J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) - [2007] NSWSC 789

No judgment structure available for this case.

CITATION: J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 789
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 19-22 June 2007, 9-10 July 2007

JUDGMENT DATE :
24 July 2007

JURISDICTION: Equity Division

JUDGMENT OF: Rein AJ

DECISION: See [78].

CATCHWORDS: Purported termination of franchise agreement - Asserted bases of breach examined and rejected - Implied obligations of good faith - Content of duty - Breach of duty

LEGISLATION CITED: Trade Practices Act 1974 (Cth), ss 51AC, 52
Uniform Civil Procedure Rules 2005, r 29.6

CASES CITED: Aura Enterprises Pty Ltd v Frontline Retail Pty Ltd (2006) 202 FLR 435; [2006] NSWSC 902
Automasters Australia Pty Ltd v Bruness Pty Ltd (2003) ATPR (Digest) 46-229; [2002] WASC 286
Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703; [1999] FCA 903
J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 748
Marks v GIO Australia Holdings Ltd (1996) 63 FCR 304
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596

PARTIES: J F Keir Pty Ltd (Plaintiff)
Priority Management Systems Pty Ltd (administrators appointed) (Defendant)

FILE NUMBER(S): SC 5042/06

COUNSEL: Mr C Harris SC; Mrs C Champion (Plaintiff)
Mr C R C Newlinds SC (Defendant) until 5 July 2007, thereafter no appearance for the Defendant

SOLICITORS: Matthews Folbigg Pty Ltd (Plaintiff)
Baker & McKenzie (Defendant) until 5 July 2007, thereafter no appearance for the Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Rein AJ

24 July 2007

5042/06 J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed)

JUDGMENT

1 HIS HONOUR: These proceedings concern a franchise agreement entered into between the plaintiff, which is known as “Priority Management – Annandale” (“Annandale”), and the defendant Priority Management Systems Pty Ltd (“PMS”), and whether or not the agreement has been validly terminated by PMS. Mr C Harris SC appears for Annandale with Mrs C Champion. Until 5 July 2007, Mr C R C Newlinds SC appeared with Ms J Chambers for PMS.

2 The franchise agreement was entered into on 25 November 2001 and had an initial period of five years with, in effect, an option for renewal by Annandale for a further five years upon the giving of requisite notice. There is no dispute that the option for renewal was exercised. PMS draws its rights to franchise in Australasia from a Canadian company.

3 The franchise “product” might best be described as information management services (and related products using the Priority Management mark or brand) and is largely concerned with training programs for business, for example in the use of the Outlook email program. Annandale was granted a non-exclusive franchise for the Sydney metropolitan area.

4 Mr Gregory Sparks (“Sparks”) is the sole director, and a 50 per cent shareholder, of PMS. He has, through a corporate structure, a majority shareholding in relevantly two other entities: Priority Management – Sydney Pty Ltd, whose business name is “Priority Management – North Sydney” (“North Sydney”), and Priority Management – Melbourne (“PM-Melbourne”). He is a director of both North Sydney and PM-Melbourne and in documentation is described as managing director of North Sydney.

5 On 1 July 2005 PMS granted to North Sydney a non-exclusive franchise for the Sydney metropolitan area. Over time North Sydney was permitted to treat other areas of NSW as its area of operation although this was done in an informal way by Sparks. By the time of the events relevant to these proceedings Annandale and North Sydney were the only remaining NSW franchisees. In about May 2004 Ms Catherine O’Donnell (“O’Donnell”) was appointed a manager of North Sydney and on 30 June 2005 she became a director of that franchisee as well. There is an issue about whether O’Donnell carried out functions on behalf of PMS as well as North Sydney.

6 Since 1 July 2002 at least PMS has granted a franchise to PM-Melbourne for the Melbourne metropolitan area.

7 On 22 August 2006 PMS sent to Annandale a notice (“the First Notice”) which PMS claims was a valid Notice of Termination pursuant to clause XIV.B of the franchise agreement.

8 Annandale has two directors and shareholders, Mr Wayne Greenwood (“Greenwood”) and his wife Dr Jeanette Keir (“Keir”).

9 Clause XIV.B is in the following terms:

10 The First Notice is found at pp 922-927 volume 3 of Exhibit “A”.

11 The First Notice asserts a number of breaches of the agreement by Annandale which can be broadly categorised as:

(1) contacting IAG in circumstances said to amount to a breach of the agreement (“the IAG matter”);

(2) failing to provide a copy of its contract with IAG as requested by PMS (“the refusal to provide documents”);

(3) failing to comply with its GST obligations (“the GST issue”);

(a) a policy document (entitled Client Management & Database Policy sent to Annandale on 17 May 2002 (“the Policy”)) said to form part of the franchise agreement (“the Policy issue”);

12 The assertion by PMS of the breaches in (3) and (4)(b) was abandoned at the commencement of the hearing. Annandale contends that the fact that these breaches were asserted remains relevant for reasons I shall explain.

13 On the first day of the hearing PMS made an application to expand the hearing to include consideration of further alleged breaches contained in a notice dated 11 April 2007 (“the Second Notice”). The Second Notice alleges breach of the Policy statement to which I have referred by virtue of Annandale having sold products and services in areas where another franchise operates. A cross summons asserting these further breaches was filed by consent on 22 June 2007. These breaches, which I shall refer to as “the further marketing breaches”, involved training provided to Ericsson Australia Ltd and TCN Channel Nine Pty Ltd, both of which were established clients of Annandale.

14 The following provisions of the franchise agreement are relevant (in addition to XIV Termination):

15 (1) Clause X.A required the franchisees to present a uniform, professional and sophisticated image and prohibited operating the business in a manner not approved or authorised by PMS.

(2) Clause X.C required PMS’s approval in relation to coordinating training for the principal office of any of the country’s 500 largest companies.

(3) Clause X.E required the franchisee to cooperate with PMS in maintaining high standards in the operation of its business.

(4) Clause X.F required the franchisee “to adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct”;

16 Annandale asserts that it was not in breach of the agreement and also asserts that there were formal defects in the First Notice. Annandale also asserts that PMS was subject to a contractual duty to act in good faith and that it has by its conduct breached the obligation in issuing the notices. Further, Annandale asserts that if its contentions concerning the effect of the franchise agreement and the notices are not upheld, the conduct of PMS amounted to unconscionable conduct within the meaning of s 51AC of the TPA.

17 The hearing commenced on 19 June 2007 and was on 22 June 2007 stood over part heard to 9 July 2007. Both Greenwood and Sparks had been extensively cross-examined and PMS, through Mr Newlinds, indicated that none of Messrs Hammond, MacIntosh or Janz (each of whom are connected with other franchisees) needed to attend for cross-examination, leaving a number of other witnesses for both Annandale and PMS whose affidavits had been filed and served yet to be cross-examined. On 5 July 2007, administrators were appointed to PMS.

18 Annandale, having been informed of the administration, sought leave to proceed against PMS under administration and I granted leave (see reasons published 10 July 2007: J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 748). As noted in that judgment at [11], according to a minute of a directors’ meeting of PMS, Sparks, as director of PMS, had resolved to place it under voluntary administration “as the Company is likely to become insolvent at some future time”.

19 As is recorded in my reasons for judgment of 10 July 2007, the administrators indicated that they did not intend to defend the proceedings and Sparks, through his counsel, indicated that his position was that were his views relevant he would not oppose the relief sought by Annandale in its statement of claim: T301.33-52.

20 Mr Harris’s position was that given that the Court had already received substantial evidence from the parties both in terms of exhibits and oral evidence the Court could not proceed in effect as if the defendant had never appeared.

21 Leaving aside the cross-summons, I think rule 29.6 of the Uniform Civil Procedure Rules 2005 makes it clear that where a defendant does not appear the plaintiff has a choice to either adjourn the proceedings or to proceed with the trial. Annandale seeks to proceed with the trial and therefore it should be permitted to do so and it must discharge the onus of proof which it accepts it bears.

22 So far as the cross-summons is concerned, PMS is not here to pursue it and hence it could be dismissed. Once again however, evidence has been received relevant to the issues raised in the cross-summons.

23 I accept Mr Harris’s submission that in the circumstances the Court should proceed to deal with all matters of which it was seized before the administrators were appointed.

Good faith

24 In Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 the NSW Court of Appeal held that the trial judge Rolfe DCJ was correct to find that a development agreement linked to a franchise agreement was subject to implied terms of reasonableness and good faith: at [186]. The Court in reaching that view made reference at [159] to Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310, in which Byrne J had felt constrained to proceed on the basis that “there is to be implied in a franchise agreement a term of good faith and fair dealing which obliges each party to exercise the powers conferred upon it by the agreement in good faith and reasonably, and not capriciously or for some extraneous purpose. Such a term is a legal incident of such a contract”, and see [160] where the Court of Appeal referred to what Finkelstein J had said in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703; [1999] FCA 903 in dealing with a dealership case.

25 Annandale submitted that I should find that the franchise agreement was subject to the implied term identified by Byrne J in Far Horizons, and subject to one issue, with which I deal, I accept that submission. The franchise agreement does expressly impose on the franchisee a duty “to adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct”: see clause X.F. No corresponding duty is expressly imposed upon PMS. The general principle is that implied terms cannot stand against express contradictory terms: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337.

26 In my view, the express imposition of a duty of good faith on Annandale is not inconsistent with the duty of good faith being imposed on PMS and I proceed on the basis that PMS was subject to that implied term.

27 Mr Harris, in helpful written submissions (Outline of Submissions for the Plaintiff, 10 July 2007, and Plaintiff’s Summary of Submissions, undated but received 10 July 2007), submitted that the implied duty of good faith requires PMS, when exercising its powers under the franchise agreement, to act:

“(i) reasonably and honestly: Renard Constructions (ME) Pty Limited v Minister for Public Works (1992) 26 NSWLR 234, Alcatel Australia v Scarcella (1998) 44 NSWLR 349;

(ii) which must be considered objectively: Renard , supra at 258, 261 and 268, Burger King Corporation v Hungry Jacks Pty Limited (2001) NSWCA 187 at [189];

(iii) not simply relying on information provided by third parties: Burger King , supra at [177], or ‘wilfully shutting (ones) eyes’ or refraining from making inquiries, but exercising the degree of ‘caution and diligence to be expected of an honest person of ordinary prudence’: Mid Density Developments Pty Limited v Rockdale Municipal Council (1993) 44 FCR 290 at 298, Russell v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (2007) NSWSC 104 at [115];

(iv) It will be a breach of the duty if the defendant is acting for some ulterior motive: Burger King , supra at [142]–[185], Mangrove Mountain Quarry Pty Limited v Barlow (2007) NSWSC 492;

(v) any action by the defendant must recognise and have regard to the legitimate interests of both parties in the enjoyment of the fruits of the contract: Overlook v Foxtel (2002) ACR 90-143; and

28 I accept those submissions: see also Automasters Australia Pty Ltd v Bruness Pty Ltd (2003) ATPR (Digest) 46-229; [2002] WASC 286 at [350]-[357] and [393], and an article by Mr Bill Dixon, “What is the Content of the Common Law Obligation of Good Faith in Commercial Franchises?” (2005) 33(3) ABLR 207.

The IAG Matter

29 The detail of what occurred is complex. In broad terms PMS claims that Annandale, by soliciting and entering into contracts with IAG (a major purchaser of training), by refusing to accept the termination of the contracts it had with IAG, as advised by PM-North Sydney, and by its dealings with RossNavigate Pty Ltd (“Ross”) (then known as Spherion) and IAG, was in breach of clauses X.A, X.C, X.E, X.F and X.G of the franchise agreement and by its conduct adversely impacted on the franchise’s brand image and reputation. Annandale’s position is that not only was it not in breach but that PMS through Sparks was itself in breach of the franchise agreement and that the situation that developed was caused or contributed to by Sparks’ attempts to support and further the interests of North Sydney, and a failure by PMS and North Sydney to recognise Annandale’s right to deal with IAG and correct misconceptions on the part of Ross and IAG.

30 In August and September 2004, Ross negotiated with North Sydney for an agreement whereby North Sydney would become a provider of training for Ross’s national clients. Ross is completely independent of North Sydney and PMS. Over the next six months Ross negotiated arrangements inter alia with Telstra and IAG whereby Ross would provide training through a panel of named organisations including North Sydney.

31 The extent to which Sparks was involved in the negotiations by North Sydney, in which he was a majority shareholder, with Ross was contested. It is clear that Sparks attended a meeting before the agreement with Ross was signed and that he signed the agreement. There was further evidence of his involvement – see Exhibit “G” to which I shall return.

32 On 15 September 2004, Sparks sent an email to Greenwood. It is written as if from the point of view of PMS and it says that O’Donnell “has secured an exclusive contract” for North Sydney with Ross “to supply our training courses under Ross’s MVAs”. It then says (Tab 2 Exhibit “1”):

“Why is this advantageous to Priority Management – North Sydney and the other state offices? Simply if we want to do business with the National Companies that go into these arrangements then we have to be involved and be part of the supply group. PM – North Sydney has lost two major clients and by association the network to these agreements over the past year and we hope that this will be a start to the recovery of them.

This contract has come through partly due to Catherine’s strong personal relationship with the Managing Director of Spherion and because of our ability to deliver a consistent high quality product Australia wide.

Catherine is the Account Manager for the Spherion Contract and all contact with Spherion has been agreed to be through Catherine.

Catherine will be in touch with you in the near future as the program and way forward becomes clearer.

This will be a big test for PM as an organisation and we wish Catherine every success in bringing the benefits to the table.”

33 On 1 April 2005 Sparks on behalf of PMS wrote to Greenwood, asserting that Greenwood and Filippa Carbone (“Carbone”, an employee of Annandale) had been harassing Ross staff especially Carolyn Smart in Melbourne. Sparks said (Tab 2 Exhibit “1”):

“[Fayad] has informed me in no uncertain terms that this conduct is unacceptable. It is not only tremendously embarrassing that something like this could happen but shows that you have no regard for any announcements regarding relationships or contracts that are entered into by other businesses.

In September 2004 I announced to the network and it was also announced on the international infonet that Catherine had secured a deal with Spherion. You have blatantly disregarded this announcement and harassed a client that you should not approach except with Catherine O’Donnell’s permission, which you do not have.

Spherion has entered into an agreement with PM-North Sydney. Spherion is a PM-North Sydney client and Spherion will do business where it wishes. Spherion has made it clear that from time to time as it puts together master vendor agreements with its clients it may invite PM-North Sydney and namely Catherine O’Donnell to be part of the provider panel and manage the PM program supply.

Please keep in mind that if Catherine had not secured the agreement with Spherion then Priority Management would not get any business from these companies . Spherion have us on watch and it is up to Priority Management to perform professionally. To this end you need to cease harassing Spherion or its staff immediately.

If PM-North Sydney is to lose this contract and, as a result, the PM group loses income because of your actions, we will need to review our legal options.” [emphasis added]

34 The letter to which I have referred was concerned only with Telstra. Telstra was a client of Ross (and both Annandale and North Sydney had provided training to Telstra – indeed Annandale had been providing training for many years). As it happens, no complaint is made in the Notice concerning Annandale’s conduct viz a viz Telstra, but the correspondence indicates that the Ross arrangements with North Sydney were a source of tension.

35 By letter of 8 April 2005, Keir did not accept that the contact which Annandale had with Telstra could be described as harassment. Keir in a letter to PMS said (p 448 Vol 2 Exhibit “A”):

“We believe our relationship with Telstra can be maintained without threatening PM Nth Sydneys agreement with Spherion. All that needs to happen is for PM Annandale to be included in the National Agreement and for our training dates to be provided to Spherion as is the case with every other Franchise. I believe this matter needs to be resolved between PM Nth Sydney and PM Annandale as the agreement is between PM Nth Sydney and Spherion, not between Priority Management Systems and Spherion. This issue of PM Annandales contact with Spherion would not have arisen if Catherine had contacted us as promised in the e-mail of the 15th of September 2004. As you are aware Catherine O’Donnell and Wayne were to meet today to discuss this and other matters. Unfortunately Catherine had to postpone the Meeting to a date yet to be arranged.”

36 It should be noted that Carbone in her affidavit denies having harassed Carolyn Smart at all. I accept her evidence as to what occurred (see para 10 and Annexure B to her affidavit) and accept that it could not possibly be fairly described as harassment.

37 On 29 March 2005 Sparks sent to Greenwood a copy of Jane Fayad’s (“Fayad”) email to O’Donnell saying that Ross would be taking on all the management and administration of training for IAG and that although North Sydney could carry on as usual all bookings must be directed to Ross (see Tab 3A Exhibit “1”). The email proceeded:

“Please NOTE

Catherine is now part of the 12 member Training Panel and has been participating with Jane Fayad in meetings with the L&D departments in IAG.. NRMA had been one of PM – North Sydneys largest accounts for many years and this business would have been totally lost without Catherine having secured the Spherion Contract that was announced to the network in September last year..

All training in the above companies must go through Catherine and Spherion there is to be no exceptions. No one is to contact Spherion direct unless authorised by Catherine as we have rules of engagement that we must adhear to. It is very important that Priority Management as an integrated business performs transparently under the agreement that PM - North Sydney has entered into. [sic]”

38 On 4 April 2005 Fayad complained about Annandale’s “interference with our premium clients especially IAG” and said she had contacted Greenwood’s office (Tab 3B Exhibit “1”):

“regarding the continuously [sic] harassment of our staff to commercially engage with him. I wish to confirm that we do not have any intention of doing business through Wayne Greenwood’s office. Priority Management North Sydney is a premium Spherion business partner that provides quality training solutions at reasonable rates. Wayne Greenwood’s business is viewed by us, to the contrary.”

39 Sparks wrote back apologising on behalf of PMS saying “we value our relationship with Spherion most highly” and saying that he had communicated “our concern” to Annandale.

40 In May 2006 Ms Glenda Watsa of IAG wrote to Carbone noting that she had been given her name by Murt McAuliffe of IAG and would like to book a course for 15 people. The course was arranged for 14 and 18 July and confirmed by email dated 2 June 2006. The contract for the two workshops is found at Tab 5 Exhibit “1” signed by Ms Watsa.

41 O’Donnell found out about the IAG contract with Annandale and emailed Ms Angela Altomare (“Altomare”) at IAG saying that Annandale and North Sydney were totally separate businesses. She also said (Tab 6 Exhibit “1”):

“Sometimes for us at Priority Management Sydney having two Priority businesses does end up causing some confusion with our clients. To assist you and others within IAG I have provided the details of both offices below.”

42 Mr McAuliffe of IAG also arranged with Annandale for some training to take place on 7 July 2006: see Tabs 8 and 9 Exhibit “1”.

43 Greenwood spoke to O’Donnell in June and a meeting was arranged for 29 June and then cancelled by O’Donnell. Greenwood surmised that O’Donnell had rung him only to obtain details of his contacts at IAG: see Tab 10 Exhibit “1”.

44 By email of 26 June 2006 to Greenwood, O’Donnell asserted that IAG was in breach of its contract with Ross by contracting with Annandale:

“This unprofessional approach by you has now put [North Sydney’s] relationship and contract in a precarious position with both IAG and [Ross]”.

45 On 29 June, Fayad spoke to Greenwood and had a conversation with him in which words to the following effect were spoken (see pp 28-29 Exhibit “1”):

Fayad: “I’m not happy at all with you training in IAG”

Greenwood: “We have been training in IAG for several years”

Fayad: “Ross has a contract to train in IAG and you don’t.”

Greenwood: “Yes we do have contracts to train in IAG and have been fulfilling those contracts. It is our understanding that your contract is not exclusive and that IAG staff can source training from other providers if they want to.”

Fayad: “The contract is exclusive and you are not to approach IAG again.”

Greenwood: “I don’t believe that’s true and telling us not to contact IAG is a restraint on my ability to trade”

46 On 29 June O’Donnell met with Fayad. Fayad complained of Carbone’s calls to IAG. Altomare had, according to Fayad, asked her to contact Greenwood. Fayad reported to O’Donnell that Greenwood had threatened her that her attempt to prevent him from contacting IAG was a restrictive trade practice. In a telephone conversation that evening Fayad told O’Donnell that IAG and Ross would sever the relationship with North Sydney unless the situation with Annandale was resolved. Fayad said that the fact that Annandale had quoted on their documentation that the training is not GST applicable is also a concern to Ross as the Australian Taxation Office (“ATO”) had advised that was not correct. She advised O’Donnell that both IAG and Ross saw the whole situation as “unproductive and very unprofessional”: p 119 Exhibit “A”.

47 On 29 June 2006 Fayad wrote on behalf of Ross to Sparks (see p 802 Vol 2 Exhibit “A”), and made a number of assertions about Annandale:

(1) that it had solicited business directly from IAG;

(2) that it had sold a number of private training courses with IAG which “have not gone through the official procurement channel via [Ross]”;

(3) that it had “made IAG line managers sign their agreement for training service and in some instances have sought prepayment contrary to IAG Procurement processes and in conflict with Ross’s ‘Master Vendor Contract’”;

(4) that she had been advised by IAG that Annandale “in some form have misrepresented themselves as an official IAG partner” which has “caused much confusion around the contract as well as has diluted the Priority Management brand reputation and relationship”;

48 Fayad sent a similar email to O’Donnell, and O’Donnell then contacted Sparks advising him of developments. She specifically drew to Sparks’ attention Fayad’s concern about GST. She said she was deeply concerned with the unprofessional behaviour towards two clients. She then asked that Sparks take immediate action against Annandale to rectify this situation and have Annandale issue a formal apology to both individuals and agree to cease any further contact with Ross and IAG.

49 On 30 June O’Donnell wrote to Greenwood by email stating that:

“Effective immediately for [sic] following two workshops have been cancelled by IAG Procurement the 14th July and 18th July.”

“Priority Management Sydney and its Directors wish to formally request that you no longer contact our clients [Ross] and IAG and any of our employees”.

50 On 1 July Sparks wrote to Fayad telling her that PMS agreed with O’Donnell’s approach and that it “completely supports the relationship between [North Sydney] and [Ross] and its clients”, and Fayad sent that on to Altomare: Tab 24 Exhibit “1”.

51 Greenwood, knowing that courses had been arranged for July and aware that IAG might wish to cancel them because of what he had been told by O’Donnell, sought written confirmation of that from IAG. I will summarise the events of the next few days by saying that Annandale sought written confirmation of cancellation and indicated that it would turn up to provide training unless it received such a cancellation. This prompted IAG, Ross, O’Donnell and Sparks to communicate with each other, and Sparks with Annandale, but in the end IAG did send written confirmation of cancellation which Annandale accepted. The courses in question on 14 and 18 July were carried out by North Sydney. Annandale had already received payment and North Sydney never billed Ross or IAG for the courses.

52 There is no evidence that Carbone did misrepresent herself as working for North Sydney. Although she does not expressly say that she did not do so she does set out two conversations in which she denied having done so: see paras 5 and 6 of Carbone’s affidavit of 5 July 2007. Having regard to her evidence and the absence of any evidence from anyone at IAG I am persuaded that she did not misrepresent herself.

53 I have noted that PMS no longer asserts that there was any GST breach or any 70/30 breach. That concession does not remove these two matters from contention because Annandale submits that Sparks’ inclusion of these matters in the Notice is relevant to his bona fides and credit.

54 Annandale had GST exempt status because it had obtained registration as a Registered Training Organisation (“RTO”). This exempted it from charging GST on training but not on stationery. Sparks was well aware that “RTO” status made an entity GST exempt (on training) because PMS itself had obtained that status. Annandale asserts that Sparks well knew that Annandale was an RTO and hence was exempt and therefore knew that PMS’s complaint about GST in the Notice was baseless. The issue goes further however because Annandale also submits that Sparks, knowing what the true position was, made no attempt to correct a misapprehension formed by Fayad. The issue assumed a further relevance when Sparks attempted to justify his inclusion of GST breach in the Notice on the basis that Annandale had sold stationery without charging GST.

55 I will deal with the issue of credibility of witnesses.

Greenwood’s credibility

56 Apart from two specific and limited matters which I shall detail, I thought that Greenwood was an honest and credible witness. The two exceptions are that I had some doubt as to Greenwood’s assertion that he had intended as at 12 July to have his staff actually attend at IAG to deliver the training in the absence of written confirmation that the contracts were cancelled, but that as at 13 July he had decided not to do that, and I thought that he was reluctant to admit that his advice to IAG that his staff would turn up was a bluff designed to have them provide the written cancellation. The second matter is his note of his conversation with Grimshaw, which states that “Angela called in and spoke to Gary [Grimshaw], saying that we had pretended to be PM-North Sydney”: see p 61 Exhibit “1” and T99.55-58. It was suggested to him that he had been told directly by Grimshaw that the allegation of impersonation had been made, which he denied. Grimshaw in a subsequent affidavit says that he cannot recall speaking to Greenwood about it, and Carbone says that Grimshaw told her that Altomare was “a bit concerned that she had been representing herself as North Sydney”. Carbone says that she rang Altomare and told her that she had not misrepresented herself as working for North Sydney, and that she rang Greenwood to tell him about her conversation with Altomare. I think it is likely that Grimshaw did tell Greenwood that Altomare had told him that Carbone had misrepresented herself as working for North Sydney, but in my view the point is a minor one and does not significantly impugn Greenwood’s veracity.

Sparks’ credibility

57 A trenchant attack was mounted by Annandale in relation to Sparks’ credibility (see paras 14-17 of Plaintiff’s Summary of Submissions). In my view that attack was justified. Mr Harris submitted that I could have no confidence in the credibility of Sparks and that I should find that he had lied both to the Court and to Annandale. It should be borne in mind that in coming to a view adverse to Sparks I have not had the benefit of submissions on behalf of Sparks nor has the Court received any affidavits of witnesses who were to be called on behalf of PMS other than Sparks. The matters relevant to Sparks’ lack of credibility are these:

(1) Sparks told Annandale that North Sydney had signed an agreement with Bized when this was not true (T252.10-T253.21). This appears to have been an attempt to prevent Annandale from continuing to deal with Bized, with whom Annandale had had a relationship for approximately three years (see pp 190-191 Exhibit “A”).

(2) Sparks wrote to all franchisees asserting that North Sydney and Ross had an exclusive agreement. Sparks admitted at T265.10-12 that the agreement was not exclusive and that what he had said in the announcement (Tab 1 Exhibit “1”) was incorrect but he would not agree that he knew that it was incorrect: see T264. He said he had looked at Schedule 2 (T262.40) and had signed the agreement in final form: T262.25. He said he had not read it completely before he signed it. I had difficulty accepting his evidence that he did not know that it was not exclusive at the time he signed it, or that he had not been involved in negotiating the removal of clause 17.10 (which related to preferred clients) or even aware of it, but in any event if he had not properly read the agreement he had no proper basis for asserting to a franchisee that it was exclusive when in fact it was not.

(b) When he made those allegations he did so in a form that gave no proper particulars of the alleged breaches and when particulars were sought he gave no answer in breach of a requirement to do so: Aura Enterprises Pty Ltd v Frontline Retail Pty Ltd (2006) 202 FLR 435; [2006] NSWSC 902.

(4) Sparks said that he was not involved in the day to day operations of North Sydney and had very little involvement of the negotiation of the Ross/North Sydney agreement having attended only one meeting. Exhibit “G” (particularly the email of 16 September 2004 from O’Donnell to Fayad) points to his having attended more than one meeting – and the chain of correspondence makes clear the importance of his role as director of North Sydney, leading to his signing the contract with Ross. That correspondence, the fact that he held a majority of the shares in North Sydney and was a director of North Sydney, the fact that O’Donnell was very new in the role, and the fact that he wrote an email on 13 May 2003 on behalf of North Sydney to Annandale about the Bized matter which he had signed on behalf of North Sydney, point to a much more extensive role within North Sydney than he was prepared to admit. I think it is obvious that Sparks had a strong motivation to ensure that whatever was done by PMS was to the benefit of North Sydney and not to the benefit of Annandale, and he had a clear conflict of interest as his then counsel conceded (T1.24, T16.24, T24.27-29 (Day 1)), but I think he was determined to play down that conflict by understating the extent to which he acted on behalf of North Sydney and the extent to which he permitted O’Donnell to act on behalf of PMS. His assertion that O’Donnell did not play a role in PMS is contradicted by correspondence sent by O’Donnell: see p 71 Exhibit “1”. The merging of Sparks’ and O’Donnell’s roles is demonstrated by his email of 5 April 2006 (Tab 42 Greenwood’s first affidavit), the announcement set out in [32] above, and the fact that O’Donnell’s email address was that of PMS (and that her office was in the same building as that in which PMS was located).

(5) Sparks admitted that PMS had obtained accreditation as an RTO with VETAB and would not be required to charge GST if it delivered training – it could also have permitted franchisees to take advantage of that registration. When Keir on behalf of Annandale sought PMS’s assistance by letter – not only was the assistance not forthcoming, the letter was not answered. Sparks gave no adequate explanation for the failure to respond to Keir’s letter and I do not accept his assertion that the absence of response was due to his concluding that there was nothing to be gained in using the RTO status (see T177.32-T178.40).

(6) Sparks also knew that Annandale was not precluded from providing training to IAG. His failure to advise Fayad of that fact is again revealing.

(7) In his opening (T32.28) Mr Newlinds on behalf of PMS stated that PMS would not have terminated for breach of the 70/30 rule, the policy issue, the refusal to provide documents, or the GST issue, but for the IAG matter. Sparks’ evidence on this in cross-examination was contradictory although he finally did say that he would not have terminated but for the IAG matter: T172.31, T187.11, T211.5, T212.

(8) At T258.1 Sparks said that Fayad had not told him she did not want to deal with a network of franchisees. At T258.15 he agreed that she had.

(9) Sparks sought no clarification of how it was said Annandale had misrepresented itself to IAG and he did not seek any explanation from Annandale on this, nor did he give any convincing explanation as to why he has not done so. He did not advise Fayad that Annandale was entitled to solicit business from IAG, entitled to enter contracts with IAG and to accept that payment be made prior to provision of the training. Greenwood said, and he was unchallenged on this, that IAG wanted to make payment early so it could claim a deduction in the current financial year. Even if Ross was entitled to assert as against North Sydney that given its arrangement with North Sydney and IAG that North Sydney should not be contacting IAG direct, North Sydney had no power to prevent Annandale from contacting IAG, unless Annandale’s conduct was a breach of the franchise agreement.

58 Sparks admitted that Annandale was entitled to contract with IAG: T256.8-14, T256.24-27. Ross was a competitor of Annandale and one with which Annandale had no connection. North Sydney was entitled to enter into an arrangement with Ross if it so wished but North Sydney as a fellow franchisee and competitor of Annandale had, in my view, no authority to terminate or seek to have terminated IAG’s contracts with Annandale. Annandale having entered into contracts for training with IAG, as it was entitled to do, was entitled to provide the services for which IAG had contracted. Annandale was entitled to reject purported cancellation or notice of cancellation of its contracts with IAG by Ross and/or North Sydney and was entitled to seek confirmation from IAG itself. Although Annandale could not insist upon written cancellation as a contractual requirement, I think it was appropriate for it to seek written confirmation from IAG given the extraordinary circumstances in which Annandale found itself.

59 Annandale was placed in the awkward position it was in because of the conduct of North Sydney and Ross, and also of PMS in part because of PMS’s failure to correct the impression that Annandale had done things it should not have, and because of PMS’s promotion and support of North Sydney’s interests as against Annandale’s legitimate interests. PMS’s attempt to assert that Annandale should have done whatever was necessary to minimise the embarrassment to Ross and IAG by reason of what had occurred, and to base a breach of the franchise agreement upon a failure by Annandale to do so, is groundless.

60 It seems clear that the Ross contract with North Sydney was never intended to benefit Annandale. The email of September 2004 talks about North Sydney and state offices, a description that does not include Annandale. O’Donnell never contacted Annandale to discuss its inclusion as a provider. Annandale’s name was never put forward by North Sydney for Telstra or IAG notwithstanding the fact that Annandale had carried out training for both (and see T266.29-34, T268.1-5). There is no evidence that Annandale’s name was included in any list provided to Ross by North Sydney. Notwithstanding the fact that PMS had accreditation to provide training it did not seek to arrange a contract between itself and Ross. Since by that time Sparks controlled franchises in the ACT, Victoria and Sydney other than Annandale, the only party disadvantaged by that failure was Annandale. Sparks appeared to have no concern about Annandale’s exclusion from the Ross arrangement and no interest in protecting Annandale’s legitimate rights as a franchisee. As a director (and shareholder) of North Sydney that is entirely understandable but as a director of PMS his lack of concern is quite a different matter.

61 Sparks through his significant shareholding and directorship of North Sydney and PM-Melbourne and ownership of the defendant as franchisor was in a position of obvious conflict. Sparks promoted and encouraged North Sydney and sought to utilise PMS’s position as franchisor to assist in weakening the position of Annandale to the advantage of North Sydney and PM-Melbourne.

62 I am persuaded that the First Notice was not given as the result of a bona fide belief that Annandale was in breach of the franchise agreement but for reasons connected to Sparks’ interests in North Sydney and matters extraneous to PMS’s legitimate interests as franchisor. First, there was no proper investigation by PMS of the allegations against Annandale but further, the unwillingness of Sparks to provide assistance to Annandale with respect to PMS’s RTO status, the failure to provide particulars of the allegations contained in the Notice when sought, the absence of any credible explanation for failing to do so and the inclusion of the GST allegation and the 70/30 allegation as well as the speed with which PMS moved to seek to take over Annandale’s business (see email of 26 September 2006 from Sparks to Hammond: p 940 vol 3 Exhibit “A”), and Sparks’ very direct material interest in North Sydney and PM-Melbourne, all point to a motive for the giving of notice which was ulterior and quite outside the proper boundaries of PMS’s interests as franchisor.

63 Even if contrary to the view I have formed Sparks did hold a bona fide belief that Annandale was in breach, that belief was not a reasonably held belief after proper investigation of the factual matters asserted by third parties. This view is reinforced by Mr MacIntosh’s evidence (para 26) that Sparks had said on a number of occasions over the period June 2004 to date that he had said he was going “to close Greenwood’s business down”, O’Donnell’s having told Greenwood that Sparks had told her that Annandale was not to be included in the Ross agreement (see para 31 of Greenwood’s affidavit) and Sparks having told Greenwood in August 2005 that the only way forward was for Greenwood to sell his business to Sparks: p 121 of Greenwood’s affidavit of 24 November 2006.

64 So far as the reference to clause X.C in the First Notice is concerned, it is clear that Annandale provided PMS with registration forms that made it clear to PMS that Annandale was dealing with IAG, and Sparks knew that IAG was a client of Annandale (T270.14-16). Sparks agreed that he never complained that Annandale had failed to obtain approval of PMS prior to dealing with IAG: see T201.9-13. It was clear that PMS did not intend itself to carry out training for IAG (or any of the largest 500 companies) but had permitted a franchisee to enter into a contract with Ross to that end. Annandale’s failure to obtain approval was not articulated as a ground of termination (as opposed to dealing with IAG against Ross and North Sydney’s wishes) and I am satisfied that PMS cannot rely on clause X.C in the circumstances. Even if it could otherwise do so I think its failure to have said anything about this topic to Annandale before 22 August 2006, the fact that Annandale had ceased dealing with IAG in July 2006, and the matters relevant to good faith which I have mentioned, would preclude reliance on this ground.

Failure to provide documents

65 PMS sought from Annandale a copy of its agreement with IAG and related documents. Annandale refused to provide those documents and asserts that it had no obligation so to do.

66 I think it is clear from clause XIII.B that it was intended to provide an opportunity to PMS to audit and inspect records of franchisees to ensure that returns of the franchisees (and hence percentage fees paid to PMS) were correct. I do not think that clause permitted PMS to obtain copies of contracts with a franchisee’s customers unless a discrepancy in the accounts could only be answered by recourse to the contracts. In any event the motive for the demand in this case appeared to be driven by North Sydney’s (and Ross’s) interests, not those of PMS. In my view Annandale was entitled to refuse to provide a copy of the IAG agreement and related documents in the circumstances.

67 Again the inclusion of this item in the Notice has been demonstrated to be not based on a bona fide belief of breach, and the refusal was a once off with no consequences, since PMS obtained a copy of one of the contracts from another source and the other details were matters pertinent to North Sydney’s dealings with Ross and IAG and not to PMS’s.

Marketing in another PMS franchisee’s territory

68 The First Notice does not specify where or in whose territory the breach of the Policy has occurred. Annandale denied that it is marketing or selling services in breach of the agreement and asked for particulars (which particulars were never provided). That absence of particularity is itself a problem but I do not need to consider this further, because of the view I take on the “Policy”.

69 It was conceded by PMS that the Policy breaches alleged in the First Notice, and the further marketing breaches specified in detail in the Second Notice, could only be relied on by PMS if the Policy was incorporated into the franchise agreement.

70 Annandale has sought to establish that the Policy was not incorporated into the franchise agreement.

71 First, says Annandale, there is evidence that the Policy was never advised to other franchisees. Evidence was led from Mr Hammond and Mr Macintosh, franchisees in Queensland and Wellington New Zealand respectively, that they had never heard of or seen the Policy. Mr Janz of Brisbane had no recollection of such a policy and given the evidence of Mr Hammond and Mr MacIntosh I infer that he had never been told of it. These witnesses were not required for cross-examination (a decision made at a time when PMS was represented by Senior Counsel). On the basis of their evidence the “Policy” was not communicated to them. Given that North Sydney and PM-Melbourne were under the control of Sparks, the only franchisees who were not in the Sparks camp were Annandale, New Zealand and Queensland, and I think a “Policy” which was not communicated to all franchisees could not meet the requirements of clause V.E.

72 Mr Harris submitted, relying on Marks v GIO Australia Holdings Ltd (1996) 63 FCR 304 per Einfeld J at 317, that a court will rigorously scrutinise a contractual power that the franchisor reserves to itself to vary a term of the agreement.

73 Mr Harris submitted that the effect of the Policy if it were adopted as part of the franchise agreement would not be consistent with the original written agreement and would alter the franchisee’s rights which would infringe the terms of clause V.E. He pointed out the changes that would be wrought by the Policy:

“9. (i) Under the written original agreement, the plaintiff had the unlimited right to market and sell training in the Sydney Metropolitan Area: under the Policy, if the plaintiff undertook any training in the Sydney Metropolitan Area of persons from another franchisees territory, it would be obliged to hand that client to the other franchisee, together with all relevant documentation, at the end of the training;

(ii) under the original written agreement, the plaintiff had the unlimited right to market and sell training in any area which was not the territory of another franchisee: under the Policy it can only do so if it has the franchisors consent;

(iii) under the original written agreement the plaintiff could not solicit for business, but could otherwise market and sell training in another franchisees territory: under the Policy it would be obliged to hand over the client, and all relevant documentation, to the other franchisee at the conclusion of training, and to pay ‘appropriate compensation’ to the other franchisee.”

74 I have considerable doubt as to whether the terms of the Policy could fall within clause V.E at all since clause V.E is directed to specifications, standards and procedures for the operation of the franchise, and I doubt whether it could have been intended that matters relevant to competition between franchisees would be so dealt with, but that point was not taken.

75 Leaving aside the point referred to in [74] above, I am satisfied that the changes proposed in the Policy constituted a significant erosion of the rights of Annandale. The erosion was of even greater significance since North Sydney had been permitted to control all franchise areas of NSW other than the Sydney metropolitan area and ACT, and PM-Melbourne was in place in Melbourne. The Policy infringed the requirement of reasonableness and consistency with the franchise agreement and the existing rights of Annandale. The aim of the Policy seems to have been directed squarely at Annandale (a view reinforced by the failure of PMS to notify other franchisees unconnected with Sparks of the Policy) and was a restriction of Annandale’s rights that was very helpful to Sparks’ interests as a shareholder of North Sydney and PM-Melbourne, so that a strong case can be mounted that the Policy was itself introduced for ulterior motives extraneous to the interests of PMS and inimical to the reasonable expectations of Annandale, and hence in breach of PMS’s duty of good faith, even if contrary to my view the contract itself permitted such amendments.

76 Since there was no basis for alleging breaches [11](1)-(4) inclusive, [11](5) cannot stand.

77 Given my conclusions on the breaches and good faith, I do not need to consider whether or not s 51AC of the Trade Practices Act was breached, or whether either of the Notices was defective in form.

Conclusion

78 In my view Annandale has established that it was not in breach of the franchise agreement and hence that the Notices purporting to terminate were invalid and it is entitled to declarations to that effect. Annandale is also entitled to an order that PMS pay its costs. Annandale should prepare short minutes of order to reflect the conclusions which I have reached.

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27/07/2007 - First sentence amended - "reference to clause X.C in the First" replaced "Second" - Paragraph(s) 64

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Citations

J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 789

Most Recent Citation

J F Keir Pty Limited v Sparks [2008] FCA 611

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4

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United Group Rail Services Ltd v Rail Corporation NSW [2008] NSWSC 1364

Tim Barr Pty Limited v Narui Gold Coast Pty Limited [2007] NSWSC 1306

Cases Cited

14

Statutory Material Cited

2

J F Keir Pty Ltd v Priority Management Systems Pty Ltd (admin apptd) [2007] NSWSC 748

Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187

Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310

CITATION:	J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 789 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	19-22 June 2007, 9-10 July 2007
JUDGMENT DATE :	24 July 2007
JURISDICTION:	Equity Division
JUDGMENT OF:	Rein AJ
DECISION:	See [78].
CATCHWORDS:	Purported termination of franchise agreement - Asserted bases of breach examined and rejected - Implied obligations of good faith - Content of duty - Breach of duty
LEGISLATION CITED:	Trade Practices Act 1974 (Cth), ss 51AC, 52 Uniform Civil Procedure Rules 2005, r 29.6
CASES CITED:	Aura Enterprises Pty Ltd v Frontline Retail Pty Ltd (2006) 202 FLR 435; [2006] NSWSC 902 Automasters Australia Pty Ltd v Bruness Pty Ltd (2003) ATPR (Digest) 46-229; [2002] WASC 286 Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Far Horizons Pty Ltd v McDonald's Australia Ltd [2000] VSC 310 Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703; [1999] FCA 903 J F Keir Pty Ltd v Priority Management Systems Pty Ltd (administrators appointed) [2007] NSWSC 748 Marks v GIO Australia Holdings Ltd (1996) 63 FCR 304 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596
PARTIES:	J F Keir Pty Ltd (Plaintiff) Priority Management Systems Pty Ltd (administrators appointed) (Defendant)
FILE NUMBER(S):	SC 5042/06
COUNSEL:	Mr C Harris SC; Mrs C Champion (Plaintiff) Mr C R C Newlinds SC (Defendant) until 5 July 2007, thereafter no appearance for the Defendant
SOLICITORS:	Matthews Folbigg Pty Ltd (Plaintiff) Baker & McKenzie (Defendant) until 5 July 2007, thereafter no appearance for the Defendant