Ether Holdings Pty Ltd v Cut Price Deli Pty Ltd

427

BETPEEN :

ETHER HQLOINGS PTY LIMITEO

F i rs t

Applicant

GREGORY

PS'IMOND

LILLINGTOB

Second

Applicant

KEPRY UlNE LILLINrGTQFJ

Third h p l l c s n t

GEP.F-LLCI HQQD

F m r t h A p p l l s a n t

ELIZABETH METIN HgOO

Fl f t h Applicant

ICGLIN ET'W29Es EKVIUEL

S ix th Applicant

RQEYN ltGG-AP.ET EMAMVEL

Seventh Applicant

Second Crgss

Respondents

C13P.pM:	WILCOX J.
m:	12 AUGUST 1985
PLACE :	SYDNEY

MINUTE OF FRi3EF.S

The )Cross Claim is dismissed.

3 .

The crc)ss claimant

pap

to the C K G S S respondents any

c o s t s lncurr?d by them of the 17ross Claim lncludlnq

sn:7 reserved costs.

?IOTE :	Settlsment m d entry of orders 1 s dealt with In
83rder 26 (2f the Federsl Co!xt Rules.

'NQTE:

This jlAdq-ment relates predommantly to its own f scrs snd

1s not of sufficient general interest to justify circulatim)

I N THE FEDEFAL CVJRT OF AUSTPALIP.

\ \

N E 3 1 SOIJTH

WALES

DISTRICT

REGISTRY

MO. 12.219 of 1984

GENERAL DIVISI'3M

)

BETWEEN :

ETHER HOLDINGS

PTY

LIMITED

First lppllcant

~2P.EGOP.Y

FAYMCIND

LILLIMGT'?N

Second Applicant

KEP.RY P-NNE LILLINGTON

Third Appllcant

GE!?SLIl

HQQD

Four th Applirr-ant

ELIZABETH Pla2TIN HQOD

Flfth Applicant

COLIN EDbIZIRD

EM%MUEL

Slxth Ip~licant

PGBYN M?.P.G>J.ET

EME-NTJEL

Seventh .".ppl~r?.nt

CUT PP.ICE PELI PTY LIMITED

Fespondent

2 .

m:	ETHER HOLDINGS PTY LIMITED

Flrst

L ' r ~ s s

Respondent

Second Cross

Respondents

This is a hearinrj of a C r n s s $Claim brought by Cut

Price Deli Fty Limited

against, a company known as Etner

Holdings Pt.? Limlted and six

mdividuals who -dere 3pparentl.T

sssn.clsted vith Ether Hsldlngs at	some staqe of its
sctlvltlec.

3 .

1974.

h e of the matters which was referred to

was the fact

that the company, Cut Price

Deli, did not at the time

granting 1 franchise aTreement have reglstration

of that

business name in the State

of Queensland.

I am not concerned with the substance of the

allegations made in the amended Statement of Claim in any

direct sense.

The reason for this is that there

vas default

in complying with directions in relation to the erinclpal

proceedings, that defal-llt apparently bemg associated wlth the

financial vicissitudes of Ether Holdings.

I gather that the

company is now either in the course of liquidation	or in
receivershlp.

On 31 May l985 an appllcatlon was made to dlsmlss the

principal proceedinas for vant If proseclJtion and

I acceded tc

that application.

I adjourned the matter of the

1:ross Clam

and ~ a v e

directions regardinq filing and service

of affidavits

in support nf the Cross Claim.

The Crnss Clam csme on for hearin? today when the

cress slalmant r;.lied upon the sffidacit endensre

2f Mu Enzo

Sgambellone. a director of Cut Priie Deli Pty

Lmited. Mr

Sqsmb?llcne s l s o gave oral ondence and a nlmber 12f ?c.cumentrs were tendered.

The most Important evhlbit in the case is the

franchise agreement whlch bears date

39 July 1983. The

exhibit is slgned by four only of the lndlvlduals whn are

named as cross respondents: that is to say, by Mr and Mrs

LillinTton and b:r

Mr and Mrs Emanuel. It 1s not slgned by Mr

and Mrs Hood. The role of these individuals under the

agreement was to act

as guarantor,

Mr Slater on behalf of the

cross claimant has drawn my attention to the pleadinss in

which it is admitted nn behalf inter alia of Mr and Mrs Haod

that they were guarantors. Having regard to the conclusion

that I have reached It is not necessary to consider whether

this furnishes sufficient evidence

to attach liability to Mr

and Mrs Hood in the absence of their signatures to the

qreement.

The franchise agreement contained certaln recitals.

The vendor company is identified in the agreement

a5 Rechi

Enterprises Pt:r

Limited.

Thls 1 s the same company as the

c ross claimant, Cut Prlce Deli Ptg Limited, the name having

been changed in

ck.e meantime.

Pecital A state5 that the vendor has owned and

cperated retail businesses

specializmg in the sale of

dsllistessan-type products,

identified principally by7 th?

trade name and mark. the name sf which i$ set fcrth ln the

zchedc!le beslde the words "The Name". Recital B states that

?h? frsnehisee. that is to sa:.

Ether Haldinqs Pt.; Limited.

desires to acquire the rlght to utillze the name withln

specified area and to conduct therein

a franchise-type

business as a sub-franchisor of the franchlsor on the terms and conditions hereinafter defined. Recital C states that the

vendor is desirous of selling

the rights on the terms and

condltions hereinafter defined.

The subject matter of the franchlse

1s described in

c1.2 of the agreement, namely, the right to

OWE. operate snd

cmduct a franchise business within the area of the State cf

Queensland. This right includes the option to condllct

busmesses at locations bp itself

and/or to franchise the

operations to sub-franchisees. By c11.3 and 4A provision is

made for the choice

of busmess locations, the qrantln9

licences, advertising arranqements and

so on.

Clause 5 deals with the payment for

the franchise and

other fees.

It requires an initial payment of $200,000 on

settlement. It

1 s not at all clear what

is meant by the words

"m	settlement" bl-lt apparently the parties 2cted upon the

hasls that this meant when the contract came Into ?ffect. Khat

1 s on completlcn of execution.

There is then provision made for fl-lrther fees tc be

~ a l d

as subsequent businesses were opened. The17 Include. in

subcl.:f). a reference ta one-third of qodwill bsina payable t o the franchlsor. In a dgcument which is net distlngulshed

6 .

for Its draftsmanship this subclause is outstandinq in beinu

almost unintelligible. It is not at all clear whether the

requirement for one-third

of the sale price of qoodwlll

applies to each of the sltuations in the subclsuse cr only the

third of them, m which case it	is irrelevant to the present
case.

I am asked on behalf of the cross claimant to read

subcl.'f) as an agreement by the franchisee that If it causes

m y franchlse business to be operated

by a person othpr than

itself then one-third of the amount payable by the purchaser

of the business for goodwill is to be payable

to the

franchisor.

A s I say, this is far from clear to me but once

suam I do not think it is necessary for me to come to

conclusion as

CO whether this construction is open.

Clauses 6 . 7 and 8 deal with matters

of cammon

Interest tg the franchlzor snd the franchisee

lncludmg the

products to be supplied, prices and promotlonal activities.

It ;la5 qamte clearly contemplated that there would be benefitz

to both parties in joint actlvltles; they no doubt attractin,?

some economies of scale. Clause 0 describes what 1 s called

"the system". The system is said to have "the distinguithing

characteristics" of "the Name" and of

"a li.cence hereby

transferred" lncludlnq

"a trade mark, a log^ and business name

'and) 3 developed marketinq concept and unlform proceiure

f x

the cperatlcn

of franchlse locations".

7 .

Clause 10 sets out certain

obligations-of the

franchlsor and cl.11 sets out obligations of the franchisee.

These include In subcl.(l)

an acknowledgement of the

franchisors "interest and exclusive right to the Name and its

distingushing characteristics including the name and style of

the Name. materials and operating procedures". In subcl.(5)

the franchisee is made to acknowledge

"the need for uniformity

ln the System".

In subcl.(6) the franchisee agrees to operate

the franchise granted herein

mder the franchlse name. The

subclause goes on to provide for the franchisor to grant to the franchisee the right to register within the location the franchise name and to licence It in its use by its franchisee.

The aTreement goes on to make provision in rsspect

numerolls ot'ner matters but I need not set those out as

the:r

are not material to the present question. The evidence

indlcates that before the maklng of the agreement two

locatlons had been established m the State of Queensland,

being the area in respect of vhich the franchiJe was to be

qlven by the cross claimant tc Ether Holdings, namel?

Tgovoomba and Kawana

Ikters.

Stores had been cpened In each

of those places during the

first SIX months of 1982,

agparentlp !under the name "Cut Prlce Deli".

At come time

around the mzddle

clf

the year it apparently became knosln to

the partles that there was

a problem about the avallabilit:; cf

the busmess nage. "PJt Frice Ileli" because of the fact that

tha name had been reglztered In the State

of Queensland by 3

company having no associatlon with any

of the parties, namely

Cut Price Stores Retailers Limited. This led to something of

a crisis and on

1 2 July 1983 Mr Sgambellone and his

co-director, Mr Eechlchi, went to Brisbane to have

meetina

wlth Mr Emanuel and Mr Llllington, the latter two gentlemen

being two of the six

indimdual cross respondents and people

who were apparently in charge of the affairs of Ether

Holdings.

Mr Sgambellone, according

to his own evidence, :aid

that his company could sue Cut Price Stores for passing off.

He said that he would follow that actlon

and, as he put It m

his widencp. "make sure we 3et

our name back". He further

said this was treated

with relief by E4essrs Emanucl m d

Lllllngton who aCceFtPd the assurance snd that there

vas n3

further discussion about the matter of the name between that

date and the date when the agreement

was sluned. The written

aureement. 3 s I have mentloned, requlred	$200,000 to be pald
on settlement.

In fact, shortly after the date

of the sureement. a

total sum of

$ l O C l . O O O

v s pad, accwding to Mr Sgambellcne.

and there ?;as discussion regardins the second half

of the

initLa1 mount.

Mr Sgambellone vas told that there vac z m e

dlfficultlr or delay in sbtaining thi3 mmey because nf finance

requirements and he offered to exten6 the time ]Anti1 Zecem5er

wlthout requiring m y interest payment. In fact that zecnnd

half of the initial payment has not ever been paid and that is

part of %he claim which is now brought. In the meantme some

other stores were opened in Queensland.

The store at

Maroochydore was opened on

6 December 1983.

A store was

opened at Townsville

on 28 November 1083, at Springwood on 5

Clctober 1983, at Tweed City -- which was apparently treated as

part of Queensland for the purposes

of this agreement -- on 3

November 1983. at Stafford City	on 6 March 1984 and a Pshmore
In April 1984.

These stores were apparently opened by Ether Holdings

but upon %he basls that they would

be operated by

sub-franchisee rsther than Ether Holdings itself.

The

svldence 1 s very skimpy in regard to that matter. However. Mr

Sgambellone was able to glve evldence by way

of dmlsslons

made to him either by Mr Emanuel or

by Mr Lllllngton a s t n

sums of money sald to have been paid by sub-franchisees	of
these stores for the right to enter the sub-franchlse

agreement.

The total payments for the qoodwill inT-redient

from the sub-franchlsees in respect

of these st@r?s appear: to

amount t o $410,000.

The cross clsim claims to recover

one-third of this amount pursuant to c1.5(f! of the agreement.

The evldence as to subsequent events

1 s even

more skimpy.

It appears that, in sclme cases , the S~OK.-S

may

Et111 be operatlng; slchough Mr STambellone say- they are nst

10.

well operated and that they are badly run down. It appears

that there is no present active involvement by Ether Holdinys

or by any of the six individuals

in relation to any of the

existing stores. Consequently, there 1 s not any basis upon

whlch injunctive relief could be granted. Nothing 1 s being

done by the cross respondents which presently adversely

affects, or threatens In ghe future adversely to affect, the

contmuiny interests of the cross clamant.

Indeed, counsel

for the cross clalmant very fairly accepts that this

IS so.

In essence then the claim comes down

to m e for

recovery of the balance of the initial sum of

$100,000

together with one-third of

$410,000 which is $136,566. The

fundamental problem in the path

of the cross claimant

as I see

it 1 s that it has never been able to Overcome the d1fficult;r

regardmy the unavailability to it of the name. The evldence

indicates that Mr Syambellone did make an approach to Cut

Price Stores in

an endeavour to ccme to an amlcable

arrangement under which the name

Clut Frice Deli would be

available for use by the cross respondents in Queensland.

That approach falled. HP then apparently qave some

Instructions to his sollcltors about legal sctlon

but It 1s

not clear whether legal proceedings were actually instltuted

ayalnst Cut Frice Stores. If they were, the7 seem to have

petered out very quickly. In an:I

evenE, l t is quite plaln

that no effective action was taken to enable any

of the

parties in this case to crbtain registrltion

in gjueensland nf

the name. There was from time to time discussion between them

regarding 3 substitute name. At one staae a suggestion was

put that the cross respondents mlght accept as

a substltute

the name "Rite Price	Deli". This was apparently considered
but relected.

At a meeting held in the Sydney office of the cross

claimant in March

1984, Messrs Hood and Emanuel said that they

would be prepared to accept the name

"Slice the Price Deli"

but In the same conversation they indicated the view that they

should not be requlred to pay the outstanding

$100,000 and

they suggested qulte extensive alterations to the schedule of

payments due to the sqreement. There was dlscussion during

which Mr Sgambellone offered to spend certain money

advertlsmg the name "Slice the Prlce De11" and to undertake

the cost of ,:hanging the signboards on the existlng shops. No

resolution of the matter was reached and Messrs Hood and

Emanuel said they would think about

I and In fact according

to Mr Sgambellone they never came back	with an answer one way
or the other.

It is impossible to obtain out

of the evidence clf Mr

Sgambellone in respect

of the March meeting any concludsd

agreement by the parties to substltute

s different name for

chat vhlch is provlded

bp the agreement itself. The critical

question then is: what is the effect of the lnablllty of the

franchisor t o procure for the frsnchisee the

1.is.e cf the name

. .

specifled In the agreement?

Mr Slster contends that the

reference to the name should not be read

as a conditlon but

merely as 9 warranty. He said it was not fundamental to the

arrangement between the parties.

I cannot accept that categorization. The evldence

Indicates that the franchlsor operated numerous stores in both

New South Wales and Vlctoria under the name

of "Cut Prlce

Deli" and one would think

it axiomatic that the value of

franchlse would be qreatlg

mcreased if the frsnchisee was

able to obtain the use

of a name which was well known

in those

two States.

I have In mind the opportunlties of benefittinq

by advertisements in those other States, whether in maTazines

or television or newspapers, or otherwlse, toqether with such

custom as mlqht- be available by people who have

patronized the

stores in the southern States. But

one does not h a ~ r e to uo

beyond the terms of the agreement itself to see the emphasls

that the parties chose to place upon the name.

As I hav?

indlcated, the system is described as including the name snd

+he franchlsee 1s made to acknowledge the need for uniformitzr

In the system.

It seems to me impossible, under those

circumstances, to accept the submlsslon made on behalf

cf the

franchisor that there

1 s no need for

uniformity in one aspect

of the system, namely the name which

is to be used by, and

Qpon, the retall outlets at which trading	1 s to be carried
@Ut.

13.

It seems to me that the lnabillty of the franchiscr

to deliver to the franchisee the right to use the particular

name nominated in the agreement and which was already itself

the subject of some reputation and apparent goodwill in other

places is something that struck at the heart of the agreement.

It amounts to a fundamental approach and prevents any recover.r

by the cross claimant under the agreement.

It is 9 matter of some surprise that the parties put

themselves in this position. As I have pointed out, the

agreement vas dated 29 July 1993 at which time the parties

were aware that there was

a problem about the name in

Queensland. However, Mr Sgambellone was apparently very

confident that this was onlg

a temporary problem snd.

~t would

appear likely that his confidencr not cnly led him

to commit

hls company to qo ahead wlth an aqreeaent which

as firmly

tied to the name

"Cut Prlce

Deli", but also that his

confidence swept alonq

Mr Emanuel and Mr Lillinqton and their

respeccive wives. In the event the confidence turned out to

be mlsplaced. That is unfortunate from ths point

of n e w of

the cross clalmant but

I think it is the dlrect result

nf a

course which It chose

to undertake.

Had it been, as suqqested in submis3ions before

me, a

matter not of crltlcal lmportsnce to use the name

"Cut Price

Peli" then, particularly in the circumstances

as they WPYP

14.

then known, I would have expected the agreement to provide

let-out clause wlth

a substituted name in the event that "Cut

Frice Deli" was not able to be obtained.

I have come to the conclusion that the cross claimant

is prxluded from recovering under this agreement and that the

Cross Claim must be dismissed.

In relation to costs of the

Cross Clalm I expect they will be ~7ery small indeed because Mr

Emanuel sppeared by leave to represent himself and the other

five lndlvidual defendants. The company, Ether HoldinFz,

was

not represented. However, there mag ha77e been some cozts

incurred in regard to the Cross Claim during the progress of

the matter and.

to the extent that there are such costs, they

2hould be pald by the cross claimant.

The order will be that the Crgss Clalm

1s dlsrnissed

and that the cross claimant

pay to the cross respcndents any

costs incurred by them of the Cross Claim including any

reserved costs.

I certify that this and the thirteen

(13!

preceding pages are

a true copg of

the Reasons for Judgment herein	of
his Honcur Mr. Jlustice Wllcox.

Assoclate

Date

7,s August 1985

1 .

Appearance for the applicants

and

cross

respondents:

Mr C E Emanuel in person

Counsel for the respondent

cross

and

clamant:

Mr -9 H Slater

Solicltors for the respcndent

cross

and

claimant:

Messrs

Picone

& CO

Date of hearlng:

12 August 1985

[1985] FCA 427

12 Aug 1985