Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2) - [2008] FCA 810

FEDERAL COURT OF AUSTRALIA
Hoy Mobile Pty Ltd v Allphones Retail Pty Ltd (No 2)
[2008] FCA 810
TRADE AND COMMERCE – Trade Practices Act 1974 (Cth) and related legislation – Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth) – Franchising Code of Conduct – consequences of franchisor’s failure to comply with cll 10 and 11 of Code – whether franchisor’s non-compliance made franchise agreement void – whether decision in Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 should be followed – purpose of Code – need to seek guidance from implications in legislative framework
Held: Franchising Code of Conduct does not evince legislative policy of striking down every franchise agreement entered into by franchisor who fails to comply with its provisions – intention of code is to protect franchisees and place obligations on franchisor to comply – failure of franchisor to comply entitles franchisee to seek to set aside agreement or to seek relief for unconscionable conduct
CONTRACT – fraud – when each party is in breach of an essential term or has conducted itself in a manner amounting to a repudiation – whether one party may terminate based on other’s breach or repudiation – whether one party may terminate under express contractual right to do so when other party has committed fraud – whether party must be ready and willing before being entitled to terminate
Held: When each party is in breach of an essential term or has conducted itself in a manner amounting to a repudiation, neither is ready and willing to perform; neither may terminate at common law or pursuant to a contractual term: Foran v Wight (1989) 168 CLR 385 considered
CONTRACT – general contractual principles – construction and interpretation of contracts – ambiguity in written provision regarding exclusive territory – relevance of pre-contractual discussions – conflicting evidence given by both parties – neither party’s evidence believed – interpretation of common intention of parties – consideration of what each party, by words or conduct, would have led a reasonable person in position of other party to believe – consideration of surrounding circumstances known to parties and purpose and object of transaction – natural and common sense approach to construction – necessity to construe agreement so as to avoid commercial inconvenience
Held: Ambiguous provision to be interpreted by reference to objective common intention of parties based on reasonable person’s understanding in circumstances of case
CONTRACT – Fraud by franchisee – whether franchisor elected to affirm franchise agreement by its words or conduct – principles of election – whether franchisor confronted with two mutually exclusive courses of action necessitating a choice – whether franchisor communicated election to franchisee – whether reasonable person in franchisee’s position would have understood franchisor’s conduct to amount to affirmation of contract
Held: Franchisor had not elected to affirm the contract – parties understood that franchisor would refrain from terminating for fraud until franchisee given opportunity to respond
CONTRACT – general implication that parties contract to do all that is necessary for the other to have benefit of contract – duty to co-operate may be implied from objective consideration of whole of terms of contract – whether franchisor’s right to impose certain charges on franchisee pursuant to agreement restricted
Held: Franchisor’s power to impose charge on franchisee to effect work required by terms of agreement limited to amount that is reasonable – necessary for franchisor to reduce amount charged to a reasonable amount
COURTS AND JUDGES – precedents – statutory interpretation – State Court of Appeal in Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 construed earlier version of legislation and decided every franchise agreement void when made in compliance with legislation – relevant provision re-enacted – whether single judge of Federal Court obliged to follow State Court of Appeal – whether State Court of Appeal decision ‘plainly wrong’ – whether subsequent decision of High Court in ACCC v Baxter Health Care (2007) 237 ALR 512 showed State Court of Appeal’s approach to statutory construction wrong – whether intention of legislation to make void or to provide remedy
Held: State Court of Appeal not followed; purpose of legislation remedial; not intended to avoid for any non compliance
Trade Practices Act, ss 51AC, 51AD, 51AE, 87
Trade Practices (Industry Codes – Franchising) Regulations 1998 (Cth), cll 6A, 10, 11, 23(f)
Allen v Tobias (1958) 98 CLR 36 applied
Aristocrat Technologies Australia Pty Ltd v DAP Services (Kempsey) Pty Ltd (2007) 157 FCR 564 cited
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588 cited
Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 cited
Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 461 cited
Attorney-General v Guardian Newspapers Ltd [1987] 1 WLR 1248 cited
Australasian Performing Rights Association Ltd v Monster Communications Pty Ltd (2006) 71 IPR 212 cited
Australian Competition and Consumer Commission v Baxter Health Care (2007) 237 ALR 512 applied
Australian Competition and Consumer Commission v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 25 cited
Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132 referred to
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 cited
Blatch v Archer (1774) 1 Cowp 63 cited
Bremer Vulkan Schiffbau und Maschinenfabrik v South India Shipping Corp Ltd [1981] AC 909 cited
Cannon Australia Pty Ltd v Patton [2007] NSWCA 24 cited
Champtaloup v Thomas [1976] 2 NSWLR 264 cited
Clough v London & North Western Railway Co (1871) LR 7 Ex 26 cited
Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 applied
Collins v Baltern (1767) 2 Wils 347 referred to
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 cited
Commissioner of Taxation v Reliance Carpet Co Pty Ltd [2008] HCA 22 cited
Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia (CEPU) v Australian Competition and Consumer Commission (2007) 162 FCR 466 cited
Compomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45 cited
Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 30 cited
DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 applied
Duncan v Koster; The Teutonia (1872) LR 4 PC 171 applied
Emhill Pty Ltd v Bonsoc Pty Ltd (No 2) [2007] VSCA 108 followed
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 referred to
Fitzgerald v Masters (1956) 95 CLR 420 referred to
Foran v Wight (1989) 168 CLR 385
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 cited
GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 cited
Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) 11 WAR 40 not followed
Green v Sommerville (1979) 141 CLR 59 referred to
Highmist Pty Ltd v Tricare Ltd [2005] QCA 357 referred to
Hilditch Pty Ltd v Dorval Kaiun KK (No 2) [2007] FCA 2014 cited
Horrocks v Lowe [1975] AC 135 referred to
Hughes v Metropolitan Railway Co (1877) 2 App Cas 439 cited
Hunter BNZ Finance v GC Maloney Pty Ltd (1988) 18 NSWLR 420 cited
Hurley v McDonald’s Australia Ltd (2000) ATPR 41-741 referred to
Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 followed
International Air Transport Association v Ansett Australia Holdings Ltd (2008) 242 ALR 47 cited
Jones v Dunkel (1959) 101 CLR 29 applied
Ketchell v Master of Education Services Pty Ltd [2007] NSWCA 161 not followed
Koompahtoo Local Aboriginal Land Council v Sanpine (2007) 241 ALR 88 referred to
Kyrwood v Drinkwater [2000] NSWCA 126 considered
Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 referred to
Lazarus Estates Ltd v Beasley [1956] 1 QB 702 cited
Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 referred to
Marshall v Director-General, Department of Transport (2001) 205 CLR 603 referred to
Master v Miller (1791) 4 TR 320 followed
Matthews v Smallwood [1910] 1 Ch 77 cited
McNamara v Consumer Trader and Tenancy Tribunal (2005) 221 CLR 646 referred to
Melbourne Harbour Trust Commissioners v Hancock (1927) 39 CLR 570 cited
Nguyen v Nguyen (1990) 169 CLR 245 cited
Nina's Bar Bistro Pty Ltd v MBE Corporation (Sydney) Pty Ltd [1984] 3 NSWLR 613 considered
Owendale Pty Ltd v Anthony (1967) 117 CLR 539 referred to
Paal Wilson & Co v Partenreedere Hannah Blumenthali [1983] 1 AC 854 referred to
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165 cited
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 768, 196 ALR 257 cited
Qantas Airways Ltd v Cameron (1996) 66 FCR 246 cited
R v Burdett (1820) 4 B & Ald 95 cited
R v Paulson [1921] 1 AC 271 cited
Radaich v Smith (1959) 101 CLR 209 referred to
Rawson v Hobbs (1961) 107 CLR 466 referred to
Roadshow Entertainment Pty Ltd v CAN 053 006 269 Pty Ltd (Receiver & Manager Appointed) (1997) 42 NSWLR 462 considered
Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289; 76 ALJR 436; [2002] HCA 5 referred to
Scarf v Jardine (1882) 7 App Cas 345 applied
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 applied
Sellars v Adelaide Petroleum NL (1992) 179 CLR 332 applied
State Training Corporation of India Ltd v Golodetz Ltd [1989] 2 Lloyd’s Rep 277 considered
Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 referred to
SZFDE v Minister for Immigration and Citizenship (2007) 237 ALR 64 cited
Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 referred to
The Ophelia [1916] 2 AC 206 cited
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 applied
Tropical Traders Ltd v Goonan (1964) 111 CLR 41 applied
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 applied
Vitol SA v Norelf Ltd (The Santa Clara) [1996] AC 800 cited
Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 242 ALR 383 cited
Watson v Foxman (1995) 49 NSWLR 315 applied
Weissensteiner v The Queen (1993) 178 CLR 217 cited
Yorkshire Insurance Co Ltd v Craine [1922] 2 AC 541 cited
Zhu v Treasurer of NSW (2004) 218 CLR 53 cited
HOY MOBILE PTY LIMITED (ACN 103 105 228) v ALLPHONES RETAIL PTY LIMITED (ACN 103 105 228)
NSD 1678 OF 2006
RARES J
30 MAY 2008
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1678 OF 2006

BETWEEN:

HOY MOBILE PTY LIMITED (ACN 103 105 228)
Applicant

AND:

ALLPHONES RETAIL PTY LIMITED (ACN 103 105 228)
Respondent

JUDGE:

RARES J

DATE OF ORDER:

30 MAY 2008

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1.On or before 3 June 2008, the applicant file and serve its draft of orders to give effect to these reasons, together with supporting schedules for the amounts of damages and interest, and its written submissions in respect of costs.
2.On or before 5 June 2008, the respondent file and serve its response to the applicant’s draft orders, together with its written submissions in respect of any areas of disagreement.
3.On or before 6 June 2008, the applicant file and serve any submissions in reply.
4.The proceedings be stood over, for argument as to the making of final orders, to 9.30 am on 10 June 2008.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

NSD 1678 OF 2006

BETWEEN:

HOY MOBILE PTY LIMITED (ACN 103 105 228)
Applicant

AND:

ALLPHONES RETAIL PTY LIMITED (ACN 103 105 228)
Respondent

JUDGE:

RARES J

DATE:

30 MAY 2008

PLACE:

SYDNEY

TABLE OF CONTENTS
1.PRE-AGREEMENT DISCUSSIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [10]
2.THE TERMS OF THE FRANCHISE AGREEMENT........ ........ ........ ........ ........ ........ ........ [42]
3.WHAT WAS THE TERRITORY?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [67]
3.1 Hoy Mobile’s evidence regarding territory........ ........ ........ ........ ........ ........ ........ ........ ... [67]
3.2 Allphones’ evidence regarding territory........ ........ ........ ........ ........ ........ ........ ........ ....... [72]
3.3 Findings regarding territory........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [81]
4.ALLPHONES’ NON-COMPLIANCE WITH THE FRANCHISING CODE OF CONDUCT     [93]
5.HOY MOBILE’S CLAIM UNDER cl 11(1)(c) OF THE CODE........ ........ ........ ........ ...... [110]
6.HOY MOBILE’S CLAIM FOR THE RECOVERY OF ‘CO-OP’ FUNDS........ ........ ..... [113]
7.HOY MOBILE’S CLAIM FOR THE REDUCTION IN STOCK LEVELS........ ........ ..... [119]
8.ALLPHONES ISSUES A NEW OPERATIONS MANUAL........ ........ ........ ........ ........ ... [121]
9.ALLPHONES’ DEMAND THAT HOY MOBILE SIGN A NEW CONTRACT........ .... [122]
10.HOY MOBILE RAISES UNDERPAYMENT BY ALLPHONES OF OPTUS COMMISSIONS          [126]
11.THE HOYS SEEK LEGAL ADVICE........ ........ ........ ........ ........ ........ ........ ........ ........ .... [130]
12.MEDIATION ABOUT THE 2002 DISCLOSURE DOCUMENT........ ........ ........ ........ . [135]
13.THE MAY 2006 QUARTERLY REVIEW MEETING........ ........ ........ ........ ........ ........ ... [139]
14.MR BIRCH’S LETTER OF 22 MAY 2006........ ........ ........ ........ ........ ........ ........ ........ .... [141]
15.FRAUD OF MR HOY........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [143]
15.1 Conversations with Mr Clarke........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [144]
15.2 How Mr Hoy carried out his fraud........ ........ ........ ........ ........ ........ ........ ........ ........ .. [156]
15.3 Did Mr Davidson condone the fraud?........ ........ ........ ........ ........ ........ ........ ........ ..... [161]
15.4 Did Mr Clarke condone the fraud?........ ........ ........ ........ ........ ........ ........ ........ ........ . [164]
15.5 Did Allphones otherwise condone the fraud?........ ........ ........ ........ ........ ........ ........ ... [171]
15.6 Did Mr Shepherd observe Allphones condoning the fraud?........ ........ ........ ........ ...... [174]
15.7 How much profit did Hoy Mobile make from the fraud?........ ........ ........ ........ ........ .. [183]
16.THE FRAUD UNRAVELS: MR QUARMBY’S COMPLAINT........ ........ ........ ........ ... [188]
17.ALLPHONES SEEKS LEGAL ADVICE........ ........ ........ ........ ........ ........ ........ ........ ...... [196]
18.THE 30 JUNE 2006 INCIDENT AND THE STOCK AND COMMISSION HOLDS. [201]
19.MR DONNELLAN’S LETTER OF 7 JULY 2006 AND ITS AFTERMATH........ ........ [208]
20.THE MEETING OF 22 AUGUST 2006........ ........ ........ ........ ........ ........ ........ ........ ........ . [217]
21.ALLPHONES’ NOTICE OF ITS INTENTION TO TERMINATE........ ........ ........ ....... [220]
22.DID ALLPHONES ELECT TO AFFIRM THE FRANCHISE AGREEMENT?........ ..... [222]
22.1 Principles of election........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [224]
22.2 Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [231]
(a)Demand for unamended RCTI agreement........ ........ ........ ........ ........ ........ ........ . [234]
(b)Store refresh requirement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [236]
(c)Request for stock transfer........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [239]
(d)Findings regarding election........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [240]

23.ALLPHONES’ ARGUMENT BASED ON cll 15 AND 16 OF THE FRANCHISE AGREEMENT [262]
24.HOW ALLPHONES NEGOTIATED AND DEALT DISHONESTLY WITH COMMISSIONS PAYABLE BY THE CARRIERS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [263]
24.1 The Optus stretch bonus........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [268]
24.2 Other carriers’ commissions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [279]
24.3 The Optus ‘bonus’ and ‘super bonus’ commissions........ ........ ........ ........ ........ ........ . [288]
25.OTHER CHARGES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [292]
25.1 Bank and credit card charges........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .. [293]
25.2 Rental fee for EFTPOS terminal........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [295]
25.3 IT management fees........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [297]
25.4 Balance of deductions for other charges........ ........ ........ ........ ........ ........ ........ ........ .. [301]
25.5 Retention canvassing........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [302]
25.6 Store refresh deductions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [310]
26.LOSS OF COMMISSIONS IN RESPECT OF THE RANDWICK STORE........ ........ . [319]
27.VODAFONE COMMISSIONS FROM PLANS WITH ‘FREE’ PHONES........ ........ .. [327]
28.SUMMARY OF DAMAGES FINDINGS........ ........ ........ ........ ........ ........ ........ ........ ..... [342]
29.COULD ALLPHONES TERMINATE THE FRANCHISE AGREEMENT?........ ........ . [344]
29.1 The High Court’s decision in Foran v White........ ........ ........ ........ ........ ........ ........ ... [345]
29.2 Was Allphones evincing an intention not to be bound?........ ........ ........ ........ ........ ..... [361]
29.3 Entitlement to terminate: Interdependency and repudiation........ ........ ........ ........ ...... [364]
29.4 Findings regarding Allphones’ entitlement to terminate........ ........ ........ ........ ........ ..... [373]
30.WAS ALLPHONES A FIDUCIARY?........ ........ ........ ........ ........ ........ ........ ........ ........ ... [386]
31.RECTIFICATION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [390]
32.WAS ALLPHONES REQUIRED TO ACT IN GOOD FAITH IN SEEKING TO TERMINATE? [391]
33.DID ALLPHONES ENGAGE IN UNCONSCIONABLE CONDUCT?........ ........ ....... [401]
33.1 Principles........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [410]
33.2 Consideration........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [419]
34.CONCLUSION........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [429]

REASONS FOR JUDGMENT

Craig Hoy was interested in setting up business on his own account as a franchisee of a mobile phone retail business. He had been working as a marketing manager for a medium sized mobile phone retailer with about ten outlets. In about September 2002 he approached Matthew Donnellan, then the general manager of Allphones Retail Pty Limited. Allphones was a mobile phone franchisor that had begun operating in Western Australia. By the time Mr Hoy met with Mr Donnellan, Allphones was expanding its operations onto the eastern seaboard. It had had a small number of outlets in New South Wales. These were franchised stores. They operated in large retail shopping centres or shopping malls.

Mr Donnellan explained that one of the features of Allphones’ business model was that, through its franchisees, it offered retail customers the opportunity to enter into contracts for the provision of mobile phone services with a range of telecommunications service providers, such as Telstra, Optus, Vodafone, Hutchison (or ‘3’) and other carriers or networks. Allphones could complete with other mobile phone retail outlets which were tied to individual carriers because it could offer various plans or deals with a range of carriers through its expanding franchise base. Thus, a customer who wanted to buy a mobile phone in an Allphones store could choose which carrier, and which plan or deal offered by that carrier, he or she wished to select. The model made the carriers competitive with one another about the plans or deals they would offer Allphones’ stores. The various carriers offered different mobile phones with differing plans or deals, although there was some overlap on the more popular models of phones at the various levels of plans or deals.
The Trade Practices (Industry Codes-Franchising) Regulations 1998 (Cth) made the Franchising Code of Conduct as a mandatory industry code to which ss 51AD and 51AE of the Trade Practices Act 1974 (Cth) applied. The Code governed the relationship that Allphones had with its actual and potential franchisees. The purpose of the Code was to regulate the conduct of participants in franchising towards other participants in franchising (cl 2(1)). It required a franchisor to create a disclosure document for actual and prospective franchisees in accordance with the requirements of Div 2.1 of the Code both before entry into a franchise agreement, and also within three months after the end of each financial year after the agreement had been made (cl 6(1)). The purposes of the disclosure document were to give a prospective franchisee or an existing one who might wish to continue or renew the relationship:
·information from the franchisor to help the franchisee to make a reasonably informed decision about the franchise;
·current information from the franchisor that is material to the running of the franchise business (cl 6A).
The Code prescribed that a franchisee be given a considerable amount of information (see esp Annexure 1 to the Code). Critically, a franchisor was required to give to a franchisee a statement whether the franchise was for an exclusive or non-exclusive territory or was limited to a particular site (Annexure 1, cl 8.1). A franchisor was also required to give a copy of the Code and a disclosure document to a prospective franchisee at least 14 days before the franchisee entered into a franchise agreement (cl 10).
Importantly, the franchisor must not enter into a franchise agreement unless it had received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee had received, read and had a reasonable opportunity to understand the disclosure document and the Code (cl 11(1)). And, before a franchisee agreement could be entered into, the franchisor must have received from the prospective franchisee signed statements that the prospective franchisee had been given advice about the proposed franchise agreement or business by an independent legal advisor, independent business advisor or independent accountant. If no such statement were received, the franchisor had to receive from the prospective franchisee a signed statement, indicating that it had been given that kind of advice about the proposed franchise agreement or business or had been told that he or she should seek that advice but had decided not to seek it (cl 11(2)).
In this case, both parties agree that a disclosure statement was provided to Mr Hoy in about September 2002, but neither party has a copy of it and neither party can identify the contents. Additionally, both parties agree that a written franchise agreement was signed, but, once again, neither has a copy of it. They have, however, agreed that an unsigned version dated 27 June 2003 contained the written terms on which they entered into their franchise agreement for Hoy Mobile to operate as an Allphones franchise from a store in a Westfield shopping centre at Eastgardens, a suburb of Sydney. Before the franchise agreement was signed, Allphones should have ensured that Hoy Mobile Pty Limited or Mr Hoy and his wife, Nicole, gave it one or more of the statements required by cl 11 of the Code. Hoy Mobile was the company which formed to conduct the franchise business. However, no statements under cl 11 were given to Allphones. And, more remarkably, the franchise agreement described Hoy Mobile’s exclusive territory as ‘N/A’, an abbreviation for ‘not applicable’.
In that context, it is unsurprising that there is a dispute between the parties about the territory. Allphones asserted that its failures to comply with the Code lead to the result that any franchise agreement entered into between the parties was void. And, both sides accuse the other of having committed serious financial irregularities in their relationship. On the one hand, Mr Hoy has admitted that he committed fraud in the operation of the franchise business by unlocking and selling previously locked mobile phones for more than what he accounted and paid to Allphones in respect of the sales. On the other hand, Allphones did not pay to Hoy Mobile all the commissions that it had agreed to share. Nor did Allphones disclose, at material times, that the total commissions it reported to its franchisees, including Hoy Mobile, as payable by telecommunications carriers for sales they effected, had been deliberately understated by Allphones. Allphones kept the difference and did not share it with the franchisees as it was obliged to do so.
After learning of Mr Hoy’s fraud, Allphones wished to rely on it to terminate the franchise agreement. Hoy Mobile claimed that Allphones was not in a position to terminate, first because it was itself in breach of essential terms of the franchise agreement and secondly, it had affirmed the franchise agreement by requiring Hoy Mobile to perform obligations under it, having full knowledge of the fraud committed by Mr Hoy.
The litigation has been particularly hard fought. The trial took over 16 days to hear. There were substantive disputes between the parties as to significant conversations and other events in their now dysfunctional relationship. Even so, the issues and amounts over which the parties have been fighting appear to be out of all proportion to the legal costs which each has incurred. Hoy Mobile claimed approximately $300,000 in underpaid commissions and damages. It also sought orders protecting its entitlement to be a franchisee. Allphones claimed to be entitled to bring the relationship to an end.
1. PRE-AGREEMENT DISCUSSIONS
In about mid-2002 Mr Hoy noticed that an Allphones store had opened in Castle Hill, a suburb of Sydney. He thought that this was an unpromising location but he observed that the outlet appeared to be trading successfully. For the previous ten years Mr Hoy had worked for Ryder Communications. It was an exclusive retail dealer for the carrier, Optus, selling mobile phones and telecommunications services to the public. Mr Hoy approached Michael Davidson, a former Optus employee whom he knew to be then working at Allphones. Mr Davidson introduced Mr Hoy to Mark McLennan of Allphones, who made an appointment for him to see Mr Donnellan. They first met in September 2002. At the time, both had been working in the telecommunications industry for many years.
At their first meeting, Mr Donnellan explained the Allphones business model to Mr Hoy essentially as follows. Allphones provided franchisees with stock on consignment for the franchisees to sell. The franchisees accounted to Allphones for the total sale proceeds.
Mr Donnellan explained to Mr Hoy that the Allphones model was different to other mobile phone franchising arrangements which were tied to particular carriers. The Allphones model gave it, as franchisor, and its franchisees, access to a broad range of various carriers’ plants and specials whenever they were available. Thus, when customers were in an Allphones shop, they could be offered the current plans and specials of whichever carrier or carriers were on offer at the time. Of course, the two men were discussing matters of some familiarity to them through their own involvements in the mobile phone industry over some years. The critical area of discussion focused on how the Allphones model was different to a conventional single carrier shop with which Mr Hoy was used to dealing. Neither Mr Hoy nor Mr Donnellan suggested that they discussed Mr Hoy’s potential territory at that first meeting.
Usually, the sale of a mobile phone would be accompanied by some arrangement with a carrier for the provision of telecommunication services, though this was not always the case. Sometimes the customer would enter into a contract or plan for a number of months or years with a carrier under which the customer would acquire a mobile phone for either no charge to the customer directly, or for a charge that was discounted from what the phone might otherwise be sold for were it offered separately or on another deal by that, or a rival, carrier. These sales were called post-paid phone sales. That is because the payment for the phone generally was made as part of the overall payment by the customer to the carrier over the time of the plan. As between Allphones and the carrier, the carrier would pay Allphones a commission for the sale of the phone at the franchised store, and further commissions over the term of the contract based on the customer’s use of the carriers’ network when making phone calls. Thus, when a post-paid phone was sold, the franchisor and the franchisee could look forward to an income stream from the sale, based on the customer’s usage of the phone over the term of the contractor plan.
On other occasions, customers purchased pre-paid phones. These were phones in which the carrier had placed a pre-paid card allowing calls to be made up to the limit of the card. When the customer had used all the credit on the card, he or she could return to a vendor of cards, including an Allphones store, and buy a recharge card for use of that carrier’s network, or, if new arrangements were made, with another carrier. In that way a customer could continue to top up the amount of available credit for use on the phone.
Sometimes, carriers offered locked phones as part of a pre-paid deal. A ‘locked’ phone was one that could only be used on the particular carrier’s network and the customer would have to continue buying recharge cards for that carrier to utilise the phone. Locked phones were sold at a price discounted from that for which a similar phone, not locked to a carrier’s network, would be sold in the stores.
At the end of the meeting, Mr Hoy said that Mr Donnellan gave him an Allphones disclosure document prepared for the purposes of the Code. Mr Hoy said that in early 2004, after the franchise agreement had been entered into, he threw the disclosure document away. It is not possible to make any finding about what the exact contents of the disclosure document were, since neither party now has a copy of it.
Sometime after their initial meeting, Mr Donnellan sent Mr Hoy an email on 23 October 2002 saying that because he had heard nothing further, he assumed Mr Hoy had decided not to go ahead with the franchise, but he would leave the door open for continued discussions. Mr Hoy telephoned Mr Donnellan later that day and discussed matters. Following that discussion Mr Hoy sent an email which, among other things, mentioned that he had forgotten to clarify how ‘co-op’ payments for shop fit out provided by telecommunications carriers were dealt with in Allphones franchises. (‘Co-op’ fit out payments were sometimes made by carriers to franchisors as part of their advertising or promotional expenditure. The carriers benefited by ensuring that the get-up associated with their brand and goodwill was inside the franchise shop. Customers would be attracted to that carrier’s product and services by a ready identification of the brand and associated get-up.)
Mr Donnellan emailed back to Mr Hoy on 24 October 2002 saying that the whole amount received by Allphones from the carriers for co-op fit out was passed on by Allphones to the franchisee. He said that for the previous two franchises, the total amount paid for co-op payments for fit out had been $18,000 and ‘… [w]e will try to maintain or increase this. The carriers are slow payers’.
Mr Donnellan explained in giving evidence that it had been in the carriers’ financial interests to support Allphones’ initial attempts in 2002 to penetrate markets in different States, through co-op payments to assist with store fit outs. As events turned out, the policies of the various carriers, who were highly competitive with one another, changed and co-op funds ceased to be used for this purpose before June 2003 when the franchise agreement was ultimately entered into between Allphones and Hoy Mobile. Thus, there were no monies paid by any of the carriers to Allphones for shop fit out which could have been passed on to Hoy Mobile. However, Mr Donnellan failed to pass on to Mr Hoy the information that the carriers’ policies had changed. And also because no fresh disclosure document was given to him by Allphones at the time of entering into the franchise agreement, Mr Hoy was not aware of the change of position. That was an oversight by Mr Donnellan and a contravention of cl 10 of the Code. However, Mr Hoy did not give evidence that if he had been informed of the true position, he would have acted any differently in his decision to go ahead.
I find that Allphones’ contravention of cl 10 of the Code and its failure to inform Hoy Mobile, at the time of entering into the franchise agreement, that no co-op payments were likely to be available to assist in defraying the cost of fitting out its store would have made no difference to Hoy Mobile’s decision to enter into the franchise agreement.
Some further discussions occurred between Mr Hoy and Mr Donnellan. Critically, on 8 November 2002 Mr Donnellan had his secretary send to Mr Hoy, by email, a copy of a franchise agreement between Allphones and a company called China Lake Holdings Pty Limited for the Castle Hill Allphones franchise. The territory was described in item 14 of the schedule to that franchise agreement as ‘Castle Hill, NSW’. The area of restraint against competition was described in the same terms (in item 10). The China Lake agreement also contained an Annexure A, which had a covenant against competition within an area of a circle having a radius of 25 km from the location of the shop in Castle Hill.
The email attaching the copy of the China Lake franchise agreement is the only contemporaneous document which described a territory of which both Allphones and Hoy Mobile had knowledge prior to then entering into their own franchise agreement.
On Monday 11 November 2002, Mr Donnellan sent an email to Mr Hoy. He referred to their having caught up on the preceding Friday and wrote: ‘[G]lad to have you on board’. I infer that after Mr Hoy received the China Lake franchise agreement, he considered its terms and then spoke to Mr Donnellan advising him that he would take up the opportunity to have a franchise agreement with Allphones. The two men had been discussing the fact that Mr Hoy wished to have more than one franchise. He also wanted to have a discount on the franchise fee payable on entry into the arrangements.
At some point, probably around early November 2002, Mr Donnellan wrote to Mr Hoy informing him that Allphones operated a franchise model, and thus could not vary any terms concerning the split of gross profits or anything else which was inconsistent with the model. Neither party has retained the original or a copy of that letter. I infer that their letter was in similar terms to Allphones’ letter to Hoy Mobile dated 27 June 2003. In that letter, Mr Donnellan said that it was not intended to disadvantage or advantage any particular franchisee over another and that Mr Hoy needed to understand and respect this position.
Mr Donnellan pointed out that because Allphones took the stock risk, by retaining title to the stock which was supplied to franchisees, as the franchise business became more successful the lower its risk became. He then said that he appreciated that Mr Hoy was ‘not a one-franchise person’ and made an offer that, for the first franchise, the fee would be $35,000, of which only $25,000 would be payable upfront. The letter continued:
‘If within that franchise you achieve either 800 connections or $600,000 in sales in your first 12 months, the final $10,000 will be waived. This is conditional on you agreeing to join the programme in 2002.’ (emphasis in original)
Mr Donnellan’s letter repeated the same offer for the second and third franchises with two differences. First, the upfront payment would be $20,000 with a further $15,000 payable for each of the two franchises, only if the relevant targets were not met. Secondly, the second franchise was to commence trading no later than 12 months after the first had commenced, and the third no later than 16 months after the first. Mr Donnellan said that it had been difficult to get concessions from the directors, but that he had persuaded them on the basis of his firm belief that Mr Hoy would be successful.
In his email on 11 November 2002, Mr Donnellan updated Mr Hoy on three potential sites that they had been discussing. One of them was Eastgardens, where he said that Allphones had identified two sites but that the rents ‘are stupid’. He said that there was one particular site which might become available in the first quarter of 2003. He asked for a payment of a deposit of $3,500 to ensure that Mr Hoy had the right of first refusal as the first of the various sites came up. (There is no evidence that Mr Hoy paid that money.) Mr Donnellan also said in that email that if Mr Hoy was prepared ‘to take a site in a smaller centre – and I respect that you are unlikely to do so – then we would grant you first right at all of these sites until you took one’ (sic).
Matters then moved a little slowly, but by 10 March 2003, Mr Hoy had prepared a two year forecast of the results he anticipated to achieve in trading as an Allphones franchisee and discussed it with Mr Donnellan. The forecast provided for trading to commence in August 2003. Mr Hoy sent the forecast to Mr Donnellan by email and sought some further information which both had discussed.
Mr Donnellan replied on 3 April 2003. He said that he would give particular figures later that week. However, he provided indicative figures for the four operating stores that Mr Hoy had enquired about and the dates on which they opened. He commented on Mr Hoy’s projections, noting that the projected sales figure of $60,000 per month would make Eastgardens the store with the second lowest turnover in New South Wales. I infer that by early March 2003 Eastgardens had been selected as the location of Mr Hoy’s franchise. Mr Donnellan also mentioned that the fit out cost of $115,500 in Mr Hoy’s projection appeared to be ‘light’ and that he had no idea how it had been estimated. He said that gross profit over the past 12 months had been 26%. This was an important calculation because it was used, as will appear, in the calculation of commissions payable by Allphones to its franchisees.
By Monday 23 June 2003 discussions had proceeded to the point where Mr Hoy and Mr Donnellan were exchanging emails finalising the terms of the intended franchise agreement. On that day Mr Hoy sent an email which attached a copy of Mr Donnellan’s 11 November 2002 email and, what I infer was a copy of the letter of offer for the three franchises to which I have referred above. He said that that copy needed to be added to the franchise agreement, but the time frames in it would have to be adjusted to fit in with the date of the first lease. Mr Donnellan emailed back on 26 June stating that he did not think that this needed to be in the agreement but that he stood by the offer which was binding.

In the morning of 27 June, Mr Hoy responded by email saying that he was happy to rely on the letter, however its spirit was to allow for a number of months between the opening of the various stores, while the agreement said that the second store had to be opened in 2003 and the third by March 2004. He asked Mr Donnellan to confirm that the time frames would be moved so that the second store could be opened by August 2004 and the third by December 2004 to coincide with the late opening of the Eastgardens store.
Mr Donnellan immediately replied saying that his secretary would write a new letter reflecting the changed date. In fact, on that day Mr Donnellan’s secretary created a letter with the new times requested by Mr Hoy by cutting and pasting from an earlier version. The letter of 27 June 2003 was made Attachment A to the franchise agreement. It was signed by Mr Donnellan’s secretary with his authority. Mr Donnellan’s secretary also created a written franchise agreement between Allphones and Hoy Mobile and dated it 27 June 2003. The parties agreed that this document (which included the letter of 27 June 2003) reflected the written terms of their franchise agreement. However, the version in evidence bears no signatures, other than Mr Donnellan’s secretary’s signature on the letter of 27 June 2003.
Mr Hoy said that he signed the original franchise agreement, and gave it to Mr Donnellan who signed it on behalf of Allphones. Two copies were not signed, but kept by Mr Hoy. Only Mr Donnellan had a copy of the agreement signed by both of them. Subsequently, when Allphones moved its head office from Perth (where I infer the original signed franchise agreement had been sent) to Sydney it lost a number of documents including, I infer, the signed franchise agreement between it and Hoy Mobile. In addition, at some stage, the hard drive of the computer used by Mr and Mrs Hoy crashed, and a number of documents, including emails between the parties, which it contained were lost.
Allphones never asked Mr Hoy or Hoy Mobile to provide it with a written statement that he or it had received, read or had a reasonable opportunity to understand the language of the disclosure document or the Code. Hoy Mobile was never asked by Allphones to provide a signed statement that it had been given advice on the proposed franchise agreement by anyone, including a lawyer, or that it had been asked to seek advice on the proposed agreement by a lawyer or anyone else prescribed in cl 11(2) of the Code. Allphones admitted that it had not complied with cll 10 and 11 of the Code before entering into the franchise agreement with Hoy Mobile.
Mrs Hoy said that she signed only one copy of the franchise agreement, and that she did so before her husband. She did not recall whether she signed or initialled each page and only recalled signing the execution page. She said that she did not recall looking at any particular part of the document. She made an appointment for her husband to see a solicitor, Colin Duff, on 1 July 2007, but she did not attend the conference with him.
Mr Hoy recalled having had a discussion with Mr Duff concerning the proposed lease with Westfield, but he did not recall anything else. He had no memory of discussing the franchise agreement with Mr Duff although he accepted it was possible that he did so. While he said that he understood that he and his wife were giving a personal guarantee when they executed the franchise agreement, he claimed not to have put any weight on it. He asserted that the discussion concerning the proposed lease took up nearly the entire meeting with Mr Duff.
Mr Duff gave evidence that his diary recorded that an appointment had been made for Mr Hoy to see him for the purpose of a certificate under s 16 of the Retail Leases Act 1994 (NSW) and thus, he said that the primary purpose of Mr Hoy’s visit was to obtain such a certificate. He gave a certificate under s 16 of the Retail Leases Act on that date for the leases that Hoy Mobile entered into with the lessors of the Eastgardens store. Mr Duff had no independent recollection of the meeting, which is hardly surprising. I am satisfied that his contemporaneous file note of his conference with Mr Hoy accurately recorded the substance of the general topics they discussed, and in limited respects, what he told Mr Hoy. Mr Duff’s file note commenced with the statement: ‘Has gone into a franchise contract’. This accorded with Mr Hoy’s evidence that he had already left the signed franchise agreement with Mr Donnellan before he saw Mr Duff. The file note recorded that Mr Hoy instructed Mr Duff that he intended, as part of the arrangements, to sign a lease. It then recorded that Mr Duff dealt with a number of issues arising in respect of the three headings with brief descriptions underneath them, ‘Queries re Lease’, ‘Franchise Agreement’ and ‘Family Trust’.
Under the heading ‘Franchise Agreement’ Mr Duff’s note referred to cl 6.4(ii) of the franchise agreement and the amount of advertising being 5% or less of the net revenue. He also noted that there was a restraint of trade, a guarantee and indemnity and also noted the ‘effect of Annexure “A” as amending terms of agreement’. I infer that the reference to ‘Annexure “A”’ referred to the letter dated 27 June 2003. Mr Duff’s notes included a second page with calculations of gross profit for the purposes of working out the net revenue of 26% retained by Allphones, of which up to 5% could be applied to advertising under cl 6.4(ii). Mr Duff also explained issues relating to the family trust to Mr Hoy. I find that Mr Hoy asked Mr Duff for, or received some explanations of, particular parts of the franchise agreement which he had previously signed and left with Allphones, rather than receiving advice generally for the purposes of cl 11(2) of the Code.
Although each of Mr Hoy and Mr Donnellan gave evidence as to what happened at various meetings between them, I have little confidence in their recollections of conversations which occurred over five years ago.
In Watson v Foxman (1995) 49 NSWLR 315 at 318-319 McLelland CJ in Eq said:
‘Where, in civil proceedings, a party alleges that the conduct of another was misleading or deceptive, or likely to mislead or deceive (which I will compendiously described as “misleading”) within the meaning of s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), it is ordinarily necessary for that party to prove to the reasonable satisfaction of the court: (1) what the alleged conduct was; and (2) circumstances which rendered the conduct misleading. Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience.
Each element of the cause of action must be proved to the reasonable satisfaction of the court, which means that the court “must feel an actual persuasion of its occurrence or existence”. Such satisfaction is “not … attained or established independently of the nature and consequence of the fact or facts to be proved” including the “seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding”: Helton v Allen (1940) 63 CLR 691 at 712.
Considerations of the above kinds can pose serious difficulties of proof for a party relying upon spoken words as the foundation of a causes of action based on s 52 of the Trade Practices Act 1974 (Cth) (or s 42 of the Fair Trading Act), in the absence of some reliable contemporaneous record or other satisfactory corroboration.’
His Honour’s observations as to the frailty of human memory are, of course, not to be taken as limited simply to cases invoking claims under the Trade Practices Act or its analogues. They are just as apposite in a case such as this where the question arises of what oral terms of the contract were agreed in the course of negotiations.
2. THE TERMS OF THE FRANCHISE AGREEMENT
The franchise agreement recited that Allphones had developed a system of doing business in association with its intellectual property and distinctive method and style for operating the franchised businesses. Clauses 1 and 2 of the franchise agreement provided that Allphones had granted Hoy Mobile the right, and the latter accepted, the obligation to operate a franchise business:
‘Right to conduct franchise
1.… within the Territory referred to in the Schedule hereto (hereafter called “the Territory”) in accordance with the terms and conditions of this Agreement.
Exclusivity
2.The Franchisor must not itself operate or licence another to operate a Franchised Business in the Territory. The Franchisee must not canvass sales outside of the Territory.’
The franchise agreement was to commence in August 2003 and run for a period of five years with an option to renew for a further term of five years (cl 3). Allphones was entitled to develop and change the system and intellectual property which it used in the conduct of its overall franchise business (cl 4). Hoy Mobile, among other obligations, agreed not to do or permit anything during the term of the franchise agreement or thereafter which might detract from Allphones’ reputation or goodwill or be misleading or deceptive or otherwise cause confusion (cl 5.8). The franchise agreement provided that Allphones had sole and absolute discretions:
·to expend co-operative advertising funds that it received from suppliers in developing and implementing a national or regional advertising and sales promotion programme (cl 6.4(i));
·to apply up to 5% of the net revenue (as defined in cll 7.4 and 7.5) generated by Hoy Mobile to advertising promotions including websites and call centre activities (cl 6.4(ii)). All other advertising in relation to Hoy Mobile had to be mutually agreed in writing (cl 6.4(iii)).
Importantly, cl 6.5(ii) provided:
‘Stock supplied by [Allphones] to [Hoy Mobile] in terms hereof is supplied on consignment, and at the cost of delivery of [Hoy Mobile], and shall at all times be subject to the control of Allphones Point-of-Sale and inventory computer system …’ (sic)
The Allphones point-of-sale and inventory computer system allowed each franchised store to enter product sales into a centralised data base. Thus, when a credit card sale was made to a customer in a store, the point-of-sale system would allow the payment to be received immediately by Allphones. Similarly, a cash sale was recorded by the system on the next working day and the franchisee would bank into Allphones’ bank account the day’s cash takings. The system caused the store’s electronic cash register receipts to be printed which recorded the goods sold and their prices (this was also the customer’s sole receipt for a cash sale) and a credit card or EFTPOS transaction receipt. The system recorded what stock each franchised store held on consignment and, as sales occurred, movements in that stock. Thus, Allphones was able to know at any time what stock was held by a franchisee, what sales it had made and what monies had been received.
Title to the stock supplied to Hoy Mobile remained vested in Allphones until it received payment (cl 6.9). Under the franchise agreement, Allphones also retained management control over all stock supplied by it to the franchised business and it was entitled, without notice, to recall any stock, or to move it to another franchised business or elsewhere (cl 6.5(iii)). Allphones had the right to conduct stock audits on a minimum of 72 hours’ notice during normal business hours (cl 6.46).
Hoy Mobile was only permitted to make available, for sale or distribution at the franchise business, products that complied with Allphones’ standards or specifications or which it had approved in writing. In general terms, Hoy Mobile was required to order its stock from Allphones and the latter had to supply that stock. Hoy Mobile had to offer for sale at its store the products or services specified by Allphones unless their sale would be contrary to law. And, Hoy Mobile was not permitted to limit its business to a portion only of the products or services authorised by Allphones (cl 6.5(i)). This requirement also applied to stock Hoy Mobile desired to sell which was not usually supplied to franchised businesses by Allphones. If Allphones decided not to supply such stock, it had to notify Hoy Mobile within 48 hours of the order (cll 6.5-6.7) in which case Hoy Mobile was free to obtain the stock elsewhere. However, if Hoy Mobile did so, it was not to use the point-of-sale system to record sales of that stock, and they were not to be made under the name ‘Allphones’ (cl 6.8).
The total value of Allphones’ stock held by Hoy Mobile was not to exceed $30,000 or a value equal to an average of 45 days of its product sales. However, Allphones had a discretion to allow Hoy Mobile to hold a greater value of stock (cl 6.14). Hoy Mobile had to operate the franchised business strictly in accordance with the standards and specifications contained in the Allphones operations manual, and other instructions provided by Allphones from time to time (cl 6.23). Hoy Mobile was not allowed to conduct any other business than the franchised business on or from the franchised premises (cl 6.24).
The franchise agreement contained detailed provisions for the selection of a site at which the franchised business would be developed and operated (cl 6.28). Allphones could specify the criteria for site selection from time to time. Hoy Mobile was prohibited from doing anything which would tend to dishonour, discredit or damage Allphones’ reputation or that of other franchisees or its system or image. In particular Hoy Mobile had to be guided by the highest standards of honesty, integrity, fair dealing and ethical conduct in all its dealings with members of the public (cl 6.34(ii)).
Importantly, Hoy Mobile agreed that it would promote only directly its sales activities in the territory and Allphones covenanted that neither it nor any related body would grant to any person a licence to use the system within the territory without Hoy Mobile’s prior consent (cl 6.45).
Allphones had the sole right to determine the recommended sale price of each item of stock. That price would be set in the point-of-sale system. Hoy Mobile could discount the price for good reason, including to remain competitive, but, if it did so, it would bear any loss on the discounted sale price (cl 7.1). Importantly, cl 7.2 provided:
‘[Hoy Mobile] undertakes to issue all invoices and receipts for stock and services sold by it under the name of [Allphones] and acknowledges that, for the most part, the Allphones Point-of-Sale and inventory computer system will produce these invoices and/or receipts.’
All monies received by Hoy Mobile in relation to the sale of stock or services supplied by Allphones had to be deposited into a nominated bank account of Allphones daily where possible and, in any event, no later than the next business day after receipt. Allphones was required to bear all bank charges in relation to those deposits (cl 7.3(i)). Allphones had to transfer to Hoy Mobile, not later than monthly, an amount equivalent to 74% of the gross profit from the total monies received by Allphones under cl 7.3(i). The gross profit was to be calculated in accordance with cl 7.5. Hoy Mobile had to bear all costs and bank charges relating to a transfer to it of that money (cl 7.3(ii)). Allphones was given the right to delay such payments if Hoy Mobile was in breach of any term of the franchise agreement (cl 7.3(iii)).
Next, cl 7.4 provided:
‘7.4(i)All moneys received by the Franchisee [sic] in relation to mobile telephone sales commission (“MTSC”) and mobile telephone airtime commission (“MTAC”) shall be promptly deposited into such bank account of [Allphones] as may be notified in writing by [Allphones] from time to time. …
(ii)[Allphones] shall on the 15^th day of each calender month, or if this shall not be a business day then the business day thereafter, transfer to [Hoy Mobile] by way of cheque or electronic funds transfer to such bank account as [Hoy Mobile] may notify [Allphones] in writing from time to time moneys equivalent to [72.5%] … of the MTSC and the MTAC from the total moneys received by [Allphones] pursuant to clause 7.4(i), and [Hoy Mobile] shall bear all costs and bank charges relating to such transfers.’ (emphasis added)
Gross profit was calculated for the purposes of cll 7.3 and 7.4 by deducting the actual cost of goods sold, the actual cost of freight to the franchised premises and credit charges (including all government duties and charges) from Hoy Mobile’s receipts from sales of stock supplied by Allphones (cl 7.5(i)). ‘MTSC’ was ‘defined as income received from the mobile telephone networks … in respect of the activation of a mobile telephone customer to the networks’. The carriers at the date of the franchise agreement were also identified. ‘MTAC’ was ‘defined as the income received from the mobile telephone networks … relating to the proportion of call revenue received by the networks that is payable to [Allphones] in accordance with its agreements with the networks’ (cl 7.5(ii) and (iii)).
While cl 7.4(i) referred to monies ‘received by the Franchisee’ (here, Hoy Mobile) in relation to MTSC and MTAC, it was common ground that the carriers had always paid Allphones those commissions. I accept Mr Donnellan’s evidence that the money which Allphones received from the carriers in respect of those commissions was dealt with as if Allphones had received it from the franchisee in accordance with cl 7.4. He said, in effect, that if a telephone service had been activated through a sale made at an Allphones store, such as that of Hoy Mobile, Allphones was bound to pay the MTSC and MTAC it received from the carrier in respect of that activation to the relevant franchisee. He said that Allphones was obliged to account to the franchisee for that commission, in accordance with the terms of cl 7.4. This understanding expressed by Mr Donnellan reflects the way in which cl 7.4 should be construed in order to give it the commercial effect the parties must have intended. They both knew that MTSC and MTAC were significant rewards for the sales efforts of franchisees and that the franchisees were intended to receive the shares of commission for MTSC and MTAC provided in cl 7.4 however the carriers might pay those sums. No other provisions in the franchise agreement would have enabled a franchisee to benefit from MTSC and MTAC which was paid to Allphones directly by the carriers in respect of sales effected by the franchisee which generated such commission.
Of course, in the unlikely event that the franchisee received either form of commission directly from the carrier, it would have had to account for it in accordance with cl 7.4. But the commonsense business understanding expressed by Mr Donnellan reflected the commercial reality that the two types of commission in cl 7.4 were very significant sources of earnings of a franchise business. The inelegantly drawn provisions of cl 7.4 were intended to divide any MTSC and MTAC paid by a carrier to either a franchisee or Allphones, between the two parties to the franchise agreement.

Importantly in light of the way in which Mr Hoy later acted as explained below, cl 7.6 required Hoy Mobile to sell all stock either by way of cash, cheque, electronic funds transfer or credit card. And, Hoy Mobile had to supply Allphones with a copy of each invoice, together with a deposit slip relating to that invoice, for the sale of stock supplied by Allphones (cl 7.9(ii)). Hoy Mobile also had to keep and maintain records, accounts, books and data which accurately reflected all particulars relating to the franchised business (cl 7.12). Allphones was entitled to have its representatives or agents inspect the franchise premises and ensure that its standard get-up requirements were met (cl 7.17).
Hoy Mobile covenanted against competing with Allphones for the ensuing six months following the termination of the franchise agreement (cl 7.22). The area of restraint was specified as ‘the Territory’ or, alternatively the area ‘within a circle having a radius’ of 25 km from the franchised business or any other franchised business (cl 7.22). Allphones formally elected not to seek to enforce this restraint in the event that it terminated the franchise agreement. This makes it unnecessary to determine the validity of the restraints or whether Hoy Mobile should be granted any relief in respect of the restraints.
Allphones could not unreasonably withhold its consent to an assignment by Hoy Mobile of the benefit of the franchise agreement, provided, that among other things, Hoy Mobile was not in breach and had paid all monies due (cl 8.1(ii)). However, if Hoy Mobile wished to sell its rights under the franchise agreement, Allphones had a right of first refusal on the terms of the proposed sale (cl 8.3).
Rights of termination were provided in cl 9. If Hoy Mobile failed to perform an obligation in circumstances where the default was capable of being rectified, Allphones could give notice requiring rectification within 30 days, failing which it could terminate. However, if Hoy Mobile had committed a breach of an obligation under the franchise agreement which was not capable of rectification, Allphones was entitled to terminate by notice in writing without requiring rectification of the breach (cl 9.1). Allphones was also entitled to terminate the agreement by giving written notice to Hoy Mobile on the occurrence of a number of events of default, including if Hoy Mobile misused or permitted misuse of Allphones’ intellectual property or did any other act which harmed Allphones’ goodwill and reputation and it failed to remedy that default within 24 hours’ notice (cl 9.2(iii)).
In addition, Allphones was entitled to terminate the franchise agreement immediately and without notice to Hoy Mobile upon the occurrence of a number of events of default including, significantly:
‘9.3 …
(viii)[Hoy Mobile] is fraudulent in connection with the operation of the Franchised Business.’
The right of termination in cl 9.3(viii) reflected the provisions of cl 23(f) of the Code. The latter provision also permitted a franchisor to terminate without notice where the franchisee was fraudulent in connection with the operation of the franchised business.
The rights under cll 9.1, 9.2 and 9.3 were expressed to be in addition to any other remedies of Allphones and, cl 9.4 went on to provide:
‘... the election not to terminate shall not constitute a waiver by [Allphones] of its rights to terminate this Agreement in accordance with this Agreement.’
Allphones had the right to purchase Hoy Mobile’s assets at a price fixed by a valuer within 30 days of termination (cl 11). The franchise agreement expressly provided that the business of Hoy Mobile was independent from the business of Allphones and that there was no agency, partnership or joint venture between them (cl 12). Importantly, cl 15 provided that the terms and conditions of the franchise agreement could not be modified, altered or amended except by written agreement of both parties. And, cl 16 provided that any waiver or partial waiver of any of Allphones’ powers, rights or remedies under the franchise agreement would not be effective unless made in writing and signed by Allphones. In addition, a failure or delay on the part of Allphones to exercise a right or remedy would not operate as a waiver, nor would any single or partial exercise of any such right, power or remedy preclude any further exercise by it of any other right or remedy under the franchise agreement (cll 16.1, 16.2).
The franchise agreement recorded that it constituted the entire agreement between the parties with respect to its subject matter and superseded all prior negotiations, representations or agreements, whether written or oral (cl 18). A dispute resolution mechanism was provided in cl 24.1. That provided that if a dispute arose between the parties they agreed to undertake and implement steps in accordance with Pt 4 of the Code. If the matter could not be resolved, they agreed to refer the matter to the mediation adviser appointed by the Franchising Policy Council (cl 24.2). A number of definitions were set out in cl 26. The franchised premises were defined to mean ‘premises from which the Franchised Business is conducted’, being the business conducted in the terms of the franchise agreement. And, ‘outlet’ was defined as ‘all Franchised Businesses operating within the Territory’ (cl 26.1). Significantly, the Code was deemed to be incorporated in the franchising agreement ‘… and in the event of any conflict between the terms of this Agreement and the Code then the provisions of the Code shall prevail’ (cl 28).
In the schedule to the franchise agreement:
·the franchised premises were stated to be:
‘Shop 104, Westfield Eastgardens
152 Bunnerong Road
Eastgardens NSW 2036’
·Mr and Mrs Hoy were nominated as the ‘manager’;
·the territory was described as: ‘N/A’ (that is: ‘not applicable’).
A covenant against competition was Annexure A to the franchise agreement. It was in terms similar to those in the China Lake agreement, providing for the area of restraint to be a circle having a radius of 25 km from the GPO (presumably the General Post Office in Sydney). There was also Attachment A to the franchise agreement being the letter dated 27 June 2003.
3. WHAT WAS THE TERRITORY?
3.1 Hoy Mobile’s evidence regarding territory
Mr Hoy said that following his first meeting with Mr Donnellan he discussed matters with his wife. He also said he went through the disclosure document and then had a second meeting in about September 2002 with Mr Donnellan at Allphones’ office. He said that at the second meeting Mr Donnellan began the conversation saying: ‘We offer 5 km territories’. Mr Hoy said that he asked whether that was diameter or radius, and Mr Donnellan enquired what the difference was. Mr Hoy said that he explained that a 5 km diameter was really only a circle of 2½ km around the store. He said that Mr Donnellan replied that the measure was definitely radius. He said that Mr Donnellan had a large map of Sydney on the wall with coloured thumb tags and different colours for different purposes, including a colour for current stores and another for shopping centres that were available. It was at that point that Mr Hoy said that he raised the Eastgardens shopping centre location, because he was aware that an Optus dealer, Century 21 (or ‘C 21’), had one of its most profitable stores in that centre.
Mr Hoy said that next he had a meeting with Mr McLennan to go through a sample lease later in September 2002. He said that at some point during that meeting they moved from the Allphones’ board room to a cubicle and Mr Donnellan walked past popping his head over the cubicle wall to say hello. Mr Hoy claimed that he said:
‘Matthew, I’ve just finished reading the disclosure document, it seems here that you’re offering 25 km territories. You’re not going to sell many of those in Sydney with that sort of territory.’
Mr Hoy said that Mr Donnellan looked at him strangely and said: ‘It’s not 25, it’s 5.’ Mr Hoy then asked for a copy of a sample contract that he would be signing. Following this meeting, he received the China Lake franchise agreement by email on 8 November 2002 from Mr Donnellan’s secretary. Mr Hoy said that he noticed in that agreement that the area of restraint and the area of the territory was defined as ‘Castle Hill’, which was not the same as the 5 km radius he claimed that Mr Donnellan had told him. He said that, at the time, he regarded the description ‘Castle Hill’ as fairly ambiguous and that he wondered whether it was the municipality of Castle Hill or the suburb of Castle Hill, yet he did not discuss that with Mr Donnellan or anyone else at Allphones.
Despite his claimed observations concerning the China Lake agreement, Mr Hoy denied that he read it carefully at the time he received it. He also denied that he read the actual franchise agreement for Hoy Mobile carefully at the time he received it. He asserted that he did not then look at the territory provided in the Hoy Mobile franchise agreement. I do not believe this evidence of Mr Hoy.
The territory which Hoy Mobile was to be granted was obviously important to Mr Hoy. It would be natural for someone in his position to turn to the schedule to make sure, among other things, of the territory and the commissions percentages which his company was to receive before he committed himself. I am not satisfied that any of the pre-contractual conversations concerning territory occurred in the way Mr Hoy asserted. First, no contemporaneous document supported his account that Allphones ever granted a 5 km territory or measured territory by a radius of 5 or 25 kms. Secondly, if Mr Hoy’s evidence were accurate, then he had received the two documents, (namely a disclosure document showing a 25 km territory and the China Lake agreement showing his supposedly ambiguous ‘Castle Hill’) and had been given the explanations by Mr Donnellan, which were each inconsistent on the issue of territory. It is implausible that, in that situation, Mr Hoy did nothing to ensure that the territory was clearly defined after he had been given the franchise agreement proposed for Hoy Mobile. If his account were accurate, it would have been troubling for him that there was an ambiguity in the China Lake agreement’s description of territory and that it was also inconsistent with Mr Donnellan’s statement regarding a 5 km radius. Moreover, Mr Hoy was careful in 2002 to protect his position by obtaining from Mr Donnellan the letter identifying the conditions upon which he would be offered the three franchises, and to have those conditions repeated and made part of the franchise agreement in June 2003. I do not believe that Mr Hoy ever understood that Allphones would grant a 5 km territory to him or to Hoy Mobile. I do not believe his evidence that he did not notice ‘N/A’ in the schedule to Hoy Mobile’s franchise agreement when the draft was provided to him.
Mr Hoy had a significant self-interest in the outcome of these proceedings. The radius of 5 km from the Eastgardens store sufficed to provide Hoy Mobile with a territory large enough to include Randwick, where Allphones had opened a store in late 2005. Yet only in May 2006, some time after that event occurred, did Mr Hoy make any assertion that the territory was 5 km. I do not accept Mr Hoy’s evidence on the discussions concerning territory.
3.2 Allphones’ evidence regarding territory
In his examination-in-chief, Mr Donnellan asserted that in late 2002, Allphones had a policy amounting to a ‘strict prohibition on granting exclusive territories other than the lease line of the shop in which they were going to become a franchisee’. He asserted that the 2002 version of Allphones’ disclosure document said that an Allphones’ territory for its franchisees was a ‘non-exclusive territory’. He said that the 2002 disclosure document had not been able to be located and had not been saved.
At the time of his negotiations with Mr Hoy in 2002, Mr Donnellan knew that Allphones had only five franchises in New South Wales. Mr Donnellan had negotiated the sale of the franchise to China Lake in 2002. He also negotiated the grant of a franchise, commencing on 1 June 2002, of a shop in Wollongong Central Shopping Centre. The franchisee agreement for that shop had a description of territory in the schedule of ‘Wollongong, NSW’. That franchise agreement had an area of restraint that conformed with the area of the territory it had granted, namely Wollongong, NSW.
Subsequently, in cross-examination, Mr Donnellan was shown an Allphones franchise agreement entered into on 17 April 2003 for a franchise business in Shellharbour Square commencing on 10 July 2003 (i.e. around the time at which the negotiations with Mr Hoy were finalised). There, the territory was ‘[a]s per marked section on the attached map’, but no such map was in evidence. The area of restraint, curiously, was a 25 km radius from the GPO. Mr Donnellan said that he did not negotiate the grant of the Shellharbour franchise.
After he had been shown these other three agreements made in 2002 and 2003, Mr Donnellan admitted that there was no policy or strict prohibition on the grant of franchised territories beyond the leased shop premises when he had his conversations with Mr Hoy in 2002. Mr Donnellan claimed that before he gave his evidence he had not looked at franchise agreements from 2002 but he said he had looked at franchise agreements from 2003. I do not believe that evidence either. Mr Donnellan was conscious at this point in his cross-examination that he had previously made an assertion of a strict policy in 2002 which, by that stage, had been shown to be false. Next, he agreed that he had not mentioned to Mr Hoy that there was any strict prohibition on the grant of franchised territories larger than the leased shop premises in any of his 2002 conversations. He was then asked:
‘You had no further discussion with him about territory prior to signing the franchise agreement in 2003, did you? --- We did have one general discussion, yes.
On the subject of territory? --- Yes.
Why have you never mentioned that until just now? --- I did in my affidavit.
Where is that in your affidavit? --- I denied the conversation that Craig [Hoy] said in his.’
The conversation that he denied was the one in which Mr Hoy had asserted that Mr Donnellan agreed to a 5 km radius territory. Mr Donnellan was then pressed about what he now claimed had occurred. He gave this evidence:
‘Now, what do you say Mr Hoy said to you on this occasion in 2003 when he raised the subject of territory? Was it him who raised it or you who raised it? --- He raised it with Mark McClennan. I was walking past; asked how things were going, and he said, “What about territories?” I said, “We don’t give them, mate.”’
I do not believe Mr Donnellan’s evidence that such a conversation occurred. Mr Hoy was not cross-examined about any such conversation when he first gave evidence. I infer that this was because the conversation was first raised by Mr Donnellan in his cross-examination. When he was recalled at the end of the trial, Mr Hoy denied the conversation asserted by Mr Donnellan. Mr McClennan was available. He had a position as a consultant with Allphones, but was not called to give evidence. I infer that nothing Mr McClennan could have said would have assisted Allphones’ case: Jones v Dunkel (1959) 101 CLR 298.
Allphones contended, based on the assertions initially made, but later disavowed by Mr Donnellan, that at the time the franchise agreement with Hoy Mobile was entered into, the only territory which Allphones was prepared to grant was limited to the physical shop in which the franchise was conducted. I reject this argument. Such a result does not fit within the matrix of mutually known facts or the very terms of the franchise agreement itself.
First, Mr Donnellan never told Mr Hoy, prior to signing the franchise agreement, words to the effect that the territory was the area of the shop lease. There is no evidence that Mr Hoy was informed to that effect prior to Hoy Mobile’s entry into the franchise agreement.
Secondly, the Castle Hill franchise, known as Castle Towers, had opened in July 2002. That was operated under the China Lake franchise agreement. In November 2002, Mr Donnellan authorised his secretary to send Mr Hoy that agreement as a sample or template for the agreement which Allphones was proposing to enter into with Mr Hoy or his nominee once a site was agreed on by them.
Thirdly, the franchise agreement with Hoy Mobile distinguished between the franchised premises for Hoy Mobile, the shop, and the territory. It would be commercially absurd for Allphones to contract, as in cl 2, that it would not operate a franchised business in ‘the Territory’ where that territory was a leased shop of which its franchisee had exclusive possession: Radaich v Smith (1959) 101 CLR 209. So much was recognised by Mr Donnellan when he said in evidence:
‘You can't go and open, I mean fundamental tenancy law, you can't go and open within the lease line of a lessee's premises. We didn't hold the lease.’
3.3 Findings regarding territory
For the reasons I have given, I do not accept either Mr Hoy or Mr Donnellan’s account of his conversation with the other concerning what the territory was to be. The remaining possibilities are that ‘N/A’ was literally the territory agreed between the parties, so that there was no territory at all; or that there was some other meaning of territory. Allphones argued that the agreement could work perfectly well without the specification of a territory. I reject that argument. A reasonable person in the position of the parties would have considered that the exclusive territory, to which cl 2 of the franchise agreement referred, was an essential term. In doing so, they would be mindful, both, that the China Lakes agreement had used a simple means of defining the territory by making it the suburb in which the franchised premises were, and that the Code required specification of, first, a territory, and secondly, whether the territory was exclusive, non-exclusive or limited to a particular site (Annexure 1 of the Code, cl 8.1). In that specification, the Code recognised that a ‘particular site’ was different to an exclusive territory.
A reasonable person in the position of the parties here would reject as inappropriate a construction of their franchise agreement that it had no territory at all. The task of construing ‘N/A’ as the description of the territory must be approached in the manner described by Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179 [40]; applied in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 242 ALR 47 at 63 [53] per Gummow, Hayne, Heydon, Crennan and Kiefel JJ. That requires the Court to put to one side the subjective beliefs or understandings of the parties about the rights and liabilities that govern their contractual relations, and to concentrate on the principle of objectivity for the ascertainment and definition of those rights and liabilities. Their Honours said that what mattered was what each party, by words or conduct, would have led a reasonable person in the position of the other party to believe. They continued:
‘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 agreements. The meaning of the terms of the 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 (Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451 at 461-462 [22].)’

Thus, when a vendor fails to deliver goods, or a purchaser fails to pay for them, on the due date, the innocent party is permitted to terminate without being subjected to an enquiry as to its motive. Often merchants terminate contracts when the other party defaults so as to take advantage of a substantive change in the market price for the goods that has occurred between the date of contract and the date on which default occurs. Indeed, the primary reason for termination at that time may be that the innocent party wants to get the benefit of the market change. In one sense, that motivation could be characterised as a purpose extraneous to the contract because it implies a disloyalty to the mutually co-operative relationship created by the contract. However, such a view would protect contract breakers from the consequences of their own disloyalty to the contractual obligation of which they were in breach.
In a long term relationship such as that between Hoy Mobile and Allphones, it can be expected that the parties will develop personality differences, as well as commercial differences of approach to particular aspects of their relationship. Courts must be cautious in characterising or giving undue weight to particular aspects of or incidents in such a relationship when arriving at a decision that some action has been taken otherwise than in good faith.
Lord Diplock made the telling observation in his classic speech in Horrocks v Lowe [1975] AC 135 at 150C-E that in ordinary life it is rare indeed for people to form their beliefs by a process of logical deduction from facts ascertained by rigorous search for all available evidence and a judicious assessment of its probative value. He pointed out that, in greater or less degree, according to their temperaments, training and intelligence, men and women are swayed by prejudice, rely on intuition instead of reasoning and leap to conclusions on inadequate evidence. People tend not to recognise the cogency of material which might cast doubt on the validity of the conclusions they reach. And, he said, that despite the imperfection of mental processes by which a belief is arrived at, it may still be ‘honest’, that is, a positive belief that the conclusion reached is true. He said this in the context of assessing whether a person may or may not have been malicious for the purpose of the law of qualified privilege. But it is an observation about human behaviour. What Lord Diplock said can be applied as well to the way in which people act in contractual relationships.
As I have found, Mr Donnellan sought to give Hoy Mobile an opportunity to explain its conduct from 7 July 2006. He was the person within Allphones who made the decision issue the notice of intention to terminate. I am satisfied that he honestly believed that Allphones should terminate the franchise agreement because it was not in Allphones’ interest to have a franchisee which had engaged in the fraud which Hoy Mobile had. The fraud was serious and, having seen and heard Mr Donnellan, I am satisfied he decided to terminate the franchise agreement because of the undesirability of having a relationship with Hoy Mobile as a party which had committed that fraud.
No doubt other factors, including some irritation at the way Hoy Mobile was behaving, may have been a part of Mr Donnellan’s thinking processes, but I am quite unpersuaded that he acted, and thus Allphones acted, otherwise that in good faith in exercising the power to terminate. I reject this ground of Hoy Mobile’s case.
33. DID ALLPHONES ENGAGE IN UNCONSCIONABLE CONDUCT?
Hoy Mobile alleged that if the franchise agreement were found to be illegal and void, as Allphones had alleged in reliance on Ketchell [2007] NSWCA 161, then much of Allphones’ conduct since Hoy Mobile commenced operating as a franchisee was unconscionable within the meaning of s 51AC of the Trade Practices Act. I have found that the franchise agreement is a valid agreement, thus this basis for invoking s 51AC does not arise.
Next, Hoy Mobile alleged that, in the circumstances pleaded by it, it was unconscionable within the meaning of s 51AC for Allphones to deny that the franchise agreement contained or ought to contain the following three terms:
·the ‘territory’ was a circle with a radius of 5 km from the location of the Eastgardens store;
·Allphones would pay to Hoy Mobile a contribution of $18,000 towards the costs of establishing the merchandising and fit out from co-op funds made available by carriers;
·the terms which I have found relating to Allphones’ obligations to pay 72.5% of MTSC or MTAC based on all the amounts it received.
Based on my findings, the first two of those issues do not require consideration because no such terms were agreed. In relation to the third issue, the franchise agreement included, in substance, an entitlement of Hoy Mobile to be paid commissions as it claimed. Allphones was in breach of those obligations.
Hoy Mobile also alleged that by threatening, up to the present, to terminate the franchise agreement in all the circumstances pleaded, Allphones was acting unconscionably within the meaning of s 51AC. Thus, there were two bases for Hoy Mobile’s claim under s 51AC namely: first, the failure of Allphones properly to pay all moneys due, including commission; and, secondly, its decision to terminate.
Hoy Mobile did not plead that any particular factor under s 51AC(3) and (4) had been enlivened. However, it is common ground that Allphones contravened cl 11 of the Code. That contravention attracts the operation under ss 51AC(3)(g) and (4)(g). Moreover, I have found that Allphones committed repeated breaches of the franchise agreement, under which it retained commission and other moneys to which it was not entitled: cf ss 51AC(3)(i), (4)(i) and see also (ja) and (k) of sub-ss (3) and (4). But, in the end, s 51AC(1) and (2) require the Court to have regard to all the circumstances in which the conduct complained occurred.
Based on the findings which I have made, Allphones:
(a)acted deceitfully in breaching its obligations to pay commission over virtually the whole time of the relationship. Indeed the relationship began to sour around late 2005 when Mr and Mrs Hoy complained of underpayment of commissions. Mr Donnellan, who had recommended Mr Hoy to Mr Shepherd as ‘a very good operator’ in October 2005, began to address Mr Hoy in emails later that year in a derogatory way;
(b)referred, in Mr Donnellan’s email exchange of 10 July 2006, to Mr and Mrs Hoy’s attempts to raise issues with other franchisees concerning Allphones’ underpayment of commissions and unjustified fees as having ‘evaporated any goodwill’;
(c)acted, through Mr Harkin, in a bullying and oppressive way, beginning with the quarterly review meeting in May 2006. This behaviour included failing to address the substance of any of Mr Birch’s correspondence after that time (except to a limited way by Mr Donnellan’s exchange with Mr Donnellan on 10 July 2006), making the demand for Hoy Mobile to provide a mobile phone for the retention customer on 30 June 2006 (including the threatening way in which that was done) and then placing it on stock and commission holds, making unjustified demands that Hoy Mobile sign a new franchise agreement, combined with the threat that it had no ‘tenure’ as a franchisee.
On the other hand, some degree of righteous indignation on Allphones’ part is understandable after its discovery of Hoy Mobile’s fraud. However, Allphones’ conduct to which I have referred went beyond any reasonable response. And, it never had the meeting Mr Donnellan said he wanted in his letter of 7 July, at which it may have been appropriate to ventilate some legitimate sense of disappointment.
Allphones argued that, in the period leading up to its giving notice of its intention to terminate on 28 August 2006, Mr and Mrs Hoy had no difficulty in airing their grievances robustly, not only with Allphones’ personnel but also through Mr Birch and to the ACCC. It pointed to the fact that Mr Birch competently represented Hoy Mobile from March 2006 and was able to protect its interests. Allphones also argued in its written submissions that there was no evidence that its conduct had any effect on Hoy Mobile and that it was ‘… more than up to the task of batting back to Allphones anything that was thrown at them and did so’.
For all that, Hoy Mobile was overcharged and underpaid by Allphones. While Hoy Mobile could talk or send letters, it received an insouciant reception from Allphones. Whatever they ‘batted back’ was not scoring runs. And Allphones persisted throughout the litigation to force Hoy Mobile to prove its monetary claims. As I have found, Allphones not only evinced an intention to not to be bound, it acted in that way. Hoy Mobile could complain as much as it liked, but Allphones had the substantive power in the relationship and used it. This was evident not just in its financial breaches, but, as Mr Harkin said in his May 2006 meeting with Mr Hoy, (before his fraud had come to light) he was going to make an example of Hoy Mobile to show other franchisees what would happen to them if they opposed Allphones as the Hoys had. No justification existed, at that time, to treat Hoy Mobile in accordance with ‘the Admiral Byng principle’, viz: ‘pour encourager les autres’ (in order to encourage others): see Attorney-General v Guardian Newspapers Ltd [1987] 1 WLR 1248 per Lord Oliver Aylmerton at 1317; Attorney-General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 75 ALR 461 at 464 per Deane J. Nor was Allphones able to advance any legitimate reason for refusing to credit Hoy Mobile with the $1,100 which Optus had allocated to defray the cost of the store refresh. I am satisfied that Allphones was acting vindictively in refusing to give Hoy Mobile that credit. I have found that Allphones had not proved that it was entitled to make the $10,000 charge (as opposed to a reasonable charge) but its conduct in relation to the Optus payment indicated that Allphones considered that it could make a profit at Hoy Mobile’s expense without justification.
33.1 Principles
In Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132 at 140 [30] Tamberlin, Finn and Conti JJ said that s 51AC, and its analogue s 12CC of the Australian Securities and Investments Commission Act (ASIC) 2001 (Cth), were not to be read down by limiting its operation only to circumstances where the common law would grant relief in respect of unconscionable conduct. They said that the section was intended to build on, and not be constrained by the common law. Their Honours said (National Exchange 148 FCR at 140 [33]): ‘… “[U]nconscionable conduct”, on its ordinary and natural interpretation, means doing what should not be done in good conscience’.
They said that the question was whether the conduct of the corporation complained of was ‘unconscionable’ according to the natural and ordinary meaning of that term having regard to the list of statutory considerations in ss 51AC(3) and (4): National Exchange 148 FCR at 142 [39]. And their Honours said that the section was not, of course, intended to protect the reckless or the unreasonable. They approved what Spigelman CJ had said in Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 at 583 [121] that ‘[u]nconscionability is a concept which requires a high level of moral obloquy’.
Tamberlin, Finn and Conti JJ held that the analogue of s 51AC required the Court to focus primarily on the unconscionable conduct of the corporation and to determine whether that conduct was contrary to the norm of conscientious behaviour. They held that the conduct in that case insisted of a carefully formulated and systematic approach which clearly offended against basic notions of good conscience and fair play: National Exchange at 148 FCR at 143 [44]. Although their Honours were speaking of s 12CC of the ASIC Act, their remarks apply equally to the notion of ‘unconscionable conduct’ in its analogue, s 51AC: Cannon Australia Pty Ltd v Patton [2007] NSWCA 246 at [43] per Campbell JA, with whom Harrison J agreed. Campbell JA had referred ([2007] NSWCA 246 at [40]) to the earlier decision of a Full Court of this Court in Hurley v McDonald’s Australia Ltd (2000) ATPR 41-741 at [21]-[22]. There Heerey, Drummond and Emmett JJ said that for conduct to be regarded at an unconscionable, serious misconduct or something clearly unfair or unreasonable had to be demonstrated. They found that the term carried with it the meaning given by the Shorter Oxford English Dictionary, namely ‘… actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable’, relying on Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262.
In Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at 324-325 [20]-[22], Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ said that the word ‘unconscionable’ involved the concept of unconscientious conduct. They said that the conscience which equity considers for these purposes is a ‘properly formed and instructed conscience’, citing Gleeson CJ in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 227 [45]. The onus is on the party alleging that the other has engaged in unconscionable conduct, so as to prevent the latter’s exercise of its contractual rights to terminate. In this respect, the Code specifically permitted termination without notice where a franchisee was fraudulent in connection with the operation of the franchise business (cl 23(f)). However, for reasons unexplained, Allphones instead issued a notice of intention to terminate the franchise agreement on seven days’ notice, rather that pursuant to cl 9.3(viii) which permitted termination in the circumstances without notice. A consequence of termination under cl 10 of the franchise agreement would be the transfer, at Allphones’ request, of the lease of the shop premises at Eastgardens (cl 10.1(x)).
One purpose of s 51AC(1) was to set a norm of conduct for corporations acting in trade or commerce in the context in which the section operates: cp Compomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45 at 85 [103]. The second reading speech stated that this norm of conduct had the purpose of protecting the legal rights of small businesses and ensuring that they could confidently deal with large firms: see National Exchange 148 FCR at 143 [48], 144 [50]. Here the supply or possible supply of services to Hoy Mobile included the rights, benefits and privileges which Allphones had to provide to it under the franchise agreement. That congeries contained an entitlement to be paid all amounts of commission due in accordance with the franchise agreement, as well as other valuable rights, such as Hoy Mobile’s right to assign its interest under the franchise agreement with Allphones’ consent (cl 8.1).
Termination of the franchise agreement by Allphones would actuate a contractual regime under which Hoy Mobile would lose the benefit of the congeries of services. Allphones argued that this result was justified because the franchise agreement and the Code contemplated it in the circumstances which have arisen.
The equitable jurisdiction to prevent an unconscientious assertion of legal rights by one party under a contract against the other is usually exercised only where the circumstances include one of the special heads of that jurisdiction, namely: fraud, accident, mistake or surprise: Tanwar 217 CLR at 335 [58]. Where accident or mistake is not involved, it is usually necessary to point to some conduct of the party asserting the rights which in some significant way has caused the other party to be in the position of being confronted by that assertion. It is not necessary that the circumstances be exceptional before equity will intervene, but the party challenging the assertion of the rights must show why it would against conscience (unconscientious) for the other to proceed: Tanwar 217 CLR at 335 [58]-[60].
The statutory jurisdiction under sub-ss 51AC(1) and (2) of the Act has a broader reach than its equitable counterpart (see also s 51AA(2)). The non-exclusive range of matters to which the Court may have regard in sub-ss 51AC(3) or (4) suggest that the Parliament was concerned not to restrict the operation of the norm of conduct in sub-ss 51AC(1) and (2), simply to the focus which equity has on whether the corporation (as the party asserting the right) has caused the business consumer or small business supplier to be in the position where the corporation’s right is available to be asserted.
Thus, here, equity would consider whether Allphones had caused Hoy Mobile to be fraudulent in connection with the operation of the franchise agreement (cl 9.3(viii)). On the facts, I have found Mr Hoy alone was responsible for that fraudulent conduct of Hoy Mobile. So, equity would not find a nexus between Allphones’ entitlement to terminate and the fraud in which Hoy Mobile had engaged.
33.2 Consideration
But, s 51AC authorises the Court to look more broadly at the whole of the relationship and to assess the corporation’s conduct in that broader context. That context includes the breaches of the franchise agreement which I have found Allphones to have committed as the basis of my finding that it was not entitled to terminate the franchise agreement because it was itself in breach of an essential term or evincing an intention not to be bound. In addition, Allphones engaged in other conduct which is relevant under ss 51AC(1) and (2).
A central feature of the Code is its requirement that a franchisor must maintain and utilise disclosure documents. The purpose of a disclosure document, in the context of an ongoing relationship between a franchisor and franchisee, is to give a current franchisee among other things:
·information from the franchisor that is material to the running of the franchise business (cl 6A(b) of the Code);
·details of the franchisor’s requirements for the supply of goods or services to a franchisee specifying whether the franchisor or an associate will receive a rebate or other financial benefit from the supply of goods or services to franchisee, and whether any rebate or financial benefit is shared, directly or indirectly, with franchisees (Annexure 1, cl 9.1(j) of the Code).
Here, the first time Allphones disclosed to franchisees, including Hoy Mobile, that it charged them a $5 fee for each post-paid mobile phone contract as a carrier reconciliation charge, was in a disclosure document it issued on 29 August 2006. That was the day after it gave to Hoy Mobile its notice of its intention to terminate. That document contained no other disclosures about deductions made by Allphones from the MTSC, which I have held it was required to pay to Hoy Mobile. Those deductions did not fall within rebates or other financial benefits received by Allphones (because I have found that it was not entitled to them), however, if it had been frank about what it was doing, it should have revealed them. But, even if I were wrong in that finding, then Allphones should have given details about the terms it received from carriers in accordance with cl 9.1 in Annexure 1 to the Code.
I am satisfied that Allphones’ conduct in relation to its suppression of the true commissions paid by carriers to it in respect of activations falling within cll 7.4 and 7.5 was a deliberate and significant departure from honest dealing with Hoy Mobile. This conduct evinced a high degree of moral obloquy. It created an imbalance in the relationship between Allphones and Hoy Mobile, because it deprived Hoy Mobile of earnings to which it was entitled under the franchise agreement, and concealed from Hoy Mobile its true entitlement. I do not consider that the conduct of Allphones towards Hoy Mobile in this regard was in good faith.

However, as sub-ss 51AC(3)(k) and 4(k) make clear, the propriety of the conduct of both parties may be relevant. Hoy Mobile also exhibited a lack of good faith in conducting its fraudulent activities of unlocking and selling phones for undisclosed profits. Unlocked phones would not usually be connected to a plan on which MTSC or MTAC or other commissions for sale of air time would be payable. It is relevant that Hoy Mobile engaged in equally dishonest conduct to that which Allphones did.
The prohibition in sub-ss 51AC(1) and (2) are against Allphones, as the relevant corporation, engaging in conduct that is, in all the circumstances unconscionable in connection with the supply or possible supply of goods or services by Hoy Mobile. The activities in which Allphones and Hoy Mobile were engaged under the franchise agreement amounted to conduct in trade or commerce. The question is whether Allphones’ overall conduct up to the time at which it issued the notice of intention to terminate was unconscionable ‘in all the circumstances’ within the meaning of s 51AC. Hoy Mobile seeks to restrain Allphones from relying upon its notice of intention to terminate the franchise agreement. In addition, Allphones has indicated that it intends to terminate for fraud under cl 9.3(viii) of the franchise agreement.
In balancing the conduct of Allphones against that of Hoy Mobile for the purposes of determining whether or not, in all the circumstances, Allphones’ intention to proceed towards a termination of the relationship is unconscionable, it is also important to appreciate that the commercial relationship of the parties is dysfunctional. Each has committed substantial financial irregularities towards the other. While Hoy Mobile’s irregularities were categorised by the use of the epithet ‘fraud’, the behaviour of Allphones in relation to its non-payment and disguising of withheld commissions was equally dishonest.
In the conduct of this litigation, Allphones doggedly persisted in its denial of any entitlement of Hoy Mobile to any of the monies claimed until some time during the trial when an agreement was made, without admissions, that some of the parts of the claim would be recognised. That meant that Hoy Mobile has had to litigate those issues together with the others on which I have upheld its claims. These were in monetary terms, out of all proportion to the cost of the litigation. Of course, those costs have been attributable largely to Hoy Mobile’s attempts to preserve its status as a franchisee. It sought to establish, unsucessfully, that Mr Clarke, on behalf of Allphones, condoned the unlocking of phones. But even if he had, there was no attempt made by Hoy Mobile to justify its fraudulent retention of money from those sales.
Allphones was not willing to carry out the franchise agreement honestly or in good faith according to its terms. Both parties have been in default of their obligations, both contractual and moral, towards one another in the conduct of the relationship. I have had regard to all of the circumstances, including Allphones’ conduct leading up to the notice of intention to terminate, and the consequences on Hoy Mobile of a termination. I am of the opinion that it would be unconscientious for Allphones to insist upon its strict legal rights to force an immediate termination in all the circumstances where the performance of its own obligations under the franchise agreement has been lamentably and dishonestly short of the standards that it ought to have followed. It engaged in unjustified bullying and oppressive conduct: cf Simply No-Knead 104 FCR at 270 [51].
I am of opinion that Allphones should be restrained under s 87 of the Trade Practices Act from relying on the fraud of Hoy Mobile effect a termination of the franchise agreement.
34. CONCLUSION
The appropriate course is to require the parties to agree upon orders to give effect to these reasons. The orders should also provide for the amount of the damages to be awarded for the breaches of contract that I have found, less the amount of profit that I have found Hoy Mobile to have retained. Interest will need to be added. The interest on Hoy Mobile’s receipts from its fraudulent trading should offset some of that due by Allphones. It may not be possible to be mathematically exact, and the parties may need to adopt a practical position of halving each year’s interest in respect of the new amount for that year to approximate its progressive accrual over that period. And the parties will need to address the question of costs.
To summarise, I have found that:
1.The territory granted to Hoy Mobile in the franchise agreement was the suburb of Eastgardens.
2.Allphones was obliged under cll 7.4 and 7.5 to pay commission to Hoy Mobile on all sums which Allphones received from carriers in respect of sales and activations of plans effected by Hoy Mobile.
3.The franchise agreement was not void because of Allphones’ failure, before it was entered into, to comply with cll 10 and 11 of the Code, and that Ketchell [2007] NSWCA 161 should not be followed.
4.Hoy Mobile was fraudulent in connection with the operation of the franchise business within the meaning of cl 9.3(viii) of the franchise agreement. Allphones did not know of that fraud and did not condone it. Nor did Allphones elect, after it learnt of the nature of the fraud, to affirm the franchise agreement.
5.Allphones was not entitled to terminate the franchise agreement by reason of Hoy Mobile’s fraudulent conduct because Allphones, itself, was not ready and willing to perform. This was because it, both, had evinced an intention not to be bound and had breached the essential term in cl 7.4 by its withholding and underpayment of commissions, and its dishonesty in concealing that conduct.
6.Hoy Mobile was not entitled to be paid by Allphones:
(a) $18,000 in respect of co-op money when it began its franchise;
(b) $32,000 in respect of the benefit Hoy Mobile derived from its fraud.
7.Allphones has not established that the amount it had charged Hoy Mobile in respect of the refresh charge was a reasonable sum to charge under cll 4, 6.23 or 6.35. In particular Allphones has shown that the sum was not reasonable by its failure to reduce it by the $1,100 paid to Allphones by Optus as a co-op payment for the purpose of defraying the store refresh charge for each Allphones’ franchise.
8.Allphones is obliged to pay Hoy Mobile the following for its breaches of the franchise agreement:

Optus stretch bonus

$ 16,388.63

Optus bonus and super bonus

$ 27,944.39

Virgin commission

$ 1,132.45

Vodafone commission

$ 709.78

Hutchison commission

$ 2041,66

EFTPOS fees

$ 1,045.49

IT management fees

$ 2,045.43

Administrative fees and bank charges unable to be allocated

$ 3,581.49

Store refresh deduction

$ 9,973.37

Diversions of 138000 number

$ 1,500.00

Retention canvassing

$ 6,507.60

Vodafone commissions from plans with ‘free’ phones

$ 2,299.46

Sub-total

$ 75,169.75

Less amount earned by Hoy Mobile’s fraud

($ 32,000.00)

Total

$ 43,169.75

9.It may be necessary to add to this amount the sums which the parties agreed during the hearing that Allphones would pay Hoy Mobile.
10.Allphones was not a fiduciary as alleged by Hoy Mobile.
11.The franchise agreement remains on foot and does not need to be rectified.
12.Allphones contravened s 51AC(1) of the Trade Practices Act because it engaged in conduct which was unconscionable in all the circumstances in connection in with the supply and acquisition from Hoy Mobile of services under the franchise agreement.

In the event that the parties cannot agree on the formulation of the orders, each should prepare its own draft of the orders and the matter can be re-listed for further argument. I will direct Hoy Mobile to serve its draft orders with supporting schedules by 3 June 2008 together with its written submissions in respect of costs and, Allphones to serve its response by 5 June 2008 together with written submissions in respect of any areas of disagreement. Any written submissions in reply should be served by Hoy Mobile by 6 June 2008, and I will relist the matter for the making of final orders on 10 June 2008.

I certify that the preceding four hundred and thiry-one (431) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.
Associate:
Dated: 30 May 2008

Counsel for the Applicant: DA Smallbone

Solicitor for the Applicant: Birch Partners

Counsel for the Respondent: D Pritchard SC, E Muston

Solicitor for the Respondent: Bartier Perry

Date of Hearing: 12-15, 18-22, 25-28 February 2008; 6, 10-12 March 2008

Date of Judgment: 30 May 2008

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1678 OF 2006

BETWEEN:	HOY MOBILE PTY LIMITED (ACN 103 105 228) Applicant
AND:	ALLPHONES RETAIL PTY LIMITED (ACN 103 105 228) Respondent

JUDGE:	RARES J
DATE OF ORDER:	30 MAY 2008
WHERE MADE:	SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NSD 1678 OF 2006

JUDGE:	RARES J
DATE:	30 MAY 2008
PLACE:	SYDNEY

Optus stretch bonus	$ 16,388.63
Optus bonus and super bonus	$ 27,944.39
Virgin commission	$ 1,132.45
Vodafone commission	$ 709.78
Hutchison commission	$ 2041,66
EFTPOS fees	$ 1,045.49
IT management fees	$ 2,045.43
Administrative fees and bank charges unable to be allocated	$ 3,581.49
Store refresh deduction	$ 9,973.37
Diversions of 138000 number	$ 1,500.00
Retention canvassing	$ 6,507.60
Vodafone commissions from plans with ‘free’ phones	$ 2,299.46
Sub-total	$ 75,169.75
Less amount earned by Hoy Mobile’s fraud	($ 32,000.00)
Total	$ 43,169.75

Counsel for the Applicant:	DA Smallbone
Solicitor for the Applicant:	Birch Partners
Counsel for the Respondent:	D Pritchard SC, E Muston
Solicitor for the Respondent:	Bartier Perry
Date of Hearing:	12-15, 18-22, 25-28 February 2008; 6, 10-12 March 2008
Date of Judgment:	30 May 2008