Harcourts South Australia Pty Ltd v Ouwens Casserly Real Estate Pty Ltd
[2017] SADC 30
•3 February 2017
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
HARCOURTS SOUTH AUSTRALIA PTY LTD v OUWENS CASSERLY REAL ESTATE PTY LTD AND ORS
[2017] SADC 30
Judgment of His Honour Judge Barrett
3 February 2017
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH - REPUDIATION AND NON-PERFORMANCE - REPUDIATION - GENERAL PRINCIPLES
The plaintiff/franchisor and the defendants/franchisees were parties to a franchise agreement which included restraints upon the franchisees engaging in a competing business. The restraint provisions were varied by a deed. The plaintiff asserts that the variation removed the restraint only in the event of termination under the agreement. The defendants assert that the variation removed the restraint altogether. The defendants established a competing business during the term of the contract without the plaintiff's permission. One issue is whether the restraint clause operated to prevent the defendants from so doing. Another issue is whether as a matter of fact the defendants abandoned the franchise.
Held:
1. The defendants breached the restraint provisions by engaging in the competing business.
2. The defendants abandoned the franchise.
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd and Ors (2004) 219 CLR 165; Electricity Generation Corporation v Woodside Energy Limited and Ors (2014) 251 CLR 640; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd and Anor (2015) 256 CLR 104; Agricultural and Rural Finance v Gardiner (2008) 238 CLR 570; Wenham v Ella (1972) 127 CLR 454; Robinson v Harman (1848) 1 Ex 850; Latrobe Capital and Mortgage Corporation Ltd v Hay Property Consultants Pty Ltd (2011) 190 FCR 299; Capital and Mortgage Corporation Ltd v Hay Property Consultants Pty Ltd [2011] FCA FC4; Sellars and Anor v Adelaide Petroleum NL (1992-4) 179 CLR 332, considered.
HARCOURTS SOUTH AUSTRALIA PTY LTD v OUWENS CASSERLY REAL ESTATE PTY LTD AND ORS
[2017] SADC 30
The plaintiff sues the defendants for breach of a real estate Franchise Agreement entered into by them on 23 November 2011. Essentially the breach alleged is that the defendants established a competing real estate business during the term of, and contrary to the provisions of, the Franchise Agreement. Further, by their actions, the defendants have repudiated or abandoned the franchise. The defendants deny that their establishment of a competing real estate business was contrary to the provisions of the Franchise Agreement. They say that the provisions of the Agreement did not restrain them from establishing a competing real estate business using their own names. Amendments to the Agreement expressly freed them from such a restraint. In addition they deny repudiating or abandoning the franchise.
A critical issue in the trial is the construction to be given to the relevant provisions of the Franchise Agreement and its two variations.
It is convenient to set out first the facts which inform the Agreement and its variations before turning to the construction of the documents. Those facts are either uncontested or, if not initially uncontested, then reasonably clearly established by the evidence in the trial.
Before turning to those facts, I indicate that I will refer to the defendants as if they were Messrs Ouwens and Casserly. They are the fifth and fourth defendants respectively and they are guarantors of the obligations under the Franchise Agreement of the obligations of the first, second and third defendants. The guarantee is secured by a Deed of Guarantee.
Background
Messrs Ouwens and Casserly had both worked for the plaintiff as real estate agents from about 2007. In November 2011 they entered into a Franchise Agreement with the plaintiff. They were both in their early 30s. The Agreement entitled them to canvas for business under the franchise in the Unley area. The Agreement did not prevent them acting as land agents for vendors’ properties outside the Unley area but they were not able to canvas for business outside that area. Notwithstanding that their franchise area was Unley, they were able to operate their business from a building in East Terrace, Adelaide, which also housed the South Australian head office of the plaintiff. Apparently the two offices were on opposite sides of a corridor, although each was quite separate. Each was separately secured. The proximity of the two offices meant that Messrs Ouwens and Casserly would at times cross paths with staff for the plaintiff including the CEO, Mr Greg Moulton. The defendants became friendly with Mr Moulton.
The plaintiff had approximately 30 franchisees in South Australia. Its Australian headquarters was in Queensland. Harcourts has a significant presence in New Zealand. It appears Harcourts may have originated in New Zealand.
The Franchise Agreement[1] was concluded on 23 November 2011 to take effect from 1 November for the term of 5 years. The franchisor was then Brock Harcourts South Australia Pty Ltd. The franchise business name was Brock Harcourts Ouwens Casserly. In August 2012 there was a rebranding of the business deleting the name ‘Brock’. The business therefore became Harcourts Ouwens Casserly. The rebranding was effected by a Deed of Variation dated 12 August 2012 (First Deed of Variation).[2] The variation took effect from 1 August 2012.
[1] Exhibit P1, tab 1.
[2] Exhibit P1, tab 2.
There was a second variation the following year. The parties executed a Second Deed of Variation on 7 May 2013 effective from 25 February 2013.[3]
[3] Exhibit P1, tab 3.
Relevant to this dispute is a hand written addition to clause 2.1 to the Second Deed of Variation initialled by the parties. I reproduce the whole of clause 2 of the Deed of Variation with the handwritten addition in italics.
2. Variation
2.1 Special Conditions
The Franchise Agreement is varied as follows:
(a) Schedule 1 – Item 3
(i)Initial Term: 5 years
(ii)Renewal Term: 5 years
(iii)Commencement Date: 1 November 2011
(b) Schedule 1 – Item 12 – Special Conditions
Special Conditions, paragraph (iii) is deleted and replaced as follows,
(iii) The Franchisor and Franchisee agree that the Franchisee will remain franchisee until at least 1 February 2015. and the restraint provisions under clause 21 will not apply. (signed)
I will defer consideration of the meaning of that clause but briefly indicate the nature of the disputed interpretations.
The plaintiff submits that the addition to clause 2.1 repeats exactly the same handwritten addition to item 12 (iii) of Schedule 1 of the original Franchise Agreement.[4] That clause relevantly reads as follows:
Item 12: Special Condition
The Franchisor and Franchisee include the following Special Conditions:
(i)…
(ii)…
(iii)The Franchisor has granted the Franchisee with the right to terminate the Agreement for a period of six (6) months following the formal re-brand and launch of ‘Harcourts’ by Brock Harcourts South Australia Pty Ltd in the Territory. In the event the termination right is exercised, the Franchisee will be released upon full payment of monies due and payable up until the termination date. and the restraint provisions under clause 21 will not apply. (signed) (handwritten additions in italics)
[4] Exhibit P1, tab 1, p 54.
The plaintiff submits that the clause in the Second Deed of Variation has to be read together with the Special Condition in the original Franchise Agreement to which it expressly refers. When the two clauses are read together it is clear that both are referring to restraints in the event of termination of the Franchise Agreement following a rebrand. The original Franchise Agreement clearly means that, and the variation should be read similarly. In the absence of termination following rebrand, the restraint provisions in clause 21 of the Franchise Agreement remain in force.
The defendants submit that the amended clause in the second variation stands alone. The variation deletes and replaces the original. It should be read as removing the restraint provisions altogether. Following the second variation the defendants were free to establish a competing business. On Friday 24 January 2014, the day before the Australia Day long weekend, the defendants’ lawyers wrote to the plaintiff giving notice that from Tuesday 28 January 2014, the day after the holiday Monday, the defendants would commence operating a competing business.[5] The letter went on to assert that the defendants remained committed to meeting the key performance criteria prescribed in the Franchise Agreement. The defendants both gave evidence that they believed they were free from any restraint in commencing a competing business so long as they complied with the key performance criteria.
[5] Exhibit P2, tab 20, p 519.
I return to the facts. By the time of the Second Deed of Variation in May 2013, the defendants had been operating their franchise business for about 18 months from the East Terrace office. They were successful and well regarded within Harcourts.[6]
[6] Brock T793 and Friebe T113-4.
In early July 2013 the defendants applied to the plaintiff to be granted a franchise at Henley Beach. They signed an application form on 3 July 2013.[7] Mr Moulton was one of their referees. That application had not been determined before the defendants took part in a short Harcourts sponsored business trip to New Zealand between 15 and 17 July. The trip was apparently regularly organised by Harcourts for its franchisees. Part at least of the purpose of the trip was for Australian franchisees to see how the company operated in New Zealand. Among the attendees were both defendants and Mr Moulton.
[7] Exhibit P1, tab 4, p 118.
During the visit to New Zealand the defendants were attracted to the practice obtaining there of what has been described in the trial as ‘aggregation of fees’. I will not pause to describe the practice despite it assuming some prominence in the case for the defendants. It was a method by which fees paid by the franchisees to the franchisor were calculated. It differed from the practice obtaining in Australia. The defendants were attracted to the practice as it appeared to them to be more favourable to franchisees than the practice in Australia.
The defendants discussed the practice with Mr Moulton during and after the trip. They sought to have that practice put in place for the prospective Henley Beach franchise. I have not paused to describe the practice in detail because it is common ground between the parties that at no stage did the plaintiff indicate to the defendants that they would countenance such a practice. On the contrary, when the proposal was first put to the plaintiff’s Board on the defendants’ behalf, the Board rejected it. It is no part of the defence case that the plaintiff breached its Franchise Agreement with the defendants by declining to accept the practice of aggregation of fees for the proposed franchise business at Henley Beach or for the existing business in Adelaide.
The defendants were nevertheless disappointed with the plaintiff’s position on that topic. It appears that Mr Moulton made representations to the plaintiff’s Board urging the Board to accept the practice. It appears that he gave the defendants the impression that, despite the Board’s unwillingness to countenance the practice, he may be able to persuade the Board to change its mind. Whatever efforts he made in that regard were unsuccessful. The Board maintained its unwillingness to allow aggregation of fees for the defendants’ proposed Henley Beach franchise.
On 31 July 2013 the plaintiff’s Board approved the defendants’ application for the Henley Beach franchise. Although no Franchise Agreement for that office had been executed, the defendants’ signed a lease for premises at Henley Beach on 5 August. It appears that before this date the defendants may not have been explicitly told by Mr Moulton, or anyone else on behalf of the plaintiff, that aggregation of fees would not be permitted. Notwithstanding that lack of indication and the fact that no Franchise Agreement had been signed, the defendants launched the Henley Beach office on 18 September. The plaintiff and defendants continued negotiations about the financial aspects of the proposed business. A draft Franchise Agreement was provided by the plaintiff to the defendants on 24 September 2013.[8]
[8] Exhibit P1, tab 11.
The negotiations came to an end when the defendants emailed the plaintiff on 30 November 2013[9] indicating that they would not sign the proposed Franchise Agreement for Henley Beach. Further, they said that, after speaking with Mr Moulton, they proposed that the parties “look at mutually agreed termination”. By that they meant the termination of the existing Franchise Agreement. The defendants both said in their evidence that they arrived at that position because they felt let down by the plaintiff over principally, although not exclusively, the plaintiff’s attitude to the aggregation of fees proposal. They felt that the plaintiff had been unreasonable.
[9] Exhibit P3, tab 35, p 624.
Mr Friebe and Mr Brock from Harcourts gave some brief evidence during the trial suggesting that it was reasonable for the plaintiff to adopt a different practice regarding amalgamation of fees in Australia as compared to New Zealand. Both witness said that the defendants had been offered other financial incentives to benefit them in setting up the Henley Beach franchise, albeit that those incentives did not include the aggregation of fees.
It is not necessary for me to determine the rights and wrongs of each party’s position during the negotiations. Nothing turns of that question. The principal relevance of the differences between the parties is that they were such that the defendants sought to terminate their existing Franchise Agreement with the plaintiff.
The differences also led the defendants to set about establishing their own quite distinct real estate business. The extent of their new business is a matter of dispute in the trial. The defendants assert that they set about establishing their own Ouwens Casserly brand in the Henley Beach office only. They believed they were entitled to do that under the existing Franchise Agreement. They denied that they intended to abandon the franchise business based in Adelaide. They maintained that they intended to continue to carry out their obligations under the Franchise Agreement until February 2015, the time when they were entitled under the amended Franchise Agreement to terminate it although its full term did not expire until October 2016. They said they would continue to work under the Harcourts Ouwens Casserly banner in the Adelaide office while delegating to others the Ouwens Casserly business at Henley Beach.
The plaintiff responded to the defendants’ email of Saturday 30 November on 3 December.[10] The plaintiff addressed the situation at the Adelaide and Henley Beach offices separately. In respect of the Adelaide office the plaintiff said that it would regard any cessation of trading under the Harcourts brand as an abandonment of the franchise. The letter went on to ask the defendants to indicate by 10 December whether they wished to abandon the franchise, in which case there would be discussions about the consequences of a termination on the basis of abandonment.[11] In respect of the Henley Beach office, which at the time bore signage indicating Harcourts Ouwens Casserly, the plaintiff sought confirmation by 5 December that the defendants would immediately cease all trading and advertising under the Harcourts banner.
[10] Exhibit P3, tab 36, pp 625-27.
[11] See Exhibit P3, tab 36, p 626, para 11.
In an email of 5 December[12] the defendants rejected any suggestion they were abandoning the Adelaide franchise. In respect of Henley Beach they said they would remove Harcourts materials from the office.
[12] Exhibit D13.
On 5 December Mr Friebe took a photograph of the Henley Beach office showing the Harcourts signage on the outside. However, that changed soon afterwards.
On 9 December Mr Friebe took further photographs of the Henley Beach office. By then the signage had been changed to Ouwens Casserly alone. For convenience during the trial the signage of Harcourts and Ouwens Casserly alone was described, respectively, as blue and orange, reflecting the predominant colours of each entity.
On the same day, the defendants sent an email to fellow franchisees[13] saying that because Harcourts had insisted on ‘franchise fee terms and payments’ which were not commercially viable, the Henley Beach office would cease trading under the Harcourts banner. No mention was made of the proposed trading under the Ouwens Casserly banner.
[13] Exhibit P2, tab 16, p 504.
Mr Ouwens said[14] that the office at Henley Beach had operated under the blue branding for about two months around September 2013. The evidence on that topic is not entirely clear but these propositions are reasonably clear.
1.The Henley Beach office operated for a period under the blue banner from no earlier than 5 August, when a lease on the premises was signed, and no later than 9 December when the blue signage on the outside of the building was replaced by the orange signage. The defendants said that on 9 December the office was closed.
2.No Franchise Agreement was ever entered into between the plaintiff and the defendants in respect of the Henley Beach office.
3.The land agents operating out of the Henley Beach office had previously operated from the Harcourts’ office in Adelaide. They returned to the Adelaide office when the Henley Beach office closed. There were about five such agents.[15]
4.The defendants anticipated that the agents working out of the Henley Beach office would bring with them the vendor/clients they already had.
5.From at least the beginning of December 2013 the defendants proposed operating an orange branded business from the Henley Beach office. By the beginning of December they had set in train the preparation of advertising materials in the orange brand. Among the materials which needed to be prepared were business cards, brochures, print advertising, electronic advertising, signs to be placed on vendor’s properties and A‑frame signs to be placed in the streets to indicate open inspections. As already mentioned the orange signage was installed on the outside of the Henley Beach office somewhere between 5 and 9 December 2013.
[14] T346.
[15] Ouwens T344-47.
Disputes
30There are three critical disputes in this case. The first is a legal dispute.
1.Were the defendants in breach of their Franchise Agreement with the plaintiff in trading at Henley Beach under the blue banner? There is no factual dispute that they did so trade.
2.Were the defendants in breach of their Franchise Agreement with the plaintiff in trading at Henley Beach under the orange banner? There might be a factual question about whether they did so trade but there is no dispute that they were preparing to do so in December 2013.
3.Were the defendants were taking steps to trade in Adelaide as well at Henley Beach under the orange banner? The defendants deny that they did so. The plaintiff contends that they did intend to do so and, in doing so, they repudiated the Franchise Agreement and abandoned the franchise.
I will defer making findings in relation to these disputes but it is convenient to here articulate them in the course of tracing the events of December 2013 and January 2014. However in tracing the events of those months I will save for separate consideration the factually contentious issue of whether the defendants were preparing to abandon the franchise business in Adelaide.
December 2013
As already mentioned the plaintiff told the defendants on 3 December that in the absence of a Franchise Agreement regarding the Henley Beach office the defendants should cease trading at Henley Beach. Specifically the plaintiff sought confirmation from the defendants that ‘they would cease and desist from any business under the Harcourts brand or any variation thereof ...’.[16] In default of confirmation the plaintiff said it reserved its rights to pursue legal action including injunction relief.
[16] Exhibit P3, tab 36, p 627.
Between 5 and 9 December the defendants replaced the blue branding with orange branding at Henley Beach. Part of the legal dispute between the parties is the question of whether the defendants were entitled to use their own names in the rebranded office despite their names being part of the Harcourts branding. The plaintiff asserts that the defendants were prevented by the terms of the Franchise Agreement from doing so. The defendants assert the contrary.
It is plain that the plaintiff regarded the orange branding at Henley Beach on or before 9 December as a breach of the Franchise Agreement. The defendants had in addition sought a mutual termination of the Franchise Agreement. In an exchange of emails between Messrs Williams and Green of Harcourts on 10 December 2013 there is mention of terminating the Adelaide franchise. Harcourts CEO, Mr Moulton, was part of that exchange of emails. He sent a copy of that exchange to the defendants. Although there was no request by anyone in that exchange for Mr Moulton to keep the emails confidential, it is not difficult to see why the correspondents within Harcourts might see the communications as confidential.
Mr Moulton said that he had “possibly”[17] sent to the defendants an internal Harcourts briefing discussing the November negotiations between the plaintiff and the defendants as to the financial arrangements for Henley Beach.18 He said he might have done so to keep the defendants in the loop. That is despite that email exchange having been sent to Mr Moulton headed “for your eyes only”.
[17] T865.
18 See Exhibit D29.
I think it is clear from the evidence of the defendants that Mr Moulton was keeping the defendants well informed about Harcourts’ plans and intentions regarding the franchise.
In cross-examination Mr Ouwens said that on 12 December the defendants had a meeting with their staff, including land agents, telling them of the plan to run the competing business of Ouwens Casserly. They expected that their agents would begin to discuss those plans with their vendor clients.
Between 12 and 16 December there was an email exchange between the defendants and Mr Williams from Harcourts which ended with Mr Williams asking on 16 December for the defendants to provide details of what they saw as the mutual termination proposal. Harcourts sought a response from the defendants before 18 December so that Harcourts could consider the proposal before the Christmas break.
On 19 December the defendants replied saying they would not be able to meet with their advisors until at least mid-January and so would not be able to provide details of their mutual termination proposals. They invited the plaintiff to provide its proposals.
On 19 December the defendants held a Christmas function at which they presented their staff with the new orange advertising material.
On Monday 23 December 2013 the plaintiff sent the defendants the first of two default notices.[18] The plaintiff alleged three breaches of the Franchise Agreement. For the purposes of the trial only the second alleged breach is material. That alleged breach is the establishment of the Henley Beach office under the Ouwens Casserly branding. The plaintiff gave the defendants thirty days to remedy the breach by undertaking to cease operating the Henley Beach office. (That 30 days was extended by the plaintiff on 14 January 2014 for a further 21 days, expiring on 3 February 2014.)[19]
[18] Exhibit P2, tab 18.
[19] Exhibit D26.
The defendants’ solicitors, Ouwens Lawyers, responded on the same day.[20] In respect of the second breach the defendants invoked the handwritten additions to the original Franchise Agreement[21] asserting that the restraint provisions under clause 21 did not apply. They said that the Franchise Agreement did not require them to have the plaintiff’s approval to establish a competing business. Accordingly they declined to give the undertaking sought.
[20] Exhibit P2, tab 19.
[21] Exhibit P1, tab 1, p 54.
On 14 January 2014 the plaintiff replied to the defendants’ email of 23 December, reaffirming the allegation of breach.[22]
[22] Exhibit D2.
January 2014
On Friday 24 January 2014 the defendants’ lawyers gave the plaintiff notice that from Tuesday 28 January the defendants proposed operating a competing business.[23] No mention was made about the location of the proposed competing business. The letter said that the defendants remained committed to meeting the key performance criteria prescribed in the Franchise Agreement for the remainder of its term and they looked forward to working in conjunction with Harcourts.
[23] Exhibit P2, tab 20.
On Tuesday 28 January the defendants say that two events occurred which caused them to effect a temporary transfer of the whole business from blue to orange branding. The events were first, Mr Moulton telling them that morning that Harcourts proposed terminating the Adelaide franchise that week and, second, Mr Dimou from the Advertiser telling them that he believed Harcourts would seek an injunction against the defendants that week. As a result of these two events on 28 January the defendants set about a complete rebranding of the Adelaide office. All the print advertising for Saturday 1 February was transferred to orange. All signs were changed. All but one or two clients agreed to change agents. All advertising materials were made ready that week.
The plaintiff says that the evidence at the trial, particularly that arising from material subpoenaed partway through the trial, overwhelmingly demonstrates that ever since December 2013 the defendants had been preparing to abandon the Franchise Agreement and trade under the orange branding both at Henley Beach and in Adelaide.
On Thursday 30 January the plaintiff gave the defendants a second default notice[24] alleging that the defendants had abandoned the Franchise Agreement by rebranding it.
[24] Exhibit P 2, tab 21.
On Monday 3 February the defendants’ lawyers wrote to the plaintiff[25] denying that they had abandoned the Franchise Agreement and indicating a willingness to take part in mediation.
[25] Exhibit P 2, tab 23.
On 4 February the plaintiff’s lawyers wrote to the defendants lawyers terminating the Franchise Agreement.[26]
[26] Exhibit P2, tab 24.
The restraint provision
Clause 21 of the original Franchise Agreement contained restraint provisions.[27] That clause reads as follows:
[27] Exhibit P1, tab 1, p 44.
21. Restraint
21.1 Definitions
In this clause 21:
‘Competing Business’ means any business that is the same as or substantially similar to the business of:
The Franchised Business;
The Network; or
any other Harcourts Franchisee.
‘Restraint Period’ means:
the Term of this Agreement; plus
a period of 6 months immediately following the Term of this Agreement (except that this paragraph (b) will not apply where this Agreement expires provided that the Franchisee gave the Franchisor written notice that the Franchisee did not wish to seek renewal of this Agreement at least 4 months prior to the Expiry Date and provided the Franchisee is not in breach at the time of providing that notice and does not breach this Agreement at any time thereafter).
‘Restricted Way’ means acting or working in any of the following capacities: contractor, director, employee, employer, franchisee, franchisor, officer, consultant, adviser (formal or informal), agent licensee, equity holder, lender, partner, unit holder, member, shareholder (except as a shareholder legally or beneficially entitled to less than 55 of the shares in a listed company), principal, beneficial owner, trustee, joint venturer, or other in any way that would entitle the Franchisee or an associate or nominee of the Franchisee to receive any benefit or reward because of the Franchisee’ association with a Competing Business.
21.2 Agreed restraint
(a)The Franchisee and the Guarantors warrant that at the time of entering into this Agreement none of the Franchisee, Key People or Guarantors are already involved, or preparing to be involved in, or preparing to be involved in, any Competing Business, or otherwise acting in a Restricted Way.
(b)During the Restraint Period the Franchisee and each Guarantor must not, and the Franchisee must require that the Key People and Staff are not, within the Restraint Area:
(i) prepare to be, or be, involved in any Competing Business;
(ii) canvas, solicit, induce or encourage any person who was an employee or franchisee of the Franchisor at any time during the Term of this Agreement to leave the Franchisor;
(iii) canvas, solicit or accept any approach from any person who was at any time during the Term of this Agreement a client or customer of the Franchisor, the Franchisee or any other franchisee of the Franchisor with a view to obtaining the custom of that person in a competing Business;
(iv) all the Location to be used for any activity of a Competing Business;
(v) interfere in any way with the relationship between the Franchisor and its clients, clients, franchisees, employees or suppliers; or
(vi) otherwise act in any Restricted Way.
(c) The Franchisee and each Guarantor:
(i) acknowledge that the Franchisee will have ongoing access to the Franchisor Intellectual Property and as a result each restriction specified in clause 21.1(e) (‘Agreed Restraint’) is in the circumstances reasonable and necessary to protect the goodwill of the Franchisor; and
(ii) acknowledges that damages are not an adequate remedy if the Franchisee or a Guarantor breaches this clause 21; and
(iii) Acknowledges that the Franchisor may apply for injunctive relief if:
(A) the Franchisee or a Guarantor breaches or threatens to breach this clause 21; or
(B) the Franchisor believes the Franchisee or a Guarantor is likely to breach this clause 21.
(d) Each party agrees that if a court of competent jurisdiction finds that any of the provision of clause 21 are not enforceable at law or in equity; but that an Unenforceable Provision would be enforceable if:
(i) one or more restricted ways included in the definition of ‘Restricted Way’ were deleted;
(ii) one or more of the alternate periods referred to in the definition of ‘Restraint Period’ were deleted; and/or
(iii) one or more of the alternate areas referred to in the definition of ‘Restraint Area” were deleted;
The Unenforceable Provision must be made enforceable by making those deletions.
The restraint prevents the defendants from operating a competing business for a period after the Agreement. The restraint is defined to apply for six months after the Agreement except where the franchisee gives four months’ notice of not seeking a renewal of the Agreement
Item 12 in Schedule 1[28] has a Special Condition expressly in contemplation of the first variation which effected a rebrand deleting the name Brock from the business name. The first Deed of Variation was executed on 21 August 2012 effective from 1 August 2012. Pursuant to the terms of the original Franchise Agreement the defendants thus had the right to terminate anytime in the six months between August 2012 and February 2013. (I have omitted exact dates because it is not clear exactly which date would be applicable. Nothing turns on the exact date.) The right to terminate following the rebrand was not exercised.
[28] Exhibit P1, tab 1 p 54.
The Second Deed of Variation signed on 7 May 2013 effective from 25 February 2013 bound the franchisees until at least 1 February 2015. After that they could terminate the Franchise Agreement. I reproduce clause 2 dealing with the variation:[29]
[29] Exhibit P1, tab 3, p 113.
2. Variation
2.1 Special Conditions
The Franchise Agreement is varied as follows:
(a) Schedule 1 – Item 3
(i) Initial Term: 5 years
(ii) Renewal Term: 5 years
(iii) Commencement Date: 1 November 2011
(b) Schedule 1 – Item 12 – Special Conditions
Special Conditions, paragraph (iii) is deleted and replaced as follows,
(iii) The Franchisor and Franchisee agree that the Franchisee will remain franchisee until at least 1 February 2015. and the restraint provisions under clause 21 will not apply. (signed) (handwritten additions in italics).
The plaintiff’s contention is that that Special Condition is the analogue of Special Condition (iii) in Item 12 of the First Schedule to the original Franchise Agreement. It is to be read in conjunction with that original condition. It should be read to mean that, just as in the original Franchise Agreement the defendants would be free of restraint if they terminated the Agreement within six months of the proposed rebrand, so in the newly varied Agreement they would be free of restraint if they terminated after 1 February 2015. All the variation has done is change the period within which, or after which, the defendants could terminate.
The defendants assert that the variation has expressly deleted and replaced the original Special Condition. It is no longer dealing with the release of restraint only in the event of termination. It is dealing with release from restraint at any time. If the new condition meant to apply only in the event of termination, it could and should have said so.
Interpretation of the second variation restraint
The terms of the contract are to be interpreted objectively not subjectively. In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd and Ors[30] the High Court said:
This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
[30] (2004) 219 CLR 165 at [40].
The ‘reasonable person’ there referred to has been said to mean a ‘reasonable business man’.[31] The inference is that the Agreement is to be read in a commercial context.
[31] See Electricity Generation Corporation v Woodside Energy Limited and Ors (2014) 251 CLR 640, 656-7, per French CJ, Hayne, Crennan and Kiefel JJ.
Reference may be had to inter alia, other contracts or statutory provisions referred to in the contract.[32] Neither party suggests that in this case any parol evidence is admissible to assist in the interpretation of the contract. The plaintiff however submits that in interpreting the Second Variation Deed, regard may be, and must be, had to the original Franchise Agreement and, to an extent, the First Variation Deed. Authority for the correctness of that submission is Agricultural and Rural Finance v Gardiner.[33]
[32] Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd and Anor (2015) 256 CLR 104 at [46] per French CJ, Nettle and Gordon JJ – see [46]-[52] generally for legal principles of interpretation.
[33] (2008) 238 CLR 570 at [32]-[38] per Gummow, Heyne and Kiefel JJ.
Taken in isolation the words of the amended Special Condition 2.1(b) appear clearly to mean that the original paragraph (iii) is wholly deleted and replaced by the new provision. The new provision makes no mention of it applying only in the event of termination. The original paragraph (iii) did expressly apply in the event of termination but the variation does not.
Despite the apparent clarity of the words in the second variation, I find that the plaintiff’s interpretation is to be preferred. I do so for two reasons.
First, when the second variation is read in conjunction with the original Franchise Agreement it is apparent that the purpose of the two clauses is to provide for a termination of the contract before it has run its full course. In the case of the original, the right to termination is conferred for a six month period following the anticipated, but as yet unconsummated, rebrand. That right not having been exercised within the nominated six months, the second variation confers a new date-determined right to terminate in February 2015. The single topic of both clauses is termination. The typed part of each clause relates to termination and the identical handwritten addition to each clause refers to a consequence of termination. The word ‘and’ at the beginning of each handwritten addition is more consistent with the same topic being addressed in the handwritten addition rather than an entirely new topic.
The defendants’ submission is that the entirely new topic of freedom of restraint generally is embarked upon in the same sentence which begins with the topic of termination. Restraint generally forms such a large part of the whole Agreement, and the whole business relationship, that this interpretation is less likely than that submitted by the plaintiff.
The second reason for so finding is that the interpretation urged by the defendants would cause an inconsistency between two provisions in the contract. Clause 11.26(a) remains unamended by the variations. Clause 11.26(a) prevents, in material respects, the defendants from participating in a competing business without the plaintiff’s prior written consent. If the parties had really intended by the variation to free the defendants from restraint generally, they would also have to vary clause 11.26(a). Their not doing so is consistent with the plaintiff’s suggested interpretation of the variation.
I find that the Second Variation clause 2.1(b) is to be construed as applying only in the event of termination after February 2015. The restraint clause 21 was to remain in operation until the termination right was exercised.
Meaning of restraint
The defendants’ second proposition is that, even if the restraint provisions did apply, they did not prevent the defendants from establishing the Henley Beach office. That is because:
1.The Henley Beach office was outside the restraint area which is described as the Territory and delineated by a map in Item 6 of Schedule 1.[34] The map marked an area around Unley. It did not extend to Henley Beach.
2.The restraint did not prevent the defendants using their own names in the new business.
3.The restraint did not expressly prevent the defendants setting up a competing business so long as they complied with the key performance criteria.
[34] Exhibit Pt, tab 1, pp 51-52.
In addition the defendants submit that a valid breach notice was ever issued by the plaintiff.
In my view each of these propositions cannot be sustained. I explain why.
Area
The area in which the defendants were restrained from establishing a competing business was, broadly speaking, the Unley area. If there were no other restraints in the Agreement, the geographical ambit of the Agreement would be limited to that area.
However, on the evidence at the trial it is clear that the defendants set up the Henley Beach office with five or six land agents relocated from the Adelaide office. Those agents brought with them their existing clients wherever their properties might be located. Mr Ouwens said that he believed that the agents would be able to bring with them all their clients even though the agreement of the individual client had to be obtained.[35] In this way the geographic restraint was being breached even though the location of the Henley Beach office was outside the restraint area.
[35] T354.
Business name
The defendants contend that even if the restraint was operative it would not prevent the defendants operating a business under their own names. While they could not trade as Harcourts Ouwens Casserly, they could not be prevented from trading as Ouwens Casserly.
The defendants were given conditional verbal approval by the plaintiff’s CEO Mr Molten to set up the Henley Beach office. There is no dispute that the approval was in anticipation of the defendants being given approval to establish a franchise office of Harcourts at Henley Beach. So it was that the advertising outside the Henley Beach office said ‘Harcourts Ouwens Casserly’. When the negotiations for the franchise broke down, the plaintiff demanded that the defendants remove the signage. This they did but they replaced the signage with the orange Ouwens Casserly brand.
Clause 4 of the Franchise Agreement relates to the use of the business names. Clause 4.4[36] provides:
4.4 Franchise undertakings
The franchisee undertakes;
…
e)not to use the business name, the marks or any part of any other business name, company name, partnership name, domain name or trade mark, or consent to any other person doing so;
[36] Exhibit P1, tab 1, p 20.
The business name as amended by the first variation was Harcourts Ouwens Casserly.[37]
[37] Exhibit P1, tab 2, p 100.
The defendants registered a company name ‘OC Coastal Pty Ltd’ and Domain names ‘ocre.com.au’ and ‘ouwenscasserly.com.au’.
In my view the meaning of the franchisee undertaking in clause 4.4(e) proscribes any part of Harcourt Ouwens Casserly being used. Ouwens Casserly is part of that name. There is no provision in the agreement exempting the defendants from that proscription.
Competing business
The defendants assert that they were entitled under the Agreement to set up a competing business so long as they complied with the key performance criteria in the Agreement. Before dealing with that contention I refer to a submission made by Mr Ross-Smith for the defendants that a memo of the plaintiff’s Board meeting on 31 July 2013[38] authorised the defendants to operate a competing business OC Projects. No such authorisation appears in the minutes. The restraint provisions remained in force. They bound the parties. There was no written authorisation for the defendants to carry on a competing business. On the contrary all written communications from the plaintiff forbade the defendants from setting up a competing business.
[38] Exhibit D27.
The defendants maintain that all along they intended to comply with the Franchise Agreement’s key performance criteria. They proposed that they would continue working in the Adelaide office, delegating the work of the Henley Beach office to agents located there from Adelaide.
Clause 11.23[39] together with item 13 of the first Schedule[40] defines the key people as Messrs Ouwens and Casserly. I reproduce clause 11.23:
[39] Exhibit P1, tab 1, p 31.
[40] Exhibit P1, tab 1, p 54.
11.23 Key People
The Key People will be directly and personally involved in the day-to-day management of the Franchised Business on the Franchisee’s behalf and in this respect:
(a) any change to the Key People must first be approved in writing by the Franchisor;
(b) the Franchisee must ensure that each Key Person devotes the agreed Minimum Hours to the Franchised Business; and
(c) if for any reason the Franchisee and the Key People are each unable to perform their usual role in the Franchised Business for a period of five consecutive Business Days, then the Franchisee must appoint a further Key Person to do so (subject to obtaining the prior approval of the Franchisor).
The minimum hours referred to in clause 11.23 are defined principally as Monday to Friday 9 am to 5 pm and Saturday 9 am to 12 noon.[41]
[41] Exhibit P1, tab 1, pp 12 and 8.
The obligations contemplated by clauses 11.23 and the restraint provisions in clause 21 operate to require the franchisees to involve themselves in the day-to-day management of the franchise business and prevent them operating a competing business. The key performance criteria are merely minimum requirements of performance.
The breach notices
I do not accept the submission that the two breach notices failed to identify a breach which amounted to an Event of Default within the meaning of the Franchise Agreement. Clause 19.4 of the Franchise Agreement lists Events of Default from (a) to (s). The first default notice issued on 23 December 2013[42] alleged that the defendants had committed an Event of Default within the meaning of clause 19.4(h) which reads as follows:
(h)The Franchisee, Guarantor, Key Person, Staff, or any director, secretary or shareholder of the Franchisee does anything to:
(i) bring the Franchised Business, the Franchisor another Harcourts Franchise or Harcourts Franchisee, the Network or the Marks into disrepute or otherwise damage the Network in any way; or
(ii) adversely affect the cohesiveness or operation, or cause actual or potential financial loss to the Franchisor, another Harcourts Franchise or Harcourts Franchisee or the Network.
[42] Exhibit P2, tab 18, p 514-15.
The letter alleged three specific breaches, the second of which was that the defendants had opened the Henley Beach office without authority and that they had registered the name Ouwens Casserly Coastal Pty Ltd, the Domain name, ‘ouwenscasserly.com.au’ and they had erected the Ouwens Casserly signage. The letter went on to demand that the defendants remedy the breach by immediately undertaking to cease the Ouwens Casserly business from using the company or Domain name and removing the signage.
The second breach notice was issued on 30 January 2014.[43] The second notice effectively asserted that the defendants had abandoned the franchise.
[43] Exhibit P2, tab 21, p 520.
I will consider the adequacy of that notice in the context of the allegation of abandonment.
Breach of franchise agreement
I find that the defendants breached the restraint provisions of the Franchise Agreement by setting up the Ouwens Casserly branch at Henley Beach. They were served with an appropriate notice of default including an enforceable demand to rectify the breach.
Abandonment of the franchise
The plaintiff alleges in its second default notice on 30 January 2014 that the defendants had abandoned the franchise. The plaintiff was required to issue such a notice pursuant to clause 19(4) of the Agreement and allow the defendants 30 days to remedy the breach before they could terminate the agreement. The plaintiff had given the defendants 30 days to remedy the first default notice issued on 23 December 2013. The defendants had not ceased to trade under the rebranded Ouwens Casserly name. On the contrary, on 24 January the defendants had advised the plaintiff that as from 28 January they would be operating a competing business.
In the light of my finding that the establishment of the Ouwens Casserly brand was a breach of the Franchise Agreement and that constituted an Event of Default, the plaintiff was entitled as of Friday 24 January 2014 to terminate the Franchise Agreement. The plaintiff did not terminate until 4 February.[44]
[44] Exhibit P2, tab 24.
The defendants submit that the plaintiff was not entitled to terminate on the grounds set out in the second default notice because the plaintiff had not allowed the defendants 30 days to rectify the alleged breach. The plaintiff terminated 5 days after the second default notice.
There are two reasons why this submission must be rejected. The first is that the plaintiff already had the right to terminate by virtue of the defendants’ failure to rectify the breach alleged in the first default notice.
The second reason is that pursuant to clause 19.3 of the Agreement[45] the plaintiff had a right to terminate with immediate effect if any of the events set out in s 23 of the Code occurred. Section 23C of the Code concerns the franchisees’ voluntary abandonment of the franchise business or the franchise relationship.
[45] Exhibit P1, tab 1, p 39.
In my view the evidence establishes that as at 30 January 2014 the defendants had abandoned the franchise. It effectively no longer existed. I explain why.
The evidence about the defendants’ evolving relationship with the plaintiff comes principally from Mr Ouwens. He gave evidence for almost five days. He was cross-examined extensively. Mr Casserly was in court while Mr Ouwens gave evidence so both examination and cross-examination of him was considerably shorter.
In his examination-in-chief Mr Ouwens explained that after the New Zealand trip from 15 to 17 July 2013, the defendants anticipated that they would be able to negotiate with the plaintiff to have the aggregation of fees practice that they had been so attracted to in New Zealand applied to their existing franchise in Adelaide and their proposed business in Henley Beach. While it is plain that the plaintiff never offered such an arrangement, it was the defendants’ hope that such an arrangement would be put in place.
The CEO Mr Moulton told the defendants after the New Zealand trip that the plaintiff’s Board had rejected the proposal to aggregate fees, but that he would try to change the plaintiff’s mind about that. On 31 July the plaintiff’s Board approved the defendants’ application for the Henley Beach office. Mr Moulton passed on that verbal approval but it was always on the basis that a Franchise Agreement would be signed. On 5 August the defendants signed a lease on the Henley Beach office.
When the financial negotiations between the parties broke down, the defendants felt a high level of disappointment. Mr Ouwens said, ‘We felt trust was lost’.[46] The principal, although not the only, disappointment was that the plaintiff maintained its unwillingness to countenance aggregation of fees.
[46] T256.
Such was the defendants’ disappointment that they told the plaintiff not only that they would not sign the proffered Franchise Agreement in respect of Henley Beach, but, after speaking with Mr Moulton, they felt that the best option was for a mutual termination of the existing Franchise Agreement. They said as much in their email to the plaintiff on 30 November 2013.[47]
[47] Exhibit P3, tab 35.
Mr Ouwens said that he and Mr Casserly made up their minds over the Christmas period to run the Ouwens Casserly brand at Henley Beach.[48] They made up their minds having discussed the matter with their advisory board which consisted of Messrs Glen Cooper, Brian Cunningham and Willem Ouwens (Mr Alex Ouwens’ father). Mr Willem Ouwens is the principal of Ouwens Lawyers, the defendants’ legal advisers.
[48] T267.
No business was conducted at the Henley Beach office between 9 December, when the Ouwens Casserly signs were photographed by Mr Friebe and 26 January. Both Ouwens and Casserly denied they had any intention of not continuing with the franchise business in Adelaide. Mr Ouwens said that they would continue with their best endeavours to meet their obligations under the Franchise Agreement.[49]
[49] T270.
Mr Ouwens’ cross-examination had begun after the morning break on 24 March 2016. It was not completed by the end of that day. The case was then adjourned to 16 June.
During 24 March Mr Ouwens agreed that around 3 December 2013 the defendants had authorised their advertising agents Showpony to prepare orange signboards, electronic and print ads, fliers and floor plans for use in the Henley Beach office. They wanted the materials to be ready for their Christmas function on 19 December when they would show them to their staff. Such materials as would be produced by then would only relate to the Henley Beach office. Mr Ouwens’ attention was drawn particularly directed to business cards.[50] He said that he was confident that no business cards were produced until the plaintiff terminated the agreement on 4 February 2014.
[50] T337.
Mr Ouwens said that on 12 December the defendants told Mr Moulton and their staff that in the New Year they would be launching the Ouwens Casserly office at Henley Beach.[51]
[51] T339.
As from 19 December, the day of the Christmas party, agents were authorised to invite vendor clients to switch to the orange brand[52] but that would only be in relation to the Henley Beach properties.[53]
[52] T377.
[53] T380.
By 13 January 2014 the defendants had reserved eight pages in the Advertiser Newspaper for its real estate section on 1 February 2014. Those pages would be under the orange banner. When pressed about whether those pages were intended to accommodate all of the defendants properties rather than just the Henley Beach properties, Mr Ouwens agreed that as of 13 January 2014, while the ‘primary focus’ was placing only the Henley Beach properties in the pages reserved for 1 February, they had an ‘insurance policy’ which was the possibility of placing all listings in the reserved pages.
Mr Ouwens gave detailed evidence about the events of Monday 27 January. He said in the morning of that day he and Mr Casserly happened to run into Mr Moulton in the corridor separating the Harcourts’ office from the Harcourts Ouwens Casserly franchise offices in Adelaide. Mr Moulton then told them that Harcourts would be terminating the Franchise Agreement that week. Further, on the same morning, they received the email from Mr Dimou of the Advertiser saying that Harcourts might be applying for an injunction preventing trading under the orange brand. Mr Ouwens gave details of his and Mr Casserly’s movements for the rest of the day and in the days following. The movements included consulting with the members of their advisory board and getting legal advice from Mr Ouwens senior. They decided only on that Monday after consulting their advisers about what they had learnt from Mr Moulton and Mr Dimou that day that they would transfer all their listings to orange.
By 2 pm on Wednesday 29 January the advertisements for the following Saturday’s Advertiser had to be completed. They had to hurriedly notify all their agents of their proposal to transfer all listing. Those agents had to get the approval of their clients. The wholesale transfer of the listing was a large and hurried process.
Just before the adjournment of the trial at the end of 23 March, Mr Roberts SC put to Mr Ouwens that Monday 27 January 2014 was a public holiday. Mr Ouwens said that in that event the events which he thought had occurred on the Monday occurred on the Tuesday.
Despite being invited to do so by the plaintiff I would not on that account reject Mr Ouwens’ evidence about the events of that week. I recognise that it is easy to be mistaken about a date on which something has occurred. However one of the consequences of that fact is that the time frame for the many changes that had to take place to effect a complete transfer of all the listing from blue to orange, was reduced by a day. There is no doubt that by Thursday 30 January 2014 the transfer of all listings from blue to orange had taken place. All the adverts for Saturday’s Advertiser had been changed. All the signboards, A-frames, brochures and business cards were changed. All but one or two clients had agreed to the change.
The Australia Day long weekend in 2014 has another significance in the trial. On Friday 24 January the defendants’ lawyers had notified the plaintiff that as from Tuesday 28 January the defendants would be operating a competing business under the Ouwens Casserly brand. The notification made no mention of the location or locations at which the new entity would trade. There was no mention of the Ouwens Casserly office operating only from Henley Beach.
That said, the letter did confirm that the defendants remained committed to meeting the key performance criteria prescribed in the Franchise Agreement for the remainder of the term of that Agreement.[54]
[54] Exhibit P2, tab 20, p 519.
The plaintiff had of course given the defendants a notice of default on 23 December alleging, inter alia, that operating the Ouwens Casserly brand without authority was a breach of the Franchise Agreement and that if the defendants did not remedy the breach within 30 days, the plaintiff might terminate the Agreement and institute legal proceedings. The 30 days expired the day before the defendants notified the plaintiff of their intention to commence the rebranded business.
Some of Mr Ouwens’ acknowledgements by the end of his evidence on 23 March made it appear possible that from early December 2013 the defendants had in fact been planning a complete rebrand of the franchise business. That is despite his assertion that the new business was only going to operate from Henley Beach and that the defendants remained committed to their obligations under the Franchise Agreement until at least February 2015.
During the adjournment of the trial between 23 March and 16 June the plaintiff subpoenaed voluminous materials relating to the proposed rebrand. Those documents became MFI-P20. A Schedule, Exhibit D35, sets out which of those materials were tendered. The tendered materials were about 18 of 133. I have only had regard to those materials which were tendered.
Ruling on the defendants’ application to amend pleadings
On the resumption of the trial on 16 June the defendants applied to amend their pleadings to allege that the plaintiff had ‘evidenced a conclusion that as at 31 January 2014 it had no further interest in the Franchise Agreement continuing’. In support of that allegation the defendants’ asserted in a Draft Amendment that Mr Moulton and Mr Dimou’s communications with the defendants on 28 January were evidence of the plaintiff’s unwillingness to continue to carry out its obligations under the agreement.
I refused the application. My reasons for doing so were:
1.The plaintiff had by that stage closed its case. To meet the proposed amendments it would have to seek to reopen its case.
2.It appeared to me, even at that stage of the trial, that the amendment was without merit. The plaintiff had made no secret of its intention to terminate the Agreement if the defendants did not rectify the alleged breach of the Agreement. It would be unremarkable if interlocutory proceedings such as an injunction would be launched in that event. If I found the plaintiff’s allegations of default by the defendants were without foundation, then legal consequences favourable to the defendants would follow. That issue was already clearly contested on the existing pleadings.
Inspection ruling
In addition to applying to amend their pleadings the defendants applied to adjourn Mr Ouwens further cross-examination to permit him to inspect the materials which had been subpoenaed and produced during the adjournment. I refused that application. I did so for these reasons:
1.I anticipated that the materials would be documents which would be admissible because they were communications to which the defendants were a party or they were materials with which the defendants would be familiar.
2.I proposed to give Mr Ouwens the opportunity to read in the witness box any document upon which he was to be cross-examined.
3.The defendants’ lawyers had access to the subpoenaed materials and would be in a position to object to any inadmissible documents and would be able to re-examine on any materials which were unfairly or unreasonably not drawn to Mr Ouwens’ attention during cross-examination.
Resumed evidence of Mr Ouwens
For the first time in the trial Mr Ouwens acknowledged that the defendants had a contingency plan (‘Plan B’) in the event that the plaintiff terminated the Franchise Agreement. Initially Mr Ouwens said that he could not recall being personally involved in Plan B. He thought the office manager was attending to it.[55] Before the two ‘triggering’ incidents on 28 January (the Moulton/Dimou communications) the defendants had no intention of transferring the Adelaide listings to orange.
[55] T421.
Notwithstanding that evidence, Mr Ouwens was somewhat equivocal on that topic when questioned about a letter the defendants’ lawyers had written to the plaintiff on Monday 3 February 2014.[56] The letter was in response to the second default notice the plaintiff had sent the defendants on Thursday 30 January. The defendants’ lawyers’ letter reiterated the defendants’ belief that they were entitled to operate a competing business within the Franchise Agreement by reason of the handwritten variations to the restraint provisions.
[56] Exhibit P2, tab 23, p 527.
Mr Robert SC asked Mr Ouwens whether the defendants intended to run the Adelaide office under the Ouwens Casserly branding but continue with Harcourts Ouwens Casserly ‘only so far as you saw it as necessary to meet the key performance indicators under the Franchise Agreement?’.
In my view Mr Ouwens answer was equivocal. He said[57]:
A. I understand now what you're saying. I don't think that was the case from my memory. I think we were just intending to run an orange brand at Henley Beach. Other business partners at Collinswood owned 60% of that business and from the best of my memory it was their decision as to which direction that office would go with its branding. As far as the city office goes, to the best of my recollection I believe we were just going to go ahead with the Harcourts branding for the next 12 months and just meet the terms of the franchise agreement for those 12 months.
[57] T446.
Further answers at T450 were likewise equivocal:
Q You say to the best of your memory, are you intending to convey by that that you are unsure one way or the other as to whether you were intending, as at 3 February, to conduct an orange branded competing business in relation to the existing city operations as at 3 February 2014.
A. I don't think we were, no.
Q. But you are not sure one way or the other.
A. I'm not sure but I'm certainly sure that we were going to run the Harcourts business in the city office
Q. What I suggest is that as at the time this letter was written it was your full intention to be running orange branded business from three sites, the city office, the Collinswood office and the Henley Beach office. What do you say to that.
A. I don't agree, I don't think that was the case.
Q. But you're not sure.
A. No, I am sure that we were going to run the Harcourts office from the city.
Despite the general thrust of the evidence of Messrs Ouwens and Casserly I do not think that they intended to operate the orange branded office from Henley Beach only. The documentary evidence points to their intending to rebrand all their operations. They thought they were entitled to set up a competing business and the documentary evidence points to their planning a wholesale rebrand. Their fall-back position was that the transfer of all aspects of the business to orange in the week of 28 to 31 January was:
·Only prompted by the Moulton/Dimou communications;
·Only temporary;
·Only to protect their clients.
That fall-back position is contradicted by the subpoenaed materials and really by the equivocal answers of particularly Mr Ouwens to which I have already referred.
I refer to some, although not all, of the materials which suggest a wholesale rebrand. I refer first to materials relating to events in the week from Monday 13 to Friday 17 January.
Tab 2 of MFI-P20 is an exchange of emails on 14 January between the defendants’ office and Smartposts, an organisation which produces signboards. Mr Ouwens sends an email saying ‘East Terrace is just a few logo changes and a new signboard out the front lawn’.
Tab 3 of MFI-P20 is an exchange of emails on the same day between the defendants’ office and Showpony, the defendants’ advertising agents, dealing with business cards. Other evidence makes it clear the business cards being discussed refer to the offices at Collingswood and Adelaide as well as Henley Beach. The person from Showpony indicates that the first print run of the business cards will be ready by Monday 27 January. The person was questioning how many cards would be required for each agent. Tab 6 is a card in Mr Ouwens’ name with the East Terrace address.
Tab 8 is an exchange of emails on 15 January in which Mr Ouwens approves (‘like[s]’) a draft newsletter prepared by Showpony including ‘all three office locations’. Tab 133 is an email on the same day from an employee within the defendants’ office to an officer of realestate.com.au. The email includes this passage:
Highly confidential at this stage, but we will be changing everything on re.com – logos and banners.
Tab 18 is an estimate dated 17 January of about $5,000 for the printing of business cards with 50 names on them. Plainly that estimate cannot be for the Henley Beach office alone.
Tab 22 is an email exchange on 17 January in which the managing director of Smartposts, the company which makes the defendants’ signboards, refers to a meeting he has had that day with Mr Ouwens in which they discussed the new Ouwens Casserly signboards ahead of the proposed opening of the new business on 1 February. There is no mention of Henley Beach only, and no mention of the opening of the new business being in anyway contingent.
The preparation of materials continues in the week of Monday 20 to Friday 24 January. On 21 January there are emails about the new brochures at Tab 31, signboards at Tab 34 and logos on electronic advertising at Tab 35.
On 22 January Tab 41 refers to new signboards on addresses on locations across the metropolitan area, not just Henley Beach.
Tab 43 is an email on 23 January referring to pictures on ‘all ads’ from 29 January.
Tab 45 is an email on 23 January when Mr Casserly says that they want everyone to have business cards by the following week.
In Tab 47 is an email on 23 January when Mr Casserly says:
It will be useful if our sales consultants could access a PDF of our Marketing Collateral to show the current Vendors over the weekend.
Tab 49 is an email from Showpony to the defendants on 24 January saying that they had spent about $8,000 in preparing approximately 30 brochures and 60 signboards.
Tab 50 is Mr Ouwens’ reply:
Make it happen!
Tab 88 is a particularly significant email on 21 January from the defendants to Mr Bill Dimou of the Advertiser. I set out the email in full.
Hi Bill,
Thanks for coming in so quickly this morning once you heard the bad news.
We held a full company meeting mid last week on how to handle (150) vendor expectations and how to explain the benefits in the change over. Unfortunately all of our 25+ agents used the fourth position in their dialogue which many clients noted. Additionally 1 February sees Ouwens Casserly launch many new properties (held back) to the market which means that new clients are receiving and unfulfilled promise on the launce of ‘their castle’.
Thank you for asking for our thoughts on appropriate compensation to appease our clients (and agents). I think a fair solution is to provide Ouwens Casserly with a page per week for the duration of the 8 weeks which we are not in the fourth position. This would bring us to approximately 4 pages I would anticipate.
Thanks again for your long term approach to the relationship with Ouwens Casserly and speedy response this morning.
Cheers
Alex & Nathan
Mr Ouwens acknowledged that the facts asserted in his email were correct. By the week beginning 13 January the defendants 25 or so land agents had spoken to their 150 or so clients giving them an expectation of the sort of prominent print advertising that they might expect if they were to change over to the orange brand. Further, the email suggests the defendants had ‘held back’ new clients pending the launch of the new brand on 1 February. In the second to last paragraph of the email the defendants were seeking a commitment from the
Advertiser to provide the requested advertising space for 8 weeks. An email on 3 February, Tab 77, seeks conformation that the promise of 8 weeks is ‘locked in’.
The defendants maintained at all times that they had no intention of rebranding the whole of their business. Insofar as they did so in the week beginning Tuesday 28 January they did so only in response to the Moulton/Dimou communications on that day and they did so only temporarily to protect their clients in the face of the plaintiff terminating the Franchise Agreement.
Notwithstanding the intention of setting up the competing business at Henley Beach, they intended to continue to abide by the terms of the Franchise Agreement as it applied to the Adelaide office.
In Mr Ouwens’ cross-examination following the adjournment, he said that documents being presented to him were part of their contingency plan, their Plan B. The defendants feared the plaintiff would terminate the Agreement and they needed to have a wholesale rebranding in place to protect their clients. Before the adjournment Mr Ouwens had made no mention of the contingency plan. He said that was because he had not been asked.
It is true that Mr Ouwens was not asked, in as many words, whether the defendants had a contingency plan. However cross-examination about the large scale commission of advertising material around 3 December[58] and the creation of multi-office business cards before 28 January,[59] to take just two topics, invited the explanation by Mr Ouwens that a contingency plan was being put in place.
[58] T331.
[59] T334.
Tab 110 is the email of Mr Ouwens to Smartposts on 21 January asking that all signboards be swapped over on the following Thursday and Friday (30 and 31 January). Evidence of a wholesale rebrand arises from Mr Ouwens request for a removable sticker to be prepared for the signboards. The removable sticker was to read ‘in conjunction with Harcourts Ouwens Casserly …’.
Mr Roberts put to Mr Ouwens[60] that the email indicated that as at 21 January the defendants intended putting orange boards on all Australian properties. Mr Ouwens said:
Well it appears that way from the email but that wasn’t my memory. But, yes, it appears that way.
[60] T627.
Mr Roberts put to Mr Ouwens that it had been untrue to say the defendants had no plan to rebrand until the events of 28 January.[61] Mr Ouwens replied:
Based on this email it doesn’t look like it was, yes. It had escaped me.
[61] T6-8.
Despite these concessions Mr Ouwens went on to maintain that the arrangements put in place before 28 January were only contingent upon the plaintiff terminating the Franchise Agreement and they were only put in effect when triggered by the events of 28 January.
I find that the documentary evidence contradicts the defendants’ evidence that prior to 28 January they had no intention of wholly transferring their franchise business to the orange brand. I find that they did have such an intention before 28 January. I find that they had such an intention from early December 2013. Their explicit notice to the plaintiff on Friday 24 January that they were going to establish a competing business, without limitation to Henley Beach, is the culmination of that intention. The defendants knew all along that the plaintiff regarded the establishment of a competing business, even only at Henley Beach, as a breach of the Franchise Agreement. Mr Moulton had been telling them that. The first breach notice made that abundantly clear. The defendants do not claim that they expected the plaintiff to acquiesce in the establishment of a competing business. They knew that their notice on 24 January would lead to the termination foreshadowed in the breach notice. What Messrs Molten and Dimou told them on the first working day after that notice could not have come as any surprise at all. They were fully prepared by 28 January for the inevitable reaction of the plaintiff. Their agents and clients were prepared. The physical arrangements necessary to effect a wholesale rebrand were either all in place, or arranged to be in place for the rebrand in the week beginning 28 January.
The arrangements were not contingent on anything that was not inevitable and foreseen. The arrangements were not temporary. Neither defendant has explained how the temporary rebrand could have been reversed. Their professed readiness to comply with the key performance criteria in the Franchise Agreement is unsustainable in the face of the wholesale rebrand.
By 30 January there was effectively nothing left of the franchise. I find that by 30 January the defendants had abandoned the franchise business and the Franchise Agreement.
Findings
I find that the plaintiff was entitled to terminate the Franchise Agreement on 4 February on these grounds:
1.The defendants had breached the Franchise Agreement by taking steps to set up the Henley Beach office without authorisation and by not remedying that breach before 3 February which was the extended time for compliance with the first default notice.
2.By 30 January 2014 the defendants had abandoned the franchise business and the Franchise Agreement within the meaning of clause 23 of the Code. No notice was required to be given in the event of abandonment.
Damages
Damages arising from a breach of contract are to be assessed in such a way as to place the parties sustaining a loss ‘… so far as money can do it, … in the same situation … as if the contract had been performed’.[62] Speaking broadly, the plaintiff is entitled to receive by way of damages the franchise fees that the defendants would have paid if they had not breached the Franchise Agreement giving rise to a lawful termination of the Agreement by the plaintiff on 4 February 2014.
[62] Wenham v Ella (1972) 127 CLR 454 at 471, applying Robinson v Harman (1848) 1 Ex 850.
The plaintiff sought to prove its loss by commissioning the valuer, Mr Martin White to estimate the losses. His first report[63] is dated 22 July 2015 and his second[64] is dated 16 March 2016. Mr White gave evidence.[65]
[63] Exhibit P7.
[64] Exhibit P8.
[65] T170-199.
The defendants submit that some of the premises upon which Mr White estimates the plaintiff’s losses are wrong and he failed to take into account a number of matters which should reduce the plaintiff’s claimed losses. In support of their case, they commissioned the valuer Mr Vernon Sawers to prepare, jointly with Mr Desmond Collison, two reports dated 22 February 2016[66] and 20 March 2016.[67] Mr Sawers gave evidence.[68]
[66] Exhibit D22.
[67] Exhibit D24.
[68] T640-69.
Before turning to the valuers’ evidence there must first be determined the question of the period during which the plaintiff had suffered a compensable loss.
The Franchise Agreement was to run from 1 November 2011 to 31 October 2016. However the second variation deed gave the defendants the right to terminate the Agreement after 15 February 2015. If they did terminate after that date they were not to be subject to the restraint conditions.
The defendants submit that the evidence of Messrs Ouwens and Casserly clearly indicates that they proposed to terminate the agreement on 15 February 2015. Even if, contrary to their case, they were found to be in breach of the Agreement and liable to pay damages, those damages cannot include any claim of loss beyond 15 February.
The plaintiff submits that reliance should not be placed only upon what the defendants said was their intention. Reliance should, first, be placed on their actions and, second, upon a prediction of what they might have done if they had not breached the Agreement. What might they have done, if, for example, they had been given, and had accepted, legal advice that, however disappointed they were with the stance of the plaintiff during the financial negotiations about the Henley Beach office, they were nevertheless legally prevented from setting up a competing business? Until February 2015 they were obliged to continue to comply with all the conditions of the agreements. Might they not have seen things differently if they had adopted that course and consequently not exercised their right to terminate the Agreement in February 2015?
There was a chance they would have seen out the whole term of the Agreement. In these circumstances the plaintiff has lost the chance of receiving the franchise fees due to it until the end of the Agreement in October 2016.
The plaintiff concedes that the evidence of the defendants about what they would have done is admissible in considering their likely actions and consequently the plaintiff’s likely loss.[69]
[69] Latrobe Capital and Mortgage Corporation Ltd v Hay Property Consultants Pty Ltd (2011) 190 FCR 299, [2011] FCA FC4 per Finkelstein J at [58], [60] and [70] and Jacobsen and Besanko JJ at [106].
Nevertheless the question remains a factual one. The plaintiff must prove it has lost an opportunity which has some value. That value must be assessed by reference to the proved degree of ‘probabilities and possibilities’. In Sellars and Anor v Adelaide Petroleum NL[70] Mason CJ, Dawson, Toohey and Gaudron JJ said:
… the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.
[70] (1992-4) 179 CLR 332 at 355.
In my view the evidence shows that the defendants would have terminated the Franchise Agreement when they were free to do so in February 2015. Their disappointment at the failure of the financial negotiations with the plaintiff in late 2013 was such that they wanted there and then to terminate the Agreement. Whatever the rights and wrongs of their views about the stance of the plaintiff, their disappointment led them to want to leave the franchise and to set up a business on their own. Their actions mirrored their words.
I find that there was no discernible prospect of them remaining in the Franchise Agreement after February 2015. I so find even after trying to imagine how differently they might have felt if they had believed themselves to be legally obliged to remain fully committed to the franchise relationship until February 2015. By that I mean, not setting up a competing business at Henley Beach and continuing within the franchise business in Adelaide, and, if it could have been accomplished, a franchise office at Henley Beach.
I find that the plaintiff is not entitled to damages for loss beyond February 2015.
I return to a consideration of the valuers’ evidence. I do so only in regard to the damages which were assessed up to February 2015. I accept the evidence of the plaintiff’s witness, Mr White and the submissions made by the plaintiff based on that evidence. I explain why.
I do so by discussing the criticisms the defendants have made about Mr White’s assessment.
In his first report[71] Mr White estimates the plaintiff’s loss up to February 2015 at $357,910. I need not go into details about the components of loss but they represented Mr White’s estimate of the loss of the franchise fees that the defendants were likely to have paid to the plaintiff - from February 2014 to February 2015.
[71] Exhibit P7.
In his first report dated 22 February 2016[72] Mr Sawers raised several criticisms of Mr White’s approach. His principal criticisms appear in the executive summary of his report and are as follows:
1.Mr White has failed to make an allowance, and a deduction, for the costs that the plaintiff would have incurred in administering the Harcourts Ouwens Casserly franchise.[73]
2.Mr White has failed to make an allowance, and a deduction, for the franchise fee rebate scheme.[74]
3.Mr White had made no calculation of the franchise fees in the event that the defendants did not use their full endeavours to work in the franchise business for the balance of the franchise period, but instead worked only in accordance with the key performance criteria.[75]
4.Mr White took no account of the performance of franchises neighbouring the defendants’ franchise when estimating the likely income of the defendants’ franchise.
[72] Exhibit D22.
[73] Exhibit D22, p 1, par E2.
[74] Exhibit D22, p 1, par E4.
[75] Exhibit D22, p 1, par E5.
The answer to the first criticism comes partly from the evidence during the trial as well as Mr White’s reply. Mr Friebe said that there was no noticeable saving to the plaintiff upon the departure of Ouwens Casserly. The plaintiff had about thirty franchisees in South Australia and the loss of one made no difference in staffing levels. Further, several personnel assumed by Mr Sawers to be employed by the plaintiff were not so employed. So there was no saving in respect of their salaries. Messrs Toyama and Williams were employed by the national office of Harcourts rather than the state office. Ms McAleese was employed by the international company. The ‘IT team’ running the helpdesk in New Zealand was employed by the international company although the local company paid a monthly fee of $1,393 based upon the volume of use by South Australia franchisees. The use by Ouwens Casserly could not be calculated but would be a very small sum. Mr Whitbread, the Chair of the plaintiff’s Board, is paid a fixed consulting fee which is unaltered by the number of franchisees.
Mr White, and the plaintiff, acknowledge that with the removal of the Ouwens Casserly franchise, the plaintiff no longer had to pay a licence fee to the parent company. However, if the plaintiff were to receive an award of damages in these proceedings for the loss of those franchise fees, then the plaintiff would be liable to pay the licence fees to the parent company. For that reason Mr White made no deduction. I find that no deduction should have been made on that account.
The second criticism relates to the franchise fee rebate scheme which allowed a reduction in the franchise fee paid by a franchisee upon attaining a certain volume of sales. Mr White acknowledged that he was not aware of this scheme and had made no allowance for it. Accordingly he revised his estimate downwards consistently with Mr Sawers’ calculations. He reduced his estimate of loss from $357,910 to $239,787 for this consideration. He included an additional reduction for interest.
The third criticism was that Mr White had taken no account of the consequences of the defendants generating less in franchise fees if they worked less effectively by merely complying with the key performance criteria. In my view no such calculation should have been attempted. There was in my view no way in which Mr White could have calculated how much less they would have earned if they had worked less. He had no way of comparing how their present efforts would compare with the key performance indicators.
A second reason for finding that no such calculation should have been attempted is that there is no reason whatsoever to think that such high performing agents as the defendants would have decided to reduced their incomes merely to spite the plaintiff. If may be that the defendants made that criticism of Mr White’s calculations on the premise that the defendants would have devoted the rest of their efforts to the competing business, but I have found that they were not entitled to do that.
The fourth criticism is that in estimating the defendants likely franchise fees for the year February 2014 to February 2015, Mr White failed to have regard to some neighbouring franchises where incomes were decreasing. Mr White’s response was that, despite what might be happening in neighbouring franchises, the defendants’ income was increasing. In my view it was reasonable for him to base his estimate of future income on the trajectory of their past increasing income.
A postscript to Mr White’s calculations is a matter raised by Mr Roberts in his address.[76] He referred to pages 196 and 197 of Mr White’s evidence and suggested that it may give rise to some adjustment of Mr White’s estimate. I will hear the parties further on that topic.
[76] T964.
Subject to the possible need for a slight adjustment, I provisionally fix the compensable loss of the plaintiff at $239,787.
Conclusion
I find that:
1.The defendants breached the terms of the Franchise Agreement by setting up the office at Henley Beach.
2.The defendants breached the terms of the Franchise Agreement by abandoning the franchise.
3.The defendants are liable to pay damages to the plaintiff for the loss the plaintiff sustained between the termination of the Franchise Agreement in February 2014 and February 2015.
4.I provisionally assess the damages to be paid by the defendants to the plaintiff at $239,787.
I will hear the parties further as to the final quantification of the damages, costs and interest.
1
5
0