ltd[5] where they said:
The settled rule, both here and in England, is that mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can. Indeed, in Jones v Schiffmann, Menzies J went so far as to say that the "assessment of damages ... does sometimes, of necessity involve what is guess work rather than estimation". Where precise evidence is not available the court must do the best it can. And uncertainty as to the profits to be derived from a business by reason of contingencies is not a reason for a court refusing to assess damages. (footnotes omitted)
[5] Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 83.
As Corboy J observed in Highway Hauliers Pty Ltd v Matthew Maxwell,[6] assessment of the value of a lost opportunity according to the probabilities and possibilities involves 'speculation and guesswork'.

The plaintiff's evidence as to assessment of damages

[6] Highway Hauliers Pty Ltd v Matthew Maxwell [2012] WASC 53 [226].

Civic's case is that it would have continued to earn franchise fees for the balance of the terms of the respective agreements. To calculate that amount, Civic relies on the evidence of Mr Temple‑Cole, a forensic accountant. He was instructed to prepare a report as to his opinion as to the loss, if any, suffered by Civic due to early termination of the franchise agreements. He was also instructed to assess various alternative assumptions, being that, had the agreements not been terminated:
a.the future revenue of the stores would have followed their respective historical trends;
b.the future revenue of the respective stores would have increased by 5% per annum from the financial year ending June 2006; or
c.the future turnover of the respective stores would have followed the trend of actual revenue figures provided for three stores that were deemed by Civic to be comparable to the respective stores.
In relation to the Highway store, Mr Temple‑Cole was instructed to consider a further alternative assumption, namely that the future turnover of the Highway store would have followed the trend of the actual revenue figures provided for the Video Ezy store run by Mr Paterson at the Highway store location.
On the assumption that revenue would have followed historical trends, Mr Temple‑Cole concluded that the average decline in revenue for the Durlacher Street store between 2003 and 2006 was ‑4%, and that that rate should be used for the purposes of calculating future franchise fees (which under the franchise agreement were based on revenue). In relation to the Highway store, Mr Temple‑Cole concluded that the historical revenue trend was 2% growth per annum, and that that rate should be used for the estimation of future franchise fees.
Mr Temple‑Cole noted that there was no historical evidence to support a growth rate of 5% in relation to either store, and that the purported comparable stores showed an average growth rate of 6%, a rate which has also no historical support in relation to either of the Thompsons' stores. He therefore concluded, correctly in my view, that the second and third assumption should not be used for the purpose of assessing Civic's damages.

In relation to estimates based on the performance of the Video Ezy Highway store conducted by Mr Paterson, Mr Temple‑Cole reached the same conclusion, namely that it was not appropriate to assume that the revenue of the Highway store, had it remained in the Thompsons' hands, would have followed the trend of the Video Ezy Highway store.
In determining his opinion as to damages, Mr Temple‑Cole assessed the cash flows which would have been payable to Civic by way of franchise and advertising fees over the remaining period of the franchise agreements, calculated the amounts net of the estimated tax on those cash flows, and then applied a discount rate of 12% for the purpose of reflecting the risks associated with receipt of the cash flows. He then grossed up that amount by the amount of tax which would have been payable on an award of damages. That resulted in a figure in relation to the Durlacher Street store of $92,366, and in relation to the Highway store of $146,050, reflecting the loss of franchise fees and advertising fees to Civic over the remaining terms of the franchise agreements.
The difficulty with Civic's assessment of damages is its reliance upon the factual assumption that, had the Thompsons not sold their business to Mr Paterson, they, or some alternative franchisee who may have purchased the stores, would have continued to trade without interruption for the remaining terms of the franchise agreements. That assumption is not borne out by the evidence.
As I have already found, the Thompsons would not have continued to trade after 16 October 2006. It is Civic's case that the Thompsons would have continued to trade notwithstanding their financial difficulties. That case appears to be based on the proposition that the stores were achieving a turnover which should have enabled the franchisee to trade comfortably, and that the Thompsons' financial accounts, when properly construed, demonstrate that the stores were trading comfortably.

Evidence as to second and third defendants' solvency and capacity to continue trading

The Thompsons assert that, in fact, they were insolvent as at October 2006. In support of that proposition, they rely on the evidence of Mr Blair Pleash, an accountant with extensive experience in both corporate and personal insolvency. He undertook an assessment of:
a.the financial statements of the partnership under which the Thompsons operated the two stores for the financial years ending 30 June 2003 to 30 June 2005;
b.a chart of accounts in relation to the partnership dated 27 July 2006;
c.the Thompsons' income tax returns for the financial years 2003 to 2006; and
d.bank statements for the financial year ending 2006.
His analysis of those accounts led him to conclude that the partnership was 'clearly insolvent' in July 2006, it had a deteriorating net asset position between 2003 and 2006 and that, just prior to the sale to Mr Paterson, the partnership had insufficient net assets to support possible advances by way of refinancing. He concluded that the partnership's working account was overdrawn from June 2003 to July 2006 and that there was no credit available on the Thompsons' credit cards and no available cash to meet due and payable debts in July 2006. Mr Pleash noted, however, that he had insufficient information available to determine whether the Thompsons had independent assets or cash available to meet the debts of the partnership, although, from the income tax returns he had reviewed, he considered that that seemed unlikely.
Civic made a number of criticisms of the conclusions reached by Mr Pleash.
The first objection was that Mr Pleash based his conclusions on the financial statements of the partnership, which recorded lower revenues than were revealed by analysis of other data sources available to Civic. Those are the data sources comprised of what is referred to as BART data, and Mr O'Connell's estimates of monthly revenue when BART data was not available. BART data is compiled when a franchisee logs on to Civic's intranet and enters its turnover data as required under the franchise agreement. If a franchisee fails to report their turnover information, Civic estimates the turnover that that franchisee would have achieved for that month, for the purpose of calculating franchising fees and advertising fees. It is apparent that Mr O'Connell made estimates of monthly turnover figures achieved by the Thompsons in each of their stores more often than not.
A number of witnesses gave evidence as to turnover figures. None of them produced the same numbers. For example, for the 2002 ‑ 2003 financial year, the revenue reported in the partnership financial statements was $818,269. Mr Laycock gave evidence that the total revenue in that year for the two stores is $969,423. Mr O'Connell's evidence was that the revenue for the two stores in the 2002 ‑ 2003 financial year was $839,283. Mr Temple‑Cole undertook an analysis of various records, and concluded that in the 2002 ‑ 2003 financial year, the turnover of both stores was $923,211 inclusive of GST, or $837, 282 exclusive of GST. Although Mr Thompson was cross‑examined about various entries in the accounts, it was clear that he effectively left matters of accounting to others, and was unable to throw any light on explanations as to discrepancies in the documents.
It is impossible to determine with any precision the actual turnover of the stores during the period in question. It seems to me inherently unreliable to base any conclusion on figures derived from estimates made by Mr O'Connell, even accepting that he may have made those estimates in the light of discussions with Mr Thompson. Nor do I accept a proposition put to Mr Thompson in cross‑examination that the revenue figures in the partnership financial statements omitted retail sales. That proposition was based on the fact that the line item for revenue in the financial statements was described as 'rental income', and there was no separate item for retail sales. However, if one looks at the list of 'key performance indicators' relied upon by Mr Laycock (as incomplete as they are) the level of retail sales would appear to be well in excess of the difference between the revenue in Mr Laycock's figures and that reported in the financial statements.
Similar discrepancies exist between the figures proffered by different witnesses for each of the other financial years from 2002 ‑ 2003 through to 2005 ‑ 2006. For reasons which I will explain below, it is not necessary to settle upon a precise finding as to the revenue generated by the stores in the financial years in question. It is sufficient to say that I am satisfied that, if the revenue was not as reported in the financial statements, it lay somewhere between the figures in those statements and the figures estimated by the other witnesses.
A second objection expressed by Civic in relation to Mr Pleash's reliance on the financial statements of the partnership was that, in the financial year 2004 ‑ 2005, the partnership balance sheets showed a long‑term liability of $539,000. It is clear that that liability related to a consolidation of loans utilised by the Thompsons in the purchase of the two franchise businesses, but also included a loan in relation to a commercial property, the Flores Road property, which was owned by the Thompsons but sold by them (at a loss of $63,000) on 30 September 2005. The Flores Road property was not brought to account as an asset of the partnership. Thus, Civic submitted, the balance sheet, which showed a total negative equity of $578,341, demonstrated a misleading position.
Mr Thompson said that the component of the liabilities to the bank which related to Flores Road was $240,000. It is correct, therefore, that that amount of the liabilities should not have appeared in the partnership accounts unless the Flores Road property was brought to account as an asset. Given that the property sold for $440,000 three months after the end of the financial year, its inclusion in the balance sheet for the partnership would have resulted in the negative equity in the partnership being reduced to approximately $138,000, or if the component of the debt related to Flores Road had been excluded from the liabilities, then the negative equity would have been reduced to $338,000 approximately. It needs to be noted that the Flores Road debt was not included in the accounts for the partnership in the prior financial years.
Civic argued that the inclusion of the Flores Road debt meant that the interest expense claimed in the partnership accounts was unrelated to the business of the two stores, and therefore should be excluded from consideration as to the profitability of the stores. Save for a portion of the interest expense in the year 2004 ‑ 2005, that submission should not be upheld. The Flores Road debt does not appear in the earlier financial years, and it is clear that substantially less interest was paid in 2002 ‑ 2003 and 2003 ‑ 2004. That interest would clearly be referable to the debts related to the purchase of the businesses. In relation to the 2004 ‑ 2005 year, approximately 44%, or around $10,000, would be referable to the Flores Road property.
A third objection expressed by Civic in relation to Mr Pleash's reliance on the partnership financial statements is that they contain a further deduction for motor vehicle expenses which Civic said were not referable to the businesses. Those expenses were reported as $26,779 in 2002 ‑ 2003, $29,944 in 2003 ‑ 2004, $20,819 in 2004 ‑ 2005 and $10,182 in 2005 ‑ 2006. Mr Thompson was not cross‑examined about those expenses, but Civic submitted that they should be ignored for the purpose of assessing the true profitability of the stores as the motor vehicles were not used in the operation of the stores. Whilst I am not satisfied that there is an evidentiary foundation for that submission, it is a matter in respect of which no definite finding is required. If a finding were required, I would not be inclined to simply ignore motor vehicle expenses as an expense of the business given that the business operated from two separate locations so it is conceivable that at least some component of motor vehicle expenses was related to the conduct of the businesses.
The reason that it is not necessary to make definite findings is because, in my view, even taken at its highest, Civic's case as to the profitability of the businesses does not establish that they were viable. In the closing submissions, Civic proposed a recalculation of the profit for the financial years 2002 ‑ 2003 through to 2005 ‑ 2006. That recalculation was based upon reported revenue figures as asserted by Mr O'Connell (the origins of which are unclear), and adding back what, in the written submissions, was said to be motor vehicle and interest expenses, although the figures used are only those shown as motor vehicle expenses in the book of accounts. Given that I do not consider that interest expenses should be added back in any event, it was appropriate to use only the motor vehicle expense figures for the purposes of the present analysis. Civic's analysis of adjusted profit gives rise to profit figures in 2002 ‑ 2003 as $31,662, 2003 ‑ 2004 as $42,927, 2004 ‑ 2005 as $36,163, and 2005 ‑ 2006 as $152,224. The 2005 ‑ 2006 figure is wholly explicable by the difference between Civic's reported revenue figure and the income reported in the Thompsons' taxation returns for 2005 ‑ 2006, the year in which no financial statements appear to have been produced.
What those figures demonstrate is that, even if one were to accept Civic's adjusted profit, which, for the reasons indicated above, I do not, the Thompsons were not earning a living wage from the business at least for the years 2002 ‑ 2003 to 2004 ‑ 2005. That is because the expenses upon which the profit is based make no provision for a salary to Mr and Mrs Thompson. In other words, they were entirely dependent on the profit of the business for their income, in a business in which they were both employed full‑time.
In my view, all of the figures support the Thompsons' position that they were unable to continue in business beyond 2006.
Civic's attempts to demonstrate that the Thompsons's position was not as bleak as they asserted included references to Mr Thompson's ownership of a boat, his interest in a race horse, and the education of their children at a private school. As to the latter, Mr Thompson said that his children's education was funded from the sale of assets, not from the businesses. Whilst various drawings from the business were shown in the accounts, Mr Thompson explained that, whenever he sold an asset, he utilised the funds to reduce the businesses' indebtedness before then drawing down of funds to meet living expenses. As to the boat, it emerged from cross‑examination that it was a yacht of little value of which Mr Thompson held a share. His share was diluted by his inability to meet ongoing expenses in relation to the boat, and when it was sold for $22,000, Mr Thompson received $4,700 for his diluted share. That was in late‑2005. Similarly, Civic did not establish that Mr Thompson had an interest in a race horse of any value.
On the other hand, it is clear that the bank was pressing for repayment of its loans which had been drawn beyond their limits for some considerable time. Franchise fees to Civic were, as at August 2006, in arrears, and had been for some time. By August 2006, the Thompsons were at least two months behind in their rent for the Durlacher Street store. Mr Thompson said that, as at 3 October 2006, there were unpaid creditors for both stores totalling $203,993.95, although that total includes some interest charges incurred after that date on outstanding amounts due to the Office of State Revenue and the Australian Taxation Office. It would appear, however, that there were outstanding creditors as of October 2006 in the vicinity of $200,000.
I am satisfied that, regardless of whether or not the Thompsons were technically insolvent as of October 2006, they were not in the position to continue trading. That position was not brought about by excessive or unnecessary expenditure, but rather because the two stores were trading poorly.
Those findings make the calculation of damages for breach of the franchise agreements more difficult. The question to be addressed is what net benefit would Civic have received under their contract had it been performed. As already noted, Civic's position is that each of the stores would have continued to trade in accordance with their historic levels of turnover for the balance of the terms of the franchise agreements. That assumption cannot be made.

Whether the plaintiff should be awarded damages for breach of the Durlacher franchise agreement

In relation to the Durlacher Street store, the position was as follows:
i.Had they not sold the assets of the businesses to Mr Paterson, the Thompsons would have had no choice but to enlist the assistance of Civic to negotiate the termination of the franchise agreements in accordance with the terms of those agreements.
ii.The possible options open under the franchise agreements were either to obtain Civic's consent to an assignment to a purchaser, or for Civic to exercise its right to terminate the franchise agreement on the basis of the voluntary abandonment of the business by the Thompsons.
iii.Given the attempts by the Thompsons over an extended period to sell the businesses, it is unlikely that any purchaser could be found.
iv.Mr Paterson had purchased the long‑term lease of the Durlacher Street premises and might well have terminated the sub‑lease to the Thompsons if their arrears of rent were not brought up to date.
v.The Thompsons' lease of the Durlacher Street store had been extended until December 2009, and the Thompsons did not hold any further option for renewal. Given that Mr Paterson was a direct competitor of Civic, and that he was under no obligation to grant any further extension of the lease, the lease of the Durlacher Street store would not have been renewed after 13 December 2009.
vi.In the circumstances, Civic would have been unlikely to purchase the assets of the Durlacher Street store and take it over to operate it as a corporate store. Taking over either of the stores was said by both Mr Laycock and Mr O'Connell not to be the preferred course of action because of the increased costs involved. I find that Civic would not have taken over the Durlacher Street store and operated it as a corporate store.
vii.In those circumstances, it is unlikely that Civic would have exercised its option to purchase the assets of the Durlacher Street store from the Thompsons upon termination. Had it done so, it would have been required to pay for those assets.
The franchise agreements clearly contemplated the abandonment of the business by the franchisee, or the possibility of the franchise business not continuing because of the insolvency of the franchisee, or the appointment of a receiver or external administrator in relation to the business or its assets. Civic would have been faced with no real alternative than to exercise its contractual rights of termination if the Thompsons had not breached the agreement by selling the assets of their businesses to Mr Paterson. To award Civic damages based on franchise fees it would have received on the assumption that the Thompsons, or some assignee of the Thompsons, would have continued to trade for the balance of the period of the franchise agreement would be to place Civic in a far better position than it would have been had the Thompsons not breached the agreement but endeavoured to perform their obligations to the extent that they were able.
Mr Temple‑Cole acknowledged that if the assumption that the businesses would have simply continued could not be drawn, then the whole approach to assessing damages would need to be revisited on the basis of fresh assumptions. He did not accept that the risk that trading would cease could be accommodated simply by applying a higher discount rate to the present value of the expected cash flows. I agree with that analysis. In light of what I have found to be the consequences if the Thompsons had not breached the Durlacher Street store franchise agreement, damages can only be assessed by reference to the value of the chance that Civic would have had to procure another purchaser or, alternatively, take over the lease of the Durlacher Street store for the remaining three years of its term. For reasons identified above, I do not consider that Civic could have found a purchaser in circumstances where Mr Paterson controlled the premises and the lease was only of short duration, and it would not have taken on the expense of operating the store as a corporate store. Civic did not adduce any evidence which could enable me to assess any value of the lost opportunity. In my view, had the Thompsons not sold the business to Mr Paterson, Civic would not have received any entitlement to franchise fees beyond October 2006. Indeed, it is very unlikely that they would have received the arrears of franchise fees which Mr and Mrs Thompson ultimately paid after the sale of their business, and Civic would, therefore, have been worse off than it ultimately was.
In the circumstances, I do not consider that Civic has established that it has suffered any damages as a result of the Thompsons' breach of the Durlacher Street franchise agreement.

Whether the plaintiff should be awarded damages for breach of the Highway franchise agreement

The decision in relation to the Highway store involves different considerations. Although Mr Paterson said that he was aware of the fact that the Thompsons had not renewed their lease of the Highway store, and were occupying the premises as monthly tenants, he did not occupy the position of lessor of those premises. Mr Paterson said that, before finalising his agreement with the Thompsons, he considered the possibility of terminating the Durlacher Street lease because the Thompsons were behind in their rent, and negotiating to lease the Highway store given that the Thompsons were only monthly tenants. In that way, he would have gained control of the Highway store premises and been in a position to open a business as a Video Ezy store from those premises. There is no reason to think, however, that Mr Paterson would have been in any better position than Civic to negotiate a lease of the Highway store premises. Given that, as I have found, Civic would not have sought an assignment of the Durlacher store lease, taking a lease of the Highway store would have enabled Civic to maintain a presence in Geraldton, and thus may have been a more attractive course to take. The Thompsons' breach of contract deprived them of the chance to pursue that course.

To assess the value, if any, of that loss of chance, the following factors need to be borne in mind:
i.The prospect of finding a franchisee to take over the Highway store franchise would have been difficult and probably involved delay.
ii.Carrying on the Highway store as a corporate store was not the preferred course for Civic, and would have involved additional expenses.
iii.Given the additional expenses of managing a corporate store, and given the trading history of the Highway store, it is unlikely that the store would have been profitable, at least in the short term. In that respect, it is likely that, if he had not purchased the assets of the Highway store and commenced to trade from those premises, Mr Paterson would have established his second store on the Durlacher Street store site and would have been in competition with the Highway store.
When assessing damages for loss of a chance, where the realisation of the chance depends on the plaintiff's own decision to take it up, the plaintiff must prove on the balance of probabilities that it would have taken it up.[7] I accept Mr Laycock's evidence that, had he known of the Thompsons' desire to close the stores, he would have sought to take steps to maintain a presence for Civic in Geraldton. I consider he would have done that through the Highway store.
[7] Sellars v Adelaide Petroleum NL; Poseidon Ltd v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332, 362 (Brennan J).
Mr Temple‑Cole's assessment suggested a loss in relation to the Highway store of $146,050. That assessment was based upon the uninterrupted receipt of franchise fees and advertising fees for the term of the Highway franchise agreement. That is the plaintiff's claim at its best, and after being grossed up to take account of tax liability. That figure is derived from Mr Temple‑Cole's assumption that the gross cash inflows before tax over the whole period of 2006 ‑ 2016 would be $246,725. Of that amount, $57,715 is comprised of advertising fees which he assumes would have been received between 2011 and 2016, and which he includes as part of Civic's loss.
The advertising fees are payable pursuant to cl 15 of the franchise agreements. That clause requires that the franchisor must credit all advertising fees to an advertising fund and account for those fees separately in its records. The franchisor is required to implement a marketing program for the Civic Video system and use the advertising funds to defray expense as it occurs in relation to the program. The franchisor is not obliged to spend money on any advertising beyond the amount available in the advertising fund. In substance, therefore, the advertising fund is a fund impressed with a trust to use the funds for advertising essentially for the benefit of the franchisees. Civic claims damages in this action in its own right. If it were to receive a component of its damages by reference to monies which would have been payable as advertising fees, it would be at liberty to utilise those funds as its own. In that event, it would be placing itself in a better position than it would have been had the contract had been performed. In my view, advertising fees should not be brought to account as a component of the damages suffered by Civic. The advertising fees of $57,715 comprise approximately 23.4% of the predicted gross receipts of the Highway store up until June 2016. Assuming, for present purposes, that the adjustments for discounting and in relation to tax are proportionate in relation to the franchise fee and advertising fee respectively, the damages grossed up for tax on Mr Temple‑Cole's calculations would be reduced by approximately $35,636 if advertising fees were removed, leaving a best case (on Mr Temple‑Cole's approach) of $110,314 as damages for breach of the Highway franchise agreement.
Mr Temple‑Cole assumed, for the purposes of his calculation, that the expenses incurred in relation to the operations of the two individual franchise stores did not form a significant proportion of the overall operating expenses of Civic. That is, he did not consider that the loss of the two stores was likely to alter Civic's costs base. That assumption ignored the fact that Civic was relieved of the costs of having visits by Mr O'Connell to Geraldton several times a year. The cost of travel and accommodation in relation to those trips was not the subject of evidence, but should properly have been set off against the receipt of the franchise fees, thus reducing the profit component of those fees. For the purposes of bringing those potential expenses to account, and in the absence of any evidence as to cost, I consider it reasonable to make a conservative estimate of $2,000 per year as the cost of which would have been incurred by Civic in relation to visits to Geraldton each year had the franchise businesses, or either of them, continued to operate.
As I have noted, it is reasonable to assume that, had a Civic outlet continued to operate from the Highway store premises, there would have been a significant risk that its revenue might have been eroded by competition from Mr Paterson's Video Ezy store which, in all likelihood, would have been located in the Durlacher Street store premises. That risk should, for present purposes, be reflected in the discount rate to be applied to the future cash inflows for the purpose of assessing the value of the opportunity lost by Civic. Mr Temple‑Cole settled on a rate of 12% as an appropriate discount rate. He did that on the basis that the risk to receipt of the cash flows was minimal, since it was based on turnover rather than profit. Mr Temple‑Cole's report was reviewed by Mr Gino Malacco, a forensic accountant. Mr Malacco did not carry out his own assessment of damage, but merely commented upon Mr Temple‑Cole's methodology and conclusion. One of the points of difference between Mr Temple‑Cole and Mr Malacco was as to the selection of a discount rate. Mr Malacco expressed the view that the discount rate of 12% did not properly reflect the risk factor associated with the video hire industry and, in general, the risk associated with revenue streams from small businesses. He considered an appropriate discount rate to be used would be in the order of 20% to 25%.
It was not seriously disputed that the video hire industry has, generally speaking, being in decline for a number of years. That is evidenced by the fact that a large number of stores, including Civic Video stores, have closed in recent years. When that is taken into account, and coupled with the likely competition which the Highway store would have encountered from Mr Paterson's Durlacher Street store, I consider that a higher discount rate should be applied when considering the assessment of the best position that Civic might have achieved had it been able to continue to receive franchise fees from the Highway store.
In my view, it is reasonable to adopt a 25% discount rate for the purposes of that calculation to take into account the risk to cash flows from the likelihood of competition from Mr Paterson and the general decline in the video rental business of which several witnesses spoke.
Applying a 25% discount rate, and utilising the tax rate at 30% which appears to be that used by Mr Temple‑Cole, both to the calculation of the net cash after tax for each year, and for the purposes of 'grossing up', and taking account of my estimate of expenses which were necessary to realise the cash flows, the discounted after‑tax cash receipts from October 2006 until 2016 can be calculated at $50,828 as shown in the following table:

Temple-Cole Estimate

Tax Payable

Net Cash after Tax

Travel Expenses

Net Cash Receipts

25% Discount Factor

Discounted after Tax Cash Receipts

2006

$1,389

$417

$972

$972

1.0000

$972

July to October 2006

$4,454

$1,336

$3,118

$3,118

1.0000

$3,118

Oct to June 2007

$12,985

$3,895

$9,090

$2,000

$7,090

1.0000

$7,090

2008

$17,992

$3,598

$14,394

$2,000

$12,394

0.8000

$9,915

2009

$18,149

$5,445

$12,704

$2,000

$10,704

0.6400

$6,851

2010

$18,461

$5,538

$12,923

$2,000

$10,923

0.5120

$5,593

2011

$18,763

$5,629

$13,134

$2,000

$11,134

0.4096

$4,560

2012

$19,069

$5,721

$13,348

$2,000

$11,348

0.3277

$3,719

2013

$19,382

$5,815

$13,567

$2,000

$11,567

0.2621

$3,032

2014

$19,701

$5,910

$13,791

$2,000

$11,791

0.2097

$2,473

2015

$20,026

$6,008

$14,018

$2,000

$12,018

0.1678

$2,017

2016

$18,710

$5,613

$13,097

$2,000

$11,097

0.1342

$1,489

Total

$189,081

$54,925

$134,156

$20,000

$114,156

$50,828

If the figure of $50,828 is grossed up for tax, again using a 30% tax rate as used by Mr Temple‑Cole, the figure of $72,611 is achieved. It is the chance to earn that amount of franchise fees from the continued operation of the Highway store which was lost as a result of Mr and Mrs Thompson's breach of contract.
In assessing the value of that chance, it is necessary to have regard to:
•the possibility that the landlord may not have been willing to grant a 10‑year lease;
•the possibility that Mr Paterson may have been preferred as a tenant by the landlord of the Highway store; and
•the likelihood that Civic would have encountered considerable difficulty in finding a new franchisee with the result that it would have had to operate the store itself in the interim thus incurring additional costs.
In those circumstances, I consider the chance of Civic receiving franchise fees for the full term of the Highway franchise agreement to be no greater than 50%. Therefore, I assess Civic's damages flowing from the breach of contract by Mr and Mrs Thompson at $36,300.

The claim against Mr Paterson

The claim against Mr Paterson is that he wrongfully and intentionally interfered with the contractual relations between Civic and the Thompsons. Civic contends that Mr Paterson knew of the existence of the franchise agreements, that sale to him would constitute a breach by the Thompsons of the franchise agreements and that Mr Paterson intended to bring about that breach as an outcome of the acceptance of his offer. Civic contends that the clear aim of Mr Paterson, which he succeeded in achieving, was to effectively shut Civic out of operating stores in the Geraldton area.

Principles in relation to intentional interference with contractual relations

The elements of the tort of intentional interference with contractual relations were summarised by Master Newnes (as he then was) in Boase v Seven Network (Operations) Ltd[8] where he said:
The general principle is that in order to establish a cause of action of unlawful interference with contract the plaintiff must show that the defendant, with knowledge of the contract and intent to prevent or hinder its performance, persuades, induces or procures one of the parties not to perform their obligations: Short v City Bank of Sydney [1912] HCA 54; (1912) 15 CLR 148.
The fact that the breach was a natural consequence of the defendant's conduct is not sufficient; the defendant must have intended the breach. It is not necessary that the defendant knows the precise terms of the contract: Woolley v Dunford (1972) 3 SASR 243 at 266–268. But the defendant must know of the contract and sufficient of its terms to know that what the defendant induced or procured the party to the contract to do would be in breach of the contract. If the defendant knew of the existence of the contract but believed reasonably that what the defendant induced or procured the party to do was not a breach, the defendant has not knowingly induced or procured the breach: Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473 at [160].
[8] Boase v Seven Network (Operations) Ltd [2005] WASC 269 [32] ‑ [33].
In Short v City Bank of Sydney,[9] Isaacs J said:
But to constitute that cause of action, the defendant must have induced or procured the doing of what he knew would be a breach of contract. A bonâ fide belief reasonably entertained that it was not a breach of contract would be fatal to the claim. If the defendant did not know of the existence of the contract, he could not induce its breach; if he reasonably believed it did not require a certain act to be performed, his inducing a party to the contract to do something inconsistent with it could not be regarded as an inducement or procurement knowingly to break the contract; if he believed on reasonable grounds that the contract had been rescinded, or performance waived, when in fact it had not, he could not be said to knowingly procure its breach.
[9] Short v City Bank of Sydney [1912] HCA 54; (1912) 15 CLR 148, 160.
In Daebo Shipping Co Ltd v The Ship Go Star,[10] the Full Court of the Federal Court identified five elements of the tort of inducing a breach of contract. They were as follows:
(1)there must be a contract between the plaintiff (or applicant) and a third party;
(2)the defendant (or respondent) must know that such a contract exists;
(3)the defendant must know that if the third party does, or fails to do, a particular act, that conduct of the third party would be a breach of the contract;
(4)the defendant must intend to induce or procure the third party to breach the contract by doing or failing to do that particular act; and
(5)the breach must cause loss or damage to the plaintiff.

Whether first defendant intentionally interfered with the franchise agreements

[10] Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156; (2012) 207 FCR 220 [88].

The first element is not in issue in this case.
As to Mr Paterson's knowledge of the existence of the contract, I am satisfied that at no time was Mr Paterson shown the Durlacher franchise agreement or the Highway franchise agreement, nor was he ever in possession of either of them. He accepted in cross‑examination, however, that at the time that Mr Smith raised the question of purchasing the stores with him, he was aware that the Thompsons had agreements with Civic regarding the operation of the two stores.[11] He denied, however, that he was aware of the term of those two agreements or whether they had expired. I accept that evidence, and find that Mr Paterson was aware that the two stores were operated pursuant to franchise agreements, although the precise terms of the franchise agreements were not known to him. I accept, however, that, from his knowledge of the industry, Mr Paterson knew that franchise agreements generally had a term that a franchisee requires the franchisor's consent to early termination of the franchise agreement.[12]
[11] ts 238 (17 June 2014).
[12] ts 235 (17 June 2014).
The third requirement identified by the Full Court in Daebo Shipping is that the defendant must know that, if a third party does a particular act, the conduct of that party would be a breach of contract. Civic argues that Mr Paterson knew that, by entering into the contract to sell their businesses to him, the Thompsons would breach their franchise agreements. It contends that that knowledge should be inferred from his general knowledge of franchise agreements within the industry, from the fact that an indemnity against any claims from Civic was incorporated in his offer to purchase the businesses, and from an inquiry which he made of Mr Smith as to Civic's attitude to the sales.
The agreements between Mr Paterson and the Thompsons in relation to each of the Durlacher store and the Highway store contained a condition which read:
Subject to the offeree indemnifying the offeror to their absolute satisfaction, for any actions whatsoever from the current franchisor of the offeree.
Civic contended that that condition was inserted by Mr Paterson because he was aware that, by entering the agreement with him, the Thompsons would be breaching their franchise agreements. Mr Paterson firmly denied that he prepared the offer documentation, or that he told Mr Smith that he wanted an indemnity.[13] Mr Smith also denied that the indemnity was inserted at Mr Paterson's request.[14] Mr Smith said that he included the indemnity on his own initiative, that it was 'a pro forma that I've used in a lot of the [sic] what we call consolidation transactions in a market that was suffering, or in an industry that was suffering, and is a pro forma that I used'.[15]
[13] ts 245(17 June 2014).
[14] ts 270 (17 June 2014).
[15] ts 271 (17 June 2014).
As I understand Civic's contention, it is that that evidence should not be accepted because the condition providing an indemnity could only operate in the interests of the purchaser, and thus would not have been inserted by the vendor's representative, Mr Smith. In my view, that does not provide a basis to reject the evidence of both Mr Smith and Mr Paterson, which was steadfastly maintained under cross‑examination. There is nothing inherently improbable about a vendor's agent inserting provisions protective of a purchaser in offer documents, and utilising pro forma provisions in that context. I am satisfied that the provision of the indemnity was inserted by Mr Smith.
The other evidence relied upon by Civic is the evidence as to Mr Paterson's inquiry of Mr Smith as to Civic's attitude to the sale. There was some inconsistency in the evidence of Mr Paterson and Mr Smith in that regard. In his written witness statement, Mr Paterson said that, when Mr Smith raised the possibility of the purchase of the Thompsons' stores with him, he asked Mr Smith what Civic's attitude to the sale was. He said that Mr Smith replied, 'The Thompsons have squared things away with Civic Video. Civic knows the Thompsons are keen to sell their stores but there are no buyers in the market under the Civic banner.' Under cross‑examination, Mr Paterson maintained that words to that effect were used by Mr Smith. He also said that, in the context of the same discussion, Mr Smith told him that the Thompsons had been advised to seek legal advice regarding implications before formalising any dealings, and that they had done so.[16] Mr Paterson's position was that, having made that inquiry, it was not his business to make any further inquiries as to whether Civic had given a clearance to the sale.[17]
[16] ts 240 (17 June 2014).
[17] ts 241 (17 June 2014).
Mr Smith's evidence was that when he was asked by Mr Paterson as to Civic's attitude, his response was to say that the Thompsons had been advised by him to seek legal advice which they had done. He did not say that he told Mr Paterson words to the effect that the Thompsons had 'squared things away with Civic Video' although that evidence from Mr Paterson was not specifically put to Mr Smith.
I find that Mr Paterson did make an inquiry as to Civic's attitude to the sale, and was told by Mr Smith that the Thompsons had been advised to take, and had taken, legal advice. I think it unlikely that Mr Smith said words to the effect that the Thompsons had 'squared things away with Civic', because that was contrary to the facts and Mr Smith would have had no basis to make that comment. There is no evidence that Mr Smith disclosed to Mr Paterson what that legal advice was, or indeed whether he knew what that advice was at the time that he had the conversation with Mr Paterson. It appears that Mr Smith was told at some point that the advice which Mr Thompson had received was that he had no choice other than to proceed with the transactions because of his financial distress.[18]
[18] ts 271 (17 June 2014).
Against that background, I find that Mr Paterson did not know, one way or the other, whether the sale by the Thompsons to him of the assets of the business would be a breach of their franchise agreements. All he knew was that the Thompsons had taken legal advice in relation to their position with Civic, and wished to proceed with the sale. He did not consider it necessary to inquire further.

It is the case that reckless indifference or wilful blindness that can amount to knowledge that an action would breach a contract.[19] At best, it might be said that Mr Paterson had grounds to suspect that the Thompsons might breach the franchise agreements by selling the assets of the business to him, but I would not conclude that that suspicion amounted to reckless indifference or wilful blindness.
[19] Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156; (2012) 207 FCR 220 [89]; Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (1995) 58 FCR 26, 43C ‑ 44F.
I do not consider that the fourth element identified in Daebo Shipping is made out, namely that Mr Paterson must have intended to induce or procure the Thompsons' breach of contract by offering to purchase the assets of the business. In this context, it is important to bear in mind that it was Mr Smith, acting on behalf of the Thompsons, who approached Mr Paterson in relation to the possible purchase of the Thompsons' stores. Although Mr Paterson made an offer to purchase, it was a response to the Thompsons' approach to him through Mr Smith. Upon his inquiry as to Civic's liability, he was told that the Thompsons had taken legal advice and wished to proceed. Undoubtedly, Mr Paterson saw an opportunity for commercial advantage in the event that the Civic stores closed. There is nothing untoward in him taking advantage of that opportunity when it was offered to him. That is a quite different position from Mr Thompson initiating the transaction with the view to inducing or procuring the Thompsons to breach their contract.
The plaintiff has failed to establish its cause of action against Mr Paterson, and the claim against him should be dismissed.
It is unnecessary for me to consider the question of damages which would have been payable had the claim against Mr Paterson been established. Had that been the case, Civic would have been entitled to be put in the position that it would have been had the tort not been committed. I see no reason why the damages, in the context of this case, would have differed from the loss of bargain damages which I have assessed in relation to the claim against the Thompsons

Conclusion

There should be judgment for the plaintiff against the second and third defendants for damages in the sum of $36,300. The claim against the first defendant should be dismissed. I will hear from the parties as to the appropriate costs orders.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: CIVIC VIDEO PTY LTD -v- PATERSON [No 3] [2014] WASC 321 (S)

CORAM: CHANEY J

HEARD: 13 OCTOBER 2014 & ON THE PAPERS

DELIVERED : 23 OCTOBER 2014

FILE NO/S: CIV 2144 of 2008

BETWEEN: CIVIC VIDEO PTY LTD
Plaintiff
AND
ROBERT HENRY PATERSON
First Defendant
MALCOLM THOMPSON
Second Defendant
BARBARA THOMPSON
Third Defendant

Catchwords:

Interest - Rate of interest - Whether pre-judgment interest should be calculated at contractual rate where that rate not pleaded at trial - Interest on judgment

Costs - Calderbank offer made by defendants - Whether unreasonable for plaintiff to reject Calderbank offer - Whether Magistrates Court or Supreme Court costs determination applies to award of costs - Whether there should be apportionment of costs where plaintiff successful against second and third defendants but failed against first defendant

Legislation:

Civil Judgments Enforcement Act 2004 (WA)
District Court of Western Australia Act 1969 (WA)
Legal Practitioners (Magistrates Court) (Civil Jurisdiction) Determination 2008 (WA)
Legal Practitioners (Magistrates Court) (Civil Jurisdiction) Determination 2010 (WA)
Rules of the Supreme Court 1971 (WA)
Supreme Court Act 1935 (WA)

Result:

Judgment entered and costs orders made

Category: B

Representation:

Counsel:

Plaintiff:     Mr I R Pike SC
First Defendant            :     Mr A Metaxas
Second Defendant        :     Ms M-L Coulson
Third Defendant           :     Ms M-L Coulson

Solicitors:

Plaintiff:     Marque Lawyers
First Defendant            :     Metaxas & Hager
Second Defendant        :     Coulson Legal
Third Defendant           :     Coulson Legal

Cases referred to in judgment:

Amaca Pty Ltd v Patricia Margaret Hannell [2007] WASCA 158 (S)
Calderbank v Calderbank [1975] 3 All ER 333
Civic Video Pty Ltd v Paterson [No 3] [2014] WASC 321
Fire & All Risks Insurance Co Ltd v Callinan (1978) 140 CLR 427
Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115
Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60
McKay v Commissioner of Main Roads [No 7] [2011] WASC 223 (S)
Michael Kellaway International Pty Ltd v Shark Bay Airport Pty Ltd (Unreported, Supreme Court of Western Australia, Library No 980302, 25 March 1998)
Vella v Ivanovski (1984) WAR 8

CHANEY J: On 15 September 2014, I delivered reasons for decision in this matter following a five‑day trial.[20] These reasons should be read in conjunction with my earlier reasons.
[20] Civic Video Pty Ltd v Paterson [No 3] [2014] WASC 321.
Following the delivery of my earlier reasons, the matter was adjourned to enable the parties to make submissions as to the terms of the judgment to be entered, and in particular in relation to the matters of interest and costs.
As between the plaintiff and the first defendant, there was agreement as to the orders which should be made, namely that there should be orders as follows:
1.The plaintiff's claim against the first defendant be dismissed.
2.The plaintiff to pay the first defendant's costs of the action, including reserved costs, but excluding those costs reserved by Master Sanderson in the order made on 13 September 2012 and the costs reserved by Registrar Whitbread on 7 June 2012.
3.The first defendant pay the plaintiff 75% of the costs reserved by Master Sanderson in the order made on 13 September 2012 and the costs reserved by Registrar Whitbread on 7 June 2012.
Those orders will be made.
As between the plaintiff and the second and third defendants, several issues arose which require determination. They are:
i.Upon what basis should interest be awarded on the damages assessed?
ii.What order for costs is appropriate having regard to a Calderbank offer made on 20 June 2010 which was rejected by the plaintiff?
iii.Should there be an apportionment of any costs payable by the second and third defendants to the plaintiff?
iv.What scale should apply to any costs payable by the second and third defendants to the plaintiff?
In relation to the third party proceedings brought by the first defendant against the second and third defendants, the second and third defendants did not oppose an order that they pay the first defendant's costs of the third party proceedings, including reserved costs, and the costs incurred by the first defendant for the fees charged by Hall Chadwick for expert reports, to be taxed. There should be an order in those terms.

The claim for interest

The plaintiff sought interest on the amount of damages assessed, namely $36,300, calculated by reference to cl 5.5 of the franchise agreements which reads:
Any amounts owing by the Franchisee to the Franchisor or its Related Bodies Corporate (pursuant to this agreement or otherwise) which have been outstanding for 60 days or more or which were not invoiced or paid because the Franchisee failed to report or unstated the Total Turnover or Quarterly Turnover will bear interests accruing daily at a rate equal to 2% above the monthly corporate overdraft reference rate (or equivalent) then offered by the Commonwealth Bank in Sydney.
Clause 5.5 of the franchise agreements was not pleaded in the Statement of Claim. A claim for interest 'in accordance with s 32 of the Supreme Court Act 1935 (WA)' was included in the prayer for relief. No evidence was led at trial as to the monthly corporate overdraft reference rate offered by the Commonwealth Bank in Sydney, nor was there any reference to cl 5.5 during the course of the hearing. In support of the claim for interest, the plaintiff filed an affidavit of Nathan Thomas Mattock, sworn 13 October 2014, who is a solicitor acting for the plaintiff in these proceedings, which attached a list of interest rates which he said were given to him by an employee of the business banking division of the Commonwealth Bank in response to his request for the bank's monthly corporate overdraft rate. The list is headed 'Commonwealth Bank of Australia Monthly Corporate Overdraft Reserve Rate'. Whether that is the same thing as 'the monthly corporate overdraft reference rate' is not explained.
An award of interest up to the date of judgment pursuant to s 32 of the Supreme Court Act is an award in the nature of damages.[21] Hence, the award of interest is compensatory in character.
[21] Haines v Bendall [1991] HCA 15; (1991) 172 CLR 60, 66 (Mason CJ & Dawson, Toohey & Gaudron JJ citing Fire & All Risks Insurance Co Ltd v Callinan (1978) 140 CLR 427, 431).
There is no basis to conclude that interest calculated at a rate of 2% above the figures contained in Mr Mattock's affidavit (which ranged from 8.89% to 11.67% before the 2% is added) represents fair compensation for the plaintiff having been held out of its damages since the date of the breach. I do not understand the plaintiff to contend that it has a contractual entitlement to interest on the damages, but rather only that the rate under cl 5.5 of the franchise agreements should be applied, as a matter of discretion, to interest awarded under s 32. In my view, to award interest at that rate would be to over compensate the plaintiff. If, contrary to my understanding, the plaintiff now asserts a contractual entitlement to interest at that rate, I would reject that contention because no claim of a contractual entitlement to interest was pleaded, nor, at any point, mentioned during the course of the trial.
In my view, interest should be allowed on the sum of $36,300 assessed at the rate of 6% per annum pursuant to s 32 of the Supreme Court Act from 3 October 2006 up until the date of judgment. I calculate that interest at $17,543.
The plaintiff also sought an order that the second and third defendants pay interest on the total judgment amount (including interest to the date of judgment) from the date of judgment until payment calculated in accordance with cl 5.5 of the franchise agreements. Interest on a judgment sum is required to be paid by s 8(1) of the Civil Judgments Enforcement Act 2004 (WA). It is to be paid at the rate prescribed by the regulations or at the rate set by the Court in the judgment or by order after the judgment is given. For the reasons that I would not award interest at the rate provided for in cl 5.5 of the franchise agreements in relation to pre‑judgment interest, I would not set that rate as the rate of interest payable on the judgment sum. It is sufficient that interest on the judgment sum be paid at the rate prescribed for the purposes of the Civil Judgments Enforcement Act.

The Calderbank offer

I assessed the damage suffered by the plaintiff as a result of the second and third defendants' breach of contract in the sum of $36,300. On 28 June 2010, the first, second and third defendants made a joint offer, without prejudice save as to costs, to the plaintiff to settle the proceedings. The offer was that the defendants would pay the plaintiff $50,000 in full and final settlement inclusive of costs between the plaintiff and all defendants. The offer specified that 'for the purposes of assessing the reasonableness of this offer, we estimate that your client's taxed costs to date in the action should it be successful may not exceed $15,000'. The letter specified that it would be relied upon on the question of costs and that indemnity costs would be sought from the date of the offer if the plaintiff was successful but did not recover an amount greater than the offer. The offer was expressly stated to be on the basis stated in Calderbank v Calderbank[22] and was open for acceptance within 14 days, that is, until 12 July 2010.
[22] Calderbank v Calderbank [1975] 3 All ER 333.
The offer was not accepted. It is necessary now to consider whether the outcome of the action is less favourable to the plaintiff than the outcome had it accepted the offer.
According to Mr Mattock, between the time that his firm, Marque Lawyers, took over the conduct of the matter in September 2009, until the date of the Calderbank offer, the plaintiff had incurred $53,309.78 in fees on a solicitor/client basis, including counsel's fees and disbursements. He asserts that the costs incurred by the plaintiff, if taxed, 'far exceeded the $14,000 difference between the Calderbank offer and the judgment amount'. No breakdown of the fees is provided. In particular, it is not possible to ascertain the extent to which the fees relate to the claim against the second and third defendants as against the claim against the first defendant (who was the only defendant from the time that the writ was issued on 10 September 2008 until the second and third defendants were joined in the action on 14 October 2009).
In comparing the offer which was made as against the ultimate outcome of the proceedings, it must also be borne in mind that acceptance of the offer would have avoided a liability which the plaintiff now has for the costs of the first defendant against whom its claim failed. As previously mentioned, the first defendant had been the only defendant for the first 13 months of the action and the costs of the first defendant up until June 2010 might well have been substantial. If the benefit of avoiding liability to the first defendant (had the Calderbank offer been accepted) is brought to account, the value of the offer for comparison purposes might be seen to be significantly more than $50,000. These considerations illustrate, however, the difficulty in assessing the comparative value of an offer where, like this one, the offer is inclusive of costs.
The outcome of the trial was that the plaintiff is entitled to $36,300 together with interest at the rate of 6% from 3 October 2006. It is not entitled to recover any of its costs so far as they relate to the claim against the first defendant. It is liable to pay the first defendant's costs of the action.
Had it accepted the offer, it would have, in effect, received its damages of $36,300 with interest at the rate of 6% from 3 October 2006 to 12 July 2010, which I calculate at $8,228. It would also have received $5,472 attributable to the second and third defendants' costs. It would not have had to pay the first defendant's costs between the issue of the writ on 10 September 2008 and 12 July 2010.
Whether or not, when looking at the position as at July 2010, in simple monetary terms the plaintiff would have achieved an outcome more favourable than it has achieved by judgment is difficult to discern. That is because there is no basis upon which I can reliably assess the net costs position under the offer. All that is known is that the plaintiff had incurred $53,309 in costs of Mr Mattock's firm up to the date of the offer. How much of that would have been recoverable as against the second and third defendants on a taxed basis as at 12 July 2010 is impossible to say. How much would have been payable by the plaintiff to the first defendant for its costs up to 12 July 2010 is also impossible to say. It is, however, reasonable to conclude that the offer is very close to the figure which would have been payable if, as at July 2010, liability were determined in accordance with my findings in the action.
However, the position is clearer if regard is had to the consequences of the plaintiff's decision to reject the offer and take the matter to trial, a process which in the end involved a further four years of litigation which culminated in a five-day trial involving senior counsel flown from Sydney. It is reasonable to assume that the plaintiff incurred very substantial legal and other costs far in excess of the $53,000 it had already spent by July 2010. Undoubtedly, a significant percentage of those costs would not be recoverable on a party/party basis, and none of those costs could be recoverable insofar as they relate to the claim against the first defendant. The first defendant undoubtedly incurred very substantial legal costs after July 2010, the recoverable portion of which the plaintiff will now have to pay. To the extent that interest is recoverable after 12 July 2010, that is interest which represents the inability of the plaintiff to utilise the funds and therefore has not put the plaintiff in a better position than had it accepted the offer and had the use of $50,000 from July 2010.
Having regard to those factors, I am satisfied that, by not accepting the offer and choosing instead to prosecute the action to trial, the plaintiff has achieved a less favourable outcome than had it accepted the offer. Measured against the outcome which would have been available had it accepted the offer, the plaintiff cannot be regarded as a successful party.
The competing positions of the plaintiff and the second and third defendants are that the plaintiff seeks an order that the second and third defendant pay its costs of the action (in relation to its claim against the second and third defendants), whereas the second and third defendants seek an order that they pay a portion of the plaintiff's costs up until 12 July 2010, and thereafter the plaintiff their costs of the action on an indemnity basis, or alternatively on a party/party basis.
The principles governing the order of indemnity costs in relation to Calderbank offers were explained by Buss JA, with whom Wheeler JA agreed, in Ford Motor Co of Australia Ltd v Lo Presti,[23] where his Honour said:
[23] Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115 [16] ‑ [18].
A Calderbank offer will not justify an award of indemnity costs unless its rejection was unreasonable. See Jones v Bradley (No 2) [2003] NSWCA 258 [7] ‑ [9]; Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375 [4]; Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; (2005) 13 VR 435 [23]; Berrigan Shire Council v Ballerini (No 2) [2006] VSCA 65 [10]; Ofria v Cameron (No 2) [2008] NSWCA 242 [20].
All of the relevant facts and circumstances must be considered in determining whether a party's rejection of a Calderbank offer was unreasonable. See SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 [37]; Jones v Bradley (No 2) [7] ‑ [9]; Leichhardt Municipal Council v Green [2004] NSWCA 341 [46]; Hazeldene’s Chicken Farm [23]; Berrigan [10]; Ghunaim v Bart (No 2) [2006] NSWCA 82 [23].
The mere fact that the recipient of a Calderbank offer is ultimately worse off than he or she would have been had the offer been accepted, does not mean that its rejection was unreasonable. See SMEC [37].
As the assessment of 'unreasonableness', Buss JA said:[24]
[24] Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115 [31].
Australian intermediate courts of appeal have disapproved the view expressed by Rolfe J in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 that unreasonableness is, on the face of it, to be found in the rejection by an offeree of a Calderbank offer which is not bettered on judgment (451). It has been established that there is no presumption of an entitlement to an award of indemnity costs in this situation. The unreasonableness of the rejection of the offer is not determined by a presumption. Rather, it depends on the circumstances of the particular case. The decision in Multicon was overruled in Jones v Bradley (No 2) [6] ‑ [9]. See also the observations in Leichhardt Municipal Council [56].
I do not consider that rejection of the 28 June 2010 offer by the plaintiff can be said to be unreasonable. There are several reasons for that conclusion. They are:
(i)I accept that the calculation of the amount of damages which I undertook in arriving at the figure of $36,300 involved, necessarily, findings of fact, having regard to all of the evidence after a five‑day trial, and the adoption of various figures for calculation purposes, such as a discount rate and the chance of earning franchise fees. It certainly could not be said to be unreasonable that the plaintiff failed to apply those factors in the assessment of its prospects of success in 2010. The assessment of unreasonableness must be made without the benefit of hindsight and without adopting the judgment sum ultimately awarded as a yardstick to measure reasonableness.[25]
[25] Ford Motor Co of Australia Ltd v Lo Presti [2009] WASCA 115 [89] (Buss JA).
(ii)Although the plaintiff had not, as of June 2010, particularised its claim, it is apparent that the plaintiff saw its entitlement as being the full amount of franchise fees that would have been payable over the terms of the Franchise Agreements. It had not yet obtained expert advice as to the value of its claim.
(iii)The offer was inclusive of costs. At the time of the offer, the plaintiff had incurred substantial costs which would have made the offer appear less attractive than, in the final event, it can now be seen to have been.

The observations made in Lo Presti were, of course, made in the context of a case where the successful party at trial, the plaintiff, was the offeror. Mr Lo Presti was awarded damages which exceeded the amount he had offered to accept as a settlement. Thus, the plaintiff was unarguably entitled to his costs on a party/party basis. The only question was whether, by reason of an unreasonable refusal to accept the plaintiff's offer, the defendant should be liable to pay costs from the date of the offer on an indemnity basis. That is different from the situation in this case. In this case, the offeree, that is, the plaintiff, was successful at trial in its claim against the second and third defendants, and, putting aside the Calderbank offer, would usually be entitled to its costs on a party/party basis as against the second and third defendants. There are, therefore, several possibilities in relation to costs. They are:
i.The position advocated by the plaintiff, that the second and third defendants pay the plaintiff's costs to be taxed on a party/party basis.
ii.The position advocated by the second and third defendants, that the second and third defendants pay the plaintiff's costs up until 12 July 2010 to be taxed on a party/party basis and the plaintiff pay the second and third defendant's costs on an indemnity basis as from 13 July 2010.
iii.The alternative position advocated by the second and third defendants, that the second and third defendants pay the plaintiff's costs taxed on a party/party basis up until 12 July 2010, and the plaintiff pay the second and third defendants' costs taxed on a party/party basis as from 13 July 2010.
iv.A further possible outcome, that the second and third defendants pay the plaintiff's costs to be taxed on a party/party basis up until 12 July 2010, and, thereafter, there be no order for costs.
In order to consider the appropriate exercise of the discretion to award costs, it is necessary to consider the relevance of the failure to accept the Calderbank offer on the exercise of that discretion.
The relevance of a failure to accept a Calderbank offer to the general discretion as to costs was discussed by Beech J in McKay v Commissioner of Main Roads [No 7][26] where his Honour said:
[26] McKay v Commissioner of Main Roads [No 7] [2011] WASC 223 (S) [127] (Buss JA).
The breadth of the court’s discretion ensures that the court retains the maximum flexibility to meet the justice of the case. The character of what animates the exercise of the exceptional power to award indemnity costs explains why the courts require a finding of unreasonable rejection before indemnity costs are available based on a Calderbank offer. Those considerations do not apply to using a Calderbank offer to order party‑party costs. I do not think the breadth of the costs discretion should be or is constrained by a requirement of finding unreasonable rejection as a prerequisite to a party-party costs order based on a Calderbank offer.
His Honour also said at [96]:
On that view of things, I think it is clear that the power to use a Calderbank offer to sustain a party‑party costs order is not conditioned on a finding that the rejection of the offer was unreasonable, as judged at the time of the offer. It would not seem to me to make sense that the offeror is, from the date of the offer, the successful party if and only if rejection of the offer were unreasonable.
In McKay, Beech J gave an example which he considered reflected a case where justice requires that a Calderbank offer should lead to party‑party costs in favour of the offeror, but where indemnity costs would be wholly inappropriate and would be unavailable as a proper exercise of discretion. He said at [124]:
Imagine an action for damages where the defendant denies it is liable to the plaintiff and, in any event, there is a dispute between the parties about the amount of loss and damage. Both parties have a strongly arguable case based on apparently cogent evidence. The defendant makes a Calderbank offer in a sum substantially more than the amount recoverable on the defence case if is it liable to the plaintiff, and substantially less than the plaintiff's claim. At trial, the plaintiff establishes liability, but is only awarded damages based on the defendant's assessment of loss and damage. In such a case, the plaintiff would be the 'successful' party for the purposes of O 66 r 1(1), as it succeeded in recovering damages from the defendant. By refusing the Calderbank offer, the plaintiff put the defendant to the costs of a trial that did not result in the plaintiff obtaining a better outcome than was offered by the defendant. In those circumstances, a party‑party costs order in favour of the defendant from the date of the offer may well be appropriate.
This case closely fits that example, save perhaps that, in this case, the damages assessed at trial were not based on the defendants' assessment (which was that the plaintiff had suffered no damages). Damages were assessed, however, on the basis that I accepted the defendants' contention that franchise fees would not have continued to be paid because the second and third defendants would have closed the businesses. The second and third defendants were thus substantially successful on that central issue with the result that the damages are far closer to the defendants' assessment than to the plaintiff's assessment, which was $238,416.
An order for payment of costs is designed to meet the justice of the case. In this case, the plaintiff chose to reject an offer which, for the reasons outlined above, would have left it better off than it is following trial, and thereby subjected all the parties to significant cost. Its case at best claimed damages of $238,416. It was readily apparent that the damages would be reduced if any of the many challenges to the assessment were successful. There can be little doubt that the costs of all parties to the case would far exceed the amount in dispute. The need for proportionality between the costs of proceedings and the value and importance of the subject matter in dispute is now well accepted in this Court.[27]
[27] Rules of Supreme Court 1971 (WA), O 1 r 4B(1)(e), 4B(2)
While I accept that, when the offer was made, precise calculation of the damages that might be recovered was difficult, this is a case where the plaintiff has chosen to continue long and expensive litigation, thus putting the defendants to substantial expense and resulting in an outcome less favourable to it than had the Calderbank offer been accepted. In those circumstances, I consider that the justice of the case requires that there be an order that the plaintiff pay the second and third defendants' costs after 12 July 2010 to be taxed on a party/party basis. The second and third defendants should pay the plaintiff's costs up until 12 July 2010 on the basis discussed below.

The scale to be applied

The second and third defendants contend that, to the extent that they are required to pay the plaintiff's costs, those costs should be taxed on the basis of the Legal Practitioners (Magistrates Court) (Civil Jurisdiction) Determination 2008 and the Legal Practitioners (Magistrates Court) (Civil Jurisdiction) Determination 2010. The basis of that contention is the provisions of O 66 r 17(1) of the Rules of the Supreme Court 1971 (WA). The rule provides:
17. Cases that Magistrates Court could have decided, costs in
(1)If an action is brought in the Supreme Court which could have been brought in the Magistrates Court without the special consent of the defendant, the plaintiff shall recover no greater sum by way of costs than he could have recovered had the action been brought in the Magistrates Court, unless the Court certifies that by reason of some important principle of law being involved, or of the complexity of the issues or of the facts, the action was properly brought in the Supreme Court.
The civil jurisdiction of the Magistrates Court extends to claims up to $75,000. The damages awarded to the plaintiff were $36,300. Accordingly, the second and third defendants contend that this is an action which could have been brought in the Magistrates Court without the special consent of the defendant, and O 66 r 17(1) should apply.
I do not accept that contention.
In Michael Kellaway International Pty Ltd v Shark Bay Airport Pty Ltd (Unreported, Supreme Court of Western Australia, Library No 980302, 25 March 1998), Kennedy J considered the provisions of s 74(2)(b) of the District Court of Western Australia Act1969. That section was (prior to its amendment) drawn in terms which, relevantly, reflected the terms of O 66 r 17(1). Citing Vella v Ivanovski (1984) WAR 8, Kennedy J identified the central test as whether the plaintiff in the case, when instituting proceedings, might reasonably have been expected to recover an amount in excess of the maximum of the jurisdiction of the Local Court. Both the second and third defendants and the plaintiff accepted that that is the appropriate test.
The plaintiff in this case wished to pursue a claim for damages well in excess of the jurisdiction of the Magistrates Court. It could not have instituted its claim for that amount in the Magistrates Court. Although the damages ultimately awarded to the plaintiff are below the amount of the civil jurisdiction of the Magistrates Court, it was not unreasonable for the plaintiff not to have commenced and pursued its action in the Magistrates Court given the claim which it wished to pursue. Order 66 r 17(1) does not, therefore, apply in the present circumstances.
The costs to be payable by the second and third defendants to the plaintiff should be taxed on the basis applicable in this Court.
I might observe in passing that this is clearly an action which should have been brought in the District Court rather than the Supreme Court. But since there is no distinction as to the costs determinations applicable in the Supreme Court and the District Court, that is not a matter of any significance for present purposes.

Apportionment

The second and third defendants contend that there should be an order that they pay 66% of the plaintiff's costs of the action up to and including 12 July 2010. That apportionment is suggested in order to take into account that portion of the plaintiff's costs to 12 July 2010 which relate to the claim against the first defendant. It is submitted that it is a more convenient approach to the assessment of costs to allocate a fixed proportion of the total costs in that way, rather than to engage in a process of identification as to the extent to which individual items of costs are attributable to either the claim against the first defendant or the claim against the second and third defendants.
The plaintiff accepts that the second and third defendants should only be required to pay those costs which relate to the claim against them. The issue for determination is, therefore, whether adoption of a percentage reduction of total costs is preferable to a more precise calculation having regard to individual costs items.
The second and third defendants refer to Amaca Pty Ltd v Patricia Margaret Hannell[28] where the Court of Appeal, dealing with the question of costs orders where the successful party has failed on certain issues which have increased the costs of action, suggested that the exercise of that power should be approached broadly, and as a matter of impression, and without an attempt at 'mathematical precision'.
[28] Amaca Pty Ltd v Patricia Margaret Hannell [2007] WASCA 158 (S) [6].
Although that observation was made in a context of apportionment of costs in relation to issues, I accept that a similar approach might be appropriate in cases where apportionment of costs is occurring by reason of success against one party but failure against another. However, in this case, where the time period in respect of which costs are to be assessed is relatively short, and costs were incurred by the plaintiff for about half of that period when the second and third defendants had not been joined as defendants, it is preferable not to simply apportion some percentage of the plaintiff's total costs as representing costs in relation to the claim against the second and third defendants respectively. No justification for the figure of 66% was proffered and, in the circumstances of this case, I am satisfied that a fairer and more just outcome can be achieved by a more precise identification of the costs said to be incurred in relation to the claim against the second and third defendants. Accordingly, I prefer the approach suggested by the plaintiff, namely, that the order should make it clear that the costs up until 12 July 2010 to be recovered from the second and third defendants are only those costs which relate to the claim against those defendants.

The appropriate orders

For the foregoing reasons, the orders which should be made are as follows:
1.The plaintiff's claim against the first defendant be dismissed.
2.The plaintiff do pay the first defendant's costs of the action, including reserved costs, but excluding those reserved costs reserved by Master Sanderson on 13 September 2012 and the costs reserved by Registrar Whitbread on 7 June 2012.
3.The first defendant do pay the plaintiff 75% of the costs reserved by Master Sanderson on 13 September 2012 and the costs reserved by Registrar Whitbread on 7 June 2012.
4.There be judgment for the plaintiff against the second and third defendants in the sum of $53,843, including the sum of $17,543, being interest from the date of the termination of the second highway franchise agreement on 3 October 2006 to the date of judgment, calculated at the rate of 6% per annum.
5.The second and third defendants do pay the plaintiff's costs up to and including 12 July 2010 insofar as they relate to the claim against the second and third defendants, including reserved costs, to be taxed in accordance with determinations applicable to proceedings in the Supreme Court, if not agreed.
6.The plaintiff do pay the second and third defendants' costs of and incidental to the action as from and including 13 July 2010, to be taxed if not agreed.
7.The second and third defendants to pay the defendant's costs of the third party proceedings, including reserved costs, and the costs incurred by the first defendant for the fees charged by Hall Chadwick for expert reports, to be taken.
8.There be no order as to costs in relation to the applications for costs of the action.

Temple-Cole Estimate		Tax Payable	Net Cash after Tax	Travel Expenses	Net Cash Receipts	25% Discount Factor	Discounted after Tax Cash Receipts
2006	$1,389	$417	$972	$972	1.0000	$972
July to October 2006	$4,454	$1,336	$3,118	$3,118	1.0000	$3,118
Oct to June 2007	$12,985	$3,895	$9,090	$2,000	$7,090	1.0000	$7,090
2008	$17,992	$3,598	$14,394	$2,000	$12,394	0.8000	$9,915
2009	$18,149	$5,445	$12,704	$2,000	$10,704	0.6400	$6,851
2010	$18,461	$5,538	$12,923	$2,000	$10,923	0.5120	$5,593
2011	$18,763	$5,629	$13,134	$2,000	$11,134	0.4096	$4,560
2012	$19,069	$5,721	$13,348	$2,000	$11,348	0.3277	$3,719
2013	$19,382	$5,815	$13,567	$2,000	$11,567	0.2621	$3,032
2014	$19,701	$5,910	$13,791	$2,000	$11,791	0.2097	$2,473
2015	$20,026	$6,008	$14,018	$2,000	$12,018	0.1678	$2,017
2016	$18,710	$5,613	$13,097	$2,000	$11,097	0.1342	$1,489
Total	$189,081	$54,925	$134,156	$20,000	$114,156	$50,828