Diab Pty Ltd v YUM! Restaurants Australia Pty Ltd

[2016] FCA 43

FEDERAL COURT OF AUSTRALIA

Diab Pty Ltd v YUM! Restaurants Australia Pty Ltd [2016] FCA 43

File number(s):

NSD 832 of 2014

Judge(s):

BENNETT J

Date of judgment:

5 February 2016

Catchwords:

CONTRACTS – representative action – respondent franchisor implemented a strategy setting maximum prices and product ranges for franchisees – whether, on the proper construction of the franchise agreement, the franchisor was in breach by reducing the prices on its ranges of pizzas – whether implementation of strategy would breach implied terms, including an implied term of good faith, of the franchise agreement – categories of damages: income/trading loss, capital loss

CONSUMER LAW – whether implementation of the strategy would involve unconscionable conduct by the respondent under s 21 of the Competition and Consumer Act 2010 (Cth) sch 2

NEGLIGENCE – whether the franchisor owes a duty of care to each franchisee in relation to any conduct or decision it makes and in the exercise of its powers under the franchisee agreement

Legislation:

Competition and Consumer Act 2010 (Cth) Sch 2

Competition and Consumer (Industry Codes – Franchising) Regulation 2014 (Cth)

Federal Court of Australia Act 1976 (Cth) ss 33H(1)(c), 33R, 33Z and 33ZF

Federal Court Rules 2011 (Cth) r 30.41

Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) reg 23A

Cases cited:

A & A (Sydney) Pty Ltd v YUM! Restaurants Australia Pty Ltd [2014] FCA 678

Abu Dhabi National Tanker Co v Product Star Shipping Ltd (No 2) [1933] 1 Lloyd’s Rep 397

Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349

Astley v Austrust Ltd (1999) 197 CLR 1

Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104

Baltic Shipping Co v Dillon (1993) 176 CLR 344

Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck) [1992] 1 AC 233

Banque Commerciale SA (In Liq) v Akhil Holdings Ltd (1990) 169 CLR 279

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

Braganza v BP Shipping Ltd [2015] 1 WLR 1661 at 1669

Burger King Corp v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184

Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640

GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1

International Air Transport Association v Ansett Australia Holdings Limited (2008) 234 CLR 151

John McGrath Motors (Canberra) Pty Ltd v Applebee (1964) 110 CLR 656

Jones v Dunkel (1959) 101 CLR 298

Krakowski v Eurolynx Properties Limited (1995) 183 CLR 563

McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579

McCartney v Orica Investments Pty Ltd [2011] NSWCA 337

Mackay v Dick (1881) 6 App Cas 251

Malec v JC Hutton Pty Ltd (1990) 169 CLR 638

March v E & MH Stramare Pty Ltd (1991) 171 CLR 506

Merck Sharp & Dohme (Australia) Pty Ltd v Peterson [2009] FCAFC 26

Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) [2015] FCA 825

Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 325 ALR 188

Paciocco v ANZ Banking Group (2015) 321 ALR 584

Royal Brunei Airlines Sdn. Bhd v Philip Tan Kok Ming [1995] 3 All ER 97

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596

Stratton Finance Pty Ltd v Webb (2014) 314 ALR 166

Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80

Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165

Tomlin v Ford Credit Australia Ltd [2005] NSWSC 540

Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15

Date of hearing:

30 – 31 July 2015, 3 – 7 and 13 – 14 August 2015,
14 – 18 and 22 September 2015, 13 – 15 October 2015

Date of last submissions:

20 November 2015

Registry:

New South Wales

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Regulator and Consumer Protection

Category:

Catchwords

Number of paragraphs:

485

Counsel for the Applicant:

Mr FM Douglas QC with Mr TD Castle and Mr JA Arnott

Solicitor for the Applicant:

J Kartsounis & Co. Solicitors

Counsel for the Respondent:

Mr RM Smith SC with Mr KL Andronos SC and
Mr SA Keizer

Solicitor for the Respondent:

Webb Henderson

ORDERS

NSD 832 of 2014

BETWEEN:

DIAB PTY LTD (ACN 003 168 812)

Applicant

AND:

YUM! RESTAURANTS AUSTRALIA PTY LTD
(ACN 000 674 993)

Respondent

JUDGE:	BENNETT J
DATE OF ORDER:	5 FEBRUARY 2016

THE COURT ORDERS THAT:

1.Proposed orders, by consent or as proposed by each party, be sent to chambers by 19 February 2016.

2.Any proposed redactions to the reasons, said to be confidential, be sent to chambers by 19 February 2016.

3.The matter be stood over to 23 February 2016 at 9.30am.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT
TABLE OF CONTENTS

1         THE PARTIES	[3]
1.1      DPL	[3]
1.2      Yum	[6]
1.3      Representative proceedings and group members	[11]
2         THE IFA	[15]
3         THE STATEMENT OF CLAIM/THE ASC	[20]
4         THE WITNESSES	[23]
4.1      Mr Diab	[23]
4.2      Mr Houston	[25]
4.3      Ms Broad	[28]
4.4      Ms Syed	[29]
4.5      Mr Sinha	[31]
4.6      Mr Smith	[35]
4.7      The experts	[39]
4.7.1    Mr Potter	[39]
4.7.2    Mr Gower	[40]
5         FACTUAL BACKGROUND AND SUBMISSIONS ON THE FACTS	[42]
5.1      Chronology of pricing	[43]
5.2      Characterisation of the VS	[46]
5.3      ACT Test	[49]
5.3.1    Appropriate to test	[50]
5.3.2    Mr Diab’s response to being informed of the ACT Test	[51]
5.3.3    Profitability of the ACT franchisee	[52]
5.3.3.1       Alleged post-launch profit	[55]
5.3.3.2       Prior year loss	[59]
5.3.3.3       DPL’s conclusion on the presentation of the ACT Test during the Franchisee Update presentation	[60]
5.3.4    ACT sales results	[61]
5.3.5    Replication of the ACT Test	[64]
5.3.6    Summary of the ACT Test	[67]
5.4      The Yum Model	[71]
5.4.1    Operation of the Yum Model	[72]
5.4.2    Purpose of the Yum Model	[75]
5.4.3    Usefulness of the Yum Model	[78]
5.4.4    Assumption of 13 additional labour hours	[81]
5.4.5    Variable labour as a balancing item	[84]
5.4.5.1       Mr Potter’s calculation of variable labour	[94]
5.4.5.2       Yum’s criticisms of Mr Potter’s analysis	[97]
5.4.5.3       Non-inclusion of depreciation and return on capital	[100]
5.4.6    Was $4.95 was an unprofitable price for the Classics range?	[103]
5.5      4 June 2014 meeting and implementation decision	[109]
5.5.1    Versions of the Yum Model	[110]
5.5.2    4 June 2014 meeting	[113]
5.6      Showing the Franchisees the Yum Model	[119]
5.6.1    Showing Mr Diab the Yum Model	[122]
5.7      Consultation with the Franchisees	[125]
5.7.1    Blowing up Adco	[125]
5.7.2    May meetings	[136]
5.7.3    Availability of Franchisee information	[139]
5.8      The reasons of Jagot J in the interlocutory application for injunctive relief	[140]
5.9      Domino’s reaction	[149]
5.9.1    First mover advantage	[149]
5.9.2    Marketing reaction	[153]
5.9.3    Impact on sales growth	[159]
5.9.4    The Help! email	[160]
5.9.5    Email from Mr Smith of 25 June 2014	[162]
5.9.6    Leaking of the VS	[165]
5.9.7    Other evidence of Domino’s reduced prices	[168]
5.9.8    Whether Yum had to follow Domino’s new market prices	[171]
5.10     Post implementation of VS	[173]
5.11     The role of the Yum US	[177]
5.11.1  AOP meeting on 9 October 2013	[178]
5.11.2  Initiation of the ACT Test	[185]
5.11.3  Approaching the FPC	[190]
5.12     Value problem	[196]
6         WITNESSES	[203]
6.1      Mr Diab	[203]
6.1.1    Email received by Mr Diab on 19 June 2014	[206]
6.2      Yum’s witnesses	[210]
6.3      The expert witnesses	[217]
7         SUBMISSIONS AS TO THE APPLICATION OF LEGAL PRINCIPLES	[220]
7.1      Principles of contractual interpretation	[220]
7.2      Breach of the IFA?	[232]
7.3      Duty of care	[250]
7.4      Unconscionability claim	[266]
7.5      Causation	[279]
8         SUMMARY OF THE SUBMISSIONS	[283]
8.1      Yum’s powers and obligations under the IFA	[284]
8.2      Application of the principles to the IFA	[286]
8.3      Breach of the IFA?	[306]
8.4      Duty of care	[318]
8.5      Unconscionability claim	[334]
8.6      Causation	[347]
9         CONSIDERATION	[353]
9.1      The nature of the IFA	[353]
9.2      The setting of a maximum price	[362]
9.3      The ACT Test, the Yum Model and the first mover advantage	[371]
9.4      Date of the implementation decision	[402]
9.5      The intervention of the interlocutory proceedings and Domino’s pre-emptive launch of a $4.95 every day pizza	[403]
9.6      The witnesses	[427]
10       CONCLUSION ON LIABILITY	[436]
11       LOSS AND DAMAGE	[439]
11.1     Evidence	[440]
11.1.1  Mr Potter’s evidence	[440]
11.1.1.1     Instructions provided	[440]
11.1.1.2     Principles of loss assessment	[441]
11.1.1.3     DPL’s loss	[443]
11.1.2  Mr Gower’s evidence	[448]
11.1.2.1     Trading loss	[448]
11.1.2.2     Capital loss	[451]
11.2     DPL submissions	[453]
11.2.1  Mr Potter’s evidence	[458]
11.2.2  Income loss	[461]
11.2.3  Capital loss	[462]
11.3     Yum submissions	[465]
11.3.1  Income loss	[465]
11.3.2  Capital loss	[468]
11.4     Consideration	[470]
11.4.1  Trading loss	[470]
11.4.2  Capital loss	[474]
11.5     Conclusion on loss and damage	[478]
11.6     Extra issues	[481]
11.6.1  Required return on capital	[482]

BENNETT J:

1. These proceedings, brought by Diab Pty Limited (DPL), a franchisee of Pizza Hut outlets, concern a decision made by Yum! Restaurants Australia Pty Limited (Yum), the franchisor. That decision, which was announced to Pizza Hut franchisees on 10 June 2014 and implemented on 1 July 2014, was to reduce the ranges of Pizza Hut pizzas from four to two and reduce the prices in the available ranges to two price points: $4.95 for “Classics” pizzas (from $9.95) and $8.50 for “Favourites” pizzas, formerly called “Legends” pizzas (from $11.95).  Yum’s strategy was known as the Value Strategy (VS) and the reduced price points were predicated on various iterations of a model prepared by Yum personnel (the Yum Model).  DPL brings its claim against Yum as the representative applicant of all persons who were franchisees under an International Franchise Agreement (IFA) with Yum to operate Pizza Hut outlets as at 1 July 2014 (Franchisees; singular: Franchisee).

2. A range of terminology and definitions are used in these reasons.  Accordingly, a glossary of terms is attached in Annexure A.  Further, the parties provided a series of chronologies, following the hearing, and a summary chronology of the events relevant to this matter is attached in Annexure B.  That chronology, submitted by the parties, is not agreed as to all of the facts as provided but serves only to provide a convenient reference of the relevant date.  DPL provided the original chronology, which is represented in black in Annexure B, and Yum made changes to DPL’s chronology and those changes are represented in blue in Annexure B.

   1.               THE PARTIES

   1.1             DPL

3. DPL is a Pizza Hut franchisee which owns and operates six Pizza Hut outlets in the Greater Macarthur region of south-western Sydney, pursuant to a separate IFA for each outlet.

4. DPL was formed in 1986.  Mr Danny Diab is the majority shareholder and managing director of DPL.  Since 1995, Mr Diab has had an extensive involvement in all aspects of the Pizza Hut business in Australia, including as a franchisee director of Pizza Hut Adco Limited (Adco), a body that, in conjunction with Yum, is responsible for marketing and promotional activities and promoting the Pizza Hut business, brands and products in Australia.  Mr Diab was a director of Adco until April 2014 and was a representative on many of Yum’s joint councils with Franchisees.  Mr Diab is also a director of Restaurant Brands New Zealand Limited (RBNZ), the New Zealand Pizza Hut master franchisee.

5. When compared to the national average, all of the current DPL outlets are high volume stores.  Mr Diab gave evidence that DPL outlets have a 2-to-1 advantage over the Domino’s stores in the Greater Macarthur region.  This is not the case with other Pizza Hut outlets.  The importance of this numerical advantage and scale was recognised within Yum as seen in an email of 11 August 2013 from the senior planner of Yum in the USA.  In the period February to June 2014 DPL outlets were experiencing increasing sales with a “run rate” of approximately 3.55% increase in sales growth.  Mr Diab gave evidence that he advised Yum of the positive progress that DPL was making.  DPL states that since the implementation of the VS, it has experienced a significant decline in its sales and profitability.

   1.2             Yum

6. Yum is an Australian subsidiary of Yum! Brands, Inc. (Yum US), which is a publicly listed company on the New York Stock Exchange and is among the world’s top 250 companies on the Fortune 500 list.  Yum operates the Pizza Hut business in Australia.  Yum called key personnel involved in the launch of the VS to give evidence.  The personnel included:

   ·Mr Graeme Houston, the General Manager of Pizza Hut South Pacific (SOPAC);

   ·Ms Lynne Broad, employed by Yum as the Head of Finance and Supply Chain, Pizza Hut;

   ·Mr Kurtis Smith, employed by Yum in July 2013 as the Head of Operations of Pizza Hut SOPAC and in January 2014, he became the Market Director for Pizza Hut in Australia until January 2015;

   ·Ms Fatima Kamali-Syed, employed by Yum as the Head of Marketing; and

   ·Mr Devesh Sinha, employed by Yum as the National Operations Manager from January 2014 until 15 July 2015.

7. Mr Houston has been a director of Yum since 21 December 2011.  Ms Broad became a director in December 2014.  Mr Smith and Mr Sinha no longer work for Yum; however, both have roles in Yum US’ Dallas headquarters.  Mr Smith is the Senior Director of Development of the USA Pizza Hut business and Mr Sinha is now the Senior Manager of Operations for what has been described as Pizza Hut Global.

8. Mr Houston gave evidence that, as at 27 November 2014, there were approximately 210 Pizza Hut franchisees in Australia, of which approximately 45 were franchisees which operated more than two outlets and approximately 4 were franchises which operated more than 5 outlets.

9. In terms of its own financial reporting cycle, Yum provides quarterly reports to the Chief Financial Officer (CFO) of Pizza Hut Global, Mr Enrique Ramirez, commencing each year with a forecast known as Q0F, which is then updated in subsequent periods by forecasts known as Q1F, Q2F and Q3F.  According to Ms Broad, these forecasts are then built into a consolidated forecast for the Pizza Hut business as a whole.

10. In terms of business and financial planning, Yum commences this process in about July of each year when Yum, with every other business unit which is a subsidiary or related entity around the world, submits a market growth plan which outlines store build and profit targets, which are agreed with the Pizza Hut Global CFO.  In about October of each year, there is a conference between Yum’s leadership team and the Yum US senior leadership team.  During this conference, Yum presents its business strategy known as the Annual Operating Plan (AOP) to the Yum US senior leadership team.  The AOP meeting for the 2014 Yum year took place on 9 October 2013.

    1.3             Representative proceedings and group members

11. These representative proceedings were commenced by DPL under Part IVA of the Federal Court of Australia Act 1976 (Cth) (the FCA Act).  The group members are defined as the Franchisees who suffered loss as a result of the introduction of the VS.  Opt-out notices were sent to all potential group members on 10 October 2014, as a result of which only 11 of the Franchisees opted out.  It follows that approximately 190 of 200 of the Franchisees are group members for the purposes of the proceedings.

12. In accordance with s 33H(1)(c) of the FCA Act, DPL has specified the questions of law and fact common to the claims of all group members in the Amended Originating Application dated 2 April 2015 (the application): (Merck Sharp & Dohme (Australia) Pty Ltd v Peterson [2009] FCAFC 26 at [6]).

13. DPL submits that, other than questions relating to the quantification of damages, there is a very high level of commonality between the claims of DPL and each of the group members – essentially because Yum’s conduct involved the introduction of a single, national strategy and Yum’s legal relationship with the Franchisees was and is conducted pursuant to a standard form IFA. However, other group members may have separate claims that they may wish to advance against Yum pursuant to s 33R of the FCA Act. These separate claims would be in addition to the claims made in the Amended Statement of Claim dated 2 April 2015 (ASC).  Also, it is probable that each group member would have to establish his, her or its damages if liability is established.

14. It should be noted that, in [26] of the ASC, DPL has clearly specified that it claims damages on its own behalf as an individual claim, which includes the quantification of its loss as to which it has led evidence from both Mr Diab and Mr Potter.  DPL particularised, in [27] of the ASC, that ‘[p]articulars of the loss and damage suffered by the [Franchisees] will be provided after the determination of the common issues relating to liability and the determination of the individual damages claim of [DPL]’. That is, if the Court finds in favour of DPL and awards damages to DPL, the judgment will enure for the benefit of all group members as findings on the common questions, other than in respect of the quantification of damages. The Court’s power to award damages to DPL only at this time is established by s 33Z(1)(e) of the FCA Act. The Court may then take submissions as to the appropriate orders or directions to be made in respect of the damages claims or assessments to be made in respect of all other group members under s 33Z(1)(g) or s 33ZF of the FCA Act.

    2.               THE IFA

15. Mr Diab, and each Franchisee, executed the IFA for a term of 10 years with a right of renewal for a further 10 years, subject to certain conditions of compliance (clause 18).  The IFA provides in clause 14 that the Franchisee cannot sell or transfer any interest in the IFA without Yum’s prior written approval of the proposed transferee.

16. Clause 1.1 provides that Yum grants to the Franchisee the right to use a comprehensive restaurant system (the System).  The Franchisee agrees to use its best endeavours to develop the Business (defined as the business of preparing, marketing and selling the products) and to increase the Revenues (defined as gross receipts received by the franchisee as payment for the products and for other goods and services) (clause 1.2).  By clause 2.3, the initial and annual payments made by the Franchisees are in consideration of the rights granted in clause 1.1 and not for Yum’s performance of any specific obligations or services.

1. Also relevant are clauses:

   5.2Franchisor may, by notice to Franchisee, at any time change or withdraw any Approved Product or add new Approved Products.  Franchisee will implement such changes, withdrawals and additions within the period specified in the notice.

   …

   6.1Franchisee will not execute or conduct any advertising or promotional activity in relation to the Business or the System without Franchisor’s prior written approval.

   6.2Franchisee will participate in such national and regional advertising, promotions, research and tests as Franchisor from time to time requires and Franchisee will not have any claim or action against Franchisor in connection with the level of success of any such advertising, promotion, research or test.

   …

   23.1This Agreement constitutes the entire agreement between the parties with respect to its subject matter and supersedes all prior negotiations, agreements or understandings.

2. “Approved Products” are defined, in schedule A of the IFA, as ‘the products from time to time approved by Franchisor for sale in the Business.’  Yum also points to the “franchisee’s representation” which forms part of the IFA:

   (a)Franchisee has reviewed this Agreement with the assistance and advice of independent legal counsel and understands and accepts the terms and conditions of this Agreement;

   (b)Franchisee has relied upon its own investigations and judgment in entering this Agreement, after receiving legal and financial advice, and no inducements, representations or warranties other than those expressly set forth in this Agreement, have been given in respect of the System, the Business or this Agreement; and

   (c)Franchisee acknowledges that establishment and operation of the Business will involve significant financial risks and that the success of the Business will depend upon the skills and financial capacity of Franchisee and also upon changing economic and market conditions and that such risks, skills and conditions are not in any way guaranteed or underwritten by Franchisor.

3. The key clause with respect to the exercise by Yum of its power to fix the prices pursuant to the VS is clause C1 the IFA.  This clause provides:

   MAXIMUM RETAIL PRICE

   Franchisee will not permit any Approved Product to be sold at the Outlet at any price exceeding the maximum retail prices advised by Franchisor to Franchisee from time to time.

   3.               THE STATEMENT OF CLAIM/THE ASC

4. There are certain matters as to the IFA that are not in dispute on the pleadings:

   ·The IFA provided the structure for the System.

   ·The Franchisees agreed to comply with specifications concerning the operation of the System, which provided for uniform operation of all restaurants within it.

   ·The matters set out in clause 1.1 of the IFA.

   ·The Franchisee is an independent contractor and no fiduciary relationship exists between the franchisor and the Franchisee.

   ·The Franchisees will not permit any Approved Products to be sold at any price exceeding the maximum retail prices advised by the franchisor to the Franchisees from time to time.

   ·The franchisor may, by notice to the Franchisees, change, withdraw or add new Approved Products.

   ·The Franchisees will participate in advertising and promotions as the franchisor requests, with no claim in connection with the level of success.

   ·The Franchisees will spend an amount on advertising as directed by the franchisor, being 6% of revenues, as defined, payable to the Adco or as directed by Yum and 0.5% of revenues on local advertising and promotions approved by the franchisor.

5. DPL’s pleaded case in contract has two related components: 

   (1)DPL pleads that on the proper construction of clause C1, Yum was obliged to set profitable prices – being prices that would enable a Franchisee to make, maintain or increase its profits;

   (2)DPL pleads that Yum was subject, in any event, to the following implied duties owed by Yum under the IFA to DPL and to each Franchisee:

   (a)A duty to cooperate with the Franchisees to achieve the objects of the IFA; and

   (b)A duty to comply with standards of conduct that are reasonable having regard to the interests of the parties to the IFA.

6. Diab also pleads that ‘for the purpose of the Implied Duties and/or for the purpose of construing Yum’s powers under the IFA’ the following, in summary, applies:

   ·The object of the IFA is to generate profits for DPL and for each Franchisee performing in accordance with the IFA.

   ·The benefit of the IFA for DPL and each Franchisee, and their interest under the IFA includes:

   ·the ability to make and increase profits after covering operating costs, overheads and cost of capital, from developing the business and by investment of capital, time, skill and labour using a proven business system and brand developed by Yum, without having to share those profits with Yum except by way of fixed royalty percentage;

   ·the ability to market, sell and transfer the business and reap a capital gain; and

   ·the collective marketing of the Pizza Hut brand to consumers in Australia, in relation to which all Franchisees contribute.

   4.               THE WITNESSES

   4.1             Mr Diab

7. Mr Diab is the managing director and the majority shareholder of DPL.  Mr Diab has been involved in the pizza business since 1987 and has been involved with Pizza Hut since 1989.  His involvement with Pizza Hut includes:

   ·Over the last 25 years, he has overseen the development and operation of DPL’s Pizza Hut outlets.

   ·From 1998 to 2011 and from 2012 to May 2014, Mr Diab was a franchisee director of Adco.

   ·He was a franchisee representative of a number of other Yum bodies including the Pizza Hut Purchasing Council, the Pizza Hut Operations Council, the Pizza Hut Development Council and the Customer Service Centres Council.

   ·Between 2009 and 2012, Mr Diab was President of the Australasian Pizza Association Inc, which is a representative body for approximately 150 of the Pizza Hut franchisees.  Further, between 2000 and 2008, Mr Diab was the President of the National Pizza Association, which was the predecessor of the Australasian Pizza Association Inc.

   ·Since 2013, Mr Diab has been a director of RBNZ.  Prior to 2013, he worked as a consultant to RBNZ and advised it in relation to its acquisition of the Eagle Boys chain in New Zealand during 1999-2000 and in relation to its acquisition of 51 Pizza Hut Outlets in Victoria in 2002, which it subsequently sold in the 2007/2008 financial year.

8. Mr Diab also holds a Diploma in Company Directorship from the University of New England and the Australian Institute of Company Directors (AICD), and a Graduate Diploma in Corporate Management from the Institute of Corporate Managers, Secretaries and Administrators (ICMSA).  Further, Mr Diab is a Foundation Fellow of the AICD, since 1991, and a Fellow of ICMSA, since 1995.

   4.2             Mr Houston

9. Mr Houston is employed by Yum as the General Manager Pizza Hut South Pacific (SOPAC) and has held this position since 2011.

10. Mr Houston was awarded a Bachelor of Commerce from Canterbury University in New Zealand in 1986.  He has been employed by Yum, or its related entities, since 1990.  His various roles have included:

    ·From 1990 to 1994, he held various Area Manager Positions in Auckland and Dunedin in New Zealand and Wollongong, New South Wales in KFC Operations (which is a division of Yum).  At that time KFC was part of Pepsi Co International.

    ·In 1994, he was promoted to the position of Operations Manager New South Wales KFC.

    ·In 1995, he was promoted to market manager for Pizza Hut New Zealand and this was the most senior position in Yum that was based in New Zealand.

    ·In 1997, Mr Houston was promoted to Market Manager KFC Victoria, Tasmania and South Australia where he was responsible for 90 company owned restaurants and 48 franchised outlets.

    ·In 2002, he was promoted to Chief Supply Chain Officer for both KFC and Pizza Hut, based in Sydney.  In that role he reported to the Managing Director Yum SOPAC.

    ·In 2003, Mr Houston became the General Manager Pizza Hut Operations SOPAC, in which he led the Operations team for Pizza Hut in Australia and New Zealand.

    ·In 2006, Mr Houston became the Vice President of Pizza Hut Delivery Operations of Yum! Restaurants International (which is a division of Yum US).  Mr Houston was responsible for developing the Pizza Hut delivery business for all countries in which Pizza Hut did business except the USA and China.  He held this job until 2011.  During this period, Mr Houston also participated in the Global Pizza Hut Brand Council, which is an annual meeting of “key thought leaders” from the global Pizza Hut brand to help develop and refine the Pizza Hut brand strategy.

11. From 2013, Mr Houston has also assumed responsibility for establishing and developing the Pizza Hut brand in Russia.  This role was expanded from 2014 as Pizza Hut Africa was added to his portfolio.

    4.3             Ms Broad

12. Mr Broad is employed by Yum as the Head of Finance & Supply Chain, Pizza Hut and has held this position since the middle of 2013 and reports to Mr Houston.  Ms Broad has held the position of Head of Finance since January 2011.  Ms Broad commenced employment with Yum in April 2007 and has held the following roles: Group Taxation & Treasury Manager, Finance Manager and Commercial Planning Manager.  Ms Broad was awarded a Bachelor of Commerce from the University of Sydney and Graduate Diploma from the Institute of Chartered Accountants in Australia.  Ms Broad is currently a director of Yum and was appointed in December 2014.

    4.4             Ms Syed

13. Ms Syed is the Head of Marketing of Yum and a member of the Leadership Team.  Ms Syed has held these positions since January 2013.  She has seven employees in her team, five in the Marketing Team and two in the Research and Development Team.  Mr Richter is the Marketing Manager and the most senior person reporting to Ms Syed.  Ms Syed began working for Yum in November 2010 as the Group Marketing Manager.

14. Ms Syed was awarded a Bachelor of Business Degree by the University of Technology, Sydney, in 2000 and was awarded a Masters of International Business Degree from the University of Sydney in 2001.  She has worked as a marketing professional in Australia for 12 years, in the following roles:

    ·Assistant Brand Manager at Nestlé Australia Ltd from 2002 to 2004.

    ·Brand Manager at Reckitt Benckiser Healthcare Australia Pty Limited from 2004 to 2006.

    ·Brand Manager at PepsiCo Australia and New Zealand from 2006 to 2008 and Senior Brand Manager from 2008 to 2010.

    ·Group Marketing Manager at Yum from 2010 to 2012.

    4.5             Mr Sinha

15. Mr Sinha was the National Operations Manager of Yum from January 2014 until 15 July 2015.

16. Mr Sinha had extensive work experience before joining the Yum system, including:

    ·From 1994 to 1995, he was a Hotel Operations Management Trainee at the Taj Mahal Hotel in Mumbai, India.

    ·From 1995 to 1996, he was the Managing Partner of Zodiac – Multicuisine Restaurant in India.

    ·From 1996 to 1998, he was the Executive of Hotel Services at Eurest Radhakrishna Hospitality Services Pvt. Ltd in India.

    ·From 1998 to 2000, Mr Sinha was a District Manager of Domino’s Pizza India.

17. Mr Sinha first worked in the Pizza Hut system in India in 2000 as the Restaurant General Manager for Favorite Food India (which was a subsidiary of Wybridge, the Master Franchisor for Pizza Hut in Indonesia), where he opened and managed Pizza Hut stores in Mumbai.  In that capacity, Mr Sinha had personal experience in making, and supervising the making, of pizzas in a Pizza Hut store.  Since 2000, Mr Sinha has had many roles associated with the Pizza Hut business.  These include:

    ·In 2002, Mr Sinha was the Area Coach in Wellington for RBNZ, in which he managed the operation of the Pizza Hut Stores.  He stayed at RBNZ until 2006.

    ·From 2006 to 2009, he had the position of Franchise Business Coach and EDI Operations Leader for Yum Restaurants International in India.

    ·From 2009-2011, Mr Sinha was the Area Manager of Southern Restaurants Pty Ltd in Melbourne, Victoria.

    ·In 2011, Mr Sinha became the Pizza Hut State Operations manager for New South Wales with Yum. 

18. In January 2014, Mr Sinha was promoted to National Operations Manager.  Each State Operations Managers reported directly to Mr Sinha and the operations team was responsible for maintaining operational standards across all Pizza Hut stores in Australia.  Mr Sinha reported directly to Mr Smith.  Mr Sinha had the overall responsibility for all operational matters that impacted customers, including such matters as food preparation, food and operational safety and customer service.

    4.6             Mr Smith

19. Mr Smith is the Senior Director of Development in the Pizza Hut USA business and has held that position since January 2015.  At the time of the hearing before Jagot J, Mr Smith was employed as a Market Director by Yum and held this position since January 2014.  The role required him to oversee day-to-day operations at Pizza Hut Australia and he reported to Mr Houston.

20. Mr Smith was awarded a Bachelor of Science in Business Administration, majoring in Accounting, from the University of Richmond, in Virginia in the USA, in 2002.  Further, in 2007, he was awarded a Masters of Business Administration from the University of Chicago – Booth School of Business.

21. Mr Smith’s professional background is, as follows:

    ·From 2002 until 2005, Mr Smith worked as an Associate at Deloitte.

    ·From 2006 to 2009, he was a consultant at Bain & Company.

    ·From December 2009 until October 2010, he was the Senior Manager, Strategy, at Hewlett Packard.

    ·Between October 2010 and July 2013, Mr Smith was employed by Yum! Restaurants International in which he held a range of positions including Manager, Strategic Planning (from October 2010 to June 2011), Senior Manager, Strategic Planning (from June 2011 to December 2011) and Director Financial and Capital Planning (from January 2012 to July 2013).

22. Mr Smith joined Yum in July 2013 as the Head of Operations, Pizza Hut SOPAC.

    4.7             The experts

    4.7.1Mr Potter

23. Mr Potter qualified as a Chartered Accountant in 1990.  He is now the principal of Axiom Forensics Pty Limited.  Mr Potter’s relevant experience to this matter is, as follows:

    ·He was a trainee accountant in Perth for two years, before obtaining a Bachelor of Commerce at the University of Western Australia.

    ·He was a graduate accountant in Perth for three years and worked as a Chartered Accountant in Perth and Sydney for 24 years.  Mr Potter’s experience in that time included 13 years in insolvency and reconstruction accountancy specialisation and 16 years in forensic accounting, which has included investigations for regulators on issues including valuation, valuation disputes and competition related disputes, pricing decisions and/or valuation matters, damages assessments and consulting assignments.

    4.7.2Mr Gower

24. Mr Gower is a Chartered Accountant and has been a director of GoweJones & Co Pty Limited since 2009.  Mr Gower’s professional background is, as follows:

    ·Between 1977 and 1982, Mr Gower was employed by Arthur Young in South Africa and Australia.

    ·In 1982, Mr Gower joined Duesbury’s (a predecessor firm of Deloitte Touche Tohmatsu).

    ·From 1987 to 1993, Mr Gower was a Partner off Duesbury’s and from 1993 to 1998 he was a Partner of Deloitte Touche Tohmatsu.

    ·Between 1998 and 2003, Mr Gower was a sole practitioner at GCA Gower & Co and he became a director of GCA Gower & Co from 2003 until 2009.

25. Mr Gower has provided accounting support across a range of areas, including:

    ·Analysis of the fairness of the acquisition considerations to be paid.

    ·Valuation of businesses.

    ·Due diligence investigations.

    ·General financial analysis and advice in respect of the preparation of forecasts, feasibility studies and evaluation of the benefits of transactions.

    ·Litigation engagements, involving providing evidence in respect of accounting matters generally and quantification of economic loss.

    5.               FACTUAL BACKGROUND AND SUBMISSIONS ON THE FACTS

26. DPL has analysed Yum’s closing submissions by subsequently providing a comprehensive table of responses to various of those submissions, and Yum has responded to these comments.  Nonetheless, this section will summarise facts asserted and, where appropriate, the parties’ submissions as to the facts as presented prior to the table being provided by DPL.  I will then turn to my consideration of the facts asserted and submissions advanced by the parties, taking the table, with Yum’s responses, into account as relevant.

    5.1             Chronology of pricing

27. DPL provided a useful table that compared headline prices for Pizza Hut and Domino’s before the VS and at 1 July 2014 when the VS was implemented.  Relevantly to the calculation of loss and damage, the analysis is of the prices of Pizza Hut pizzas before the VS, the prices due to the implementation of the VS and the prices of pizzas during the period of loss.  Accordingly, the prices of the ranges of Pizza Hut pizzas, with a delivery fee of $8.00, before the VS were:

DELIVERY		PICK UP
Range of pizza	Price	Range of pizza	Price
Mia (6 pizzas in range)	$5.00	Mia (6 pizzas in range)	$5.00
Classics (6 pizzas in range)	$9.95	Classics (6 pizzas in range)	$9.95
Legends (8 pizzas in range)	$11.95	Legends (8 pizzas in range)	$11.95
Signature (7 pizzas in range)	$14.95	Signature (7 pizzas in range)	$14.95

1. As at 1 July 2014, the date of the implementation of the VS, the delivery price was increased to $8.95, the Legends range was changed to Favourites (with the number of pizzas increasing from 8 to 11 in the range) and the Mia and Signature ranges were removed.  The prices of the ranges of Pizza Hut pizzas as at 1 July 2014 were:

DELIVERY		PICK UP
Range of pizza	Price	Range of pizza	Price
Mia (6 pizzas in range)	Deleted	Mia (6 pizzas in range)	Deleted
Classics (6 pizzas in range)	$4.95	Classics (6 pizzas in range)	$4.95
Favourites (11 pizzas in range)	$8.50	Favourites (11 pizzas in range)	$8.50
Signature (7 pizzas in range)	Deleted	Signature (7 pizzas in range)	Deleted

1. Yum says that major price adjustments were made to the ranges of pizzas following the implementation of the VS.  Yum relies on Ms Syed’s affidavit dated 13 July 2015, which is relevantly summarised as follows:

   ·On 14 August 2014, Yum increased the delivered price for the Classics range from $4.95 to $8.95, increased the delivered price for the Favourites range from $8.50 to $11.95 and the delivery fee was decreased from $8.95 to $4.95.

   ·On 30 September 2014, Yum increased the delivered price for the Classics range from $8.95 to $9.95.

   ·On 2 December 2014, Yum increased the pick up price for the Favourites range from $8.50 to $10.95.  A new tier of pizza range was also introduced, which was called the Loaded Classics range.  The price for this range was $7.95 and the delivered price was $10.95.

   ·On 22 December 2014, Yum increased the fixed delivery fee from $4.95 to $7.95.

   ·On 5 May 2015, Yum increased the pick up price for the Classics range from $4.95 to $6.95 (except on its website), increased the pick up price for the Loaded Classics range from $7.95 to $9.95 and increased the pick up price the Favourites range from $10.95 to $11.95.

   5.2             Characterisation of the VS

1. DPL describes its characterisation of the VS in [13] of the ASC, which is as follows:

   On 10 June 2014, Yum advised the Applicant and the other Franchisees (Advice), that:

   (a)On an from 1 July 2014, it was reducing the maximum prices that could be charged for pizzas sold at Pizza Hut Outlets for takeaway and delivery to two price points (Reduced Prices):

   (i)“Classics” pizzas at $4.95 (including GST) – being a reduction of approximately 50% from the preceding price of $9.95; and

   (ii)“Legends” pizzas at $8.50 (including GST) – being a reduction of approximately 29% from the preceding price of $11.95.

   (b)On and from 1 July 2014, Yum was reducing the range of Approved Products to be sold at Pizza Huts to the “Classics” and “Legends” ranges of pizzas (removing the “Signature” and “Pizza MIA” ranges of pizzas);

   (c)Yum had made its decision to implement the Reduced Prices in (a), the change in the range of Approved Products in (b) and certain other changes, including changes to delivery prices (Reduced Price Strategy) on the basis of trials of a reduced price strategy at Pizza Hut Outlets in the ACT and experience in New Zealand, which it asserted had provided evidence of a significant increase in sales revenue in those markets in response to those trials;

   (d)On an from 1 July 2014, Yum would initiate a public marketing campaign of the new Pizza Hut prices as being for a limited time only, for the purpose of achieving a spike in sales, when it was not Yum’s intention that the prices be for a limited time only;

   (e)The introduction of the Reduced Price Strategy would be accompanied by an advertising program lasting 1 month only with financial support from Yum’s US parent company;

   (f)Yum would provide $1,000 per Outlet to each Pizza Hut franchisee in Australia by way of assistance to cover stock write offs arising from the deletion of the “Signature” pizza range;

   (g)Yum would not otherwise provide any compensation to franchisees for any loss of profits they may incur in implementing the Reduced Price Strategy.

2. Paragraph 13 of the ASC refers to ‘Reduced Prices’ as providing the foundation of the VS.  As described by DPL, the VS comprised four main elements:

   ·the “Reduced Prices” – being the new price points for pizzas, which in fact became $4.95 for “Classics” and $8.50 for “Favourites” (previously called “Legends”);

   ·a menu reduction to two ranges of pizzas, by eliminating the “Signature” range and the “Mia” range;

   ·an advertising campaign to support the launch of the VS.  A media booking authorisation form from Mediacom dated 20 May 2014 indicated approval for media spending of XXXX XXXXX XX; and

   ·a provision of assistance to the Franchisees of $1,000 including GST per outlet in relation to the launch.

3. Yum criticises DPL’s characterisation of the VS as it contends that DPL seeks to confine the VS to only the elements enumerated in the ASC.  Yum submits that it has always said that the VS was an integrated market strategy that contained many elements, ranging from menu design, to an aggressive and attention catching marketing campaign, to reducing and simplifying the price points at which products could be purchased.  In particular, it was always intended by Yum, as part of the VS, that Yum would be first into the market with an everyday value proposition of full sized pizzas at $4.95 all day every day.  Yum says that these elements are not acknowledged by DPL, as DPL has isolated one aspect of the strategy by naming it the ‘Reduced Price Strategy’ in [13] of the ASC.  Accordingly, Yum submits that this terminology diminishes the significance of the remaining elements of the VS, in particular, being first to market with an all-day every day value proposition.

   5.3             ACT Test

4. Yum used a test in the ACT to trial the VS before its implementation (the ACT Test).  It was commenced on 4 February 2014 and concluded on 28 April 2014.  The ACT franchisee, who owned all 8 outlets in the ACT market, implemented the VS during this period with the assistance of Yum.  Yum agreed to underwrite any losses suffered by the ACT franchisee during the test period.  As a result of the ACT Test, Yum paid the ACT franchisee the sum of $143,000 to make good his losses.  The ACT franchisee continued to implement the VS after 28 April 2014 and Yum also paid him $51,000 to make good the losses in this period after the completion of the test.

   5.3.1Appropriate to test

5. The parties are not in dispute that Yum’s decision to test the VS in the ACT was appropriate.  The test was appropriate for the following reasons:

   ·Yum believed that there was a “value” problem in Australia and it wished to see whether adopting the New Zealand $4.90 strategy would increase sales, transactions and Franchisee profitability.

   ·Conducting a trial of a strategy, such as the VS, was an appropriate action by a franchisor acting responsibly towards its franchisees, particularly where it had the cooperation and support of the participating franchisee and had agreed to indemnify him.

   ·The ACT was an appropriate place to conduct such a test because it was a distinct media market with its own signal, there was a single franchisee who owned all 8 outlets in the market, the franchisee was one of the better performing franchisees and the low average current level of per store average (PSA) sales meant that there was significant room for improvement.

   5.3.2Mr Diab’s response to being informed of the ACT Test

6. DPL submits that Mr Diab’s response on being informed of the Act Test at the Adco meeting on 12 February 2014 was measured and appropriate, as he advised his franchisee colleagues in an email on 13 February 2014:

   These tests are quite radical and have strong long term implications on our business, however we will assess the results carefully and decide whether this is the right thing for our businesses – if these tests are unsuccessful then we would have put the discount strategy fight to bed once and for all.  I reiterate the Adco directors are currently opposed to these strategies, however have agreed to examine and scrutinise any results, at the end of the day it will require significant hard evidence to determine the viability or failure of either of these tests.

   5.3.3Profitability of the ACT franchisee

7. DPL contends that Yum asserted that profitability of the ACT franchisee improved during the ACT Test and that this was presented to the Franchisees on 14 and 15 May 2014 and repeated without qualification in the evidence presented before Jagot J during the Franchisees’ interlocutory application to prevent Yum from implementing the VS.  Yum represented to the Franchisees, in a presentation on 14 May 2014 entitled “Franchisee Update May 2014” (the Franchisee Update), that there had been a $425 per week per store improvement ($425 improvement) in comparable profit in weeks 5 – 10 of the ACT Test.  Yum submits that weeks 1 – 4 were not included in the presentation to the Franchisees on 14 May 2014 because the results in that period were not in a “steady state” and this issue was not challenged by DPL.  Yum also submits that weeks 11 and 12 were not included because of the impact of the Easter and ANZAC Day holidays.  At the time of the presentation, Ms Broad did not have profit and loss statements from the ACT franchisee; however, Ms Broad agreed that she did have sales information for that period but could not recall why same store sales growth  (SSSG) was not presented.  DPL contended that this calculation of the $425 improvement was ‘simply a product of financial engineering by Ms Broad that does not withstand reasonable scrutiny’.  However, DPL did not establish that Ms Broad engaged in deliberate “engineering” of the results but did establish that the presentation to the Franchisees did not include relevant data, which may have affected the conclusions that could be drawn.

8. DPL submits that the true position, which was neither revealed to the Franchisees nor to Jagot J, was that the ACT franchisee incurred a loss during the test of approximately $140,000, for which it was compensated by Yum pursuant to the indemnity or “backstop” arrangement.  Furthermore Yum had also agreed to pay the additional $51,000 to the ACT franchisee for its post-test losses on the basis that it maintained the VS prices following the conclusion of the test.

9. DPL submits, relying on the Franchisee Update, that there were two elements that comprised the calculation of the alleged $425 improvement:

   (1)An alleged post-launch profit for weeks 5 – 10 of $155 per week per store; and

   (2)A prior year loss of $270 per week per store.

   5.3.3.1Alleged post-launch profit

10. Ms Broad concedes that the $155 per week per store figure was taken from the adjusted profit and loss figures for weeks 5 – 9 (in Exhibit AO) not weeks 5 – 10 as stated in the above presentation document.  In cross-examination, Ms Broad, stated that the calculation of $155 was only until week 9 and then Yum ‘double-checked to see if week 10 made a difference to that number’.  DPL contends that Ms Broad invented this answer in the witness box to ‘attempt to cover up this relatively trivial slip’.

11. Nonetheless, the figure of $155 per week per store was calculated using 1.5% of sales for local store marketing (LSM) costs.  DPL argues that Ms Broad arrived at this figure by “stripping out” LSM costs in excess of 1.5% and that this approach was not according to normal accounting practices of “matching” expenses and revenues.  DPL analysed the full 12 week profit and loss for the ACT franchisee who incurred a 1.8% charge for ‘Local Store Marketing – Leaflet’ costs and a 4% charge for ‘Additional LSM’.  On this basis, the ACT franchisee incurred costs equating to 5.8% of sales during the ACT test which were as a result of LSM. 

12. Ms Broad explained that the 4% additional LSM was not actually spent by the ACT franchisee on LSM but was paid by it to Yum as a contribution to the overall marketing budget for the ACT Test.  Nonetheless, DPL contends that Yum failed to account for all marketing expenses when determining net profit and arbitrarily cut off the expenses at 1.5% of sales rather than accounting for the 5.8% in total marketing expenses.  It follows, DPL says, that if Yum had taken the full cost into account, the amount of extra cost would have been at least three times the amount calculated for LSM expenses in the Franchise Update, and an overall loss would have been calculated.  Ms Broad did not object to this proposition if DPL’s calculation was correct and if it was appropriate to take the additional LSM into account.

13. Yum acknowledges that the ACT franchisee did provide 4% additional LSM.  However, it contests the argument that the 4% should have been taken into account when analysing whether the ACT Test was profitable.  Ms Broad said that she was ‘trying to get an understanding of what would happen to the [profit and loss] of a store if we launched the pricing strategy nationally’ and that the 4% additional LSM was required to replicate the marketing budget that would be used nationally.  Yum submits that the “matching principle” was not appropriate in the circumstances because Ms Broad was analysing the impact on profitability that the VS would have upon a national rollout and the 4% Additional LSM would not be replicated on a national level.  That is, the expense would not be incurred by the Franchisees on a national level, as the Franchisees’ contribution to the overall marketing budget would be what they currently paid.

    5.3.3.2Prior year loss

14. Ms Broad acknowledged that the prior year loss of $270 per week per store presented to the Franchisees in the Franchisee Update did not reflect her own estimate for period 3 of 2013 which she calculated as a loss of $257 per week per store.  DPL suggests that the most likely explanation for the $270 per week per store figure is that it was based upon an average of the ACT franchisee data from period 5 to period 11 in 2013, which showed an average weekly loss per store of $273.  DPL contends that this figure included a deduction for head office costs which, if removed, would have resulted in a profit of $239 per week per store for the ACT franchisee in 2013.  That is, if this profit figure were used, there would have been a loss of approximately $980 per week per store, comparing 2013 and weeks 5 – 9 of the ACT Test.

    5.3.3.3DPL’s conclusion on the presentation of the ACT Test during the Franchisee Update presentation

15. DPL concludes that Yum actively engaged in a “public relations exercise” by presenting manipulated data to the Franchisees, which presented a false picture of the profitability of the ACT Test.  Further, DPL contends that even if Yum did not have the full 12 weeks of data at the date of the presentations to the Franchisees on 14 and 15 May 2014, it certainly did have data at the time of the interlocutory hearing before Jagot J and it failed to make any qualification or explanation to the Franchisees or to the Court.  It follows, DPL says, that Yum was in breach of its implied obligations to act reasonably and cooperatively in relation to the exercise of its power to set maximum prices under clause C1 of the IFA, because the true result of the ACT Test was that the VS prices caused the ACT franchisee to make a loss and thus Yum had no justification for reducing the price points for the Franchisees by application of the VS.

    5.3.4ACT sales results

16. DPL contends that Yum presented misleading sales results in the Franchisee Update, as it compared an SSSG of -5%, from the 12 weeks before the ACT Test to a range of increases in sales during the ACT Test, ranging from 14% to 48%.  DPL argues that the presentation of SSSG in the Franchisee Update was misleading for the following reasons, as put to Ms Broad:

    ·The prior 12 week period was never a valid comparison, as it included Christmas and the January holidays, which as times when Canberra sales are traditionally low due to Parliament not sitting, school holidays and the public service shuts down.  The trend is clear when one assesses the decline in PSA sales in the past two years over this period.

    ·The 48% increase in Week 6 reflected an abnormal dip in the prior year, which was associated with the transition period prior to the ACT franchisee taking over control of all the ACT outlets.

    ·Weeks 7 and 8 in 2014 were inflated due to the misalignment of Easter dates between the two years.  That is, in 2014 Parliament was sitting in both of those weeks, whereas in the prior year Parliament sat for only one of those weeks as the other was during Easter.

17. Yum challenges DPL’s criticism that the prior 12 week period was never a valid comparator.  Yum relies on Ms Broad’s explanation that the 12 week period before the ACT Test was used because:

    ·Ms Broad had the profit and loss statements for that period and the data were better, relying on assumed data.

    ·Ms Broad did not regard a failure to adjust for Christmas as a serious failure.

    ·Mr Houston believed that it was the only rational period to use and did not see anything that was not representative of the business, even though Christmas fell in the period.

18. Following the ACT Test, the ACT franchisee continued to implement the VS with Yum’s consent.  The ACT franchisee experienced poor sales results after week 12 of the ACT Test. Yum attributed this to Yum ceasing advertising and the fact that Domino’s was not advertising on television.  DPL contends that this assertion cannot be sustained in light of the Nielsen reports, which show that there was continued advertising by Yum and Domino’s following week 12 of the ACT Test. 

    5.3.5Replication of the ACT Test

19. DPL contends that to the extent that there were any positive results generated by the ACT Test, they were not replicable because of the amount of money that was spent by Yum on advertising to generate those profits.  DPL argues that, as Yum knew as at 14 May 2014 when the Franchisees briefings commenced, the only conclusion to be drawn from the sales results in the ACT was that extensive advertising could increase sales significantly in the absence of any response by Domino’s.  Pizza Hut outspent Domino’s by 2:1 on media spending during the ACT Test, which contrasted the usual spending ratio, where Domino’s outspent Pizza Hut by 2:1.  DPL says that there was simply no basis for Yum to have formed the conclusion as at that date, with all of the data which were then available, that the ACT test had been a success in terms of sales.  By 10 June 2014, when the VS was announced to the Franchisees, the situation in the ACT was worse, and the negative trend was continuing as at 24 June 2014 when an interlocutory hearing took place before Jagot J.

20. Yum strongly denies DPL’s assertion that Yum’s large advertising budget during the ACT Test meant that the results were not replicable.  Yum relies on Ms Syed’s evidence.  Ms Syed stated that she believed that ‘[t]he plan could be replicated nationally’ even though additional funds may be required ‘to support the launch’. 

21. DPL’s theory was that the expenditure on marketing for the ACT stores must be calculated and then that figure multiplied by stores nationally.  Ms Syed rejected this theory as she said that media is replicated based on ‘reach and frequency as opposed to looking at a dollar amount and working from there’ and Yum contends that there is no evidence to support the theory that Yum did not believe that the strategy could be replicable nationally.  Further, Yum submits, Mr Houston stated that “replicate” meant achieve the media outcome achieved in the ACT, not the dollars actually spent.  That is, focusing on the actual dollars spent was not the correct approach in assessing whether the ACT Test could be replicated.  The VS as formulated included provision for an increased national marketing budget.  This was not available upon implementation as planned, as it required not only Adco approval but also extra contribution from the Franchisees, which were not forthcoming.

    5.3.6Summary of the ACT Test

22. On 8 March 2014, during week 5 of the ACT Test, Ms Broad sent an email to Mr Smith, Mr Houston and Mr Sinha providing her opinion as to the success of the ACT Test.  Ms Broad stated the following opinion, based on three weeks profit and loss data:

    My opinion at this stage is that the test was well worth doing and the marketing team should be congratulated – the sales growth and transaction growth we have achieved in this test have proven beyond doubt that velocity pricing is the path we need to head down. … Having said that, from a profitability stand point, I believe it’s marginal – this is one of our best Franchisee groups and I don’t believe they are making the same amount of money they were previously – it’s borderline at best at this stage.

    …

    From my perspective, looking at these numbers, our underlying business model doesn’t support velocity pricing… and I believe we should stop the test at the end of week 6…

23. DPL concludes that Ms Broad’s statement was vindicated by the national rollout of the VS, as the sales data after its inception show a negative downward trend, which is very similar to the negative downward trend in PSA sales for the ACT from the time of Domino’s intervention in the ACT.  It follows, DPL says, that Ms Broad’s conclusion ‘was and ought to have been obvious to any reasonable and fair minded observer conscious of Yum’s duties to act reasonably and cooperatively under the [IFAs]’. 

24. Yum argues that DPL’s reliance on Ms Broad’s email is misplaced for the following reasons:

    ·Ms Broad’s view was based only on three weeks’ profit and loss.  Profitability did not improve until the fifth week of the ACT Test.

    ·Data for the first four weeks of the ACT Test were not representative, as a steady state had not been reached.  Yum argues that a steady state was reached in weeks 5 – 10 of the ACT Test.

    ·Ms Broad made it clear in her affidavit evidence that subsequent results of the ACT Test allayed her concerns about the VS.

    ·Ms Broad acknowledged that after 3 weeks it was only a profitability point that prevented her from supporting the implementation of the VS.

1. DPL submits that Yum cannot escape a finding of breach of the implied duties of reasonableness and cooperation, on the basis of selective information and manipulated data, by turning a clear and catastrophic loss result produced under otherwise ideal conditions in the ACT into evidence which was sufficient to justify the imposition of the VS upon DPL and all other Franchisees.

   5.4             The Yum Model

2. Prior to 10 June 2014 and after the ACT Test, Yum prepared a model for deciding whether to implement the VS (Yum Model).  Mr Houston stated  that Ms Broad was responsible for the Yum Model and that Mr Smith’s role was to ‘validate and refine it’.

   5.4.1Operation of the Yum Model

3. In its written submissions, Yum describes the Yum Model’s operation, as to which Yum’s witnesses gave evidence:

   242.Firstly, the Yum Model is an Excel model. The model itself is an electronic Excel document, not a paper document.  It is comprised of various pieces of data and assumptions contained in different cells on different worksheets.  Various cells are linked to other cells (often on different worksheets) by means of formulas which also form part of the model.  It is the data, assumptions and formulas, as embodied in the electronic document, which constitute the Yum Model.

   243.The Yum model contains numerous input cells, into which different inputs could be placed.  In some cases, if an input is changed in one input cell it automatically changes the inputs in certain other cells.  For example, upon selecting a particular store in the store selector drop-down box, the “Store Profile” inputs (such as the average value of sales, number of transactions, and so on) automatically update.  In other cases, each input cell needs to be altered manually.  The input cells which require manual alteration are shaded yellow in the Yum Model.

   244.The Yum model operates by applying the chosen inputs to the existing data, assumptions and formulas to produce certain outputs.  Every time that an input or multiple inputs are changed, the outputs are recalculated by the model.

   245.Once the Yum Model was created, it was used in an iterative process.  That is, over the period in late May and early June 2014, on numerous occasions Mr Sinha and Mr Purcell altered various inputs in order to see what outputs would result.  Their ultimate goal was to determine what level of transaction uplift or increase would be required, following the introduction of the Value Strategy, in order for the National Average store to maintain the same EBITDA level as it had before the introduction of the Value Strategy.

   246.Every time a “version” of the Yum Model was saved, emailed or printed out, what was saved, emailed or printed included the particular set of inputs and the resultant outputs in the model at that particular time.  The model itself, however, continued to exist in electronic form.

4. Yum also commented in its submissions on different versions of the Yum Model in evidence:

   247.[DPL] has put into evidence 5 emails from Mr Purcell, at different points in time, which attach a particular “version” of the model – i.e. containing particular inputs and outputs.  This is only evidence that Mr Purcell had placed particular inputs into the model, resulting in particular outputs, at a particular point in time and had reason to email the results, either to Mr Sinha (Ex[hibits] V, W and X) or to Yum’s LT (Ex[hibits] G and H).

5. DPL contends that it put into evidence every version of the model that was discovered by Yum, so that Yum’s statement that there were “only” 5 emails is an unfair characterisation.

   5.4.2Purpose of the Yum Model

6. DPL describes the purpose of the Yum Model and its contents in [13C] – [13F] of the ASC, as follows:

   13C.    The Yum Model:

   (a)Was constructed by Yum as a model of the profitability at a store EBITDA level for each Pizza Hut Outlet in Australia;

   (b)Included 52 weeks of data available to Yum from its Micros system in relation to sale and transactions at each Pizza Hut Outlet in Australia;

   (c)Calculated sales and transactions for a “National Average” Outlet in relation to sales and transactions at all Pizza Hut Outlets in Australia from its Micros system;

   (d)Included a calculation of the weekly “National Average” store level EBITDA for the 52 week period covered by the data referred to in (b) above;

   (e)Included a model for calculating the cost of labour by reference to the different types of labour used in an Outlet, including the number of hours and pay rates for management and crew members (Labour Model);

   (f)Included a provision for comparing current levels of Outlet performance with future levels of Outlet performance and for the “National Average”, based on different assumptions, designated as “Now” and “Future”, including in relation:

   (i)The elements used to determine the sales revenue, and in particular sale price, transaction composition in terms of pizzas per order and sides per order, transaction mix and delivery mix;

   (ii)The elements comprising the Labour Model, and in particular the number of hours and pay rates for management and crew members, and a rate for driver costs per day of the week.

   13D.On the basis of the Yum Model, and prior to providing the Advice to the Applicant and the other Franchisees on 10 June 2014, Yum determined that the “break even” increase in transactions for the “National Average” Outlet upon the assumptions made in the Yum Model was 34.5% (Break Even Transaction Level).

   …

   13F.The Break Even Transaction Level for the “National Average” in the Yum Model was based on the following assumptions in relation to the effect of the Reduced Prices and/or Reduced Price Strategy:

   (a)       There would be an increase of 218 transactions per week;

   (b)Thirteen (13) additional labour hours for crew members would be required to produce the additional 218 transactions per week;

7. Yum characterises the Yum Model somewhat differently.  Yum’s characterisation of the purpose of the Yum Model is that ‘it was in essence a “break even” model’.  That is, Yum used the Yum Model to ascertain the level of increase in transactions required for the national average store to retain the same EBITDA level of profitability after the introduction of the VS as it had before the VS.  Yum says that the Yum Model relied on data derived from Yum’s records about the operation of the notional national average store for the 12 months from May 2013 to May 2014 and assumptions about the likely impact of the VS derived largely from the experience during the ACT Test. 

8. Through an iterative process of entering various inputs, Yum relied on the conclusion based on the Yum Model that transactions would need to increase by approximately 34.5% for the national average store to “break even”.  This was an increase of 218 transactions per week (from 635 transactions to 853 transactions per week).  Yum submits that this result was one of the factors which it considered in deciding whether to proceed with the VS.  Yum points out what the Yum Model was not used for, including:

   ·Yum did not attempt to predict what would happen if the VS was implemented.  For example, the Yum Model did not predict what increase in transactions or profits would result from implementing the VS.  Its purpose was to predict what increase in transactions would be required for profit levels to remain the same and to assist in evaluating the likelihood of whether there would be an increase in transactions sufficient to maintain or increase profits by reference to other matters.

   ·The Yum Model was not a pricing model.  Yum contends that the Yum Model did not attempt to calculate what prices should be charged for pizzas (or any other products) under the VS and that the decision concerning prices was determined independently of the Yum Model.  That is, the Yum Model simply applied the prices which were provided as input into the model in order to do the “break even” calculations.

   5.4.3Usefulness of the Yum Model

9. DPL does not criticise all aspects of the Yum Model, as DPL states that it was ‘a very useful EBITDA model for Australian Pizza Hut outlets, and was capable of being [sic] to evaluate the impact of the VS upon those outlets through the consideration of the “national average” outlet’.  To this extent, DPL says, it accepts Ms Broad’s evidence that ‘[m]odelling a store on a national average basis is a standard financial average technique used in the business’. 

10. DPL accepts all of Yum’s inputs into the 34.5% Yum Model other than the input for “variable labour”.  Yum made an assumption in the Yum Model that an additional 13 hours of variable labour would be required to process the additional 218 transactions that would occur if there was a 34.5% increase in transactions.  That is, the 34.5% was the “output” of the Yum Model designed to identify the break-even point of the Franchisees’ profitability. 

11. DPL and Yum have used different rates to determine variable labour:  DPL relies on “dockets per hour”, whereas Yum relies on “minutes per docket” (MPD).  Mr Sinha’s described MPD as follows:

    The MPD value is derived by dividing the total amount of variable labour employed (expressed in minutes) by the number of transactions.  The higher the MPD figure, the less efficient the labour is.

    (emphasis added)

    5.4.4Assumption of 13 additional labour hours

12. Mr Sinha placed the additional 13 hours of variable labour assumption into the Yum Model.  Yum summarised how Mr Sinha derived his assumption as follows:

    ·Mr Sinha first calculated the minimum number of weekly labour hours which would be required to staff a Pizza Hut outlet, given Yum’s rules about minimum staffing levels.  This was 97 hours of management, 70 hours of team member time and 40 hours of delivery drivers who also assist in the store.  That is, the total was 207 hours.  Mr Sinha formed the view that these hours were more than sufficient to service the pre-VS transaction level of 635 transactions per week.  Mr Sinha gave evidence that 70 team member hours when divided by 635 transactions, gives an MPD of 6.6 and his reasoning was that it was less efficient than the New Zealand benchmark of 5.6 and the results achieved during the ACT Test.  That is, Mr Sinha concluded that an MPD of 6.6 was reasonable and, therefore, that his estimates of 70 team member hours was also reasonable.

    ·Mr Sinha then allocated the 218 additional transactions on a day-by-day basis during the week, maintaining the same relativities on a day-by-day basis as before the VS.  This resulted in a different number of additional transactions for each day, ranging from 20 additional transactions on a Monday to 41 additional transactions on a Friday.

    ·On the basis of Mr Sinha’s own experience of utilising labour in Pizza Hut outlets, he formed the view that the existing minimum labour hours would not be fully utilised before the VS.  In other words, in Mr Sinha’s opinion the minimum 207 labour hours used before the VS was capable of producing more than 635 transactions per week.

    ·Mr Sinha then assessed the quantity of additional transactions on each day.  He formed the view that the existing level of labour was sufficient to cover the additional number of transactions on Mondays, Wednesdays, Thursdays and Sundays (which ranged from 20 to 28 additional transactions per day).  He also formed the view that the additional number of transactions on Tuesdays, Fridays and Saturdays (which ranged from 37 to 41 additional transactions per day) would require additional labour and allocated additional hours on those days, totalling 13 additional hours for the week.

13. Mr Sinha calculated that an additional 13 team member hours resulted in an overall MPD of 5.84.  Mr Sinha noted that MPD rates for the ACT stores during the ACT Test from week 4 of the ACT Test onwards were below 5.6.  As the MPD of 5.84 was higher (and therefore less efficient) than both the New Zealand benchmark and the results in the ACT Test (from week 4 onwards), Mr Sinha was satisfied that his calculations of 13 additional labour hours was a reasonable one.

14. Mr Sinha was the internal Yum expert responsible for modelling labour hours and allocating the correct labour hours and Mr Houston and Ms Broad relied on his expertise in this area.  Mr Sinha’s evidence is that Mr Travis Purcell had primary responsibility for the structure of the Yum Model and for entering data into the model and that Mr Sinha assisted in preparing some parts of the Yum Model, including preparing the labour cost figures.

    5.4.5Variable labour as a balancing item

15. DPL argues that Yum’s “break-even” position is that if ‘more than 13 hours of labour were required, [the F]ranchisees would lose money if there was a transaction uplift of 34.5%’.  That is, if more than 13 hours of additional labour were required, the break-even transaction uplift would be greater than 34.5%.

16. DPL contends that Mr Sinha’s evidence in support of the 13 additional labour hours ought to be rejected for the following reasons:

    ·Mr Sinha regarded an MPD of 5.6 as an appropriate “benchmark” for measuring labour efficiency during the ACT Test.  This decision was based on an email that Mr Sinha received from Mr David Hill, the sole New Zealand franchisee, (dated 16 February 2014) about the New Zealand experience.  DPL submits that the benchmark figure of 5.6 MPD was an ‘aspirational target’ and was a forecast rather than an actual result achieved by the various New Zealand outlets in question. 

    ·The actual MPD rate for those outlets, contained in the material sent to Mr Sinha, was 6.69.  When Mr Sinha was asked why he relied on the benchmark rather than the underlying data, his response was: ‘[w]hen I got 5.6, I had an opportunity of testing it in ACT and that’s how I got confirmed that yes, that’s a reasonable benchmark… And when we started achieving [the benchmark], I didn’t really have any reason to go back to the New Zealand data because we were achieving better results in ACT’.  DPL contends that ignoring the actual data was ‘an inexcusable misuse of the data’ and that Mr Sinha’s attempts to explain why the data were not used were unacceptable and should be rejected.

    ·Even though the New Zealand data represented a limited sample of high volume stores in 2 weeks in Christchurch, Yum has not explained why it did not seek full data directly from RBNZ so that it had a comparable data set for the NZ outlets for the purpose of analysing the ACT Test or for use in the Yum Model.  Yum argues that Mr Sinha did not assess whether particular stores in New Zealand met the benchmark as this was irrelevant to him; rather, he concentrated on the benchmark figure.

    ·Extra deliveries were being made by drivers but were not being converted into labour hours and were ignored in determining the MPD rate from the ACT Test, which included only the actual team member hours.  DPL contends that this produced MPD rates for all ACT outlets other than Erindale of less than 5.6, which resulted in Mr Sinha concluding that the ACT outlets had been more efficient in their labour usage than New Zealand.

    ·The Court is entitled to find that the true position is that the ACT franchisee was using delivery drivers as proxy crew members, and paying them on the basis of $14 per hour, being the rate of 2 deliveries at a contract rate of $7 per delivery.  If the extra deliveries in the ACT Test were accounted for on the basis of 2 extra deliveries being equivalent to 1 hour of team member labour, and additional team member labour were added to existing team member labour, the average MPD of the ACT Test was 8.70.

    ·Mr Sinha said that the ACT franchisee was guaranteeing two deliveries to a driver per hour as a bare minimum and if the driver did not get the two deliveries, then the ACT franchisee would guarantee the money.  DPL submits that the effect of this explanation is that the ACT franchisee was prepared to pay drivers to do nothing in its stores and, to the extent that they substituted for team members, Mr Sinha was not prepared to account for it in his calculations. 

17. Yum argues that DPL’s proposition advanced in submissions that the labour records produced to the Court did not accurately reflect these extra hours, is false.  (In the table of asserted inaccuracies served after the conclusion of the hearing, DPL says that it did not mean to state that the labour sheets were inaccurate but rather that there was an inconsistency in the hours recorded for the ACT franchisee stores in the labour sheets, in terms of how total labour was comprised or allocated.  Yum says that this is irrelevant and (see [94]) that Mr Potter selected Erindale to the exclusion of other ACT stores for a specific reason and that this was not due to the extra delivery issue).  DPL did not call any evidence to prove that the records were inaccurate; rather, it relied on Mr Potter’s assumption of inaccuracy based on an exhibit, Exhibit Y, where Mr Sinha said: ‘Most stores have drivers who can help out so it makes sense to put extra of those when either the Kitchenhand is new or is not available’.  Mr Potter’s criticism relies on the view that the ACT labour records understate labour hours and Yum argues that Mr Potter has no expertise which would enable him to form any judgment on the appropriateness of the labour rate.  Yum argues that the statement at its most ‘suggests that on limited occasions drivers were asked to help out.  It says nothing about the accuracy of the labour records.  It does not say that any entry in the records for the extra deliveries was a payment for work done as a kitchen hand’.  Further, Mr Sinha gave evidence that Mr Singh (who worked for the ACT franchisee) confirmed that it was an exceptional occasion where ACT outlets were using additional driver hours as crew hours and if these drivers were working in stores, then they should have been converted to drivers who work in the store and are paid an hourly rate.

18. Yum rejects DPL’s criticism of Mr Sinha and DPL’s submission that Mr Sinha’s evidence was in effect developed only in cross-examination.

19. Yum criticises Mr Potter’s reliance on Exhibit Y as the foundation for his criticisms of the Yum Model.  Exhibit Y is an email exchange between Mr Sinha and the ACT franchisee about the use of delivery drivers in the kitchen.  As a result, Yum provided a lengthy explanation in its submissions of the email correspondence.  The explanation is as follows:

    (i)The cause of the email correspondence is Mr Sinha’s concern about the high number of extra deliveries (i.e. deliveries being paid for but not done) in the ACT stores – see email of 27.3.14, 8.04 pm.

    (ii)Mr Sinha was concerned to know whether new leaflets would help increase delivery sales and thus reduce the extra delivery numbers – email of 28.3.14, 12.06 am.  This directly corroborates Mr Sinha’s evidence of his understanding of extra deliveries as a minimum payment guarantee for delivery drivers.  If it was a minimum payment guarantee, then increasing the number of delivery transactions would reduce the number of extra deliveries paid. If, however, extra deliveries constituted payment for drivers working as kitchen hands, then increasing the number of delivery transactions would not decrease the number of extra deliveries (and could well increase them if those extra delivery transactions had to be processed by drivers working as kitchen hands).

    (iii)Mr Singh told Mr Sinha that the number of actual deliveries during the ACT Test was decreasing during non-peak times, which partly explains the increase in extra deliveries compared to before the ACT Test.

    (iv)Mr Singh explained that, with respect to the Kingston store, he needed to have two delivery drivers engaged even though there were only three deliveries to be done, as one driver could not do those deliveries in the required time, but that also meant he ended up paying for extra deliveries – email of 28.3.14, 11:52 am.  This is again consistent with extra deliveries being a minimum payment guarantee to drivers.

    (v)Mr Singh stated to Mr Sinha that, when stores had drivers available to help out (i.e. when they were not doing deliveries) it made sense to utilise them as kitchen hands if a kitchen hand was new or not available – email of 28.3.14, 9:19am.  Mr Sinha responded by asking Mr Singh to identify where the under-utilised drivers were working so that Mr Sinha could see if there was an opportunity to utilise them more effectively – email of 28.3.14, 11:29am.  This was a request by Mr Singh to be allowed to use delivery drivers as a form of kitchen hand labour in certain limited circumstances, given the pressures he was under. It is not evidence that this was in fact a common practice.

    (vi)Under cross-examination, Mr Sinha accepted that the use of drivers as kitchen hand labour may have been occurring occasionally in the ACT, but he was not aware of it being a regular practice, he instructed Mr Singh to make sure it was not happening and he was told by Mr Singh “That’s taken care of”.

1. I received a great deal of assistance from the experts who gave their evidence clearly and objectively.  In particular, the detailed analysis and explanation by Mr Potter was clear and helpful, although I did not ultimately accept the assumptions upon which much of his analysis was made.

   10.             CONCLUSION ON LIABILITY

2. It follows that I have accepted Yum’s submissions generally. DPL has not established that Yum was in breach of its obligations in relation to the implementation of the VS. Accordingly, DPL’s application should be dismissed with costs. However, the application sets out a series of specific questions for the purpose of s 33H(1)(c) of the FCA Act as being common to the claims of the group members represented by DPL. These reasons have dealt with the submissions made by the parties and those submissions did not specifically address the questions set out in the application. Indeed, some of the questions in the application are simply not capable of a straightforward answer as seen in these reasons, or were not addressed in submissions. That is, to the extent that the submissions addressed the questions, the questions have been answered in the reasons.

3. It may be necessary for consideration to be given with respect to the orders in the application.  I will give the parties an opportunity to consider whether any orders with respect to the questions in the application need to be addressed further in light of the reasons.  The parties should confer and discuss proposed orders and proposed orders should be sent, by consent or by each party, to chambers within 14 days.

4. Further, these reasons may contain matters confidential to the parties.  I will provide an opportunity for the parties to propose any redactions within 14 days.

   11.             LOSS AND DAMAGE

5. While I have concluded that DPL has not established liability on the part of Yum, I will set out the submissions on loss and damage that were provided by the parties.  

   11.1           Evidence

   11.1.1Mr Potter’s evidence

   11.1.1.1Instructions provided

6. DPL provided Mr Potter with the following instructions:

   ·The commencement of the loss period is 10 June 2014 when the VS was announced and implemented shortly thereafter.

   ·The relevant principle for the assessment of loss is that DPL, and other of the Franchisees, are entitled to recover an amount in compensation which would put DPL (and other of the Franchisees) in the position they would have been in had the VS not been announced and implemented.

   ·Financial accounts for the DPL stores are only available for the 9 month period ended 31 March 2015.

   ·DPL anticipates the sale of its stores to be completed within 3 months (from 18 June 2015) and an EBITDA multiple of 4.5 times reported EBITDA for the year ended 30 June 2015 is expected to be achieved.

   ·The decline in reported sales for the 9 months ended 31 March 2015 on an annualised basis as compared to the year ended 30 June 2014 is entirely attributable to the implementation of the VS.

   11.1.1.2Principles of loss assessment

7. Mr Potter relied on the following principles of loss assessment:

   ·In his experience, the commonly applied approach to assessing a loss and, in this case, is to ‘compare the expected future net cash flows following the loss commencement date assuming the [VS] had not been implemented (hypothetical cash flows) to the future net cash flows following the loss commencement date that have been actually earned by the store, the difference being a loss of net cash flows’.

   ·The loss of cash flows is ordinarily valued at the date of the commencement of the loss (10 June 2014) using the discounted cash flow methodology.  The commonly used discount rate is the required rate-of-return, which makes an allowance for market type events or risks that had contributed to the decline in net cash flows that would have occurred in any event.  This is defined as the trading loss (or income loss).

   ·The value of a business is equal to the present value of the future net cash flows that can reasonably be expected from that asset.  The present value of the asset is calculated by discounting future net cash flows to the date of the commencement of the loss.  Then, the valuation can be undertaken by implementing the multiple of EBITDA method.  This is defined as the capital loss.

   ·If the effect of the implementation of the VS on cash flows is expected to continue past the date of the assessment of the loss, it is necessary to make an assumption as regards the expected future actual net cash flows and the extent of the difference in the future.

   ·The projection of both the hypothetical expected future net cash flows and the future actual cash flows requires judgment.  Mr Potter stated that ‘it is usual practice for valuers to have regard to historical trends in the business for 2 to 5 years prior to the loss commencement date’.

   ·It was not possible at the time of writing the report, Mr Potter said, to determine whether the effect of the VS was permanent or temporary.  That is, the effect on the Franchisees who have continued to operate their stores and anticipate continuing to operate them in the future is unknown.

   ·Some Franchisees have decided to sell their stores subsequent to the implementation of the VS, which would crystallise the loss of expected future net cash flows.  In these cases, Mr Potter noted, the loss will be calculated by reference to the comparison of hypothetical and actual net cash flows up to the date of sale and the extent to which the sale price has been diminished.

8. Mr Potter noted that he used the crystallisation method in his calculation of loss for DPL’s stores, as he was instructed that DPL would realise the stores in the near future.

   11.1.1.3DPL’s loss

9. Mr Potter attached the following table in his report:

Item number	Item description	$
1.	Expected future annual EBITDA	1,231,223
2.	Less: Actual EBITDA for year ended 30 June 2015	(763,012)
3.	Equals: Loss of net cash flow for year ended 30 June 2015	468,211
4.	Present value of trading loss at 10 June 2014	438,164
5.	Capital value loss	2,106,949
6.	Present value of capital value loss at 10 June 2014	1,971,737
7.	Total present value of trading and capital loss at 10 June 2014	2,409,901
8.	Pre judgment court interest (if awarded)	165,543
9.	Total value of loss including court interest to 30 June 2015	2,575,444

1. Mr Potter calculated item 1, which is the expected EBITDA for the year ended 30 June 2015, by taking the average of the EBITDA for the years ended 30 June 2013 and 30 June 2014 (this data was taken from Yum records).  In item 2, Mr Potter took the actual EBITDA at 31 March 2015 (9 months) and annualised that figure.  Accordingly, item 3 is the difference between items 1 and 2.  Item 4 is the present value of the trading loss at 10 June 2014.  The present value was calculated using the following sum formula:

   Where:

   PV = present value

   n = 12 periods.  Accordingly, i ranges from 1 to 12 from 30 June 2014 to 30 June 2015.  Mr Potter assumed there was no difference between the value at 10 June 2014 and 30 June 2014 as the period was not affected by the announcement of the VS.

   E_i = expected income in the i^th period.  In this case, Mr Potter took item 3 and divided by 12 as he assumed the cash flows arose evenly over the year for the trading business.

   k = discount rate.  Mr Potter used his weighted average cost of capital calculation on a post tax basis.  Accordingly, the discount rate used was 12.6%.

2. As a result, the value of item 3 is reduced by $30,057 due to the present value calculation.

3. Mr Potter calculated item 5 by multiplying item 3 by the EBITDA multiple of 4.5.  Mr Potter acknowledged, in his report dated 18 June 2015 (Mr Potter’s second report), that he was instructed by DPL to assume the EBITDA multiple of 4.5 times.  Mr Potter, in his report dated 19 June 2014 (Mr Potter’s first report), stated that the expected range for the EBITDA multiple of a Pizza Hut Franchise would be between 4 and 4.5.  That is, a small business would typically have a value of between 1 to 5 times EBITDA and ‘a franchise business generally [has a] value at the higher end of the range because of the value of the brand and the relationship with the franchisor’.  Following Mr Potter’s second report and receiving Mr Gower’s reports, Mr Potter undertook a further analysis of higher volume New South Wales outlet sales.  In this analysis, Mr Potter calculated a weighted average EBITDA multiple of 3.93 and a standard deviation of 1.19.  He concluded that DPL’s instructions that the EBITDA multiple be 4.5 was appropriate in the circumstances as it was well within the standard deviation range.  Nonetheless, he acknowledged an EBITDA multiple is not usually a precise figure and noted that using a range is usually more appropriate, which he did.

4. Item 6 can be calculated either by multiplying item 4 by the EBITDA multiple of 4.5 or by using the formula in [444] and calculating the present value of item 5 at 10 June 2014.  Item 7 is calculated by adding items 4 and 6 together.  Mr Potter has made an allowance for interest in item 8.  Item 9 is the addition of items 7 and 8.

   11.1.2Mr Gower’s evidence

   11.1.2.1Trading loss

5. Mr Gower contended that Mr Potter relied on his own model to demonstrate the unfavourable impact the VS was expected to have on store profitability.  However, Mr Gower says, inconsistently, Mr Potter disregarded his model to quantify DPL’s loss and relies on DPL’s historical financial performance to determine hypothetical cash flows.  Mr Potter’s model calculated the total EBITDA generated by DPL (excluding Minto) after the implementation of VS as $19,583 per week.  Mr Gower argued that this figure is approximately the same as DPL’s (excluding Minto) 2014 EBITDA of $19,644 per week.  Accordingly, Mr Gower concluded that no trading loss has been suffered by DPL and Mr Potter is unable to explain his departure from his own model in his assessment of DPL’s loss.

6. Mr Gower also criticised Mr Potter for relying on actual EBITDA for the period ended 30 June 2015.  Mr Gower stated that the ‘adoption of actual EBITDA assumes that not only is the decline in sales directly attributable to the VS but all changes in expenses are also directly attributable to the VS’.That is, Mr Gower said, Mr Potter undertook no analysis or enquiry on the financial statements to establish that the changes in expenses are entirely attributable to the implementation of the VS.  Mr Gower reviewed DPL’s financial statements and observed the following between the period ended 30 June 2014 and the 9 month period to 31 March 2015:

   ·DPL’s sales during the 6 month period to 31 December 2014 remained consistent with 2014 and declined during the quarter ended 31 March 2015.

   ·Cost of sales increased, primarily as a consequence of an increase in the price of pizza toppings (4% of sales) and a minor decrease in pizza cheese costs (1% of sales).

   ·Employment costs increased.

   ·Expenses declined, as Pizza Hut implemented the call-to-store system (requiring staff at each store to answer customer calls directly), no local store marketing costs were incurred, advertising costs declined, no training and development costs were incurred and an increase in costs such as repairs and maintenance, rent and outgoings, land rates and taxes, store petty cash, electricity and gas.

7. Mr Gower concluded that during the period 1 July 2014 to 30 June 2015, costs had both increased and decreased compared to the period ended 30 June 2014.  With respect to the costs that have increased, Mr Gower stated that it is necessary to understand the basis for the increase before assuming that it is all attributable to the VS.  Further, the reduction in advertising costs and no local store marketing costs are factors that could also affect sales that were not addressed by Mr Potter.

   11.1.2.2Capital loss

8. Mr Gower considered Mr Potter’s quantification of capital loss for DPL to be flawed for the following reasons:

   ·Mr Potter assumed the VS caused the increase in costs for DPL and assumed a decline in EBITDA is entirely attributable to the VS (as stated above in [440]).

   ·Mr Potter undertook his analysis on a group basis, implicitly assuming that the value of each store, prior to the VS, is the same.  It follows that Mr Potter had no regard to the remaining terms of the IFAs of each stores and the remaining terms of the leases and Mr Gower contended that the stores with a longer IFA and lease are likely to have a different value to those with shorter terms remaining.  Further, Mr Gower argued that Mr Potter had no regard to the various upgrade requirements of each store that may affect value and that Mr Potter did not assess widely different historical EBITDA figures for different stores, that could significantly alter their value.

9. Mr Gower concluded that ‘Mr Potter’s adoption of an EBITDA multiple of 4.5 times the assumed reduction in EBITDA without regard to the specific circumstances of each store is likely to misstate the capital loss which he asserts has been lost by DPL as a consequence of the VS’.  That is, there are circumstances which are not directly related to the VS that affected DPL’s EBITDA and those circumstances were not taken into account by Mr Potter.  In the hot tub, Mr Potter stated that he was instructed to use an EBITDA multiple of 4.5, that he was comparing the position to June 2014 and that the period of leases and franchise agreements had been reducing over that period.  Accordingly, Mr Potter could not see a more appropriate approach that could effectively take in all of those factors over the loss period and concluded that with the complexity of factors, the approach that he took was most appropriate.

   11.2           DPL submissions

10. DPL claims loss in its individual claim arising from the introduction of the VS.  DPL’s claim for loss is stated in [26] of the ASC, as follows:

    By reason of the matters pleaded in any or all of paragraphs 1 to 25 above the Applicant has suffered loss and damage by reason of the breaches of duty and contravening conduct of the respondent.

    Particulars

    (i)The Applicant proposed, prior to 1 July 2014, to sell its Outlets at the then prevailing level of EBITDA of each of those Outlets and using a multiple of 4-4.5 times;

    (ii)Loss of profit since 1 July 2014 from not being able to sell the Approved Products at the prices prevailing as at 30 June 2014, or such other prices in excess of the Reduced Prices as would have prevailed if Yum had not implemented the Reduced Prices and/or the Reduced Price Strategy;

    (iii)Loss of profit since 1 July 2014 on sales foregone as a consequence of the Other Prices Stipulated by Yum, in particular in relation to delivery sales;

    (iv)Loss of value of each of the Outlets as at the date of judgment represented by the difference in the actual realisable value of each of the Outlets at the date of judgment and the sale value that would have been achieved at or prior to that date on the basis of that Outlet’s likely EBITDA multiplied by 4-4.5 times, such EBITDA calculations having regard to the prices prevailing prior to 1 July 2014, or such other prices in excess of the Reduced Prices as would have prevailed if Yum had not implemented the Reduced Prices and/or the Reduced Price Strategy.

11. DPL submits that the loss may be correctly characterised as the ‘loss of the ability to continue to earn profits from its outlets after 1 July 2014 that [DPL] had been earning prior to 1 July 2014’.  Those profits, DPL says, give rise to two heads of damages:

    ·Income loss: Difference between DPL’s actual profitability (measured on an EBITDA basis) under the VS and what it would have earned if the VS had not been introduced.

    ·Capital loss: Loss of capital value of the outlet as a consequence of the VS, which can be determined by hypothesising a sale of the outlet and comparing the differences in values.

12. DPL submits that the following principles apply for the assessment of damages:

    ·The guiding principle in relation to the assessment of damages for a lost opportunity is that the Court will do the best it can with the evidence available to it (Malec v JC Hutton Pty Ltd (1990) 169 CLR 638).

    ·Any difficulties in proof in relation to the damages assessment are generally resolved in favour of the applicant (McCartney v Orica Investments Pty Ltd [2011] NSWCA 337).

    ·There is no relevant difference, in this case, between the calculations of damages under any of the three causes of action.

    ·The date for assessment of damages will be the date of the breach, the date on which Yum announced the VS to the Franchises, which was on 10 June 2014.  It follows that interest would be added from 10 June 2014 to the date of judgment.

    ·The damages calculations by Mr Potter are provisional, in the sense that he used DPL’s actual accounts up to 31 March 2015. Accordingly, DPL submits that if the Court accepts DPL’s submissions that it is entitled to be awarded damages, the Court can determine a provisional damages amount as at 31 March 2015 and make an order pursuant to r 30.41 of the Federal Court Rules 2011 (Cth) that the final damages award be determined by a Registrar, or otherwise give directions in accordance with s 33Z of the FCA Act to take account of then updated financial information from DPL’s outlets and actual sales data.

13. The Court’s powers in a representative proceeding are found in s 33Z of the FCA Act, as follows:

    (1)The Court may, in determining a matter in a representative proceeding, do any one or more of the following:

    (a)       determine an issue of law;

    (b)       determine an issue of fact;

    (c)       make a declaration of liability;

    (d)       grant any equitable relief;

    (e)make an award of damages for group members, sub‑group members or individual group members, being damages consisting of specified amounts or amounts worked out in such manner as the Court specifies;

    (f)award damages in an aggregate amount without specifying amounts awarded in respect of individual group members;

    (g)       make such other order as the Court thinks just.

14. DPL submits that, pursuant to s 33Z(e) of the FCA Act, the Court can have regard to the approach taken to assess DPL’s damages and give directions in relation to the manner in which the amounts other group members can be calculated. DPL concedes that a complication may arise for some group members in relation to the calculation of capital loss where an outlet has closed. That is, if the closure of the outlet was caused by the VS, then the capital loss will represent the entirety of the capital value of the outlet as at 10 June 2014.

    11.2.1Mr Potter’s evidence

15. Mr Potter provided a damages calculation of DPL’s loss and Mr Gower has offered no alternative calculation.  DPL submits that Yum cannot resist an award of damages based on Mr Potter’s evidence by asserting, for example, that this evidence is insufficient in some respect.

16. DPL contends that Mr Potter’s determination of DPL’s hypothetical EBITDA by taking an average of the two prior years EBITDA and assuming 0% growth is conservative.  The factors contributing to this determination are:

    ·DPL’s sales were growing in the first half of 2014;

    ·DPL maintained its 2-to-1 advantage over Domino’s in the Greater Macarthur Region;

    ·DPL’s sales growth, as at 10 June 2014, showed a positive “run rate” of 3.5%;

    ·DPL’s stores had been recently upgraded; and

    ·There was no reason to expect that, absent the VS, DPL would have experience reduced earnings after 1 July 2014.

1. DPL notes Mr Gower’s criticism that there were changes in a number of cost items in DPL’s accounts for the period after 1 July 2014.  DPL submits that Mr Diab was not cross-examined on any of these items and these criticisms should be disregarded.  In any event, DPL contends that the changes were all brought about by the VS and that Mr Potter discounted the profitability back to 10 June 2014 using DPL’s after-tax discount rate of 12.6%, which has the consequence of making allowances for normal business risks that DPL would have faced post 1 July 2014.  Mr Gower said that he did not accept that all of the risks to which he had pointed were taken into account in the discounting process.  DPL contends that Mr Gower did not seek to identify which, if any risks were not taken into account beyond this generalised statement.  Accordingly, DPL submits, the Court is entitled to accept Mr Potter’s evidence that the risks and contingencies have been fully taken into account in the discounting process.

   11.2.2Income loss

2. The explanation of Mr Potter’s calculation for income loss is in section 9 of Mr Potter’s second report.  Mr Potter concluded that DPL’s income loss as at 10 June 2014 is $438,164.

   11.2.3Capital loss

3. Mr Diab gave evidence that the usual way in which outlet sales prices are determined is by using the outlet’s EBITDA and applying an EBITDA multiple.  DPL says that Yum contests this evidence as their approach is that the EBITDA multiple method is one factor that is taken into account in determining a selling price and other qualitative factors are also relevant, including outlet location, competitor activity, age and condition of the outlet and the remaining length of the IFA.  DPL contends that that the EBITDA multiple can be adjusted to take into account these factors.

4. DPL submits that, as Mr Potter’s analysis of higher volume NSW outlet sales (in [446] above) established a weighted average EBITDA multiple of 3.93 and a standard deviation of 1.19, it was reasonable for Mr Diab to conclude that the appropriate multiple was 4.5 for DPL outlets (which is within 1 standard deviation of the mean).  DPL concedes that a reason for not applying a 4.5 multiple arises in the event that one of the outlets would not be sold on a going concern basis, which could be an issue for DPL’s stores at Minto and Narellan. 

5. Accordingly, DPL submits that on the basis of the 4.5 multiple being applied to all DPL outlets, DPL’s capital loss, as calculated by Mr Potter, is $2,106,949.

   11.3           Yum submissions

   11.3.1Income loss

6. Yum notes that DPL’s claim for losses necessarily assumes that the entire difference between actual trading results and the results that DPL claims would have resulted had the VS not been introduced was caused by the VS.  This was evident as Mr Potter was expressly instructed to make that assumption in preparing the loss calculation.

7. Yum submits that DPL’s loss calculation fails to take into account the following:

   ·The possibility that Domino’s would have introduced a $4.95 every day strategy.  Domino’s had already been selling $4.95 pizzas two days a week for a year, and had trialled a four day-per-week $4.95 offer in August 2013.  Domino’s has continued to offer $4.95 every day even after Pizza Hut increased its prices.

   ·The fact that Yum increased its prices again at various times after 1 July 2014, see [45] above.

8. It follows, Yum submits, that any damages should be limited to the loss incurred in the period when the VS was operative.  Yum contends that DPL’s claim makes no allowance for this and Mr Potter’s calculations do not take this into account.

   11.3.2Capital loss

9. Yum submits that there can be no capital loss for the DPL’s Minto restaurant, as the IFA expires on 30 October 2015 (which has been extended pursuant to an order made on 21 October 2015 to 29 February 2016) and that an outlet has no capital once the IFA expires, unless there is an agreement to renew it.  Yum states that the position is similar for DPL’s Narellan store which expires in April 2016.  Yum contends that as the other stores have not been sold, no capital loss has crystallised and the capital value of the stores may increase in the future.  That is, a future loss is not recoverable as it is hypothetical and not proven.

10. Yum disagrees with DPL’s reliance on 4.5 as the EBITDA multiple.  Yum submits that there is no proper basis for this assessment and that the evidence clearly shows there are widely differing EBITDA multiples for the sale of Pizza Hut stores.  Yum submits that the actual EBITDA multiple depends on numerous variables, including the remaining term of the IFA has rental costs.  That is, a 4.5 EBITDA multiple or even a range of 4 to 4.5 does not provide an acceptable basis to calculate any capital loss.

    11.4           Consideration

    11.4.1Trading loss

11. Mr Gower criticised Mr Potter for not relying on his own model to quantify DPL’s loss and relying on DPL’s historical financial performance to determine hypothetical cash flows.  Mr Potter’s analysis was not an attempt to create his own model.  Rather, he was assessing the Yum Model for its flaws to calculate whether the labour hours allowance by Yum was a realistic figure that could be relied upon in achieving a 34.5% transaction uplift for the national average store.  The aim of Mr Potter’s analysis was not to model projected EBITDA but rather to assess the extra labour hours and break even point.  It follows that Mr Gower’s criticism of Mr Potter’s analysis is unfounded, as Mr Potter should not be required to rely on his model in this way.  Nonetheless, it is unclear why Mr Potter used the average EBITDA method of DPL’s historical financial performance.  This was not clear on the evidence and there is no basis for assuming that this is the best approach in assessing the future hypothetical EBITDA of DPL’s outlets.

12. Mr Gower opposed Mr Potter’s reliance on actual EBITDA for the period ended 30 June 2015 as Mr Potter undertook no analysis or enquiry on the financial statements to establish that the changes in expenses were entirely attributable to the implementation of the VS.  DPL submits that Mr Diab was not cross-examined on any of these items and, as a result, these criticisms should be disregarded. 

13. It is difficult to assess whether the expenses incurred for the period were all attributable to the VS.  This is an assumption that was made by Mr Potter and no alternative calculation was posited to take into account the expenses.  As Yum did not provide an alternative calculation, it is difficult to assess how Mr Potter should have taken into account the changes in expenses.  If a different analysis were provided, it is likely that the Mr Potter’s calculation of income loss would have been altered.

14. Nonetheless, I accept that there is clear evidence that the $4.95 price was increased at various times after 1 July 2014.  The delivered price for Classics only remained at $4.95 until 14 August 2015 and since that time the price has been above $8.95.  The pick up price remained at $4.95 until 5 May 2015, which is after the 9 month period assessed by Mr Potter.  Accordingly, further assessment would be required to analyse the effects of these changes.  The assumption that the VS was operative throughout the entire period until 31 March 2015 is not completely accurate and DPL’s claims make no allowance for these changes in price.  It follows that the damages calculation would need to be altered and to take into account the period when the VS was operative and not operative.

    11.4.2Capital loss

15. I accept Mr Gower’s criticism of Mr Potter’s calculation as Mr Potter had no regard to the remaining terms of the IFAs and leases.  The value of an IFA varies depending on the remaining term.  If the IFA has concluded there is no capital value unless there is an agreement to renew it.  Further, the capital loss determined by DPL is hypothetical, as the stores have not been sold.  It is not until the store is sold that the value crystallises and the capital loss or gain can be realised.  It is even more difficult to assess a capital loss or capital gain where a store requires Yum’s consent to be sold or a lease renewal transferred.  As the stores have not been sold, the quantum of damages necessary to put DPL into the position before the breach had occurred, cannot be quantified.

16. However, some Franchisees may have lost their stores as they have been foreclosed, which reduces the capital value to zero.  In those circumstances, the capital value loss is clearly the entire value of the franchise prior to a breach.  This calculation is easier than for DPL, as the DPL stores have not been sold and the loss has not crystallised, so capital value may remain.

17. Further, Yum submits that the EBITDA multiple method is one factor that is taken into account in determining a selling price but that other factors must also be taken into account.  While DPL contends that the EBITDA multiple can be adjusted to take into account these other factors, no sufficient explanation was provided as to how these factors can be taken into account.  If they were to be included, the EBITDA multiple of 4.5 may not be appropriate.  Mr Potter suggested that a range for the EBITDA multiple is most appropriate as it takes into account the different circumstances of each DPL outlet.  Accordingly, an appropriate method may be to consider the range of EBITDA multiples suggested (which is 4 to 4.5) to find a suitable figure for each store. 

18. Nonetheless, on the evidence before the Court, it is difficult to find that Mr Potter’s analysis provides a conclusive result for capital loss.  Many factors have not been fully assessed and the value of any capital loss would need to be reviewed if a breach of Yum’s obligations were established.

    11.5           Conclusion on loss and damage

19. The evidence is insufficient to determine the appropriate quantum of damages if DPL had been successful.  As Yum points out, the claimed loss as set out in Mr Potter’s evidence is incomplete, based on assumptions that have been challenged, including the assumption that all losses were caused by implementation of the VS without accounting for Domino’s response and Yum’s subsequent price increases.  Claims for capital losses are based on a multiple of EBITDA that has not been properly validated for the sale of all of DPL’s Pizza Hut stores.  In particular, there has been no allowance for different lengths of contract and whether Yum would agree to a transfer.

20. Consideration might be given, if DPL were successful, to allowing DPL to apply to reopen but that does not need presently to be considered.

21. There remains the question of loss and damage quantification for other Franchisees.  DPL submits that all have lost income and capital.  DPL accepts that there would be variation between the Franchisees.  If such matters were to require resolution further evidence and submissions would be necessary and/or directions for alternative methods of determination.

    11.6           Extra issues

22. This issue does not directly relate to loss and damage but to the EBITDA multiple and thereby is relevant to Mr. Potter’s model.

    11.6.1Required return on capital

23. Mr Potter extended the results of the Yum Model to incorporate capital expenditure and return on capital to demonstrate how Franchisees would be impacted should the VS not achieve at least a break-even level of EBITDA.  In Mr Potter’s first report, the EBITDA multiple range was not dependent on a capital expenditure assumption and he assessed a rate of return of 22.40% and EBITDA multiple in the range of 4.0 to 4.25.  In Mr Potter’s second report, Mr Potter was instructed to use an instructed EBITDA multiple of 4.5 and an instructed level of capital expenditure (which was based on the instructed cost of franchise upgrades based on a Yum disclosure document).  Accordingly, Mr Potter’s rate of return specific to DPL stores was different from that in his first report.

24. Following Mr Potter’s second report, Yum provided Mr Potter with Mr Houston’s affidavit of 17 July 2015.  This affidavit included information to the effect that:

    ·A more current version of the disclosure document was available which set out a different range of franchise upgrade costs to those which Mr Potter was instructed to assume;

    ·A “Full Upgrade” would only be required in extremely rare circumstances;

    ·The Franchisees were required to perform a minor front of house upgrade five years after entering a franchise agreement and every ten years after that, if applicable, for a cost in the range of $9,000 to $35,000; and

    ·The Franchisees were required to perform a major front of house upgrade every ten years after entering a franchise agreement, for a cost in the range of $25,000 to $100,000.

25. After receiving Mr Houston’s affidavit, Mr Potter calculated an updated capital expenditure based on this information over a ten year period and calculated an average capital expenditure on a per year basis for minor and major front of house upgrades.  As a result, Mr Potter calculated a different range of required rates of return (ranging from 22.4% to 19.4%) implied by the same EBITDA multiple of 4.5 and for a range from 4.0 to 4.5.  Mr Potter concluded, having assumed that the national average store was generating the required return prior to the implementation of the VS, that an EBITDA multiple closer to 4.0 or high threes (as compared to 4.25 or 4.5) for the national average store may be more appropriate.  He conceded that it was more appropriate as it was consistent with his weighted average EBITDA multiple of 3.94 based on historical Pizza Hut data and the weighted average EBITDA multiple of 4.13 from Mr Gower’s report dated 20 July 2015.

26. While the analyses seem to be valid, there is insufficient material before me to establish that the return on capital is a valid cost within the framework of the IFA.  In view of my decision on liability, it does not need to be determined.

I certify that the preceding four hundred and eighty-five (485) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bennett.

Associate:

Dated:       5 February 2016

ANNEXURE A

Definition	Description of definition
$425 improvement	$425 per store per week improvement by ACT franchisee presented to the Franchisees by Yum
A & A proceedings	Interlocutory application by A & A (Sydney) Pty Ltd and 80 applicant Franchisees, including DPL, seeking to restrain Yum from implementing the VS
Adco	Pizza Hut Adco Limited.  A body responsible for marketing and promotional activities in conjunction with Yum promoting the Pizza Hut business, brands and products in Australia.
AICD	Australian Institute of Company Directors
AOP	Annual Operating Plan.  A meeting in October of each year
application	Amended Originating Application dated 2 April 2015
ASC	Amended Statement of Claim dated 2 April 2015
DPL	Diab Pty Limited
FAC	Franchisee Advisory Council
FCA Act	Federal Court of Australia Act 1976 (Cth)
FPC	Franchisee Policy Committee
Franchisees	All persons who were franchisees under an IFA with Yum to operate Pizza Hut outlets as at 1 July 2014
Franchisee Update	Franchisee Update May 2014
CFO	Chief Financial Officer
Help! email	Email from Mr Houston to Mr Bergren of Yum US on 3 June 2014
ICMSA	Institute of Corporate Managers, Secretaries and Administrators
IFA	Standard form International Franchise Agreement
LSM	Local store marketing
Micros	Micros Point of Sale System.  Provides data that lives inside the operating system inside all Pizza Hut outlets
Mr Potter’s first report	Mr Potter’s report dated 19 June 2014
Mr Potter’s second report	Mr Potter’s report dated 18 June 2015
MPD	Minutes per docket
PSA	Per store average
Q0F, Q1F, Q2F, Q3F	Quarterly Forecasts and summary memorandum of the Australian management to the USA.  The Q0F was the outcome of the AOP process and set the annual plan for the year.  Q2F was an update in June.
RBNZ	Restaurant Brands New Zealand Limited.  The New Zealand Pizza Hut master franchisee.
SOPAC	South Pacific
SSSG	Same store sales growth
Stubbs email	Email sent by Mr William Stubbs on 23 June 2014 to Yum’s leadership team regarding the intervention by Domino’s.
System	Comprehensive restaurant system as defined in the IFA
Velocity pricing	VS’s two price points: $4.95 for “Classics” pizzas (from $9.95) and $8.50 for “Favourites” pizzas (from $11.95)
VS	Value Strategy
WA Test	Western Australia Test
Yum	Yum! Restaurants Australia Pty Limited
Yum Model	The model used to analyse the viability of the VS and to assess the number of extra labour hours required to ensure a 34.5% uplift in transactions for the National Average Store.
Yum US	Yum! Brands Inc.  The US parent company of Yum