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

[2000] NSWSC 390

CITATION:	DYMOCKS HOLDINGS PTY. L.TD & ORS. V. TOP RYDE BOOKSELLERS PTY. LTD. & ORS [2000] NSWSC 390 revised - 18/05/2000
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 4913/99
HEARING DATE(S):	17/04/00 to 19/04/00
JUDGMENT DATE:	15 May 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:	CONTRACT - Franchise agreement - Moneys paid by franchisees in response to memoranda from franchisor - Whether enforceable contract - Certainty of terms - Remedy sought by some but not all franchisees - Whether contract frustrated - Specific performance not available - Enquiry as to damages ordered - TRUST - Moneys paid by franchisees to finance setting up of internet website - Whether resulting trust of proportionate share of website - Whether excluded by intention shown in comtemporary documents.
LEGISLATION CITED:	Nil
CASES CITED:	Muschinski v. Dodds (1985) 160 CLR 583 Baumgartner v. Baumgartner (1987) 164 CLR 137 Grant v. John Grant & Sons Pty. Ltd. (1954) 91 CLR 112 Martin Baker Aircraft Ltd. v. Canadian Flight Equipment Ltd. (1955) 2 QB 556 at 582
DECISION:	See pars.72, 73 &74 of judgment

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

CORAM: HODGSON, CJ in Eq.

Monday 15th May 2000

NO. 4913 OF 1999
DYMOCK'S HOLDINGS PTY. LIMITED & ORS. V. TOP RYDE BOOKSELLERS PTY. LIMITED & ORS.

JUDGMENT

1 The second plaintiff, Dymock's Pty. Limited, is the registrant with Network Solutions Inc. of internet domain name "dymocks.com" (since 2nd September 1996), and the registered licensee holder with Internet Names World Wide of internet domain name "dymocks.com.au" (since the mid-1990s). The third plaintiff, which I will call the Franchisor, is a company which grants franchises for the use of the Dymocks name and systems. The second and third plaintiffs are wholly owned subsidiaries of the first plaintiff, which I will call "Holdings". I will refer to the plaintiffs collectively as "Dymocks" or "the Dymocks group". 2 The defendants are franchise operators pursuant to contracts with the Franchisor. The third defendant (which I will call "Hughes"), the sixth defendant (which I will call "Red Rocks"), and the seventh defendant (which I will call "Librus") claim an interest in the internet site associated with the names "dymocks.com" and "dymocks.com.au". The other defendants have reached agreement with the plaintiffs, and are no longer involved in the proceedings. 3 In these proceedings, the plaintiffs claim declarations that Dymock's Pty. Limited is the legal and beneficial owner of the domain names and of the associated website, and of the material at that website. By their Cross-claim, Hughes, Red Rocks and Librus claim an interest in the website and other relief on the basis of trust, estoppel, Trade Practices Act and Fair Trading Act.

FRANCHISE AGREEMENTS

4   It is convenient first to set out the relevant terms of the franchise agreements between the Franchisor and the relevant defendants. Each of such agreements contains the same terms except for material relating to such things as the premises to which the agreement relates, the term, the commencement date, the renewal term, the nominated manager, and the initial franchise fee. 5   The agreement between the Franchisor and Hughes concerns premises at Hurstville; provides for a term from 1st April 1997 for five years, and a renewal term of five years; and specifies the nominated manager as Neil Hughes. This agreement replaced an agreement with Hughes concerning the same premises made on 1st April 1992. 6   The agreement between the Franchisor and Red Rocks concerns premises at North Rocks; provides for a term from 26th October 1997 for five years, with no option for renewal; and specifies the nominated manager as Dierk Mohr. This agreement replaced an agreement with Red Rocks concerning the same premises made on 22nd October 1993. 7   The agreement between the Franchisor and Librus concerns premises at Parramatta; provides for a term of five years to 18th November 2002, and a renewal term of five years; and it specifies the nominated manager as James Harrington. Previously, another company associated with Mr. and Mrs. Harrington, namely Fomake Pty. Limited ("Fomake"), had an agreement with the Franchisor relating to premises at Eastwood, which was due to expire on 9th January 1999. That agreement was cancelled when Fomake sold the business at Eastwood in 1997, and the current licence agreement was entered into in connection with the purchase by Librus of the business at Parramatta. 8   The recitals in each agreement refer to the development by the Franchisor and related companies of the Dymocks system for retail sale of books, and their proprietorship of trade marks and names including the name Dymocks. 9   Clause 1B of each agreement provides for the grant by the Franchisor, and the acceptance by the particular Franchisee under the agreement, of a non-exclusive franchise and right to use the marks and the Dymocks system for the term of the agreement at the identified premises. 10   Clause 4A provides for an initial franchise fee, which is a lump sum specified in a schedule to the agreement. Clause 4B provides for a monthly franchise fee, the rate of which is set out in a schedule to the agreement. In each case, the rate is 7.5% (reducible to 6% on timely payment) of the gross revenue from sales of products from approved suppliers; and 10% (reducible to 8.5% on timely payment) of the gross revenue from sales of products from other than approved suppliers. 11   Clause 4C relates to payments required by the Franchisee for advertising and promotion. Its terms are important for this case, and I will set them out in full.

4C. ADVERTISING AND PROMOTION
(a) The Franchisor shall, for the purpose of conducting the Advertising Fund, establish a separate bank account and shall operate such account to pay the costs of developing, publishing, operating and administering advertising, public relations and promotional material and programs in such manner as the Franchisor, in its sole discretion, deems appropriate for the benefit of all the DYMOCKS stores (whether franchised or not). On winding up of the Advertising Fund each such franchisee and company-owned store is to have a proportionate interest in the Advertising Fund after payment of monies expended pursuant to this Clause equal to the proportion to which its total Advertising Fund contributions for the preceding Accounting Month is a proportion of the aggregate Advertising Fund contributions for that Accounting Month.

(b) The Franchisee shall contribute to the Advertising Fund by the seventh (7th) business day following each Accounting Month the Advertising Contribution. The Franchisor agrees to apply all such amounts exclusively for the development and publication of DYMOCKS advertising and promotions, including such advertising agency fees, public relations expenses and reasonable overhead and administrative costs (including costs of materials, employees' salaries and on costs, and the cost of printing promotional literature and stationery) as the Franchisor may incur in connection with the administration of the Advertising Fund.

(c) The Franchisor may at its sole discretion from time to time advance monies, with interest payable at the Australian Merchant Bankers Bill Rate (90 days) plus 2% to the Advertising Fund at the sole discretion of the Franchisor and repayment of such monies shall be a proper payment of advertising expenses pursuant to this Clause. The Franchisee acknowledges and agrees that the total contributions to the Advertising Fund need not be spent in the year in which such contributions are received, and that a reserve may be accumulated as seen fit by the Franchisor, in the Advertising Fund, and further acknowledges that upon the termination of this Agreement he shall not be entitled to claim any part of the monies standing in the Advertising Fund.

(d) The Franchisee acknowledges and agrees that the Franchisor is entitled to administer the Advertising Fund as it deems appropriate and is not obliged to expend a proportionate part of the contributions in any area or on behalf of any particular Franchisee. The Franchisor hereby agrees that no monies in the Advertising Fund shall be invested in or lent to the Franchisor or any company related thereto or invested in any prescribed interest unless such monies are secured by bank guarantee and attract interest at not less than the then current commercial interest rate provided that nothing herein shall prohibit payment of costs and expenses or repayment of loans properly made pursuant to this Clause.

(e) The Franchisor shall be entitled to delegate its responsibilities contained in this Clause to one or more designees of its choosing. The Franchisor agrees to keep a proper set of books of account in relation to monies paid to it for Advertising Fund contributions and to accurately maintain them at all times and to ensure that such books of account are audited (at the cost of the Advertising Fund) at the end of each financial year ending 30th June by a registered company auditor and to send or cause to be sent by post to the Franchisee a copy of the profit and loss statement and balance sheet of such books of account within four (4) months of the end of the financial year to which such accounts relate.

(f) In addition to contributing to the Advertising Fund as set forth above, the Franchisee agrees to participate in all other sales and promotional activities as the Franchisor may reasonably require and shall promptly pay the costs of such programs upon demand.

(g) Further the Franchisee shall promote and advertise the Business in his local area strictly in accordance with standards and procedures set forth in the Confidential Operations Manual and shall within each twelve month period expend not less than the Local Advertising Requirement on such local promotions and advertising and shall provide evidence of such expenditure each month to the Franchisor.

(h) The Franchisor may by notice in writing to the Franchisee require the Franchisee not to use and/or remove any advertising or promotional material that has not been approved as aforesaid provided that if such direction is not complied with immediately the Franchisor or its agents may forthwith enter the Franchisee's premises or any other premises where they reasonably believe such material to be and remove same.

12   In a schedule to the agreement, the Advertising Contribution referred to in cl.4C(b) is fixed at 2% of gross revenue; and the Local Advertising Requirement referred to in cl.4C(g) is fixed at 1% of gross revenue. 13   Clauses 5A-5S contain covenants by the Franchisee. Clause 5J deals with the Dymocks names and marks, in the following terms:

5J. The Franchisee acknowledges that the Franchisor is, or may become, the owner or licensed user of the Marks and that the Franchisee's right to use them is derived solely from this Agreement. Such right is limited to the operation of the Business in accordance with this Agreement. The Franchisee agrees not to contest or oppose, nor to assist anyone else to contest or oppose, the Franchisor's application for or registration of the Marks as trade or service marks, business or company name. The Franchisee agrees that his usage of the Marks and any goodwill established thereby shall ensure to the exclusive benefit of the Franchisor. The Franchisee and Guarantor further agree that after the termination or expiration of the Franchise they will not directly or indirectly at any time or in any manner identify any premises or any other business as a franchise, or themselves as a franchisee of, or otherwise associated with, the Franchisor; nor will he use in any manner or for any purpose any of the Marks or any imitation or likeness thereof.

14   Clause 9C provides for termination by the Franchisor for breach. Clause 9C(b) treats as fundamental breaches of contract the permission by the Franchisee of any one or more of a number of specified acts, including the following:

9C(b) ...
(24) uses the Franchisor's name, trade or service marks or logos at other than the Franchise Premises;
(25) uses the Franchisor's name, trade or service marks or logos in combination with other names or words in the corporate or business name of the Franchisee;
...

15   Clause 10B prohibits assignment of the franchise by the Franchisee except with the prior written approval of the Franchisor, which may be granted on conditions including the following:

10B ...
(c) the Franchisee executing a general release of the Franchisor, its officers, directors and employees from all claims, rights and actions that it may have against the Franchisor in respect of this Agreement;
...

HISTORY

16   The name "Dymocks" has been used by various companies in the Dymocks group since about 1920. In the mid-1980s, the Dymocks group began to grant franchises; and now there are franchises in relation to over eighty stores. In 1995, the Dymocks group became interested in establishing a presence on the internet. There is in evidence a memorandum dated 25th May 1995 from the then Managing Director of the Dymocks group to franchisees, advising that the policy was to be adopted that no Dymocks store should set up a connection to the internet without the written authority of the Franchisor. A page to that effect was sent on 7th June 1995 to franchisees for inclusion in the Franchise Operations Manual. 17   On 23rd August 1995, a memorandum was sent to all stores from the then General Manager of Retail Operations for the Dymocks group, Tony Aduckiewicz. This memorandum advised that the company's interim policy concerning connection to the internet was that Dymocks would create a home page which would be paid for by the Franchisor; and that people browsing would be able to click beyond the home page to a stores' page. 18   On 17th November 1995, a further memorandum was sent to all stores from Mr. Aduckiewicz offering participation in a company, controlled by franchise owners, to sell books and associated products on the internet under the Dymocks brand. This memorandum sought bids for a 25% share in such a company. No such bids were subsequently made. 19   On 16th January 1996, a memorandum was sent to all franchise owners and all staff from Mr. Aduckiewicz, reporting that there was no interest from the franchise owners to tender for a share in an internet company, and asking for ideas. The memorandum concluded: "At this stage, I would not expect to sell books over the net". 20   There is in evidence a Dymocks form entitled "Capital Appropriation Request", apparently signed by Mr. Aduckiewicz on 17th September 1996, requesting $100,000.00 to set up an internet site. Despite the entitlement of the form, written words appear on it as follows: "This is not capex it is operating exp outside plan it should be advertising". On the same form, there is also a reference to anticipated costs of $71,000.00 for ongoing support, associated with a date 17th September 1997. 21   On 14th October 1996, a meeting was held of New South Wales franchise owners, attended inter alia by Mr. Harrington, Eastwood; Mr. Hughes, Hurstville; and Mr. Mohr, North Rocks. The minutes of the meeting recorded that Mr. Aduckiewicz presented a prototype of the Dymocks internet site. 22   The minutes went on to record the following:

The proposal for the Dymocks site would have an administrator within FROPS collating the orders received from customers. They would then email the stores selected to process the orders. Should a store decline to fill the order, for whatever reason, it would be up to that store to contact the customer. TA to investigate how individual stores could pass on a sale to another store. If no store is selected by the customer, then the sale will go to George Street bookstore.

FROPS means Franchise Operations. Further down, the minutes continued:

There was much discussion relating to the cost associated with the Internet. TA advised that the cost would be $1,250 pa. This charge will pay for installation, support, development and home page, additional pages will cost $250. Any income made from this investment will go back into the Advertising Fund.

The NSW franchise owners objected to this stating they believed the costs should be allocated against local advertising. TA pointed out that this would diminish their resources to advertise. ...

The minutes went on to record a second option, with a consortium to develop a site, to be administered by franchise owners.

23   At a board meeting of the Dymocks group held on 22nd October 1996, the following resolution was passed:

Resolved that the proposed Internet system involving franchise owners proceed provided that it is permitted by the current franchise agreement. Each franchise owner signing an acknowledgment of the proposal terms must signify their irrevocable acceptance by including their understanding that expenditure incurred and income earned will be debited and credited to the national advertising fund.

Further resolved that each franchise owner will pay at least the set annual fee for their store's home page.

24   On 7th November 1996, a memorandum was sent to all Australian and New Zealand stores from Mr. Aduckiewicz, entitled "Dymocks on the Internet". The text of the memorandum was as follows:

After detailed discussions at each State FOR and a review at the National Forum, a plan of action for the Dymocks site has been developed.

The Internet site will be owned and run by the Advertising Fund.

An advisory committee will oversee the running of the site. The committee will comprise two franchise owners appointed by DFS, two elected franchise owners as well as a DFS representative.

Every Dymocks franchise owner will be required to contribute $1250 per annum as a site rental for their individual home pages. The $1250 may be treated as a local advertising expense.

Additional pages will be charged out at $250 per page, per annum. Both these rental charges will be credited to the Advertising Fund.

The fund will take over the running of the George Street main store, special order section. This section is currently earning approximately $520,000 in sales and incurring approximately $220,000 in expenses. Sales are generated from mail, fax, telephone and personal enquiries. All these sales will be taken over as well as Internet sales.

The attached Business Plan and cash flow summarise the proposal.

All profit from book sales will be credited to the Advertising Fund, and all losses will be borne by the Advertising Fund.

The business plan contained the following material under the heading "Infrastructure":
It is proposed that "Dymocks Internet" take over the running of the Special Orders function currently being operated jointly by The Ground Floor and the Mezzanine.
"Dymocks Internet" will be a division of the Advertising Fund guided by an advisory committee made up of Franchise Owners and a DFS representative.
Orders received over the Net would be satisfied initially by transferring stock from the shelves of the three main George St. stores to "Dymocks Internet" where the books would be packed and despatched.
Any books not on the Database but which appear in "Books in Print" will be processed as they are now.

It contained the following material under the heading "Financial Structure":
The Internet site is being built by a third party contractor.
The same contractor is able to support the site with hardware and software.
The site will be owned and run by the Dymocks Advertising fund, ensuring equity for franchise owners.
All franchise owners will be compelled to subscribe to the site and any profits generated or losses incurred will be allocated to the fund.

It also contained a cash-flow forecast, which suggested a surplus in 1997 of $1,550.00, in 1998 of $123,010.00, in 1999 of $174,862.00, and in 2000 of $221,017.00 - in each case, after crediting subscriptions (apparently from franchisees at $1,250.00 each), amounting to $113,750.00 in 1997 and rising to $150,000.00 in 2000. The cash-flow forecast provided for a franchise fee at 6%, amounting to $37,200 in 1997 and rising to $64,282.00 in 2000.

25   On 9th December 1996, there was a meeting of the Internet Advisory Committee, attended inter alia by Mr. Hughes and Mr. Aduckiewicz. According to the minutes, there was discussion concerning the takeover of "Special Orders", which was to be handed over to the Franchisor and financed by the Advertising Fund. The minutes recorded that Wendy Miller of Dymocks was to send out invoices for subscriptions to all franchise owners, of $1,250.00 for each site. The minutes noted "This cost can be allocated against the Local Advertising fund". The minutes continued:

TA confirmed that this site rental covers the capital cost of installing the site and allows a small amount of cash for working capital. There will be no guarantee that this cost will remain the same next year, as it depends on the profitability of the Dymocks site. Charges will be discussed with the Advisory Committee.

26   The next day, a memorandum was sent to all Australian and New Zealand franchise owners from Mr. Aduckiewicz, headed "Internet", and stating the following:

You may have noted by now from previous correspondence that our site is close to being launched publically (sic).

At the moment I have invited comments and suggestions from staff and franchise owners, and soon I will be canvassing public comment on our site.

Yesterday we held the inaugural meeting of the Internet Committee, and a plan of action has been put in place to ensure an orderly launch. One question which was communicated on a potential concern was the issue of fees payable by franchise owners.

As discussed at our last round of FOR's, the site cost is being charged out at $1,250 per store for 1997. This amount may be paid out of your Local Advertising fund.

Ongoing fees will depend largely on the profitability or otherwise of the site and will be subject to the recommendations of the Internet Committee. The initial fee allows us to recover the capital cost of installing the site and allows a small amount of cash surplus for working capital.

The full charge of $1,250 will be invoiced as at 20 December 1996, payable by the end of January 1997. There should be no further charges, the only exception being those franchise owners who will be developing pages in addition to their homepage. Each additional page attracts a charge of $300pa.

Over the next few weeks you will receive a detailed outline of the Internet site together with hardware requirements if you wish to interact with either the Dymocks Internet or Intranet sites.

I will keep you updated as this venture develops.

27   Invoices dated 20th December 1996 were then sent out to franchisees for Internet Subscription for 1997 $1,250.00. These invoices were paid by most franchisees, including Hughes, Red Rocks, and Librus. 28   On 31st January 1997, there was a meeting of the Internet Advisory Committee, attended inter alia by Mr. Hughes and Mr. Aduckiewicz. The minutes noted a request by Mr. Aduckiewicz that there be a delay in moving staff from the Special Orders Department for three months, and that the committee agreed to a three month trial. I interpolate here that apparently the Special Orders Department had been run by the franchisee running the Dymocks City Business and Education section, Craig Scutella. Apparently, the trial being proposed involved orders received over the internet being filled by the Special Orders Department. According to a memorandum dated 18th February 1997 from Mr. Aduckiewicz to Mr. Scutella, it was proposed that 10% of the proceeds of these sales should be credited to the internet site. 29   There was a public launch of the Dymocks website in February 1997. 30   On 13th March 1997, a circular letter was sent by Mr. Aduckiewicz to all franchisees. The letter included the following:

At the November round of FOR's, I presented the costing plan to you and explained the charging method, being $1,250 as a start-up subscription and an ongoing charge of $250 per annum to cover running expenses until such time and the site was self-funding. All profit from sales through the Net will be credited to the Advertising Fund. At today's date, the site has been fully paid for to current operational stage and has come in under budget by $2,000.

The fact that the Fund is involved and is in fact held in trust on your behalf, requires me to ask you for a signed acknowledgment that you understand the workings and fundings of the Internet site. Accordingly, would you please sign the acknowledgment below and let me have a copy for my files.

There was a form of acknowledgment at the bottom of the letter, in the following terms:
I acknowledge that the Dymocks Internet site is funded by the Advertising Fund, and that all profits generated from sales over the Dymock's Internet site will be credited to the Advertising Fund.

That acknowledgment was signed by franchisees, including Mr. Hughes.

31   The profit and loss account for the Advertising Fund for the year ended 30th June 1997 showed internet income amounting to $117,212.00, made up of 93 subscriptions of $1,250.00 each, amounting to $116,250.00, 10% internet sales amounting to $712.00, and advertising amounting to $250.00. The account noted internet costs of $85,098.00. 32   In September 1997, Librus purchased the Parramatta business, and entered into a franchise in respect of that business. The vendors of that business entered into a deed of release dated 2nd September 1997, giving the release contemplated by cl.10B(c) of the franchise agreement. In November 1997, Fomake sold the Eastwood business; and on 10th November 1997, entered into a similar deed of release. 33   On 29th December 1997, the Dymocks group placed a purchase order for development of the website, for a price of $124,500.00, by a computer company. 34   On 19th March 1998, a memorandum to all franchise owners from Julian Bish, the Technology Manager of the Dymocks group, reported a re-launch of the Dymocks site on 17th February 1998. 35   A memorandum to all stores from the managing director of the Dymocks group, dated 7th April 1998, reported that it was not then possible to have the Internet operation stand alone, and that the internet was operating as a sub-set of the George Street Special Orders Department. Ten percent of sales were remitted to the Fund each month by the franchisee operating that Department. 36   On 28th April 1998, a meeting was held of New South Wales franchise owners. It was attended by Mr. Harrington, Mr. Hughes and Mr. Mohr, among others. The minutes recorded that the question of ownership of the website sales was raised; that $300,000.00 had been contributed to the website by franchise owners; and that benefits of sales should be returned to franchise owners either by royalty or deposited in the Advertising Fund. 37   The profit and loss statement for the Advertising Fund for the year ended 30th June 1998 showed an overall loss of $148,305.00. It recorded internet income of $19,767.00, comprised of advertising $600.00, ten percent internet sales $20,417.00, and a negative of $1,250.00, being a refund apparently to a franchisee. The statement showed internet costs of $201,341.00. 38   On 13th September 1998, there was a meeting at Hyatt Sanctuary Cove of the Franchise Owners Council (FOC). The minutes of that meeting record the following:

FOC agreed that the Advertising Fund is not sufficiently resourced to continue investing in the Internet site.

The FOC broadly supported the proposal that a letter be sent to all franchise owners advising that Dymocks will refund to the Advertising Fund all Internet site development costs to date, in return for all franchise owners signing a document agreeing that Dymocks has full, free and unfettered rights to do as they wish with the site. This is conditional on franchise owners being given 30 days notice if Dymocks is to dispose of its ownership of the site.

39   On 19th October 1998, the Managing Director of the Dymocks group wrote to franchisees enclosing a discussion paper from the meeting of 13th September 1998, which recommended that the responsibility for the site be re-assigned to Dymocks, with Dymocks to reimburse expenditure to date; reporting that the FOC had agreed with the outcome recommended in the paper; and reporting that the Dymocks board had agreed to the reimbursement of the development costs to date plus interest, in return for all franchise owners signing an attached deed. The deed provided that the Franchisor would reimburse the Advertising Fund for the amount expended by it on the internet site, together with interest at 8.1% per annum; that the Franchisor would have no further liability to procure payment of any royalty to the Advertising Fund; and that the franchisee would assign to the Franchisor the whole of its right, title and interest (if any) in the internet site. A number of the franchisees, including Hughes, Red Rocks and Librus, did not sign the deed. 40   On 25th March 1999, the Managing Director of the Dymocks group wrote to franchise owners reporting a recent meeting which discussed future plans for the Dymocks website, with general acceptance that the Advertising Fund could not continue to fund the development of the website. The letter reported that Dymocks was prepared to convert development expenditure to date to equity, if external funding was sought for the further development of the site, provided all franchise owners agreed in writing that they abandoned absolutely any claim of any nature to the site. The letter reported that this approach had received unanimous approval from the FOC. The letter sought the franchise owner's signature to a form of standard letter, giving effect to that proposal. 41   On 12th April 1999, a letter was sent to the Managing Director of the Dymocks group by three franchise owners, including Mr. Mohr. The letter asked a number of questions about the proposal, including a question whether Dymocks would sign a legally enforceable document protecting franchise owners from undue competition from a new internet company. The Managing Director replied with a memorandum dated 14th April 1999, dealing with the various questions, and giving a negative answer to the one which I mentioned. 42   The profit and loss statement for the Advertising Fund for the year ended 30th June 1999 showed no income and no expenditure in relation to the internet. The evidence showed that this was because internet expenditure and income was written out of the Advertising Fund in about August 1999, prior to the preparation of the statement. In fact, $111,147.00 was paid out as internet expenses during that year. 43   It appears that all franchise owners apart from Hughes, Red Rocks and Librus have now reached agreement with Dymocks. It is Dymocks' intention now to undertake a significant capital raising to fund further development of the website. Dymocks is not prepared to undertake this whilst other parties maintain a claim to an interest in the website. 44   Mr. Hughes, Mr. Mohr and Mr. Harrington gave evidence to the effect that they paid the contribution of $1,250.00 in knowledge of the documents provided by Dymocks, and in the expectation that the proposed structure would be in the interests of the shops, because loss of sales by reason of on-line sales would be balanced by the payment of profits to the Advertising Fund and increased exposure. They also said that they believed that they obtained an equity interest in the site, and in the domain name, through their contributions. Mr. Harrington gave evidence that when he purchased the Parramatta business, he checked that the vendor of Dymocks Parramatta had paid the $1,250.00 contribution. 45   There was also evidence led on behalf of Hughes, Red Rocks and Librus from an internet analysist, Ramin Marzbani, to the effect that a value of $50 million was a conservative assessment of the value of the Dymocks website. Mr. Marzbani also expressed the opinion that there would be damage done to a retail store if the on-line selling system were owned by a competitive entity, particularly taking account of the ability of on-line sellers to discount.

ISSUES

46   Hughes, Red Rocks and Librus claim an interest in the website on the basis of express, resulting and/or constructive trust, estoppel, and the Trade Practices and/or Fair Trading Acts. Alternatively, they claim compensation. The plaintiffs, in addition to opposing those claims, submit that Librus has no claim because of the releases given at the time of the acquisition of the Parramatta franchise.

SUBMISSIONS

47   Mr. Burton for Hughes, Red Rocks and Librus submitted that those defendants were entitled to an equity in the website proportionate to their contributions, on the basis of resulting trust, because the money providing funds for the development of the website was provided by the franchisees. The website was different from other material created by expenditure of the Advertising Fund, because it had enduring value. Alternatively, the same result was reached on the basis of express trust: there was a common intention of Dymocks and the franchisees, expressed in the documents, that the franchisees have an equitable interest in the site. Alternatively again, the same result was reached on the basis of constructive trust. Because the money for the site was provided by franchisees, it would be unconscionable to treat the asset created by that money in any other way: see Muschinski v. Dodds (1985) 160 CLR 583, Baumgartner v. Baumgartner (1987) 164 CLR 137. 48 Next, Mr. Burton submitted that the conduct of Dymocks in what was said and what was not said, was sufficient to amount to misleading conduct and, if resiled from, to give rise to an estoppel. Nothing was communicated to any franchisee, prior to late 1998, that Dymocks saw itself as the owner of the website. This conduct gave rise to the belief by the franchisees that they had an interest in an asset of enduring value. 49 Mr. Burton relied on a number of other matters as suggesting unconscionability, and also as going to the probabilities. The memorandum of 7th November 1996 represented that sales in the Special Orders Department of Dymocks would be taken over by the Advertising Fund, together with the internet site; and franchisees were not told when this did not happen, or when, on the contrary, internet sales were taken over by the Special Order Department, and only a ten percent figure of internet sales credited to the Advertising Fund. The costs of the site were paid from the Advertising Fund right up to August 1999, and then there was a reversal going back to July 1998. The incentives offered to franchisees by Dymocks for release of any claim showed that Dymocks had doubts about ownership. All money provided by Dymocks for development of the site was provided as a loan to the Advertising Fund, until August 1999. The evidence did not show that $1,250.00 per annum from franchisees, and sales from special orders, would not have been enough to maintain and develop the website. Mr. Marzbani's evidence was uncontradicted, and should be accepted. 50 Finally, Mr. Burton submitted that the releases given in 1997 did not give up the rights which Librus would otherwise have: see Grant v. John Grant & Sons Pty. Limited (1954) 91 CLR 112. 51 Mr. Graham QC for Dymocks submitted that the franchisees never had any interest in the name "Dymocks": at most they may have some interest in the website together with a licence to use the name. 52 Mr. Graham submitted that there was nothing sinister in the August 1999 reversal entries. On 1st July 1998, there was a negative balance in the Advertising Fund of over $250,000.00, financed by a loan from Dymocks. If the internet expenses for the year ended 30th June 1999 had been burdened on the account as well, there would be an additional $110,000.00 of loss. The reversal relieved the Advertising Fund of this burden. 53 The asset in dispute in these proceedings had been owned by Dymock's Pty. Limited long before November 1996; it had been the registered owner of the relevant domain names for some time. The question was, did anything happen to take away from Dymock's Pty. Limited its legal and beneficial ownership. In fact, at most it permitted the site bearing its name to be used by the Franchisor. 54 Turning to the memorandum of 7th November 1996, Mr. Graham submitted that the internet site, referred to in that memorandum, was something which had yet to be created, namely that being built by a third party contractor, made up of software and development costs: it did not embrace the Dymocks name or the domain name for the site. The reference to "equity" meant fairness, not that the franchise owners would beneficially own the site. This was confirmed by the franchise fee showed in the cash-flow forecast as being paid at the rate of six percent. The statement in the letter of 13th March 1997 that the site was funded by the Advertising Fund, and that the Fund was held in trust for the franchisees, could amount to no more than a purported admission, made by someone not shown to have authority to make such an admission. 55 Mr. Graham referred to cl.4C of the franchise agreement. He submitted that the money spent on the site was within the terms of cl.4C(a), so that software created by that expenditure would be an asset of the Fund. There was in fact no consideration provided by the franchisees for the acquisition of any asset, because the payment made could have been required anyway, without conditions, under cl.4C(f). Mr. Graham referred to Marks v. GIO Australia Holdings Ltd. (1998) 196 CLR 494; and submitted that there was no evidence that franchisees would not have paid the $1,250.00 had they not been offered the conditions set out in the memorandum of 7th November 1996. 56 Mr. Graham submitted that the memorandum of 7th November 1996 did not suggest that the Advertising Fund would have any interest in the Dymocks name. At most, there was an offer to use the name for an uncertain period, which might be at will, or for a reasonable time, or until terminated on reasonable notice, or for one year, or for the duration of current franchise agreements, or in perpetuity. Plainly, it was not an offer that the name be used in perpetuity: see Martin Baker Aircraft Ltd. v. Canadian Flight Equipment Ltd. (1955) 2 QB 556, at 582. In fact, clearly no more than a term of one year was intended, and that has expired. If the offer was interpreted as being for a reasonable time, the attitude of the majority of franchisees in accepting Dymocks offers showed that a reasonable time had now expired. The omission to include Special Orders made no difference to the profitability of the site. 57 In reply, Mr. Burton submitted that the defendants' witnesses had said that they relied on the documentation, and they were not cross-examined on that. The website and the right to use the Dymocks name were linked. Any decision to withdraw permission to use the Dymocks name from the website would at worst have to be exercised in a fiduciary manner, that is, in good faith for the benefit of the franchisees. Mr. Burton pointed out that no senior management had been called to explain or justify Dymocks' policy and actions.

DECISION

58 In my opinion, it is plain that the Dymocks group required the franchisees to pay $1,250.00 on the basis set out in the memoranda of 7th November and 10th December 1996. It may be that, pursuant to cl.4C(f) of the franchise agreement, it could have required such a payment unconditionally; but it did not in fact do this. The reasonableness of the requirement of the payment of $1,250.00 was, in part at least, justified by the conditions set out in that memorandum. In my opinion, that would certainly amount to consideration: at the very least, it avoided the possibility of challenge to the requirement on the ground that an unconditional requirement of payment of $1,250.00, in connection with the setting up of a website to which the franchisees would have no entitlement, would have been unreasonable. 59 Mr. Graham has in effect submitted that, in so far as the conditions dealt with the use of the Dymocks name, they were void for uncertainty. In my opinion, what the memorandum contemplated was that the website was in substance to be treated as a franchisee, paying six percent of sales for use of the Dymocks name. What was to be treated as part of the Advertising Fund was the website, so regarded. In my opinion, Dymocks could not prevent the operation of that website by refusing to franchise the use of its name, on those terms, at least unless its decision to do so was one arrived at bona fide having regard to the interests of the franchisees as well as its own interest. 60 In my opinion therefore, the terms of the memoranda are sufficiently certain to give rise to a contract, and are supported by consideration. Further, in my opinion, the terms of the memoranda amount to a declaration that the website, subject to the payment of a franchise fee, would be held on the same terms as the Advertising Fund, such terms amounting in my opinion to a trust. The memoranda also amounted to a representation to the same effect. 61 I do not think there is any significance in any differences between the terms of the two memoranda. The memorandum of 10th December 1996 could be seen as suggesting a possible change in the terms of the arrangement, from a yearly payment of $1,250.00 per franchisee, to an initial payment of $1,250.00 and subsequent payments of $300.00 per annum per additional page developed by individual franchisees. However, this memorandum also noted that ongoing fees would depend largely on the profitability or otherwise of the site; and in my opinion the arrangement at all times was that, after the initial payment of $1,250.00, subsequent payments would depend upon expenses and profitability but would not be more than about $1,250.00 per annum, apart from payments for additional pages for individual franchisees. 62 In my opinion, the arrangement was confirmed by the letters sent to franchisees on 13th March 1997. That letter was sent after the payments of $1,250.00 had been made, and contemplates an initial payment of $1,250.00 and ongoing charges of $250.00 per annum. There may be a question whether that letter and the associated acknowledgments were sufficient to change the terms of the arrangement, from one in which the franchisees would be bound to contribute whatever was necessary for the operation of the website, up to a limit of something like $1,250.00 per annum, to an arrangement whereby they could not be required to pay more than $250.00 per annum. However, it is unnecessary to decide this; and in my opinion, in acknowledging that the website was funded by the Advertising Fund, that all profits from it would be credited to the Advertising Fund, and that the Advertising Fund was held in trust for the franchisees, it confirms the arrangement. To that extent, in my opinion, it was within the authority of Mr. Aduckiewicz thus to confirm the arrangement. 63 In my opinion, contrary to the submission of Mr. Burton, the arrangement did not give the franchisees any additional interest in the website, or in the Dymocks name. The only interest given to franchisees was an interest co-extensive with their interest in the Advertising Fund, and the Advertising Fund's interest in the website, subject to the payment of a franchise 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. 64 The next question is whether the arrangement can still be enforced, in circumstances where most of the franchisees do not seek to enforce that arrangement, but have, on the contrary, come to a different arrangement with Dymocks. 65 Indeed, it has been suggested that the arrangement could not be continued, because the Advertising Fund did not have the means to continue to fund the website. However, according to the terms that were proposed at the time the $1,250.00 was paid, the franchisees could be required to pay $1,250.00 per annum, or other sum as was necessary depending upon the profitability or otherwise of the site. Dymocks did not in fact seek any further contributions from franchisees, and the evidence does not suggest that payments of the order of $1,250.00 per annum from the franchisees would not have been sufficient to finance the website until such time as it became profitable. 66 However, in my opinion, the circumstance that most franchisees are now not seeking the continuance of this arrangement, and cannot now be required to make whatever contributions might be necessary to fund the website until profitability, means in my opinion that the contract or trust which I have found should not now be specifically enforced at the suit of the three defendants. This is because the majority of the franchisees are not ready, willing and able to join in such specific performance, and because participation in the arrangement by just the three defendants would make it something entirely different from that which was contemplated. 67 Dymocks has not suggested that it is under no liability to these three defendants because the arrangement has been frustrated and cannot now be given effect to. However, had such a defence been raised, in my opinion it would have failed, because the impossibility of performance which now exists is substantially due to the actions of Dymocks itself, in failing to pursue the arrangement, failing to seek ongoing support for the site from franchisees, and ultimately coming to an agreement with the franchisees other than these three defendants. In my opinion therefore, whether one approaches this by way of contract or trust or representation under the Trade Practices Act or estoppel, Dymocks remain bound, so far as money can do it, to put these three defendants in the same position as they would have been if the arrangement had been carried out. 68 In my opinion, these three defendants have suffered and will suffer loss through Dymocks' failure to carry through the arrangement, in two respects: first, through the loss of a prospective benefit to the Advertising Fund, which would in turn have benefited these defendants by increased funding of advertising and perhaps decreased demands upon them for contribution to the Advertising Fund; and secondly, more importantly, the substantial chance that their business will be damaged through unrestrained competition from the Dymocks website, including competition through discounting of books. It will be extremely difficult to quantify these damages; but in my opinion they are sufficiently substantial to justify an enquiry. 69 Another possible approach to compensating the defendants would be to require Dymocks to account for the advantage which it has obtained for itself by failing to carry through the arrangement. On the evidence, what it has obtained, subject to the claims of the three defendants, is full beneficial ownership of an asset whose value may be of the order of $50 million, instead of such asset being treated as part of the Advertising Fund, subject to payment of a franchise fee to Dymocks. On that approach, it has in effect obtained this benefit at the expense of the Advertising Fund and thus of its franchisees, and should account proportionately to each of the three defendants. There may be cases where that approach might be appropriate; but I do not think it would be appropriate in this case. In my opinion, compensating the three defendants for their real loss would be adequate compensation in this case, particularly having regard to the quantum of the consideration which they gave in the first place. 70 In my reasons so far, I believe I have sufficiently dealt with Mr. Graham's submissions, apart from his reliance on the 1997 releases in relation to Librus. In my opinion, notwithstanding those releases, Librus obtained the same rights as other franchisees to the Advertising Fund, and thus to the website, when it entered into its 1997 franchise agreement. 71 As regards Mr. Burton's submissions, in my opinion there was no resulting trust giving rise to an interest in the website itself, and particularly not an interest in the Dymocks name: the terms on which the money was paid were those set out in the memoranda to which I have referred, and there is no sufficient basis for inferring a different intention, particularly having regard to the terms of the franchise agreements relating to the Dymocks name. For the same reasons, in my opinion there was no express trust in terms other than those I have identified. There is no unconscionability in Dymocks, so long as the terms to which I have referred are given effect to by compensation. For the same general reason, I do not think any remedies under the Trade Practices Act or Fair Trading Act would go further than what I have contemplated.

CONCLUSION

72   For the reasons I have given, I would propose to declare that the three defendants are entitled to such compensation as would put them in the position in which they would have been if the website had remained an asset of the Advertising Fund, subject to payment of six percent franchise fee to Dymocks; and to order an enquiry as to the amount of such compensation. 73   I would declare that the plaintiffs own the website and the domain names, subject only to a charge for the defendants' right to that compensation. 74   I will hear submissions on costs; but it may be that a final decision on costs should not be made until the enquiry as to compensation has been completed.

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Last Modified: 09/25/2000