Dymocks Holdings Pty. L.td and ORS. v Top Ryde Booksellers Pty. Ltd.

[2000] NSWSC 795

CITATION:	DYMOCKS HOLDINGS PTY. L.TD & ORS. V. TOP RYDE BOOKSELLERS PTY. LTD. & ORS [2000] NSWSC 795
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 4913/99
HEARING DATE(S):	03/08/00
JUDGMENT DATE:	11 August 2000
PARTIES :	Dymock's Holdings Pty. Ltd. - 1st plaintiff Dymock's Pty. Ltd. - 2nd plaintiff Dymocks Franchise Systems (NSW) Pty. Ltd. - 3rd plaintiff Top Ryde Booksellers Pty. Ltd. - 1st defendant Brandway Pty. Ltd. - 2nd defendant Hughes Products Pty. Ltd. - 3rd defendant Tony Ayaz - 4th defendant Rojoma Pty. Ltd. - 5th defendant Red Rocks Pty. Ltd. - 6th defendant Librus Pty. Ltd. - 7th defendant
JUDGMENT OF:	Hodgson CJinEq at 1

COUNSEL :	P. Graham QC with D.L. Williams for plaintiffs G. Burton for 3rd, 6th & 7th defendants
SOLICITORS:	Deacons Graham & James, Sydney for plaintiffs Miller Goddard, Sydney for 3rd, 6th & 7th defendants
CATCHWORDS:	DAMAGES - Franchisees entitled to such compensation as would put them in position they would have been in if a website had remained an asset of a certain fund - Franchise agreements provide option for renewal on terms of Franchistor's then standard form of agreement - Franchisor introduces new form of agreement precluding any claim by Franchisees to website - Whether damages thereby limited to period of current agreements.
DECISION:	See par.24 of judgment

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

CORAM: HODGSON, CJ in Eq.

Friday 11th August 2000

NO. 4913 OF 1999
DYMOCKS HOLDINGS PTY. LIMITED & ORS. V. TOP RYDE BOOKSELLERS PTY. LIMITED & ORS.

JUDGMENT

1   On 9th June 2000, pursuant to reasons for judgment given on 15th May 2000, I made orders including the following orders 1, 3, 4 and 5:

1. Declare that the second plaintiff is the legal and beneficial owner of the following items, subject to a charge or charges as described in order 3 in favour of the third, sixth and seventh defendants and each of them:
(a) the URL "dymocks.com";
(b) the URL "dymocks.com.au";
(c) the domain name " ";
(d) the domain name " ";
(e) the world wide web site accessible by the said domain names; and the web pages and constituent text, graphics and code on the web site.

2. ...

3. Declare that the items in order 1(a)-(f) are charged with the payment to the third, sixth and seventh defendants and each of them of such amounts as declared and ordered to be paid to those defendants or any of them pursuant to the orders 4 and 5, and that the said defendants have no other right or interest in such items.

4. Declare that the third, sixth and seventh defendants and each of them are or is entitled to such compensation as would put them in the position which they would have been if the web site referred to in order 1 (e) had remained an asset of the Advertising Fund, subject to payment of a 6 per cent franchise fee to Dymock's.

5. Order an inquiry before Hodgson CJ in Eq in respect of the amount of compensation payable to the third, sixth and seventh defendants pursuant to the declaration in 4 above.

2   Before the enquiry contemplated by Order 5 proceeds, the parties have sought determination of the following preliminary issues:

1. For what period should the 3rd defendant be compensated so as to put it in the position in which it would have been in if the Dymock's website had remained an asset of the Advertising Fund subject to payment of a six per cent franchise fee payable to Dymock's.

2. For what period should the 6th defendant be compensated so as to put it in the position in which it would have been in if the Dymock's website had remained an asset of the Advertising Fund subject to payment of a six per cent franchise fee payable to Dymock's.

3. For what period should the 7th defendant be compensated so as to put it in the position in which it would have been in if the Dymock's website had remained an asset of the Advertising Fund subject to payment of a six per cent franchise fee payable to Dymock's.

OUTLINE OF FACTS

3   As noted in my judgment, the current agreement between the third plaintiff (the franchisor) and the third defendant (Hughes) provided for a term of five years from 1st April 1997, and a renewal term of five years. Clause 1C of that agreement dealt with renewal, in the following terms:

1C. Subject to the provisions of this paragraph, the Franchisee shall have an option (exercisable only by written notice delivered to the Franchisor less than nine (9) months, but more than six (6) months, prior to the end of the Term) to renew the Franchise for one (1) further period, the duration of which shall be the Renewal Term, if and only if:

(a) the Franchisee has been throughout the Term in full compliance with this Agreement, the lease of the Premises and all other contracts between the Franchisor and the Franchisee and all other agreements and obligations with other parties relating to or incidental to the Franchise;

(b) the Franchisee enters into the Franchisor's then current Franchise Agreement (which may contain terms different from those herein contained including the then current Franchise Fees and Advertising Contributions, but which shall not contain an option to renew and shall not oblige the Franchisee to pay a further Initial Franchise Fee) unless, at the sole option of the Franchisor, this requirement is waived by written notice from the Franchisor, in which case the terms hereof (except the option to renew) shall remain in force for the Renewal Term;

(c) the Franchisee has paid to the Franchisor all outstanding amounts due to it;

(d) the Franchisee is able to maintain possession of the Premises or alternate premises which have been approved by the Franchisor in writing and which are obtained in accordance with Clause 2C hereof;

(e) the Franchisee refurbishes the Premises to meet the then current standards and specifications for DYMOCKS stores; and

(f) the Franchisee shall pay to the Franchisor its full cost of renewing the Franchise, including but not limited to legal fees incurred in the preparation of all necessary documents and stamp duty on such documents.

For the purposes hereof the Franchisee shall be deemed to have irrevocably elected not to renew the Franchise (and his option shall thereupon terminate) if he fails to execute and return to the Franchisor its then standard Franchise Agreement referred to in paragraph (b) hereof and other documents required by the Franchisor for a renewal within one (1) month after the Franchisor has delivered same to the Franchisee on receipt of the Franchisee's notice exercising the option.

Continuation . If the Franchisee continues to operate the Franchise Premises with the express or implied consent of the Franchisor, following the expiration or termination of the Franchise Agreement, regardless of the reason for expiration or termination, said continuation will be construed to be a month-to-month extension of the Franchise Agreement. Notwithstanding any other provisions of this Agreement the Franchise Agreement shall then be terminable by either party upon thirty (30) days written notice. Otherwise, all provisions of the Franchise Agreement shall prevail while operations continue.

4   The current agreement between the franchisor and the sixth defendant (Red Rocks) provided for a term of five years from 26th October 1997, with no options for renewal. 5   The current agreement between the franchisor and the seventh defendant (Librus) provided for a term of five years to 18th November 2002, and a renewal term of five years. Clause 1C of that agreement was in the same terms as cl.1C of the Hughes agreement. 6   The Dymocks’ standard franchise agreement in use as at 7th November 1996, and thereafter up to the date of the above agreements, also contained a clause to the effect of cl.1C. 7   Dymocks has put on evidence concerning the exercise of options by franchisees since 1st January 1991. Out of 84 franchise options that have been capable of exercise since that time, 55 have been exercised and 29 have not. Out of the 55 franchisees who exercised their option, 19 paid for a further option to be granted at that time. 8   At some time prior to 18th November 1999, Dymocks adopted a new standard form of franchise agreement. Clause 1.1(35) of that standard form contains a definition of “Dymocks Web Site” as follows:

“Dymocks Web Site” means any Web Site from time to time operated by a Member of the Dymocks Group or its nominee located at an address accessible on the Internet through the World Wide Web

9   Clause 2.1(9) contains an acknowledgment by the franchisee in the following terms:

2.1(9) the Franchisee has no legal or equitable interest of any nature or description whatever in:
(a) any Dymocks Web Site;
(b) the methodology or development tools used for developing any Dymocks Web Site;
(c) material which is incorporated into or which has been used in the course of developing any Dymocks Web Site;
(d) any business conducted through a Dymocks Web Site; or
(e) any revenue or other consideration derived from the operation or disposal of or any other dealing with any Dymocks Web Site.

10   Clause 2.2(3) contains an acknowledgment by the franchisee in the following terms:

2.2(3) The Franchisee and the Guarantor acknowledge that:-
(a) any Member of the Dymocks Group or its nominee or nominees is entitled for its own benefit absolutely, to operate or directly or indirectly hold or dispose of an equity interest in an entity which operates:-
(i) a Dymocks Web Site;
(ii) a facility for home shopping by telephone, television, computer or
other means including the facility for telephone shopping operated under the name "Booktel";
(b) the existence and operation of one or more Dymocks Web Sites or facilities for home shopping provides a benefit to the Franchisee in that it increases brand awareness by members of the public in the Dymocks name and brand.

11   Clause 9.18 of that standard form is in the following terms:

9.18 The Franchisee and the Guarantor without the prior written consent of a Member of the Dymocks Group given after the date of this Agreement, must not at any time hold any direct or indirect interest in a Web Site which incorporate or includes the word “Dymocks” or any variation or likeness of that name.

12   The principal of Hughes has given evidence, which I accept, that it paid a substantial fee to Dymocks when it acquired its agreement and option in 1997, and that it is and always has been its intention to exercise its option. Similar evidence has been given by the principal of Librus, and I accept that evidence also. Both of these persons say that, if Dymocks had sought to exclude rights to the website from any renewal of their term, they would have vigorously opposed this.

SUBMISSIONS

13   Mr. Graham QC for Dymocks has provided the following written submissions:

1 There is a firmly established rule that, in an action for breach of contract, a defendant is not liable in damages for not doing that which he or she has not promised to do (per Mason C. J. and Dawson J. in The Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64 at 91.6).
2. In the case of a breach of contract a plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach (Hadley v Baxendale; see also The Commonwealth of Australia v Amann Aviation Pty Limited at 91.9-92. 1).
3. If it be right to suppose that the loss of the prospect of securing a renewal of a contract was within the contemplation of the parties as a probable result of the breach, then, notwithstanding the principle stated in paragraph 1, a plaintiff is entitled to compensation which takes into account the value of the loss of the prospect of securing a renewal of the contract (The Commonwealth of Australia v Amann Aviation Pty Limited (per Mason C.J. and Dawson J. at page 92.2).
4. What was in the contemplation of the parties depends upon a consideration of the terms of the contract in the light of the matrix of circumstances in which it was made (The Commonwealth of Australia v Amann Aviation Pty Limited per Mason C.J. and Dawson J. at page 92.4).
5. The parties cannot have "necessarily contemplated" the loss of the prospect of renewal of the franchise agreement as the probable result of a fundamental breach on the part of Dymock's of the internet site contract of November 1996-January 1997.
6. Where compensation is sought in respect of the deprivation of a possible benefit which is dependent upon the unrestricted volition of another it may be impossible to say that any assessable loss results from the breach (per Mason C.J. and Dawson J in The Commonwealth of Australia v Amann Aviation Pty Limited at page 93.4).
7. Unlike Amann , the present case is not one where the capital costs likely to be incurred by a successor franchisee would be such as to lead to such a franchisee insisting upon the payment of a large financial reward by the franchisor to the franchisee to compensate the franchisee for its heavy initial expenditure. (See Amann page 94.2.) If Dymock's changes from one franchises to another it gets paid for the new franchise, it does not have to, as in Amann, pay substantial amounts to obtain a new "franchisee".
8. In the present case the contract was to the following effect:-
In consideration of the franchisee paying $1,250 to the third defendant, otherwise payable as local area advertising, to the Advertising Fund, and such other sums as may from time to time be levied pursuant to the November 1996 arrangement, the franchisor promised to treat the internet site as an asset of the Advertising Fund subject to the payment of a 6% franchise fee to Dymocks.
(see judgment paragraphs 59-62).
9. As His Honour said (judgment paragraph 63):-
"In my opinion, contrary to the submission of Mr. Burton, the arrangement did not give the franchisees any additional interest in the web site, or in the Dymocks name. The only interest given to franchisees was an interest coextensive with their interest in the Advertising Fund, and the Advertising Fund's interest in the web site, subject to the payment of a franchises fee to Dymocks for use of the name. This in turn means that franchisees would receive the benefit of the arrangement only for so long as their franchises continued ." (the emphasis is ours)
10. In the instant case Dymock's breach in respect of the internet site did not deprive the defendant franchisees of an opportunity to perform their franchise agreements. It did not cut short the duration of any of the franchise agreements or qualify in any way any rights or expectations of renewal.
11. In any event, the options for renewal of the defendant franchisees' franchise agreements were conditioned upon their acceptance of new franchises in the franchisor's then current form (see Exhibit PX1, Clause 1C(b) on page 10). The then current form at the time of the commencement of the proceedings was that indicated in Exhibit ADF1 to the affidavit of Andrew Dymock Forsyth of 19 May 2000 being an agreement dated 18 November 1999 and that agreement acknowledged the lack of any interest by franchisees in the Dymock's internet site. Even if in exercising its powers to alter the standard form of franchise agreement, Dymock's was bound to act reasonably and in good conscience (see Renard Constructions (NE) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234 at 268), the terms of the contract in respect of Dymock's power to make changes were so explicit and so extensive that to insert the subject provisions in relation to the internet site could not constitute conduct which was lacking in reasonableness and good conscience. (NB the express power to increase the franchise fees payable and to increase the advertising levies payable.)
In any event the changes which were made were not unreasonable and lacking in good conscience given the conformity of those changes to the wishes of the overwhelming majority of franchisees, the relatively trivial contribution made by franchisees to the cost of the internet site ($1,250 per franchise), the lack of profitability of the internet site and the lack of any provision conferring rights in respect of the internet site in the franchise agreements containing the relevant options.
12. Furthermore, the considerations referred to by His Honour in paragraph 59 may cut down the franchisees rights to receive the benefit of the arrangement in any event.

14   In amplification of the second paragraph of paragraph 11 of those submissions, Mr. Graham pointed out that the consideration was even less than $1,250.00, because it was merely the use of $1,250.00 for one purpose rather than another. 15   Mr. Burton, for Hughes, Red Rocks and Librus, submitted that if the website had remained an asset of the advertising fund, as contemplated by Order 4, then Dymocks would not have been at liberty to defeat the rights of the franchisees by adopting a new form of franchise agreement: in effect Dymocks would have been bound, by the agreement or arrangement which it made, not to do so. The general words of cl.1C were not sufficient to overcome the express provisions of the arrangements: see Grant v. John Grant& Sons Pty. Ltd. (1954) 91 CLR 112. 16 Mr. Burton submitted that if Dymocks otherwise had the legal right to adopt a new form and insist on its use for the renewal period, and thereby defeat the rights of franchisees, to do so would be unconscientious and not in good faith: see Muschinski v. Dodds (1985) 160 CLR 583 at 613, 619-620; Alcatel Australia Ltd. v. Scarcella (1998) 44 NSWLR 349 at 363-9; and Stern v. McArther (1988) 165 CLR 489. 17 In 1996, when Dymocks obtained payment of $1,250.00 from each of the franchisees, and again in 1997 when Dymocks obtained payment from Hughes and Librus for their franchises and options, Dymocks did not disclose that it was going to seek to take back the website for its own benefit, or change the standard form of the franchise agreement in order to achieve this. Mr. Burton submitted that Dymocks was accordingly estopped from doing so: see The Commonwealth v. Verwayen (1990) 170 CLR 394; Waltons Stores (Interstate) Ltd. v. Maher (1988) 164 CLR 387. The silence would be misleading conduct, if Dymocks were subsequently were to seek to deprive the franchisees of those rights: see Demagogue Pty. Ltd. v. Ramensky (1992) 39 FCR 31; Winterton Constructions Pty. Ltd. v. Hambros Australia Ltd. (1992) 39 FCR 97; Warner v. Elders Rural Finance Ltd. (1993) 41 FCR 399. Mr. Burton also referred to Taylor v. Johnson (1983) 151 CLR 422, and Pierce Bell Sales Pty. Ltd. v. Frazer (1973) 130 CLR 575. Mr. Burton also referred to s.51AC of the Trade Practices Act, which would be in force by 2002. 18 In reply, Mr. Graham referred to the very wide words of cl.1C, which referred inter alia to freedom to increase the franchise fee and to change provisions concerning the advertising fund. The only restriction on Dymocks’ power was that it had to be exercised by introducing a standard form, that is, a form applicable to all. The adoption by Dymocks of the new form was reasonable, as shown by the circumstance that no-one else was objecting to it.

DECISION

19   Mr. Graham’s submission that there should be no damages for any period beyond 2002 depends upon the proposition that, even if the arrangement referred to in Order 4 had been in place and continuing with the general support of franchisees, Dymocks could and would, prior to 2002, have adopted a standard form like that which has in fact been adopted, and would thereby progressively have excluded franchisees, including Hughes and Librus, from any claim relating to the website after the end of their existing terms. Mr. Graham submitted that Dymocks was not prevented from doing so by the terms of the arrangement, because that arrangement only gave rights to the advertising fund, the franchisees had rights to the advertising fund only so long as their franchises lasted, and those with options had the right to continue their franchises only on the terms of Dymocks’ then standard form. 20   However, the fact is that, when the arrangement was made, although options held by franchisees were subject to cl.1C, the promise made by Dymocks that the website would be the property of the advertising fund was not qualified by any reference to Dymocks’ power to change the terms of franchises. The question is, how would Dymocks’ promise reasonably have been understood, in all the circumstances, including the circumstance that franchise agreements contained cl.1C? In my opinion, Dymocks’ promise would reasonably have been understood to mean that the website would continue to be the property of the advertising fund, and that each franchisee would have the benefit of this promise during their current and renewal terms, notwithstanding the existence of cl.1C. 21   In my opinion, this is confirmed by the consideration that, on the hypothesis being considered, there would have been about 80 franchisees having rights to the advertising fund, the burden of supporting the Dymocks website, and the benefit of the absence of unrestricted competition from the website. If Dymocks then at some stage introduced the new franchise form, it would have meant that any new franchisees coming in thereafter would have had no right relating to the web site, and no obligation to share the burden of the web site. To ensure that existing franchisees did not have a greater burden than contemplated by the arrangement, the share of the burden which would otherwise have been borne by the new franchisees would presumably have to be taken up by Dymocks. There may be some question as to whether this would be by loan or some other contribution; but however it was done, progressively the burden of the web site would be taken over by Dymocks, and the continuing franchisees would progressively be deprived of the benefit of a website being supported by franchisees and run for the advertising fund for the benefit of the franchisees. 22   In any event, if Dymocks had wished, when it made the arrangement, to have the right to defeat franchisees having the benefit of the arrangement during their renewal terms, in my opinion there would need to have been some qualification to the express terms of the arrangement which Dymocks made. 23   Accordingly, in my opinion, Hughes and Librus are prima facie entitled to be compensated on the basis that the website remained an asset of the advertising fund to 2007; and Red Rocks is entitled to be compensated on the basis that it remained an asset of the advertising fund to 2002. There may need to be some adjustments to this. There may need to be some deduction for the chance that the period could be less, because of the chance of Dymocks refusing to continue to franchise the use of its name by the website, pursuant to a decision arrived at bona fide having regard to the interests of the franchisees as well as its own interest; the chance of all franchisees agreeing to abandon the arrangement; and the chance of Hughes and Librus not exercising their options. There may also need to be some addition, for the chance of Dymocks agreeing to a further renewal of the terms, on the same terms as previously. 24   Subject to those possible adjustments, I answer the questions posed as follows:

1. 1st April 2007
2. 26th October 2002
3. 18th November 2007.

I will order separate determination of those questions.
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Last Modified: 09/27/2000