Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc
[2011] NSWCA 137
•01 June 2011
Court of Appeal
New South Wales
Case Title: Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc Medium Neutral Citation: [2011] NSWCA 137 Hearing Date(s): 3 and 4 May 2011 Decision Date: 01 June 2011 Jurisdiction: Before: Macfarlan JA at [1]
Young JA at [125]
Tobias AJA at [126]Decision: (1) Appeal allowed.
(2) Set aside Orders 1, 2 and 3 made at first instance on 16 August 2010.
(3) Judgment for the respondent Western Export Services Inc against the appellant in the sum of $1,195,946.
(4) Order the appellant to pay to the respondent Western Export Services Inc interest in an amount to be determined.
(5) Dismiss the appellant's cross-claim.
(6) Direct that:
(a) within seven days of the date of this Judgment the respondents lodge with the Court, and serve, a written submission as to the amount of interest that the respondents contend should be awarded in favour of the respondent Western Export Services Inc and as to the orders as to costs incurred at first instance and on appeal that the Court should make;
(b) the appellant lodge and serve a response within a further seven days; and
(c) the respondents lodge and serve any reply within a further seven days.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]Catchwords: CONTRACT - construction - commercial agreement - whether provision entitling respondent to commission on sales made by appellant extended to commission on sales made by associated entitles - whether court entitled to depart from literal meaning of unambiguous provision in order to give it a commercial and businesslike operation
CONTRACT - implied terms - commercial agreement - whether implied term that appellant would not voluntarily do anything that caused respondent to be deprived of the circumstances under which it would derive commission - whether implication of term warranted when agreement did not impose obligation on appellant to make sales that would have entitled the respondent to commission
CONTRACT - implied terms - commercial agreement - termination on reasonable notice
TRADE PRACTICES - misleading and deceptive conduct - sophisticated commercial parties negotiating at arm's length the terms of proposed agreement - whether alleged representations concerning the terms were misleading or deceptive
EQUITY - fiduciary duties - commercial agreement between sophisticated parties - whether by entering agreement with appellant that gave rise to a potential conflict of interest respondent breached any fiduciary duty owed to appellant - whether appellant gave fully informed consent
Legislation Cited: Trade Practices Act 1974 (Cth)
Cases Cited: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191
Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582
Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99
Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Codelfa Construction Pty Ltd v State Railway of NSW [1982] HCA 24; (1982) 149 CLR 337
Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438
Elders IXL Ltd v National Employers' Mutual General Insurance Association Ltd (NSW Court of Appeal, 29 April 1988, unreported)
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41
Hydarnes Steamship Company v Indemnity Mutual Marine Assurance Company [1895] 1 QB 500
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1
Lazarus v Cairn Line of Steamships Ltd [1911-13] All ER Rep 1265
Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2002) 210 CLR 181 Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579
RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417
Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462
Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596
Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; (2000) NSW ConvR 55-939Texts Cited: Category: Principal judgment Parties: Jireh International Pty Ltd t/as Gloria Jean's Coffees (Appellant)
Western Export Services Inc (First Respondent)
David Cisneros (Second Respondent)
Steven Meier (Third Respondent)Representation - Counsel: Counsel
R Merkel QC/D J Higgs SC/T Maltz (Appellant)
F C Corsaro SC (Respondents)- Solicitors: Solicitors
Meerkin & Apel (Appellant)
Koffels (Respondents)File number(s): CA 2010/228608 Decision Under Appeal - Court / Tribunal: - Before: Hammerschlag J - Date of Decision: 11 June 2010 - Citation: Western Export Services Inc v Jireh International Pty Limited [2010] NSWSC 622 - Court File Number(s) SC 2004/175257 Publication Restriction:
Judgment
MACFARLAN JA :
Nature of Case and Conclusions
On 19 March 1996 the appellant ("Jireh") and the first respondent ("WES") made an agreement in writing (the "Letter Agreement"). By the Letter Agreement, WES, an American company, agreed to assist Jireh, an Australian company, to become the Gloria Jean's Gourmet Coffees Master Franchisee for Australia carrying with it the right to operate and franchise Gloria Jean's Gourmet Coffee Stores ("GJGC Stores") in Australia. The Letter Agreement was signed on behalf of Jireh by its principal officers, Nabi Saleh and Peter Irvine, and on behalf of WES by its principal officers, David Cisneros and Steven Meier. Shortly after the Letter Agreement was entered into, Jireh acquired the Master Franchise in question from Gloria Jean's Gourmet Coffees Corporation and a company related to it (together, "Gloria Jean's").
Part of the remuneration to WES for which the Letter Agreement provided was a commission of five per cent "of the ex-factory price of the coffees, teas and other products" sold by Jireh to GJGC Stores in Australia and in other countries (Clause 3). The present proceedings arose out of a dispute between Jireh and WES as to whether that commission was payable not only on sales made to GJGC Stores by Jireh itself but also on sales by two companies associated with Jireh that commenced to supply those stores in or after 2004.
By its Statement of Claim filed in 2009, WES claimed payment of commissions that it alleged were owing to it under the Letter Agreement. By its Cross-Claim, Jireh sought relief against WES, Mr Cisneros and Mr Meier, inter alia, for breach of fiduciary duties. These cross-defendants are the respondents to the present appeal.
Following a hearing at first instance occupying in excess of three weeks, Hammerschlag J sitting in the Equity Division of the Court found in favour of WES that the commission was so payable. In reaching this conclusion his Honour dealt with a variety of contentions made by Jireh that are not in issue on this appeal. These included a contention, that his Honour rejected, that the Letter Agreement was not intended to create legally binding obligations.
The matters that were in issue on the appeal and my conclusions in relation to them are as follows.
First, Jireh contended on appeal that the primary judge erred in construing the relevant commission provision of the Letter Agreement (Clause 3) as applying not only to sales by Jireh itself but also to sales by associated entities. I have concluded below that this contention should be upheld (see [52]-[66] below). In my view the provision is unambiguous and there is no basis for departing from its literal meaning. In particular the provision would not have an absurd operation if construed literally. I do not agree with the primary judge's apparent conclusion that it is permissible to depart from the literal meaning of an unambiguous provision in order to give it what the Court considers to be "a commercial and business-like operation".
Secondly, Jireh contended that the primary judge erred in concluding, as an alternative basis for finding in favour of WES, that there was to be implied in the Letter Agreement an obligation on Jireh "to refrain by its own voluntary act from removing from the operation of cl 3 sales which are made to its Franchisees and which would, but for that voluntary act, have attracted cl 3 commission" (Judgment [300]). Again I have concluded that Jireh's contention is correct (see [67]-[87] below). As the Letter Agreement did not impose any obligation upon Jireh to make sales that would generate commission, the implication of this term was not in my view warranted. Commission was only payable in the event that Jireh made sales. Jireh did not undertake to make sales, nor therefore to refrain from causing associated companies from making sales in its stead, at least where, as was accepted to be the case, Jireh was acting for bona fide commercial reasons.
Thirdly, Jireh contended that WES engaged in misleading and deceptive conduct in contravention of s 52(1) Trade Practices Act 1974 (Cth) by, in substance, misrepresenting to Jireh the effect of the draft Letter Agreement prior to Jireh executing it. I have agreed below with the primary judge's conclusion that WES did not engage in such conduct (see [88]-[97] below).
Fourthly, Jireh contended that WES breached a fiduciary duty that it owed to Jireh by placing itself, in connection with the parties' entry into the Letter Agreement, in a position of conflict between that duty and its own interests without obtaining Jireh's fully informed consent. Jireh submitted that the consent it implicitly gave by entering into the Letter Agreement was not fully informed because WES failed to explain to Jireh that the proposed Letter Agreement would give only very limited protection to Jireh's interests and because WES engaged in the misleading and deceptive conduct referred to above. Again I have concluded below that the primary judge was correct in rejecting Jireh's contention (see [98]-[109]).
Fifthly, Jireh contended that the Letter Agreement contained an implied term entitling it to terminate the Agreement. I have concluded below that if Jireh had any such entitlement it did not arise until after 2004, with the result, bearing in mind my other conclusions, that establishment of the right would not assist Jireh in relation to any of the claims for relief made in the proceedings (see [110]-[121]).
The Background to the Letter Agreement
The factual findings of the primary judge are set out in detail in the judgment at first instance ([2010] NSWSC 622 at [5]-[162]). For the purposes of this appeal it is sufficient at this stage to note the following.
WES is a Colorado-based corporation that carried on business as a manufacturers' and buyers' representative. Its principals, Mr Cisneros and Mr Meier, had American legal qualifications but only Mr Meier was qualified to practise, as an attorney in Colorado. WES represented Brothers' Gourmet Coffees Inc ("Brothers"), a corporation that operated coffee lounges in the United States, in selling wholesale packaged gourmet coffee products in the international market. In about 1993 Brothers purchased Gloria Jean's Gourmet Coffees Corporation, a company that then managed a chain of about 250 mall-based coffee shops, predominantly situated in the United States, under the name Gloria Jean's.
After initial discussions concerning the possibility of Mr Saleh obtaining a Brothers' franchise for Australia, Mr Saleh and WES discussed the possibility of an entity nominated by Mr Saleh and Mr Irvine becoming a Gloria Jean's Master Franchisee. By the middle of 1995 Mr Saleh had received from Gloria Jean's a draft Master Franchise Agreement appointing Jireh as Gloria Jean's Master Franchisee for Australia. Mr Saleh obtained legal advice in relation to this document from Mr Gary Best, a partner in the Australian firm of Mallesons Stephen Jaques.
In the middle of 1995 WES provided to Mr Saleh a draft Letter of Intent intended to record arrangements between WES and Maranatha Import Export Pty Ltd ("Maranatha"), a company associated with Mr Saleh. The Letter of Intent provided for payment to WES of commission and also for it to have "10 per cent ownership in the entity established by Maranatha designated for the purposes of this Letter of Intent". In August 1995 Mr Saleh and Mr Irvine met with Mr Cisneros and Mr Meier in Colorado to discuss their proposed arrangements. They discussed WES's contemplated equity interest being provided by way of commission on product sales, and on a subsequent sale of the Master Franchise, because Mr Best had advised Mr Saleh that there were difficulties in a foreign company such as WES holding equity in an Australian company.
Messrs Saleh, Irvine, Cisneros and Meier then travelled to Chicago to meet with representatives of Gloria Jean's. In the following months representatives of the three parties had discussions and negotiations concerning drafts of the Master Franchise Agreement and also a draft Roasting Agreement under which Jireh was to be authorised to roast, blend, flavour and package coffee beans under Gloria Jean's trademarks. These agreements were subsequently entered into on or about 5 April 1996.
On 21 August 1995 WES had forwarded to Jireh a draft form of Letter Agreement to record the arrangements between WES and Jireh. There were subsequent communications concerning the form of the Letter Agreement, to some of which it will be necessary to refer later. After earlier signature by WES, the final form of Letter Agreement was signed on behalf of Jireh on 19 March 1996.
The Letter Agreement
The Letter Agreement was in the following terms:
"LETTER OF AGREEMENT
BY AND BETWEEN
NABI SALEH AND PETER IRVINE
AND
DAVID CISNEROS AND STEVEN MEIER
WHEREAS, Nabi Saleh and Peter Irvine (collectively "JIREH INTERNATIONAL PTY LTD."), desire to obtain the right from Gloria Jean's Gourmet Coffees Franchising Corp., ("GJGC CORP."), to become the Gloria Jean's Gourmet Coffees Master Franchisee for Australia, including the right to operate and franchise Gloria Jean's Gourmet Coffees Stores ("GJGC STORES"); to import and supply products to those stores, and; to establish Australia as a regional supplier of Gloria Jeans' coffees, teas and accessories ("Products"), and
WHEREAS, David Cisneros and Steven Meier (collectively "WES") have provided and will provide contract negotiation assistance, logistical support and export services to JIREH INTERNATIONAL PTY LTD.,
THE PARTIES agree to the following terms and conditions:
1. WES shall, on behalf of, and in conjunction with, JIREH INTERNATIONAL PTY LTD., negotiate and otherwise assist JIREH INTERNATIONAL PTY LTD. to enter into an Agreement with GJGC CORP., and with the establishment of GJGC STORES in Australia.
2. Except as the parties may otherwise agree, WES shall be the sole and exclusive supplier and exporter of Gloria Jean's products from the United States to JIREH INTERNATIONAL PTY LTD.. For this service, WES shall receive a commission (or margin) of 5% of the ex-factory price.
3. One of the primary goals of negotiations with GJGC CORP. is to establish JIREH INTERNATIONAL PTY LTD., or an associated entity, as a roaster/supplier of Gloria Jean's, or other branded coffees, teas and other products for sale in GJGC STORES in Australia and to GJGC Master Franchisees or GJGC STORES in other countries. For sales by JIREH INTERNATIONAL PTY LTD. to GJGC STORES in Australia and to other countries, WES shall receive a commission of 5% of the ex-factory price of the coffees, teas and other products.
4. It is mutually understood that WES and JIREH INTERNATIONAL PTY LTD. (or its principals) will pursue all opportunities to supply coffees, teas and other products to GJGC CORP., or its related companies. The parties shall agree to mutually acceptable compensation for such supply as opportunities arise.
5. In consideration for the above services and in furtherance of the relationship between the parties, upon the sale or transfer of any interest of JIREH INTERNATIONAL PTY LTD., JIREH INTERNATIONAL PTY LTD. shall, upon the closing of the sale or transfer, pay to WES a total of four percent (4%) of the sales price of that interest.
6. Payment of any compensation due under the terms of this Agreement shall be made on a quarterly basis and each party shall provide to the other, at the time payment is due, an accounting of all sales which come within the scope of this Agreement.
7. JIREH INTERNATIONAL PTY LTD. and WES agree to meet within six (6) months after the effective date of this Agreement and review the business of the parties under the terms of this Agreement to determine if the compensation established herein is fair and reasonable based on mutually agreeable factors for the venture.
Effective the 19 day of March 1996.
JIREH INTERNATIONAL PTY LTD. WES
By: By:
(Sgd) Nabi Saleh (Sgd) David Cisneros
By: By:
(Sgd) Peter Irvine (Sgd) Steven P Meier".
Post-Contractual Events
After the various agreements were entered into, the parties proceeded for some years to give effect to them, including by Jireh granting numerous franchises for the operation of GJGC Stores in Australia.
On 11 March 2004 Jireh entered into an agreement with Jireh International Warehouse and Distribution Pty Ltd ("JIWD") under which Jireh appointed JIWD as its "Preferred Supplier" of all products to Jireh's franchisees (that is, GJGC Stores). JIWD had been incorporated on 21 May 2003. It was also a company associated with Mr Saleh and Mr Irvine.
Thereafter JIWD, rather than Jireh, supplied products to Jireh's franchisees. WES contends that commission was nevertheless payable under Clause 3 of the Letter Agreement. On the other hand Jireh contends that no commission was payable because the last sentence of Clause 3 referred only to sales by Jireh.
WES did not contend in the proceedings that Jireh made this change in the supply arrangements for the purpose of avoiding payment of commission to WES. It did not challenge Jireh's evidence that the change occurred for bona fide commercial reasons.
In December 2004 Gloria Jean's Coffees International Pty Ltd ("GJCI"), another company associated with Messrs Saleh and Irvine, acquired from Gloria Jean's the right to operate and grant Gloria Jean's franchises throughout the world other than in the United States and Puerto Rico. GJCI subsequently granted to Jireh the right to continue as Master Franchisee in Australia. As a result of GJCI's acquisition, Gloria Jean's terminated an authority that WES had to supply products to Gloria Jean's International Master Franchisees, including Jireh. In consequence WES ceased to supply products to Jireh and no further commission was payable under Clause 2 of the Letter Agreement.
After December 2004 a limited quantity of products was supplied by GJCI to Jireh's franchisees. WES alleges, and Jireh denies, that commission was payable under Clause 3 on these sales, as well as on those made by JIWD.
The Judgment at First Instance
By its Statement of Claim WES claimed damages equivalent to commission payments which it said that Jireh should have made, but did not make, under Clause 3 of the Letter Agreement. The primary judge found that WES was entitled to damages in the amount of $9,660,235, together with interest up to 16 August 2010 of $2,599,533, as he considered that commission was payable under Clause 3 on sales to Jireh's franchisees by Jireh, JIWD and GJCI.
As mentioned earlier, the primary judge dealt with a number of contentions that are not made on appeal. It is unnecessary to refer to his Honour's findings concerning these matters other than to record that his Honour examined the communications between the parties leading up to 19 March 1996 and the terms of the Letter Agreement, and concluded that the parties had in entering into the Letter Agreement "a clear and unequivocal intention to contract" (Judgment [240]).
The primary judge's conclusions concerning the matters in issue on the appeal were as follows.
Construction of Clause 3
The primary judge's description of the principles to be applied in construing Clause 3 included the following observations:
"286 A commercial contract should be given a business-like interpretation. The nature and extent of the commercial aims and purposes of the agreement or parts of it are part of the essential background circumstances: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589; Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350. See too the summary of principles in Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at [19] and following .
...
288 If the words used are unambiguous, the Court must give effect to them. If the language is open to two constructions, that will be preferred which avoids consequences which appear to be capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109".
The primary judge said in relation to the second sentence of Clause 3 of the Letter Agreement that "[o]n the plain English meaning of the words, there is no ambiguity and no warrant to read in the words 'or an associated entity' in cl 3 where they do not appear" (Judgment [290]).
Having rejected a contention that JIWD acted as Jireh's agent and that for that reason sales by JIWD to franchisees were sales by Jireh, the primary judge expressed the following conclusions:
"298 The question is what the parties intended the phrase 'sales by Jireh...to GJGC stores' to mean. The requirement for there to be a sale is satisfied, and GJGC stores is undoubtedly a short-hand expression for Jireh's Franchisees. The sales in question were made to GJGC stores under Jireh's franchise arrangements with them.
299 I do not consider that a reasonable person in the position of the parties would have understood the term 'sales by Jireh...to GJGC stores' to include only sales by Jireh itself and to exclude sales to GJGC stores under Jireh's franchise arrangements where all that happens is that Jireh appoints a Preferred Supplier closely related to it to make the sales to the GJGC stores. Giving the term 'sales by Jireh...to GJGC stores' a commercial and business-like operation, I think it comprehends sales to GJGC stores under Jireh's franchise arrangements with them by Jireh's Preferred Supplier acting where Jireh itself (but for the interposition of a Preferred Supplier), Jireh itself would have sold".
Implied Term
The primary judge then dealt with WES's alternative argument that if its construction argument were incorrect the Court should find that the Letter Agreement contained an implied term that prohibited Jireh from changing the supply arrangements in the way that it did (Judgment [300]-[319]).
His Honour stated the issue to be resolved as follows:
"307 In the present case this entails a determination of what benefits Jireh promised WES and whether the term for which WES contends is necessary to give business efficacy to the Letter Agreement so that WES receives the benefit of Jireh's promise. As the Court of Appeal pointed out in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 125 'a contract may 'contemplate' many benefits for the respective parties, but each can only call on the other to provide, or co-operate in the providing of, benefits promised by that party'".
Having referred to case authority and observed that each case depends on its own circumstances, the primary judge said:
"312 Under the Letter Agreement Jireh promised to reward WES for its contribution (past and ongoing), amongst others, by paying WES a commission on sales to GJGC stores. The basal premise underlying this is a contemplation that the sales to GJGC stores would be by Jireh. For the promise to WES to be efficacious, Jireh cannot be free by its voluntary act to except from the operation of cl 3 sales made to its Franchisees (which it itself otherwise would have made) by interposing a third party to be the seller, whether or not Jireh has other genuine commercial reasons for doing so. A breach remains a breach, irrespective of whether the breaching party has genuine commercial reasons for its behaviour. The position may have been different if the breach depended on an absence of good faith.
...
315 Without the implication, the result would be that Jireh retains the benefits of the Letter Agreement and its performance, but is able to exonerate itself by voluntary step from an important corresponding obligation to remunerate WES.
...
318 I find that there should be implied into the Letter Agreement a term (which Jireh has breached) that Jireh not voluntarily do anything which causes WES to be deprived of the circumstances under which it is to get its cl 3 commission. Those circumstances are that sales have taken place which Jireh would, but for its voluntary act, itself have made and on which it would have been obliged to pay cl 3 commission to WES".
Misleading and Deceptive Conduct
Jireh contended that if the proper construction of Clause 3 was as the primary judge found it to be, or if there was implied in the Letter Agreement the term that the primary judge found was implied, Jireh was induced to enter into the Letter Agreement by misleading and deceptive conduct of WES in contravention of s 52(1) Trade Practices Act 1974 (Cth).
To understand the primary judge's conclusions on this issue, it is necessary to refer to the following communications between the parties.
On 18 January 1996 Mr Saleh wrote to Mr Cisneros in the following terms concerning Clause 3 of the draft Letter Agreement. Clause 3 in the draft then under consideration remained unchanged in the final Letter Agreement.
" Point 3.
With regard to coffee, there was no percentage that was agreed upon as we were waiting to see the outcome of our meeting with G.J. and as you no doubt are aware, Jim Wayman gave the roasting agreement to me up front. We can tell you right now that there will be no way that a 5% commission on coffee is sustainable as Gloria Jean's themselves are only getting 25 cents a pound. We believe that once we have costed out the product to the selling price, we would be in a far better position to tell you what the product can bear but as an indication feel that this would be in the vicinity of 20-25 Australian cents per kilo".
Mr Cisneros responded later the same day as follows:
"Point 3 - The basic reality is that the main business of Gloria Jean's will be coffee sales. The bulk of this coffee will be roasted at your facilities, not only for Australia, but also for Asia, a deal that we helped put together, despite the fact that we won't make nearly as much money on licensed product, than if we sold from the U.S. The fact that Gloria Jean's is licensing this opportunity for 25 cents a pound, does not bear on our relationship. We are willing to compromise, but your offer is only approximately 1.7% of sales. Let's finalize something during our conversation tomorrow" .
After a meeting took place between Mr Saleh, Mr Cisneros and Mr Meier on Friday 19 January 1996, Mr Cisneros wrote to Mr Saleh on 22 January 1996 in the following terms:
"Thank you for talking with Steve and me on Friday regarding various matters ...
...
c. WES agreement [that is, the Letter Agreement] - Please find attached revised agreement which should meet your concerns. Please feel free to sign the fax copy and fax back to us to sign".
The form of agreement that Mr Cisneros then attached was the form that later became the Letter Agreement. It differed from the earlier draft only by the addition of Clause 7 (see [18] above).
Mr Saleh responded on 30 January 1996 with the following comments:
"Point 3:
This will be 25 Aust. cents per kilo on the coffee and not 5% and also that a figure to be determined for the teas and other products.
I believe that once this is altered we should be in a position to sign your agreement and send it even before the main agreement has been signed".
Mr Cisneros in turn responded on 31 January 1996, relevantly as follows:
"3. WES agreement - If you review Point 7 of the agreement, we changed it to reflect a final negotiation of the numbers as you requested, and hence, we don't see the need to change Points 2 and 3, since these will be subject to a final discussion anyway. We believe that a full discussion of the nature of our relationship should be discussed when Steve or I visit for the Gloria Jean's first store opening, and the numbers will naturally follow from that discussion".
In a letter of 6 February 1996, Mr Saleh noted that Mr Meier would be sending material relating to the draft Master Franchise Agreement for Mr Saleh to pass on to Mr Best. Mr Saleh also said the following in relation to the draft Letter Agreement:
"W.E.S. Agreement - Have noted that the inclusion of Point 7 to this agreement makes the matter quite clear that none of the above becomes operational until we have negotiated the numbers together and worked out what in fact is the right mix and what each product can bear for an on charge by W.E.S. Happy to go through this in total detail when you or Steve visit Australia".
The primary judge found that on 1 March 1996 a conversation to the following effect occurred between Mr Saleh and Mr Meier (Judgment [57], [206], [211]):
"MEIER: Nabi, I am surprised with your letter of February 6. We have already talked about your concerns with our commissions and you agreed with the language of clause 7 when we spoke on January 19. That was why we changed the agreement to add clause 7 and sent it to you on January 22.
SALEH: Steve, we just need to be certain that all of the items can bear the 5% commissions on products supplied from the U.S. under clause 2 and 3, especially the roasted coffee.
MEIER: We are willing to meet after the first stores are opened to review the commissions. Unless Jireh shows the 5% commission causes each product line to have gross profit margins that aren't workable for the stores, then the 5% commission will continue for that product line. However, it is important that you understand we need to have an agreement in place with Jireh until we review the commissions and before we move forward with this business.
SALEH: Steve, thank you talking with me. I believe you have achieved what I needed to proceed with the signing of the agreement. I look forward to proceeding with you and David with this venture and to seeing you or David in Australia".
In a fax of 5 March 1996 to Mr Meier, Mr Saleh said the following:
"It was a pleasure talking to you on the phone on 1 st March and confirming to you that we believe that you have achieved all that was needed to proceed with the signing of the contracts.
Do please accept my sincere thanks for all your efforts and commitments to see this contract come through.
We will be meeting with Gary and Athena on Monday, 4 th March, or at the very latest on the 5 th of March, depending on their availability, to have the contract signed and couriered out to Gloria Jean's Corporate Counsel. We would have made all the necessary changes and would be waiting to receive their count-signed copy at which time funds would be transferred to Gloria Jean's account.
...
The W.E.S. contract will be couriered to you directly as well.
We look forward with interest to the growth in our relationships and that of our organisations.
Best personal regards".
Jireh contended before the primary judge that by these communications WES led it to believe that "the Letter Agreement was not to be binding or operational until there was further agreement on the commissions, if any, which Jireh was to pay" (Judgment [175]-[176]) and that this constituted misleading and deceptive conduct.
The primary judge gave the following reasons for rejecting this contention:
"259 It follows from my finding that the 1 March 1996 conversation occurred as well as from all the considerations which have caused me to conclude that the parties intended to create legally binding arrangements, that WES never engaged in any conduct, nor did Jireh suffer any damage by any conduct on the part of WES, which was misleading or deceptive or likely to mislead or deceive within the meaning of s 52 of the Act".
The only aspects of his Honour's reasoning concerning the issue of whether the parties intended to create legally binding arrangements to which reference need be made are the following:
"223 Turning then to matters which go to, but also go beyond the conversation itself and are pertinent to whether there was an intention to contract. There is a significant, if not overwhelming body of material revealing conduct on the part of Mr Saleh, Mr Irvine, Mr McCullough and the internal accountant Mr King (neither of whose authority was put in issue) spanning from the time of the Letter Agreement until disavowal of its binding effect on 27 August 2002, inconsistent with belief on the part of any of them that the Letter Agreement was not binding and consistent only with it being, and having been understood to be, binding.
...
236 Jireh's position that the parties were still negotiating on price and never reached agreement, and that subjectively neither Mr Irvine nor Mr Saleh intended or believed that a binding agreement had been concluded is unsustainable and I reject it.
237 I do not accept Jireh's proposition that by agreeing to cl 7 Mr Saleh gave up Jireh's power to bargain or that there was anything implausible in Jireh agreeing to that provision. Jireh's agreement to cl 7 enabled the Letter Agreement to proceed in a manner which satisfied both WES' requirement for the percentages to be specified and Mr Saleh's concerns about sustainability of profit. Both parties had an interest in the enterprise succeeding. Jireh had the protection that WES would be unlikely to act so as to undermine its own interests, especially given the efforts which WES had to that point made. Also, at the least each had an obligation of honesty and good faith with respect to the negotiations which cl 7 contemplated: United Group Rail Services Ltd v Rail Corporation of New South Wales [2009] NSWCA 177 at 77-78. Mr Saleh had no reason to, nor did he believe (indeed the contrary) that WES would act other than honestly and in good faith. In various documents Mr Saleh referred to the parties (or Messrs Cisneros and Meier) as partners, joint venturers and friends".
Fiduciary duty
The primary judge referred to a contention made by Jireh that "Messrs Cisneros and Meier (and consequently WES) were in a fiduciary relationship with Jireh because they were in truth acting as its lawyers, particularly with respect to Jireh's position under US law" and that as a result WES had an obligation to disclose, but did not disclose, that the Letter Agreement was to be binding (Judgment [267]-[278]).
The primary judge gave the following reasons for rejecting this contention:
"269 Jireh's submissions are unsustainable for the reason that in my view WES was not under any such duty in relation to the Letter Agreement and if it was, it never breached that duty.
270 In negotiating the Letter Agreement Jireh and WES were negotiating at arm's length the terms of their commercial arrangement. WES was not (as was arguably the case with the Master Franchise Agreement and Roasting Agreement) negotiating for or on behalf of Jireh or in a position where Jireh was vulnerable to it.
271 More importantly, Jireh intended (as did WES) there to be a binding contract. It was not operating under any misapprehension, and accordingly Jireh could have been under no duty to disavow it of its belief.
272 Finally and in any event, WES made it abundantly clear that the Letter Agreement was to be binding".
Termination by Jireh
During the hearing of the appeal Jireh sought leave to amend its Amended Notice of Appeal to enable it to contend that as a matter of construction, or as the result of an implied term, the Letter Agreement could be terminated by Jireh in whole (or alternatively in part) on reasonable notice (or alternatively at any time) and that Jireh had terminated it in or prior to 2004.
At first instance Jireh pleaded contentions to this effect and the issues that those contentions raised were the subject of argument. However Jireh abandoned the contentions on the last day of the hearing (during final addresses). As a result the primary judge did not deal with the contentions.
The Proper Construction of Clause 3
The primary judge considered, correctly in my view, that the reference in the second sentence of Clause 3 to Jireh was not ambiguous and that there was "no warrant to read in the words 'or an associated entity' in cl 3 where they do not appear" (Judgment [290]). On this literal meaning of the words, commission was thus only payable upon sales by the corporate entity Jireh International Pty Ltd effected by its officers, employees or agents on its behalf. WES did not challenge his Honour's finding that the sales by JIWD (and implicitly, those by GJCI) were not effected as agent for Jireh. Further, I note that WES did not contend that the words with which the first recital to the Letter Agreement commenced constituted a definition of "JIREH INTERNATIONAL PTY LTD" so as to render the reference to "JIREH INTERNATIONAL PTY LTD" in the second sentence of Clause 3 a reference to "Nabi Saleh and Peter Irvine" rather than the appellant (Appeal transcript, 4/5/11, p 65, lines 44-48).
Despite finding that the reference to Jireh was unambiguous and that the sales in question were not made by Jireh or any agent on its behalf, the primary judge found that commission was payable under Clause 3 in respect of sales by JIWD. He did so because he took the view that the commission provision comprehended sales "under Jireh's franchise arrangements with [the franchised stores] by Jireh's Preferred Supplier acting where Jireh itself (but for the interposition of a Preferred Supplier) ... would have sold" (Judgment [299]). (The primary judge did not give separate attention to the limited sales by GJCI, which was not a "Preferred Supplier" but was a company associated with Jireh).
The opening words of the sentence in which his Honour made this finding, and the preceding sentence, indicate that he made it in order to give the provision "a commercial and business-like operation".
In my view the primary judge erred in taking this approach. So far as they are able, courts must of course give commercial agreements a commercial and business-like interpretation. However, their ability to do so is constrained by the language used by the parties. If after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the court must give effect to that language unless to do so would give the contract an absurd operation. In the case of absurdity, a court is able to conclude that the parties must have made a mistake in the language that they used and to correct that mistake. A court is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation if an interpretation different to that dictated by the language were adopted.
In my view the primary judge departed from these principles. There is no suggestion in his Honour's judgment that he considered that the contract would have an absurd operation if it were given its literal meaning. Rather his Honour appears to have acted on the basis that the provision would make more sense from a commercial point of view if it extended beyond sales by Jireh to sales by JIWD. Both sentences of [299] of the primary judgment indicate that this was his Honour's approach. Each focuses upon what his Honour perceived to have been the reasonable commercial operation of Clause 3 without acknowledging that, absent a finding of absurdity of operation, the proper construction of an unambiguous contractual provision accords with its literal meaning.
The principles to which I have referred are established or supported by the following authorities.
The judgment of Gleeson CJ in McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22] is perhaps the most frequently cited authority for the proposition that commercial contracts should be given a businesslike interpretation. It is notable however that immediately after stating this proposition his Honour noted that the interpretation of a commercial document required "attention to the language used by the parties" and that the language of the provision in question did not " require the [unbusinesslike] interpretation for which the appellants contend" ([22] and [23], emphasis added). In other words the observation as to the need for a businesslike interpretation was made in relation to a provision that was capable of being read in more than one way and was therefore ambiguous.
In the case to which Gleeson CJ referred in support of the proposition, namely, Hydarnes Steamship Company v Indemnity Mutual Marine Assurance Company [1895] 1 QB 500, the literal meaning of the provision in question was, in effect, absurd. As Lord Esher MR put it, on the literal meaning of the provision "the result from a business point of view is insensible" (at 505). That circumstance entitled the Court to depart from the literal meaning and to construe the provision "in a businesslike way, so as to give it a sensible application" (at 504).
Consistent with these cases is the well-known observation of Gibbs J in Australian Broadcasting Commission v Australian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99:
"If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious or the most grammatically accurate' ... " (at 109).
To like effect was the following statement by Kirby P in Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310:
"Whoever may be the parties to the agreement, it is the fundamental rule, that a court should give the words of a written agreement the natural meaning that they bear. Subject to that rule, in giving meaning to the words of an agreement between commercial parties, courts will endeavour to avoid a construction which makes commercial nonsense or is shown to be commercially inconvenient. This is because courts will infer that commercial parties would not themselves normally agree in such a way" (at 313-314).
In Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2002) 210 CLR 181 at [43], Gleeson CJ, Gummow and Hayne JJ referred with approval to the observation of Lord Diplock in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 that "if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense". As their Honours pointed out, minds may differ as to what comprises "business commonsense" in particular circumstances.
Their Honours then adopted as the appropriate question to be addressed one of whether "something must have gone wrong with the language" (at [43]), this being the expression used by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 913. In effect, this question requires an inquiry as to whether the relevant provision would have an absurd operation if construed in accordance with the literal meaning of the words used.
Whilst in some cases there may be difficulties in determining upon which side of the line the case falls, a finding of absurdity of operation is different in principle from a finding that a contract would have an uncommercial or unbusinesslike operation if given a particular meaning (see Westpac Banking Corporation v Tanzone Pty Ltd [2000] NSWCA 25; (2000) NSW ConvR 55-939 at [19]-[23]). In my view it is clear that the present case fell only within the latter category, rather than the former. There was therefore no warrant for departing from the unambiguous terms of Clause 3.
Whilst the view could be taken that it would have been reasonable for commission to be payable in the case of sales by entities associated with Jireh, the Court does not know, and it is not relevant for the Court to know, why the parties adopted a more restrictive provision and in particular why they added a reference to "an associated entity" at the commencement of Clause 3 but chose not to do so in the critical last sentence of Clause 3. The provision operates perfectly well when restricted in its application to sales by Jireh. There is nothing absurd about its operation in that way. It is not permissible for the Court to rewrite the provision to have it operate in what may be a more reasonable fashion.
For these reasons I conclude that Clause 3 does not entitle WES to commission on sales made by JIWD or GJCI, as distinct from Jireh, to Jireh's franchisees.
Implied Term
The primary judge said that if his construction of Clause 3 were incorrect then he would nevertheless imply the term identified in [33] above. This implication would have led to WES being entitled to damages equivalent to Clause 3 commission upon sales made by JIWD and GJCI to Jireh's franchisees (as did success by WES on its construction argument). Again I respectfully differ from the conclusion reached by the primary judge.
In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, Mason J (with whom Gibbs, Stephen and Aickin JJ agreed) discussed the circumstances in which contracts would be found impliedly to impose obligations on parties to do what was necessary to secure performance of the contracts. His Honour observed:
"It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself" (at 607-8).
In the present case the Letter Agreement did not, at least in express terms, impose any obligation upon Jireh to make sales to any of its franchisees so as to entitle WES to commission. In express terms, the second sentence of Clause 3 simply entitled WES to commission in the event that such sales occurred, but did not require Jireh to make such sales.
The primary judge correctly approached the implied term issue by seeking to determine "what benefits Jireh promised WES and whether the term for which WES contends is necessary to give business efficacy to the Letter Agreement so that WES receives the benefit of Jireh's promise" (Judgment [307]). Thus the question to be addressed was whether Jireh impliedly promised WES that it would receive commission under Clause 3 and that Jireh would therefore make the sales to franchisees that would generate that commission.
I can see no justification for holding that Jireh impliedly promised this. The most obvious barrier to such an implication is that the Letter Agreement provided no basis for identifying what quantity of sales would be the subject of such an implied promise. If the parties intended that there be a minimum level of sales by Jireh, it is not easy to see why they did not so specify. A further barrier is that the Court can do no more than speculate whether, assuming that the parties intended that Jireh would be obliged to make some sales, whether they intended that there be no sales at all by companies associated with Jireh rather than Jireh itself, or that such sales be permitted so long as Jireh itself made a certain amount of sales.
The primary judge said that Jireh promised to reward WES for its services, in part, by paying a commission on sales to GJGC Stores and that "[t]he basal premise underlying this is a contemplation that the sales to GJGC stores would be by Jireh" (Judgment [312]). I do not consider that there is any support in the Letter Agreement (or elsewhere) for the latter proposition.
Clause 3 commission was one of a number of types of remuneration of WES for which the Letter Agreement provided. By the terms of Clause 3, WES's entitlement to commission was contingent upon Jireh making relevant sales. There is nothing unusual about an entitlement to remuneration or other consideration being contingent upon an event occurring. Indeed the commission payable under Clause 5 of the Letter Agreement is contingent upon Jireh effecting a relevant sale or transfer of, for example, its Master Franchise. It could not sensibly be suggested that Jireh had an implied obligation to make such a sale or transfer.
The primary judge does not point to any aspect of the Letter Agreement that supports the existence of the "basal premise" to which he referred. To my mind there is nothing either in the Letter Agreement's specific provisions or general tenor that indicates that the parties intended to prohibit Jireh from permitting or causing an associated entity to make sales to any of Jireh's franchisees, at least if that occurred for bona fide commercial reasons (which is not in question).
The primary judge added that "[w]ithout the implication, the result would be that Jireh retains the benefits of the Letter Agreement and its performance but is able to exonerate itself by voluntary step from an important corresponding obligation to remunerate WES" (Judgment [315]). This observation assumed the existence of an obligation on Jireh to make sales, with the consequence that WES was entitled to commission on those sales. It does not identify any basis for concluding that Jireh had such an obligation.
The view that there was no implied term of the type found by the primary judge is supported by Jireh's submission that unless any relevant implied term was restricted to requiring Jireh to act in good faith, the implied term would to a significant extent inhibit Jireh's ability to make commercial decisions in connection with the supply of its franchisees.
Jireh criticised the primary judge's reference in the implied term that he formulated to the concept of "Preferred Supplier". As Jireh rightly pointed out, that was a concept that only became relevant in 2004 when Jireh varied the arrangements for supply of its franchisees and could not as such have been in the contemplation of the parties at the time that the Letter Agreement was entered into. However it seems to me that his Honour was simply referring in a general sense to Jireh's appointment of a related company as a supplier. The reference to "Preferred Supplier" was inappropriate but is not of any significance.
It may be, as Jireh conceded on appeal, that the Letter Agreement contained an implied term prohibiting Jireh from taking the course that it took for reasons other than genuine commercial ones, for example, for the purpose of avoiding payment of commission. However WES did not plead or otherwise contend that Jireh's conduct in changing the arrangements for the supply of products to franchisees was other than bona fide.
The following authorities support the approach that I have taken.
In Elders IXL Ltd v National Employers' Mutual General Insurance Association Ltd (NSW Court of Appeal, 29 April 1988, unreported) an insured was entitled to a rebate on premiums in respect of two workers' compensation policies if the policies were current "for a further period of twelve months". The rebate was not paid because the policies were not renewed as the insurer stopped writing workers' compensation business.
McHugh JA said that "if you cannot imply a term that the insurer would renew the policy, and it is not suggested that you can, it is difficult to imply a term to the effect that the insurer would not voluntarily do anything to prevent the policy being renewed". His Honour concluded that the insurer's only obligation was to pay the rebate if, and only if, the parties "renewed their business relationship".
Likewise Samuels JA agreed that there was no basis for finding that the insurer was obliged to remain in the workers' compensation insurance business and therefore to renew the policies. Without such an obligation there was no basis for implying a term that the insurer would not voluntarily do anything to prevent the policy being renewed. As his Honour put it, "the cooperative steps to be taken can only be assessed once the full extent of the parties' mutual obligations has been determined".
This Court took a similar approach in Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462. In that case the Court held that an agent's contractual right to be the sole and exclusive distributor of products could not be defeated by the supplier/principal selling its business. The Court posed the first question for consideration as follows:
"The first question to be considered is the meaning and effect of the express provisions of the contract. It may be that, upon its true construction, the contract obliges the principal, during the term of the agency, to continue the business or to take steps which depend upon such continuance, or gives the agent a right to a continuing benefit ... On the other hand, it may be that there is no such obligation or right to be found in the contract" (at 473-4).
The Court applied the reasoning of Scrutton J in Lazarus v Cairn Line of Steamships Ltd [1911-13] All ER Rep 1265 which included the following summation of the principles to be derived from earlier authorities:
"I read [the earlier authorities] as deciding (1) that the first thing to consider is the express words the parties have used; (2) that a term they have not expressed is not to be implied because the court thinks it is a reasonable term, but only if the court thinks it is necessarily implied in the nature of the contract the parties have made; (3) that where there is a principal subject-matter in the power of one of the parties, and an accessory or subordinate benefit arising by contract out of its existence to the other party, the court will not, in the absence of express words, imply a term that the subject-matter shall be kept in existence merely in order to provide the subordinate or accessory benefit to the other party; (4) but that where there is an express term requiring the continuance of the principal subject-matter, or giving the plaintiff a right to a continuing benefit, the courts will not imply a condition that the plaintiff's right in this respect shall cease on certain events not expressly provided for" (at 1268).
Similarly in Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 this Court held that any implied contractual duty to co-operate must relate to a contractual obligation contained in the contract. In this respect, the Court said:
"The 'implication' of a term implied in law depends upon the demonstration of 'necessity' ... It follows that, leaving aside fiduciary obligations (which are not involved here), there cannot be a duty to co-operate in bringing about something which the contract does not require to happen. An 'implication, arising as it does from necessity, must be limited by the extent of the need': Board of Fire Commissioners (NSW) v Ardouin (1961) 109 CLR 105 at 118, per Kitto J. For these reasons, we consider it necessary to address the issue whether the clauses envisaging negotiation between the parties were enforceable and capable of supporting the implied obligation enforced by the injunction ordered below.
...
A contract may 'contemplate' many benefits for the respective parties, but each can only call on the other to provide, or co-operate in the providing of, benefits promised by that party. For example, in the absence of an express covenant, a landlord is not bound in contract to repair the demised premises" (at 124-5).
In RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417, Young J (as his Honour then was) found that there was an implied obligation on the purchaser of a business not voluntarily to do anything that would make it materially more difficult for the vendor to receive the royalties to which the purchase contract provided it was entitled. The royalties were to be paid over the following 3 years on sales made by the purchaser through the business sold. However the purchaser had ceased to manufacture the product within 18 months of the purchase. It appears from Young J's obiter remarks concerning breach of the implied term (an issue that was yet to be litigated) that his Honour contemplated that the implied obligation that he found would not have prevented the purchaser voluntarily ceasing to manufacture the product if it did so for good commercial reasons (at 424). The approach taken by his Honour is therefore consistent with that which I have taken.
In assessing whether there was an implied negative prohibition on Jireh of the type that he found to exist, the primary judge correctly considered whether Jireh was obliged to supply products to its franchisees and whether in consequence WES had a correlative right to have that occur and therefore to earn commission. However, for the reasons that I have given, I respectfully disagree with his Honour's conclusion that Jireh had such an obligation to supply. As a result the primary judge's implication of an implied negative obligation on Jireh cannot be supported.
Misleading and Deceptive Conduct
In its argument on appeal Jireh alleged that WES engaged in the following misleading and deceptive conduct:
"27. ... Messrs Cisneros and Meier ensured Jireh was 'put off the scent' by representing that ...:
a. the revised Letter Agreement attached to its letter of 22 January 1996 should meet Jireh's concerns;
b. the Letter Agreement (Point 7) attached to WES' correspondence of [22] January 1996 had been changed to reflect a final negotiation of the numbers as Jireh requested;
c. the rates of commission in the Letter Agreement would be subject to final discussion;
d. that when either Mr Meier or Mr Cisneros visited Australia for the Gloria Jean's first store opening a full discussion of the nature of the relationship (between Jireh and WES) should occur and the numbers would naturally flow from that discussion;
e. Clause 7 to the Letter Agreement had been added to address Jireh's concerns;
f. the Letter Agreement was in place until Jireh and WES reviewed the commissions;
g. by the Letter Agreement the commission would only apply until the question of whether it was 'workable' was reviewed.
28. Each of these representations were false and misleading in that the Letter Agreement:
a. Did not meet Jireh's concerns being an inability to be bound to these commission rates that were or may or not be competitive, sustainable or more than the product could bear;
b. Clause 7 did not reflect a review in the sense of a final negotiation or an agreement in place until a final review of the commission in the context of this response by WES to Jireh's expressed concerns which it purported to overcome;
c. Rather it provided for the compensation payable to WES (including the 5% in Clause 3) would continue to apply unless varied by later agreement. This was nothing more than the legal position in respect of any agreement (subject to the feeble protection of Clause 7 as construed by his Honour that WES negotiate in good faith and honestly);
d. The 'review' provided for in Clause 7 only obliged WES to engage in that process with an obligation of honesty and good faith with respect to the negotiations which the clause contemplated (Judgment at [237]);
e. In reality the degree of protection offered by Clause 7 was feeble in contrast to what WES represented (and further should have been fully explained to Jireh). As found by His Honour, WES was only required to review the commissions in good faith: United Group Rail Services v Rail Corporation of New South Wales [2009] NSWCA 177 at 77-78 (Judgment at [237]). A duty to 'review' in good faith provided no assurance that an agreement would be reached. WES could pursue its own interests".
Jireh submitted that the misleading and deceptive conduct arose out of Mr Cisneros' letters of 22 and 31 January 1996, Mr Saleh's letter of 6 February 1996 and the telephone conversation of 1 March 1996 between Mr Saleh and Mr Meier (see [38], [41]-[43] above).
Mr Cisneros' letter of 22 January 1996 responded to concerns expressed earlier by Mr Saleh (for example, in his letter of 18 January 1996) as to whether the five per cent commission for which Clause 3 of the draft Letter Agreement provided was too high, or would prove to be so when Jireh's business commenced. The revised draft Letter Agreement that Mr Cisneros sent with his letter of 22 January 1996 included Clause 7, which was not in the previous draft. Mr Cisneros said that the revised draft "should" meet Mr Saleh's concerns.
Mr Saleh responded on 30 January 1996 by maintaining his concern. In his letter of 31 January 1996 Mr Cisneros asserted that Clause 7 in the draft should assuage Mr Saleh's concerns. Mr Saleh responded on 6 February 1996 by noting that "none of the above [probably a reference to the whole of the Letter Agreement] becomes operational until we have negotiated the numbers together and worked out what in fact is the right mix and what each product can bear for an on charge by W.E.S." This was not what the draft Clause 7 said. It was arguably also not an accurate reflection of what Mr Cisneros said in his letter of 31 January 1996, although Mr Cisneros' reference to "[p]oints [that is, clauses] 2 and 3" being "subject to a final discussion anyway" was open to more than one interpretation.
In the telephone conversation of 1 March 1996 Mr Meier referred to a conversation of 19 January 1996. The primary judge did not make a finding about what was said in that conversation. When in the 1 March conversation Mr Saleh repeated his earlier expressed concern at the level of commissions, Mr Meier referred to WES's willingness to review the commissions. Mr Meier made it clear, contrary to the view expressed by Mr Saleh in his letter of 6 February 1996, that the Letter Agreement would be immediately operative. However what Mr Meier said as to what would occur when the contemplated review took place was ambiguous. On one view Mr Meier was saying that the commission provisions would be changed if (but only if) the parties reached agreement on changes. On the other hand it is arguable that what he was indicating was that Jireh would have a right to have changes made if it established that the "gross profit margins" were not "workable".
The primary judge appears to have relied particularly upon the 1 March 1996 conversation in rejecting the suggestion that WES misled Jireh about the effect of the proposed Letter Agreement (Judgment [259] quoted in [46] above). His Honour's reference to his earlier conclusions concerning the issue of whether the parties intended to create legally binding arrangements was probably a reference particularly to his conclusion that neither Mr Irvine nor Mr Saleh subjectively intended or believed that a binding agreement had been concluded (Judgment [236] quoted in [47] above). This conclusion pointed against the view that WES's conduct was misleading or deceptive and that Jireh was misled.
As pointed out in Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592, regard must be had to the whole of the conduct of a person alleged to have engaged in misleading or deceptive conduct and, in assessing whether that conduct was misleading or deceptive, regard must be had to the nature of the parties involved (at [39]-[41]). In the present case, the parties' representatives were sophisticated and experienced businessmen who were, as the primary judge held, negotiating at arm's length the terms of their commercial arrangement (Judgment [270]). Jireh had, as WES knew, an Australian solicitor (Mr Best of Malleson Stephen Jaques) retained at least in connection with the negotiation and finalisation of the Master Franchise Agreement and Roasting Agreement. Reference to the solicitor was made in Mr Cisneros' letter of 31 January 1996 and in letters that Mr Saleh wrote to Mr Cisneros or Mr Meier on 6 February, 20 February and 5 March 1996. Mr Best was in fact consulted in 1995 in relation to the draft Letter of Intent (see [15] above) which was designed to record the arrangements between the interests of Mr Saleh and Mr Irvine and those of WES. That was the progenitor of the subsequently prepared drafts of the Letter Agreement.
I agree with the primary judge's view that WES did not engage in misleading or deceptive conduct. Mr Meier made it very clear to Mr Saleh in the conversation of 1 March 1996 that the Letter Agreement would be immediately binding. That there was some ambiguity in what he said as to what was to happen when the contemplated review occurred did not in my view render what he said misleading or deceptive. That ambiguity is not in any event the specific subject of any of the representations alleged.
The following comments may be made about the alleged representations recorded in subparagraphs (a) to (g) of [27] of Jireh's Amended Outline of Submissions (see [88] above):
(a) This alleged representation reflects a statement made in Mr Cisneros' letter of 22 January 1996 that in my view effectively and simply invited Jireh to consider the revised draft (and in particular the new provision, Clause 7) to see whether it met Jireh's concerns. In any event it was superseded by the terms of the more specific communication of 1 March 1996.
(b)(c) These reflect statements that Mr Cisneros made in his letter of 31 January 1996. They did not represent a clear misinterpretation of Clause 7 but in any event were superseded by the more specific communication of 1 March 1996.
(d) This again reflected what Mr Cisneros said in his letter of 31 January 1996. It was a vague statement that did not incorporate any misrepresentation as to the effect of the draft Letter Agreement.
(e) Jireh alleges that this was a representation made by Mr Meier in the conversation of 1 March 1996. The alleged representation does not precisely reflect what Mr Meier said. What he said in my view amounted to no more than a description of how Clause 7 had come to be included in the draft. In any event, bearing in mind the context in which the statement was made and by whom and to whom it was made, it was not misleading or likely to mislead. As the primary judge pointed out, the effect of Clause 7 was at least to give rise to an obligation of honesty and good faith on WES with respect to the negotiations that Clause 7 contemplated (Judgment [237] quoted in [47] above). Jireh may well have been prepared to rely upon WES acting in good faith in participating in the review and WES may well have thought that Jireh would adopt that approach.
(f)(g) Mr Meier made it clear to Mr Saleh on 1 March 2006 that the Letter Agreement would be immediately operative and would continue to be operative unless the review resulted in a change. He did not indicate, as Jireh alleges, that the Letter Agreement would only be operative until the review occurred (implicitly, whatever the outcome of the review might be).
As Jireh did not therefore establish that WES made any misleading representations and as establishment of that formed the basis of Jireh's misleading and deceptive conduct claim, that claim fails.
Fiduciary Duty
Jireh submitted that the following circumstances gave rise to a fiduciary duty of WES to Jireh:
"(i) Mr Meier and Mr Cisneros each had legal training;
(ii) Mr Saleh and Mr Irvine were informed by Messrs Meier and Cisneros of these skills;
(iii) they were also informed WES would use these skills to assist Jireh;
[(iv)] WES did so by Mr Meier drafting and advising as to the terms of the Roasting Agreement and the Master Franchise Agreement;
[(v)] Mr Cisneros drafted the Letter Agreement and advised in relation to the effect of clause 7 thereof;
[(vi)] WES suggested that it would continue to provide 'ongoing' legal assistance" (Jireh's Amended Outline of Submissions [12]).
Subject to two matters, these factual allegations broadly reflected findings made by the primary judge. The first qualification is that the primary judge did not find that what Mr Cisneros said about Clause 7 of the Letter Agreement amounted to advice to Jireh, as distinct from statements of contentions made in the course of negotiations. The second qualification is that the legal work done by Mr Meier and Mr Cisneros, and such discussions as occurred in relation to it, pertained to the United States law aspect of the transactions. The Roasting Agreement expressly provided that it was to be governed by the laws of California and the Master Franchise Agreement provided that it was to be governed by the laws of Illinois. There was not during the negotiations any suggestion that the Letter Agreement would give rise to any question of United States law. On the appeal, counsel for WES accepted that WES undertook legal work on behalf of Jireh in connection with the Roasting Agreement and the Master Franchise Agreement (Transcript 3/5/11, pp 52-3).
During the course of argument, Jireh broadened its allegation of the existence of a fiduciary duty to base it on the existence of a principal and agent relationship, as well as on a relationship akin to a solicitor and client relationship arising out of the legal work undertaken to be done, and done, by WES on Jireh's behalf.
The terms of the Letter Agreement reflected a principal and agent relationship. Its second recital said that WES would "provide contract negotiation assistance, logistical support and export services" to Jireh and Clause 1 said that WES would "on behalf of, and in conjunction with, JIREH INTERNATIONAL PTY LTD. negotiate and otherwise assist JIREH INTERNATIONAL PTY LTD. to enter into an Agreement with GJGC CORP, and with the establishment of GJGC STORES in Australia" (see [18] above). In the period of six to nine months prior to the conclusion of the Letter Agreement, WES had already been undertaking on Jireh's behalf many of the activities so described. The relationship described in the Letter Agreement was thus one that had already been on foot for some time prior to 19 March 1996 (the date the Agreement was concluded).
The relationships of principal and agent and of solicitor and client are accepted traditional categories of fiduciary relationship ( John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd [2010] HCA 19; (2010) 241 CLR 1 at [87]). However it is unnecessary to reach a conclusion as to whether in light of the commercial nature of the transactions and the fact that WES's work was to be undertaken for the common benefit of Jireh and WES, WES in the particular circumstance of this case owed a fiduciary duty to Jireh (see ibid at [85]-[93]), as, if the duty existed, there was in my view no breach of it.
Jireh contended that WES breached the alleged duty because, in connection with the negotiation of and entry into the Letter Agreement, it placed itself in a position of conflict between its own interests and its duty to Jireh, without having obtained Jireh's fully informed consent (Amended Outline of Submissions [23]). Jireh alleged that for it to have given its fully informed consent there had to have been "full candour and disclosure by WES". Jireh argued that this had not been the case because, first, WES had "omitted to explain the very limited protection (if any) clause 7 provided with respect to Jireh's concerns, from both a legal and practical point of view" and, secondly, WES had made the misleading representations referred to in [88] above (ibid [23], [26], [27]).
The Letter Agreement was a document recording the arrangements between WES and Jireh in connection with the Gloria Jean's contracts. It identified the services to be provided by WES and the remuneration to be paid by Jireh for those services. Plainly WES and Jireh had opposing interests in the negotiation and conclusion of the Letter Agreement. On the assumption that WES owed a fiduciary duty to Jireh in relation to the performance of the contemplated services, WES was in a position of conflict between its duty and its own interests. Jireh was undoubtedly aware of this and by entering into the Letter Agreement it implicitly gave its consent to the existence of that conflict. The question then is whether that consent was "fully informed".
The assumed fiduciary duty, if it existed, related to the provision by WES of the services described in the Letter Agreement. Whilst the duty did not necessarily extend to all aspects of the relationship between WES and Jireh (because "a person may be a fiduciary in some activities but not in others": Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 at 98), the Letter Agreement did relate directly to the activities and arrangements assumed to have given rise to the fiduciary duty as it recorded WES's remuneration in respect of them. Accordingly, if there was a fiduciary duty it applied in the context of the negotiations of, and entry into, the Letter Agreement. Thus, as I see it, if there had been some particular material fact pertinent to the relationship between Jireh and WES that was to be recorded in the Letter Agreement of which WES was aware but Jireh was unaware, WES would have been obliged to disclose it to Jireh for Jireh's consent to WES's position of conflict to be fully informed.
In my view however the matter that Jireh claims was not disclosed (that is, that Clause 7 gave it very limited, if any, protection) was not of that character. The limited protection given by Clause 7 was apparent from its terms and for the reasons I have given above (see [88]-[97]) WES did not engage in any misleading or deceptive conduct concerning the effect of Clause 7.
As pointed out in Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 "[w]hat is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given" (at 466). These circumstances can include the "sophistication and intelligence of the persons to whom disclosure must be made" ( Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [107]). Here the representatives of the parties concerned were sophisticated and intelligent commercial people. They were negotiating at arm's length and, as known to WES, Jireh was in close contact with its Australian lawyer from whom Jireh was able to obtain advice about the Letter Agreement if it so chose. In these circumstances WES was not obliged to explain to Jireh that Clause 7 gave it only limited protection. As I have said, that was in any event apparent from the terms of the clause.
I add that some analogy to the present case is to be found in the following remarks of Kirby P in Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582:
"We are not dealing here with ordinary individuals invoking the protection of equity from the unconscionable operation of a rigid rule of the common law. Nor are we dealing with parties which were unequal in bargaining power. Nor were the parties lacking in advice either of a legal character or of technical expertise. The Court has before it two groupings of substantial commercial enterprises, well resourced and advised, dealing in a commercial transaction having a great value. As has been found, they did not reach the point of formulating their agreement in terms which would be enforced by the law of contract. This is not, of itself, a reason for denying them the beneficial application of the principles developed by equity. But it is a reason for scrutinising carefully the circumstances which are said to give rise to the conclusion that an insistence by the appellants on their legal rights would be so unconscionable that the Court will provide relief from it" (at 585).
For these reasons I would, as the primary judge did, reject Jireh's claim that WES breached a fiduciary duty owed to it.
Termination by Jireh
Jireh relied upon Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 to support its contention that it was entitled to terminate the Letter Agreement on reasonable notice or, alternatively, at any time it chose. In that case McHugh JA (with whom Priestley JA generally agreed) said the following:
"When the question arises whether a commercial agreement for an indefinite period may be terminated, the answer depends upon whether the agreement contains an implied term to that effect... The existence of the term is a matter of construction. But the question of construction does not depend only upon a textual examination of the words or writings of the parties. It also involves consideration of the subject matter of the agreement, the circumstances in which it was made and the provisions to which the parties have or have not agreed'... " (at 443).
After consideration of authority, his Honour went on to say:
"In principle, the better view would seem to be that, although there is [a] presumption against implying a term that an agreement is terminable, ordinarily the nature of a commercial agreement will lead to the conclusion that the parties must have intended it to be terminable on notice ... .
Whether a contract is terminable on reasonable notice instead of at will also depends upon the existence of an implied term ... That question is determined by the circumstances existing at the date of the contract ... however, the reasonableness of the period of notice depends upon the circumstances existing when the notice is given ...
When a contract is terminable on reasonable notice, the period of notice must be sufficiently long to enable the recipient to deploy his labour and equipment in alternative employment, to carry out his commitments, to bring current negotiations to fruition and to wind up the association in a businesslike manner ... " (at 444, citations omitted).
The Letter Agreement does not specify a term for its operation or incorporate a means by which one or both of the parties may terminate it. Accordingly, in the absence of the implication of a term of the type for which Jireh contends (and of termination for repudiation or serious breach), the Agreement is perpetual.
In opposing a finding that the Letter Agreement contained the implied term regarding termination for which Jireh contended, WES pointed out that the parties had originally contemplated that WES would, in return for its services, be entitled to an equity interest in the entity that acquired the rights being sought from GJGC (see [15] above) and that when Mr Saleh indicated that Jireh's solicitor had said that there was a problem in a foreign entity such as WES holding an equity interest in an Australian entity (Affidavit of David Cisneros, 20 May 2009, First Appeal Book p. 15D-G) the parties decided that WES should be remunerated by the payment of commissions, such as came to be provided for in the Letter Agreement.
WES argued that a finding that Jireh had an ability to terminate the Letter Agreement would result in Jireh being able to deprive WES of part of its remuneration for which the Letter Agreement provided. In particular WES argued that if Jireh could terminate the Agreement, it would be in a position to deprive WES of the prospect of earning the commission to which WES would be entitled under Clause 5 if in the future Jireh sold or transferred any of its interest in the Master Franchise.
I do not regard this argument as sufficiently compelling to warrant the conclusion that the parties intended that they would be bound by the Letter Agreement in perpetuity. It would not in my view accord with common-sense to conclude that the parties intended that the Letter Agreement would never be able to be terminated, save in the case of termination by one party on the grounds of repudiation or serious breach by the other party. However WES's argument does identify an important consideration in determining at what point of time after conclusion of the Letter Agreement the parties should be taken to have intended that a right of termination would arise and the period of notice (if any) that the parties should be taken to have intended should be given.
Implication of a term that would have enabled Jireh to terminate soon after the inception of the Letter Agreement would not in my view have satisfied the well established tests for implication of a contractual term (see Codelfa Construction Pty Ltd v State Railway of NSW [1982] HCA 24; (1982) 149 CLR 337 at 347). In light of the presence in the Letter Agreement of Clause 5 entitling WES to commission on the sale or transfer of an interest of Jireh, it would in my view by no means be "reasonable and equitable" to imply such a term in the Letter Agreement, nor would the term be "so obvious that 'it goes without saying'" (ibid).
It is not easy to determine the period that would have needed, or would need, to elapse before Jireh became entitled to terminate. Bearing in mind the nature of the Letter Agreement and in particular the provisions of Clause 5, I consider that that period would be one of at least ten years. Thus Jireh would not in my view have been entitled to terminate the Letter Agreement prior to March 2006.
This Court has not had the benefit of findings by the primary judge as to these matters, as Jireh, at the conclusion of the hearing at first instance, abandoned its argument that it had a right to terminate, and had terminated, the Letter Agreement. The issues are ones that the primary judge was much better placed to determine than this Court because (as is evident from the observations of McHugh JA quoted above in [111]) their determination would have required consideration of a wide range of circumstances. The primary judge had the advantage of hearing the whole of the evidence that was adduced over a period of in excess of three weeks, putting him in a better position than this Court to form a view as to the point of time after 2006 at which reasonable people in the position of the parties would have expected the parties, in particular, Jireh, to have had a right to terminate the Letter Agreement and to determine the period of notice (if any) that was reasonably required to be given.
In these circumstances and because any opinion that I may form on these questions will not affect the outcome of the appeal, I consider that I should refrain from expressing an opinion on the questions. My opinion would not affect what I consider to be the correct outcome of the appeal because, as I have said above, I consider that for a period of at least ten years after the inception of the Letter Agreement Jireh did not have a right to terminate.
Any right that Jireh had to terminate thus arose after 2004, which was the year in which Jireh last made sales to its franchises. In reaching this conclusion I have taken account of the fact that the remuneration of WES for services provided to some extent related to services to be provided after the date of the Letter Agreement. On the other hand it is significant that both the Master Franchise Agreement and the Roasting Agreement had terms of ten years. In my view it cannot be said that it is "so obvious that it goes without saying" that, if the parties had addressed their minds to the question, they would have considered that Jireh should, and did, have a right to terminate the Letter Agreement in the ten years that the Master Franchise and Roasting Agreements were expected to be on foot. What they would have thought about whether Jireh would have a right to terminate the Letter Agreement if the Master Franchise or Roasting Agreements came to an end earlier (for example following breach or if Jireh sold its interest in the Master Franchise and paid commission under Clause 5) need not be considered as that did not occur (at least not before the end of 2004, which is the period that is presently relevant).
As Jireh did not itself make any relevant sales to its franchisees after 2004 and as I have held above that sales by associated companies to those franchisees would not have triggered the operation of Clause 3 of the Letter Agreement, the answer to the question of whether Jireh had a right to terminate, and did terminate, after 2004 is of no consequence to the outcome of the appeal.
Conclusion and Orders
For the reasons I have given above, I have reached different conclusions to those reached by the primary judge on the construction and implied term issues. On the view that I have taken, only sales by Jireh itself entitled WES to commission under Clause 3 of the Letter Agreement. As a result, the judgment for damages in the sum of $9,660,235 entered in favour of WES against Jireh should be reduced to no more than $1,195,946. This sum reflects the amount of commission payable on sales made by Jireh itself.
My rejection of Jireh's claims that WES engaged in misleading and deceptive conduct and committed a breach of fiduciary duty and that Jireh was entitled to, and did, terminate the Letter Agreement in or prior to 2004 means that Jireh has been unsuccessful in resisting WES's claim for damages equivalent to the commission payable upon sales made by Jireh itself, that is, the sum of $1,195,946 to which I have referred above. As a result the judgment in favour of WES should be for that amount, plus interest.
I accordingly propose the following orders:
(1) Appeal allowed.
(2) Set aside Orders 1, 2 and 3 made at first instance on 16 August 2010.
(3) Judgment for the respondent Western Export Services Inc against the appellant in the sum of $1,195,946.
(4) Order the appellant to pay to the respondent Western Export Services Inc interest in an amount to be determined.
(5) Dismiss the appellant's cross-claim.
(6) Direct that:
(a) within seven days of the date of this Judgment the respondents lodge with the Court, and serve, a written submission as to the amount of interest that the respondents contend should be awarded in favour of the respondent Western Export Services Inc and as to the orders as to costs incurred at first instance and on appeal that the Court should make;
(b) the appellant lodge and serve a response within a further seven days; and
(c) the respondents lodge and serve any reply within a further seven days.
YOUNG JA : I agree with Macfarlan JA.
TOBIAS AJA : I agree with Macfarlan JA.
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