Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd

[2014] SASC 84

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

ESSENTIAL BEAUTY FRANCHISING (WA) PTY LTD AND ORS v PILTON HOLDINGS PTY LTD AND ORS

[2014] SASC 84

Judgment of The Honourable Justice Blue

30 June 2014

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH

EQUITY - GENERAL PRINCIPLES - UNCONSCIONABILITY, UNCONSCIONABLE DEALINGS AND OTHER FORMS OF EQUITABLE FRAUD

TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - UNCONSCIONABLE CONDUCT - PARTICULAR CASES

TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - RESTRICTIVE TRADE PRACTICES - ARRANGEMENTS AFFECTING COMPETITION - CONTRACT, ARRANGEMENT OR UNDERSTANDING

EQUITY - GENERAL PRINCIPLES - PENALTY - RELIEF AGAINST PENALTY AND FORFEITURE

The plaintiff seeks a declaration that it validly terminated a master franchise agreement with the defendants, judgment for a debt due upon termination and ancillary relief. The defendants counterclaim seeking a declaration that the purported termination was unlawful or that the plaintiff breached the Competition and Consumer Act 2010 (Cth), specific performance or relief against forfeiture and damages for breach of contract or unconscionable conduct.

The plaintiff is part of the Essential Beauty group which is the master franchisor of Essential Beauty salons throughout Australia.  The first defendant, Pilton Holdings, was appointed by the plaintiff as master franchisee for Western Australia in March 2004.

In 2010, disputes arose between the plaintiff and defendants as to who was entitled to approve products and suppliers for the purpose of use and purchase by franchisees.  The disputes involved the proper construction of clause 9.1.2 of the master franchise agreement. 

In December 2010, Essential Beauty gave directions to Pilton to withdraw an approved products and suppliers list issued by Pilton to franchisees and replace it with a list prepared by Essential Beauty, to withdraw breach notices issued by Pilton to franchisees for alleged use of non-approved products or products obtained from non-approved suppliers, to undergo master franchisee training and to produce evidence of advertising placed by Pilton for new franchisees.  Pilton contended that the directions notices were invalid and in general did not comply with them.  After issuing a breach notice to Pilton, Essential Beauty purported to terminate the master franchise agreement in March 2011.

Held: 

1.       On the proper construction of clause 9.1.2 of the Agreement, Essential Beauty was given the role of accrediting third party suppliers.  Pilton was required by that clause to use reasonable endeavours to ensure that franchisees purchased products from any one of Essential Beauty, Pilton or accredited suppliers and was not entitled to require franchisees to purchase from Pilton alone.  Pilton accepts that Essential Beauty was entitled to determine which are approved products (at [212], [218], [231]).

2.       On the proper construction of clauses 9.3 and 12.9, Essential Beauty was entitled to give directions to Pilton concerning the use by franchisees of approved products and the purchase by franchisees of products from approved suppliers (at [251], [256], [260]).

3.       With the exception of the directions concerning the breach notices issued by Pilton to franchisees, Essential Beauty’s directions notices were authorised by the Agreement and were lawful and effective and were not withdrawn (at [279], [285], [289], [309], [334]).

4.       The issue of the directions notices by Essential Beauty was not in breach of its good faith obligations and was not unconscionable (at [326], [329]).

5. Pilton would not have been in breach of section 47 of the Competition and Consumer Act 2010 (Cth) if it had complied with the directions notices requiring it to issue Essential Beauty’s list of approved products and suppliers to franchisees (at [353], [356]).

6.       Pilton breached the agreement by not complying with the directions notices (at [357]).

7.       Pilton’s non-compliance with the directions notices following service of Essential Beauty’s breach notice entitled Essential Beauty to terminate the agreement (at [374]-[376]).

8.       Essential Beauty’s conduct was not unconscionable (at [383]).

9.       There is no basis for granting relief against forfeiture in favour of Pilton (at [389]).

10.     Essential Beauty’s termination of the agreement was valid.  Essential Beauty is entitled to judgment on its claim and the counterclaim is dismissed (at [391]-[392]).

11.     Quaere whether Pilton would have been entitled to specific performance of the agreement if it had not been validly terminated (at [415]).

12.     If the defendants had succeeded on their counterclaim, Pilton’s damages assessed (at [518]-[519]).

Australian Competition and Consumer Act 2010 (Cth) s 47, 42; Australian Consumer Law s 20, 21, 22; Commonwealth of Australia Constitution Act 1901 s 51; Trade Practices Act 1974 (Cth) 47, 51AA, 51AC, referred to.
Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570; Australian Competition and Consumer Commission v Bill Express Ltd (in liq) and Ors [2009] FCA 1022; (2009) 180 FCR 105 ; Australian Competition and Consumer Commission v IMB Group Pty Ltd (in liq) [2002] FCA 402; (2002) ATPR (Digest) 46-221; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; John J Starr (Real Estate) Pty Ltd v Robert R Andrew (A’Asia) Pty Ltd (1991) 6 ACSR 63; Pampered Paws Connection Pty Ltd v Pets Paradise Franchising (Qld) Pty Ltd (No 10) [2012] FCA 25; Sellers v Adelaide Petroleum NL & Ors [1994] HCA 4; (1994) 179 CLR 335; Stationers Supply Pty Ltd v Victorian Authorised Newsagents Association Ltd (1993) 44 FCR 35; SWB Family Credit Union Ltd v Parramatta Tourist Services Pty Ltd [1980] FCA 125; (1980) 48 FLR 445; Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45; (2011) 84 ALJR 1, discussed.
BICC Plc v Burndy Corp [1985] 1 All ER 417 ; Burger King Corporation v Hungry Jack’s Pty Ltd [2001] NSWCA 187; 69 NSWLR 558; Byrne v Australian Airlines Ltd (1995) 185 CLR 420; Chaka Holdings Pty Ltd v Sumsin Pty Ltd  (1987) 10 VBR 18; 171; Ciavarella v Balner (1983) 153 CLR 438; Co-operative Insurance Society Ltd v Argyll Stores [1998] AC 1; Dowsett v Reid (1912) 15 CLR 695; Federal Airports Corporations v Makucha Developments Pty Ltd (1993) 115 ALR 679; Grannall v Marrickville Margarine Pty Ltd (1955) 93 CLR 55; Jones v Dunkel (1959) 101 CLR 298 ; Legione v Hateley (1983) 152 CLR 406; Meridian Retail Pty Ltd v Australian Unity Retail Network Pty Ltd [2006] VSC 223; Renard Construction (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 235 ; Rinaldon v Hurley [1951] VLR 13 ; Scott v Rayment (1868) LR 7 Eq 112; Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1997) 144 CLR 596 ; Stern v Arthur (1988) 165 CLR 489; Stockloser v Johnson [1954] 1 QB 476; The Electricity Generation Corporation (trading as Verve Energy) v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 447; Thomas Borthwick & Sons (Australasia) Ltd v South Otago Freezing Co Ltd [1978] 1 NZLR 538; Vischer v Giudice [2009] HCA 34; (2009) 239 CLR 361 ; Voskuilen v Morisset Mega-Market Pty Ltd [2002] NSWSC 63 , considered.

ESSENTIAL BEAUTY FRANCHISING (WA) PTY LTD AND ORS v PILTON HOLDINGS PTY LTD AND ORS
[2014] SASC 84

Civil:

BLUE J:

1. The first plaintiff Essential Beauty Franchising (WA) Pty Ltd (Essential Beauty WA) sues the first defendant Pilton Holdings Pty Ltd and the second defendant Angus Forrest.  Essential Beauty WA seeks a declaration that it validly terminated a Master Franchise Agreement on 15 March 2011, judgment for $272,494.68 and relief ancillary to the declaration.

2. Pilton counterclaims for a declaration that the purported termination was unlawful or Essential Beauty WA breached the Competition and Consumer Act 2010 (Cth),[1] specific performance or equitable relief against forfeiture and damages for breach of contract or unconscionable conduct.

   [1]    The name of the Act changed from the Trade Practices Act 1974 to the Competition and Consumer Act 2010 with effect on 1 January 2011. Conduct alleged to breach provisions of the Act straddles 1 January 2011. For ease of reference, I refer to the Act under its current name even when referring to conduct before 1 January 2011.

3. The principal issues arising are as follows.

   1.What is the proper construction of clauses 9.1, 9.3, 12.9 and 12.18 of the Master Franchise Agreement?

   2.Were directions given by Essential Beauty WA to Pilton in December 2010 lawful and effective?

   3.Was the giving of the directions in breach of good faith or unconscionable?

   4.Did Pilton breach the Master Franchise Agreement by not complying with the directions?

   5.Did Pilton’s non-compliance following service of a breach notice entitle Essential Beauty WA to terminate?

   6.Was the conduct of Essential Beauty WA in bad faith or unconscionable?

   7.Is Pilton entitled to relief against forfeiture?

   8.Is Pilton entitled to specific performance?

   9.Is Pilton entitled to damages for wrongful termination?

   PART A:  BACKGROUND

   The parties

   The Maiello group

4. Tony Maiello was born in South Australia in 1966.  He worked as a teacher until 1997.

5. In 1990, Mr and Mrs Maiello opened a beauty salon in Adelaide trading as Essential Beauty.  The business was carried on by Essential Beauty (SA) Pty Ltd, which later became known informally as Essential Beauty Head Office (Essential Beauty HO).

6. In 1994, Essential Beauty HO moved the beauty salon to a shop in Regent Arcade, Adelaide.  In 1997, Mr Maiello resigned his teaching job to work full time at the Regent Arcade beauty salon.

7. In 2000, Mr Maiello decided to create a franchise system for Essential Beauty salons in South Australia.  He engaged Stephen Newnes to assist him.

8. In January 2001, Mr Maiello incorporated Essential Beauty Franchising Pty Ltd (Essential Beauty Franchising) to be the franchisor.  He was its sole director.  For ease of reference, I use the term Essential Beauty to denote any one or more of Mr Maiello’s companies bearing the name “Essential Beauty” including Essential Beauty HO, Essential Beauty Franchising and Essential Beauty WA.

9. In January 2001, Essential Beauty Franchising granted a franchise to Mr and Mrs Ruggiero to operate an Essential Beauty salon at Arndale.[2]  Mr Maiello gave to the Ruggieros details of the suppliers to the Regent Arcade salon and invited them to deal directly with those suppliers.

   [2]    A company owned and controlled by the Ruggieros was the franchisee.  All Essential Beauty franchises were granted to companies owned and controlled by one or more individuals.  For ease of reference, I refer to the individual(s) as the franchisee and ignore the company structure.

10. Between 2001 and March 2004, Essential Beauty Franchising granted franchises to franchisees to open six further salons at Ingle Farm, Marion, Parabanks, Tea Tree Plaza, Unley and West Lakes in South Australia.    

11. In early 2002, Essential Beauty acquired premises at Regency Road, Prospect to use as a warehouse and office.  Essential Beauty began distributing products acquired from manufacturers or importers branded “Essential Beauty”.  It also distributed products under manufacturers’ own brand names to franchisees.  Over time, it branded additional products as “Essential Beauty” and became a distributor of additional manufacturer-branded products.  The number of external suppliers to franchisees declined.  The proportion of products supplied by Essential Beauty increased.

12. In 2003, Essential Beauty HO sold the Regent Arcade salon to the Ruggieros and it became an Essential Beauty franchised salon.

13. In March 2004, Mr Maiello incorporated Essential Beauty WA.  He was its sole director.  That company was incorporated to perform the dedicated function of being the master franchisor for the grant of an Essential Beauty master franchise in Western Australia.  Mr Maiello also incorporated Essential Beauty Franchising (Vic) Pty Ltd (Essential Beauty Victoria), Essential Beauty Franchising (Qld) Pty Ltd (Essential Beauty Qld) and Essential Beauty Franchising (NSW) Pty Ltd (Essential Beauty NSW) to act as dedicated master franchisors in each State.

14. In March 2004, Essential Beauty WA granted a master franchise to Pilton for Western Australia.  In May 2004, Essential Beauty Victoria granted a master franchise to Peter Tsamourtzis and another person for Victoria.[3] 

    [3]    All Essential Beauty master franchisees were companies owned and controlled by an individual or partners.  For ease of reference, apart from Pilton, I refer to the individual or principal individual as the master franchisee and ignore the company structure.

15. In June 2005, Mr Maiello registered the business name “Essential Distribution”.  Essential Beauty HO conducted the distribution business under the name “Essential Distribution” thereafter.[4]   

    [4]    For a short time, the business name was registered in the name of Mr Maiello and then Essential Beauty Franchising.

16. In around 2007, Essential Beauty Qld granted a master franchise for Queensland to Jan Olechnowicz.  Subsequently, Ann Donnarumma became the master franchisee instead. 

17. In August 2009, Mr Forrest established a warehouse in Western Australia.   Not long afterwards, Mr Tsamourtzis established a warehouse in Victoria for a distribution business trading under the name “Salons R Us”.  Thereafter, Essential Distribution sold directly to franchisees in South Australia and Queensland and principally to the master franchisees’ companies in Western Australia and Victoria.

18. As at February 2014, there were 59 Essential Beauty stores in Australia: 18 in South Australia, 17 in Western Australia, 17 in Victoria, 5 in Queensland and 2 in New South Wales.

    The Forrest group

19. Angus Forrest was born in Scotland in 1971.

20. In 1995, Mr Forrest began working for his brother’s business in Glasgow retailing and later wholesaling imported clothing, bags and jewellery. In about 1997, he established his own business wholesaling body-piercing jewellery to retailers in Europe.

21. In early 2000, Mr Forrest emigrated to Perth.  He formed a company, Great Western Metals Pty Ltd, to wholesale body piercing jewellery to retailers in Western Australia and elsewhere in Australia.  He ultimately sold that business in 2006.

22. In February 2004, Mr and Mrs Forrest incorporated Pilton.  They were its directors and shareholders. 

23. In March 2004, Pilton became the master franchisee of the Essential Beauty franchise for Western Australia.  In 2006, Mr Forrest incorporated E B Realty Pty Ltd to enter into leases with shopping centre landlords and in turn grant subleases or licences to Essential Beauty franchisees.  He later incorporated Barnton Roundabout Pty Ltd and Million Billion Pty Ltd in 2010 to operate Essential Beauty stores at Hay Street Perth and Mirrabooka respectively.

24. In June 2004, Pilton granted a franchise to Mr and Mrs Furler to operate an Essential Beauty store at Hay Street, Perth, which opened in October 2004.  Ultimately, between 2005 and 2010, a further nine Essential Beauty stores were to be opened in Western Australia.  

25. The following table shows when franchisees in Western Australia signed franchise agreements and when their stores were opened.

Location	Franchisee	Agreement	Opening
Hay Street Perth	Furlers (later operated by Angus Forrest from 2005, Sarah McLadden from 2006 and Barnton Roundabout from 2010)	June 2004	October 2004
Morley	Karen Geneve (sold to Alison Hope in March 2010)	2005	March 2005
Midland	Karen Geneve	December 2006	June 2007
Innaloo	Sarah Maguire-Leigh	May 2007	September 2007
Rockingham	Sarah Maguire-Leigh	September 2008	November 2008
Joondalup	Sarah Maguire-Leigh	December 2008	December 2008
Armadale	Sarah Maguire-Leigh	December 2008	February 2009
Cannington	Nilar Soe	May 2007	February 2009
Mirrabooka	Million Billion	NA	September 2010
Hillarys	Sarah Barker	October 2010	December 2010

1. For each new franchise store, Pilton arranged the shop fitting, furniture, equipment and initial stocking and charged the franchisee the cost of the establishment. 

2. Essential Beauty supplied the opening stock from Adelaide directly to the Furlers in October 2004 and to Karen Geneve in March 2005.  Essential Beauty also supplied stock as needed directly to the first two franchisees over this period.  In April 2005, Mr Forrest started using his garage as a warehouse for beauty products purchased from Essential Beauty.  From April 2005 to July 2009, products were generally supplied by Essential Beauty to Pilton, which on sold them to Western Australian franchisees. 

3. In February 2007, Mr Forrest incorporated West Granton Pty Ltd.  In July 2007, West Granton took over from Pilton the role of purchasing beauty products from Essential Beauty and selling them to franchisees in Western Australia.

4. In August 2009, West Granton opened a warehouse at Joondalup.  West Granton purchased product from Essential Distribution in South Australia and sold it to franchisees.  West Granton also began buying products from manufacturers or distributors and selling products under the name “Beauty Mart” – or perhaps “Essential Distribution” - to non-Essential Beauty salons.

5. In January 2010, Barnton Roundabout took over operation of the Essential Beauty salon at Hay Street, Perth from Sarah McLadden.

6. In July 2010, Pilton took back from West Granton the role of distributor of beauty products to Essential Beauty franchisees and other beauty stores.

7. In September 2010, Million Billion commenced operating the new Mirrabooka store.

   The Essential Beauty business

8. There are thousands of beauty salons around Australia.  There are a handful of chains of beauty stores providing distinctive products and services that are mostly targeted upmarket.  By contrast, Essential Beauty is and was targeted at the value segment of the market. 

9. Between 2001 and 2004, the principal services provided by Essential Beauty salons were waxing, slimtone body shaping, massage, false tan application, nails, makeup and body piercing.  Over time, additional services were added, such as permanent hair reduction, microdermabrasion and tattoo removal.  In addition, the predominance of different types of services changed over time.

   Dealings between the parties

10. In 2001, Mr Forrest visited Mr Maiello at the Regent Arcade salon.  Essential Beauty began to purchase body-piercing jewellery from Great Western Metals.  Over the next three years, Mr Forrest visited each of the Essential Beauty salons in South Australia that opened over that time.

11. In late 2001/early 2002, Mr Forrest expressed interest to Mr Maiello in becoming involved in Essential Beauty’s business in Western Australia.  Between 2002 and March 2004, there were to be several conversations between Mr Maiello and Mr Forrest on this topic. 

12. In or before July 2002, Mr Newnes sent to Mr Forrest a draft heads of agreement.[5]  In July 2002, communications passed between Mr Maiello and Mr Forrest in relation to the draft heads of agreement.  The proposal they were discussing involved the establishment of a joint venture company to act as a master franchisee in Western Australia and be owned equally by Mr Forrest and Mr Maiello.  Its revenue would be a $25,000 initial franchise fee and ongoing 15 percent franchise fee charged to franchisees established in Western Australia. 

    [5]    This draft was not tendered.

1. It was proposed by Mr Forrest that products sold or used by franchisees be purchased directly from Essential Beauty in Adelaide and the joint venture company would not become involved.  Mr Maiello expressed concern about the franchisees having to obtain product from Adelaide without a local distribution centre in Western Australia.  As a result, it was proposed that the joint venture company also distribute product in Western Australia to the franchisees.

2. In August 2002, Mr Newnes prepared a new draft heads of agreement.  The proposed parties were Essential Beauty HO and Mr Forrest.  The joint venture company would distribute Essential Beauty products to franchisees subject to terms and conditions agreed with Essential Beauty HO.

3. By December 2002, Mr Maiello had provided to Mr Forrest a draft master franchise agreement, disclosure document and operations manual.[6]  The operations manual (the Operations Manual) was issued by Essential Beauty to its South Australian franchisees.  When issued, Essential Beauty had only the franchisee at Arndale.  Section 4.2 of the operations manual listed various authorised suppliers for various products or services.  Essential Beauty was the authorised supplier for some products and third party suppliers were authorised suppliers for other products.

   [6]    The agreement and disclosure document were not tendered, but the operations manual was tendered.

4. In December 2002 and April 2003, memoranda were exchanged concerning drafts of a master franchise agreement.[7] 

   [7]    These drafts were not tendered.

5. In October or November 2003, Mr Maiello sent a letter to Mr Forrest attaching projections for the proposed Western Australia master franchise.  He projected the establishment of 16 franchises within the first three years.  He showed revenue from initial and ongoing franchise fees over the first four years comprising the vast majority of revenue for the master franchisee.  He showed franchise fee revenue in the fourth year of $832,000.  He showed profit from the sale of products culminating in $12,000 per annum in the fourth year derived from the sale of products to 16 franchisees. 

6. At some point, the concept discussed between Mr Maiello and Mr Forrest evolved from their having equal ownership of the master franchisee to Mr Forrest owing 100 percent of the master franchisee but paying 50 percent of the franchise fees to Mr Maiello’s company.

   Master Franchise Agreement

7. On 15 March 2004, Essential Beauty WA, Pilton and Mr Forrest entered into the Master Franchise Agreement (the Agreement).  Mr Forrest’s role was solely as guarantor of Pilton’s obligations as master franchisee.  By clause 4, Essential Beauty WA granted to Pilton a master franchise in Western Australia.  Clause 4.1 provided:

   4.1     GRANT

   In consideration of the Master Franchisee’s undertakings, the Company grants to the Master Franchisee the right in the Area to:

   establish and operate a Master Franchise operation;

   enter into Franchise Agreements;

   act as a licensee of the Mark “Essential Beauty”;

   personally conduct the System within the Area through the establishment of Premises for Franchisees

   on the following terms and conditions:

   4.1.1  termination or expiration of this Agreement shall constitute a termination or expiration of the Master Franchise;

   4.1.2  the Master Franchisee will only enter into Franchise Agreements with Franchisees who are responsible and of good character, financially substantial and competent to operate a Franchise and have completed a training program to the satisfaction of the Master Franchisee and the Company;

   4.1.3  the Master Franchisee will only enter into Franchise Agreements on the terms of the then current Franchise Agreement as notified by the Company from time to time unless the Company has approved in writing any amendment of the Franchise Agreement in respect of any particular Franchisee;

   4.1.4  the Master Franchisee shall diligently search for and screen potential franchisees within the Area in such manner as is reasonably specified by the Company …

8. Pursuant to clauses 6 and 7, the term of the Agreement was five years from 15 March 2004 together with three rights of renewal of five years each.

9. The System was defined by recital A.  Recitals A, C and E provided:

   AThe Company has knowledge and skills concerning the business of beauty services and associated products (“The System”).  The Company has a licence from Tony Maiello to commercialise a franchise system developed by the licensor under the Franchise Code.

   CDistinguishing characteristics of The System include:

   ·the business name “Essential Beauty”;

   ·certain trademarks and logos for which registration is sought, or has been obtained, in the Commonwealth of Australia;

   ·developed marketing concepts and sales techniques;

   ·an Operations Manual;

   ·beauty service techniques;

   ·techniques for beauty salon operation;

   ·exclusive beauty and other products;

   ·distinctive colour schemes;

   ·distinctive beauty salon development and fit-out;

   ·distinctive uniforms bearing the “Essential Beauty” logo;

   …

   EThe System requires that licensees and sub-licensees adhere to standards and policies developed by the Company which provide for the successful and uniform operation of businesses utilising The System.

10. Clause 1 contained the following relevant definitions:

    “Beauty Services” means the provisions of beauty services including make-up and eye services, facials, waxing, massage, body piercing and Henna tattooing (false), electrolysis, nail enhancement, collagen treatments and Slimtone body shaping.

    …

    “Franchise Agreement” means a form of agreement approved of by the Company and entered into by the Master Franchisee with a Franchisee.

    …

    “Operations Manual” means the procedural advice manual developed by the Company and lent to the Master Franchisees or its Franchisees by the Company.  Amendments, variations, deletions or additions made to the Operations Manual by the Company during the Term or any Renewal Term of this Agreement are also included.

    …

    “Product” means beauty products and consumables and other like aids used in the carrying out of Beauty Services or sold by the Franchisees.

11. Pilton agreed to pay a master franchise fee of $250,000 by instalments.  By clause 10.1, Pilton also agreed to pay to Essential Beauty WA 50 percent of the initial franchisee fee and of the ongoing franchisee service fee receivable from each franchisee.

12. Clause 9 was entitled “Product”.  Clause 9.1 provided as follows:

    9.1USE AND PURCHASE OF PRODUCT

    9.1.1  During the Term or any Renewal Term the Master Franchisee shall use all reasonable endeavours to ensure that Franchisees will only use Product approved of by the Company.

    9.1.2  The Master Franchisee shall use all reasonable endeavours to ensure that Franchisees purchase all Product from it or the Company or from suppliers who demonstrate an ability to meet the Company’s reasonable quality standards and specifications for such Product.  The Master Franchisee will carry sufficient stock of the Product, as specified by the Company, to enable it to adequately supply the Franchisees.

    9.1.3  The Master Franchisee will use all reasonable endeavours to ensure that the right of the Franchisees to utilise or offer for sale or otherwise deal with the Product is strictly limited in accordance with the terms of Franchise Agreements and any directives contained in the Operations Manual.

13. Clause 9.3 provided:

    9.3DIRECTIONS

    The Master Franchisee will promptly adhere to and implement any reasonable directions of the Company as to

    9.3.1  the Product to be used in The System;

    9.3.2  any maximum (but not minimum) price Franchisees may charge Clients for product.

14. Clause 12.5 provided:

    The Master Franchisee agrees with the Company as follows:

    12.5MASTER FRANCHISE TRAINING

    to participate in such initial and ongoing training as the Company may reasonably require:

    12.5.1 Payment

    the Master Franchisee shall pay all its own costs for attending ongoing training;

    12.5.2 Training Location

    training shall take place in Adelaide;

    12.5.3 Persons Required to Train

    the Master Franchisee (if a natural person) or such other person as the Company shall direct shall attend training;

15. Clause 12.9 provided:

    The Master Franchisee agrees with the Company as follows:

    12.9FOLLOW DIRECTIONS

    to follow and use all reasonable endeavours to cause Franchisees to follow the directions of the Company as to:

    12.9.1 the manner of display and use of any Approved Name, Marks or the Image;

    12.9.2 the manner of effecting satisfactory Customer relations by Franchisees;

    12.9.3 the provision of Beauty Services and use of Product by Franchisees;

    12.9.4 any other matter provided for in this Agreement or the Operations Manual.

16. Clause 12.18 provided:

    The Master Franchisee agrees with the Company as follows:

    12.18 GOOD FAITH

    to act in good faith at all times to the Company and forthwith provide such      assistance and co-operation as may be practical upon request by the      Company.

17. On 15 March 2004, Mr Forrest visited Adelaide to undergo initial training.  He was given a copy of the then current operations manual on 17 March 2004.  Clause 4.2 was in identical terms to the earlier version provided to Mr Forrest in 2002.

    Development of the business in WA

    First and second stores

18. In June 2004, Essential Beauty WA, Pilton and the Furlers entered into a franchise agreement for an Essential Beauty salon at Hay Street Mall, Perth.[8]  The franchise agreement was drafted by Mr Maiello’s solicitors in Adelaide. The first four franchise agreements were all tripartite agreements between Essential Beauty WA, Pilton and the franchisees and were in the same form (the old form franchise agreement).

    [8]    The franchise agreement was not tendered, but a subsequent franchise agreement in the same form was tendered and received in evidence.

19. Under the franchise agreement, Essential Beauty WA and Pilton jointly granted to the Furlers a franchise to operate an Essential Beauty salon.  Clause 9.3 provided as follows:

    The Franchisee shall at all times purchase all goods, materials, Products and packaging for the Products from the Franchisor or such suppliers nominated in writing by the Franchisor who have been authorised by the Franchisor to supply the Franchisee.  It shall be the responsibility of the Franchisee to ensure that sufficient stocks are maintained at all times and training given to enable the proper and efficient running of the Franchise.

20. Clause 13.6 provided:

    The Franchisee agrees with the Franchisor and Master Franchisee as follows:

    …

    13.6not produce sell or supply any Product or service other than those products referred to in this agreement unless expressly authorised in writing by the Franchisor.

21. Pilton arranged and paid for the shop fitting, furniture, equipment and other establishment of the store.  Essential Beauty sent products from Adelaide to the store to form the opening stock.  Some opening stock was also purchased by Pilton from National Salon Supplies. Pilton invoiced the Furlers for the establishment, including the opening stock.

22. In late October 2004, Mr Maiello attended in Perth for the opening of the Hay Street store.  On 29 October 2004, he had dinner at the Forrests’ house.  There was a discussion about the distribution of Essential Beauty products in Western Australia.  I address the evidence concerning this conversation in Part B below.  On 30 October 2004, the Hay Street store opened. 

23. On 29 November 2004, Mr Maiello sent by facsimile to Mr Forrest a list of products stocked by Essential Beauty.  It showed Essential Beauty’s buy price - cost paid to suppliers - and sell price - amount charged to franchisees in South Australia.

24. In early 2005, Essential Beauty WA and Pilton entered into a franchise agreement with Karen Geneve to operate a franchise store at Centro Galleria in Morley.  In March 2005, the store opened. 

25. In April 2005, Essential Beauty sent a consignment of products to Pilton at a cost of approximately $48,000.[9]  This was the initial stock to establish the warehouse in Mr Forrest’s garage.  Up to that time, Essential Beauty had been supplying and invoicing the franchisees in Perth direct.

    [9]    All dollar figures are exclusive or GST unless otherwise stated.

26. In mid 2005, the Furlers abandoned the store at Hay Street.  Mr Forrest took over operation of the store until late 2006.  In late 2006, Sarah McLadden became the franchisee for the Hay Street store.  She remained the franchisee until December 2009, when she abandoned it. Mr Forrest’s company, Barnton Roundabout, then took over operation of the store.

    Third and fourth stores

27. In June 2007, Karen Geneve opened her second franchise store at Midland.  She was to continue to operate both the Morley and Midland stores until March 2010. 

28. In September 2007, a fourth Essential Beauty store was opened at Innaloo.  The franchisee was Sarah Maguire-Leigh who later changed her name to Sarah Nehemia. 

    Distribution

29. In July 2007, West Granton took over from Pilton the wholesaling of beauty products.  West Granton continued to purchase, as Pilton had done, from Essential Distribution in Adelaide. 

30. In 2008, Mr Forrest and Mr Maiello looked for a suitable location for a dedicated warehouse for Mr Forrest in Perth.  They located a property at Joondalup.  Mr Forrest was to begin operations at the Joondalup warehouse in August 2009.

    Renewal of term

31. On 30 September 2008, Mr Forrest wrote to Mr Maiello requesting renewal of the term of the master franchise for a further five years.  On 3 October 2008, Mr Maiello responded by email agreeing to the renewal.

32. Mr Forrest subsequently drafted a letter for Mr Maiello to sign dated 13 November 2008.  Mr Maiello signed the letter stating that renewal was granted in accordance with clause 7 of the Agreement for a new term of five years starting on 15 March 2009.  At the same time, it was agreed to increase the number of renewal terms from three periods to six periods each of five years.

    Fifth to eighth stores

33. In the second half of 2008, Mr Forrest agreed with Sarah Maguire-Leigh to establish three additional stores and to provide financial assistance to enable her to do so.

34. By this time, Mr Maiello was contemplating using or intending to use a single company, Essential Beauty Franchising, as the franchisor throughout Australia in lieu of the separate State-based franchisor companies which he was using in Western Australia, Victoria and Queensland.[10]

    [10]   And the dormant New South Wales named company.

35. In September 2008, Pilton and Sarah Maguire-Leigh entered into a franchise agreement for a new Essential Beauty store to be located at Rockingham City Shopping Centre at Rockingham.  The franchise agreement was in a different form to the previous tripartite franchise agreements entered into by Western Australian franchisees.  Although not parties to the franchise agreement, both Essential Beauty Franchising and Essential Beauty WA were mentioned in the agreement - as “EB” and “EB Western Australia” respectively.  Pilton was called “Essential Beauty” in the agreement.  The new agreement had been drafted by Mr Maiello’s solicitors in Adelaide.  All subsequent franchise agreements were in this new form (the new form franchise agreement).

36. The new form franchise agreement included the following terms:

    2.5The Franchisee acknowledges that EB may issue directions to the Franchisee from time to time which the Franchisee will comply with as if they were issued by Essential Beauty as master franchisee.

    5.The Franchised shall, at all times until after the Dissolution Date, use its best endeavours at the full cost of the Franchisee:

    …

    5.2.2  Prior to the Dissolution Date only use Products and equipment approved by Essential Beauty

    …

    6.2.the Franchisee shall not at any time until after the Dissolution Date, directly or indirectly except with the prior written consent of Essential Beauty:

    6.2.1  sell or attempt to sell any goods or services other than the required Business Activities to Clients to the extent permitted by law;

    …

    [Business Activities was defined by clause 81 to mean:

    the sale of goods and services approved by EB to Clients at the Franchised Premises and at other locations as approved by EB within the Territory and other activities as specified in the Manuals.]

    …

    27.1The Franchisee agrees to purchase all Products from Approved Suppliers, including the Franchisor, as they have demonstrated to EB an ability to meet EB’s standards and reliability for Products used in the System or sold by Franchisees.

    [Clause 81 defined Product to mean:

    Stock and materials which are sold or used in the Franchised Business as designated by EB from time to time]

    [Clause 81 defined Approved Supplier to mean:

    each of the supplies (including without limitation EB, Essential Beauty and subsidiary or associate of EB or Essential Beauty) approved by Essential Beauty to supply goods and/or services to the Franchisee from time to time]

    27.2Essential Beauty shall, to ensure compatibility and quality standards, either sell to the Franchisee Specified Equipment, Products, and additional goods and equipment required from time to time in the Franchised Business or shall designate Approved Suppliers from whom the Franchisee will make those purchases.

    27.3Essential Beauty will assist in the selection of Approved Suppliers following the directions of EB and may revoke approval of an approved supplier from time to time.

37. Clause 81 contained definitions.  Within the definition of Approved Suppler was the following substantive provision:

    Essential Beauty will not unreasonably withhold its approval to a supplier nominated by the Franchisee whether the Franchisee wishes to purchase products or equipment from another supplier if that supplier is able in the opinion of Essential Beauty to satisfy the goods and services specifications, quality, availability and support are to the standards that Essential Beauty requires from time to time.

38. In February 2009, the seventh and eighth stores were opened.  One was at Armadale, the franchisee being Sarah Maguire-Leigh.  The other was at Cannington, the franchisee being Nilar Soe.

39. In late 2008, Mr Maiello established an internal website accessible only by Essential Beauty franchisors, master franchisees and franchisees (the intranet).  Information previously exchanged by email, hard copy or telephone was now exchanged via the intranet.

    Opening of Joondalup warehouse

40. On 1 August 2009, West Granton started operating the Joondalup warehouse.  Thereafter, generally Essential Distribution shipped goods to the Joondalup warehouse and Mr Forrest in turn supplied franchisees from the Joondalup warehouse.

41. Mr Forrest’s distribution business traded under two different names.  When he sold products to franchisees, he used the name “Essential Distribution”.  When he sold products to non-Essential Beauty stores, he used the name “Beauty Mart” and perhaps also the name “Essential Distribution”.

42. At about the same time, Mr Tsamourtzis established a warehouse in Melbourne.  He conducted a similar distribution business, trading as Salons R Us, to that conducted by Mr Forrest.  Ms Donnarumma - who had fewer stores in Queensland and had become involved later - did not establish a warehouse or distribution business in Queensland and the Queensland franchisees were supplied directly by Essential Distribution from Adelaide.

    Products and suppliers

    ACCC notifications

43. In May 2009, Mr Maiello sought advice from Kelly & Co whether Essential Beauty would contravene the Trade Practices Act 1974 (Cth) if franchisees were required to purchase only from approved suppliers. On 1 June 2009, Kelly & Co provided advice, which Mr Maiello copied to Mr Forrest. Kelly & Co recommended that Essential Beauty apply for an authorisation from, or lodge a notification with, the Australian Competition and Consumer Commission (ACCC).

1. On 3 August 2009, Kelly & Co lodged on behalf of Mr Maiello’s franchisor companies notifications to the ACCC of conduct that might amount to exclusive dealing or third line forcing.  Kelly & Co lodged another notification of conduct that might amount to third line forcing on behalf of the three master franchisees, which was signed by Mr Forrest, Mr Tsamourtzis and Ms Donnarumma.  The notification by the master franchisees stated that it was a condition of the individual franchise agreements that franchisees acquire approved goods and services only from the franchisors or approved suppliers. 

   Approval of products and suppliers

2. On 14 October 2009, Mr Forrest sent an email to Mr Maiello enclosing what he said was an extract from the operations manual showing approved suppliers.  It showed Essential Distribution with one phone number in Western Australia and another phone number in South Australia.  It showed three external suppliers for specific products or services.

3. On 30 October 2009, Mr Maiello sent to Mr Forrest a final version of a document setting out the procedure for nominating a product/service or supplier for approval.  The procedure for nominating a product or service involved submitting an application form to Essential Beauty in South Australia; the product or service would then be trialled at five random franchise stores; if a majority provided positive feedback, there would be an Australia-wide vote of franchisees; and if a majority voted in favour, it would be approved.  There was a similar procedure for franchisees to nominate suppliers for approval.  This was a relatively democratic procedure, giving the ultimate decision to the franchisees collectively rather than a decision being imposed on them from above.  A copy of the procedure was provided to the ACCC in due course.

   Mr Forrest looks to diversify his distribution business

4. On 10 December 2009, Mr Forrest sent an email to Mr Maiello saying that he could not obtain supply from four brands because it had been blocked by the local Western Australian distributor.  One of the brands was Artav, a significant supplier to Essential Distribution.

5. Mr Maiello responded saying that he had not contacted the brands and in two instances did not deal with that brand.  He went on to say:

   In summary, we have no contractual obligations with ED with each other.  I did not have to give you those EB accounts in WA nor anything else.  Our agreement is the franchise business only.  I always said we should do an ED so we can both grow and get bigger accounts and move forward.  I did this out of the kindness of my heart and now it is pissing me off majorly for lots of different reasons.  I wish I never suggested it. 

6. On 11 December 2009, Mr Forrest replied.  He said that he had wanted to find out how Mr Maiello felt about his dealing with certain suppliers.  With opening Beauty Mart, he intended to go his own way to a large degree with different suppliers. 

7. Mr Maiello responded the same day.  He said that the proposal by Mr Forrest to go his own way was breaking away from the vision of Essential Beauty.  If it was all too hard, he would supply the Essential Beauty Western Australian stores and Mr Forrest could go his own way. 

8. In March 2010, Karen Geneve sold the Morley franchise business to Alison Hope.  Karen Geneve continued to operate the Midland salon.

9. In early 2010, Mr Forrest engaged Insight to provide strategic advice.  On 12 May 2010, Insight gave to Mr Forrest a business activity plan.  Insight recommended that Pilton ensure all Essential Beauty franchisees were using Beauty Mart products to their full capacity.  Insight recommend that Pilton strive to source products at competitive prices and negotiate more favourable pricing in terms of trade with key suppliers. Insight recommended that Pilton strive to recruit and implement two new franchise stores per year between 2010 and 2014.  Insight recommend that Beauty Mart seek to develop new markets and market product lines to independent beauty salons. 

10. In June 2010, Mr Forrest engaged Mr Fernandez to provide strategic advice. Mr Fernandez worked at Mr Forrest’s warehouse/office at Joondalup ranging from half a day up to two days a week from June 2010 to March 2011. Mr Fernandez was to instigate regular visits with Mr Forrest to the franchisees and the franchise stores from around July or August 2010.  Some were to franchisees by appointment.  Others were to franchise stores unannounced

    ACCC notifications

11. On 14 April 2010, Mr Forrest sent an email to Mr Maiello saying that he could not keep waiting for the ACCC and was proposing to revert to wholesaling through Pilton, which made it legal for him to insist on his franchisees buying from him.  Mr Maiello urged Mr Forrest to be patient. 

12. On 20 April 2010, the ACCC sent a letter with its response to the 3 August 2009 notifications.  It did not notify that the public detriment outweighed the public benefit in the notified arrangements.  It concluded that the notified conduct was not likely to have the effect of substantially lessening competition because Essential Beauty stores across Australia comprised less than two percent of the market for beauty services.  It concluded that the notified conduct did not amount to third line forcing by either the franchisors or the master franchisees.  Kelly & Co sent the ACCC’s letter to Mr Maiello who sent it on to Mr Forrest.

13. On 12 May 2010, Mr Forrest sent an email to Mr Maiello saying that he planned to stop trading through West Granton and start trading through Pilton so that he was doing first line forcing and not third line forcing.  He still wanted to work within the framework that Mr Maiello had produced for new approved suppliers and asked for Mr Maiello to send the procedure to him.

14. On 1 July 2010, Pilton took over the distribution business that West Granton conducted out of the Joondalup warehouse.

    Approval of products and suppliers

15. On 5 July 2010, Mr Maiello sent an email to Mr Forrest and Mr Tsamourtzis.  He attached a copy of the procedure for franchisees to nominate a product or supplier for approval.  This was essentially the same as the version he had sent to Mr Forrest on 30 October 2009.  He told Mr Forrest and Mr Tsamourtzis not to comment on the procedure; it was the version sent to the ACCC and it was just for their information. 

16. Mr Maiello also attached to his email an authorised product list.  It listed 21 products under six headings.  Eleven products were manufactured for Mr Maiello and bore the label “Essential Beauty” or “Essential Distribution”.  Each of the other ten products bore the manufacturer’s own brand name.  Mr Maiello invited comments on the product list from Mr Forrest and Mr Tsamourtzis.  Mr Maiello also attached to his email a list of approved suppliers. He invited comments by way of additions in red or advice. 

17. On 7 July 2010 at 9.09 am, Mr Forrest sent an email to Mr Maiello.  He made several alterations in red to the procedure for nominating a product or supplier.  Essentially the procedures were the same as drafted by Mr Maiello from the point of view of the franchisees, except that the franchisees’ dealings in nominating, trialling and voting on a product or supplier would be with the master franchisee in their State rather than with the master franchisor.

18. Mr Forrest did not make any comments concerning the authorised product list.  However, he sent to Mr Maiello a different version of an approved supplier list.  It showed 22 different categories of product or service and an approved supplier for each category.  It only applied in Western Australia.  It showed Pilton as the approved supplier in all categories except three, for which it showed third party suppliers.

19. On 7 July 10 at 10.03 am, Mr Maiello responded to the email.  He asked Mr Forrest to add his suppliers to Mr Maiello’s approved supplier list or to add Mr Maiello’s suppliers to Mr Forrest’s list.  He said that there was no need to alter the approval procedures and they should be left as they were. 

20. On 7 July 2010 at 11.31 am, Mr Maiello sent a second email to Mr Forrest.  He said “we are approaching this nationally so WA is incorporated into the list along with all other States”.

21. On 7 July at 11.53 am, Mr Maiello sent a third email to Mr Forrest.  He attached to the email Mr Forrest’s list of approved suppliers with provision for additional columns for South Australia, Victoria and Queensland.  He said it was what Mr Forrest had sent with the addition of the States at the top.

22. On 7 July 2010 at 12.31 pm, Mr Forrest sent an email to Mr Maiello attaching the original version of the approval procedures document sent by Mr Maiello on 5 July with a note on the front page saying State-based approval procedures may also apply.

23. Mr Maiello put his own versions of the authorised product list, approved supplier list and nomination procedure document - with Mr Forrest’s note on the first page - onto the intranet and they became accessible to all franchisees around Australia.  Mr Forrest’s versions were not put on the intranet.

24. In July and August 2010, Sarah Maguire-Leigh contacted Mr Maiello on several occasions complaining that she could not obtain timely product from Mr Forrest.  Emails passed between Mr Maiello and Mr Forrest on this topic.  Other Western Australian franchisees also contacted Essential Distribution in South Australia with complaints about availability of, or requests for, product.

25. On 24 July and 2 August 2010, an email exchange occurred between Mr Maiello and Mr Forrest.  There was a consensus that Mr Forrest would increase his stock holding levels to avoid franchisees in Western Australia not being able to obtain products when they needed them and that, if Mr Forrest did not have product in stock, he would order from Essential Distribution in Adelaide, which would dispatch directly to the store but invoice Pilton.

    Renewal terms

26. In about July 2010, Mr Maiello was advised by his solicitors that Essential Beauty WA was required to provide to Pilton a disclosure document in relation to the 2009 renewal for a further five years.  Mr Maiello sent or asked his solicitors to send the current version of Essential Beauty’s master franchise agreement to Mr Forrest because Mr Maiello had a disclosure document for the current version but not for the original 2004 version. 

27. On 9 August 2010, Mr Maiello sent an email to Mr Forrest explaining that he wished to use the new form master franchise agreement for the renewal for this reason.  Mr Maiello referred to clause 7.1.2 of the Agreement which provided that a renewal would be upon the terms of the current form of franchise agreement. 

28. Between 2 and 9 September 2010, a further email exchange occurred between Mr Maiello and Mr Forrest about adopting the new version of the master franchise agreement for the renewal period that had begun in March 2009.  Mr Forrest said that the renewal had already been effected and he did not want to change to the new version until the next renewal. 

29. Between 16 and 21 October 2010, there was a further email exchange between Mr Maiello and Mr Forrest concerning execution of the new version of the master franchise agreement.  The parties moved towards entrenched positions, if not acrimony.

    Products and suppliers

    Direction by Mr Forrest to franchisees

30. On 31 August 2010, Mr Forrest and Mr Fernandez attended a quarterly meeting with the Western Australian franchisees.  Mr Forrest handed out the approved supplier list for Western Australia that he had sent to Mr Maiello on 7 July.  He said that all non-approved products were required to be removed from franchise stores by 12 October 2010.  He would visit all stores to ensure compliance.  He said that there was a procedure for franchisees to nominate products or suppliers to become approved.  Later on 31 August 2010, Mr Forrest sent an email to each franchisee attaching an approval procedure which was the version he had sent to Mr Maiello on 7 July 2010.

    Additional stores

31. On 10 September 2010, a ninth Essential Beauty store was opened at Mirrabooka.  It was operated by Million Billion, one of Mr Forrest’s companies.

32. On 15 September 2010, Mr Maiello sent an email to Mr Forrest.  He suggested eight regional shopping centres, 19 sub-regional shopping centres and six strip locations that Mr Forrest should consider for establishing new franchises.

33. On 15 October 2010, Pilton and Sarah Barker entered into a franchise agreement to open a new franchise store at Hillarys, which ultimately was to open in December 2010.

    Supply of product

34. On 7 October 2010, Mr Maiello sent an email to Mr Forrest and Mr Tsamourtzis.  He identified a problem being a situation in which franchisees in Western Australia or Victoria could not obtain timely products from Pilton or Salons R Us respectively.  He identified a solution.  He attached a flow chart showing Pilton and Salons R Us respectively supplying franchisees in Western Australia and Victoria but, when they could not supply a product, Essential Distribution in South Australia supplying those franchisees directly.  He sought input from Mr Forrest and Mr Tsamourtzis.

35. On 8 October 2010, Mr Forrest responded.  He said that he opposed Western Australia franchisees ordering directly from Essential Distribution in Adelaide.  Mr Maiello responded saying that he would consider the position and make a decision in due course.

36. In mid October 2010, it was arranged that Mr Maiello and Mr Gagliardi would visit Western Australia on 17 November 2010 to meet with Mr Forrest and the Western Australian franchisees to impart strategic directions to the franchisees.

37. On 19 October 2010, Mr Maiello sent an email to Mr Forrest and Mr Tsamourtzis.  He said that he had decided that all franchisees Australia-wide could buy from Salons R Us, Pilton or Essential Distribution – they are all authorised suppliers.  If they had sufficient supply of a product, franchisees based in their State would always come to them first and that is the way it should be.  However, if franchisees could not obtain product locally, they should be able to obtain it interstate.  He would not be making this public yet to franchisees. 

38. On 19 October 2010, Mr Forrest visited each Western Australian store.  He made a record of products that he considered were not approved products or had not been supplied by approved suppliers.

39. On 21 October 2010, Mr Forrest responded to Mr Maiello’s 19 October email.  He said that he was the sole distributor in Western Australia and did not have a problem with excessive complaints.  Mr Maiello responded, taking issue and referring to the Agreement.  This led to a further email exchange in which the parties moved towards entrenched positions and acrimony. 

40. On 29 October 2010, Mr Forrest sent an email to the Western Australian franchisees referring to recent incidences of their emailing and phoning South Australia with product inquiries or for general support.  He said that the correct channel for all Western Australian issues was to contact his company. 

    Pilton’s breach notices to franchisees

41. On 1 November 2010, Mr Forrest sent notices of breach to each Western Australian franchisee except Alison Hope.  Each letter listed products in the salon when Mr Forrest had visited on 19 October 2010 which were said by Mr Forrest to be either non-approved products or obtained from non-approved suppliers.

42. Several notices referred to the following non-approved products:

    “Kendal” Wipes

    “Liv” Wipes

    “Fake Bake” spray tan products

    “Pharmatex” disposable gloves

    “Steripure” de-mineralised water

    “Tork” hand towels and or dispensers

    “Listerine”

    “Urban Butterfly” products

    There were some additional products listed for only one or two stores. 

43. The notices nearly all referred to body jewellery purchased from non-approved suppliers.  Some referred to appointment books and one referred to aprons from non‑approved suppliers. 

44. On 3 November 2010, Mr Maiello sent an email to Mr Forrest referring to the four breach notices sent to Sarah Nehemia.  He said that they contained wrong information pertaining to approved and non-approved product.

45. On 3 November 2010, Mr Forrest sent an email to Mr Maiello concerning a supplier AAB.  He attached the approval procedure which he had sent to Western Australian franchisees on 31 August 2010 and asked Mr Maiello to request AAB to complete the procedure and send it to Mr Forrest if AAB sought approved supplier status for Western Australia.  Mr Maiello responded asking why Mr Forrest had plagiarised his original document and requesting him to refrain from using his template.

46. On 3 November 2010, Mr Maiello telephoned Mr Forrest.  There was a short conversation, which was terminated by Mr Forrest hanging up the phone.  On 4 November 2010, Mr Maiello sent an email to Mr Forrest demanding that he withdraw the breach notices issued to the Western Australian franchisees.

47. On 5 November 2010, a telephone and email exchange occurred between Mr Forrest and Sarah Nehemia in relation to the breach notices that became argumentative and acrimonious. 

48. On 8 November 2010, Mr Maiello sent an email to Mr Forrest attaching an approved product & supplier list dated 30 September 2010 that Mr Forrest had issued.  It listed 24 categories of products.  For 17 categories, it showed Pilton as the approved supplier.  For seven categories, it showed a third party as the approved supplier.  Mr Maiello said that he had been contacted by numerous franchisees seeking clarification and would be responding to them that the list was not correct. 

49. On the same day, Pilton’s solicitors sent an email to Essential Beauty WA’s solicitors.  They contended that the definition of “approved suppliers” in the franchise agreements with the franchisees clearly stated that suppliers were to be approved by Pilton.  They contended that Mr Maiello had approved Pilton as a supplier in any event.

50. On the same day, Mr Maiello sent to the Western Australian franchisees - or all franchisees - an email.  It referred to an unapproved list circulated by the Western Australian master franchisee and attached the authorised product list and the approved supplier list - each essentially as sent to Mr Forrest on 5 July.

51. On 19 November 2010, Mr Maiello and Mr Gagliardi delivered a seminar to the Western Australian franchisees.  There was no individual meeting between Mr Maiello and Mr Forrest.  Each blamed the other for a meeting not occurring.

52. On 25 November 2010, Pilton’s solicitors wrote to each of the Western Australian franchisees. They attached the approved product & supplier list issued by Pilton dated 30 September 2010.  They required that any stock and materials not acquired from suppliers approved by Pilton be removed within seven days, any outstanding orders from non-approved suppliers - including Essential Beauty - be cancelled and invoices be provided for stock provided by non-approved suppliers within the last 30 days.

53. On the same day, Pilton’s solicitors wrote to Sarah Nehemia in respect of each of her franchise stores enclosing a notice of dispute.  The dispute was defined to be the purchase of products from suppliers not approved by Pilton in breach of clause 9.3 of the Innaloo old form franchise agreement and clauses 5.2 and 27 of the other three new form franchise agreements.

54. On 1 December 2010, Essential Beauty WA’s solicitors wrote to Pilton’s solicitors.  They referred to the four breach notices issued to Sarah Nehemia and contended that they were erroneous in certain respects.  They demanded the immediate withdrawal of all breach notices issued by Pilton.

55. On 4 December 2010, Mr Forrest visited a number of the franchise stores unannounced.  A number of the franchisees later sent emails to Mr Forrest or Mr Maiello complaining about the visits and Mr Forrest’s conduct during them.  Mr Forrest responded maintaining his entitlement to make unannounced store inspections.

56. On 9 December 2010, Pilton issued a further breach notice to Sarah Nehemia in respect of the Joondalup store as a result of his visit on 3 December.  It referred to essentially the same products as the 1 November breach notice.  For ease of reference, I refer to the 1 November and 9 December 2010 breach notices collectively as the “Pilton breach notices”.

1. On 10 December 2010, Essential Beauty WA’s solicitors wrote to Pilton’s solicitors.  They complained about the unannounced visits to the franchisees on 4 December and required that any subsequent inspections be with prior written notice to the franchisees and outside normal business hours. 

   EBWA’s notices to Pilton

   EBWA’s directions notices

2. On 15 December 2010, Essential Beauty WA’s solicitors wrote to Pilton attaching a directions notice.  Relevantly the notice directed that Pilton:

   1.withdraw the Pilton breach notices and the demands in the letters from Pilton’s solicitors issued on 25 November 2010;

   2.not, without the prior written agreement of Essential Beauty WA, issue to franchisees other breach notices, termination notices or demands in relation to products or services stocked or supplied by Western Australian franchisees;

   3.cause Mr Forrest to attend two days training with Essential Beauty in Adelaide on four topics in mid to late January 2011 on a date and at a time to be arranged by 22 December; and

   4.produce to Essential Beauty WA copies of all advertising placed by Pilton for new franchisees over the past 12 months.

3. On 17 December 2010, Essential Beauty WA’s solicitors sent to Pilton a second directions notice.  Relevantly, the notice directed that Pilton:

   1.withdraw all current lists of approved products and suppliers including the one enclosed with its solicitors’ letters dated 25 November 2010; and

   2.circulate the enclosed approved products and suppliers list to all Western Australian franchisees.

4. For ease of reference, I refer to the 15 and 17 December 2010 notices collectively as the “EBWA directions notices”.  I refer to the approved product and supplier list enclosed with the 17 December notice as the “EBWA list” and the list that had been sent by Pilton’s solicitors to franchisees on 25 November as the “Pilton list”.

5. On 17 December 2010, Pilton’s solicitors sent a letter to Essential Beauty WA enclosing a notice of dispute.  It related to the directions notice issued on 15 December 2010 and to Essential Beauty supplying products directly to franchisees.

6. On 4 January 2011, at a telephone conference between Mr Maiello and Mr Forrest to discuss the issues that had arisen, nothing was resolved.

7. On 12 January 2011, Essential Beauty WA’s solicitors sent to Pilton a notice of dispute in relation to the directions issued in the EBWA directions notices.

   EBWA’s breach notice

8. On 28 January 2011, Essential Beauty WA’s solicitors served on Pilton a breach notice (the EBWA breach notice).  The breaches alleged were failure to comply with the Essential Beauty WA directions notices.

9. On 19 February 2011, Mr Forrest sent an email to Mr Maiello.  He said that Mr Maiello appeared to have suggested that Mr Forrest come to South Australia personally for training so that Mr Forrest could conduct training in Western Australia in relation to make-up “feathering” techniques.  If so, Mr Forrest would decline the offer because he was not technically in a position to train Western Australian salons.  Mr Maiello sent an email in response pointing out that Mr Forrest had been given a directive in the directions notice to attend for training in South Australia and noting that Mr Forrest had declined to comply.

10. On 14 March 2011, Mr Maiello and Mr Forrest attended a mediation in Sydney pursuant to the dispute resolution provisions of the Agreement.  No resolution was reached.

    Termination and subsequent events

11. On 15 March 2011, Essential Beauty WA’s solicitors sent to Pilton’s solicitors a notice of termination of the Agreement (the termination notice).

12. On 18 March 2011, Essential Beauty WA’s solicitors wrote to Pilton’s solicitors enclosing a deed of assignment by Pilton to Essential Beauty Franchising of the benefit of each of the eight franchise agreements with the arms length franchisees in Western Australia and requiring, pursuant to clause 23.6 of the Agreement, that Pilton execute the assignment deed.

13. On 23 March 2011, Pilton’s solicitors wrote to Essential Beauty WA’s solicitors alleging that the purported termination was unlawful and stating that Pilton intended to commence proceedings seeking relief including an injunction preventing reliance upon the termination notice.

14. On 24 March 2011, Essential Beauty WA, purportedly acting as attorney for Pilton under clause 23.6 of the Agreement, executed an assignment deed assigning the benefit of the eight franchise agreements to Essential Beauty Franchising.

15. After March 2011, Barnton Roundabout and Million Billion continued to trade at the Hay Street and Mirrabooka stores under the name “Essential Beauty”, although in practise there were no ongoing links between that operation and Essential Beauty stores around Australia.  The other eight Essential Beauty stores in Western Australia as at March 2011 became franchisees under direct arrangements made with Essential Beauty Franchising.

16. On 13 April 2011, Essential Beauty WA instituted this action against Pilton and Mr Forrest.  On 30 June 2011, Pilton and Mr Forrest instituted a cross action. 

17. Between December 2011 and April 2013, the following new Essential Beauty stores were opened in Western Australia by or under the auspices of Essential Beauty Franchising:

Location	Opening
Belmont Forum at Cloverdale	November 2011
Centro at Warwick	March 2012
Centro at Mandurah	March 2012
Karrinyup Shopping Centre at Karrinyup	May 2012
Raine Square, Perth	August 2012
The Shops at Ellenbrook	October 2012
Bunbury Forum Shopping Centre at Bunbury	March 2013
Livingston Marketplace at Canning Vale	April 2013

1. Seven of the eight stores were opened as company stores without a franchisee. The stores at Raine Square Perth and Karrinyup were later transferred to Karen Geneve. The stores at Warwick, Mandurah and Canning Vale were later transferred to other franchisees. The store at Ellenbrook remains a company store.

2. In January 2013, Essential Beauty Franchising entered into a regional master franchise agreement with the Mr and Mrs Higgins for regional Western Australia outside the Perth metropolitan area. The store at Bunbury was opened by the Higgins under that regional master franchise agreement. In late 2013, an additional store was opened at Geraldton by the Higgins under that regional master franchise agreement. The Higgins also acquired the Belmont store after it had been opened by Essential Beauty as a company store.

   PART B:  THE TRIAL

   Claims by the parties

   Plaintiffs’ claims

3. By the time of trial, the plaintiffs’ principal claim remaining was a claim by Essential Beauty WA against Pilton and Mr Forrest for a declaration that the Agreement was validly terminated and for franchise fees and interest.  The existence and quantum of that debt were agreed at $272,494.68 inclusive of interest calculated to 3 February 2014.  Essential Beauty WA seeks interest from 4 February 2014 to the date of judgment.  The only issue in relation to the debt remaining is the setoff claimed by Pilton and Mr Forrest by reason of Pilton’s counterclaim.

4. Essential Beauty WA also seeks a declaration that it is entitled to be indemnified by Pilton and Mr Forrest for, and an order for payment of, its legal costs - including costs of action - as a result of Pilton’s alleged default under the Agreement on a contractual basis under clause 12.23 or 17 of the Agreement.

5. Essential Beauty Franchising was joined as a co-plaintiff with Essential Beauty WA to seek a declaration against Pilton that Pilton’s rights under the eight franchise agreements with the eight arm’s length franchisees in Western Australia had been validly assigned in March 2011 by Essential Beauty WA as attorney for Pilton to Essential Beauty Franchising.  It is agreed that, if Essential Beauty WA is successful in both the action and counterclaim, this relief should be granted.

6. Essential Beauty WA joined EB Realty as a defendant to seek a declaration that Pilton is obliged to procure the assignment by EB Realty of leases held by EB Realty in respect of arm’s length franchise stores in Western Australia.  It is agreed that, if Essential Beauty WA is successful in the action and on the counterclaim, this relief should be granted in relation to the three leases still held by EB Realty.

7. Essential Beauty WA originally joined Barnton Roundabout and Million Billion to seek injunctive and declaratory relief preventing their continuing to trade under the name “Essential Beauty”.  That relief is no longer sought as the Hay Street and Mirrabooka stores ceased to trade under the name “Essential Beauty” in April 2013. 

   Defendant’s claims

8. The counterclaim is brought principally by Pilton against Essential Beauty WA.[11]

   [11]   Mr Forrest relies on the counterclaim by EBWA to Pilton only by way of defence by setting off against Pilton’s liability to EBWA the liability arising from the matters pleaded in the Pilton counterclaim. 

9. The principal cause of action advanced by Pilton is breach of contract.  Pilton seeks a declaration that the termination notice was unlawful and seeks specific performance of the Agreement and damages for breach.

10. In the alternative, Pilton seeks a declaration that Essential Beauty WA engaged in unconscionable conduct in contravention of sections 51AA or 51AC of the Competition and Consumer Act 2010 (Cth) or sections 20 or 21 of the Australian Consumer Law which is Schedule 2 to that Act.  Pilton seeks damages for those contraventions quantified in the same amount as the damages sought for breach of contract.  Pilton seeks the same damages against Mr Maiello for aiding and abetting the contraventions.

11. In the further alternative, Pilton seeks relief against forfeiture of its interest under the Agreement.

12. In its defence and counterclaim, Pilton had pleaded two oral agreements - termed the “Approved Supplier Agreement” and the “Supply Agreement” - made in early 2004.  During its opening address, Pilton clarified that its case was that there was a single oral agreement entered into in early 2004 on the various terms pleaded.  Pilton sought specific performance and/or damages for breach of the oral agreement.  During closing address, Pilton abandoned its oral agreement case and relied exclusively on the Master Franchise Agreement.

13. Mr Forrest, Barnton Roundabout and Million Billion had pleaded that Mr Forrest entered into an oral agreement with Essential Beauty WA in the first half of 2005 and in December 2009 - termed the “Forrest Unit Agreement”.  They pleaded that it was agreed that they would not pay franchise fees or advertising levies for the stores at Hay Street Perth and Mirrabooka.  They sought specific performance and/or damages for breach of that agreement.  That claim was resolved at trial.

    Evidence at trial

14. A tender book of 11 lever arch folders was prepared for trial.  Virtually all of the documents in the tender book were tendered by one or other of the parties by consent.  Both parties tendered various additional documents during the oral evidence.

15. It was agreed that Pilton would be dux litus at trial.  Pilton’s lay witnesses were Mr Forrest and Mr Fernandez.  Essential Beauty WA’s lay witness was Mr Maiello.  Ultimately, there is not a serious challenge by either party to the credit of the opponent’s witnesses.  While there were variations between the evidence given by the three witnesses, the case does not turn upon those variations.

16. Pilton called a retail network planning expert, Justin Ganly, to give expert evidence.  A report prepared by Mr Ganly in November 2013 together with supplementary schedules prepared during trial was received into evidence.  Essential Beauty WA called a retail network planning expert, Bruce Waddington, to give evidence on the same matters.  A report prepared by Mr Waddington in July 2013 together with a report prepared during trial was received into evidence.  Mr Ganly and Mr Waddington gave their evidence concurrently.  Their evidence addressed predictions of new Essential Beauty stores that might be opened in future, their likely turnover and viability as well as predictions of likely turnover of existing Essential Beauty stores.

17. Pilton called an accountant, Trevor Lean, to give expert accounting evidence.  A report prepared by Mr Lean in December 2013 together with supplementary schedules prepared during trial was received into evidence.  Essential Beauty WA called an accountant, Peter Holmes, to give evidence on the same matters.  A report prepared by Mr Holmes in January 2014 together with supplementary schedules prepared during trial was received into evidence.  Mr Waddington and Mr Holmes gave concurrent evidence.  Their evidence related to the franchise fees and profit on the distribution of product likely to have been earned by Pilton if it had remained master franchisee until 2039, contingencies and an appropriate discount rate.  Most issues between Mr Waddington and Mr Holmes were resolved during their concurrent evidence.

    Evidence of Mr Maiello and Mr Forrest

18. Pilton makes a handful of criticisms of Mr Maiello’s evidence in cross-examination.  Pilton contends that Mr Maiello’s evidence became advocacy for his case rather than being responsive to questions and that he refused to acknowledge any form of wrongdoing when he should have done so.  However, Pilton does not contend that I should make or not make any specific findings of fact by reference to the credibility of Mr Maiello’s evidence or of Mr Forrest’s evidence.  In reality, the differences between the evidence given by Mr Forrest and Mr Maiello were few and were immaterial to the outcome of the case.

19. Essential Beauty WA makes a handful of criticisms of Mr Forrest’s evidence in cross-examination.  Essential Beauty WA contends that it was evasive, vague and argumentative and points particularly to his evidence concerning the payment of the advertising levy and franchise service fees.  Essential Beauty WA contends that these matters reflect on Mr Forrest’s credit which Essential Beauty WA contends is relevant to quantum of loss.  I reject Essential Beauty WA’s contention that Mr Forrest was a dishonest witness.  The issue of payment of franchise service fees and advertising levies was not a pleaded issue or an issue material to the case and was relevant only to credit.  It is not surprising that Mr Forrest did not have much recollection concerning the payment of those amounts some years ago.

20. For the sake of completeness, I record that I consider that each of Mr Forrest and Mr Maiello was an honest witness in the sense that each gave evidence to the best of his recollection.  I found Mr Maiello to be a more reliable historian than Mr Forrest but each witness was unreliable when addressing matters occurring many years ago from memory. 

21. As observed above, Pilton pleaded - but abandoned in closing address - that there was an oral agreement entered into in early 2004 relating to supply.  Mr Forrest gave evidence of a telephone conversation with Mr Maiello which he said occurred a couple of months before signing the Agreement in March 2004.  Mr Forrest gave evidence that the relevant part of the telephone conversation was as follows:

    I said it would be best for me to stock the products in Western Australia so I can adequately supply the shops, chain of shops I am about to set up.  He said “Yes” because it would take too long to send the products from Adelaide to the WA salons.  And he said “I want you to stock them in Western Australia so you can deliver them the next day.  On top of that you will have the added attraction of making a wholesale profit on those products that you supply to WA franchisees”.  I agreed to that.  I said “Yes”.

22. Mr Maiello in cross-examination denied that such a conversation occurred in early 2004.  However, he gave evidence of a conversation in very similar terms which he said occurred in person on 29 October 2004.  Mr Maiello’s evidence was that, during this later conversation, he suggested to Mr Forrest that he use his garage as a warehouse to distribute products obtained from Essential Beauty in Adelaide to Western Australian franchisees.  This would give the franchisees an assurance that they could obtain product on a timely basis and in good condition rather than relying upon its being freighted from South Australia with the risk of damage or loss in transit only being discovered on arrival at the store.  This would also give Mr Forrest a profit on the sale of the products to the franchisees.  When this conversation had earlier been put in cross-examination to Mr Forrest, Mr Forrest said that he did not recall discussing products that day, but did not deny that the conversation took place in accordance with Mr Maiello’s version.

23. When this evidence was given by Mr Forrest and Mr Maiello, the existence of a conversation about supply around January 2004 was important because Pilton was still pursuing a case that there was an oral agreement entered into in January 2004.  This relevance disappeared upon Pilton abandoning its oral contract case during closing address.

24. For the sake of completeness, I record my finding that the conversation narrated by Mr Forrest in fact took place in October 2004 rather than around January 2004.  I make that finding for several reasons.  The topic of distribution of products being made locally in Western Australia had already been discussed between the parties in mid 2002.  On the face of the written communications between the parties in July 2002, Mr Maiello had expressed concern about the franchisees having to obtain product from Adelaide without a local distribution centre in Western Australia.  In August 2002, a new draft of the Heads of Agreement was prepared on the basis that there would be a local distribution centre in Western Australia.  Given that evidence, there was no reason for a similar discussion to the same effect around January 2004.

25. The evidence is clear that all distribution of product to the first two franchisees in Western Australia, namely the Furlers and Karen Geneve, was made directly by Essential Beauty in Adelaide to the franchisees between October 2004 and March 2005.  It was only in April 2005 that Essential Beauty sent the first consignment of products to Pilton.  If the conversation had occurred as narrated by Mr Forrest around January 2004, it may be expected that Pilton would have established a local distribution centre in Western Australia, even if only in Mr Forrest’s garage, by October 2004 when the first store was opened.  Conversely, if the conversation did not occur until the end of October 2004, that fits better with Mr Forrest taking steps thereafter to establish his garage as the local distribution centre.

26. I was impressed by Mr Maiello’s recollection and account of the conversation in October 2004 compared to Mr Forrest’s recollection and account of the telephone discussion around January 2004.  I found Mr Forrest’s recollection of the events before March 2004 to be quite unreliable.  His evidence-in-chief was inconsistent with contemporaneous documents later put to him in cross-examination.  For example, he gave evidence that Mr Maiello only introduced the concept of a lump sum master franchise fee of $250,000 in the last month before the Agreement was signed.  However, documents tendered by Essential Beauty WA proved that it had been raised in October 2003.  He also gave evidence that he only received the first draft of the master franchise agreement six weeks before signing; whereas documents later tendered showed a draft had been provided by December 2002.

27. Having made that finding, it would make no difference to the result of this case if I had found that the conversation occurred around January 2004 in accordance with Mr Forrest’s evidence.  In that event, the conversation could form part of the surrounding circumstances for the purpose of construing clause 9.1 of the Agreement addressed below.  However, it is evident from the mid‑2002 communications between the parties and from Mr Maiello’s letter in October 2003 that both parties envisaged that there would be a local distribution centre operated by Mr Forrest in Western Australian before the Agreement was executed.  There is nothing in the pre-contractual communications between the parties, or in Mr Forrest’s account of the telephone conversation around January 2004, that it was agreed that distribution to the franchisees would be undertaken exclusively by Pilton to the exclusion of Essential Beauty.

    Other witnesses

1. Mr Ganly’s predictions proceed on the basis that three of the six hypothetical future stores would be opened in July 2014 and two more in July 2015 and, in addition, they proceed on the basis that eight new stores would already have been opened between March 2011 and June 2013 whereas I have found that it is likely that only one new store every nine months would have been opened by Pilton.

2. I assess Pilton’s loss on the assumption that five of the eight stores opened by Essential Beauty WA before June 2013 would only have been opened, one every nine months, after July 2013 and the six new stores predicted by Mr Ganly would have been opened thereafter  - the first in September 2017 - one every nine months.

   Contribution of new stores

3. I assume that the stores would have been opened by Mr Forrest in the same order as they were opened by Mr Maiello and then the new stores predicted by Mr Ganly from July 2014 would have been opened in the same order as shown by Mr Ganly.  I therefore assume openings as follows.

Location	Opening per Mr Lean	Opening assessed	Delay (years)
Cloverdale	December 2011	September 2011	¼ year earlier
Warwick	March 2012	June 2012	¼ year
Mandurah	March 2012	March 2013	1 year
Karrinyup	May 2012	December 2013	1½ years
Raine Square Perth	September 2012	September 2014	2 years
Ellenbrook	October 2012	June 2015	2¾ years
Bunbury	March 2013	March 2016	3 years
Livingston	April 2013	December 2016	3¾ years
Booragoon	July 2014	September 2017	3¼ years
Cockburn	July 2014	June 2018	4 years
Claremont	July 2014	March 2019	4¾ years
Madeley	July 2015	December 2019	4½ years
Kwinana	July 2015	September 2020	5¼ years
Alkimos	July 2021	June 2021	Nil

1. Mr Ganly was instructed by Pilton that the existing Essential Beauty stores had not reached revenue maturity until their fourth year.  Accordingly, Mr Ganly projected mature revenue for the fourth year of operation of the future hypothetical Essential Beauty stores and made a pro rata reduction for the first three years based on the pattern of the mature existing Essential Beauty stores.  I accept this as an appropriate starting point. 

2. I first make an assessment of the order of magnitude of the difference in lost profit arising from the stores being opened at a slower rate than according to Piltons’s case. During the financial year ended 30 June 2016, Mr Lean assumed that the seven new stores from Bunbury to Kwinana shown in the table above would have been opened but my assessment is that, apart from Bunbury being open for 3 months, they would not have been opened by Mr Forrest.  In addition, the four stores that would have been opened from Mandurah to Ellenbrook shown in the table onwards would have been open a shorter time and would have generated less revenue because they would have been more immature.

3. Mr Ganly’s assessment was that the seven stores from Bunbury to Kwinana would have generated revenue of approximately $4 million in the 2016 financial year.  Mr Ganly’s assessment was that the four stores from Mandurah to Ellenbrook would have generated revenue of approximately $2.3 million in the 2016 financial year compared to approximately $1.1 million in the 2013 financial year when they were less mature by 3 years.  The combined reduction in revenue of approximately $5.2 million compares to Mr Ganly’s estimate of revenue generated by all stores that he assessed would be open in the financial year ended 30 June 2016 of approximately $14.4 million. The reduction in revenue is approximately 36 percent of total revenue estimated by Mr Ganly for all stores.

4. Based on my analysis at [444] above for the 2012 financial year, the percentage reduction in net profit resulting from a percentage reduction in revenue of 36% would substantially exceed 36%. The ratio for the 2016 financial year would necessarily differ from the ratio for the 2012 financial year.

5. Because Mr Ganly’s estimates proceed on the basis that stores take 3 full years to reach revenue maturity, the effects of delayed store openings to September 2020 would persist until the 2024 financial year. The reduction in revenue and the consequential reduction in net profit due to delayed store openings will vary from year to year throughout the period from the 2015 financial year to the 2024 financial year. It is not appropriate to attempt a broad-axe assessment of the financial effect of delayed store openings on the assessment of Pilton’s loss. If Pilton had succeeded on the counterclaim, I would have invited Pilton to request Mr Ganly to make a fresh assessment of store revenue for the 2015 to 2024 financial years and possibly thereafter on the revised assumption of store openings in accordance with [471] above and Mr Lean to make a consequential fresh calculation of lost net profit based on Mr Ganly’s revised revenue figures.

   Future change in revenue

6. Mr Ganly projected future changes in revenue - generally increases - for both existing and future hypothetical Essential Beauty stores after they achieve revenue maturity in their fourth year.  He did this having regard to the following factors.

7. First, Mr Ganly defined the catchment area for a shopping area as being within 15 minutes drive time for a regional shopping centre and 10 minutes drive time for a sub-regional shopping centre.  He ascertained the existing population within that catchment area using statistics obtained from the Australian Bureau of Statistics and the Western Australian government.  He had regard to future population forecasts for those areas by the Australian Bureau of Statistics and the Western Australian government.

8. Secondly, Mr Ganly had regard to forecasts in changes in Western Australian retail spending per capita for “Other Goods” produced by Deloitte Access Economics.  These forecasts extend to the financial year ended 2021.  For the remaining years up to 2039, Mr Ganly adopted the average annual rate during the ten years to 2021 and applied that average rate.

9. Thirdly, Mr Ganly applied a discount of 0.5 percent per annum to allow for the addition of future competitors within centres in which Essential Beauty stores are located.

10. Mr Waddington made various criticisms of Mr Ganly’s method in this respect.  However, he was not instructed by Essential Beauty WA to perform his own assessment. 

11. Essential Beauty WA makes criticisms in closing address of Mr Ganly in relation to his future projections.  For similar reasons to my assessment in relation to the opening of new stores, I consider that Mr Ganly’s approach is reasonable.  The potential for better results to some extent offsets the potential for worse results.  This includes the potential for closing an existing Essential Beauty store which is offset to some extent by the potential for opening more new Essential Beauty stores than are the subject of Pilton’s claim.

12. Again, notwithstanding the above analysis, Mr Ganly’s projected revenue figures are subject to various contingencies that can be identified but are largely imponderable. It is appropriate to recognise these contingencies when assessing the overall discount rate considered at [507] below.

    Calculation of loss of profit

    Franchise fees

13. Mr Lean made a calculation of franchise fees at 7.5 percent of revenue that would have been received by Pilton if Essential Beauty stores - new and hypothetical - had generated the revenue predicted by Mr Ganly.

    Gross profit on sale of product

14. Mr Lean made an estimate of the revenue that would have been generated by Pilton from the sale of products to franchisees and the cost of goods sold to achieve that revenue.  He used the same methodology for future sales as for past sales described at [422] to [425] above. 

    Indirect costs

15. Mr Lean made an estimate of indirect costs that would have been incurred by Pilton in conducting the franchise and distribution businesses.  He used the same methodology as for the past described at [426] and [427] above. 

    Net profit

16. Mr Lean deducted the indirect costs from the franchise fees and gross profit on sale of product to give net profit before tax, deducted tax, and calculated net profit after tax.

17. Mr Holmes gave evidence that the net profit after tax should be grossed up to reflect a notional net profit before tax on the assumption that company tax at 30 percent will be payable on any award of damages in favour of Pilton.  Accordingly, the final step should be to divide the derived profit after tax figures by 70 percent to reflect a 30 percent company tax rate. 

18. As a result of changes made during and following concurrent evidence, Mr Lean’s financial calculation of after tax losses is set out in the following table.

2015-2019	2020-2024	2025-2029	2030-2034	2035-2039
Franchise fees	5,717,523	7,267,772	8,629,909	10063,499	10,938,279
Gross profit from sale of products	3,252,631	4,134,549	4,909,451	5,725,505	6,222,654
Less indirect costs	3,014,758	3,111,350	3,089,415	3,089,415	2,892,676
Profit before tax	5,955,396	8,290,971	10,449,945	12,699,088	14,268,257
Tax	1,786,618	2,487,291	3,134,984	3,809,727	4,280,476
Profit after tax	4,168,778	5,803,680	7,314,961	8,889,361	9,987,781

Net present value and discount for risks

General risks

1. In his report, Mr Lean expressed an opinion about a discount that should be applied in calculating the net present value for future net profits which he projected.  He expressed the opinion that an appropriate discount rate would be 20 percent per annum of cash flows before tax.  Essential Beauty WA objected to the admissibility of Mr Lean’s evidence in this regard on the ground that Mr Lean did not have any demonstrated expertise or experience in the assessment of discount rates or calculation of net present value.  Mr Lean gave evidence on the voir dire.  Mr Lean in cross-examination candidly admitted that he relied upon someone else to derive his discount rate.  It was demonstrated in cross-examination that Mr Lean did not have the necessary understanding of the concepts and methodology involved or of the source figures and information that he used.  After hearing his evidence, I ruled that Mr Lean lacked expertise or experience in this field and that his opinions concerning discount rates and net present value were inadmissible. 

2. In his report and evidence, Mr Holmes pointed out that Mr Lean had used a mixture of real figures - not adjusting for inflation - and nominal figures - adjusting for inflation - in projecting revenue and costs.  It was agreed by the parties that all projections should be done on the basis of real figures and that the discount rate should be selected on a real basis.  On this basis, Mr Holmes expressed the opinion that an appropriate discount rate was in the range 22 percent per annum to 27 percent per annum of cash flows after tax but then grossed up to allow for tax.  Mr Holmes prepared calculations of net present value discounting the net operating profit figures for each year projected by Mr Lean at 22 percent and 27 percent respectively.  Mr Holmes discounted those figures back to 1 February 2014. 

3. Essential Beauty WA identified various contingencies to which Pilton’s future losses were subject.  Mr Holmes identified which of those contingencies in his opinion were encompassed in the discount range of 22 to 27 percent.  Those contingencies included:

   1.a lease from a landlord not being obtained for a new store or not being renewed or being renewed only on terms making a franchise unprofitable;

   2.a franchisee not being found for a new store or a franchisee not renewing a franchise or becoming insolvent;

   3.competition from other beauty stores;

   4.cannibalisation between Essential Beauty stores;

   5.finance or funding issues and exposure to increased interest rates;

   6.economic downturn;

   7.fluctuations in product price and amount; and

   8.master franchisee issues such as sickness, retirement, product issues, service issues and staff issues.

4. Mr Holmes gave evidence that the following contingencies identified by Essential Beauty WA were not factored into his discount rate assessment:

   1.the risk that the Agreement would not be renewed every five years;

   2.the inability of the master franchisee to fund new stores;

   3.four out of eight stores operated by arm’s length franchisees as at March 2011 being owned by a single franchisee - Sarah Nehemia; and

   4.bad relationships between master franchisee and franchisees including potential litigation and relationship issues between master franchisor and master franchisee.

   Risk of non-renewal

5. It is common ground that I am to assess the likelihood that the Agreement would not have been renewed every five years.  I find that it is virtually certain that Pilton would have sought to renew the Agreement every five years.  While the relationship between Mr Forrest and Mr Maiello had badly deteriorated by March 2011 and Mr Forrest’s relationship with the franchisees had also deteriorated, Pilton had a very compelling financial motive to persist.  Equally, it is virtually certain that, if the Agreement had not been terminated in March 2011, Mr Maiello would not have permitted a renewal in March 2014 - the next renewal date - if Pilton had not been in compliance with the Agreement.

6. It is more difficult to assess the likelihood that Pilton would have been entitled to renew.  Clause 7.1 of the Agreement - as varied in 2008 - provided:

   7.1     Further right of renewal

   Subject to the provisions of this paragraph the master franchisee shall have the options to renew the Agreement for six (6) periods as set out in item 5 of the first schedule, if and only if, at the time of exercise of each of the options the master franchisee:

   7.1.1has been, throughout the Term, or the relevant prior renewal term in compliance with this agreement; and

   7.1.2enters into the company’s then current form of master franchise agreement which will contain terms substantially the same as in this agreement; and

   7.1.3has paid to the company all outstanding amounts due to it; and

   7.1.4causes the guarantor or a person approved of by the company in substitution for the guarantor, to enter into the then current master franchise agreement referred to in sub-clause 7.1.2 in the capacity of a guarantor.

7. Clause 7.1.1 made it a precondition to entitlement to renew that Pilton had not been in breach of the Agreement at any time during the previous term.  I proceed on the assumption that this clause would be construed such that minor or technical breaches would be disregarded. 

8. If, as I have concluded, Pilton was in substantial breach of the Agreement by not following the December 2010 directions, even if Essential Beauty WA had not been entitled to terminate the Agreement in March 2011, it would have been entitled to refuse a renewal in March 2014.  In that event, Pilton’s future losses would be assessed at $0. 

9. Alternatively, if, contrary to my conclusions, Pilton was not in breach of the Agreement by refusing to following Essential Beauty WA’s directions, I am required to assess the likelihood that Pilton would otherwise have substantially breached the Agreement before September/December 2013 when Pilton was required to exercise the option.  The parties make very different contentions concerning this likelihood.  Pilton contends that there is a 90 percent likelihood that Pilton would not have been in breach.  Essential Beauty WA contends that there is only a 10 percent likelihood that Pilton would not have been in breach.

10. In assessing the likelihood, it is necessary to take into account my assessment of Mr Forrest and his likely conduct.  Mr Forrest demonstrated between July 2010 and March 2011 a remarkable willingness to engage in combat with Mr Maiello and back his own judgment as to whether his conduct was in breach of the Agreement.  Mr Forrest was also prepared to take a very hard line with the franchisees and was apparently unconcerned that they were put offside by his conduct.  Under the new form franchise agreements, Pilton was obliged not unreasonably to withhold its approval to a supplier nominated by a franchisee.  In addition, Mr Forrest had sent to all franchisees at the end of August 2010 a product and supplier nomination procedure that gave the ultimate decision-making on approval of products and suppliers to the franchisees acting as a whole.  Given these circumstances, I find Mr Forrest’s conduct vis a vis the franchisees from August 2010 onwards remarkably confrontational and commercially risky.  I add to this my assessment of Mr Forrest based on his evidence in the witness box. 

11. Ultimately, my assessment is that there would have been a 50 percent likelihood that Pilton would have committed a substantial breach of the Agreement by September 2013 so as to disentitle it to renew the Agreement. 

12. In respect to future periods, if the Agreement had been renewed with effect from March 2014, there is a much lower likelihood that Pilton would have been in breach of the Agreement at the time of renewal as, ex hypothesis, it would have weathered the storm up to December 2013.  I assess that likelihood at 10 percent for each subsequent renewal.

    Other risks and contingencies

13. Essential Beauty WA identifies three other specific contingencies that in Mr Holmes’ opinion are not encompassed in the contingencies resulting in his assessed discount rate in the range 22 to 27 percent per annum. They are summarised at [493] above.

14. One contingency is the risk that Pilton will not be able to fund the assumed rate of opening new stores. I have assessed that Pilton would not have opened new stores at the rate claimed by Pilton of two or three new stores per year but would rather have opened new stores only at a rate of one new store every nine months. On that assessment, the cash flow generated from existing stores would be sufficient to fund the opening of new stores on the basis that Pilton would seek to recoup that capital expenditure from the franchisee before opening the next new store. I do not consider it appropriate to apply a specific discount for this contingency. It should be considered as part of the general discount addressed at [507] below.

15. Essential Beauty WA identifies a risk resulting from the fact that, as at March 2011, four of Pilton’s eight arm’s length franchise stores were owned by a single person, namely Sarah Nehemia, and as at February 2014 ten of the 17 franchise stores were owned by three persons, namely Sarah Nehemia, Karen Geneve and the Higgins.  Mr Holmes did not express any opinion on this risk, but gave evidence that, to the extent it exists, it is not encompassed in his assessed discount rate. 

16. I do not consider it appropriate to apply a specific discount for this contingency. Sarah Nehemia has operated the four stores since the last one was opened in February 2009 without apparent problems arising from multiple stores. Karen Geneve operated two stores from 2007 to 2010 without apparent problems and was able to sell one of the stores to Alison Hope in 2010. She has since operated three stores without apparent problem. Mr Maiello gave evidence that around Australia there are cases of some franchisees owning and operating more than one store. If Sarah Nehemia, Karen Geneve or the Higgins should not wish to continue to operate multiple stores, there is no obvious reason why they could not sell one or two stores to a new franchisee. This risk should be considered as part of the general discount addressed at [507] below.

17. The other specific risk identified by Essential Beauty WA is that associated with a bad relationship between master franchisee and franchisees and a bad relationship between master franchisee and master franchisor. I have already observed that Mr Forrest demonstrated a remarkable combativeness with the franchisees in the second half of 2010 and this appeared to put all the franchisees offside. My assessment made at [449] above that franchisee revenue would have been 5 percent lower under a relationship with Mr Forrest compared to Mr Maiello also applies to future periods.

    Appropriate general discount rates

1. I consider that it is appropriate to adopt 27 percent per annum as the discount rate in calculating the net present value of future losses, subject to adjustments for contingencies not encompassed in the annual discount figure.  I have selected the upper end of the range given by Mr Holmes in evidence because of the risks and uncertainties arising from Mr Ganly’s predictions concerning the opening of new stores and future performance of new and existing stores, the number and nature of the general risks and contingencies identified by Essential Beauty WA and assigned to the general risk category and my overall assessment that the risk should be at the upper end rather than the lower or middle end of the range given by Mr Holmes. On the other hand, I do not consider it should be above 27 percent.

2. Mr Holmes calculated the net present value of the future losses calculated by Mr Lean using a discount rate of 27 percent per annum for each renewal period.  This produced the following figures calculated after tax and then grossed up to be the equivalent of pre-tax profit.

Period	NPV of net profit after tax	NPV grossed up for tax
2014-2019	$1,600,237	$2,286,054
2019-2024	$695,173	$993,104
2024-2029	$267,332	$381,903
2029-2034	$98,500	$140,714
2034-2039	$34,683	$49,547
Total	$2,695,925	$3,851,322

1. Mr Holmes discounted the figures back to 1 February 2014.  It is appropriate that the figures be discounted back instead to 30 June 2014.  If an interest rate of 27 percent per annum between 1 February 2014 and 30 June 2014 were applied to Mr Holmes’ results, this would produce the following figures discounted to 30 June 2014.

Period	NPV 1.2.14	NPV 30.6.14
2014-2019	$2,286,054	$2,543,235
2019-2024	$993,104	$1,104,828
2024-2029	$381,903	$424,867
2029-2034	$140,714	$156,544
2034-2039	$49,547	$55,121
Total	$3,851,322	$4,284,596

1. If Pilton had succeeded on the counterclaim, I would have invited Pilton to request Mr Lean or Mr Holmes to make a fresh discount calculation to 30 June instead of 1 February 2014. However, for the purpose of these reasons for judgment, I assume that the calculation would have produced the same figures as in the table at [509] above.

2. I apply a discount for the risk of non-renewal of 50 percent for the first renewal period 2014 to 2019.  This discount applies also to all subsequent five-year renewal periods. In addition, I apply a discount of 10 percent of the discounted figure at the beginning of each five-year renewal period to represent the risk that there would be a breach and consequently a non-renewal during that five-year period.   This discount is shown in the following table:

Period	Amount	Non-renewal Discount	Net Amount
2014-2019	$2,543,235	50	$1,271,617
2019-2024	$1,104,828	55	$472,314
2024-2029	$424,867	59.5	$163,468
2029-2034	$156,544	63.5	$54,282
2034-2039	$55,121	67	$17,280
Total	$4,284,596	$1,978,961

1. I would also apply a discount of 5% of revenue and adjust the net profit by an amount to be calculated by Mr Lean in consultation with Mr Holmes as described at [451] above.

   Loss of initial franchise fees

2. Pilton claims that it lost the opportunity to earn an initial franchise fee of $12,500 in respect of each of the fourteen future stores that it would have opened after March 2011. 

3. Pilton failed to lay an evidentiary foundation upon which I could make an assessment that there was more than an insignificant possibility that Pilton would have received an initial franchise fee of $12,500 - 50 percent of an initial franchise fee of $25,000 - upon the opening of each of the hypothetical stores. 

4. Pilton did not tender the franchise agreement with the Furlers for Hay Street Perth or with Karen Geneve for Morley or adduce evidence that those franchisees paid an initial franchise fee.  Pilton tendered the franchise agreements, or parts of the franchise agreements, with Karen Geneve for the Midland store, Sarah Maguire-Leigh for the Innaloo store and Nilar Soe for the Cannington store.  Those agreements referred to a “franchise fee” in clause 5.2 but no part of the Agreement was tendered which identified the amount of that franchise fee.  The progress payment sheets annexed to those agreements suggest that there was an initial franchise fee of $15,000 (inclusive of GST) payable for the Midland store, $10,000 (plus GST) payable for the Innaloo store and $25,000 (plus GST) payable for the Cannington store.  The franchise agreements from 2008 onwards for the Rockingham, Joondalup, Armadale and Hillarys stores proved that no initial franchise fee was charged. 

5. Mr Forrest did not give evidence that, if he had remained master franchisee after March 2011, he would have charged or recovered an initial franchise fee.  Based on his conduct from 2008 onwards, I have no basis to find that he would have charged such a fee.  I find that it is probable that Mr Forrest would not have charged an initial franchise fee.  This does not necessarily mean that nothing should be awarded for the loss of the opportunity to earn such a fee because the assessment is to be on possibilities and not the balance of probability. However, Pilton has not adduced any evidence from which I could make any assessment that the prospects of Pilton recovering such a fee exceeded nil or an insignificant percentage.

6. In addition, the general practice between 2004 and 2010 was that Pilton incurred costs to establish each store – including holding costs - and then sought to recover from the franchisee the costs of doing so.  Pilton did not satisfactorily prove that its recovery of costs equalled or exceeded the costs incurred including its holding costs.  There was evidence that this was not achieved in respect of the Hay Street Perth store opened for the Furlers.  Mr Lean in his report had attempted to assess a loss by Pilton based on the establishment of new stores but Pilton abandoned that claim and that approach. There was also evidence adduced by Essential Beauty WA that it did not recover the full costs of establishing some of the stores opened by it between 2011 and 2013. 

   Conclusion

7. If Pilton had succeeded on its counterclaim, I would assess Pilton’s past loss to 30 June 2013 at $952,471 subject to reductions reflecting:

   1.slower openings of new stores; and

   2.a discount of 5% of franchisee revenue,

   impacting net profit in an amount to be calculated by Mr Lean and checked by Mr Holmes.

   I would hear submissions from the parties on the extent to which the after tax losses calculated should be grossed up given Pilton’s carry forward tax losses in 2013 and perhaps 2012. I would allow interest on the 2011 loss at 8.75 percent per annum over 7 weeks to 30 June 2011, interest on the 2011 loss and 2012 loss at 8.25 percent per annum over 6 months to 30 June 2012, interest on the 2011 loss, 2012 loss and 2013 loss at 7 percent per annum over 9 months to 30 June 2013 and interest on the 2011 loss, 2012 loss and 2013 loss at 6.5 percent per annum over 12 months to 30 June 2014.

8. I would assess Pilton’s future loss at $1,978,961 subject to adjustments reflecting:

   1.slower openings of new stores impacting revenue in an amount that would need to be calculated by Mr Ganly and checked by Mr Waddington; and

   2.a discount of 5% of franchisee revenue,

   impacting net profit in an amount to be calculated by Mr Lean and checked by Mr Holmes which calculations would be subject to any submissions by the parties. It would also be subject to a recalculation of the present value of the future losses on the adjusted net profit figures calculated at a discount of 27 percent per annum to 30 June 2014 that would need to be calculated by Mr Lean or Mr Holmes and checked by the other.  

   PART L:  CONCLUSION

9. Essential Beauty WA is entitled to judgment for $272,494.68 inclusive of interest to 3 February 2014 plus interest at 6.5 percent per annum from that date to judgment.  Essential Beauty WA is entitled to an order compelling Pilton to take all reasonable steps to procure the assignment by EB Realty of the three leases to Essential Beauty WA or its nominee. 

10. I will hear the parties as to the precise terms of relief and as to costs, including Essential Beauty WA’s contractual claim for costs pursuant to the Agreement.

11. I dismiss the counterclaim.

12. I will hear the parties as to the orders to be made reflecting my reasons for judgment.