Dresna Pty Ltd v Linknarf Management Services Pty Ltd (in Liq)
[2006] FCA 540
•12 MAY 2006
FEDERAL COURT OF AUSTRALIA
Dresna Pty Ltd v Linknarf Management Services Pty Ltd (In Liq)
[2006] FCA 540CONTRACT – agreement for the sale by respondents of supermarket business to applicant – sale conditional upon obtaining consent of landlord to assignment of lease – consent of landlord not obtained – separate agreement between applicant and respondents to commence proceedings against landlord – agreements terminated by respondents – whether respondents entered into agreement with third party for sale of supermarket while sale agreement with applicant still on foot – whether respondents sought approval from Australian Competition and Consumer Commission to sell supermarket to third party in breach of contractual obligations to applicant – whether respondents failed to disclose material information to applicant in breach of contractual obligations to applicant – whether breaches of contractual obligations, if any, caused applicant’s loss or damage
EQUITY – whether joint purpose of obtaining landlord’s consent gave rise to a fiduciary relationship between applicant and respondents
TRADE PRACTICES – whether respondents’ lack of disclosure of material information amounted to misleading or deceptive conduct – whether respondents’ conduct caused applicant’s loss or damage
Trade Practices Act 1974 (Cth) ss 50, 52 and 82
Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 cited
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 referred to
Central Exchange Ltd v Anaconda Nickel Ltd (2001) 24 WAR 382 cited
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 referred to
Dresna Pty Ltd v Linknarf Management Services Pty Ltd (In Liq) formerly Franklins Management Services Pty Ltd [2005] FCA 1011 referred to
Dresna Pty Ltd v Misu Nominees Pty Ltd [2003] FCA 1537 referred to
Dresna Pty Ltd v Misu Nominees Pty Ltd [2004] FCAFC 169 referred to
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR ¶41-703 cited
GEC Marconi Systems v BHP-IT (2003) 128 FCR 1 cited
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 referred to
Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 cited
Jones v Dunkel (1959) 101 CLR 298 cited
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2005] FCA 288 cited
Pacific Brands Sport & Leisure Pty Ltd v Underworks Pty Ltd [2006] FCAFC 40 referred to
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 cited
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 cited
Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 discussed
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 citedR Meagher, D Heydon and M Leeming, Meagher Gummow & Lehane’s Equity: Doctrines & Remedies (2002, 4th ed)
DRESNA PTY LTD (ACN 097 346 784) v LINKNARF MANAGEMENT SERVICES PTY LTD (IN LIQUIDATION) formerly FRANKLINS MANAGEMENT SERVICES PTY LTD (ACN 000 052 077) and LINKNARF LIMITED (IN LIQUIDATION) formerly FRANKLINS LIMITED (ACN 000 929 902)
VID 909 of 2002
WEINBERG J
12 MAY 2006
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 909 OF 2002
BETWEEN:
DRESNA PTY LTD (ACN 097 346 784)
APPLICANTAND:
LINKNARF MANAGEMENT SERVICES PTY LTD (IN LIQUIDATION) formerly FRANKLINS MANAGEMENT SERVICES PTY LTD (ACN 000 052 077)
FIRST RESPONDENTLINKNARF LIMITED (IN LIQUIDATION) formerly FRANKLINS LIMITED (ACN 000 929 902)
SECOND RESPONDENTJUDGE:
WEINBERG J
DATE OF ORDER:
12 MAY 2006
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1. The application be dismissed, with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 909 OF 2002
BETWEEN:
DRESNA PTY LTD (ACN 097 346 784)
APPLICANTAND:
LINKNARF MANAGEMENT SERVICES PTY LTD (IN LIQUIDATION) formerly FRANKLINS MANAGEMENT SERVICES PTY LTD (ACN 000 052 077)
FIRST RESPONDENTLINKNARF LIMITED (IN LIQUIDATION) formerly FRANKLINS LIMITED (ACN 000 929 902)
SECOND RESPONDENT
JUDGE:
WEINBERG J
DATE:
12 MAY 2006
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
INTRODUCTION
These proceedings arise out of the withdrawal of the Franklins supermarket chain from the Australian market. The Franklins business was operated by Franklins Limited, the parent company of which was the Hong Kong-based Dairy Farm International Holdings Limited (“Dairy Farm”). Following a strategic review in 2000, Dairy Farm decided to “cut its losses and wholly leave Australia”. To do so involved the sale or closure of 287 stores.
The Franklins supermarket chain had been one of three major national supermarket chains. The other two national chains were operated by Coles Myer Limited (“Coles”) and Woolworths Limited (“Woolworths”). The exit of one of the three major players in the market plainly raised competition issues. In particular, if the entirety, or a large portion, of the Franklins business were sold to one of the two national competitors, this had the potential to infringe s 50 of the Trade Practices Act 1974 (Cth) (“the TPA”) – the prohibition on acquisitions that would result in a substantial lessening of competition.
On 22 May 2001, the Australian Competition and Consumer Commission (“the ACCC”) announced that it had reached an in principle agreement with Dairy Farm. The agreement was for about 200 stores to be sold to independent retailers, and a maximum of 67 stores to be sold to Woolworths. This agreement was conditional upon acceptable undertakings being given by the parties to the ACCC.
Accordingly, on 4 June 2001, undertakings were given by Franklins Limited and Dairy Farm Management Services Limited (a subsidiary of Dairy Farm) to the ACCC pursuant to s 87B of the TPA (“the undertakings”).
Generally speaking, the intended effect of those undertakings was to ensure that as many as possible of the Franklins stores allocated for sale to independent operators did, in fact, end up being sold to those operators. As part of the undertakings, over 100 of the Franklins stores were earmarked for sale to independent supermarket operators pursuant to a process called the Joint Independent Divestiture Alliance (“JIDA”) process. The JIDA process involved independent operators submitting “bids” for stores to the “JIDA Committee”. The JIDA Committee was a body made up of representatives of Franklins Limited and Metcash Trading Limited, a wholesaler of groceries and stock to independent supermarkets.
The undertakings also required Franklins Limited to obtain the consent of the ACCC before selling any stores to Woolworths or Coles, other than the 67 stores the ACCC had already agreed could be sold to Woolworths. The undertakings further required Dairy Farm Management Services Limited and Franklins Limited to report to the ACCC any development that materially affected the sale of Franklins stores in accordance with the undertakings.
Woolworths also gave undertakings to the ACCC, dated 7 June 2001. Amongst other things, those undertakings prevented Woolworths from interfering in the JIDA process.
No undertakings were given by Coles. This was unsurprising, given that in mid-2001, there was no proposal before the ACCC for Coles to acquire any Franklins stores.
The applicant in this proceeding is a company which sought to purchase the Franklins store at Mentone, a suburb in Melbourne, Victoria (“the Mentone store”). While an agreement was reached for the sale of the Mentone store to the applicant, the respondents claim that they were unable to secure, from the landlord of the Mentone store, consent to an assignment of the lease to the applicant. As such, the respondents contend that they were unable to complete the sale and terminated, on notice, the sale agreement with the applicant. The Mentone store was ultimately sold to Coles for $2.3 million. This was the same price as had been negotiated with the applicant.
Mr Leo Blake is a director and shareholder of the applicant. The other director and shareholder of the applicant is Mr Blake’s wife. Mr Blake owns a number of supermarkets, including the “Leo’s Fine Food and Wine” stores at Kew and Heidelberg. In his view, the purchase of the Mentone store was a “one off opportunity”. In simple terms, Mr Blake claims that the Mentone store should have been sold to him, and not to Coles. He claims that he failed to acquire the Mentone store as a result of the respondents’ wrongful conduct, and claims damages that include the lost profits he would have earned from the Mentone business.
HISTORY OF LITIGATION
The litigation arising out of the applicant’s failure to secure the purchase of the Mentone store has a long and complex history.
These proceedings were transferred from the Supreme Court of Victoria to this Court on 13 December 2002, following the addition of a claim against Coles for misuse of market power under s 46 of the TPA. At that time there were five respondents in the proceeding. Those respondents can be grouped into three categories:
·Misu Nominees Pty Ltd and Kandara Pty Ltd, the lessors of the Mentone store site (“the Lessor”);
·Franklins Management Services Pty Ltd (“FMS”) (an entity wholly owned by Franklins Limited and the holder of the lease over the Mentone store) and Franklins Limited; and
·Coles.
Since the commencement of proceedings, the Franklins parties have gone into liquidation. As such, the names of the Franklins parties have changed. Franklins Limited is now Linknarf Limited (in liq) and FMS is now Linknarf Management Services Pty Ltd (in liq). I will refer to these parties jointly in these reasons for judgment as “Franklins”.
At the time of the transfer of proceedings to this Court, the applicant relied upon numerous causes of action. They included claims under s 46 and s 52 of the TPA, as well as claims for inducing breach of lease, unlawful interference with lease, and tortious conspiracy as between Coles and the Lessor.
On 19 December 2003, I gave a judgment in relation to an application by the applicant for leave to amend its statement of claim: Dresna Pty Ltd v Misu Nominees Pty Ltd [2003] FCA 1537. Further background to these proceedings is set out in those reasons for judgment. That decision was appealed to the Full Court: Dresna Pty Ltd v Misu Nominees Pty Ltd [2004] FCAFC 169. The effect of the Full Court’s decision was that the applicant was able to plead claims of conspiracy as between Franklins Limited and Coles (in addition to its claim of tortious conspiracy as between Coles and the Lessor).
In May 2005, the applicant settled its claims against Coles, and the Lessor. It did not, however, resolve its claims against Franklins. In June 2005, Franklins, somewhat belatedly, sought leave to bring cross-claims against Coles and the Lessor. Such leave was refused: Dresna Pty Ltd v Linknarf Management Services Pty Ltd (In Liq) formerly Franklins Management Services Pty Ltd [2005] FCA 1011.
In its final incarnation, the application before me against the remaining respondents, the two Franklins parties, is an application for damages for breach of contract, breach of s 52 of the TPA, and breach of fiduciary duty.
THE APPLICANT’S CLAIMS
The applicant’s claims for breach of contract arise from two agreements. The first agreement is a business sale agreement dated 8 August 2001 between Franklins on the one hand, and the applicant and Mr Blake on the other. It will be convenient to describe this business sale agreement as “the Mentone BSA”. The second agreement, which was said to be partially written, and partially oral, was entered into on or about 28 September 2001. That agreement, between Franklins and the applicant, involved them in jointly bringing proceedings, in the Supreme Court of Victoria, against the Lessor for unreasonably withholding consent to the assignment of the lease of the Mentone store to the applicant. For convenience sake, I will refer to this agreement as “the litigation agreement”.
The applicant also claims that its joint collaboration with Franklins in pursuit of a common objective, namely obtaining the consent of Lessor to the assignment of the Mentone store lease, gives rise to a fiduciary relationship. The litigation agreement is said to be part of that joint collaboration.
The applicant submits that despite the existence of an agreement to sell the Mentone store to it, Franklins dealt with Coles and agreed, or had a “deal in principle” to sell the store to Coles (“the Franklins/Coles deal”). The applicant submits that this deal was part of a wider dealing between Franklins and Coles that took place in August 2001, that encompassed a number of stores, and was in disregard of the undertakings. The applicant contends that, in the context of this wider deal, the price for Mentone was negotiated in late August/early September 2001. This was well before Franklins gave notice terminating the Mentone BSA, on 28 November 2001, and well before it obtained ACCC consent for the sale to Coles, on 21 December 2001.
In the alternative, the applicant submits that Franklins and Coles entered into an agreement for the sale of the Mentone store on or about 23 November 2001. The applicant contends that Franklins did not disclose the existence of that agreement to it, or to the ACCC. The applicant also submits that Franklins did not disclose to the applicant the fact that it had made a confidential submission to the ACCC on 23 November 2001, seeking the ACCC’s consent for the sale of the Mentone store to Coles. Together, I shall refer to these matters as “the late November 2001 dealings”.
In addition, the applicant further submits that Franklins was aware, at least from 15 October 2001, of an arrangement between Coles and the Lessor, by which Coles had agreed to take up the lease on the Mentone store on a “vacant possession” basis (“the Lessor/Coles deal”). The applicant contends that Franklins failed to disclose its knowledge of that arrangement to it, or to the ACCC.
The applicant claims that the Franklins/Coles deal, the late November 2001 dealings, and Franklins’ failure to disclose its knowledge of the Lessor/Coles deal, amount to breaches of Franklins’ contractual and fiduciary obligations.
In addition, the applicant submits that these matters give rise to a claim of misleading or deceptive conduct under s 52 of the TPA, both in terms of Franklins failure to disclose these matters to the applicant, and its failure to disclose these matters to the ACCC.
The applicant contends that, had it been aware of these matters prior to the end of December 2001 (when the Mentone store was sold to Coles), it could have made use of the information to take steps to ensure the completion of the sale of the Mentone store to it. The applicant submits it would have done this either by taking legal action to force the assignment of the Mentone store lease, or by persuading the ACCC to refuse its consent for the sale of the Mentone store to Coles.
Likewise, the applicant contends that had these matters been disclosed to the ACCC, it would have intervened to ensure the sale of the Mentone store to the applicant.
The applicant claims that it has suffered loss as a result of these matters, including the costs expended in the Supreme Court proceedings taken against the Lessor and the lost profits the applicant would have earned had it acquired the Mentone store.
FRANKLINS’ DEFENCES
In general terms, Franklins claims that it tried its best to sell the Mentone store to the applicant. However, the Lessor refused to consent to the assignment of the lease. Franklins joined with the applicant for a time in taking legal action against the Lessor to try to force the assignment. However, by November 2001, Franklins submits that it was apparent that time had simply “run out” in terms being able to complete the sale to the applicant before the complete closure of the Franklins business at the end of January 2002. On 16 November 2001, at a directions hearing in the proceedings Franklins and the applicant brought against the Lessor, Habersberger J indicated that the matter would not be able to be given a trial date in 2001, and set the matter down for further directions on 15 February 2002. Shortly after that directions hearing, on 28 November 2001, Franklins terminated the Mentone BSA. Only after ACCC consent was obtained on 21 December 2001, according to Franklins, did it negotiate the sale price of the Mentone store with Coles.
Franklins claims that it was known or understood by the applicant at all material times that some of the stores originally allocated for sale pursuant to the JIDA process would ultimately be sold to Coles. This, Franklins submits, would be for a variety of reasons. One potential reason was that no appropriate bids had been received for a store. Another potential reason was that a landlord may refuse to assign the store lease to an independent operator.
Furthermore, Franklins contends that at all material times it made the applicant aware that it needed the support of its Hong Kong parent company, Dairy Farm, to remain solvent, and that this support would not continue beyond the end of January 2002. Consequently, Franklins submits, the managed sell-down needed to be completed within a narrowly confined timeframe.
Turning specifically to the alleged “deals” between Franklins and Coles, Franklins submits there was no deal in relation to the sale of the Mentone store prior to late December 2001. It contends that the price for the Mentone store was only agreed between 21 December 2001 (the date upon which ACCC approval was given for the sale of the Mentone store to Coles) and 24 December 2001 (the date the agreement to sell the Mentone store to Coles was signed). Franklins submits that the first time the potential sale of the Mentone store was discussed between Coles and Franklins was on 23 November 2001 and, following one last attempt obtain the Lessor’s consent to the assignment of the lease, which attempt was rejected on 27 November 2001, the ACCC was approached to obtain its consent to sell the store to Coles, and the Mentone BSA and litigation agreement were terminated.
Franklins does not dispute that it made its submission to the ACCC on 23 November 2001, five days before both giving notice to terminate the Mentone BSA and terminating the litigation agreement, on 28 November 2001.
In relation to the Lessor/Coles deal, Franklins does not deny the existence of such a deal. It is clear on the evidence that an agreement between the Lessor and Coles was signed on 29 June 2001. This was revealed in the Supreme Court proceedings on 18 December 2001 after the Lessor responded to a subpoena to produce documents, and was disclosed in an affidavit of Mrs Judith Wasser, the director and “owner” of the Lessor, filed the following day.
As previously indicated, the nature of the Lessor/Coles deal was that Coles agreed “in principle” to take up the lease of the Mentone store on a vacant possession basis. The idea behind the arrangement was that if the Lessor refused to consent to Franklins assigning the lease, Franklins would be forced simply to close the Mentone store. The property would then be vacant, and Coles could take up the lease. This would allow Coles to acquire the Mentone store without having to obtain ACCC approval, as the undertakings did not apply to Coles or the Lessor.
Coles stated in its offer to the Lessor, dated 6 June 2001, that “it is not our intention that you breach any contractual obligations that you may have in respect of the Site”. However, the terms of the Lessor/Coles deal required the Lessor to use reasonable endeavours to ensure that Franklins continued to trade until the proposed Coles lease commenced and to negotiate to acquire stock from Franklins which Coles would then purchase from the Lessor. It is clear that the Lessor/Coles deal was an attempt to effect a practical outcome as close to assignment as possible, while trying to avoid unlawful interference with the Lessor’s obligations under the existing lease.
The issue in this proceeding is the time at which Franklins became aware of the Lessor/Coles deal. In its final submissions, Franklins did not reject the contention that it knew of the Lessor/Coles deal prior to 18 December 2001. In its final submissions, it states:
“It is true that Franklins did not disclose to Dresna the fact that Coles had entered into an agreement in principle with the landlord based on vacant possession, learned at least by some within Franklins on about 15 October 2001”.
However, Franklins submits that even if there was non-disclosure in relation to the Lessor/Coles deal, causation of loss or damage cannot be established. In relation to the line of causation through the ACCC, namely that the ACCC would have blocked the sale of the Mentone store had it known of the Lessor/Coles deal, Franklins submits that there is no evidence to support this contention. In relation to the line of causation through the Supreme Court proceedings, namely that an expedited hearing would have been obtained, and judgment given in the applicant’s favour, had the Court been told of the Lessor/Coles deal, Franklins contends that the case could not be brought on for hearing in 2001, irrespective of whether or not the Court was told of the Lessor’s “collateral purpose” in refusing assignment of the lease. And, Franklins submits, even if the case had been brought on in 2001, there is no assurance that the applicant would have succeeded.
FACTUAL ISSUES FOR DETERMINATION
The factual issues to be determined on this application include the following:
· whether the applicant has established the existence of the Franklins/Coles deal, as alleged, or alternatively, the existence of the November 2001 dealings;
· whether the applicant has established that Franklins became aware on or about 15 October 2001, if not before that date, of the existence of the Lessor/Coles deal;
· whether the applicant has established that Franklins’ knowledge of the existence of the Lessor/Coles deal was not disclosed to the applicant, or to the ACCC, until 18 December 2001 during the Supreme Court proceedings;
· whether, had either of these “deals” been disclosed to the applicant, or to the ACCC, the ACCC would have blocked the sale of the Mentone store to Coles;
· whether, had either of these “deals” been disclosed to the applicant, an expedited hearing would have been granted in the Supreme Court proceedings (ie before January 2002), so that the Lessor would have been compelled to assign the lease of the Mentone store to the applicant.
THE APPLICANT’S EVIDENCE
MR LEO BLAKE
Mr Blake’s evidence goes to the knowledge of the applicant and what the applicant would have done had it been told of the “deals” it alleges. His evidence also provides helpful background to the circumstances surrounding the sale of the Mentone store.
In late May 2001, Mr Blake became aware that the Mentone store was available for purchase from Franklins. Mr Blake says that he was keen to purchase the Mentone store because of what he regarded as favourable rent on the property, the lease being a long term lease, there being less competition in that area than others, the car parking facilities, the customer base and the potential to upgrade the liquor licence.
Mr Blake said that he regarded the sale of the Mentone store as a “one off opportunity” because independents are not usually able to acquire stores of this type.
On 31 May 2001, Mr Blake met with Mr Geoff Webb. Mr Webb was contracted by Franklins to assist with the JIDA process. Mr Blake, in his evidence in-chief, described the meeting as follows:
“On 31 May 2001, I met with Geoff Webb of Franklins at my office in Kew. During the course of that meeting Webb gave me various documents in relation to the sale of Franklins stores, some of which I had already received. He said that he was here to do a deal. I asked him whether he had authority to do a deal given the formal bidding process outlined by Franklins. He said that he did. I offered to pay $2 million for Mentone. He stated that Mentone was a very profitable store and if I wanted Mentone I would also have to take a “dog store” with it, rather than cherry pick the good store. I offered $2m for Mentone and $500,000 for North Blackburn. He said the $500,000 for the North Blackburn store was okay. He then consulted a document in his briefcase and said that the $2,000,000 offered for Mentone was insufficient. I then said “What price was Franklins looking for?” He responded by saying “$2.3 million because the store is showing a profit of $1.25 million”. I then said “Are you in a position to do a deal now if I offered $2.3 million and the $500,000 now?” Webb said “Yes”. ”
Mr Blake says he had doubts as to whether Mr Webb had the authority to sell the store to him outside of the JIDA process. The JIDA process involving buyers bidding for stores and those bids being considered by the JIDA committee had been well-documented in the supermarket industry. Mr Blake wrote a short handwritten note to “cement” the deal which both he and Mr Webb signed.
Following this meeting, Franklins denied any agreement to sell to Mr Blake because he had not followed the proper process, namely submitting a bid to the JIDA Committee, and because Mr Webb was not authorised to sell.
However, after proceedings were commenced by Mr Blake against Franklins (“the Webb proceedings”), Franklins agreed to honour the deal struck between Mr Blake and Mr Webb, and on 8 August 2001, the applicant and Franklins entered into the Mentone BSA for the sale of the Mentone store.
Clause 4.1 of the Mentone BSA provided that a condition precedent to the completion of the sale was for the Lessor to give its consent to the transfer of the lease. Clause 4.2 provided that the parties to the sale must use “reasonable endeavours” to satisfy this condition.
On or about 13 August 2001, Mr Blake met with Ms Susan Herbert of Arnold Bloch Leibler (“ABL”), solicitors for the Lessor. He provided her with a submission in support of the assignment. By early September 2001, the Lessor had not given its consent to the assignment. Despite this, Mr Blake gave evidence that after the signing of the Mentone BSA, he prepared for the refurbishment of the Mentone store which he planned to undertake. This included meeting with subcontractors such as plumbers, carpenters and electricians. He proceeded with this work because, in his opinion, the Lessor had no basis upon which to object to an assignment of the lease.
The assignment clause in the Mentone store lease, clause 9.1, is relevantly in the following terms:
“… the Lessee shall not, subject to subclause 9.2, assign … this Lease … without consent of the Lessor such consent not to be unreasonably withheld provided that:-
9.1.1 The Lessee proves to the reasonable satisfaction of the Lessor that the proposed assignee is a respectable, responsible and solvent person or company of sound financial standing of comparable commercial standing to the Lessee …”
On 6 September 2001, the Lessor refused consent to the assignment. On 7 September 2001, Mr Herbert Fischbacher of Mason Sier Turnbull, Mr Blake’s solicitors, wrote to Franklins offering, among other things, to indemnify Franklins if they issued proceedings against the Lessor seeking orders to compel it to consent to an assignment of the Mentone store lease.
A supplementary submission was then made by Mr Blake to the Lessor, which included the offer of further security by way of personal and bank guarantees equivalent to the sum of 12 months rent. On 24 September 2001, the Lessor again rejected the request to assign the lease. Preparations were then made for Franklins, indemnified by Mr Blake, to take legal action against the Lessor to force the lease assignment.
On 16 October 2001, proceedings were commenced against the Lessor by FMS, the applicant, and Mr and Mrs Blake. Directions hearings before Habersberger J were held on 19 October 2001 and 16 November 2001. On 27 or 28 November 2001, Mr Blake was informed by Mr Fischbacher that Franklins had decided to pull out of the litigation and would serve a notice of termination of the Mentone BSA. An injunction restraining Franklins from disposing of the Mentone store was granted on 10 December 2001, but was dissolved on 20 December 2001.
Mr Blake says that he was informed by some contractors, on 13 December 2001, that Coles was seeking tenders to fit out the Mentone store. He gave this information to his solicitor, Mr Alan Foster (after Franklins pulled out of the litigation, Mr Blake changed solicitors), and on 18 December 2001, Mr Blake says he became aware for the first time that Coles “had done a deal” with the Mentone landlord. Mr Blake also gave evidence that he did not have any knowledge of any dealings between Franklins and Coles in relation to Mentone, prior to the termination of the Mentone BSA.
Mr Blake says that had he known of the Lessor/Coles deal on or about 15 October 2001 (the date Mr Blake says he now understands that Franklins knew of that deal), or had he learned of any dealings between Franklins and Coles in relation to the Mentone store while the Mentone BSA was on foot, he would have instructed Mr Fischbacher to take “whatever steps were available to secure the store”. He also says he would have contacted the ACCC himself, or through his lawyer.
Mr Blake says that the Mentone store was very important to him and his business, and that he would have done everything he could to ensure he obtained it.
Under cross-examination, Mr Blake acknowledged that, in general he was aware that a landlord may be able to thwart the sale of a supermarket to an independent by refusing to consent to the assignment of the lease. He also acknowledged that he was aware of the clause in the Mentone BSA that provided that the Lessor’s consent to the assignment of the lease was a condition precedent to completion of the sale. He further acknowledged that by mid-August 2001, it was well-documented in the press that a number of independent supermarket buyers were having difficulty getting consents from landlords because landlords preferred chain operators, namely Coles and Woolworths, as tenants. This was because they believed that having a chain store as a tenant increased the capital value of their property. However, Mr Blake said that he believed that in his case there would be no problems getting an assignment from the Lessor, and on this basis he began preparing for the store refit to ensure that the Mentone store was ready for trading at Christmas.
MR HERBERT FISCHBACHER
As previously indicated, Mr Fischbacher is Mr Blake’s solicitor. His main area of expertise is industrial relations law. However, he is also experienced in commercial transactions and litigation. He was responsible for the conduct of the Supreme Court litigation against the Lessor for both Mr Blake and Franklins, up until 30 November 2001. At that time, the solicitors for Franklins claimed that Mason Sier Turnbull, Mr Fischbacher’s firm, was precluded from acting on behalf of Mr Blake in the litigation against the Lessor.
Mr Fischbacher gave evidence relating to the circumstances in which he sought the consent of the Lessor to the assignment of the Mentone store lease to the applicant. He gave evidence about his communications with Ms Herbert, solicitor for the Lessor, and explained how a number of his calls, seeking assignment of the lease, were ignored or not returned over August and September 2001. He also explained that ABL gave him “excuses” as to why instructions could not be obtained from Mrs Wasser in relation to the assignment request.
Mr Fischbacher then explained how Mr Blake and Franklins had arranged to commence proceedings against the Lessor for unreasonably withholding consent to the assignment, and the course that those proceedings took. As previously indicated, the first directions hearing took place before Habersberger J on 19 October 2001. The Lessor was represented by Ms Gordon. The plaintiffs were represented by Dr Croft SC and Mr Osborne. At that first directions hearing, Habersberger J refused Dr Croft’s application for the matter to be given a hearing date straight away. A further directions hearing was held on 16 November 2001. At that hearing Mr Osbourne appeared for the plaintiffs and Mr Nettle QC and Ms Gordon for the Lessor. Habersberger J indicated at that point that a hearing in December 2001 was impossible and that the earliest a further directions hearing could be held was 15 February 2002, at which time his Honour would consider setting the matter down for trial.
In his examination in-chief, Mr Fischbacher gave evidence about a meeting he had on 19 November 2001 with Ms April Arslan and Mr Roger Stansfield, of Home Wilkinson and Lowry (“HWL”), solicitors for Franklins. Ms Mary Weir, General Counsel for Franklins, was also present by way of telephone hook up.
At that meeting, Mr Fischbacher says that Ms Weir stated that while the “situation” (continuing to try to obtain the consent of the Lessor to assignment) could not go on indefinitely:
·the Mentone store could be kept open post-January; but
·support from Dairy Farm was only week to week and would cease by Christmas 2001; and
·it was apparent that Coles were interested in Mentone.
Mr Fischbacher says he was also informed at this meeting, for the first time, that ABL had indicated to Mr Stansfield that the Lessor was interested in assigning the lease to Coles. However, Mr Fischbacher says that he assumed there was no way Coles could obtain the store.
Mr Fischbacher’s evidence was that during the period between August to late December 2001, he had “no idea” of the existence of the Lessor/Coles deal. He says that had be been told about this deal on or before 15 October 2001, his “whole strategy would have been fundamentally different”. He asserts that the case against the Lessor would have been “much simpler and more powerful” if it could have been shown that the reasons for refusing consent to the assignment were “merely a pretext”. Similarly, Mr Fischbacher says had he known of the “dealings” between Franklins and Coles in relation to the Mentone store, prior to 29 November 2001 (when he says he became aware of Franklins seeking the ACCC’s consent to sell the store to Coles), this would have also “fundamentally” changed his strategy. He says he may have contemplated commencing proceedings against Franklins, in addition to the Lessor. Mr Fischbacher also says he would have “reported” any dealings to the ACCC.
Under cross-examination, Mr Fischbacher acknowledged that he was aware of other independent operators who were experiencing difficulties similar to those of the applicant in obtaining consents to assignments of leases over Franklins’ stores. He also acknowledged that he had “suspicions”, by about mid-October, that Coles was interested in the Mentone store and that the Lessor may have wanted Coles as a tenant. Mr Fischbacher was shown a letter written by him to Mr Blake on 7 November 2001, summarising the progress of the proceedings against the Lessor, where he stated:
“It has been suggested that Metcash take a head lease over the Mentone property and sublease to you. I share your view that, in my opinion, the landlord would not accept this as an alternative to, say, Coles Myer taking the lease.”
He also acknowledged under cross-examination that it was his firm view at that time that Coles were the competition.
MR GERRY MASTERS
Mr Masters was subpoenaed to give evidence by the applicant. He is currently the Managing Director of Coles Myer Supermarkets. Mr Masters was the primary point of contact within Coles for Mr Ian Cornell, the Managing Director of Franklins Limited, over the period of the managed sell-down. During 2001, Mr Masters had various discussions with Mr Cornell about the possible sale of Franklins stores to Coles. Mr Masters’ evidence goes to the existence of the Franklins/Coles deal, and to the November 2001 dealings.
It is fair to say that Mr Masters’ recollection of events in 2001, beyond the general, was not strong. However, his evidence does provide helpful background to Coles’ commercial goals before and during the managed sell-down.
Mr Masters gave evidence that in about mid-2000, Coles had become aware that Franklins was considering quitting the Australian market. It commissioned a merchant banking firm to consider the acquisition of Franklins stores. That project became known as “Project Lincoln”. This led to Coles making an offer to acquire a package of Franklins stores in late 2000/early 2001. That offer was rejected. However, in early 2001, Dairy Farm asked Coles to submit a new offer whereby stores in all States were “cherry picked”. On 16 February 2001, Coles offered to acquire 116 Franklins stores, conditional upon Coles acquiring 21 “core stores”. Mentone was included in the 116 stores, but was not identified as a “core store”. That offer was rejected by Franklins as well.
Mr Masters gave evidence that at some stage after this, Franklins announced the sale of the parcel of stores to Woolworths and announced the JIDA process. Accordingly, Coles appeared to have been “shut out of the deal”. Mr Masters was shown a draft memorandum dated 24 April 2001 from Mr Dennis Eck, the Managing Director of Coles, to Coles Directors. That draft memorandum asked “how did this position develop”. He identified the document as one that had been read by him at the relevant time. The draft memorandum concludes by stating “[f]inally we will open dialogue with the landlords at the appropriate time but mindful of Dairy Farm’s threat”. Mr Masters was not asked to explain what the Dairy Farm “threat” referred to.
Coles continued to express its interest in purchasing Franklins stores following the announcement of the Woolworths sale and JIDA process. Mr Masters recalled that some time after the announcement of the JIDA process, Coles contacted a number of landlords of Franklins stores, expressing an interest in taking on the lease of the store, provided those landlords were “free to deal” with Coles.
Mr Masters referred to an internal Coles memorandum sent to himself, amongst others, from the Coles Property Department. The memorandum was dated 17 May 2001, and indicated that Coles had contacted the landlords of 106 Franklins stores over the preceding 24 hours. The Mentone store was listed as one of the 106 stores. The memorandum stated:
“The overwhelming response from lessors is positive and there appears a genuine desire to further discussions/negotiations with CML [Coles] subject to ACCC, Franklin’s [sic] and CML Board approval.”
Mr Masters referred to other internal Coles documents which indicated Coles’ concern, in May 2001, that it may miss out on acquiring any Franklins stores during the managed exit. Mr Masters explained that Coles continued to have discussions with landlords during this period.
Mr Masters gave evidence that he and Mr Cornell had various discussions about the possible sale of Franklins stores which might be available to Coles. He referred to a number of internal communications in relation to “Project Lincoln”, none of which mentioned the Mentone store specifically. Those communications included a memorandum dated 29 June 2001 from Mr John Kop, the project manager for Project Lincoln, and Ms Rebecca King, an employee in the Coles Property Department, to Mr Masters. The memorandum stated, amongst other things:
“Real estate is continuing to negotiate with landlords of identified stores on the basis of vacant possession. This process is operating separately to any other negotiations that may be taking place.”
Mr Masters said he had no particular recollection of this memorandum.
Mr Masters was subject to wide-ranging and thorough examination by Mr Garratt QC, counsel for the applicant. At one stage, Mr Garratt sought, and was granted, leave to cross-examine Mr Masters.
In relation to the specific dealings between Mr Cornell and Mr Masters, Mr Masters stated that he did not recall Mr Cornell saying the Mentone store was not available to Coles. In fact, he could not recall any specific conversation with Mr Cornell in relation to the Mentone store at all. Nor, strangely, was Mr Masters aware of Franklins giving undertakings to the ACCC. He stated that they formed no part of his thinking when dealing with Mr Cornell.
Mr Masters was unable to explain how the same purchase price as that which Mr Blake had agreed to pay for the Mentone store had also been negotiated by Coles. He was however, taken to an email, sent from Mr Nat Portelli, a senior employee in the Coles Property Department, to him on 10 October 2001. That email stated:
“The owner [the Lessor] continues to support the approach in line with the RDC approved lease offer which also demonstrated our ability to pay up to approximately $4m in good will if so required (remembering Leo Blake’s offer is for $2.3m, which is as communicated by the lessor).”
Therefore, although Mr Masters could not remember how the price for the Mentone store was arrived at, it is clear that Coles was made aware, by the Lessor, of the price the applicant had agreed to pay.
Mr Masters confirmed that Coles’ preference was to acquire stores as going concerns. He said that he would have thought that Coles would not have been able to conclude a deal with a landlord, without having concluded a deal with Franklins. He said he would have thought the two deals would have been done together.
Mr Masters said that in general, due diligence would take place after an in principle agreement had been struck between himself and Mr Cornell. He said due diligence was not used as a price negotiation tool. Mr Masters was shown a bundle of documents. He agreed that the documents appeared to be due diligence reports conducted in relation to the Mentone store. The reports all bore dates of mid-December 2001.
Mr Masters was taken to a document headed “Discussion with I.C. today (23/11/01)”. Mr Masters identified the first page of that document as having been prepared by himself, and the following pages as having been prepared by either Ms King or Mr Kop. The first page noted that Franklins were preparing a submission to the ACCC. That submission would outline that “[d]espite all Franklins’ best efforts there are a group of stores that remain unresolved and this position won’t change” and “Franklins will argue that the best result for all concerned is if they are allowed to sell there [sic] stores to CML”. The note also recorded that Franklins would have a meeting with the ACCC on 27 November 2001, and that “I.C.” (presumably Mr Cornell) would telephone Coles with an update on the evening of 27 November 2001. The note then stated that Franklins believed they would have a response from the ACCC by the middle of the following week, and that “[i]f everything is okay we will start the usual checks and approval processes within the company”.
The following pages of this document began by stating “[t]he purpose of this paper is to set out the current position and the opportunity for CML to participate in the final stage of the Franklins exit from Australia”. The note went on to state:
“3. Franklins’ proposal
· Franklins are proposing that CML acquire a third tranche of stores.
· The third tranche comprises 13 stores with the possibility of a further 2 falling into the third tranche. Of these 13, due diligence has already been conducted on 6.
· If the ACCC agrees to Franklins’ position, due diligence would take place early December.
· The legal documentation for the sale and lease assignment would be completed on or before 21 December, 2001.
…
4.The opportunity for CML
…
· CML and Franklins have agreed to an initial purchase price for the additional 13 stores, totalling $18.2 million, subject to Due Diligence, ACCC, RDC & Board approval.” (emphasis added)
The final page of the document contains an attachment which identifies the Mentone store as one of nine stores in “tranche 3” (another four stores are listed as “other stores” which, when added to the nine stores, may account for the reference in the note to 13 stores). No breakdown of the $18.2 million figure was found in any documents produced by Franklins or Coles.
Under cross-examination, Mr Masters agreed that neither Mr Cornell nor he would have engaged in negotiations concerning Franklins stores unless Mr Cornell was “free to deal” with a particular store. When it was suggested that Mr Cornell told Mr Masters at their meeting in June that Coles should not interfere in the JIDA process by contacting landlords of stores which had been the subject of successful JIDA bids, Mr Masters said he had no recollection of this, but did not deny it either.
MR NICK CARTER
Like Mr Masters, Mr Nick Carter was subpoenaed to give evidence. Mr Carter was employed by Coles in 2001, and worked in Coles’ property division in Victoria. However, he no longer works for Coles.
During the period of the Franklins managed sell-down, Mr Carter was involved with the strategy to contact and negotiate with landlords of Franklins stores directly. Mr Carter sent the original letter of offer to the Lessor on 6 June 2001, as well as the final letter of offer that was signed by the lessor on 29 June 2001. The letter of offer essentially constituted an agreement based upon Coles taking vacant possession of the Mentone store and entering into a new lease. Mr Carter sent out similar letters of offer to other landlords of Franklins stores.
The introduction to the letter was in the following terms:
“We refer to our recent discussions concerning our participation in the Site.
We confirm that it is not our intention that you breach any contractual obligations that you may have in respect of the Site. Nothing in this letter is intended to lead to you breaching those contractual obligations. However, on the basis that you are able to deal with us, we put the following offer to you.”
The letter then goes on to set out the proposed terms and conditions of the arrangement.
Mr Carter was asked about any meetings he had with Mrs Wasser or her legal advisers. He did not have any specific recollections, but believed that there had been at least one meeting. Mr Carter was taken to documents that indicated that discussions between Coles and Mrs Wasser and her advisers had taken place after the original 6 June 2001 letter of offer was sent out, and which led to the terms of the offer being amended.
Mr Carter was taken to a letter, faxed on 18 October 2001, from Coles to Mrs Wasser. The letter stated:
“Further to our recent discussions, I now confirm that Coles Myer will agree to enter into a new lease in the form agreed with you at a Base Rent equivalent to $120 per square metre per annum with a Percentage rental rate applicable of 2%, in the event that Coles Myer acquire the Franklins business at your Mentone store.” (emphasis added)
Mr Carter identified the signature on the letter being that of Ms Kylie Morton, his Personal Assistant, signed on his behalf.
Mr Carter accepted, under cross-examination, that it would be a fair summary of Coles’ position that it was very keen to get the Mentone store.
MR PETER ACTON
Mr Acton is a management consultant and investment adviser retained by the applicant as an expert witness. He gave evidence as to the value of the income stream that would have accrued to the applicant had it succeeded in acquiring the Mentone store in 2001.
Mr Acton assessed the value of the income stream foregone as being between $9.2 million and $9.9 million.
MR ARTHUR HAYES
Mr Hayes gave evidence on behalf of the applicant. He has 46 years experience in the supermarket industry, including as a supermarket owner, as Chief Executive Officer of independent chains of supermarkets, and as the head of a large distributor of groceries.
Mr Hayes’ evidence went to the success of Mr Blake’s supermarket operations. He considered Mr Blake to be a remarkable retailer, and one of the top independent operators in the industry. He noted that Mr Blake has succeeded in both the top end of the supermarket industry, with his Leo’s Fine Food & Wine operations, and in the budget end of the market, with his Maxi Foods supermarket. Mr Hayes said that Mr Blake had an excellent commercial reputation in the supermarket industry, both in 2001 and today. These aspects of Mr Hayes’ evidence were not challenged.
MR ALAN FOSTER
Mr Foster is the applicant’s solicitor and has conduct of the current proceeding. He took over the conduct of the proceeding on behalf of the applicant on 30 November 2001, following Franklins giving notice of termination of the Mentone BSA and termination of the litigation agreement. At that time, as was previously mentioned, Franklins claimed that Mason Sier Turnbull, Mr Fischbacher’s firm, was precluded from acting on behalf of Mr Blake in the litigation against the Lessor.
Mr Foster gave evidence that he first became aware that Coles may have entered into an agreement or an arrangement in relation to the Mentone store on 14 December 2001. He referred to an affidavit he swore in the Supreme Court proceedings on that date, in which he stated:
“At 1.45pm today I was informed by Mr Leo Blake … and verily believe that yesterday he was informed by Shopfitters and Electricians that Coles Myer Limited (or related company) has put out tenders to various contractors to the supermarket industry relating to the refurbishment of the Franklins Mentone store located at 81-93 Mentone Parade, Mentone Victoria. The works are to be carried out between 16 and 21 January 2002.
He informed me and I verily believe that in his discussions with the respective contractors they mentioned that the works were being undertaken under a code name “Project Lincoln.””
The remainder of Mr Foster’s evidence in-chief was directed to some of the details surrounding the conduct of the Supreme Court proceedings during December 2001. He also gave evidence as to the costs incurred in respect of that litigation from 30 November 2001 to 20 December 2001.
Mr Foster was cross-examined as to his evidence in relation to costs. However, it is unnecessary to say anything further about that matter.
MR KERRY JONES
At the time of the Franklins managed sell-down, Mr Kerry Jones was a Commissioner at the ACCC. He was the Commissioner responsible for mergers, and accordingly, had oversight of the Franklins managed sell-down. Mr Jones was subpoenaed by the applicant to give evidence.
The importance of Mr Jones’ evidence is as follows. Assuming that the ACCC had been aware of the Franklins/Coles deal, or the Lessor/Coles deal, what steps, if any, would it have taken? Specifically, would it have refused consent to the sale of the Mentone store to Coles? Accordingly, Mr Jones’ evidence goes to the issue of causation of loss or damage.
In Mr Jones’ evidence in-chief, he outlined certain aspects of the undertakings. He stated that, pursuant to the undertakings, Franklins Limited was required to obtain the prior written consent of the ACCC before selling a store to Woolworths (other than 67 stores that Woolworths had already been permitted to purchase) or to Coles. Furthermore, Franklins Limited was also required to report to the ACCC any development that materially affected the sale of stores in accordance with the undertakings, or might prevent completion of the sale of Franklins stores in accordance with the undertakings. It was required to do so within two business days of Franklins becoming aware of the development.
Mr Jones’ evidence was that the ACCC was very reluctant to give its consent to the sale to Coles or Woolworths of a store assigned for sale pursuant to the JIDA process, unless it became apparent the store could not be sold to an independent.
Mr Jones stated that if there were discussions between Coles and Franklins about the sale to Coles of the Mentone store, in early or mid-August, either as part of a parcel of stores, or on its own, the ACCC was unaware of them. He stated that if such discussions had taken place, they should have been reported to the ACCC as “material developments”, pursuant to the undertakings. However, under cross-examination, Mr Jones agreed that the undertakings did not extend to preventing Franklins from discussing stores with Coles, and that the ACCC was aware this was happening. He also acknowledged that the ACCC always expected that some of the JIDA stores which could not be sold to an independent would ultimately be sold to Coles.
Mr Jones considered that if Coles had informed Franklins that it had “done a deal” with the Lessor on the basis of vacant possession, Franklins would be under an obligation to report this to the ACCC.
Mr Jones readily acknowledged under cross-examination that there was no obligation on the part of Coles to reveal to the ACCC that it had concluded agreements with landlords, save for any local competition issues that may arise from Coles taking over a particular store. Nor was there any such obligation imposed upon landlords.
Mr Jones acknowledged that it was “quite reasonable to think” that the ACCC assumed by November of 2001 that a position had been reached between many landlords and Coles that if vacant possession was available, Coles would take up the lease on the store. Mr Jones said that this seemed to be a logical reason why some landlords were adopting a “hard-nosed attitude” in terms of refusing assignment of leases to independents. He said he could not think of another good reason why a landlord would do this unless it had some sort of arrangement with Coles.
Mr Jones’ analysis accorded with a file note, tendered before me, prepared by Mr Russell Phillips, Director of Mergers and Asset Sales at the ACCC, of a discussion between himself, Mr Jones and representatives of Metcash on 28 November 2001. Mr Phillips worked under Mr Jones. The discussion was generally described as “about the JIDA process and how the process is to conclude”. That file note, dated 3 December 2001, recorded that:
“[i]t is clear to Metcash that Coles has approached landlords and made it known that it is interested in these stores. Landlords would not be so hard nosed if they didn’t have the Coles option up their sleeve.”
The file note also recorded, in response to Franklins’ 23 November 2001 submission requesting permission to offer nine stores, including Mentone, to Coles that:
“Mr Jones indicated that his first preference is to get the nine stores to independents. But if that looks unlikely, he does not see merit in forcing the closure of the stores along with the disruption to trading/competition and employee entitlements. Should this happen, Coles will finish with the stores anyway and so there are costs for no benefits.”
Following this meeting and a meeting between Franklins and the ACCC, Mr Phillips and Mr Jones had a discussion regarding Franklins’ 23 November 2001 submission. The file note of this discussion, also prepared by Mr Phillips and dated 3 December 2001, recorded one of the main points arising as follows:
“If Franklins was put in liquidation, the losers would be Franklins/DFI [Dairy Farm] because it would get nothing for the stores and possibly sued for breach of lease; employees would lose jobs and entitlements; local competition would be disrupted; and small, speciality store owners in the shopping centres would suffer during the closure of the stores. Metcash would also be a loser as it would not get the sales volume from the nine stores. The “winner” would be Coles as it would get the stores for no cost.”
The same file note recorded that:
“It was accepted that refusing consent appears to offer a worse outcome than granting consent IF Franklins/DFI is serious about walking away at the end of January 2002. Metcash will lose either way but competition, employees and specialty store owners are better off if consents are granted (note: the one exception was Belmont, where a sale to Coles is undesirable on local competition grounds).”
Mr Jones agreed that these file notes reflected the ACCC’s views at the relevant time. It is interesting to note that even though the note records that the ACCC had local competition concerns in relation to a store at Belmont, a suburb of Newcastle, Mr Jones gave evidence that the ACCC ultimately gave its consent for this store to be sold to Coles as well, rather than forcing Franklins to close it.
Another file note prepared by Mr Phillips of a discussion held with Mr Jones on 19 December 2001 states that Mr Jones “also decided that Mentone could be offered to Coles if the Court decision on Thursday goes the same way as the Hampton Park decision”. In the Hampton Park case, a landlord was refusing to assign the lease to another independent operator. In that case, Mr Phillips had reported to Mr Jones that the judge had “agreed to listen to case on its merits in January” and that “the Court appeared to have some sympathy for the landlord’s position”.
Mr Jones was also taken to a letter written by Mr Mark Pearson of the ACCC to Mr Blake’s solicitors in response to their submission, made on 2 January 2001, that the ACCC intervene in the sale of the Mentone store to Coles. The letter was dated 8 January 2002. In general terms, Mr Jones indicated that the letter accurately reflected the ACCC’s position at the time. In that letter, Mr Pearson stated:
“the Commission has been aware since early June 2001 that Coles was approaching landlords at locations where it had an interest in operating a store. In fact, it was Coles that informed the Commission of its intended actions. … The Commission formed the view that the approaches made by Coles to landlords were not a contravention of the Trade Practices Act 1974”.
The same letter also stated that the undertakings “do not prevent Franklins from talking to Coles”.
FRANKLINS’ EVIDENCE
MR IAN CORNELL
The evidence of Mr Cornell, Franklins’ principal witness, goes to whether there was any “deal” between Coles and Franklins in relation to the Mentone store prior to December 2001. It also provides helpful background to the circumstances surrounding the managed sell-down.
Mr Cornell was the Managing Director of Franklins Limited between January 1999 and Easter 2002, and was responsible for conducting the managed sell-down. By 2002, Mr Cornell had had 26 years experience in supermarket retailing.
Mr Cornell explained that Franklins had lost money for three out of four years before the year ending December 2000. Following these losses, it was decided that the Franklins’ supermarket business should be sold off. In about July 2000, Dairy Farm unsuccessfully attempted to find an overseas buyer for the business. In late 2000, Mr Cornell had discussions with Aldi, a German owned retailer, about the possibility of purchasing some of Franklins’ stores. Ultimately, these discussions were also unsuccessful.
In about November 2000, Mr Cornell approached the ACCC to try to establish a basis upon which Franklins could be sold domestically. Mr Cornell said that he knew the ACCC would have to approve any sale, by reason of the competition concerns that would arise out of such a transaction.
In December 2000, Mr Cornell had discussions with Coles about buying Franklins stores. Coles made what Mr Cornell considered to be a “ridiculously low offer” for Franklins’ Queensland and New South Wales stores. Mr Cornell said that he thought then that Coles were not seriously interested in buying Franklins’ stores, or were “totally unrealistic” about any possible purchase of stores. At the same time, discussions were progressing with Woolworths for the purchase of Franklins stores.
On 30 March 2001, Dairy Farm and Franklins made a confidential written submission to the ACCC, proposing the sale of Franklins’ stores to the following parties:
(a) 170 stores to independents;
(b) 79 stores to Woolworths; and
(c) 18 stores to Coles or independents.
Twenty stores were allocated for closure under the proposal.
When the matter came on for directions again on 16 November 2001, Habersberger J indicated that a hearing in December 2001 was impossible. His Honour suggested that the parties come back before him for directions on 15 February 2002. Again, there is nothing in the transcript of this second hearing that suggests that earlier disclosure of the Lessor/Coles deal would be likely to have resulted in the obtaining of an early trial date, and it must be remembered that the intervening Christmas period was hardly conducive to a speedy resolution of this matter.
However, the applicant faces a further hurdle. Ultimately, on this limb of the case, it must satisfy me of the likelihood that the Supreme Court not only would have found in its favour against the Lessor, but that it would have done so in a sufficiently timely manner to avoid Franklins simply walking away. Once again, having regard to the evidence which points clearly to Dairy Farm ceasing its Australian operations entirely by no later than January 2002, the prospects of such a timely result in favour of the applicant must be viewed as highly doubtful.
Whatever else may be said about the merits of the applicant’s claim, I am not persuaded that a particular outcome would have been achieved arising from a trial that never took place.
Although the applicant submitted that clause 9.1.1 was susceptible of only one interpretation, and that it was inevitable that the Lessor would have been ordered, at the end of the day, to grant consent to the assignment of the lease, I am unable to accept that contention. I have no idea what the evidence would have been regarding Franklins’ commercial standing at the time the lease was entered into, or indeed, at the time of the proposed assignment. I do not know which of the Franklins’ entities would have been regarded as the appropriate comparator, given that FMS was the leaseholder, but was a non-trading entity, wholly owned by Franklins Limited. It is not clear precisely how the Lessor would have put its case regarding the construction of the relevant clause of the lease. To conclude that, as a matter of probability, the applicant would have been successful, is to engage in conjecture, and not the drawing of legitimate inferences.
The matter is complicated still further by the fact that the Lessor foreshadowed bringing a counterclaim against Franklins alleging various breaches of the lease on its part. Whether or not there was anything to this, or whether it was simply a delaying tactic, I cannot say. What is certain, however, as the history of this case demonstrates, is that complex commercial litigation can take many unforeseeable twists and turns. The reality is that a well-resourced, competently-advised, and highly determined litigant, such as the Lessor, can make it difficult for a party such as the applicant, which was under extreme pressure, to have its case heard and determined within a very short timeframe. It is no answer to say, as the applicant does, that the courts will ensure that no one will be denied justice by reason of the adoption of such tactics. The harsh reality is that delay can work against the interests of plaintiffs, and that fact is well understood by commercially astute defendants. It must be remembered that the rights of plaintiffs to have their cases heard speedily have to be balanced against the rights of defendants to have sufficient time to prepare and present their cases adequately.
Accordingly, the applicant is left to rely, in relation to the lack of disclosure of the Lessor/Coles deal, upon the line of causation through the ACCC. Its case is that had it been informed of that deal by Franklins on or about 15 October 2001, as it ought to have been, the applicant could have passed on this information to the ACCC. The scenario is that upon receipt of this information, the ACCC would have been likely to have blocked the sale of the Mentone store to Coles.
The evidence of Mr Jones, and the documentary evidence of the ACCC, was seriously damaging to this aspect of the applicant’s case. The ACCC had been aware since June 2001 that Coles was approaching landlords of Franklins stores, and in fact Coles had informed the ACCC of its intended actions. Mr Jones acknowledged that at least by November 2001, it was “quite reasonable to think” that the ACCC assumed that a position had been reached between many landlords and Coles that if vacant possession were available, Coles would take up the lease on the store.
Mr Jones acknowledged that the ACCC could not force a landlord to take on a certain tenant. The ACCC had no power to stop Coles and landlords coming to such arrangements, subject only to any local competition concerns. There were no such concerns in the case of Mentone. Even in one case where there had been such concerns, the ACCC had ultimately agreed to the sale. The ACCC was concerned with the “macro” outcome of the managed sell-down, and not with individual transactions.
The reality was that in circumstances where landlords were “digging their heels in”, the ACCC preferred to consent to the sale of those stores to Coles, rather than blocking those sales. The reason was plain. The ACCC, sensibly, did not wish to see stores being closed, with employees losing their jobs, local competition being disrupted, and inconvenience to the public, only to see Coles obtain those stores in any event on a vacant possession basis.
The evidence points strongly against any finding that “confirmation” of what the ACCC already suspected, namely the existence of the Lessor/Coles deal, would have made any difference to the ACCC’s position. I am not persuaded that this would have led the ACCC to refuse consent to the sale of the Mentone store to Coles after 21 December 2001, the date upon which it ultimately gave its consent.
The applicant’s claim in relation to misleading or deceptive conduct fails for the same reason, even if I were to find that the lack of disclosure constituted a contravention of s 52.
CONCLUDING COMMENTS
It needs to be understood that the dealings between the applicant and Franklins during the second half of 2001 took place against a particular background. While Franklins wished to sell the Mentone store to the applicant, and did what it could to facilitate that sale, the Lessor adamantly refused to consent to the assignment of the lease. In part, that was because the Lessor had already entered into a deal with Coles, which would either take vacant possession of the property, or buy the business from Franklins.
Although the right of the Lessor to refuse consent to the assignment was, at best, unclear, the Lessor almost certainly knew that Franklins was pressed for time. The Lessor’s legal advisers, ABL, Mr Nettle QC and Ms Gordon, must have appreciated that anything other than an immediate hearing of the case brought against their client, would work in its favour. Franklins would then be forced either to seek the ACCC’s consent to sell the Mentone store to Coles, or simply close it down. Either way, Coles would get the Mentone store by reason of its deal with the Lessor, and the Lessor would achieve its goal of having a “major” as its tenant.
Franklins decided, following the second directions hearing before Habersberger J on 16 November 2001, and following the final refusal by the Lessor to consent to the assignment, that time had simply run out. There was no realistic prospect, so far as it was concerned, of obtaining orders forcing the Lessor to give its consent. I am not persuaded that there was, at that stage, or indeed at any stage, a “backroom” deal regarding the sale of the Mentone store between Franklins and Coles. The fact that Franklins made a final approach to the Lessor in late November indicates to me that it was still genuinely attempting to procure the Lessor’s consent at that time.
It is possible that Franklins acted prematurely, and in breach of implied contractual obligations, by seeking the ACCC’s consent to sell the Mentone store to Coles before it formally terminated both the Mentone BSA and the litigation agreement. It may also be that Franklins breached implied contractual obligations by not disclosing the knowledge that some of its staff had of the Lessor/Coles deal. However, I am not satisfied that the disclosure of these matters to the applicant would have been likely to have made any difference to the ultimate fate of the Mentone store.
The evidence before me suggests that Mr Blake is an excellent supermarket retailer. Had there been sufficient time to litigate the matters in dispute between himself and the Lessor, he may well have succeeded in establishing that the Lessor had no right to refuse consent to the assignment of the lease.
However, the reality is that Coles, which had earlier missed out on obtaining a slice of the Franklins business, and was determined to remedy that situation, and the Lessor, which was equally determined to have a “major” as a tenant, exploited the time pressure, extreme in the end, that Franklins was under to exit Australia. Neither Coles nor the Lessor had any obligations preventing them from interfering with the JIDA process. The applicant was simply outflanked by a well advised, and well resourced, Lessor, determined to secure Coles as its tenant, and not an independent. There was nothing that Franklins could realistically have done, given the time constraints it was under, to change that situation.
For the reasons set out above, the application must be dismissed, with costs.
I certify that the preceding two hundred and fifty-four (254) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg. Associate:
Dated: 12 May 2006
Counsel for the Applicant: Mr R.M. Garratt QC and Mr M.K. Moshinsky Solicitor for the Applicant: Foster Harris Counsel for the Respondent: Mr M.J. Colbran QC and Mr G.J. Fitzgerald Solicitor for the Respondent: Home Wilkinson Lowry Dates of Hearing: 22, 23, 24, 25, 26 and 29 August 2005 and 2, 5, 6, 7, 8, 15 and 16 September 2005 Date of Judgment: 12 May 2006
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